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, including higher inflation, either nationally or in our market area, that are worse than expected; (ii) changes in the interest rate environment that reduce our interest margins, reduce the fair value of financial instruments or reduce the demand for our loan products; (iii) increased competitive pressures among financial services companies; (iv) changes in consumer spending, borrowing and savings habits; (v) changes in the quality and composition of our loan or investment portfolios; (vi) changes in real estate market values in our market area; (vii) decreased demand for loan products, deposit flows, competition, or decreased demand for financial services in our market area; (viii) major catastrophes such as earthquakes, floods or other natural or human disasters and infectious disease outbreaks, including the current coronavirus (COVID-19) pandemic, the related disruption to local, regional and global economic activity and financial markets, and the impact that any of the foregoing may have on us and our customers and other constituencies; (ix) legislative or regulatory changes that adversely affect our business or changes in the monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board; (x) technological changes that may be more difficult or expensive than expected; (xi) success or consummation of new business initiatives may be more difficult or expensive than expected; (xii) the inability to successfully integrate acquired businesses and financial institutions into our business operations; (xiii) adverse changes in the securities markets; (xiv) the inability of third party service providers to perform; and (xv) changes in accounting policies and practices, as may be adopted by bank regulatory agencies or the Financial Accounting Standards Board.
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
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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 2022.
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 eleven 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 June 30, 2022, we had no loans in deferral status.
The granting of the payment deferrals had no significant impact on our evaluation of the allowance for loan losses. We did not grant any PPP loans pursuant to the CARES Act or the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.
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.
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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.
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Based on management’s comprehensive analysis of the loan portfolio, management believes the allowance for loan losses is appropriate as of June 30, 2022.
Balance Sheet Analysis
General
Total assets decreased by $3.5 million, or 0.3%, to $1.2 billion at June 30, 2022, from $1.2 billion at December 31, 2021. The decrease in assets was primarily due to decreases in cash and cash equivalents of $66.0 million and equity securities of $1.1 million, partially offset by increases in net loans of $50.6 million, securities held-to-maturity of $9.3 million, and premises and equipment of $2.3 million.
Cash and cash equivalents decreased by $66.0 million, or 43.4%, to $86.2 million at June 30, 2022 from $152.3 million at December 31, 2021. The decrease in cash and cash equivalents was a result of cash being deployed to fund an increase in net loans of $50.6 million, an increase in securities held-to-maturiy of $9.3 million, an increase in property and equipment of $2.3 million due primarily to the purchase of property and equipment for a new branch office, and a reduction in FHLB advances of $7.0 million.
Equity securities decreased by $1.1 million, or 5.3%, to $18.9 million at June 30, 2022 from $19.9 million at December 31, 2021. The decrease in equity securities was primarily attributable to market depreciation of $1.1 million as market interest rates increased during the six months ended June 30, 2022.
Securities held-to-maturity increased by $9.3 million, or 52.1%, to $27.2 million at June 30, 2022 from $17.9 million at December 31, 2021 due primarily to the purchases of securities, partially offset by maturities and pay-downs.
Loans, net of the allowance for loan losses, increased by $50.6 million, or 5.2%, to $1.0 billion at June 30, 2022 from $968.1 million at December 31, 2021. The increase in loans, net of the allowance for loan losses, was primarily due to loan originations of $307.4 million during the six months ended June 30, 2022, consisting primarily of $266.3 million in construction loans with respect to which approximately 32.1% of the funds were disbursed at loan closings, with the remaining funds to be disbursed over the terms of the construction loans.
Loan originations increased by $97.0 million due to increased originations of construction loans. The increase in our loan portfolio was partially offset by decreases in non-residential loans of $23.4 million, commercial and industrial loans of $15.8 million, mixed-use loans of $5.2 million, residential loans of $1.4 million, and multi-family loans of $560,000, coupled with normal pay-downs and principal reductions.
Premises and equipment increased by $2.3 million, or 9.7, to $26.2 million at June 30, 2022 from $23.9 million at December 31, 2021 due to the acquisition of property and equipment for a new branch site located in Bloomingburg, New York.
