UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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(Address of Principal Executive Offices)
(
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | | Accelerated filer | | ||
☒ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of August 10, 2022, there were
TABLE OF CONTENTS
2
PART I —FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHEAST COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
June 30, | December 31, | |||||
| 2022 |
| 2021 | |||
(In thousands, except share | ||||||
and per share amounts) | ||||||
ASSETS | ||||||
Cash and amounts due from depository institutions | $ | | $ | | ||
Interest-bearing deposits |
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Total cash and cash equivalents |
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Certificates of deposit |
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Equity securities |
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Securities available-for-sale, at fair value |
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Securities held-to-maturity (fair value of $ |
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Loans receivable |
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Deferred loan costs, net | | | ||||
Allowance for loan losses | ( | ( | ||||
Net loans | |
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Premises and equipment, net |
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Investments in restricted stock, at cost |
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Bank owned life insurance |
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Accrued interest receivable |
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Goodwill |
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Real estate owned |
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Property held for investment |
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Right of Use Assets – Operating |
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Right of Use Assets – Financing |
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Other assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Liabilities: |
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Deposits: |
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Non-interest bearing | $ | | $ | | ||
Interest bearing |
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Total deposits |
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Advance payments by borrowers for taxes and insurance |
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Federal Home Loan Bank advances |
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Lease Liability – Operating |
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Lease Liability – Financing |
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Accounts payable and accrued expenses |
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Total liabilities |
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See notes to interim unaudited consolidated financial statements.
3
NORTHEAST COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (continued)
(Unaudited)
June 30, | December 31, | |||||
| 2022 |
| 2021 | |||
(In thousands, except share | ||||||
and per share amounts) | ||||||
Stockholders’ equity: |
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Preferred stock, $ |
| $ |
| $ | ||
Common stock, $ | | | ||||
Additional paid-in capital |
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Unearned Employee Stock Ownership Plan (“ESOP”) shares |
| ( | ( | |||
Retained earnings |
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Accumulated other comprehensive loss |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | | ||
See notes to interim unaudited consolidated financial statements.
4
NORTHEAST COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
(In thousands, except per share amounts) | |||||||||||||
INTEREST INCOME: |
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Loans | $ | | $ | | $ | | $ | | |||||
Interest-earning deposits |
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Securities |
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Total Interest Income |
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INTEREST EXPENSE: |
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Deposits |
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Borrowings |
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Financing lease |
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Total Interest Expense |
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Net Interest Income |
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Provision for loan loss |
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Net Interest Income after Provision for Loan Losses |
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NON-INTEREST INCOME: |
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Other loan fees and service charges |
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Gain on disposition of equipment |
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Earnings on bank owned life insurance |
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Investment advisory fees |
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Unrealized (loss) gain on equity securities |
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Other |
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Total Non-Interest Income |
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NON-INTEREST EXPENSES: |
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Salaries and employee benefits |
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Occupancy expense |
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Equipment |
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Outside data processing |
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Advertising |
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Real estate owned expense |
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Other |
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Total Non-Interest Expenses |
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INCOME BEFORE PROVISION FOR INCOME TAXES |
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PROVISION FOR INCOME TAXES |
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NET INCOME | $ | | $ | | $ | | $ | | |||||
EARNINGS PER COMMON SHARE – BASIC AND DILUTED¹ | | | | | |||||||||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED¹ |
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¹Shares amounts related to periods prior to the July 12, 2021 closing of the Company’s second-step conversion offering have been restated to give retroactive recognition to the
See notes to interim unaudited consolidated financial statements.
5
NORTHEAST COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
(In thousands) | (In thousands) | ||||||||||||
Net Income | $ | | $ | | $ | | $ | | |||||
Other comprehensive income (loss): |
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Defined benefit pension: |
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Reclassification adjustments out of accumulated other comprehensive income: |
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Amortization of actuarial loss¹ |
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Actuarial loss (gain) arising during period |
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Total |
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Income tax effect² |
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Total other comprehensive income (loss) |
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Total Comprehensive Income | $ | | $ | | $ | | $ | | |||||
See notes to interim unaudited consolidated financial statements.
6
NORTHEAST COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Three and Six months Ended June 30, 2022 and 2021
(Unaudited)
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Number of | Common | Paid- in | Unearned | Retained | Treasury | Comprehensive | ||||||||||||||||||
| Shares, net¹ |
| Stock |
| Capital |
| ESOP Shares |
| Earnings |
| Stock |
| Loss |
| Total | |||||||||
(In thousands, except share and per share amounts) | ||||||||||||||||||||||||
Balance – December 31, 2020 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | ( | $ | | |||||||||
Net income |
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Other comprehensive income |
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Cash dividend declared ($ |
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| ( |
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ESOP shares earned |
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Balance - March 31, 2021 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | ( | $ | | |||||||||
Net income |
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Other comprehensive income (loss) |
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| ( |
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ESOP shares earned |
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Balance - June 30, 2021 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | ( | $ | | |||||||||
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Number of | Common | Paid- in | Unearned | Retained | Treasury | Comprehensive | ||||||||||||||||||
| Shares, net |
| Stock |
| Capital |
| ESOP Shares |
| Earnings |
| Stock |
| Loss |
| Total | |||||||||
(In thousands, except share and per share amounts) | ||||||||||||||||||||||||
Balance – December 31, 2021 | | $ | | $ | | $ | ( | $ | | $ | - | $ | ( | $ | | |||||||||
Net income |
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Other comprehensive income |
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Cash dividend declared ($ |
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ESOP shares earned |
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Balance – March 31, 2022 | | $ | | $ | | $ | ( | $ | | $ | - | $ | ( | $ | | |||||||||
Net income |
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Other comprehensive income |
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Cash dividend declared ($ |
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ESOP shares earned |
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Balance – June 30, 2022 | | $ | | $ | | $ | ( | $ | | $ | — | $ | ( | $ | | |||||||||
¹Shares amounts related to periods prior to the July 12, 2021 closing of the Company’s second-step conversion offering have been restated to give retroactive recognition to the
See notes to interim unaudited consolidated financial statements.
7
NORTHEAST COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, | |||||||
| 2022 |
| 2021 | ||||
(In thousands) | |||||||
Cash Flows from Operating Activities: |
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Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Net accretion of securities premiums and discounts, net |
| ( | ( | ||||
Provision for loan losses |
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Depreciation |
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Net amortization of deferred loan fees and costs |
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Deferred income tax (benefit) expense |
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Unrealized loss recognized on equity securities |
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Earnings on bank owned life insurance |
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Gain on dispositions of premises and equipment |
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ESOP compensation expense |
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(Increase) decrease in accrued interest receivable |
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Decrease (increase) in other assets |
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(Decrease) increase in accounts payable - loan closing | ( | | |||||
Decrease in accounts payable and accrued expenses |
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Net Cash Provided by Operating Activities |
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Cash Flows from Investing Activities: |
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Net increase in loans |
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Proceeds from sale of loan |
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Principal repayments on securities held-to-maturity |
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Purchase of securities held-to-maturity |
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Net redemptions of restricted stock |
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Purchases of premises and equipment |
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Net Cash Used in Investing Activities |
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Cash Flows from Financing Activities: |
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Net increase in deposits |
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Repayment of FHLB of NY advances |
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Issuance of common stock funded by stock subscriptions | — | | |||||
Decrease in advance payments by borrowers for taxes and insurance |
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Cash dividends paid |
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Net Cash (Used in) Provided by Financing Activities |
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Net (Decrease) Increase in Cash and Cash Equivalents |
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Cash and Cash Equivalents – Beginning |
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Cash and Cash Equivalents – Ending | $ | | $ | | |||
See notes to interim unaudited consolidated financial statements.
8
NORTHEAST COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Six Months Ended June 30, | |||||||
| 2022 |
| 2021 | ||||
(In thousands) | |||||||
Supplementary Cash Flows Information: |
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Income taxes paid | $ | | $ | | |||
Interest paid | $ | | $ | | |||
Supplementary Disclosure of Non-Cash Investing and Financing Activities: |
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Dividends declared and not paid | $ | | $ | — | |||
See notes to interim unaudited consolidated financial statements.
9
NORTHEAST COMMUNITY BANCORP, INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
NORTHEAST COMMUNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies
The following is a description of the Company’s business and significant accounting and reporting policies:
Nature of Business:
Northeast Community Bancorp, Inc. (the “Company”) is a Maryland corporation that was incorporated in May 2021 to be the successor to NorthEast Community Bancorp, Inc., a federally chartered corporation (the “Mid-Tier Holding Company”), upon completion of the second-step conversion of NorthEast Community Bank (the “Bank”) from the two-tier mutual holding company structure to the stock holding company structure. NorthEast Community Bancorp, MHC was the former mutual holding company for the Mid-Tier Holding Company prior to the completion of the second-step conversion. In conjunction with the second-step conversion, each of NorthEast Community Bancorp, MHC and the Mid-Tier Holding Company merged out of existence and now cease to exist. The second-step conversion was completed on July 12, 2021, at which time the Company sold, for gross proceeds of $
The Bank is a New York State-chartered savings bank and completed its conversion from a federally-chartered savings bank effective as of the close of business on June 29, 2012. The Company’s primary activity is the ownership and operation of the Bank.
The Bank is headquartered in White Plains, New York. The Bank was founded in 1934 and is a community oriented financial institution dedicated to serving the financial services needs of individuals and businesses within its market area. The Bank currently conducts business through its
The Bank’s principal business consists of originating primarily construction loans and, to a lesser extent, commercial and industrial loans and multifamily and mixed-use residential real estate loans and non-residential real estate loans. The Bank offers a variety of retail deposit products to the general public in the areas surrounding its main office and its branch offices, with interest rates that are competitive with those of similar products offered by other financial institutions operating in its market area. The Bank also utilizes borrowings as a source of funds. The Bank’s revenues are derived primarily from interest on loans and, to a lesser extent, interest on investment securities and mortgage-backed securities. The Bank also generates revenues from other income including deposit fees, service charges and investment advisory fees.
The Bank also offers investment advisory and financial planning services under the name Harbor West Wealth Management Group, a division of the Bank, through a networking arrangement with a registered broker-dealer and investment advisor.
New England Commercial Properties LLC (“NECP”), a New York limited liability company and wholly owned subsidiary of the Bank, was formed in October 2007 to facilitate the purchase or lease of real property by the Bank. New England Commercial Properties, LLC currently owns
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NECB Financial Services Group, LLC (“NECB Financial”), a New York limited liability company and wholly owned subsidiary of the Bank, was formed in the third quarter of 2012 as a complement to Harbor West Wealth Management Group to sell life insurance and fixed rate annuities. NECB Financial is licensed in the States of New York and Connecticut.
72 West Eckerson LLC (“72 West Eckerson”), a New York limited liability company and wholly owned subsidiary of the Bank, was formed in April 2015 to facilitate the purchase or lease of real property by the Bank and currently owns the Bank branch locations in Spring Valley, New York and Monroe, New York.
166 Route 59 Realty LLC (“166 Route 59 Realty”), a New York limited liability company and wholly owned subsidiary of the Bank, was formed in April 2021 to facilitate the purchase or lease of real property by the Bank and currently owns the property for the Bank branch located in Airmont, New York.
3 Winterton Realty LLC, a New York limited liability company and wholly owned subsidiary of the Bank, was formed in October 2021 to facilitate the purchase or lease of real property by the Bank and currently owns the property for the Bank branch located in Bloomingburg, New York.
Principal of Consolidations:
The accompanying unaudited consolidated financial statements include the accounts of the Company, the Bank, NECP, NECB Financial, 72 West Eckerson, 166 Route 59 Realty, and 3 Winterton Realty LLC (collectively the “Company”) and have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All significant inter-company accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. The unaudited consolidated interim financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2021.
In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the operating results for the interim periods have been included. The results of operations for periods of less than a year are not necessarily indicative of results for the full year or any other period.
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Estimates that are particularly susceptible to change in the near term, including novel coronavirus (“COVID-19”) related changes, are used in connection with the determination of the allowance for loan losses, the review of the need for a valuation allowance of the Company’s deferred tax assets and the fair value of financial instruments.
COVID-19:
The Company continues to monitor the impact of COVID-19 and considers these disruptions to be temporary. If the disruptions continue, this might have an adverse effect on the Company’s results of operations, financial position, and liquidity in 2022. Further, a decrease in the results of future operations could strain the Company’s regulatory capital ratios.
Note 2 — Regulatory Capital
The Company and the Bank are subject to regulatory capital requirements promulgated by the federal banking agencies. The Federal Reserve establishes capital requirements, including well capitalized standards, for the consolidated bank holding company, and the FDIC has similar requirements for the Company’s subsidiary bank. Prior to January 1,
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2015, quantitative measures were established by regulation to ensure capital adequacy which required the Bank to maintain minimum amounts and ratios of Total, Tier 1 capital (as defined by regulations) to risk-weighted assets (as defined), and of Core tier 1 capital to adjusted total assets (as defined).
