Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion and analysis reflects our unaudited consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from our unaudited consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements, which appear beginning on page F-1 of the Prospectus. You should read the information in this section in conjunction with the business and financial information regarding Colonial Federal Savings Bank provided in the Prospectus.
Overview
Our results of operations depend primarily on our net interest income and, to a lesser extent, non-interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, securities and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting of deposits and borrowings. Non-interest income consists primarily of earnings on bank-owned life insurance, service charges on deposit accounts and other income. Our results of operations also are affected by our provision for loan losses and non-interest expense. Non-interest expense consists primarily of salaries and employee benefits, occupancy and equipment, data processing costs, advertising, FDIC deposit insurance premiums and other expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, government policies and actions of regulatory authorities.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, 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,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
•
statements of our goals, intentions and expectations;
•
statements regarding our business plans, prospects, growth and operating strategies;
•
statements regarding the quality of our loan and investment portfolios; and
•
estimates of our risks and future costs and benefits.
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. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this report.
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:
•
conditions relating to the COVID-19 pandemic, including the severity and duration of the associated economic slowdown either nationally or in our market areas, that are worse than expected;
•
general economic conditions, either nationally or in our market areas, that are worse than expected;
•
changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
•
our ability to access cost-effective funding;
•
fluctuations in real estate values and both residential and commercial real estate market conditions;
•
demand for loans and deposits in our market area;
•
our ability to implement and change our business strategy;
19
•
competition among depository and other financial institutions;
•
inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
•
adverse changes in the securities or secondary mortgage markets;
•
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;
•
changes in the quality or composition of our loan or investment portfolios;
•
technological changes that may be more difficult or expensive than expected;
•
the inability of third-party providers to perform as expected;
•
a failure or breach of our operational or security systems or infrastructure, including cyberattacks;
•
our ability to manage market risk, credit risk and operational risk;
•
our ability to enter new markets successfully and capitalize on growth opportunities;
•
our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
•
changes in consumer spending, borrowing and savings habits;
•
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
•
our ability to retain key employees;
•
our compensation expense associated with equity allocated or awarded to our employees; and
•
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
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
The discussion and analysis of the financial condition and results of operations are based on our unaudited consolidated financial statements, which are prepared in conformity with generally accepted accounting principles used in the United States of America. The preparation of these consolidated 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.
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our unaudited consolidated financial statements may not be comparable to companies that comply with such new or revised accounting standards.
20
The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the statement of financial condition date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses,, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of a loan receivable is charged off as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as a critical accounting policy.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a given borrower's ability to repay, the estimated value of any underlying collateral, the size and composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. We do not separately identify consumer loans for impairment disclosure unless such loans are subject to a troubled debt restructuring agreement. The general component covers pools of loans by loan class not considered impaired. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include: (1) levels and trends in delinquent, classified, non-accrual and impaired loans, as well as loan modifications; (2) trends in the nature and volume of the portfolio and terms of loans and the existence and effect of any concentrations of credit and changes in level of such concentrations; (3) effects of the changes in risk selection and lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices; (4) experience, ability, and depth of lending department management and other relevant staff; and (5) national, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans. Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation. As a result of the COVID-19 pandemic, we increased certain of our qualitative loan portfolio risk factors relating to local and national economic conditions. An unallocated component of the allowance for loan losses is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimated specific and general losses in the portfolio.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.
There have been no material changes to our critical accounting policies during the six months ended December 31, 2021.
For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1 of the audited consolidated financial statements within the prospectus.
21
Comparison of Financial Condition at December 31, 2021 and June 30, 2021
Total Assets. Total assets increased $22.9 million, or 6.8%, to $361.8 million at December 31, 2021 from $338.9 million at June 30, 2021. The increase resulted primarily from increases in cash and cash equivalents of $7.1 million, or 17.4%, securities held to maturity of $17.8 million, or 16.9%, and other assets of $1.0 million, or 266% offset by a decrease in securities available-for-sale of $2.0 million, or 88.9% and net loans of $1.5 million, or 0.9%.
Cash and Cash Equivalents. Cash and cash equivalents increased $7.1 million, or 17.4%, to $47.8 million at December 31, 2021 from $40.7 million at June 30, 2021. The increase was a result of an increase in deposits.
Net Loans. Net loans decreased $1.5 million, or 0.9%, to $172.9 million at December 31, 2021 from $174.4 million at June 30, 2021. The decrease was due to decreases of $608,000, or 0.4%, in one- to four-family residential real estate loans, $858,000, or 5.2%, in commercial real estate loans offset by increases of $305,000, or 1.9% in multi-family real estate loans. One- to four-family residential real estate loans decreased due to lower originations and customers refinancing loans with other institutions as we elected not to originate such loans at the lower rates being offered by our competitors. The decrease in commercial real estate loans reflected repayments exceeding originations during the quarter ended December 31, 2021.
Securities Available-for-Sale. Securities available-for-sale decreased $2.0 million to $254,000 at December 31, 2021 from $2.3 million at June 30, 2021. The decrease was due to the sale in July 2021 of a $2.0 million seven-year U.S. Treasury security that was purchased in March 2021. The security was sold for a pre-tax gain of $48,000.
Securities Held-to-Maturity. Securities held-to-maturity increased $17.8 million, or 16.9%, to $122.9 million at December 31, 2021 from $105.1 million at June 30, 2021, as we invested excess cash into securities to increase our overall yield on our interest-earning assets.
Total Liabilities. Total liabilities increased $22.3 million, or 7.7%, to $312.5 million at December 31, 2021 from $290.2 million at June 30, 2021. The increase was the result of an increase in deposits of $23.0 million, or 8.1%, offset by a $630,000, or 68.6%, decrease in Federal Home Loan Bank advances.
Deposits. Deposits increased $23.0 million, or 8.1%, to $307.6 million at December 31, 2021 from $284.6 million at June 30, 2021. The increase was the result of increases of $22.2 million, or 73.8%, in non-interest bearing deposits, a $3.0 million, or 4.3%, increase in savings accounts offset by decreases of $146,000, or 0.4% in money market accounts and a $2.6 million, or 2.3% in certificates of deposit. The increase in savings accounts reflects subscription funds received in connection with the proposed stock offering which closed on January 12, 2022. The decrease in certificates of deposit reflected depositors’ decision not to renew maturing certificates of deposit due to low current market interest rates.
Borrowings. Borrowings, consisting entirely of Federal Home Loan Bank advances, decreased $630,000, or 68.6% to $288,000 at December 31, 2021 from $918,000 at June 30, 2021, as a result of payments on short-term borrowings.
Retained Earnings. Total retained earnings increased $695,000, or 1.4%, to $49.3 million at December 31, 2021 from $48.6 million at June 30, 2021. The increase primarily resulted from net income of $706,000 for the six months ended December 31, 2021.
Comparison of Operating Results for the Three Months Ended December 31, 2021 and 2020
General. We had net income of $234,000 for the three months ended December 31, 2021, compared to net income of $215,000 for the three months ended December 31, 2020, an increase of $19,000, or 8.8%. The increase in net income was primarily due to an increase in net interest income of $195,000, or 10.7%, offset by increases of $142,000, or 8.1%, in non-interest expense and $43,000, or 390.9% in income tax expense.
Interest and Dividend Income. Interest and dividend income decreased $176,000, or 7.2%, to $2.3 million for the three months ended December 31, 2021 from $2.4 million for the three months ended December 31, 2020. The
22
decrease was attributable to a $180,000 decrease in interest on loans, a $1,000 decrease in interest on securities and a $5,000 increase on other interest earning assets. Interest income on loans decreased primarily due to a decrease in the average balance of loans of $11.0 million to $172.5 million for the three months ended December 31, 2021 from $183.5 million for the three months ended December 31, 2020 and, to a lesser extent, due to a decrease in the average yield on loans of 17 basis points to 3.80% for the three months ended December 31, 2021 from 3.97% for the three months ended December 31, 2020. Interest income on securities increased due to an increase in the average balance of securities of $22.7 million to $117.4 million for the three months ended December 31, 2021 from $94.7 million for the three months ended December 31, 2020, offset by a decrease in the average yield on securities of 51 basis points to 2.08% for the three months ended December 31, 2021 from 2.59% for the three months ended December 31, 2020. The decreases in the average yields on loans and securities reflected the lower market interest rate environment existing in 2021.
Interest Expense. Interest expense decreased $371,000, or 59.1%, to $257,000 for the three months ended December 31, 2021 from $628,000 for the three months ended December 31, 2020. The decrease was primarily due to a decrease of $356,000, or 63.3%, in interest expense on certificates of deposit. The average cost of certificates of deposit decreased 96 basis points to 0.75% for the three months ended December 31, 2021 from 1.71% for the three months ended December 31, 2020 and the average balance of certificates of deposit decreased $22.1 million to $109.6 million for the three months ended December 31, 2021 from $131.7 million for the three months ended December 31, 2020. Additionally, interest expense on borrowings, consisting entirely of FHLB advances, decreased $14,000, or 87.5% to $2,000 for the three months ended December 31, 2021 from $16,000 for the three months ended December 31, 2020 due primarily to the decrease in the average balance of borrowings to $345,000 for the three months ended December 31, 2021 from $2.3 million for the three months ended December 31, 2020 and, to a lesser extent, a decline in the cost of borrowings of 44 basis points to 2.32% for the three months ended December 31, 2021 from 2.76% for the three months ended December 31, 2020 due to the maturity of a higher-costing borrowing.
Net Interest Income. Net interest income increased $195,000, or 10.7%, to $2.0 million for the three months ended December 31, 2021 from $1.8 million for the three months ended December 31, 2020. The increase was due to an increase in average net interest-earning assets of $9.3 million combined with an increase in our net interest rate spread to 2.37% for the three months ended December 31, 2021 from 2.08% for the three months ended December 31, 2020. Our net interest margin increased to 2.46% for the three months ended December 31, 2021 compared to 2.27% for the three months ended December 31, 2020. The increase in the net interest rate spread was primarily a result of the yield on interest-earning assets decreasing at a slower rate than the decline in the cost of interest-bearing liabilities.
Provision for Loan Losses. We recorded a provision for loan losses of $10,000 and $15,000 for the three-month periods ended December 31, 2021 and December 31, 2020, respectively. The provision reflected the application of qualitative factors related to the economic conditions caused by the COVID-19 pandemic, offset by a decrease in loans and continued strong asset quality. The allowance for loan losses was $1.7 million, or 1.00% of total loans, at December 31, 2021, compared to $1.7 million, or 0.98% of total loans, at December 31, 2020. The allowance for loan loss was $1.7 million, or .98% of total loans at June 30,2021. We had $2.0 million of loans designated special mention at December 31, 2021, which represented a single loan collateralized by four commercial real estate properties. We did not have any loans designated as special mention at December 31, 2020. We had no loans that had been categorized as substandard, doubtful or loss at December 31, 2021 or 2020. We did not have any non-performing loans at either December 31, 2021 or 2020. We did not have any charge-offs or recoveries for the three months ended December 31, 2021 or for the three months ended December 31, 2020.
23
Non-Interest Income. Non-interest income information is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
Change
|
|
(Dollars in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percent
|
|
Customer service fees
|
|
$
|
31
|
|
|
$
|
33
|
|
|
$
|
(2
|
)
|
|
|
(6.1
|
%)
|
Income on bank-owned life insurance
|
|
|
75
|
|
|
|
73
|
|
|
|
2
|
|
|
|
2.7
|
%
|
Gain on sale of security available for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0
|
%
|
Other income
|
|
|
55
|
|
|
|
51
|
|
|
|
4
|
|
|
|
7.8
|
%
|
Total non-interest income
|
|
$
|
161
|
|
|
$
|
157
|
|
|
$
|
4
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income increased $4,000, or 2.5%, to $161,000 for the three months ended December 31, 2021 from $157,000 for the three months ended December 31, 2020. The increase was primarily due to a $4,000 increase in other fee income.
Non-Interest Expense. Non-interest expense information is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
Change
|
|
(Dollars in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percent
|
|
Salaries and employee benefits
|
|
$
|
1,167
|
|
|
$
|
1,174
|
|
|
$
|
(7
|
)
|
|
|
(0.6
|
%)
|
Occupancy and equipment
|
|
|
208
|
|
|
|
202
|
|
|
|
6
|
|
|
|
3.0
|
%
|
Advertising
|
|
|
37
|
|
|
|
22
|
|
|
|
15
|
|
|
|
68.2
|
%
|
Data processing
|
|
|
91
|
|
|
|
86
|
|
|
|
5
|
|
|
|
5.8
|
%
|
Deposit insurance
|
|
|
21
|
|
|
|
22
|
|
|
|
(1
|
)
|
|
|
(4.5
|
%)
|
Other
|
|
|
372
|
|
|
|
248
|
|
|
|
124
|
|
|
|
50.0
|
%
|
Total non-interest expense
|
|
$
|
1,896
|
|
|
$
|
1,754
|
|
|
$
|
142
|
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense increased $142,000, or 8.1%, to $1.9 million for the three months ended December 31, 2021 from $1.8 million for the three months ended December 31, 2020. The increase was due primarily to a $15,000 increase in advertising expense, and a $124,000 increase in other expenses due to increased consultant and audit expenses.
Provision for Income Taxes. The provision for income taxes was $32,000 for the three months ended December 31, 2021, which represented a $43,000, or 390.9%, increase from the benefit for income taxes of $(11,000) for the three months ended December 31, 2020. Our effective tax rate was 12.0% and (5.4)% for the quarters ended December 31, 2021 and December 31, 2020, respectively. The lower effective tax rate for the three months ended December 31, 2021 and 2020 as compared to the statutory rate reflected the benefit of our investment in tax-advantaged municipal securities and bank-owned life insurance as well as reduced state taxes through utilization of a Massachusetts securities corporation to hold our investment securities. The increase in the provision for income taxes for the three months ended December 31, 2021 was due to higher pre-tax income and higher earnings at the bank level for state tax purposes.
24
Average Balance and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. No tax- equivalent adjustments have been made. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees totaled $354,000 and $296,000 at December 31, 2021 and December 31, 2020, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2021
|
|
|
2020
|
|
(Dollars in thousands)
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
172,505
|
|
|
$
|
1,640
|
|
|
|
3.80
|
%
|
|
$
|
183,494
|
|
|
$
|
1,820
|
|
|
|
3.97
|
%
|
Securities
|
|
|
117,441
|
|
|
|
612
|
|
|
|
2.08
|
%
|
|
|
94,652
|
|
|
|
613
|
|
|
|
2.59
|
%
|
Other
|
|
|
37,190
|
|
|
|
16
|
|
|
|
0.17
|
%
|
|
|
41,440
|
|
|
|
11
|
|
|
|
0.11
|
%
|
Total interest-earning assets
|
|
|
327,136
|
|
|
|
2,268
|
|
|
|
2.77
|
%
|
|
|
319,586
|
|
|
|
2,444
|
|
|
|
3.06
|
%
|
Non-interest-earning assets
|
|
|
14,340
|
|
|
|
|
|
|
|
|
|
13,099
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
341,476
|
|
|
|
|
|
|
|
|
$
|
332,685
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
30,903
|
|
|
$
|
4
|
|
|
|
0.05
|
%
|
|
$
|
27,290
|
|
|
$
|
4
|
|
|
|
0.06
|
%
|
Saving deposits
|
|
|
72,233
|
|
|
|
18
|
|
|
|
0.10
|
%
|
|
|
63,353
|
|
|
|
16
|
|
|
|
0.10
|
%
|
Money market deposits
|
|
|
41,411
|
|
|
|
27
|
|
|
|
0.26
|
%
|
|
|
31,581
|
|
|
|
30
|
|
|
|
0.38
|
%
|
Certificates of deposit
|
|
|
109,563
|
|
|
|
206
|
|
|
|
0.75
|
%
|
|
|
131,700
|
|
|
|
562
|
|
|
|
1.71
|
%
|
Total interest-bearing deposits
|
|
|
254,110
|
|
|
|
255
|
|
|
|
0.40
|
%
|
|
|
253,924
|
|
|
|
612
|
|
|
|
0.96
|
%
|
FHLB advances
|
|
|
345
|
|
|
|
2
|
|
|
|
2.32
|
%
|
|
|
2,315
|
|
|
|
16
|
|
|
|
2.76
|
%
|
Total interest-bearing liabilities
|
|
|
254,455
|
|
|
|
257
|
|
|
|
0.40
|
%
|
|
|
256,239
|
|
|
|
628
|
|
|
|
0.98
|
%
|
Non-interest-bearing demand deposits
|
|
|
34,168
|
|
|
|
|
|
|
|
|
|
26,068
|
|
|
|
|
|
|
|
Other non-interest-bearing liabilities
|
|
|
3,515
|
|
|
|
|
|
|
|
|
|
2,746
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
292,138
|
|
|
|
|
|
|
|
|
|
285,053
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
49,338
|
|
|
|
|
|
|
|
|
|
47,632
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
341,476
|
|
|
|
|
|
|
|
|
$
|
332,685
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
2,011
|
|
|
|
|
|
|
|
|
$
|
1,816
|
|
|
|
|
Net interest rate spread(1)
|
|
|
|
|
|
|
|
|
2.37
|
%
|
|
|
|
|
|
|
|
|
2.08
|
%
|
Net interest-bearing assets(2)
|
|
$
|
72,681
|
|
|
|
|
|
|
|
|
$
|
63,347
|
|
|
|
|
|
|
|
Net interest margin(3)
|
|
|
|
|
|
|
|
|
2.46
|
%
|
|
|
|
|
|
|
|
|
2.27
|
%
|
Average interest-bearing assets
to interest-bearing liabilities
|
|
|
|
|
|
|
|
|
128.56
|
%
|
|
|
|
|
|
|
|
|
124.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Net interest rate spread represents the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
(2)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3)
Net interest margin represents net interest income divided by average total interest-earning assets.
25
Rate/Volume Analysis
The following table presents 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 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
December 31, 2021 vs 2020
|
|
(In thousands)
|
|
Increase (Decrease) Due to Volume
|
|
|
Increase (Decrease) Due to Rate
|
|
|
Total Increase (Decrease)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(109
|
)
|
|
$
|
(71
|
)
|
|
$
|
(180
|
)
|
Securities
|
|
|
148
|
|
|
|
(149
|
)
|
|
|
(1
|
)
|
Other
|
|
|
(1
|
)
|
|
|
6
|
|
|
|
5
|
|
Total interest-earning assets
|
|
|
38
|
|
|
|
(214
|
)
|
|
|
(176
|
)
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
Savings deposits
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Money market deposits
|
|
|
9
|
|
|
|
(12
|
)
|
|
|
(3
|
)
|
Certificates of deposit
|
|
|
(94
|
)
|
|
|
(262
|
)
|
|
|
(356
|
)
|
Total deposits
|
|
|
(82
|
)
|
|
|
(275
|
)
|
|
|
(357
|
)
|
FHLB advances
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
(14
|
)
|
Total interest-bearing liabilities
|
|
|
(96
|
)
|
|
|
(275
|
)
|
|
|
(371
|
)
|
Change in net interest income
|
|
$
|
134
|
|
|
$
|
61
|
|
|
$
|
195
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Operating Results for the Six Months Ended December 31, 2021 and 2020
General. We had net income of $706,000 for the six months ended December 31, 2021, compared to net income of $594,000 for the six months ended December 31, 2020, an increase of $112,000, or 18.9%. The increase in net income was primarily due to an increase in net interest income of $417,000, or 11.7%, and an increase of $64,000, or 18.1%, in non-interest income, offset by an increase of $286,000, or 8.8%, in non-interest expense.
Interest and Dividend Income. Interest and dividend income decreased $366,000, or 7.5%, to $4.5 million for the six months ended December 31, 2021 from $4.9 million for the six months ended December 31, 2020. The decrease was attributable to a $377,000 decrease in interest on loans, offset by an $11,000 increase in interest on other interest-earning assets. Interest income on loans decreased due to a decrease in the average balance of loans of $11.5 million to $173.7 million for the six months ended December 31, 2021 from $185.2 million for the six months ended December 31, 2020 and due to a decrease in the average yield on loans of 18 basis points to 3.79% for the six months ended December 31, 2021 from 3.97% for the six months ended December 31, 2020. Interest income on other interest-earning assets increased due to an increase in the average balance of other interest-earning assets of $817,000 to $39.1 million for the six months ended December 31, 2021 from $38.3 million for the six months ended December 31, 2020. The decreases in the average yields on interest-earning assets reflected the lower market interest rate environment existing in 2021.
Interest Expense. Interest expense decreased $783,000, or 59.4%, to $535,000 for the six months ended December 31, 2021 from $1.3 million for the six months ended December 31, 2020. The decrease was primarily due to a decrease of $750,000, or 63.6%, in interest expense on certificates of deposit. The average cost of certificates of deposit decreased 101 basis points to 0.78% for the six months ended December 31, 2021 from 1.79% for the six months ended December 31, 2020 and the average balance of certificates of deposit decreased $21.4 million to $110.1 million for the six months ended December 31, 2021 from $131.5 million for the six months ended December 31, 2020. Additionally, interest expense on borrowings, consisting entirely of FHLB advances, decreased $32,000, or
26
84.2%, to $6,000 for the six months ended December 31, 2021 from $38,000 for the six months ended December 31, 2020 due primarily to the decrease in the average balance of borrowings to $456,000 for the six months ended December 31, 2021 from $2.7 million for the six months ended December 31, 2020 and, to a lesser extent, a decline in the cost of borrowings of 20 basis points to 2.63% for the six months ended December 31, 2021 from 2.83% for the six months ended December 31, 2020 due to the maturity of a higher-costing borrowing.
Net Interest Income. Net interest income increased $417,000, or 11.7%, to $4.0 million for the six months ended December 31, 2021 from $3.6 million for the six months ended December 31, 2020. The increase was due to an increase in average net interest-earning assets of $5.6 million combined with an increase in our net interest rate spread to 2.37% for the six months ended December 31, 2021 from 2.02% for the six months ended December 31, 2020. Our net interest margin increased to 2.46% for the six months ended December 31, 2021 compared to 2.23% for the six months ended December 31, 2020. The increase in the net interest rate spread was primarily a result of the yield on interest-earning assets decreasing at a slower rate than the decline in the cost of interest-bearing liabilities.
Provision for Loan Losses. We recorded provision for loan losses of $25,000 and $30,000 for the six-month periods ended December 31, 2021 and December 31, 2020, respectively. The provision reflected the application of qualitative factors related to the economic conditions caused by the COVID-19 pandemic, offset by a decrease in loans and continued strong asset quality. The allowance for loan losses was $1.7 million, or 1.00% of total loans, at December 31, 2021, compared to $1.7 million, or 0.98% of total loans, at December 31, 2020. The allowance for loan losses was $1.7 million, or .98% of total loans, at June 30, 2021. We did not have any charge-offs or recoveries for the six months ended December 31, 2021 or for the six months ended December 31, 2020.
Non-Interest Income. Non-interest income information is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
December 31,
|
|
|
Change
|
|
(Dollars in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percent
|
|
Customer service fees
|
|
$
|
61
|
|
|
$
|
60
|
|
|
$
|
1
|
|
|
|
1.7
|
%
|
Income on bank-owned life insurance
|
|
|
149
|
|
|
|
145
|
|
|
|
4
|
|
|
|
2.8
|
%
|
Gain on sale of security available for sale
|
|
|
48
|
|
|
|
-
|
|
|
|
48
|
|
|
|
|
|
Other income
|
|
|
159
|
|
|
|
148
|
|
|
|
11
|
|
|
|
7.4
|
%
|
Total non-interest income
|
|
$
|
417
|
|
|
$
|
353
|
|
|
$
|
64
|
|
|
|
18.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income increased $64,000, or 18.1%, to $417,000 for the six months ended December 31, 2021 from $353,000 for the six months ended December 31, 2020. The increase was primarily due to a $48,000 gain realized on the sale in July 2021 of a $2.0 million seven-year U.S. Treasury security that was purchased in March 2021.
Non-Interest Expense. Non-interest expense information is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
December 31,
|
|
|
Change
|
|
(Dollars in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percent
|
|
Salaries and employee benefits
|
|
$
|
2,147
|
|
|
$
|
2,098
|
|
|
$
|
49
|
|
|
|
2.3
|
%
|
Occupancy and equipment
|
|
|
418
|
|
|
|
394
|
|
|
|
24
|
|
|
|
6.1
|
%
|
Advertising
|
|
|
78
|
|
|
|
47
|
|
|
|
31
|
|
|
|
66.0
|
%
|
Data processing
|
|
|
171
|
|
|
|
170
|
|
|
|
1
|
|
|
|
0.6
|
%
|
Deposit insurance
|
|
|
43
|
|
|
|
43
|
|
|
|
-
|
|
|
|
0.0
|
%
|
Other
|
|
|
691
|
|
|
|
510
|
|
|
|
181
|
|
|
|
35.5
|
%
|
Total non-interest expense
|
|
$
|
3,548
|
|
|
$
|
3,262
|
|
|
$
|
286
|
|
|
|
8.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense increased $286,000, or 8.8%, to $3.5 million for the six months ended December 31, 2021 from $3.3 million for the six months ended December 31, 2020. The increase was due primarily to a $49,000 increase in salaries and employee benefit expense due to normal annual merit salary and benefit increases, and a $181,000 increase in other expenses due to increased consultant and audit expenses.
27
Provision for Income Taxes. The provision for income taxes was $132,000 for the six months ended December 31, 2021, which represented an $88,000, or 200.0%, increase from the provision for income taxes of $44,000 for the six months ended December 31, 2020. Our effective tax rate was 15.8% and 6.9% for the six months ended December 31, 2021 and December 31, 2020, respectively. The lower effective tax rate for the six months ended December 31, 2021 and 2020 as compared to the statutory rate reflected the benefit of our investment in tax-advantaged municipal securities and bank-owned life insurance as well as reduced state taxes through utilization of a Massachusetts securities corporation to hold our investment securities. The increase in the provision for income taxes for the six months ended December 31, 2021 was due to higher pre-tax income and higher earnings at the bank level for state tax purposes.
Average Balance and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. No tax- equivalent adjustments have been made. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees totaled $354,000 and $296,000 at December 31, 2021 and December 31, 2020, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31,
|
|
|
|
2021
|
|
|
2020
|
|
(Dollars in thousands)
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
|
Average
Outstanding
Balance
|
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
173,701
|
|
|
$
|
3,294
|
|
|
|
3.79
|
%
|
|
$
|
185,170
|
|
|
|
$
|
3,671
|
|
|
|
3.97
|
%
|
Securities
|
|
|
111,952
|
|
|
|
1,202
|
|
|
|
2.15
|
%
|
|
|
97,144
|
|
|
|
|
1,202
|
|
|
|
2.47
|
%
|
Other
|
|
|
39,107
|
|
|
|
33
|
|
|
|
0.17
|
%
|
|
|
38,290
|
|
|
|
|
22
|
|
|
|
0.11
|
%
|
Total interest-earning assets
|
|
|
324,760
|
|
|
|
4,529
|
|
|
|
2.79
|
%
|
|
|
320,604
|
|
|
-
|
|
|
4,895
|
|
|
|
3.05
|
%
|
Non-interest-earning assets
|
|
|
14,117
|
|
|
|
|
|
|
|
|
|
13,089
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
338,877
|
|
|
|
|
|
|
|
|
$
|
333,693
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
30,786
|
|
|
$
|
8
|
|
|
|
0.05
|
%
|
|
$
|
27,045
|
|
|
|
$
|
7
|
|
|
|
0.05
|
%
|
Saving deposits
|
|
|
71,667
|
|
|
|
37
|
|
|
|
0.10
|
%
|
|
|
63,061
|
|
|
|
|
33
|
|
|
|
0.10
|
%
|
Money market deposits
|
|
|
41,266
|
|
|
|
54
|
|
|
|
0.26
|
%
|
|
|
31,435
|
|
|
|
|
60
|
|
|
|
0.38
|
%
|
Certificates of deposit
|
|
|
110,088
|
|
|
|
430
|
|
|
|
0.78
|
%
|
|
|
131,480
|
|
|
|
|
1,180
|
|
|
|
1.79
|
%
|
Total interest-bearing deposits
|
|
|
253,807
|
|
|
|
529
|
|
|
|
0.42
|
%
|
|
|
253,021
|
|
|
|
|
1,280
|
|
|
|
1.01
|
%
|
FHLB advances
|
|
|
456
|
|
|
|
6
|
|
|
|
2.63
|
%
|
|
|
2,686
|
|
|
|
|
38
|
|
|
|
2.83
|
%
|
Total interest-bearing liabilities
|
|
|
254,263
|
|
|
|
535
|
|
|
|
0.42
|
%
|
|
|
255,707
|
|
|
|
|
1,318
|
|
|
|
1.03
|
%
|
Non-interest-bearing demand deposits
|
|
|
32,018
|
|
|
|
|
|
|
|
|
|
25,806
|
|
|
|
|
|
|
|
|
Other non-interest-bearing liabilities
|
|
|
3,474
|
|
|
|
|
|
|
|
|
|
4,706
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
289,755
|
|
|
|
|
|
|
|
|
|
286,219
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
49,122
|
|
|
|
|
|
|
|
|
|
47,474
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
338,877
|
|
|
|
|
|
|
|
|
$
|
333,693
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
3,994
|
|
|
|
|
|
|
|
|
|
$
|
3,577
|
|
|
|
|
Net interest rate spread(1)
|
|
|
|
|
|
|
|
|
2.37
|
%
|
|
|
|
|
|
|
|
|
|
2.02
|
%
|
Net interest-bearing assets(2)
|
|
$
|
70,497
|
|
|
|
|
|
|
|
|
$
|
64,897
|
|
|
|
|
|
|
|
|
Net interest margin(3)
|
|
|
|
|
|
|
|
|
2.46
|
%
|
|
|
|
|
|
|
|
|
|
2.23
|
%
|
Average interest-bearing assets
to interest-bearing liabilities
|
|
|
|
|
|
|
|
|
127.73
|
%
|
|
|
|
|
|
|
|
|
|
125.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
Net interest rate spread represents the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
(5)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(6)
Net interest margin represents net interest income divided by average total interest-earning assets.
28
Rate/Volume Analysis
The following table presents 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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
December 31, 2021 vs 2020
|
|
(In thousands)
|
|
Increase (Decrease) Due to Volume
|
|
|
Increase (Decrease) Due to Rate
|
|
|
Total Increase (Decrease)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(227
|
)
|
|
$
|
(150
|
)
|
|
$
|
(377
|
)
|
Securities
|
|
|
183
|
|
|
|
(183
|
)
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
11
|
|
|
|
11
|
|
Total interest-earning assets
|
|
|
(44
|
)
|
|
|
(322
|
)
|
|
|
(366
|
)
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Savings deposits
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
4
|
|
Money market deposits
|
|
|
19
|
|
|
|
(25
|
)
|
|
|
(6
|
)
|
Certificates of deposit
|
|
|
(192
|
)
|
|
|
(558
|
)
|
|
|
(750
|
)
|
Total deposits
|
|
|
(167
|
)
|
|
|
(584
|
)
|
|
|
(751
|
)
|
FHLB advances
|
|
|
(32
|
)
|
|
|
-
|
|
|
|
(32
|
)
|
Total interest-bearing liabilities
|
|
|
(199
|
)
|
|
|
(584
|
)
|
|
|
(783
|
)
|
Change in net interest income
|
|
$
|
155
|
|
|
$
|
262
|
|
|
$
|
417
|
|
|
|
|
|
|
|
|
|
|
|
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage the impact of changes in market interest rates on net interest income and capital. We have an Asset/Liability Committee that is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. The Committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.
As part of our ongoing asset-liability management, we use the following strategies to manage our interest rate risk:
•
emphasize the marketing of our non-interest-bearing demand, money market, savings and demand accounts;
•
invest in short- to medium-term repricing and/or maturing securities whenever the market allows; and
•
maintain a strong capital position.
We do not engage in hedging activities, such as engaging in futures, options or interest rate swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.
29
We consider two types of simulations impacted by changes in interest rates, which are (1) net interest income and (2) changes in the economic value of equity.
Net Interest Income Analysis. We analyze our sensitivity to changes in interest rates through our net interest income simulation model, the results of which are provided to us by an independent third party. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a one-year period based on current interest rates. We then calculate what the net interest income would be for the same period under different interest rate assumptions. The following table shows the estimated impact on net interest income for the one-year period beginning December 31, 2021 resulting from potential changes in interest rates, expressed in basis points. These estimates require certain assumptions to be made, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain. As a result, no simulation model can precisely predict the impact of changes in interest rates on our net interest income.
Although the net interest income table below provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
|
|
|
|
|
|
|
|
|
Change in Interest Rates (basis points)(1)
|
|
Net Interest Income
Year 1 Forecast (In thousands)
|
|
|
Year 1 Change from Level
|
|
+400
|
|
$
|
8,300
|
|
|
|
2.6
|
%
|
+300
|
|
|
8,302
|
|
|
|
2.7
|
%
|
+200
|
|
|
8,285
|
|
|
|
2.4
|
%
|
+100
|
|
|
8,238
|
|
|
|
1.9
|
%
|
Level
|
|
|
8,087
|
|
|
|
-
|
|
-100
|
|
|
7,566
|
|
|
|
-6.4
|
%
|
|
|
|
|
|
|
|
(1)
Assumes an immediate uniform change in interest rates at all maturities.
Economic Value of Equity. We monitor interest rate risk through the use of a simulation model that estimates the amounts by which the fair value of our assets and liabilities (our economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. The quarterly reports developed in the simulation model assist us in identifying, measuring, monitoring and controlling interest rate risk to ensure compliance within our policy guidelines.
The table below sets forth, as of December 31, 2021, the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2021
|
|
|
|
|
|
|
Estimated Decrease in EVE
|
|
|
EVE as a Percentage of Present Value of Assets(3)
|
|
Change in Interest Rates (basis points)(1)
|
|
Estimated EVE(2)
(In thousands)
|
|
|
Amount
(In thousands)
|
|
|
Percent
|
|
|
EVE Ratio(4)
|
|
|
Decrease
(basis points)
|
|
+400
|
|
$
|
38,931
|
|
|
$
|
(14,657
|
)
|
|
|
(27.4
|
%)
|
|
|
12.2
|
%
|
|
|
(256
|
)
|
+300
|
|
|
42,705
|
|
|
|
(10,883
|
)
|
|
|
(20.3
|
%)
|
|
|
12.9
|
%
|
|
|
(180
|
)
|
+200
|
|
|
46,683
|
|
|
|
(6,905
|
)
|
|
|
(12.9
|
%)
|
|
|
13.7
|
%
|
|
|
(105
|
)
|
+100
|
|
|
50,576
|
|
|
|
(3,012
|
)
|
|
|
(5.6
|
%)
|
|
|
14.3
|
%
|
|
|
(39
|
)
|
Level
|
|
|
53,588
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14.7
|
%
|
|
|
-
|
|
-100
|
|
|
52,587
|
|
|
|
(1,001
|
)
|
|
|
(1.9
|
%)
|
|
|
14.1
|
%
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Assumes an immediate uniform change in interest rates at all maturities.
(2)
EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)
EVE Ratio represents EVE divided by the present value of assets.
30
The table above indicates that at December 31, 2021, in the event of an instantaneous 200 basis point increase in interest rates, we would experience an 12.9% decrease in EVE, and in the event of an instantaneous 100 basis point decrease in interest rates, we would experience a 1.99% decrease in EVE.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in EVE require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the EVE table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the EVE table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on EVE and will differ from actual results.
EVE calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.
Liquidity and Capital Resources
Liquidity. 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 and calls of securities. We also have the ability to borrow from the Federal Home Loan Bank of Boston. At December 31, 2021, we had $288,000 outstanding in advances from the Federal Home Loan Bank of Boston. At December 31, 2021, we had the ability to borrow $68.4 million in additional Federal Home Loan Bank of Boston advances. Additionally, at December 31, 2021, we had a $2.4 million line of credit with the Federal Home Loan Bank of Boston, none of which was drawn at December 31, 2021.
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 cash equivalents. The levels of these assets are dependent on our operating, financing, lending, 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. Net cash (used in) provided by operating activities was $(30,000) and $549,000 for the six months ended December 31, 2021 and 2020, respectively. Net cash used by investing activities, which consists primarily of disbursements for loan originations and the purchase of investment securities, offset by principal collections on loans and proceeds from maturing securities and pay downs on securities, was $15.2 million for the six months ended December 31, 2021, primarily due to the purchase of $27.7 million of securities, offset by maturities, pre-payments and calls of securities of $9.6 million and a net decrease in loans of $1.5 million. Net cash provided by investing activities was $8.4 million for the six months ended December 31, 2020. Net cash provided by financing activities was $22.4 million for the six months ended December 31, 2021, primarily due to an increase in deposits of $22.9 million, offset by the repayment of $630,000 in Federal Home Loan Bank of Boston advances. Net cash provided by financing activities was $2.1 million for the six months ended December 31, 2020.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments based on our current strategy to increase loans with an increase in core deposits and the continued use of Federal Home Loan Bank of Boston advances as needed, to fund loan growth.
Capital Resources. At December 31, 2021, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $49.3 million, or 14.4% of adjusted total assets, which is above the well-capitalized required level of $17.1 million, or 5.0%; and total risk-based capital of $51.1 million, or 29.3% of risk-weighted assets, which is above the well-capitalized required level of $17.4 million, or 10.0%. Management is not aware of any conditions or events since the most recent notification that would change our category.
The net offering proceeds, discussed in Note 1 to the unaudited consolidated financial statements, will significantly increase our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net
31
offering proceeds are used for general corporate purposes, including funding loans. Our financial condition and results of operations will be enhanced by the net offering proceeds, resulting in increased net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net offering proceeds, as well as other factors associated with the offering, our return on equity will be lower immediately following the offering. See “Risk Factors—Risks Related to the Offering—The capital we raise in the stock offering may negatively impact our return on equity until we can fully implement our business plan. This could negatively affect the trading price of our shares of common stock” in the Prospectus.
Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. The financial instruments include commitments to originate loans, unused lines of credit and standby letters of credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.
At December 31, 2021, we had $3.5 million of commitments to originate loans and $4.7 million of unadvanced funds under home equity lines of credit. See Note 9 in the Notes to the unaudited consolidated financial statements for further information.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see note 1 of the notes to our consolidated financial statements beginning on page F-1 of the Prospectus. As an emerging growth company, we have elected to use the extended transition period to delay the adoption of new or re-issued accounting pronouncements applicable to public companies until such pronouncements are applicable to non-public companies.
Impact of Inflation and Changing Prices
The unaudited financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America, 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.