What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-11-08 · 87 added, 173 removed, 197 unchanged (57% of the section changed)

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the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations;

the effects of the COVID-19 pandemic on the United States economy in general and the local economies in which the Company operates;

the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations;

the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve"), inflation, interest rate, market and monetary fluctuations;

the potential adverse effects of the Consent Orders and any additional regulatory restrictions that may be imposed by banking regulators;

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Financial institutions can be affected by changing conditions in the real estate and financial markets.

The lingering effects of the COVID-19 pandemic, geopolitical instability, including the conflict between Russia and Ukraine and the war in Israel, foreign currency exchange volatility, volatility in global capital markets, inflationary pressures, and higher interest rates may meaningfully impact loan production, income levels, and the measurement of certain significant estimates such as the allowance for credit losses.

The effects of geopolitical instability, including the conflict between Russia and Ukraine and the war in Israel, foreign currency exchange volatility, volatility in global capital markets, inflationary pressures, and higher interest rates may meaningfully impact loan production, income levels, and the measurement of certain significant estimates such as the allowance for credit losses.

Moreover, in a period of economic contraction, we may experience elevated levels of credit losses, reduced interest income, impairment of financial assets, diminished access to capital markets and other funding sources, and reduced demand for our products and services.

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As a result of this geographic concentration, a significant broad-based deterioration in economic conditions in these areas could have a material adverse impact on the quality of our loan portfolio, results of operations and future growth potential.

An unexpected COVID-19 pandemic resurgence due to new variants could cause us to experience higher credit losses in our lending portfolio, additional increases in our allowance for credit losses, impairment of financial assets, diminished access to capital markets and other funding sources, further reduced demand for our products and services, and other negative impacts on our financial position, results of operations.

During 2022, the Federal Reserve took unprecedented action during the year to restrain inflation and improve the stability of the economy by raising the target federal funds rate several times from 25 basis points in the beginning of the year to 75 basis points toward the end of the year and brought the benchmark interest rates up by a collective 4.50 percent.

During the first quarter 2023, the Federal Reserve increased the target federal funds rate another 0.25 percent and further increased the target federal funds rate another 0.25 percent in May 2023.

At its June 2023 meeting, the Federal Reserve left interest rates unchanged for the first time since March 2022, in order to give themselves time to assess the still developing effects of previous increases in interest rates and borrowing costs.

However, on July 26, 2023, the Federal Reserve increased the target funds rate another 0.25 percent.

At its policy meeting in September 2023, the Federal Reserve again left its target federal funds rate unchanged (5.25% - 5.50%).

The Federal Reserve has indicated that it may further increase the target federal funds rate in the second half 2023 in an attempt to reduce inflation.

Any substantial or unexpected change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations.

As inflation increases and market interest rates rise, the value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments.

In addition, inflation generally increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our non-interest expenses.

Furthermore, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.

Any of these effects, if sustained, may impair our capital and liquidity positions, require us to take capital actions, prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements, or result in downgrades in our credit ratings and the reduction or elimination of our common stock dividend in future periods.

Our operations are subject to risks and uncertainties surrounding our exposure to changes in the interest rate environment.

Earnings and liquidity depend to a great extent on our interest rates.

Interest rates are highly sensitive to many factors beyond our control, including competition, general economic conditions, geopolitical tensions and monetary and fiscal policies of various governmental and regulatory authorities, including the Federal Reserve.

Conditions such as inflation, deflation, recession, unemployment and other factors beyond our control may also affect interest rates.

The nature and timing of any changes in interest rates or general economic conditions and their effect on us cannot be controlled and are difficult to predict.

If the rate of interest we pay on our interest-bearing liabilities increases more than the rate of interest we receive on our interest-earning assets, our net interest income, and therefore our earnings, could contract and be materially adversely affected.

Our earnings could also be materially adversely affected if the rates on interest-earning assets fall more quickly than those on our interest-bearing liabilities.

Changes in interest rates could also create competitive pressures, which could impact our liquidity position.

Changes in interest rates also can affect our ability to originate loans, our ability to obtain and retain deposits, and the value of interest-earning assets, and the ability to realize gains from the sale of such assets, which could all negatively impact shareholder's equity and regulatory capital.

Since March 2022, the Federal Reserve Open Markets Committee ("FOMC") has raised the Fed Funds rate by 525 basis points.

