BOGOTA FINANCIAL CORP. General
Management's discussion and analysis of financial condition and results of operations atSeptember 30, 2022 andDecember 31, 2021 and for the three and nine months endedSeptember 30, 2022 andSeptember 30, 2021 is intended to assist in understanding the financial condition and results of operations ofBogota Financial Corp. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" and words of similar meaning. These forward-looking statements include, but are not limited to:
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statements of our goals, intentions and expectations;
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statements regarding our business plans, prospects, growth and operating strategies;
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statements regarding the quality of our loan and investment portfolios; and
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estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
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general economic conditions, either nationally or in our market area, that are worse than expected;
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the continuing impact of the COVID-19 pandemic on our financial condition and results of operation;
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changes in the level and direction of loan delinquencies, charge-offs and non-performing and classified loans and changes in estimates of the adequacy of the allowance for loan losses;
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our ability to access cost-effective funding;
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fluctuations in real estate values and both residential and commercial real estate market conditions;
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demand for loans and deposits in our market area;
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our ability to continue to implement our business strategies;
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competition among depository and other financial institutions;
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inflation and changes in market interest rates that reduce our margins and yields, reduce the fair value of financial instruments or reduce our volume of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make whether held in portfolio or sold in the secondary market;
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adverse changes in the securities markets;
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changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
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our ability to manage market risk, credit risk and operational risk;
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our ability to enter new markets successfully and capitalize on growth opportunities;
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our ability to successfully integrate into our operations any assets, liabilities or systems we may acquire, as well as new management personnel or customers, and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
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changes in consumer spending, borrowing and savings habits;
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changes in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the
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our ability to retain key employees;
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risks as it relates to cyber security against our information technology and those of our third-party providers and vendors;
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the current or anticipated impact of military conflict, terrorism or other geopolitical events;
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our compensation expense associated with equity allocated or awarded to our employees; and
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changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Acquisition of
OnFebruary 28, 2021 , the Company completed its acquisition ofGibraltar Bank . As a part of the transaction, the Company issued 1,267,916 shares of its common stock toBogota Financial , MHC. The conversion and consolidation of data processing platforms, systems and customer files occurred onAugust 16, 2021 . As ofFebruary 28, 2021 ,Gibraltar had assets of$106.2 million , loans of$77.7 million and deposits of$81.6 million and operated from three offices located inNewark ,Oak Ridge andParsippany, New Jersey inMorris andEssex Counties,New Jersey . Critical Accounting Policies A summary of our accounting policies is described in Note 1 to the consolidated financial statements included with our Annual Report on Form 10-K at and for the year endedDecember 31, 2021 . Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations. There have been no significant changes to the Company's critical accounting policies sinceDecember 31, 2021 .
COVID-19
As ofSeptember 30, 2022 , the Bank had granted 172 loan modifications totaling$67.9 million , which represented 11.6% of the total loan portfolio, allowing customers who were affected by the COVID-19 pandemic to defer principal and/or interest payments. These short-term loan modifications were treated in accordance with Section 4013 of the Coronavirus Aid Relief and Economic Security ("CARES") Act and, as such, were not treated as troubled debt restructurings during the short-term modification period if the loan was not in arrears atDecember 31, 2019 . 29 --------------------------------------------------------------------------------
Furthermore, these loans continued to accrue interest. As of
As a qualifiedSmall Business Administration ("SBA") lender, the Bank was automatically authorized to originate loans under the Paycheck Protection Program ("PPP"). During 2020, the Bank received and processed 113 PPP applications totaling$10.5 million . The Bank participated in the second round of PPP loans and during the first half of 2021, the Bank received and processed 54 PPP applications totaling$6.9 million . The Bank had a$282,000 outstanding PPP loan atSeptember 30, 2022 .
