General
Management's discussion and analysis of financial condition and results of operations atJune 30, 2021 as compared toDecember 31, 2020 and for the three and six months endedJune 30, 2021 andJune 30, 2020 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:
• statements of our goals, intentions and expectations;
• statements regarding our business plans, prospects, growth and operating strategies;
• statements regarding the quality of our loan and investment portfolios; and
• 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: • general economic conditions, either nationally or in our market area, that are worse than expected; • changes in the level and direction of loan delinquencies and charge-offs and changes in estimates of the adequacy of the allowance for loan losses; • our ability to access cost-effective funding; • fluctuations in real estate values and both residential and commercial real estate market conditions; • demand for loans and deposits in our market area; • our ability to continue to implement our business strategies; • competition among depository and other financial institutions;
• 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; • adverse changes in the securities markets; • changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; • our ability to manage market risk, credit risk and operational risk; 27 --------------------------------------------------------------------------------
• our ability to enter new markets successfully and capitalize on
growth opportunities; • 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; • changes in consumer spending, borrowing and savings habits; • changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, theFinancial Accounting Standards Board , theSecurities and Exchange Commission or thePublic Company Accounting Oversight Board ; • our ability to retain key employees; • our compensation expense associated with equity allocated or awarded to our employees; and • changes in the financial condition, results of operations or future prospects of issuers of securities that we own. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including if the coronavirus can continue to be controlled and abated and whether the reopening of businesses will result in a meaningful increase in economic activity. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: demand for our products and services may decline, making it difficult to grow assets and income; • if the economy is unable to substantially remain open, and higher levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; • collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; • our allowance for loan losses may be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income; • the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; • our cyber security risks are increased as the result of an increase in the number of employees working remotely; • we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and •Federal Deposit Insurance Corporation premiums may increase if the agency experience additional resolution costs. Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the pandemic could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability. 28 --------------------------------------------------------------------------------
Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.
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 is expected to occur on or aboutAugust 16, 2021 .
As of
Critical Accounting Policies
A summary of our accounting policies is described in Note 1 to the unaudited consolidated financial statements included with our Annual Report on Form 10-K at and for the year endedDecember 31, 2020 . 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. Management believes that the most critical accounting policy, which involves the most complex or subjective decisions or assessments, is as follows: Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the relevant balance sheet date. The amount of the allowance is based on significant estimates, and the ultimate losses may vary from such estimates as more information becomes available or conditions change. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions used and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses. As a substantial percentage of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans. Assumptions are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance. Management reviews the assumptions supporting such appraisals to determine that the resulting values reasonably reflect amounts realizable on the related loans. Management performs an evaluation of the adequacy of the allowance for loan losses at least quarterly. We consider a variety of factors in establishing this estimate including current economic conditions, delinquency statistics, geographic concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions. The evaluation has specific and general components. The specific component relates to loans that are deemed to be impaired and classified as special mention, substandard, doubtful, or loss. For such loans that are also classified as impaired, an allowance is generally established when the collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.
Actual loan losses may be significantly more than the allowance we have established, which could have a material negative effect on our financial results. See Note 1 to the Notes to the consolidated financial statements for a complete discussion of the allowance for loan losses.