Additional increases in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations, which could not only result in increased loan defaults, foreclosures and charge-offs, but could also necessitate further increases to our allowance for credit losses and reduce net income.

In addition, based on our interest rate sensitivity analyses, an increase in the general level of interest rates may negatively affect the market value of the investment portfolio depending on the duration of certain securities included in the investment portfolio.

In December of 2023, the FOMC signaled its intention to reduce interest rates in 2024, contingent upon inflation settling at its

In March 2024, however, the Fed decided to keep the federal funds target rate at 5.25% to 5.5%, where it has remained since July 2023.

The extent to which current economic environment has a further impact on our business, results of operations, and financial condition, as well as the regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the current economic environment and actions taken by governmental authorities and other third parties in response to the geopolitical conflict, and inflationary pressure.

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The Company's non-interest expense primarily consists of employee compensation, administration, and other operating expenses.

At September 30, 2023, we had total assets of $1.98 billion, and total equity of $278.0 million.

Net income available to common shareholders for the three and nine months ended September 30, 2023 was $1.0 million and $20.3 million, respectively.

At March 31, 2024, we had total assets of $2.01 billion, and total equity of $288.4 million.

Net income available to common shareholders for the three months ended March 31, 2024 was $6.1 million.

Results of Operations

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Our net income available to common shareholders for the third quarter of 2023 decreased $9.5 million, or 90.3%, to $1.0 million, compared to $10.5 million for the same period last year.

Earnings per share were $0.09 per basic common share and $0.08 per diluted common share for the third quarter of 2023 compared to $0.88 per basic common share and $0.87 per diluted

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

Our net income available to common shareholders for the first quarter of 2024 decreased $5.0 million, or 44.8%, to $6.1 million, compared to $11.1 million for the same period last year.

Earnings per share were $0.51 per basic common share and $0.51 per diluted common share for the first quarter of 2024 compared to $0.93 per basic common share and $0.92 per diluted

common share for the same period last year.

The decrease was primarily due to a $9.3 million increase in other operating expenses resulting from the recognition of a $9.5 million contingent loss related to cash that was stolen from a third-party armored car carrier facility that was used by the Company, and lower net interest income, partially offset by lower provision for credit losses, and by a reduction in income tax expense.

Net Interest Income :

Our net interest income was $15.7 million for the third quarter of 2023 compared to $19.3 million for the third quarter of 2022, a decrease of $3.6 million, or 18.7%.

Net interest income decreased during the three months ended September 30, 2023, primarily due to a $9.1 million increase in interest expense on deposits.

Interest income increased $6.8 million, or 30.3%, during the three months ended September 30, 2023 as compared to the same period in the prior year.

The increase in interest income was primarily due to an increase of $6.4 million in interest and fees on loans, due to higher loan balances and market interest rates, as well as a $0.2 million increase in interest on deposits with banks.

The increase in interest income was partially offset by an increase in interest expense during the three months ended September 30, 2023 of $10.4 million, or 341.5%, due to an increase in market interest rates on deposits and the overall mix of deposits of $9.1 million and an increase in interest on borrowings of $1.3 million, due to an increase in borrowing levels at market interest rates.

Provision for credit losses :

For the three months ended September 30, 2023, the provision for credit losses was $0.3 million, compared to $0.6 million for the three months ended September 30, 2022.

The provision for credit losses during the third quarter of 2023 was primarily driven by an increase in outstanding loan balances, as well as an increase in the qualitative loss factor for the residential 1 to 4 family loan portfolio due to an increase in delinquent loan balances.

Non-interest Income :

Our non-interest income was $1.8 million for the three months ended September 30, 2023, a decrease of $0.2 million, compared to $2.0 million for the three months ended September 30, 2022.

The decrease is primarily attributable to a decrease in service fees on deposit account of $0.1 million, primarily attributable to a decrease in our cannabis banking deposit accounts, as well as a decrease in loan fees of $0.2 million, partially offset by a gain in other income of $0.2 million.

Non-interest Expense :

Our non-interest expense increased $9.6 million, or 151.9%, to $15.8 million for the three months ended September 30, 2023, from $6.3 million for the three months ended September 30, 2022.

The increase in non-interest expense was primarily due to a $9.5 million contingent loss related to cash that was stolen from a third-party armored car carrier facility that was used by the Company.