Comparison of Financial Condition at
Total Assets. Total assets increased$108.8 million , or 13.0%, fromDecember 31, 2021 to$946.2 million atSeptember 30, 2022 primarily due to loan originations and the purchase of investment securities with excess liquidity. The increase in assets reflected a$136.9 million , or 24.0%, increase in loans, a$46.3 million , or 110.6%, increase in securities available for sale and a$10.1 million or 13.6%, increase in securities held to maturity, offset by a$91.7 million , or 87.3%, decrease in cash and cash equivalents. Cash and Cash Equivalents. Total cash and cash equivalents decreased$91.7 million , or 87.3%, to$13.3 million atSeptember 30, 2022 from$105.1 million atDecember 31, 2021 . The decrease was primarily due to funding loan originations and investment security purchases during the nine months endedSeptember 30, 2022 . Securities Available for Sale. Total securities available for sale increased$46.3 million , or 110.6%, to$88.1 million atSeptember 30, 2022 from$41.8 million atDecember 31, 2021 . The increase was due to$69.5 million of purchases of primarily mortgage-backed securities and corporate bonds and to a lesser extentU.S. treasury bills and government agency obligations, with excess cash. The increase in securities available for sale reflected a$10.1 million increase in corporate bonds, a$4.9 million increase inU.S. treasury bills, a$2.5 million increase inU.S. government agency obligations, and a$28.7 million increase in mortgage-backed securities. Securities Held to Maturity. Total securities held to maturity increased$10.1 million , or 13.6%, to$84.1 million atSeptember 30, 2022 from$74.1 million atDecember 31, 2021 , primarily due to$23.1 million in purchases ofU.S government and agency obligations and corporate and municipal bonds which was offset by repayments of mortgage-backed securities. The increase in securities held to maturity reflected a$4.6 million increase in corporate bonds, a$10.0 million increase inU.S. government agency obligations, a$4.0 million increase in municipal bonds offset by a$8.5 million decrease in mortgage-backed securities. Net Loans. Net loans increased$136.9 million , or 24.0%, to$707.1 million atSeptember 30, 2022 from$570.2 million atDecember 31, 2021 . The increase was due to an increase of$132.3 million , or 41.3%, in one-to four-residential real estate loans to$452.3 million from$320.0 million atDecember 31, 2021 , and an increase of$18.6 million , or 44.9%, in construction loans to$60.0 million atSeptember 30, 2022 from$41.4 million atDecember 31, 2021 and an increase of$657,000 , or 2.4%, in consumer loans to$28.4 million atSeptember 30, 2022 from$27.7 million atDecember 31, 2021 , offset by a$6.0 million , or 75.9%, decrease in commercial and industrial loans to$1.9 million atSeptember 30, 2022 from$7.9 million as ofDecember 31, 2021 and a decrease of$8.3 million , or 4.8%, in commercial and multi-family real estate loans to$167.0 million atJune 30, 2022 from$175.4 million atDecember 31, 2021 . The decrease in commercial and industrial loans was due to the forgiveness and repayment of$5.5 million in PPP loans that were originated in 2021 and 2020. As ofSeptember 30, 2022 , the Bank had no loans held for sale compared$1.2 million loans held for sale as ofDecember 31, 2021 . Bank-Owned Life Insurance. Bank-owned life insurance increased$5.5 million , or 22.4%, due to a$5.0 million purchase of bank-owned life insurance during the nine months endedSeptember 30, 2022 . 30 -------------------------------------------------------------------------------- Deposits. Total deposits increased$70.7 million , or 11.8%, to$668.2 million atSeptember 30, 2022 from$597.5 million atDecember 31, 2021 reflecting a new$27.0 million interest-bearing checking municipal relationship and an increase in certificates of deposit. The increase in deposits reflected an increase in interest-bearing deposits of$73.4 million , or 13.1%, to$631.5 million as ofSeptember 30, 2022 from$558.2 million atDecember 31, 2021 offset by a decrease in non-interest-bearing deposits of$2.7 million , or 6.8%, to$36.6 million as ofSeptember 30, 2022 from$39.3 million as ofDecember 31, 2021 .
At
Borrowings.Federal Home Loan Bank of New York borrowings increased$43.1 million , or 50.6%, to$128.1 million atSeptember 30, 2022 from$85.1 million atDecember 31, 2021 , as short-term advances increased$74.0 million and repayments of long-term advances were$30.9 million . The weighted average rate of borrowings was 2.60% and 1.69% as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. The increase in advances was used to fund loan growth. Total Equity. Stockholders' equity decreased$6.5 million to$141.1 million , primarily due increased accumulated other comprehensive loss for securities available for sale of$6.4 million and the repurchase of 546,421 shares of stock during the nine months at a cost of$6.0 million , offset by$5.0 million of net income for the nine months endedSeptember 30, 2022 . AtSeptember 30, 2022 , the Company's ratio of average stockholders' equity-to-total assets was 17.08%, compared to 17.67% atDecember 31, 2021 . 31 --------------------------------------------------------------------------------
Average Balance Sheets and Related Yields and Rates
The following tables present information regarding average balances of assets
and liabilities, the total dollar amounts of interest income and dividends from
average interest-earning assets, the total dollar amounts of interest expense on
average interest-bearing liabilities, and the resulting annualized average
yields and costs. The yields and costs for the periods indicated are derived by
dividing income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. Average balances have been calculated
using daily balances. Nonaccrual loans are included in average balances only.
