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
33
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 ten 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, 2021.
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, 2021. 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 March 31, 2022, we had no loans in deferral status.
The granting of the payment deferrals had no significant impact on our evaluation of the allowance for loan losses. We did not grant any PPP loans pursuant to the CARES Act or the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.
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 2022. Further, a decrease in the results of future operations might place a strain on the Company’s regulatory capital ratios.
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.
34
Table of Contents
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 accrued status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. All troubled debt restructured loans are classified as impaired.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss model, or CECL, ASU 2016-13. We previously elected to defer the adoption of ASU 2016-13 until December 31, 2021. As permitted by the CARES Act, and based on legislation enacted in December 2020 which extended certain provision of the CARES Act, we elected to extend the adoption of CECL until January 1, 2023 in accordance with the recent legislation. This standard requires earlier recognition of expected credit losses on loans and certain other instruments, compared to the incurred loss model.
35
Table of Contents
Based on management’s comprehensive analysis of the loan portfolio, management believes the allowance for loan losses is appropriate as of March 31, 2022.
Balance Sheet Analysis
General
Total assets increased by $56.3 million, or 4.6%, to $1.3 billion at March 31, 2022, from $1.2 billion at December 31, 2021. The increase in assets was primarily due to increases in net loans of $34.1 million and cash and cash equivalents of $22.4 million.
Cash and cash equivalents increased by $22.4 million, or 14.7%, to $174.7 million at March 31, 2022 from $152.3 million at December 31, 2021. The increase in cash can primarily be attributable to an increase in deposits of $64.8 million. These sources of funds were deployed via an increase in net loans of $34.1 million, an increase in property and equipment of $1.6 million due primarily to the purchase of property and equipment for a new branch office, and a reduction in FHLB advances of $7.0 million.
Equity securities decreased by $634,000, or 3.2%, to $19.3 million at March 31, 2022 from $19.9 million at December 31, 2021. The decrease in equity securities was primarily attributable to market depreciation of $634,000 as market interest rates increased during the March 31, 2022 quarter.
Securities held-to-maturity decreased by $241,000, or 1.3%, to $17.6 million at March 31, 2022 from $17.9 million at December 31, 2021 due primarily to maturities and pay-downs.
Loans, net of the allowance for loan losses, increased by $34.1 million, or 3.5%, to $1.0 billion at March 31, 2022 from $968.1 million at December 31, 2021. The increase in loans, net of the allowance for loan losses, was primarily due to loan originations of $121.8 million during the quarter ended March 31, 2022, consisting primarily of $112.8 million in construction loans with respect to which approximately 31.4% of the funds were disbursed at loan closings and the remaining funds to be disbursed over the terms of the construction loans.
Loan originations resulted in a net increase of $52.9 million in construction loans. The increase in our loan portfolio was partially offset by decreases in multi-family loans of $9.0 million, non-residential loans of $4.7 million, mixed-use loans of $2.3 million, and commercial and industrial loans of $2.9 million, coupled with normal pay-downs and principal reductions.
Premises and equipment increased by $1.6 million, or 6.6%, to $25.5 million at March 31, 2022 from $23.9 million at December 31, 2021 due to the acquisition of property and equipment for a new branch site located in Bloomingburg, New York.
Investments in restricted stock decreased by $315,000, or 20.1%, to $1.3 million at March 31, 2022 from $1.6 million at December 31, 2021 due to a reduction in mandatory Federal Home Loan Bank stock in connection with the maturity/pay-off of $7.0 million in advances during the quarter ended March 31, 2022.
Accrued interest receivable increased by $460,000, or 10.7%, to $4.7 million at March 31, 2022 from $4.3 million at December 31, 2021 due to an increase in the loan portfolio.
Foreclosed real estate was $2.0 million at March 31, 2022 and December 31, 2021.
Right of use assets — operating decreased by $134,000, or 5.2%, to $2.4 million at March 31, 2022 from $2.6 million at December 31, 2021, primarily due to amortization.
Other assets decreased by $1.1 million, or 23.8%, to $3.6 million at March 31, 2022 from $4.7 million at December 31, 2021 due to a decrease in tax assets of $1.1 million.
