Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
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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.
At December 31, 2021, $640.7 million, or 65.9%, of our total loan portfolio, net of loans in process, consisted of construction loans primarily located in high absorption areas in the New 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 0.16%, 0.58% and 0.64% at December 31, 2021, 2020 and 2019, 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 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. We intend to continue this strategy following the conversion.
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 currently expect to open a new branch office in Sullivan County, New York during the second quarter of 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 being raised in the offering will provide 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.
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Critical Accounting Policies
In the preparation of our consolidated financial statements, we have adopted various accounting policies that govern the application of U.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.
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
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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.
In June 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 until December 31, 2020. As permitted by the CARES Act, and based on legislation enacted in December 2020 which extended certain provision of the CARES Act, we elected to extend the adoption of CECL until January 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 December 31, 2021.
Balance Sheet Analysis
General
Total assets increased by $256.8 million, or 26.5%, to $1.2 billion at December 31, 2021, from $968.2 million at December 31, 2020. The increase in assets was primarily due to increases in net loans of $148.4 million, cash and cash equivalents of $83.1 million, investment securities held-to-maturity of $10.5 million, investment in equity securities of $9.6 million, and premises and equipment of $5.2 million.
Cash and cash equivalents increased by $83.1 million, or 120.1%, to $152.3 million at December 31, 2021 from $69.2 million at December 31, 2020. The increase in cash was primarily attributable to an increase in deposits of $155.5 million coupled with an increase in stockholders’ equity primarily due to the completion of the second-step conversion offering that increased stockholders’ equity by $88.4 million, net of conversion costs. These sources of funds were deployed via an increase in loans of $148.4 million, an increase in investment securities held-to-maturity of $10.5 million, an increase in equity securities of $9.6 million, an increase in property and equipment of $5.2 million due primarily to the purchase of property for a new branch office, and cash dividends of $2.3 million.
Equity securities increased by $9.6 million, or 93.0%, to $19.9 million at December 31, 2021 from $10.3 million at December 31, 2020. The increase in equity securities was primarily attributable to the purchase of equity securities totaling $10.0 million, partially offset by market depreciation of $389,000.
Securities held-to-maturity increased by $10.5 million, or 142.2%, to $17.9 million at December 31, 2021 from $7.4 million at December 31, 2020. The increase was primarily due to purchases of investment securities totaling $15.3 million, partially offset by maturities and pay-downs of $4.8 million.
Loans, net of the allowance for loan losses, increased by $148.4 million, or 18.1%, to $968.1 million at December 31, 2021 from $819.7 million at December 31, 2020. The increase in loans, net of the allowance for loan losses, was primarily due to loan originations of $727.3 million, consisting primarily of $603.4 million in construction loans with respect to which approximately 36.8% of the funds were disbursed at loan closings and the remaining funds to be disbursed over the terms of the construction loans.
Loan originations resulted in a net increase of $138.0 million in construction loans, $27.8 million in commercial and industrial loans, $1.3 million in mixed-use loans, and $1.0 million in one- to four-family loans. The increases in our loan portfolio were partially offset by decreases in non-residential loans of $13.7 million and multi-family loans of $6.1 million, coupled with normal pay-downs and principal reductions.
Premises and equipment increased by $5.2 million, or 28.0%, to $23.9 million at December 31, 2021 from $18.7 million at December 31, 2020 due to the acquisition of property for a new branch site located in Monsey, New York.
Foreclosed real estate was $2.0 million at both December 31, 2021 and December 31, 2020.
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Right of use assets — operating decreased by $530,000, or 17.1%, to $2.6 million at December 31, 2021 from $3.1 million at December 31, 2020, primarily due to amortization.
Other assets decreased by $377,000, or 7.5%, to $4.7 million at December 31, 2021 from $5.1 million at December 31, 2020 due to a decrease in tax assets of $708,000 and a decrease in suspense accounts of $55,000, partially offset by an increase in prepaid expense of $365,000.
Total deposits increased by $155.5 million, or 20.1%, to $927.2 million at December 31, 2021 from $771.7 million at December 31, 2020. The increase was primarily due to an increase in non-interest bearing demand deposits of $109.5 million, or 49.5%, an increase in savings account balances of $83.2 million, or 81.8%, and an increase in NOW/money market accounts of $17.5 million, or 17.3%, from December 31, 2020 to December 31, 2021. These increases were partially offset by a decrease in certificates of deposit of $54.7 million, or 15.7%, from December 31, 2020 to December 31, 2021.
Federal Home Loan Bank advances were $28.0 million at both December 31, 2021 and December 31, 2020.