Loan fees are included in interest income on loans and are not material.
Three Months Ended September 30,
2022 2021
Average Interest and Yield/ Average Interest and Yield/
Balance Dividends Cost (3) Balance Dividends Cost (3)
(Dollars in thousands)
Assets: (unaudited)
Cash and cash
equivalents $ 5,912 $ 30 2.05 % $ 101,453 $ 33 0.13 %
Loans 670,145 7,019 4.15 % 584,754 5,967 4.05 %
Securities 182,626 1,061 2.32 % 88,619 424 1.91 %
Other interest-earning
assets 6,629 65 3.99 % 5,521 62 4.49 %
Total interest-earning
assets 865,312 8,175 3.75 % 780,347 6,486 3.30 %
Non-interest-earning
assets 51,273 52,346
Total assets $ 916,585 $ 832,693
Liabilities and
equity:
NOW and money market
accounts $ 138,015 $ 173 0.50 % $ 108,411 $ 148 0.54 %
Savings accounts 60,912 40 0.26 % 64,076 36 0.22 %
Certificates of
deposit 403,223 1,037 1.02 % 375,495 857 0.91 %
Total interest-bearing
deposits 602,150 1,250 0.82 % 547,982 1,041 0.75 %
Federal Home Loan Bank
advances (4) 128,534 717 2.30 % 96,041 369 1.52 %
Total interest-bearing
liabilities 730,684 1,967 1.08 % 644,023 1,410 0.87 %
Non-interest-bearing
deposits 40,028 33,330
Other
non-interest-bearing
liabilities 4,232 10,246
Total liabilities 774,944 687,599
Total equity 141,641 145,094
Total liabilities and
equity $ 916,585 $ 832,693
Net interest income $ 6,208 $ 5,076
Interest rate spread
(1) 2.68 % 2.43 %
Net interest margin
(2) 2.85 % 2.58 %
Average
interest-earning
assets
to average
interest-bearing
liabilities 118.42 % 121.17 %
(1)
Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(2)
Net interest margin represents net interest income divided by average total
interest-earning assets.
(3)
Annualized.
(4)
Cash flow hedges are used to manage interest rate risk
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Nine Months Ended September 30,
2022 2021
Average Interest and Yield/ Average Interest and Yield/
Balance Dividends Cost (3) Balance Dividends Cost (3)
(Dollars in thousands)
Assets:
Cash and cash equivalents $ 32,485 $ 89 0.36 % $ 97,579 $ 119 0.16 %
Loans 612,252 18,404 4.01 % 585,156 17,117 3.91 %
Securities 168,081 2,698 2.14 % 81,900 1,512 2.46 %
Other interest-earning
assets 5,458 175 4.30 % 5,785 213 4.92 %
Total interest-earning
assets 818,276 21,366 3.49 % 770,420 18,961 3.29 %
Non-interest-earning
assets 52,040 40,177
Total assets $ 870,316 $ 810,597
Liabilities and equity:
NOW and money market
accounts $ 146,653 $ 610 0.56 % $ 99,261 $ 427 0.57 %
Savings accounts 64,509 126 0.26 % 56,982 84 0.20 %
Certificates of deposit 369,808 2,189 0.79 % 374,101 2,844 1.02 %
Total interest-bearing
deposits 580,970 2,925 0.67 % 530,344 3,355 0.85 %
Federal Home Loan Bank
advances (4) 97,571 1,403 1.92 % 101,249 1,177 1.55 %
Total interest-bearing
liabilities 678,541 4,328 0.85 % 631,593 4,532 0.96 %
Non-interest-bearing
deposits 44,256 28,602
Other
non-interest-bearing
liabilities 3,705 9,458
Total liabilities 726,502 669,653
Total equity 143,814 140,944
Total liabilities and
equity $ 870,316 $ 810,597
Net interest income $ 17,038 $ 14,429
Interest rate spread (1) 2.63 % 2.33 %
Net interest margin (2) 2.78 % 2.50 %
Average interest-earning
assets
to average
interest-bearing
liabilities 120.59 % 121.98 %
(1)
Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(2)
Net interest margin represents net interest income divided by average total
interest-earning assets.
(3)
Annualized.
(4)
Cash flow hedges are used to manage interest rate risk
33
--------------------------------------------------------------------------------Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on net
interest income. The rate column shows the effects attributable to changes in
rate (changes in rate multiplied by prior volume). The volume column shows the
effects attributable to changes in volume (changes in volume multiplied by prior
rate). The net column represents the sum of the prior columns. Changes
attributable to changes in both rate and volume that cannot be segregated have
been allocated proportionally based on the changes due to rate and the changes
due to volume.