Total deposits increased by $64.8 million, or 7.0%, to $991.9 million at March 31, 2022 from $927.2 million at December 31, 2021. The increase was primarily due to an increase in non-interest bearing demand deposits of
36
Table of Contents
$50.4 million, or 15.2%, and an increase in savings account balances of $24.1 million, or 13.0%. These increases were partially offset by a decrease in certificates of deposit of $8.3 million, or 2.9%, and a decrease in NOW/money market accounts of $1.4 million, or 1.2%, from December 31, 2021 to March 31, 2022.
Federal Home Loan Bank advances decreased by $7.0 million, or 25.0%, to $21.0 million at March 31, 2022 from $28.0 million at December 31, 2021.
Advance payments by borrowers for taxes and insurance increased by $387,000, or 20.5%, to $2.3 million at March 31, 2022 from $1.9 million at December 31, 2021 due primarily to the accumulation of tax payments from borrowers.
Lease liability – operating decreased by $130,000, or 5.0%, to $2.5 million at March 31, 2022 from $2.6 million at December 31, 2021, primarily due to amortization.
Accounts payable and accrued expenses decreased by $4.7 million, or 35.0%, to $8.8 million at March 31, 2022 from $13.5 million at December 31, 2021 due primarily to a decrease in suspense accounts for loan closings of $2.6 million and a decrease in accrued expenses of $2.2 million.
Stockholders’ equity increased by $3.0 million, or 1.2% to $254.4 million at March 31, 2022, from $251.4 million at December 31, 2021. The increase in stockholders’ equity was due to net income of $3.6 million for the quarter ended March 31, 2022, a reduction of $217,000 in unearned employee stock ownership plan shares, and $19,000 in other comprehensive income, partially offset by dividends declared of $931,000.
Results of Operations for the Three Months Ended March 31, 2022 and 2021
Financial Highlights
Net income for the three months ended March 31, 2022 was $3.6 million compared to net income of $3.2 million for the three months ended March 31, 2021. Net income for the three months ended March 31, 2022 was greater than net income for the three months ended March 31, 2021 primarily due to an increase in net interest income and no provision for loan losses expense, partially offset by a decrease in non-interest income, an increase in non-interest expense, and an increase in income tax expense.
Net Interest Income
Net interest income totaled $11.9 million for the quarter ended March 31, 2022, as compared to $10.4 million for the quarter ended March 31, 2021. The increase in net interest income of $1.5 million, or 15.2%, was primarily due to an increase in interest income combined with a decrease in interest expense.
The increase in interest income is attributable to increases in loans, investment securities, equity securities, and interest-bearing deposits as we continued to deploy the proceeds raised in our July 2021 second-step conversion. The decrease in interest expense is attributable to a decrease in the balances and cost of funds on our certificates of deposits, partially offset by increases in the balances and cost of funds in our interest-bearing demand deposits and our savings and club accounts.
In this regard, interest and dividend income increased by $1.5 million, or 12.3%, to $13.3 million for the quarter ended March 31, 2022 from $11.8 million for the quarter ended March 31, 2021 due to an increase in the average balance of interest earning assets of $268.0 million, or 29.7%, to $1.2 billion for the quarter ended March 31, 2022 from $902.0 million for the quarter ended March 31, 2021, partially offset by a decrease in the yield on interest earning assets by 70 basis points from 5.24% for the quarter ended March 31, 2021 to 4.54% for the quarter ended March 31, 2022.
Interest expense decreased by $117,000, or 8.0%, to $1.3 million for the quarter ended March 31, 2022 from $1.5 million for the quarter ended March 31, 2021 due to a decrease in the cost of interest bearing liabilities by 17 basis points from 1.02% for the quarter ended March 31, 2021 to 0.85% for the quarter ended March 31, 2022, partially offset by an increase in average interest bearing liabilities of $60.0 million, or 10.4%, to $635.3 million for the quarter ended March 31, 2022 from $575.4 million for the quarter ended March 31, 2021.
37
Table of Contents
Net interest margin decreased by 51 basis points, or 11.2%, during the quarter ended March 31, 2022 to 4.08% compared to 4.59% during the quarter ended March 31, 2021.
Provision for Loan Losses.
The Company recorded no loan loss provision for the quarter ended March 31, 2022 compared to a loan loss provision of $17,000 for the quarter ended March 31, 2021. We charged-off $10,000 and $11,000 during the quarter ended March 31, 2022 and March 31, 2021, respectively, against various unpaid overdrafts in our demand deposit accounts. We recorded recoveries of $95,000 and $8,000 during the quarter ended March 31, 2022 and March 31, 2021, respectively.
