NORTHEAST COMMUNITY BANCORP, INC. This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the audited consolidated financial statements of the Company that appear beginning on page F-1 of this report.
Executive Summary
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities, mortgage-backed securities and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting of money market accounts, statement savings accounts, individual retirement accounts and certificates of deposit. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of loan fees, service charges, and earnings on bank owned life insurance. Non-interest expense currently consists primarily of salaries and employee benefits, deposit insurance premiums, directors' fees, occupancy and equipment, data processing and professional fees. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Business Strategy
Growing our assets with a continued focus on the origination of construction loans.
AtDecember 31, 2022 ,$852.7 million , or 70.1%, of our total loan portfolio, net of loans in process, consisted of construction loans primarily located in high demand and high absorption areas in theNew York Metropolitan Area. There continues to be a significant need for construction financing within the high absorption, homogeneous communities served by the Bank and we intend to continue to support the growth of these communities through the financing of condominium and apartment construction loans within the communities.
Maintaining strong asset quality and managing credit risk.
Strong asset quality is a key to the long-term financial success of any financial institution. We have been successful in maintaining strong asset quality in recent years. Our ratio of non-performing assets to total assets was 0.10%, 0.16%, and 0.58% atDecember 31, 2022 , 2021 and 2020, respectively. We attribute this credit quality to a conservative credit culture and an effective credit risk management environment. We have an experienced team of credit professionals, well-defined and implemented credit policies and procedures, what we believe to be conservative loan underwriting criteria, and active credit monitoring policies and procedures. Our senior management team also spends 29
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substantial time conducting construction site visits and visiting regularly with community leaders and borrowers in our high absorption communities, which enables us to understand the needs of our communities and to stay informed as to matters affecting those communities.
Continuing to grow our non-interest bearing deposit accounts through the maintenance of low customer fees and charges.
We believe that as a community bank we should maintain the fees and charges we charge our customers as low as possible. By doing so, we have been able to attract and retain food service and other businesses as customers of the Bank and at the same time increase the amount of our non-interest bearing business accounts.
Expanding our franchise through de novo branching or branch acquisitions.
As the communities we serve continue to grow and expand into new areas, we believe there will be branch expansion opportunities within our market area and in the newly developing communities expanding outward from existing high absorption, homogeneous communities where our branches are currently located. To this end, we opened a new branch office inSullivan County, New York during the year endedDecember 31, 2022 . We intend to explore additional opportunities as they arise to expand our branch network.
Expanding our employee base, infrastructure and technology, as necessary, to support future growth.
We have already made significant investments in our infrastructure, technology and employee base to support the growth in our construction portfolio and the increased compliance responsibilities due to such growth, including experienced Bank Secrecy Act professionals. The additional capital raised in the 2021 second-step conversion offering provided us with additional resources to attract and retain the necessary talent and continue to enhance our infrastructure and technology to support our growth following the conversion.
Implement a stockholder-focused strategy for management of our capital.
We recognize that a strong capital position is essential to achieving our long-term objective of building stockholder value, and we believe that our capital position will support our future growth and expansion, and will give us flexibility to pursue other capital management strategies to enhance stockholder value. Critical Accounting Policies In the preparation of our consolidated financial statements, we have adopted various accounting policies that govern the application ofU.S. generally accepted accounting principles ("GAAP") and to general practices within the banking industry. Our significant accounting policies are described in note one to the consolidated financial statements included in this report. Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies, which are discussed below, to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
Allowance for Loan Losses
We consider the allowance for loan losses to be a critical accounting policy.
The allowance for loan losses represents management's estimate of losses
inherent in the loan portfolio as of the statement of financial condition date
and is recorded as a reduction to loans. The allowance for loan losses is
increased by the provision for loan losses, and decreased by charge-offs, net of
recoveries. Loans deemed to be uncollectible are charged against the allowance
for loan losses, and subsequent recoveries, if any, are credited to the
allowance. All, or part, of the principal balance of loans receivable are
charged off to the allowance as soon as it is determined that the repayment of
all, or part, of the principal balance is highly unlikely.
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The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. The allowance consists of general reserves. If an impairment is identified, we charge off the impaired portion immediately. A loan is considered impaired when, based on current information and events, it is probable that we 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 management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment records, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis. The general component of the allowance calculation is also based on the loss factors that reflect our historical charge-off experience adjusted for current economic conditions applied to loan groups with similar characteristics or classifications in the current portfolio. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, we have a proprietary structured loan rating process which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. These proprietary systems, depending on the type of loan, take into consideration factors such as project location, loan duration, loan to value or loan to cost, property condition, borrower experience, guarantor strength, tenant concentration, projected debt-service coverage, absorption rate, sponsor's experience, and as well as other factors. Loans whose terms are modified are classified as troubled debt restructurings if we grant such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan's stated maturity date at a below market rate. Adversely classified, non-accrual troubled debt restructurings may be returned to accrued status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. All troubled debt restructured loans are classified as impaired. InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss model, or CECL, ASU 2016-13. We previously elected to defer the adoption of ASU 2016-13 untilDecember 31, 2020 . As permitted by the CARES Act, and based on legislation enacted inDecember 2020 which extended certain provision of the CARES Act, we elected to extend the adoption of CECL untilJanuary 1, 2023 in accordance with the recent legislation. This standard requires earlier recognition of expected credit losses on loans and certain other instruments, compared to the incurred loss model.
Based on management's comprehensive analysis of the loan portfolio, management
believes the allowance for loan losses is appropriate as of
Balance Sheet Analysis General Total assets increased by$200.0 million , or 16.3%, to$1.4 billion atDecember 31, 2022 , from$1.2 billion atDecember 31, 2021 . The increase in assets was primarily due to increases in net loans of$244.1 million , investment securities held-to-maturity of$8.5 million , accrued interest receivable of$4.3 million , and premises and equipment of$2.2 million , partially offset by decrease in cash and cash equivalents of$57.0 million and investment in equity securities of$1.9 million . 31 Table of Contents Cash and cash equivalents decreased by$57.0 million , or 37.4%, to$95.3 million atDecember 31, 2022 from$152.3 million atDecember 31, 2021 . The decrease in cash and cash equivalents was a result of cash being deployed to fund an increase in net loans of$245.1 million , an increase in securities held-to-maturity of$8.5 million , an increase in property and equipment of$2.2 million due primarily to the purchase of property and equipment for a new branch office, and a reduction in FHLB advances of$7.0 million .