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COVID-19
COVID-19 has adversely impacted a broad range of industries in which the Company's customers operate and could impair their ability to fulfill their financial obligations. The pandemic has caused significant disruption in theU.S. economy and disrupted banking and other financial activity in the areas in which the Company operates.Congress , the President and the banking regulators have taken several actions designed to cushion the economic fallout, including enactment of the Coronavirus Aid Relief and Economic Security ("CARES") Act at the end ofMarch 2020 . The goal of the CARES Act is to prevent severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. OnDecember 27, 2020 , the 2021 Consolidated Appropriations Act, which was enacted as part of an omnibus spending bill for the 2021 federal fiscal year, included provisions intended to provide additional aid to those impacted by the pandemic. In addition to the general impact of COVID-19, certain provisions of the CARES Act, the 2021 Consolidated Appropriations Act as well as other legislative and regulatory relief efforts may have a material impact on the Company's operations. The Company's business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 is unsuccessful or the effects of the pandemic continue or worsen, the Company may experience a material adverse effect on its business, financial condition, results of operations and cash flows. As ofJune 30, 2021 , 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 CARES Act and will not be treated as troubled debt restructurings during the short-term modification period if the loan was not in arrears atDecember 31, 2019 . Furthermore, these loans will continue to accrue interest. Of the 172 loans to which loan modifications were granted only five loans have requested additional deferrals as ofJune 30, 2021 . The five loans still on deferral represents$884,000 or 0.2% of net loans, and all are within the one-to-four family residential real estate portfolio.
Financial position and results of operations
The Company's fee income has been and may continue to be reduced due to COVID-19. In keeping with the guidance from regulators, the Company is actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds, account maintenance, minimum balance, and ATM fees. These reductions in fees are thought to be temporary in conjunction with the length of the COVID-19 related economic crisis. At this time, the Company is unable to project the materiality of such an impact. The Company's interest income could be reduced due to COVID-19. In keeping with the guidance from the regulators, the Company is actively working with COVID-19 affected borrowers to defer payments, interest and fees. While interest and fees will accrue to income through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. As a result, interest income in future periods could be negatively impacted. Credit and asset quality The Company is working with customers affected by COVID-19. As a result of the current economic crisis caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and challenges faced. The extent to which industries, or the tangential impact of those industries to other borrowers or industries, are impacted will likely be in direct proportion to the duration and depth of the COVID-19 pandemic. The Company is also providing assistance to individuals and small business clients directly impacted by the COVID-19 pandemic by allowing borrowers to modify their loans. Under the CARES Act, loans less than 30 days past due as ofDecember 31, 2019 will be considered current for the COVID-19 modifications. Loans that were modified due to COVID-19 will not be classified as a troubled debt restructurings ("TDR"). 30
-------------------------------------------------------------------------------- The CARES Act authorized theSmall Business Administration ("SBA") to temporarily guarantee loans under a new 7(a) program called the Paycheck Protection Program ("PPP"). PPP loans have: (a) an interest rate of 1.0%, (b) a five-year loan term to maturity for loans made on or afterJune 5, 2020 (loans made prior toJune 5, 2020 have a two-year term, however borrowers and lenders may mutually agree to extend the maturity for such loans to five years); and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower's PPP loan, including any accrued interest, is eligible to be forgiven under the PPP if employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. The 2021 Consolidated Appropriations Act signed into law onDecember 27, 2020 approved an additional$286,000,000 for PPP loans. As a qualifiedSmall Business Administration 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 .
Comparison of Financial Condition at
Total Assets. Total assets increased$77.9 million , or 10.5%, to$818.9 million atJune 30, 2021 fromDecember 31, 2020 primarily due to acquiring$106.0 million in assets from theGibraltar Bank acquisition. The increase in assets reflected a$20.3 million , or 25.2%, increase in cash and cash equivalents to$100.7 million , a$20.2 million , or 35.0%, increase in securities held-to-maturity, a$27.0 million , or 10.5%, increase in loans and a$8.2 million , or 48.7% increase in bank owned life insurance.