Three Months Ended September 30, Nine Months Ended September 30,
2022 Compared to Three 2022 Compared to Nine Months
Months Ended September 30, 2021 Ended September 30, 2021
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
(In thousands)
Interest income: (unaudited)
Cash and cash equivalents
$ (147 ) $ 116 $ (31 ) Loans receivable 900 152 1,052 829 458 1,287 Securities 530 107 637 1,522 (336 ) 1,186 Other interest earning assets 37 (34 ) 3 (12 ) (26 ) (38 ) Total interest-earning assets 1,233 457 1,690 2,192 212 2,404 Interest expense: NOW and money market accounts 88 (63 ) 25 196 (13 ) 183 Savings accounts (10 ) 14 4 13 29 42 Certificates of deposit 68 112 180 (32 ) (623 ) (655 )Federal Home Loan Bank advances 138 210 348 (69 ) 295 226 Total interest-bearing liabilities 284 273 557 108 (312 ) (204 ) Net increase (decrease) in net interest income$ 949 $ 184 $ 1,133 $ 2,084 $ 524 $ 2,608
Comparison of Operating Results for the Three Months Ended
General. Net income increased by$888,000 , or 85.2%, to$1.9 million for the three months endedSeptember 30, 2022 from$1.0 million for the three months endedSeptember 30, 2021 . The increase was due to an increase in net interest income of$1.1 million and a decrease of$137,000 in non-interest expense, offset by a decrease in non-interest income of$105,000 and an increase of$150,000 in provision for loan losses. Interest Income. Interest income increased$1.7 million , or 26.1%, to$8.2 million for the three months endedSeptember 30, 2022 . The increase reflected an$85.0 million increase in the average balance of interest-earnings assets, and a 45 basis points increase in the average yield on interest-earning assets to 3.75% for the three months endedSeptember 30, 2022 from 3.30% for the three months endedSeptember 30, 2021 . Interest income on cash and cash equivalents decreased$3,000 , or 36.3%, to$30,000 for the three months endedSeptember 30, 2022 from$33,000 for the three months endedSeptember 30, 2021 due to a$95.5 million decrease in the average balance of cash and cash equivalents to$5.9 million for the three months endedSeptember 30, 2022 from$101.5 million for the three months endedSeptember 30, 2021 , reflecting the use of excess liquidity to fund loan originations and purchase investment securities. This was offset by a 192 basis point increase in the average yield on cash and cash equivalents from 0.13% for the three months endedSeptember 30, 2021 to 2.05% for the three months endedSeptember 30, 2022 due to the higher interest rate environment. Interest income on loans increased$1.1 million , or 17.6%, to$7.0 million for the three months endedSeptember 30, 2022 compared to$6.0 million for the three months endedSeptember 30, 2021 due primarily to an$85.4 million increase in the average balance of loans to$670.1 million for the three months endedSeptember 30, 2022 from$584.8 million for the three months endedSeptember 30, 2021 and, to a lesser extent, due to a ten basis point increase in the average yield on loans from 4.05% for the three months endedSeptember 30, 2021 to 4.15% for the three months endedSeptember 30 , 34 --------------------------------------------------------------------------------
2022. Interest income on securities increased$637,000 , or 150.1%, to$1.1 million for the three months endedSeptember 30, 2022 from$424,000 for the three months endedSeptember 30, 2021 due primarily to a$94.0 million increase in the average balance of securities to$182.6 million for the three months endedSeptember 30, 2022 from$88.6 million for the three months endedSeptember 30, 2021 , reflecting the purchase of investments with excess liquidity, and to a lesser extent, due to a 41 basis point increase in the average yield from 1.91% for the three months endedSeptember 30, 2021 to 2.32% for the three months endedSeptember 30, 2022 . Interest Expense. Interest expense increased$557,000 , or 39.5%, to$2.0 million for the three months endedSeptember 30, 2022 from$1.4 million for the three months endedSeptember 30, 2021 . The decrease primarily reflected a 21 basis point increase in the average cost of interest-bearing liabilities to 1.08% for the three months endedSeptember 30, 2022 from 0.87% for the three months endedSeptember 30, 2021 . Interest expense on interest-bearing deposits increased$209,000 , or 20.1%, to$1.3 million for the three months endedSeptember 30, 2022 from$1.0 million for the three months endedSeptember 30, 2021 . The increase was