Equity securities decreased by
Securities held-to-maturity increased by
Loans, net of the allowance for loan losses, increased by$244.1 million , or 25.2%, to$1.2 billion atDecember 31, 2022 from$968.1 million atDecember 31, 2021 . The increase in loans, net of the allowance for loan losses, was primarily due to loan originations of$700.1 million during the year endedDecember 31, 2022 , consisting primarily of$580.7 million in construction loans with respect to which approximately 31.3% of the funds were disbursed at loan closings, with the remaining funds to be disbursed over the terms of the construction loans. Loan originations resulted in a net increase of$246.8 million in construction loans,$39.0 million in multi-family loans, and$277,000 in consumer loans. The increase in our loan portfolio was partially offset by decreases in non-residential loans of$24.7 million , commercial and industrial loans of$8.3 million , mixed-use loans of$6.8 million , and residential loans of$1.7 million , coupled with normal pay-downs and principal reductions. Premises and equipment increased by$2.2 million , or 9.0%, to$26.1 million atDecember 31, 2022 from$23.9 million atDecember 31, 2021 due to the acquisition of property and equipment for a new branch site located inBloomingburg, New York . Investments inFederal Home Loan Bank stock decreased by$331,000 , or 21.1%, to$1.2 million atDecember 31, 2022 from$1.6 million atDecember 31, 2021 due primarily to a reduction in mandatoryFederal Home Loan Bank stock in connection with the maturity of$7.0 million in advances during the quarter endedMarch 31, 2022 . Accrued interest receivable increased by$4.3 million , or 100.7%, to$8.6 million atDecember 31, 2022 from$4.3 million atDecember 31, 2021 due to an increase in the loan portfolio and seven interest rate increases in 2022 that resulted in an increase in the interest rates on loans in our construction loan portfolio. Foreclosed real estate decreased by$540,000 , or 27.1%, to$1.5 million atDecember 31, 2022 from$2.0 million atDecember 31, 2021 due to a write down on the fair market value of the property because the increase in interest rates caused an increase in the capitalization rate thereby resulting in a reduction in the calculated fair market value of the property. Right of use assets - operating decreased by$252,000 , or 9.8%, to$2.3 million atDecember 31, 2022 from$2.6 million atDecember 31, 2021 , primarily due to amortization. Other assets increased by$655,000 , or 14.0%, to$5.3 million atDecember 31, 2022 from$4.7 million atDecember 31, 2021 due to increases in suspense accounts of$641,000 , tax assets of$24,000 , and prepaid expense of$12,000 , partially offset by decreases in securities and principal receivables of$19,000 and miscellaneous assets of$2,000 . Total deposits increased by$194.8 million , or 21.0%, to$1.1 billion atDecember 31, 2022 from$927.2 million atDecember 31, 2021 . The increase was primarily due to increases in certificates of deposit of$90.7 million , or 31.0%, savings account balances of$88.9 million , or 48.1%, and non-interest bearing demand deposits of$45.4 million , or 13.7%. These increases were partially offset by a decrease in NOW/money market accounts of$30.3 million , or 25.6%, fromDecember 31, 2021 toDecember 31, 2022 . 32
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Advance payments by borrowers for taxes and insurance increased by$485,000 , or 25.7%, to$2.4 million atDecember 31, 2022 from$1.9 million atDecember 31, 2021 due primarily to the accumulation of tax payments from borrowers.
Lease liability - operating decreased by
Accounts payable and accrued expenses increased by$1.2 million , or 9.0%, to$14.8 million atDecember 31, 2022 from$13.5 million atDecember 31, 2021 due primarily to an increase in accrued bonus expense of$1.1 million for employees. Stockholders' equity increased by$10.6 million , or 4.2% to$262.0 million atDecember 31, 2022 , from$251.4 million atDecember 31, 2021 . The increase in stockholders' equity was due to net income of$24.8 million for the year endedDecember 31, 2022 , a reduction of$869,000 in unearned employee stock ownership plan shares coupled with an increase of$206,000 in earned employee stock ownership plan shares,$295,000 in other comprehensive income, and$208,000 in the amortization of restricted stock and stock options awarded in connection with the Company's 2022 Equity Incentive Plan, partially offset by stock repurchases totaling$9.3 million and dividends paid and declared of$6.5 million .
Loans
Our loan portfolio consists primarily of construction loans, commercial and industrial loans, multifamily and mixed-use residential real estate loans and non-residential real estate loans. We also have a limited amount of one- to four-family residential real estate loans, which we no longer originate, and consumer loans, which we originate on a very limited basis.
The following table shows the loan portfolio at the dates indicated:
2022 2021
Amount Percent Amount Percent
(Dollars in thousands)
Residential real estate loans:
One- to four-family $ 5,467 0.45 $ 7,189 0.74 %
Multifamily 123,385 10.14 84,425 8.68
Mixed-use 21,902 1.80 28,744 2.95Total residential real estate loans 150,754 12.39 120,358
12.37
Non-residential real estate loans 25,324 2.08 50,016
5.14
Construction loans 930,628 76.45 683,830
70.29
Commercial and industrial loans 110,069 9.04 118,378
12.17 Consumer loans 546 0.04 269 0.03 Total loans 1,217,321 100.00 % 972,851 100.00 % Allowance for losses (5,474) (5,242) Deferred loan costs, net 372 484 Loans, net$ 1,212,219 $ 968,093
Loan Maturity. The following table sets forth certain information at
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to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.
Non-
One- to Residential Commercial
Four- Multi- Mixed- Real and Total
December 31, 2022 Family Family Use Estate Construction Industrial Consumer Loans
(Dollars in thousands)
Amounts due in:
One year or less $ - $ 7,487 $ 2,207 $ 4,452 $ 500,530 $ 70,203 $ 544 $ 585,423
More than 1-5 years 1,814 24,387 8,329 13,906 409,428 34,577 2 492,443
More than 5-15 years 314 87,012 10,920 6,841 20,670 5,289 - 131,046
More than 15 years 3,339 4,499 446 125 - - - 8,409
Total $ 5,467 $ 123,385 $ 21,902 $ 25,324 $ 930,628 $ 110,069 $ 546 $ 1,217,321 The following table sets forth all loans atDecember 31, 2022 that are due afterDecember 31, 2022 and have either fixed interest rates or floating or adjustable interest rates: Floating or Total at Fixed Rates Adjustable Rates December 31, 2022 (Dollars in thousands) Residential real estate loans: One- to four-family$ 3,278 $ 2,190 $ 5,468 Multifamily 57,616 58,282 115,898 Mixed-use 2,534 17,161 19,695
Non-residential real estate loans 4,878 15,995 20,873 Construction loans 12,469 417,628 430,097 Commercial and industrial loans 13,605
26,260 39,865
Consumer loans 2 - 2
Total $ 94,382 $ 537,516 $ 631,898
Securities
Our investment portfolio consists primarily of mutual funds, residential
mortgage-backed securities issued by Fannie Mae, Freddie Mac, and
