Bogota Financial Corp. 10-K

ITEM 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market for Registrant ’ s Common Equity The common stock of Bogota Financial Corp. is listed on The NASDAQ Capital Market under the symbol “BSBK”. At March 28, 2024, Bogota Financial Corp. had approximately 1,975 stockholders of record. Bogota Financial Corp. currently does not anticipate paying a dividend to its stockholders. The payment and amount of any dividend payments will be subject to statutory and regulatory limitations, and will depend upon a number of factors, including the following: regulatory capital requirements; our financial condition and results of operations; our other uses of funds for the long-term value of stockholders; tax considerations; the Federal Reserve Board’s current regulations restricting the waiver of dividends by mutual holding companies; and general economic conditions. There were no sales of unregistered securities during the quarter ended December 31, 2023. On May 24, 2023, the Company announced it had received regulatory approval for the repurchase of up to 249,920 shares of its common stock, which was approximately 5% of its then outstanding common stock (excluding shares held by Bogota Financial, MHC). As of December 31, 2023, 216,837 shares have been repurchased under this program at a cost of $1.6 million. The following table provides information on repurchases by the Company of its common stock under the Company's Board approved program during the fourth quarter of 2023. ISSUER PURCHASES OF EQUITY SECURITIES Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs October 1 - 31, 2023 38,600 $ 7.41 38,600 89,019 November 1 - 30, 2023 20,000 7.19 20,000 69,019 December 1 - 31, 2023 35,936 7.64 35,936 33,083 Total 94,536 $ 7.45 94,536 ITEM 6. RESERVED 35 Table of Contents ITEM 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations This discussion and analysis reflects the information contained in our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. Certain of the information in this section has been derived from the consolidated financial statements, which appear elsewhere in this Annual Report on Form 10-K. You should read the information in this section in conjunction with the other business and financial information provided in this Annual Report on Form 10-K. Overview Net Interest Income. Our primary source of income is net interest income. Net interest income is the difference between interest income, which is the income we earn on our loans and investments, and interest expense, which is the interest we pay on our deposits and borrowings. Provision for Credit Losses. The current expected credit loss (“CECL”) model requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). It replaces the incurred loss model that delayed the recognition of a credit loss until it was probable that a loss event was incurred. The estimate of expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the historical period used. The Company considers future economic conditions and portfolio performance as part of a reasonable and supportable forecast. Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses (“ACL”). The Company has designated six portfolio segments, which are residential, commercial real estate, multi-family, construction, commercial and industrial and consumer. These portfolio segments are further disaggregated into classes, which represent loans and leases of similar type, risk characteristics, and methods for monitoring and assessing credit risk. The Company has minimal history of credit losses and therefore uses the Weighted Average Remaining Maturity method for all segments and relies on the use of qualitative factors to determine future credit losses. The Company considers the impact of current environmental factors at the reporting date that did not exist over the period from which historical experience was used. Relevant factors include, but are not limited to, concentrations of credit risk (geographic, large borrower, and industry), economic trends and conditions, changes in underwriting standards, experience and depth of lending staff, trends in delinquencies, and the level of criticized loans. The Company also incorporates a one-year reasonable and supportable loss forecast period to account for the effect of forecasted economic conditions and other factors on the performance of the commercial portfolio, which could differ from historical loss experience. The Company performs a quarterly asset quality review, which includes a review of forecasted gross charge-offs and recoveries, non-performing assets, criticized loans and leases, and risk rating migration. The asset quality review is reviewed by management and the results are used to consider a qualitative overlay to the quantitative baseline. After the one-year reasonable and supportable loss forecast period, this overlay adjustment assumes an immediate reversion to historical loss rates for the remaining loan life period. The Company establishes a specific reserve for individually evaluated loans which do not share similar risk characteristics with the loans included in the quantitative baseline. These individually evaluated loans are removed from the pooling approach discussed above for the quantitative baseline, and include non-accrual loans, and other loans as deemed appropriate by management. A financial asset is considered collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of loans deemed collateral-dependent, the Company elected the practical expedient to estimate expected credit losses based on the collateral’s fair value less cost to sell. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less cost to sell. Substantially all of the collateral consists of various types of real estate, including, residential properties; commercial properties, such as retail centers, office buildings, and lodging; agriculture land; and vacant land. The reserve for unfunded commitments (the “Unfunded Reserve”) represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The Unfunded Reserve is recognized as a liability (other liabilities in the consolidated statements of condition), with adjustments to the reserve recognized in other noninterest expense in the consolidated statements of income. The Unfunded Reserve is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). To estimate future draws on unfunded balances, current utilization rates are compared to historical utilization rates. If current utilization rates are below historical utilization rates, the rate difference is applied to the committed balance to estimate the future draw. Loss rates are estimated by utilizing the same loss rates calculated for the allowance general reserves. Non-Interest Income. Our primary sources of non-interest income are banking fees and service charges, net gains in cash surrender value of bank-owned life insurance and miscellaneous income. Non-Interest Expenses. Our non-interest expenses consist of salaries and employee benefits, net occupancy, equipment, data processing, federal deposit insurance premiums, advertising, directors fees, professional fees and other general and administrative expenses. Salaries and employee benefits consist primarily of salaries and wages paid to our employees, payroll taxes, expenses for workers' compensation and disability insurance, health insurance, retirement plans, our employee stock ownership plan, our equity incentive plan and other employee benefits, as well as other incentives. Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, rental expenses, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using a straight-line method based on the estimated useful lives of the related assets or the expected lease terms, if shorter. Federal deposit insurance premiums are payments we make to the Federal Deposit Insurance Corporation for insurance of our deposit accounts. Data processing expenses are fees we pay to third parties for use of their software and for processing customer information, deposits and loans. Advertising includes most marketing expenses, including multi-media advertising (public and in-store), promotional events and materials, civic and sales-focused memberships, and community support. Professional fees include legal, accounting, auditing, risk management and payroll processing expenses. Directors fees consist of the fees we pay to our directors for their service on our board of directors, as well as the costs associated with the directors’ retirement plan and grants to directors under our equity incentive plan. Other expenses include expenses for office supplies, postage, telephone, insurance and other miscellaneous operating expenses. 36 Table of Contents Income Tax Expense. Our income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and the tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amounts expected to be realized. Business Strategy Our business strategy is to operate as a well-capitalized and profitable community bank dedicated to providing personal service to individuals and businesses. We believe that we have a competitive advantage in the markets we serve because of our 130-year history in the community, our knowledge of the local marketplace and our long-standing reputation for providing superior, relationship-based customer service. We believe we can distinguish ourselves by maintaining the culture of a local community bank. The following are the key elements of our business strategy: Continue to focus on residential real estate lending. We have been, and will continue to be, primarily a one- to four-family residential real estate lender in our market area. As of December 31, 2023, $486.1 million, or 67.7% of our total loan portfolio, consisted of one- to four-family residential real estate loans. We expect that one- to four-family residential real estate lending will remain our primary lending activity. Continue to emphasize commercial and multi-family real estate lending. We view the growth of commercial real estate and multi-family lending as a means of increasing our interest income and the yield on our loan portfolio, and reducing the average term to repricing of our loans. We believe that local banking consolidation has created opportunities to attract talent with experience originating commercial real estate loans within our market area. Further, the additional capital raised in the offering enabled us to increase our commercial real estate and multi-family loan originations in our market area, and originate loans with larger balances. Our commercial real estate and multi-family loan portfolio increased to $175.4 million, or 24.5% of total loans, at December 31, 2023, from $162.3 million, or 22.5% of total loans, at December 31, 2022. Increase lower-cost core deposits . We continue to emphasize offering core deposits (demand deposit accounts, savings accounts and money market accounts) to individuals, businesses and municipalities. We attract and retain transaction accounts by offering competitive products and rates and providing quality customer service. Core deposits are our least costly source of funds, which improves our interest rate spread and also contributes