What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-12 compared with 2024-03-13 · 45 added, 50 removed, 281 unchanged (25% of the section changed)

9 unchanged sentences

We focus on small to mid - sized business and retail customers and offer a range of loan products, deposit services, and other financial products through our retail branches and other channels.

The Company's results of operations are dependent primarily on its net interest income, which is the difference between the interest income earned on its interest earning-assets and the

interest expense paid on its interest-bearing liabilities.

The Company's results of operations are dependent primarily on its net interest income, which is the difference between the interest income earned on its interest earning-assets and the interest expense paid on its interest-bearing liabilities.

In our operations, we have three major lines of lending:

1 unchanged sentence

Our interest income is primarily generated from our lending and investment activities.

Our deposit products include checking, savings, money market accounts, and certificates of deposit.

Our deposit products include checking, savings, money market accounts, and certificates

The majority of our deposit accounts are obtained through our retail banking business, which provides us with low cost funding to grow our lending efforts.

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Net income available to common shareholders for 2024 was $27.5 million.

In 2023, net income available to common shareholders decreased 32.0% over the previous year primarily due to a $11.4 million increase in non-interest expenses, primarily due to a one-time 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.

In addition, non-interest expense increased due to an increase in compensation and benefits expense, lower net interest income, and lower non-interest income, partially offset by lower provision for credit losses.

In 2024, net income available to common shareholders decreased 3.3% over the previous year primarily due to a decrease in net interest income, an increase in the provision for credit losses, and a decrease in non-interest income, partially offset by a decrease in non-interest expense.

At December 31, 2024, total assets increased 5.9% and total equity increased 5.5%, compared to December 31, 2023.

Our risk based tier 1 capital ratio was 21.2% at December 31, 2024.

In addition, during 2023 we returned $8.6 million of capital to our common shareholders through common stock dividends.

In addition, during the fiscal year ended December 31, 2024 we returned $8.6 million of capital to our common shareholders through cash dividends, and we repurchased 200,000 common stock shares at a total cost of $4.3 million.

Our business operations are subject to risks and uncertainties that could materially affect our operating results.

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Interest income for 2024 increased to $125.1 million, an increase of $12.4 million, or 11.0%, from $112.7 million for 2023, primarily due to an increase in interest and fees on loans of $11.8 million, or 11.1%.

Interest and fees on loans increased during the year ended December 31, 2023, due to higher average outstanding loan balances and higher market interest rates, and an increase in interest earned on average deposits held at the Federal Reserve Bank ("FRB") of $1.8 million, due to higher interest rates paid on deposits, partially offset by a decrease in the average balance of $225.1 million.

Interest and fees on loans increased during the year ended December 31, 2024, due to higher average outstanding loan balances and higher market interest rates.

Interest expense increased to $66.4 million for 2024, from $48.5 million for 2023, an increase of $17.9 million, or 36.9%.

The increase in interest expense was primarily due to an increase in market interest rates on deposit accounts at the Bank, as well as a change in the deposit mix.

In addition, a decrease in non-interest bearing demand balances and an increase in brokered deposit balances contributed to the increase in interest expense during the 2023 fiscal year..

In addition, a decrease in non-interest bearing demand balances and an increase in interest-bearing deposit balances contributed to the increase in interest expense during the 2024 fiscal year..

Comparative Average Balances, Yields and Rates

66 unchanged sentences

Our provision for credit losses in each period is driven by net charge-offs and changes to the allowance for credit losses.

We recorded a recovery for credit losses of $2.1 million and a provision for loan losses of $1.8 million in 2023 and 2022, respectively.

The (recovery) provision for credit losses as a percentage of interest income was (1.82)% and 2.06% in 2023 and 2022, respectively.

Our provision for credit losses decreased by $3.9 million in 2023 compared to 2022 primarily as a result of a decrease in vintage loss rates and a change in the loan portfolio mix, partially offset by an increase in outstanding loan balances.

Additionally, the provision for unfunded commitments contributed to $461.0 thousand of the decrease.

We recorded a provision for credit losses of $0.7 million and a recovery for credit losses of $2.1 million in 2024 and 2023, respectively.