due to a seven basis point increase in the average cost of interest-bearing deposits to 0.82% for the three months endedSeptember 30, 2022 from 0.75% for the three months endedSeptember 30, 2021 . The increase in the average cost of deposits was due to higher average balances and higher average costs of certificates of deposit. This increase was also due to a$54.2 million increase in the average balance of total deposits to$602.2 million for the three months endedSeptember 30, 2022 from$548.0 million for the three months endedSeptember 30, 2021 . Interest expense onFederal Home Loan Bank borrowings increased$348,000 , or 94.0%, from$369,000 for the three months endedSeptember 30, 2021 to$717,000 for the three months endedSeptember 30, 2022 . The increase was due to an increase in the average cost of borrowings of 78 basis points to 2.30% for the three months endedSeptember 30, 2022 from 1.52% for the three months endedSeptember 30, 2021 due to the higher newer borrowing rates. The increase was also due to an increase in the average balance of borrowings of$32.5 million to$128.5 million for the three months endedSeptember 30, 2022 from$96.0 million for the three months endedSeptember 30, 2021 . Net Interest Income. Net interest income increased$1.1 million , or 22.3%, to$6.2 million for the three months endedSeptember 30, 2022 from$5.1 million for the three months endedSeptember 30, 2021 . The increase reflected a 25 basis point increase in our net interest rate spread to 2.68% for the three months endedSeptember 30, 2022 from 2.43% for the three months endedSeptember 30, 2021 . The net interest margin increased 27 basis points to 2.85% for the three months endedSeptember 30, 2022 from 2.58% for the three months endedSeptember 30, 2021 . Provision for Loan Losses. The Bank recorded a$175,000 provision for loan losses for the three months endedSeptember 30, 2022 compared to a$25,000 provision for the three-month period endedSeptember 30, 2021 . Higher balances in residential and construction loans were the reason for the provision for the three months endedSeptember 30, 2022 . The Bank continues to have a low level of delinquent and non-accrual loans in the portfolio, as well as no charge-offs. Non-performing assets were$1.9 million , or 0.20% of total assets, atSeptember 30, 2022 . The allowance for loan losses was$2.4 million , or 0.34% of loans outstanding and 128.8% of nonperforming loans, atSeptember 30, 2022 . Non-Interest Income. Non-interest income decreased by$105,000 , or 28.0%, to$270,000 for the three months endedSeptember 30, 2022 from$374,000 for the three months endedSeptember 30, 2021 . Gain on sale of loans decreased$127,000 as the Bank decided to portfolio loans rather than sell loans. This decrease was offset by a$28,000 , or 17.8%, increase in bank-owned life insurance to$185,000 for the three months endedSeptember 30, 2022 from$157,000 for the three months endedSeptember 30, 2021 due to a$5.0 million purchase of bank-owned life insurance during the nine months endedSeptember 30, 2022 . 35 -------------------------------------------------------------------------------- Non-Interest Expense. For the three months endedSeptember 30, 2022 , non-interest expense decreased$137,000 , or 3.6%, over the comparable 2021 period primarily due to the$370,000 of expense related to the data processing conversion in 2021. Salaries and employee benefits increased$125,000 , or 6.2%, due to the new equity plan established inSeptember 2021 and due to more employees due to the acquisition and the addition of a sixth branch office. Data processing expense increased$54,000 , or 21.1%, due to higher costs associated with being a larger organization. Professional fees increased$35,000 , or 27.2%, due in part to the settlement of a legal case in 2022. The increase in advertising expense of$96,000 , or 160.2%, was due to additional promotions for branch locations and new promotions on deposit and loan products. Income Tax Expense. Income tax expense increased$127,000 , or 21.0%, to$734,000 for the three months endedSeptember 30, 2022 from$607,000 for the three months endedSeptember 30, 2021 . The increase was due to$1.0 million of higher taxable income. The effective tax rate for the three months endedSeptember 30, 2022 and 2021 were 27.55% and 36.80%, respectively. For the period endingSeptember 30, 2021 there was a true up expense after the tax returns were completed resulting in a higher effective tax rate.