Advance payments by borrowers for taxes and insurance decreased by $374,000, or 16.6%, to $1.9 million at December 31, 2021 from $2.3 million at December 31, 2020 due primarily to the reduction in the commercial real estate loan portfolio.
Lease liability – operating decreased by $511,000, or 16.4%, to $2.6 million at December 31, 2021 from $3.1 million at December 31, 2020, primarily due to amortization.
Accounts payable and accrued expenses increased by $4.7 million, or 52.9%, to $13.5 million at December 31, 2021 from $8.8 million at December 31, 2020 due primarily to an increase in suspense accounts for loan closings of $2.7 million, an increase in deferred compensation of $496,000, an increase in dividend declared but not paid of $782,000, and an increase in accrued expenses of $692,000.
Stockholders’ equity increased by $97.6 million, or 63.4% to $251.4 million at December 31, 2021, from $153.8 million at December 31, 2020. The increase in stockholders’ equity was primarily a result of the completion of the second-step conversion offering which increased stockholders’ equity by $88.4 million, net of conversion costs, coupled with a $7.0 million from the retirement of treasury shares, offset by the $7.8 million cost related to the implementation of an employee stock ownership plan in connection with the second-step conversion.
The increase in stockholders’ equity was also due to net income of $11.9 million for the year ended December 31, 2021 and a reduction of $931,000 in unearned employee stock ownership plan shares, partially offset by dividends paid/declared of $2.9 million and $46,000 in other comprehensive income.
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.
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The following table shows the loan portfolio at the dates indicated:
2021
2020
Amount
Percent
Amount
Percent
(Dollars in thousands)
Residential real estate loans:
One- to four-family
$
7,189
0.74
$
6,170
0.75
%
Multifamily
84,425
8.68
90,506
10.97
Mixed-use
28,744
2.95
30,508
3.70
Total residential real estate loans
120,358
12.37
127,184
15.42
Non-residential real estate loans
50,016
5.14
60,665
7.36
Construction loans
683,830
70.29
545,788
66.18
Commercial and industrial loans
118,378
12.17
90,577
10.98
Consumer loans
269
0.03
494
0.06
Total loans
972,851
100.00
%
824,708
100.00
%
Allowance for losses
(5,242)
(5,088)
Deferred loan costs, net
484
113
Loans, net
$
968,093
$
819,733
Loan Maturity . The following table sets forth certain information at December 31, 2021 regarding the dollar amount of loan principal repayments becoming due during the periods indicated. The tables do not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience 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, 2021
Family
Family
Use
Estate
Construction
Industrial
Consumer
Loans
(Dollars in thousands)
Amounts due in:
One year or less
$
—
$
9,498
$
1,030
$
12,787
$
406,854
$
90,993
$
258
$
521,420
More than 1-5 years
2,304
27,642
10,867
21,238
266,456
24,717
11
353,235
More than 5-15 years
1,191
43,255
15,803
15,858
10,520
2,668
—
89,295
More than 15 years
3,694
4,030
1,044
133
—
—
—
8,901
Total
$
7,189
$
84,425
$
28,744
$
50,016
$
683,830
$
118,378
$
269
$
972,851
The following table sets forth all loans at December 31, 2021 that are due after December 31, 2022 and have either fixed interest rates or floating or adjustable interest rates:
Floating or
Total at
Fixed Rates
Adjustable Rates
December 31, 2021
(Dollars in thousands)
Residential real estate loans:
One- to four-family
$
3,628
$
3,561
$
7,189
Multifamily
22,810
52,117
74,927
Mixed-use
4,233
23,481
27,714
Non-residential real estate loans
12,426
24,803
37,229
Construction loans
2,663
274,313
276,976
Commercial and industrial loans
4,298
23,087
27,385
Consumer loans
11
—
11
Total
$
50,069
$
401,362
$
451,431
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Securities
Our investment portfolio consists primarily of mutual funds, residential mortgage-backed securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae primarily with stated final maturities of 10 years or more, and municipal securities with maturities of one year or more.
