Item 2. Management’s Discussion and Analysis
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, 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.
COVID-19 Pandemic:
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID- 19”) originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020 and based on the rapid increase in exposure globally, WHO classified COVID-19 as a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections.
The outbreak of COVID- 19 has adversely impacted a broad range of industries in which customers of the Company operate and impair their ability to fulfill their financial obligations to the Company. In addition, the spread of COVID- 19 has caused significant disruptions in the U.S. economy and in banking and other financial activities in the areas in which the Company operates. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions and the ability of borrowers to repay their obligations to us on a timely basis or if at all. If the global response to contain COVID-19 is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations, and cash flows.
Although the full magnitude of the pandemic is uncertain, management is actively monitoring the impact of the global situation on the banking industry and the Company’s financial condition, liquidity, future results of operations, and workforce. Given the daily evolution of COVID-19 and the global responses to curb the spread of COVID-19, the
35
Table of Contents
Company is currently unable to estimate and quantify the effects of this crisis on the Company’s results of operations, financial condition, or liquidity for 2021.
Nevertheless, the adverse economic effects of COVID- 19 might lead to an increase in credit risk on the Company’s construction loan, commercial and industrial loan, and multi-family, mixed-use, and non-residential real estate loan portfolios. Likewise, the Company is also monitoring the fluctuations in the markets as it pertains to interest rates and the impact on deposits and fair value of our securities portfolio for other than temporary impairment.
To curtail the spread of COVID- 19, the Company temporarily closed one branch due to its location in an enclosed shopping mall and the lobby, except by appointment only, of the other eight branches. Currently, all our nine branches have resumed normal operations in servicing our customers.
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act in response to the COVID- 19 pandemic. This legislation aims at providing relief for individuals and businesses that have been negatively impacted by the COVID-19 pandemic.
The CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” (“TDR”) accounting guidance in ASC 310- 40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of (1) December 30, 2020 or (2) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2020.
On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 was signed into law, which also contains provisions that could directly impact financial institutions, including extending the time that insured depository institutions and depository institution holding companies have to comply with the current expected credit losses (“CECL”) accounting standard and extending the authority granted to banks under the CARES Act to elect to temporarily suspend the requirements under U.S. GAAP applicable to troubled debt restructurings for loan modifications related to the COVID-19 pandemic for any loan that was not more than 30 days past due as of December 31, 2020. The act directs financial regulators to support community development financial institutions and minority depository institutions and directs Congress to re-appropriate $429 billion in unobligated CARES Act funds. The Payroll Protection Program (PPP), which was originally established under the CARES Act, was also extended under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.
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, 2021, we had two loans totaling $8.9 million still in deferral status.
The first loan, with a balance of $8.8 million as of September 30, 2021, is secured by a 218 unit apartment complex located in Philadelphia, Pennsylvania. We granted deferment to this loan effective May 1, 2021 until November 1, 2021 based on a review of a current rent roll whereby we determined the borrower has been negatively affected by the COVID-19 pandemic, with a higher than normal level of delinquent rent payments and non-paying tenants and limited recourse under a continued eviction moratorium in Pennsylvania, and based on our good relationship with the borrower. The borrower’s real estate taxes are paid through March 31, 2022. We will continue to monitor the rent collection activity throughout the deferral period.
The second loan, with a balance of $75,000 as of September 30, 2021, is secured by a mixed-use building located in Brooklyn, New York. We granted deferment of principal and interest payments to this loan effective August 1, 2021 until February 1, 2022 with the borrower making monthly tax escrow payments.
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.
While the Company 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 2021. Further, a decrease in the results of future operations might place a strain on the Company’s regulatory capital ratios.
36
Table of Contents
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 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
37
Table of Contents
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, 2020. 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, 2021.
Balance Sheet Analysis
General
Total assets increased by $139.9 million, or 14.4%, to $1.1 billion at September 30, 2021, from $968.2 million at December 31, 2020. The increase in assets was primarily due to increases in net loans of $84.8 million, cash and cash equivalents of $38.8 million, investment securities held-to-maturity of $6.0 million, equity securities of $4.8 million, and premises and equipment of $4.9 million.
Cash and cash equivalents increased by $38.8 million, or 56.1%, to $108.0 million at September 30, 2021 from $69.2 million at December 31, 2020. The increase in cash can primarily be attributed to an increase in deposits of $45.1 million and an increase in stockholders’ equity primarily due to the completion of the second-step conversion offering that increased stockholders’ equity by $88.4 million, net of conversion costs, partially offset by an increase in loans of $84.8 million, an increase in investment securities held-to-maturity of $6.0 million, an increase in equity securities of $4.8 million, an increase in property and equipment of $4.9 million due primarily to the purchase of property for a new branch office, and cash dividends of $1.3 million.