Based on a review of the loans that were in the loan portfolio at March 31, 2022, management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable.
Management uses available information to establish the appropriate level of the allowance for loan losses. Future additions or reductions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
Non-Interest Income
Non-interest income for the quarter ended March 31, 2022 was $58,000 compared to non-interest income of $443,000 for the quarter ended March 31, 2021. The decrease in total non-interest income was primarily due to unrealized loss of $634,000 on equity securities during the quarter ended March 31, 2022 compared to an unrealized loss of $155,000 on equity securities during the quarter ended March 31, 2021. The unrealized loss of $634,000 on equity securities was primarily due to a rising interest rate environment and the Federal Reserve’s interest rate increase that impacted the value of the equity securities during the March 31, 2022 quarter.
The decrease in total non-interest income was partially offset by an increase of $69,000 in other loan fees and service charges, an increase of $19,000 in investment advisory fees, and an increase of $5,000 in other non-interest income.
The increase in other loan fees and service charges was due to an increase of $45,000 in ATM and debit card usage fees and an increase of $23,000 in other loan fees and loan servicing fees. The increase in investment advisory fees was due to an increase in assets under management at the Harbor West Wealth Management Group.
Non-Interest Expense
Non-interest expense increased by $666,000, or 10.2%, to $7.2 million for the quarter ended March 31, 2022 from $6.6 million for the quarter ended March 31, 2021. The increase resulted primarily from increases of $455,000 in other operating expense, $171,000 in salaries and employee benefits, $41,000 in equipment expense, $30,000 in occupancy expense, and $30,000 in advertising expense, partially offset by decreases of $51,000 in outside data processing expense and $10,000 in real estate owned expense.
Other non-interest expense increased by $455,000, or 29.9%, to $2.0 million for the three months ended March 31, 2022 from $1.5 million for the three months ended March 31, 2021 due mainly to increases of $137,000 in legal fees, $128,000 in miscellaneous other non-interest expense, $81,000 in audit and accounting fees, $49,000 in consulting fees, $28,000 in service contracts expense, $28,000 in expenses related to the hiring of personnel, $9,000 in insurance expense, and $4,000 in office supplies. These increases were partially offset by decreases of $4,000 in directors, officers and employee expense and $5,000 in directors compensation.
38
Table of Contents
The increase of $128,000 in miscellaneous other non-interest expense was mainly due to increases of $81,000 in regulatory insurance premiums and assessments due to an increase in our total assets and an increase of $38,000 in miscellaneous charge-offs.
Salaries and employee benefits increased by $171,000, or 4.7%, to $3.8 million for the three months ended March 31, 2022 from $3.7 million for the three months ended March 31, 2021 primarily due to an increase in number of full time equivalent personnel, an increase in bonus accruals for 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 $41,000, or 16.5%, to $290,000 for the three months ended March 31, 2022 from $249,000 for the three months ended March 31, 2021 due to the purchases of additional equipment to support the Company’s branch expansion.
Occupancy expense increased by $30,000, or 5.2%, to $603,000 for the three months ended March 31, 2022 from $573,000 for the three months ended March 31, 2021 primarily as a result of the cost of operating additional branch office space.
Advertising expense increased by $30,000, or 125.0%, to $54,000 for the three months ended March 31, 2022 from $24,000 for the three months ended March 31, 2021 due mainly to the resumption of advertising and promotional products.
Outside data processing expense decreased by $51,000, or 10.5%, to $436,000 for the three months ended March 31, 2022 from $487,000 for the three months ended March 31, 2021 due to a switch in service provider in 2021 that reduced our data processing expense in 2022.
Real estate owned expense decreased by $10,000, or 24.4%, to $31,000 for the three months ended March 31, 2022 from $41,000 for the three months ended March 31, 2021 due to a reduction in operating expenses to maintain the one real estate owned property.
Income Taxes. We recorded income tax expense of $1.1 million and $982,000 for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, we had approximately $184,000 in tax exempt income, compared to approximately $162,000 in tax exempt income for the three months ended March 31, 2021. Our effective income tax rates were 23.5% and 23.2% for the three months ended March 31, 2022 and 2021, respectively.
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
39
Table of Contents
presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.
