What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-30 compared with 2022-03-30 · 124 added, 122 removed, 509 unchanged (33% of the section changed)

7 unchanged sentences

Non-interest income currently consists primarily of loan fees, service charges, and earnings on bank owned life insurance.

Non-interest expense currently consists primarily of salaries and employee benefits, deposit insurance premiums, directors’ fees, occupancy and equipment, data processing and

professional fees.

Non-interest expense currently consists primarily of salaries and employee benefits, deposit insurance premiums, directors’ fees, occupancy and equipment, data processing and professional fees.

Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

1 unchanged sentence

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.

At December 31, 2022, $852.7 million, or 70.1%, of our total loan portfolio, net of loans in process, consisted of construction loans primarily located in high demand and high absorption areas in 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.

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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.

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.

1 unchanged sentence

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.

To this end, we opened a new branch office in Sullivan County, New York during the year ended December 31, 2022.

We intend to explore additional opportunities as they arise to expand our branch network.

1 unchanged sentence

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.

The additional capital raised in the 2021 second-step conversion offering provided us with additional resources to attract and retain the necessary talent and continue to enhance our infrastructure and technology to support our growth following the conversion.

Implement a stockholder-focused strategy for management of our capital.

29 unchanged sentences

Loans whose terms are modified are classified as troubled debt restructurings if we grant such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty.

Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated

maturity date at a below market rate.

Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date at a below market rate.

Adversely classified, non-accrual troubled debt restructurings may be returned to accrued status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.

8 unchanged sentences

Balance Sheet Analysis

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.

Total assets increased by $200.0 million, or 16.3%, to $1.4 billion at December 31, 2022, from $1.2 billion at December 31, 2021.

The increase in assets was primarily due to increases in net loans of $244.1 million, investment securities held-to-maturity of $8.5 million, accrued interest receivable of $4.3 million, and premises and equipment of $2.2 million, partially offset by decrease in cash and cash equivalents of $57.0 million and investment in equity securities of $1.9 million.

Cash and cash equivalents decreased by $57.0 million, or 37.4%, to $95.3 million at December 31, 2022 from $152.3 million at December 31, 2021.

The decrease in cash and cash equivalents was a result of cash being deployed to fund an increase in net loans of $245.1 million, an increase in securities held-to-maturity of $8.5 million, an increase in property and equipment of $2.2 million due primarily to the purchase of property and equipment for a new branch office, and a reduction in FHLB advances of $7.0 million.

Equity securities decreased by $1.9 million, or 9.5%, to $18.0 million at December 31, 2022 from $19.9 million at December 31, 2021.

The decrease in equity securities was attributable to market depreciation of $1.9 million as market interest rates increased during the year ended December 31, 2022.

Securities held-to-maturity increased by $8.5 million, or 47.6%, to $26.4 million at December 31, 2022 from $17.9 million at December 31, 2021 due primarily to the purchases of securities, partially offset by maturities and pay-downs.

Loans, net of the allowance for loan losses, increased by $244.1 million, or 25.2%, to $1.2 billion at December 31, 2022 from $968.1 million at December 31, 2021.

The increase in loans, net of the allowance for loan losses, was primarily due to loan originations of $700.1 million during the year ended December 31, 2022, consisting primarily of $580.7 million in construction loans with respect to which approximately 31.3% of the funds were disbursed at loan closings, with the remaining funds to be disbursed over the terms of the construction loans.

Loan originations resulted in a net increase of $246.8 million in construction loans, $39.0 million in multi-family loans, and $277,000 in consumer loans.

The increase in our loan portfolio was partially offset by decreases in non-residential loans of $24.7 million, commercial and industrial loans of $8.3 million, mixed-use loans of $6.8 million, and residential loans of $1.7 million, coupled with normal pay-downs and principal reductions.

Premises and equipment increased by $2.2 million, or 9.0%, to $26.1 million at December 31, 2022 from $23.9 million at December 31, 2021 due to the acquisition of property and equipment for a new branch site located in Bloomingburg, New York.

Investments in Federal Home Loan Bank stock decreased by $331,000, or 21.1%, to $1.2 million at December 31, 2022 from $1.6 million at December 31, 2021 due primarily to a reduction in mandatory Federal Home Loan Bank stock in connection with the maturity of $7.0 million in advances during the quarter ended March 31, 2022.

