Ponce Financial Group, Inc.: Form 10-Q for the period ended Sep 30, 2023

General

Management’s discussion and analysis of the financial condition at September 30, 2023 and December 31, 2022, and results of operations for the three and nine months ended September 30, 2023 and 2022, is intended to assist in understanding the financial condition and results of operations of Ponce Financial Group, Inc. (the “Company”). The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto appearing in Part I, Item 1, of this quarterly report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "intend," "anticipate," "assume," "plan," "seek," "expect," "will," "may," "should," "indicate," "would," "believe," "contemplate," "continue," "target" and words of similar meaning. These forward-looking statements include, but are not limited to:

• statements of the Company’s goals, intentions and expectations;
• statements regarding its business plans, prospects, growth and operating strategies;
• statements regarding the quality of its loan and investment portfolios; and
• estimates of the risks and future costs and benefits;

These forward-looking statements are based on current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

• the scope, duration and severity of rising interest rates, and its effects on our business and operations, our customers, including their ability to make timely payments on loans, our service providers, and on the economy and financial markets in general;
• changes in consumer spending, borrowing and savings habits;
• general economic conditions, either nationally or in the market areas, that are worse than expected;
• the Company’s ability to manage market risk, credit risk and operational risk in the current economic environment;
• changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
• the ability to access cost-effective funding;
• fluctuations in real estate values and real estate market conditions;
• demand for loans and deposits in the market area;
• the Company’s ability to implement and change its business strategies;
• competition among depository and other financial institutions;
• inflation and changes in the interest rate environment that reduce the Company’s margins and yields, its mortgage banking revenues, the fair value of financial instruments or the level of loan originations, or increase the level of defaults, losses and prepayments on loans the Company have made and make;
• adverse changes in the securities or secondary mortgage markets;
• changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
• adverse changes related to the businesses of our partners, including Grain Technology, Inc. (“Grain”) specifically (as defined herein);
• changes in the quality or composition of the Company’s loan or investment portfolios;
• technological changes that may be more difficult or expensive than expected;
• the inability of third party providers to perform as expected;
• the Company’s ability to enter new markets successfully and capitalize on growth opportunities;
• the Company’s ability to successfully integrate into its operations, any assets, liabilities, customers, systems and management personnel the Company may acquire and management’s ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
• the Company’s ability to retain key employees;
• the Company’s compensation expense associated with equity allocated or awarded to its employees; and
• changes in the financial condition, results of operations or future prospects of issuers of securities that the Company may own.

Additional factors that may affect the Company’s results are discussed in our Annual Report on Form 10-K for the year ended December 31, 2022 under the heading “Risk Factors” filed with the Securities and Exchange Commission (“SEC”) on March 21, 2023.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. The Company is under no duty to and does not assume any obligation to update any forward-looking statements after the date they were made, whether as a result of new information, future events or otherwise.

Non-GAAP Financial Measures

The following discussion contains certain non-GAAP financial measures in addition to results presented in accordance with GAAP. These non-GAAP measures are intended to provide the reader with additional supplemental perspective on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information. The Company’s non-GAAP measures may not be comparable to similar non-GAAP information which may be presented by other companies. In all cases, it should be understood that non-GAAP operating measures do not depict amounts that accrue directly to the benefit of shareholders. An item that management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company’s results and condition for any particular year. A reconciliation of non-GAAP financial measures to GAAP measures is provided below.

The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, the information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.

The table below includes references to the Company's net income (loss) and earnings (loss) per share for the nine months ended September 30, 2023 and 2022 before the Company’s contribution to the Ponce De Leon Foundation. In management's view, that information, which is considered non-GAAP information, may be useful to investors as it will improve an understanding of core operations for the current and future periods. The non-GAAP net income (loss) amount and earnings (loss) per share reflect adjustments related to the non-recurring gain on sale of real property and the Company’s contribution to the Ponce De Leon Foundation, net of tax effect. A reconciliation of the non-GAAP information to GAAP net income (loss) and earnings (loss) per share is provided below.

Non-GAAP Reconciliation – Net Income (Loss) before the Contribution to the Ponce De Leon Foundation (Unaudited)

(Dollars in thousands, except per share data)

(1) Earnings (loss) per share were computed (for the GAAP and non-GAAP basis) based on the weighted average number of basic shares outstanding for the nine months ended September 30, 2023 and 2022 (22,920,680 shares and 22,524,477 shares, respectively).

The CARES Act

On March 27, 2020, Congress passed, and the President signed, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to address the economic effects of the COVID-19 pandemic.

The CARES Act appropriated $349.0 billion for PPP loans and on April 24, 2020, the U.S. Small Business Administration (“SBA”) received another $310.0 billion in PPP funding. On December 27, 2020, the Economic Aid Act appropriated $284.0 billion for both first and second draw PPP loans, bringing the total appropriations for PPP loans to $943.0 billion. PPP ended on May 31, 2021. Loans under the PPP that meet SBA requirements may be forgiven in certain circumstances, and are 100% guaranteed by the SBA. The Company had received SBA approval and originated 5,340 PPP loans, of which 7 loans totaling $1.1 million were outstanding at September 30, 2023. PPP loans have a two-year or five-year term, provide for fees of up to 5% of the loan amount and earn interest at a rate of 1% per annum.

Federal Economic Relief Funds To Aid Lending

On June 7, 2022, Ponce Financial Group, Inc. (the “Company”), the holding company for Ponce Bank,‎ closed a private placement (the “Private Placement”) of 225,000 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series A‎, par value $0.01 (the “Preferred Stock”) for an aggregate purchase price equal to $225,000,000 in cash, to the United States Department of the Treasury (the “Treasury”) pursuant to the Emergency Capital Investment Program (“ECIP”).‎ The holders of the Preferred Stock will be entitled to a dividend payable in cash quarterly at an annual rate dependent on certain factors as reported by the Company to Treasury in a quarterly supplemental report. The initial dividend rate is zero percent for the first two years after issuance, and thereafter the floor dividend rate is 0.50% and the ceiling dividend rate is 2.00%. After 10 years of issuance, the perpetual dividend rate in effect, will be determined based on said floor and ceiling. The actual dividend rate that will be paid by the Company on the Preferred Stock cannot be determined at this time.