The following table sets forth the stated maturities and weighted average yields of investment securities atDecember 31, 2022 . Weighted average yields on tax-exempt securities are presented on a tax equivalent basis using a combined federal and state marginal rate of 24.9%. Certain securities have adjustable interest rates and will reprice monthly, quarterly, semi-annually or annually within the various maturity ranges. Equity securities are not included in the table based on lack of a maturity date. The table presents contractual maturities for mortgage-backed securities and does not reflect repricing or the effect of prepayments. Due after One but within Due after Five but within Due within One Year Five Years Ten Years Due after Ten Years Total Weighted Weighted Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average December 31, 2022 Value Yield Value Yield Value Yield Value Yield Value Yield (Dollars in thousands) Securities available-for-sale: Mortgage-backed securities $ - - % $ 1 2.92 % $ - - % $ - - %$ 1 2.92 % Total available-for-sale $ - - % $ 1 2.92 % $ - - % $ - - %$ 1 2.92 % Securities held-to-maturity: Mortgage-backed securities $ - - %$ 11 3.77 %$ 1,402 1.86 %$ 2,379 1.83 %$ 3,792 1.85 %U.S. agency collateralized mortgage obligations - - - - - 3,043 1.55 3,043 1.55 U.S. Treasury securities 10,014 2.25 - - - - - - 10,014 2.25 Municipal bonds 549 1.36 1,597 1.43 1,665 1.45 5,735 1.45 9,546 1.44 Total held-to-maturity$ 10,563 2.20 %$ 1,608 1.45 %$ 3,067 1.64 %$ 11,157 1.56 %$ 26,395 1.82 % Total investment securities$ 10,563 2.20 %$ 1,609 1.45 %$ 3,067 1.64 %$ 11,157 1.56 %$ 26,396 1.82 % 34 Table of Contents Deposits Deposits are a major source of our funds for lending and other investment purposes, and our deposits are provided primarily by individuals within our market area. In addition, we rely on brokered, listing and military deposits, which represent a viable and cost effective addition to our deposit gathering and maintenance strategy, often at a lower "all-in" cost when compared to our retail branch network. Use of these types of deposits allows us to match the maturity of these deposits to the term of our construction loans. The following table sets forth the deposits as a percentage of total deposits for the dates indicated: At December 31, 2022 2021 Average Average Outstanding Average Outstanding Average Balance Percent Rate Balance Percent Rate (Dollars in thousands) Demand deposits: Non-interest bearing$ 355,118 36.31% -$ 260,529 32.52% - NOW and money market 108,077 11.05% 0.95% 114,940 14.35% 0.53% Total 463,195 47.36% 0.18% 375,469 46.87% 0.14% Savings accounts 228,811 23.40% 2.68% 108,877 13.59% 0.63% Certificates of deposit 285,991 29.24% 2.52% 316,690 39.54% 0.97% Total$ 977,997 100.00% 1.59%$ 801,036 100.00% 0.50% As ofDecember 31, 2022 and 2021, the aggregate amount of uninsured deposits (deposits in amounts greater than or equal to$250,000 , which is the maximum amount for federal deposit insurance) was$672.8 million and$548.2 million , respectively. In addition, as ofDecember 31, 2022 , the aggregate amount of all our uninsured certificates of deposit was$205.8 million . We have no deposits that are uninsured for any reason other than being in excess of the maximum amount for federal deposit insurance. The following table sets forth the portion of the Bank's certificates of deposit, by account, that are in excess of theFDIC insurance limit, by remaining time until maturity, as ofDecember 31 ,
2022:
At
December 31, 2022
(In thousands)
Maturity Period:
Three months or less $ 9,613
Over three through six months 50,700
Over six through twelve months 69,464
Over twelve months 76,068
Total $ 205,845
Average Balance Sheets
The following tables set forth average balance sheets, average yields and costs,
and certain other information for the years indicated. No tax-equivalent yield
adjustments have been made, as the effects would be immaterial. All average
balances are daily average balances. Non-accrual loans were included in the
computation of average balances. The yields set forth below include the effect
of deferred fees, discounts, and premiums that are amortized or accreted to
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interest income or interest expense. Deferred loan fees totaled
Year Ended December 31,
2022 2021
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans receivable $ 1,054,577 $ 69,992 6.64 % $ 866,518 $ 47,898 5.53 %
Securities 42,771 681 1.59 23,026 320 1.39
Federal Home Loan Bank stock 1,299 69 5.31 1,576 71 4.51
Other interest-earning assets 101,999 1,260 1.24 91,999 115 0.13
Total interest-earning assets 1,200,646 72,002 6.00 983,119 48,404 4.92
Allowance for Loan Losses (5,387) (5,154)
Noninterest-earning assets 79,835 72,855
Total assets $ 1,275,094 $ 1,050,820
Interest-bearing liabilities:
Interest-bearing demand deposits $ 108,077 $ 918 0.85 % $ 114,940 $ 696 0.61 %
Savings and club accounts 228,811 2,688 1.17 108,877 328 0.30
Certificates of deposit 285,991 3,938 1.38 316,690 3,335 1.05
Interest-bearing deposits 622,879 7,544 1.21 540,507 4,359 0.81
Federal Home Loan Bank advances
and other 22,247 583 2.62 28,000 742 2.65
Total interest-bearing liabilities 645,126 $ 8,127 1.26 568,507 $ 5,101 0.90
Noninterest-bearing demand
deposits 355,118 260,529
Other noninterest-bearing
liabilities 16,137 24,310
Total liabilities 1,016,381 853,346
Total shareholders' equity 258,713 197,474
Total liabilities and
shareholders' equity $ 1,275,094 $ 1,050,820
Net interest income $ 63,875 $ 43,303
Net interest rate spread (1) 4.74 % 4.02 %
Net interest margin (3) 5.32 % 4.40 %
Net interest-earning assets (2) $ 555,520 $ 414,612
Average interest-earning assets to
interest-bearing liabilities 186.11 % 172.93 %
Net interest rate spread represents the difference between the weighted (1) average yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total
interest-earning assets.
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on our
net interest income. The rate column shows the effects attributable to changes
in rate (changes in rate multiplied by prior volume). The volume column shows
the effects attributable to changes in volume (changes in volume multiplied by
prior rate). The total column represents the sum of the prior columns. or
purposes of this table, changes attributable to both rate and volume,
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which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
Year Ended 12/31/2022
Compared to
Year Ended 12/31/2021
Increase (Decrease)
Due to
Volume Rate Total
(Dollars in thousands)
Interest income:
Loans receivable $ 11,479 $ 10,615 $ 22,094
Securities 309 52 361
Federal Home Loan Bank stock (14) 12 (2)
Other interest-earning assets 14 1,131 1,145
Total $ 11,788 $ 11,810 $ 23,598
Interest expense:
Interest bearing demand deposit
650 1,710 2,360
Certificates of deposits (347) 950 603
Borrowed money (151) (8) (159)
Total 108 2,918 3,026
Net change in net interest income
Results of Operations for the Years Ended
Financial Highlights
Net income for the year endedDecember 31, 2022 was$24.8 million compared to net income of$11.9 million for the year endedDecember 31, 2021 . Net income for the year endedDecember 31, 2022 was greater than the year endedDecember 31, 2021 primarily due to an increase in net interest income and a decrease in provision for loan losses expense, partially offset by a decrease in non-interest income, an increase in non-interest expenses, and an increase
in
income tax expense.