The recognition of the loss during the quarter was driven by the completion of an outside forensic accountant's report confirming the loss.

Income tax expense was $0.3 million on income before taxes of $1.4 million for the three months ended September 30, 2023, resulting in an effective tax rate of 24.8%, compared to income tax expense of $3.9 million on income before taxes of $14.4 million for the same period of 2022, resulting in an effective tax rate of 27.0%.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Our net income available to common shareholders for the nine months ended September 30, 2023 decreased $11.1 million, or 35.3%, to $20.3 million compared to $31.3 million for the nine months ended September 30, 2022.

Earnings per share were $1.70 per basic common share and $1.67 per diluted common share for the nine months ended September 30, 2023 compared to $2.63 per basic common share and $2.58 per diluted common share for the same period last year.

The decrease in net income available to common shareholders primarily resulted from a decrease in net interest income of $5.7 million, a decrease in non-interest income of $1.4 million, and an increase in non-interest expense of $11.3 million, partially offset by a decrease in the provision for credit losses of $2.6 million.

The decrease was primarily due to lower net interest income, an increase in provision for credit losses, and a decrease in non-interest income.

Net Interest Income :

Our net interest income decreased $5.7 million, or 10.5%, to $48.7 million for the nine months ended September 30, 2023, compared to $54.4 million for the same period last year.

Interest income for the nine months ended September 30, 2023, increased $19.9 million to $82.4 million, or 31.9%, from $62.5 million for the same period of 2022.

The increase in interest income was primarily due to an increase in interest and fees on loans of $18.1 million due to an increase in market interest rates and balances outstanding, and an increase in interest earned on Federal Reserve Bank ("FRB") deposits of $1.7 million.

Interest expense increased $25.6 million, or 317.7%, for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to an increase in interest paid on deposits of $22.2 million, or 375.9%, primarily due to an increase in market interest rates and a shift in deposit mix.

Further contributing to the increase in interest expense was an increase in interest on borrowings of $3.5 million, or 160.2%, due to an increase in borrowing levels and higher market interest rates.

Provision for credit losses :

The provision for credit losses was a recovery of $1.6 million for the nine months ended September 30, 2023, compared to a provision for credit losses of $1.0 million for the nine months ended September 30, 2022.

The recovery in the provision for credit losses for the nine months ended September 30, 2023 was primarily related to decreases in

loss factors related to the construction, commercial owner occupied, and residential 1 to 4 family investment loan portfolios from December 31, 2022, partially offset by increases in outstanding balance.

On January 1, 2023 we implemented ASU 2016-13 Financial Instruments - Credit Losses.

This resulted in an increase to the allowance for credit losses of $1.9 million.

For more information about our provision for credit losses and our allowance for loan and lease losses and loss experience, see “Financial Condition-Allowance for Loan and Lease Losses” below and Note 4 - Loans And Allowance For Credit Losses on Loans to the unaudited consolidated financial statements.

Our net interest income was $14.1 million for the first quarter of 2024 compared to $17.1 million for the first quarter of 2023, a decrease of $3.0 million, or 18.1%.

Net interest income decreased during the three months ended March 31, 2024, primarily due to an increase in interest expense on deposits and borrowings, partially offset by an increase in interest and fees on loans.

Interest income increased $3.5 million, or 13.3%, during the three months ended March 31, 2024 as compared to the same period in the prior year.

The increase in interest income was primarily due to an increase of $3.5 million in interest and fees on loans, due to higher loan balances and market interest rates, partially offset by a $0.1 million decrease in interest on deposits with banks.

The increase in interest income was offset by an increase in interest expense during the three months ended March 31, 2024 of $6.5 million, or 73.8%, primarily due to an increase in market interest rates on deposits and the overall mix of deposits of $5.9 million and an increase in interest on borrowings of $0.7 million, due to an increase in market interest rates.

Provision for (recovery of) credit losses :

For the three months ended March 31, 2024, the provision for credit losses was $0.2 million, compared to a recovery provision of $(2.4) million for the three months ended March 31, 2023.

The provision (recovery) for the three months ended March 31, 2023, was driven by a decrease in the construction loan portfolio post CECL implementation that resulted in the provision recovery, while the increase in provision expense during the three months ended March 31, 2024, was due to a change in the mix of the loan portfolio which resulted in an increase in the qualitative loss factors, mainly attributed to the residential 1 - 4 family investment and multi-family loan portfolios.