The following table sets forth the stated maturities and weighted average yields of investment securities at December 31, 2021. Weighted average yields on tax-exempt securities are presented on a tax equivalent basis using a combined federal and state marginal rate of 23.6%. 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, 2021
Value
Yield
Value
Yield
Value
Yield
Value
Yield
Value
Yield
(Dollars in thousands)
Securities available-for-sale:
Mortgage-backed securities
$
—
—
%
$
1
2.29
%
$
—
—
%
$
—
—
%
$
1
2.29
%
Total available-for-sale
$
—
—
%
$
1
2.29
%
$
—
—
%
$
—
—
%
$
1
2.29
%
Securities held-to-maturity:
Mortgage-backed securities
$
1
2.11
%
$
18
2.27
%
$
12
1.90
%
$
4,379
1.85
%
$
4,410
1.86
%
U.S. agency collateralized mortgage obligations
—
—
—
—
—
3,453
1.60
3,453
1.60
Municipal bonds
537
1.33
1,761
1.36
1,640
1.45
6,079
1.45
10,017
1.43
Total held-to-maturity
$
538
1.33
%
$
1,779
1.37
%
$
1,652
1.45
%
$
13,911
1.61
%
$
17,880
1.57
%
Total investment securities
$
538
1.33
%
$
1,780
1.37
%
$
1,652
1.45
%
$
13,911
1.61
%
$
17,881
1.57
%
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,
2021
2020
Average
Average
Outstanding
Average
Outstanding
Average
Balance
Percent
Rate
Balance
Percent
Rate
(Dollars in thousands)
Demand deposits:
Non-interest bearing
$
260,529
32.52%
—
$
172,508
22.97%
—
NOW and money market
114,940
14.35%
0.53%
104,390
13.90%
0.50%
Total
375,469
46.87%
0.14%
276,898
36.86%
0.16%
Savings accounts
108,877
13.59%
0.63%
101,738
13.54%
0.33%
Certificates of deposit
316,690
39.54%
0.97%
372,535
49.59%
1.35%
Total
$
801,036
100.00%
0.50%
$
751,171
100.00%
0.72%
As of December 31, 2021 and 2020, 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 $548.2 million and $381.9 million, respectively. In addition, as of December 31, 2021, the aggregate amount of all our uninsured certificates of deposit was $134.7 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
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deposit, by account, that are in excess of the FDIC insurance limit, by remaining time until maturity, as of December 31, 2021:
At
December 31, 2021
(In thousands)
Maturity Period:
Three months or less
$
7,830
Over three through six months
31,309
Over six through twelve months
33,020
Over twelve months
62,574
Total
$
134,733
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 interest income or interest expense. Deferred loan fees totaled $484,000 and $113,000 for the years ended December 31, 2021 and 2020, respectively. Loan balances exclude loans held for sale.
Year Ended December 31,
2021
2020
Average
Average
Outstanding
Average
Outstanding
Average
Balance
Interest
Yield/Rate
Balance
Interest
Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans receivable
$
866,518
$
47,898
5.53
%
$
797,735
$
48,202
6.04
%
Securities
23,026
320
1.39
18,705
333
1.78
Federal Home Loan Bank stock
1,576
71
4.51
1,559
82
5.26
Other interest-earning assets
91,999
115
0.13
58,438
360
0.62
Total interest-earning assets
983,119
48,404
4.92
876,437
48,977
5.59
Allowance for Loan Losses
(5,154)
(4,965)
Noninterest-earning assets
72,855
67,494
Total assets
$
1,050,820
$
938,966
Interest-bearing liabilities:
Interest-bearing demand deposits
$
114,940
$
696
0.61
%
$
104,390
$
768
0.74
%
Savings and club accounts
108,877
328
0.30
101,738
626
0.62
Certificates of deposit
316,690
3,335
1.05
372,535
7,860
2.11
Interest-bearing deposits
540,507
4,359
0.81
578,663
9,254
1.60
Federal Home Loan Bank advances and other
28,000
742
2.65
26,811
723
2.70
Total interest-bearing liabilities
568,507
$
5,101
0.90
605,474
$
9,977
1.65
Noninterest-bearing demand deposits
260,529
172,508
Other noninterest-bearing liabilities
24,310
12,595
Total liabilities
853,346
790,577
Total shareholders’ equity
197,474
148,389
Total liabilities and shareholders’ equity
$
1,050,820
$
938,966
Net interest income
$
43,303
$
39,000
Net interest rate spread (1)
4.02
%
3.94
%
Net interest margin (3)
4.40
%
4.45
%
Net interest-earning assets (2)
$
414,612
$
270,963
Average interest-earning assets to interest-bearing liabilities
172.93
%
144.75
%
(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
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(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, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
Year Ended 12/31/2021
Compared to
Year Ended 12/31/2020
Increase (Decrease)
Due to
Volume
Rate
Total
(Dollars in thousands)
Interest income:
Loans receivable
$
3,978
$
(4,282)
$
(304)
Securities
79
(103)
(24)
Other interest-earning assets
138
(383)
(245)
Total
$
4,195
$
(4,768)
$
(573)
Interest expense:
Interest bearing demand deposit
$
73
$
(145)
$
(72)
Savings accounts
41
(339)
(298)
Certificates of deposits
(1,042)
(3,483)
(4,525)
Borrowed money
32
(13)
19
Total
(896)
(3,980)
(4,876)
Net change in net interest income
$
5,091
$
(788)
$
4,303
Results of Operations for the Years Ended December 31, 2021 and 2020
Financial Highlights
Net income for the year ended December 31, 2021 was $11.9 million compared to net income of $12.3 million for the year ended December 31, 2020. Net income for the year ended December 31, 2021 was lower than the year ended December 31, 2020 primarily due to an increase in provision for loan losses expense, an increase in non-interest expenses, a decrease in other income, and an increase in income tax expense. These were partially offset by an increase in net interest income.