The ECIP investment by the Treasury is part of a program to invest over $8.7 billion into Community Development Financial Institution (“CDFI”) or ‎Minority Depository Institution (“MDI”), of which Ponce Bank is both. The ECIP is intended to incentivize CDFIs and MDIs to provide loans, grants, ‎and forbearance to small businesses, minority-owned businesses, and consumers in low-income and underserved communities that may have been ‎disproportionately impacted by the economic effects of the COVID-19 pandemic.

In the event of a liquidation, dissolution or winding up of the Company, the Preferred Stock will be entitled to a liquidation preference, subject to certain limitations, in the amount of the sum of $1,000 per share plus declared and unpaid dividends (without accumulation of undeclared dividends) on each share.

CDFI Equitable Recovery Program

On September 26, 2023, the Bank received a $3.7 million grant from the U.S. Treasury as part of the Community Development Financial Institutions ("CDFI") Equitable Recovery Program ("ERP") which aims to help CDFI's further their mission of helping low and low-to-moderate income communities recover from the impact of the COVID-19 pandemic.

Bank Enterprise Award Program

The Bank received approval for a grant in the amount of $0.5 million as part of the Bank Enterprise Award Program from the CDFI. Awards under the Bank Enterprise Award Program are subject to the program terms and must be used for qualified activities, which include providing loans, investments and financial services to residents and businesses in distressed communities.

Critical Accounting Policies

Accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management and that could have a material impact on the carrying value of certain assets, liabilities or on income under different assumptions or conditions. Management believes that the most critical accounting policy relates to the allowance for credit losses.

The allowance for credit losses is established as probable incurred losses are estimated to have occurred through a provision for credit losses charged to earnings. Credit losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The discussion and analysis of the financial condition and results of operations are based on the Company’s consolidated financial statements, which are prepared in conformity with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. The estimates and assumptions used are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

See Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to the accompanying Financial Statements for a discussion of significant accounting policies.

Factors Affecting the Comparability of Results

Ponce De Leon Foundation.

On January 27, 2022, the Company made a $5.0 million contribution to the Ponce De Leon Foundation as part of the conversion and reorganization, which is included in non-interest expense for the nine months ended September 30, 2022, in the accompanying Consolidated Statements of Operations.

Write-off and Write-Down.

In 2020, the Company entered into a business arrangement with the FinTech startup company Grain. Grain’s product is a mobile application geared to the underbanked, minorities and new generations entering the financial services market. In employing this mobile application, the Bank uses non-traditional underwriting methodologies to provide revolving credit to borrowers who otherwise may gravitate to using alternative non-bank lenders. Under the terms of its agreement with Grain, the Bank is the lender for Grain-originated microloans with credit lines currently up to $1,500 and, where applicable, the depository for related security deposits. Grain originates and services these microloans and is responsible for maintaining compliance with the Bank's origination and servicing standards, as well as applicable regulatory and legal requirements. If a microloan is found to be fraudulent, becomes 90 days delinquent upon 90 days of origination or defaults due to a failure of Grain to properly service the microloan, the Bank’s applicable standards for origination or servicing are deemed to have not been complied with and the microloan is put back to Grain, who then becomes responsible for the microloan and any related losses. The microloans put back to Grain are accounted for as an “other asset,” specifically referred to herein as the “Grain Receivable.” At December 31, 2022, the Bank had 27,886 Grain microloans outstanding, net of put backs, with an aggregate balance totaling $18.2 million and which were performing, in management's opinion, comparably to similar portfolios, offset by a $15.4 million allowance for loan losses, resulting in $2.8 million in Grain microloans, net of allowance for loan losses.

At September 30, 2023, the Bank had 16,687 Grain microloans outstanding, net of put backs, with an aggregate balance totaling $9.3 million and which were performing, in management’s opinion, comparably to similar portfolios, offset by an $8.1 million allowance for credit losses, resulting in $1.2 million in Grain microloans. Since the beginning of the Bank’s agreement with Grain and through

September 30, 2023, 45,322 microloans amounting to $24.3 million have been deemed to be fraudulent and put back to Grain. The Company has written-down a total of $15.6 million, net of recoveries, of the Grain Receivable and received $6.8 million in cash from Grain and through the application of security deposits connected to fraudulent loan accounts. The Bank also opted to use the $1.8 million grant it received from the U.S. Treasury Department’s Rapid Response ‎Program to defray the Grain Receivable. The application of those amounts resulted in no net receivable. Additionally, the Company wrote-off its equity investment in Grain of $1.0 million during the year ended December 31, 2022. As of September 30, 2023, the Company’s total exposure to Grain was $1.2 million of the remaining microloans, net of allowance for credit losses, excluding $2.4 million of unused commitments available to Grain borrowers and $1.6 million of security deposits by Grain borrowers. The $1.3 million of recoveries for the nine months ended September 30, 2023 and the $18.5 million write-off for the nine months ended September 30, 2022 related to Grain is included in non-interest expense in the accompanying Consolidated Statements of Operations. Of the $1.3 million of recoveries for the nine months ended September 30, 2023, $0.7 million were payments received from Grain on the Grain Receivable and the remainder were payments from Grain borrowers.

(in thousands)

(1) Includes $0.3 million for allowance for unused commitments on the $2.4 million of unused commitments available to Grain borrowers reported in other liabilities in the accompanying Consolidated Statements of Financial Conditions. Excludes $1.6 million of security deposits by Grain originated borrowers reported in deposits in the accompanying Consolidated Statements of Financial Conditions.

Grain has been victimized by cyber fraud using synthetic and other forms of fraudulent identifications, a phenomenon that has become prevalent with Fintechs. Grain remains a pre-profit startup highly dependent on earnings from its relationship with the Bank, a new relationship with another financial institution, and further capital raises which may not materialize.