Non-interest Income :

Our non-interest income was $5.2 million for the nine months ended September 30, 2023, a decrease of $1.4 million, or 20.7%, compared to $6.6 million for the same period last year.

The decrease is primarily attributable to a decrease in service fees on deposit accounts of $0.6 million, a decrease in the gain on the sale of OREO assets of $0.3 million, and a decrease in other loan fees of $0.5 million.

Fee income for the nine months ended September 30, 2023 from commercial deposit accounts of depositors who do business in the cannabis-related industry totaled $2.9 million, compared to $3.6 million for the same period last year.

Fee income is included in service fees on deposit accounts in the accompanying Consolidated Statements of Income.

Our non-interest income was $1.1 million for the three months ended March 31, 2024, a decrease of $0.7 million, compared to $1.8 million for the three months ended March 31, 2023.

The decrease is primarily attributable to a decrease in service fees on deposit accounts of $0.8 million, partially offset by an increase in other loan fees $0.1 million.

Non-interest Expense :

Our non-interest expense increased $11.3 million to $29.0 million for the nine months ended September 30, 2023, from $17.7 million for the nine months ended September 30, 2022.

The increase in non-interest expense was primarily due to a $9.5 million contingent loss related to cash that was stolen from a third-party armored car carrier facility that was used by the Company.

The recognition of the loss during the quarter was driven by the completion of an outside forensic accountant's report confirming the loss.

Also contributing to the increase in non-interest expense during the nine months ended September 30, 2023, was an increase in compensation and benefits of $1.5 million, and OREO expense of $0.2 million.

The increase in compensation and benefits was primarily driven by an increase in salary expense of $0.4 million, and a decrease in deferred origination costs of $0.8 million, as a result of lower loan origination volume.

The increase in OREO costs is due to the increase in costs associated with the management and disposition of our foreclosed properties.

Income tax expense was $6.2 million on income before taxes of $26.5 million for the nine months ended September 30, 2023, resulting in an effective tax rate of 23.5%, compared to income tax expense of $11.0 million on income before taxes of $42.4 million for the same period of 2022, resulting in an effective tax rate of 25.9%.

Our non-interest expense decreased $0.2 million, or 3.4%, to $6.5 million for the three months ended March 31, 2024, from $6.8 million for the three months ended March 31, 2023.

The decrease in non-interest expense was primarily due to a decrease in compensation and benefits of $0.4 million, and a decrease in professional services of $0.1 million, partially offset by an increase in OREO expense of $0.2 million, and an increase in FDIC insurance of $0.1 million.

Income tax expense was $2.2 million on income before taxes of $8.4 million for the three months ended March 31, 2024, resulting in an effective tax rate of 26.6%, compared to income tax expense of $3.4 million on income before taxes of $14.6 million for the same period of 2023, resulting in an effective tax rate of 23.6%.

Net Interest Income

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The following tables presents the average daily balances of assets, liabilities and equity and the respective interest earned or paid on interest-earning assets and interest-bearing liabilities, as well as average annualized rates, for the periods indicated.

For the Three Months Ended September 30,

For the Three Months Ended March 31,

Balance Interest

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** Includes balances of FHLBNY and ACBB stock.

For the Nine Months Ended September 30,

Average Balance Interest Income/ Expense Yield/ Cost Average Balance Interest Income/ Expense Yield/ Cost

(Dollars in thousands)

Loans* $ 1,776,181 $ 77,602 5.84 % $ 1,535,264 $ 59,511 5.18 %

Investment securities** 26,737 745 3.73 % 26,758 565 2.82 %

Interest bearing deposits 113,858 4,059 4.77 % 400,085 2,404 0.80 %

Total interest-earning assets 1,916,776 82,406 5.75 % 1,962,107 62,480 4.26 %

Other assets 79,467 78,769

Allowance for credit losses (31,826) (30,232)

Total assets $ 1,964,417 $ 2,010,644

Liabilities and Shareholders’ Equity

Interest bearing deposits:

Checking $ 79,716 $ 627 1.05 % $ 94,904 $ 296 0.42 %

Money markets 368,777 11,023 4.00 % 354,522 1,962 0.74 %

Savings 140,435 1,231 1.17 % 195,494 527 0.36 %

Time deposits 505,109 11,027 2.92 % 520,103 2,994 0.77 %

Brokered certificates of deposit 114,676 4,138 4.82 % 10,230 114 1.49 %

Total interest-bearing deposits 1,208,713 28,046 3.10 % 1,175,253 5,893 0.67 %

Borrowings 182,495 5,661 4.15 % 120,763 2,176 2.41 %

Total interest-bearing liabilities 1,391,208 33,707 3.24 % 1,296,016 8,069 0.83 %

Non-interest bearing deposits 278,854 454,749

Other liabilities 16,584 13,706

Total non-interest bearing liabilities 295,438 468,455

Equity 277,771 246,173

Total liabilities and shareholders’ equity $ 1,964,417 $ 2,010,644

Net interest income $ 48,699 $ 54,411

Interest rate spread 2.51 % 3.43 %

Net interest margin 3.40 % 3.71 %

* The average balance of loans includes loans on nonaccrual.

** Includes balances of FHLBNY and ACBB stock.

Financial Condition

At September 30, 2023, the Company’s total assets were $1.98 billion, a decrease of $1.2 million, or 0.1%, from December 31, 2022.

The decrease in total assets was primarily attributable to a decrease in cash and cash equivalents of $55.4 million, partially offset by an increase in loans receivable, and an increase in FHLBNY restricted stock, and other assets.

The decrease in cash and cash equivalents was primarily due to cash withdrawn from deposits, as well as an increase in loans receivable, partially offset by an increase in borrowings.

Loans increased $48.6 million at September 30, 2023, primarily due to increases in loan balances classified as commercial real estate ("CRE") owner occupied loans, residential 1-4 family investment loans, and multi-family loans, partially offset by a decrease in the construction loan portfolio, compared to the loan balances at December 31, 2022.

Total liabilities were $1.71 billion at September 30, 2023.

This represented a $13.2 million, or 0.8%, decrease, from $1.72 billion at December 31, 2022.

The decrease in total liabilities was primarily due to a decrease in total deposits, which decreased $43.0 million, or 2.7%, to $1.53 billion at September 30, 2023, from $1.58 billion at December 31, 2022.

The decrease in deposits was attributable to a decrease in non-interest demand deposits of $121.4 million and savings deposits of $92.4 million, partially offset by an increase in time deposits of $11.4 million, an increase in interest checking deposits of $28.2 million, and an increase in money market balances of $117.8 million.

The decrease in total deposits was partially offset by an increase in borrowings of $28.0 million, driven by an increase in FHLBNY advances.

Total equity was $278.0 million and $266.0 million at September 30, 2023 and December 31, 2022, respectively, an increase of $11.9 million from December 31, 2022.

The increase was primarily due to the retention of earnings, partially offset by the payment of $6.5 million of cash dividends, and $2.1 million adoption of ASC 326.

The following table presents certain key condensed balance sheet data as of September 30, 2023 and December 31, 2022 :

September 30,

At March 31, 2024, the Company’s total assets were $2.01 billion, a decrease of $14.4 million, or 0.7%, from December 31, 2023.

The decrease in total assets was primarily attributable to a decrease in cash and cash equivalents of $9.3 million, a decrease in loans receivable, and a decrease in other assets.

The decrease in cash and cash equivalents was primarily due to a repayment of borrowings, partially offset by an increase in deposits .

Loans decreased $1.8 million at March 31, 2024, primarily due to decreases in loan balances classified as construction, and commercial - non-owner occupied, partially offset by an increase in the residential - multifamily loan portfolio, compared to the loan balances at December 31, 2023.

Other assets decreased $2.1 million during the three months ended March 31, 2024, to $8.4 million at March 31, 2024, from $10.5 million at December 31, 2023, primarily driven by a decrease of $2.0 million in prepaid taxes.

Total liabilities were $1.72 billion at March 31, 2024.

This represented an $18.5 million, or 1.1%, decrease, from $1.74 billion at December 31, 2023.

The decrease in total liabilities was primarily due to a decrease in borrowings of $30 million, partially offset by an increase in deposits, which increased $10.9 million, or 0.7%, to $1.56 billion at March 31, 2024, from $1.55 billion at December 31, 2023.

The decrease in borrowings was due to the pay-down of FHLBNY advances.