Equity securities increased by $4.8 million, or 46.3%, to $15.1 million at September 30, 2021 from $10.3 million at December 31, 2020. The increase in equity securities was primarily attributed to the purchase of equity securities totaling $5.0 million, partially offset by market depreciation of $215,000.
Securities held-to-maturity increased by $6.0 million, or 81.8%, to $13.4 million at September 30, 2021 from $7.4 million at December 31, 2020. The increase was primarily due to the purchase of investment securities totaling $10.3 million, partially offset by maturities and pay-downs of $4.3 million.
Loans, net of the allowance for loan losses, increased by $84.8 million, or 10.3%, to $904.6 million at September 30, 2021 from $819.7 million at December 31, 2020. The increase in loans, net of the allowance for loan losses, was primarily due to net increases in construction loans of $87.5 million, commercial and industrial loans of $13.2 million and multi-family loans of $612,000. The increases were partially offset by decreases in non-residential loans of $8.6 million, mixed-use loans of $6.1 million, and one- to four-family loans of $1.4 million, coupled with normal pay-downs and principal reductions.
Premises and equipment increased by $4.9 million, or 26.1%, to $23.5 million at September 30, 2021 from $18.7 million at December 31, 2020 due to the acquisition of property for a new branch site located in Monsey, New York.
Foreclosed real estate was $2.0 million at both September 30, 2021 and December 31, 2020.
Right of use assets — operating, recognized in accordance with Accounting Standards Codification 842 “Leases”, decreased by $397,000, or 12.8%, to $2.7 million at September 30, 2021 from $3.1 million at December 31, 2020, primarily due to amortization.
38
Table of Contents
Other assets increased by $286,000, or 5.7%, to $5.3 million at September 30, 2021 from $5.1 million at December 31, 2020 due to an increase in tax assets of $347,000 and an increase in prepaid expense of $233,000, partially offset by a decrease in suspense accounts of $351,000.
Total deposits increased by $45.1 million, or 5.8%, to $816.8 million at September 30, 2021, from $771.7 million at December 31, 2020. The increase was primarily due to an increase in non-interest bearing demand deposits of $85.3 million, or 38.5%, and an increase in NOW/money market accounts of $17.1 million, or 17.0%, from December 31, 2020 to September 30, 2021. These increases were partially offset by a decrease in certificates of deposit of $53.2 million, or 15.3%, and a decrease in savings account balances of $4.1 million, or 4.0%, from December 31, 2020 to September 30, 2021.
Federal Home Loan Bank advances were $28.0 million at both September 30, 2021 and December 31, 2020.
Accounts payable and accrued expense increased by $232,000, or 2.6%, to $9.1 million at September 30, 2021 from $8.9 million at December 31, 2020 due primarily to increases of $439,000 in deferred compensation, partially offset by a decrease of $177,000 in accrued expenses.
Stockholders’ equity increased by $94.9 million, or 61.7% to $248.7 million at September 30, 2021, from $153.8 million at December 31, 2020. The increase in stockholders’ equity was primarily a result of the completion of the second-step conversion offering that increased stockholders’ equity by $88.4 million, net of conversion costs. The second-step conversion also reduced stockholders’ equity by the addition of new unearned employee stock ownership plan shares totaling $7.8 million and increased stockholders’ equity by the retirement of treasury shares totaling $7.0 million.
The increase in stockholders’ equity was also due to net income of $7.7 million for the nine months ended September 30, 2021 and a reduction of $693,000 in unearned employee stock ownership plan shares, partially offset by dividends paid of $1.1 million and $9,000 in other comprehensive loss.
Results of Operations for the Three Months Ended September 30, 2021 and 2020
Financial Highlights
Net income for the three months ended September 30, 2021 was $730,000 compared to net income of $3.1 million for the three months ended September 30, 2020. Net income for the three months ended September 30, 2021 was lower than net income for the three months ended September 30, 2020 primarily due to an increase in the provision for loan losses expense and an increase in non-interest expense. These were partially offset by an increase in the net interest income, an increase in non-interest income, and a decrease in income tax expense.
Net Interest Income
Net interest income totaled $10.9 million for the three months ended September 30, 2021, as compared to $9.8 million for the three months ended September 30, 2020. The increase in net interest income of $1.1 million, or 11.3%, was primarily due to an increase in interest income combined with a decrease in interest expense.
The increase in interest income is attributed to increases in loans, investment securities, equity securities, and interest-bearing deposits as we continued to deploy the proceeds raised in the second-step conversion. The decrease in interest expense is consistent with the decrease in interest rates in response to the COVID-19 pandemic and its impact on the economy and interest rate environment.