non-interest income from account related services. However, at December 31, 2023, core deposits decreased to 21.1% of our total deposits compared to 29.8% of our total deposits at December 31, 2022 due to customers moving funds to higher-yielding certificates of deposits in the higher interest rate environment. Grow through opportunistic bank or branch acquisitions. We plan to open a new branch in Upper Saddle River during the second quarter of 2024. We will consider acquisition opportunities that may enhance the value of our franchise and yield potential financial benefits for our stockholders. Although we believe opportunities exist to increase our market share in our market, we expect to expand into contiguous markets. The capital we raised in the offering will also provide us the opportunity to acquire smaller institutions or fee-based businesses located in or contiguous to our market area. Continue to emphasize operating efficiencies and cost controls . We are focused on controlling expenses while increasing our net income. We are disciplined in managing non-interest expenses by identifying cost savings opportunities such as renegotiating key third-party contracts and reducing other operating expenses. Our efficiency ratio was 97.04% for the year ended December 31, 2023 compared to 59.03% for the year ended December 31, 2022. The increase was primarily due to one-time severance costs associated with the change in our President and Chief Executive Officer. To support our growth in a cost-effective way, we plan to continue to invest prudently in technology to help improve our operational infrastructure. 37 Table of Contents Maintain disciplined underwriting . We emphasize a disciplined credit culture based on intimate knowledge of the market, close ties to our customers, sound underwriting standards and experienced loan officers. We are committed to actively monitoring and managing our loan portfolio in an effort to proactively identify and mitigate credit risks within the portfolio. At December 31, 2023, non-performing assets totaled $12.8 million, which represented 1.36% of total assets. At December 31, 2022, there were $857,000 of non-performing assets which represented 0.09% of total assets. Critical Accounting Policies The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, income and expenses and disclosure of contingent assets and liabilities. We consider the accounting policy discussed below to be a critical accounting policy, which is presented in the notes to the consolidated financial statements. The estimates and assumptions that we use are based on historical experience and various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations. The JOBS Act, which was enacted in 2012, contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we plan to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be fully comparable to public companies that comply with such new or revised accounting standards. The following represents our critical accounting policy: Allowance for Credit Losses. The allowance for credit losses is the amount estimated by management as necessary to absorb credit losses in the loan portfolio that are expected over the life of an exposure (or pool of exposures). The amount of the allowance is based on significant estimates, and the ultimate losses may vary from such estimates as more information becomes available or conditions change. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions used and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for credit losses. As a substantial percentage of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans. Assumptions are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance. Management reviews the assumptions supporting such appraisals to determine that the resulting values reasonably reflect amounts realizable on the related loans. Management performs an evaluation of the adequacy of the allowance for credit losses at least quarterly. We consider a variety of factors in establishing this estimate including current economic and forecasted conditions, delinquency statistics, geographic concentrations, and the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions. The evaluation has polled and individual components. The individual component relates to loans that do not share similar risk characteristics with the remaining loans in the pools that are collectively evaluated. For such loans that are also collateral dependent, an allowance is generally established when the collateral value, less costs to sell as appropriate, of the loan is lower than the carrying value of that loan. The general component covers non-classified loans that share similar risk characteristics and is based on the weighted average remaining maturity and historical loss experience adjusted for qualitative factors. 