NorthEast Community Bancorp, Inc./MD/ - Quarter Report: 2022 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-40589

NorthEast Community Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Maryland

86-3173858

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

325 Hamilton Avenue

White Plains, New York 10601

(Address of Principal Executive Offices)

(914) 684-2500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	NECB	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer		Accelerated filer	

Non-accelerated filer	☒	Smaller reporting company	☒	Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 7, 2022, there were 16,119,924 shares of the registrant’s common stock outstanding.

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TABLE OF CONTENTS


`
		Page

Part I	Financial Information	3

Item 1.	Financial Statements	3

	Consolidated Statements of Financial Condition as of September 30, 2022 and December 31, 2021 (Unaudited)	3

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)	5

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)	6

	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)	7

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited)	8

	Notes to Condensed Consolidated Financial Statements (Unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48

Item 4.	Controls and Procedures	49

Part II	Other Information	50

Item 1.	Legal Proceedings	50

Item 1A.	Risk Factors	50

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 3.	Defaults Upon Senior Securities	50

Item 4.	Mine Safety Disclosures	50

Item 5.	Other Information	50

Item 6.	Exhibits	50

Exhibit Index		51

Signatures		52

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PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

NORTHEAST COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)


	September 30,		December 31,
	2022		2021

	(In thousands, except share
	and per share amounts)
ASSETS
Cash and amounts due from depository institutions	$	14,182	$	8,344
Interest-bearing deposits		40,750		143,925
Total cash and cash equivalents		54,932		152,269
Certificates of deposit		100		100
Equity securities		18,307		19,943
Securities available-for-sale, at fair value		1		1
Securities held-to-maturity (fair value of $22,900 and $17,620, respectively)		26,732		17,880
Loans receivable		1,117,417		972,851
Deferred loan costs, net		551		484
Allowance for loan losses		(5,461)		(5,242)
Net loans		1,112,507		968,093
Premises and equipment, net		26,349		23,907
Investments in restricted stock, at cost		1,238		1,569
Bank owned life insurance		25,741		25,291
Accrued interest receivable		6,635		4,283
Goodwill		651		651
Real estate owned		1,807		1,996
Property held for investment		1,453		1,481
Right of Use Assets – Operating		2,161		2,564
Right of Use Assets – Financing		356		359
Other assets		5,935		4,683
Total assets	$	1,284,905	$	1,225,070
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	354,336	$	330,853
Interest bearing		633,288		596,311
Total deposits		987,624		927,164
Advance payments by borrowers for taxes and insurance		2,297		1,884
Federal Home Loan Bank advances		21,000		28,000
Lease Liability – Operating		2,210		2,604
Lease Liability – Financing		524		496
Accounts payable and accrued expenses		11,213		13,540
Total liabilities		1,024,868		973,688

See notes to interim unaudited consolidated financial statements.

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NORTHEAST COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (continued)

(Unaudited)


	September 30,		December 31,
	2022		2021

	(In thousands, except share
	and per share amounts)
Stockholders’ equity:
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding	$	—	$	—
Common stock, $0.01 par value; 75,000,000 shares authorized; 16,214,528 shares and 16,377,936 shares issued and outstanding, respectively		162		164
Additional paid-in capital		142,265		145,335
Unearned Employee Stock Ownership Plan (“ESOP”) shares		(7,649)		(8,301)
Retained earnings		125,334		114,323
Accumulated other comprehensive loss		(75)		(139)
Total stockholders’ equity		260,037		251,382
Total liabilities and stockholders’ equity	$	1,284,905	$	1,225,070

See notes to interim unaudited consolidated financial statements.

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NORTHEAST COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(In thousands, except per share amounts)
INTEREST INCOME:
Loans	$	18,771	$	11,935	$	46,244	$	35,237
Interest-earning deposits		414		53		718		74
Securities		199		104		534		277
Total Interest Income		19,384		12,092		47,496		35,588
INTEREST EXPENSE:
Deposits		1,786		995		4,123		3,390
Borrowings		129		178		417		528
Financing lease		9		9		28		27
Total Interest Expense		1,924		1,182		4,568		3,945
Net Interest Income		17,460		10,910		42,928		31,643
Provision for loan loss		—		3,593		—		3,610
Net Interest Income after Provision for Loan Losses		17,460		7,317		42,928		28,033
NON-INTEREST INCOME:
Other loan fees and service charges		544		381		1,562		1,095
Gain on disposition of equipment		52		—		98		7
Earnings on bank owned life insurance		153		152		450		447
Investment advisory fees		107		139		364		381
Unrealized loss on equity securities		(573)		(154)		(1,636)		(215)
Other		26		14		66		38
Total Non-Interest Income		309		532		904		1,753
NON-INTEREST EXPENSES:
Salaries and employee benefits		3,979		4,054		11,420		11,223
Occupancy expense		598		489		1,763		1,534
Equipment		259		229		825		718
Outside data processing		473		395		1,388		1,218
Advertising		78		36		183		83
Real estate owned expense		199		18		252		85
Other		2,237		1,633		6,220		4,857
Total Non-Interest Expenses		7,823		6,854		22,051		19,718
INCOME BEFORE PROVISION FOR INCOME TAXES		9,946		995		21,781		10,068
PROVISION FOR INCOME TAXES		2,404		265		5,201		2,372
NET INCOME	$	7,542	$	730	$	16,580	$	7,696

EARNINGS PER COMMON SHARE – BASIC AND DILUTED	$	0.49	$	0.05	$	1.07	$	0.48
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED		15,536		15,572		15,515		15,973

See notes to interim unaudited consolidated financial statements.

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NORTHEAST COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(In thousands)				(In thousands)
Net Income	$	7,542	$	730	$	16,580	$	7,696
Other comprehensive income (loss):
Defined benefit pension:
Reclassification adjustments out of accumulated other comprehensive income:
Amortization of actuarial loss¹		7		8		20		24
Actuarial loss (gain) arising during period		23		(14)		63		(35)
Total		30		(6)		83		(11)
Income tax effect²		(7)		—		(19)		2
Total other comprehensive income (loss)		23		(6)		64		(9)
Total Comprehensive Income	$	7,565	$	724	$	16,644	$	7,687

¹Amounts are included in salaries and employees benefits in the consolidated statements of income as part of net periodic pension cost. See Note 9 for further information.

²Amounts are included in provision for income taxes in the consolidated statements of income.

See notes to interim unaudited consolidated financial statements.

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NORTHEAST COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)


													Accumulated
					Additional								Other
	Number of		Common		Paid- in		Unearned		Retained		Treasury		Comprehensive
	Shares, net		Stock		Capital		ESOP Shares		Earnings		Stock		Loss		Total

	(In thousands, except share and per share amounts)

Balance – December 31, 2021		16,377,936	$	164	$	145,335	$	(8,301)	$	114,323	$	-	$	(139)	$	251,382
Net income		—		—		—		—		3,645		—		—		3,645
Other comprehensive income		—		—		—		—		—		—		19		19
Cash dividend declared ($0.06 per share)		—		—		—		—		(931)		—		—		(931)
ESOP shares earned		—		—		41		217		—		—		—		258
Balance – March 31, 2022		16,377,936	$	164	$	145,376	$	(8,084)	$	117,037	$	-	$	(120)	$	254,373
Net income		—		—		—		—		5,393		—		—		5,393
Other comprehensive income		—		—		—		—		—		—		22		22
Cash dividend declared ($0.24 per share)		—		—		—		—		(3,722)		—		—		(3,722)
ESOP shares earned		—		—		28		218		—		—		—		246
Balance – June 30, 2022		16,377,936	$	164	$	145,404	$	(7,866)	$	118,708	$	-	$	(98)	$	256,312
Net income		—		—		—		—		7,542		—		—		7,542
Other comprehensive income		—		—		—		—		—		—		23		23
Cash dividend declared ($0.06 per share)		—		—		—		—		(916)		—		—		(916)
Stock Repurchases		(250,288)		(3)		(3,192)		—		—		—		—		(3,195)
Restricted Stock Award		86,880		1		(1)		—		—		—		—		—
ESOP shares earned		—		—		54		217		—		—		—		271
Balance – September 30, 2022		16,214,528	$	162	$	142,265	$	(7,649)	$	125,334	$	—	$	(75)	$	260,037

													Accumulated
					Additional								Other
	Number of		Common		Paid- in		Unearned		Retained		Treasury		Comprehensive
	Shares, net¹		Stock		Capital		ESOP Shares		Earnings		Stock		Loss		Total

	(In thousands, except share and per share amounts)

Balance – December 31, 2020		17,721,500	$	132	$	56,901	$	(1,296)	$	105,305	$	(7,032)	$	(185)	$	153,825
Net income		—		—		—		—		3,245		—		—		3,245
Other comprehensive income		—		—		—		—		—		—		3		3
Cash dividend declared ($0.02 per share)		—		—		—		—		(144)		—		—		(144)
ESOP shares earned		—		—		32		65		—		—		—		97
Balance - March 31, 2021		17,721,500	$	132	$	56,933	$	(1,231)	$	108,406	$	(7,032)	$	(182)	$	157,026
Net income		—		—		—		—		3,721		—		—		3,721
Other comprehensive income (loss)		—		—		—		—		—		—		(6)		(6)
ESOP shares earned		—		—		41		65		—		—		—		106
Balance - June 30, 2021		17,721,500	$	132	$	56,974	$	(1,166)	$	112,127	$	(7,032)	$	(188)	$	160,847
Net income		—		—		—		—		730		-		—		730
Other comprehensive loss		—		—		—		—		—		—		(6)		(6)
Cash dividend declared ($0.06 per share)		—		—		—		—		(925)		—		—		(925)
ESOP shares earned		—		—		15		476		—		—		—		491
Purchase of unearned common stock held by employee stock ownership plan		—		—		—		(7,828)		—		—		—		(7,828)
Second-step conversion and stock offering:
Conversion of existing shares		6,593,954
MHC shares sold in public offering, net of cost		9,784,077		32		95,358		—		—		—		—		95,390
Retirement of NECB, MHC shares		(17,721,500)
Fractional shares resulting from conversion of existing shares		(95)
Treasury stock retired		—		—		(7,032)		—		—		7,032		—		—
Balance - September 30, 2021		16,377,936	$	164	$	145,315	$	(8,518)	$	111,932	$	-	$	(194)	$	248,699

¹Shares amounts related to periods prior to the July 12, 2021 closing of the Company’s second-step conversion offering have been restated to give retroactive recognition to the 1.3400 exchange ratio applied in the conversion offering.

See notes to interim unaudited consolidated financial statements.

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NORTHEAST COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
	2022		2021

	(In thousands)
Cash Flows from Operating Activities:
Net income	$	16,580	$	7,696
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization (accretion) of securities premiums and discounts, net		18		(2)
Provision for loan losses		-		3,610
Depreciation		892		837
Net amortization of deferred loan fees and costs		377		29
Deferred income tax benefit		(1,235)		(347)
Unrealized loss recognized on equity securities		1,636		215
Impairment of real estate owned		189		-
Earnings on bank owned life insurance		(450)		(447)
Gain on dispositions of premises and equipment		(98)		(7)
ESOP compensation expense		775		694
Increase in accrued interest receivable		(2,352)		(196)
Decrease in other assets		417		488
Decrease in accounts payable - loan closing		(2,520)		(69)
Increase in accounts payable and accrued expenses		218		149
Net Cash Provided by Operating Activities		14,447		12,650
Cash Flows from Investing Activities:
Net increase in loans		(149,344)		(91,604)
Proceeds from sale of loans		4,553		3,148
Principal repayments on securities held-to-maturity		1,168		4,274
Purchase of marketable equity securities		—		(5,000)
Purchase of securities held-to-maturity		(10,038)		(10,312)
Net redemptions of restricted stock		331		26
Purchases of premises and equipment		(3,236)		(5,699)
Net Cash Used in Investing Activities		(156,566)		(105,167)
Cash Flows from Financing Activities:
Net increase in deposits		60,460		45,129
Repayment of FHLB of NY advances		(7,000)		—
Loan to ESOP		—		(7,828)
Issuance of common stock funded by stock subscriptions		—		95,390
Stock repurchases		(3,195)		—
Increase (decrease) in advance payments by borrowers for taxes and insurance		413		(74)
Cash dividends paid		(5,896)		(1,278)
Net Cash Provided by Financing Activities		44,782		131,339
Net (Decrease) Increase in Cash and Cash Equivalents		(97,337)		38,822
Cash and Cash Equivalents – Beginning		152,269		69,191
Cash and Cash Equivalents – Ending	$	54,932	$	108,013

See notes to interim unaudited consolidated financial statements.

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NORTHEAST COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)


	Nine Months Ended September 30,
	2022		2021

	(In thousands)
Supplementary Cash Flows Information:
Income taxes paid	$	5,485	$	3,296
Interest paid	$	4,491	$	3,869
Supplementary Disclosure of Non-Cash Investing and Financing Activities:
Dividends declared and not paid	$	968	$	—

See notes to interim unaudited consolidated financial statements.

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NORTHEAST COMMUNITY BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, unless otherwise stated)

(Unaudited)

NORTHEAST COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies

The following is a description of the Company’s business and significant accounting and reporting policies:

Nature of Business:

Northeast Community Bancorp, Inc. (the “Company”) is a Maryland corporation that was incorporated in May 2021 to be the successor to NorthEast Community Bancorp, Inc., a federally chartered corporation (the “Mid-Tier Holding Company”), upon completion of the second-step conversion of NorthEast Community Bank (the “Bank”) from the two-tier mutual holding company structure to the stock holding company structure. NorthEast Community Bancorp, MHC was the former mutual holding company for the Mid-Tier Holding Company prior to the completion of the second-step conversion. In conjunction with the second-step conversion, each of NorthEast Community Bancorp, MHC and the Mid-Tier Holding Company merged out of existence and now cease to exist. The second-step conversion was completed on July 12, 2021, at which time the Company sold, for gross proceeds of $97.8 million, a total of 9,784,077 shares of common stock at $10.00 per share. As part of the second-step conversion, each of the existing outstanding shares of Mid-Tier Holding Company common stock owned by persons other than NorthEast Community Bancorp, MHC was converted into 1.3400 shares of Company common stock. As a result of the second-step conversion, all share information has been subsequently revised to reflect the 1.3400 exchange ratio, unless otherwise noted.