The increase in deposits was attributable to an increase in money market balances of $77.0 million, partially offset by a decrease in non-interest demand deposits of $35.8 million, savings deposits of $11.4 million, and time deposit balances of $27.0 million.

Total equity was $288.4 million and $284.3 million at March 31, 2024 and December 31, 2023, respectively, an increase of $4.1 million from December 31, 2023.

The increase was primarily due to the retention of earnings, partially offset by the payment of $2.2 million of cash dividends.

The following table presents certain key condensed balance sheet data as of March 31, 2024 and December 31, 2023 :

2024 December 31,

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Cash and cash equivalents

Cash and cash equivalents decreased $55.4 million to $126.7 million at September 30, 2023 from $182.2 million at December 31, 2022, a decrease of 30.4%.

The decrease was primarily due to cash withdrawn from deposits and the funding of loans, partially offset by an increase in borrowings.

Cash and cash equivalents decreased $9.3 million to $171.1 million at March 31, 2024 from $180.4 million at December 31, 2023, a decrease of 5.1%.

The decrease was primarily due to a repayment of borrowings, partially offset by an increase in deposits.

Investment securities

Total investment securities decreased to $16.6 million at September 30, 2023, from $18.7 million at December 31, 2022, a decrease of $2.2 million or 11.5%.

The decrease was attributed to normal pay downs of $2.0 million, and a decrease in the fair market valuation of $0.2 million.

Total investment securities decreased to $15.9 million at March 31, 2024, from $16.4 million at December 31, 2023, a decrease of $0.5 million or 2.9%.

The decrease was attributed to normal pay downs.

For detailed information on the composition and maturity distribution of our investment portfolio, see NOTE 3 - Investment Securities in the notes to the unaudited consolidated financial statements.

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Loans receivable :

Loans receivable increased to $1.80 billion at September 30, 2023 from $1.75 billion at December 31, 2022.

T he increase was primarily due to increases in the CRE owner occupied loans, residential - 1 to 4 family, residential - 1 to 4 family investment loans, and residential - multifamily loans, partially offset by a decrease in the construction loan portfolio.

Loans receivable as of September 30, 2023 and December 31, 2022, consisted of the following:

September 30, 2023 December 31, 2022

Loans receivable decreased slightly to $1.786 billion at March 31, 2024 from $1.787 billion at December 31, 2023.

T he decrease was primarily due to decreases in the construction, and CRE non-owner occupied loan portfolios, partially offset by an increase in the residential - multifamily loan portfolio.

Loans receivable as of March 31, 2024 and December 31, 2023, consisted of the following:

March 31, 2024 December 31, 2023

Amount Percentage of Loans to total

Loans Amount Percentage of Loans to total

Loans $ Change % Change

(Dollars in thousands)

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Total Loans $ 1,785,542 100.0 % $ 1,787,340 100.0 % $ (1,798) (0.1) %

At September 30, 2023, total deposits decreased to $1.53 billion from $1.58 billion at December 31, 2022, a decrease of $43.0 million, or 2.7%.

The decrease in deposits was primarily due to a decrease in non-interest bearing demand deposits, and a decrease in savings deposits, partially offset by increases in money market, checking, and time deposit accounts.

The decrease in non-interest bearing demand deposits was mainly primarily due to a decrease in our cannabis related deposits, which decreased $83.5 million, from $177.3 million at December 31, 2022, to $93.9 million at September 30, 2023, as well as a decrease in business checking of $26.2 million during the same time period.

September 30, December 31,

At March 31, 2024, total deposits increased to $1.56 billion from $1.55 billion at December 31, 2023, an increase of $10.9 million, or 0.7%.

The increase in deposits was primarily due to an increase in money market deposit balances, partially offset by decreases in non-interest bearing, savings, and time deposit account balances.

The increase in the money market balance was primarily due to an increase of $90.2 million in our premier money market product, and $10.2 million in the municipal money market product, partially offset by a $15.1 million decrease in the brokered money market balance.

The decrease in non-interest bearing demand deposits was primarily due to a decrease in our cannabis related deposits, which decreased $15.5 million, as well as a decrease in business checking of $14.3 million during the same time period.

March 31, December 31,

2024 2023 $ Change % Change

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Estimated uninsured deposits $ 601,443 $ 622,966 $ (21,523) (3.5) %

Total borrowings were $154.2 million at September 30, 2023 and $126.1 million at December 31, 2022.