Cash and Cash Equivalents. Total cash and cash equivalents increased
Securities Available for Sale. Total securities available for sale decreased
Securities Held to Maturity. Total securities held to maturity increased$20.2 million , or 35.0%, to$77.7 million atJune 30, 2021 from$57.5 million atDecember 31, 2020 , primarily to$27.3 million in purchases of securities and$7.0 million of securities acquired fromGibraltar Bank , which was offset by repayments in mortgage-backed securities. The increase in securities held to maturity reflected a$2.5 million increase in corporate bonds, a$4.5 million increase inU.S. government agency obligations, a$1.4 million increase in municipal bonds and a$10.4 million increase in mortgage-backed securities. Net Loans. Net loans increased$26.1 million , or 4.7%, to$583.8 million atJune 30, 2021 from$557.7 million atDecember 31, 2020 . The increase was due to a$18.2 million , or 10.6%, increase in commercial and multi-family real estate loans to$189.8 million atJune 30, 2021 from$171.6 million atDecember 31, 2020 , an increase of$4.1 million , or 1.2% in one- to-four residential real estate loans to$344.1 million atJune 30, 2021 from$340.0 million atDecember 31, 2020 , an increase of$3.8 million , or 38.7%, in construction real estate loans to$13.8 million atJune 30, 2021 from$9.9 million atDecember 31, 2020 , an increase of$3.8 million or 15.4% in consumer loans to$28.5 million atJune 30, 2021 from$24.7 million atDecember 31, 2020 , partially offset by a decrease of$3.0 million , or 22.2%, in commercial and industrial loans to$10.6 million atJune 30, 2021 from$13.7 million as ofDecember 31, 2020 . The increase in loans was primarily due to the$76.8 million of loans acquired fromGibraltar Bank , which was offset by residential loan pay downs and the sale of$15.7 million of residential loans. The decrease in commercial and industrial loans was due to the forgiveness and repayment of PPP loans that were originated in 2020. As ofJune 30, 2021 the Bank had$894,000 in loans held for sale compare the no loans held for sale as ofDecember 31, 2021 . 31 -------------------------------------------------------------------------------- Deposits. Total deposits increased$67.2 million , or 13.4%, to$569.2 million atJune 30, 2021 from$502.0 million atDecember 31, 2020 . The increase in deposits reflected an increase in interest bearing deposits of$62.5 million , or 13.2%, to$537.4 million as ofJune 30, 2021 from$474.9 million atDecember 31, 2020 and an increase in non-interest bearing deposits of$4.7 million , or 17.4%, to$31.8 million as ofJune 30, 2021 from$27.1 million as ofDecember 31, 2020 . The increases are primarily due to the$81.4 million of deposits acquired fromGibraltar Bank . AtJune 30, 2021 , municipal deposits totaled$22.8 million , which represented 4.0% of total deposits, and brokered deposits totaled$54.2 million , which represented 9.5% of total deposits. AtDecember 31, 2020 , municipal deposits totaled$37.6 million , which represented 7.5% of total deposits, and brokered deposits totaled$54.2 million , which represented 10.8% of total deposits. Borrowings.Federal Home Loan Bank of New York borrowings decreased$7.3 million , or 7.0%, to$97.0 million atJune 30, 2021 from$104.3 million atDecember 31, 2020 , as maturities of$17.3 million of FHLB advances were offset by$10.3 million of borrowings that were assumed fromGibraltar Bank . The weighted average rate of borrowings was 1.74% and 1.64% as ofJune 30, 2021 andDecember 31, 2020 , respectively. Total Equity. Stockholders' equity increased$16.2 million to$144.6 million , primarily due to the$11.5 million of stock issued in connection with the acquisition ofGibraltar Bank and the$4.4 million of net income for the six months endedJune 30, 2021 . AtJune 30, 2021 , the Company's ratio of average stockholders' equity-to-total assets was 17.43%, compared to 16.97% atDecember 31, 2020 . 32
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Average Balance Sheets and Related Yields and Rates