The Bank is a New York State-chartered savings bank and completed its conversion from a federally-chartered savings bank effective as of the close of business on June 29, 2012. The Company’s primary activity is the ownership and operation of the Bank.

The Bank is headquartered in White Plains, New York. The Bank was founded in 1934 and is a community oriented financial institution dedicated to serving the financial services needs of individuals and businesses within its market area. The Bank currently conducts business through its eleven branch offices located in Bronx, New York, Orange, Rockland, Sullivan, and Westchester Counties in New York and Essex, Middlesex and Norfolk Counties in Massachusetts and two loan production offices located in White Plains, New York, and New City, New York.

The Bank’s principal business consists of originating primarily construction loans and, to a lesser extent, commercial and industrial loans and multifamily and mixed-use residential real estate loans and non-residential real estate loans. The Bank offers a variety of retail deposit products to the general public in the areas surrounding its main office and its branch offices, with interest rates that are competitive with those of similar products offered by other financial institutions operating in its market area. The Bank also utilizes borrowings as a source of funds. The Bank’s revenues are derived primarily from interest on loans and, to a lesser extent, interest on investment securities and mortgage-backed securities. The Bank also generates revenues from other income including deposit fees, service charges and investment advisory fees.

The Bank also offers investment advisory and financial planning services under the name Harbor West Wealth Management Group, a division of the Bank, through a networking arrangement with a registered broker-dealer and investment advisor.

New England Commercial Properties LLC (“NECP”), a New York limited liability company and wholly owned subsidiary of the Bank, was formed in October 2007 to facilitate the purchase or lease of real property by the Bank. New England Commercial Properties, LLC currently owns one foreclosed property located in Pennsylvania.

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NECB Financial Services Group, LLC (“NECB Financial”), a New York limited liability company and wholly owned subsidiary of the Bank, was formed in the third quarter of 2012 as a complement to Harbor West Wealth Management Group to sell life insurance and fixed rate annuities. NECB Financial is licensed in the States of New York and Connecticut.

72 West Eckerson LLC (“72 West Eckerson”), a New York limited liability company and wholly owned subsidiary of the Bank, was formed in April 2015 to facilitate the purchase or lease of real property by the Bank and currently owns the Bank branch locations in Spring Valley, New York and Monroe, New York.

166 Route 59 Realty LLC (“166 Route 59 Realty”), a New York limited liability company and wholly owned subsidiary of the Bank, was formed in April 2021 to facilitate the purchase or lease of real property by the Bank and currently owns the property for the Bank branch located in Airmont, New York.

3 Winterton Realty LLC, a New York limited liability company and wholly owned subsidiary of the Bank, was formed in October 2021 to facilitate the purchase or lease of real property by the Bank and currently owns the property for the Bank branch located in Bloomingburg, New York.

Principal of Consolidations:

The accompanying unaudited consolidated financial statements include the accounts of the Company, the Bank, NECP, NECB Financial, 72 West Eckerson, 166 Route 59 Realty, and 3 Winterton Realty LLC (collectively the “Company”) and have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All significant inter-company accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. The unaudited consolidated interim financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2021.

In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the operating results for the interim periods have been included. The results of operations for periods of less than a year are not necessarily indicative of results for the full year or any other period.

Use of Estimates:

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Estimates that are particularly susceptible to change in the near term, including novel coronavirus (“COVID-19”) related changes, are used in connection with the determination of the allowance for loan losses, the review of the need for a valuation allowance of the Company’s deferred tax assets and the fair value of financial instruments.

COVID-19:

The Company continues to monitor the impact of COVID-19 and considers these disruptions to be temporary. If the disruptions continue, this might have an adverse effect on the Company’s results of operations, financial position, and liquidity in 2022. Further, a decrease in the results of future operations could strain the Company’s regulatory capital ratios.

Note 2 — Regulatory Capital

The Company and the Bank are subject to regulatory capital requirements promulgated by the federal banking agencies. The Federal Reserve establishes capital requirements, including well capitalized standards, for the consolidated bank holding company, and the FDIC has similar requirements for the Company’s subsidiary bank. Prior to January 1,

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2015, quantitative measures were established by regulation to ensure capital adequacy which required the Bank to maintain minimum amounts and ratios of Total, Tier 1 capital (as defined by regulations) to risk-weighted assets (as defined), and of Core tier 1 capital to adjusted total assets (as defined).

Effective January 1, 2015, the Company adopted the Basel III final rule. Based on the Company’s capital levels and statement of condition composition at December 31, 2021, the implementation of the new rule had no material impact on our regulatory capital level or ratios at the Bank level. The rule established limits at the Company level and increased the minimum Tier 1 capital to risk based assets requirement from 4% to 6% of risk-weighted assets; established a new common equity Tier 1 capital; and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rule has a capital conservation buffer requirement that was phased in at a rate of 0.625% annually beginning January 1, 2016 through January 1, 2020, when full capital conservation buffer requirement of 2.50% became effective. The Federal Reserve Board has provided a “small bank holding company” exception to its consolidated capital requirements, and legislation and the related issuance of regulations by the Federal Reserve Board has increased the threshold for the exception to $3.0 billion. As a result, the Company is not subject to the capital requirements until such time as its consolidated assets exceed $3.0 billion.

The Bank met all capital adequacy requirements to which it was subject as of September 30, 2022 and December 31, 2021.

The following table presents information about the Bank’s capital levels at the dates presented:


					Regulatory Capital Requirements
					Minimum Capital						For Classification as
	Actual				Adequacy(1)						Well-Capitalized
	Amount		Ratio		Amount			Ratio			Amount			Ratio

	(Dollars in Thousands)
As of September 30, 2022:
Total capital (to risk-weighted assets)	$	212,881	13.86	%	$	≥	122,851	≥	8.00	%	$	≥	153,563	≥	10.00	%
Tier 1 capital (to risk-weighted assets)		207,448	13.51			≥	92,138	≥	6.00			≥	122,851	≥	8.00
Common equity tier 1 capital (to risk-weighted assets)		207,448	13.51			≥	69,104	≥	4.50			≥	99,816	≥	6.50
Core (Tier 1) capital (to adjusted total assets)		207,448	16.91			≥	49,060	≥	4.00			≥	61,325	≥	5.00
As of December 31, 2021:
Total capital (to risk-weighted assets)	$	196,155	15.28	%	$	≥	102,702	≥	8.00	%	$	≥	128,377	≥	10.00	%
Tier 1 capital (to risk-weighted assets)		190,941	14.87			≥	77,026	≥	6.00			≥	102,702	≥	8.00
Common equity tier 1 capital (to risk-weighted assets)		190,941	14.87			≥	57,770	≥	4.50			≥	83,445	≥	6.50
Core (Tier 1) capital (to adjusted total assets)		190,941	16.79			≥	45,486	≥	4.00			≥	56,857	≥	5.00

(1)	Ratios do not include the capital conservation buffer.

Based on the most recent notification by the FDIC, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action. There have been no conditions or events that have occurred since notification that management believes have changed the Bank’s category.

Note 3 — Equity Securities

The following table is the schedule of equity securities at September 30, 2022 and December 31, 2021. The equity securities consists of our investment in a market-rate bond mutual fund that invests in high quality fixed income bonds, mainly government agency securities whose proceeds are designed to positively impact community development

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throughout the United States. The mutual fund focuses exclusively on providing affordable housing for low- and moderate-income borrowers and renters, including those in majority minority census tracts.


	September 30,		December 31,
	2022		2021

	(In Thousands)
Equity Securities, at Fair Value	$	18,307	$	19,943

The following is a summary of unrealized gain or loss recognized in net income on equity securities during the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(In Thousands)				(In Thousands)

Net loss recognized on equity securities during the period	$	573	$	154	$	1,636	$	215
Less: Net losses realized on the sale of equity securities during the period		—		—		—		—
Unrealized net loss recognized on equity securities held at the reporting date	$	573	$	154	$	1,636	$	215

Note 4 — Securities Available-for-Sale

The following table summarizes the Company’s portfolio of securities available-for-sale at September 30, 2022 and December 31, 2021.


	September 30, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In Thousands)
Mortgage-backed securities – residential:
Federal Home Loan Mortgage Corporation	$	1	$	—	$	—	$	1
	$	1	$	—	$	—	$	1


	December 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In Thousands)
Mortgage-backed securities – residential:
Federal Home Loan Mortgage Corporation	$	1	$	—	$	—	$	1
	$	1	$	—	$	—	$	1

There were no sales of securities available-for-sale as of September 30, 2022 and December 31, 2021.

Contractual final maturities of mortgage-backed securities were as follows:


	September 30, 2022
	Amortized Cost		Fair Value

	(In Thousands)
Due after one year but within five years	$	1	$	1
	$	1	$	1

The maturities shown above are based upon contractual final maturity. Actual maturities will differ from contractual maturities due to scheduled monthly repayments and due to the underlying borrowers having the right to prepay their obligations. At September 30, 2022 and December 31, 2021, the Company had no unrealized loss.

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Note 5 — Securities Held-to-Maturity

The following table summarizes the Company’s portfolio of securities held-to-maturity at September 30, 2022 and December 31, 2021.


	September 30, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In Thousands)
Mortgage-backed securities – residential:
Government National Mortgage Association	$	544	$		$	13	$	531
Federal Home Loan Mortgage Corporation		985		—		140		845
Federal National Mortgage Association		2,389		—		275		2,114
Collateralized mortgage obligations – GSE		3,083		—		480		2,603
Total mortgage-backed securities		7,001		—		908		6,093
Municipal Bonds		9,709		—		2,787		6,922
U.S. Treasury securities		10,022		—		137		9,885
	$	26,732	$	—	$	3,832	$	22,900


	December 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In Thousands)
Mortgage-backed securities – residential:
Government National Mortgage Association	$	656	$	19	$	—	$	675
Federal Home Loan Mortgage Corporation		1,059		—		5		1,054
Federal National Mortgage Association		2,695		23		6		2,712
Collateralized mortgage obligations – GSE		3,453		18		49		3,422
Total mortgage-backed securities		7,863		60		60		7,863
Municipal Bonds		10,017		7		267		9,757
	$	17,880	$	67	$	327	$	17,620

Contractual final maturities of mortgage-backed securities, municipal bonds, U.S. Treasury securities were as follows at September 30, 2022:


	September 30, 2022
	Amortized		Fair
	Cost		Value

	(In Thousands)
Due within one year	$	10,389	$	10,292
Due after one but within five years		1,774		1,983
Due after five but within ten years		2,585		2,346
Due after ten years		11,984		8,279
	$	26,732	$	22,900

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The age of unrealized losses and the fair value of related securities held-to-maturity were as follows:


	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses

	(In Thousands)
September 30, 2022:
Mortgage-backed securities - residential:
Government National Mortgage Association	$	531	$	13	$	—	$	—	$	531	$	13
Federal Home Loan Mortgage Corporation		809		139		36		1		845		140
Federal National Mortgage Association		2,114		275		—		—		2,114		275
Collateralized mortgage obligations – GSE		2,603		480		—		—		2,603		480
Total mortgage-backed securities		6,057		907		36		1		6,093		908
Municipal Bonds		6,922		2,787		—		—		6,922		2,787
U.S. Treasury securities		9,885		137		—		—		9,885		137
	$	22,864	$	3,831	$	36	$	1	$	22,900	$	3,832


	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses

	(In Thousands)
December 31, 2021:
Municipal Bonds	$	9,134	$	267	$	—	$	—	$	9,134	$	267
Mortgage-backed securities - residential:
Federal Home Loan Mortgage Corporation	$	1,004	$	5	$	—	$	—	$	1,004	$	5
Federal National Mortgage Association		2,035		6		—		—		2,035		6
Collateralized mortgage obligations – GSE		907		49		—		—		907		49
Total mortgage-backed securities		3,946		60		—		—		3,946		60
	$	13,080	$	327	$	—	$	—	$	13,080	$	327

At September 30, 2022, thirty five mortgage-backed securities, five municipal bonds and two U.S. Treasury notes had unrealized loss due to interest rate volatility. Management concluded that the unrealized loss reflected above was temporary in nature since the unrealized loss was related primarily to market interest rates volatility, and not related to the underlying credit quality of the issuers of the securities. Additionally, the Company has the ability and intent to hold the securities for the time necessary to recover the amortized cost. At December 31, 2021, there were four mortgage-backed securities and three municipal bonds with unrealized loss.

Note 6 — Loans Receivable and the Allowance for Loan Losses

Loans are stated at unpaid principal balances plus net deferred loan origination fees and costs less an allowance for loan losses. Interest on loans receivable is recorded on the accrual basis. An allowance for uncollected interest is established on loans where management has determined that the borrowers may be unable to meet contractual principal and/or interest obligations or where interest or principal is 90 days or more past due, unless the loans are well secured with a reasonable expectation of collection. When a loan is placed on nonaccrual, an allowance for uncollected interest is established and charged against current income. Thereafter, interest income is not recognized unless the financial condition and payment record of the borrower warrant the recognition of interest income. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Interest on loans that have been restructured is accrued according to the renegotiated terms. Net loan origination fees and costs are deferred and amortized into interest income over the contractual lives of the related loans by use of the level yield method. Past due status of loans is based upon the contractual due date. Prepayment penalties received on loans which pay in full prior to the scheduled maturity are included in interest income in the period the prepayment penalties are collected.