Comparison of Operating Results for the Nine Months Ended
General. Net income decreased by$514,000 , or 9.4%, to$5.0 million for the nine months endedSeptember 30, 2022 from$5.5 million for the nine months endedSeptember 30, 2021 . The decrease was due to a decrease in non-interest income of$2.4 million , an increase in provision for loan losses of$363,000 , and an increase of$412,000 in income taxes, offset by an increase in net interest income of$2.6 million . Interest Income. Interest income increased$2.4 million , or 12.7%, to$21.4 million for the nine months endedSeptember 30, 2022 from$19.0 million for the nine months endedSeptember 30, 2021 . The increase reflected a$47.9 million increase in the average balance of interest-earnings assets, and a 20 basis point increase in the average yield on interest-earning assets to 3.49% for the nine months endedSeptember 30, 2022 from 3.29% for the nine months endedSeptember 30, 2021 . Interest income on cash and cash equivalents decreased$30,000 , or 33.6%, to$89,000 for the nine months endedSeptember 30, 2022 from$119,000 for the nine months endedSeptember 30, 2021 due to a$65.1 million decrease in the average balance of cash and cash equivalents to$32.5 million for the nine months endedSeptember 30, 2022 from$97.6 million for the nine months endedSeptember 30, 2021 , reflecting the use of excess liquidity to fund loan originations and purchase investment securities. This was offset by a 20 basis point increase in the average yield on cash and cash equivalents from 0.16% for the nine months endedSeptember 30, 2021 to 0.36% for the nine months endedSeptember 30, 2022 due to the higher interest rate environment. Interest income on loans increased$1.3 million , or 7.5%, to$18.4 million for the nine months endedSeptember 30, 2022 compared to$17.1 million for the nine months endedSeptember 30, 2021 due primarily to a$27.1 million increase in the average balance of loans to$612.3 million for the nine months endedSeptember 30, 2022 from$585.2 million for the nine months endedSeptember 30, 2021 and, to a lesser extent, due to a ten basis point increase in the average yield on loans from 3.91% for the nine months endedSeptember 30, 2021 to 4.01% for the nine months endedSeptember 30, 2022 . Interest income on securities increased$1.2 million , or 78.4%, to$2.7 million for the nine months endedSeptember 30, 2022 from$1.5 million for the nine months endedSeptember 30, 2021 due to a$86.2 million increase in the average balance of securities to$168.1 million for the nine months endedSeptember 30, 2022 from$81.9 million for the nine months endedSeptember 30, 2021 , reflecting the purchase of investments with excess liquidity. The increase was offset by a 32 basis point decrease in the average yield from 2.46% for the nine months endedSeptember 30, 2021 to 2.14% for the nine months endedSeptember 30, 2022 . Interest Expense. Interest expense decreased$204,000 , or 4.5%, to$4.3 million for the nine months endedSeptember 30, 2022 from$4.5 million for the nine months endedSeptember 30, 2021 . The decrease primarily reflected a 11 basis point decrease in the average cost of interest-bearing liabilities to 0.85% for the nine months endedSeptember 30, 2022 from 0.96% for the nine months endedSeptember 30, 2021 , offset by a$46.9 million , or 7.3%, increase in the average balance of interest-bearing liabilities from$631.6 million for the nine months endedSeptember 30, 2021 to$678.5 million for the nine months endedSeptember 30, 2022 . 36 -------------------------------------------------------------------------------- Interest expense on interest-bearing deposits decreased$430,000 , or 12.8%, to$2.9 million for the nine months endedSeptember 30, 2022 from$3.4 million for the nine months endedSeptember 30, 2021 . The decrease was due primarily to an 18 basis point decrease in the average cost of interest-bearing deposits to 0.67% for the nine months endedSeptember 30, 2022 from 0.85% for the nine months endedSeptember 30, 2021 . The decrease in the average cost of deposits was due to a higher average balance of core deposits, offset by a decrease in the average balance and average cost of certificates of deposit. This decrease was offset by a$50.6 million increase in the average balance of deposits to$581.0 million for the nine months endedSeptember 30, 2022 from$530.3 million for the nine months endedSeptember 30, 2021 , primarily due to a$47.4 million increase in the average balance of NOW and money market accounts from$99.3 million for the nine months endedSeptember 30, 2021 to$146.7 million for the nine months endedSeptember 30, 2022 . Interest expense onFederal Home Loan Bank borrowings increased$226,000 , or 19.2%, from$1.2 million for the nine months endedSeptember 30, 2021 to$1.4 million for the nine months endedSeptember 30, 2022 . The increase was due to an increase in the average cost of borrowings of 37 basis points to 1.92% for the nine months endedSeptember 30, 2022 from 1.55% for the nine months endedSeptember 30, 2021 due to the higher new borrowing rates. The increase was offset by a decrease in the average balance of borrowings of$3.7 million to$97.6 million for the nine months endedSeptember 30, 2022 from$101.2 million for the nine months endedSeptember 30, 2021 . Net Interest Income. Net interest income increased$2.6 million , or 18.1%, to$17.0 million for the nine months endedSeptember 30, 2022 from$14.4 million for the nine months endedSeptember 30, 2021 . The increase reflected a 30 basis point increase