The provision (recovery) for credit losses as a percentage of interest income was 0.58% and 1.82% in 2024 and 2023, respectively.

Our provision for credit losses increased by $2.8 million in 2024 compared to 2023 primarily as a result of an increase in outstanding loan balances, partially offset by a decrease in loss rates.

Additionally, the provision for unfunded commitments contributed to $369.0 thousand of the increase.

For more information about our provision and allowance for credit losses and our loss experience, see “Risk Management and Asset Quality-Allowance for Credit Losses” and NOTE 4.

11 unchanged sentences

Total non-interest income $ 4,301 $ 6,692 $ (2,391) (35.7) %

Non-interest income decreased by $1.7 million to $6.7 million during the year ended December 31, 2023 compared to 2022, primarily due to a decrease in fee income related to commercial deposit accounts and other loan fees, partially offset by an increase in income earned on bank owned life insurance.

Non-interest income decreased by $2.4 million to $4.3 million during the year ended December 31, 2024 compared to 2023, primarily due to a decrease in fee income related to cannabis related business deposit fees and other loan fees.

The fee income for the year ended December 31, 2024 from the commercial deposit accounts of depositors who do business in the cannabis industry totaled $1.1 million and is included in service fees on deposit accounts in the accompanying consolidated statements of income.

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Total non-interest expense $ 25,984 $ 35,267 $ (9,283) (26.3) %

Non-interest expense increased $11.4 million to $35.3 million for the year ended December 31, 2023, from $23.8 million for 2022 primarily due to an increase in other operating expense of $9.1 million, an increase in compensation and benefits of $1.5 million, and an increase in OREO expense of $0.3 million.

The increase in other operating expense was primarily driven from a one-time 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.

The increase in compensation and benefits was primarily due to a $0.5 million increase in salaries, and a $0.9 million decrease in deferred loan origination costs, attributable to a reduction in the number of loans originated.

The increase in OREO expense is due to higher costs to maintain the Company's OREO inventory.

Non-interest expense decreased $9.3 million to $26.0 million for the year ended December 31, 2024, from $35.3 million for 2023 primarily due to a decrease in other operating expense of $10.1 million, partially offset by an increase in compensation and benefits of $0.4 million, and an increase in professional services of $0.4 million.

The decrease in other operating expense was primarily driven from the recognition of a one-time contingent loss during 2023 of $9.5 million.

The increase in compensation and benefits during the year ended December 31, 2024, was primarily due to a $0.4 million increase in salaries, and a $0.2 million decrease in deferred loan origination costs attributable to a reduction in the number of loans originated, partially offset by a $0.2 million decrease in SERP expense.

The increase in professional fees of $0.4 million was primarily due to a $0.7 million increase in consulting fees attributed to our Bank Secrecy Act compliance, partially offset by a decrease of $0.3 million decrease in legal expense.

Income tax expense decreased $0.4 million to $8.8 million on income before taxes of $36.3 million for 2024, compared to income tax expense of $9.2 million on income before taxes of $37.7 million for 2023.

2 unchanged sentences

At December 31, 2024, the Company’s total assets were $2.14 billion, an increase of $118.7 million or 5.9%, from December 31, 2023.

The increase in total assets was primarily attributable to an increase in loans, restricted stock, and other assets.

Cash and cash equivalents decreased $1.8 million, to $180.4 million at December 31, 2023.

Total loans outstanding increased $35.9 million at December 31, 2023, primarily due to an increase in residential 1 to 4 family loans of $29.0 million;

residential 1 to 4 family investment loans of $24.0 million;

and commercial owner occupied loans of $15.7 million;

partially offset by a decrease in construction loans of $34.8 million.

The increase in total assets was primarily attributable to an increase in cash and cash equivalents and total loans outstanding.

Cash and cash equivalents increased $41.2 million, to $221.5 million at December 31, 2024.

Total loans outstanding increased $80.8 million at December 31, 2024, primarily due to an increase in residential multi-family loans of $71.4 million, and commercial owner-occupied loans of $18.7 million, partially offset by a decrease in construction loans of $8.2 million.

Total liabilities were $1.84 billion at December 31, 2024.

This represented a $103.0 million, or 5.9%, increase from $1.74 billion at December 31, 2023.