Investments in restricted stock decreased by $331,000, or 21.1%, to $1.2 million at June 30, 2022 from $1.6 million at December 31, 2021 due to a reduction in mandatory Federal Home Loan Bank stock in connection with the maturity/pay-off of $7.0 million in advances during the quarter ended June 30, 2022.
Accrued interest receivable increased by $949,000, or 22.2%, to $5.2 million at June 30, 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 June 30, 2022 and December 31, 2021.
Right of use assets — operating decreased by $268,000, or 10.5%, to $2.3 million at June 30, 2022 from $2.6 million at December 31, 2021, primarily due to amortization.
Other assets increased by $793,000, or 16.9%, to $5.5 million at June 30, 2022 from $4.7 million at December 31, 2021 due to increases in suspense accounts of $406,000, tax assets of $326,000, and prepaid expenses of $84,000.
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Total deposits increased by $1.4 million, or 0.2%, to $928.6 million at June 30, 2022 from $927.2 million at December 31, 2021. The increase was primarily due to an increase in non-interest bearing demand deposits of $31.6 million, or 9.6%, and an increase in savings account balances of $24.5 million, or 13.3%. These increases were partially offset by a decrease in certificates of deposit of $48.7 million, or 16.6%, and a decrease in NOW/money market accounts of $6.1 million, or 5.1%, from December 31, 2021 to June 30, 2022.
Federal Home Loan Bank advances decreased by $7.0 million, or 25.0%, to $21.0 million at June 30, 2022 from $28.0 million at December 31, 2021.
Advance payments by borrowers for taxes and insurance decreased by $147,000, or 7.8%, to $1.7 million at June 30, 2022 from $1.9 million at December 31, 2021 due primarily to payment of taxes for borrowers, partially offset by the accumulation of tax payments from borrowers.
Lease liability – operating decreased by $260,000, or 10.0%, to $2.3 million at June 30, 2022 from $2.6 million at December 31, 2021, primarily due to amortization.
Accounts payable and accrued expenses decreased by $2.5 million, or 18.1%, to $11.1 million at June 30, 2022 from $13.5 million at December 31, 2021 due primarily to a decrease in suspense accounts for loan closings of $1.6 million and a decrease in accrued expenses of $1.2 million.
Stockholders’ equity increased by $4.9 million, or 2.0% to $256.3 million at June 30, 2022, from $251.4 million at December 31, 2021. The increase in stockholders’ equity was due to net income of $9.0 million for the six months ended June 30, 2022, a reduction of $504,000 in unearned employee stock ownership plan shares, and $41,000 in other comprehensive income, partially offset by dividends paid and declared of $4.7 million.
Results of Operations for the Three Months Ended June 30, 2022 and 2021
Financial Highlights
Net income for the three months ended June 30, 2022 was $5.4 million compared to net income of $3.7 million for the three months ended June 30, 2021. Net income for the three months ended June 30, 2022 increased from net income for the three months ended June 30, 2021 primarily due to an increase in net interest income, 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 $13.5 million for the three months ended June 30, 2022, as compared to $10.4 million for the three months ended June 30, 2021. The increase in net interest income of $3.2 million, or 30.5%, 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 increase in interest income is also attributed to an increase in interest rates during the three months ended June 30, 2022.
The decrease in interest expense is attributable to a decrease in the balances and cost of funds on our certificates of deposits and our borrowed money, 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, total interest income increased by $3.2 million, or 27.1%, to $14.8 million for the thre months ended June 30, 2022 from $11.7 million for the three months ended June 30, 2021 due to an increase in the average balance of interest earning assets of $257.0 million, or 27.8%, to $1.2 billion for the three months ended June 30, 2022 from $924.9 million for the three months ended June 30, 2021, partially offset by a decrease in the yield on interest earning assets by 3 basis points from 5.05% for the three months ended June 30, 2021 to 5.02% for the three months ended June 30, 2022.