in the net interest rate spread to 2.63% for the nine months endedSeptember 30, 2022 from 2.33% for the nine months endedSeptember 30, 2021 . The net interest margin increased 28 basis points to 2.78% for the nine months endedSeptember 30, 2022 from 2.50% for the nine months endedSeptember 30, 2021 . Provision for Loan Losses. The Bank recorded a$275,000 provision for loan losses the nine months endedSeptember 30, 2022 compared to a$88,000 credit for the nine months endedSeptember 30, 2021 . Higher balances in residential and construction loans were the reason for the provision for the nine months endedSeptember 30, 2022 . The Bank continues to have a low level of delinquent and non-accrual loans in the portfolio, as well as no charge-offs. Non-Interest Income. Non-interest income decreased by$2.4 million , or 73.1%, to$868,000 for the nine months endedSeptember 30, 2022 from$3.2 million for the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2021 , there was a$1.9 million bargain purchase gain recognized in theGibraltar Bank acquisition in 2021. Gain on sale of loans decreased$560,000 , or 86.6%, to$87,000 for the nine months endedSeptember 30, 2022 from$647,000 for the nine months endedSeptember 30, 2021 . The decrease was due to less sales as the Bank decided to retail more originated loans in the higher rate environment. Bank-owned life insurance income increased$119,000 , or 30.3%, to$511,000 for the nine months endedSeptember 30, 2022 from$392,000 for the nine months endedSeptember 30, 2021 due to a$5.0 million purchase of bank-owned life insurance during the nine months endedSeptember 30, 2022 . Non-Interest Expense. For the nine months endedSeptember 30, 2022 , non-interest expense decreased$12,000 , or 0.1%, to$10.8 million , over the comparable 2021 period. Salaries and employee benefits increased$713,000 , or 12.7%, due to a equity plan implemented inSeptember 2021 and due to more employees due to the acquisition and the addition of a sixth branch office. Data processing expense increased$143,000 , or 18.3%, due to higher data processing expense associated with a larger company. Advertising expense increased$188,000 due to additional promotions for branch locations and new promotions for loan and deposit products. Professional fees decreased$137,000 , or 23.0%, due to lower consulting expense. Merger fees and core conversion costs were$1.1 million in 2021. The increase in equipment and occupancy expenses of$134,000 , or 14.9%, was mainly due to the additional branch locations. Income Tax Expense. Income tax expense increased$412,000 , or 28.0%, to$1.9 million for the nine months endedSeptember 30, 2022 from$1.5 million for the nine months endedSeptember 30, 2021 . The increase was due to$1.3 million of higher taxable income. The effective tax rate for the nine months endedSeptember 30, 2022 and 37 --------------------------------------------------------------------------------
2021 were 27.46% and 21.14% respectively. The lower tax rate for the nine months
ended
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage our exposure to changes in market interest rates. Accordingly, our board of directors has established an Asset/Liability Management Committee (the "ALCO"), which is comprised of three members of executive management and two independent directors, which oversees the asset/liability management processes and related procedures. The ALCO meets on at least a quarterly basis and reviews asset/liability strategies, liquidity positions, alternative funding sources, interest rate risk measurement reports, capital levels and economic trends at both national and local levels. Our interest rate risk position is also monitored quarterly by the board of directors. We manage our interest rate risk to minimize the exposure of our earnings and capital to changes in market interest rates. We have implemented the following strategies to manage our interest rate risk: originating and purchasing loans with adjustable interest rates; promoting core deposit products; monitoring the length of our borrowings with theFederal Home Loan Bank and brokered deposits depending on the interest rate environment; maintaining a significant portion of our investments as available-for-sale; diversifying our loan portfolio; and strengthening our capital position. By following these strategies, we believe that we are better positioned to react to changes in market interest rates. Net Portfolio Value Simulation. We analyze our sensitivity to changes in interest rates through a net portfolio value of equity ("NPV") model. NPV represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities, adjusted for the value of off-balance sheet contracts. The NPV ratio represents the dollar amount of our NPV divided by the present value of our total assets for a given interest rate scenario. NPV attempts to quantify our economic value using a discounted cash flow methodology while the NPV ratio reflects that value as a form of capital ratio. We estimate what our NPV would be at a specific date. We then calculate what the NPV would be at the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate NPV under the assumptions that interest rates increase 100, 200, 300 and 400 basis points from current market rates and that interest rates decrease 100 and 200 basis points from current market rates. The following table presents the estimated changes in our net portfolio value that would result from changes in market interest rates asSeptember 30, 2022 . All estimated changes presented in the table are within the policy limits approved by the board of directors. NPV as Percent of Portfolio NPV Value of Assets (Dollars in thousands) Basis Point ("bp") Change in Dollar Dollar Percent Interest Rates Amount Change Change NPV Ratio Change 400 bp$ 67,694 $ (55,057 ) (44.86 )% 8.56 % (37.24 )% 300 bp 81,990 (40,761 ) (33.20 ) 10.06 (26.25 ) 200 bp 97,160 (25,591 ) (20.85 ) 11.54 (15.40 ) 100 bp 111,127 (11,624 ) (9.47 ) 12.77 (6.38 ) - 122,751 - - 13.64 (100) bp 128,514 5,763 4.70 13.81 1.25 (200) bp 148,638 25,887 21.09 15.46 13.34 38