Interest and dividend income increased by $93,000, or 0.8%, to $12.1 million for the three months ended September 30, 2021 from $12.0 million for the three months ended September 30, 2020 due to an increase in the average balance of interest earning assets of $136.1 million, or 15.3%, to $1.0 billion for the three months ended September 30, 2021 from $888.6 million for the three months ended September 30, 2020, partially offset by a decrease in the yield on interest earning assets by 68 basis points from 5.40% for the three months ended September 30, 2020 to 4.72% for the three months ended September 30, 2021. In addition to the decrease in interest rates in response to the COVID-19 pandemic and its impact on the economy and interest rate environment that decreased the yield on interest earning assets, the
39
Table of Contents
decrease in the yield on interest earning assets is also attributed to the over-weighting of the amount of low yielding other interest-earning assets relative to total interest-earning assets due to the yet to be deployed funds raised in the second-step conversion.
Interest expense decreased by $1.0 million, or 46.1%, to $1.2 million for the three months ended September 30, 2021 from $2.2 million for the three months ended September 30, 2020 due to a decrease in average interest bearing liabilities of $50.6 million, or 8.5%, to $547.9 million for the three months ended September 30, 2021 from $598.6 million for the three months ended September 30, 2020 and a decrease in the cost of interest bearing liabilities by 61 basis points from 1.47% for the three months ended September 30, 2020 to 0.86% for the three months ended September 30, 2021.
The decrease in the cost of interest bearing liabilities was also partially due to a shift to non-interest bearing demand deposits and interest bearing demand deposits from interest bearing certificates of deposits and savings and club accounts. In this regard, the average balances of non-interest bearing demand deposits increased by $92.9 million, or 49.2%, to $281.5 million for the three months ended September 30, 2021 from $188.6 million for the three months ended September 30, 2020 and the average balances of interest bearing demand deposits increased by $17.0 million, or 17.0%, to $117.3 million for the three months ended September 30, 2021 from $100.3 million for the three months ended September 30, 2020.
During this same time period, the average balances of certificates of deposits decreased by $63.2 million, or 17.2%, to $305.1 million for the three months ended September 30, 2021 from $368.2 million for the three months ended September 30, 2020 and the average balances of savings and club accounts decreased by $4.5 million, or 4.4%, to $97.6 million for the three months ended September 30, 2021 from $102.1 million for the three months ended September 30, 2020. Net interest margin decreased by 15 basis points, or 3.4%, during the three months ended September 30, 2021 to 4.26% compared to 4.41% during the three months ended September 30, 2020.
Provision for Loan Losses. Management recorded a loan loss provision of $3.6 million for the three months ended September 30, 2021 compared to a loan loss provision of $229,000 for the three months ended September 30, 2020. We charged-off a total of $3.6 million and $7,000 during the three months ended September 30, 2021 and September 30, 2020, respectively.
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 regarding 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 in Greenwich, Connecticut and guaranteed by the two borrowers. The loan was 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. The loan remains in foreclosure but is subject to Connecticut’s continuing foreclosure backlog. The property securing the loan is subject to a parking easement and based on a recently updated appraisal showing the property’s value with the parking easement to be zero, the Company has determined to write off the $3.6 million loan as a non-cash charge against the allowance for loan losses.
The Company intends to aggressively seek recovery of all amounts due from the personal guarantors of the loan. However, the recovery process is uncertain and might take an extended period of time to resolve this matter. In the event the Company is 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 recognizing the recovery into income.
The provision recorded for the three months ended September 30, 2020 was primarily attributed to the perceived potential credit risk associated with the COVID-19 pandemic, although no specific or probable losses were identified at that time. Although the COVID- 19 pandemic and the resulting recession has impacted the local economy, we have not experienced any significant deterioration of our borrowers’ ability to keep current in accordance with the terms of their obligations.
40
Table of Contents
We also charged-off $3,000 and $7,000 during the three months ended September 30, 2021 and September 30, 2020, respectively, against various unpaid overdrafts in our demand deposit accounts. We recorded recoveries of $151,000 and $1,000 during the three months ended September 30, 2021 and September 30, 2020, respectively.
Based on a review of the loans that were in the loan portfolio at September 30, 2021, 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, 2021 was $532,000 compared to non-interest income of $527,000 for the three months ended September 30, 2020. The increase in total non-interest income was primarily due to an increase of $130,000 in other loan fees and service charges, an increase of $27,000 in investment advisory fees, and a net loss of $2,000 on the sale of fixed assets that occurred during the three months ended September 30, 2020 compared to none during the three months ended September 30, 2021. These increases were partially offset by unrealized loss on equity securities of $154,000 during the three months ended September 30, 2021 compared to none during the three months ended September 30, 2020.
The increase in other loan fees and service charges was due to an increase of $81,000 in other loan fees and loan servicing fees and an increase of $49,000 in ATM and debit card usage fees. The increase in investment advisory fees was due to an increase in commission income from Harbor West Wealth Management Group.
The unrealized loss on equity securities was primarily due to an increase in market interest rates that impacted the value of the equity securities.