Interest expense decreased by $2,000, or 0.2%, to $1.3 million for the three months ended June 30, 2022 from $1.3 million for the three months ended June 30, 2021 due to a decrease in the cost of interest bearing liabilities by 7 basis
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points from 0.91% for the three months ended June 30, 2021 to 0.84% for the three months ended June 30, 2022, partially offset by an increase in average interest bearing liabilities of $45.4 million, or 8.0%, to $613.6 million for the three months ended June 30, 2022 from $568.3 million for the three months ended June 30, 2021.
Net interest margin increased by 9 basis points, or 2.1%, during the three months ended June 30, 2022 to 4.58% compared to 4.49% during the three months ended June 30, 2021.
Provision for Loan Losses.
The Company recorded no loan loss provision for the three months ended June 30, 2022 and June 30, 2021. We charged-off $7,000 and $9,000 during the three months ended June 30, 2022 and June 30, 2021, respectively, against various unpaid overdrafts in our demand deposit accounts. We recorded recoveries of $146,000 and $1,000 during the three months ended June 30, 2022 and June 30, 2021, respectively. The recovery of $146,000 during the three months ended June 30, 2022 was due to a recovery on a previously charged-off multi-family property.
Based on a review of the loans that were in the loan portfolio at June 30, 2022, management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable.
Management uses available information to establish the appropriate level of the allowance for loan losses. Future additions or reductions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
Non-Interest Income
Non-interest income for the three months ended June 30, 2022 was $536,000 compared to non-interest income of $778,000 for the three months ended June 30, 2021. The decrease in total non-interest income was primarily due to an unrealized loss of $430,000 on equity securities during the three months ended June 30, 2022 compared to an unrealized loss of $93,000 on equity securities during the three months ended June 30, 2021. The unrealized loss of $430,000 on equity securities was primarily due to a rising interest rate environment due to the Federal Reserve’s interest rate increase, which impacted the value of the equity securities during the June 30, 2022 quarter.
The decrease in total non-interest income was partially offset by an increase of $234,000 in other loan fees and service charges, an increase of $39,000 on gain from the sale of fixed assets, an increase of $10,000 in other non-interest income, an increase of $2,000 in bank-owned life insurance income, and a decrease of $4,000 in investment advisory fees.
The increase in other loan fees and service charges was due to an increase of $161,000 in other loan fees and loan servicing fees and an increase of $71,000 in ATM and debit card usage fees.
Non-Interest Expense
Non-interest expense increased by $698,000, or 11.0%, to $7.0 million for the three months ended June 30, 2022 from $6.3 million for the three months ended June 30, 2021. The increase resulted primarily from increases of $305,000 in other operating expense, $142,000 in outside data processing expense, $101,000 in salaries and employee benefits, $90,000 in occupancy expense, $38,000 in equipment expense, and $27,000 in advertising expense, partially offset by a decrease of $5,000 in real estate owned expense.
Other non-interest expense increased by $305,000, or 17.9%, to $2.0 million for the three months ended June 30, 2022 from $1.7 million for the three months ended June 30, 2021 due mainly to increases of $245,000 in miscellaneous other non-interest expense, $116,000 in legal fees, $76,000 in service contracts expense, $20,000 in insurance expense, $17,000 in expenses related to the hiring of personnel, $16,000 in directors compensation, $9,000 in office supplies,
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$7,000 in directors, officers and employee expense, and $3,000 in telephone expense. These increases were partially offset by a decrease of $167,000 in consulting fees and a decrease of $38,000 in audit and accounting fees.
The increase of $245,000 in miscellaneous other non-interest expense was mainly due to an increase of $136,000 in regulatory insurance premiums and assessments due to an increase in our total assets, and increases of $49,000 in public company expenses, $23,000 in dues and subscriptions, $16,000 in check and correspondence bank charges, and $15,000 in miscellaneous charge-offs.
The increase of $116,000 in legal fees was due to the increased expenses associated with being a fully public company.
Outside data processing expense increased by $142,000, or 42.1%, to $479,000 for the three months ended June 30, 2022 from $337,000 for the three months ended June 30, 2021 due to the cost of operating additional two branches and additional data processing services.