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Summary Income Statements
The following table sets forth the income summary for the periods indicated:
Year Ended December 31,
Change Fiscal 2021/2020
2021
2020
$
%
(Dollars in thousands)
Net interest income
$
43,303
$
39,000
$
4,303
11.03
%
Provision for loan losses
3,610
814
2,796
343.49
%
Non-interest income
2,354
2,513
(159)
(6.33)
%
Non-interest expenses
26,473
25,088
1,385
5.52
%
Income tax expense
3,669
3,282
387
11.79
%
Net income
$
11,905
$
12,329
$
(424)
(3.44)
%
Return on average assets
1.13
%
1.31
%
Return on average equity
6.03
%
8.31
%
Net Interest Income
Net interest income totaled $43.3 million for the year ended December 31, 2021, as compared to $39.0 million for the year ended December 31, 2020. The increase in net interest income of $4.3 million, or 11.0%, was primarily due to a decrease in interest expense that exceeded a decrease in interest income in a manner consistent with the decrease in interest rates during the third and fourth quarters of 2019 coupled with an additional 150 basis point cut in interest rates in March 2020 in response to the COVID-19 pandemic. In this regard, our cost of interest bearing liabilities decreased much greater than our yield on interest earning assets as our interest bearing liabilities repriced much faster to lower rates than our yield on interest earning assets.
Interest and dividend income decreased by $573,000, or 1.2%, due to a decrease in the yield on interest earning assets by 67 basis points from 5.59% for the year ended December 31, 2020 to 4.92% for the year ended December 31, 2021, partially offset by an increase in the average interest earning assets of $106.7 million, or 12.2%, from $876.4 million for the year ended December 31, 2020 to $983.1 million for the year ended December 31, 2021.
Interest expense decreased by $4.9 million, or 48.9%, due to a decrease in average interest bearing liabilities of $37.0 million, or 6.1%, from $605.5 million for the year ended December 31, 2020 to $568.5 million for the year ended December 31, 2021 and a decrease in the cost of interest bearing liabilities by 75 basis points from 1.65% to 0.90%. The decrease in the cost of interest bearing liabilities was also partially due to a shift to non-interest bearing demand deposits from interest bearing certificates of deposits as the average balances of non-interest bearing demand deposits increased by $88.0 million, or 51.0%, from $172.5 million for the year ended December 31, 2020 to $260.5 million for the year ended December 31, 2021 and the average balances of certificates of deposits decreased by $55.8 million, or 15.0% from $372.5 million for the year ended December 31, 2020 to $316.7 million for the year ended December 31, 2021. Net interest margin decreased by 5 basis points, or 1.0%, during the year ended December 31, 2021 to 4.40% compared to 4.45% at December 31, 2020.
Provision for Loan Losses. A provision for loan losses of $3.6 million was recorded for the year ended December 31, 2021 as compared to $814,000 for the year ended December 31, 2020. During 2021, we charged-off a total of $3.6 million against one non-performing non-residential mortgage loan and various unpaid overdrafts in our demand deposit accounts. During 2020, we charged-off a total of $364,000 against one non-performing non-residential mortgage loan, one non-performing commercial and industrial loan, and various unpaid overdrafts in our demand deposit accounts. We recorded recoveries of $160,000 and $27,000 during the years ended December 31, 2021 and December 31, 2020, respectively.
The increase in provision level was primarily attributed to the charge-off of $3.6 million during the quarter ended September 30, 2021 relating to a non-residential bridge loan secured by real estate with a balance of $3.6 million. The loan is secured by commercial real estate located in Greenwich, Connecticut and guaranteed by the two borrowers. The loan was originated in 2016 as a two-year bridge loan and, upon the borrower’s failure to satisfy the loan at the
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maturity date, the loan was accelerated and a foreclosure action was instituted. The loan remains in foreclosure but is subject to Connecticut’s continuing foreclosure backlog. The property securing the loan is subject to a parking easement and based on a recently updated appraisal showing the property’s value with the parking easement to be zero, the Company determined to write off the $3.6 million loan as a non-cash charge against the allowance for loan losses.