The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Nonaccrual loans are included in average balances only. Loan fees are included in interest income on loans and are not material. Three Months Ended June 30, 2021 2020 Average Interest and Yield/ Average Interest and Yield/ Balance Dividends Cost (3) Balance Dividends Cost (3) (Dollars in thousands) Assets: Cash and cash equivalents$ 99,956 $ 41 0.16 %$ 48,248 $ 69 0.57 % Loans 591,134 5,685 3.86 % 578,212 5,246 3.63 % Securities 86,594 402 1.86 % 68,267 418 2.45 % Other interest-earning assets 5,740 74 5.16 % 6,236 83 5.32 % Total interest-earning assets 783,424 6,202 3.17 % 700,963 5,816 3.32 % Non-interest-earning assets 41,827 28,109 Total assets$ 825,251 $ 729,072 Liabilities and equity: NOW and money market accounts$ 99,267 $ 142 0.57
%$ 52,699 $ 125 0.95 % Savings accounts 64,341 26 0.16 % 29,764 18 0.25 % Certificates of deposit 375,373 883 0.94 % 379,210 1,898 2.00 % Total interest-bearing deposits 538,981 1,051 0.78 % 461,673 2,041 1.77 %Federal Home Loan Bank advances 100,289 376 1.50 % 109,758 489 1.78 % Total interest-bearing liabilities 639,270 1,427 0.90 % 571,431 2,530 1.78 %
Non-interest-bearing deposits 26,736 24,471 Other non-interest-bearing liabilities 15,421 7,378 Total liabilities 681,427 603,280 Total equity 143,824 125,792 Total liabilities and equity$ 825,251 $ 729,072 Net interest income$ 4,775 $ 3,286 Interest rate spread (1) 2.28 % 1.55 % Net interest margin (2) 2.44 % 1.88 % Average interest-earning assets to average interest-bearing liabilities 122.55 % 122.67 %
(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. 33
-------------------------------------------------------------------------------- Six Months Ended June 30, 2021 2020 Average Interest and Yield/ Average Interest and Yield/ Balance Dividends Cost (3) Balance Dividends Cost (3) (Dollars in thousands) Assets: Cash and cash equivalents$ 95,564 $ 91 0.19 %$ 69,337 $ 351 1.01 % Loans 585,279 11,150 3.83 % 550,246 10,343 3.76 % Securities 78,485 1,088 2.77 % 66,083 861 2.61 % Other interest-earning assets 5,919 147 4.98 % 5,888 179 6.08 % Total interest-earning assets 765,247 12,476 3.27 % 691,554 11,734 3.39 % Non-interest-earning assets 35,878 28,240 Total assets$ 801,125 $ 719,794 Liabilities and equity: NOW and money market accounts$ 94,606 $ 251 0.54 %$ 50,263 $ 257 1.03 % Savings accounts 53,344 48 0.18 % 29,208 37 0.25 % Certificates of deposit 373,355 2,015 1.09 % 386,437 4,064 2.11 % Total interest-bearing deposits 521,305 2,314 0.90 % 465,908 4,358 1.88 % Federal Home Loan Bank advances 103,897 808 1.57 % 100,997 1,006 2.00 % Total interest-bearing liabilities 625,202 3,122 1.01 % 566,905 5,364 1.90 % Non-interest-bearing deposits 27,820 17,056 Other non-interest-bearing liabilities 9,268 14,552 Total liabilities 662,290 598,513 Total equity 138,835 121,281 Total liabilities and equity$ 801,125 $ 719,794 Net interest income$ 9,354 $ 6,370 Interest rate spread (1) 2.27 % 1.50 % Net interest margin (2) 2.46 % 1.85 % Average interest-earning assets to average interest-bearing liabilities 122.40 % 121.99 %
(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. 34
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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 EndedJune 30 ,
Six Months Ended
2021 Compared to Three
2020 Compared to Six Months
Months EndedJune 30, 2020
Ended
Increase (Decrease) Due to
Increase (Decrease) Due to
Volume Rate Net Volume Rate Net (In thousands) Interest income: Cash and cash equivalents$ 83 $ (111 ) $ (28 ) $ 50 $ (310 ) $ (260 ) Loans receivable 499 (60 ) 439 1,342 (535 ) 807 Securities 341 (357 ) (16 ) 344 (117 ) 227 Other interest earning assets (26 ) 17 (9 ) 2 (34 ) (32 ) Total interest-earning assets 897 (511 ) 386
1,738 (996 ) 742
Interest expense: NOW and money market accounts 265 (248 ) 17 239 (245 ) (6 ) Savings accounts 55 (47 ) 8 43 (32 ) 11 Certificates of deposit (36 ) (979 ) (1,015 ) (143 ) (1,906 ) (2,049 )Federal Home Loan Bank advances (142 ) 29 (113 ) 46 (244 ) (198 ) Total interest-bearing liabilities 142 (1,245 ) (1,103 ) 185 (2,427 ) (2,242 ) Net increase (decrease) in net interest income$ 755 $ 734 $ 1,489 $ 1,553 $ 1,431 $ 2,984
Comparison of Operating Results for the Three Months Ended