Salaries and employee benefits increased by $101,000, or 2.9%, to $3.6 million for the three months ended June 30, 2022 from $3.5 million for the three months ended June 30, 2021 primarily due to an increase in number of full time equivalent personnel due to the opening of two additional branch offices, an increase in bonus accruals for loan production personnel as loan originations increased, and an increase in 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.
Occupancy expense increased by $90,000, or 19.1%, to $562,000 for the three months ended June 30, 2022 from $472,000 for the three months ended June 30, 2021 primarily as a result of the cost of operating additional branch office space.
Equipment expense increased by $37,000, or 15.5%, to $276,000 for the three months ended June 30, 2022 from $239,000 for the three months ended June 30, 2021 due to the purchases of additional equipment to support the Company’s branch expansion.
Advertising expense increased by $27,000, or 112.5%, to $51,000 for the three months ended June 30, 2022 from $24,000 for the six months ended June 30, 2021 due mainly to the resumption of advertising and promotional products to promote the opening of additional branch offices.
Real estate owned expense decreased by $5,000, or 19.2%, to $21,000 for the three months ended June 30, 2022 from $26,000 for the three months ended June 30, 2021 due to a reduction in operating expenses to maintain the one real estate owned property.
Income Taxes. We recorded income tax expense of $1.7 million and $1.1 million for the three months ended June 30, 2022 and 2021, respectively. For the three months ended June 30, 2022, we had approximately $185,000 in tax exempt income, compared to approximately $174,000 in tax exempt income for the three months ended June 30, 2021. Our effective income tax rates were 23.7% and 23.2% for the three months ended June 30, 2022 and 2021, respectively.
Results of Operations for the Six Months Ended June 30, 2022 and 2021
Financial Highlights
Net income for the six months ended June 30, 2022 was $9.0 million compared to net income of $7.0 million for the six months ended June 30, 2021. Net income for the six months ended June 30, 2022 was greater than net income for the six months ended June 30, 2021 primarily due to an increase in net interest income, partially offset by a decrease in non-interest income, an increase in non-interest expense, and an increase in income tax expense.
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Net Interest Income
Net interest income totaled $25.5 million for the six months ended June 30, 2022, as compared to $20.7 million for the six months ended June 30, 2021. The increase in net interest income of $4.7 million, or 22.8%, 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 increase in interest income is also attributed to an increase in interest rates during the six months ended June 30, 2022.
The decrease in interest expense is attributable to a decrease in the balances and cost of funds on our certificates of deposits and borrowed money, 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 income increased by $4.6 million, or 19.6%, to $28.1 million for the six months ended June 30, 2022 from $23.5 million for the six months ended June 30, 2021 due to an increase in the average balance of interest earning assets of $262.5 million, or 28.7%, to $1.2 billion for the six months ended June 30, 2022 from $913.5 million for the six months ended June 30, 2021, partially offset by a decrease in the yield on interest earning assets by 36 basis points from 5.14% for the six months ended June 30, 2021 to 4.78% for the six months ended June 30, 2022.
Interest expense decreased by $119,000, or 4.3%, to $2.6 million for the six months ended June 30, 2022 from $2.8 million for the six months ended June 30, 2021 due to a decrease in the cost of interest bearing liabilities by 12 basis points from 0.97% for the six months ended June 30, 2021 to 0.85% for the six months ended June 30, 2022, partially offset by an increase in average interest bearing liabilities of $52.6 million, or 9.2%, to $624.4 million for the six months ended June 30, 2022 from $571.8 million for the six months ended June 30, 2021.
Net interest margin decreased by 21 basis points, or 4.6%, during the six months ended June 30, 2022 to 4.33% compared to 4.54% during the six months ended June 30, 2021.
Provision for Loan Losses.
The Company recorded no loan loss provision for the six months ended June 30, 2022 compared to a loan loss provision of $17,000 for the six months ended June 30, 2021. We charged-off $17,000 and $20,000 during the six months ended June 30, 2022 and June 30, 2021, respectively, against various unpaid overdrafts in our demand deposit accounts. We recorded recoveries of $242,000 and $9,000 during the six months ended June 30, 2022 and June 30, 2021, respectively. The recoveries of $242,000 during the six months ended June 30, 2022 comprised of recoveries of $146,000 regarding a previously charged-off multi-family property, $53,000 regarding a previously charged-off non-residential property, and $43,000 regarding a previously charged-off mixed property.