Non-Interest Expense
Non-interest expense increased by $839,000, or 13.9%, to $6.9 million for the three months ended September 30, 2021 from $6.0 million for the three months ended September 30, 2020. The increase resulted primarily from increases of $889,000 in salaries and employee benefits, $37,000 in equipment expense, $15,000 in other operating expense, $9,000 in advertising expense, and $9,000 in occupancy expense, partially offset by decreases of $54,000 in outside data processing expense, $50,000 in impairment loss on goodwill, and $16,000 in real estate owned expense.
Salaries and employee benefits increased by $889,000, or 28.1%, to $4.1 million for the three months ended September 30, 2021 from $3.2 million for the three months ended September 30, 2020 primarily due to an increase in number of full time equivalent personnel, an increase in bonuses paid to loan production personnel as loan originations increased, and an increase in employee stock ownership plan (“ESOP”) compensation cost as the ESOP purchased additional shares of Company common stock using funds loaned from the Company as part of the second-step conversion offering. These increases were partially offset by an increase in loan origination expenses related to loan origination fees due to an increase in loan originations.
Equipment expense increased by $37,000, or 19.3%, to $229,000 for the three months ended September 30, 2021 from $192,000 for the three months ended September 30, 2020 due to the purchases of additional equipment to support the Company’s operations.
Other non-interest expense increased by $15,000, or 0.9%, to $1.6 million for the three months ended September 30, 2021 from $1.6 million for the three months ended September 30, 2020 due mainly to increases of $84,000 in consulting services, $27,000 in audit and accounting fees, $18,000 in service contracts expense, $11,000 in directors
41
Table of Contents
compensation, and $9,000 in telephone expense, partially offset by decreases of $55,000 in legal fees, $51,000 in miscellaneous other non-interest expense, $13,000 in insurance expense, $8,000 in directors, officers and employee expense, $5,000 in office supplies, and $1,000 in recruitment expenses related to the hiring of personnel.
Advertising expense increased by $9,000, or 33.3%, to $36,000 for the three months ended September 30, 2021 from $27,000 for the three months ended September 30, 2020 due mainly to the resumption of advertising and promotional products.
Occupancy expense increased by $9,000, or 1.9%, to $489,000 for the three months ended September 30, 2021 from $480,000 for the three months ended September 30, 2020 primarily as a result of the cost of operating additional office space.
Outside data processing expense decreased by $54,000, or 12.0%, to $395,000 for the three months ended September 30, 2021 from $449,000 for the three months ended September 30, 2020 due to additional services required in 2020.
There was no goodwill impairment expense for the three months ended September 30, 2021 compared to goodwill impairment expense of $50,000 for the three months ended September 30, 2020. The goodwill was recorded in connection with the acquisition of Harbor West Financial Planning Wealth Management Group in 2007, which is operated as a division of Northeast Community Bank. The goodwill impairment was caused primarily by the expected decrease in revenue from this division due to a decrease in clients and the resulting decrease in assets under management.
Real estate owned expense decreased by $16,000, or 47.1%, to $18,000 for the three months ended September 30, 2021 from $34,000 for the three months ended September 30, 2020 due to a reduction in operating expenses to maintain the one real estate owned property.
Income Taxes. We recorded income tax expense of $265,000 and $956,000 for the three months ended September 30, 2021 and 2020, respectively. For the three months ended September 30, 2021, we had approximately $185,000 in tax exempt income, compared to approximately $166,000 in tax exempt income for the three months ended September 30, 2020. Our effective income tax rates were 26.6% and 23.4% for the three months ended September 30, 2021 and 2020, respectively.
Results of Operations for the Nine Months Ended September 30, 2021 and 2020
Financial Highlights
Net income for the nine months ended September 30, 2021 was $7.7 million compared to net income of $8.9 million for the nine months ended September 30, 2020. Net income for the nine months ended September 30, 2021 was lower than net income for the nine months ended September 30, 2020 primarily due to an increase in the provision for loan losses expense, an increase in non-interest expense, and a decrease in non-interest income. These were partially offset by an increase in the net interest income and a decrease in income tax expense.
Net Interest Income
Net interest income totaled $31.6 million for the nine months ended September 30, 2021, as compared to $28.8 million for the nine months ended September 30, 2020. The increase in net interest income of $2.9 million, or 10.0%, was primarily due to the decrease in interest expense that exceeded a decrease in interest income. In a manner consistent with the decrease in interest rates in response to the COVID-19 pandemic, our cost of interest bearing liabilities decreased much greater than our yield on interest earning assets as our interest bearing liabilities repriced much faster to lower interest rates than our yield on interest earning assets.
Interest and dividend income decreased by $1.4 million, or 3.8%, to $35.6 million for the nine months ended September 30, 2021 from $37.0 million for the nine months ended September 30, 2020 due to a decrease in the yield on interest earning assets by 65 basis points from 5.64% for the nine months ended September 30, 2020 to 4.99% for the nine months ended September 30, 2021, partially offset by an increase in the average balance of interest earning assets of
42
Table of Contents
$76.4 million, or 8.7%, to $951.0 million for the nine months ended September 30, 2021 from $874.6 million for the nine months ended September 30, 2020.