38 Table of Contents Actual credit losses may be significantly more than the allowance we have established which could have a material negative effect on our financial results. See Note 1 to the Notes to the consolidated financial statements for a complete discussion of the allowance for loan losses. Selected Financial Data The following tables set forth selected historical financial and other data for Bogota Financial Corp. and Bogota Savings Bank at and for the periods indicated. The following information is only a summary and should be read in conjunction with our consolidated financial statements and the notes thereto contained in this Annual Report on Form 10-K. The information at and for the years ended December 31, 2023 and 2022 is derived in part from the audited consolidated financial statements appearing in this Annual Report on Form 10-K. At December 31, 2023 2022 (In thousands) Selected Financial Condition Data: Total assets $ 939,324 $ 951,099 Cash and cash equivalents 24,929 16,841 Securities held-to-maturity 72,656 77,427 Securities available-for-sale 68,888 85,101 Loans receivable, net 714,689 719,026 Bank owned life insurance 30,988 30,206 Total liabilities 802,151 811,440 Deposits 625,347 701,411 Borrowings 167,690 102,319 Total equity 137,173 139,659 For the Year Ended December 31, 2023 2022 (In thousands) Selected Operating Data: Interest income $ 37,280 $ 30,347 Interest expense 22,307 7,269 Net interest income 14,973 23,078 Provision for (recovery) credit loan losses $ (125 ) 425 Net interest income after provision for (recovery) credit losses 15,098 22,653 Non-interest income 1,139 1,123 Non-interest expenses 15,756 14,285 Income before income taxes 481 9,491 Income taxes (benefit) expense $ (162 ) 2,614 Net income $ 643 $ 6,877 39 Table of Contents At or For the Year Ended December 31, 2023 2022 Performance Ratios: Return on average assets (1) 0.07 % 0.77 % Return on average equity (2) 0.46 % 4.76 % Interest rate spread (3) 1.28 % 2.59 % Net interest margin (4) 1.71 % 2.76 % Efficiency ratio (5) 97.04 % 59.03 % Average interest-earning assets to average interest-bearing liabilities 116.95 % 119.60 % Loans to deposits 114.29 % 102.51 % Average equity to assets (6) 14.89 % 16.22 % Capital Ratios: (Bank only) Tier 1 capital (to adjusted total assets) 15.24 % 15.61 % Other Data: Number of offices 6 6 Number of full-time equivalent employees 68 61 (1) Represents net income divided by average total assets. (2) Represents net income divided by average equity. (3) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost on average interest-bearing liabilities. Tax exempt income is reported on a tax equivalent basis using a combined federal and state marginal tax rate of 28% for 2023 and 2022. (4) Represents net interest income as a percent of average interest-earning assets. Tax exempt income is reported on a tax equivalent basis using a combined federal and state marginal tax rate of 28% for 2023 and 2022. (5) Represents non-interest expense divided by the sum of net interest income and non-interest income. (6) Represents average equity divided by average total assets. 40 Table of Contents Average Balance Sheets The following tables set forth average balances, 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 are 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 interest income or interest expense, as applicable. For the Years Ended December 31, 2023 2022 Average Balance Interest and Dividends Yield/ Cost Average Balance Interest and Dividends Yield/Cost (Dollars in thousands) Assets: Cash and cash equivalents $ 10,868 $ 568 5.23 % $ 25,044 $ 117 0.47 % Loans 713,799 32,046 4.49 638,679 26,264 4.11 Securities 144,880 4,162 2.87 167,987 3,678 2.19 Other interest-earning assets 6,389 504 7.90 5,677 288 5.05 Total interest-earning assets 875,936 37,280 4.26 837,387 30,347 3.62 Non-interest-earning assets 54,925 52,525 Total assets $ 930,861 $ 889,912 Liabilities and Equity: NOW and money market accounts $ 85,663 1,399 1.63 $ 140,473 787 0.56 Savings accounts 48,351 580 1.20 62,626 184 0.29 Certificates of deposit 498,129 16,045 3.22 394,593 4,136 1.05 Total interest-bearing deposits 632,143 18,024 2.85 597,692 5,107 0.85 Federal Home Loan Bank advances (1) 116,816 4,283 3.67 102,458 2,162 2.11 Total interest-bearing liabilities 748,959 22,307 2.98 700,150 7,269 1.04 Non-interest-bearing deposits 38,636 41,501 Other non-interest-bearing liabilities 4,627 3,914 Total liabilities 792,222 745,565 Total equity 138,639 144,347 Total liabilities and equity $ 930,861 $ 889,912 Net interest income $ 14,973 $ 23,078 Interest rate spread (2) 1.28 % 2.58 % Net interest margin (3) 1.71 % 2.76 % Average interest-earning assets to average interest-bearing liabilities $ 126,977 $ 137,237 (1) Cash flow hedges are used to manage interest rate risk. During the year ended December 31, 2023, the net effect on interest expense on Federal Home Loan Bank advances was a reduced expense of $364,000. (2) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (3) Net interest margin represents net interest income divided by average total interest-earning assets. 41 Table of Contents Rate/Volume Analysis The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. 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 two columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. Year Ended December 31, 2023 vs 2022 Increase (Decrease) Due to Volume Rate Net (In thousands) Interest income: Cash and cash equivalents $ (102 ) $ 553 $ 451 Loans receivable 3,248 2,534 5,782 Securities (554 ) 1,038 484 Other interest-earning assets 39 178 217 Total interest-earning assets 2,631 4,303 6,934 Interest expense: NOW and money market accounts (406 ) 1,018 612 Savings accounts (51 ) 447 396 Certificate of deposit 1,339 10,571 11,910 Federal Home Loan Bank advances 338 1,783 2,121 Total interest-bearing liabilities 1,220 13,819 15,039 Net increase (decrease) in net interest income $ 1,411 $ (9,516 ) $ (8,105 ) Comparison of Financial Condition at December 31, 2023 and December 31, 2022 Total Assets. Total assets decreased $11.8 million, or 1.2%, to $939.3 million at December 31, 2023 from $951.1 million at December 31, 2022. The decrease was primarily due to $4.3 million decrease in loans receivable and a $21.0 million decrease in securities, partially offset by an increase in cash and cash