Bogota Financial Corp.'s Q1 Profit Turnaround: Yield Expansion and Strategic Balance Sheet Shifts (NASDAQ:BSBK) - BSBK Stock Research Report

## Executive Summary / Key Takeaways * Bogota Financial Corp. (NASDAQ:BSBK) reported a significant turnaround in the first quarter of 2025, moving from a net loss in the prior year period to net income, driven primarily by expanded net interest income and a notable increase in non-interest income. * The improvement in net interest income was a direct result of higher yields on interest-earning assets, outpacing the increase in funding costs and leading to a wider net interest margin. * Balance sheet management played a key role, with excess cash used to reduce higher-cost borrowings, contributing to overall financial stability despite decreases in total assets, loans, and deposits. * Asset quality metrics showed slight improvement, with a decrease in delinquent loans, although a significant non-performing construction loan remains a focus for management and is undergoing foreclosure proceedings. * The Bank maintains a strong capital position, exceeding all regulatory requirements and classified as well-capitalized, providing a buffer against potential economic headwinds and supporting strategic flexibility. ## A Community Bank Adapting to Rate Realities Bogota Financial Corp., the holding company for Bogota Savings Bank, traces its roots back to 1893, establishing a long-standing presence as a community bank primarily serving customers in New Jersey. The Company transitioned to a publicly traded entity in January 2020 following a mutual holding company reorganization and stock offering. Operating as a single retail banking segment, BSBK focuses on traditional banking services: originating residential, commercial, and consumer loans and gathering deposits. This community-centric model forms the bedrock of its strategy, emphasizing local relationships and service. In the current economic climate, characterized by elevated interest rates and shifting market dynamics, BSBK's strategy centers on managing interest rate risk, optimizing its funding mix through core deposits, and maintaining a robust capital position. The Company actively monitors its balance sheet composition, including the duration of borrowings and the mix of its investment portfolio, to minimize the impact of rate fluctuations on earnings and capital. While technology is integral to modern banking operations, including data processing as noted in expenses, information available does not detail specific technological differentiators or significant R&D initiatives beyond standard operational needs, focusing the strategic narrative instead on traditional banking levers and risk management. The competitive landscape for BSBK in New Jersey is populated by a mix of larger regional banks and other community institutions. Larger players like Valley National Bancorp (TICKER:VLY), Provident Financial Services (TICKER:PFS), Lakeland Bancorp (TICKER:LBAI), and Citizens Financial Group (TICKER:CFG) offer broader product suites and benefit from greater scale and often more advanced digital capabilities. For instance, competitors like VLY and CFG demonstrate higher operational efficiency and faster digital processing times compared to BSBK's more traditional approach. BSBK's competitive advantages lie primarily in its deep-rooted community brand and the stable capital structure afforded by its mutual holding company form. These factors contribute to customer loyalty and capital efficiency, helping to offset disadvantages related to smaller scale, which can lead to higher operating costs and slower innovation compared to larger, more technologically advanced rivals. Indirect competition from online banks and fintech further pressures traditional models, potentially increasing BSBK's customer acquisition costs relative to digital-first competitors. ## Financial Performance: A Shift Towards Profitability The first quarter of 2025 marked a significant improvement in Bogota Financial Corp.'s financial results. The Company reported net income of \$731,000 for the three months ended March 31, 2025, a substantial turnaround from the net loss of \$441,000 reported in the comparable period of 2024. This positive swing was primarily driven by a notable increase in net interest income and a surge in non-interest income.

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Net interest income increased by \$942,000, or 35.5%, to \$3.60 million for the three months ended March 31, 2025, up from \$2.65 million in the prior year period. This expansion was largely attributable to higher yields earned on interest-earning assets. The average yield on interest-earning assets increased by 44 basis points to 4.99% in Q1 2025, while the average cost of interest-bearing liabilities increased by a smaller 6 basis points to 3.87%. This differential resulted in a significant improvement in the net interest rate spread, which widened to 1.12% from 0.68%, and an increase in the net interest margin to 1.66% from 1.18%. Interest income on loans rose by \$396,000, or 4.8%, despite a decrease in average loan balances, reflecting a 27 basis point increase in the average loan yield to 4.88%. Similarly, interest income on securities increased by \$304,000, or 19.9%, driven by a 138 basis point increase in the average yield to 5.05%, partially offset by lower average balances following a balance sheet rebalancing in late 2024.