Accrued interest receivable increased by $4.3 million, or 100.7%, to $8.6 million at December 31, 2022 from $4.3 million at December 31, 2021 due to an increase in the loan portfolio and seven interest rate increases in 2022 that resulted in an increase in the interest rates on loans in our construction loan portfolio.

Foreclosed real estate decreased by $540,000, or 27.1%, to $1.5 million at December 31, 2022 from $2.0 million at December 31, 2021 due to a write down on the fair market value of the property because the increase in interest rates caused an increase in the capitalization rate thereby resulting in a reduction in the calculated fair market value of the property.

Right of use assets — operating decreased by $252,000, or 9.8%, to $2.3 million at December 31, 2022 from $2.6 million at December 31, 2021, 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.

Other assets increased by $655,000, or 14.0%, to $5.3 million at December 31, 2022 from $4.7 million at December 31, 2021 due to increases in suspense accounts of $641,000, tax assets of $24,000, and prepaid expense of $12,000, partially offset by decreases in securities and principal receivables of $19,000 and miscellaneous assets of $2,000.

Total deposits increased by $194.8 million, or 21.0%, to $1.1 billion at December 31, 2022 from $927.2 million at December 31, 2021.

The increase was primarily due to increases in certificates of deposit of $90.7 million, or 31.0%, savings account balances of $88.9 million, or 48.1%, and non-interest bearing demand deposits of $45.4 million, or 13.7%.

These increases were partially offset by a decrease in NOW/money market accounts of $30.3 million, or 25.6%, from December 31, 2021 to December 31, 2022.

Federal Home Loan Bank advances decreased by $7.0 million, or 25.0%, to $21.0 million at December 31, 2022 from $28.0 million at December 31, 2021 due to maturity of borrowings.

Advance payments by borrowers for taxes and insurance increased by $485,000, or 25.7%, to $2.4 million at December 31, 2022 from $1.9 million at December 31, 2021 due primarily to the accumulation of tax payments from borrowers.

Lease liability – operating decreased by $241,000, or 9.3%, to $2.4 million at December 31, 2022 from $2.6 million at December 31, 2021, 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.

Accounts payable and accrued expenses increased by $1.2 million, or 9.0%, to $14.8 million at December 31, 2022 from $13.5 million at December 31, 2021 due primarily to an increase in accrued bonus expense of $1.1 million for employees.

Stockholders’ equity increased by $10.6 million, or 4.2% to $262.0 million at December 31, 2022, from $251.4 million at December 31, 2021.

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.

The increase in stockholders’ equity was due to net income of $24.8 million for the year ended December 31, 2022, a reduction of $869,000 in unearned employee stock ownership plan shares coupled with an increase of $206,000 in earned employee stock ownership plan shares, $295,000 in other comprehensive income, and $208,000 in the amortization of restricted stock and stock options awarded in connection with the Company’s 2022 Equity Incentive Plan, partially offset by stock repurchases totaling $9.3 million and dividends paid and declared of $6.5 million.

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.

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The following table sets forth certain information at December 31, 2022 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.

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.

34 unchanged sentences

agency collateralized mortgage obligations

Treasury securities

Municipal bonds

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We have no deposits that are uninsured for any reason other than being in excess of the maximum amount for federal deposit insurance.

The following table sets forth the portion of the Bank’s certificates of

deposit, by account, that are in excess of the FDIC insurance limit, by remaining time until maturity, as of December 31, 2021:

The following table sets forth the portion of the Bank’s certificates of deposit, by account, that are in excess of the FDIC insurance limit, by remaining time until maturity, as of December 31, 2022:

December 31, 2022

10 unchanged sentences

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.

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 $372,000 and $484,000 for the years ended December 31, 2022 and 2021, respectively.

34 unchanged sentences

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.

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 12/31/2022

4 unchanged sentences

Loans receivable

Federal Home Loan Bank stock

Other interest-earning assets

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Net income for the year ended December 31, 2022 was $24.8 million compared to net income of $11.9 million for the year ended December 31, 2021.

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.