-------------------------------------------------------------------------------- Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The above table assumes that the composition of our interest-sensitive assets and liabilities existing at the date indicated remains constant uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our NPV and will differ from actual results. Net Interest Income Analysis. We also use income simulation to measure interest rate risk inherent in our balance sheet at a given point in time by showing the effect on net interest income, over specified time frames and using different interest rate shocks and ramps. The assumptions include management's best assessment of the effect of changing interest rates on the prepayment speeds of certain assets and liabilities, projections for account balances in each of the product lines offered and the historical behavior of deposit rates and balances in relation to changes in interest rates. These assumptions are subject to change, and as a result, the model is not expected to precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from the simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in the balance sheet composition and market conditions. Assumptions are supported with quarterly back testing of the model to actual market rate shifts. As ofSeptember 30, 2022 , net interest income simulation results indicated that its exposure over one year to changing interest rates was within our guidelines. The following table presents the estimated impact of interest rate changes on our estimated net interest income over one year:
Changes in Interest Rates Change in Net Interest Income Year One
(basis points)(1) (% change from year one base)
400 (23.75 )%
300 (17.83 )
200 (11.87 )
100 (5.90 )
- -
(100) 4.53
(200) (0.94 )
(1)The calculated change in net interest income assumes an instantaneous parallel shift of the yield curve.
The preceding simulation analyses does not represent a forecast of actual results and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions vary, prepayment/refinancing levels, the varying impact of interest rate changes on caps and floors embedded in adjustable-rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables will likely deviate from those assumed.
Liquidity and Capital Resources
Liquidity. Liquidity describes our ability to meet financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities and proceeds from calls, maturities and sales of securities and sales of loans. We also have the ability to borrow from theFederal Home Loan Bank of New York . AtSeptember 30, 2022 , we had the ability to borrow up to$329.5 million , of which$128.0 million was outstanding and$1.5 million was utilized as collateral for letters of credit issued to secure municipal deposits. AtSeptember 30, 2022 , we had$51.0 million in unsecured lines of credit with four correspondent banks with no outstanding balance. 39
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The board of directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we had ample sources of liquidity to satisfy our short- and long-term liquidity needs as ofSeptember 30, 2022 . While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any period. AtSeptember 30, 2022 , cash and cash equivalents totaled$13.3 million . Securities classified as available-for-sale, which provide additional sources of liquidity, totaled$88.1 million atSeptember 30, 2022 . We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year ofSeptember 30, 2022 totaled$244.7 million , or 40.0% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits andFederal Home Loan Bank of New York advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. Capital Resources. We are subject to various regulatory capital requirements administered by theNew Jersey Department of Banking and Insurance and theFederal Deposit Insurance Corporation . AtSeptember 30, 2022 , we exceeded all applicable regulatory capital requirements, and were considered "well capitalized" under regulatory guidelines. As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, as modified inApril 2020 , the federal banking agencies were required to develop a "Community Bank Leverage Ratio" (the ratio of a bank's Tier 1 "equity capital to average total consolidated assets) for financial institutions with less than$10 billion . A "qualifying community bank" with capital exceeding 9% will be considered compliant with all applicable regulatory capital and leverage requirements, including the capital requirements to be considered "well capitalized" under Prompt Corrective Action statutes. As a result of the CARES Act, the ratio was temporarily reduced to 8% for calendar year 2020 and 8.5% for calendar year 2021 in response to COVID-19 and transitioned back to 9% as ofJanuary 1, 2022 . As ofSeptember 30, 2022 , the Bank is reporting as a qualifying community bank with a ratio of 17.50%.
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