General. Net income increased by$36,000 , or 2.5%, to$1.4 million for the three months endedJune 30, 2021 from net income of$1.4 million for the three months endedJune 30, 2020 . The increase was due to increases in net interest income of$1.5 million and a decrease in the provision for loan losses of$279,000 offset by decreases in non-interest income of$235,000 , and increases in non-interest expense of$1.4 million and income tax expense of$80,000 . Interest Income. Interest income increased$386,000 , or 6.6%, to$6.2 million for the three months endedJune 30, 2021 . The increase reflected an$82.5 million increase in the average balance of interest-earnings assets, offset by a 15 basis points decrease in the average yield on interest-earning assets to 3.17% for the three months endedJune 30, 2021 from 3.32% for the three months endedJune 30, 2020 . Interest income on cash and cash equivalents decreased$28,000 , or 40.6%, to$41,000 for the three months endedJune 30, 2021 from$69,000 for the three months endedJune 30, 2020 due to a 41 basis point decrease in the average yield on cash and cash equivalents from 0.57% for the three months endedJune 30, 2020 to 0.16% for the three months endedJune 30, 2021 due to the lower interest rate environment. The decrease was offset by a$51.7 million increase in the average balance of cash and cash equivalents to$100.0 million for the three months endedJune 30, 2021 from$48.2 million for the three months endedJune 30, 2020 . Interest income on loans increased$439,000 , or 8.4%, to$5.7 million for the three months endedJune 30, 2021 from$5.2 million for the three months endedJune 30, 2020 due to a$12.9 million increase in the average balance of loans to$591.1 million for the three months endedJune 30, 2021 from$578.2 million for the three months endedJune 30, 2020 . The increase in the average balance of loans reflected our continued efforts to increase our loan originations and the loans acquired fromGibraltar Bank . The increase was supplemented by a 23 basis 35 -------------------------------------------------------------------------------- point increase in the average yield on loans from 3.63% for the three months endedJune 30, 2020 to 3.86% for the three months endedJune 30, 2021 due to a higher rate environment when comparing the two periods. Interest income on securities decreased$16,000 , or 3.8%, to$402,000 for the three months endedJune 30, 2021 from$418,000 for the three months endedJune 30, 2020 due to a$18.3 million increase in the average balance of securities to$86.6 million for the three months endedJune 30, 2021 from$68.3 million for the three months endedJune 30, 2020 offset by a 59 basis point decrease in the average yield from 2.45% for the three months endedJune 30, 2020 to 1.86% for the three months endedJune 30, 2021 . Interest Expense. Interest expense decreased$1.1 million , or 43.6%, to$1.4 million for the three months endedJune 30, 2021 from$2.5 million for the three months endedJune 30, 2020 . The decrease primarily reflected a 88 basis point decrease in the average cost of interest-bearing liabilities to 0.90% for the three months endedJune 30, 2021 from 1.78% for the three months endedJune 30, 2020 . Interest expense on interest-bearing deposits decreased$990,000 , or 48.5%, to$1.1 million for the three months endedJune 30, 2021 from$2.0 million for the three months endedJune 30, 2020 . The decrease was due primarily to a 99 basis point decrease in the average cost of interest-bearing deposits to 0.78% for the three months endedJune 30, 2021 from 1.77% for the three months endedJune 30, 2020 . The decrease in the average cost of deposits was due to the lower interest rate environment and an increase in the average balance of lower-cost transaction accounts and a decrease in the average balance of higher cost certificates of deposit. This decrease was offset by a$77.3 million increase in the average balance of deposits to$539.0 million for the three months endedJune 30, 2021 from$461.7 million for the three months endedJune 30, 2020 . Interest expense onFederal Home Loan Bank borrowings decreased$112,000 , or 23.0%, from$489,000 for the three months endedJune 30, 2020 to$376,000 for the three months endedJune 30, 2021 . The decrease was primarily due