Effective January 1, 2015, the Company adopted the Basel III final rule. Based on the Company’s capital levels and statement of condition composition at December 31, 2021, the implementation of the new rule had no material impact on our regulatory capital level or ratios at the Bank level. The rule established limits at the Company level and increased the minimum Tier 1 capital to risk based assets requirement from
The Bank met all capital adequacy requirements to which it was subject as of June 30, 2022 and December 31, 2021.
The following table presents information about the Bank’s capital levels at the dates presented:
Regulatory Capital Requirements |
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Minimum Capital | For Classification as |
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Actual | Adequacy(1) | Well-Capitalized |
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| Amount |
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(Dollars in Thousands) |
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As of June 30, 2022: |
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Total capital (to risk-weighted assets) | $ | |
| | % | $ | ≥ | |
| ≥ | | % | $ | ≥ | |
| ≥ | | % | |
Tier 1 capital (to risk-weighted assets) |
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Common equity tier 1 capital (to risk-weighted assets) |
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Core (Tier 1) capital (to adjusted total assets) |
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As of December 31, 2021: |
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Total capital (to risk-weighted assets) | $ | |
| | % | $ | ≥ | |
| ≥ | | % | $ | ≥ | |
| ≥ | | % | |
Tier 1 capital (to risk-weighted assets) |
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Common equity tier 1 capital (to risk-weighted assets) |
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Core (Tier 1) capital (to adjusted total assets) |
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| (1) | Ratios do not include the capital conservation buffer. |
Based on the most recent notification by the FDIC, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action. There have been no conditions or events that have occurred since notification that management believes have changed the Bank’s category.
Note 3 — Equity Securities
The following table is the schedule of equity securities at June 30, 2022 and December 31, 2021. The equity securities consists of our investment in a market-rate bond mutual fund that invests in high quality fixed income bonds, mainly government agency securities whose proceeds are designed to positively impact community development
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throughout the United States. The mutual fund focuses exclusively on providing affordable housing for low- and moderate-income borrowers and renters, including those in majority minority census tracts.
June 30, | December 31, | ||||||
| 2022 |
| 2021 | ||||
(In Thousands) | |||||||
Equity Securities, at Fair Value | $ | | $ | | |||
The following is a summary of unrealized gain or loss recognized in net income on equity securities during the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | |||||||
(In Thousands) | (In Thousands) | ||||||||||||
Net (loss) gain recognized on equity securities during the period | $ | ( | $ | | $ | ( | $ | ( | |||||
Less: Net losses realized on the sale of equity securities during the period | — | — | — | — | |||||||||
Unrealized net (loss) gain recognized on equity securities held at the reporting date | $ | ( | $ | | $ | ( | $ | ( | |||||
Note 4 — Securities Available-for-Sale
The following table summarizes the Company’s portfolio of securities available-for-sale at June 30, 2022 and December 31, 2021.
June 30, 2022 | ||||||||||||
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
| Cost |
| Gains |
| Losses |
| Value | |||||
(In Thousands) | ||||||||||||
Mortgage-backed securities – residential: |
|
|
|
|
|
|
|
| ||||
Federal Home Loan Mortgage Corporation | $ | | $ | — | $ | — | $ | | ||||
$ | | $ | — | $ | — | $ | | |||||
December 31, 2021 | ||||||||||||
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
| Cost |
| Gains |
| Losses |
| Value | |||||
| (In Thousands) | |||||||||||
Mortgage-backed securities – residential: |
|
|
|
|
|
|
|
| ||||
Federal Home Loan Mortgage Corporation | $ | | $ | — | $ | — | $ | | ||||
$ | | $ | — | $ | — | $ | | |||||
There were
Contractual final maturities of mortgage-backed securities were as follows:
June 30, 2022 | ||||||
| Amortized Cost |
| Fair Value | |||
(In Thousands) | ||||||
Due after one year but within five years | $ | | $ | | ||
$ | | $ | | |||
The maturities shown above are based upon contractual final maturity. Actual maturities will differ from contractual maturities due to scheduled monthly repayments and due to the underlying borrowers having the right to prepay their obligations. At June 30, 2022 and December 31, 2021, the Company had
13
Note 5 — Securities Held-to-Maturity
The following table summarizes the Company’s portfolio of securities held-to-maturity at June 30, 2022 and December 31, 2021.
June 30, 2022 | ||||||||||||
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
| Cost |
| Gains |
| Losses |
| Value | |||||
(In Thousands) | ||||||||||||
Mortgage-backed securities – residential: |
|
|
|
|
|
|
| |||||
Government National Mortgage Association | $ | | $ | $ | | $ | | |||||
Federal Home Loan Mortgage Corporation |
| |
| — |
| |
| | ||||
Federal National Mortgage Association |
| |
| — |
| |
| | ||||
Collateralized mortgage obligations – GSE |
| |
| — |
| |
| | ||||
Total mortgage-backed securities | | — | | | ||||||||
Municipal Bonds | | — | | | ||||||||
U.S. Treasury securities | | — | | | ||||||||
$ | | $ | — | $ | | $ | | |||||
December 31, 2021 | ||||||||||||
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
| Cost |
| Gains |
| Losses |
| Value | |||||
(In Thousands) | ||||||||||||
Mortgage-backed securities – residential: |
|
|
|
|
|
|
|
| ||||
Government National Mortgage Association | $ | | $ | | $ | — | $ | | ||||
Federal Home Loan Mortgage Corporation |
| |
| — |
| |
| | ||||
Federal National Mortgage Association |
| |
| |
| |
| | ||||
Collateralized mortgage obligations – GSE |
| |
| |
| |
| | ||||
Total mortgage-backed securities | | | | | ||||||||
Municipal Bonds | | | | | ||||||||
$ | | $ | | $ | | $ | | |||||
Contractual final maturities of mortgage-backed securities, municipal bonds, U.S. Treasury securities were as follows at June 30, 2022:
June 30, 2022 | ||||||
Amortized | Fair | |||||
| Cost |
| Value | |||
| (In Thousands) | |||||
Due within one year | $ | | $ | | ||
Due after one but within five years |
| |
| | ||
Due after five but within ten years |
| |
| | ||
Due after ten years |
| |
| | ||
$ | | $ | | |||
The maturities shown above are based upon contractual final maturity. Actual maturities will differ from contractual maturities due to scheduled monthly repayments and due to the underlying borrowers having the right to prepay their obligations.
14
The age of unrealized losses and the fair value of related securities held-to-maturity were as follows:
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | |||||||
(In Thousands) | ||||||||||||||||||
June 30, 2022: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities - residential: | ||||||||||||||||||
Government National Mortgage Association | $ | | $ | | $ | — | $ | — | $ | | $ | | ||||||
Federal Home Loan Mortgage Corporation | | | — | — | | | ||||||||||||
Federal National Mortgage Association | | | — | — | | | ||||||||||||
Collateralized mortgage obligations – GSE | | | — | — | | | ||||||||||||
Total mortgage-backed securities | | | — | — | | | ||||||||||||
Municipal Bonds | | | — | — | | | ||||||||||||
U.S. Treasury securities | | | — | — | | | ||||||||||||
$ | | $ | | $ | — | $ | — | $ | | $ | | |||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | |||||||
(In Thousands) | ||||||||||||||||||
December 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal Bonds | $ | | $ | | $ | — | $ | — | $ | | $ | | ||||||
Mortgage-backed securities - residential: | ||||||||||||||||||
Federal Home Loan Mortgage Corporation | $ | | $ | | $ | — | $ | — | $ | | $ | | ||||||
Federal National Mortgage Association | | | — | — | | | ||||||||||||
Collateralized mortgage obligations – GSE | | | — | — | | | ||||||||||||
Total mortgage-backed securities | | | — | — | | | ||||||||||||
$ | | $ | | $ | — | $ | — | $ | | $ | | |||||||
At June 30, 2022,
Note 6 — Loans Receivable and the Allowance for Loan Losses
Loans are stated at unpaid principal balances plus net deferred loan origination fees and costs less an allowance for loan losses. Interest on loans receivable is recorded on the accrual basis. An allowance for uncollected interest is established on loans where management has determined that the borrowers may be unable to meet contractual principal and/or interest obligations or where interest or principal is 90 days or more past due, unless the loans are well secured with a reasonable expectation of collection. When a loan is placed on nonaccrual, an allowance for uncollected interest is established and charged against current income. Thereafter, interest income is not recognized unless the financial condition and payment record of the borrower warrant the recognition of interest income. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Interest on loans that have been restructured is accrued according to the renegotiated terms. Net loan origination fees and costs are deferred and amortized into interest income over the contractual lives of the related loans by use of the level yield method. Past due status of loans is based upon the contractual due date. Prepayment penalties received on loans which pay in full prior to the scheduled maturity are included in interest income in the period the prepayment penalties are collected.
15
The composition of loans were as follows at June 30, 2022 and December 31, 2021:
June 30, | December 31, | ||||||
| 2022 |
| 2021 | ||||
(In Thousands) | |||||||
Residential real estate: |
|
|
|
| |||
One-to-four family | $ | | $ | | |||
Multi-family |
| |
| | |||
Mixed-use |
| |
| | |||
Total residential real estate |
| |
| | |||
Non-residential real estate |
| |
| | |||
Construction |
| |
| | |||
Commercial and industrial |
| |
| | |||
Consumer |
| |
| | |||
Total Loans |
| |
| | |||
Allowance for loan losses |
| ( |
| ( | |||
Deferred loan costs, net |
| |
| | |||
$ | | $ | | ||||
Loans serviced for the benefit of others totaled approximately $
The Company had
The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the statement of financial condition date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
16
The following tables summarize the allocation of the allowance for loan losses and loans receivable by loan class and impairment method at June 30, 2022 and December 31, 2021:
At June 30, 2022:
Non- | Commercial | ||||||||||||||||||||
Residential | residential | and | |||||||||||||||||||
| Real Estate |
| Real Estate |
| Construction |
| Industrial |
| Consumer |
| Unallocated |
| Total | ||||||||
(In Thousands) | |||||||||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
| ||||||||||||||
Ending balance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Ending balance: individually evaluated for impairment | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Ending balance | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||
Ending balance: individually evaluated for impairment | $ | | $ | | $ | — | $ | — | $ | — | $ | — | $ | | |||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||
At December 31, 2021:
Non- | Commercial | ||||||||||||||||||||
Residential | residential | and | |||||||||||||||||||
Real Estate | Real Estate | Construction | Industrial | Consumer | Unallocated | Total | |||||||||||||||
(In Thousands) | |||||||||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Ending balance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Ending balance: individually evaluated for impairment | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Ending balance | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||
Ending balance: individually evaluated for impairment | $ | | $ | | $ | — | $ | — | $ | — | $ | — | $ | | |||||||
Ending balance: collectively evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||
17
The activity in the allowance for loan loss by loan class for the three months ended June 30, 2022 and 2021 was as follows:
Non- | Commercial | ||||||||||||||||||||
Residential | residential | and | |||||||||||||||||||
| Real Estate |
| Real Estate |
| Construction |
| Industrial |
| Consumer |
| Unallocated |
| Total | ||||||||
(In Thousands) | |||||||||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
| ||||||||||||||
Balance - March 31, 2022 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Charge-offs |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Recoveries |
| |
| — |
| — |
| — |
| — |
| — |
| | |||||||
Provision (Benefit) |
| ( |
| ( |
| |
| ( |
| |
| |
| — | |||||||
Balance - June 30, 2022 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Non- | Commercial | ||||||||||||||||||||
Residential | residential | and | |||||||||||||||||||
| Real Estate |
| Real Estate |
| Construction |
| Industrial |
| Consumer |
| Unallocated |
| Total | ||||||||
(In Thousands) | |||||||||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
| ||||||||||||||
Balance - March 31, 2021 | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||
Charge-offs |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Recoveries |
| |
| — |
| — |
| — |
| — |
| — |
| | |||||||
Provision (Benefit) |
| ( |
| ( |
| |
| ( |
| |
| |
| — | |||||||
Balance - June 30, 2021 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
The activity in the allowance for loan loss by loan class for the six months ended June 30, 2022 and 2021 was as follows:
Non- | Commercial | ||||||||||||||||||||
Residential | residential | and | |||||||||||||||||||
Real Estate | Real Estate | Construction | Industrial | Consumer | Unallocated | Total | |||||||||||||||
(In Thousands) | |||||||||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance - December 31, 2021 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Charge-offs |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Recoveries |
| |
| |
| — |
| — |
| — |
| — |
| | |||||||
Provision (Benefit) |
| ( |
| ( |
| |
| ( |
| |
| |
| — | |||||||
Balance - June 30, 2022 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Non- | Commercial | ||||||||||||||||||||
Residential | residential | and | |||||||||||||||||||
Real Estate | Real Estate | Construction | Industrial | Consumer | Unallocated | Total | |||||||||||||||
(In Thousands) | |||||||||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance - December 31, 2020 | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||
Charge-offs |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Recoveries |
| |
| — |
| — |
| — |
| |
| — |
| | |||||||
Provision (Benefit) |
| ( |
| ( |
| |
| ( |
| |
| |
| | |||||||
Balance - June 30, 2021 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
During the three months ended June 30, 2022, the provision expenses recorded for construction loans were primarily attributed to the increased loan balances. The credit provision recorded for residential loans was due to loan recoveries during the three-month period. The credit provision recorded for non-residential loans and commercial and industrial loans was due to decreased loan balances.