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Non-interest income saw a dramatic increase of \$590,000, or 197.4%, reaching \$889,000 in Q1 2025 compared to \$299,000 in Q1 2024. This surge was significantly influenced by a one-time death benefit accrual of approximately \$543,000 from a bank-owned life insurance policy related to a former employee, alongside higher balances in 2025. Additionally, the Company recognized a \$29,000 gain on the sale of a loan, contributing to the increase. Total non-interest expense increased by \$217,000, or 5.9%, for the three months ended March 31, 2025. This was primarily due to a \$300,000 increase in occupancy and equipment expense, stemming from increased costs related to a sale-leaseback transaction completed in the fourth quarter of 2024. This increase was partially offset by a \$78,000 decrease in salaries and employee benefits costs, a result of reduced headcount. The income tax benefit decreased by \$259,000, reflecting the increase in taxable income compared to the prior year period. ## Balance Sheet Shifts and Asset Quality Focus As of March 31, 2025, total assets stood at \$930.19 million, a decrease of \$41.30 million, or 4.3%, from \$971.49 million at December 31, 2024. This reduction was primarily driven by a \$26.60 million decrease in cash and cash equivalents, as excess funds were strategically used to pay down borrowings. Securities available for sale also decreased by \$2.60 million, mainly due to maturities exceeding purchases. Net loans decreased by \$10.24 million, or 1.4%, to \$701.48 million. This decline was observed primarily in one-to-four-family residential real estate loans (- \$6.60 million), construction loans (- \$9.70 million), and commercial and industrial loans (- \$1.10 million). Management attributed these decreases to reduced demand influenced by the prevailing interest rate environment. Commercial real estate loans, however, saw an increase of \$7.80 million. Total liabilities decreased by \$42.30 million, or 5.1%, to \$791.94 million. This was largely due to a \$32.40 million decrease in Federal Home Loan Bank (FHLB) borrowings and a \$9.15 million decrease in total deposits. The reduction in FHLB borrowings included decreases in both short-term (- \$5.00 million) and long-term (- \$27.40 million) advances. The weighted average rate on borrowings increased slightly, reflecting the shorter maturities of new advances in the current rate environment. Deposits decreased primarily in certificates of deposit (- \$17.30 million) and money market accounts (- \$1.20 million), partially offset by increases in NOW accounts (+ \$6.60 million) and savings accounts (+ \$2.40 million). Management noted that these shifts in deposit mix reflected customer responses to the lower rate environment and market opportunities. As of March 31, 2025, uninsured deposits totaled \$49.8 million, representing 7.9% of total deposits. The Company maintains significant borrowing capacity at the FHLB (\$261.90 million total, \$139.80 million outstanding) and unsecured lines of credit (\$54.00 million), indicating ample liquidity resources.

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Asset quality metrics showed some stability and slight improvement. Delinquent loans decreased by \$842,000 to \$13.50 million, or 1.9% of total loans, at March 31, 2025, down from \$14.30 million, or 2.0%, at December 31, 2024. Non-performing assets also decreased slightly to \$13.90 million, representing 1.49% of total assets. The allowance for credit losses (ACL) decreased slightly to \$2.59 million from \$2.62 million, resulting in an ACL coverage ratio of 0.37% of total loans (stable) and 18.65% of non-performing loans (slightly down from 18.77%). The decrease in the ACL was linked to the decrease in loan balances and off-balance sheet commitments. Notably, the Bank reported no exposure to commercial real estate loans secured by office space. Non-performing loans included a significant \$10.90 million construction loan for a catering hall, which management considers well-secured with a 45% loan-to-value ratio, and for which legal foreclosure action is ongoing. No specific reserves were required for nonaccrual loans as they were deemed well-secured and in the process of collection. Stockholders equity increased by \$965,000 to \$138.30 million, primarily due to the net income for the quarter and a decrease in accumulated other comprehensive loss, partially offset by share repurchases totaling \$398,000 for 50,211 shares. The Bank remains well-capitalized, with a Community Bank Leverage Ratio of 15.00% at March 31, 2025, well above the regulatory minimum.

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## Managing Market Risk and Future Outlook Interest rate risk remains the most significant market risk for BSBK, given the longer maturities of its assets relative to its liabilities. The Company employs various strategies, including originating adjustable-rate loans, promoting core deposits, and utilizing interest rate swaps, to manage this exposure. Sensitivity analysis using NPV and Net Interest Income simulations indicates that the Company's exposure to immediate parallel shifts in the yield curve is within its policy limits. For example, a 100 basis point increase in rates is estimated to increase net portfolio value by 9.51%, while a 100 basis point decrease is estimated to decrease it by 9.31%. Over one year, a 100 basis point increase in rates is estimated to increase net interest income by 3.06%, while a 100 basis point decrease is estimated to decrease it by 1.00%. These models, however, rely on assumptions that may not perfectly reflect actual market behavior. While the materials do not include specific forward-looking guidance figures from management, the strategic focus outlined in the management discussion points towards continued efforts to optimize the balance sheet in response to the interest rate environment. The decrease in loan demand, particularly in residential and construction segments, suggests that loan growth may remain challenged in the near term if rates stay elevated. Management's focus on managing funding costs and increasing asset yields is likely to continue as key drivers of net interest income performance. The significant one-time gain in non-interest income in Q1 2025 highlights the potential for variability in this revenue stream in future periods. Key risks highlighted include general economic conditions, changes in loan delinquencies and credit losses, the ability to access cost-effective funding, fluctuations in real estate values, competition, changes in regulations, and cybersecurity threats. The ongoing legal action related to the large non-performing construction loan represents a specific credit risk to monitor. ## Conclusion Bogota Financial Corp.'s first quarter 2025 results demonstrate a positive shift towards profitability, largely driven by effective yield management on its asset portfolio and a temporary boost to non-interest income. The Company's strategic focus on managing interest rate risk and maintaining a strong capital position provides a stable foundation in a challenging economic environment. While loan growth faces headwinds from current interest rates and competition from larger, more technologically advanced institutions persists, BSBK's community banking model and balance sheet discipline are key factors supporting its performance. The ability to continue optimizing its funding structure and managing asset quality, particularly resolving the non-performing construction loan, will be critical factors influencing its trajectory in the coming quarters. The Q1 performance suggests the Company is making progress in adapting to the current rate cycle, positioning it for potential continued profitability if these trends persist.