Summary Income Statements
The following table sets forth the income summary for the periods indicated:
Year Ended December 31,
Change Fiscal 2022/2021
2022 2021 $ %
(Dollars in thousands)
Net interest income $ 63,875 $ 43,303 $ 20,572 11.03 %
Provision for loan losses 439 3,610 (3,171) 343.49 %
Non-interest income 1,683 2,354 (671) (6.33) %
Non-interest expenses 30,690 26,473 4,217 5.52 %
Income tax expense 9,586 3,669 5,917 11.79 %
Net income $ 24,843 $ 11,905 $ 12,938 (3.44) %
Return on average assets 1.95 % 1.13 %
Return on average equity 9.60 % 6.03 %
Net Interest Income
Net interest income totaled $63.9 million for the year ended December 31, 2022 ,
as compared to $43.3 million for the year ended December 31, 2021 . The increase
in net interest income of $20.6 million , or 47.5%, was primarily due to an
increase in interest income that exceeded an increase in interest expense in a
manner consistent with the increase in
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interest rates attributable to theFederal Reserve's rate increases during the year endedDecember 31, 2022 . In this regard, our yield on interest earning assets increased much greater than our cost of interest bearing liabilities as our yield on interest earning assets repriced faster due to higher rates than our cost of interest bearing liabilities. The increase in net interest income was also due to increases in loans and investment securities, partially offset by decreases in interest-bearing deposits at other financial institutions andFederal Home Loan Bank stock as we continued to grow the Company by leveraging the proceeds raised in ourJuly 2021 second-step conversion. Interest and dividend income increased by$23.6 million , or 48.8%, due to an increase in the yield on interest earning assets by 107 basis points from 4.92% for the year endedDecember 31, 2021 to 6.00% for the year endedDecember 31, 2022 and an increase in the average interest earning assets of$217.5 million , or 22.1%, from$983.1 million for the year endedDecember 31, 2021 to$1.2 billion for the year endedDecember 31, 2022 . Interest expense increased by$3.0 million , or 59.3%, due to an increase in average interest bearing liabilities of$76.6 million , or 13.5%, from$568.5 million for the year endedDecember 31, 2021 to$645.1 million for the year endedDecember 31, 2022 and an increase in the cost of interest bearing liabilities by 36 basis points from 0.90% for the year endedDecember 31, 2021 to 1.26% for the year endedDecember 31, 2022 . The increase in the cost of interest bearing liabilities was also partially due to a shift to savings accounts from interest bearing certificates of deposits and interest bearing demand deposits as the average balances of savings accounts increased by$119.9 million , or 110.2%, from$108.9 million for the year endedDecember 31, 2021 to$228.8 million for the year endedDecember 31, 2022 . During the same time period, the average balances of interest bearing certificates of deposits decreased by$30.7 million , or 9.7%, from$316.7 million for the year endedDecember 31, 2021 to$286.0 million for the year endedDecember 31, 2022 and the average balances of interest bearing demand deposits decreased by$6.9 million , or 6.0%, from$114.9 million for the year endedDecember 31, 2021 to$108.1 million for the year endedDecember 31, 2022 . The decrease in the average balances of interest bearing certificates of deposits occurred from January toAugust 2022 and was partially offset by an increase in the average balances of interest bearing certificates of deposits fromSeptember 2022 toDecember 2022 . In addition, the average balances of our non-interest bearing demand deposits increased by$94.6 million , or 36.3%, from$260.5 million for the year endedDecember 31, 2021 to$355.1 million for the year endedDecember 31, 2022 . Net interest margin increased by 92 basis points, or 20.8%, during the year endedDecember 31, 2022 to 5.32% compared to 4.40% atDecember 31, 2021 . Provision for Loan Losses. A provision for loan losses of$439,000 was recorded for the year endedDecember 31, 2022 as compared to$3.6 million for the year endedDecember 31, 2021 . The provision for loan losses during 2022 was primarily attributable to charge-offs totaling$426,000 comprising of a$328,000 charge-off against one construction project in connection with the sale to a third party of the project's two non-performing loans precipitated by legal action between the two partners/borrowers in the project, an$86,000 charge-off against two mixed-used loans to a borrower in connection with the sale of the two performing troubled debt restructured loans to a third party, and a$34,000 charge-off against various unpaid overdrafts in our demand deposit accounts. The provision for loan losses recorded for the year endedDecember 31, 2021 was primarily attributable to the charge-off of the previously disclosed non-residential bridge loan with a balance of$3.6 million secured by commercial real estate located inGreenwich, Connecticut . The loan is secured by commercial real estate located inGreenwich, Connecticut and guaranteed by the two borrowers. The loan originated in 2016 as a two-year bridge loan and, upon the borrower's failure to satisfy the loan at the maturity date, the loan was accelerated and a foreclosure action was instituted. Although the loan was fully charged-off, the loan remains in foreclosure and management and the borrower negotiated a standstill agreement which allows the borrowers to retain, at their own expense, the zoning and planning consultants necessary to obtain re-approvals from the town to proceed with the original planned residential condominium development. The Company intends to aggressively seek recovery of all amounts due from the personal guarantors of the loan. If successful against the guarantors, any recovery received would be added back to the allowance for loan losses and an analysis will be performed at that time to determine the appropriateness of the recovery into income. There has been no change in the status of the recovery action during the fourth quarter endedDecember 31 ,
2022.
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We also charged-off
We recorded recoveries of
Based on a review of the loans that were in our loan portfolio atDecember 31, 2022 , management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable. Management uses available information to establish the appropriate level of the allowance for loan losses. Future additions or reductions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
Non-Interest Income
The following table sets forth a summary of non-interest income for the periods
indicated:
Year Ended December 31,
2022 2021
(Dollars in thousands)Other loan fees and service charges$ 1,994 $
1,568
Gain on disposition of equipment 98
7
Earnings on bank-owned life insurance 604
600
Investment advisory fees 474
514
Realized and unrealized loss on equity securities (1,573)
(389) Other 86 54 Total$ 1,683 $ 2,354 The decrease in total non-interest income was primarily due to an unrealized loss of$1.9 million in our equity securities, partially offset by a one-time capital gains distribution of$329,000 from our equity securities resulting in a net unrealized loss on equity securities of$1.6 million in 2022 compared to an unrealized loss of$389,000 in 2021. The net unrealized loss of$1.6 million on equity securities during the 2022 period was due to a rising interest rate environment and theFederal Reserve's interest rate increases during the year endedDecember 31, 2022 . The decrease in total non-interest income was also due to a decrease of$40,000 in investment advisory fees, partially offset by an increase of$426,000 in other loan fees and service charges, an increase of$91,000 on gain from the sale of fixed assets, an increase of$31,000 in other non-interest income, and an increase of$5,000 in bank-owned life insurance income. The decrease in investment advisory fees was due to a decrease in assets under management of Harbor West and a decrease in commission income from Harbor West due to market conditions. The increase in other loan fees and service charges was due to increases of$375,000 in loan servicing fees and$194,000 in ATM and debit card usage fees, partially offset by decreases of$139,000 in loan fees and$3,000 in deposit accounts fees. 39 Table of Contents Non-Interest Expense The following table sets forth an analysis of non-interest expense for the periods indicated: Year Ended December 31, 2022 2021 (Dollars in thousands) Salaries and employee benefits$ 15,549 $ 14,996 Occupancy expense 2,428 2,115 Equipment 1,107 993 Outside data processing 1,886 1,652 Advertising 299 139 Impairment loss on goodwill 451 - Real estate owned expense 623 93 Other 8,347 6,485 Total$ 30,690 $ 26,473