Interest expense decreased by $4.3 million, or 52.1%, to $3.9 million for the nine months ended September 30, 2021 from $8.2 million for the nine months ended September 30, 2020 due to a decrease in average interest bearing liabilities of $52.3 million, or 8.5%, to $563.8 million for the nine months ended September 30, 2021 from $616.0 million for the nine months ended September 30, 2020 and a decrease in the cost of interest bearing liabilities by 85 basis points from 1.78% for the nine months ended September 30, 2020 to 0.93% for the nine months ended September 30, 2021.
The decrease in the cost of interest bearing liabilities was also partially due to a shift to non-interest bearing demand deposits and interest bearing demand deposits from interest bearing certificates of deposits and savings and club accounts. In this regard, the average balances of non-interest bearing demand deposits increased by $85.0 million, or 52.4%, to $247.3 million for the nine months ended September 30, 2021 from $162.3 million for the nine months ended September 30, 2020 and the average balances of interest bearing demand deposits increased by $6.6 million, or 6.2%, to $113.4 million for the nine months ended September 30, 2021 from $106.7 million for the nine months ended September 30, 2020.
During this same time period, the average balances of certificates of deposits decreased by $58.8 million, or 15.4%, to $322.0 million for the nine months ended September 30, 2021 from $380.8 million for the nine months ended September 30, 2020 and the average balances of savings and club accounts decreased by $1.7 million, or 1.7%, to $100.4 million for the nine months ended September 30, 2021 from $102.1 million for the nine months ended September 30, 2020. Net interest margin increased by 5 basis points, or 1.1%, during the nine months ended September 30, 2021 to 4.44% compared to 4.39% during the nine months ended September 30, 2020.
Provision for Loan Losses. Management recorded a loan loss provision of $3.6 million for the nine months ended September 30, 2021 compared to a loan loss provision of $762,000 for the nine months ended September 30, 2020.
The provision recorded for the nine months ended September 30, 2021 was primarily attributed to the previously disclosed charge-off of $3.6 million during the nine months ended September 30, 2021 regarding 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 in Greenwich, Connecticut and guaranteed by the two borrowers. The loan was 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. The loan remains in foreclosure but is subject to Connecticut’s continuing foreclosure backlog. The property securing the loan is subject to a parking easement and based on a recently updated appraisal showing the property’s value with the parking easement to be zero, the Company has determined to write off the $3.6 million loan as a non-cash charge against the allowance for loan losses.
The Company intends to aggressively seek recovery of all amounts due from the personal guarantors of the loan. However, the recovery process is uncertain and might take an extended period of time to resolve this matter. In the event the Company is 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 recognizing the recovery into income.
The provision recorded for the nine months ended September 30, 2020 was primarily attributed to the perceived potential credit risk associated with the COVID-19 pandemic, although no specific or probable losses were identified at that time. Although the COVID- 19 pandemic and the resulting recession has impacted the local economy, we have not experienced any significant deterioration of our borrowers’ ability to keep current in accordance with the terms of their obligations.
We also charged-off $23,000 and $10,000 during the nine months ended September 30, 2021 and September 30, 2020, respectively, against various unpaid overdrafts in our demand deposit accounts. We recorded recoveries of $160,000 and $25,000 during the nine months ended September 30, 2021 and September 30, 2020, respectively.
43
Table of Contents
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 nine months ended September 30, 2021 was $1.8 million compared to non-interest income of $2.0 million for the nine months ended September 30, 2020. The decrease in total non-interest income was primarily due to an unrealized loss of $215,000 in our equity securities in the 2021 period compared to an unrealized gain of $299,000 in the comparable period in 2020, a decrease of $120,000 in other non-interest income, and a decrease of $10,000 in bank owned life insurance income. These were partially offset by an increase of $374,000 in other loan fees and service charges, an increase of $63,000 in investment advisory fees, and a net gain of $7,000 on the sale of fixed assets in the 2021 period compared to a net loss of $2,000 on the sale of fixed assets in the 2020 period.
The unrealized loss on equity securities was primarily due to an increase in market interest rates that impacted the value of the equity securities. The decrease in other non-interest income was due to a gain of $125,000 in 2020 as a result of an independent third party successful bid on a sheriff foreclosure sale on a mixed-use property securing a delinquent real estate mortgage loan.
The increase in other loan fees and service charges was due to an increase of $208,000 in other loan fees and loan servicing fees and an increase of $174,000 in ATM and debit card usage fees, partially offset by a decrease of $7,000 in deposit account fees. The increase in investment advisory fees was due to an increase in commission and advisory fee income from Harbor West Wealth Management Group.
