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.
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COVID-19 Pandemic
Due to the impact of COVID-19 on our borrowers, we granted eligible loan modifications under the CARES Act in the form of payment deferral of principal and interest to 196 loans totaling $190.9 million at the time payment deferral was requested. As of September 30, 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.
Critical Accounting Policies
We consider accounting policies involving significant judgements and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider these accounting policies to be our crucial accounting policies. The judgements and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgements and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
Allowance for Loan Losses
We consider the allowance for loan losses to be a critical accounting policy. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific and general reserves. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, a specific allowance is established or a partial charge-off is taken when the fair market value of the collateral is lower than the carrying value of that loan. Beginning in the fourth quarter of 2012, we discontinued the use of specific allowances. If an impairment is identified, we now charge off the impaired portion immediately. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment records, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis.
The general component of the allowance calculation is also based on the loss factors that reflect our historical charge-off experience adjusted for current economic conditions applied to loan groups with similar characteristics or classifications in the current portfolio. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, we have a structured loan rating process which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into
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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.
Based on management’s comprehensive analysis of the loan portfolio, management believes the allowance for loan losses is appropriate as of September 30, 2022.
Balance Sheet Analysis
General
Total assets increased by $59.8 million, or 4.9%, to $1.3 billion at September 30, 2022, from $1.2 billion at December 31, 2021. The increase in assets was primarily due to increases in net loans of $144.4 million, securities held-to-maturity of $8.9 million, premises and equipment of $2.4 million, and accrued interest receivable of $2.4 million, partially offset by decreases in cash and cash equivalents of $97.3 million and equity securities of $1.6 million.
Cash and cash equivalents decreased by $97.3 million, or 63.9%, to $54.9 million at September 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 $144.4 million, an increase in securities held-to-maturity of $8.9 million, an increase in property and equipment of $2.4 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 $1.6 million, or 8.2%, to $18.3 million at September 30, 2022 from $19.9 million at December 31, 2021. The decrease in equity securities was attributable to market depreciation of $1.6 million as market interest rates increased during the nine months ended September 30, 2022.
Securities held-to-maturity increased by $8.9 million, or 49.5%, to $26.7 million at September 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 $144.4 million, or 14.9%, to $1.1 billion at September 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 $499.2 million during the nine months ended September 30, 2022, consisting primarily of $425.1 million in construction loans with respect to which approximately 45.6% of the funds were disbursed at loan closings, with the remaining funds to be disbursed over the terms of the construction loans.
Loan originations resulted in a net increase of $178.6 million in construction loans, $4,0 million in multi-family loans, and $754,000 in consumer 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 $7.0 million, mixed-use loans of $5.9 million, and residential loans of $1.5 million, coupled with normal pay-downs and principal reductions.
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Premises and equipment increased by $2.4 million, or 10.2, to $26.3 million at September 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 September 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 March 31, 2022.
Accrued interest receivable increased by $2.4 million, or 54.9%, to $6.6 million at September 30, 2022 from $4.3 million at December 31, 2021 due to an increase in the loan portfolio and five interest rate increases in 2022 that caused an increase in the interest rates in our construction loan portfolio.
Foreclosed real estate decreased by $189,000, or 9.5%, to $1.8 million at September 30, 2022 from $2.0 million at December 31, 2021 due to a write down on the fair market value of the property because the increase in interest rates caused an increase in the capitalization rate thereby resulting in a reduction in the calculated fair market value of the property.
Right of use assets — operating decreased by $403,000, or 15.7%, to $2.2 million at September 30, 2022 from $2.6 million at December 31, 2021, primarily due to amortization.
Other assets increased by $1.3 million, or 26.7%, to $5.9 million at September 30, 2022 from $4.7 million at December 31, 2021 due to increases in tax assets of $765,000 and suspense accounts of $544,000, partially offset by decreases in prepaid expenses of $32,000 securities principal receivable of $19,000.
Total deposits increased by $60.5 million, or 6.5%, to $987.6 million at September 30, 2022 from $927.2 million at December 31, 2021. The increase was primarily due to an increase in savings account balances of $71.2 million, or 38.5% and an increase in non-interest bearing demand deposits of $23.5 million, or 7.1%. These increases were partially offset by a decrease in NOW/money market accounts of $21.0 million, or 17.8%, and a decrease in certificates of deposit of $13.2 million, or 4.5%, and from December 31, 2021 to September 30, 2022.
Federal Home Loan Bank advances decreased by $7.0 million, or 25.0%, to $21.0 million at September 30, 2022 from $28.0 million at December 31, 2021.
Advance payments by borrowers for taxes and insurance increased by $413,000, or 21.9%, to $2.3 million at September 30, 2022 from $1.9 million at December 31, 2021 due primarily to the accumulation of tax payments from borrowers.
Lease liability – operating decreased by $394,000, or 15.1%, to $2.2 million at September 30, 2022 from $2.6 million at December 31, 2021, primarily due to amortization.
Accounts payable and accrued expenses decreased by $2.4 million, or 17.2%, to $11.2 million at September 30, 2022 from $13.5 million at December 31, 2021 due primarily to a decrease in suspense accounts for loan closings of $2.5 million.
Stockholders’ equity increased by $8.7 million, or 3.4% to $260.0 million at September 30, 2022, from $251.4 million at December 31, 2021. The increase in stockholders’ equity was due to net income of $16.6 million for the nine months ended September 30, 2022, a reduction of $652,000 in unearned employee stock ownership plan shares coupled with an increase of $124,000 in earned employee stock ownership plan shares, and $64,000 in other comprehensive income, partially offset by dividends paid and declared of $5.6 million and stock repurchases totaling $3.2 million.
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Results of Operations for the Three Months Ended September 30, 2022 and 2021
Financial Highlights
Net income for the three months ended September 30, 2022 was $7.5 million compared to net income of $730,000 for the three months ended September 30, 2021. Net income for the three months ended September 30, 2022 increased from net income for the three months ended September 30, 2021 primarily due to an increase in net interest income and a decrease in the provision for loan losses, partially offset by a decrease in non-interest income, an increase in non-interest expense, and an increase in income tax expense. The decrease in the provision for loan losses was because the Company recorded $3.6 million in provision for loan losses during the three months ended September 30, 2021 due to the previously disclosed charge-off of a non-residential bridge loan with a balance of $3.6 million compared to no provision for loan losses during the three months ended September 30, 2022.
Net Interest Income
Net interest income totaled $17.5 million for the three months ended September 30, 2022, as compared to $10.9 million for the three months ended September 30, 2021. The increase in net interest income of $6.6 million, or 60.0%, was primarily due to an increase in interest income offset by an increase in interest expense.
The increase in interest income is attributable to increases in loans and investment securities, offset by a decrease in interest-bearing deposits. The increase in interest income is also attributed to a rising interest rate environment and the Federal Reserve’s interest rate increases during the nine months ended September 30, 2022.
In this regard, total interest income increased by $7.3 million, or 60.3%, to $19.4 million for the three months ended September 30, 2022 from $12.1 million for the three months ended September 30, 2021. The increase was due to an increase in the average balance of interest earning assets of $163.8 million, or 16.0%, to $1.2 billion for the three months ended September 30, 2022 from $1.0 billion for the three months ended September 30, 2021 and an increase in the yield on interest earning assets by 180 basis points from 4.72% for the three months ended September 30, 2021 to 6.52% for the three months ended September 30, 2022.
The increase in market interest rates during the twelve months subsequent to September 30, 2021 also caused an increase in our interest expense. As a result, the increase in interest expense for the three months ended September 30, 2022 was due to an increase in the cost of funds on our deposits and an increase in the balances on our savings and club balances, partially offset by decreases in the balances on our certificates of deposits and interest-bearing demand deposits and decreases in the cost of funds and balances on our borrowed money.
Interest expense increased by $742,000, or 62.8%, to $1.9 million for the three months ended September 30, 2022 from $1.2 million for the three months ended September 30, 2021. The increase was due to an increase in the cost of interest bearing liabilities by 37 basis points from 0.86% for the three months ended September 30, 2021 to 1.23% for the three months ended September 30, 2022 and an increase in average interest bearing liabilities of $76.0 million, or 13.9%, to $624.0 million for the three months ended September 30, 2022 from $547.9 million for the three months ended September 30, 2021.
Net interest margin increased by 162 basis points, or 38.0%, during the three months ended September 30, 2022 to 5.88% compared to 4.26% during the three months ended September 30, 2021.
Provision for Loan Losses.
The Company recorded no loan loss provision for the three months ended September 30, 2022 compared to a loan loss provision of $3.6 million for the three months ended September 30, 2021. We charged-off $6,000 during the three months ended September 30, 2022 against various unpaid overdrafts in our demand deposit accounts compared to charge-offs of $3.6 million during the three months ended September 30, 2021 related to a non-residential bridge loan.
The provision recorded for the three months ended September 30, 2021 was primarily attributed to the previously disclosed charge-off of $3.6 million during the three months ended September 30, 2021 with respect to a non-residential bridge loan secured by real estate with a balance of $3.6 million. The loan is secured by commercial real estate located
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in Greenwich, Connecticut and guaranteed by the two borrowers. The loan originated in 2016 as a two-year bridge loan and, upon the borrower’s failure to satisfy the loan at the maturity date, the loan was accelerated and a foreclosure action was instituted. Although the loan was fully charged-off, the loan remains in foreclosure and management and the borrower are negotiating a standstill agreement which will allow the borrowers to retain, at their own expense, the zoning and planning consultants necessary to obtain re-approvals from the town to proceed with the original planned residential condominium development. Should the standstill agreement not materialize, the Company intends to aggressively seek recovery of all amounts due from the personal guarantors of the loan. If successful against the guarantors, any recovery received would be added back to the allowance for loan losses and an analysis will be performed at that time to determine the appropriateness of the recovery into income.
We also charged-off $3,000 during the three months ended September 30, 2021 against various unpaid overdrafts in our demand deposit accounts.
We recorded no recoveries during the three months ended September 30, 2022 compared to recoveries of $151,000 during the three months ended September 30, 2021.
Based on a review of the loans that were in the loan portfolio at September 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 September 30, 2022 was $309,000 compared to non-interest income of $532,000 for the three months ended September 30, 2021. The decrease in total non-interest income was primarily due to an unrealized loss of $573,000 on equity securities during the three months ended September 30, 2022 compared to an unrealized loss of $154,000 on equity securities during the three months ended September 30, 2021. The unrealized loss of $573,000 on equity securities during the 2022 period was due to a rising interest rate environment and the Federal Reserve’s interest rate increases, which impacted the value of the equity securities during the September 30, 2022 quarter.
The decrease in total non-interest income was partially offset by an increase of $163,000 in other loan fees and service charges, an increase of $52,000 on gain from the sale of fixed assets, an increase of $12,000 in other non-interest income, an increase of $1,000 in bank-owned life insurance income, and a decrease of $32,000 in investment advisory fees.
The increase in other loan fees and service charges was due to an increase of $115,000 in other loan fees and loan servicing fees and an increase of $47,000 in ATM and debit card usage fees.
Non-Interest Expense
Non-interest expense increased by $969,000, or 14.1%, to $7.8 million for the three months ended September 30, 2022 from $6.9 million for the three months ended September 30, 2021. The increase resulted primarily from increases of $604,000 in other operating expense, $181,000 in real estate owned expense, $109,000 in occupancy expense, $78,000 in outside data processing expense, $42,000 in advertising expense, and $30,000 in equipment expense, partially offset by a decrease of $75,000 in salaries and employee benefits.
Other non-interest expense increased by $604,000, or 37.0%, to $2.2 million for the three months ended September 30, 2022 from $1.6 million for the three months ended September 30, 2021 due mainly to increases of $231,000 in
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miscellaneous other non-interest expense, $221,000 in legal fees, $55,000 in service contracts expense, $48,000 in audit and accounting fees, $22,000 in insurance expense, $22,000 in expenses related to the hiring of personnel, $14,000 in directors, officers and employee expense, $11,000 in directors compensation, and $2,000 in telephone expense. These increases were partially offset by decreases of $15,000 in consulting fees and $7,000 in office supplies,.
The increase of $231,000 in miscellaneous other non-interest expense was mainly due to an increase of $82,000 in regulatory insurance premiums and assessments due to an increase in our total assets, and increases of $73,000 in public company expenses, $52,000 in dues and subscriptions, $36,000 in miscellaneous charge-offs, and $8,000 in check and correspondence bank charges, partially offset by a decrease of $23,000 in miscellaneous other expenses.
The increase of $221,000 in legal fees was due to the increased expenses associated with being a fully public company.
Real estate owned expense increased by $181,000, or 1,005.6%, to $199,000 for the three months ended September 30, 2022 from $18,000 for the three months ended September 30, 2021 due to a write down of $189,000 on the fair market value of a foreclosed property because the increase in interest rates caused an increase in the capitalization rate thereby resulting in a reduction in the calculated fair market value of the property.
Occupancy expense increased by $109,000, or 22.3%, to $598,000 for the three months ended September 30, 2022 from $489,000 for the three months ended September 30, 2021 primarily as a result of the cost of operating additional branch offices.
Outside data processing expense increased by $78,000, or 19.7%, to $473,000 for the three months ended September 30, 2022 from $395,000 for the three months ended September 30, 2021 due to the cost of operating additional two branches and additional data processing services.
Advertising expense increased by $42,000, or 116.7%, to $78,000 for the three months ended September 30, 2022 from $36,000 for the nine months ended September 30, 2021 due mainly to the resumption of advertising and promotional products to promote the opening of additional branch offices.
Equipment expense increased by $30,000, or 13.1%, to $259,000 for the three months ended September 30, 2022 from $229,000 for the three months ended September 30, 2021 due to the purchases of additional equipment to support the Company’s branch expansion.
Salaries and employee benefits decreased by $75,000, or 1.9%, to $4.0 million for the three months ended September 30, 2022 from $4.1 million for the three months ended September 30, 2021 primarily due to an increase in loan origination offset expenses related to loan origination fees due to an increase in loan originations and a decrease in employee stock ownership plan (“ESOP”) compensation cost. These decreases were partially offset by an increase in compensation expense due to an increase in the number of full time equivalent personnel due to the opening of two additional branch offices and an increase in bonus accruals for loan production personnel as loan originations increased.
Income Taxes. We recorded income tax expense of $2.4 million and $265,000 for the three months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022 and September 30, 2021, we had approximately $185,000 in tax exempt income. Our effective income tax rates were 24.2% and 26.6% for the three months ended September 30, 2022 and 2021, respectively.
Results of Operations for the Nine months Ended September 30, 2022 and 2021
Financial Highlights
Net income for the nine months ended September 30, 2022 was $16.6 million compared to net income of $7.7 million for the nine months ended September 30, 2021. Net income for the nine months ended September 30, 2022 was greater than net income for the nine months ended September 30, 2021 primarily due to an increase in net interest income and a decrease in the provision for loan losses, partially offset by a decrease in non-interest income, an increase in non-interest expense, and an increase in income tax expense. The decrease in the provision for loan losses was because the Company recorded $3.6 million in provision for loan losses during the nine months ended September 30,
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2021 due to the previously disclosed charge-off of a non-residential bridge loan with a balance of $3.6 million compared to no provision for loan losses during the nine months ended September 30, 2022.
Net Interest Income
Net interest income totaled $42.9 million for the nine months ended September 30, 2022, as compared to $31.6 million for the nine months ended September 30, 2021. The increase in net interest income of $11.3 million, or 35.7%, was primarily due to an increase in interest income offset by an increase in interest expense.
The increase in interest income is attributable to increases in loans, investment 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 due, in large part, to the increase in interest rates attributable to the Federal Reserve’s rate increases during the nine months ended September 30, 2022.
In this regard, interest income increased by $11.9 million, or 33.5%, to $47.5 million for the nine months ended September 30, 2022 from $35.6 million for the nine months ended September 30, 2021. The increase in interest income was due to an increase in the average balance of interest earning assets of $229.2 million, or 24.1%, to $1.2 billion for the nine months ended September 30, 2022 from $951.0 million for the nine months ended September 30, 2021 and an increase in the yield on interest earning assets by 38 basis points from 4.99% for the nine months ended September 30, 2021 to 5.37% for the nine months ended September 30, 2022.
The increase in market interest rates during the nine months ended September 30, 2022 also caused an increase in our interest expense. As a result, the increase in interest expense for the nine months ended September 30, 2022 is attributable to an increase in the cost of funds on our deposits and an increase in the balances on our savings and club balances, partially offset by decreases in the balances on our certificates of deposits and interest-bearing demand deposits and decreases in the cost of funds and balances on our borrowed money.
Interest expense increased by $623,000, or 15.8%, to $4.6 million for the nine months ended September 30, 2022 from $3.9 million for the nine months ended September 30, 2021. The increase in interest expense was due to an increase in the cost of interest bearing liabilities by 5 basis points from 0.93% for the nine months ended September 30, 2021 to 0.98% for the nine months ended September 30, 2022 and an increase in average interest bearing liabilities of $60.5 million, or 10.7%, to $624.3 million for the nine months ended September 30, 2022 from $563.8 million for the nine months ended September 30, 2021.
Net interest margin decreased by 41 basis points, or 9.2%, during the nine months ended September 30, 2022 to 4.85% compared to 4.44% during the nine months ended September 30, 2021.
Provision for Loan Losses.
The Company recorded no loan loss provision for the nine months ended September 30, 2022 compared to a loan loss provision of $3.6 million for the nine months ended September 30, 2021. The provision recorded for the nine months ended September 30, 2021 was primarily attributed to the charge-off of the aforementioned non-residential bridge loan with a balance of $3.6 million secured by commercial real estate located in Greenwich, Connecticut.
We also charged-off $23,000 during both the nine months ended September 30, 2022 and September 30, 2021 against various unpaid overdrafts in our demand deposit accounts. We recorded recoveries of $242,000 during the nine months ended September 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-use property. We recorded recoveries of $160,000 during the nine months ended September 30, 2021 comprised primarily of recoveries of $150,000 regarding a previously charged-off multi-family property.
Based on a review of the loans that were in the loan portfolio at September 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.
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Management uses available information to establish the appropriate level of the allowance for loan losses. Future additions or reductions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
Non-Interest Income
Non-interest income for the nine months ended September 30, 2022 was $904,000 compared to non-interest income of $1.8 million for the nine months ended September 30, 2021. The decrease in total non-interest income was primarily due to unrealized loss of $1.6 million on equity securities during the nine months ended September 30, 2022 compared to an unrealized loss of $215,000 on equity securities during the nine months ended September 30, 2021. The unrealized loss of $1.6 million on equity securities during the 2022 period was due to a rising interest rate environment and the Federal Reserve’s interest rate increases.
The decrease in total non-interest income was partially offset by increases of $467,000 in other loan fees and service charges, $91,000 on gain from the sale of fixed assets, $28,000 in other non-interest income, and $3,000 in bank-owned life insurance income and a decrease of $17,000 in investment advisory fees,.
The increase in other loan fees and service charges was due to an increase of $301,000 in other loan fees and loan servicing fees and an increase of $163,000 in ATM and debit card usage fees.
Non-Interest Expense
Non-interest expense increased by $2.3 million, or 11.8%, to $22.1 million for the nine months ended September 30, 2022 from $19.7 million for the nine months ended September 30, 2021. The increase resulted primarily from increases of $1.4 million in other operating expense, $229,000 in occupancy expense, $197,000 in salaries and employee benefits, $170,000 in outside data processing expense, $167,000 in real estate owned expense, $107,000 in equipment expense, and $100,000 in advertising expense.
Other non-interest expense increased by $1.4 million, or 28.1%, to $6.2 million for the nine months ended September 30, 2022 from $4.9 million for the nine months ended September 30, 2021 due mainly to increases of $601,000 in miscellaneous other non-interest expense, $475,000 in legal fees, $159,000 in service contracts expense, $92,000 in audit and accounting fees, $66,000 in expenses related to the hiring of personnel, $52,000 in insurance expense, $23,000 in directors compensation, $16,000 in directors, officers and employee expense, $7,000 in telephone expense, and $6,000 in office supplies. These increases were partially offset by a decrease of $134,000 in consulting fees.
The increase of $601,000 in miscellaneous other non-interest expense was mainly due to an increase of $299,000 in regulatory insurance premiums and assessments due to an increase in our total assets, an increase of $125,000 in public company expense, an increase of $90,000 in miscellaneous charge-offs, an increase of $78,000 in dues and subscriptions, and an increase of $26,000 in check and correspondence bank charges, partially offset by a decrease of $17,000 in miscellaneous other expense.
The increase of $475,000 in legal fees was due to the increased expenses associated with being a fully public company. The increase of $159,000 in service contracts expense was due to the cost of operating two additional branch office space.
Occupancy expense increased by $229,000, or 14.9%, to $1.8 million for the nine months ended September 30, 2022 from $1.5 million for the nine months ended September 30, 2021 primarily as a result of the cost of operating two additional branch offices.
Salaries and employee benefits increased by $197,000, or 1.8%, to $11.4 million for the nine months ended September 30, 2022 from $11.2 million for the nine months ended September 30, 2021 primarily due to an increase in
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compensation expense due to an increase in the 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 health insurance premiums. These increases were partially offset by an increase in loan origination offset expenses and fees resulting from an increase in loan originations.
Outside data processing expense increased by $170,000, or 14.0%, to $1.4 million for the nine months ended September 30, 2022 from $1.2 million for the nine months ended September 30, 2021 due to the cost of operating additional two branches and additional data processing services.
Real estate owned expense increased by $167,000, or 196.5%, to $252,000 for the nine months ended September 30, 2022 from $85,000 for the nine months ended September 30, 2021 due to a write down of $189,000 on the fair market value of a foreclosed property because the increase in interest rates caused an increase in the capitalization rate thereby resulting in a reduction in the calculated fair market value of the property.
Equipment expense increased by $107,000, or 14.9%, to $825,000 for the nine months ended September 30, 2022 from $718,000 for the nine months ended September 30, 2021 due to the purchases of additional equipment to support the Company’s branch expansion.
Advertising expense increased by $100,000, or 120.5%, to $183,000 for the nine months ended September 30, 2022 from $83,000 for the nine months ended September 30, 2021 due mainly to the resumption of advertising and promotional products to promote the opening of our additional branch offices.
Income Taxes. We recorded income tax expense of $5.2 million and $2.4 million for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, we had approximately $553,000 in tax exempt income, compared to approximately $522,000 in tax exempt income for the nine months ended September 30, 2021. Our effective income tax rates were 23.9% and 23.6% for the nine months ended September 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 September 30,
2022
2021
Average
Interest and
Yield/
Average
Interest and
Yield/
Balance
Dividends
Cost
Balance
Dividends
Cost
Loans receivable
$
1,067,835
$
18,771
7.03
%
$
862,796
$
11,935
5.53
%
Securities (1)
47,157
199
1.69
27,208
104
1.53
Other interest-earning assets
73,524
414
2.25
134,680
53
0.16
Total interest-earning assets
1,188,516
19,384
6.52
1,024,684
12,092
4.72
Allowance for loan losses
(5,467)
(5,181)
Non-interest-earning assets
81,702
73,990
Total assets
$
1,264,751
$
1,093,493
Interest bearing demand
$
104,669
$
241
0.92
%
$
117,329
$
183
0.62
%
Savings and club accounts
233,447
660
1.13
97,556
48
0.20
Certificates of deposit
264,850
885
1.34
305,057
764
1.00
Interest-bearing deposits
602,966
1,786
1.18
519,942
995
0.77
Borrowed money
$
21,000
138
2.63
28,000
187
2.67
Interest-bearing liabilities
623,966
1,924
1.23
547,942
1,182
0.86
Non-interest-bearing demand
365,025
281,499
Other non-interest-bearing liabilities
15,557
41,992
Total liabilities
1,004,548
871,433
Equity
260,203
222,060
Total liabilities and equity
$
1,264,751
$
1,093,493
Net interest income/interest spread
$
17,460
5.29
%
$
10,910
3.86
%
Net interest margin
5.88
%
4.26
%
Net interest-earning assets
$
564,550
$
476,742
Average interest-earning assets to interest-bearing liabilities
190.48
%
187.01
%
Nine Months Ended September 30,
2022
2021
Average
Interest and
Yield/
Average
Interest and
Yield/
Balance
Dividends
Cost
Balance
Dividends
Cost
Loans receivable
$
1,018,802
$
46,244
6.05
%
$
843,850
$
35,237
5.57
%
Securities (1)
43,400
534
1.64
22,636
277
1.63
Other interest-earning assets
117,983
718
0.81
84,465
74
0.12
Total interest-earning assets
1,180,185
47,496
5.37
950,951
35,588
4.99
Allowance for loan losses
(5,362)
(5,125)
Non-interest-earning assets
78,536
71,449
Total assets
$
1,253,359
$
1,017,275
Interest bearing demand
$
112,332
$
601
0.71
%
$
113,370
$
503
0.59
%
Savings and club accounts
217,291
1,340
0.82
100,431
174
0.23
Certificates of deposit
271,985
2,182
1.07
321,956
2,713
1.12
Interest-bearing deposits
601,608
4,123
0.91
535,757
3,390
0.84
Borrowed money
22,667
445
2.62
28,000
555
2.64
Interest-bearing liabilities
624,275
4,568
0.98
563,757
3,945
0.93
Non-interest-bearing demand
356,846
247,258
Other non-interest-bearing liabilities
15,422
26,762
Total liabilities
996,543
837,777
Equity
256,816
179,498
Total liabilities and equity
$
1,253,359
$
1,017,275
Net interest income/interest spread
$
42,928
4.39
%
$
31,643
4.06
%
Net interest margin
4.85
%
4.44
%
Net interest-earning assets
$
555,910
$
387,194
Average interest-earning assets to interest-bearing liabilities
189.05
%
168.68
%
(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 9/30/2022
Compared to
Three Months Ended 9/30/2021
Increase (Decrease)
Due to
Volume
Rate
Total
(Dollars in thousands)
Interest income:
Loans receivable
$
3,195
$
3,641
$
6,836
Securities
83
12
95
Other interest-earning assets
(174)
535
361
Total
$
3,104
$
4,188
$
7,292
Interest expense:
Interest bearing demand deposit
$
(118)
$
176
$
58
Savings accounts
139
473
612
Certificates of deposits
(544)
665
121
Borrowed money
(46)
(3)
(49)
Total
(569)
1,311
742
Net change in net interest income
$
3,673
$
2,877
$
6,550
Nine Months Ended 9/30/2022
Compared to
Nine Months Ended 9/30/2021
Increase (Decrease)
Due to
Volume
Rate
Total
(Dollars in thousands)
Interest income:
Loans receivable
$
7,753
$
3,254
$
11,007
Securities
255
2
257
Other interest-earning assets
40
604
644
Total
$
8,048
$
3,860
$
11,908
Interest expense:
Interest bearing demand deposit
$
(8)
$
106
$
98
Savings accounts
364
802
1,166
Certificates of deposits
(406)
(125)
(531)
Borrowed money
(105)
(5)
(110)
Total
(155)
778
623
Net change in net interest income
$
8,203
$
3,082
$
11,285
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Asset Quality
The following table sets forth information with respect to our non-performing assets at the dates indicated.
September 30,
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
1,807
1,996
Total non-performing assets
$
1,807
$
1,996
Total non-performing loans to total loans
—
%
—
%
Total non-performing assets to total assets
0.14
%
0.16
%
Non-performing assets totaled $1.8 million at September 30, 2022 and $2.0 million at December 31, 2021, respectively. There were no nonaccrual loans at September 30, 2022 and December 31, 2021. During the nine months ended September 30, 2022, we collected interest income of $23,000 upon the satisfaction of two TDR loans that became non-accrual in June 2022 but were satisfied in July 2022. We did not recognize any interest income on non-accrual loans during the nine months ended September 30, 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 nine months ended September 30, 2022 or September 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.
The two TDR loans that were previously placed during the three months ended June 30, 2022 on nonaccrual status due to a maturity default paid-off during the three months ended September 30, 2022. None of the loans that were modified during the previous twelve months had defaulted during the three and nine months ended September 30, 2022 and September 30, 2021. At September 30, 2022, two loans with aggregate balances of $861,000 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:
September 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
23
15
Total net charge-offs
(219)
3,456
Allowance at end of period
$
5,461
$
5,242
Total loans outstanding
$
1,117,417
$
972,851
Average loans outstanding
1,018,802
866,518
Ratio of allowance to non-performing loans
—
%
—
%
Ratio of allowance to total loans
0.49
%
0.54
%
Ratio of net charge-offs to average loans
(0.02)
%
0.40
%
Non-performing loans
$
—
$
—
The allowance for loan losses increased by $219,000 to $5.5 million at September 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 $23,000.
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 12.5%, 16.9%, and 20.2%, respectively, for the nine months ended September 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 nine months ended September 30, 2022 and 2021, our loan originations totaled $499.2 million and $486.0 million, respectively. Cash received from the maturities and pay-downs on securities totaled $1.2 million and $4.3 million for the nine months ended September 30, 2022 and 2021, respectively. We purchased securities totaling $10.0 million and $15.3 million during the nine months ended September 30, 2022 and September 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 $18.1 million and $29.4 million from the Federal Home Loan Bank of New York as of September 30, 2022 and December 31, 2021, respectively. There were $21.0 million and $28.0 million in Federal Home Loan Bank advances at September 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 September 30, 2022 and December 31, 2021.
At September 30, 2022, we had unfunded commitments on construction loans of $554.4 million, outstanding commitments to originate loans of $391.7 million, unfunded commitments under lines of credit of $130.0 million, and unfunded standby letters of credit of $9.1 million. At September 30, 2022, certificates of deposit scheduled to mature in less than one year totaled $133.8 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 September 30, 2022, the Company had liquid assets of $35.9 million and $3.7 million in loan participations originated by the Bank which are held by the Company.
Off-Balance Sheet Arrangements
For the nine months ended September 30, 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.