Non-interest expense increased by$4.2 million , or 15.9%, to$30.7 million for the year endedDecember 31, 2022 from$26.5 million for the year endedDecember 31, 2021 . The increase resulted primarily from increases of$1.9 million in other operating expense,$553,000 in salaries and employee benefits,$530,000 in real estate owned expense,$451,000 in goodwill impairment loss,$313,000 in occupancy expense,$234,000 in outside data processing expense,$160,000 in advertising expense, and$114,000 in equipment expense. Other non-interest expense increased by$1.9 million , or 28.7%, to$8.3 million in 2022 from$6.5 million in 2021 due mainly to increases of$880,000 in miscellaneous other non-interest expense,$534,000 in legal fees,$178,000 in service contracts expense,$135,000 in directors compensation,$69,000 in insurance expense,$68,000 in audit and accounting fees,$65,000 in recruitment expenses related to the hiring of additional personnel,$33,000 in telephone expense, and$8,000 in office supplies, partially offset by decreases of$94,000 in consulting services and$14,000 in directors, officers and employee expense. The increase of$880,000 in miscellaneous other non-interest expense was due to increases of$473,000 inFDIC insurance premiums andNew York State regulatory assessments,$156,000 in public company expense,$129,000 in dues and subscriptions, and$111,000 in miscellaneous charge-offs and various over and short in branch operations. Salaries and employee benefits increased by$553,000 , or 3.7%, to$15.5 million in 2022 from$15.0 million in 2021. The increase was due to an increase in bonuses paid to employees and loan production personnel and an increase in the number of full-time equivalent employees to 137 as ofDecember 31, 2022 from 131 as ofDecember 31, 2021 . The increase in bonuses paid to employees and loan production personnel was due to the strong earnings and an increase in the loan portfolio in 2022. The increase in full-time equivalent employees was due to our efforts to expand our operations. Occupancy expense increased by$313,000 , or 14.8%, to$2.4 million in 2022 from$2.1 million in 2021 primarily as a result of the cost of operating an additional branch office to accommodate our expansion. Equipment expense increased by$114,000 , or 11.5%, to$1.1 million in 2022 from$993,000 in 2021 due to an increase in the purchases of additional equipment with the addition of a new branch office in 2022. Real estate owned expense increased by$530,000 , or 569.9%, to$623,000 in 2022 from$93,000 in 2021 due to the write down of$540,000 in the value of the one foreclosed property in 2022, partially offset by a reduction of$10,000 in operating expenses to maintain the one real estate owned property in 2022. The write down of$540,000 on the fair market value of a foreclosed property was due to the increase in interest rates resulting in an increase in the capitalization rate thereby reducing the calculated fair market value of the property. Outside data processing expense increased by$234,000 , or 14.2%, to$1.9 million in 2022 from$1.7 million in 2021 due to the cost of operating an additional branch and additional services required in 2022 to enable the company to expand. 40 Table of Contents
There was a goodwill impairment expense of$451,000 in 2022 compared to no goodwill impairment expense in 2021. The goodwill was recorded in connection with the acquisition ofHarbor West Financial Planning Wealth Management Group in 2007, which is operated as a division of the Bank. The goodwill impairment in 2022 was caused primarily by the expected decrease in revenue from this division due to a decrease in clients and the resulting decrease in assets under management. Advertising expense increased by$160,000 , or 115.1%, to$299,000 in 2022 from$139,000 in 2021 due mainly to the resumption of advertising and promotional products to promote the opening of an additional branch office. Income Taxes. The Company recorded income tax expense of$9.6 million and$3.7 million for the years endedDecember 31, 2022 and 2021, respectively. For the year endedDecember 31, 2022 , the Company had approximately$740,000 in tax exempt income, compared to approximately$711,000 in tax exempt income for the year endedDecember 31, 2021 . The Company's effective income tax rates were 27.8% and 23.6% for the years endedDecember 31, 2022 and 2021, respectively. Risk Management Overview Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for at fair value. Other risks that we face are operational risk, liquidity risk and reputation risk. Operational risk includes risks related to fraud, regulatory compliance, processing errors, technology, and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.
Management of Credit Risk
The objective of our credit risk management strategy is to quantify and manage credit risk and to limit the risk of loss resulting from an individual customer default. Our credit risk management strategy focuses on conservatism, an excellent knowledge of the communities we lend in, and significant levels of monitoring. Our lending practices include conservative exposure limits and underwriting, extensive documentation and collection standards. Our credit risk management strategy also emphasizes diversification at the borrower level as well as regular credit examinations, continuous site visits by executive management and management reviews of large credit exposures and credits that might experience deterioration of credit quality. As part of its risk management process, the Bank conducts stress testing on its commercial real estate portfolio, performs a global cash flow analysis for loans associated with multiple properties and/or guarantors and also operates a loan review program for all real estate loans (including construction loans) with terms more than 12 months. In addition, we track our board approved limits for each commercial real estate category on a monthly basis.
Analysis of Non-Performing, Troubled Debt Restructurings and Classified Assets.
Classified Assets.FDIC regulations and our Asset Classification Policy provide that loans and other assets considered to be of lesser quality be classified 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 institution 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 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. We classify an asset as "special mention" if the asset has a potential weakness that warrants management's escalated level of attention.
While
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such assets are not impaired, management has concluded that if the potential
weakness in the asset is not addressed, the value of the asset may deteriorate,
adversely affecting the repayment of the asset. Loans classified as impaired for
financial reporting purposes are generally those loans classified as substandard
or doubtful for regulatory reporting purposes.
An insured institution is required to establish allowances for loan losses in an
amount deemed prudent by management for loans classified as substandard or
doubtful, as well as for other problem loans. General 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 problem assets as "loss," it is required to charge off such amounts.
An institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the FDIC .
The following table sets forth information with respect to our non-performing assets at the dates indicated.