Non-Interest Expense
Non-interest expense increased by $1.3 million, or 7.3%, to $19.7 million for the nine months ended September 30, 2021 from $18.4 million for the nine months ended September 30, 2020. The increase resulted primarily from increases of $1.2 million in salaries and employee benefits, $210,000 in other operating expense, $114,000 in equipment expense, and $98,000 in occupancy expense, partially offset by decreases of $90,000 in real estate owned expense, $80,000 in outside data processing expense, $61,000 in advertising expense, and $50,000 in impairment loss on goodwill.
Salaries and employee benefits increased by $1.2 million, or 11.9%, to $11.2 million for the nine months ended September 30, 2021 from $10.0 million for the nine months ended September 30, 2020 primarily due to an increase in number of full time equivalent personnel, an increase in bonuses paid to loan production personnel as loan originations increased, and an increase in employee stock ownership plan (“ESOP”) compensation cost as the Company ESOP purchased additional shares of Company common stock using funds loaned from the Company as part of the second-step conversion offering. These increases were partially offset by an increase in loan origination expenses related to loan origination fees due to an increase in loan originations.
Other non-interest expense increased by $210,000, or 4.5%, to $4.9 million for the nine months ended September 30, 2021 from $4.6 million for the nine months ended September 30, 2020 due mainly to increases of $301,000 in consulting services, $103,000 in audit and accounting fees, $31,000 in service contracts expense, $22,000 in telephone expense, and $9,000 in directors compensation, partially offset by decreases of $124,000 in legal fees, $83,000 in miscellaneous other non-interest expense, $33,000 in insurance expense, $14,000 in directors, officers and employee expense, and $3,000 in recruitment expenses related to the hiring of personnel.
Equipment expense increased by $114,000, or 18.9%, to $718,000 for the nine months ended September 30, 2021 from $604,000 for the nine months ended September 30, 2020 due to the purchases of additional equipment.
44
Table of Contents
Occupancy expense increased by $98,000, or 6.8%, to $1.5 million for the nine months ended September 30, 2021 from $1.4 million for the nine months ended September 30, 2020 primarily as a result of the cost of operating additional office space.
Real estate owned expense decreased by $90,000, or 51.4%, to $85,000 for the nine months ended September 30, 2021 from $175,000 for the nine months ended September 30, 2020 due to a write-down of $56,000 during the 2020 period on the one real estate owned property and a reduction in operating expenses to maintain the one real estate owned property.
Outside data processing expense decreased by $80,000, or 6.2%, to $1.2 million for the nine months ended September 30, 2021 from $1.3 million for the nine months ended September 30, 2020 due to additional services required in 2020, among other things, to enable employees to work remotely.
Advertising expense decreased by $61,000, or 42.4%, to $83,000 for the nine months ended September 30, 2021 from $144,000 for the nine months ended September 30, 2020 due mainly to the curtailment of advertising and promotional products in light of the COVID- 19 pandemic.
There was no goodwill impairment expense for the nine months ended September 30, 2021 compared to goodwill impairment expense of $50,000 for the nine months ended September 30, 2020. The goodwill was recorded in connection with the acquisition of Harbor West Financial Planning Wealth Management Group in 2007, which is operated as a division of Northeast Community Bank. The goodwill impairment was caused primarily by the expected decrease in revenue from this division due to a decrease in clients and the resulting decrease in assets under management.
Income Taxes. We recorded income tax expense of $2.4 million and $2.7 million for the nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021, we had approximately $522,000 in tax exempt income, compared to approximately $337,000 in tax exempt income for the nine months ended September 30, 2020. Our effective income tax rates were 23.6% and 23.4% for the nine months ended September 30, 2021 and 2020, respectively.
45
Table of Contents
Average Balances and Yields
The following table presents 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.