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The composition of loans were as follows at September 30, 2022 and December 31, 2021:


	September 30,		December 31,
	2022		2021

	(In Thousands)
Residential real estate:
One-to-four family	$	5,706	$	7,189
Multi-family		88,418		84,425
Mixed-use		22,817		28,744
Total residential real estate		116,941		120,358
Non-residential real estate		25,587		50,016
Construction		862,450		683,830
Commercial and industrial		111,416		118,378
Consumer		1,023		269
Total Loans		1,117,417		972,851
Deferred loan costs, net		551		484
Allowance for loan losses		(5,461)		(5,242)
	$	1,112,507	$	968,093

Loans serviced for the benefit of others totaled approximately $16,585,000 and $14,610,000 at September 30, 2022 and December 31, 2021, respectively. The value of mortgage servicing rights was not material at September 30, 2022 and December 31, 2021. The Company did not originate Payroll Protection Program (“PPP”) loans associated with the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (the “CARES Act”) in 2022 or 2021.

The Company had no loans to related parties at September 30, 2022 and December 31, 2021. In addition, the Company did not originate any loans to related parties in 2022 or 2021.

The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the statement of financial condition date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

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The following tables summarize the allocation of the allowance for loan losses and loans receivable by loan class and impairment method at September 30, 2022 and December 31, 2021:

At September 30, 2022:


			Non-				Commercial
	Residential		residential				and
	Real Estate		Real Estate		Construction		Industrial		Consumer		Unallocated		Total

	(In Thousands)
Allowance for loan losses:
Ending balance	$	395	$	143	$	3,893	$	931	$	35	$	64	$	5,461
Ending balance: individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance: collectively evaluated for impairment	$	395	$	143	$	3,893	$	931	$	35	$	64	$	5,461
Loans receivable:
Ending balance	$	116,941	$	25,587	$	862,450	$	111,416	$	1,023	$	—	$	1,117,417
Ending balance: individually evaluated for impairment	$	861	$	—	$	—	$	—	$	—	$	—	$	861
Ending balance: collectively evaluated for impairment	$	116,080	$	25,587	$	862,450	$	111,416	$	1,023	$	—	$	1,116,556

At December 31, 2021:


			Non-				Commercial
	Residential		residential				and
	Real Estate		Real Estate		Construction		Industrial		Consumer		Unallocated		Total

	(In Thousands)
Allowance for loan losses:
Ending balance	$	571	$	381	$	3,143	$	973	$	10	$	164	$	5,242
Ending balance: individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance: collectively evaluated for impairment	$	571	$	381	$	3,143	$	973	$	10	$	164	$	5,242
Loans receivable:
Ending balance	$	120,358	$	50,016	$	683,830	$	118,378	$	269	$	—	$	972,851
Ending balance: individually evaluated for impairment	$	876	$	746	$	—	$	—	$	—	$	—	$	1,622
Ending balance: collectively evaluated for impairment	$	119,482	$	49,270	$	683,830	$	118,378	$	269	$	—	$	971,229

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The activity in the allowance for loan loss by loan class for the three months ended September 30, 2022 and 2021 was as follows:


			Non-				Commercial
	Residential		residential				and
	Real Estate		Real Estate		Construction		Industrial		Consumer		Unallocated		Total

	(In Thousands)
Allowance for loan losses:
Balance - June 30, 2022	$	546	$	198	$	3,581	$	865	$	16	$	261	$	5,467
Charge-offs		—		—		—		—		(6)		—		(6)
Recoveries		—		—		—		—		—		—		—
Provision (Benefit)		(151)		(55)		312		66		25		(197)		—
Balance -September 30, 2022	$	395	$	143	$	3,893	$	931	$	35	$	64	$	5,461

			Non-				Commercial
	Residential		residential				and
	Real Estate		Real Estate		Construction		Industrial		Consumer		Unallocated		Total

	(In Thousands)
Allowance for loan losses:
Balance - June 30, 2021	$	687	$	476	$	3,196	$	682	$	15	$	38	$	5,094
Charge-offs		—		(3,593)		—		—		(3)		—		(3,596)
Recoveries		151		—		—		—		—		—		151
Provision (Benefit)		(321)		3,512		51		195		(11)		167		3,593
Balance - September 30, 2021	$	517	$	395	$	3,247	$	877	$	1	$	205	$	5,242

The activity in the allowance for loan loss by loan class for the nine months ended September 30, 2022 and 2021 was as follows:


			Non-				Commercial
	Residential		residential				and
	Real Estate		Real Estate		Construction		Industrial		Consumer		Unallocated		Total

	(In Thousands)
Allowance for loan losses:
Balance - December 31, 2021	$	571	$	381	$	3,143	$	973	$	10	$	164	$	5,242
Charge-offs		—		—		—		—		(23)		—		(23)
Recoveries		189		53		—		—		—		—		242
Provision (Benefit)		(365)		(291)		750		(42)		48		(100)		—
Balance - September 30, 2022	$	395	$	143	$	3,893	$	931	$	35	$	64	$	5,461

			Non-				Commercial
	Residential		residential				and
	Real Estate		Real Estate		Construction		Industrial		Consumer		Unallocated		Total

	(In Thousands)
Allowance for loan losses:
Balance - December 31, 2020	$	707	$	519	$	3,068	$	774	$	20	$	—	$	5,088
Charge-offs		—		(3,593)		—		—		(23)		—		(3,616)
Recoveries		152		—		—		—		8		—		160
Provision (Benefit)		(342)		3,469		179		103		(4)		205		3,610
Balance - September 30, 2021	$	517	$	395	$	3,247	$	877	$	1	$	205	$	5,242

During the three months ended September 30, 2022, the provision expenses recorded for construction loans and commercial and industrial loans were primarily attributed to the increased loan balances. The credit provision recorded for residential loans was due to reduced credit risk assessed during the three-month period. The credit provision recorded for non-residential loans was due to decreased loan balances.

During the three months ended September 30, 2021, the provision expenses recorded for non-residential loans were primarily attributed to the previously disclosed charge-off of $3.6 million during the three months ended September 30, 2021 regarding a nonresidential bridge loan secured by real estate with a balance of $3.6 million. The provision expenses recorded for commercial and industrial loan and construction loan segments were primarily due to increased loan balances, and the credit provision recorded for residential real estate loan segment was due to decreased loan balance.

During the nine months ended September 30, 2022, the provision expenses recorded for construction loans were attributed to the increased loan balances. The credit provision recorded for residential loans was primarily due to loan recoveries and reduced credit risk during the nine-month period. The credit provision recorded for non-residential loans

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was attributed to loan recoveries and decreased loan balances. The credit provision recorded for commercial and industrial loans was primarily due to decreased loan balances during the nine-month period.

During the nine months ended September 30, 2021, the provision expenses recorded were primarily attributed to the previously disclosed charge-off of $3.6 million during the nine months ended September 30, 2021 regarding a nonresidential bridge loan secured by real estate with a balance of $3.6 million, as well as increased loan balances in construction loan and commercial and industrial loan segments. The credit provision recorded for residential real estate was due to decreased loan balances.

The following table shows our recorded investment, unpaid principal balance and allocated allowance for loan losses for loans that were considered impaired as of and for the periods presented:

As of and for the Three and Nine months Ended September 30, 2022 and 2021:


							Three Months Ended September 30, 2022				Nine Months Ended September 30, 2022
	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income		Average Recorded		Interest Income
2022	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized

	(In Thousands)
With no related allowance recorded:
Residential real estate-Multi-family	$	861	$	861	$	—	$	863	$	11	$	867	$	33
Non-residential real estate		—		—		—		385		—		570		14
Construction		—		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—		—
		861		861		—		1,248		11		1,437		47
With an allowance recorded		—		—		—		—		—		—		—

Total:
Residential real estate-Multi-family		861		861		—		863		11		867		33
Non-residential real estate		—		—		—		385		—		570		14
Construction		—		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—		—
	$	861	$	861	$	—	$	1,248	$	11	$	1,437	$	47

							Three Months Ended September 30, 2021				Nine Months Ended September 30, 2021
	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income		Average Recorded		Interest Income
2021	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized

	(In Thousands)
With no related allowance recorded:
Residential real estate-Multi-family	$	1,964	$	1,964	$	—	$	1,971	$	24	$	1,986	$	69
Non-residential real estate		740		807		—		2,571		9		3,486		26
Construction		—		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—		—
		2,704		2,771		—		4,542		33		5,472		95
With an allowance recorded		—		—		—		—		—		—		—

Total:
Residential real estate-Multi-family		1,964		1,964		—		1,971		24		1,986		69
Non-residential real estate		740		807		—		2,571		9		3,486		26
Construction		—		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—		—
	$	2,704	$	2,771	$	—	$	4,542	$	33	$	5,472	$	95

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As of and for the Year Ended December 31, 2021:


	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
2021	Investment		Balance		Allowance		Investment		Recognized

	(In Thousands)
With no related allowance recorded:
Residential real estate-Multi-family	$	876	$	876	$	—	$	1,986	$	86
Non-residential real estate		746		813		—		3,891		36
Construction		—		—		—		—		—
Commercial and industrial		—		—		—		—		—
		1,622		1,689		—		5,877		122
With an allowance recorded		—		—		—		—		—

Total:
Residential real estate-Multi-family		876		876		—		1,986		86
Non-residential real estate		746		813		—		3,891		36
Construction		—		—		—		—		—
Commercial and industrial		—		—		—		—		—
	$	1,622	$	1,689	$	—	$	5,877	$	122

There were no non-accrual loans at September 30, 2022. The Company did not recognize any interest income on non-accrual loans during the nine months ended September 30, 2022 and 2021. During the three months ended September 30, 2022, the Company collected $23,000 interest income from a non-accrual loan that was satisfied in July 2022. The Company is not committed to lend additional funds to borrowers whose loans have been placed on non-accrual status. There were no non-accrual loans at December 31, 2021.

The following tables provide information about delinquencies in our loan portfolio at the dates indicated.

Age Analysis of Past Due Loans as of September 30, 2022:


													Recorded
													Investment >
	30 – 59 Days		60 – 89 Days		Greater Than		Total Past				Total Loans		90 Days and
	Past Due		Past Due		90 Days		Due		Current		Receivable		Accruing

	(In Thousands)
Residential real estate:
One- to four-family	$	—	$	—	$	—	$	—	$	5,706	$	5,706	$	—
Multi-family		—		—		—		—		88,418		88,418		—
Mixed-use		—		—		—		—		22,817		22,817		—
Non-residential real estate		—		—		—		—		25,587		25,587		—
Construction loans		—		1,578		—		1,578		860,872		862,450		—
Commercial and industrial loans		—		—		—		—		111,416		111,416		—
Consumer		—		—		—		—		1,023		1,023		—
	$	—	$	1,578	$	—	$	1,578	$	1,115,839	$	1,117,417	$	—

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Age Analysis of Past Due Loans as of December 31, 2021:


													Recorded
													Investment
	30 – 59 Days		60 – 89 Days		Greater Than		Total Past				Total Loans		> 90 Days and
	Past Due		Past Due		90 Days		Due		Current		Receivable		Accruing

	(In Thousands)
Residential real estate:
One- to four-family	$	—	$	—	$	—	$	—	$	7,189	$	7,189	$	—
Multi-family		—		—		—		—		84,425		84,425		—
Mixed-use		—		—		—		—		28,744		28,744		—
Non-residential real estate		—		—		—		—		50,016		50,016		—
Construction loans		—		—		—		—		683,830		683,830		—
Commercial and industrial loans		—		—		—		—		118,378		118,378		—
Consumer		—		—		—		—		269		269		—
	$	—	$	—	$	—	$	—	$	972,851	$	972,851	$	—

The following tables provide certain information related to the credit quality of our loan portfolio.

Credit Risk Profile by Internally Assigned Grade as of September 30, 2022:


	Residential		Non-residential				Commercial
	Real Estate		Real Estate		Construction		and Industrial		Consumer		Total

	(In Thousands)
Grade:
Pass	$	116,941	$	25,587	$	862,450	$	111,416	$	1,023	$	1,117,417
Special Mention		—		—		—		—		—		—
Substandard		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—
	$	116,941	$	25,587	$	862,450	$	111,416	$	1,023	$	1,117,417

Credit Risk Profile by Internally Assigned Grade as of December 31, 2021:


	Residential		Non-residential				Commercial
	Real Estate		Real Estate		Construction		and Industrial		Consumer		Total

	(In Thousands)
Grade:
Pass	$	120,358	$	49,270	$	683,830	$	118,378	$	269	$	972,105
Special Mention		—		—		—		—		—		—
Substandard		—		746		—		—		—		746
Doubtful		—		—		—		—		—		—
	$	120,358	$	50,016	$	683,830	$	118,378	$	269	$	972,851

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Troubled Debt Restructuring:

The following table shows our recorded investment for loans classified as a troubled debt restructuring (a “TDR”) that are performing according to their restructured terms at the periods indicated:


	September 30,			December 31,
	2022			2021
	Number of	Recorded		Number of	Recorded
	contracts	Investment		contracts	Investment

	(Dollars in Thousands)
Residential Real Estate - Mixed-use	2	$	861	2	$	876
Non-residential real estate	—		—	2		746
Total performing	2	$	861	4	$	1,622

The following is a summary of interest foregone on loans classified as a TDR for the three and nine month periods ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(In Thousands)				(In Thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	21	$	54	$	62	$	130
Less: Interest income included in the results of operations		11		33		47		95
Total foregone interest	$	10	$	21	$	15	$	35

There were no loans modified that were deemed to be a TDR during the nine months ended September 30, 2022 and 2021. During the three and nine months ended September 30, 2022 and 2021, none of the loans that were modified during the previous twelve months had defaulted.

Note 7 — Real Estate Owned (“REO”)

The Company owned one foreclosed property valued at approximately $1,807,000 at September 30, 2022 and $1,996,000 at December 31, 2021, consisting of an office building located in Pennsylvania. The property was acquired through foreclosure in December 2014.

Further declines in real estate values may result in impairment charges in the future. Routine holding costs are charged to expense as incurred and improvements to real estate owned that enhance the value of the real estate are capitalized. REO expense recorded in the consolidated statements of income amounted to $200,000 and $17,000 for the three months, and $252,000 and $85,000 for the nine months ended September 30, 2022 and 2021, respectively.