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

Total deposits decreased $23.2 million, or 1.5%, to $1.55 billion at December 31, 2023, from $1.58 billion at December 31, 2022.

Deposits from the cannabis industries decreased to $96.7 million at December 31, 2023, from

$177.3 million at December 31, 2022.

The increase in total liabilities was primarily due to an increase in deposits.

Total deposits increased $78.2 million, or 5.0%, to $1.63 billion at December 31, 2024, from $1.55 billion at December 31, 2023.

Deposits from the cannabis industries increased to $151.9 million at December 31, 2024, from $96.7 million at December 31, 2023.

Total borrowings were $188.3 million at December 31, 2024, an increase of $20.2 million, compared to December 31, 2023, primarily due to an increase in FHLB advances of $20.0 million.

16 unchanged sentences

Cash and cash equivalents

Cash and cash equivalents decreased $1.8 million to $180.4 million at December 31, 2023, from $182.2 million at December 31, 2022, a decrease of 1.0%.

Cash and cash equivalents increased $41.2 million to $221.5 million at December 31, 2024, from $180.4 million at December 31, 2023, an increase of 22.8%.

The increase was mainly due to an increase in deposits and borrowings, partially offset by an increase in loans.

Investment securities

3 unchanged sentences

Loans receivable increased to $1.87 billion at December 31, 2024, from $1.79 billion at December 31, 2023.

The increase was primarily due to an increase in residential 1 - 4 family of $29.0 million;

residential 1 to 4 family investment of $24.0 million;

and commercial owner-occupied loans of $15.7 million;

partially offset by a decrease of $34.8 million in construction loans.

The increase was primarily due to an increase in residential multi-family loans of $71.4 million, and commercial owner-occupied loans of $18.7 million, partially offset by a decrease in construction loans of $8.2 million.

Allowance for credit losses

Allowance for credit losses increased $0.4 million, to $32.6 million, or 1.38%, at December 31, 2024, from $32.1 million at December 31, 2023.

The increase was primarily due to an increase in the portfolio balance, net of a decrease in historical loss rates.

In 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses , and subsequent related updates, using the modified retrospective approach for all financial assets measured at amortized cost, including loans and held-to-maturity debt securities, and unfunded commitments.

On January 1, 2023, the Company recorded a cumulative effect decrease to retained earnings of $2.1 million, net of tax, of which $1.9 million related to loans, and $960.0 thousand related to unfunded commitments.

There were no such charges for securities held by the Company at the date of adoption.

At December 31, 2023, the Bank’s total deposits decreased to $1.55 billion from $1.58 billion at December 31, 2022, a decrease of $23.2 million, or 1.5%.

The decrease in deposits was primarily attributed to a decrease in non-interest bearing demand deposits of $120.4 million, savings of $105.1 million, time deposits of $42.2 million, and interest checking of $20.1 million

partially offset by an increase in money market of $218.4 million, and brokered CD balances of $46.2 million.

Deposits from the cannabis businesses decreased to $96.7 million at December 31, 2023, from $177.3 million at December 31, 2022, a decrease of $80.6 million.

The decrease in such deposits is primarily attributable to increased competition from other banks, and the consolidation of the cannabis industry.

The Bank expects this trend to continue in the foreseeable future.

The increase was primarily due to an increase in the portfolio balance, partially offset by a decrease in historical loss rates.

At December 31, 2024, the Bank’s total deposits increased to $1.63 billion from $1.55 billion at December 31, 2023, an increase of $78.2 million, or 5.0%.

The increase in deposits was primarily attributed to an increase in time deposits of $108.1 million, and money market deposits of $48.4 million, partially offset by a decrease in non-interest bearing demand deposits of $48.2 million, and savings deposits of $27.6 million.

Deposits from the cannabis businesses increased to $151.9 million at December 31, 2024, from $96.7 million at December 31, 2023, an increase of $55.2 million.

At December 31, 2024, total borrowings increased $20.2 million to $188.3 million at December 31, 2024, from $168.1 million at December 31, 2023.

1 unchanged sentence

Total shareholders’ equity increased to $300.1 million at December 31, 2024, from $284.3 million at December 31, 2023, an increase of $15.8 million or 5.5%.