Three Months Ended September 30,
2021
2020
Average
Interest and
Yield/
Average
Interest and
Yield/
Balance
Dividends
Cost
Balance
Dividends
Cost
Loans receivable
$
862,796
$
11,935
5.53
%
$
807,465
$
11,882
5.89
%
Securities (1)
27,208
104
1.53
20,190
102
2.02
Other interest-earning assets
134,680
53
0.16
60,974
15
0.10
Total interest-earning assets
1,024,684
12,092
4.72
888,629
11,999
5.40
Allowance for loan losses
(5,181)
(5,167)
Non-interest-earning assets
73,990
65,773
Total assets
$
1,093,493
$
949,235
Interest bearing demand
$
117,329
$
183
0.62
%
$
100,287
$
151
0.60
%
Savings and club accounts
97,556
48
0.20
102,065
84
0.33
Certificates of deposit
305,057
764
1.00
368,220
1,772
1.92
Interest-bearing deposits
519,942
995
0.77
570,572
2,007
1.41
Borrowed money
$
28,000
187
2.67
28,000
187
2.67
Interest-bearing liabilities
547,942
1,182
0.86
598,572
2,194
1.47
Non-interest-bearing demand
281,499
188,616
Other non-interest-bearing liabilities
41,992
12,336
Total liabilities
871,433
799,524
Equity
222,060
149,711
Total liabilities and equity
$
1,093,493
$
949,235
Net interest income/interest spread
$
10,910
3.86
%
$
9,805
3.93
%
Net interest margin
4.26
%
4.41
%
Net interest-earning assets
$
476,742
$
290,057
Average interest-earning assets to interest-bearing liabilities
187.01
%
148.46
%
46
Table of Contents
Nine Months Ended September 30,
2021
2020
Average
Interest and
Yield/
Average
Interest and
Yield/
Balance
Dividends
Cost
Balance
Dividends
Cost
Loans receivable
$
843,850
$
35,237
5.57
%
$
793,002
$
36,323
6.11
%
Securities (1)
22,636
277
1.63
20,519
325
2.11
Other interest-earning assets
84,465
74
0.12
61,044
346
0.76
Total interest-earning assets
950,951
35,588
4.99
874,565
36,994
5.64
Allowance for loan losses
(5,125)
(4,891)
Non-interest-earning assets
71,449
67,146
Total assets
$
1,017,275
$
936,820
Interest bearing demand
$
113,370
$
503
0.59
%
$
106,721
$
615
0.77
%
Savings and club accounts
100,431
174
0.23
102,130
542
0.71
Certificates of deposit
321,956
2,713
1.12
380,777
6,535
2.29
Interest-bearing deposits
535,757
3,390
0.84
589,628
7,692
1.74
Borrowed money
$
28,000
555
2.64
26,391
536
2.71
Interest-bearing liabilities
563,757
3,945
0.93
616,019
8,228
1.78
Non-interest-bearing demand
247,258
162,278
Other non-interest-bearing liabilities
26,762
11,595
Total liabilities
837,777
789,892
Equity
179,498
146,928
Total liabilities and equity
$
1,017,275
$
936,820
Net interest income/interest spread
$
31,643
4.06
%
$
28,766
3.86
%
Net interest margin
4.44
%
4.39
%
Net interest-earning assets
$
387,194
$
258,546
Average interest-earning assets to interest-bearing liabilities
168.68
%
141.97
%
(1) Cash on deposit at Federal Home Loan Bank or Federal Reserve Board.
Rate/Volume Analysis
The following table sets 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 9/30/2021
Compared to
Three Months Ended 9/30/2020
Increase (Decrease)
Due to
Volume
Rate
Total
(Dollars in thousands)
Interest income:
Loans receivable
$
3,068
$
(3,015)
$
53
Securities
118
(116)
2
Other interest-earning assets
25
13
38
Total
$
3,211
$
(3,118)
$
93
Interest expense:
Interest bearing demand deposit
$
26
$
6
$
32
Savings accounts
(4)
(32)
(36)
Certificates of deposits
(266)
(742)
(1,008)
Borrowed money
—
—
—
Total
(244)
(768)
(1,012)
Net change in net interest income
$
3,455
$
(2,350)
$
1,105
47
Table of Contents
Nine Months Ended 9/30/2021
Compared to
Nine Months Ended 9/30/2020
Increase (Decrease)
Due to
Volume
Rate
Total
(Dollars in thousands)
Interest income:
Loans receivable
$
3,142
$
(4,228)
$
(1,086)
Securities
47
(95)
(48)
Other interest-earning assets
159
(431)
(272)
Total
$
3,348
$
(4,754)
$
(1,406)
Interest expense:
Interest bearing demand deposit
$
57
$
(169)
$
(112)
Savings accounts
(9)
(359)
(368)
Certificates of deposits
(890)
(2,932)
(3,822)
Borrowed money
38
(19)
19
Total
(804)
(3,479)
(4,283)
Net change in net interest income
$
4,152
$
(1,275)
$
2,877
Asset Quality
The following table sets forth information with respect to our non-performing assets at the dates indicated.
September 30,
December 31,
2021
2020
(Dollars in thousands)
Non-accrual loans:
Residential real estate loans:
Multifamily
$
—
$
—
Mixed-use
—
—
Total residential real estate loans
—
—
Non-residential real estate loans
—
3,572
Construction loans
—
—
Commercial and industrial loans
—
—
Consumer loans
—
—
Total non-accrual loans
—
3,572
Accruing loans past due 90 days or more:
Residential real estate loans:
Multifamily
—
—
Total residential real estate loans
—
—
Non-residential real estate loans
—
—
Construction loans
—
—
Commercial and industrial loans
—
—
Consumer loans
—
—
Total accruing loans past due 90 days or more
—
—
Total non-performing loans
—
3,572
Real estate owned
1,996
1,996
Total non-performing assets
$
1,996
$
5,568
Total non-performing loans to total loans
—
%
0.43
%
Total non-performing assets to total assets
0.18
%
0.58
%
During the nine months ended September 30, 2021, non-performing assets decreased by $3.6 million, or 64.2%, to $2.0 million from $5.6 million as of December 31, 2020. The decrease in non-performing assets was primarily due to the previously disclosed charge-off of $3.6 million on a non-accrual, non-residential bridge loan during 2021.
48
Table of Contents
We had no non-performing loans at September 30, 2021 compared to one non-performing loan at December 31, 2020. For the nine months ended September 30, 2021 and September 30, 2020, gross interest income of $171,000 and $192,000, respectively, would have been recorded had the non-accrual loans at the end of the period been on accrual status throughout the period. During the nine months ended September 30, 2021, we did not collect any interest income from the loans that were in non-accrual status in 2020.
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, 2021 or 2020 or during the year ended December 31, 2020. 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.
At September 30, 2021, five loans with aggregate balances of $2.7 million 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, 2020, five loans with aggregate balances of $2.8 million were considered TDRs but were performing in accordance with their restructured terms for the requisite period of time.
Impaired loans at September 30, 2021 totaled $740,000 and consisted of two non-residential mortgage loans. There was a charge-off of $3.6 million on an impaired, non-accrual, non-residential bridge loan during the nine months ended September 30, 2021. The two impaired loans are performing according to their loan terms.
49
Table of Contents
The following table sets forth an analysis of the activity in the allowance for loan losses for the periods indicated:
September 30,
December 31,
2021
2020
(In Thousands)
Allowance at beginning of period
$
5,088
$
4,611
Provision for loan losses
3,610
814
Charge-offs:
Residential real estate loans:
One- to four-family
—
—
Multifamily
—
—
Mixed-use
—
—
Total residential real estate loans
—
—
Non-residential real estate loans
3,593
65
Construction loans
—
—
Commercial and industrial loans
—
271
Consumer loans
23
28
Total charge-offs
3,616
364
Recoveries:
Residential real estate loans:
One- to four-family
—
—
Multifamily
150
—
Mixed-use
2
—
Total residential real estate loans
152
—
Non-residential real estate loans
—
9
Construction loans
—
—
Commercial and industrial loans
—
15
Consumer loans
8
3
Total recoveries
160
27
Allowance at end of period
$
5,242
$
5,088
Total loans outstanding
$
909,466
$
824,708
Average loans outstanding
843,850
797,735
Ratio of allowance to non-performing loans
—
%
142.44
%
Ratio of allowance to total loans
0.58
%
0.62
%
Ratio of net charge-offs to average loans
0.55
%
0.04
%
Non-performing loans
$
—
$
3,572
Net charge-offs (charge-offs less recoveries)
3,456
337
The allowance for loan losses increased by $154,000 to $5.2 million at September 30, 2021 from $5.1 million at December 31, 2020. The increase in the allowances for loan losses was due primarily to the increase in the provision for loan losses, which reflected the increase in the charge-off levels and an increase in the construction loan and commercial and industrial loan portfolio, partially offset by the reduction of the non-performing asset levels and a decrease in the residential, multifamily, mixed-use and non-residential mortgage loan portfolio.
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.
50
Table of Contents
Our Cash Liquidity ratio, On Balance Sheet Liquidity ratio, and On Balance Sheet Liquidity & Borrowing Capacity ratio averaged 11.9%, 14.7%, and 21.2%, respectively, for the nine months ended September 30, 2021 compared to 8.9%, 11.3%, and 19.9%, respectively, for the year ended December 31, 2020. 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. However, during the existing low interest rate environment, we have strategically allowed these metrics to fall below the minimum thresholds at times to provide for the effective management of extension risk and other interest rate risks.
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 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, 2021 and 2020, our loan originations totaled $486.0 million and $248.5 million, respectively. Cash received from the sales, calls, maturities and pay-downs on securities totaled $4.3 million and $1.3 million for the nine months ended September 30, 2021 and 2020, respectively. We purchased securities totaling $15.3 million during the nine months ended September 30, 2021. We did not purchase any securities during the nine months ended September 30, 2020.
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 $39.0 million and $49.4 million from the Federal Home Loan Bank of New York as of September 30, 2021 and December 31, 2020, respectively. There were $28.0 million of Federal Home Loan Bank advances at September 30, 2021 and December 31, 2020.
In addition, we have a borrowing agreement with ACBB to provide short-term borrowings of $8.0 million at September 30, 2021 and December 31, 2020. There were no outstanding borrowings with ACBB at September 30, 2021 and December 31, 2020.
At September 30, 2021, we had unfunded commitments on construction loans of $373.9 million, outstanding commitments to originate loans of $259.4 million, unfunded commitments under lines of credit of $138.8 million, and unfunded standby letters of credit of $6.9 million. At September 30, 2021, certificates of deposit scheduled to mature in less than one year totaled $190.4 million. Based on prior experience, management believes that a significant portion of
51
Table of Contents
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, 2021, the Company had liquid assets of $43.3 million and $5.2 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, 2021, 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.
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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.