equivalents of $8.1 million. Cash and Cash Equivalents. Total cash and cash equivalents increased $8.1 million, or 48.0%, to $24.9 million at December 31, 2023 from $16.8 million at December 31, 2022. This increase was primarily due to loan payments received, proceeds from calls and maturities of securities and additional borrowings, offset by the decrease in deposits. Securities Available for Sale. Total securities available for sale decreased $16.2 million, or 19.1%, to $68.9 million at December 31, 2023 from $85.1 million at December 31, 2022. The decrease was due to decreases of $7.7 million in mortgage-backed securities, $80,000 in agency bonds, $4.9 million in U.S. treasury bills and $3.7 million in corporate bonds. Securities Held to Maturity. Total securities held to maturity decreased $4.8 million, or 6.2%, to $72.7 million at December 31, 2023 from $77.4 million at December 31, 2022, primarily due to a $7.7 million decrease in municipal securities and a $5.8 million of principal pay downs and maturities on mortgage-backed securities offset by a $8.7 million increase in corporate bonds. Net Loans. Net loans decreased $4.3 million, or 0.6%, to $714.7 million at December 31, 2023 from $719.0 million at December 31, 2022 due to $69.0 million in repayments, partially offset by new production of $64.7 million. Due to the interest rate environment, we have seen a decrease in demand for residential and construction loans, which have been primary drivers of our loan growth in recent periods. The decrease in net loans was due to a $9.6 million, or 1.9%, decrease in one- to four-family residential real estate loans and home equity lines of credit secured by one- to four-family residential real estate to $486.1 million at December 31, 2023 from $495.7 million at December 31, 2022, and a decrease of $12.5 million, or 20.3%, in construction loans to $49.3 million at December 31, 2023 from $61.8 million at December 31, 2022 offset by an increase of $13.0 million, or 8.0%, increase in commercial and multi-family real estate loans to $175.4 million at December 31, 2023 from $162.3 million at December 31, 2022, and an increase of $5.0 million, or 295.3%, in commercial and industrial loans to $6.7 million at December 31, 2023 from $1.7 million as of December 31, 2022. As of December 31, 2023the Bank had no loans held for sale. 42 Table of Contents Bank-Owned Life Insurance. Bank-owned life insurance increased $782,000, or 2.6%, to $31.0 million at December 31, 2023 from $30.2 million at December 31, 2022 due to an increase in the cash surrender value. The was no new bank-owned life insurance purchased in 2023. Deposits. Total deposits decreased $76.1 million, or 10.8%, to $625.3 million at December 31, 2023 from $701.4 million at December 31, 2022. The decrease in deposits reflected decreases in NOW, money market and savings accounts, which decreased by $68.7 million from $170.2 million at December 31, 2022 to $101.5 million at December 31, 2023, offset by an increase in certificate of deposit accounts, which increased by $682,000 to $493.3 million from $492.6 million at December 31, 2022. At December 31, 2023, municipal deposits totaled $48.0 million, which represented 7.7% of total deposits, and brokered deposits totaled $53.5 million, which represented 8.5% of total deposits. At December 31, 2022, municipal deposits totaled $57.5 million, which represented 8.2% of total deposits, and brokered deposits totaled $53.3 million, which represented 8.5% of total deposits. Borrowings. Federal Home Loan Bank of New York borrowings increased $65.4 million, or 63.9%, to $167.7 million at December 31, 2023 from $102.3 million at December 31, 2022, due to proceeds from-long term advances totaling $86.9 million, offset by as a decrease of $21.5 million in short-term advances. The weighted average rate of borrowings was 4.54% and 3.36% as of December 31, 2023 and December 2022, respectively. Cash flow hedges are used to manage interest rate risk. At December 31, 2023, the Company had two interest rate swaps with a notional amount of $20.0 million hedging on certain FHLB advances. Total Equity. Stockholders’ equity decreased $2.5 million, or 1.8% to $137.2 million, due to increased accumulated other comprehensive loss for securities available for sale of $254,000 and the repurchase of 418,786 shares of stock at a cost of $3.7 million, offset by net income of $643,000 for the twelve months ended December 31, 2023 and stock compensation of $933,000.At December 31, 2023, the Company’s ratio of average stockholders’ equity-to-total assets was 15.24%, compared to 15.61% at December 31, 2022. Comparison of Operating Results for the Years Ended December 31, 2023 and 2022 General. Net income decreased by $6.2 million, or 90.7%, to $643,000 for the twelve months ended December 31, 2023 from $6.9 million for the twelve months ended December 31, 2022. This decrease was primarily due to a decrease of $8.1 million in net interest income, and an increase of $1.5 million in non-interest expense, offset by a decrease of $550,000 in the provision for credit losses and a decrease of $2.8 million in income tax expense. Interest Income. Interest income increased $6.9 million, or 22.8%, from $30.3 million for the twelve months ended December 31, 2022 to $37.3 million for the twelve months ended December 31, 2023 due to increases in the average balances of and higher yields on interest-earning assets. Interest income on cash and cash equivalents increased $451,000, or 385.5%, to $568,000 for the twelve months ended December 31, 2023 from $117,000 for the