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 pandemics or infectious disease outbreaks, 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 impact of failures or disruptions in or breaches of the Company’s operational or security systems, data or infrastructure, or those of third parties, including as a result of cyberattacks or campaigns; (xv) the inability of third party service providers to perform; and (xvi) 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 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.
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Balance Sheet Analysis
General
Total assets increased by $295.0 million, or 20.7%, to $1.7 billion at September 30, 2023, from $1.4 billion at December 31, 2022. The increase in assets was primarily due to an increase in net loans of $291.2 million and an increase in cash and cash equivalents of $11.4 million, partially offset by a decrease in securities held-to-maturity of $10.9 million.
Cash and cash equivalents increased by $11.4 million, or 12.0%, to $106.7 million at September 30, 2023 from $95.3 million at December 31, 2022. The increase in cash and cash equivalents was a result of a decrease in securities held-to-maturity of $10.9 million, increases in deposits of $243.7 million and increases in borrowings of $43.0 million used to fund an increase of $291.2 million in net loans, partially offset by stock repurchases of $21.8 million.
Equity securities decreased by $327,000, or 1.8%, to $17.7 million at September 30, 2023 from $18.0 million at December 31, 2022. The decrease in equity securities was attributable to market depreciation of $327,000 due to market interest rate volatility during the nine months ended September 30, 2023.
Securities held-to-maturity decreased by $10.9 million, or 41.2%, to $15.5 million at September 30, 2023 from $26.4 million at December 31, 2022 due to the maturity of $10.0 million in U.S. Treasury holdings, the establishment of $131,000 in an allowance for credit losses for held-to-maturity securities, and to maturities and pay-downs of various investment securities.
The allowance for credit losses for held-to-maturity securities totaling $131,000 was established pursuant to the adoption of the current expected credit losses model (“CECL”) on held-to-maturity investment securities loss exposures. In this regard, we recognized a one-time credit of $132,000 due to the adoption of CECL at January 1, 2023, partially offset by a credit loss expense reduction totaling $1,000 during the nine months ended September 30, 2023.
Loans, net of the allowance for credit losses, increased by $291.2 million, or 24.0%, to $1.5 billion at September 30, 2023 from $1.2 billion at December 31, 2022. The increase in loans, net of the allowance for credit losses, was primarily due to loan originations of $653.0 million during the nine months ended September 30, 2023, consisting primarily of $575.8 million in construction loans with respect to which approximately 40.5% 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 $45.5 million in multi-family loans, $23.5 million in commercial and industrial loans, and $8.2 million in mixed-use loans.
Loan originations resulted in a net increase of $238.3 million in construction loans, $52.3 million in multi-family loans, $6.6 million in mixed-use loans, and $696,000 in consumer loans. The increase in our loan portfolio was partially offset by decreases of $5.0 million in non-residential loans, $2.1 million in commercial and industrial loans, and $164,000 in residential loans, coupled with normal pay-downs and principal reductions.
The allowance for credit losses related to loans decreased to $4.8 million as of September 30, 2023 from $5.5 million as of December 31, 2022. The decrease in the allowance for credit losses related to loans was due to a one-time decrease of $1.6 million due to the adoption of CECL at January 1, 2023 and charge-offs of $285,000, partially offset by provision for credit losses totaling $1.2 million.
Premises and equipment decreased by $540,000, or 2.1%, to $25.5 million at September 30, 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 $309,000, or 25.0%, to $929,000 at September 30, 2023 from $1.2 million at December 31, 2022 due primarily to a reduction in mandatory Federal Home Loan Bank stock in connection with the maturity of $7.0 million in advances during the nine months ended September 30, 2023.
Bank owned life insurance (“BOLI”) decreased by $970,000, or 3.7%, to $24.9 million at September 30, 2023 from $25.9 million at December 31, 2022 due to two death claims totaling $1.8 million on BOLI policies, partially offset by increases in the BOLI cash value.
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Accrued interest receivable increased by $2.7 million, or 31.7%, to $11.3 million at September 30, 2023 from $8.6 million at December 31, 2022 due to an increase in the loan portfolio and interest rate increases in 2023 that resulted in an increase in the interest rates on loans in our construction loan portfolio.
Foreclosed real estate was $1.5 million at September 30, 2023 and December 31, 2022. Right of use assets — operating decreased by $377,000, or 16.3%, to $1.9 million at September 30, 2023 from $2.3 million at December 31, 2022, primarily due to amortization. Other assets increased by $3.1 million, or 57.7%, to $8.4 million at September 30, 2023 from $5.3 million at December 31, 2022 due to an increase in tax assets of $3.0 million and an increase in suspense accounts of $115,000.