During the three months ended June 30, 2021, the provision expenses recorded for construction loans were primarily attributed to the increased loan balances. The credit provision recorded for other loan segments was primarily due to decreased loan balances.
During the six months ended June 30, 2022, the provision expenses recorded for construction loans were attributed to the increased loan balances. The credit provition recorded for residential loans was primarily due to loan recoveries during the six-month period. The credit provision recorded for non-residential loans was attributed to loan recoveries and
18
decreased loan balances. The credit provision recorded for commercial and industrial loans was primarily due to decreased loan balances.
During the six months ended June 30, 2021, the provision expenses recorded for construction loans were primarily attributed to the increased loan balances. The credit provision recorded for other loan segments was primarily due to decreased loan balances.
The following table shows our recorded investment, unpaid principal balance and allocated allowance for loan losses for loans that were considered impaired as of and for the periods presented:
As of and for the Three and Six months Ended June 30, 2022 and 2021:
Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | ||||||||||||||||||||
| Recorded |
| Unpaid Principal |
| Related |
| Average Recorded |
| Interest Income |
| Average Recorded |
| Interest Income | ||||||||
2022 | Investment | Balance | Allowance | Investment | Recognized |
| Investment | Recognized | |||||||||||||
(In Thousands) | |||||||||||||||||||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Residential real estate-Multi-family | $ | | $ | | $ | — | $ | | $ | | $ | | $ | | |||||||
Non-residential real estate |
| |
| |
| — |
| |
| |
| |
| | |||||||
Construction |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Commercial and industrial |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
| |
| |
| — |
| |
| |
| |
| | ||||||||
With an allowance recorded |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Residential real estate-Multi-family |
| |
| |
| — |
| |
| |
| |
| | |||||||
Non-residential real estate |
| |
| |
| — |
| |
| |
| |
| | |||||||
Construction |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Commercial and industrial |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
$ | | $ | | $ | — | $ | | $ | | $ | | $ | | ||||||||
Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | ||||||||||||||||||||
| Recorded |
| Unpaid Principal |
| Related |
| Average Recorded |
| Interest Income |
| Average Recorded |
| Interest Income | ||||||||
2021 | Investment | Balance | Allowance | Investment | Recognized |
| Investment | Recognized | |||||||||||||
(In Thousands) | |||||||||||||||||||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Residential real estate-Multi-family | $ | | $ | | $ | — | $ | | $ | | $ | | $ | | |||||||
Non-residential real estate |
| |
| |
| — |
| |
| |
| |
| | |||||||
Construction |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Commercial and industrial |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
| |
| |
| — |
| |
| |
| |
| | ||||||||
With an allowance recorded |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Residential real estate-Multi-family |
| |
| |
| — |
| |
| |
| |
| | |||||||
Non-residential real estate |
| |
| |
| — |
| |
| |
| |
| | |||||||
Construction |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Commercial and industrial |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
$ | | $ | | $ | — | $ | | $ | | $ | | $ | | ||||||||
19
As of and for the Year Ended December 31, 2021:
| Recorded |
| Unpaid Principal |
| Related |
| Average Recorded |
| Interest Income | ||||||
2021 | Investment | Balance | Allowance | Investment | Recognized | ||||||||||
(In Thousands) | |||||||||||||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
| |||||
Residential real estate-Multi-family | $ | | $ | | $ | — | $ | | $ | | |||||
Non-residential real estate |
| |
| |
| — |
| | | ||||||
Construction |
| — |
| — |
| — |
| — |
| — | |||||
Commercial and industrial |
| — |
| — |
| — |
| — |
| — | |||||
| |
| |
| — |
| |
| | ||||||
With an allowance recorded |
| — |
| — |
| — |
| — |
| — | |||||
Total: |
|
|
|
|
|
|
|
|
|
| |||||
Residential real estate-Multi-family |
| |
| |
| — |
| |
| | |||||
Non-residential real estate |
| |
| |
| — |
| |
| | |||||
Construction |
| — |
| — |
| — |
| — |
| — | |||||
Commercial and industrial |
| — |
| — |
| — |
| — |
| — | |||||
$ | | $ | | $ | — | $ | | $ | | ||||||
There were
The following tables provide information about delinquencies in our loan portfolio at the dates indicated.
Age Analysis of Past Due Loans as of June 30, 2022:
Recorded | |||||||||||||||||||||
Investment | |||||||||||||||||||||
30 – 59 Days | 60 – 89 Days | Greater Than | Total Past | Total Loans | 90 Days and | ||||||||||||||||
| Past Due |
| Past Due |
| 90 Days |
| Due |
| Current |
| Receivable |
| Accruing | ||||||||
(In Thousands) | |||||||||||||||||||||
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
One- to four-family | $ | — | $ | — | $ | — | $ | — | $ | | $ | | $ | — | |||||||
Multi-family |
| — |
| |
| — |
| |
| |
| |
| — | |||||||
Mixed-use |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Non-residential real estate |
| — |
| |
| — |
| |
| |
| |
| — | |||||||
Construction loans |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Commercial and industrial loans |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Consumer |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
$ | — | $ | | $ | — | $ | | $ | | $ | | $ | — | ||||||||
20
Age Analysis of Past Due Loans as of December 31, 2021:
Recorded | |||||||||||||||||||||
Investment | |||||||||||||||||||||
30 – 59 Days | 60 – 89 Days | Greater Than | Total Past | Total Loans | 90 Days and | ||||||||||||||||
| Past Due |
| Past Due |
| 90 Days |
| Due |
| Current |
| Receivable |
| Accruing | ||||||||
(In Thousands) | |||||||||||||||||||||
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
One- to four-family | $ | — | $ | — | $ | — | $ | — | $ | | $ | | $ | — | |||||||
Multi-family |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Mixed-use |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Non-residential real estate |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Construction loans |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Commercial and industrial loans |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Consumer |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
$ | — | $ | — | $ | — | $ | — | $ | | $ | | $ | — | ||||||||
The following tables provide certain information related to the credit quality of our loan portfolio.
Credit Risk Profile by Internally Assigned Grade as of June 30, 2022:
Residential | Non-residential | Commercial | ||||||||||||||||
| Real Estate |
| Real Estate |
| Construction |
| and Industrial |
| Consumer |
| Total | |||||||
(In Thousands) | ||||||||||||||||||
Grade: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Pass | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Special Mention |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Substandard |
| — |
| |
| — |
| — |
| — |
| | ||||||
Doubtful |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
$ | | $ | | $ | | $ | | $ | | $ | | |||||||
Credit Risk Profile by Internally Assigned Grade as of December 31, 2021:
Residential | Non-residential | Commercial | ||||||||||||||||
| Real Estate |
| Real Estate |
| Construction |
| and Industrial |
| Consumer |
| Total | |||||||
(In Thousands) | ||||||||||||||||||
Grade: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Pass | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Special Mention |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Substandard |
| — |
| |
| — |
| — |
| — |
| | ||||||
Doubtful |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
$ | | $ | | $ | | $ | | $ | | $ | | |||||||
21
Troubled Debt Restructuring:
The following table shows our recorded investment for loans classified as a troubled debt restructuring (a “TDR”) that are performing according to their restructured terms at the periods indicated:
June 30, | December 31, | ||||||||||
2022 | 2021 | ||||||||||
Number of | Recorded | Number of | Recorded | ||||||||
| contracts |
| Investment |
| contracts |
| Investment | ||||
(Dollars in Thousands) | |||||||||||
Residential Real Estate - Mixed-use |
| | $ | |
| | $ | | |||
Non-residential real estate |
| — |
| — |
| |
| | |||
Total performing |
| | $ | |
| | $ | | |||
The following is a summary of interest foregone on loans classified as a TDR for the three and six month periods ended June 30, 2022 and 2021:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||
(In Thousands) | (In Thousands) | |||||||||||
Interest income that would have been recognized had the loans performed in accordance with their original terms | $ | | $ | | $ | | $ | | ||||
Less: Interest income included in the results of operations |
| | |
| |
| | |||||
Total foregone interest | $ | | $ | | $ | | $ | | ||||
There were
The CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” (“TDR”) accounting guidance in ASC 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of (1) January 1, 2022 or (2) 60 days after the President declares a termination of the COVID-19 national emergency were eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2020. As of June 30, 2022, we had
Note 7 — Real Estate Owned (“REO”)
The Company owned
Further declines in real estate values may result in impairment charges in the future. Routine holding costs are charged to expense as incurred and improvements to real estate owned that enhance the value of the real estate are capitalized. REO expense recorded in the consolidated statements of income amounted to $
22
Note 8 — Federal Home Loan Bank of New York (“FHLB”) Advances
FHLB advances are summarized as follows at June 30, 2022 and December 31, 2021:
June 30, | December 31, |
| ||||||||||
2022 | 2021 |
| ||||||||||
|
| Weighted Average |
|
| Weighted Average |
| ||||||
Amount | Interest Rate | Amount | Interest Rate |
| ||||||||
(Dollars in Thousands) |
| |||||||||||
Advances maturing in: |
|
|
|
|
|
|
|
| ||||
One year or less | $ | | | % | $ | | | % | ||||
After one to three years | |
| | % | |
| | % | ||||
After five years (due 2030) |
| |
| | % |
| |
| | % | ||
$ | |
| | % | $ | |
| | % | |||
At June 30, 2022,
Note 9 — Benefits Plans
Outside Director Retirement Plan (“DRP”)
The DRP is an unfunded non-contributory defined benefit pension plan covering all non-employee directors meeting eligibility requirements as specified in the plan document. The following table sets forth information regarding the components of net pension periodic expense measured as of June 30, 2022 and 2021:
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
(Dollars In Thousands) |
| (Dollars In Thousands) | |||||||||||
Net periodic pension expense: |
|
|
|
|
|
| |||||||
Service cost | $ | | $ | | $ | | $ | | |||||
Interest cost |
| | |
| |
| | ||||||
Actuarial loss recognized |
| | |
| |
| | ||||||
Total net periodic pension expense included in other non-interest expenses | $ | | $ | | $ | | $ | | |||||
Unrecognized net loss of $
Supplemental Executive Retirement Plan (“SERP”)
The SERP is a non-contributory defined benefit plan that covers certain officers of the Company. Under the SERP, each of these individuals will be entitled to receive upon retirement an annual benefit paid in monthly installments equal to
23
Expenses of $
Stock-Based Deferral Plan
In June 2021, the Company established a stock-based deferral plan for eligible key executives and members of the Board of Directors of the Company to elect to defer compensation received from the Company for their services and make deemed investments of that deferred compensation in shares of the Company’s common stock. At June 30, 2022, the Company did not have any obligations under the plan.
401(k) Plan
The Company maintains a 401(k) plan for all eligible employees. Participants are permitted to contribute from
Employee Stock Ownership Plan (“ESOP”)
In conjunction with the Mid-Tier Holding Company’s public stock offering in 2006, the Bank established an ESOP for all eligible employees (substantially all full-time employees). The ESOP borrowed $
In conjunction with the Company’s second-step conversion offering, on July 12, 2021, the ESOP borrowed $
Each year, the Bank makes discretionary contributions to the ESOP equal to the principal and interest payment required on the loan from the Company. The ESOP may further pay down the principal balance of the loans by using dividends paid, if any, on the shares of Company common stock it owns. The balance remaining on the first ESOP loan was $
Shares purchased with the loan proceeds serve as collateral for the loan and are held in a suspense account for future allocation among ESOP participants. As the loan principal is repaid, shares will be released from the suspense account and become eligible for allocation. The allocation among plan participants will be as described in the ESOP governing document.
ESOP shares initially pledged as collateral were recorded as unearned ESOP shares in the stockholders’ equity section of the consolidated statement of financial condition. Thereafter, on a monthly basis over the terms of the ESOP loans, approximately
24
ESOP shares are summarized as follows:
| June 30, | December 31, | |||||
| 2022 |
| 2021 | ||||
Allocated shares | |
| | ||||
Shares committed to be released | |
| | ||||
Unearned shares | |
| | ||||
Total ESOP Shares | |
| | ||||
Less allocated shares distributed to former or retired employees | ( |
| ( | ||||
Total ESOP Shares Held by Trustee | |
| | ||||
Fair value of unearned shares | $ | | $ | | |||
Note 10 — Leases
The Company has operating leases and finance leases all comprised of real estate property. The operating leases comprise substantially all of the Company’s obligations in which the Company is the lessee, with remaining lease terms ranging between and
In accordance with ASC 842, the Company recognized operating and financing lease assets and corresponding lease liabilities related to office facilities and retail branches. The operating and financing lease assets represent the Company’s right to use an underlying asset for the lease term, and the lease liability represents the Company’s obligation to make lease payments over the lease term. The Company has elected that any short term leases would be expensed as incurred.
The operating and financing lease asset and lease liability are determined at the commencement date of the lease based on the present value of the lease payments. Our leases do not provide an implicit interest rate. The company used its incremental borrowing rate, the rate of interest to borrow in a collateralized basis for a similar term, at the lease commencement date.
All of the leases are net leases and, therefore, do not contain non-lease components. The Company either pays directly or reimburses the lessor for property and casualty insurance cost and the property taxes assessed on the property, as well as a portion of the common area maintenance associated with the property which are categorized as non-components as outlined in the applicable guidance.
At June 30, 2022 and December 31, 2021, the quantitative data relating to the Company’s leases are as follows (in thousands):
| June 30, |
| December 31, |
| |||
2022 | 2021 |
| |||||
Finance Lease Amounts: |
|
|
|
| |||
ROU asset | $ | | $ | | |||
Lease liability | $ | | $ | | |||
Operating Lease Amounts: |
|
|
| ||||
ROU assets | $ | | $ | | |||
Lease liabilities | $ | | $ | | |||
Weighted-average remaining lease term |
|
|
|
| |||
Finance lease |
|
| |||||
Operating leases |
|
| |||||
Weighted-average discount rate |
|
|
|
| |||
Finance lease |
| | % |
| | % | |
Operating leases |
| | % |
| | % | |
25
The components of lease expense and cash flow information related to leases as follows:
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| |||||||||
2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||
(Dollars In Thousands) | (Dollars In Thousands) | ||||||||||||
Finance Lease Cost | |||||||||||||
Amortization of ROU asset | $ | | | $ | | $ | | ||||||
Interest on lease liability | $ | | | $ | | $ | | ||||||
Operating Lease Costs | $ | | | $ | | $ | | ||||||
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
| |||||||||
Finance lease | $ | — | — | $ | — | $ | — | ||||||
Operating leases | $ | | | $ | | $ | | ||||||
Maturities of lease liabilities at June 30, 2022 are as follows (in thousands):
| Operating |
| Finance | |||
Leases | Lease | |||||
Years ended December 31: | ||||||
2022 | $ | | $ | | ||
2023 |
| |
| | ||
2024 |
| |
| | ||
2025 |
| |
| | ||
2026 |
| |
| | ||
Thereafter |
| |
| | ||
Total lease payments | $ | | $ | | ||
Interest |
| ( |
| ( | ||
Lease liability | $ | | $ | | ||
Note 11 — Fair Value Disclosures
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company’s securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company has to record at fair value other assets and liabilities on a non-recurring basis, such as securities held to maturity, impaired loans and other real estate owned. U.S. GAAP has established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are as follows:
Level 1: | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
Level 2: | Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
Level 3: | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity). |
26
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company’s assets that are carried at fair value on a recurring basis and the level that was used to determine their fair value at June 30, 2022 and December 31, 2021:
Quoted Prices in | Significant Other | Significant | Total Carried | |||||||||||||||||||||
Active Markets for | Observable | Unobservable | at Fair | |||||||||||||||||||||
Identical Assets | Inputs | Inputs | Value on a | |||||||||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Recurring Basis | |||||||||||||||||||||
June 30, | December 31, | June 30, | December 31, | June 30, | December 31, | June 30, | December 31, | |||||||||||||||||
Description |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Mutual funds | $ | | $ | | $ | — | $ | — | $ | — | $ | — | $ | | $ | | ||||||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
FHLMC |
| — |
| — |
| |
| |
| — |
| — |
| |
| | ||||||||
Total assets | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | | $ | | ||||||||
There were
The Company did
The methods and assumptions used to estimate fair value at June 30, 2022 and December 31, 2021 are as follows:
For real estate owned, fair value is generally determined through independent appraisals or fair value estimations of the underlying properties which generally include various Level 3 inputs which are not identifiable. The appraisals or fair value estimation may be adjusted by management for qualitative reasons and estimated liquidation expenses. Management’s assumptions may include consideration of location and occupancy of the property and current economic conditions. Subsequently, as these properties are actively marketed, the estimated fair values may be periodically adjusted through incremental subsequent write-downs to reflect decreases in estimated values resulting from sales price observations and the impact of changing economic and market conditions.
A loan is considered impaired when, based upon current information and events; it is probable that the Company will be unable to collect all scheduled payments in accordance with the contractual terms of the loan. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component of the allowance for loan losses or through partial charge-offs, and as such are carried at the lower of cost or the fair value. Estimates of fair value of the collateral are determined based on a variety of information, including available valuations from certified appraisers for similar assets, present value of discounted cash flows and inputs that are estimated based on commonly used and generally accepted industry liquidation advance rates and estimates and assumptions developed by management. The appraisals may be adjusted by management for estimated liquidation expenses and qualitative factors such as economic conditions. If real estate is not the primary source of repayment, present value of discounted cash flows and estimates using generally accepted industry liquidation advance rates are utilized. Due to the multitude of assumptions, many of which are subjective in nature, and the varying inputs and techniques used by appraisers, the Company recognizes that valuations could differ across a wide spectrum of valuation techniques employed and accordingly, fair value estimates for impaired loans are classified as Level 3.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.
27
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at June 30, 2022 and December 31, 2021:
Securities
Fair values for marketable equity securities are determined by quoted market prices on nationally recognized and foreign securities exchanges (Level 1). Fair values for securities available for sale and held to maturity are determined utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things.
The carrying amounts and estimated fair value of our financial instruments are as follows:
Fair Value at | |||||||||||||||
|
|
| Quoted |
|
| ||||||||||
Prices in | |||||||||||||||
Active | Significant | ||||||||||||||
Markets for | Other | Significant | |||||||||||||
Identical | Observable | Unobservable | |||||||||||||
Carrying | Assets | Inputs | Inputs | ||||||||||||
(In thousands) |
| Amount |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | |||||
Financial Assets |
|
|
|
|
| ||||||||||
Cash and cash equivalents | $ | | $ | | $ | | $ | — | $ | — | |||||
Certificates of deposit | | | — | | — | ||||||||||
Marketable equity securities | | | | — | — | ||||||||||
Securities available for sale | | | — | | — | ||||||||||
Securities held to maturity | | | — | | — | ||||||||||
Loans receivable, net | | | — | — | | ||||||||||
Investments in restricted stock | | | — | | — | ||||||||||
Accrued interest receivable | | | — | | — | ||||||||||
Financial Liabilities |
|
|
|
|
| ||||||||||
Deposits | | | — | | — | ||||||||||
FHLB of New York advances | | | — | | — | ||||||||||
28
Fair Value at | |||||||||||||||
|
| Quoted |
|
| |||||||||||
Prices in | |||||||||||||||
Active | Significant | ||||||||||||||
Markets for | Other | Significant | |||||||||||||
Identical | Observable | Unobservable | |||||||||||||
Carrying | Assets | Inputs | Inputs | ||||||||||||
(In thousands) |
| Amount |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | |||||
Financial Assets |
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents | $ | | $ | | $ | | $ | — | $ | — | |||||
Certificates of deposit | | | — | | — | ||||||||||
Marketable equity securities | | | | — | — | ||||||||||
Securities available for sale | | | — | | — | ||||||||||
Securities held to maturity | | | — | | — | ||||||||||
Loans receivable, net | | | — | — | | ||||||||||
Investments in restricted stock | | | — | | — | ||||||||||
Accrued interest receivable | | | — | | — | ||||||||||
Financial Liabilities |
|
|
|
|
| ||||||||||
Deposits | | | — | | — | ||||||||||
FHLB of New York advances | | | — | | — | ||||||||||
Note 12 — Revenue Recognition
The majority of the Company’s revenues come from interest income and other sources, including loans and securities that are outside the scope of ASC 606, Revenue from Contracts with Customers. The Company’s services that fall within the scope of ASC 606 are presented within noninterest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include deposit service charges on deposits, electronic banking fees and charges income, and investment advisory fees.
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as referral fees based month end reports. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2022, the Company did not have any significant contract balances.
29
All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the three and six months ended June 30, 2022 and 2021. Sources of revenue outside the scope of ASC 606 are noted as such:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | |||||||
(In Thousands) | (In Thousands) | ||||||||||||
Non-interest income: |
|
|
|
|
|
| |||||||
Deposit-related fees and charges | $ | | $ | | $ | | $ | | |||||
Loan-related fees and charges(1) |
| | |
| |
| | ||||||
Electronic banking fees and charges |
| | |
| |
| | ||||||
Gain on disposition of equipment(1) |
| | |
| |
| | ||||||
Income from bank owned life insurance(1) |
| | |
| |
| | ||||||
Investment advisory fees |
| | |
| |
| | ||||||
Unrealized (loss) gain on equity securities(1) |
| ( | |
| ( |
| ( | ||||||
Miscellaneous(1) |
| | |
| |
| | ||||||
Total non-interest income | $ | | $ | | $ | | $ | | |||||
| (1) | Not within the scope of ASC 606. |
A description of the Company’s revenue streams accounted for under ASC 606 is as follows:
Service Charges on Deposit Accounts
The Company earns fees from deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed at the point in the time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.
Electronic Banking Fee Income
The Company earns interchange fees from debit and credit card holder transactions conducted through various payment networks. Interchange fees from cardholder transactions are recognized daily, concurrently with the transaction processing services provided by an outsourced technology solution.
Investment Advisory Fees
The Company earns fees from investment advisory and financial planning services under the name of Harbor West Financial Planning Wealth Management, a division of the Company through a networking arrangement with a registered broker-dealer and investment advisor. The registered broker-dealer deducts investment advisory fees and financial planning services fees from the client’s assets under management and remits the fees, net of administrative fees, to the Company on a monthly basis. The Company recognizes the fees into non-interest income upon receipt of the monthly remittances.
30
Note 13 — Other Non-Interest Expenses
The following is an analysis of other non-interest expenses:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | |||||||
(In Thousands) | (In Thousands) | ||||||||||||
Other | $ | | $ | | $ | | $ | | |||||
Service contracts |
| | |
| |
| | ||||||
Consulting expense |
| | |
| |
| | ||||||
Telephone |
| | |
| |
| | ||||||
Directors compensation |
| | |
| |
| | ||||||
Audit and accounting |
| | |
| |
| | ||||||
Insurance |
| | |
| |
| | ||||||
Director, officer, and employee expense |
| | |
| |
| | ||||||
Legal fees |
| | |
| |
| | ||||||
Office supplies and stationary |
| | |
| |
| | ||||||
Recruiting expense |
| | |
| |
| | ||||||
$ | | $ | | $ | | $ | | ||||||
Note 14 — Recent Accounting Pronouncements
Accounting Standards Pending Adoption:
ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires credit losses on most financial assets to be measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model).
Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.
The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (PCD assets) should be determined in a similar manner to other financial assets measured on an amortized cost basis. Upon initial recognition, the allowance for credit losses is added to the purchase price (gross up approach) to determine the initial amortized cost basis. The subsequent accounting for PCD assets will use the CECL model described above.
The ASU made certain targeted amendments to the existing impairment model for available-for-sale (AFS) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.
As amended, ASU No. 2016-13 and any related amending ASUs No. 2019-04, 2019-11, 2020-03, and 2022-02 are effective for entities qualifying as smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted for all entities as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years.
The Company has begun collecting and evaluating data and system requirements to implement this standard. The adoption of this update could have a material impact on the Company’s consolidated results of operations and financial condition. The extent of the impact is still unknown and will depend on many factors, such as the composition of the
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Company’s loan portfolio and expected loss history at adoption. Management has engaged consultants to assess the preparedness of the Company for evaluating and implementing CECL.
ASU 2020-04 - Reference Rate Reform (Topic 848)
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) which provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued, subject to meeting certain criteria. Under the new guidance, an entity can elect by accounting topic or industry subtopic to account for the modification of a contract affected by reference rate reform as a continuation of the existing contract, if certain conditions are met. In addition, the new guidance allows an entity to elect on a hedge-by-hedge basis to continue to apply hedge accounting for hedging relationships in which the critical terms change due to reference rate reform, if certain conditions are met. A one-time election to sell and/or transfer held-to-maturity debt securities that reference a rate affected by reference rate reform is also allowed. ASU No. 2020-04 became effective for all entities as of March 12, 2020 and will apply to all LIBOR reference rate modifications through December 31, 2022.
ASU 2021-01 - Reference Rate Reform (Topic 848)
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The amendments in this update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this update to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. ASU No. 2021-01 became immediately effective for all entities, which may elect to apply the update retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively to new modifications from any date within an interim period that includes or is subsequent to the issuance date of ASU No. 2021-01 up to the date that financial statements are available to be issued. In addition, ASU No.2021-01 applies to all contract modifications made through December 31, 2022. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on our business operations and consolidated financial statements. The amendments in this update apply to contract modifications that replace a reference rate reform and contemporaneous modifications of other terms related to the replacement of the reference rate.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Statements contained in this report that are not historical facts may constitute forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), which involve significant risks and uncertainties. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. The Company undertakes no obligation to update these forward-looking statements in the future.
The Company cautions readers of this report that a number of important factors could cause the Company’s actual results to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from those predicted and could affect the future prospects of the Company include, but are not limited to: (i) general economic conditions, including higher inflation, either nationally or in our market area, that are worse than expected; (ii) changes in the interest rate environment that reduce our interest margins, reduce the fair value of financial instruments or reduce the demand for our loan products; (iii) increased competitive pressures among financial services companies; (iv) changes in consumer spending, borrowing and savings habits; (v) changes in the quality and composition of our loan or investment portfolios; (vi) changes in real estate market values in our market area; (vii) decreased demand for loan products, deposit flows, competition, or decreased demand for financial services in our market area; (viii) major catastrophes such as earthquakes, floods or other natural or human disasters and infectious disease outbreaks, including the current coronavirus (COVID-19) pandemic, the related disruption to local, regional and global economic activity and financial markets, and the impact that any of the foregoing may have on us and our customers and other constituencies; (ix) legislative or regulatory changes that adversely affect our business or changes in the monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board; (x) technological changes that may be more difficult or expensive than expected; (xi) success or consummation of new business initiatives may be more difficult or expensive than expected; (xii) the inability to successfully integrate acquired businesses and financial institutions into our business operations; (xiii) adverse changes in the securities markets; (xiv) the inability of third party service providers to perform; and (xv) changes in accounting policies and practices, as may be adopted by bank regulatory agencies or the Financial Accounting Standards Board.
COVID-19 Pandemic:
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020 and based on the rapid increase in exposure globally, WHO classified COVID-19 as a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections.
The outbreak of COVID-19 has adversely impacted a broad range of industries in which customers of the Company operate and impair their ability to fulfill their financial obligations to the Company. In addition, the spread of COVID-19 has caused significant disruptions in the U.S. economy and in banking and other financial activities in the areas in which the Company operates. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions and the ability of borrowers to repay their obligations to us on a timely basis or if at all. If the global response to contain COVID-19 is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations, and cash flows.
Although the full magnitude of the pandemic is uncertain, management is actively monitoring the impact of the global situation on the banking industry and the Company’s financial condition, liquidity, future results of operations, and workforce. Given the daily evolution of COVID-19 and the global responses to curb the spread of COVID-19, the
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Company is currently unable to estimate and quantify the effects of this crisis on the Company’s results of operations, financial condition, or liquidity for 2022.
Nevertheless, the adverse economic effects of COVID-19 might lead to an increase in credit risk on the Company’s construction loan, commercial and industrial loan, and multi-family, mixed-use, and non-residential real estate loan portfolios. Likewise, the Company is also monitoring the fluctuations in the markets as it pertains to interest rates and the impact on deposits and fair value of our securities portfolio for other than temporary impairment.
To curtail the spread of COVID-19, the Company temporarily closed one branch due to its location in an enclosed shopping mall and the lobby, except by appointment only, of the other eight branches. Currently, all our eleven branches have resumed normal operations in servicing our customers.
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act in response to the COVID-19 pandemic. This legislation aims at providing relief for individuals and businesses that have been negatively impacted by the COVID-19 pandemic.
The CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” (“TDR”) accounting guidance in ASC 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of (1) December 30, 2020 or (2) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2021.
On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 was signed into law, which also contains provisions that could directly impact financial institutions, including extending the time that insured depository institutions and depository institution holding companies have to comply with the current expected credit losses (“CECL”) accounting standard and extending the authority granted to banks under the CARES Act to elect to temporarily suspend the requirements under U.S. GAAP applicable to troubled debt restructurings for loan modifications related to the COVID-19 pandemic for any loan that was not more than 30 days past due as of December 31, 2021. The act directs financial regulators to support community development financial institutions and minority depository institutions and directs Congress to re-appropriate $429 billion in unobligated CARES Act funds. The Payroll Protection Program (PPP), which was originally established under the CARES Act, was also extended under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.
Due to the impact of COVID-19 on our borrowers, we granted eligible loan modifications under the CARES Act in the form of payment deferral of principal and interest to 196 loans totaling $190.9 million at the time payment deferral was requested. As of June 30, 2022, we had no loans in deferral status.
The granting of the payment deferrals had no significant impact on our evaluation of the allowance for loan losses. We did not grant any PPP loans pursuant to the CARES Act or the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.
While the Company considers these disruptions to be temporary, if the disruptions continue, this might have an adverse effect on the Company’s results of operations, financial position, and liquidity in 2022. Further, a decrease in the results of future operations might place a strain on the Company’s regulatory capital ratios.
Critical Accounting Policies
We consider accounting policies involving significant judgements and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider these accounting policies to be our crucial accounting policies. The judgements and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgements and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
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Allowance for Loan Losses
We consider the allowance for loan losses to be a critical accounting policy. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific and general reserves. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, a specific allowance is established or a partial charge-off is taken when the fair market value of the collateral is lower than the carrying value of that loan. Beginning in the fourth quarter of 2012, we discontinued the use of specific allowances. If an impairment is identified, we now charge off the impaired portion immediately. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment records, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis.
The general component of the allowance calculation is also based on the loss factors that reflect our historical charge-off experience adjusted for current economic conditions applied to loan groups with similar characteristics or classifications in the current portfolio. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, we have a structured loan rating process which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type of collateral and financial condition of the borrowers.
Loans whose terms are modified are classified as troubled debt restructurings if we grant such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date at a below market rate. Adversely classified, non-accrual troubled debt restructurings may be returned to accrued status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. All troubled debt restructured loans are classified as impaired.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss model, or CECL, ASU 2016-13. We previously elected to defer the adoption of ASU 2016-13 until December 31, 2021. As permitted by the CARES Act, and based on legislation enacted in December 2020 which extended certain provision of the CARES Act, we elected to extend the adoption of CECL until January 1, 2023 in accordance with the recent legislation. This standard requires earlier recognition of expected credit losses on loans and certain other instruments, compared to the incurred loss model.
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Based on management’s comprehensive analysis of the loan portfolio, management believes the allowance for loan losses is appropriate as of June 30, 2022.
Balance Sheet Analysis
General
Total assets decreased by $3.5 million, or 0.3%, to $1.2 billion at June 30, 2022, from $1.2 billion at December 31, 2021. The decrease in assets was primarily due to decreases in cash and cash equivalents of $66.0 million and equity securities of $1.1 million, partially offset by increases in net loans of $50.6 million, securities held-to-maturity of $9.3 million, and premises and equipment of $2.3 million.
Cash and cash equivalents decreased by $66.0 million, or 43.4%, to $86.2 million at June 30, 2022 from $152.3 million at December 31, 2021. The decrease in cash and cash equivalents was a result of cash being deployed to fund an increase in net loans of $50.6 million, an increase in securities held-to-maturiy of $9.3 million, an increase in property and equipment of $2.3 million due primarily to the purchase of property and equipment for a new branch office, and a reduction in FHLB advances of $7.0 million.
Equity securities decreased by $1.1 million, or 5.3%, to $18.9 million at June 30, 2022 from $19.9 million at December 31, 2021. The decrease in equity securities was primarily attributable to market depreciation of $1.1 million as market interest rates increased during the six months ended June 30, 2022.
Securities held-to-maturity increased by $9.3 million, or 52.1%, to $27.2 million at June 30, 2022 from $17.9 million at December 31, 2021 due primarily to the purchases of securities, partially offset by maturities and pay-downs.
Loans, net of the allowance for loan losses, increased by $50.6 million, or 5.2%, to $1.0 billion at June 30, 2022 from $968.1 million at December 31, 2021. The increase in loans, net of the allowance for loan losses, was primarily due to loan originations of $307.4 million during the six months ended June 30, 2022, consisting primarily of $266.3 million in construction loans with respect to which approximately 32.1% of the funds were disbursed at loan closings, with the remaining funds to be disbursed over the terms of the construction loans.
Loan originations increased by $97.0 million due to increased originations of construction loans. The increase in our loan portfolio was partially offset by decreases in non-residential loans of $23.4 million, commercial and industrial loans of $15.8 million, mixed-use loans of $5.2 million, residential loans of $1.4 million, and multi-family loans of $560,000, coupled with normal pay-downs and principal reductions.
Premises and equipment increased by $2.3 million, or 9.7, to $26.2 million at June 30, 2022 from $23.9 million at December 31, 2021 due to the acquisition of property and equipment for a new branch site located in Bloomingburg, New York.
Investments in restricted stock decreased by $331,000, or 21.1%, to $1.2 million at June 30, 2022 from $1.6 million at December 31, 2021 due to a reduction in mandatory Federal Home Loan Bank stock in connection with the maturity/pay-off of $7.0 million in advances during the quarter ended June 30, 2022.
Accrued interest receivable increased by $949,000, or 22.2%, to $5.2 million at June 30, 2022 from $4.3 million at December 31, 2021 due to an increase in the loan portfolio.
Foreclosed real estate was $2.0 million at June 30, 2022 and December 31, 2021.
Right of use assets — operating decreased by $268,000, or 10.5%, to $2.3 million at June 30, 2022 from $2.6 million at December 31, 2021, primarily due to amortization.
Other assets increased by $793,000, or 16.9%, to $5.5 million at June 30, 2022 from $4.7 million at December 31, 2021 due to increases in suspense accounts of $406,000, tax assets of $326,000, and prepaid expenses of $84,000.
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Total deposits increased by $1.4 million, or 0.2%, to $928.6 million at June 30, 2022 from $927.2 million at December 31, 2021. The increase was primarily due to an increase in non-interest bearing demand deposits of $31.6 million, or 9.6%, and an increase in savings account balances of $24.5 million, or 13.3%. These increases were partially offset by a decrease in certificates of deposit of $48.7 million, or 16.6%, and a decrease in NOW/money market accounts of $6.1 million, or 5.1%, from December 31, 2021 to June 30, 2022.
Federal Home Loan Bank advances decreased by $7.0 million, or 25.0%, to $21.0 million at June 30, 2022 from $28.0 million at December 31, 2021.
Advance payments by borrowers for taxes and insurance decreased by $147,000, or 7.8%, to $1.7 million at June 30, 2022 from $1.9 million at December 31, 2021 due primarily to payment of taxes for borrowers, partially offset by the accumulation of tax payments from borrowers.
Lease liability – operating decreased by $260,000, or 10.0%, to $2.3 million at June 30, 2022 from $2.6 million at December 31, 2021, primarily due to amortization.
Accounts payable and accrued expenses decreased by $2.5 million, or 18.1%, to $11.1 million at June 30, 2022 from $13.5 million at December 31, 2021 due primarily to a decrease in suspense accounts for loan closings of $1.6 million and a decrease in accrued expenses of $1.2 million.
Stockholders’ equity increased by $4.9 million, or 2.0% to $256.3 million at June 30, 2022, from $251.4 million at December 31, 2021. The increase in stockholders’ equity was due to net income of $9.0 million for the six months ended June 30, 2022, a reduction of $504,000 in unearned employee stock ownership plan shares, and $41,000 in other comprehensive income, partially offset by dividends paid and declared of $4.7 million.
Results of Operations for the Three Months Ended June 30, 2022 and 2021
Financial Highlights
Net income for the three months ended June 30, 2022 was $5.4 million compared to net income of $3.7 million for the three months ended June 30, 2021. Net income for the three months ended June 30, 2022 increased from net income for the three months ended June 30, 2021 primarily due to an increase in net interest income, partially offset by a decrease in non-interest income, an increase in non-interest expense, and an increase in income tax expense.
Net Interest Income
Net interest income totaled $13.5 million for the three months ended June 30, 2022, as compared to $10.4 million for the three months ended June 30, 2021. The increase in net interest income of $3.2 million, or 30.5%, was primarily due to an increase in interest income combined with a decrease in interest expense.