twelve months ended December 31, 2022 due a 476 basis point increase in the average yield from 0.47% for the twelve months ended December 31, 2022 to 5.23% for the twelve months ended December 31, 2023 due to the higher interest rate environment. This was offset by a $14.2 million decrease in the average balance to $10.9 million for the twelve months ended December 31, 2023 from $25.0 million for the twelve months ended December 31, 2022, reflecting the use of excess liquidity to fund loan originations. Interest income on loans increased $5.8 million, or 22.0%, to $32.0 million for the twelve months ended December 31, 2023 compared to $26.3 million for the twelve months ended December 31, 2022 due primarily to a $75.1 million increase in the average balance to $713.8 million for the twelve months ended December 31, 2023 from $638.7 million for the twelve months ended December 31, 2022 and a 38 basis point increase in the average yield from 4.11% for the twelve months ended December 31, 2022 to 4.49% for the twelve months ended December 31, 2023. The increase was offset by a $1.2 million reserve for nonaccrual interest on a delinquent construction loan. Interest income on securities increased $484,000, or 13.2%, to $4.2 million for the twelve months ended December 31, 2023 from $3.7 million for the twelve months ended December 31, 2022 due primarily to a 68 basis point increase in the average yield from 2.19% for the twelve months ended December 31, 2022 to 2.87% for the twelve months ended December 31, 2023. The increase was offset by a $23.1 million decrease in the average balance of securities to $144.9 million for the twelve months ended December 31, 2023 from $168.0 million for the twelve months ended December 31, 2022. 43 Table of Contents Interest Expense. Interest expense increased $15.0 million, or 206.9%, from $7.3 million for the twelve months ended December 31, 2022 to $22.3 million for the twelve months ended December 31, 2023 primarily due higher costs on interest-bearing liabilities. Interest expense on interest-bearing deposits increased $12.9 million, or 252.9%, to $18.0 million for the twelve months ended December 31, 2023 from $5.1 million for the twelve months ended December 31, 2022. The increase was due to a 200 basis point increase in the average cost of interest-bearing deposits to 2.85% for the twelve months ended December 31, 2023 from 0.85% for the twelve months ended December 31, 2022. The increase in the average cost of deposits was due to the higher interest rate environment and a change in the composition of the deposit portfolio. The average balances of certificates of deposit increased $103.5 million to $498.1 million for the twelve months ended December 31, 2023 from $394.6 million for the twelve months ended December 31, 2022 while NOW and money market accounts and savings accounts decreased $54.8 million and $14.3 million for the twelve months ended December 31, 2023, respectively, compared to the twelve months ended December 31, 2022. At December 31, 2023 $53.3 million of deposits were brokered deposits costing 4.65%. Interest expense on Federal Home Loan Bank borrowings increased $2.1 million, or 98.1%, from $2.2 million for the twelve months ended December 31, 2022 to $4.3 million for the twelve months ended December 31, 2023. The increase was due to an increase in the average cost of 156 basis points to 3.67% for the twelve months ended December 31, 2023 from 2.11% for the twelve months ended December 31, 2022 due to the new borrowings at higher rates. The increase was also due to an increase in the average balance of borrowings of $14.4 million to $116.8 million for the twelve months ended December 31, 2023 from $102.5 million for the twelve months ended December 31, 2022. Cash flow hedges used to manage interest rate risk totaled $20.0 million at December 31, 2023. During the twelve months ended December 31, 2023, the use of the cash flow hedges reduced the interest expense on the Federal Home Loan Bank advances by $364,000. Net Interest Income. Net interest income decreased $8.1 million, or 35.1%, to $15.0 million for the twelve months ended December 31, 2023 from $23.1 million for the twelve months ended December 31, 2022. The increase reflected a 130 basis point decrease in our net interest rate spread to 1.28% for the twelve months ended December 31, 2023 from 2.58% for the twelve months ended December 31, 2022. Our net interest margin decreased 105 basis points to 1.71% for the twelve months ended December 31, 2023 from 2.76% for the twelve months ended December 31, 2022. Provision for (recovery of) Credit Losses. We recorded a $125,000 recovery of credit losses for the twelve months ended December 31, 2023 compared to a $425,000 provision for loan losses for the twelve-month period ended December 31, 2022. The Bank had a decrease in the loan portfolio as well as no charge-offs offset by increased delinquent and non-performing loans. As of January 1, 2023 the Bank adopted CECL and recorded a one-time adjustment of $157,000 to the allowance for credit losses. Non-Interest Income. Non-interest income increased by $15,000, or 1.4%. Gain on sale of loans decreased $58,000, or 66.2%, as loan originations were lower in 2023 due to the higher interest rate environment and the decision to slow loan production to preserve capital and liquidity. Other income decreased $41,000 or 25.1%. Income from bank-owned life insurance increased $87,000, or 12.5%, due to higher balances during 2023. Non-Interest Expenses. For the twelve months ended December 31, 2023, non-interest expense increased $1.5 million, or 10.3%, over 2022. Salaries and employee benefits increased $1.1 million, or 12.7%, due to an accrual of a severance contract for the retirement of the previous President and a higher employee count. Director fees decreased $181,000, or 22.6%, due to lower pension expense. Professional fees increased $115,000 or 21.1%, due to higher legal expense. FDIC insurance premiums increased $198,000, or 89.9%, due to a higher assessment rate in 2023. Data processing decreased $163,000, or 14.4%, due to the timing of invoices. Other expense increased $341,000, or 34.6%, due to an instance of wire fraud related to a customer account that is under review with the insurance company. Income Tax Expense. Income taxes decreased $2.8 million, or 106.2%, to a benefit of $162,000 for the twelve months ended December 31, 2023 from $2.6 million expense for the twelve months ended December 31, 2022. The decrease was due to $9.0 million, or 94.9%, of lower taxable income. The effective tax rate for the twelve months ended December 31, 2023 and 2022 was (33.76%) and 27.55%, respectively. 44 Table of Contents Management of Market Risk General. The majority of our assets and liabilities are monetary. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of loans and securities, have longer maturities than our liabilities, consisting primarily of deposits and borrowings. As a result, a principal part of our business strategy is to manage our exposure to changes in market interest rates. Accordingly, our board of directors has an Asset/Liability Management Committee (the “ALCO”), which is comprised of three members of executive management and two independent directors, which oversees the asset/liability management process and related procedures. The ALCO meets on at least a quarterly basis and reviews asset/liability strategies, liquidity positions, alternative funding sources, interest rate risk measurement reports, capital levels and economic trends at both national and local levels. Our interest rate risk position is also monitored quarterly by the board of directors. We manage our interest rate risk to mitigate the exposure of our earnings and capital to changes in market interest rates. We have implemented the following strategies to manage our interest rate risk: originating loans with adjustable interest rates; promoting core deposit products; monitoring the length of our borrowings with the Federal Home Loan Bank and brokered deposits depending on the interest rate environment; maintaining a portion of our investments as available-for-sale; diversifying our loan portfolio; and strengthening our capital position. By following these strategies, we believe that we are better positioned to react to changes in market interest rates. Net Portfolio Value Simulation. We analyze our sensitivity to changes in interest rates through a net portfolio value of equity (“NPV”) model. NPV represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts. The NPV ratio represents the dollar amount of our NPV divided by the present value of our total assets for a given interest rate scenario. NPV attempts to quantify our economic value using a discounted cash flow methodology while the NPV ratio reflects that value as a form of capital ratio. We estimate what our NPV would be at a specific date. We then calculate what the NPV would be at the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate NPV under the assumptions that interest rates increase 100, 200, 300 and 400 basis points from current market rates and that interest rates decrease 100, 200, 300 and 400 points from current market rates. The following table presents the estimated changes in our net portfolio value that would result from changes in market interest rates as December 31, 2023. All estimated changes presented in the table are within the policy limits approved by the board of directors. NPV NPV as Percent of Portfolio Value of Assets (Dollars in thousands) Basis Point (“bp”) Change in Interest Rates Dollar Amount Dollar Change Percent Change NPV Ratio Change 400 bp $ 65,917 $ (52,510 ) (44.34 )% 7.97 % (44.08 )% 300 bp 78,070 (40,357 ) (34.08 ) 9.23 (19.79 ) 200 bp 90,909 (27,518 ) (23.24 ) 10.52 (19.63 ) 100 bp 104,512 (13,915 ) (11.75 ) 11.82 (9.70 ) 0 118,427 — — 13.09 — (100) bp 132,213 13,786 34.88 14.29 38.66 (200) bp 145,616 27,189 46.19 15.38 37.13 (300) bp 158,179 39,752 33.57 16.35 34.61 (400) bp 169,514 51,087 43.14 17.16 31.09 Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The above table assumes that the composition of our interest-sensitive assets and liabilities existing at the date indicated remains constant uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our NPV and will differ from actual results. 45 Table of Contents Net Interest Income Analysis. We also use income simulation to measure interest-rate risk inherent in our balance sheet at a given point in time by showing the effect on net interest income, over specified time frames and using different interest rate shocks and ramps. The assumptions include management’s best assessment of the effect of changing interest rates on the prepayment speeds of certain assets and liabilities, projections for account balances in each of the product lines offered and the historical behavior of deposit rates and balances in relation to changes in interest rates. These assumptions are subject to change, and as a result, the model is not expected to precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from the simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in the balance sheet composition and market conditions. Assumptions are supported with quarterly back testing of the model to actual market rate shifts. As of December 31, 2023, net interest income simulation results indicated that its exposure over one year to changing interest rates was within our guidelines. The following table presents the estimated impact of interest rate changes on our estimated net interest income over one year: Changes in Interest Rates (basis points) (1) Change in Net Interest Income Year One (% change from year one base) 400 bp -41.48 300 bp -31.31 200 bp -20.71 100 bp -10.21 0 0 (100) bp 8.74 (200) bp 12.50 (300) bp 13.98 (400) bp 13.09 (1) The calculated change in net interest income assumes an instantaneous parallel shift of the yield curve. The preceding simulation analysis does not represent a forecast of actual results and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions vary, prepayment/refinancing levels, the varying impact of interest rate changes on caps and floors embedded in adjustable-rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables will likely deviate from those assumed. Liquidity and Capital Resources Liquidity. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing needs and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities and proceeds from calls, maturities and sales of securities. We also have the ability to borrow from the Federal Home Loan Bank of New York. At December 31, 2023, we had the ability to borrow up to $308.2 million, of which $167.7 million was outstanding and $1.5 million was utilized as collateral for letters of credit issued to secure municipal deposits resulting in remaining availability of $140.4 million. At December 31, 2023, we also had $54.0 million in unsecured lines of credit with four correspondent banks with no outstanding balances . The board of directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we had enough sources of liquidity to satisfy our short- and long-term liquidity needs as of December 31, 2023. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan sales and prepayments are greatly influenced by market interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any period. At December 31, 2023, cash and cash equivalents totaled $24.9 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $68.9 million with a unrealized loss of $9.2 million at December 31, 2023. 46 Table of Contents We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of December 31, 2023 totaled $430.8 million, or 68.9% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and Federal Home Loan Bank of New York advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. Capital Resources. The Bank is subject to various regulatory capital requirements administered by NJDBI and the Federal Deposit Insurance Corporation. At December 31, 2023, we exceeded all applicable regulatory capital requirements, and were considered “well capitalized” under regulatory guidelines. See Note 13 in the Notes to the consolidated financial statements. Off-Balance Sheet Arrangements and Aggregate Contractual Obligations Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. The financial instruments include commitments to originate loans, unused lines of credit and standby letters of credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments. At December 31, 2023, we had $21.3 million of commitments to originate loans, comprised of $2.7 million of residential loans, $18.7 million of commitments under commercial loans and lines of credit (including $16.8 million of unadvanced portions of commercial construction loans), $50.2 million of commitments under home equity loans and lines of credit and $2.6 million of unfunded commitments under consumer lines of credit. See Note 14 in the Notes to the consolidated financial statements for further information. Upon adoption of the CECL method of calculating the ACL on January 1, 2023, the Bank recorded a one-time increase in the reserve for unfunded liabilities of $152,000. The reserve for unfunded commitments (the “Unfunded Reserve”) represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The Unfunded Reserve is recognized as a liability (other liabilities in the consolidated statements of condition), with adjustments to the reserve recognized in other noninterest expense in the consolidated statements of income. The Unfunded Reserve is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). To estimate future draws on unfunded balances, current utilization rates are compared to historical utilization rates. If current utilization rates are below historical utilization rates, the rate difference is applied to the committed balance to estimate the future draw. Loss rates are estimated by utilizing the same loss rates calculated for the allowance general reserve. Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities. Recent Accounting Pronouncements Please refer to Note 1 in the Notes to the consolidated financial statements that appear starting on page 54 of this Annual Report on Form 10-K for a description of recent accounting pronouncements that may affect our financial condition and results of operations. Impact of Inflation and Changing Prices The financial statements and related data presented herein have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, market interest rates generally have a more significant impact on a financial institution’s performance than inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk For information regarding market risk, see Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Management of Market Risk.”