Total deposits increased by $243.7 million, or 21.7%, to $1.4 billion at September 30, 2023 from $1.1 billion at December 31, 2022. The increase was primarily due to a shift in deposits whereby certificates of deposit increased by $364.3 million, or 73.7%, partially offset by decreases in non-interest bearing demand deposits of $67.1 million, or 17.8%, savings account balances of $46.3 million, or 16.9%, and NOW/money market accounts of $7.2 million, or 8.2%.
Federal Home Loan Bank advances decreased by $7.0 million, or 33.3%, to $14.0 million at September 30, 2023 from $21.0 million at December 31, 2022 due to maturity of borrowings. Federal Reserve Bank borrowings increased to $50.0 million at September 30, 2023 from none at December 31, 2022.
Advance payments by borrowers for taxes and insurance increased by $141,000, or 6.0%, to $2.5 million at September 30, 2023 from $2.4 million at December 31, 2022 due primarily to accumulation of real estate tax payments remitted by borrowers.
Lease liability – operating decreased by $372,000, or 15.7%, to $2.0 million at September 30, 2023 from $2.4 million at December 31, 2022, primarily due to repayments.
Accounts payable and accrued expenses decreased by $1.9 million, or 13.0%, to $12.8 million at September 30, 2023 from $14.8 million at December 31, 2022 due primarily to a decrease in suspense accounts for loan closings of $2.5 million and a decrease in accrued bonus expense of $1.6 million for employees, partially offset by an increase in the allowance for credit losses for off-balance sheet commitments totaling $1.2 million and an increase of $538,000 in accounts payable.
The allowance for credit losses for off-balance sheet commitments was $1.2 million at September 30, 2023 due to a one-time credit of $1.6 million resulting from the adoption of CECL at January 1, 2023, partially offset by a credit loss expense reduction totaling $395,000 during the nine months ended September 30, 2023.
Stockholders’ equity increased by $10.4 million, or 4.0% to $272.4 million at September 30, 2023, from $262.0 million at December 31, 2022. The increase in stockholders’ equity was due to net income of $34.2 million for the nine months ended September 30, 2023, $1.3 million in the amortization of restricted stock and stock options granted in connection with the 2022 Equity Incentive Plan, a reduction of 652,000 in unearned employee stock ownership plan shares coupled with an increase of $308,000 in earned employee stock ownership plan shares, and $22,000 in other comprehensive income, partially offset by stock repurchases totaling $21.8 million, dividends paid and declared of $2.5 million, 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 September 30, 2023 and 2022
Financial Highlights
Net income for the three months ended September 30, 2023 was $11.8 million compared to net income of $7.5 million for the three months ended September 30, 2022. The increase in net income of $4.3 million, or 57.0%, between periods was primarily due to an increase in net interest income, partially offset by an increase in provision for credit losses, a decrease in non-interest income, an increase in non-interest expense, and an increase in income tax expense.
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Net Interest Income
Net interest income totaled $25.1 million for the three months ended September 30, 2023, as compared to $17.5 million for the three months ended September 30, 2022. The increase in net interest income of $7.7 million, or 43.9%, 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 the average balances of loans and interest-bearing deposits, partially offset by decreases in the average balances of investment securities and FHLB stock. The increase in interest income is also attributable to a rising interest rate environment due to the Federal Reserve’s interest rate increases in the past year.
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 September 30, 2023 was due to an increase in the cost of funds on our deposits, partially offset by a decrease in the average balance of our borrowed money. The increase in interest expense was also due to an increase in the balances on our certificates of deposits, offset by decreases in the balances on our savings and club deposits, our interest-bearing demand deposits, and our borrowed money.
Total interest and dividend income increased by $15.8 million, or 81.3%, to $35.1 million for the three months ended September 30, 2023 from $19.4 million for the three months ended September 30, 2022. The increase in interest and dividend income was due to an increase in the average balance of interest earning assets of $381.3 million, or 32.1%, to $1.6 billion for the three months ended September 30, 2023 from $1.2 billion for the three months ended September 30, 2022 and an increase in the yield on interest earning assets by 243 basis points from 6.52% for the three months ended September 30, 2022 to 8.95% for the three months ended September 30, 2023.