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Note 8 — Federal Home Loan Bank of New York (“FHLB”) Advances

FHLB advances are summarized as follows at September 30, 2022 and December 31, 2021:


	September 30,				December 31,
	2022				2021
			Weighted Average				Weighted Average
	Amount		Interest Rate		Amount		Interest Rate

	(Dollars in Thousands)
Advances maturing in:
One year or less	$	7,000	2.83	%	$	7,000	2.79	%
After one to three years		7,000	2.86	%		14,000	2.85	%
After five years (due 2030)		7,000	1.61	%		7,000	1.61	%
	$	21,000	2.43	%	$	28,000	2.52	%

At September 30, 2022, none of the above advances were subject to early call or redemption features. All advances had fixed interest rates and the term of the advance ranges between 2 and 10 years. At September 30, 2022, the advances were secured by a pledge of the Company’s investment in the capital stock of the FHLB and a blanket assignment of the Company’s otherwise unpledged qualifying mortgage loans. At September 30, 2022, these unpledged qualifying mortgage loans were not pledged to any company other than the FHLB. At September 30, 2022, the Company had the ability to borrow $18.1 million, net of $21.0 million in outstanding advances, from the FHLB and $8.0 million from Atlantic Community Bankers Bank (“ACBB”).

Note 9 — Benefits Plans

Outside Director Retirement Plan (“DRP”)

The DRP is an unfunded non-contributory defined benefit pension plan covering all non-employee directors meeting eligibility requirements as specified in the plan document. The following table sets forth information regarding the components of net pension periodic expense measured as of September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(Dollars In Thousands)				(Dollars In Thousands)
Net periodic pension expense:
Service cost	$	30	$	33	$	90	$	98
Interest cost		14		10		42		30
Actuarial loss recognized		7		8		20		24
Total net periodic pension expense included in other non-interest expenses	$	51	$	51	$	152	$	152

Unrecognized net loss of $23,000 and unrealized net gain of $14,000 for the three months, and unrecognized net loss of $63,000 and unrecognized net gain of $35,000 for the nine months ended September 30, 2022 and 2021, respectively, were included in accumulated other comprehensive income.

Supplemental Executive Retirement Plan (“SERP”)

The SERP is a non-contributory defined benefit plan that covers certain officers of the Company. Under the SERP, each of these individuals will be entitled to receive upon retirement an annual benefit paid in monthly installments equal to 50% of his average base salary in the three-year period preceding retirement. Each individual may also retire early and receive a reduced benefit upon the attainment of certain age and years of service combination. Additional terms related to death while employed, death after retirement, disability before retirement and termination of employment are fully described within the plan document. The benefit payment term is the greater of 15 years or the executives remaining life. No benefits are expected to be paid during the next five years.

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Expenses of $121,000 and $132,000 for the three months, and $361,000 and $359,000 for the nine months ended September 30, 2022 and 2021, respectively, were recorded for this plan and are reflected in the Consolidated Statements of Income under Salaries and Employee Benefits.

Stock-Based Deferral Plan

In June 2021, the Company established a stock-based deferral plan for eligible key executives and members of the Board of Directors of the Company to elect to defer compensation received from the Company for their services and make deemed investments of that deferred compensation in shares of the Company’s common stock. At September 30, 2022, the Company did not have any obligations under the plan.

401(k) Plan

The Company maintains a 401(k) plan for all eligible employees. Participants are permitted to contribute from 1% to 15% or 60% of their annual compensation up to the maximum permitted under the Internal Revenue Code. The Company provided no matching contribution during the three and nine months ended September 30, 2022 and 2021.

Employee Stock Ownership Plan (“ESOP”)

In conjunction with the Mid-Tier Holding Company’s public stock offering in 2006, the Bank established an ESOP for all eligible employees (substantially all full-time employees). The ESOP borrowed $5,184,200 from the Mid-Tier Holding Company and used those funds to acquire 518,420 shares of the Mid-Tier Holding Company common stock at $10.00 per share. The loan from the Mid-Tier Holding Company, which has been assumed by the Company, carries an interest rate of 8.25% and is repayable in twenty annual installments through 2025.

In conjunction with the Company’s second-step conversion offering, on July 12, 2021, the ESOP borrowed $7,827,260 from the Company and used those funds to acquire 782,726 shares of Company common stock at $10.00 per share. The loan from the Company carries an interest rate equal to 3.25% and is repayable in fifteen annual installments through 2035.

Each year, the Bank makes discretionary contributions to the ESOP equal to the principal and interest payment required on the loan from the Company. The ESOP may further pay down the principal balance of the loans by using dividends paid, if any, on the shares of Company common stock it owns. The balance remaining on the first ESOP loan was $1,703,000 at September 30, 2022 and December 31, 2021. The balance remaining on the second ESOP loan was $7,270,000 at September 30, 2022 and December 31, 2021.

Shares purchased with the loan proceeds serve as collateral for the loan and are held in a suspense account for future allocation among ESOP participants. As the loan principal is repaid, shares will be released from the suspense account and become eligible for allocation. The allocation among plan participants will be as described in the ESOP governing document.

ESOP shares initially pledged as collateral were recorded as unearned ESOP shares in the stockholders’ equity section of the consolidated statement of financial condition. Thereafter, on a monthly basis over the terms of the ESOP loans, approximately 2,894 shares for the ESOP loan made in 2006 and approximately 4,348 shares for the ESOP loan made in 2021 are committed to be released respectively. Compensation expense is recorded equal to the shares committed to be released multiplied by the average closing price of the Company’s stock during that month. ESOP expense totaled approximately $271,000 and $491,000 for the three months, and $775,000 and $694,000 for the nine months ended September 30, 2022 and 2021, respectively. Dividends on unallocated shares, which totaled approximately $52,000 and $57,000 for the three months, and $313,000 and $61,000 for the nine months ended September 30, 2022 and 2021, are recorded as a reduction of the ESOP loan. Dividends on allocated shares, which totaled approximately $36,000 and $31,000 for the three months, and $219,000 and $43,000 for the nine months ended September 30, 2022 and 2021, respectively, are charged to retained earnings.

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ESOP shares are summarized as follows:


	September 30,		December 31,
		2022		2021
Allocated shares		607,922		521,012
Shares committed to be released		65,190		86,910
Unearned shares		804,297		869,487
Total ESOP Shares		1,477,409		1,477,409
Less allocated shares distributed to former or retired employees		(112,548)		(106,369)
Total ESOP Shares Held by Trustee		1,364,861		1,371,040
Fair value of unearned shares	$	9,973,281	$	9,677,390

Note 10 — Leases

The Company has operating leases and finance leases all comprised of real estate property. The operating leases comprise substantially all of the Company’s obligations in which the Company is the lessee, with remaining lease terms ranging between 2 and 9 years. Most operating lease agreements consist of initial lease terms ranging between 5 and 10 years, with options to renew the leases or extend the term. The finance lease has a remaining lease term of 95 years. The payment structure of all leases is fixed rental payments with lease payments increasing on pre-determined dates at either a predetermined amount or change in the consumer price index.

In accordance with ASC 842, the Company recognized operating and financing lease assets and corresponding lease liabilities related to office facilities and retail branches. The operating and financing lease assets represent the Company’s right to use an underlying asset for the lease term, and the lease liability represents the Company’s obligation to make lease payments over the lease term. The Company has elected that any short term leases would be expensed as incurred.

The operating and financing lease asset and lease liability are determined at the commencement date of the lease based on the present value of the lease payments. Our leases do not provide an implicit interest rate. The company used its incremental borrowing rate, the rate of interest to borrow in a collateralized basis for a similar term, at the lease commencement date.

All of the leases are net leases and, therefore, do not contain non-lease components. The Company either pays directly or reimburses the lessor for property and casualty insurance cost and the property taxes assessed on the property, as well as a portion of the common area maintenance associated with the property which are categorized as non-components as outlined in the applicable guidance.

At September 30, 2022 and December 31, 2021, the quantitative data relating to the Company’s leases are as follows (in thousands):


	September 30,			December 31,
	2022			2021
Finance Lease Amounts:
ROU asset	$	356		$	359
Lease liability	$	524		$	496
Operating Lease Amounts:
ROU assets	$	2,161		$	2,564
Lease liabilities	$	2,210		$	2,604
Weighted-average remaining lease term
Finance lease		95 years			95 years
Operating leases		6.73 years			7.02 years
Weighted-average discount rate
Finance lease		9.50	%		9.50	%
Operating leases		1.14	%		1.22	%

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The components of lease expense and cash flow information related to leases as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(Dollars In Thousands)				(Dollars In Thousands)
Finance Lease Cost
Amortization of ROU asset	$	1		1	$	3	$	3
Interest on lease liability	$	9		9	$	28	$	27
Operating Lease Costs	$	140		142	$	423	$	425
Cash paid for amounts included in the measurement of lease liabilities
Finance lease	$	—		—	$	—	$	—
Operating leases	$	279		136	$	417	$	407

Maturities of lease liabilities at September 30, 2022 are as follows (in thousands):


	Operating		Finance
	Leases		Lease
Years ended December 31:
2022	$	129	$	23
2023		423		30
2024		333		30
2025		302		30
2026		235		31
Thereafter		875		4,158
Total lease payments	$	2,297	$	4,302
Interest		(87)		(3,778)
Lease liability	$	2,210	$	524

Note 11 — Fair Value Disclosures

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company’s securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company has to record at fair value other assets and liabilities on a non-recurring basis, such as securities held to maturity, impaired loans and other real estate owned. U.S. GAAP has established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The three levels of the fair value hierarchy are as follows:

Level 1:

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2:

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3:

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

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An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company’s assets that are carried at fair value on a recurring basis and the level that was used to determine their fair value at September 30, 2022 and December 31, 2021:


	Quoted Prices in				Significant Other				Significant				Total Carried
	Active Markets for				Observable				Unobservable				at Fair
	Identical Assets				Inputs				Inputs				Value on a
	(Level 1)				(Level 2)				(Level 3)				Recurring Basis
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
Description	2022		2021		2022		2021		2022		2021		2022		2021
Assets:
Marketable equity securities:
Mutual funds	$	18,307	$	19,943	$	—	$	—	$	—	$	—	$	18,307	$	19,943
Mortgage-backed securities
FHLMC		—		—		1		1		—		—		1		1
Total assets	$	18,307	$	19,943	$	1	$	1	$	—	$	—	$	18,308	$	19,944

There were no transfers between Level 1 and 2 during the three and nine months ended September 30, 2022 or the year ended December 31, 2021. The Company did not have any liabilities that were carried at fair value on a recurring basis at September 30, 2022 and December 31, 2021.

The following table sets forth the Company’s assets that are carried at fair value on a non-recurring basis and the level that was used to determine their fair value, at September 30, 2022 and December 31:

Quoted Prices in

Significant Other

Significant

Total Carried

Active Markets for

Observable

Unobservable

at Fair

Identical Assets

Inputs

Value on a

(Level 1)

(Level 2)

(Level 3)

Non-Recurring Basis

September 30,

December 31,

September 30,

December 31,

September 30,

December 31,

September 30,

December 31,

Description

2022

2021

2022

2021

2022

2021

2022

2021

(In Thousands)

Assets:

Real estate owned

—

1,807

—

1,807

—

Total assets

—

1,807

—

1,807

—

The following tables present the qualitative information about non-recurring Level 3 fair value measurements of financial instruments at the periods indicated:

At September 30, 2022

Fair

Valuation

Unobservable

Weighted

Value

Technique

Input

Range

Average

(In Thousands)

Assets:

Real estate owned

1,807

Income approach

Capitalization rate

11.00

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at September 30, 2022 and December 31, 2021.

The methods and assumptions used to estimate fair value at September 30, 2022 and December 31, 2021 are as follows:

For real estate owned, fair value is generally determined through independent appraisals or fair value estimations of the underlying properties which generally include various Level 3 inputs which are not identifiable. The appraisals or fair value estimation may be adjusted by management for qualitative reasons and estimated liquidation expenses.

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Management’s assumptions may include consideration of location and occupancy of the property and current economic conditions. Subsequently, as these properties are actively marketed, the estimated fair values may be periodically adjusted through incremental subsequent write-downs to reflect decreases in estimated values resulting from sales price observations and the impact of changing economic and market conditions.

A loan is considered impaired when, based upon current information and events; it is probable that the Company will be unable to collect all scheduled payments in accordance with the contractual terms of the loan. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component of the allowance for loan losses or through partial charge-offs, and as such are carried at the lower of cost or the fair value. Estimates of fair value of the collateral are determined based on a variety of information, including available valuations from certified appraisers for similar assets, present value of discounted cash flows and inputs that are estimated based on commonly used and generally accepted industry liquidation advance rates and estimates and assumptions developed by management. The appraisals may be adjusted by management for estimated liquidation expenses and qualitative factors such as economic conditions. If real estate is not the primary source of repayment, present value of discounted cash flows and estimates using generally accepted industry liquidation advance rates are utilized. Due to the multitude of assumptions, many of which are subjective in nature, and the varying inputs and techniques used by appraisers, the Company recognizes that valuations could differ across a wide spectrum of valuation techniques employed and accordingly, fair value estimates for impaired loans are classified as Level 3.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2022 and December 31, 2021:

Securities

Fair values for marketable equity securities are determined by quoted market prices on nationally recognized and foreign securities exchanges (Level 1). Fair values for securities available for sale and held to maturity are determined utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things.

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The carrying amounts and estimated fair value of our financial instruments are as follows:


					Fair Value at September 30, 2022
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying				Assets		Inputs		Inputs
(In thousands)	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash and cash equivalents	$	54,932	$	54,932	$	54,932	$	—	$	—
Certificates of deposit		100		100		—		100		—
Marketable equity securities		18,307		18,307		18,307		—		—
Securities available for sale		1		1		—		1		—
Securities held to maturity		26,732		22,900		—		22,900		—
Loans receivable, net		1,112,507		1,097,136		—		—		1,097,136
Investments in restricted stock		1,238		1,238		—		1,238		—
Accrued interest receivable		6,635		6,635		—		6,635		—
Financial Liabilities
Deposits		987,624		986,647		—		986,647		—
FHLB of New York advances		21,000		19,540		—		19,540		—


					Fair Value at December 31, 2021
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying				Assets		Inputs		Inputs
(In thousands)	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash and cash equivalents	$	152,269	$	152,269	$	152,269	$	—	$	—
Certificates of deposit		100		100		—		100		—
Marketable equity securities		19,943		19,943		19,943		—		—
Securities available for sale		1		1		—		1		—
Securities held to maturity		17,880		17,620		—		17,620		—
Loans receivable, net		968,093		968,247		—		—		968,247
Investments in restricted stock		1,569		1,569		—		1,569		—
Accrued interest receivable		4,283		4,283		—		4,283		—
Financial Liabilities
Deposits		927,164		929,003		—		929,003		—
FHLB of New York advances		28,000		28,283		—		28,283		—

Note 12 — Revenue Recognition

The majority of the Company’s revenues come from interest income and other sources, including loans and securities that are outside the scope of ASC 606, Revenue from Contracts with Customers. The Company’s services that fall within the scope of ASC 606 are presented within noninterest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include deposit service charges on deposits, electronic banking fees and charges income, and investment advisory fees.

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract

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liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as referral fees based month end reports. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2022, the Company did not have any significant contract balances.

All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the three and nine months ended September 30, 2022 and 2021. Sources of revenue outside the scope of ASC 606 are noted as such:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(In Thousands)				(In Thousands)
Non-interest income:
Deposit-related fees and charges	$	17	$	16	$	53	$	50
Loan-related fees and charges⁽¹⁾		308		193		861		561
Electronic banking fees and charges		219		172		648		484
Gain on disposition of equipment⁽¹⁾		52		—		98		7
Income from bank owned life insurance⁽¹⁾		153		152		450		447
Investment advisory fees		107		139		364		381
Unrealized loss on equity securities⁽¹⁾		(573)		(154)		(1,636)		(215)
Miscellaneous⁽¹⁾		26		14		66		38
Total non-interest income	$	309	$	532	$	904	$	1,753

(1)	Not within the scope of ASC 606.

A description of the Company’s revenue streams accounted for under ASC 606 is as follows:

Service Charges on Deposit Accounts

The Company earns fees from deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed at the point in the time the Company fulfills the customer’s request. The Company discontinued the imposition of overdraft fees on all consumer and business accounts in August 2022. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Electronic Banking Fee Income

The Company earns interchange fees from debit and credit card holder transactions conducted through various payment networks. Interchange fees from cardholder transactions are recognized daily, concurrently with the transaction processing services provided by an outsourced technology solution.

Investment Advisory Fees

The Company earns fees from investment advisory and financial planning services under the name of Harbor West Financial Planning Wealth Management, a division of the Company through a networking arrangement with a registered broker-dealer and investment advisor. The registered broker-dealer deducts investment advisory fees and financial

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planning services fees from the client’s assets under management and remits the fees, net of administrative fees, to the Company on a monthly basis. The Company recognizes the fees into non-interest income upon receipt of the monthly remittances.

Note 13 — Other Non-Interest Expenses

The following is an analysis of other non-interest expenses:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(In Thousands)				(In Thousands)
Other	$	751	$	520	$	2,088	$	1,487
Service contracts		275		220		804		645
Consulting expense		251		266		710		844
Telephone		145		143		437		430
Directors compensation		155		144		436		413
Audit and accounting		163		115		463		371
Insurance		95		73		273		221
Director, officer, and employee expense		73		59		201		185
Legal fees		283		62		640		165
Office supplies and stationary		23		30		100		94
Recruiting expense		23		1		68		2
	$	2,237	$	1,633	$	6,220	$	4,857

Note 14 — Recent Accounting Pronouncements

Accounting Standards Pending Adoption:

ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which requires credit losses on most financial assets to be measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model).

Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.

The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination ("PCD assets") should be determined in a similar manner to other financial assets measured on an amortized cost basis. Upon initial recognition, the allowance for credit losses is added to the purchase price ("gross up approach") to determine the initial amortized cost basis. The subsequent accounting for PCD assets will use the CECL model described above.

The ASU made certain targeted amendments to the existing impairment model for available-for-sale (AFS) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.

As amended, ASU No. 2016-13 and any related amending ASUs No. 2019-04, 2019-11, 2020-03, and 2022-02 are effective for entities qualifying as smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted for all entities as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years.

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The Company is actively working on preliminary test calculations, and data validation, as well as process and procedural documentation.

Management is in the process of evaluating the impact adoption of ASU 2016-13 will have on the Company’s Consolidated Financial Statements. This process has engaged multiple areas of the Company in evaluating loss estimation methods and application of these methods to specific segments of the loan portfolio. Management has been actively monitoring FASB developments and evaluating the use of different methods allowed. Due to continuing development of our methodology, additional time is required to quantify the effect this ASU will have on the Company’s Consolidated Financial Statements. Management plans on running parallel calculations and finalizing a method or methods of adoption in time for the effective date.

The Company will utilize a lifetime loss rate calculation for all its loan portfolio, as well as supplement the loss estimate by including reasonable and supportable forecasts of macroeconomic conditions. The Company began to perform parallel runs of the new model in comparison to its current ALLL model during the third quarter of 2022 and continues to evaluate the results and assumptions. Implementation efforts are continuing to focus on model validation, model calibration, qualitative factors, finalizing procedures and other governance, and control documentation. The Company will adopt this new guidance on January 1, 2023, and is currently evaluating the impact of this new guidance on its consolidated financial statements.

ASU 2020-04 - Reference Rate Reform (Topic 848)

In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848)" which provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued, subject to meeting certain criteria. Under the new guidance, an entity can elect by accounting topic or industry subtopic to account for the modification of a contract affected by reference rate reform as a continuation of the existing contract, if certain conditions are met. In addition, the new guidance allows an entity to elect on a hedge-by-hedge basis to continue to apply hedge accounting for hedging relationships in which the critical terms change due to reference rate reform, if certain conditions are met. A one-time election to sell and/or transfer held-to-maturity debt securities that reference a rate affected by reference rate reform is also allowed. ASU No. 2020-04 became effective for all entities as of March 12, 2020 and will apply to all LIBOR reference rate modifications through December 31, 2022.

ASU 2021-01 - Reference Rate Reform (Topic 848)

In January 2021, the FASB issued ASU No. 2021-01, "Reference Rate Reform (Topic 848)". The amendments in this update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this update to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. ASU No. 2021-01 became immediately effective for all entities, which may elect to apply the update retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively to new modifications from any date within an interim period that includes or is subsequent to the issuance date of ASU No. 2021-01 up to the date that financial statements are available to be issued. In addition, ASU No.2021-01 applies to all contract modifications made through December 31, 2022. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on our business operations and consolidated financial statements. The amendments in this update apply to contract modifications that replace a reference rate reform and contemporaneous modifications of other terms related to the replacement of the reference rate.

Note 15 — Stock Compensation Plans

At a special shareholders meeting held on September 29, 2022, our shareholders approved the Company’s 2022 Equity Incentive Plan whereby 1,369,771 shares of the Company’s common stock have been reserved from authorized but unissued shares for purposes of grants of incentive stock options, nonqualified stock options, restricted stock,

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restricted stock units, performance shares and performance units to selected employees and non-employee directors of the Company.

At September 30, 2022, 86,880 shares of restricted stock and 217,206 nonqualified stock options in the aggregate were awarded to six non-employee directors of the Company as set forth in the 2022 Equity Incentive Plan. The fair value of restricted stock is determined by the product of the number of shares granted and the final market price of the Company’s common stock at the grant date. The fair value of the share-based payments for the nonqualified stock options is estimated using the Black-Scholes option-pricing model. The aggregate fair value of the restricted stock and nonqualified stock options totaled $1.1 million and $843,000, respectively, at the date of the grants to our non-employee directors on September 30, 2022. The assumptions used to estimate the fair value of the nonqualified stock options includes 7.5 expected life, 3.97% risk free interest rate, 1.94% projected dividend yield, and 28.94% volatility rate. The restricted stock and nonqualified stock options granted to the non-employee directors vest at a rate of 20% per year from the date of the grant.

The Company recognizes compensation costs for the fair value of the restricted stock and stock options on a straight-line basis over the requisite service period of five years. During the three and nine months ended at September 30, 2022, there were no compensation costs recognized.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Statements contained in this report that are not historical facts may constitute forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), which involve significant risks and uncertainties. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. The Company undertakes no obligation to update these forward-looking statements in the future.

The Company cautions readers of this report that a number of important factors could cause the Company’s actual results to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from those predicted and could affect the future prospects of the Company include, but are not limited to: (i) general economic conditions, including higher inflation, either nationally or in our market area, that are worse than expected; (ii) changes in the interest rate environment that reduce our interest margins, reduce the fair value of financial instruments or reduce the demand for our loan products; (iii) increased competitive pressures among financial services companies; (iv) changes in consumer spending, borrowing and savings habits; (v) changes in the quality and composition of our loan or investment portfolios; (vi) changes in real estate market values in our market area; (vii) decreased demand for loan products, deposit flows, competition, or decreased demand for financial services in our market area; (viii) major catastrophes such as earthquakes, floods or other natural or human disasters and infectious disease outbreaks, including the current coronavirus (COVID-19) pandemic, the related disruption to local, regional and global economic activity and financial markets, and the impact that any of the foregoing may have on us and our customers and other constituencies; (ix) legislative or regulatory changes that adversely affect our business or changes in the monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board; (x) technological changes that may be more difficult or expensive than expected; (xi) success or consummation of new business initiatives may be more difficult or expensive than expected; (xii) the inability to successfully integrate acquired businesses and financial institutions into our business operations; (xiii) adverse changes in the securities markets; (xiv) the inability of third party service providers to perform; and (xv) changes in accounting policies and practices, as may be adopted by bank regulatory agencies or the Financial Accounting Standards Board.

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COVID-19 Pandemic

Due to the impact of COVID-19 on our borrowers, we granted eligible loan modifications under the CARES Act in the form of payment deferral of principal and interest to 196 loans totaling $190.9 million at the time payment deferral was requested. As of September 30, 2022, we had no loans in deferral status. The granting of the payment deferrals had no significant impact on our evaluation of the allowance for loan losses. We did not grant any PPP loans pursuant to the CARES Act or the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.

Critical Accounting Policies

We consider accounting policies involving significant judgements and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider these accounting policies to be our crucial accounting policies. The judgements and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgements 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.

Allowance for Loan Losses

We consider the allowance for loan losses to be a critical accounting policy. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance consists of specific and general reserves. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, a specific allowance is established or a partial charge-off is taken when the fair market value of the collateral is lower than the carrying value of that loan. Beginning in the fourth quarter of 2012, we discontinued the use of specific allowances. If an impairment is identified, we now charge off the impaired portion immediately. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment records, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis.

The general component of the allowance calculation is also based on the loss factors that reflect our historical charge-off experience adjusted for current economic conditions applied to loan groups with similar characteristics or classifications in the current portfolio. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, we have a structured loan rating process which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into

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consideration, among other things, delinquency status, size of loans, type of collateral and financial condition of the borrowers.

Loans whose terms are modified are classified as troubled debt restructurings if we grant such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date at a below market rate. Adversely classified, non-accrual troubled debt restructurings may be returned to accrued status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. All troubled debt restructured loans are classified as impaired.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss model, or CECL, ASU 2016-13. We previously elected to defer the adoption of ASU 2016-13 until December 31, 2021. As permitted by the CARES Act, and based on legislation enacted in December 2020 which extended certain provision of the CARES Act, we elected to extend the adoption of CECL until January 1, 2023 in accordance with the recent legislation. This standard requires earlier recognition of expected credit losses on loans and certain other instruments, compared to the incurred loss model.

Based on management’s comprehensive analysis of the loan portfolio, management believes the allowance for loan losses is appropriate as of September 30, 2022.

Balance Sheet Analysis

General

Total assets increased by $59.8 million, or 4.9%, to $1.3 billion at September 30, 2022, from $1.2 billion at December 31, 2021. The increase in assets was primarily due to increases in net loans of $144.4 million, securities held-to-maturity of $8.9 million, premises and equipment of $2.4 million, and accrued interest receivable of $2.4 million, partially offset by decreases in cash and cash equivalents of $97.3 million and equity securities of $1.6 million.

Cash and cash equivalents decreased by $97.3 million, or 63.9%, to $54.9 million at September 30, 2022 from $152.3 million at December 31, 2021. The decrease in cash and cash equivalents was a result of cash being deployed to fund an increase in net loans of $144.4 million, an increase in securities held-to-maturity of $8.9 million, an increase in property and equipment of $2.4 million due primarily to the purchase of property and equipment for a new branch office, and a reduction in FHLB advances of $7.0 million.

Equity securities decreased by $1.6 million, or 8.2%, to $18.3 million at September 30, 2022 from $19.9 million at December 31, 2021. The decrease in equity securities was attributable to market depreciation of $1.6 million as market interest rates increased during the nine months ended September 30, 2022.

Securities held-to-maturity increased by $8.9 million, or 49.5%, to $26.7 million at September 30, 2022 from $17.9 million at December 31, 2021 due primarily to the purchases of securities, partially offset by maturities and pay-downs.

Loans, net of the allowance for loan losses, increased by $144.4 million, or 14.9%, to $1.1 billion at September 30, 2022 from $968.1 million at December 31, 2021. The increase in loans, net of the allowance for loan losses, was primarily due to loan originations of $499.2 million during the nine months ended September 30, 2022, consisting primarily of $425.1 million in construction loans with respect to which approximately 45.6% of the funds were disbursed at loan closings, with the remaining funds to be disbursed over the terms of the construction loans.