The increase in interest income is attributable to increases in loans, investment securities, equity securities, and interest-bearing deposits as we continued to deploy the proceeds raised in our July 2021 second-step conversion. The increase in interest income is also attributed to an increase in interest rates during the three months ended June 30, 2022.
The decrease in interest expense is attributable to a decrease in the balances and cost of funds on our certificates of deposits and our borrowed money, partially offset by increases in the balances and cost of funds in our interest-bearing demand deposits and our savings and club accounts.
In this regard, total interest income increased by $3.2 million, or 27.1%, to $14.8 million for the thre months ended June 30, 2022 from $11.7 million for the three months ended June 30, 2021 due to an increase in the average balance of interest earning assets of $257.0 million, or 27.8%, to $1.2 billion for the three months ended June 30, 2022 from $924.9 million for the three months ended June 30, 2021, partially offset by a decrease in the yield on interest earning assets by 3 basis points from 5.05% for the three months ended June 30, 2021 to 5.02% for the three months ended June 30, 2022.
Interest expense decreased by $2,000, or 0.2%, to $1.3 million for the three months ended June 30, 2022 from $1.3 million for the three months ended June 30, 2021 due to a decrease in the cost of interest bearing liabilities by 7 basis
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points from 0.91% for the three months ended June 30, 2021 to 0.84% for the three months ended June 30, 2022, partially offset by an increase in average interest bearing liabilities of $45.4 million, or 8.0%, to $613.6 million for the three months ended June 30, 2022 from $568.3 million for the three months ended June 30, 2021.
Net interest margin increased by 9 basis points, or 2.1%, during the three months ended June 30, 2022 to 4.58% compared to 4.49% during the three months ended June 30, 2021.
Provision for Loan Losses.
The Company recorded no loan loss provision for the three months ended June 30, 2022 and June 30, 2021. We charged-off $7,000 and $9,000 during the three months ended June 30, 2022 and June 30, 2021, respectively, against various unpaid overdrafts in our demand deposit accounts. We recorded recoveries of $146,000 and $1,000 during the three months ended June 30, 2022 and June 30, 2021, respectively. The recovery of $146,000 during the three months ended June 30, 2022 was due to a recovery on a previously charged-off multi-family property.
Based on a review of the loans that were in the loan portfolio at June 30, 2022, management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable.
Management uses available information to establish the appropriate level of the allowance for loan losses. Future additions or reductions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
Non-Interest Income
Non-interest income for the three months ended June 30, 2022 was $536,000 compared to non-interest income of $778,000 for the three months ended June 30, 2021. The decrease in total non-interest income was primarily due to an unrealized loss of $430,000 on equity securities during the three months ended June 30, 2022 compared to an unrealized loss of $93,000 on equity securities during the three months ended June 30, 2021. The unrealized loss of $430,000 on equity securities was primarily due to a rising interest rate environment due to the Federal Reserve’s interest rate increase, which impacted the value of the equity securities during the June 30, 2022 quarter.
The decrease in total non-interest income was partially offset by an increase of $234,000 in other loan fees and service charges, an increase of $39,000 on gain from the sale of fixed assets, an increase of $10,000 in other non-interest income, an increase of $2,000 in bank-owned life insurance income, and a decrease of $4,000 in investment advisory fees.
The increase in other loan fees and service charges was due to an increase of $161,000 in other loan fees and loan servicing fees and an increase of $71,000 in ATM and debit card usage fees.
Non-Interest Expense
Non-interest expense increased by $698,000, or 11.0%, to $7.0 million for the three months ended June 30, 2022 from $6.3 million for the three months ended June 30, 2021. The increase resulted primarily from increases of $305,000 in other operating expense, $142,000 in outside data processing expense, $101,000 in salaries and employee benefits, $90,000 in occupancy expense, $38,000 in equipment expense, and $27,000 in advertising expense, partially offset by a decrease of $5,000 in real estate owned expense.
Other non-interest expense increased by $305,000, or 17.9%, to $2.0 million for the three months ended June 30, 2022 from $1.7 million for the three months ended June 30, 2021 due mainly to increases of $245,000 in miscellaneous other non-interest expense, $116,000 in legal fees, $76,000 in service contracts expense, $20,000 in insurance expense, $17,000 in expenses related to the hiring of personnel, $16,000 in directors compensation, $9,000 in office supplies,
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$7,000 in directors, officers and employee expense, and $3,000 in telephone expense. These increases were partially offset by a decrease of $167,000 in consulting fees and a decrease of $38,000 in audit and accounting fees.
The increase of $245,000 in miscellaneous other non-interest expense was mainly due to an increase of $136,000 in regulatory insurance premiums and assessments due to an increase in our total assets, and increases of $49,000 in public company expenses, $23,000 in dues and subscriptions, $16,000 in check and correspondence bank charges, and $15,000 in miscellaneous charge-offs.
The increase of $116,000 in legal fees was due to the increased expenses associated with being a fully public company.
Outside data processing expense increased by $142,000, or 42.1%, to $479,000 for the three months ended June 30, 2022 from $337,000 for the three months ended June 30, 2021 due to the cost of operating additional two branches and additional data processing services.
Salaries and employee benefits increased by $101,000, or 2.9%, to $3.6 million for the three months ended June 30, 2022 from $3.5 million for the three months ended June 30, 2021 primarily due to an increase in number of full time equivalent personnel due to the opening of two additional branch offices, an increase in bonus accruals for loan production personnel as loan originations increased, and an increase in employee stock ownership plan (“ESOP”) compensation cost as the ESOP purchased additional shares of Company common stock using funds loaned from the Company as part of the second-step conversion offering. These increases were partially offset by an increase in loan origination expenses related to loan origination fees due to an increase in loan originations.
Occupancy expense increased by $90,000, or 19.1%, to $562,000 for the three months ended June 30, 2022 from $472,000 for the three months ended June 30, 2021 primarily as a result of the cost of operating additional branch office space.
Equipment expense increased by $37,000, or 15.5%, to $276,000 for the three months ended June 30, 2022 from $239,000 for the three months ended June 30, 2021 due to the purchases of additional equipment to support the Company’s branch expansion.
Advertising expense increased by $27,000, or 112.5%, to $51,000 for the three months ended June 30, 2022 from $24,000 for the six months ended June 30, 2021 due mainly to the resumption of advertising and promotional products to promote the opening of additional branch offices.
Real estate owned expense decreased by $5,000, or 19.2%, to $21,000 for the three months ended June 30, 2022 from $26,000 for the three months ended June 30, 2021 due to a reduction in operating expenses to maintain the one real estate owned property.
Income Taxes. We recorded income tax expense of $1.7 million and $1.1 million for the three months ended June 30, 2022 and 2021, respectively. For the three months ended June 30, 2022, we had approximately $185,000 in tax exempt income, compared to approximately $174,000 in tax exempt income for the three months ended June 30, 2021. Our effective income tax rates were 23.7% and 23.2% for the three months ended June 30, 2022 and 2021, respectively.
Results of Operations for the Six Months Ended June 30, 2022 and 2021
Financial Highlights
Net income for the six months ended June 30, 2022 was $9.0 million compared to net income of $7.0 million for the six months ended June 30, 2021. Net income for the six months ended June 30, 2022 was greater than net income for the six months ended June 30, 2021 primarily due to an increase in net interest income, partially offset by a decrease in non-interest income, an increase in non-interest expense, and an increase in income tax expense.
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Net Interest Income
Net interest income totaled $25.5 million for the six months ended June 30, 2022, as compared to $20.7 million for the six months ended June 30, 2021. The increase in net interest income of $4.7 million, or 22.8%, was primarily due to an increase in interest income combined with a decrease in interest expense.
The increase in interest income is attributable to increases in loans, investment securities, equity securities, and interest-bearing deposits as we continued to deploy the proceeds raised in our July 2021 second-step conversion. The increase in interest income is also attributed to an increase in interest rates during the six months ended June 30, 2022.
The decrease in interest expense is attributable to a decrease in the balances and cost of funds on our certificates of deposits and borrowed money, partially offset by increases in the balances and cost of funds in our interest-bearing demand deposits and our savings and club accounts.
In this regard, interest income increased by $4.6 million, or 19.6%, to $28.1 million for the six months ended June 30, 2022 from $23.5 million for the six months ended June 30, 2021 due to an increase in the average balance of interest earning assets of $262.5 million, or 28.7%, to $1.2 billion for the six months ended June 30, 2022 from $913.5 million for the six months ended June 30, 2021, partially offset by a decrease in the yield on interest earning assets by 36 basis points from 5.14% for the six months ended June 30, 2021 to 4.78% for the six months ended June 30, 2022.
Interest expense decreased by $119,000, or 4.3%, to $2.6 million for the six months ended June 30, 2022 from $2.8 million for the six months ended June 30, 2021 due to a decrease in the cost of interest bearing liabilities by 12 basis points from 0.97% for the six months ended June 30, 2021 to 0.85% for the six months ended June 30, 2022, partially offset by an increase in average interest bearing liabilities of $52.6 million, or 9.2%, to $624.4 million for the six months ended June 30, 2022 from $571.8 million for the six months ended June 30, 2021.
Net interest margin decreased by 21 basis points, or 4.6%, during the six months ended June 30, 2022 to 4.33% compared to 4.54% during the six months ended June 30, 2021.
Provision for Loan Losses.
The Company recorded no loan loss provision for the six months ended June 30, 2022 compared to a loan loss provision of $17,000 for the six months ended June 30, 2021. We charged-off $17,000 and $20,000 during the six months ended June 30, 2022 and June 30, 2021, respectively, against various unpaid overdrafts in our demand deposit accounts. We recorded recoveries of $242,000 and $9,000 during the six months ended June 30, 2022 and June 30, 2021, respectively. The recoveries of $242,000 during the six months ended June 30, 2022 comprised of recoveries of $146,000 regarding a previously charged-off multi-family property, $53,000 regarding a previously charged-off non-residential property, and $43,000 regarding a previously charged-off mixed property.
Based on a review of the loans that were in the loan portfolio at June 30, 2022, management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable.
Management uses available information to establish the appropriate level of the allowance for loan losses. Future additions or reductions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
Non-Interest Income
Non-interest income for the six months ended June 30, 2022 was $594,000 compared to non-interest income of $1.2 million for the six months ended ended June 30, 2021. The decrease in total non-interest income was primarily due to unrealized loss of $1.1 million on equity securities during the six months ended June 30, 2022 compared to an unrealized
40
loss of $62,000 on equity securities during the six months ended June 30, 2021. The unrealized loss of $1.1 million on equity securities was primarily due to a rising interest rate environment due to the Federal Reserve’s interest rate increase, which impacted the value of the equity securities during the six months ended June 30, 2022.
The decrease in total non-interest income was partially offset by increases of $303,000 in other loan fees and service charges, $39,000 on gain from the sale of fixed assets, $16,000 in other non-interest income, $15,000 in investment advisory fees, and $2,000 in bank-owned life insurance income.
The increase in other loan fees and service charges was due to an increase of $185,000 in other loan fees and loan servicing fees and an increase of $116,000 in ATM and debit card usage fees.
Non-Interest Expense
Non-interest expense increased by $1.4 million, or 10.6%, to $14.2 million for the six months ended June 30, 2022 from $12.9 million for the six months ended June 30, 2021. The increase resulted primarily from increases of $759,000 in other operating expense, $272,000 in salaries and employee benefits, $121,000 in occupancy expense, $91,000 in outside data processing expense, $78,000 in equipment expense, and $58,000 in advertising expense, partially offset by a decrease of $16,000 in real estate owned expense.
Other non-interest expense increased by $759,000, or 23.5%, to $4.0 million for the six months ended June 30, 2022 from $3.2 million for the six months ended June 30, 2021 due mainly to increases of $372,000 in miscellaneous other non-interest expense, $254,000 in legal fees, $104,000 in service contracts expense, $44,000 in expenses related to the hiring of personnel, $43,000 in audit and accounting fees, $30,000 in insurance expense, $12,000 in office supplies, $11,000 in directors compensation, $4,000 in telephone expense, and $3,000 in directors, officers and employee expense. These increases were partially offset by a decrease of $118,000 in consulting fees.
The increase of $372,000 in miscellaneous other non-interest expense was mainly due to an increase of $217,000 in regulatory insurance premiums and assessments due to an increase in our total assets, an increase of $54,000 in miscellaneous charge-offs, an increase of $53,000 in public company expense, an increase of $25,000 in dues and subscriptions, and an increase of $19,000 in check and correspondence bank charges.
The increase of $254,000 in legal fees was due to the increased expenses associated with being a fully public company.
Salaries and employee benefits increased by $272,000, or 3.8%, to $7.4 million for the six months ended June 30, 2022 from $7.2 million for the six months ended June 30, 2021 primarily due to an increase in number of full time equivalent personnel related to the opening of two additional branch offices, an increase in bonus accruals for loan production personnel as loan originations increased, and an increase in employee stock ownership plan (“ESOP”) compensation cost as the ESOP purchased additional shares of Company common stock using funds loaned to the ESOP from the Company as part of the second-step conversion offering. These increases were partially offset by an increase in loan origination expenses and fees resulting from an increase in loan originations.
Occupancy expense increased by $121,000, or 11.6%, to $1.2 million for the six months ended June 30, 2022 from $1.0 million for the six months ended June 30, 2021 primarily as a result of the cost of operating additional branch office space.
Outside data processing expense increased by $91,000, or 11.0%, to $915,000 for the six months ended June 30, 2022 from $824,000 for the six months ended June 30, 2021 due to the cost of operating additional two branches and additional data processing services.
Equipment expense increased by $78,000, or 16.0%, to $566,000 for the six months ended June 30, 2022 from $488,000 for the six months ended June 30, 2021 due to the purchases of additional equipment to support the Company’s branch expansion.
41
Advertising expense increased by $58,000, or 123.4%, to $105,000 for the six months ended June 30, 2022 from $47,000 for the six months ended June 30, 2021 due mainly to the resumption of advertising and promotional products to promote the opening of our additional branch offices.
Real estate owned expense decreased by $16,000, or 23.5%, to $52,000 for the six months ended June 30, 2022 from $68,000 for the six months ended June 30, 2021 due to a reduction in operating expenses to maintain the one real estate owned property.
Income Taxes. We recorded income tax expense of $2.8 million and $2.1 million for the six months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022, we had approximately $370,000 in tax exempt income, compared to approximately $336,000 in tax exempt income for the six months ended June 30, 2021. Our effective income tax rates were 23.6% and 23.2% for the six months ended June 30, 2022 and 2021, respectively.
Average Balances and Yields
The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average daily balances of assets or liabilities, respectively, for the periods presented. Loan fees, including prepayment fees, are included in interest income on loans and are not material. Non-accrual loans are included in the average balances only. In addition, yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.
42
Three Months Ended June 30, | |||||||||||||||||
2022 | 2021 | ||||||||||||||||
| Average |
| Interest and |
| Yield/ |
| Average |
| Interest and |
| Yield/ |
| |||||
Balance | Dividends | Cost | Balance | Dividends | Cost | ||||||||||||
Loans receivable | $ | 997,983 | $ | 14,412 |
| 5.78 | % | $ | 833,973 | $ | 11,575 |
| 5.55 | % | |||
Securities(1) |
| 43,880 | 177 |
| 1.61 |
| 21,513 | 90 |
| 1.67 | |||||||
Other interest-earning assets |
| 139,978 | 249 |
| 0.71 |
| 69,368 | 11 |
| 0.06 | |||||||
Total interest-earning assets |
| 1,181,841 | 14,838 |
| 5.02 |
| 924,854 | 11,676 |
| 5.05 | |||||||
Allowance for loan losses |
| (5,333) |
|
| (5,103) |
|
| ||||||||||
Non-interest-earning assets |
| 77,693 |
|
| 72,615 |
|
| ||||||||||
Total assets | $ | 1,254,201 | $ | 992,366 |
|
| |||||||||||
Interest bearing demand | $ | 115,097 | $ | 190 | 0.66 | % | $ | 114,675 | $ | 164 |
| 0.57 | % | ||||
Savings and club accounts |
| 214,840 | 354 | 0.66 |
| 101,162 | 48 |
| 0.19 | ||||||||
Certificates of deposit |
| 262,703 | 616 | 0.94 |
| 324,420 | 901 |
| 1.11 | ||||||||
Interest-bearing deposits |
| 592,640 | 1,160 | 0.78 |
| 540,257 | 1,113 |
| 0.82 | ||||||||
Borrowed money | $ | 21,000 | 136 | 2.59 |
| 28,000 | 185 |
| 2.64 | ||||||||
Interest-bearing liabilities |
| 613,640 | 1,296 | 0.84 |
| 568,257 | 1,298 |
| 0.91 | ||||||||
Non-interest-bearing demand |
| 368,359 |
| 239,996 |
|
| |||||||||||
Other non-interest-bearing liabilities |
| 16,108 |
| 24,429 |
|
| |||||||||||
Total liabilities |
| 998,107 |
| 832,682 |
|
| |||||||||||
Equity |
| 256,094 |
| 159,684 |
|
| |||||||||||
Total liabilities and equity | $ | 1,254,201 | $ | 992,366 |
|
| |||||||||||
Net interest income/interest spread | $ | 13,542 | 4.18 | % |
| $ | 10,378 |
| 4.14 | % | |||||||
Net interest margin |
|
| 4.58 | % |
|
|
|
|
| 4.49 | % | ||||||
Net interest-earning assets | $ | 568,201 | $ | 356,597 |
|
|
|
| |||||||||
Average interest-earning assets to interest-bearing liabilities |
| 192.60 | % |
|
| 162.75 | % |
|
|
|
| ||||||
Six Months Ended June 30, | ||||||||||||||||||
2022 | 2021 | |||||||||||||||||
| Average |
| Interest and |
| Yield/ |
| Average |
| Interest and |
| Yield/ |
| ||||||
Balance | Dividends | Cost | Balance | Dividends | Cost | |||||||||||||
Loans receivable | $ | 993,879 | $ | 27,473 |
| 5.53 | % | $ | 834,219 | $ | 23,302 |
| 5.59 | % | ||||
Securities(1) |
| 41,489 | 335 |
| 1.61 |
| 20,312 | 173 |
| 1.70 | ||||||||
Other interest-earning assets |
| 140,582 | 304 |
| 0.43 |
| 58,942 | 21 |
| 0.07 | ||||||||
Total interest-earning assets |
| 1,175,950 | 28,112 |
| 4.78 |
| 913,473 | 23,496 |
| 5.14 | ||||||||
Allowance for loan losses |
| (5,308) |
|
| (5,096) |
|
| |||||||||||
Non-interest-earning assets |
| 76,927 |
|
| 70,157 |
|
| |||||||||||
Total assets | $ | 1,247,569 | $ | 978,534 |
|
| ||||||||||||
Interest bearing demand | $ | 116,228 | $ | 359 | 0.62 | % | $ | 111,357 | $ | 320 |
| 0.57 | % | |||||
Savings and club accounts |
| 209,080 | 681 | 0.65 |
| 101,893 | 127 |
| 0.25 | |||||||||
Certificates of deposit |
| 275,612 | 1,297 | 0.94 |
| 330,546 | 1,948 |
| 1.18 | |||||||||
Interest-bearing deposits |
| 600,920 | 2,337 | 0.78 |
| 543,796 | 2,395 |
| 0.88 | |||||||||
Borrowed money | 23,514 | 307 | 2.61 |
| 28,000 | 368 |
| 2.63 | ||||||||||
Interest-bearing liabilities |
| 624,434 | 2,644 | 0.85 |
| 571,796 | 2,763 |
| 0.97 | |||||||||
Non-interest-bearing demand |
| 352,689 |
| 229,854 |
|
| ||||||||||||
Other non-interest-bearing liabilities |
| 15,352 |
| 19,020 |
|
| ||||||||||||
Total liabilities |
| 992,475 |
| 820,670 |
|
| ||||||||||||
Equity |
| 255,094 |
| 157,864 |
|
| ||||||||||||
Total liabilities and equity | $ | 1,247,569 | $ | 978,534 |
|
| ||||||||||||
Net interest income/interest spread | $ | 25,468 | 3.93 | % |
| $ | 20,733 |
| 4.18 | % | ||||||||
Net interest margin |
|
| 4.33 | % |
|
|
|
|
| 4.54 | % | |||||||
Net interest-earning assets | $ | 551,516 | $ | 341,677 |
|
|
|
| ||||||||||
Average interest-earning assets to interest-bearing liabilities |
| 188.32 | % |
|
| 159.76 | % |
|
|
|
| |||||||
| (1) | Cash on deposit at Federal Home Loan Bank or Federal Reserve Board. |
43
Rate/Volume Analysis
The following tables set forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns.
Three Months Ended 6/30/2022 | |||||||||
Compared to | |||||||||
Three Months Ended 6/30/2021 | |||||||||
Increase (Decrease) | |||||||||
Due to | |||||||||
| Volume |
| Rate |
| Total | ||||
(Dollars in thousands) | |||||||||
Interest income: |
|
|
|
|
|
| |||
Loans receivable | $ | 2,353 | $ | 484 | $ | 2,837 | |||
Securities |
| 109 |
| (22) |
| 87 | |||
Other interest-earning assets |
| 22 |
| 216 |
| 238 | |||
Total | $ | 2,484 | $ | 678 | $ | 3,162 | |||
Interest expense: |
|
|
|
|
|
| |||
Interest bearing demand deposit | $ | 1 | $ | 25 | $ | 26 | |||
Savings accounts |
| 96 |
| 210 |
| 306 | |||
Certificates of deposits |
| (157) |
| (128) |
| (285) | |||
Borrowed money |
| (45) |
| (4) |
| (49) | |||
Total |
| (105) |
| 103 |
| (2) | |||
Net change in net interest income | $ | 2,589 | $ | 575 | $ | 3,164 | |||
Six Months Ended 6/30/2022 | |||||||||
Compared to | |||||||||
Six Months Ended 6/30/2021 | |||||||||
Increase (Decrease) | |||||||||
Due to | |||||||||
| Volume |
| Rate |
| Total | ||||
(Dollars in thousands) | |||||||||
Interest income: |
|
|
|
|
|
| |||
Loans receivable | $ | 4,875 | $ | (704) | $ | 4,171 | |||
Securities |
| 189 |
| (27) |
| 162 | |||
Other interest-earning assets |
| 61 |
| 222 |
| 283 | |||
Total | $ | 5,125 | $ | (509) | $ | 4,616 | |||
Interest expense: |
|
|
|
|
|
| |||
Interest bearing demand deposit | $ | 14 | $ | 25 | $ | 39 | |||
Savings accounts |
| 219 |
| 335 |
| 554 | |||
Certificates of deposits |
| (294) |
| (357) |
| (651) | |||
Borrowed money |
| (59) |
| (2) |
| (61) | |||
Total |
| (120) |
| 1 |
| (119) | |||
Net change in net interest income | $ | 5,245 | $ | (510) | $ | 4,735 | |||
44
Asset Quality
The following table sets forth information with respect to our non-performing assets at the dates indicated.
| June 30, | December 31, |
| |||||
| 2022 |
| 2021 |
| ||||
(Dollars in thousands) |
| |||||||
Total non-accrual loans | $ | 769 | $ | — | ||||
Total accruing loans past due 90 days or more |
| — |
| — | ||||
Total non-performing loans |
| 769 |
| — | ||||
Real estate owned |
| 1,996 |
| 1,996 | ||||
Total non-performing assets | $ | 2,765 | $ | 1,996 | ||||
Total non-performing loans to total loans |
| 0.08 | % |
| — | % | ||
Total non-performing assets to total assets |
| 0.23 | % |
| 0.16 | % | ||
Non-performing assets totaled $2.8 million at June 30, 2022 and $2.0 million at December 31, 2021, respectively. There were two nonaccrual non-residential loans totaling $769,000 as of June 30, 2022, which are secured by the same property to one borrower that is in foreclosure due to a maturity default at June 30, 2022. There were no nonaccrual loans at December 31, 2021. During the six months ended June 30, 2022, we did not collect any interest income on loans that were placed on non-accrual status.
From time to time, as part of our loss mitigation strategy, we may renegotiate the loan terms based on the economic or legal reasons related to the borrower’s financial difficulties. There were no new TDRs during the six months ended June 30, 2022 or June 30, 2021 or during the year ended December 31, 2021. TDRs may be considered to be non-performing and if so are placed on non-accrual, except for those that have established a sufficient performance history (generally a minimum of six consecutive months of performance) under the terms of the restructured loan.
During the three and six months ended June 30, 2022, two TDR loans were placed on nonaccrual status due to a maturity default. During the three and six months ended June 30, 2021, none of the loans that were modified during the previous twelve months had defaulted. At June 30, 2022, two loans with aggregate balances of $865,000 were considered TDRs but were performing in accordance with their restructured terms for the requisite period of time (generally at least six consecutive months) to be returned to accrual status. At December 31, 2021, four loans with aggregate balances of $1.6 million were considered TDRs but were performing.
45
The following table sets forth an analysis of the activity in the allowance for loan losses for the periods indicated:
June 30, | December 31, | |||||||
| 2022 |
| 2021 |
| ||||
(Dollars In Thousands) | ||||||||
Allowance at beginning of period | $ | 5,242 | $ | 5,088 | ||||
Provision for loan losses |
| — |
| 3,610 | ||||
Net Charge-offs: |
|
|
|
| ||||
Residential real estate loans: |
|
|
|
| ||||
One- to four-family |
| — |
| — | ||||
Multifamily |
| (146) |
| (150) | ||||
Mixed-use |
| (43) |
| — | ||||
Total residential real estate loans |
| (189) |
| (150) | ||||
Non-residential real estate loans |
| (53) |
| 3,591 | ||||
Construction loans |
| — |
| — | ||||
Commercial and industrial loans |
| — |
| — | ||||
Consumer loans |
| 17 |
| 15 | ||||
Total net charge-offs |
| (225) |
| 3,456 | ||||
Allowance at end of period | $ | 5,467 | $ | 5,242 | ||||
Total loans outstanding | $ | 1,023,622 | $ | 972,851 | ||||
Average loans outstanding |
| 993,879 |
| 866,518 | ||||
Ratio of allowance to non-performing loans |
| 710.92 | % |
| — | % | ||
Ratio of allowance to total loans |
| 0.53 | % |
| 0.54 | % | ||
Ratio of net charge-offs to average loans |
| (0.02) | % |
| 0.40 | % | ||
Non-performing loans | $ | 769 | $ | — | ||||
The allowance for loan losses increased by $225,000 to $5.5 million at June 30, 2022 from $5.2 million at December 31, 2021. The increase in the allowances for loan losses was due primarily to recoveries totaling $242,000, partially offset by charge-offs totaling $17,000.
Liquidity and Capital Resources
We maintain liquid assets at levels we believe are adequate to meet our liquidity needs. We established a liquidity ratio policy that identify three liquidity ratios consisting of (1) Cash/Deposits Short Term Borrowings (“Cash Liquidity”), (2) Cash Investments/Deposits Short Term Borrowings (“On Balance Sheet Liquidity”), and (3) Cash Investments Borrowing Capacity/Deposits Short Term Borrowings (“On Balance Sheet Liquidity Borrowing Capacity”) to assist in the management of our liquidity. We also establish targets of 2.0% for the Cash Liquidity ratio, 8.0% for the On Balance Sheet Liquidity ratio, and 20.0% for the On Balance Sheet Liquidity Borrowing Capacity ratio.
Our Cash Liquidity ratio, On Balance Sheet Liquidity ratio, and On Balance Sheet Liquidity Borrowing Capacity ratio averaged 14.8%, 19.0%, and 22.7%, respectively, for the six months ended June 30, 2022 compared to 12.7%, 15.7%, and 21.7%, respectively, for the year ended December 31, 2021. We adjust our liquidity levels to fund deposit outflows, pay real estate taxes on real estate loans, repay our borrowings, and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.
Our liquidity ratios cannot be calculated using amounts disclosed in our consolidated financial statements, as many of the calculations involve monthly, quarterly or annual averages. To calculate our liquidity ratios, the average liquidity base from the prior month is used as the denominator to calculate a daily liquidity ratio. The liquidity base consists of savings account balances, certificates of deposit balances, checking and money market balances, deposit loans and borrowings. The daily balances of these components are averaged to arrive at the liquidity base for the month, and the daily cash balances in selected general ledger accounts are used to derive our liquidity position. A daily liquidity ratio is calculated using the liquidity for the day divided by the prior month’s average liquidity base. At the end of each month, a monthly liquidity position is calculated using the average liquidity position for the month divided by the prior month’s
46
average liquidity base. To calculate quarterly and annual liquidity ratios, we take the average liquidity for the three- or twelve-month period, respectively, and average it.
Our primary sources of liquidity are deposits, prepayment of loans and mortgage-backed securities, maturities of investment securities, other short-term investments, earnings, and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included with our Consolidated Financial Statements.
Our primary investing activities are the origination of construction loans, commercial and industrial loans, multifamily loans, and to a lesser extent, mixed-use real estate loans and other loans. For the six months ended June 30, 2022 and 2021, our loan originations totaled $307.4 million and $285.1 million, respectively. Cash received from the maturities and pay-downs on securities totaled $737,000 and $793,000 for the six months ended June 30, 2022 and 2021, respectively. We purchased securities totaling $10.0 million and $4.3 million during the six months ended June 30, 2022 and June 30, 2021, respectively.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of New York to provide advances. As a member of the Federal Home Loan Bank of New York, we are required to own capital stock in the Federal Home Loan Bank of New York and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to credit-worthiness have been met. We had an available borrowing limit of $24.1 million and $29.4 million from the Federal Home Loan Bank of New York as of June 30, 2022 and December 31, 2021, respectively. There were $21.0 million and $28.0 million in Federal Home Loan Bank advances at June 30, 2022 and December 31, 2021, respectively.
In addition, we are party to a loan agreement with ACBB under which we can borrow up to $8.0 million in short-term borrowings. There were no outstanding borrowings with ACBB at June 30, 2022 and December 31, 2021.
At June 30, 2022, we had unfunded commitments on construction loans of $491.1 million, outstanding commitments to originate loans of $258.2 million, unfunded commitments under lines of credit of $139.9 million, and unfunded standby letters of credit of $7.3 million. At June 30, 2022, certificates of deposit scheduled to mature in less than one year totaled $158.1 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as various types of sourced deposits, and/or Federal Home Loan Bank advances, in order to maintain our level of assets. Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents. In addition, the cost of such deposits may be significantly higher or lower depending on market interest rates at the time of renewal.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its stockholders and for the repurchase, if any, of its shares of common stock. At June 30, 2022, the Company had liquid assets of $40.1 million and $3.7 million in loan participations originated by the Bank which are held by the Company.
Off-Balance Sheet Arrangements
For the six months ended June 30, 2022, we did not engage in any off-balance sheet transactions reasonably likely to have a material adverse effect on our financial condition, results of operations or cash-flows.
47
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk is defined as the exposure to current and future earnings and capital that arises from adverse movements in interest rates. Depending on a bank’s asset/liability structure, adverse movements in interest rates could be either rising or falling interest rates. For example, a bank with predominantly long-term fixed-rate assets and short-term liabilities could have an adverse earnings exposure to a rising rate environment. Conversely, a short-term or variable-rate asset base funded by longer-term liabilities could be negatively affected by falling rates. This is referred to as re-pricing or maturity mismatch risk.
Interest rate risk also arises from changes in the slope of the yield curve (yield curve risk), from imperfect correlations in the adjustment of rates earned and paid on different instruments with otherwise similar re-pricing characteristics (basis risk), and from interest rate related options embedded in our assets and liabilities (option risk).
Our objective is to manage our interest rate risk by determining whether a given movement in interest rates affects our net interest income and the market value of our portfolio equity in a positive or negative way and to execute strategies to maintain interest rate risk within established limits. The results at June 30, 2022 indicate the level of risk within the parameters of our model. Our management believes that the June 30, 2022 results indicate a profile that reflects interest rate risk exposures in both rising and declining rate environments for both net interest income and economic value.
Model Simulation Analysis. We view interest rate risk from two different perspectives. The traditional accounting perspective, which defines and measures interest rate risk as the change in net interest income and earnings caused by a change in interest rates, provides the best view of short-term interest rate risk exposure. We also view interest rate risk from an economic perspective, which defines and measures interest rate risk as the change in the market value of portfolio equity caused by changes in the values of assets and liabilities, which fluctuate due to changes in interest rates. The market value of portfolio equity, also referred to as the economic value of equity, is defined as the present value of future cash flows from existing assets, minus the present value of future cash flows from existing liabilities.
These two perspectives give rise to income simulation and economic value simulation, each of which presents a unique picture of our risk of any movement in interest rates. Income simulation identifies the timing and magnitude of changes in income resulting from changes in prevailing interest rates over a short-term time horizon (usually one or two years). Economic value simulation reflects the interest rate sensitivity of assets and liabilities in a more comprehensive fashion, reflecting all future time periods. It can identify the quantity of interest rate risk as a function of the changes in the economic values of assets and liabilities, and the corresponding change in the economic value of equity of NorthEast Community Bank. Both types of simulation assist in identifying, measuring, monitoring and controlling interest rate risk and are employed by management to ensure that variations in interest rate risk exposure will be maintained within policy guidelines.
We produce these simulation reports and discuss them at our Asset and Liability Committee meetings on at least a quarterly basis. The simulation reports compare baseline (no interest rate change) to the results of an interest rate shock, to illustrate the specific impact of the interest rate scenario tested on income and equity. The model, which incorporates asset and liability rate information, simulates the effect of various interest rate movements on income and equity value. The reports identify and measure our interest rate risk exposure present in our current asset/liability structure. Management considers both a static (current position) and dynamic (forecast changes in volume) analysis as well as non-parallel and gradual changes in interest rates and the yield curve in assessing interest rate exposures.
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If the results produce quantifiable interest rate risk exposure beyond our limits, then the testing will have served as a monitoring mechanism to allow us to initiate asset/liability strategies designed to reduce and therefore mitigate interest rate risk. The table below sets forth an approximation of our interest rate risk exposure. The simulation uses projected repricing of assets and liabilities at June 30, 2022. The income simulation analysis presented represents a one-year impact of the interest scenario assuming a static balance sheet. Various assumptions are made regarding the prepayment speed and optionality of loans, investment securities and deposits, which are based on analysis and market information. The assumptions regarding optionality, such as prepayments of loans and the effective lives and repricing of non-maturity deposit products, are documented periodically through evaluation of current market conditions and historical correlations to our specific asset and liability products under varying interest rate scenarios.
Because the prospective effects of hypothetical interest rate changes are based on a number of assumptions, these computations should not be relied upon as indicative of actual results. While we believe such assumptions to be reasonable, assumed prepayment rates may not approximate actual future prepayment activity on mortgage-backed securities or agency issued collateralized obligations (secured by one- to four-family loans and multifamily loans). Further, the computation does not reflect any actions that management may undertake in response to changes in interest rates and assumes a constant asset base. Management periodically reviews the rate assumptions based on existing and projected economic conditions and consults with industry experts to validate our model and simulation results.
The table below sets forth, as of June 30, 2022, NorthEast Community Bank’s net portfolio value, the estimated changes in our net portfolio value and net interest income that would result from the designated instantaneous parallel changes in market interest rates.
Twelve Month | ||||||||
Net Interest Income | Net Portfolio Value | |||||||
Percent | Percent |
| ||||||
Change in Interest Rates (Basis Points) |
| of Change |
| Estimated NPV |
| of Change |
| |
+200 |
| 25.13 | % | $ | 319,110 |
| 6.00 | % |
+100 |
| 12.55 |
| 310,869 |
| 3.27 | ||
0 |
| — |
| 301,033 |
| — | ||
-100 |
| (13.41) | % |
| 289,292 |
| (3.90) | % |
As of June 30, 2022, based on the scenarios above, net interest income would increase by approximately 12.55% to 25.13%, over a one-year time horizon in a rising interest rate environment. One-year net interest income would decrease by approximately 13.41% in a declining interest rate environment over the same period.
Economic value at risk would be positively impacted by a rise in interest rates and negatively impacted by a decline in interest rates. We have established an interest rate floor of zero percent for measuring interest rate risk. The difference between the two results reflects the relatively long terms of a portion of our assets which is captured by the economic value at risk but has less impact on the one year net interest income sensitivity.
Overall, our June 30, 2022 results indicate that we are adequately positioned with an acceptable net interest income and economic value at risk and that all interest rate risk results continue to be within our policy guidelines.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure (1) that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and (2) that they are alerted in a timely manner about material information relating to the Company required to be filed in its periodic Securities and Exchange Commission filings.
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During the quarter ended June 30, 2022, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various legal actions and claims arising in the normal course of business. In the opinion of management, these legal actions and claims are not expected to have a material adverse impact on the Company’s financial condition.
Item 1A. Risk Factors
For information regarding the Company’s risk factors, refer to “Item 1A: Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 30, 2022 (the “Form 10-K”). As of June 30, 2022, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index.
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EXHIBIT INDEX
Exhibit No. | Description |
31.1 | |
31.2 32.0 | |
101.0 | The following materials from the Company’s Quarterly Report to Stockholders on Form 10-Q for the quarter ended June 30, 2022, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. |
101.INS† | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH† | XBRL Taxonomy Extension Schema Document |
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB† | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document |
104† | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
† Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
Date: August 12, 2022
NORTHEAST COMMUNITY BANCORP, INC. | ||
By: | /s/ Kenneth A. Martinek | |
Name: | Kenneth A. Martinek | |
Title: | Chairman and Chief Executive Officer | |
(Principal Executive Officer) | ||
By: | /s/ Donald S. Hom | |
Name: | Donald S. Hom | |
Title: | Executive Vice President and Chief Financial Officer | |
(Principal Financial and Chief Accounting Officer) | ||
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