Interest expense increased by $8.1 million, or 420.2%, to $10.0 million for the three months ended September 30, 2023 from $1.9 million for the three months ended September 30, 2022. The increase in interest expense was due to an increase in the cost of interest bearing liabilities by 263 basis points from 1.23% for the three months ended September 30, 2022 to 3.86% for the three months ended September 30, 2023 and an increase in average interest bearing liabilities of $413.2 million, or 66.2%, to $1.0 billion for the three months ended September 30, 2023 from $624.0 million for the three months ended September 30, 2022.
Net interest margin increased by 52 basis points, or 8.8%, during the three months ended September 30, 2023 to 6.40% compared to 5.88% during the three months ended September 30, 2022.
Provision for Credit Losses.
The Company recorded credit loss expenses totaling $156,000 for the three months ended September 30, 2023 compared to no credit loss expense for the three months ended September 30, 2022. The credit loss expense of $156,000 for the three months ended September 30, 2023 was comprised of credit loss expense for loans of $438,000, partially offset by credit loss expense reduction for off-balance sheet commitments of $278,000 and credit loss expense reduction for held-to-maturity investment securities of $4,000.
We charged-off $71,000 during the three months ended September 30, 2023 as compared to charge-offs of $6,000 during the three months ended September 30, 2022. The charge-offs of $71,000 and $6,000 during the three months ended September 30, 2023 and 2022, respectively, were against various unpaid overdrafts in our demand deposit accounts. We recorded no recoveries from previously charged-off loans during the three months ended September 30, 2023 and 2022.
Based on a review at September 30, 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
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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.
Non-Interest Income
Non-interest income for the three months ended September 30, 2023 was $221,000 compared to non-interest income of $309,000 for the three months ended September 30, 2022. The decrease of $88,000, or 28.5%, in total non-interest income was primarily due to a decrease of $180,000 in other loan fees and service charges, a decrease of $52,000 in gain on sale of fixed assets, and a decrease of $6,000 in other non-interest income, partially offset by an increase of $7,000 in investment advisory fees and a decrease of $143,000 in unrealized loss on equity securities.
The decrease in other loan fees and service charges was due to a decrease of $202,000 in other loan fees and loan servicing fees and a decrease of $3,000 in deposit account fees, partially offset by an increase of $25,000 in ATM/debit card/ACH fees.
The decrease in unrealized loss on equity was due to an unrealized loss of $430,000 on equity securities during the three months ended September 30, 2023 compared to an unrealized loss of $573,000 on equity securities during the three months ended September 30, 2022. The unrealized loss of $430,000 on equity securities during the three months ended September 30, 2023 was due to market interest rate volatility during the quarter ended September 30, 2023.
Non-Interest Expense
Non-interest expense increased by $1.1 million, or 14.0%, to $8.9 million for the three months ended September 30, 2023 from $7.8 million for the three months ended September 30, 2022. The increase resulted primarily from increases of $721,000 in salaries and employee benefits, $409,000 in other operating expense, $96,000 in outside data processing expense, $55,000 in advertising expense, and $18,000 in occupancy expense, partially offset by decreases of $188,000 in real estate owned expense and $19,000 in equipment expense.
Salaries and employee benefits increased by $721,000, or 18.1%, to $4.7 million for the three months ended September 30, 2023 from $4.0 million for the three months ended September 30, 2022 primarily due to the hiring of additional personnel to support the growth of the Company, the amortization of expenses related to the 2022 Equity Incentive Plan awards of restricted stocks and options, and a decrease in loan origination expenses related to loan origination fees due to a decrease in loan originations.
Other non-interest expense increased by $409,000, or 18.3%, to $2.6 million for the three months ended September 30, 2023 from $2.2 million for the three months ended September 30, 2022 due mainly to increases of $354,000 in miscellaneous other non-interest expense, $89,000 in service contracts expense, $61,000 in directors compensation, $22,000 in telephone expense, $21,000 in office supplies, and $3,000 in insurance expense. These increases were partially offset by decreases of $60,000 in consulting fees, $44,000 in legal fees, $21,000 in expenses related to the hiring of personnel, $10,000 in directors, officers, and employee expenses, and $5,000 in audit and accounting fees.
The increase of $354,000 in miscellaneous other non-interest expense was mainly due to increases of $367,000 in regulatory insurance premiums and assessments due to an increase in our total assets, $33,000 in dues and subscriptions, $20,000 in miscellaneous expenses, $5,000 in check and correspondence bank charges, and $2,000 in postage expenses. These increases were partially offset by decreases of $67,000 in public company expenses relating to expenses incurred in connection with the shareholders’ approval of the 2022 Equity Incentive Plan and $6,000 in miscellaneous charge-offs.