Loan originations resulted in a net increase of $178.6 million in construction loans, $4,0 million in multi-family loans, and $754,000 in consumer loans. The increase in our loan portfolio was partially offset by decreases in non-residential loans of $23.4 million, commercial and industrial loans of $7.0 million, mixed-use loans of $5.9 million, and residential loans of $1.5 million, coupled with normal pay-downs and principal reductions.

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Premises and equipment increased by $2.4 million, or 10.2, to $26.3 million at September 30, 2022 from $23.9 million at December 31, 2021 due to the acquisition of property and equipment for a new branch site located in Bloomingburg, New York.

Investments in restricted stock decreased by $331,000, or 21.1%, to $1.2 million at September 30, 2022 from $1.6 million at December 31, 2021 due to a reduction in mandatory Federal Home Loan Bank stock in connection with the maturity/pay-off of $7.0 million in advances during the quarter ended March 31, 2022.

Accrued interest receivable increased by $2.4 million, or 54.9%, to $6.6 million at September 30, 2022 from $4.3 million at December 31, 2021 due to an increase in the loan portfolio and five interest rate increases in 2022 that caused an increase in the interest rates in our construction loan portfolio.

Foreclosed real estate decreased by $189,000, or 9.5%, to $1.8 million at September 30, 2022 from $2.0 million at December 31, 2021 due to a write down on the fair market value of the property because the increase in interest rates caused an increase in the capitalization rate thereby resulting in a reduction in the calculated fair market value of the property.

Right of use assets — operating decreased by $403,000, or 15.7%, to $2.2 million at September 30, 2022 from $2.6 million at December 31, 2021, primarily due to amortization.

Other assets increased by $1.3 million, or 26.7%, to $5.9 million at September 30, 2022 from $4.7 million at December 31, 2021 due to increases in tax assets of $765,000 and suspense accounts of $544,000, partially offset by decreases in prepaid expenses of $32,000 securities principal receivable of $19,000.

Total deposits increased by $60.5 million, or 6.5%, to $987.6 million at September 30, 2022 from $927.2 million at December 31, 2021. The increase was primarily due to an increase in savings account balances of $71.2 million, or 38.5% and an increase in non-interest bearing demand deposits of $23.5 million, or 7.1%. These increases were partially offset by a decrease in NOW/money market accounts of $21.0 million, or 17.8%, and a decrease in certificates of deposit of $13.2 million, or 4.5%, and from December 31, 2021 to September 30, 2022.

Federal Home Loan Bank advances decreased by $7.0 million, or 25.0%, to $21.0 million at September 30, 2022 from $28.0 million at December 31, 2021.

Advance payments by borrowers for taxes and insurance increased by $413,000, or 21.9%, to $2.3 million at September 30, 2022 from $1.9 million at December 31, 2021 due primarily to the accumulation of tax payments from borrowers.

Lease liability – operating decreased by $394,000, or 15.1%, to $2.2 million at September 30, 2022 from $2.6 million at December 31, 2021, primarily due to amortization.

Accounts payable and accrued expenses decreased by $2.4 million, or 17.2%, to $11.2 million at September 30, 2022 from $13.5 million at December 31, 2021 due primarily to a decrease in suspense accounts for loan closings of $2.5 million.

Stockholders’ equity increased by $8.7 million, or 3.4% to $260.0 million at September 30, 2022, from $251.4 million at December 31, 2021. The increase in stockholders’ equity was due to net income of $16.6 million for the nine months ended September 30, 2022, a reduction of $652,000 in unearned employee stock ownership plan shares coupled with an increase of $124,000 in earned employee stock ownership plan shares, and $64,000 in other comprehensive income, partially offset by dividends paid and declared of $5.6 million and stock repurchases totaling $3.2 million.

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Results of Operations for the Three Months Ended September 30, 2022 and 2021

Financial Highlights

Net income for the three months ended September 30, 2022 was $7.5 million compared to net income of $730,000 for the three months ended September 30, 2021. Net income for the three months ended September 30, 2022 increased from net income for the three months ended September 30, 2021 primarily due to an increase in net interest income and a decrease in the provision for loan losses, partially offset by a decrease in non-interest income, an increase in non-interest expense, and an increase in income tax expense. The decrease in the provision for loan losses was because the Company recorded $3.6 million in provision for loan losses during the three months ended September 30, 2021 due to the previously disclosed charge-off of a non-residential bridge loan with a balance of $3.6 million compared to no provision for loan losses during the three months ended September 30, 2022.

Net Interest Income

Net interest income totaled $17.5 million for the three months ended September 30, 2022, as compared to $10.9 million for the three months ended September 30, 2021. The increase in net interest income of $6.6 million, or 60.0%, was primarily due to an increase in interest income offset by an increase in interest expense.

The increase in interest income is attributable to increases in loans and investment securities, offset by a decrease in interest-bearing deposits. The increase in interest income is also attributed to a rising interest rate environment and the Federal Reserve’s interest rate increases during the nine months ended September 30, 2022.

In this regard, total interest income increased by $7.3 million, or 60.3%, to $19.4 million for the three months ended September 30, 2022 from $12.1 million for the three months ended September 30, 2021. The increase was due to an increase in the average balance of interest earning assets of $163.8 million, or 16.0%, to $1.2 billion for the three months ended September 30, 2022 from $1.0 billion for the three months ended September 30, 2021 and an increase in the yield on interest earning assets by 180 basis points from 4.72% for the three months ended September 30, 2021 to 6.52% for the three months ended September 30, 2022.

The increase in market interest rates during the twelve months subsequent to September 30, 2021 also caused an increase in our interest expense. As a result, the increase in interest expense for the three months ended September 30, 2022 was due to an increase in the cost of funds on our deposits and an increase in the balances on our savings and club balances, partially offset by decreases in the balances on our certificates of deposits and interest-bearing demand deposits and decreases in the cost of funds and balances on our borrowed money.

Interest expense increased by $742,000, or 62.8%, to $1.9 million for the three months ended September 30, 2022 from $1.2 million for the three months ended September 30, 2021. The increase was due to an increase in the cost of interest bearing liabilities by 37 basis points from 0.86% for the three months ended September 30, 2021 to 1.23% for the three months ended September 30, 2022 and an increase in average interest bearing liabilities of $76.0 million, or 13.9%, to $624.0 million for the three months ended September 30, 2022 from $547.9 million for the three months ended September 30, 2021.

Net interest margin increased by 162 basis points, or 38.0%, during the three months ended September 30, 2022 to 5.88% compared to 4.26% during the three months ended September 30, 2021.

Provision for Loan Losses.

The Company recorded no loan loss provision for the three months ended September 30, 2022 compared to a loan loss provision of $3.6 million for the three months ended September 30, 2021. We charged-off $6,000 during the three months ended September 30, 2022 against various unpaid overdrafts in our demand deposit accounts compared to charge-offs of $3.6 million during the three months ended September 30, 2021 related to a non-residential bridge loan.

The provision recorded for the three months ended September 30, 2021 was primarily attributed to the previously disclosed charge-off of $3.6 million during the three months ended September 30, 2021 with respect to a non-residential bridge loan secured by real estate with a balance of $3.6 million. The loan is secured by commercial real estate located

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in Greenwich, Connecticut and guaranteed by the two borrowers. The loan originated in 2016 as a two-year bridge loan and, upon the borrower’s failure to satisfy the loan at the maturity date, the loan was accelerated and a foreclosure action was instituted. Although the loan was fully charged-off, the loan remains in foreclosure and management and the borrower are negotiating a standstill agreement which will allow the borrowers to retain, at their own expense, the zoning and planning consultants necessary to obtain re-approvals from the town to proceed with the original planned residential condominium development. Should the standstill agreement not materialize, the Company intends to aggressively seek recovery of all amounts due from the personal guarantors of the loan. If successful against the guarantors, any recovery received would be added back to the allowance for loan losses and an analysis will be performed at that time to determine the appropriateness of the recovery into income.

We also charged-off $3,000 during the three months ended September 30, 2021 against various unpaid overdrafts in our demand deposit accounts.

We recorded no recoveries during the three months ended September 30, 2022 compared to recoveries of $151,000 during the three months ended September 30, 2021.

Based on a review of the loans that were in the loan portfolio at September 30, 2022, management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable.

Management uses available information to establish the appropriate level of the allowance for loan losses. Future additions or reductions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

Non-Interest Income

Non-interest income for the three months ended September 30, 2022 was $309,000 compared to non-interest income of $532,000 for the three months ended September 30, 2021. The decrease in total non-interest income was primarily due to an unrealized loss of $573,000 on equity securities during the three months ended September 30, 2022 compared to an unrealized loss of $154,000 on equity securities during the three months ended September 30, 2021. The unrealized loss of $573,000 on equity securities during the 2022 period was due to a rising interest rate environment and the Federal Reserve’s interest rate increases, which impacted the value of the equity securities during the September 30, 2022 quarter.

The decrease in total non-interest income was partially offset by an increase of $163,000 in other loan fees and service charges, an increase of $52,000 on gain from the sale of fixed assets, an increase of $12,000 in other non-interest income, an increase of $1,000 in bank-owned life insurance income, and a decrease of $32,000 in investment advisory fees.

The increase in other loan fees and service charges was due to an increase of $115,000 in other loan fees and loan servicing fees and an increase of $47,000 in ATM and debit card usage fees.

Non-Interest Expense

Non-interest expense increased by $969,000, or 14.1%, to $7.8 million for the three months ended September 30, 2022 from $6.9 million for the three months ended September 30, 2021. The increase resulted primarily from increases of $604,000 in other operating expense, $181,000 in real estate owned expense, $109,000 in occupancy expense, $78,000 in outside data processing expense, $42,000 in advertising expense, and $30,000 in equipment expense, partially offset by a decrease of $75,000 in salaries and employee benefits.

Other non-interest expense increased by $604,000, or 37.0%, to $2.2 million for the three months ended September 30, 2022 from $1.6 million for the three months ended September 30, 2021 due mainly to increases of $231,000 in

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miscellaneous other non-interest expense, $221,000 in legal fees, $55,000 in service contracts expense, $48,000 in audit and accounting fees, $22,000 in insurance expense, $22,000 in expenses related to the hiring of personnel, $14,000 in directors, officers and employee expense, $11,000 in directors compensation, and $2,000 in telephone expense. These increases were partially offset by decreases of $15,000 in consulting fees and $7,000 in office supplies,.

The increase of $231,000 in miscellaneous other non-interest expense was mainly due to an increase of $82,000 in regulatory insurance premiums and assessments due to an increase in our total assets, and increases of $73,000 in public company expenses, $52,000 in dues and subscriptions, $36,000 in miscellaneous charge-offs, and $8,000 in check and correspondence bank charges, partially offset by a decrease of $23,000 in miscellaneous other expenses.

The increase of $221,000 in legal fees was due to the increased expenses associated with being a fully public company.

Real estate owned expense increased by $181,000, or 1,005.6%, to $199,000 for the three months ended September 30, 2022 from $18,000 for the three months ended September 30, 2021 due to a write down of $189,000 on the fair market value of a foreclosed property because the increase in interest rates caused an increase in the capitalization rate thereby resulting in a reduction in the calculated fair market value of the property.

Occupancy expense increased by $109,000, or 22.3%, to $598,000 for the three months ended September 30, 2022 from $489,000 for the three months ended September 30, 2021 primarily as a result of the cost of operating additional branch offices.

Outside data processing expense increased by $78,000, or 19.7%, to $473,000 for the three months ended September 30, 2022 from $395,000 for the three months ended September 30, 2021 due to the cost of operating additional two branches and additional data processing services.

Advertising expense increased by $42,000, or 116.7%, to $78,000 for the three months ended September 30, 2022 from $36,000 for the nine months ended September 30, 2021 due mainly to the resumption of advertising and promotional products to promote the opening of additional branch offices.

Equipment expense increased by $30,000, or 13.1%, to $259,000 for the three months ended September 30, 2022 from $229,000 for the three months ended September 30, 2021 due to the purchases of additional equipment to support the Company’s branch expansion.

Salaries and employee benefits decreased by $75,000, or 1.9%, to $4.0 million for the three months ended September 30, 2022 from $4.1 million for the three months ended September 30, 2021 primarily due to an increase in loan origination offset expenses related to loan origination fees due to an increase in loan originations and a decrease in employee stock ownership plan (“ESOP”) compensation cost. These decreases were partially offset by an increase in compensation expense due to an increase in the number of full time equivalent personnel due to the opening of two additional branch offices and an increase in bonus accruals for loan production personnel as loan originations increased.

Income Taxes. We recorded income tax expense of $2.4 million and $265,000 for the three months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022 and September 30, 2021, we had approximately $185,000 in tax exempt income. Our effective income tax rates were 24.2% and 26.6% for the three months ended September 30, 2022 and 2021, respectively.

Results of Operations for the Nine months Ended September 30, 2022 and 2021

Financial Highlights

Net income for the nine months ended September 30, 2022 was $16.6 million compared to net income of $7.7 million for the nine months ended September 30, 2021. Net income for the nine months ended September 30, 2022 was greater than net income for the nine months ended September 30, 2021 primarily due to an increase in net interest income and a decrease in the provision for loan losses, partially offset by a decrease in non-interest income, an increase in non-interest expense, and an increase in income tax expense. The decrease in the provision for loan losses was because the Company recorded $3.6 million in provision for loan losses during the nine months ended September 30,

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2021 due to the previously disclosed charge-off of a non-residential bridge loan with a balance of $3.6 million compared to no provision for loan losses during the nine months ended September 30, 2022.

Net Interest Income

Net interest income totaled $42.9 million for the nine months ended September 30, 2022, as compared to $31.6 million for the nine months ended September 30, 2021. The increase in net interest income of $11.3 million, or 35.7%, was primarily due to an increase in interest income offset by an increase in interest expense.

The increase in interest income is attributable to increases in loans, investment securities, and interest-bearing deposits as we continued to deploy the proceeds raised in our July 2021 second-step conversion. The increase in interest income is also due, in large part, to the increase in interest rates attributable to the Federal Reserve’s rate increases during the nine months ended September 30, 2022.

In this regard, interest income increased by $11.9 million, or 33.5%, to $47.5 million for the nine months ended September 30, 2022 from $35.6 million for the nine months ended September 30, 2021. The increase in interest income was due to an increase in the average balance of interest earning assets of $229.2 million, or 24.1%, to $1.2 billion for the nine months ended September 30, 2022 from $951.0 million for the nine months ended September 30, 2021 and an increase in the yield on interest earning assets by 38 basis points from 4.99% for the nine months ended September 30, 2021 to 5.37% for the nine months ended September 30, 2022.

The increase in market interest rates during the nine months ended September 30, 2022 also caused an increase in our interest expense. As a result, the increase in interest expense for the nine months ended September 30, 2022 is attributable to an increase in the cost of funds on our deposits and an increase in the balances on our savings and club balances, partially offset by decreases in the balances on our certificates of deposits and interest-bearing demand deposits and decreases in the cost of funds and balances on our borrowed money.

Interest expense increased by $623,000, or 15.8%, to $4.6 million for the nine months ended September 30, 2022 from $3.9 million for the nine months ended September 30, 2021. The increase in interest expense was due to an increase in the cost of interest bearing liabilities by 5 basis points from 0.93% for the nine months ended September 30, 2021 to 0.98% for the nine months ended September 30, 2022 and an increase in average interest bearing liabilities of $60.5 million, or 10.7%, to $624.3 million for the nine months ended September 30, 2022 from $563.8 million for the nine months ended September 30, 2021.

Net interest margin decreased by 41 basis points, or 9.2%, during the nine months ended September 30, 2022 to 4.85% compared to 4.44% during the nine months ended September 30, 2021.

Provision for Loan Losses.

The Company recorded no loan loss provision for the nine months ended September 30, 2022 compared to a loan loss provision of $3.6 million for the nine months ended September 30, 2021. The provision recorded for the nine months ended September 30, 2021 was primarily attributed to the charge-off of the aforementioned non-residential bridge loan with a balance of $3.6 million secured by commercial real estate located in Greenwich, Connecticut.

We also charged-off $23,000 during both the nine months ended September 30, 2022 and September 30, 2021 against various unpaid overdrafts in our demand deposit accounts. We recorded recoveries of $242,000 during the nine months ended September 30, 2022 comprised of recoveries of $146,000 regarding a previously charged-off multi-family property, $53,000 regarding a previously charged-off non-residential property, and $43,000 regarding a previously charged-off mixed-use property. We recorded recoveries of $160,000 during the nine months ended September 30, 2021 comprised primarily of recoveries of $150,000 regarding a previously charged-off multi-family property.

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Non-Interest Income

Non-interest income for the nine months ended September 30, 2022 was $904,000 compared to non-interest income of $1.8 million for the nine months ended September 30, 2021. The decrease in total non-interest income was primarily due to unrealized loss of $1.6 million on equity securities during the nine months ended September 30, 2022 compared to an unrealized loss of $215,000 on equity securities during the nine months ended September 30, 2021. The unrealized loss of $1.6 million on equity securities during the 2022 period was due to a rising interest rate environment and the Federal Reserve’s interest rate increases.

The decrease in total non-interest income was partially offset by increases of $467,000 in other loan fees and service charges, $91,000 on gain from the sale of fixed assets, $28,000 in other non-interest income, and $3,000 in bank-owned life insurance income and a decrease of $17,000 in investment advisory fees,.

The increase in other loan fees and service charges was due to an increase of $301,000 in other loan fees and loan servicing fees and an increase of $163,000 in ATM and debit card usage fees.

Non-Interest Expense

Non-interest expense increased by $2.3 million, or 11.8%, to $22.1 million for the nine months ended September 30, 2022 from $19.7 million for the nine months ended September 30, 2021. The increase resulted primarily from increases of $1.4 million in other operating expense, $229,000 in occupancy expense, $197,000 in salaries and employee benefits, $170,000 in outside data processing expense, $167,000 in real estate owned expense, $107,000 in equipment expense, and $100,000 in advertising expense.

Other non-interest expense increased by $1.4 million, or 28.1%, to $6.2 million for the nine months ended September 30, 2022 from $4.9 million for the nine months ended September 30, 2021 due mainly to increases of $601,000 in miscellaneous other non-interest expense, $475,000 in legal fees, $159,000 in service contracts expense, $92,000 in audit and accounting fees, $66,000 in expenses related to the hiring of personnel, $52,000 in insurance expense, $23,000 in directors compensation, $16,000 in directors, officers and employee expense, $7,000 in telephone expense, and $6,000 in office supplies. These increases were partially offset by a decrease of $134,000 in consulting fees.

The increase of $601,000 in miscellaneous other non-interest expense was mainly due to an increase of $299,000 in regulatory insurance premiums and assessments due to an increase in our total assets, an increase of $125,000 in public company expense, an increase of $90,000 in miscellaneous charge-offs, an increase of $78,000 in dues and subscriptions, and an increase of $26,000 in check and correspondence bank charges, partially offset by a decrease of $17,000 in miscellaneous other expense.

The increase of $475,000 in legal fees was due to the increased expenses associated with being a fully public company. The increase of $159,000 in service contracts expense was due to the cost of operating two additional branch office space.

Occupancy expense increased by $229,000, or 14.9%, to $1.8 million for the nine months ended September 30, 2022 from $1.5 million for the nine months ended September 30, 2021 primarily as a result of the cost of operating two additional branch offices.

Salaries and employee benefits increased by $197,000, or 1.8%, to $11.4 million for the nine months ended September 30, 2022 from $11.2 million for the nine months ended September 30, 2021 primarily due to an increase in

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compensation expense due to an increase in the number of full time equivalent personnel related to the opening of two additional branch offices, an increase in bonus accruals for loan production personnel as loan originations increased, and an increase in health insurance premiums. These increases were partially offset by an increase in loan origination offset expenses and fees resulting from an increase in loan originations.

Outside data processing expense increased by $170,000, or 14.0%, to $1.4 million for the nine months ended September 30, 2022 from $1.2 million for the nine months ended September 30, 2021 due to the cost of operating additional two branches and additional data processing services.

Real estate owned expense increased by $167,000, or 196.5%, to $252,000 for the nine months ended September 30, 2022 from $85,000 for the nine months ended September 30, 2021 due to a write down of $189,000 on the fair market value of a foreclosed property because the increase in interest rates caused an increase in the capitalization rate thereby resulting in a reduction in the calculated fair market value of the property.

Equipment expense increased by $107,000, or 14.9%, to $825,000 for the nine months ended September 30, 2022 from $718,000 for the nine months ended September 30, 2021 due to the purchases of additional equipment to support the Company’s branch expansion.

Advertising expense increased by $100,000, or 120.5%, to $183,000 for the nine months ended September 30, 2022 from $83,000 for the nine months ended September 30, 2021 due mainly to the resumption of advertising and promotional products to promote the opening of our additional branch offices.

Income Taxes. We recorded income tax expense of $5.2 million and $2.4 million for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, we had approximately $553,000 in tax exempt income, compared to approximately $522,000 in tax exempt income for the nine months ended September 30, 2021. Our effective income tax rates were 23.9% and 23.6% for the nine months ended September 30, 2022 and 2021, respectively.

Average Balances and Yields

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 daily balances of assets or liabilities, respectively, for the periods presented. Loan fees, including prepayment fees, are included in interest income on loans and are not material. Non-accrual loans are included in the average balances only. In addition, yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.

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	Three Months Ended September 30,
	2022							2021
	Average			Interest and		Yield/		Average			Interest and		Yield/
	Balance			Dividends		Cost		Balance			Dividends		Cost

Loans receivable	$	1,067,835		$	18,771	7.03	%	$	862,796		$	11,935	5.53	%
Securities⁽¹⁾		47,157			199	1.69			27,208			104	1.53
Other interest-earning assets		73,524			414	2.25			134,680			53	0.16
Total interest-earning assets		1,188,516			19,384	6.52			1,024,684			12,092	4.72
Allowance for loan losses		(5,467)							(5,181)
Non-interest-earning assets		81,702							73,990
Total assets	$	1,264,751						$	1,093,493

Interest bearing demand	$	104,669		$	241	0.92	%	$	117,329		$	183	0.62	%
Savings and club accounts		233,447			660	1.13			97,556			48	0.20
Certificates of deposit		264,850			885	1.34			305,057			764	1.00
Interest-bearing deposits		602,966			1,786	1.18			519,942			995	0.77
Borrowed money	$	21,000			138	2.63			28,000			187	2.67
Interest-bearing liabilities		623,966			1,924	1.23			547,942			1,182	0.86
Non-interest-bearing demand		365,025							281,499
Other non-interest-bearing liabilities		15,557							41,992
Total liabilities		1,004,548							871,433
Equity		260,203							222,060
Total liabilities and equity	$	1,264,751						$	1,093,493
Net interest income/interest spread				$	17,460	5.29	%				$	10,910	3.86	%
Net interest margin						5.88	%						4.26	%
Net interest-earning assets	$	564,550						$	476,742
Average interest-earning assets to interest-bearing liabilities		190.48	%						187.01	%


	Nine Months Ended September 30,
	2022							2021
	Average			Interest and		Yield/		Average			Interest and		Yield/
	Balance			Dividends		Cost		Balance			Dividends		Cost

Loans receivable	$	1,018,802		$	46,244	6.05	%	$	843,850		$	35,237	5.57	%
Securities⁽¹⁾		43,400			534	1.64			22,636			277	1.63
Other interest-earning assets		117,983			718	0.81			84,465			74	0.12
Total interest-earning assets		1,180,185			47,496	5.37			950,951			35,588	4.99
Allowance for loan losses		(5,362)							(5,125)
Non-interest-earning assets		78,536							71,449
Total assets	$	1,253,359						$	1,017,275

Interest bearing demand	$	112,332		$	601	0.71	%	$	113,370		$	503	0.59	%
Savings and club accounts		217,291			1,340	0.82			100,431			174	0.23
Certificates of deposit		271,985			2,182	1.07			321,956			2,713	1.12
Interest-bearing deposits		601,608			4,123	0.91			535,757			3,390	0.84
Borrowed money		22,667			445	2.62			28,000			555	2.64
Interest-bearing liabilities		624,275			4,568	0.98			563,757			3,945	0.93
Non-interest-bearing demand		356,846							247,258
Other non-interest-bearing liabilities		15,422							26,762
Total liabilities		996,543							837,777
Equity		256,816							179,498
Total liabilities and equity	$	1,253,359						$	1,017,275

Net interest income/interest spread				$	42,928	4.39	%				$	31,643	4.06	%
Net interest margin						4.85	%						4.44	%
Net interest-earning assets	$	555,910						$	387,194
Average interest-earning assets to interest-bearing liabilities		189.05	%						168.68	%

(1)	Cash on deposit at Federal Home Loan Bank or Federal Reserve Board.

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Rate/Volume Analysis

The following tables set forth the effects of changing rates and volumes on our 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 total column represents the sum of the prior columns.


	Three Months Ended 9/30/2022
	Compared to
	Three Months Ended 9/30/2021
	Increase (Decrease)
	Due to
	Volume		Rate		Total

	(Dollars in thousands)
Interest income:
Loans receivable	$	3,195	$	3,641	$	6,836
Securities		83		12		95
Other interest-earning assets		(174)		535		361
Total	$	3,104	$	4,188	$	7,292
Interest expense:
Interest bearing demand deposit	$	(118)	$	176	$	58
Savings accounts		139		473		612
Certificates of deposits		(544)		665		121
Borrowed money		(46)		(3)		(49)
Total		(569)		1,311		742
Net change in net interest income	$	3,673	$	2,877	$	6,550


	Nine Months Ended 9/30/2022
	Compared to
	Nine Months Ended 9/30/2021
	Increase (Decrease)
	Due to
	Volume		Rate		Total

	(Dollars in thousands)
Interest income:
Loans receivable	$	7,753	$	3,254	$	11,007
Securities		255		2		257
Other interest-earning assets		40		604		644
Total	$	8,048	$	3,860	$	11,908
Interest expense:
Interest bearing demand deposit	$	(8)	$	106	$	98
Savings accounts		364		802		1,166
Certificates of deposits		(406)		(125)		(531)
Borrowed money		(105)		(5)		(110)
Total		(155)		778		623
Net change in net interest income	$	8,203	$	3,082	$	11,285

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Asset Quality

The following table sets forth information with respect to our non-performing assets at the dates indicated.


	September 30,			December 31,
	2022			2021

	(Dollars in thousands)
Total non-accrual loans	$	—		$	—
Total accruing loans past due 90 days or more		—			—
Total non-performing loans		—			—
Real estate owned		1,807			1,996
Total non-performing assets	$	1,807		$	1,996
Total non-performing loans to total loans		—	%		—	%
Total non-performing assets to total assets		0.14	%		0.16	%

Non-performing assets totaled $1.8 million at September 30, 2022 and $2.0 million at December 31, 2021, respectively. There were no nonaccrual loans at September 30, 2022 and December 31, 2021. During the nine months ended September 30, 2022, we collected interest income of $23,000 upon the satisfaction of two TDR loans that became non-accrual in June 2022 but were satisfied in July 2022. We did not recognize any interest income on non-accrual loans during the nine months ended September 30, 2021.

From time to time, as part of our loss mitigation strategy, we may renegotiate the loan terms based on the economic or legal reasons related to the borrower’s financial difficulties. There were no new TDRs during the nine months ended September 30, 2022 or September 30, 2021 or during the year ended December 31, 2021. TDRs may be considered to be non-performing and if so are placed on non-accrual, except for those that have established a sufficient performance history (generally a minimum of six consecutive months of performance) under the terms of the restructured loan.