Net income for the year ended December 31, 2022 was greater than the year ended December 31, 2021 primarily due to an increase in net interest income and a decrease in provision for loan losses expense, partially offset by a decrease in non-interest income, an increase in non-interest expenses, and an increase in income tax expense.

Summary Income Statements

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Net interest income totaled $63.9 million for the year ended December 31, 2022, as compared to $43.3 million for the year ended December 31, 2021.

The increase in net interest income of $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.

The increase in net interest income of $20.6 million, or 47.5%, was primarily due to an increase in interest income that exceeded an increase in interest expense in a manner consistent with the increase in

interest rates attributable to the Federal Reserve’s rate increases during the year ended December 31, 2022.

In this regard, our yield on interest earning assets increased much greater than our cost of interest bearing liabilities as our yield on interest earning assets repriced faster due to higher rates than our cost of interest bearing liabilities.

The increase in net interest income was also due to increases in loans and investment securities, partially offset by decreases in interest-bearing deposits at other financial institutions and Federal Home Loan Bank stock as we continued to grow the Company by leveraging the proceeds raised in our July 2021 second-step conversion.

Interest and dividend income increased by $23.6 million, or 48.8%, due to an increase in the yield on interest earning assets by 107 basis points from 4.92% for the year ended December 31, 2021 to 6.00% for the year ended December 31, 2022 and an increase in the average interest earning assets of $217.5 million, or 22.1%, from $983.1 million for the year ended December 31, 2021 to $1.2 billion for the year ended December 31, 2022.

Interest expense increased by $3.0 million, or 59.3%, due to an increase in average interest bearing liabilities of $76.6 million, or 13.5%, from $568.5 million for the year ended December 31, 2021 to $645.1 million for the year ended December 31, 2022 and an increase in the cost of interest bearing liabilities by 36 basis points from 0.90% for the year ended December 31, 2021 to 1.26% for the year ended December 31, 2022.

The increase in the cost of interest bearing liabilities was also partially due to a shift to savings accounts from interest bearing certificates of deposits and interest bearing demand deposits as the average balances of savings accounts increased by $119.9 million, or 110.2%, from $108.9 million for the year ended December 31, 2021 to $228.8 million for the year ended December 31, 2022.

During the same time period, the average balances of interest bearing certificates of deposits decreased by $30.7 million, or 9.7%, from $316.7 million for the year ended December 31, 2021 to $286.0 million for the year ended December 31, 2022 and the average balances of interest bearing demand deposits decreased by $6.9 million, or 6.0%, from $114.9 million for the year ended December 31, 2021 to $108.1 million for the year ended December 31, 2022.

The decrease in the average balances of interest bearing certificates of deposits occurred from January to August 2022 and was partially offset by an increase in the average balances of interest bearing certificates of deposits from September 2022 to December 2022.

In addition, the average balances of our non-interest bearing demand deposits increased by $94.6 million, or 36.3%, from $260.5 million for the year ended December 31, 2021 to $355.1 million for the year ended December 31, 2022.

Net interest margin increased by 92 basis points, or 20.8%, during the year ended December 31, 2022 to 5.32% compared to 4.40% at December 31, 2021.

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.

A provision for loan losses of $439,000 was recorded for the year ended December 31, 2022 as compared to $3.6 million for the year ended December 31, 2021.

The provision for loan losses during 2022 was primarily attributable to charge-offs totaling $426,000 comprising of a $328,000 charge-off against one construction project in connection with the sale to a third party of the project’s two non-performing loans precipitated by legal action between the two partners/borrowers in the project, an $86,000 charge-off against two mixed-used loans to a borrower in connection with the sale of the two performing troubled debt restructured loans to a third party, and a $34,000 charge-off against various unpaid overdrafts in our demand deposit accounts.

The provision for loan losses recorded for the year ended December 31, 2021 was primarily attributable to the charge-off of the previously disclosed non-residential bridge loan with a balance of $3.6 million secured by commercial real estate located in Greenwich, Connecticut.

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 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.

The loan originated in 2016 as a two-year bridge loan and, upon the borrower’s failure to satisfy the loan at the maturity date, the loan was accelerated and a foreclosure action was instituted.

