PRINCETON BANCORP, INC. Our Management's Discussion and Analysis of Financial Condition and Results of Operations is presented in sections as follows:
• Overview and Strategy
• Comparison of Financial Condition at
• Comparison of Operating Results for the Years Ended
2021
• Rate/Volume Analysis
• Liquidity, Commitments and Capital Resources
• Off-Balance Sheet Arrangements
• Impact of Inflation
• Exposure to changes in Interest Rates
• Critical Accounting Policies and Estimates
• Recently Issued Accounting Standards
Overview and Strategy
We remain focused on establishing and retaining customer relationships by offering a broad range of traditional financial services and products, competitively priced and delivered in a responsive manner to small businesses, to professionals and individuals in our market area. As a community bank, we seek to provide superior customer service that is highly personalized, efficient and responsive to local needs. To better serve our customers, we endeavor to provide state-of-the-art delivery systems with ATMs, current operating software, timely reporting, online bill pay and other similar up-to-date products and services. We seek to deliver these products and services with the care and professionalism expected of a community bank and with a special dedication to personalized customer service.
Our primary business objectives are:
• to provide local businesses, professionals and individuals with
banking services responsive to and determined by their needs and
local market conditions;
• to attract deposits and loans through competitive pricing,
responsiveness and service; and
• to provide a reasonable return to stockholders on capital invested.
We strive to serve the financial needs of our customers while providing an
appropriate return to our stockholders, consistent with safe and sound banking
practices. We expect that a financial strategy that utilizes variable rates and
matching assets and liabilities will enable us to increase our net interest
margin, while managing interest rate risk. We also seek to generate fee income
from various sources, subject to our desire to maintain competitive pricing
within our market area.
Our recognition of, and commitment to, the needs of the local community, combined with highly personalized and responsive customer service, differentiates us from our competition. We continue to capitalize upon the personal contacts and relationships of our organizers, directors, stockholders and officers to establish and grow our customer base.
Comparison of Financial Condition at
General. Total assets were$1.60 billion atDecember 31, 2022 , a decrease of$85.9 million , or 5.1% when compared to$1.69 billion at the end of 2021. The primary reason for the decrease in total assets was a decrease in cash and cash equivalents of approximately$105.4 million , partially offset by an increase of$35.2 million in net loans. The increase in loans receivable primarily consisted of a$102.5 million increase in commercial real estate loans and a$13.9 million increase in construction loans, partially offset by a$77.3 million decrease in PPP loans during the twelve-month period covered. Total liabilities decreased by$88.9 million to$1.38 billion atDecember 31, 2022 from$1.47 billion atDecember 31, 2021 . Total deposits atDecember 31, 2022 decreased by$98.4 million , or 6.8%, when compared toDecember 31, 2021 , primarily due decreases of$89.4 million in money market deposits,$34.9 million in savings and$21.2 million in non-interest checking, partially offset by a$42.4 million increase in time deposits over$250,000 . The Bank had$ 10 million in borrowings atDecember 31, 2022 and no outstanding borrowings atDecember 31, 2021 . 35
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Total stockholders' equity atDecember 31, 2022 increased$3.0 million or 1.4% when compared to the end of 2021. This increase was primarily due to the$26.5 million of earnings recorded during the twelve months of 2022, offset by the$9.4 million of common stock repurchased, the$6.5 million of cash dividends paid during the period, and the$9.1 million decrease in the accumulated other comprehensive income on the available-for-sale investment portfolio related to an increase in the interest rate yield curve. The Bank completed its 2022 stock buyback program during the fourth quarter and in total repurchased 324,017 shares of common stock at a total cost of$9.4 million and a weighted average cost of$29.07 per share. The ratio of equity to total assets atDecember 31, 2022 and atDecember 31, 2021 , was 13.7% and 12.8%, respectively. We manage our balance sheet based on a number of interrelated criteria, such as changes in interest rates, fluctuations in certain asset and liability categories whose changes are not totally controlled by us, swings in deposit account balances driven by depositors' needs, prepayments and issuer call options exercised on securities available for sale, early payoffs on loans, investment opportunities presented by market conditions, lending originations, capital provided by earnings, and active management of our overall liquidity positions. The management of these dynamic and interrelated elements of our balance sheet results in fluctuations in balance sheet items throughout the year.