At December 31,
2022 2021
(Dollars in thousands)
Total non-accrual loans $ - $ -Total accruing loans past due 90 days or more -
- Total non-performing loans - - Real estate owned 1,456 1,996 Total non-performing assets$ 1,456 $ 5,568
Total non-performing loans to total loans - % - % Total non-performing assets to total assets 0.10 %
0.16 %
During the year endedDecember 31, 2022 , non-performing assets decreased by$540,000 , or 27.1%, to$1.5 million from$2.0 million as ofDecember 31, 2021 . The decrease in non-performing assets was primarily due to the previously disclosed write down of$540,000 in the value of the one foreclosed property in 2022. The write down of$540,000 on the fair market value of a foreclosed property was due to the increase in interest rates resulting in an increase in the capitalization rate thereby reducing the calculated fair market value of the property. We had no non-performing loans atDecember 31, 2022 and atDecember 31, 2021 . In 2022, we collected no interest income from a loan that was in non-accrual status in 2022 and was charge-off in 2022. In 2021, we collected no interest income from a loan that was in non-accrual status in 2021 and was charge-off in 2021. From time to time, as part of our loss mitigation strategy, we may renegotiate the loan terms based on the economic or legal reasons related to the borrower's financial difficulties. There were no new troubled debt restructurings ("TDRs") during the years endedDecember 31, 2022 andDecember 31, 2021 . TDRs may be considered to be non-performing and if so are placed on non-accrual, except for those that have established a sufficient performance history (generally a minimum of six consecutive months of performance) under the terms of the restructured loan. AtDecember 31, 2021 , four loans with aggregate balances of$1.6 million were considered TDRs but were performing in accordance with their restructured terms for the requisite period of time to be returned to accrual status. Of the four TDR loans atDecember 31, 2021 , two of the TDR loans totaling$746,000 were to one borrower and secured by the same non-residential property that had a charge-off of$67,000 on one of the loans in prior years. The borrower satisfied these two loans in 2022 as noted in the following paragraph. The remaining two TDR loans with an aggregate balance of$855,000 atDecember 31, 2022 were to one borrower and secured by two adjacent non-residential properties but were performing in accordance with their restructured terms for the requisite period of time (generally at least six consecutive months) to be returned to accrual status. We subsequently sold these two loans to a third party onJanuary 5, 2023 at a loss of$86,000 . We had two impaired loans atDecember 31, 2022 totaling$855,000 consisting of the two aforementioned TDR loans that were subsequently sold to a third party inJanuary 2023 . We had four impaired loans atDecember 31, 2021 totaling$1.6 million consisting of the four aforementioned TDR loans whereby two of the
impaired TDR loans totaling
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The following table summarizes classified and criticized assets of all portfolio types at the dates indicated:
At December 31,
2022 2021
(In thousands)
Classified loans:
Substandard $ 855 $ 746
Doubtful - -
Loss - -
Total classified loans 855 746
Special mention 946 -
Total criticized loans $ 1,801 $ 746 On the basis of management's review of our assets, we had one loan totaling$946,000 classified as special mention atDecember 31, 2022 compared to no assets classified as special mention atDecember 31, 2021 . In addition, we classified$855,000 as substandard atDecember 31, 2022 compared to$746,000 atDecember 31, 2021 . There were no assets classified as doubtful or loss atDecember 31, 2022 or 2021. The loan portfolio is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all classified assets constitute non-performing assets. The increase in special mention assets was due to the deterioration of the property securing the only special mention loan as ofDecember 31, 2022 . The increase in substandard assets was primarily due to the addition of two performing mixed-use mortgage loans totaling$855,000 that were classified as TDRs and as substandard because we incurred a loss of$83,000 on the sale to a third-party of these two loans onJanuary 5, 2023 , partially offset by the satisfaction in 2022 of two performing non-residential mortgage loans totaling$746,000 that were classified as TDRs and impaired loans but has been performing and management decided at classified as substandard atDecember 31, 2021 . For more information, see the discussion of TDR loans included above.
Delinquent Loans
The following table provides information about delinquencies in our loan portfolio at the dates indicated:
At December 31,
2022 2021
Days Past Due Days Past Due
30 - 59 60 - 89 90 or more 30 - 59 60 - 89 90 or more
(In thousands)
Residential real estate loans:
Multi-family $ - $ 946 $ - $ - $ - $ -
Non-residential real estate loans - - - - - - Total $ -$ 946 $ - $ - $ - $ -
Analysis and Determination of the Allowance for Loan Losses
Our allowance for loan losses is maintained at a level necessary to absorb loan
losses which are both probable and reasonably estimable. Management, in
determining the allowance for loan losses, considers the losses inherent in its
loan portfolio and changes in the nature and volume of loan activities, along
with the general economic and real estate market conditions. We utilize a
two-tier approach: (1) identification of impaired loans; and (2) establishment
of general valuation allowances on the remainder of our loan portfolio. We
maintain a loan review system, which allows for a periodic review of our loan
portfolio and the early identification of potential impaired loans. Such system
takes into consideration, among other things, delinquency status, size of loans,
type and market value of collateral and financial condition of the borrowers.
Beginning in the fourth quarter of 2012, we discontinued the use of specific
allowances. If an impairment is identified, we now charge off the impaired
portion immediately. A loan evaluated for impairment is
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considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. We do not aggregate such loans for evaluation purposes. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Should full collection of principal be expected, cash collected on non-accrual loans can be recognized as interest income. The general component consists of quantitative and qualitative factors and covers non-impaired loans. The quantitative factors are based on historical loss experience adjusted for qualitative factors. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio segment. These qualitative factors include consideration of the following:
? Levels and trends in delinquencies and impaired loans;
? Levels and trends in charge-offs and recoveries;
? Trends in volume and terms of loans;
? Effects of any changes in risk selection and underwriting standards;
? Changes in the value of underlying collateral for collateral-dependent loans
? Other changes in lending policies, procedures and practices;
? Experience, ability and depth of lending management and other relevant staff;
? National and local economic trends and conditions;
? Industry conditions; and
? Effects of changes in credit concentrations.
The allowance is increased through provisions charged against current earnings, and offset by recoveries of previously charged-off loans. Loans which are determined to be uncollectible are charged against the allowance. Management uses available information to recognize probable and reasonably estimable loan losses, but future loss provisions may be necessary based on changing economic conditions. The allowance for loan losses as ofDecember 31, 2022 and 2021 was maintained at a level that represents management's best estimate of losses inherent in the loan portfolio. In addition, theFDIC and theNew York State Department of Financial Services , as an integral part of their examination process, periodically review our allowance for loan losses and could require us to increase our allowance for loan losses. Each quarter, management evaluates the total balance of the allowance for loan losses based on several factors that are not loan specific, but are reflective of the inherent losses in the loan portfolio. This process includes, but is not limited to, a periodic review of loan collectability in light of historical experience, the nature and volume of loan activity, conditions that may affect the ability of the borrower to repay, underlying value of collateral, if applicable, and economic conditions in our market areas. First, we group loans by delinquency status. All loans 90 days or more delinquent and all loans classified as substandard or doubtful are evaluated individually, based primarily on the value of the collateral securing the loan. Loans are segregated by type and delinquency status and a loss allowance is established by using loss experience data and management's judgment concerning other matters it considers significant. The allowance is allocated to each category of loan based on the results of the above analysis.
This analysis process is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe that we have established the allowance at a level
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to absorb probable and estimable losses, additions may be necessary if economic or other conditions in the future differ from the current environment.