The two TDR loans that were previously placed during the three months ended June 30, 2022 on nonaccrual status due to a maturity default paid-off during the three months ended September 30, 2022. None of the loans that were modified during the previous twelve months had defaulted during the three and nine months ended September 30, 2022 and September 30, 2021. At September 30, 2022, two loans with aggregate balances of $861,000 were considered TDRs but were performing in accordance with their restructured terms for the requisite period of time (generally at least six consecutive months) to be returned to accrual status. At December 31, 2021, four loans with aggregate balances of $1.6 million were considered TDRs but were performing.

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The following table sets forth an analysis of the activity in the allowance for loan losses for the periods indicated:


	September 30,			December 31,
	2022			2021

	(Dollars In Thousands)
Allowance at beginning of period	$	5,242		$	5,088
Provision for loan losses		—			3,610
Net Charge-offs:
Residential real estate loans:
One- to four-family		—			—
Multifamily		(146)			(150)
Mixed-use		(43)			—
Total residential real estate loans		(189)			(150)
Non-residential real estate loans		(53)			3,591
Construction loans		—			—
Commercial and industrial loans		—			—
Consumer loans		23			15
Total net charge-offs		(219)			3,456
Allowance at end of period	$	5,461		$	5,242
Total loans outstanding	$	1,117,417		$	972,851
Average loans outstanding		1,018,802			866,518
Ratio of allowance to non-performing loans		—	%		—	%
Ratio of allowance to total loans		0.49	%		0.54	%
Ratio of net charge-offs to average loans		(0.02)	%		0.40	%
Non-performing loans	$	—		$	—

The allowance for loan losses increased by $219,000 to $5.5 million at September 30, 2022 from $5.2 million at December 31, 2021. The increase in the allowances for loan losses was due primarily to recoveries totaling $242,000, partially offset by charge-offs totaling $23,000.

Liquidity and Capital Resources

We maintain liquid assets at levels we believe are adequate to meet our liquidity needs. We established a liquidity ratio policy that identify three liquidity ratios consisting of (1) Cash/Deposits & Short Term Borrowings (“Cash Liquidity”), (2) Cash & Investments/Deposits & Short Term Borrowings (“On Balance Sheet Liquidity”), and (3) Cash & Investments & Borrowing Capacity/Deposits & Short Term Borrowings (“On Balance Sheet Liquidity & Borrowing Capacity”) to assist in the management of our liquidity. We also establish targets of 2.0% for the Cash Liquidity ratio, 8.0% for the On Balance Sheet Liquidity ratio, and 20.0% for the On Balance Sheet Liquidity & Borrowing Capacity ratio.

Our Cash Liquidity ratio, On Balance Sheet Liquidity ratio, and On Balance Sheet Liquidity & Borrowing Capacity ratio averaged 12.5%, 16.9%, and 20.2%, respectively, for the nine months ended September 30, 2022 compared to 12.7%, 15.7%, and 21.7%, respectively, for the year ended December 31, 2021. We adjust our liquidity levels to fund deposit outflows, pay real estate taxes on real estate loans, repay our borrowings, and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.

Our liquidity ratios cannot be calculated using amounts disclosed in our consolidated financial statements, as many of the calculations involve monthly, quarterly or annual averages. To calculate our liquidity ratios, the average liquidity base from the prior month is used as the denominator to calculate a daily liquidity ratio. The liquidity base consists of savings account balances, certificates of deposit balances, checking and money market balances, deposit loans and borrowings. The daily balances of these components are averaged to arrive at the liquidity base for the month, and the daily cash balances in selected general ledger accounts are used to derive our liquidity position. A daily liquidity ratio is calculated using the liquidity for the day divided by the prior month’s average liquidity base. At the end of each month, a monthly liquidity position is calculated using the average liquidity position for the month divided by the prior month’s

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average liquidity base. To calculate quarterly and annual liquidity ratios, we take the average liquidity for the three- or twelve-month period, respectively, and average it.

Our primary sources of liquidity are deposits, prepayment of loans and mortgage-backed securities, maturities of investment securities, other short-term investments, earnings, and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included with our Consolidated Financial Statements.

Our primary investing activities are the origination of construction loans, commercial and industrial loans, multifamily loans, and to a lesser extent, mixed-use real estate loans and other loans. For the nine months ended September 30, 2022 and 2021, our loan originations totaled $499.2 million and $486.0 million, respectively. Cash received from the maturities and pay-downs on securities totaled $1.2 million and $4.3 million for the nine months ended September 30, 2022 and 2021, respectively. We purchased securities totaling $10.0 million and $15.3 million during the nine months ended September 30, 2022 and September 30, 2021, respectively.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of New York to provide advances. As a member of the Federal Home Loan Bank of New York, we are required to own capital stock in the Federal Home Loan Bank of New York and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to credit-worthiness have been met. We had an available borrowing limit of $18.1 million and $29.4 million from the Federal Home Loan Bank of New York as of September 30, 2022 and December 31, 2021, respectively. There were $21.0 million and $28.0 million in Federal Home Loan Bank advances at September 30, 2022 and December 31, 2021, respectively.

In addition, we are party to a loan agreement with ACBB under which we can borrow up to $8.0 million in short-term borrowings. There were no outstanding borrowings with ACBB at September 30, 2022 and December 31, 2021.

At September 30, 2022, we had unfunded commitments on construction loans of $554.4 million, outstanding commitments to originate loans of $391.7 million, unfunded commitments under lines of credit of $130.0 million, and unfunded standby letters of credit of $9.1 million. At September 30, 2022, certificates of deposit scheduled to mature in less than one year totaled $133.8 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as various types of sourced deposits, and/or Federal Home Loan Bank advances, in order to maintain our level of assets. Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents. In addition, the cost of such deposits may be significantly higher or lower depending on market interest rates at the time of renewal.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its stockholders and for the repurchase, if any, of its shares of common stock. At September 30, 2022, the Company had liquid assets of $35.9 million and $3.7 million in loan participations originated by the Bank which are held by the Company.

Off-Balance Sheet Arrangements

For the nine months ended September 30, 2022, we did not engage in any off-balance sheet transactions reasonably likely to have a material adverse effect on our financial condition, results of operations or cash-flows.

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Impact of Inflation and Changing Prices

The consolidated financial statements and related notes of NorthEast Community Bancorp have been prepared in accordance with GAAP, which generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk is defined as the exposure to current and future earnings and capital that arises from adverse movements in interest rates. Depending on a bank’s asset/liability structure, adverse movements in interest rates could be either rising or falling interest rates. For example, a bank with predominantly long-term fixed-rate assets and short-term liabilities could have an adverse earnings exposure to a rising rate environment. Conversely, a short-term or variable-rate asset base funded by longer-term liabilities could be negatively affected by falling rates. This is referred to as re-pricing or maturity mismatch risk.

Interest rate risk also arises from changes in the slope of the yield curve (yield curve risk), from imperfect correlations in the adjustment of rates earned and paid on different instruments with otherwise similar re-pricing characteristics (basis risk), and from interest rate related options embedded in our assets and liabilities (option risk).

Our objective is to manage our interest rate risk by determining whether a given movement in interest rates affects our net interest income and the market value of our portfolio equity in a positive or negative way and to execute strategies to maintain interest rate risk within established limits. The results at September 30, 2022 indicate the level of risk within the parameters of our model. Our management believes that the September 30, 2022 results indicate a profile that reflects interest rate risk exposures in both rising and declining rate environments for both net interest income and economic value.

Model Simulation Analysis. We view interest rate risk from two different perspectives. The traditional accounting perspective, which defines and measures interest rate risk as the change in net interest income and earnings caused by a change in interest rates, provides the best view of short-term interest rate risk exposure. We also view interest rate risk from an economic perspective, which defines and measures interest rate risk as the change in the market value of portfolio equity caused by changes in the values of assets and liabilities, which fluctuate due to changes in interest rates. The market value of portfolio equity, also referred to as the economic value of equity, is defined as the present value of future cash flows from existing assets, minus the present value of future cash flows from existing liabilities.

These two perspectives give rise to income simulation and economic value simulation, each of which presents a unique picture of our risk of any movement in interest rates. Income simulation identifies the timing and magnitude of changes in income resulting from changes in prevailing interest rates over a short-term time horizon (usually one or two years). Economic value simulation reflects the interest rate sensitivity of assets and liabilities in a more comprehensive fashion, reflecting all future time periods. It can identify the quantity of interest rate risk as a function of the changes in the economic values of assets and liabilities, and the corresponding change in the economic value of equity of NorthEast Community Bank. Both types of simulation assist in identifying, measuring, monitoring and controlling interest rate risk and are employed by management to ensure that variations in interest rate risk exposure will be maintained within policy guidelines.

We produce these simulation reports and discuss them at our Asset and Liability Committee meetings on at least a quarterly basis. The simulation reports compare baseline (no interest rate change) to the results of an interest rate shock, to illustrate the specific impact of the interest rate scenario tested on income and equity. The model, which incorporates asset and liability rate information, simulates the effect of various interest rate movements on income and equity value. The reports identify and measure our interest rate risk exposure present in our current asset/liability structure. Management considers both a static (current position) and dynamic (forecast changes in volume) analysis as well as non-parallel and gradual changes in interest rates and the yield curve in assessing interest rate exposures.

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If the results produce quantifiable interest rate risk exposure beyond our limits, then the testing will have served as a monitoring mechanism to allow us to initiate asset/liability strategies designed to reduce and therefore mitigate interest rate risk. The table below sets forth an approximation of our interest rate risk exposure. The simulation uses projected repricing of assets and liabilities at September 30, 2022. The income simulation analysis presented represents a one-year impact of the interest scenario assuming a static balance sheet. Various assumptions are made regarding the prepayment speed and optionality of loans, investment securities and deposits, which are based on analysis and market information. The assumptions regarding optionality, such as prepayments of loans and the effective lives and repricing of non-maturity deposit products, are documented periodically through evaluation of current market conditions and historical correlations to our specific asset and liability products under varying interest rate scenarios.

Because the prospective effects of hypothetical interest rate changes are based on a number of assumptions, these computations should not be relied upon as indicative of actual results. While we believe such assumptions to be reasonable, assumed prepayment rates may not approximate actual future prepayment activity on mortgage-backed securities or agency issued collateralized obligations (secured by one- to four-family loans and multifamily loans). Further, the computation does not reflect any actions that management may undertake in response to changes in interest rates and assumes a constant asset base. Management periodically reviews the rate assumptions based on existing and projected economic conditions and consults with industry experts to validate our model and simulation results.

The table below sets forth, as of September 30, 2022, NorthEast Community Bank’s net portfolio value, the estimated changes in our net portfolio value and net interest income that would result from the designated instantaneous parallel changes in market interest rates.


	Twelve Month
	Net Interest Income		Net Portfolio Value
	Percent				Percent
Change in Interest Rates (Basis Points)	of Change		Estimated NPV		of Change
+200	21.85	%	$	328,303	5.02	%
+100	10.94			321,967	2.99
0	—			312,624	—
-100	(11.80)	%		302,139	(3.35)	%

As of September 30, 2022, based on the scenarios above, net interest income would increase by approximately 10.94% to 21.85%, over a one-year time horizon in a rising interest rate environment. One-year net interest income would decrease by approximately 11.80% in a declining interest rate environment over the same period.

Economic value at risk would be positively impacted by a rise in interest rates and negatively impacted by a decline in interest rates. We have established an interest rate floor of zero percent for measuring interest rate risk. The difference between the two results reflects the relatively long terms of a portion of our assets which is captured by the economic value at risk but has less impact on the one year net interest income sensitivity.

Overall, our September 30, 2022 results indicate that we are adequately positioned with an acceptable net interest income and economic value at risk and that all interest rate risk results continue to be within our policy guidelines.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure (1) that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and (2) that they are alerted in a timely manner about material information relating to the Company required to be filed in its periodic Securities and Exchange Commission filings.

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During the quarter ended September 30, 2022, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in various legal actions and claims arising in the normal course of business. In the opinion of management, these legal actions and claims are not expected to have a material adverse impact on the Company’s financial condition.

Item 1A. Risk Factors

For information regarding the Company’s risk factors, refer to “Item 1A: Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 30, 2022 (the “Form 10-K”). As of September 30, 2022, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On July 27, 2022, the Company announced that its Board of Directors had authorized a stock repurchase program to acquire up to 1,637,794 shares, or 10%, of the Company's currently issued and outstanding common stock commencing on August 1, 2022. The stock repurchase program is the Company’s first repurchase program since completing its second-step conversion and related stock offering in July 2021.

The following table provides information on repurchases by the Company of its common stock under the Company’s stock repurchase program during the three months ended September 30, 2022:


				Total Number of Shares	Maximum Number of
				Purchased as Part of	Shares that May Yet Be
	Total Number of		Average Price Paid	Publicly Announced	Purchased Under the
Period	Shares Purchased		Per Share	Plans or Programs	Plans or Programs
July 1 - 31, 2022	-	$	-	-	1,637,794
August 1 - 31, 2022	146,677		12.80	146,677	1,491,117
September 1 - 30, 2022	103,611		12.64	103,611	1,387,506
Total	250,288			250,288

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

See Exhibit Index.

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EXHIBIT INDEX


Exhibit No.	Description

31.1†	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of NorthEast Community Bancorp, Inc.
31.2† 32.0†	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of NorthEast Community Bancorp, Inc. Certification of Chief Executive Officer and Chief Financial Officer of NorthEast Community Bancorp, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.0†	The following materials from the Company’s Quarterly Report to Stockholders on Form 10-Q for the quarter ended September 30, 2022, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.

101.INS†	XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH†	XBRL Taxonomy Extension Schema Document

101.CAL†	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF†	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB†	XBRL Taxonomy Extension Label Linkbase Document

101.PRE†	XBRL Taxonomy Extension Presentation Linkbase Document
104†	Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

† Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.

Date: November 10, 2022


	NORTHEAST COMMUNITY BANCORP, INC.

	By:	/s/ Kenneth A. Martinek
	Name:	Kenneth A. Martinek
	Title:	Chairman and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Donald S. Hom
	Name:	Donald S. Hom
	Title:	Executive Vice President and Chief Financial Officer
		(Principal Financial and Chief Accounting Officer)