Although the loan was fully charged-off, the loan remains in foreclosure and management and the borrower negotiated a standstill agreement which allows the borrowers to retain, at their own expense, the zoning and planning consultants necessary to obtain re-approvals from the town to proceed with the original planned residential condominium development.

The Company intends to aggressively seek recovery of all amounts due from the personal guarantors of the loan.

If successful against the guarantors, any recovery received would be added back to the allowance for loan losses and an analysis will be performed at that time to determine the appropriateness of the recovery into income.

There has been no change in the status of the recovery action during the fourth quarter ended December 31, 2022.

We also charged-off $23,000 during the year ended December 31, 2021 against various unpaid overdrafts in our demand deposit accounts.

We recorded recoveries of $242,000 during the year ended December 31, 2022 comprised of recoveries of $146,000 regarding a previously charged-off multi-family property, $53,000 regarding a previously charged-off non-residential property, and $43,000 regarding a previously charged-off mixed-use property.

We recorded recoveries of $160,000 during the year ended December 31, 2021 comprised primarily of recoveries of $150,000 regarding a previously charged-off multi-family property.

Based on a review of the loans that were in our loan portfolio at December 31, 2022, management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable.

Management uses available information to establish the appropriate level of the allowance for loan losses.

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Other loan fees and service charges

Gain (loss) on disposition of equipment

Gain on disposition of equipment

Earnings on bank-owned life insurance

Investment advisory fees

Unrealized (loss) gain on equity securities

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.

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.

Realized and unrealized loss on equity securities

The decrease in total non-interest income was primarily due to an unrealized loss of $1.9 million in our equity securities, partially offset by a one-time capital gains distribution of $329,000 from our equity securities resulting in a net unrealized loss on equity securities of $1.6 million in 2022 compared to an unrealized loss of $389,000 in 2021.

The net unrealized loss of $1.6 million on equity securities during the 2022 period was due to a rising interest rate environment and the Federal Reserve’s interest rate increases during the year ended December 31, 2022.

The decrease in total non-interest income was also due to a decrease of $40,000 in investment advisory fees, partially offset by an increase of $426,000 in other loan fees and service charges, an increase of $91,000 on gain from the sale of fixed assets, an increase of $31,000 in other non-interest income, and an increase of $5,000 in bank-owned life insurance income.

The decrease in investment advisory fees was due to a decrease in assets under management of Harbor West and a decrease in commission income from Harbor West due to market conditions.

The increase in other loan fees and service charges was due to increases of $375,000 in loan servicing fees and $194,000 in ATM and debit card usage fees, partially offset by decreases of $139,000 in loan fees and $3,000 in deposit accounts fees.

Non-Interest Expense

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Non-interest expense increased by $4.2 million, or 15.9%, to $30.7 million for the year ended December 31, 2022 from $26.5 million for the year ended December 31, 2021.

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 resulted primarily from increases of $1.9 million in other operating expense, $553,000 in salaries and employee benefits, $530,000 in real estate owned expense, $451,000 in goodwill impairment loss, $313,000 in occupancy expense, $234,000 in outside data processing expense, $160,000 in advertising expense, and $114,000 in equipment expense.

Other non-interest expense increased by $1.9 million, or 28.7%, to $8.3 million in 2022 from $6.5 million in 2021 due mainly to increases of $880,000 in miscellaneous other non-interest expense, $534,000 in legal fees, $178,000 in service contracts expense, $135,000 in directors compensation, $69,000 in insurance expense, $68,000 in audit and accounting fees, $65,000 in recruitment expenses related to the hiring of additional personnel, $33,000 in telephone expense, and $8,000 in office supplies, partially offset by decreases of $94,000 in consulting services and $14,000 in directors, officers and employee expense.

The increase of $880,000 in miscellaneous other non-interest expense was due to increases of $473,000 in FDIC insurance premiums and New York State regulatory assessments, $156,000 in public company expense, $129,000 in dues and subscriptions, and $111,000 in miscellaneous charge-offs and various over and short in branch operations.

Salaries and employee benefits increased by $553,000, or 3.7%, to $15.5 million in 2022 from $15.0 million in 2021.

The increase was due to an increase in bonuses paid to employees and loan production personnel and an increase in the number of full-time equivalent employees to 137 as of December 31, 2022 from 131 as of December 31, 2021.