Service contracts expense increased by $89,000, or 32.3%, to $364,000 for the three months ended September 30, 2023 from $275,000 for the three months ended September 30, 2022 due to the increased cost to support the growth of the Company. Directors compensation increased by $61,000, or 39.4%, to $217,000 for the three months ended September 30, 2023 from $155,000 for the three months ended September 30, 2022 due to the amortization of expenses related to the 2022 Equity Incentive Plan awards of restricted stocks and options.
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Telephone expense increased by $22,000, or 14.9%, to $167,000 for the three months ended September 30, 2023 from $145,000 for the three months ended September 30, 2022 due to increased usage to service customers. Office supplies and stationery increased by $21,000, or 92.6%, to $44,000 for the three months ended September 30, 2023 from $23,000 for the three months ended September 20, 2022 due to the growth of the Company.
Consultant fees decreased by $60,000, or 24.0%, to $191,000 for the three months ended September 30, 2023 from $251,000 for the three months ended September 30, 2022 due to the retention of consultants to help implement CECL in 2022. Legal fees decreased by $44,000, or 15.6%, to $239,000 for the three months ended September 30, 2023 from $283,00 for the three months ended September 30, 2022 due to a reduction in transactions requiring legal services. Recruiting expense decreased by $21,000, or 92.5%, to $2,000 for the three months ended September 30, 2023 from $23,000 for the three months ended September 30, 2022 due to less reliance on traditional recruiting firms for personnel hirings.
Outside data processing expense increased by $96,000, or 20.3%, to $569,000 for the three months ended September 30, 2023 from $473,000 for the three months ended September 30, 2022 due to an increase in transactions and additional data processing services.
Advertising expense increased by $55,000, or 70.5%, to $133,000 for the three months ended September 30, 2023 from $78,000 for the three months ended September 30, 2022 due mainly to the resumption of advertising to promote interest rates offered on our deposit products.
Occupancy expense increased by $18,000, or 3.0%, to $616,000 for the three months ended September 30, 2023 from $598,000 for the three months ended September 30, 2022 primarily as a result of the increased cost of operating office space.
Real estate owned expense decreased by $188,000, or 94.5%, to $11,000 for the three months ended September 30, 2023 from $199,000 for the three months ended September 30, 2022 due to a write down in 2022 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 decreased by $19,000, or 7.3%, to $240,000 for the three months ended September 30, 2023 from $259,000 for the three months ended September 30, 2022 due to a reduced need to purchase additional equipment.
Income Taxes. We recorded income tax expense of $4.4 million and $2.4 million for the three months ended September 30, 2023 and 2022, respectively. For the three months ended September 30, 2023, we had approximately $187,000 in tax exempt income, compared to approximately $185,000 in tax exempt income for the three months ended September 30, 2022. Our effective income tax rates were 27.3% and 24.2% for the three months ended September 30, 2023 and 2022, respectively.
Results of Operations for the Nine Months Ended September 30, 2023 and 2022
Financial Highlights
Net income for the nine months ended September 30, 2023 was $34.2 million compared to net income of $16.6 million for the nine months ended September 30, 2022. The increase in net income of $17.6 million, or 106.1% for the nine months ended September 30, 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 losses, non-interest expense, and income tax expense.
Net Interest Income
Net interest income totaled $72.0 million for the nine months ended September 30, 2023 as compared to $42.9 million for the nine months ended September 30, 2022. The increase in net interest income of $29.1 million, or 67.7%, 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 the average balances of loans, partially offset by decreases in the average balances of interest-bearing deposits, investment securities, and FHLB stock. The increase in interest income is also attributable to a rising interest rate environment as a result of the Federal Reserve’s interest rate increases during 2023.
The increase in market interest rates in 2023 also caused an increase in our interest expense. As a result, the increase in interest expense for the nine months ended September 30, 2023 was due to an increase in the cost of funds on our deposits, partially offset by a decrease in the cost of our borrowed money. The increase in interest expense was also due to an increase in the balances on our certificates of deposits and an increase in the balances of our savings and club deposits, offset by a decrease in the balances on our interest-bearing demand deposits, and a decrease in the balances of our borrowed money.
Total interest and dividend income increased by $47.9 million, or 100.8%, to $95.4 million for the nine months ended September 30, 2023 from $47.5 million for the nine months ended September 30, 2022. The increase in interest and dividend income was due to an increase in the average balance of interest earning assets of $287.9 million, or 24.4%, to $1.5 billion for the nine months ended September 30, 2023 from $1.2 billion for the nine months ended September 30, 2022 and an increase in the yield on interest earning assets by 329 basis points from 5.37% for the nine months ended September 30, 2022 to 8.66% for the nine months ended September 30, 2023.
Interest expense increased by $18.8 million, or 411.8%, to $23.4 million for the nine months ended September 30, 2023 from $4.6 million for the nine months ended September 30, 2022. The increase in interest expense was due to an increase in the cost of interest bearing liabilities by 237 basis points from 0.98% for the nine months ended September 30, 2022 to 3.35% for the nine months ended September 30, 2023, and an increase in average interest bearing liabilities of $307.2 million, or 49.2%, to $931.5 million for the nine months ended September 30, 2023 from $624.3 million for the nine months ended September 30, 2022.
Net interest margin increased by 169 basis points, or 34.8%, during the nine months ended September 30, 2023 to 6.54% compared to 4.85% during the nine months ended September 30, 2022.
Provision for Credit Losses
The Company recorded credit loss expenses totaling $767,000 for the nine months ended September 30, 2023 compared to no credit loss expense for the nine months ended September 30, 2022. The credit loss expense of $767,000 for the nine months ended September 30, 2023 was comprised of credit loss expense for loans of $1.2 million, partially offset by a credit loss expense reduction for off-balance sheet commitments of $395,000 and credit loss expense reduction for held-to-maturity investment securities of $1,000.
We charged-off $286,000 during the nine months ended September 30, 2023 as compared to charge-offs of $23,000 during the nine months ended September 30, 2022. The charge-offs of $286,000 during the nine months ended September 30, 2023 were comprised of a charge-off of $159,000 related to three performing construction loans on the same project whereby we sold the loans to a third-party at a loss of $159,000, as well as charge-offs of $127,000 against various unpaid overdrafts in our demand deposit accounts. The charge-offs of $23,000 during the nine months ended September 30, 2022 were against various unpaid overdrafts in our demand deposit accounts.
We recorded no recoveries from previously charged-off loans during the nine months ended September 30, 2023 compared to recoveries of $242,000 during the nine months ended September 30, 2022, which was comprised of $146,000 from a previously charged-off loan secured by a multi-family property, $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 September 30, 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.
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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.
Non-Interest Income
Non-interest income for the nine months ended September 30, 2023 was $2.4 million compared to non-interest income of $904,000 for the nine months ended September 30, 2022. The increase of $1.5 million, or 160.6%, in total non-interest income was primarily due to a decrease of $1.3 million in unrealized loss on equity securities and an increase of $407,000 in BOLI income. These were partially offset by a decrease of $145,000 in other loan fees and service charges, a decrease of $98,000 in gain on sale of fixed assets, and a decrease of $21,000 in investment advisory fees.
The decrease in unrealized loss on equity was due to an unrealized loss of $327,000 on equity securities during the nine months ended September 30, 2023 compared to an unrealized loss of $1.6 million on equity securities during the nine months ended September 30, 2022. The unrealized loss of $327,000 on equity securities during the 2023 period was due to market interest rate volatility as the Federal Reserve continued to increase interest rates, which impacted the value of the equity securities during the nine months ended September 30, 2023.
The increase in BOLI income was primarily due to two death claims totaling $1.8 million on BOLI policies that resulted in additional BOLI income of $404,000 during the nine months ended September 30, 2023. The decrease in other loan fees and service charges was due to a decrease of $207,000 in other loan fees and loan servicing fees and a decrease of $12,000 in deposit account fees, partially offset by an increase of $75,000 in ATM and debit card usage fees.
Non-Interest Expense
Non-interest expense increased by $3.9 million, or 17.8%, to $26.0 million for the nine months ended September 30, 2023 from $22.1 million for the nine months ended September 30, 2022. The increase resulted primarily from increases of $2.7 million in salaries and employee benefits, $844,000 in other operating expense, $250,000 in outside data processing expense, $237,000 in advertising expense, $127,000 in occupancy expense, and $19,000 in equipment expense, partially offset by a decrease of $200,000 in real estate owned expense.
Salaries and employee benefits increased by $2.7 million, or 23.3%, to $14.1 million for the nine months ended September 30, 2023 from $11.4 million for the nine months ended September 30, 2022 primarily due to the hiring of additional personnel to support the growth of the Company, the amortization of expenses related to the 2022 Equity Incentive Plan awards of restricted stocks and options, and a decrease in loan origination expenses related to loan origination fees due to a decrease in loan originations.
Other non-interest expense increased by $844,000, or 13.6%, to $7.1 million for the nine months ended September 30, 2023 from $6.2 million for the nine months ended September 30, 2022 due mainly to increases of $682,000 in miscellaneous other non-interest expense, $236,000 in service contracts expense, $230,000 in directors compensation, $48,000 in telephone expense, $33,000 in office supplies, and $17,000 in insurance expense. These increases were partially offset by decreases of $165,000 in legal fees, $99,000 in consulting fees, $87,000 in audit and accounting fees, $42,000 in expenses related to the hiring of personnel, and $10,000 in directors, officers, and employee expenses.
The increase of $682,000 in miscellaneous other non-interest expense was mainly due to an increase of $543,000 in regulatory insurance premiums and assessments due to an increase in our total assets, an increase of $172,000 in dues and subscriptions, an increase of $25,000 in miscellaneous other non-interest expense, an increase of $12,000 in check and correspondence bank charges, and an increase of $5,000 in postage expense, partially offset by a decrease of $39,000 in public company expense relating to expenses incurred in connection with the shareholders’ approval of the 2022 Equity Incentive Plan and a decrease of $36,000 in miscellaneous charge-offs.
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Service contracts expense increased by $236,000, or 29.4%, to $1.0 million for the nine months ended September 30, 2023 from $803,000 for the nine months ended September 30, 2022 due to an increase in services provided by third parties in order to support the growth of the Company. Directors compensation increased by $230,000, or 52.8%, to $666,000 for the nine months ended September 30, 2023 from $436,000 for the nine months ended September 30, 2022 due to the amortization of expenses related to the 2022 Equity Incentive Plan awards of restricted stocks and options.
Legal fees decreased by $165,000, or 25.9%, to $474,000 for the nine months ended September 30, 2023 from $640,000 for the nine months ended September 30, 2022 due to a reduction in transactions requiring legal services. Consultant fees decreased by $99,000, or 13.9%, to $611,000 for the nine months ended September 30, 2023 from $710,000 for the nine months ended September 30, 2022 due to the retention of consultants to help implement CECL in 2022. Recruiting expense decreased by $41,000, or 61.1%, to $27,000 for the nine months ended September 30, 2023 from $68,000 for the nine months ended September 30, 2023 due to less reliance on traditional recruiting firms for personnel hirings.
Outside data processing expense increased by $250,000, or 18.0%, to $1.6 million for the nine months ended September 30, 2023 from $1.4 million for the nine months ended September 30, 2022 due to an increase in transactions and additional data processing services.
Advertising expense increased by $237,000, or 129.5%, to $420,000 for the nine months ended September 30, 2023 from $183,000 for the nine months ended September 30, 2022 due mainly to the resumption of advertising and promotional products to promote the interest rates offered on our deposit products.
Occupancy expense increased by $127,000, or 7.2%, to $1.9 million for the nine months ended September 30, 2023 from $1.8 million for the nine months ended September 30, 2022 primarily as a result of the increased cost of operating office space.
Equipment expense increased by $19,000, or 2.3%, to $844,000 for the nine months ended September 30, 2023 from $825,000 for the nine months ended September 30, 2022 due to the purchases of additional equipment to support the Company’s expansion.
Real estate owned expense decreased by $200,000, or 79.4%, to $52,000 for the nine months ended September 30, 2023 from $252,000 for the nine months ended September 30, 2022 due to a write down in 2022 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.
Income Taxes. We recorded income tax expense of $13.4 million and $5.2 million for the nine months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, we had approximately $956,000 and $553,000, respectively, in tax exempt income. The increase in tax exempt income was primarily due to two death claims totaling $1.8 million on BOLI policies that resulted in additional BOLI income of $404,000 during the nine months ended September 30, 2023.
Our effective income tax rates were 28.2% and 23.9% for the nine months ended September 30, 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.
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Three Months Ended September 30,
2023
2022
Average
Interest and
Yield/
Average
Interest and
Yield/
Balance
Dividends
Cost
Balance
Dividends
Cost
Loans receivable
$
1,446,946
$
33,757
9.33
%
$
1,067,835
$
18,771
7.03
%
Securities
33,754
181
2.14
45,919
183
1.59
Federal Home Loan Bank stock
929
18
7.75
1,238
16
5.17
Other interest-earning assets
88,156
1,181
5.36
73,524
414
2.25
Total interest-earning assets
1,569,785
35,137
8.95
1,188,516
19,384
6.52
Allowance for credit losses
(4,404)
(5,467)
Non-interest-earning assets
85,133
81,702
Total assets
$
1,650,514
$
1,264,751
Interest bearing demand
$
78,768
$
522
2.65
%
$
104,669
$
241
0.92
%
Savings and club accounts
235,613
1,624
2.76
233,447
660
1.13
Certificates of deposit
707,142
7,743
4.38
264,850
885
1.34
Interest-bearing deposits
1,021,523
9,889
3.87
602,966
1,786
1.18
Borrowed money
15,631
119
3.05
21,000
138
2.63
Interest-bearing liabilities
1,037,154
10,008
3.86
623,966
1,924
1.23
Non-interest-bearing demand
322,213
365,025
Other non-interest-bearing liabilities
16,694
15,557
Total liabilities
1,376,061
1,004,548
Equity
274,453
260,203
Total liabilities and equity
$
1,650,514
$
1,264,751
Net interest income/interest spread
Net interest margin
$
25,129
5.09
%
$
17,460
5.29
%
Net interest-earning assets
6.40
%
5.88
%
Average interest-earning assets to interest-bearing liabilities
$
532,631
$
564,550
Nine Months Ended September 30,
2023
2022
Average
Interest and
Yield/
Average
Interest and
Yield/
Balance
Dividends
Cost
Balance
Dividends
Cost
Loans receivable
$
1,353,446
$
91,826
9.05
%
$
1,018,802
$
46,244
6.05
%
Securities
39,375
589
1.99
42,080
485
1.54
Federal Home Loan Bank stock
1,002
61
8.12
1,320
49
4.95
Other interest-earning assets
74,308
2,886
5.18
117,983
718
0.81
Total interest-earning assets
1,468,131
95,362
8.66
1,180,185
47,496
5.37
Allowance for credit losses
(4,640)
(5,362)
Non-interest-earning assets
83,200
78,536
Total assets
$
1,546,691
$
1,253,359
Interest bearing demand
$
84,920
$
1,433
2.25
%
$
112,332
$
601
0.71
%
Savings and club accounts
262,977
5,373
2.72
217,291
1,340
0.82
Certificates of deposit
567,378
16,244
3.82
271,985
2,182
1.07
Interest-bearing deposits
915,275
23,050
3.36
601,608
4,123
0.91
Borrowed money
16,216
327
2.69
22,667
445
2.62
Interest-bearing liabilities
931,491
23,377
3.35
624,275
4,568
0.98
Non-interest-bearing demand
329,993
356,846
Other non-interest-bearing liabilities
16,373
15,422
Total liabilities
1,277,857
996,543
Equity
268,834
256,816
Total liabilities and equity
$
1,546,691
$
1,253,359
Net interest income/interest spread
$
71,985
5.31
%
$
42,928
4.39
%
Net interest margin
6.54
%
4.85
%
Net interest-earning assets
$
536,640
$
555,910
Average interest-earning assets to interest-bearing liabilities
157.61
%
189.05
%
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Table of Contents
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 9/30/2023
Compared to
Three Months Ended 9/30/2022
Increase (Decrease)
Due to
Volume
Rate
Total
(Dollars in thousands)
Interest income:
Loans receivable
$
7,799
$
7,187
$
14,986
Securities
(221)
219
(2)
Federal Home Loan Bank stock
(21)
23
2
Other interest-earning assets
97
670
767
Total
$
7,654
$
8,099
$
15,753
Interest expense:
Interest bearing demand deposit
$
(389)
$
670
$
281
Savings accounts
6
958
964
Certificates of deposits
2,902
3,956
6,858
Borrowed money
(120)
101
(19)
Total
2,399
5,685
8,084
Net change in net interest income
$
5,255
$
2,414
$
7,669
Nine Months Ended 9/30/2023
Compared to
Nine Months Ended 9/30/2022
Increase (Decrease)
Due to
Volume
Rate
Total
(Dollars in thousands)
Interest income:
Loans receivable
$
18,188
$
27,394
$
45,582
Securities
(50)
154
104
Federal Home Loan Bank stock
(19)
31
12
Other interest-earning assets
(524)
2,692
2,168
Total
$
17,595
$
30,271
$
47,866
Interest expense:
Interest bearing demand deposit
$
(267)
$
1,099
$
832
Savings accounts
336
3,697
4,033
Certificates of deposits
4,179
9,883
14,062
Borrowed money
(137)
19
(118)
Total
4,111
14,698
18,809
Net change in net interest income
$
13,484
$
15,573
$
29,057
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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,
2023
2022
(Dollars in thousands)
Total non-accrual loans
$
4,381
$
—
Total accruing loans past due 90 days or more
—
—
Total non-performing loans
4,381
—
Real estate owned
1,456
1,456
Total non-performing assets
$
5,837
$
1,456
Total non-performing loans to total loans
0.29
%
—
%
Total non-performing assets to total assets
0.34
%
0.10
%
Non-performing assets totaled $5.8 million at September 30, 2023 compared to $1.5 million at December 31, 2022. At September 30, 2023, we had two non-performing, non-accrual construction loans totaling $4.4 million secured by the same project located in the Bronx, New York. The other non-performing assets consisted of one foreclosed property at September 30, 2023 and December 31, 2022.
There were no nonaccrual loans at December 31, 2022. During the nine months ended September 30, 2023, we did not collect any interest income from the loans that were in non-accrual status. We did not collect any interest income from 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 nine months ended September 30, 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.
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.
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The following table sets forth an analysis of the activity in the allowance for credit losses related to loans for the periods indicated:
September 30
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
1,163
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
159
328
Commercial and industrial loans
—
—
Consumer loans
127
35
Total net charge-offs
286
207
Allowance at end of period
$
4,767
$
5,474
Total loans outstanding
$
1,507,938
$
1,217,321
Average loans outstanding
1,446,946
1,054,577
Ratio of allowance to non-performing loans
1.09
%
—
%
Ratio of allowance to total loans
0.32
%
0.45
%
Ratio of net charge-offs to average loans
0.02
%
0.02
%
Non-performing loans
$
4,381
$
—
The Company’s allowance for credit losses related to loans totaled $4.8 million, or 0.32% of total loans as of September 30, 2023 compared to $5.5 million, or 0.45% of total loans as of December 31, 2022. In addition, the Company’s allowance for credit losses related to off-balance sheet commitments totaling $1.2 million and an allowance for credit losses related to held-to-maturity debt securities totaling $131,000 as of September 30, 2023 compared to none at December 31, 2022.
The allowance for credit losses related to loans decreased by $707,000 to $4.8 million at September 30, 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 $286,000 that comprised of a charge-off of $159,000 related to three performing construction loans on the same project whereby we sold the loans to a third-party at a loss of $159,000 and charge-offs of $127,000 against various unpaid overdrafts in our demand deposit accounts, partially offset by provision for credit losses related to loans totaling $1.2 million at September 30, 2023.
The allowance for credit losses related to off-balance sheet commitments of $1.2 million comprised of the adoption of CECL totaling $1.6 million, partially offset by a credit loss expense reduction of $395,000 at September 30, 2023.
The allowance for credit losses related to held-to-maturity of debt securities of $131,000 comprised of the adoption of CECL totaling $132,000 and credit loss expense reduction of $1,000 at September 30, 2023.
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
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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 7.1%, 10.2%, and 19.4%, respectively, for the nine months ended September 30, 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 nine months ended September 30, 2023 and 2022, our loan originations totaled $653.0 million and $499.2 million, respectively. Cash received from the maturities and pay-downs on securities totaled $10.7 million and $1.2 million for the nine months ended September 30, 2023 and 2022, respectively. We purchased securities totaling $70,000 and $10.0 million during the nine months ended September 30, 2023 and September 30, 2022, 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 $31.3 million and $31.5 million from the Federal Home Loan Bank of New York as of September 30, 2023 and December 31, 2022, respectively. There were $14.0 million and $21.0 million in Federal Home Loan Bank advances at September 30, 2023 and December 31, 2022, respectively.
The Federal Reserve Bank of New York (“FRBNY”) approved on August 30, 2023 the Bank’s eligibility to pledge loans under the Borrower-in-Custody program of the FRBNY thereby allowing the Bank to borrow from the Discount Window at the FRBNY. As of September 30, 2023, we had $50.0 million in FRBNY borrowings and an available borrowing limit of $739.4 million.
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, 2023 and December 31, 2022.
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At September 30, 2023, we had unfunded commitments on construction and multi-family mortgage loans of $464.1 million, outstanding commitments to originate loans of $123.9 million, unfunded commitments under lines of credit of $110.0 million, and unfunded standby letters of credit of $10.3 million. At September 30, 2023, certificates of deposit scheduled to mature in less than one year totaled $588.3 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, Federal Home Loan Bank advances, or Federal Reserve Bank borrowings, 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, 2023, the Company had liquid assets of $4.5 million and $14.4 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, 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.