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated:
At December 31,
2022 2021
% of Allowance % of Loans in % of Allowance % of Loans in
Amount to Total Category to Total Amount to Total Category to Total
Amount Allowance Loans Amount Allowance Loans
(Dollars in thousands)
Residential real estate
loans:
One- to four-family $ 11 0.20 % 0.45 % $ 17 0.32 % 0.74 %
Multifamily 479 8.75 10.14 481 9.18 8.68
Mixed-use 38 0.69 1.73 73 1.39 2.95
Non-residential real
estate loans 131 2.39 2.08 381 7.27 5.14
Construction loans 3,835 70.06 75.32 3,143 59.96 70.29
Commercial and
industrial 955 17.45 10.24 973 18.56 12.17
Consumer loans 18 0.33 0.04 10 0.19 0.03Total general allowance$ 5,467 99.87 % 100.00 %$ 5,078 96.87 % 100.00 % Unallocated 7 0.13 - 164 3 - Total allowance for loan losses$ 5,474 100.00 % 100.00 %$ 5,242 100.00 % 100.00 % 45 Table of Contents
The following table sets forth an analysis of the activity in the allowance for loan losses for the periods indicated:
At or For the Year Ended December 31,
2022 2021
(Dollars in thousands)
Total loans net of deferred fees $ 1,217,693 $ 973,335
Average loans outstanding 1,054,577 866,518
Allowance at beginning of period $ 5,242 $ 5,088
Net charge-offs:
Residential real estate loans:
One- to four-family - -
Multifamily - (150)
Mixed-use (103) -
Total residential real estate loans (103) (150)
Non-residential real estate loans (53) 3,591
Construction loans 328 -
Commercial and industrial loans - - Consumer loans 35 15 Total net charge-offs 207 3,456 Provision for loan losses 439 3,610 Allowance at end of period $ 5,474 $ 5,242 Average loan outstanding: Residential real estate loans: One- to four-family 6,213 5,490 Multifamily 83,907 84,748 Mixed-use 24,333 28,263 Total residential real estate loans 114,453 118,501 Non-residential real estate loans 33,531 52,094 Construction loans 795,340 602,585 Commercial and industrial loans 110,452 93,101 Consumer loans 501 237 Total 1,054,277 866,518 Net charge-offs as a percentage of average loans outstanding Residential real estate loans: One- to four-family
- % - % Multifamily - (0.18) Mixed-use (0.42) - Total residential real estate loans (0.09) (0.13) Non-residential real estate loans (0.16) 6.89 Construction loans 0.04 - Commercial and industrial loans
- - Consumer loans 6.99 6.33 Total net charge-offs 0.02 % 0.40 % Credit Quality Ratios: As a percentage of year-end loans, net of unearned income: Allowance for loan loss 0.45 % 0.54 % Nonaccrual loans - % - % Nonperforming loans - % - %
Allowance for loan losses to nonaccrual loans - % - % Allowance for loan losses to nonperforming loans
- % - %
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The allowance for loan losses increased by $232,000 to $5.5 million at
December 31, 2022 from $5.2 million at December 31, 2021 . The increase in the
allowances for loan losses was due primarily to provision for loan losses of
$439,000 , which reflected the charge-off of $449,000 which had an unfavorable
impact on the historical loss factors, and increases in the construction loan
and consumer loan portfolio, partially offset by decreases in the residential,
mixed-use, and non-residential mortgage loan portfolio and the commercial and
industrial loan portfolio. The allowance for loan losses was also impacted the
reduction of the TDRs in 2022. We had recoveries totaling $241,000 in 2022 and
$160,000 in 2021.
The historical loss percentage factor for multifamily, non-residential, and
commercial and industrial loans declined while the historical loss percentage
factor for mixed-use, construction, and consumer loans increased. The historical
loss percentage factor declined because one single charge-off of $152,000 in
2017 for multifamily loans, one single loan charge-off of $125,000 in 2017 for
non-residential loans were out of the historical loss look back period, and
therefore were not included in the historical loss rate calculation at December
31, 2022 . The historical loss percentage factor for commercial and industrial
loans decreased due to decreased historical loss as a percentage of total
historical loss over the years. The historical loss percentage factor for
mixed-use, construction, and consumer loans increased due to loan charge-offs in
2022. Other adjustments in provision for loan loss include movements in the
qualitative factors as risks in each respective segment change.
Loans evaluated collectively totaled $1.2 billion at December 31, 2022 compared
to $971.2 million at December 31, 2021 . Loans evaluated individually totaled
$855,000 at December 31, 2022 compared to $1.6 million at December 31, 2021 .
Interest Rate Risk Management
Interest rate risk is defined as the exposure to current and future earnings and capital that arises from adverse movements in interest rates. Depending on a bank's asset/liability structure, adverse movements in interest rates could be either rising or falling interest rates. For example, a bank with predominantly long-term fixed-rate assets and short-term liabilities could have an adverse earnings exposure to a rising rate environment. Conversely, a short-term or variable-rate asset base funded by longer-term liabilities could be negatively affected by falling rates. This is referred to as re-pricing or maturity mismatch risk.
Interest rate risk also arises from changes in the slope of the yield curve (yield curve risk), from imperfect correlations in the adjustment of rates earned and paid on different instruments with otherwise similar re-pricing characteristics (basis risk), and from interest rate related options embedded in our assets and liabilities (option risk).
Our objective is to manage our interest rate risk by determining whether a given movement in interest rates affects our net interest income and the market value of our portfolio equity in a positive or negative way and to execute strategies to maintain interest rate risk within established limits. The results atDecember 31, 2022 indicate the level of risk within the parameters of our model. Our management believes that theDecember 31, 2022 results indicate a profile that reflects interest rate risk exposures in both rising and declining rate environments for both net interest income and economic value. Model Simulation Analysis. We view interest rate risk from two different perspectives. The traditional accounting perspective, which defines and measures interest rate risk as the change in net interest income and earnings caused by a change in interest rates, provides the best view of short-term interest rate risk exposure. We also view interest rate risk from an economic perspective, which defines and measures interest rate risk as the change in the market value of portfolio equity caused by changes in the values of assets and liabilities, which fluctuate due to changes in interest rates. The market value of portfolio equity, also referred to as the economic value of equity, is defined as the present value of future cash flows from existing assets, minus the present value of future cash flows from existing liabilities. These two perspectives give rise to income simulation and economic value simulation, each of which presents a unique picture of our risk of any movement in interest rates. Income simulation identifies the timing and magnitude of changes in income resulting from changes in prevailing interest rates over a short-term time horizon (usually one or two years). Economic value simulation reflects the interest rate sensitivity of assets and liabilities in a more 47
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comprehensive fashion, reflecting all future time periods. It can identify the quantity of interest rate risk as a function of the changes in the economic values of assets and liabilities, and the corresponding change in the economic value of equity of the Bank. Both types of simulation assist in identifying, measuring, monitoring and controlling interest rate risk and are employed by management to ensure that variations in interest rate risk exposure will be maintained within policy guidelines. We produce these simulation reports and discuss them with our managementAsset and Liability Committee on a quarterly basis. The simulation reports compare baseline (no interest rate change) to the results of an interest rate shock, to illustrate the specific impact of the interest rate scenario tested on income and equity. The model, which incorporates asset and liability rate information, simulates the effect of various interest rate movements on income and equity value. The reports identify and measure our interest rate risk exposure present in our current asset/liability structure. Management considers both a static (current position) and dynamic (forecast changes in volume) analysis as well as non-parallel and gradual changes in interest rates and the yield curve in assessing interest rate exposures. If the results produce quantifiable interest rate risk exposure beyond our limits, then the testing will have served as a monitoring mechanism to allow us to initiate asset/liability strategies designed to reduce and therefore mitigate interest rate risk. The table below sets forth an approximation of our interest rate risk exposure. The simulation uses projected repricing of assets and liabilities atDecember 31, 2022 . The income simulation analysis presented represents a one-year impact of the interest scenario assuming a static balance sheet. Various assumptions are made regarding the prepayment speed and optionality of loans, investment securities and deposits, which are based on analysis