The increase in borrowings is due to the increase of $28.0 million in FHLBNY advances.

Total borrowings were $138.2 million at March 31, 2024 and $168.1 million at December 31, 2023.

The decrease in borrowings is due to the decrease of $30.0 million in FHLBNY advances.

$75.0 million of the outstanding FHLBNY advances have short-term maturities.

Total equity increased to $278.0 million at September 30, 2023 from $266.0 million at December 31, 2022, an increase of $11.9 million, or 4.5%, primarily due to the retention of earnings from the period, partially offset by the payment of $6.5 million in cash dividends, and $2.1 million resulting from the adoption of ASC 326.

Total equity increased to $288.4 million at March 31, 2024 from $284.3 million at December 31, 2023, an increase of $4.1 million, or 1.4%, primarily due to the retention of earnings from the period, partially offset by the payment of $2.2 million in cash dividends.

Liquidity and Capital Resources

Liquidity is a measure of our ability to generate cash to support asset growth, meet deposit withdrawals, satisfy other contractual obligations, and otherwise operate on an ongoing basis.

At September 30, 2023, our cash position was $126.7 million.

At March 31, 2024, our cash position was $171.1 million.

We invest cash that is in excess of our immediate operating needs primarily in our interest-bearing account at the Federal Reserve.

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Stability, low cost and customer loyalty comprise key characteristics of core deposits.

We also use brokered deposits as a funding source, which is more volatile than core deposits.

The Bank also joined IntraFi Financial Network to secure an additional alternative funding source.

IntraFi provides the Bank an additional source of external funds through their weekly CDARS® settlement process.

The rates are comparable to other brokered deposit sources.

As of September 30, 2023, the Company had $177.5 million of brokered deposits sourced from IntraFi.

We also use brokered deposits as a funding source.

The Bank joined the IntraFi Financial Network to secure an additional alternative funding source.

IntraFi provides the Bank an additional source of external funds through their weekly CDARS® settlement process, as well as their ICS® money market product.

As of March 31, 2024, the Company had $222.4 million of brokered deposits sourced from IntraFi.

While deposit accounts comprise the vast majority of our funding needs, we maintain secured borrowing lines with the FHLBNY.

As of September 30, 2023, the Company had lines of credit with the FHLBNY of $945.3 million, of which $111.2 million was outstanding, and an additional $60.0 million from two letters of credit for securing public funds.

The remaining borrowing capacity was $774.1 million at September 30, 2023.

In the second quarter of 2023, we opened a secured borrowing line with the FRB under the Bank Term Funding Program ("BTFP").

The BTFP is secured by certain eligible investment securities.

As of September 30, 2023, we had a line of credit under this program of $13.3 million, of which zero was outstanding.

We had outstanding loan commitments of $113.7 million at September 30, 2023.

As of March 31, 2024, the Company had lines of credit with the FHLBNY of $960.4 million, of which $95.0 million was outstanding, and an additional $60.0 million from a letter of credit for securing public funds.

The remaining borrowing capacity was $805.4 million at March 31, 2024.

We had outstanding loan commitments of $112.8 million at March 31, 2024.

Our loan commitments are normally originated with the full amount of collateral.

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The funding requirements for such commitments occur on a measured basis over time and would be funded by normal deposit growth.

The following is a discussion of our cash flows for the nine months ended September 30, 2023 and 2022.

Cash provided by operating activities was $14.0 million in the nine months ended September 30, 2023, compared to $34.3 million for the same period in the prior year.

The decrease in operating cash flow was primarily due to the increase in prepaid taxes, the recovery of provision for credit losses, and the decrease in net income.

Cash used in investing activities was $48.0 million in the nine months ended September 30, 2023, compared to cash used in investing activities of $191.6 million in the same period last year.

The decrease in cash used in the investing activities was primarily due to the decrease in cash outflow from the origination of loans during the period.

Cash used in financing activities was $21.4 million in the nine months ended September 30, 2023, compared to cash used in financing activities of $245.9 million in the same period of last year.

The decrease in cash used in financing activities was driven by a net increase in FHLBNY borrowings of $28.0 million, a decrease in the withdrawal of noninterest-bearing deposits of $38.5 million, and growth in interest-bearing deposits of $78.4 million compared to net withdrawals of $73.2 million in the prior year.