to the lower interest rate environment, as the average cost of borrowings decreased 28 basis point to 1.50% for the three months endedJune 30, 2021 from 1.78% for the three months endedJune 30, 2020 and the average balance of borrowings decreased$9.5 million to$100.3 million for the 3 months endedJune 30, 2021 from$109.8 million for the three months endedJune 30, 2020 . Net Interest Income. Net interest income increased$1.5 million , or 45.3%, to$4.8 million for the three months endedJune 30, 2021 from$3.3 million for the three months endedJune 30, 2020 . The increase reflected a 73 basis point increase in our net interest rate spread to 2.28% for the three months endedJune 30, 2021 from 1.55% for the three months endedJune 30, 2020 . Our net interest margin increased 56 basis points to 2.44% for the three months endedJune 30, 2021 from 1.88% for the three months endedJune 30, 2020 . Provision for Loan Losses. We recorded a credit for loan losses of$54,000 for the three months endedJune 30, 2021 compared to a$225,000 provision for loan losses for the three-month period endedJune 30, 2020 . Lower balances in residential loans, a more positive economic environment and continued strong asset quality metrics were the reasons for the credit during the three months endedJune 30, 2021 . 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$685,000 , or 0.08% of total assets, atJune 30, 2021 . The allowance for loan losses was$2.1 million , or 0.36% of loans outstanding and 310.9% of nonperforming loans, atJune 30, 2021 . Non-Interest Income. Non-interest income decreased by$234,000 or 30.53%, to$533,000 for the three months endedJune 30, 2021 from$768,000 for the three months endedJune 30, 2020 . The decrease was due to$604,000 lower income on bank owned life insurance. Last year the Bank collected$648,000 in death proceeds. This was offset by a$284,000 gain on sale of$9.4 million residential loans during the three months endedJune 30, 2021 . Non-Interest Expense. For the three months endedJune 30, 2021 , non-interest expense increased$1.4 million to$3.6 million , over the comparable 2020 period. Salaries and employee benefits increased$833,000 , or 69.3%, attributable to adding the newGibraltar employees. Data processing expense increased$147,000 , or 89.2%, due to higher data processing expense from maintaining two core systems. Professional fees increased$90,000 , or 46.8%, due in part to merger expenses of$74,000 associated with theGibraltar Bank acquisition. The increase of other general operating expenses was mainly due to increase occupancy costs for the acquiredGibraltar Bank branches and the branch location inHasbrouck Heights expected to be opened in June. 36 --------------------------------------------------------------------------------
Income Tax Expense. Income tax expense increased
Comparison of Operating Results for the Six Months Ended
General. Net income increased by$4.4 million to$4.4 million for the six months endedJune 30, 2021 from net income of$65,000 for the six months endedJune 30, 2020 . The increase was due to increases in net interest income of$3.0 million , a decrease in the provision for loan losses of$363,000 , an increases in non-interest income of$2.0 million , decreases in non-interest expense of$223,000 offset by an increase in income tax expense of$1.2 million . Interest Income. Interest income increased$742,000 , or 6.3%, to$12.5 million for the six months endedJune 30, 2021 . The increase reflected a$73.7 million increase in the average balance of interest-earnings assets, offset by a 12 basis points decrease in the average yield on interest-earning assets to 3.27% for the six months endedJune 30, 2021 from 3.39% for the six months endedJune 30, 2020 . Interest income on cash and cash equivalents decreased$260,000 , or 74.1%, to$91,000 for the six months endedJune 30, 2021 from$351,000 for the six months endedJune 30, 2020 due to a 82 basis point decrease in the average yield on cash and cash equivalents from 1.01% for the six months endedJune 30, 2020 to 0.19% for the six months endedJune 30, 2021 due to the lower interest rate environment. The decrease was offset by a$26.2 million increase in