The Company continues to closely monitor its portfolio of consumer loans originated by Grain as well as Grain’s refinement of solutions for detecting and preventing cyber fraud in the application for microloans. The Company has requested, and Grain has agreed, that no new microloans be originated until further notice and that further extensions of credit to an existing microloan borrower only be made upon confirmation that such borrower is not fraudulent. Further, like other start-up companies, there is a higher level of risk that Grain may not be able to execute its business plan and may fail. In the event Grain were to cease operations, and although it has considered contingency plans, the Bank may have greater difficulty in servicing and collecting the microloan portfolio. In such a case, the level the Bank has provided for in its allowance for credit losses for its microloan portfolio may be inadequate and it may need to increase its provision for credit losses, which could materially decrease the Company’s net income. As a consequence of such events, the Bank may determine it appropriate to terminate its relationship with Grain.

Vision 2025 Evolves

The Company has deployed a Fintech-based small business automated lending technology in partnership with LendingFront Technologies, Inc. The technology is a mobile application that digitizes the lending workflow from pre-approval to servicing and enables the Company to originate, close and fund small business loans within very short spans of time, without requiring a physical presence within banking offices and with automated underwriting using both traditional and non-traditional methods. The application has full loan origination and servicing capabilities and is integrated with Salesforce. All Commercial Relationship Officers and Business Development Managers will utilize these capabilities. The Company is seeking to establish loan origination partnerships with non-profit and community-based organizations to ensure penetration in underserved and underbanked markets.

The Company also established a relationship with SaveBetter, LLC, a fintech startup focusing on brokered deposits. As of September 30, 2023, the Company had $350.2 million in such deposits. The recent regulatory easing of brokered deposit rules may enable the Company to classify such deposits as core deposits.

On October 1, 2022, the Company entered into a Membership Interest Purchase Agreement with Bamboo Payment Holding LLC ("Bamboo"). Under the agreement, the Company purchased from Bamboo 180 Membership Interest Units representing an aggregate amount equal to up to 18% of total issued and outstanding Membership Interest in Bamboo for a purchase price of $2.5 million. During the first nine months of 2023, the Company made three additional contributions for a total of $1.0 million for a total investment in Bamboo of $3.5 million. With over a decade processing payments in Latin America, Bamboo has a diverse network connects Latin American local payment processing to global companies as well as domestic solutions to locally based organizations.

At December 31, 2018, the Company had approximately $1.06 billion in assets, $918.5 million in loans and $809.8 million in deposits. The Company has since grown to $2.62 billion in assets, $1.79 billion in loans receivables, net of allowance for credit losses of $27.4 million, and $1.40 billion in deposits at September 30, 2023, all while investing in infrastructure, implementing digital banking, acquiring Mortgage World, adopting GPS, diversifying its product offering and partnering with Fintech companies. The Company raised over $132.0 million in additional capital through our conversion and reorganization and realized approximately $20.0 million in net gain while freeing up approximately $40.0 million in investable funds through our sale-and-leaseback initiative. Now, the Company believes that it is poised to enhance its presence, locally and in similar communities outside New York, as a leading CDFI and MDI financial institution holding company.

On June 7, 2022, the Company issued 225,000 shares of the Company’s Preferred Stock‎, par value $0.01 for an aggregate purchase price equal to $225.0 million in cash to the Treasury, pursuant to the Treasury’s ECIP‎. Under the ECIP, Treasury provided investment capital directly to depository institutions that are CDFIs or MDIs or their holding companies, to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, in low-income and underserved communities. Treasury has indicated that the investment will qualify as Tier 1 capital. No dividends will accrue or be due for the first two years after issuance. For years three through ten, depending upon the level of qualified and/or deep impact lending made in targeted communities, as defined in the ECIP guidelines, dividends will be at an annual rate of either 2.0%, 1.25% or 0.5% and, thereafter, will be fixed at one of the foregoing rates. Holders of Preferred Stock generally do not have any voting rights, with the exception of voting rights on certain matters as outlined in the Certificate of Designations. The Company has the option to redeem the shares of Preferred Stock (i) in whole or in part on any dividend payment date on or after June 15, 2027, or (ii) in whole but not in part at any time within ninety days following a Regulatory Capital Treatment Event, as defined below, in each case at a cash redemption price equal to the liquidation amount, with an amount equal to any dividends that have been declared but not paid prior to the redemption date. The Company may not redeem shares of Preferred Stock without having received the prior approval of the appropriate Federal banking agency for the Company, as defined in Section 3(q) of the Federal Deposit Insurance Act, to the extent required under applicable capital rules. Such redemptions are subject to certain conditions and limitations. In the event of a liquidation, dissolution or winding up of the Company, the Preferred Stock will be entitled to a liquidation preference, subject to certain limitations, in the amount of the sum of $1,000 per share plus declared and unpaid dividends (without accumulation of undeclared dividends) on each share.

A “Regulatory Capital Treatment Event” means a good-faith determination that, as a result of (i) any amendment to, or change in, the laws, rules or regulations of the United States or any political subdivision of or in the United States (including, for the avoidance of doubt, any agency or instrumentality of the United States, including the Federal Reserve and other appropriate federal bank regulatory agencies) that is enacted or becomes effective after the initial issuance of any share of the Preferred Stock; (ii) any proposed change in those laws, rules or regulations that is announced after the initial issuance of any share of the Preferred Stock; or (iii) any official administrative or judicial decision or administrative action or other official pronouncement interpreting or applying those laws, rules or regulations or policies with respect thereto that is announced or becomes effective after the initial issuance of the Preferred Stock, there is more than an insubstantial risk that we will not be entitled to treat the full liquidation preferences of the shares of Preferred Stock then outstanding as “Additional Tier 1 Capital” (or its equivalent) for purposes of the capital adequacy standards of Federal Reserve Regulation Q, 12 C.F.R. Part 217 (or, as and if applicable, the successor capital adequacy guidelines, rules or regulations of the Federal Reserve or the capital adequacy guidelines, rules or regulations of any successor appropriate federal banking agency), as then in effect and applicable, for as long as any share of Preferred Stock is outstanding.