The increase in bonuses paid to employees and loan production personnel was due to the strong earnings and an increase in the loan portfolio in 2022.

The increase in full-time equivalent employees was due to our efforts to expand our operations.

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.

There was no goodwill impairment expense of in 2021 compared to a goodwill impairment expense of $98,000 in 2020.

Occupancy expense increased by $313,000, or 14.8%, to $2.4 million in 2022 from $2.1 million in 2021 primarily as a result of the cost of operating an additional branch office to accommodate our expansion.

Equipment expense increased by $114,000, or 11.5%, to $1.1 million in 2022 from $993,000 in 2021 due to an increase in the purchases of additional equipment with the addition of a new branch office in 2022.

Real estate owned expense increased by $530,000, or 569.9%, to $623,000 in 2022 from $93,000 in 2021 due to the write down of $540,000 in the value of the one foreclosed property in 2022, partially offset by a reduction of

$10,000 in operating expenses to maintain the one real estate owned property in 2022.

The write down of $540,000 on the fair market value of a foreclosed property was due to the increase in interest rates resulting in an increase in the capitalization rate thereby reducing the calculated fair market value of the property.

Outside data processing expense increased by $234,000, or 14.2%, to $1.9 million in 2022 from $1.7 million in 2021 due to the cost of operating an additional branch and additional services required in 2022 to enable the company to expand.

There was a goodwill impairment expense of $451,000 in 2022 compared to no goodwill impairment expense in 2021.

The goodwill was recorded in connection with the acquisition of Harbor West Financial Planning Wealth Management Group in 2007, which is operated as a division of the Bank.

The goodwill impairment in 2022 was caused primarily by the expected decrease in revenue from this division due to a decrease in clients and the resulting decrease in assets under management.

Advertising expense 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.

Advertising expense increased by $160,000, or 115.1%, to $299,000 in 2022 from $139,000 in 2021 due mainly to the resumption of advertising and promotional products to promote the opening of an additional branch office.

Income Taxes.

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Total non-performing assets to total assets

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.

During the year ended December 31, 2022, non-performing assets decreased by $540,000, or 27.1%, to $1.5 million from $2.0 million as of December 31, 2021.

The decrease in non-performing assets was primarily due to the previously disclosed write down of $540,000 in the value of the one foreclosed property in 2022.

We had no non-performing loans at December 31, 2022 and at December 31, 2021.

In 2022, we collected no interest income from a loan that was in non-accrual status in 2022 and was charge-off in 2022.

In 2020, we collected $85,000 in interest income from a loan that was in non-accrual status in 2019 and was satisfied in 2020.

In 2021, we collected no interest income from a loan that was in non-accrual status in 2021 and was charge-off in 2021.

From time to time, as part of our loss mitigation strategy, we may renegotiate the loan terms based on the economic or legal reasons related to the borrower’s financial difficulties.

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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.

Of the four TDR loans at December 31, 2021, two of the TDR loans totaling $746,000 were to one borrower and secured by the same non-residential property that had a charge-off of $67,000 on one of the loans in prior years.

The borrower satisfied these two loans in 2022 as noted in the following paragraph.

The remaining two TDR loans with an aggregate balance of $855,000 at December 31, 2022 were to one borrower and secured by two adjacent non-residential properties but were performing in accordance with their restructured terms for the requisite period of time (generally at least six consecutive months) to be returned to accrual status.

We subsequently sold these two loans to a third party on January 5, 2023 at a loss of $86,000.

We had two impaired loans at December 31, 2022 totaling $855,000 consisting of the two aforementioned TDR loans that were subsequently sold to a third party in January 2023.

We had four impaired loans at December 31, 2021 totaling $1.6 million consisting of the four aforementioned TDR loans whereby two of the impaired TDR loans totaling

$746,000 loans were satisfied in 2022 and the other two impaired TDR loans totaling $855,000 were sold to a third party on January 5, 2023 at a loss of $86,000.

The following table summarizes classified and criticized assets of all portfolio types at the dates indicated:

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Total criticized loans

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.

On the basis of management’s review of our assets, we had one loan totaling $946,000 classified as special mention at December 31, 2022 compared to no assets classified as special mention at December 31, 2021.