Based on a review of the loans that were in the loan portfolio at June 30, 2022, management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable.
Management uses available information to establish the appropriate level of the allowance for loan losses. Future additions or reductions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
Non-Interest Income
Non-interest income for the six months ended June 30, 2022 was $594,000 compared to non-interest income of $1.2 million for the six months ended ended June 30, 2021. The decrease in total non-interest income was primarily due to unrealized loss of $1.1 million on equity securities during the six months ended June 30, 2022 compared to an unrealized
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loss of $62,000 on equity securities during the six months ended June 30, 2021. The unrealized loss of $1.1 million on equity securities was primarily due to a rising interest rate environment due to the Federal Reserve’s interest rate increase, which impacted the value of the equity securities during the six months ended June 30, 2022.
The decrease in total non-interest income was partially offset by increases of $303,000 in other loan fees and service charges, $39,000 on gain from the sale of fixed assets, $16,000 in other non-interest income, $15,000 in investment advisory fees, and $2,000 in bank-owned life insurance income.
The increase in other loan fees and service charges was due to an increase of $185,000 in other loan fees and loan servicing fees and an increase of $116,000 in ATM and debit card usage fees.
Non-Interest Expense
Non-interest expense increased by $1.4 million, or 10.6%, to $14.2 million for the six months ended June 30, 2022 from $12.9 million for the six months ended June 30, 2021. The increase resulted primarily from increases of $759,000 in other operating expense, $272,000 in salaries and employee benefits, $121,000 in occupancy expense, $91,000 in outside data processing expense, $78,000 in equipment expense, and $58,000 in advertising expense, partially offset by a decrease of $16,000 in real estate owned expense.
Other non-interest expense increased by $759,000, or 23.5%, to $4.0 million for the six months ended June 30, 2022 from $3.2 million for the six months ended June 30, 2021 due mainly to increases of $372,000 in miscellaneous other non-interest expense, $254,000 in legal fees, $104,000 in service contracts expense, $44,000 in expenses related to the hiring of personnel, $43,000 in audit and accounting fees, $30,000 in insurance expense, $12,000 in office supplies, $11,000 in directors compensation, $4,000 in telephone expense, and $3,000 in directors, officers and employee expense. These increases were partially offset by a decrease of $118,000 in consulting fees.
The increase of $372,000 in miscellaneous other non-interest expense was mainly due to an increase of $217,000 in regulatory insurance premiums and assessments due to an increase in our total assets, an increase of $54,000 in miscellaneous charge-offs, an increase of $53,000 in public company expense, an increase of $25,000 in dues and subscriptions, and an increase of $19,000 in check and correspondence bank charges.
The increase of $254,000 in legal fees was due to the increased expenses associated with being a fully public company.
Salaries and employee benefits increased by $272,000, or 3.8%, to $7.4 million for the six months ended June 30, 2022 from $7.2 million for the six months ended June 30, 2021 primarily due to an increase in number of full time equivalent personnel related to the opening of two additional branch offices, an increase in bonus accruals for loan production personnel as loan originations increased, and an increase in employee stock ownership plan (“ESOP”) compensation cost as the ESOP purchased additional shares of Company common stock using funds loaned to the ESOP from the Company as part of the second-step conversion offering. These increases were partially offset by an increase in loan origination expenses and fees resulting from an increase in loan originations.
Occupancy expense increased by $121,000, or 11.6%, to $1.2 million for the six months ended June 30, 2022 from $1.0 million for the six months ended June 30, 2021 primarily as a result of the cost of operating additional branch office space.
Outside data processing expense increased by $91,000, or 11.0%, to $915,000 for the six months ended June 30, 2022 from $824,000 for the six months ended June 30, 2021 due to the cost of operating additional two branches and additional data processing services.
Equipment expense increased by $78,000, or 16.0%, to $566,000 for the six months ended June 30, 2022 from $488,000 for the six months ended June 30, 2021 due to the purchases of additional equipment to support the Company’s branch expansion.