Comparison of Financial Condition at September 30, 2023 and December 31, 2022

Total Assets. Total consolidated assets increased $311.9 million, or 13.5%, to $2.62 billion at September 30, 2023 from $2.31 billion at December 31, 2022. The increase in total assets is largely attributable to increases of $294.5 million in net loans receivable, $62.7 million in cash and cash equivalents, $12.1 million in mortgage loans held for sale and $2.3 million in other assets, offset by decreases of $39.8 million in held-to-maturity securities, $12.8 million in available-for-sale securities and $5.8 million in Federal Home Loan Bank of New York stock.

Cash and Cash Equivalents. Cash and cash equivalents increased $62.7 million, or 115.3%, to $117.0 million at September 30, 2023, compared to $54.4 million at December 31, 2022. The increase in cash and cash equivalents was primarily the result of increases of $157.7 million in net borrowings and $148.7 million in net deposits, proceeds of $48.6 million from maturities/calls of securities and $32.8 million in proceeds from the sale of loans, offset by increases of $294.6 million in net loans and $42.8 million in loans held for sale and $11.0 million in share repurchases.

Securities. The composition of securities at September 30, 2023 and December 31, 2022 and the amounts maturing of each classification are summarized as follows:

(in thousands)

The Company securities portfolio decreased $39.8 million in held-to-maturity and $12.8 million in available-for-sale during the nine months ended September 30, 2023. The decrease was primarily due to a call on one of the securities in the amount of $10.0 million and changes in principal.

Gross Loans Receivable. The composition of gross loans receivable at September 30, 2023 and at December 31, 2022 and the percentage of each classification to total loans are summarized as follows:

(Dollars in thousands)

(1) As of September 30, 2023 and December 31, 2022, business loans include $1.1 million and $20.0 million, respectively, of PPP loans.

(2) As of September 30, 2023 and December 31, 2022, consumer loans include $9.3 million and $18.2 million of microloans originated by Grain pursuant to its arrangement with the Bank.

Based on current internal loan reviews, the Company believes that the quality of our underwriting, our weighted average loan-to-value ratio of 58.3% and our customer selection processes have served us well and provided us with a reliable base with which to maintain a well-protected loan portfolio.

Commercial real estate loans, as defined by applicable banking regulations, include multifamily residential, nonresidential properties, and construction and land mortgage loans. At September 30, 2023 and December 31, 2022, approximately 4.9% and 6.4%, respectively, of the outstanding principal balance of the Bank’s commercial real estate mortgage loans were secured by owner-occupied commercial real estate. Owner-occupied commercial real estate is similar in many ways to commercial and industrial lending in that these loans are generally made to businesses predominantly on the basis of the cash flows of the business rather than on valuation of the real estate.

Banking regulations have established guidelines relating to the amount of construction and land mortgage loans and investor- owned commercial real estate mortgage loans of 100% and 300% of total risk-based capital, respectively. Should a bank’s ratios be in excess of these guidelines, banking regulations generally require an increased level of monitoring in these lending areas by bank management. The Bank’s policy is to operate within the 100% guideline for construction and land mortgage loans and up to 400% for investor owned commercial real estate mortgage loans. Both ratios are calculated by dividing certain types of loan balances for each of the two categories by the Bank’s total risk-based capital. At September 30, 2023 and December 31, 2022, the Bank’s construction and land mortgage loans as a percentage of total risk-based capital was 85.1% and 38.5%, respectively. Investor owned commercial real estate mortgage loans as a percentage of total risk-based capital was 251.7% and 194.0% as of September 30, 2023 and December 31, 2022, respectively. At September 30, 2023, the Bank was within the 100% guideline for construction and land mortgage loans and the 300% guideline for investor owned commercial real estate mortgage loans established by banking regulators. Management believes that it has established the appropriate level of controls to monitor the Bank’s lending in these areas.

Loans Held For Sale. Loans held for sale, at fair value, at September 30, 2023 increased $12.1 million, or 612.6%, to $14.1 million from $2.0 million at December 31, 2022.

Deposits. The composition of deposits at September 30, 2023 and December 31, 2022 and changes in dollars and percentages are summarized as follows:

(Dollars in thousands)

(1) As of December 31, 2022, $81.7 million of SaveBetter deposits were reclassified from money market accounts to certificates of deposits. $36.2 million were reclassified to Certificates of deposits of $250K or more and $45.5 million were reclassified to certificates of deposit less than $250K.

(2) As of September 30, 2023 and December 31, 2022, there were $0.3 million and $13.6 million, respectively, in individual listing service deposits amounting to $250,000 or more. All brokered certificates of deposit individually amounted to less than $250,000.

When wholesale funding is necessary to complement the Company's core deposit base, management determines which source is best suited to address both liquidity risk and interest rate risk in line with management objectives. The Company’s Interest Rate Risk Policy imposes limitations on overall wholesale funding and noncore funding reliance. The overall reliance on wholesale funding and noncore funding were within those policy limitations as of September 30, 2023 and December 31, 2022. The Management Asset/Liability Committee generally meets on a bi-weekly basis to review funding needs, if any, and to ensure the Company operates within the approved limitations.

Borrowings. The Bank had outstanding borrowings at September 30, 2023 of $675.1 million in term advances from the FHLBNY and FRBNY and $511.4 million of outstanding term advances from the FHLBNY at December 31, 2022. The Bank also had $6.0 million of overnight line of credit advance from the FHLBNY at December 31, 2022. Additionally, the Bank had two unsecured lines of credit in the amount of $75.0 million and $90.0 million with two correspondent banks at September 30, 2023 and December 31, 2022, respectively, under which there was nothing outstanding at both September 30, 2023 and December 31, 2022. The Bank had no overnight line of credit advance at September 30, 2023.

Stockholders’ Equity. The Company’s consolidated stockholders’ equity decreased $7.6 million, or 1.55%, to $485.1 million at September 30, 2023 from $492.7 million at December 31, 2022. This decrease in stockholders’ equity was largely attributable to $11.0 million in share repurchases and an increase of $2.6 million in other comprehensive loss, partially offset by $2.8 million in net income, $1.2 million in share-based compensation, $1.1 million as a result of implementation of CECL and $0.8 million in ESOP.

Comparison of Results of Operations for the Three Months Ended September 30, 2023 and 2022

The discussion of the Company’s results of operations for the three months ended September 30, 2023 and 2022 are presented below. The results of operations for interim periods may not be indicative of future results.