the average balance of cash and cash equivalents to$95.6 million for the six months endedJune 30, 2021 from$69.3 million for the six months endedJune 30, 2020 . Interest income on loans increased$807,000 , or 7.8%, to$11.2 million for the six months endedJune 30, 2021 from$10.3 million for the six months endedJune 30, 2020 due to a$35.0 million increase in the average balance of loans to$585.3 million for the six months endedJune 30, 2021 from$550.2 million for the six months endedJune 30, 2020 . The increase in the average balance of loans reflected our continued efforts to increase our loan originations and the loans acquired fromGibraltar Bank . The increase was supplemented by a 7 basis point increase in the average yield on loans from 3.76% for the six months endedJune 30, 2020 to 3.83% for the six months endedJune 30, 2021 due to a higher rate environment when comparing the two periods. Interest income on securities increased$226,000 , or 26.3%, to$1.1 million for the six months endedJune 30, 2021 from$861,000 for the six months endedJune 30, 2020 due to a$12.4 million increase in the average balance of securities to$78.5 million for the six months endedJune 30, 2021 from$66.1 million for the six months endedJune 30, 2020 offset by a 16 basis point decrease in the average yield from 2.61% for the six months endedJune 30, 2020 to 2.77% for the six months endedJune 30, 2021 . Interest Expense. Interest expense decreased$2.2 million , or 41.8%, to$3.1 million for the six months endedJune 30, 2021 from$5.4 million for the six months endedJune 30, 2020 . The decrease primarily reflected a 89 basis point decrease in the average cost of interest-bearing liabilities to 1.01% for the six months endedJune 30, 2021 from 1.90% for the six months endedJune 30, 2020 . Interest expense on interest-bearing deposits decreased$2.1 million , or 46.9%, to$2.3 million for the six months endedJune 30, 2021 from$4.4 million for the six months endedJune 30, 2020 . The decrease was due primarily to 98 basis point decrease in the average cost of interest-bearing deposits to 0.90% for the six months endedJune 30, 2021 from 1.88% for the six months endedJune 30, 2020 . The decrease in the average cost of deposits was due to the lower interest rate environment and an increase in the average balance of lower-cost transaction accounts and a decrease in the average balance of higher cost certificates of deposit. This decrease was offset by a$55.4 million increase in the average balance of deposits to$521.3 million for the six months endedJune 30, 2021 from$465.9 million for the six months endedJune 30, 2020 . Interest expense onFederal Home Loan Bank borrowings decreased$198,000 , or 19.7%, from$1.0 million for the six months endedJune 30, 2020 to$808,000 for the six months endedJune 30, 2021 . The decrease was primarily due to the lower interest rate environment, as the average cost of borrowings decreased 43 basis point to 1.57% for the six months endedJune 30, 2021 from 2.00% for the six months endedJune 30, 2020 . 37
-------------------------------------------------------------------------------- Net Interest Income. Net interest income increased$3.0 million , or 46.8%, to$9.4 million for the six months endedJune 30, 2021 from$6.4 million for the six months endedJune 30, 2020 . The increase reflected a 77 basis point increase in our net interest rate spread to 2.27% for the six months endedJune 30, 2021 from 1.50% for the six months endedJune 30, 2020 . Our net interest margin increased 61 basis points to 2.46% for the six months endedJune 30, 2021 from 1.85% for the six months endedJune 30, 2020 . Provision for Loan Losses. We recorded a credit for loan losses of$113,000 for the six months endedJune 30, 2021 compared to a$250,000 provision for loan losses for the six-month period endedJune 30, 2020 . Lower balances in residential loans, a more positive economic environment and continued strong asset quality metrics were the reasons for the credit during the six months endedJune 30, 2021 . 