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Advertising expense increased by $58,000, or 123.4%, to $105,000 for the six months ended June 30, 2022 from $47,000 for the six months ended June 30, 2021 due mainly to the resumption of advertising and promotional products to promote the opening of our additional branch offices.
Real estate owned expense decreased by $16,000, or 23.5%, to $52,000 for the six months ended June 30, 2022 from $68,000 for the six months ended June 30, 2021 due to a reduction in operating expenses to maintain the one real estate owned property.
Income Taxes. We recorded income tax expense of $2.8 million and $2.1 million for the six months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022, we had approximately $370,000 in tax exempt income, compared to approximately $336,000 in tax exempt income for the six months ended June 30, 2021. Our effective income tax rates were 23.6% and 23.2% for the six months ended June 30, 2022 and 2021, respectively.
Average Balances and Yields
The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average daily balances of assets or liabilities, respectively, for the periods presented. Loan fees, including prepayment fees, are included in interest income on loans and are not material. Non-accrual loans are included in the average balances only. In addition, yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.
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Three Months Ended June 30,
2022
2021
Average
Interest and
Yield/
Average
Interest and
Yield/
Balance
Dividends
Cost
Balance
Dividends
Cost
Loans receivable
$
997,983
$
14,412
5.78
%
$
833,973
$
11,575
5.55
%
Securities (1)
43,880
177
1.61
21,513
90
1.67
Other interest-earning assets
139,978
249
0.71
69,368
11
0.06
Total interest-earning assets
1,181,841
14,838
5.02
924,854
11,676
5.05
Allowance for loan losses
(5,333)
(5,103)
Non-interest-earning assets
77,693
72,615
Total assets
$
1,254,201
$
992,366
Interest bearing demand
$
115,097
$
190
0.66
%
$
114,675
$
164
0.57
%
Savings and club accounts
214,840
354
0.66
101,162
48
0.19
Certificates of deposit
262,703
616
0.94
324,420
901
1.11
Interest-bearing deposits
592,640
1,160
0.78
540,257
1,113
0.82
Borrowed money
$
21,000
136
2.59
28,000
185
2.64
Interest-bearing liabilities
613,640
1,296
0.84
568,257
1,298
0.91
Non-interest-bearing demand
368,359
239,996
Other non-interest-bearing liabilities
16,108
24,429
Total liabilities
998,107
832,682
Equity
256,094
159,684
Total liabilities and equity
$
1,254,201
$
992,366
Net interest income/interest spread
$
13,542
4.18
%
$
10,378
4.14
%
Net interest margin
4.58
%
4.49
%
Net interest-earning assets
$
568,201
$
356,597
Average interest-earning assets to interest-bearing liabilities
192.60
%
162.75
%
Six Months Ended June 30,
2022
2021
Average
Interest and
Yield/
Average
Interest and
Yield/
Balance
Dividends
Cost
Balance
Dividends
Cost
Loans receivable
$
993,879
$
27,473
5.53
%
$
834,219
$
23,302
5.59
%
Securities (1)
41,489
335
1.61
20,312
173
1.70
Other interest-earning assets
140,582
304
0.43
58,942
21
0.07
Total interest-earning assets
1,175,950
28,112
4.78
913,473
23,496
5.14
Allowance for loan losses
(5,308)
(5,096)
Non-interest-earning assets
76,927
70,157
Total assets
$
1,247,569
$
978,534
Interest bearing demand
$
116,228
$
359
0.62
%
$
111,357
$
320
0.57
%
Savings and club accounts
209,080
681
0.65
101,893
127
0.25
Certificates of deposit
275,612
1,297
0.94
330,546
1,948
1.18
Interest-bearing deposits
600,920
2,337
0.78
543,796
2,395
0.88
Borrowed money
23,514
307
2.61
28,000
368
2.63
Interest-bearing liabilities
624,434
2,644
0.85
571,796
2,763
0.97
Non-interest-bearing demand
352,689
229,854
Other non-interest-bearing liabilities
15,352
19,020
Total liabilities
992,475
820,670
Equity
255,094
157,864
Total liabilities and equity
$
1,247,569
$
978,534
Net interest income/interest spread
$
25,468
3.93
%
$
20,733
4.18
%
Net interest margin
4.33
%
4.54
%
Net interest-earning assets
$
551,516
$
341,677
Average interest-earning assets to interest-bearing liabilities
188.32
%
159.76
%
(1) Cash on deposit at Federal Home Loan Bank or Federal Reserve Board.
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Rate/Volume Analysis
The following tables set forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns.
Three Months Ended 6/30/2022
Compared to
Three Months Ended 6/30/2021
Increase (Decrease)
Due to
Volume
Rate
Total
(Dollars in thousands)
Interest income:
Loans receivable
$
2,353
$
484
$
2,837
Securities
109
(22)
87
Other interest-earning assets
22
216
238
Total
$
2,484
$
678
$
3,162
Interest expense:
Interest bearing demand deposit
$
1
$
25
$
26
Savings accounts
96
210
306
Certificates of deposits
(157)
(128)
(285)
Borrowed money
(45)
(4)
(49)
Total
(105)
103
(2)
Net change in net interest income
$
2,589
$
575
$
3,164
Six Months Ended 6/30/2022
Compared to
Six Months Ended 6/30/2021
Increase (Decrease)
Due to
Volume
Rate
Total
(Dollars in thousands)
Interest income:
Loans receivable
$
4,875
$
(704)
$
4,171
Securities
189
(27)
162
Other interest-earning assets
61
222
283
Total
$
5,125
$
(509)
$
4,616
Interest expense:
Interest bearing demand deposit
$
14
$
25
$
39
Savings accounts
219
335
554
Certificates of deposits
(294)
(357)
(651)
Borrowed money
(59)
(2)
(61)
Total
(120)
1
(119)
Net change in net interest income
$
5,245
$
(510)
$
4,735
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Asset Quality
The following table sets forth information with respect to our non-performing assets at the dates indicated.
June 30,
December 31,
2022
2021
(Dollars in thousands)
Total non-accrual loans
$
769
$
—
Total accruing loans past due 90 days or more
—
—
Total non-performing loans
769
—
Real estate owned
1,996
1,996
Total non-performing assets
$
2,765
$
1,996
Total non-performing loans to total loans
0.08
%
—
%
Total non-performing assets to total assets
0.23
%
0.16
%
Non-performing assets totaled $2.8 million at June 30, 2022 and $2.0 million at December 31, 2021, respectively. There were two nonaccrual non-residential loans totaling $769,000 as of June 30, 2022, which are secured by the same property to one borrower that is in foreclosure due to a maturity default at June 30, 2022. There were no nonaccrual loans at December 31, 2021. During the six months ended June 30, 2022, we did not collect any interest income on loans that were placed on non-accrual status.
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 six months ended June 30, 2022 or June 30, 2021 or during the year ended December 31, 2021. TDRs may be considered to be non-performing and if so are placed on non-accrual, except for those that have established a sufficient performance history (generally a minimum of six consecutive months of performance) under the terms of the restructured loan.
During the three and six months ended June 30, 2022, two TDR loans were placed on nonaccrual status due to a maturity default. During the three and six months ended June 30, 2021, none of the loans that were modified during the previous twelve months had defaulted. At June 30, 2022, two loans with aggregate balances of $865,000 were considered TDRs but were performing in accordance with their restructured terms for the requisite period of time (generally at least six consecutive months) to be returned to accrual status. At December 31, 2021, four loans with aggregate balances of $1.6 million were considered TDRs but were performing.
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The following table sets forth an analysis of the activity in the allowance for loan losses for the periods indicated:
June 30,
December 31,
2022
2021
(Dollars In Thousands)
Allowance at beginning of period
$
5,242
$
5,088
Provision for loan losses
—
3,610
Net Charge-offs:
Residential real estate loans:
One- to four-family
—
—
Multifamily
(146)
(150)
Mixed-use
(43)
—
Total residential real estate loans
(189)
(150)
Non-residential real estate loans
(53)
3,591
Construction loans
—
—
Commercial and industrial loans
—
—
Consumer loans
17
15
Total net charge-offs
(225)
3,456
Allowance at end of period
$
5,467
$
5,242
Total loans outstanding
$
1,023,622
$
972,851
Average loans outstanding
993,879
866,518
Ratio of allowance to non-performing loans
710.92
%
—
%
Ratio of allowance to total loans
0.53
%
0.54
%
Ratio of net charge-offs to average loans
(0.02)
%
0.40
%
Non-performing loans
$
769
$
—
The allowance for loan losses increased by $225,000 to $5.5 million at June 30, 2022 from $5.2 million at December 31, 2021. The increase in the allowances for loan losses was due primarily to recoveries totaling $242,000, partially offset by charge-offs totaling $17,000.
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 14.8%, 19.0%, and 22.7%, respectively, for the six months ended June 30, 2022 compared to 12.7%, 15.7%, and 21.7%, respectively, for the year ended December 31, 2021. We adjust our liquidity levels to fund deposit outflows, pay real estate taxes on real estate loans, repay our borrowings, and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.
Our liquidity ratios cannot be calculated using amounts disclosed in our consolidated financial statements, as many of the calculations involve monthly, quarterly or annual averages. To calculate our liquidity ratios, the average liquidity base from the prior month is used as the denominator to calculate a daily liquidity ratio. The liquidity base consists of savings account balances, certificates of deposit balances, checking and money market balances, deposit loans and borrowings. The daily balances of these components are averaged to arrive at the liquidity base for the month, and the daily cash balances in selected general ledger accounts are used to derive our liquidity position. A daily liquidity ratio is calculated using the liquidity for the day divided by the prior month’s average liquidity base. At the end of each month, a monthly liquidity position is calculated using the average liquidity position for the month divided by the prior month’s
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average liquidity base. To calculate quarterly and annual liquidity ratios, we take the average liquidity for the three- or twelve-month period, respectively, and average it.
Our primary sources of liquidity are deposits, prepayment of loans and mortgage-backed securities, maturities of investment securities, other short-term investments, earnings, and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included with our Consolidated Financial Statements.
Our primary investing activities are the origination of construction loans, commercial and industrial loans, multifamily loans, and to a lesser extent, mixed-use real estate loans and other loans. For the six months ended June 30, 2022 and 2021, our loan originations totaled $307.4 million and $285.1 million, respectively. Cash received from the maturities and pay-downs on securities totaled $737,000 and $793,000 for the six months ended June 30, 2022 and 2021, respectively. We purchased securities totaling $10.0 million and $4.3 million during the six months ended June 30, 2022 and June 30, 2021, respectively.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of New York to provide advances. As a member of the Federal Home Loan Bank of New York, we are required to own capital stock in the Federal Home Loan Bank of New York and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to credit-worthiness have been met. We had an available borrowing limit of $24.1 million and $29.4 million from the Federal Home Loan Bank of New York as of June 30, 2022 and December 31, 2021, respectively. There were $21.0 million and $28.0 million in Federal Home Loan Bank advances at June 30, 2022 and December 31, 2021, respectively.
In addition, we are party to a loan agreement with ACBB under which we can borrow up to $8.0 million in short-term borrowings. There were no outstanding borrowings with ACBB at June 30, 2022 and December 31, 2021.
At June 30, 2022, we had unfunded commitments on construction loans of $491.1 million, outstanding commitments to originate loans of $258.2 million, unfunded commitments under lines of credit of $139.9 million, and unfunded standby letters of credit of $7.3 million. At June 30, 2022, certificates of deposit scheduled to mature in less than one year totaled $158.1 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 June 30, 2022, the Company had liquid assets of $40.1 million and $3.7 million in loan participations originated by the Bank which are held by the Company.
Off-Balance Sheet Arrangements
For the six months ended June 30, 2022, we did not engage in any off-balance sheet transactions reasonably likely to have a material adverse effect on our financial condition, results of operations or cash-flows.
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Impact of Inflation and Changing Prices
The consolidated financial statements and related notes of NorthEast Community Bancorp have been prepared in accordance with GAAP, which generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
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.