Overview. Net income for the three months ended September 30, 2023 was $2.6 million compared to net loss of ($14.7) million for the three months ended September 30, 2022. Earnings per basic and diluted share was $0.12 for the three months ended September 30, 2023 compared to loss per basic and diluted share of $(0.64) for three months ended September 30, 2022. The $17.3 million increase of net income for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was due to decreases of $8.8 million in provision for credit losses and $8.1 million in non-interest expenses and an increase of $4.1 million of non-interest income, offset by an increase of $2.5 million in provision for income taxes and a decrease of $1.1 million in net interest income.

The following table presents the results of operations for the periods indicated:

(Dollars in thousands)

Interest and Dividend Income. Interest and dividend income increased $11.9 million, or 54.9%, to $33.5 million for the three months ended September 30, 2023 from $21.6 million for the three months ended September 30, 2022. Interest income on loans receivable, which is the Company’s primary source of income, increased $8.2 million, or 48.2%, to $25.3 million for the three months ended September 30, 2023 from $17.1 million for the three months ended September 30, 2022. Interest and dividend income on securities and FHLBNY stock and deposits due from banks increased $3.7 million, or 79.9%, to $8.2 million for the three months ended September 30, 2023 from $4.6 million for the three months ended September 30, 2022.

The following table presents interest income on loans receivable for the periods indicated:

(Dollars in thousands)

The following table presents interest and dividend income on securities and FHLBNY stock and deposits due from banks for the periods indicated:

(Dollars in thousands)

Interest Expense. Interest expense increased $12.9 million, or 321.7%, to $17.0 million for the three months ended September 30, 2023 from $4.0 million for the three months ended September 30, 2022, primarily due to an increase average cost of funds.

The following table presents interest expense for the periods indicated:

(Dollars in thousands)

Net Interest Income. Net interest income decreased $1.1 million, or 6.1%, to $16.5 million for the three months ended September 30, 2023 from $17.6 million for the three months ended September 30, 2022. The $1.1 million decrease in net interest income for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was attributable to an increase of $12.9 million in interest expense due primarily to a higher average cost of funds on interest bearing liabilities, offset by an increase of $11.9 million in interest and dividend income primarily due to increases in average loans receivable and interest and dividend on securities and FHLBNY stock and deposits due from banks.

Net interest rate spread decreased by 150 basis point to 1.58% for the three months ended September 30, 2023 from 3.08% for the three months ended September 30, 2022. The decrease in the net interest rate spread for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to an increase in the average rates paid on interest-bearing liabilities of 231 basis points to 3.64% for the three months ended September 30, 2023 from 1.33% for the three months ended September 30, 2022 and an increase in the average yields on interest-earning assets of 81 basis points to 5.22% for the three months ended September 30, 2023 from 4.41% for the three months ended September 30, 2022.

Net interest margin decreased 101 basis points for the three months ended September 30, 2023, to 2.58% from 3.59% for three months ended September 30, 2022, reflecting an increase in our securities portfolio and our organic loan growth.

The Federal Reserve raised the target range for the federal funds rate by 25 basis points to 5.25%-5.50% during its July 26, 2023 meeting, pushing borrowing costs to the highest level in 22 years. The Federal Reserve has signaled that there will likely be additional federal funds interest rate increases. The recent increase and the anticipated increases are in response to inflation rising at a rate not seen in over 40 years. Because of this rising rate environment, the speed with which it is anticipated to be implemented, the significant competitive pressures in our markets and the potential negative impact of these factors on our deposit and loan pricing, our net interest margin may be negatively impacted. Our net interest income may also be negatively impacted if the demand for loans decreases due to the rate increases, alone or in tandem with the concurrent inflationary pressures. We may be negatively impacted if we are unable to appropriately time adjustments to our funding costs and the rates we earn on our loans.

Non-Interest Income. Non-interest income increased $4.1 million, or 256.8%, to $5.6 million for the three months ended September 30, 2023 from $1.6 million for the three months ended September 30, 2022. The increase in non-interest income for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was attributable to a grant of $3.7 million received in the third quarter of 2023 from the Treasury as part of the CDFI Equitable Recovery Program and a $0.5 million in assignment fee that was recognized in the third quarter of 2023.

The following table presents non-interest income for the periods indicated:

(Dollars in thousands)

57

Non-Interest Expense. Non-interest expense decreased $8.1 million, or 31.9%, to $17.3 million for the three months ended September 30, 2023 from $25.4 million for the three months ended September 30, 2022. The $8.1 million decrease in non-interest expense for the three months ended September 30, 2023, compared to the three months ended September 30, 2022 was mainly attributable to $8.9 million of Grain consumer microloans write-offs during the third quarter of 2022 and a decrease of $0.3 million in direct loan expense, partially offset by increases of $0.6 million in data processing expenses and $0.4 million in professional fees.

The following table presents non-interest expense for the periods indicated:

(Dollars in thousands)

Income Tax (Benefit) Provision. The Company had a provision for income taxes of $1.7 million for the three months ended September 30, 2023 compared to a benefit for income taxes of $0.8 million for three months ended September 30, 2022.

Average Balance Sheets

The following table sets forth average outstanding balances, average yields and rates, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. Average balances are derived from average daily balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.

(Dollars in thousands)

(1) Annualized where appropriate.

(2) Loans include loans and mortgage loans held for sale, at fair value.

(3) Securities include available-for-sale securities and held-to-maturity securities.

(4) Includes FHLBNY demand account, FHLBNY stock dividends and FRBNY demand deposits.

(5) FRBNY demand deposits for prior period have been reclassified for consistency.

(6) Includes reclassification of $28.3 million average outstanding balances and $0.2 million of interest expenses from money market to certificates of deposit for the three months ended September 30, 2022.

(7) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(8) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(9) Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on the Company’s net interest income for the periods indicated. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.

(In thousands)

(1) Loans include loans and mortgage loans held for sale, at fair value.

(2) Securities include available-for-sale securities and held-to-maturity securities.

Comparison of Results of Operations for the Nine Months Ended September 30, 2023 and 2022

The discussion of the Company’s results of operations for the nine months ended September 30, 2023 and 2022 are presented below. The results of operations for interim periods may not be indicative of future results.

Overview. Net income for the nine months ended September 30, 2023 was $2.8 million compared to net loss of ($20.8) million for the nine months ended September 30, 2022. Earnings per basic and diluted share was $0.12 for the nine months ended September 30, 2023 compared to loss per basic and diluted share of ($0.92) for nine months ended September 30, 2022. The $23.6 million increase of net income for the nine months ended September 30, 2023 was due to decreases of $19.3 million in non-interest expenses and $10.1 million in provision for loan losses and an increase of $3.0 million in non-interest income, partially offset by an increase of a $6.3 million in provision for income taxes and a decrease of $2.4 million in net interest income.

The following table presents the results of operations for the periods indicated:

(Dollars in thousands)

60

Interest and Dividend Income. Interest and dividend income increased $33.1 million, or 57.2%, to $90.9 million for the nine months ended September 30, 2023 from $57.8 million for the nine months ended September 30, 2022. Interest income on loans receivable, which is the Company’s primary source of income, increased $16.7 million, or 32.5%, to $68.0 million for the nine months ended September 30, 2023 from $51.3 million for the nine months ended September 30, 2022. Interest and dividend income on securities and FHLBNY stock and deposits due from banks increased $16.4 million, or 252.5%, to $22.9 million for the nine months ended September 30, 2023 from $6.5 million for the nine months ended September 30, 2022.

The following table presents interest income on loans receivable for the periods indicated:

(Dollars in thousands)

The following table presents interest and dividend income on securities and FHLBNY stock and deposits due from banks for the periods indicated:

(Dollars in thousands)

Interest Expense. Interest expense increased $35.5 million, or 480.4%, to $42.8 million for the nine months ended September 30, 2023 from $7.4 million for the nine months ended September 30, 2022, primarily due to an increase in the average cost of funds.

(Dollars in thousands)

Net Interest Income. Net interest income decreased $2.4 million, or 4.7%, to $48.1 million for the nine months ended September 30, 2023 from $50.4 million for the nine months ended September 30, 2022. The $2.4 million decrease in net interest income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was attributable to an increase of $35.5 million in interest expense due primarily to a higher average cost of funds on interest bearing liabilities, offset by an increase of $33.1 million in interest and dividend income primarily due to increases in average loans receivable, interest and dividend income on securities and FHLBNY stock and deposits due from banks.

Net interest rate spread decreased by 196 basis point to 1.66% for the nine months ended September 30, 2023 from 3.62% for the nine months ended September 30, 2022. The decrease in the net interest rate spread for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to an increase in the average rates paid on interest-bearing liabilities of 244 basis points to 3.36% for the nine months ended September 30, 2023 from 0.92% for the nine months ended September 30, 2022 and an increase in the average yields on interest-earning assets of 48 basis points to 5.02% for the nine months ended September 30, 2023 from 4.54% for the nine months ended September 30, 2022.

Net interest margin decreased 131 basis points for the nine months ended September 30, 2023, to 2.65% from 3.96% for nine months ended September 30, 2022, reflecting an increase in cost of funds.

The Federal Reserve raised the target range for the federal funds rate by 25 basis points to 5.25%-5.50% during its July 26, 2023 meeting, pushing borrowing costs to the highest level in 22 years. The Federal Reserve has signaled that there will likely be additional federal funds interest rate increases. The recent increase and the anticipated increases are in response to inflation rising at a rate not seen in over 40 years. Because of this rising rate environment, the speed with which it is anticipated to be implemented, the significant competitive pressures in our markets and the potential negative impact of these factors on our deposit and loan pricing, our net interest margin may be negatively impacted. Our net interest income may also be negatively impacted if the demand for loans decreases due to the rate increases, alone or in tandem with the concurrent inflationary pressures. We may be negatively impacted if we are unable to appropriately time adjustments to our funding costs and the rates we earn on our loans.

Non-Interest Income. Non-interest income increased $3.0 million, or 49.4%, to $8.9 million for the nine months ended September 30, 2023 from $6.0 million for the nine months ended September 30, 2022. The increase in non-interest income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was attributable to a grant of $3.7 million received in the third quarter of 2023 from the Treasury and an increase of $1.6 million in late and prepayment charges, partially offset by a decrease of $1.8 million in loan origination.

The following table presents non-interest income for the periods indicated:

(Dollars in thousands)

Non-Interest Expense. Non-interest expense decreased $19.3 million, or 27.54%, to $50.8 million for the nine months ended September 30, 2023 from $70.1 million for the nine months ended September 30, 2022. The $19.3 million decrease in non-interest expense for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022 was attributable to $18.5 million of Grain consumer microloan write-offs during the corresponding period last year compared with $1.3 million of Grain consumer microloan recoveries recognized during the current period. The decrease in non-interest expense was also impacted by a $5.0 million contribution to the Ponce De Leon Foundation during the corresponding period last year, partially offset by increases of $1.3 million in provision for contingencies, $1.3 million in data processing expenses, $1.0 million in compensation and benefits and $0.7 million in professional fees.

The following table presents non-interest expense for the periods indicated:

(Dollars in thousands)

Income Tax (Benefit) Provision. The Company had a provision for income taxes of $2.1 million for the nine months ended September 30, 2023 compared to a benefit for income taxes of $4.3 million for nine months ended September 30, 2022.

Average Balance Sheets

The following table sets forth average outstanding balances, average yields and rates, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. Average balances are derived from average daily balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.

(Dollars in thousands)

(1) Annualized where appropriate.

(2) Loans include loans and mortgage loans held for sale, at fair value.

(3) Securities include available-for-sale securities and held-to-maturity securities.

(4) Includes FHLBNY demand account and FHLBNY stock dividends and FRBNY demand deposits.

(5) FRBNY demand deposits for prior period have been reclassified for consistency.

(6) Includes reclassification of $12.2 million average outstanding balances and $0.2 million of interest expenses from money market to certificates of deposit for the nine months ended September 30, 2022.

(7) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(8) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(9) Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on the Company’s net interest income for the periods indicated. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.

(In thousands)

(1) Loans include loans and mortgage loans held for sale, at fair value.

(2) Securities include available-for-sale securities and held-to-maturity securities.

Management of Market Risk

General. The most significant form of market risk is interest rate risk because, as a financial institution, the majority of the Bank’s assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of its financial condition and results of operations to changes in market interest rates. The Bank’s Asset/Liability Management Committee is responsible for evaluating the interest rate risk inherent in the Bank’s assets and liabilities, for determining the level of risk that is appropriate, given the business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with policies and guidelines approved by the Board of Directors. The Bank currently utilizes a third-party modeling solution that is prepared on a quarterly basis, to evaluate its sensitivity to changing interest rates, given the Bank’s business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.

In order to better manage its interest rate risk, on October 12, 2023 the Bank entered into two interest rate swap transactions with Goldman Sachs Bank USA. One interest rate swap is for a period of two years effective October 12, 2023 and terminates on November 1, 2025 with a notional amount of $150.0 million. The Bank will pay a fixed rate of interest of 4.885% and receive the SOFR rate. The other interest rate swap is for a period of three years effective October 12, 2023 and terminates on November 1, 2026 with a notional amount of $100.0 million. The Bank will pay a fixed rate of interest of 4.62% and receive the SOFR rate.

Net Interest Income Simulation Models. Management utilizes a respected, sophisticated third party designed asset liability modeling software that measures the Bank’s earnings through simulation modeling. Earning assets, interest-bearing liabilities and off-balance sheet financial instruments are combined with forecasts of interest rates for the next 12 months and are combined with other factors in order to produce various earnings simulations over that same 12-month period. To limit interest rate risk, the Bank has policy guidelines for earnings risk which seek to limit the variance of net interest income in both gradual and instantaneous changes to interest rates. As of September 30, 2023, in the event of an instantaneous upward and downward change in rates from management's interest rate forecast over the next twelve months, assuming a static balance sheet, the following estimated changes are calculated:

(Dollars in thousands)

(1) Assumes an instantaneous uniform change in interest rates at all maturities.

Although an instantaneous and severe shift in interest rates was used in this analysis to provide an estimate of exposure under these scenarios, management believes that a gradual shift in interest rates would have a more modest impact. Further, the earnings simulation model does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, and changing product spreads that could alter any potential adverse impact of changes in interest rates.

The behavior of the deposit portfolio in the baseline forecast and in alternate interest rate scenarios set out in the table above is a key assumption in the projected estimates of net interest income. The projected impact on net interest income in the table above assumes no change in deposit portfolio size or mix from the baseline forecast in alternative rate environments. In higher rate scenarios, any customer activity resulting in the replacement of low-cost or noninterest-bearing deposits with higher-yielding deposits or market-based funding would reduce the benefit in those scenarios.

At September 30, 2023, the earnings simulation model indicated that the Bank was in compliance with the Board of Directors approved Interest Rate Risk Policy.

Economic Value of Equity Model. While earnings simulation modeling attempts to determine the impact of a changing rate environment to net interest income, the Economic Value of Equity Model (“EVE”) measures estimated changes to the economic values of assets, liabilities and off-balance sheet items as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case EVE. Rates are then shocked as prescribed by the Interest Rate Risk Policy to measure the sensitivity in EVE values for each of those shocked rate scenarios versus the base case. The Interest Rate Risk Policy sets limits for those sensitivities. At September 30, 2023, the EVE modeling calculated the following estimated changes in EVE due to instantaneous upward and downward changes in rates:

(Dollars in thousands)

(1) Assumes an instantaneous uniform change in interest rates at all maturities.

(2) EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(4) EVE Ratio represents EVE divided by the present value of assets.

Although an instantaneous and severe shift in interest rates was used in this analysis to provide an estimate of exposure under these scenarios, management believes that a gradual shift in interest rates would have a more modest impact. Since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, and changing product spreads that could alter the adverse impact of changes in interest rates.

At September 30, 2023, the EVE model indicated that the Bank was in compliance with the Board of Directors’ approved Interest Rate Risk Policy.

Most Likely Earnings Simulation Models. Management also analyzes a most-likely earnings simulation scenario that projects the expected change in rates based on a forward yield curve adopted by management using expected balance sheet volumes forecasted by management. Separate growth assumptions are developed for loans, investments, deposits, etc. Other interest rate scenarios analyzed by management may include delayed rate shocks, yield curve steepening or flattening, or other variations in rate movements to further analyze or stress the balance sheet under various interest rate scenarios. Each scenario is evaluated by management and weighted to determine the most likely result. These processes assist management to better anticipate financial results and, as a result, management may determine the need to review other operating strategies and tactics which might enhance results or better position the balance sheet to reduce interest rate risk going forward.

Each of the above analyses may not, on its own, be an accurate indicator of how net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as interest rate caps and floors) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates. The Asset/Liability Committee reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as part of its responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing and capital policies.

Management's model governance, model implementation and model validation processes and controls are subject to review in the Bank’s regulatory examinations to ensure they are in compliance with the most recent regulatory guidelines and industry and regulatory practices. Management utilizes a respected, sophisticated third party designed asset liability modeling software to help ensure implementation of management's assumptions into the model are processed as intended in a robust manner. That said, there are numerous assumptions regarding financial instrument behaviors that are integrated into the model. The assumptions are formulated by combining observations gleaned from the Bank’s historical studies of financial instruments and the best estimations of how, if at all, these instruments may behave in the future given changes in economic conditions, technology, etc. These assumptions may prove to be inaccurate. Additionally, given the large number of assumptions built into Bank’s asset liability modeling software, it is difficult, at best, to compare its results to other banks.

The Asset/Liability Management Committee may determine that the Company should over time become more or less asset or liability sensitive depending on the underlying balance sheet circumstances and its conclusions regarding interest rate fluctuations in future periods. The historically low benchmark federal funds interest rate of the last several years implemented in response the turmoil resulting from COVID-19 pandemic has ended. The Federal Reserve Board increased the benchmark federal funds interest rate by 25 basis points to 5.25% - 5.50% at its July 26, 2023 meeting. The Federal Reserve Board has signaled that there will likely be additional federal funds interest rate increases. The recent increase and the anticipated increases are in response to inflation rising at a rate not seen in over 40 years. Because of this rising rate environment, the speed with which it is anticipated to be implemented, the significant competitive pressures in our markets and the potential negative impact of these factors on our deposit and loan pricing, our net interest margin may be negatively impacted. Our net interest income may also be negatively impacted if the demand for loans decreases due to the rate increases, alone or in tandem with the concurrent inflationary pressures. We may be negatively impacted if we are unable to appropriately time adjustments to our funding costs and the rates we earn on our loans.

GAP Analysis. In addition, management analyzes interest rate sensitivity by monitoring the Bank’s interest rate sensitivity "gap." The interest rate sensitivity gap is the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest bearing-liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets maturing or repricing during a period exceeds the amount of interest rate sensitive liabilities maturing or repricing during the same period, and a gap is considered negative when the amount of interest rate sensitive liabilities maturing or repricing during a period exceeds the amount of interest rate sensitive assets maturing or repricing during the same period.

The following table sets forth the Company’s interest-earning assets and its interest-bearing liabilities at September 30, 2023, which are anticipated to reprice or mature in each of the future time periods shown based upon certain assumptions. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at September 30, 2023, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and as a result of contractual rate adjustments on adjustable-rate loans.

(Dollars in thousands)

(1) Includes available-for-sale securities and held-to-maturity securities.

The following table sets forth the Company’s interest-earning assets and its interest-bearing liabilities at December 31, 2022, which are anticipated to reprice or mature in each of the future time periods shown based upon certain assumptions. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 2022, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and as a result of contractual rate adjustments on adjustable-rate loans.

(Dollars in thousands)

(1) Includes available-for-sale securities and held-to-maturity securities.

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income and EVE tables presented assume that the composition of the interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net interest income and EVE tables provide an indication of the interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and EVE and will differ from actual results. Furthermore, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset. In the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the gap table.

In the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the gap table.

Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of loans, deposits and borrowings.

Liquidity and Capital Resources

Liquidity describes the ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the Company’s customers and to fund current and future planned expenditures. The primary sources of funds are deposits, principal and interest payments on loans and available-for-sale securities and proceeds from the sale of loans. The Bank also has access to borrow from the FHLBNY and the FRBNY. At September 30, 2023 and December 31, 2022, the Bank had $675.1 million and $517.4 million, respectively, of term and overnight outstanding advances from the FHLBNY and the FRBNY, and also had a guarantee from the FHLBNY through letters of credit of up to $1.0 million as of September 30, 2023 and $21.5 million as of December 31, 2022. At September 30, 2023 and December 31, 2022, there was eligible collateral of approximately $853.6 million and $478.8 million, respectively, in mortgage loans available to secure advances from the FHLBNY. The Bank also has two unsecured lines of credit of $75.0 million and $90.0 million, respectively, with two correspondent banks, of which there was none outstanding at September 30, 2023 and December 31, 2022. The Bank did not have any outstanding securities sold under repurchase agreements with brokers as of September 30, 2023 and December 31, 2022.

Although maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and competition. The most liquid assets are cash and interest-bearing deposits in banks. The levels of these assets are dependent on operating, financing, lending, and investing activities during any given period.

Net cash (used in) provided by operating activities was ($25.4) million and $14.2 million for the nine months ended September 30, 2023 and 2022, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations, purchases of new securities, and purchase of equipment offset by principal collections on loans and proceeds from maturities, calls and principal repayments on securities was ($207.3) million and ($641.1) million for the nine months ended September 30, 2023 and 2022, respectively. Net cash provided by financing activities, consisting of activities in borrowing and deposit accounts, was $295.4 million and $535.5 million for the nine months ended September 30, 2023 and 2022, respectively.

The Bank’s management took steps to enhance the Company’s liquidity position by increasing its on balance sheet cash and cash equivalents position in order to meet unforeseen liquidity events and to fund upcoming funding needs.

At September 30, 2023 and December 31, 2022, all regulatory capital requirements were met, resulting in the Company and the Bank being categorized as well capitalized at September 30, 2023 and December 31, 2022. Management is not aware of any conditions or events that would change this categorization.

Material Cash Requirements

Commitments. As a financial services provider, the Company routinely is a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. Although these contractual obligations represent the Company’s future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans originated. At September 30, 2023 and December 31, 2022, the Company had outstanding commitments to originate loans and extend credit of $507.3 million and $281.3 million, respectively.

It is anticipated that the Company will have sufficient funds available to meet its current lending commitments. Certificates of deposit that are scheduled to mature in 2023 totaled $203.7 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits are not retained, the Company may utilize FHLBNY advances, unsecured credit lines with correspondent banks, or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

The Company adopted a share repurchase program effective May 16, 2023 which was completed in August 2023. Under the repurchase program, the Company was authorized to repurchase up to 1,235,000 shares of the Company's stock or approximately 5% of the Company's then current issued and outstanding shares. During the nine months ended September 30, 2023, the Company repurchased a total of 1,235,000 shares of the Company's common stock. As of September 30, 2023 and December 31, 2022, 1,233,111 shares and 1,976 shares, respectively, were held as treasury stock as a result of share buy-back and restricted stock units vested during 2023 and restricted stock units vested during 2022, respectively.

Contractual Obligations. In the ordinary course of its operations, the Company enters into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities. There have been no material changes in the Company’s material cash requirements under its contractual obligations as discussed in its most recent annual report on Form 10-K.

Other Material Cash Requirements. In addition to contractual obligations, the Company’s material cash requirements also includes compensation and benefits expenses for its employees, which were $22.4 million for the nine months ended September 30, 2023. The Company also has material cash requirements for occupancy and equipment expenses, excluding depreciation and amortization of $1.4 million, related to rental expenses, general maintenance and cleaning supplies, guard services, software licenses and other miscellaneous expenses, which were $9.5 million for the nine months ended September 30, 2023.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2023. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

During the nine months ended September 30, 2023, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in our 2022 Form 10-K and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our businesses, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no material changes in our Risk Factors from those disclosed in Item 1A of our 2022 Form 10-K or our other SEC filings.