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$685,000 , or 0.08% of total assets, atJune 30, 2021 . The allowance for loan losses was$2.1 million , or 0.36% of loans outstanding and 310.9% of nonperforming loans, atJune 30, 2021 . Non-Interest Income. Non-interest income increased by$2.0 million or 220.8%, to$2.9 million for the six months endedJune 30, 2021 from$889,000 for the six months endedJune 30, 2020 . The increase was due to$1.9 million bargain purchase gain for theGibraltar merger, a$520,000 gain on sale of$15.7 million residential loans sold during the six months endedJune 30, 2021 , offset by$614,000 lower income on bank owned life insurance. Non-Interest Expense. For the six months endedJune 30, 2021 , non-interest expense decreased$223,000 to$7.0 million , over the comparable 2020 period. Salaries and employee benefits increased$1.1 million , or 45.3%, attributable to adding the newGibraltar employees and normal merit increases. Data processing expense increased$570,000 , or 183.0%, due to higher data processing expense from maintaining two core systems and expense associated with the upcoming core conversion. Professional fees increased$143,000 , or 44.0%, due to higher legal and consulting fees. Merger expenses increased$392,000 associated with theGibraltar Bank acquisition. The increase of other general operating expenses was mainly due to increase occupancy costs for the acquiredGibraltar Bank branches and the branch location inHasbrouck Heights expected to be opened in June. During the six months endedJune 30, 2020 the Bank made a$2.9 million contribution to theBogota Charitable Foundation and there was no contribution for the six months endedJune 30, 2021 Income Tax Expense. Income tax expense increased$1.2 million , to$864,000 for the six months endedJune 30, 2021 from a benefit of$289,000 for the six months endedJune 30, 2020 . The increase was due to$5.5 million of higher taxable income.
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 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- 38
-------------------------------------------------------------------------------- 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 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 asJune 30, 2021 . 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$ 116,931 $ (15,463 ) (11.68 )% 15.97 % (26.21 )% 300 bp 124,778 (7,616 ) (5.75 ) 16.59 3.04 200 bp 131,558 (836 ) (0.63 ) 16.99 5.53 100 bp 134,669 2,275 1.72 16.88 4.84 - 132,394 - - 16.10 (100) bp 137,793 5,399 9.78 16.30 1.25 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. 39
-------------------------------------------------------------------------------- As ofJune 30, 2021 , 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 (6.63)% 300 -4.75 200 -2.65 100 -1.17 - - (100) 1.49
(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 the 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, 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 . AtJune 30, 2021 , we had the ability to borrow up to$257.5 million , of which$97.0 million was outstanding and$1.5 million was utilized as collateral for letters of credit issued to secure municipal deposits. AtJune 30, 2021 , we had$51.0 million in unsecured lines of credit with four correspondent banks with no outstanding balance. 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 enough sources of liquidity to satisfy our short- and long-term liquidity needs as ofJune 30, 2021 . 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. AtJune 30, 2021 , cash and cash equivalents totaled$100.7 million . Securities classified as available-for-sale, which provide additional sources of liquidity, totaled$11.2 million atJune 30, 2021 . 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 ofJune 30, 2021 totaled$277.6 million , or 48.8% 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. 40
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Capital Resources. We are subject to various regulatory capital requirements administered by theNew Jersey Department of Banking and Insurance and theFederal Deposit Insurance Corporation . AtJune 30, 2021 , 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. As ofJune 30, 2021 , the Bank is reporting as a qualifying community bank with a ratio of 17.67%.
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