Comparison of Operating Results for the Years Ended
General.
Net income for the year endedDecember 31, 2022 was$26.5 million , an increase of approximately$4.0 million , or 17.8%, as compared to the year endedDecember 31, 2021 . This increase over 2021's results was primarily due to a$5.5 million increase in net-interest income, a$3.2 million decrease in the provision for loan losses and a$196,000 increase in non-interest income, partially offset by a$4.0 million increase in non-interest expenses and an$856,000 increase in income tax expense.
Net interest income.
Net interest income for the twelve-month period endedDecember 31, 2022 was$68.1 million , an increase of$5.5 million , or 8.8%, over 2021. This increase was due to a$4.8 million increase in interest earned on earning assets and a$674,000 decline in interest expense. For the twelve-month period endedDecember 31, 2022 , the average outstanding balance of earning assets decreased by$13.8 million and average outstanding interest-bearing liabilities decreased$17.0 million . The total interest rate on average interest-earning assets for the twelve-month periods endedDecember 31, 2022 and 2021 was 4.80% and 4.45%, respectively. The net interest margin increased 39 basis points from 4.02% for the year endedDecember 31, 2021 to 4.41% for the year ended December31, 2022.
Total interest and dividend income.
Total interest and dividend income increased$4.8 million , or 6.9%, to$74.1 million for the year endedDecember 31, 2022 , compared to$69.3 million for the prior year. The improvement in interest income resulted from an increase in the yield on earning assets of 35 basis points to 4.80% for the twelve-month period endedDecember 31, 2022 . Interest income and fees on loans increased$3.6 million , or 5.4%, to$71.0 million for the year endedDecember 31, 2022 , compared to$67.3 million for the prior year. The increase was attributable to a 29 basis point increase in the year-over-year average yield on loans to 5.16%, due to the rising interest rates over the period. Interest income on securities increased approximately$434,000 , or 25.1%, for the year endedDecember 31, 2022 compared to the prior year. This decrease was attributable to an$9.8 million increase in average balances and a 25 basis point increase in the yield earned on the securities portfolio. Other interest and dividends increased$726,000 , or 368.5%, to$923,000 for the year endedDecember 31, 2022 , compared to$197,000 for the prior year due to an increase in federal funds sold. This increase was due to a 94 basis point increase in the yield and a$32.2 million increase in average balances of federal funds sold.
Interest Expense.
Total interest expense decreased
Interest expense on borrowings was not meaningful for either period presented.
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Provision for Loan Losses.
The provision for credit losses for the twelve months endedDecember 31, 2022 was$400,000 compared with a provision of$3.6 million for the 2021 period. The decrease in the provision was due to a reduction in net charge-offs from$3.0 million during 2021 to$559,000 during 2022. Therefore, there was less provision needed to fund the allowance for loan losses in 2022. As ofDecember 31, 2022 and 2021, the Bank did not apply any qualitative factors to the loans originated from PPP, based on theU.S government's guarantee and the CARES Act requirement to classify these loans at 0% in determining risk-based capital ratio. The rate of allowance for credit losses to period end loans was 1.20% atDecember 31, 2022 , compared to 1.24% atDecember 31, 2021 , which reflects management's assessment of the credit quality in the loan portfolio. See the section above titled "Analysis of Allowance for Loan Losses" for a discussion of our allowance for loan losses methodology, including additional information regarding the determination of the provision for loan losses.
Non-Interest Income.
Total non-interest income for the twelve-month period endedDecember 31, 2022 increased$196 thousand , or 4.2%, from the 2021 twelve-month period, primarily due to a$282,000 recovery of a prior year loss on aSmall Business Investment Company ("SBIC") fund. Non-Interest Expense. For the twelve-month period endedDecember 31, 2022 , non-interest expense was$38.5 million , compared to$34.5 million for the same period in 2021. This increase was primarily due to an increase in salaries and employee benefits as well as data processing and communications costs to enhance services provided to customers. These increases resulted from inflation pressure on these expenses.
Income Tax Expense.
For the year endedDecember 31, 2022 , the Bank recorded income tax expense of$7.6 million resulting in an effective tax rate of 22.2%, compared to a$6.7 million expense resulting in an effective tax rate of 23.0% for the same period in 2021. The current effective tax rate was impacted by a refund related to a prior tax period and the impact of legislation enacted by the Governor of theState of New York establishing an economic nexus threshold of$1.0 million inNew York City ("NYC") receipts for purposes of the NYC business corporation tax for tax years beginning on or afterJanuary 1, 2022 , partially offset by the diminished impact of tax-exempt income resulting from an increase in earnings. 37
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Average Balance Sheets. The following table sets forth average balance sheets, yields and costs, and certain other information for the years indicated. The average yields and costs of funds shown are derived by dividing income or expense by the daily average balance of assets or liabilities, respectively, for the periods presented. Net loan fees of$5.2 million and$9.2 million were recorded for twelve months endedDecember 31, 2022 and 2021, respectively. Nonaccrual loans are included in the average balance of loans receivable, net for all periods presented. No tax-equivalent adjustments have been made. 2022 2021 Change 2022 vs 2021 Average Income/ Yield Average Income/ Yield Average Yield Balances Expense Rates Balances Expense Rates Balances Rates (Dollars in thousands) Interest-earning assets: Loans receivable$ 1,375,501 $ 70,996 5.16 %$ 1,381,626 $ 67,348 4.87 %$ (6,125 ) 0.29 % Securities Taxable available-for-sale 47,358 986 2.08 % 33,805 547 1.62 % 13,553 0.46 % Tax exempt available-for-sale 43,549 1,167 2.68 % 47,294 1,172 2.48 % (3,745 ) 0.20 % Held-to-maturity 204 11 5.39 % 212 11 5.19 % (8 ) 0.20 % Federal funds sold 66,292 797 1.20 % 43,402 50 0.11 % 22,890 1.09 % Other interest earning-assets 10,612 126 1.19 % 50,995 147 0.29 % (40,383 ) 0.90 % Total interest-earning assets 1,543,516$ 74,083 4.80 % 1,557,334$ 69,275 4.45 % (13,818 ) 0.35 % Other non-earnings assets 101,940 101,479 461 Total assets$ 1,645,456 $ 1,658,813 $ (13,357 ) Interest-bearing liabilities Demand$ 261,951 $ 823 0.31 %$ 263,715 $ 716 0.27 %$ (1,764 ) 0.04 % Savings 220,222 714 0.32 % 205,788 512 0.25 % 14,434 0.08 % Money markets 353,224 1,565 0.44 % 339,903 1,004 0.30 % 13,321 0.15 % Certificates of deposit 293,627 2,893 0.99 % 336,488 4,441 1.32 % (42,861 ) -0.33 % Total deposit 1,129,024 5,995 0.42 % 1,145,894 6,673 0.58 % (16,870 ) -0.16 % Borrowings 153 5 3.37 % 270 1 0.37 % (117 ) 3.00 % Total interest-bearing liabilities 1,129,177$ 6,000 0.53 % 1,146,164$ 6,674 0.58 % (16,987 ) -0.05 % Non-interest-bearing deposits 280,729 273,260 7,469 Other liabilities 20,755 25,470 (4,715 ) Total liabilities 1,430,661 1,444,894 (14,233 ) Stockholders' equity 214,795 213,919 876 Total liabilities and stockholder's equity$ 1,645,456 $ 1,658,813 $ (13,357 ) Net interest-earnings assets$ 414,339 $ 411,170 $ 3,169 Net interest income; interest rate spread 4.27 % 3.87 % 0.39 % Net interest margin$ 68,083 4.41 %$ 62,601 4.02 %$ 5,482 0.39 % Net interest margin FTE1 4.47 % 4.08 % 0.39 %
1 Includes federal and state tax effect of tax exempt securities and loans.
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Rate/Volume Analysis
The following table reflects the sensitivity of our interest income and interest
expense to changes in volume and in yields on interest-earning assets and costs
of interest-bearing liabilities during the periods indicated.
Twelve Months Ended
December 31,
2022 vs. 2021
Increase (Decrease) Due to
Rate Volume Net
(Dollars in thousands)
Interest and dividend income:
Loans receivable, including fees $ 3,964 $ (316 ) $ 3,648
Investment securities
Available-for-sale 212 222 434
Other interest-earning assets 935 (209 ) 726
Total interest-earning assets $ 5,111 $ (303 ) $ 4,808
Interest expense:
Interest-bearing demand and savings deposits $ 268 $ 41 $ 309
Money market 502 59 561
Certificates of deposit (1,126 ) (422 ) (1,548 )
Borrowings 8 (4 ) 4
Total interest expense $ (348 ) $ (326 ) $ (674 )
Change in net interest income $ 5,459 $ 23 $ 5,482 Liquidity, Commitments and Capital Resources
Liquidity. Our liquidity, represented by cash and due from banks, is a product of our operating, investing and financing activities. Our primary sources of funds are deposits, principal repayments of securities and outstanding loans, and funds provided from operations. In addition, we invest excess funds in short-term interest-earnings assets such as overnight deposits orU.S. agency securities, which provide liquidity to meet lending requirements. While scheduled payments from the amortization of loans and securities and short-term investments are relatively predictable sources of funds, general interest rates, economic conditions and competition greatly influence deposit flows and repayments on loans and mortgage-backed securities. We strive to maintain sufficient liquidity to fund operations, loan demand and to satisfy fluctuations in deposit levels. We are required to have enough investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound banking operations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. We attempt to maintain adequate but not excessive liquidity, and liquidity management is both a daily and long-term function of our business management. We manage our liquidity in accordance with a board of directors-approved asset-liability policy, which is administered by our asset-liability committee ("ALCO"). ALCO reports interest rate sensitivity, liquidity, capital and investment-related matters on a quarterly basis to our board of directors. We review cash flow projections regularly and update them in order to maintain liquid assets at levels believed to meet the requirements of normal operations, including loan commitments and potential deposit outflows from maturing certificates of deposit and savings withdrawals. While deposits are our primary source of funds, when needed we are also able to generate cash through borrowings from the FHLB-NY. AtDecember 31, 2022 , we had remaining available capacity with FHLB-NY, subject to certain collateral restrictions, of$165.0 million . 39
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Additionally, we are a shareholder ofAtlantic Community Bancshares, Inc. , and as such, as ofDecember 31, 2022 , we had available capacity with its subsidiary,Atlantic Community Bankers Bank of$10.0 million to provide short-term liquidity generally for a period of not more than fourteen days.
Contractual Obligations. We have non-cancelable operating leases for branch
offices and our operations center. The following table is a schedule of future
payments under operating leases with initial terms longer than 12 months at
Amount
Years Ended December 31 (in thousands)
2023 $ 2,298
2024 2,065
2025 2,048
2026 1,854
2027 1,559
Thereafter 10,371
Total $ 20,195 The following table summarizes our contractual cash obligations relating to certificates of deposits:
Amount
Years Ended December 31 (in thousands)
2023 $ 158,658
2024 120,028
2025 36,246
2026 21,786
2027 and thereafter 1,859
Total $ 338,577
Capital Resources. Consistent with our goals to operate as a sound and
profitable financial institution, we actively seek to maintain our status as a
well-capitalized institution in accordance with regulatory standards. As of
December 31, 2022 , we met the capital requirements to be considered "well
capitalized." See Note 16 - "Regulatory Matters" in the Notes to Consolidated
Financial Statements included within this Form 10-K for more information
regarding our capital resources.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the
normal course of our business of investing in loans and securities as well as in
the normal course of maintaining and improving our facilities. These financial
instruments include significant purchase commitments, such as commitments
related to capital expenditure plans and commitments to purchase investment
securities or mortgage-backed securities, and commitments to extend credit to
meet the financial needs of our customers.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the loan contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee by our customers. Our exposure to credit loss
in the event of non-performance by the counterparty to the financial instrument
for commitments to extend credit is represented by the contractual notional
amount of those instruments. We use the same credit policies in making
commitments and conditional obligations as we do for on-balance-sheet
instruments. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
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We had the following off-balance sheet financial instruments whose contract
amounts represent credit risk at
2022 2021
(in thousands)
Performance and standby letters of credit
41,753 41,816
Unfunded commitments under lines of credit 5,800 4,573
Total$ 189,511 $ 286,031
For additional information regarding our outstanding lending commitments at
Impact of Inflation
The financial statements included in this document have been prepared in accordance with accounting principles generally accepted inthe United States of America . These principles require the measurement of financial position and results of operations in terms of historical dollars, without considering changes in the relative purchasing power of money, over time, due to inflation. Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation.
Exposure to Changes in Interest Rates
Gap Analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring the Bank's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to affect adversely net interest income while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to affect adversely net interest income. The table on the next page sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding atDecember 31, 2022 , which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the "GAP Table"). Except as stated below, the amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities atDecember 31, 2022 , on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase. 41
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More than 3 More than 1 More than 3
3 Months or Months to 1 Year to 3 Years to 5 More than 5 Non-Rate
less Year Years Years Years Sensitive Total Amount
(Dollars in thousands)
Interest-earning assets: (1)
Investment securities $ 8,147 $ 4,457 $ 6,971 $ 8,338 $ 69,151 $ (13,461 ) $ 83,603
Loans receivable 470,378 172,613 349,256 294,296 85,880 (18,516 ) 1,353,907
Other interest-earnings assets (2) 42,932 - - - - 12,161 55,093
Other non-interest assets - - - - - 109,176 109,176
Total interest-earning assets $ 521,457 $
177,070
Interest-bearing liabilities: Checking and savings accounts$ 11,889 $ 448,533 $ - $ - $ - $ -$ 460,422 Money market accounts 15,391 268,261 - - - - 283,652 Certificate accounts 27,209 131,359 157,039 22,971 - - 338,578 Total interest-bearing liabilities$ 54,489 $ 848,153 $ 157,039 $ 22,971 $ - $ -$ 1,082,652 Interest-earning assets less interest-bearing liabilities$ 466,968 $ (671,083 ) $ 199,188 $ 279,663 $ 155,031 $ (19,816 ) $ 519,127
Cumulative interest-rate sensitivity gap (3)
Cumulative interest-rate gap as a percentage of total assets at December 31, 2022 29.15 % -12.74 % -0.31 % 17.15 % 26.83 % Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at December 31, 2022 956.99 % 77.39 % 99.54 % 125.38 % 139.70 %
(1) Interest-earnings assets are included in the period in which the balances are
expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) Includes interest-bearing bank balances, FHLB Stock and Federal Funds Sold
(3) Interest-rate sensitivity gap represents the difference between total
interest-earning assets and total interest-bearing liabilities.
Net Portfolio Value Analysis. Our interest rate sensitivity also is monitored by
management through the use of a model which generates estimates of the changes
in our net portfolio value ("NPV") over a range of interest rate scenarios. NPV
is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the
same scenario. The following table sets forth our NPV as of December 31, 2022
and reflects the changes to NPV as a result of immediate and sustained changes
in interest rates as indicated.
Change in NPV as % of Portfolio
Interest Rates Net Portfolio Value Value of Assets
In Basis Points
(Rate Shock) Amounts $ Change % Change NPV Ratio Change
(Dollars in thousands)
300 $ 331,335 $ (1,509 ) -0.45 % -7.10 % -5.85 %
200 $ 341,112 $ 8,268 2.48 % -4.89 % -3.64 %
100 $ 340,044 $ 7,200 2.16 % -3.00 % -1.76 %
Static $ 332,844 $ - -1.25 %
(100) $ 332,718 $ (126 ) -0.04 % 0.26 % 1.51 %
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As is the case with the GAP Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV model provides an indication of interest rate risk exposure at a particular point in time, such model is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.
Critical Accounting Policies and Estimates
In the preparation of our financial statements, we have adopted various accounting policies that govern the application of accounting principles generally accepted inthe United States and in accordance with general practices within the banking industry. Our significant accounting policies are described in our financial statements under Note 1- "Summary of Significant Accounting Policies." While all these policies are important to understanding the financial statements, certain accounting policies described below involve significant judgment and assumptions by management that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting estimates 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. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and assumptions that could have a material impact on the carrying values of our assets and liabilities and our results of operations. Allowance for Credit Losses. The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents our estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents our estimate of losses inherent in our unfunded loan commitments and is recorded in other liabilities on the balance sheet. The allowance for loan losses is increased by the provision for loan losses and recoveries, and decreased by charge-offs. Generally, loans deemed to be uncollectible are charged-off against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance for loan losses. All, or part, of the principal balance of loans receivable are charged-off to the allowance for loan losses when it is determined that the repayment of all, or part, of the principal balance is highly unlikely. For a more detailed discussion of our allowance for loan loss methodology and the allowance for loan losses see the section titled "Analysis of Allowance for Loan Losses" in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Other-Than-Temporary Impairment. Management evaluates securities for other-than-temporary-impairment ("OTTI") quarterly, and more frequently when economic or market conditions warrant such an evaluation. In determining OTTI under FASB Accounting Standards Codification ("ASC") Topic 320, Investments - Debt and Equity Securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost; (2) the financial condition and near term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an OTTI decline exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows. When an OTTI of debt securities occurs, the amount of the OTTI recognized in earnings depends on whether the Bank intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Bank intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings at an amount equal to the difference between the securities' amortized cost basis and its fair value at the balance sheet date. If the Bank does not intend to sell the security and it is not more likely that the Bank will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors shall be recognized in other comprehensive income, net of applicable tax benefit. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.Goodwill and Core Deposit Intangible. Both goodwill and the core deposit intangible asset are reviewed for impairment annually or when events and circumstances indicate that an impairment may have occurred. AtMay 31, 2022 , the Bank in reviewing whether its goodwill was impaired looked at applicable accounting guidance requires an annual review of the fair value of a Reporting Unit that has goodwill in order to determine if it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a Reporting Unit is less than its carrying amount, including goodwill. A qualitative factor test can be performed to determine whether it is necessary to perform a quantitative goodwill impairment test. If this qualitative test determines it is not more likely than not (less than 50% probability) the fair value of the Reporting Unit exceed the Carrying Value, then the Bank does not have to perform a quantitative test and goodwill can be considered not impaired. After performing the qualitative factor test the result was the Bank was more than 50% probable the fair value of the Reporting Unit exceeds the than the Carrying Value, therefore a quantitative test was not required as ofMay 31, 2022 . 43
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Income Taxes. We account for income taxes in accordance with income tax accounting guidance contained in FASB ASC Topic 740, Income Taxes. This includes guidance related to accounting for uncertainties in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. We had no material unrecognized tax benefits or accrued interest and penalties as ofDecember 31, 2022 and 2021. Our policy is to account for interest and penalties as a component of other expense. We have provided for federal and state income taxes on the basis of reported income. The amounts reflected on our tax returns differ from these provisions due principally to temporary differences in the reporting of certain items for financial reporting and income tax reporting purposes. The tax effect of these temporary differences is accounted for as deferred taxes applicable to future periods. Deferred income tax expense or benefit is determined by recognizing deferred tax liabilities and assets, respectively, for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. The realization of deferred tax assets is assessed and a valuation allowance provided for the full amount which is not more-likely-than-not to be realized. OnSeptember 29, 2020 ,New Jersey GovernorPhil Murphy signed into law A.4721, extending throughDecember 31, 2023 , the 2.5% surtax currently imposed on Corporation Business Tax (CBT) filers with allocated taxable net income over$1 million . As originally enacted, the surtax rate was scheduled to decrease from 2.5% to 1.5% for privilege periods beginning on or afterJanuary 1, 2020 throughDecember 31, 2021 and expire for privilege periods beginning on or afterJanuary 1, 2022 . The change made by A.4721 took effect immediately and applied retroactively to privilege periods beginning on or afterJanuary 1, 2020 . The Bank recorded an additional$63,000 in income tax expense related to the adjusted surtax during 2020. Effective in 2019,New Jersey has adopted combined income tax reporting for certain members of a commonly-controlled unitary business group.
Recently Issued Accounting Standards
See Note 1- "Summary of Significant Accounting Policies" in the Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-K for a discussion of recently issued accounting standards.
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