Three Months Ended March 31,
2022
2021
Average
Interest and
Yield/
Average
Interest and
Yield/
Balance
Dividends
Cost
Balance
Dividends
Cost
Loans receivable
$
989,729
$
13,061
5.28
%
$
834,468
$
11,727
5.62
%
Securities (1)
39,070
158
1.62
19,098
83
1.74
Other interest-earning assets
141,191
54
0.15
48,400
10
0.08
Total interest-earning assets
1,169,990
13,273
4.54
901,966
11,820
5.24
Allowance for loan losses
(5,283)
(5,090)
Non-interest-earning assets
76,155
67,674
Total assets
$
1,240,862
$
964,550
Interest bearing demand
$
117,370
$
169
0.58
%
$
108,002
$
156
0.58
%
Savings and club accounts
203,255
328
0.65
102,632
79
0.31
Certificates of deposit
288,664
681
0.94
336,739
1,047
1.24
Interest-bearing deposits
609,289
1,178
0.77
547,373
1,282
0.94
Borrowed money
26,056
170
2.61
28,000
183
2.61
Interest-bearing liabilities
635,345
1,348
0.85
575,373
1,465
1.02
Non-interest-bearing demand
336,845
219,599
Other non-interest-bearing liabilities
14,590
13,553
Total liabilities
986,780
808,525
Equity
254,082
156,025
Total liabilities and equity
$
1,240,862
$
964,550
Net interest income/interest spread
$
11,925
3.69
%
$
10,355
4.22
%
Net interest margin
4.08
%
4.59
%
Net interest-earning assets
$
534,645
$
326,593
Average interest-earning assets to interest-bearing liabilities
184.15
%
156.76
%
(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
40
Table of Contents
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 3/31/2022
Compared to
Three Months Ended 3/31/2021
Increase (Decrease)
Due to
Volume
Rate
Total
(Dollars in thousands)
Interest income:
Loans receivable
$
5,313
$
(3,979)
$
1,334
Securities
114
(39)
75
Other interest-earning assets
30
14
44
Total
$
5,457
$
(4,004)
$
1,453
Interest expense:
Interest bearing demand deposit
$
16
$
(3)
$
13
Savings accounts
118
131
249
Certificates of deposits
(136)
(230)
(366)
Borrowed money
(13)
—
(13)
Total
(15)
(102)
(117)
Net change in net interest income
$
5,472
$
(3,902)
$
1,570
Asset Quality
The following table sets forth information with respect to our non-performing assets at the dates indicated.
March 31,
December 31,
2022
2021
(Dollars in thousands)
Total non-accrual loans
$
—
$
—
Total accruing loans past due 90 days or more
—
—
Total non-performing loans
—
—
Real estate owned
1,996
1,996
Total non-performing assets
$
1,996
$
1,996
Total non-performing loans to total loans
—
%
—
%
Total non-performing assets to total assets
0.16
%
0.16
%
Non-performing assets totaled $2.0 million at both March 31, 2022 and December 31, 2021. We had no non-performing loans at March 31, 2022 and December 31, 2021. During the three months ended March 31, 2022, we did not collect any interest income from the loans that were in non-accrual status in 2021.
From time to time, as part of our loss mitigation strategy, we may renegotiate the loan terms based on the economic or legal reasons related to the borrower’s financial difficulties. There were no new TDRs during the three months ended March 31, 2022 or 2021 or during the year ended December 31, 2021. TDRs may be considered to be non-performing and if so are placed on non-accrual, except for those that have established a sufficient performance history (generally a minimum of six consecutive months of performance) under the terms of the restructured loan.
At March 31, 2022 and December 31, 2021, four loans with aggregate balances of $1.6 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.
Impaired loans at March 31, 2022 totaled $766,000 and consisted of two non-residential mortgage loans. The two impaired loans are performing according to their loan terms.
41
Table of Contents
The following table sets forth an analysis of the activity in the allowance for loan losses for the periods indicated:
March 31,
December 31,
2022
2021
(Dollars In Thousands)
Allowance at beginning of period
$
5,242
$
5,088
Provision for loan losses
—
3,610
Net Charge-offs:
Residential real estate loans:
One- to four-family
—
—
Multifamily
—
(150)
Mixed-use
(43)
—
Total residential real estate loans
(43)
(150)
Non-residential real estate loans
(53)
3,591
Construction loans
—
—
Commercial and industrial loans
—
—
Consumer loans
10
15
Total net charge-offs
(86)
3,456
Allowance at end of period
$
5,328
$
5,242
Total loans outstanding
$
1,007,040
$
972,851
Average loans outstanding
989,729
866,518
Ratio of allowance to non-performing loans
—
%
—
%
Ratio of allowance to total loans
0.53
%
0.54
%
Ratio of net charge-offs to average loans
(0.01)
%
0.40
%
Non-performing loans
$
—
$
—
The allowance for loan losses increased by $86,000 to $5.3 million at March 31, 2022 from $5.2 million at December 31, 2021. The increase in the allowances for loan losses was due primarily to charge-offs totaling $10,000, partially offset by recoveries of $96,000.