In addition, we classified $855,000 as substandard at December 31, 2022 compared to $746,000 at December 31, 2021.

There were no assets classified as doubtful or loss at December 31, 2022 or 2021.

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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.

The increase in special mention assets was due to the deterioration of the property securing the only special mention loan as of December 31, 2022.

The increase in substandard assets was primarily due to the addition of two performing mixed-use mortgage loans totaling $855,000 that were classified as TDRs and as substandard because we incurred a loss of $83,000 on the sale to a third-party of these two loans on January 5, 2023, partially offset by the satisfaction in 2022 of two performing non-residential mortgage loans totaling $746,000 that were classified as TDRs and impaired loans but has been performing and management decided at classified as substandard at December 31, 2021.

For more information, see the discussion of TDR loans included above.

Delinquent Loans

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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.

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

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.

Loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status.

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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.

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.

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated:

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The allowance for loan losses increased by $232,000 to $5.5 million at December 31, 2022 from $5.2 million at December 31, 2021.

The increase in the allowances for loan losses was due primarily to 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.

The increase in the allowances for loan losses was due primarily to provision for loan losses of $439,000, which reflected the charge-off of $449,000 which had an unfavorable impact on the historical loss factors, and increases in the construction loan and consumer loan portfolio, partially offset by decreases in the residential, mixed-use, and non-residential mortgage loan portfolio and the commercial and industrial loan portfolio.

The allowance for loan losses was also impacted the reduction of the TDRs in 2022.

We had recoveries totaling $241,000 in 2022 and $160,000 in 2021.

The historical loss percentage factor for multifamily, non-residential, and commercial and industrial loans declined while the historical loss percentage factor for mixed-use, construction, and consumer loans increased.

The historical loss percentage factor declined because one single charge-off of $152,000 in 2017 for multifamily loans, one single loan charge-off of $125,000 in 2017 for non-residential loans were out of the historical loss look back period, and therefore were not included in the historical loss rate calculation at December 31, 2022.

The historical loss percentage factor for commercial and industrial loans decreased due to decreased historical loss as a percentage of total historical loss over the years.

The historical loss percentage factor for mixed-use, construction, and consumer loans increased due to loan charge-offs in 2022.

Other adjustments in provision for loan loss include movements in the qualitative factors as risks in each respective segment change.

Loans evaluated collectively totaled $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.

Loans evaluated collectively totaled $1.2 billion at December 31, 2022 compared to $971.2 million at December 31, 2021.

Loans evaluated individually totaled $855,000 at December 31, 2022 compared to $1.6 million at December 31, 2021.

Interest Rate Risk Management

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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

risk within the parameters of our model.

The results at December 31, 2022 indicate the level of risk within the parameters of our model.

Our management believes that the December 31, 2022 results indicate a profile that reflects interest rate risk exposures in both rising and declining rate environments for both net interest income and economic value.

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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.

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.

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Cash received from the sales, calls, maturities and pay-downs on securities totaled $1.5 million and $4.8 million for the years ended December 31, 2022 and 2021, respectively.

We purchased $25.3 million and $189,000 in securities for the years ended December 31, 2021 and 2020, respectively.

We purchased $10.0 million and $25.3 million in securities for the years ended December 31, 2022 and 2021, respectively.

Deposit flows are generally affected by the level of interest rates we offer, the interest rates and products offered by local competitors, and other factors.

Total deposits increased by $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.

Total deposits increased by $194.8 million at December 31, 2022 due to

increases in non-interest bearing demand deposits, savings account deposits, and certificates of deposits, offset by a decrease in NOW/money market balances.

Liquidity management is both a daily and long-term function of business management.

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We had an available borrowing limit of $31.5 million and $29.4 million from the Federal Home Loan Bank of New York as of December 31, 2022 and 2021, respectively.

Federal Home Loan Bank advances were $28.0 million at both December 31, 2021 and 2020.

Federal Home Loan Bank advances were $21.0 million and $28.0 million at December 31, 2022 and 2021, respectively.

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, 2022 and 2021.

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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.

The Company’s primary sources of income are interest income derived from investments in loans and interest bearing accounts at other financial institutions and dividends received from the Bank.

At December 31, 2022, the Company had liquid assets of $20.3 million.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis