UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
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: 001-41456
ECB Bancorp, Inc.
(Exact Name of Registrant as Specified in its Charter)
Maryland
88-1502079
( State or other jurisdiction of
incorporation or organization)
(I.R.S. EmployerIdentification No.)
419 Broadway
Everett, Massachusetts
02149
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (617) 387-1110
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Ticker Symbol
Name of each exchange on which registered
Common Stock, $0.01 par value
ECBK
The NASDAQ Stock Market, LLC
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 requirements for the past 90 days.
Yes [ X ] No [ ]
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 during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 [ ]
Non-accelerated filer [X]
Smaller reporting company [X]
Emerging growth company [X]
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 Act). Yes [ ] No [X]
As of November 8th, 2023, 9,388,678 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.
Form 10-Q
Index
Page
Part I. Financial Information
Item 1.
Financial Statements
Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022
1
Consolidated Statements of Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)
2
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)
3
Consolidated Statements of Changes in Shareholders' Equity for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)
4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 (unaudited)
6
Notes to Consolidated Financial Statements (unaudited)
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
44
Item 4.
Controls and Procedures
Part II. Other Information
Legal Proceedings
45
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Defaults upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
46
Signature Page
47
EXPLANATORY NOTE
ECB Bancorp, Inc., a Maryland corporation (the “Company” or the “Registrant”), was formed on March 7, 2022 to serve as the bank holding company for Everett Co-operative Bank (the “Bank”) as part of the Bank’s mutual-to-stock conversion, which was consummated on July 27, 2022. Financial and other information prior to and including July 27, 2022 included in this Quarterly Report is for the Bank.
Part I. – Financial Information
Item 1. Financial Statements
ECB Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
September 30, 2023 (unaudited) and December 31, 2022
(in thousands except share data)
September 30, 2023
December 31, 2022
ASSETS
Cash and due from banks
$
3,430
3,123
Short-term investments
93,957
58,927
Total cash and cash equivalents
97,387
62,050
Interest-bearing time deposits
—
300
Investments in available-for-sale securities (at fair value)
5,006
5,001
Investments in held-to-maturity securities, at cost (fair values of $65,844 at September 30, 2023 (unaudited) and $69,707 at December 31, 2022)
74,869
77,591
Loans, net of allowance for credit losses of $8,292 as of September 30, 2023 (unaudited) and $7,200 as of December 31, 2022
997,359
885,674
Federal Home Loan Bank stock, at cost
9,571
7,293
Premises and equipment, net
3,729
3,698
Accrued interest receivable
3,390
2,632
Deferred tax asset, net
4,687
4,344
Bank-owned life insurance
14,367
14,067
Other assets
3,397
1,812
Total assets
1,213,762
1,064,462
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing
84,785
84,903
Interest-bearing
727,746
633,246
Total deposits
812,531
718,149
Federal Home Loan Bank advances
224,000
174,000
Other liabilities
11,719
9,583
Total liabilities
1,048,250
901,732
Shareholders' Equity:
Preferred Stock, par value $0.01; Authorized: 1,000,000 shares; Issued and outstanding: 0 shares and 0 shares, respectively
Common Stock, par value $0.01; Authorized: 30,000,000 shares; Issued and outstanding: 9,195,989 shares and 9,175,247 shares, respectively
92
Additional paid-in capital
88,807
89,286
Retained earnings
83,066
80,076
Accumulated other comprehensive income
246
249
Unallocated common shares held by the Employee Stock Ownership Plan
(6,699
)
(6,973
Total shareholders' equity
165,512
162,730
Total liabilities and shareholders' equity
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Consolidated Statements of Income (Loss)
(unaudited)
Three months ended
Nine months ended
September 30,
2023
2022
Interest and dividend income:
Interest and fees on loans
12,313
7,150
35,362
18,095
Interest and dividends on securities
723
360
1,950
1,022
Other interest income
1,130
251
2,567
355
Total interest and dividend income
14,166
7,761
39,879
19,472
Interest expense:
Interest on deposits
5,843
1,025
14,815
2,332
Interest on Federal Home Loan Bank advances
2,237
197
6,213
310
Total interest expense
8,080
1,222
21,028
2,642
Net interest and dividend income
6,086
6,539
18,851
16,830
(Benefit) provision for credit losses
(184
925
696
1,800
Net interest and dividend income after (benefit) provision for credit losses
6,270
5,614
18,155
15,030
Noninterest income:
Customer service fees
123
114
371
326
Income from bank-owned life insurance
175
90
372
731
Net gain on sales of loans
9
16
13
84
Other income
15
8
35
28
Total noninterest income
322
228
791
1,169
Noninterest expense:
Salaries and employee benefits
2,914
2,679
8,623
6,960
Director compensation
139
108
379
325
Occupancy and equipment expense
243
190
695
561
Data processing
275
222
810
624
Computer software and licensing
88
78
216
180
Advertising and promotions
201
236
576
511
Professional fees
304
176
962
560
Federal Deposit Insurance Corporation deposit insurance
206
54
613
163
Charitable contributions
3,214
17
3,249
Other expense
434
346
1,125
928
Total noninterest expense
4,811
7,303
14,016
14,061
Income (loss) before income tax expense
1,781
(1,461
4,930
2,138
Income tax expense (benefit)
440
(426
1,263
394
Net income (loss)
1,341
(1,035
3,667
1,744
Share data:
Weighted average shares outstanding, basic
8,486,577
8,445,615
8,485,936
Weighted average shares outstanding, diluted
Basic earnings (loss) per share
0.16
(0.12
0.43
0.21
Diluted earnings (loss) per share
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Other comprehensive (loss) income, net of tax:
Net unrealized holding (loss) gain on securities available-for-sale
(2
(3
(17
Other comprehensive (loss) income, net of tax
Comprehensive income (loss)
1,339
(1,033
3,664
1,727
Statements of Changes in Shareholders' Equity
Shares of Common Stock Outstanding
Common Stock
Additional Paid in Capital
Retained Earnings
Accumulated Other Comprehensive (Loss)/Income
Unallocated Common Stock Held by ESOP
Total
Balance at June 30, 2022
-
80,135
(102
80,033
Net loss
Other comprehensive income, net of tax
Proceeds of stock offering and issuance of common shares (net of costs of $2.6 million )
8,181,227
82
79,165
79,247
Issuance of common shares donated to the Everett Co-operative Bank Charitable Foundation
260,000
2,597
2,600
Purchase of common shares by the ESOP (734,020 shares)
734,020
7,333
(7,340
ESOP shares committed to be released (15,195 shares)
63
152
215
Balance at September 30, 2022
9,175,247
89,158
79,100
(100
(7,188
161,062
Balance at June 30, 2023
89,355
81,725
248
(6,791
164,629
Net income
Other comprehensive loss, net of tax
ESOP shares committed to be released (9,251 shares)
22
Repurchase of common stock
(49,242
(1
(589
(590
Restricted stock awards issued
69,984
Stock-based compensation
20
Balance at September 30, 2023
9,195,989
Balance at December 31, 2021
77,356
(83
77,273
Balance at December 31, 2022
Cumulative Effect Accounting Adjustment for ASU 2016-13 Adoption
(677
ESOP shares committed to be released (27,451 shares)
91
274
365
5
Consolidated Statements of Cash Flows
Nine Months Ended
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities, net
153
Provision for credit losses
Change in deferred loan costs/fees
(29
(169
Gain on sales of loans, net
(13
(84
Proceeds from sales of loans
359
5,824
Loans originated for sale, net
(346
(4,439
Depreciation and amortization expense
205
223
Increase in accrued interest receivable
(758
(556
Increase in accrued interest payable
548
247
Increase in bank-owned life insurance
(300
(301
Gain from life insurance policy death benefit
(72
(430
Deferred income tax benefit
(76
(1,045
ESOP expense
Stock-based compensation expense
Increase in other assets
(1,513
(1,624
Increase in other liabilities
1,041
582
Net cash provided by operating activities
3,803
4,740
Cash flows from investing activities:
Purchases of held-to-maturity securities
(2,437
(11,704
Proceeds from paydowns and maturities of held-to-maturity securities
5,141
Purchase of interest-bearing time deposits
Proceeds from maturities of interest bearing time deposits
Purchase of Federal Home Loan Bank Stock
(3,204
(3,084
Redemption of Federal Home Loan Bank Stock
926
1,819
Loan originations and principal collections, net
(103,487
(212,760
Purchase of loans
(9,262
(7,059
Recoveries of loans previously charged off
Capital expenditures
(236
(177
Proceeds from life insurance policy death benefit
896
Net cash used in investing activities
(112,258
(225,218
Cash flows from financing activities:
Net (decrease) increase in demand deposits, NOW and savings accounts
(27,794
13,468
Net increase in time deposits
122,176
67,527
Proceeds from long-term Federal Home Loan Bank advances
185,000
20,000
Repayments of long-term Federal Home Loan Bank advances
(80,000
Net change in short-term Federal Home Loan Bank advances
(55,000
21,475
Net proceeds from issuance of common stock
Common stock repurchased
Net cash provided by financing activities
143,792
201,717
Net increase (decrease) in cash and cash equivalents
35,337
(18,761
Cash and cash equivalents at beginning of year
52,975
Cash and cash equivalents at end of period
34,214
Supplemental disclosures:
Interest paid
20,480
2,395
Income taxes paid
1,931
1,595
Noncash activities:
Transfer of bank-owned life insurance to other assets
72
Effect of the adoption of ASU 2016-13
Allowance for credit losses
182
Deferred income taxes
266
761
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 1 - CONVERSION
On March 9, 2022, the Board of Directors of Everett Co-operative Bank (the "Bank") adopted a Plan of Conversion under which the Bank would convert from a Massachusetts mutual co-operative bank into a Massachusetts stock co-operative bank and become the wholly owned subsidiary of a newly chartered stock holding company, ECB Bancorp, Inc. (the “Holding Company”). The Plan of Conversion received all of the approvals of various regulatory agencies and the Plan of Conversion was approved by the required vote of more than two-thirds of the Bank’s depositors present and voting at a special meeting of depositors held on May 5, 2022. The Bank’s mutual to stock conversion and the Company’s stock offering were consummated on July 27, 2022. In the offering, the Company sold 8,915,247 shares of common stock at a per share price of $10.00 for gross offering proceeds of $89.2 million. Additionally, the Company contributed 260,000 shares and $600,000 in cash to the Everett Co-operative Bank Charitable Foundation (the “Foundation”).
The Bank has established a Liquidation Account in an amount equal to the net worth of the Bank as of the date of the latest consolidated statement of financial condition contained in the final prospectus distributed in connection with the Company's stock offering. The function of the Liquidation Account is to establish a priority on liquidation of the Bank. The Liquidation Account will be maintained by the Bank for the benefit of the eligible account holders who continue to maintain deposit accounts with the Bank following the conversion. Each eligible account holder shall, with respect to each deposit account, hold a related inchoate interest in a portion of the Liquidation Account balance, in relation to each deposit account balance at the eligibility record date, or to such balance as it may be subsequently reduced, as hereinafter provided. The initial Liquidation Account balance shall not be increased, and shall be subject to downward adjustment to the extent of any downward adjustment of any subaccount balance of any eligible account holder in accordance with the regulations of the Division of Banks of the Commonwealth of Massachusetts.
In the unlikely event of a complete liquidation of the Bank (and only in such event), following all liquidation payments to creditors (including those to depositors to the extent of their deposit accounts) each eligible account holder shall be entitled to receive a liquidating distribution from the Liquidation Account, in the amount of the then-adjusted subaccount balances for his or her deposit accounts then held, before any liquidating distribution may be made to any holder of the Bank’s capital stock.
The Bank may not declare or pay a cash dividend on its outstanding capital stock if the effect thereof would cause its regulatory capital to be reduced below the amount required to maintain the Liquidation Account and under FDIC rules and regulations.
NOTE 2 – BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of ECB Bancorp, Inc. have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The consolidated financial statements of ECB Bancorp, Inc. (referred to herein as "the Company," “we,” “us,” or “our”) include the balances and results of operations of the Company and the Bank, its wholly-owned subsidiary, as well as First Everett Securities Corporation, a wholly-owned subsidiary of the Bank. Intercompany transactions and balances are eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company's financial position as of September 30, 2023 and the results of operations and cash flows for the interim periods ended September 30, 2023 and 2022. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the fiscal year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2022 and accompanying notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The Company qualifies as an emerging growth company (“EGC”) under the Jumpstart Our Business Startups Act of 2012 and has elected to defer the adoption of new or revised accounting standards until the nonpublic company effective dates. As such, the Company will adopt standards on the nonpublic company effective dates until such time that we no longer qualify as an EGC.
Certain previously reported amounts have been reclassified to conform to the current period’s presentation.
RECENT ACCOUNTING STANDARDS
ASU 2016-13 Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments
Effective January 1, 2023, the Company adopted Accounting Standards Update (ASU) 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, this update makes changes to the accounting for credit-related impairment of available for sale debt securities by eliminating other-than-temporary impairment charges. Following the expected loss model, credit-related losses on available for sale debt securities will be reflected as a valuation allowance for credit losses on those securities. The Company adopted Topic 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Accordingly, a cumulative effect transition adjustment amounting to $677,000 decreased the opening balance of retained earnings, effective January 1, 2023. Prior periods have not been restated and continue to be presented under the incurred loss model. A summary of the financial statement impact upon adoption of Topic 326 is as follows:
Financial Statement Impact of Adoption
Balance
Transition
12/31/2022
Adjustment
1/1/2023
(In Thousands)
Assets:
Allowance for credit losses on loans
7,200
7,382
4,610
Liabilities
Allowance for credit losses on off balance sheet credit exposures
402
1,163
Effective January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures. Update No. 2022-02 applies to public entities that have adopted ASC Topic 326. The amendments in this update eliminate the existing accounting guidance for troubled debt restructures ("TDRs") by creditors in Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors and instead requires that an entity evaluate whether a modification represents a new loan or a continuation of an existing loan. The amendments also enhance disclosure requirements for certain loans refinancing and restructuring by creditors when a borrower is experiencing financial difficulty. ASU 2022-02 also requires additional disclosure of current period gross write-offs by year of origination for financing receivables to be included in the entity's vintage disclosure, as currently required under Topic 326.
NOTE 3 – INVESTMENTS IN SECURITIES
Allowance for Credit Losses - Available for Sale Securities
The Company's available for sale securities are carried at fair value. For available for sale securities in an unrealized loss position, management will first evaluate whether there is intent to sell, or if it is more likely than not that the Company will be required to sell a security prior to anticipated recovery of its amortized cost basis. If either of these criteria are met, the Company will record a write-down of the security's amortized cost basis to fair value through income. For those available for sale securities which do not meet the intent or requirement to sell criteria, management will evaluate whether the decline in fair value is a result of credit related matters or other factors. In performing this assessment, Management considers the creditworthiness of the issuer including whether the security is guaranteed by the U.S. Federal Government or other government agency, the extent to which fair value is less than amortized cost, and changes in credit rating during the period, among other factors. If this assessment indicates the existence of credit losses, the security will be written down to fair value, as determined by a discounted cash flow analysis. To the extent the estimated cash flows do not support the amortized cost, the deficiency is considered to be due to credit loss and is recognized in earnings. Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense. Losses are charged against the allowance when the uncollectibility of a security is confirmed, or when either of the aforementioned criteria surrounding intent or requirement to sell have been met.
Allowance for Credit Losses - Held to Maturity Securities
The Company measures expected credit losses on held to maturity securities on a collective basis by major security type. Management classifies the held-to maturity portfolio into the following major security types: U.S. Government Sponsored Enterprises, U.S. Treasury, Agency Mortgage-Backed Securities, and Corporate Bonds.
Investments in securities have been classified in the consolidated balance sheets according to management’s intent. The following tables summarize the amortized cost, allowance for credit losses, and fair value of securities and their corresponding amounts of unrealized gains and losses at the dates indicated:
Gross
Allowance
Amortized
Unrealized
for Credit
Fair
Held-to-maturity:
Cost
Gains
Losses
Value
Debt securities issued by U.S. government-sponsored enterprises
10,220
(523
9,697
Mortgage-backed securities
47,687
(7,368
40,320
Corporate bonds
11,585
(1,080
10,505
U.S. Treasury securities
5,377
(55
5,322
Total held-to-maturity securities
(9,026
65,844
11,213
(578
10,641
51,864
(6,181
45,686
11,612
(1,041
10,571
2,902
(93
2,809
(7,893
69,707
Substantially all held to maturity securities held by the Company are guaranteed by the U.S. federal government or other government sponsored agencies and have a long history of no credit losses. As a result, management has determined these securities to have a zero loss expectation and therefore the Company did not record a provision for estimated credit losses on any held to maturity securities during the three and nine months ended September 30, 2023. The Company's investments in corporate bonds are deemed “investment grade” and (a) the Company does not intend to sell these securities before recovery and (b) it is more likely than not that the Company will not be required to sell these securities before recovery. The Company does not expect to suffer a credit loss as of September 30, 2023. Excluded from the table above is accrued interest on held to maturity securities of $265,000 and $267,000 at September 30, 2023 and December 31, 2022, respectively, which is included within accrued interest receivable in the Consolidated Balance Sheets. Additionally, the Company did not record any write-offs of accrued interest income on held to maturity securities for the three and nine months ended September 30, 2023. No securities held by the Company were delinquent on contractual payments at September 30, 2023, nor were any securities placed on non-accrual status for the three and nine months then ended.
Available-for-sale
Debt securities
5,000
Total available-for-sale securities
4,991
10
The Company did not record a provision for estimated credit losses on any available for sale securities for the three and nine months ended September 30, 2023. Excluded from the table above is accrued interest on available for sale securities of $57,000 and $49,000 at September 30, 2023 and December 31, 2022, respectively, which is included within accrued interest receivable in the Consolidated Balance Sheets. Additionally, the Company did not record any write-offs of accrued interest income on available for sale securities for the three and nine months ended September 30, 2023. No securities held by the Company were delinquent on contractual payments at September 30, 2023, nor were any securities placed on non-accrual status for the three and nine months then ended.
The actual maturities of certain available for sale or held to maturity securities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. A schedule of the contractual maturities of available for sale and held to maturity securities as of September 30, 2023 is presented below:
Available-
for-sale
Held-to-maturity
Within 1 year
7,267
7,183
After 1 year through 5 years
21,672
20,324
After 5 years through 10 years
3,538
3,068
After 10 years
42,392
35,269
When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. There were no sales of securities during the three and nine months ended September 30, 2023 and 2022.
The carrying value of securities pledged to secure advances from the Federal Home Loan Bank of Boston (“FHLBB”) was $63.3 million and $63.0 million as of September 30, 2023 and December 31, 2022, respectively.
The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, and have no allowance for credit losses, are as follows as of September 30, 2023 and December 31, 2022:
Less than 12 Months
12 Months or Longer
Held to Maturity:
2,723
(23
6,974
(500
7,442
(275
32,748
(7,093
40,190
2,476
2,846
(54
Total temporarily impaired securities
12,641
(299
53,073
(8,727
65,714
2,847
(40
5,046
(538
7,893
20,795
(1,294
24,710
(4,887
45,505
37,022
(2,468
29,756
(5,425
66,778
Management evaluates securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.
At September 30, 2023, four debt securities issued by U.S. government-sponsored enterprises, fifty-two mortgage backed securities, seven corporate bonds and two U.S. treasury securities had unrealized losses with aggregate depreciation of 5.1%, 15.5%, 9.3% and 1.0%, respectively, from the Company’s amortized cost basis. These unrealized losses relate to changes in market interest rates since acquiring the securities. As management has the intent and ability to hold debt securities until maturity or cost recovery, no allowance for credit losses on securities is deemed necessary as of September 30, 2023.
NOTE 4 – LOANS, ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY
Loans
Loans that the Company has the intent and ability to hold until maturity or payoff are carried at amortized cost (net of the allowance for credit losses). Amortized cost is the principal amount outstanding, adjusted by partial charge-offs and net of deferred loan costs or fees. For originated loans, loan fees and certain direct origination costs are deferred and amortized into interest income over the contractual life of the loan using the level-yield method. When a loan is paid off, the unamortized portion is recognized in interest income. Interest income on loans is accrued based upon the daily principal amount outstanding except for loans on nonaccrual status. As a general rule, loans more than 90 days past due with respect to principal or interest are classified as nonaccrual loans, or sooner if management considers such action to be prudent. However, loans that are more than 90 days past due may be kept on an accruing status if the loan is well secured and in the process of collection. Income accruals are suspended on all nonaccrual loans in a timely manner and all previously accrued and uncollected interest is reversed against current income. A loan can be returned to accrual status when collectibility of principal and interest is reasonably assured and the loan has performed for a period of time, generally six months. When doubt exists as to the collectability of a loan, any payments received are applied to reduce the amortized cost of the loan to the extent necessary to eliminate such doubt. For all loan portfolios, a charge-off occurs when the Company determines that a specific loan, or portion thereof, is uncollectible. This determination is made based on management's review of specific facts and circumstances of the individual loan, including the expected cash flows to repay the loan, the value of the collateral and the ability and willingness of any guarantors to perform.
11
Allowance for Credit Losses - Loans Held for Investment
The allowance for credit losses is established based upon the Company's current estimate of expected lifetime credit losses on loans measured at amortized cost. Credit losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan. Subsequent recoveries, if any, are credited to the allowance. Under the CECL methodology, the Company estimates credit losses for financial assets on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. The quantitative model utilizes a loss factor based approach to estimate expected credit losses, which are derived from internal historical and industry loss experience. The model estimates expected credit losses using loan level data over the estimated life of the exposure, considering the effect of prepayments. Economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period, beyond which is a reversion to the historical long-run average. Management has determined a reasonable and supportable period of 12 months, and a reversion period of 12 months, to be appropriate for purposes of estimating expected credit losses. The qualitative risk factors impacting the expected risk of loss within the portfolio include the following:
Loans that do not share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting. For the loans that will be individually assessed, the Company will use either a discounted cash flow (“DCF”) approach or a fair value of collateral approach. The latter approach will be used for loans deemed to be collateral dependent or when foreclosure is probable. Accrued interest receivable amounts are excluded from balances of loans held at amortized cost and are included within accrued interest receivable in the consolidated balance sheets. Management has elected not to measure an allowance for credit losses on these amounts as the Company employs a timely write-off policy. Consistent with the Company's policy for nonaccrual loans, accrued interest receivable is typically written off when loans reach 90 days past due and are placed on nonaccrual status.
In the ordinary course of business, the Company enters into commitments to extend credit. Such financial instruments are recorded in the financial statements when they are funded. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for credit losses. The reserve for unfunded lending commitments is included in other liabilities in the consolidated balance sheets.
12
Loans consisted of the following as of the dates indicated:
At September 30,
At December 31,
Amount
Percent
(Dollars in thousands)
Real estate loans:
One-to-four family residential
395,290
39.3
%
355,381
39.8
Multi-family
281,192
28.0
241,951
27.1
Commercial
185,657
18.5
156,212
17.5
Home equity lines of credit and loans
33,407
3.3
27,783
3.1
Construction
101,615
10.1
107,317
12.0
Other loans:
Commercial loans
8,471
0.8
4,266
0.5
Consumer
0.0
1,005,880
100.0
893,132
Less:
Net deferred loan fees
(229
(258
(8,292
(7,200
Total loans, net
Certain directors and executive officers of the Company and companies in which they have a significant ownership interest are also customers of the Bank. Total outstanding loan balances to such persons and their companies amounted to $889,000 and $943,000 as of September 30, 2023 and December 31, 2022, respectively. The following table sets forth the activity for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended
Beginning Balance
909
1,223
943
1,257
New Loans
Advances
75
375
Paydowns
(20
(325
(659
Ending Balance
889
973
The carrying value of loans pledged to secure advances from the FHLBB were $558.3 million and $333.5 million as of September 30, 2023 and December 31, 2022, respectively.
The following tables set forth information regarding the allowance for credit losses as of and for the three and nine months ended September 30, 2023:
For the three months ended September 30, 2023
Charge-offs
Recoveries
Provision (benefit)
Ending Balance(1)
1,980
40
2,020
2,150
79
2,229
2,348
(154
2,194
203
207
1,570
(126
1,444
218
(21
8,470
(178
8,292
For the nine months ended September 30, 2023
Cumulative effect accounting adjustment(2)
Provision
1,703
130
187
1,839
77
313
1,797
145
252
194
33
1,286
136
60
34
103
Unallocated
320
(320
910
(1) Balances of accrued interest receivable excluded from amortized cost and the calculation of allowance for credit losses amounted to $2.9 million as of September 30, 2023.
(2) Represents an adjustment needed to reflect the cumulative day one impact pursuant to the Company's adoption of Accounting Standards Update 2016-13. The adjustment for the nine months ended September 30, 2023 represents a $182,000 increase to the allowance attributable to the change in accounting methodology for estimating the allowance for credit losses resulting from the Company's adoption of the standard.
The following table shows the age analysis of past due loans as of the date indicated:
30–59 Days
60–89 Days
90 Daysor More
TotalPast Due
TotalCurrent
TotalLoans
90 days or more and accruing
As of September 30, 2023
507
781
394,509
97
121
33,286
604
290
902
1,004,978
14
The following table shows information regarding nonaccrual loans as of the dates indicated:
Three Months Ended September 30, 2023
Nine Months Ended September 30, 2023
With Allowance for Credit Losses
Without Allowance for Credit Losses
Interest Income Recognized
1,195
26
Total nonaccrual loans
1,211
Credit Quality Information
The Company utilizes a seven grade internal loan rating system for multi-family and commercial real estate, construction, commercial loans and certain residential and home equity lines of credit as follows:
Loans rated 1 – 3: Loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 4: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 5: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Bank will sustain some loss if the weakness is not corrected.
Loans rated 6: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 7: Loans in this category are considered uncollectible (loss) and of such little value that their continuance as loans is not warranted.
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial loans with aggregate potential outstanding balances of $500,000 or more, and all commercial real estate loans (including multi-family and construction loans as well as residential and home equity line of credit loans to commercial borrowers) with aggregate potential outstanding balances of $1.0 million or more. For loans that are not formally rated, the Company initially assesses credit quality based upon the borrower’s ability to pay and subsequently monitors these loans based on the borrower’s payment activity.
The following table details the amortized cost balances of the Company's loan portfolios, presented by credit quality indicator and origination year as of September 30, 2023:
Term Loans Amortized Cost Basis by Origination Year
Revolving Loans Amortized Cost Basis
Revolving Loans Converted to Term
2021
2020
2019
Prior
Pass
2,956
36,791
15,626
5,206
4,268
9,320
74,167
Special Mention
457
1,267
Substandard
Doubtful
Loans not formally rated (1)
35,886
89,996
73,559
52,081
7,482
60,852
319,856
38,842
126,787
89,185
58,097
11,750
70,629
Current-period gross charge-offs (2)
40,732
195,365
24,872
8,942
10,031
1,050
280,992
200
40,932
Commercial real estate
32,013
72,933
24,286
16,663
4,096
31,970
3,696
327
6,252
6,579
377
37
67
41
25,734
26,828
704
31,986
20,653
54,145
18,883
2,006
2,988
98,675
1,303
1,637
2,940
21,956
55,782
3,402
3,454
87
159
817
8,399
512
38
48
74
(1) There was one home equity line of credit loan originated prior to 2019 with an amortized cost of $16,000 that is not formally rated and was on non-accrual as of September 30, 2023. All other loans not formally rated were accruing as of September 30, 2023.
(2) Gross charge-off disclosures are made starting in the period of adoption and prospectively.
At September 30, 2023, the Company had one consumer mortgage loan secured by residential real estate property in the process of foreclosure with a carrying amount of $110,000.
For the three and nine months ended September 30, 2023, the Company did not provide loan restructurings involving borrowers that are experiencing financial difficulty.
18
Prior Period Disclosures Pre Adoption of ASC 326
The following tables set forth information regarding the allowance for loan losses for the three and nine months ended September 30, 2022:
For the three months ended September 30, 2022
1,469
183
1,652
779
386
1,165
1,353
1,554
193
204
950
131
1,081
5,111
6,037
For the nine months ended September 30, 2022
1,271
381
417
748
1,099
455
185
855
226
347
(27
4,236
19
The following table sets forth information regarding the allowance for loan losses and portfolio evaluation method as of December 31, 2022:
As of December 31, 2022
Allowance for loans individually evaluated for impairment
Allowance for loans collectively evaluated for impairment
Total allowance for loan losses
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
656
354,725
892,476
The following table shows the age analysis of past due financing receivables as of the date indicated:
Loans on Non-accrual
189
355,192
892,943
The following table presents the Bank’s loans by credit quality indicator as of December 31, 2022:
Real Estate
Home Equity
Residential
Lines of Creditand Loans
Grade
63,817
2,995
103,272
572,513
Special mention
467
Loans not formally rated
291,097
24,788
4,045
320,152
Information about loans that meet the definition of an impaired loan in Accounting Standards Codification (ASC) 310-10-35 is as follows as of and for the three and nine months ended September 30, 2022:
As of September 30, 2022
Three Months Ended September 30, 2022
Nine Months Ended September 30, 2022
Recorded Investment
Unpaid Principal Balance
Related Allowance
Average Recorded Investment
September 30, 2022
With no related allowance recorded:
699
701
29
694
Total impaired loans
727
42
There were no impaired loans with an allowance recorded as of or during the nine months ended September 30, 2022.
Information about loans that meet the definition of an impaired loan in Accounting Standards Codification (ASC) 310-10-35 is as follows as of December 31, 2022:
There were no impaired loans with an allowance recorded as of December 31, 2022.
There were no consumer mortgage loans secured by residential real estate in the process of foreclosure as of December 31, 2022.
During three and nine months ended September 30, 2022, there were no loans that were modified in a troubled debt restructuring and there were no loans modified as TDR loans that subsequently defaulted within one year of the modification.
21
NOTE 5 – EMPLOYEE BENEFITS
Pension Plans
Defined Benefit Plan
The Company provided pension benefits for its employees through membership in the Defined Benefit Plan of the Co-operative Banks Employees Retirement Association (CBERA) (the Plan). The Plan is a multi-employer plan whereby the contributions by each bank are not restricted to provide benefits to the employees of the contributing bank. Each employee reaching the age of 21 and having completed at least one year of service automatically became eligible to participate in the Plan. Participants became vested after completion of six years of eligible service.
At the December 15, 2021 Board of Directors meeting, the Directors voted to freeze benefit accruals and withdraw from the CBERA Plan as of April 30, 2022. The Company recorded a liability as of December 31, 2021 and a related expense, each in the amount of $2,001,000, related to this withdrawal.
For the three and nine months ended September 30, 2022, a benefit of $0 and $582,000, respectively, was recorded to reflect a reduction in the liability related to the withdrawal from the defined benefit plan. The reduction was primarily driven by increases in interest rates since December 31, 2021, which caused defined benefit plan discount rates to rise. In May of 2022, the final withdrawal liability was determined to be $1,419,000. The Company paid the final amount and has withdrawn from the Plan in the second quarter of 2022.
401(k) Plan
The Company has adopted a savings plan which qualifies under Section 401(k) of the Internal Revenue Code and provides for voluntary contributions by participating employees ranging from 1% to 75% of their compensation, subject to certain limitations based on federal tax laws. The Company makes matching contributions equal to 100% of each employee’s voluntary contributions, up to 7% of the employee’s compensation, as defined.
Total expense related to the 401(k) plan for the three and nine months ended September 30, 2023 amounted to $120,000 and $351,000, respectively. Total expense related to the 401(k) plan for the three and nine months ended September 30, 2022 amounted to $100,000 and $280,000, respectively.
Employee Incentive Plan
The Company provides an employee incentive plan which is approved annually by the Board of Directors, based on various factors. The employee incentive plan expense for the three and nine months ended September 30, 2023 amounted to $363,000 and $1,077,000, respectively. The employee incentive plan expense for the three and nine months ended September 30, 2022 amounted to $355,000 and $918,000, respectively.
Supplemental Executive Retirement Plan (SERP)
The Company formed a SERP for certain executive officers. The SERP provides nonfunded retirement benefits designed to supplement benefits available through the Bank’s other retirement plans for employees.
The liability for the SERP amounted to $1,022,000 and $1,156,000 as of September 30, 2023 and December 31, 2022, respectively. The benefit for the three and nine months ended September 30, 2023 amounted to $19,000 and $58,000, respectively. The expense for the three and nine months ended September 30, 2022 amounted to $25,000 and $76,000, respectively.
Director Fee Continuation Plan (DFCP)
Effective January 1, 2017, the Company established a Director Fee Continuation Plan which provides supplemental retirement benefits for directors. Under the DFCP, individuals who are directors as of the effective date of the DFCP are 100% vested in their benefits. Individuals who become directors after the effective date shall be fully vested in their accounts after having served on the Board of Directors for twelve years. The expense for the three and nine months ended September 30, 2023 amounted to $22,000 and
$66,000, respectively. The expense for the three and nine months ended September 30, 2022 amounted to $32,000 and $96,000, respectively.
Supplemental Executive Retirement Agreement
On January 1, 2018, the Company entered into a supplemental executive retirement agreement with a named executive officer whereby the Company is obligated to provide post-retirement salary continuation benefits equal to 60% of the executive officer’s final average compensation, as defined. Benefits are 100% vested, commence upon retirement, and are payable based on a ten-year certain and life annuity. The liability for the Plan amounted to $3,170,000 and $3,081,000 as of September 30, 2023 and December 31, 2022, respectively. The expense recognized for the Plan for the three and nine months ended September 30, 2023 amounted to $30,000 and $89,000, respectively. The expense recognized for the Plan for the three and nine months ended September 30, 2022 amounted to $187,000 and $561,000, respectively.
Executive Deferred Compensation Plans
In 2021 and 2023, the Company entered into deferred compensation plans with two named executive officers that allow the Company to make contributions to an account for the executive officers each year, as of January 1, based on the prior year’s performance and the Company's intent that the contribution equal 10% of the executive officers' salaries and bonuses. The Company may make other contributions to the deferred compensation plans, at its discretion, at other times during the year. The expense recognized under the deferred compensation plans for the three and nine months ended September 30, 2023 amounted to $41,000 and $63,000, respectively. The expense recognized under the deferred compensation plans for the three and nine months ended September 30, 2022 amounted to $5,000 and $27,000, respectively.
Deferred Compensation Plan for Directors
The Company maintains the Everett Co-operative Bank Deferred Compensation Plan for Directors (the “Director Deferred Compensation Plan”) to allow for certain tax planning opportunities and additional retirement income for directors of the Company. All non-employee directors are eligible to participate in the Director Deferred Compensation Plan. Under the Director Deferred Compensation Plan, directors may elect to defer the receipt of up to 100% of their director fees. Participants are always 100% vested in their deferred fees and any interest credited to those deferrals. Earnings are credited to a participant’s deferrals each year and are indexed to the highest certificate of deposit rate offered by the Bank on January 1st of each year. The liability for the Director Deferred Compensation Plan amounted to $658,000 and $592,000 as of September 30, 2023 and December 31, 2022, respectively.
Employment and Change in Control Agreements
During 2022, the Company entered into an employment agreement with the Chief Executive Officer and Change in Control agreements with certain executive officers, which provide severance payments in the event of the executive’s involuntary or constructive termination of employment, including upon a termination following a change in control as defined in the agreements.
Survivor Benefit Plan
The Company entered into Survivor Benefit Plan Participation Agreements with a group of employees whereby the Company is obligated to provide up to two years of recognized compensation, as defined, to the beneficiary if the participant dies while employed by the Company. There was no expense recorded during the three and nine months ended September 30, 2023. The expense recognized for the three and nine months ended September 30, 2022 was $0 and $166,000, respectively.
Employee Stock Ownership Plan
As part of the Initial Public Offering ("IPO") completed on July 27, 2022, the Bank established a tax-qualified Employee Stock Ownership Plan ("ESOP") to provide eligible employees the opportunity to own Company shares. The ESOP borrowed $7.3 million from the Company to purchase 734,020 common shares during the IPO. The loan is payable in annual installments over 20 years at an interest rate of 4.75%. As the loan is repaid to the Company, shares are released and allocated proportionally to eligible participants on the basis of each participant’s proportional share of compensation relative to the compensation of all participants. The unallocated ESOP shares are pledged as collateral on the loan.
23
The Company accounts for its ESOP in accordance with FASB ASC 718-40, Compensation – Stock Compensation. Under this guidance, unreleased shares are deducted from shareholders’ equity as unearned ESOP shares in the accompanying consolidated balance sheets. The Company recognizes compensation expense equal to the fair value of the ESOP shares during the periods in which they are committed to be released. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, the difference will be credited or debited to shareholders' equity. As the loan is internally leveraged, the loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP shown as a liability in the Company’s consolidated balance sheets.
Total compensation expense recognized in connection with the ESOP was $114,000 and $365,000 for the three and nine months ended September 30, 2023, respectively. The expense recognized was $215,000 for both the three and nine months ended September 30, 2022. The following table presents share information held by the ESOP:
Allocated shares
36,701
Shares committed to be released
27,451
Unallocated shares
669,868
697,319
Total shares
Fair value of unallocated shares
7,353
11,192
NOTE 6 - STOCK-BASED COMPENSATION
On September 7, 2023, the Company adopted the ECB Bancorp, Inc. 2023 Equity Incentive Plan ("2023 Equity Plan”). The 2023 Equity Plan provides 1,248,133 shares of common stock for equity based compensation awards including restricted stock awards, restricted stock units, stock options, and incentive stock options. As of September 30, 2023, there were 1,003,189 shares available for future grants.
Stock-Based Compensation - Stock Options
On September 8, 2023, the Company granted 174,960 stock options to non-employee directors. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The following table sets forth information regarding the grant:
Date of grant
9/8/2023
Options granted
174,960
Vesting period (years)
Expiration date
9/8/2033
Expected volatility (1)
30.17
Expected term (years) (2)
6.50
Expected dividend yield (3)
0.00
Risk free rate of return (4)
4.31
Fair value per option
4.74
(1) Expected volatility is based on the standard deviation of the historical volatility of the daily adjusted closing price of a group of peers' shares.
(2) Expected term represents the period of time that the option is expected to be outstanding. The Company determined that expected life using the "Simplified Method."
(3) Expected dividend yield is determined based on management's expectations regarding issuing dividends in the foreseeable future.
(4) The risk-free rate of return is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected term of the option.
24
The following tables represent stock option activities for the periods indicated:
Three months ended September 30, 2023
Outstanding and exercisable
Non-vested
Shares
Weighted-Average Exercise Price
Weighted-Average Remaining Contractual Term (years)
Aggregate Intrinsic Value ($1000)
Balance at beginning of period
Granted
11.80
9.95
Exercised
Vested
Forfeited or expired
Balance at end of period
Nine months ended September 30, 2023
Stock-Based Compensation - Restricted Stock Awards
The restricted stock awards are measured based on grant-date fair value, which reflects the closing price of our stock on the date of grant. Restricted stock awards vest over five years in equal portions beginning on the first anniversary date of the restricted stock award.
On September 8, 2023, the Company granted 69,984 restricted stock awards to non-employee directors with a five-year vesting period. The following table represents information regarding non-vested restricted stock award activities for the periods indicated:
Number of Shares
Weighted-Average Grant Date Fair Value Per Share
Forfeited
25
The following table represents the compensation expense and income tax benefit recognized for stock options and restricted stock awards for the periods indicated:
Stock options
Restricted stock awards
Total stock-based compensation expense
Related tax benefits recognized in earnings
There was no stock-based compensation expense or related income tax benefit recognized for the three and nine months ended September 30, 2022.
The following table sets forth the total compensation cost related to non-vested awards not yet recognized and the weighted average period (in years) over which it is expected to be recognized as of September 30, 2023:
Weighted average period
819
4.95
816
1,635
There was no unrecognized stock-based compensation expense as of December 31, 2022.
NOTE 7 - FAIR VALUE MEASUREMENTS
ASC 820-10, Fair Value Measurement – Overall, provides a framework for measuring fair value under U.S. GAAP. This guidance also allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis.
In accordance with ASC 820-10, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.
Level 3 – Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, and are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value for September 30, 2023 and December 31, 2022.
The Company’s investment in debt instruments available for sale is generally classified within Level 2 of the fair value hierarchy. For those securities, the Bank obtains fair value measurements from independent pricing services. The fair value
measurements consider observable data that considers standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.
The Company’s individually assessed collateral dependent loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using appraisals obtained from a third party, and are adjusted for selling costs. These appraised values may be discounted based on management’s historical knowledge, expertise, or changes in the market conditions from time of valuation. For Level 3 inputs, fair values are based upon management’s estimates of the value of the underlying collateral or the present value of the expected cash flows.
As of September 30, 2023 and December 31, 2022, the following summarizes assets measured at fair value on a recurring basis:
Fair Value Measurements at Reporting Date Using
Quoted Prices
Significant
in Active
Other
Unobservable
Markets for
Observable
Inputs
Identical Assets
Level 3
Level 1
Level 2
Total available for-sale-securities
Under certain circumstances, the Company makes adjustments to its assets and liabilities although they are not measured at fair value on an ongoing basis.
As of September 30, 2023 and December 31, 2022, the Bank had no assets or liabilities for which a nonrecurring change in fair value had been recorded.
ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. ASU 2016-01 requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The exit price notion is a market-based measurement of fair value that is represented by the price to sell an asset or transfer a liability in the principal market (or most advantageous market in the absence of a principal market) on the measurement date. For September 30, 2023 and December 31, 2022, fair values of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.
27
Carrying
Financial assets:
Cash and cash equivalents
Held-to-maturity securities
Federal Home Loan Bank stock
Loans, net
915,147
Financial liabilities:
Deposits, other than certificates of deposit
370,508
Certificates of deposit
442,023
434,310
217,282
Accrued interest payable
1,284
Interest bearing time deposits
841,271
398,302
319,847
310,943
172,427
736
NOTE 8 – COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies but usually includes income producing commercial properties or residential real estate.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of September 30, 2023 and December 31, 2022, the maximum potential amount of the Company’s obligation was $0
and $13,000, respectively, for standby letters of credit. The Company’s outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company may seek recourse through the customer’s underlying line of credit. If the customer’s line of credit is also in default, the Company may take possession of the collateral, if any, securing the line of credit.
Amounts of financial instruments whose contract amounts represent off-balance sheet credit risk are as follows as of September 30, 2023 and December 31, 2022:
Commitments to originate loans
32,696
37,220
Commitments to purchase loans
3,035
6,653
Unadvanced funds on lines of credit
79,871
80,224
Unadvanced funds on construction loans
56,275
72,431
Letters of credit
171,877
196,541
The Bank accrues for credit losses related to off-balance sheet financial instruments. Potential losses on off-balance sheet loan commitments are estimated using the same risk factors used to determine the allowance for credit losses, adjusted for the likelihood that funding will occur. The allowance for off-balance sheet commitments is recorded within other liabilities on the consolidated balance sheets and amounted to $949,000 and $402,000 as of September 30, 2023 and December 31, 2022, respectively. For the three and nine months ended September 30, 2023, a benefit of $6,000 and $214,000, respectively, was recorded to reflect a reduction in allowance for off-balance sheet commitments. Provision recorded for off-balance sheet commitments was $61,000 and $120,000 for the three and nine months ended September 30, 2022, respectively.
NOTE 9 – OTHER COMPREHENSIVE (LOSS) INCOME
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the shareholders' equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income.
The components of other comprehensive (loss) income and related tax effects are as follows for the three and nine months ended September 30, 2023 and 2022:
Unrealized (losses) gains on securities:
Net unrealized holding (losses) gains on available-for-sale securities
(4
(24
Reclassification adjustment for realized gains in net income
Income tax (expense) benefit
Net-of-tax amount
Accumulated other comprehensive income as of September 30, 2023 and December 31, 2022 consists of unrecognized benefit costs, net of taxes, and unrealized holding gains on securities available for sale, net of tax, as follows:
Net unrealized holding gains on securities available-for-sale, net of tax
Unrecognized SERP costs, net of tax
149
Unrecognized director fee continuation plan costs, net of tax
NOTE 10 – REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.
Management believes, as of September 30, 2023, that the Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 2023, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Bank’s actual capital amounts and ratios are presented in the table as of the dates indicated:
Minimum For Capital
Minimum To Be Well
Adequacy Purposes
Capitalized Under
Plus Capital
Prompt Corrective
Actual
Conservation Buffer
Action Provisions
Ratio
(dollars in thousands)
Total Capital (to Risk Weighted Assets)
142,830
16.40%
91,443
10.50%
87,089
10.00%
Tier 1 Capital (to Risk Weighted Assets)
133,589
15.34%
74,026
8.50%
69,671
8.00%
Common Equity Tier 1 Capital (to Risk Weighted Assets)
60,962
7.00%
56,608
6.50%
Tier 1 Capital (to Average Assets)
11.14%
47,955
4.00%
59,943
5.00%
138,023
88,386
84,177
130,421
15.49%
71,550
67,342
58,924
54,715
13.89%
37,562
46,953
30
NOTE 11 - EARNINGS PER SHARE ("EPS")
Basic earnings per share is calculated by dividing the income available to common shares by the weighted-average number of common shares outstanding during the period. Diluted earnings per share have been calculated in a manner similar to that of basic earnings per share except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares (such as those resulting from the exercise of stock options) were issued during the period, computed using the treasury stock method. There were no securities that had a dilutive effect during the three and nine months ended September 30, 2023 or the three and nine months ended September 30, 2022. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations.
(in thousands, except per share data)
Net income (loss) allocated to common stock
Weighted-average common shares outstanding used to calculate basic earnings (loss) per common share
Add: Dilutive effect of stock options and restricted stock awards
Weighted-average common shares outstanding used to calculate diluted earnings (loss) per common share
Earnings (loss) per common share
Basic
Diluted
For the three and nine months ended September 30, 2023, the shares that were anti-dilutive, and therefore excluded from the calculation of diluted earnings per share, included options to purchase 174,960 shares of common stock and 69,984 shares of restricted stock awards. For the three and nine months ended September 30, 2022, there were no anti-dilutive shares.
NOTE 12 - SUBSEQUENT EVENTS
On October 31, 2023, the Company granted a total of 235,973 restricted stock awards to certain employees pursuant to its 2023 Equity Incentive Plan. The fair value of the stock granted was approximately $2.4 million.
On October 31, 2023, the Company granted a total of 589,009 stock options to certain employees pursuant to its 2023 Equity Incentive Plan. These options were granted with an exercise price of $10.12.
31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Management’s discussion and analysis of the financial condition and results of operations at and for the three and nine months ended September 30, 2023 and 2022 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in ECB Bancorp, Inc.’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2023.
Critical Accounting Estimates
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with generally accepted accounting principles used in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
Allowance for Credit Losses
The Company estimates the allowance for credit losses in accordance with the CECL methodology for loans measured at amortized cost. The allowance for credit losses is established based upon the Company's current estimate of expected lifetime credit losses. Arriving at an appropriate amount of allowance for credit losses involves a high degree of judgment.
The Company estimates credit losses on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. Management's judgement is required for the selection and application of these factors which are derived from historical loss experience as well as assumptions surrounding expected future losses and economic forecasts.
Loans that no longer share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting. For the loans that are individually assessed, the Company uses either a discounted cash flow (“DCF”) approach or a fair value of collateral approach. The latter approach is used for loans deemed to be collateral dependent or when foreclosure is probable. Changes in these judgements and assumptions could be due to a number of circumstances which may have a direct impact on the provision for credit losses and may result in changes to the amount of allowance. The allowance for credit losses is increased by the provision for credit losses and by recoveries of loans previously charged off. Credit losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan.
Income Taxes
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are
reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments may require us to make projections of future taxable income and/or to carryback to taxable income in prior years. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.
Securities Valuation
We classify our investments in debt securities as either held-to-maturity or available-for-sale. Securities classified as held-to maturity are recorded at amortized cost. Available-for-sale securities are carried at fair value. We obtain our fair values from one or more third-party services. This service’s fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows.
For any debt security with a fair value less than its amortized cost basis, we will determine whether we have the intent to sell the debt security or whether it is more likely than not we will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, the Company will recognize a full impairment charge to earnings. For all other debt securities that don't meet either condition and that have expected credit losses, the credit loss will be recognized in earnings. Any non-credit related loss impairment related to all other factors will be recorded in other comprehensive income (loss). Management also assesses the nature of the unrealized losses taking into consideration factors such as changes in risk-free interest rates, general credit spread widening, market supply and demand, creditworthiness of the issuer, and quality of the underlying collateral.
Comparison of Financial Condition at September 30, 2023 and December 31, 2022
Total Assets. Total assets increased $149.3 million, or 14.0%, to $1.21 billion at September 30, 2023 from $1.06 billion at December 31, 2022. The increase was primarily the result of increases in loans and cash and cash equivalents.
Cash and Cash Equivalents. Cash and cash equivalents increased $35.3 million, or 56.9%, to $97.4 million at September 30, 2023 from $62.1 million at December 31, 2022. Cash and cash equivalents increased primarily due to increases in deposits and borrowings that were greater than our loan growth as we have focused on maintaining strong levels of liquidity.
Loans. Net loans increased $111.7 million, or 12.6%, to $997.4 million at September 30, 2023 from $885.7 million at December 31, 2022.
Federal Home Loan Bank stock. The Federal Home Loan Bank (FHLB) is a cooperative bank that provides services to its member banking institutions. The primary reason for our membership in the FHLB is to gain access to a reliable source of wholesale funding and as a tool to manage interest rate risk. The purchase of stock in the FHLB is a requirement for a member to gain access to funding. We purchase and/or are subject to redemption of FHLB stock proportional to the volume of funding received and view the holdings as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return. We held an investment in FHLB stock of $9.6 million and $7.3 million at September 30, 2023 and December 31, 2022, respectively. The amount of stock we are required to purchase is in proportion to our FHLB borrowings and level of total assets. Accordingly, the increase in the FHLB stock is due to increased borrowings.
Bank-owned Life Insurance. We invest in bank-owned life insurance to help offset the costs of our employee benefit plan obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable. Bank-owned life insurance increased $300,000, or 2.1%, to $14.4 million at September 30, 2023 from $14.1 million at December 31, 2022. The increase was due
to an increase of $300,000 in the cash surrender value of our bank-owned life insurance portfolio during the nine months ended September 30, 2023.
Deposits. Deposits increased $94.4 million, or 13.1%, to $812.5 million at September 30, 2023 from $718.1 million at December 31, 2022.
Core deposits (defined as all deposits other than certificates of deposit), decreased $27.8 million, or 7.0%, to $370.5 million at September 30, 2023 from $398.3 million at December 31, 2022.
Federal Home Loan Bank Advances. Advances from the Federal Home Loan Bank increased $50.0 million, or 28.7%, to $224.0 million at September 30, 2023 from $174.0 million at December 31, 2022. The increase in advances was utilized to support loan growth and enhance liquidity.
Shareholders' Equity. Total shareholders' equity increased $2.8 million, or 1.7%, to $165.5 million at September 30, 2023 from $162.7 million at December 31, 2022. The increase was primarily due to net income of $3.7 million for the nine months ended September 30, 2023 partially offset by a $677,000 reduction in retained earnings related to the adoption of CECL and a $589,000 reduction in additional paid-in capital related to stock repurchases.
Comparison of Operating Results for the Three Months Ended September 30, 2023 and September 30, 2022
Net Income. We recorded net income of $1.3 million for the three months ended September 30, 2023, compared to a net loss of $1.0 million for the three months ended September 30, 2022. The net loss during the three months ended September 30, 2022 was driven by a $3.2 million charitable contribution to the Everett Co-operative Bank Charitable Foundation made in connection with our initial public offering.
Interest and Dividend Income. Interest and dividend income increased $6.4 million, or 82.5%, to $14.2 million for the three months ended September 30, 2023 from $7.8 million for the three months ended September 30, 2022. This increase was due to a $5.2 million increase in interest and fees on loans, a $363,000 increase in interest and dividends on investment securities and an $879,000 increase in other interest income. The increase in interest and fees on loans was driven by an increase of $324.1 million in the average balance of the loan portfolio to $1.0 billion for the three months ended September 30, 2023 from $677.6 million for the three months ended September 30, 2022, as well as an increase in the average yield of 69 basis points to 4.88% during the three months ended September 30, 2023 from 4.19% during the three months ended September 30, 2022. The yield for the three months ended September 30, 2023 benefited from new loans with higher rates as well as adjustable rate loans repricing higher. The increase in interest and dividend income on investment securities was driven by an increase in the yield on securities of 73 basis points to 2.58% during the three months ended September 30, 2023 from 1.85% during the three months ended September 30, 2022, as well as an increase of $7.2 million in the average balance of the investment security portfolio to $81.4 million for the three months ended September 30, 2023 from $74.3 million for the three months ended September 30, 2022. The increase in other interest income resulted primarily from an increase in the yield on short term investments of 321 basis points to 5.39% during the three months ended September 30, 2023 from 2.18% during the three months ended September 30, 2022, as well as an increase of $37.6 million in the average balance of short term investments to $83.2 million for the three months ended September 30, 2023 from $45.6 million for the three months ended September 30, 2022. The increase in yield was driven by increases in the rate paid on reserves at the Federal Reserve Bank.
Average interest-earning assets increased $368.5 million, to $1.17 billion for the three months ended September 30, 2023 from $797.8 million for the three months ended September 30, 2022. The yield on interest-earning assets increased 90 basis points to 4.75% for the three months ended September 30, 2023 from 3.85% for the three months ended September 30, 2022.
Interest Expense. Total interest expense increased $6.9 million, or 561.2%, to $8.1 million for the three months ended September 30, 2023 from $1.2 million for the three months ended September 30, 2022. Interest expense on deposit accounts increased $4.8 million, or 470.0%, to $5.8 million for the three months ended September 30, 2023 from $1.0 million for the three months ended September 30, 2022, primarily due to an increase in the cost of interest bearing deposits of 251 basis points to 3.25% for the three months ended September 30, 2023 from 0.74% for the three months ended September 30, 2022 and an increase in the average balance of interest-bearing deposits of $167.3 million, or 30.6%, to $713.5 million for the three months ended September 30, 2023 from $546.2 million for the three months ended September 30, 2022. Interest expense on FHLB advances increased $2.0 million, or 1,035.5%, to $2.2 million for the three months ended September 30, 2023 from $197,000 for the three months ended September 30, 2022, primarily due to an increase in the average balance of FHLB advances of $179.2 million, or 405.6%, to $223.3 million for the three months ended September 30, 2023 from $44.2 million for the three months ended September 30, 2022 as well as an increase in the cost of FHLB advances of 220 basis points to 3.97% for the three months ended September 30, 2023 from 1.77% for the three months ended September 30, 2022. The increase in FHLB advances was used to fund loan growth and for liquidity management.
Net Interest and Dividend Income. Net interest and dividend income decreased $453,000, or 6.9%, to $6.1 million for the three months ended September 30, 2023 from $6.5 million for the three months ended September 30, 2022, primarily due to a decrease in the net interest rate spread of 170 basis points to 1.33% for the three months ended September 30, 2023 from 3.03% for the three months ended September 30, 2022, partially offset by a $22.0 million increase in the average balance of net interest-earning assets during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The decrease in the net interest rate spread was due to an increase in the cost of interest-bearing liabilities that exceeded the increase in the yield on interest-earning assets resulting primarily from the significant increase in market interest rates that directly impact our funding costs. The net interest margin decreased 124 basis points to 2.00% for the three months ended September 30, 2023 from 3.24% for the three months ended September 30, 2022.
Provision for Credit Losses. Based on management’s analysis of the adequacy of the allowance for credit losses, a benefit of $184,000 was recorded for the three months ended September 30, 2023, compared to a provision of $925,000 for the three months ended September 30, 2022. The $1.1 million, or 119.9%, decrease in the provision was driven by lower loan growth during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 as well as a shift in the mix of our loan portfolio to loan segments with lower estimated credit loss reserve requirements.
Noninterest Income. Noninterest income increased $94,000, or 41.2%, to $322,000 for the three months ended September 30, 2023 from $228,000 for the three months ended September 30, 2022. The increase was driven by a $72,000 gain recognized in income from a life insurance policy death benefit during the three months ended September 30, 2023. The table below sets forth our noninterest income for three months ended September 30, 2023 and 2022:
Three Months EndedSeptember 30,
Change
7.9
85
94.4
(7
(43.8
87.5
94
41.2
Noninterest Expense. Noninterest expense decreased $2.5 million, or 34.1%, to $4.8 million for the three months ended September 30, 2023 from $7.3 million for the three months ended September 30, 2022. Significant changes are as follows:
36
The table below sets forth our noninterest expense for the three months ended September 30, 2023 and 2022:
235
8.8
28.7
Occupancy and equipment
53
27.9
23.9
Computer software and licensing fees
12.8
(35
(14.8
128
72.7
FDIC deposit insurance
281.5
(3,207
(99.8
25.4
(2,492
(34.1
Income Tax Expense. Income tax expense increased $866,000, or 203.3%, to $440,000 for the three months ended September 30, 2023 from an income tax benefit of $426,000 for the three months ended September 30, 2022. The effective tax rate was 24.7% and 29.2% for the three months ended September 30, 2023 and 2022, respectively. The effective tax rate in the three months ended September 30, 2023 benefited from a $72,000 non-taxable gain recognized into income from life insurance policy death benefits.
Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. Average balances are daily average balances. Non-accrual loans are included in average balances only. Average yields include the effect of deferred costs and fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
For the Three Months Ended September 30,
Average Outstanding Balance
Interest
Yield/ Rate(5)
Interest-earning assets:
Total loans
1,001,686
4.88
677,634
4.19
Securities (1)
81,446
530
2.58
74,273
1.85
Short term investments
83,194
5.39
45,638
250
2.18
0.71
Total interest-earning assets
1,166,326
13,973
4.75
797,845
7,747
3.85
Non-interest-earning assets
33,337
28,102
1,199,663
825,947
Interest-bearing liabilities:
Checking accounts
21,135
0.08
48,135
0.04
Savings accounts
169,767
1,109
2.59
57,106
0.09
Money market accounts
94,988
579
2.42
178,833
0.48
427,561
4,151
262,082
792
1.20
Total interest-bearing deposits
713,451
3.25
546,156
0.74
223,348
3.97
44,171
1.77
Total interest-bearing liabilities
936,799
3.42
590,327
0.82
Non-interest-bearing demand deposits
85,577
89,299
Non-interest-bearing liabilities
11,499
7,996
1,033,875
687,622
Shareholders' Equity
165,788
138,325
Net interest income
5,893
6,525
Net interest rate spread (2)
1.33
3.03
Net interest-earning assets (3)
229,527
207,518
Net interest margin (4)
2.00
3.24
Average interest-earning assets to interest- bearing liabilities
124.50
135.15
(1) Excludes interest and dividends on cost method investments of $193,000 and $14,000 for the three months ended September 30, 2023 and 2022, respectively.
(2) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
(5) Annualized
Rate/Volume Analysis. The following tables present the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior period 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. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.
Three Months Ended September 30, 2023 vs. 2022
Increase (Decrease) Due to
Total Increase
Volume
Rate
(Decrease)
(In thousands)
3,839
1,324
5,163
Securities
148
184
315
565
880
4,189
2,037
6,226
73
1,023
1,096
(143
364
746
2,613
3,359
672
4,146
4,818
1,561
479
2,040
2,233
4,625
6,858
Change in net interest income
1,956
(2,588
(632
Comparison of Operating Results for the Nine Months Ended September 30, 2023 and September 30, 2022
Net Income. We recorded net income of $3.7 million for the nine months ended September 30, 2023, compared to net income of $1.7 million for the nine months ended September 30, 2022.
Interest and Dividend Income. Interest and dividend income increased $20.4 million, or 104.8%, to $39.9 million for the nine months ended September 30, 2023 from $19.5 million for the nine months ended September 30, 2022. This increase was due to a $17.3 million increase in interest and fees on loans, a $928,000 increase in interest and dividends on investment securities and a $2.2 million increase in other interest income. The increase in interest and fees on loans was driven by an increase of $388.5 million in the average balance of the loan portfolio to $981.1 million for the nine months ended September 30, 2023 from $592.6 million for the nine months ended September 30, 2022, as well as an increase in the average yield of 74 basis points to 4.82% during the nine months ended September 30, 2023 from 4.08% during the nine months ended September 30, 2022. The yield for the nine months ended September 30, 2023 benefited from new loans with higher rates as well as adjustable-rate loans repricing higher. The increase in interest and dividend income on investment securities was driven by an increase in the yield on securities of 79 basis points to 2.52% during the nine months ended September 30, 2023 from 1.73% during the nine months ended September 30, 2022, as well as an increase of $7.7 million in the average balance of the investment security portfolio to $81.6 million for the nine months ended September 30, 2023 from $73.9 million for the nine months ended September 30, 2022. The increase in other interest income resulted primarily from an increase in the yield on short term investments of 400 basis points to 5.10% during the nine months ended September 30, 2023 from 1.10% during the nine months ended September 30, 2022, as well as an increase of $24.1 million in the average balance of short term investments to $67.3 million for the nine months ended September 30, 2023 from $43.1 million for the nine months ended September 30, 2022. The increase in yield was driven by increases in the rate paid on reserves at the Federal Reserve Bank.
Average interest-earning assets increased $420.2 million to $1.13 billion for the nine months ended September 30, 2023 from $709.9 million for the nine months ended September 30, 2022. The yield on interest earning-assets increased 102 basis points to 4.67% for the nine months ended September 30, 2023 from 3.65% for the nine months ended September 30, 2022.
39
Interest Expense. Total interest expense increased $18.4 million, or 695.9%, to $21.0 million for the nine months ended September 30, 2023 from $2.6 million for the nine months ended September 30, 2022. Interest expense on deposit accounts increased $12.5 million, or 535.3%, to $14.8 million for the nine months ended September 30, 2023 from $2.3 million for the nine months ended September 30, 2022, primarily due to an increase in the cost of interest-bearing deposits of 228 basis points to 2.88% for the nine months ended September 30, 2023 from 0.60% for the nine months ended September 30, 2022 and an increase in the average balance of interest-bearing deposits of $170.8 million, or 33.0%, to $688.9 million for the nine months ended September 30, 2023 from $518.1 million for the nine months ended September 30, 2022. Interest expense on FHLB advances increased $5.9 million, or 1,904.2%, to $6.2 million for the nine months ended September 30, 2023 from $310,000 for the nine months ended September 30, 2022, due to an increase in the average balance of FHLB advances of $186.3 million, or 686.3%, to $213.4 million for the nine months ended September 30, 2023 from $27.1 million for the nine months ended September 30, 2022 as well as an increase in the cost of FHLB advances of 236 basis points to 3.89% for the nine months ended September 30, 2023 from 1.53% for the nine months ended September 30, 2022. The increase in FHLB advances were used to fund loan growth and for liquidity management.
Net Interest and Dividend Income. Net interest and dividend income increased $2.0 million, or 12.0%, to $18.9 million for the nine months ended September 30, 2023 from $16.8 million for the nine months ended September 30, 2022, primarily due to a $63.1 million increase in the average balance of net interest-earning assets during the nine months ended September 30, 2023, partially offset by a decrease in the net interest rate spread of 145 basis points to 1.55% for the nine months ended September 30, 2023 from 3.00% for the nine months ended September 30, 2022. The decrease in the net interest rate spread was due to an increase in the cost of interest-bearing liabilities that exceeded the increase in the yield on interest-earning assets resulting primarily from the significant increase in market interest rates that directly impact our funding costs. The net interest margin decreased 98 basis points to 2.18% for the nine months ended September 30, 2023 from 3.16% for the nine months ended September 30, 2022.
Provision for Credit Losses. Based on management’s analysis of the adequacy of the allowance for credit losses, a provision of $696,000 was recorded for the nine months ended September 30, 2023, which decreased $1.1 million, or 61.3%, from a provision of $1.8 million for the nine months ended September 30, 2022. The decrease in the provision was driven by lower loan growth during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.
Noninterest Income. Noninterest income decreased $378,000, or 32.3%, to $791,000 for the nine months ended September 30, 2023 from $1.2 million for the nine months ended September 30, 2022. The decrease resulted primarily from a decrease in income from bank-owned life insurance of $359,000. Noninterest income for the nine months ended September 30, 2023 included a gain of $72,000 from life insurance policy death benefits. Noninterest income for the nine months ended September 30, 2022 included a gain of $440,000 from life insurance policy death benefits. The table below sets forth our noninterest income for nine months ended September 30, 2023 and 2022:
Nine Months EndedSeptember 30,
13.8
(359
(49.1
(71
(84.5
25.0
(378
(32.3
Noninterest Expense. Noninterest expense decreased $45,000, or 0.3%, to $14.0 million for the nine months ended September 30, 2023 from $14.1 million for the nine months ended September 30, 2022. Significant changes are as follows:
The table below sets forth our noninterest expense for the nine months ended September 30, 2023 and 2022:
Nine Months Ended September 30,
1,663
16.6
134
186
29.8
20.0
65
12.7
71.8
450
276.1
(3,232
(99.5
21.3
(45
(0.3
Income Tax Expense. Income tax expense increased $869,000, or 220.6%, to $1.3 million for the nine months ended September 30, 2023 from $394,000 for the nine months ended September 30, 2022. The effective tax rate was 25.6% and 18.4% for the nine months ended September 30, 2023 and 2022, respectively. The lower effective tax rate in the nine months ended September 30, 2022 was driven by $427,000 in non-taxable gains recognized into income from life insurance policy death benefits.
For the Nine Months Ended September 30,
981,116
4.82
592,641
4.08
81,562
1,539
2.52
73,865
954
1.73
67,286
2,566
5.10
43,139
354
1.10
0.69
1,130,048
39,468
4.67
709,863
19,404
3.65
32,272
27,442
1,162,320
737,305
22,388
38,898
169,817
3,129
2.46
53,691
0.07
102,054
1,508
1.98
188,300
515
0.37
394,673
10,164
3.44
237,245
1,767
1.00
688,932
2.88
518,134
0.60
213,399
3.89
27,139
1.53
902,331
3.12
545,273
0.65
84,698
85,270
10,805
7,923
997,834
638,466
164,486
98,839
18,440
16,762
1.55
3.00
227,717
164,590
3.16
125.24
130.18
(1) Excludes interest and dividends on cost method investments of $411,000 and $68,000 for the nine months ended September 30, 2023 and 2022, respectively.
Nine Months Ended September 30, 2023 vs. 2022
13,540
3,727
17,267
477
585
294
1,918
2,212
13,942
6,122
20,064
(10
(9
177
2,925
3,102
(334
1,327
993
1,785
6,612
8,397
1,618
10,865
12,483
4,816
1,087
5,903
6,434
11,952
18,386
7,508
(5,830
1,678
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. We are also able to borrow from the Federal Home Loan Bank of Boston and the Atlantic Community Bankers Bank. At September 30, 2023, we had outstanding advances of $224.0 million from the Federal Home Loan Bank. At September 30, 2023, we had unused borrowing capacity of $213.0 million with the Federal Home Loan Bank and $10.0 million with the Atlantic Community Bankers Bank.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments. The levels of these assets are dependent on our operating, financing and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities.
At September 30, 2023, we had $35.7 million in loan commitments outstanding. In addition to commitments to originate and purchase loans, we had $79.9 million in unused lines of credit to borrowers and $56.3 million in unadvanced construction loans.
Non brokered certificates of deposit due within one year of September 30, 2023 totaled $220.1 million, or 27.2%, of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including brokered deposits and FHLB advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2024, or on our savings and money market accounts.
We believe, however, based on historical experience and current market interest rates that we will retain upon maturity a large portion of our certificates of deposit with maturities of one year or less as of September 30, 2023.
43
Our primary investing activity is originating loans. During the nine months ended September 30, 2023 and the year ended December 31, 2022, we originated and purchased $198.6 million and $557.5 million of loans, respectively.
Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced net increases in deposits of $94.4 million and $146.4 million for the nine months ended September 30, 2023 and the year ended December 31, 2022, respectively. At September 30, 2023 and December 31, 2022, the level of brokered time deposits was $87.7 million and $100.8 million, respectively. Deposit flows are affected primarily by the overall level of interest rates and the interest rates and products offered by us and our competitors. FHLB advances increased by $50.0 million and $165.0 million for the nine months ended September 30, 2023 and the year ended December 31, 2022, respectively.
For additional information, see the consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022 included as part of the consolidated financial statements appearing elsewhere in this Form 10-Q.
We are committed to maintaining a strong liquidity position. We continuously monitor our liquidity position and adjustments are made to the balance between sources and uses of funds as deemed appropriate by management. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into our contingency funding planning process, which provides the basis for the identification of our liquidity needs. We anticipate that we will have sufficient funds to meet our current funding commitments. In addition, based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.
At September 30, 2023, Everett Co-operative Bank exceeded all of its regulatory capital requirements, and was categorized as well-capitalized at that date. Management is not aware of any conditions or events since the most recent notification of well-capitalized status that would change our category. See Note 10 of the notes to consolidated financial statements.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented in this Form 10-Q have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable, as the Registrant is a smaller reporting company.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2023. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.
During the quarter ended September 30, 2023, there have been 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 control over financial reporting.
Part II – Other Information
Item 1. Legal Proceedings
The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Bank’s or the Company’s financial condition or results of operations.
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
There were no sales of unregistered securities during the period covered by this Report.
On August 10, 2023, the Company announced the commencement of a stock repurchase program to acquire up to 458,762 shares, or 5% of the Company’s then outstanding common stock. Repurchases will be made from time to time depending on market conditions and other factors, and will be conducted through open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. There is no guarantee as to the exact number of shares to be repurchased by the Company. The following table sets forth the information regarding the Company's common stock repurchase activities during the three months ended September 30, 2023:
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Program
Maximum Number of Shares That May Yet Be Purchased Under the Program
From July 1, 2023 to July 31, 2023
From August 1, 2023 to August 31, 2023
17,538
12.00
441,224
From September 1, 2023 to September 30, 2023
31,704
11.88
409,520
49,242
11.92
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
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, thereunto duly authorized.
ECB BANCORP, INC.
Date: November 9, 2023
/s/Richard J. O'Neil, Jr.
Richard J. O’Neil, Jr.
President and Chief Executive Officer
/s/John A. Citrano
John A. Citrano
Executive Vice President and Chief Financial Officer