Liquidity and Capital Resources
We maintain liquid assets at levels we believe are adequate to meet our liquidity needs. We established a liquidity ratio policy that identify three liquidity ratios consisting of (1) Cash/Deposits & Short Term Borrowings (“Cash Liquidity”), (2) Cash & Investments/Deposits & Short Term Borrowings (“On Balance Sheet Liquidity”), and (3) Cash & Investments & Borrowing Capacity/Deposits & Short Term Borrowings (“On Balance Sheet Liquidity & Borrowing Capacity”) to assist in the management of our liquidity. We also establish targets of 2.0% for the Cash Liquidity ratio, 8.0% for the On Balance Sheet Liquidity ratio, and 20.0% for the On Balance Sheet Liquidity & Borrowing Capacity ratio.
Our Cash Liquidity ratio, On Balance Sheet Liquidity ratio, and On Balance Sheet Liquidity & Borrowing Capacity ratio averaged 16.3%, 20.2%, and 23.9%, respectively, for the three months ended March 31, 2022 compared to 12.7%, 15.7%, and 21.7%, respectively, for the year ended December 31, 2021. We adjust our liquidity levels to fund deposit outflows, pay real estate taxes on real estate loans, repay our borrowings, and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.
Our liquidity ratios cannot be calculated using amounts disclosed in our consolidated financial statements, as many of the calculations involve monthly, quarterly or annual averages. To calculate our liquidity ratios, the average liquidity base from the prior month is used as the denominator to calculate a daily liquidity ratio. The liquidity base consists of savings account balances, certificates of deposit balances, checking and money market balances, deposit loans and borrowings. The daily balances of these components are averaged to arrive at the liquidity base for the month, and the daily cash balances in selected general ledger accounts are used to derive our liquidity position. A daily liquidity ratio is calculated using the liquidity for the day divided by the prior month’s average liquidity base. At the end of each month, a monthly liquidity position is calculated using the average liquidity position for the month divided by the prior month’s
42
Table of Contents
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 three months ended March 31, 2022 and 2021, our loan originations totaled $121.8 million and $125.6 million, respectively. Cash received from the maturities and pay-downs on securities totaled $240,000 and $444,000 for the three months ended March 31, 2022 and 2021, respectively. We did not purchase any securities during the three months ended March 31, 2022 and March 31, 2021.
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 $30.5 million and $29.4 million from the Federal Home Loan Bank of New York as of March 31, 2022 and December 31, 2021, respectively. There were $21.0 million and $28.0 million in Federal Home Loan Bank advances at March 31, 2022 and December 31, 2021, respectively.
In addition, we have a borrowing agreement with ACBB to provide short-term borrowings of $8.0 million at March 31, 2022 and December 31, 2021. There were no outstanding borrowings with ACBB at March 31, 2022 and December 31, 2021.
At March 31, 2022, we had unfunded commitments on construction loans of $435.7 million, outstanding commitments to originate loans of $263.8 million, unfunded commitments under lines of credit of $131.3 million, and unfunded standby letters of credit of $7.3 million. At March 31, 2022, certificates of deposit scheduled to mature in less than one year totaled $188.1 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as various types of sourced deposits, and/or Federal Home Loan Bank advances, in order to maintain our level of assets. Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents. In addition, the cost of such deposits may be significantly higher or lower depending on market interest rates at the time of renewal.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its stockholders and for the repurchase, if any, of its shares of common stock. At March 31, 2022, the Company had liquid assets of $43.6 million and $3.7 million in loan participations originated by the Bank which are held by the Company.
Off-Balance Sheet Arrangements
For the three months ended March 31, 2022, we did not engage in any off-balance sheet transactions reasonably likely to have a material adverse effect on our financial condition, results of operations or cash-flows.
43
Table of Contents
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.