The increase in total shareholders' equity was primarily due to the retention of earnings from the period, partially offset by the recognition of $8.6 million of cash dividends.

The increase in total shareholders' equity was primarily due to the retention of earnings from the period, partially offset by the recognition of $8.6 million of cash dividend, and repurchases of shares of the Company's common stock in the amount of $4.3 million during the year ended December 31, 2024.

Liquidity and Capital Resources

10 unchanged sentences

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

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

As of December 31, 2024, the Company has $13.5 million of brokered deposits from IntraFi.

Additionally, we have access to other brokered deposit funding sources that we utilize as a source of additional liquidity.

In addition to IntraFi, we utilize Wells Fargo, Piper Sandler, and Stonecastle to obtain brokered deposits, and as of December 31, 2024, the Company had $202.2 million sourced from these broker relationships.

While deposit accounts comprise the vast majority of our funding needs, we maintain secured borrowing lines with the FHLBNY and the Federal Reserve Bank ("FRB").

During 2024, the Company reallocated a portion of its eligible collateral from the FHLBNY to the FRB discount window in order to diversify its borrowing capabilities.

At December 31, 2024, the Company had a $740.5 million line of credit from the FHLBNY, of which $145.0 million was outstanding, $50.0 million was a letter of credit to secure public deposits, and $545.5 million was unused.

As of December 31, 2024, the Company had a borrowing capacity through the FRB discount window of $252.0 million.

There were no outstanding balances with the FRB as of December 31, 2024.

Our investment portfolio primarily consists of mortgage-backed available for sale securities issued by US government agency and government sponsored entities.

50 unchanged sentences

Cumulative interest sensitivity gap to total assets 5.7 % 7.6 % 22.2 % 22.6 % 22.4 % —

(1) Loan balances exclude nonaccruing loans, deferred fees and costs, and loan discounts.

(1) Loan balances exclude non-accruing loans, deferred fees and costs, and loan discounts.

Off-Balance Sheet Arrangements and Contractual Obligations

4 unchanged sentences

When we make commitments, we are exposed to credit risk.

However, the maximum credit risk for these commitments will generally be lower than the contractual amount because a significant portion of these commitments is expected to expire without being used by the customer.

However, the maximum credit risk for

these commitments will generally be lower than the contractual amount because a significant portion of these commitments is expected to expire without being used by the customer.

In addition, we manage the potential risk in commitments to lend by limiting the total amount of commitments, by monitoring maturity structure of these commitments and by applying the same credit standards for these commitments as for all of our credit activities.

12 unchanged sentences

At December 31, 2024 and December 31, 2023, standby letters of credit with customers were $0.6 million and $1.5 million, respectively.

At December 31, 2023, we had contractual obligations primarily relating to commitments to extent credits, deposits, secured and unsecured borrowings, and operating leases.

At December 31, 2024, we had contractual obligations primarily relating to commitments to extend credits, deposits, secured and unsecured borrowings, and operating leases.

We have adequate resources to fund all unfunded commitments to the extent required and meet all contractual obligations as they come due.

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Our allowances for credit losses represents management's best estimate of probable losses inherent in our investment and loan portfolios, excluding those loans accounted for under fair value.

Refer to N ote 1 in the Notes t o the Consolidated Financial Statements for further information.

Refer to Note 1 in the Notes to the Consolidated Financial Statements for further information.

Our determination of the allowance for credit losses is based on periodic evaluations of the loan and lease portfolios and other relevant factors, broken down into vintage based on year of origination.

These critical estimates include significant use of our

own historical data and other qualitative, and quantitative data.

These critical estimates include significant use of our own historical data and other qualitative, and quantitative data.

These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change.

6 unchanged sentences

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.

One key assumption in the vintage model is the underlying prepayment speeds, which is derived by the average loan life within the various pools.

To provide a sensitivity of the impact to the ACL estimate, management adjusted the average lives of the vintage pools, by both increasing and decreasing the prepayment speeds by 20%, which provided an estimated range of impact between $0.9 million for a lower prepayment speed and $(1.2) million for a higher prepayment speed.

This range was deemed immaterial to the overall ACL reserve balance.

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

3 unchanged sentences

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