The following is a discussion of our cash flows for the three months ended March 31, 2024 and 2023.

Cash provided by operating activities was $8.4 million in the three months ended March 31, 2024, compared to $10.5 million for the same period in the prior year.

The decrease in operating cash flow was primarily due to the decrease in net income, partially offset by the increase in the provision for credit losses.

Cash provided by investing activities was $3.6 million in the three months ended March 31, 2024, compared to cash used in investing activities of $14.4 million in the same period last year.

The increase in cash provided in the investing activities was primarily due to the decrease in cash outflow from the origination of loans, and the redemption of restricted stock, during the period.

Cash used in financing activities was $21.2 million in the three months ended March 31, 2024, compared to cash used in financing activities of $32.3 million in the three months ended March 31, 2023.

The decrease in cash used in financing activities during the three months ended March 31, 2024, was driven by the growth in interest-bearing deposits of $46.7 million, partially offset by a decrease in noninterest-bearing deposits of $35.8 million, compared to net withdrawals of $112.2 million in the three months ended March 31, 2023.

Capital Adequacy

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We also use other means to manage our capital.

Total equity increased $11.9 million at September 30, 2023, from December 31, 2022, primarily from the Company’s net income of $20.3 million for the period, net of common and preferred stock dividends of $6.5 million and the adoption of ASC 326 of $2.1 million.

Total equity increased $4.1 million at March 31, 2024, from December 31, 2023, primarily from the Company’s net income of $6.2 million for the period, net of common and preferred stock dividends of $2.2 million.

Banks and bank holding companies are subject to various regulatory capital requirements administered by federal banking agencies.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and the

Company must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and the Company must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices.

The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

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Under the capital rules issued by the Federal banking agencies, the Company and the Bank elected to exclude the effects of certain Accumulated Other Comprehensive Income (“AOCI”) items from its regulatory capital calculation.

At September 30, 2023, the Bank and the Company were both considered “well capitalized”.

The following table presents the tier 1 regulatory capital leverage ratios of the Company and the Bank at September 30, 2023:

At March 31, 2024, the Bank and the Company were both considered “well capitalized”.

The following table presents the tier 1 regulatory capital leverage ratios of the Company and the Bank at March 31, 2024:

Amount Ratio Amount Ratio

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The allowance calculation and determination process is dependent on the use of key assumptions.

Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, projected industry outlook, and economic conditions.

Key reserve assumptions and estimation processes react to and are influenced by observed changes

in loan portfolio performance experience, the financial strength of the borrower, projected industry outlook, and economic conditions.

The process of determining the level of the allowance for credit losses requires a high degree of judgment.

To the extent actual outcomes differ from our estimates, additional provision for loan and lease losses may be required that would reduce future earnings.

Fair Value Estimates:

ASC 820 - Fair Value Measurements defines fair value as a market-based measurement and is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date.

We classify fair value measurements of financial instruments based on the three-level fair value hierarchy in the accounting standards.

We are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value.

The fair values of assets may include using estimates, assumptions, and judgments.

Valuations of assets or liabilities using techniques non quoted market price are sensitive to assumptions used for the significant inputs.

Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility.

underlying factors, assumptions, or estimates used for estimating fair values could materially impact our future financial condition and results of operations.

The majority of our assets recorded at fair value are our investment securities available for sale.

The fair value of our available for sale securities are provided by independent third-party valuation services.

We may also have a small amount of SBA loans recorded at fair value, which represents the face value of the guaranteed portion of the SBA loans pending settlement.

OREO is recorded at fair value on a non-recurring basis and is based on the values of independent third-party full appraisals, less costs to sell (a range of 5% to 10%).

Appraisals are updated every 12 months or sooner if we have identified possible further deterioration in value.

Refer to Note 7.

Fair Value in the Notes to the unaudited consolidated financial statements for further information.

Income Taxes:

In the normal course of business, we and our subsidiaries enter into transactions for which the tax treatment is unclear or subject to varying interpretations.

We evaluate and assess the relative risks and merits of the tax treatment of transactions, filing positions, filing methods and taxable income calculations after considering statutes, regulations, and other information, and maintain tax accruals consistent with our evaluation of these relative risks and merits.

The result of our evaluation and assessment is by its nature an estimate.

When tax returns are filed, it is highly likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained.

The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination.

The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions.

Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.

The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis