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.
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
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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.
We consider the allowance for credit losses (“ACL”) to be a critical accounting policy. In connection with the Company’s adoption of Topic 326 effective January 1, 2023, the Company adopted the three applicable components of the ACL: an ACL related to loans, an ACL related to held-to-maturity (“HTM”) securities, and an ACL related to off-balance sheet credit exposures. See Note 1, Summary of Significant Accounting Policies, for additional information on the adoption of ASC 326.
Balance Sheet Analysis
General
Total assets increased by $77.8 million, or 5.5%, to $1.5 billion at March 31, 2023, from $1.4 billion at December 31, 2022. The increase in assets was primarily due to increases in net loans of $98.6 million, partially offset by decreases in cash and cash equivalents of $18.3 million and other assets of $3.3 million.
Cash and cash equivalents decreased by $18.3 million, or 19.2%, to $77.0 million at March 31, 2023 from $95.3 million at December 31, 2022. The decrease in cash and cash equivalents was a result of cash being deployed to fund an increase in net loans of $98.6 million, a reduction in FHLB advances of $7.0 million, and stock repurchases of $10.5 million.
Equity securities increased by $225,000, or 1.2%, to $18.3 million at March 31, 2023 from $18.0 million at December 31, 2022. The increase in equity securities was attributable to market depreciation of $225,000 due to market interest rate volatility during the three months ended March 31, 2023.
Securities held-to-maturity decreased by $287,000, or 1.1%, to $26.1 million at March 31, 2023 from $26.4 million at December 31, 2022 due partially to the establishment of $136,000 in an allowance for held-to-maturity securities pursuant to the adoption of the current expected credit losses model (“CECL”) on held-to-maturity investment securities loss exposures and to maturities and pay-downs.
Loans, net of the allowance for credit losses, increased by $98.6 million, or 8.1%, to $1.3 billion at March 31, 2023 from $1.2 million at December 31, 2022. The increase in loans, net of the allowance for credit losses, was primarily due to loan originations of $214.7 million during the three months ended March 31, 2023, consisting primarily of $176.4 million in construction loans with respect to which approximately 31.5% of the funds were disbursed at loan closings, with the remaining funds to be disbursed over the terms of the construction loans. In addition, we originated $17.0 million in commercial and industrial loans, $13.1 million in multi-family loans, and $8.2 million in mixed-use loans.
Loan originations resulted in a net increase of $78.2 million in construction loans, $13.5 million in commercial and industrial loans, $7.2 million in mixed-use loans, $1.6 million in multi-family loans, and $490,000 in consumer loans. The increase in our loan portfolio was partially offset by decreases in non-residential loans of $3.7 million and residential loans of $67,000, coupled with normal pay-downs and principal reductions.
Premises and equipment decreased by $220,000, or 0.8%, to $25.8 million at March 31, 2023 from $26.1 million at December 31, 2022 primarily due to depreciation of fixed assets.
Investments in Federal Home Loan Bank stock decreased by $315,000, or 25.4%, to $923,000 at March 31, 2023 from $1.2 million at December 31, 2022 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, 2023.
Accrued interest receivable increased by $1.3 million, or 15.4%, to $9.9 million at March 31, 2023 from $8.6 million at December 31, 2022 due to an increase in the loan portfolio and two interest rate increases in 2023 that caused an increase in the interest rates in our construction loan portfolio.
Foreclosed real estate was $1.5 million at March 31, 2023 and at December 31, 2022.
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Right of use assets — operating decreased by $130,000, or 5.6%, to $2.2 million at March 31, 2023 from $2.3 million at December 31, 2022, primarily due to amortization.
Other assets decreased by $3.3 million, or 61.5%, to $2.1 million at March 31, 2023 from $5.3 million at December 31, 2022 due to a decrease in tax assets of $4.1 million coupled with a reclassification of tax assets totaling $1.0 million from other assets to other liabilities and a decrease in suspense accounts of $268,000, partially offset by increases in prepaid expenses of $47,000 and miscellaneous assets of $5,000.
Total deposits increased by $86.4 million, or 7.7%, to $1.2 billion at March 31, 2023 from $1.1 billion at December 31, 2022. The increase was primarily due to an increase in certificates of deposit of $122.3 million, or 31.9%, savings account balances of $5.1 million, or 1.9% and NOW/money market accounts of $4.7 million, or 5.3%. These increases were partially offset by a decrease in non-interest bearing demand deposits of $45.7 million, or 12.2%, from December 31, 2022 to March 31, 2023.
Federal Home Loan Bank advances decreased by $7.0 million, or 33.3%, to $14.0 million at March 31, 2023 from $21.0 million at December 31, 2022 due to maturity of borrowings.
Advance payments by borrowers for taxes and insurance increased by $1.4 million, or 58.4%, to $3.8 million at March 31, 2023 from $2.4 million at December 31, 2022 due primarily to the accumulation of tax payments from borrowers.
Lease liability – operating decreased by $129,000, or 5.5%, to $2.2 million at March 31, 2023 from $2.4 million at December 31, 2022, primarily due to amortization.
Accounts payable and accrued expenses decreased by $3.4 million, or 23.3%, to $11.3 million at March 31, 2023 from $14.8 million at December 31, 2022 due primarily to a decrease in accrued bonus expense of $3.2 million for employees and a decrease in suspense accounts for loan closings of $2.7 million, partially offset by the addition of an allowance for off-balance sheet commitments of $1.4 million due to the adoption of CECL on off-balance sheet exposures and a reclassification of tax assets totaling $1.0 million from other assets to other liabilities.
Stockholders’ equity increased by $514,000, or 0.2% to $262.5 million at March 31, 2023, from $262.0 million at December 31, 2022. The increase in stockholders’ equity was due to net income of $11.2 million for the three months ended March 31, 2023, $433,000 in the amortization of restricted stocks and stock options granted in connection with the 2022 Equity Incentive Plan, a reduction of $145,000 in unearned employee stock ownership plan shares coupled with an increase of $109,000 in earned employee stock ownership plan shares, and $7,000 in other comprehensive income, partially offset by stock repurchases totaling $10.5 million, dividends paid and declared of $875,000, and a one-time adjustment to retained earnings of $99,000 due to the adoption of CECL.
Results of Operations for the Three Months Ended March 31, 2023 and 2022
Financial Highlights
Net income for the three months ended March 31, 2023 was $11.2 million compared to net income of $3.6 million for the three months ended March 31, 2022. The increase in net income of $7.6 million, or 208.5% for the three months ended March 31, 2023 compared to the same period in the prior year was due to increases in net interest income and non-interest income, partially offset by increases in provisions for credit loss expense, non-interest expense, and income tax expense.
Net Interest Income
Net interest income totaled $22.8 million for the three months ended March 31, 2023, as compared to $11.9 million for the three months ended March 31, 2022. The increase in net interest income of $10.9 million, or 91.5%, was primarily due to an increase in interest income offset by an increase in interest expense.
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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 in the past year.
In this regard, total interest income increased by $15.2 million, or 114.8%, to $28.5 million for the three months ended March 31, 2023 from $13.3 million for the three months ended March 31, 2022. The increase was due to an increase in the average balance of interest earning assets of $207.0 million, or 17.7%, to $1.4 billion for the three months ended March 31, 2023 from $1.2 billion for the three months ended March 31, 2022 and an increase in the yield on interest earning assets by 374 basis points from 4.54% for the three months ended March 31, 2022 to 8.28% for the three months ended March 31, 2023.
The increase in market interest rates in the past year also caused an increase in our interest expense. As a result, the increase in interest expense for the three months ended March 31, 2023 was due to an increase in the cost of funds on our deposits and borrowed money and increases in the balances on our certificates of deposits and savings and club balances, partially offset by decreases in the balances on interest-bearing demand deposits and balances on our borrowed money.
Interest expense increased by $4.3 million, or 320.8%, to $5.7 million for the three months ended March 31, 2023 from $1.3 million for the three months ended March 31, 2022. The increase was due to an increase in the cost of interest bearing liabilities by 189 basis points from 0.85% for the three months ended March 31, 2022 to 2.74% for the three months ended March 31, 2023 and an increase in average interest bearing liabilities of $191.7 million, or 30.2%, to $827.0 million for the three months ended March 31, 2023 from $635.3 million for the three months ended March 31, 2022.
Net interest margin increased by 255 basis points, or 62.5%, during the three months ended March 31, 2023 to 6.63% compared to 4.08% during the three months ended March 31, 2022.
Provision for Credit Losses
The Company recorded credit loss expense of $1,000 for the three months ended March 31, 2023 compared to no credit loss expense for the three months ended March 31, 2022. The credit loss expense of $1,000 for the three months ended March 31, 2023 was due to the implementation of CECL and was comprised of credit loss expense for loans of $197,000 and credit loss expense for HTM investment securities of $4,000, which expenses were mostly offset by a credit loss expense reduction for off-balance sheet commitments of $200,000.
We charged-off $21,000 during the three months ended March 31, 2023 as compared to charged-off of $10,000 during the three months ended March 31, 2022 against various unpaid overdrafts in our demand deposit accounts.
We recorded no recoveries from previously charged-off loans during the three months ended March 31, 2023 compared to recoveries of $96,000 during the three months ended March 31, 2022 which comprised of $53,000 from a previously charged-off loan secured by a non-residential property and $43,000 regarding a previously charged-off loan secured by a mixed-use property.
Based on a review at March 31, 2023 of the loans that were in the loan portfolio, our off-balance sheet credit exposures, and our HTM investment securities, management believes that the allowances for these three components are maintained at a level that represents our best estimate of inherent losses in the loan portfolio, off-balance sheet credit exposures, and HTM investment securities that were both probable and reasonably estimable.
Management uses available information to establish the appropriate level of the three ACLs. Future additions or reductions to the three ACLs might 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 three ACLs might not be sufficient to cover actual credit losses, and future provisions for credit losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our three ACLs. Such agencies may require us to recognize adjustments to the three ACLs based on their judgments about information available to them at the time of their examination.
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Non-Interest Income
Non-interest income for the three months ended March 31, 2023 was $1.1 million compared to non-interest income of $58,000 for the three months ended March 31, 2022. The increase in total non-interest income was primarily due to an unrealized gain on equity securities of $225,000 during the three months ended March 31, 2023 compared to an unrealized loss of $634,000 on equity securities during the three months ended March 31, 2022. The unrealized gain of $225,000 on equity securities during the 2023 period was due to market interest rate volatility during the quarter ended March 31, 2023.
The increase in total non-interest income was also due to increases of $216,000 in other loan fees and service charges and $2,000 in bank-owned life insurance income, partially offset by a decrease of $20,000 in investment advisory fees.
The increase in other loan fees and service charges was due to an increase of $179,000 in other loan fees and loan servicing fees and an increase of $41,000 in ATM and debit card usage fees, partially offset by a decrease of $4,000 in savings account fees.
Non-Interest Expense
Non-interest expense increased by $971,000, or 13.4%, to $8.2 million for the three months ended March 31, 2023 from $7.2 million for the three months ended March 31, 2022. The increase resulted primarily from increases of $714,000 in salaries and employee benefits, $113,000 in other operating expense, $79,000 in outside data processing expense, $66,000 in occupancy expense, and $14,000 in equipment expense, partially offset by a decrease of $10,000 in real estate owned expense and $5,000 in advertising expense,.
Salaries and employee benefits increased by $714,000, or 18.7%, to $4.5 million for the three months ended March 31, 2023 from $3.8 million for the three months ended March 31, 2022 primarily due to the amortized expense in 2023 but none in 2022 regarding the restricted stocks and stocks options granted to employees in connection with the 2022 Equity Incentive Plan, an increase in the number of full time equivalent personnel due to the opening of one additional branch office and the expansion of headquarters staff to support the Company’s growth, an increase in bonus accruals, an increase in the employee stock ownership plan (“ESOP”) compensation cost, and a decrease in loan origination offset expenses related to loan origination fees. These increases were partially offset by a decrease in the Supplemental Executive Retirement Plan (“SERP”) compensation due to an increase in the discount rate used to calculate accrued benefits/expense.
Other non-interest expense increased by $113,000, or 5.7%, to $2.1 million for the three months ended March 31, 2023 from $2.0 million for the three months ended March 31, 2022 due mainly to increases of $151,000 in miscellaneous other non-interest expense, $85,000 in directors compensation, $62,000 in service contracts expense, $15,000 in telephone expense, $13,000 in insurance expense, $10,000 in office supplies, and $4,000 in directors, officers and employee expense. These increases were partially offset by decreases of $94,000 in audit and accounting fees, $69,000 in consulting fees, $34,000 in legal fees, and $26,000 in expenses related to the hiring of personnel.
The increase of $151,000 in miscellaneous other non-interest expense was mainly due to an increase of $102,000 in dues and subscriptions, an increase of $56,000 in regulatory insurance premiums and assessments due to an increase in our total assets, and an increase of $17,000 in check and correspondence bank charges, partially offset by a decrease of $26,000 in miscellaneous charge-offs.
The increase of $85,000 in directors compensation was due to the amortized expense in 2023 but none in 2022 regarding the restricted stocks and stocks options granted to directors in connection with the 2022 Equity Incentive Plan.
Outside data processing expense increased by $79,000, or 18.1%, to $515,000 for the three months ended March 31, 2023 from $436,000 for the three months ended March 31, 2022 due to the cost of operating an additional branch office and additional data processing services.
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Occupancy expense increased by $66,000, or 10.9%, to $669,000 for the three months ended March 31, 2023 from $603,000 for the three months ended March 31, 2022 primarily as a result of the cost of operating an additional branch office.
Equipment expense increased by $14,000, or 4.8%, to $304,000 for the three months ended March 31, 2023 from $290,000 for the three months ended March 31, 2022 due to the purchases of additional equipment to support the Company’s expansion.
Real estate owned expense decreased by $10,000, or 32.3%, to $21,000 for the three months ended March 31, 2023 from $31,000 for the three months ended March 31, 2022 due to reduction in operating expenses to maintain the one real estate owned property.
Advertising expense decreased by $5,000, or 9.3%, to $49,000 for the three months ended March 31, 2023 from $54,000 for the three months ended March 31, 2022 due to normal fluctuations in advertising campaign expenses to promote deposit products.
Income Taxes. We recorded income tax expense of $4.5 million and $1.1 million for the three months ended March 31, 2023 and 2022, respectively. For the three months ended March 31, 2023 and March 31, 2022, we had approximately $182,000 and $184,000, respectively, in tax exempt income. Our effective income tax rates were 28.7% and 23.5% for the three months ended March 31, 2023 and 2022, 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.
Three Months Ended March 31,
2023
2022
Average
Interest and
Yield/
Average
Interest and
Yield/
Balance
Dividends
Cost
Balance
Dividends
Cost
Loans receivable
$
1,269,850
$
27,575
8.69
%
$
989,729
$
13,061
5.28
%
Securities
44,523
211
1.90
37,585
142
1.51
Federal Home Loan Bank stock
1,150
22
7.65
1,485
16
4.31
Other interest-earning assets
61,484
703
4.57
141,191
54
0.15
Total interest-earning assets
1,377,007
28,511
8.28
1,169,990
13,273
4.54
Allowance for credit losses
(5,459)
(5,283)
Non-interest-earning assets
80,900
76,155
Total assets
$
1,452,448
$
1,240,862
Interest bearing demand
$
90,199
$
428
1.90
%
$
117,370
$
169
0.58
%
Savings and club accounts
286,510
1,913
2.67
203,255
328
0.65
Certificates of deposit
431,259
3,211
2.98
288,664
681
0.94
Interest-bearing deposits
807,968
5,552
2.75
609,289
1,178
0.08
Borrowed money
$
19,056
121
2.54
26,056
170
2.61
Interest-bearing liabilities
827,024
5,673
2.74
635,345
1,348
0.85
Non-interest-bearing demand
345,298
336,845
Other non-interest-bearing liabilities
15,181
14,590
Total liabilities
1,187,503
986,780
Equity
264,945
254,082
Total liabilities and equity
$
1,452,448
$
1,240,862
Net interest income/interest spread
$
22,838
5.54
%
$
11,925
3.69
%
Net interest margin
6.63
%
4.08
%
Net interest-earning assets
$
549,983
$
534,645
Average interest-earning assets to interest-bearing liabilities
166.50
%
184.15
%
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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 3/31/2023
Compared to
Three Months Ended 3/31/2022
Increase (Decrease)
Due to
Volume
Rate
Total
(Dollars in thousands)
Interest income:
Loans receivable
$
4,424
$
10,090
$
14,514
Securities
29
40
69
Federal Home Loan Bank stock
(21)
27
6
Other interest-earning assets
(227)
876
649
Total
$
4,205
$
11,033
$
15,238
Interest expense:
Interest bearing demand deposit
$
(261)
$
520
$
259
Savings accounts
183
1,402
1,585
Certificates of deposits
472
2,058
2,530
Borrowed money
(45)
(4)
(49)
Total
349
3,976
4,325
Net change in net interest income
$
3,856
$
7,057
$
10,913
Asset Quality
The following table sets forth information with respect to our non-performing assets at the dates indicated.
March 31,
December 31,
2023
2022
(Dollars in thousands)
Total non-accrual loans
$
—
$
—
Total accruing loans past due 90 days or more
—
—
Total non-performing loans
—
—
Real estate owned
1,456
1,456
Total non-performing assets
$
1,456
$
1,456
Total non-performing loans to total loans
—
%
—
%
Total non-performing assets to total assets
0.10
%
0.10
%
Non-performing assets totaled $1.5 million at March 31, 2023 and December 31, 2022. There were no nonaccrual loans at March 31, 2023 and December 31, 2022. During the three months ended March 31, 2023, we did not collect any interest income from the loans that were in non-accrual status in 2022.
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 loan modifications during the three months ended March 31, 2023 or 2022 or during the year ended December 31, 2022. 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.
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The two TDRs with an aggregate balance of $855,000 at December 31, 2022 were performing in accordance with their restructured terms (generally at least six consecutive months) and were sold to a third party on January 5, 2023 at a loss of $86,000.
The following table sets forth an analysis of the activity in the allowance for credit losses related to loans for the periods indicated:
March 31,
December 31,
2023
2022
(Dollars In Thousands)
Allowance at beginning of period
$
5,474
$
5,242
Impact of adopting ASC 326
(1,584)
—
Provision for credit losses
197
439
Net Charge-offs:
Residential real estate loans:
One- to four-family
—
—
Multifamily
—
—
Mixed-use
—
(103)
Total residential real estate loans
—
(103)
Non-residential real estate loans
—
(53)
Construction loans
—
328
Commercial and industrial loans
—
—
Consumer loans
21
35
Total net charge-offs
21
207
Allowance at end of period
$
4,066
$
5,474
Total loans outstanding
$
1,314,505
$
1,217,321
Average loans outstanding
1,269,850
1,054,577
Ratio of allowance to non-performing loans
—
%
—
%
Ratio of allowance to total loans
0.31
%
0.45
%
Ratio of net charge-offs to average loans
0.00
%
0.02
%
Non-performing loans
$
—
$
—
In connection with the adoption of CECL, the Company’s allowance for credit losses related to loans totaled $4.1 million, or 0.31% of total loans as of March 31, 2023 compared to $5.5 million, or 0.45% of total loans as of December 31, 2022. In addition, the Company established an allowance for credit losses related to off-balance sheet commitments totaling $1.4 million and an allowance for credit losses related to held-to-maturity debt securities totaling $136,000 as of March 31, 2023.
The allowance for credit losses related to loans decreased by $1.4 million to $4.1 million at March 31, 2023 from $5.5 million at December 31, 2022. The decrease in the allowances for credit losses was due primarily to the adoption of CECL which reduced the allowance by $1.6 million and charge-offs totaling $21,000 against various unpaid overdrafts in our demand deposit accounts, partially offset by provision for credit losses related to loans totaling $197,000 at March 31, 2023.
The allowance for credit losses related to off-balance sheet commitments of $1.4 million comprised of the adoption of CECL totaling $1.6 million, partially offset by a credit loss expense reduction of $200,000 at March 31, 2023.
The allowance for credit losses related to held-to-maturity of debt securities of $136,000 comprised of the adoption of CECL totaling $132,000 and credit loss expense of $4,000 at March 31, 2023.
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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 6.3%, 10.1%, and 13.2%, respectively, for the three months ended March 31, 2023 compared to 11.2%, 15.5%, and 19.0%, respectively, for the year ended December 31, 2022. 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 average liquidity base. To calculate quarterly and annual liquidity ratios, we take the average liquidity for the three- or twelve-month period, respectively, and average it.
Our primary sources of liquidity are deposits, prepayment of loans and mortgage-backed securities, maturities of investment securities, other short-term investments, earnings, and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included with our Consolidated Financial Statements.
Our primary investing activities are the origination of construction loans, commercial and industrial loans, multifamily loans, and to a lesser extent, mixed-use real estate loans and other loans. For the three months ended March 31, 2023 and 2022, our loan originations totaled $214.7 million and $121.8 million, respectively. Cash received from the maturities and pay-downs on securities totaled $142,000 and $240,000 for the three months ended March 31, 2023 and 2022, respectively. We did not purchase any securities during the three months ended March 31, 2023 and March 31, 2022.
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 $35.5 million and $31.5 million from the Federal Home Loan Bank of New York as of March 31, 2023 and December 31, 2022, respectively. There were $14.0 million and $21.0 million in Federal Home Loan Bank advances at March 31, 2023 and December 31, 2022, respectively.
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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 March 31, 2023 and December 31, 2022.
At March 31, 2023, we had unfunded commitments on construction loans of $578.5 million, unfunded commitments under lines of credit of $132.1 million, outstanding commitments to originate loans of $115.2 million, and unfunded standby letters of credit of $10.6 million. At March 31, 2023, certificates of deposit scheduled to mature in less than one year totaled $376.3 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as various types of sourced deposits, and/or Federal Home Loan Bank advances, in order to maintain our level of assets. Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents. In addition, the cost of such deposits may be significantly higher or lower depending on market interest rates at the time of renewal.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its stockholders and for the repurchase, if any, of its shares of common stock. At March 31, 2023, the Company had liquid assets of $8.5 million and $14.5 million in loan participations originated by the Bank which are held by the Company.
Off-Balance Sheet Arrangements
For the three months ended March 31, 2023, we did not engage in any off-balance sheet transactions reasonably likely to have a material adverse effect on our financial condition, results of operations or cash-flows.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes of NorthEast Community Bancorp have been prepared in accordance with GAAP, which generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.