The Company is aggressively seeking recovery of all amounts due from the personal guarantors of the loan. However, the recovery process is uncertain and may take an extended period of time to resolve this matter. In the event the Company is successful against the guarantors, any recovery received would be added back to the allowance for loan losses and an analysis would be performed at that time to determine the appropriateness of the recovery into income.
The provision recorded for the year ended December 31, 2020 was primarily attributable to the perceived potential credit risk associated with the COVID-19 pandemic, although no specific or probable losses were identified at that time. Although the COVID- 19 pandemic and the resulting recession has impacted the local economy, we have not experienced any significant deterioration of our borrowers’ ability to keep current in accordance with the terms of their obligations. Based on a review of the loans that were in the loan portfolio at December 31, 2021, 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,
2021
2020
(Dollars in thousands)
Other loan fees and service charges
$
1,568
$
1,045
Gain (loss) on disposition of equipment
7
(61)
Earnings on bank-owned life insurance
600
609
Investment advisory fees
514
425
Unrealized (loss) gain on equity securities
(389)
288
Other
54
207
Total
$
2,354
$
2,513
The decrease in total other income was primarily due to an unrealized loss of $389,000 in our equity securities in 2021 compared to an unrealized gain of $288,000 in 2020, a decrease of $153,000 in other non-interest income, and a decrease of $9,000 in bank owned life insurance income. These were partially offset by an increase of $523,000 in other loan fees and service charges, an increase of $89,000 in investment advisory fees, and a net gain of $7,000 on the sale of fixed assets in 2021 compared to a net loss of $61,000 on the sale of fixed assets in 2020.
The unrealized loss of $389,000 in our equity securities was primarily due to an increase in the medium to long-term interest rates. The decrease in other non-interest income was primarily due to a gain of $125,000 in the quarter ended March 31, 2020 on a foreclosure sale of a delinquent mortgage loan and a decrease in miscellaneous income from our branch operations.
The increase in other loan fees and service charges was due to increases of $240,000 in ATM and debit card usage fees, $167,000 in loan servicing fees, and $137,000 in loan fees, partially offset by decreases of $15,000 in safe deposit fees and $6,000 in deposit accounts fees.
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The increase in investment advisory fees was due to an increase in fees generated by an increase in assets under management of Harbor West and an increase in commission income from Harbor West.
Non-Interest Expense
The following table sets forth an analysis of non-interest expense for the periods indicated:
Year Ended December 31,
2021
2020
(Dollars in thousands)
Salaries and employee benefits
$
14,996
$
13,809
Occupancy expense
2,115
1,932
Equipment
993
917
Outside data processing
1,652
1,771
Advertising
139
168
Impairment loss on goodwill
—
98
Real estate owned expense
93
313
Other
6,485
6,080
Total
$
26,473
$
25,088
Non-interest expense increased by $1.4 million, or 5.5%, to $26.5 million for the year ended December 31, 2021 from $25.1 million for the year ended December 31, 2020. The increase resulted primarily from increases of $1.2 million in salaries and employee benefits, $405,000 in other operating expense, $183,000 in occupancy expense, and $76,000 in equipment expense, partially offset by decreases of $220,000 in real estate owned expense, $119,000 in outside data processing expense, $98,000 in impairment loss on goodwill, and $29,000 in advertising expense.
Salaries and employee benefits increased by $1.2 million, or 8.6%, to $15.0 million in 2021 from $13.8 million in 2020. The was due to the payment of bonuses to branch personnel in connection with the COVID-19 pandemic, an increase in bonuses paid to loan production personnel, and an increase in the number of full-time equivalent employees to 131 as of December 31, 2021 from 123 as of December 31, 2020. The increase in bonuses paid to loan production personnel was due to an increase in the construction loan portfolio. The increase in full-time equivalent employees was due to our efforts to expand our operations.
Other non-interest expense increased by $405,000, or 6.7%, to $6.5 million in 2021 from $6.1 million in 2020 due mainly to increases of $280,000 in consulting services, $137,000 in audit and accounting fees, $108,000 in service contracts expense, $27,000 in telephone expense, $24,000 in recruitment expenses related to the hiring of additional personnel, $20,000 in directors compensation, and $1,000 in office supplies, partially offset by decreases of $100,000 in miscellaneous other non-interest expense, $52,000 in legal fees, $26,000 in insurance expense, and $14,000 in directors, officers and employee expense. The decrease of $100,000 in miscellaneous other non-interest expense was due to a decrease of $218,000 in FDIC insurance premiums, partially offset by increases of $64,000 in dues and subscriptions expenses and $57,000 in various service charges.
Occupancy expense increased by $183,000, or 9.5%, to $2.1 million in 2021 from $1.9 million in 2020 primarily as a result of the cost of operating additional office space to accommodate our expansion. Equipment expense increased by $76,000, or 8.3%, to $993,000 in 2021 from $917,000 in 2020 due to an increase in the purchases of additional equipment.
Real estate owned expense decreased by $220,000, or 70.3%, to $93,000 in 2021 from $313,000 in 2020 due to the write down of $169,000 in the value of the one foreclosed property in 2020 and a reduction in operating expenses to maintain the one real estate owned property in 2021.
Outside data processing expense decreased by $119,000, or 6.7%, to $1.7 million in 2021 from $1.8 million in 2020 due to additional services required in 2020 to enable the company to expand and additional expense incurred to allow employees to work remotely.
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There was no goodwill impairment expense of in 2021 compared to a goodwill impairment expense of $98,000 in 2020. The goodwill was recorded in connection with the acquisition of Harbor West Financial Planning Wealth Management Group in 2007, which is operated as a division of the Bank. The goodwill impairment in 2020 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 decreased by $29,000, or 17.3%, to $139,000 in 2021 from $168,000 in 2020 as we reduced advertising and promotional products in light of the COVID-19 pandemic.
Income Taxes. The Company recorded income tax expense of $3.7 million and $3.3 million for the years ended December 31, 2021 and 2020, respectively. For the year ended December 31, 2021, the Company had approximately $711,000 in tax exempt income, compared to approximately $671,000 in tax exempt income for the year ended December 31, 2020. The Company’s effective income tax rates were 23.6% and 21.0% for the years ended December 31, 2021 and 2020, 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,
2021
2020
(Dollars in thousands)
Total non-accrual loans
—
3,572
Total accruing loans past due 90 days or more
—
—
Total non-performing loans
—
3,572
Real estate owned
1,996
1,996
Total non-performing assets
$
1,996
$
5,568
Total non-performing loans to total loans
—
%
0.43
%
Total non-performing assets to total assets
0.16
%
0.58
%
During the year ended December 31, 2021, non-performing assets decreased by $3.6 million, or 64.2%, to $2.0 million from $5.6 million as of December 31, 2020. The decrease in non-performing assets was primarily due to the previously disclosed charge-off of $3.6 million on a non-accrual, non-residential bridge loan during 2021.
We had no non-performing loans at December 31, 2021, as compared to one loan at December 31, 2020. For the years ended December 31, 2021 and 2020, gross interest income of $173,000 and $236,000, respectively, would have been recorded had the non-accrual loans at the end of the period been on accrual status throughout the period. In 2021, we collected no interest income from a loan that was in non-accrual status in 2021 and was charge-off in 2021. In 2020, we collected $85,000 in interest income from a loan that was in non-accrual status in 2019 and was satisfied in 2020.
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 ended December 31, 2021 and December 31, 2020. 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.
At December 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 (generally at least six consecutive months) to be returned to accrual status. At December 31, 2020, five loans with aggregate balances of $2.8 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.
Impaired loans at December 31, 2021 totaled $746,000 and consisted of two non-residential mortgage loans. These two loans are performing according to their loan terms but we had charged-off $67,000 on one of the loans.
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The following table summarizes classified and criticized assets of all portfolio types at the dates indicated:
At December 31,
2021
2020
(In thousands)
Classified loans:
Substandard
$
746
$
3,722
Doubtful
—
—
Loss
—
—
Total classified loans
746
3,722
Special mention
—
301
Total criticized loans
$
746
$
4,023
On the basis of management’s review of our assets, we had no assets classified as special mention at December 31, 2021 compared to $301,000 classified as special mention at December 31, 2020. In addition, we classified $746,000 as classified as substandard at December 31, 2021 compared to $3.7 million at December 31, 2020. There were no assets classified as doubtful or loss at December 31, 2021 or 2020. 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 decrease in special mention assets was due to the improvement of the borrower’s financial condition and substantial pay down of principal balance for one loan and the satisfaction of the other loan. The decrease in substandard assets was primarily due to the previously disclosed charge-off of $3.6 million on a non-accrual, non-residential bridge loan during 2021 and the satisfaction of a performing, non-residential loan with a balance of $150,000 during 2021, partially offset by the addition of two non-residential mortgage loans totaling $746,000 that were classified as impaired loans but has been performing and management decided to classified as substandard.
Delinquent Loans
The following table provides information about delinquencies in our loan portfolio at the dates indicated:
At December 31,
2021
2020
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:
Mixed-use
$
—
$
—
$
—
$
—
$
—
$
—
Non-residential real estate loans
—
—
—
—
—
3,572
Total
$
—
$
—
$
—
$
—
$
—
$
3,572
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 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
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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 of December 31, 2021 and 2020 was maintained at a level that represents management’s best estimate of losses inherent in the loan portfolio. In addition, the FDIC and the New 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 to absorb probable and estimable losses, additions may be necessary if economic or other conditions in the future differ from the current environment.
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The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated:
At December 31,
2021
2020
% 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
$
17
0.32
%
0.74
%
$
16
0.32
%
0.75
%
Multifamily
481
9.18
8.68
602
11.83
10.93
Mixed-use
73
1.39
2.95
89
1.75
3.62
Non-residential real estate loans
381
7.27
5.14
519
10.20
6.87
Construction loans
3,143
59.96
70.29
3,068
60.30
66.70
Commercial and industrial
973
18.56
12.17
774
15.21
11.07
Consumer loans
10
0.19
0.03
20
0.39
0.06
Total general allowance
$
5,078
96.87
%
100.00
%
$
5,088
100.00
%
100.00
%
Unallocated
164
3.13
—
—
—
—
Total allowance for loan losses
$
5,242
100.00
%
100.00
%
$
5,088
100.00
%
100.00
%
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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,
2021
2020
(Dollars in thousands)
Total loans net of deferred fees
$
972,851
$
824,708
Average loans outstanding
866,518
797,735
Allowance at beginning of period
$
5,088
$
4,611
Net charge-offs:
Residential real estate loans:
One- to four-family
—
—
Multifamily
(150)
(3)
Mixed-use
—
—
Total residential real estate loans
(150)
(3)
Non-residential real estate loans
3,591
56
Construction loans
—
—
Commercial and industrial loans
—
256
Consumer loans
15
28
Total net charge-offs
3,456
337
Provision for loan losses
3,610
814
Allowance at end of period
$
5,242
$
5,088
Average loan outstanding:
Residential real estate loans:
One- to four-family
5,490
7,478
Multifamily
84,748
90,720
Mixed-use
28,263
29,438
Total residential real estate loans
118,501
127,636
Non-residential real estate loans
52,094
60,152
Construction loans
602,585
523,112
Commercial and industrial loans
93,101
86,405
Consumer loans
237
430
Total
866,518
797,735
Net charge-offs as a percentage of average loans outstanding
Residential real estate loans:
One- to four-family
—
%
—
%
Multifamily
(0.18)
—
Mixed-use
—
—
Total residential real estate loans
(0.13)
(0.00)
Non-residential real estate loans
6.89
0.09
Construction loans
—
—
Commercial and industrial loans
—
0.30
Consumer loans
6.33
6.51
Total net charge-offs
0.40
%
0.04
%
Credit Quality Ratios:
As a percentage of year-end loans, net of unearned income:
Allowance for loan loss
0.54
%
0.62
%
Nonaccrual loans
—
%
0.43
%
Nonperforming loans
—
%
0.43
%
Allowance for loan losses to nonaccrual loans
—
%
142.44
%
Allowance for loan losses to nonperforming loans
—
%
142.44
%
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The allowance for loan losses increased by $154,000 to $5.2 million at December 31, 2021 from $5.1 million at December 31, 2020. The increase in the allowances for loan losses was due primarily to the increase in the provision for loan losses, which reflected the increase in the charge-off levels which had an unfavorable impact on the historical loss factors and an increase in the construction loan, commercial and industrial loan, and residential loan portfolio, partially offset by the reduction of the non-performing asset levels and a decrease in the multifamily, mixed-use, and non-residential mortgage loan portfolio. We had recoveries totaling $160,000 in 2021.
The increase on provision for loan loss recorded were primarily attributed to the previously disclosed charge-off of $3.6 million in 2021 of a non-residential bridge loan secured by real estate with a balance of $3.6 million. The loan is secured by commercial real estate located in Greenwich, Connecticut and guaranteed by the two borrowers. The loan was 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. The loan remains in foreclosure but is subject to Connecticut’s continuing foreclosure backlog. The property securing the loan is subject to a parking easement and based on a recently updated appraisal showing the property’s value with the parking easement to be zero, the Company has determined to write off the $3.6 million loan as a non-cash charge against the allowance for loan losses. The Company intends to aggressively seek recovery of all amounts due from the personal guarantors of the loan. However, the recovery process is uncertain and might take an extended period of time to resolve this matter. In the event the Company is 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 recognizing the recovery into income.