and market information. The assumptions regarding optionality, such as prepayments of loans and the effective lives and repricing of non-maturity deposit products, are documented periodically through evaluation of current market conditions and historical correlations to our specific asset and liability products under varying interest rate scenarios. Because the prospective effects of hypothetical interest rate changes are based on a number of assumptions, these computations should not be relied upon as indicative of actual results. While we believe such assumptions to be reasonable, assumed prepayment rates may not approximate actual future prepayment activity on mortgage-backed securities or agency issued collateralized obligations (secured by one- to four-family loans and multifamily loans). Further, the computation does not reflect any actions that management may undertake in response to changes in interest rates and assumes a constant asset base. Management periodically reviews the rate assumptions based on existing and projected economic conditions and consults with industry experts to validate our model and simulation results. The table below sets forth, as ofDecember 31, 2022 , the Bank's net portfolio value, the estimated changes in our net portfolio value and net interest income that would result from the designated instantaneous parallel changes in market interest rates. Twelve Month Net Interest Income Net Portfolio Value Percent Percent
Change in Interest Rates (Basis Points) of Change
Estimated NPV of Change +200 19.92 %$ 314,474 5.00 % +100 9.98 308,494 3.00 0 - 299,513 - -100 (10.75) %$ 287,788 (3.91) %
As ofDecember 31, 2022 , based on the scenarios above, net interest income would increase by approximately 9.98% to 19.92%, over a one-year time horizon in a rising interest rate environment. One-year net interest income would decrease by approximately 10.75% in a declining interest rate environment over the same period. Conversely, economic value at risk would be negatively impacted by a rise in interest rates. We have established an interest rate floor of zero percent for measuring interest rate risk. The difference between the two results reflects the relatively long terms of a portion of our assets which is captured by the economic value at risk but has less impact on the one year net interest income sensitivity. 48 Table of Contents
Overall, our
Liquidity and Capital Resources
We maintain liquid assets at levels we believe are adequate to meet our
liquidity needs. We established a liquidity ratio policy that identify three
liquidity ratios consisting of (1) Cash/Deposits & Short Term Borrowings ("Cash
Liquidity"), (2) Cash & Investments/Deposits & Short Term Borrowings ("On
Balance Sheet Liquidity"), and (3) Cash & Investments & Borrowing
Capacity/Deposits & Short Term Borrowings ("On Balance Sheet Liquidity &
Borrowing Capacity") to assist in the management of our liquidity. We also
establish targets of 2.0% for the Cash Liquidity ratio, 8.0% for the On Balance
Sheet Liquidity ratio, and 20.0% for the On Balance Sheet Liquidity & Borrowing
Capacity ratio.
Our Cash Liquidity ratio, On Balance Sheet Liquidity ratio, and On Balance Sheet
Liquidity & Borrowing Capacity ratio averaged 11.2%, 15.5%, and 19.0%,
respectively, for the year ended December 31, 2022 compared to 12.7%, 15.7%, and
21.7%, respectively, for the year ended December 31, 2021 . We adjust our
liquidity levels to fund deposit outflows, pay real estate taxes on real estate
loans, repay our borrowings, and to fund loan commitments. We also adjust
liquidity as appropriate to meet asset and liability management objectives.
However, during the existing low interest rate environment, we have
strategically allowed these metrics to fall below the minimum thresholds at
times to provide for the effective management of extension risk and other
interest rate risks.
Our liquidity ratios cannot be calculated using amounts disclosed in our
consolidated financial statements, as many of the calculations involve monthly,
quarterly or annual averages. To calculate our liquidity ratios, the average
liquidity base from the prior month is used as the denominator to calculate a
daily liquidity ratio. The liquidity base consists of savings account balances,
certificates of deposit balances, checking and money market balances, deposit
loans and borrowings. The daily balances of these components are averaged to
arrive at the liquidity base for the month, and the daily cash balances in
selected general ledger accounts are used to derive our liquidity position. A
daily liquidity ratio is calculated using the liquidity for the day divided by
the prior month's average liquidity base. At the end of each month, a monthly
liquidity position is calculated using the average liquidity position for
the month divided by the prior month's average liquidity base. To calculate
quarterly and annual liquidity ratios, we take the average liquidity for the
three- or twelve-month period, respectively, and average it.
Our primary sources of liquidity are deposits, amortization and prepayment of
loans and mortgage-backed securities, maturities of investment securities, other
short-term investments, earnings, and funds provided from operations. While
scheduled principal repayments on loans and mortgage-backed securities are a
relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by market interest rates, economic conditions, and rates
offered by our competition. We set the interest rates on our deposits to
maintain a desired level of total deposits. In addition, we invest excess funds
in short-term interest-earning assets, which provide liquidity to meet lending
requirements.
Our cash flows are derived from operating activities, investing activities and
financing activities as reported in our Consolidated Statements of Cash Flows
included with the Consolidated Financial Statements which begin on page F-1 of
the Consolidated Financial Statements in this report.
Our primary investing activities are the origination of construction loans,
commercial and industrial loans, multifamily loans, and to a lesser extent,
mixed-use real estate loans and other loans. For the years ended December 31,
2022 and 2021, our loan originations totaled $700.1 million and $727.3 million ,
respectively. Cash received from the sales, calls, maturities and pay-downs on
securities totaled $1.5 million and $4.8 million for the years ended
December 31, 2022 and 2021, respectively. We purchased $10.0 million and $25.3
million in securities for the years ended December 31, 2022 and 2021,
respectively.
Deposit flows are generally affected by the level of interest rates we offer,
the interest rates and products offered by local competitors, and other factors.
Total deposits increased by $194.8 million at December 31, 2022 due to
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increases in non-interest bearing demand deposits, savings account deposits, and certificates of deposits, offset by a decrease in NOW/money market balances.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with theFederal Home Loan Bank of New York to provide advances. As a member of theFederal Home Loan Bank of New York , we are required to own capital stock in theFederal Home Loan Bank of New York and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by,the United States ), provided certain standards related to credit-worthiness have been met. We had an available borrowing limit of$31.5 million and$29.4 million from theFederal Home Loan Bank of New York as ofDecember 31, 2022 and 2021, respectively.Federal Home Loan Bank advances were$21.0 million and$28.0 million atDecember 31, 2022 and 2021, respectively. In addition, we have a borrowing agreement withAtlantic Community Bankers Bank ("ACBB") to provide short-term borrowings of$8.0 million atDecember 31, 2022 and 2021. There were no outstanding borrowings with ACBB atDecember 31, 2022 and 2021. AtDecember 31, 2022 , we had unfunded commitments on construction loans of$637.4 million , outstanding commitments to originate loans of$164.9 million , unfunded commitments under lines of credit of$133.9 million , and unfunded standby letters of credit of$12.5 million . AtDecember 31, 2022 , certificates of deposit scheduled to mature in less than one year totaled$258.9 million . Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as various types of sourced deposits, and/orFederal Home Loan Bank advances, in order to maintain our level of assets. Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents. In addition, the cost of such deposits may be significantly higher or lower depending on market interest rates at the time of renewal. The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, The Company is responsible for paying any dividends declared to its stockholders, and interest and principal on outstanding debt, if any. The Company's primary sources of income are interest income derived from investments in loans and interest bearing accounts at other financial institutions and dividends received from the Bank. AtDecember 31, 2022 , the Company had liquid assets of$20.3 million .
Off-Balance Sheet Arrangements
For the year ended
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see note 24 in the notes to the consolidated financial statements of the Company included in this report.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes of the 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 the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
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