Additionally the provision expenses recorded for commercial and industrial loan and construction loan segments were primarily due to increased loan balances, and the credit provision recorded for residential real estate loan segment was due to decreased loan balance.
The historical loss percentage factor for multifamily and mixed-use loans declined while the historical loss percentage factor for non-residential, commercial and industrial, and consumer loans increased. The historical loss percentage factor declined because one single loan charge off of $246,000 in 2016 for multifamily loans and one single loan charge off of $103,000 in 2016 for mixed-use loans were out the historical loss look back period, and therefore were not included in the historical loss rate calculation at December 31, 2021. The historical loss percentage factor for non-residential loans increased due to decreased average loan balances over the years. The historical loss percentage factor for commercial and industrial and consumer loans increased due to the average loan charge offs increased slightly in recent years. Other adjustments in provision for loan loss include movements in the qualitative factors as risks in each respective segment change.
Loans evaluated collectively totaled $971.2 million at December 31, 2021 compared to $818.2 million at December 31, 2020. Loans evaluated individually totaled $1.6 million at December 31, 2021 compared to $6.5 million at December 31, 2020.
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 at December 31, 2021 indicate the level of
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risk within the parameters of our model. Our management believes that the December 31, 2021 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 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 management Asset 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 at December 31, 2021. 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.
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The table below sets forth, as of December 31, 2021, 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
33.02
%
$
292,809
7.89
%
+100
16.49
282,924
4.25
0
—
271,387
—
-100
(4.55)
%
$
269,489
(0.70)
%
As of December 31, 2021, based on the scenarios above, net interest income would increase by approximately 16.49% to 33.02%, over a one-year time horizon in a rising interest rate environment. One-year net interest income would decrease by approximately 4.55% 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.
Overall, our December 31, 2021 results indicate that we are adequately positioned with an acceptable net interest income and economic value at risk and that all interest rate risk results continue to be within our policy guidelines.
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 12.7%, 15.7%, and 21.7%, respectively, for the year ended December 31, 2021 compared to 8.9%, 11.3%, and 19.9%, respectively, for the year ended December 31, 2020. 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.
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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, 2021 and 2020, our loan originations totaled $727.3 million and $389.7 million, respectively. Cash received from the sales, calls, maturities and pay-downs on securities totaled $4.8 million and $2.0 million for the years ended December 31, 2021 and 2020, respectively. We purchased $25.3 million and $189,000 in securities for the years ended December 31, 2021 and 2020, 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 $155.5 million at December 31, 2021 due to increases in non-interest bearing demand deposits, savings account deposits, and NOW/money market deposits, offset by a decrease in certificates of deposits 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 the Federal Home Loan Bank of New York to provide advances. As a member of the Federal Home Loan Bank of New York, we are required to own capital stock in the Federal 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 $29.4 million and $49.4 million from the Federal Home Loan Bank of New York as of December 31, 2021 and 2020, respectively. Federal Home Loan Bank advances were $28.0 million at both December 31, 2021 and 2020.
In addition, we have a borrowing agreement with Atlantic Community Bankers Bank (“ACBB”) to provide short-term borrowings of $8.0 million at December 31, 2021 and 2020. There were no outstanding borrowings with ACBB at December 31, 2021 and 2020.
At December 31, 2021, we had unfunded commitments on construction loans of $436.9 million, outstanding commitments to originate loans of $174.4 million, unfunded commitments under lines of credit of $130.7 million, and unfunded standby letters of credit of $6.9 million. At December 31, 2021, certificates of deposit scheduled to mature in less than one year totaled $189.2 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/or Federal 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 source of income is dividends received from the Bank. At December 31, 2021, the Company had liquid assets of $44.4 million.
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Off-Balance Sheet Arrangements
For the year ended December 31, 2021, we did not engage in any off-balance sheet transactions reasonably likely to have a material adverse effect on our financial condition, results of operations or cash-flows.
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see note 23 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to the section captioned “Item 7: Management’s Discussion and Analysis of Results of Operations and Financial Condition.”
ITEM 8. FINANCIAL STATEMENTS
The information required by this item is included herein beginning on page F-1.
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ITEM 9.
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISLCOSURE
None.