ECB Bancorp, Inc.: Form 10-Q for the period ended Sep 30, 2023

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:

• statements of our goals, intentions and expectations;
• statements regarding our business plans, prospects, growth and operating strategies;
• statements regarding the quality of our loan portfolio; 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.

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:

• changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit 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 strategies;
• competition among depository and other financial institutions;
• inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, 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;
• 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;
• the risk of adverse changes in business conditions due to geo-political tensions;
• our ability to attract and retain key 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

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.

• One-to-four family residential real estate loans increased $39.9 million, or 11.2%, to $395.3 million at September 30, 2023 from $355.4 million at December 31, 2022.
• Multi-family real estate loans increased $39.3 million, or 16.2%, to $281.2 million at September 30, 2023 from $242.0 million at December 31, 2022.
• Commercial real estate loans increased $29.4 million, or 18.8%, to $185.7 million at September 30, 2023 from $156.2 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.

• Certificates of deposit increased $122.2 million, or 38.2%, to $442.0 million at September 30, 2023 from $319.8 million at December 31, 2022. Brokered certificates of deposit decreased $13.1 million, or 13.1%, to $87.7 million at September 30, 2023 from $100.8 million at December 31, 2022.
• Savings accounts increased $19.5 million, or 13.2%, to $167.9 million at September 30, 2023 from $148.4 million at December 31, 2022.
• Money market deposit accounts decreased $38.7 million, or 28.5%, to $97.4 million at September 30, 2023 from $136.1 million at December 31, 2022.
• Interest bearing checking accounts decreased $8.4 million, or 29.2%, to $20.5 million at September 30, 2023 from $28.9 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:

(Dollars in thousands)

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:

• Charitable contributions decreased $3.2 million, or 99.8%, driven by a $3.2 million contribution to the Everett Co-operative Bank Charitable Foundation made in the third quarter of 2022 in connection with the Company’s initial public offering;
• Salaries and employee benefits increased $235,000, or 8.8%, driven by merit increases and additional staffing to support our strategic plan. Partially offsetting this increase was a decrease in supplemental executive retirement plan expenses driven by increases in defined benefit plan discount rates as well as a decrease in Employee Stock Ownership Plan (“ESOP”) costs. ESOP costs decreased due to a lower average stock price and lower number of shares committed to be released in the quarter ended September 30, 2023 as compared to the quarter ended September 30, 2022;
• FDIC deposit insurance expense increased $152,000, or 281.5%, driven by both increases in assessment rates charged by the FDIC as well as an increase in our asset size; and
• Professional fees increased $128,000 or 72.7% driven by increased costs related to operating as a public company.

The table below sets forth our noninterest expense for the three months ended September 30, 2023 and 2022:

(Dollars in thousands)

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.

(Dollars in thousands)

(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.

(In thousands)

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.

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:

(Dollars in thousands)

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:

• Charitable contributions decreased $3.2 million, or 99.5%, driven by a $3.2 million contribution to the Everett Co-operative Bank Charitable Foundation made in the third quarter of 2022 in connection with the Company’s initial public offering;
• Salaries and employee benefits increased $1.7 million, or 23.9%, driven by merit increases, additional staffing to support our strategic plan as well as expenses related to the ESOP which did not exist in the first half of 2022. Partially offsetting these increases was a decrease in supplemental executive retirement plan expenses driven by increases in defined benefit plan discount rates. The nine months ended September 30, 2022 included a benefit of $582,000 to reflect a reduction in

the liability related to our withdrawal from the defined benefit plan as well as expenses of $166,000 related to our Survivor Benefit Plan, both of which did not recur in the nine months ended September 30, 2023;

• FDIC deposit insurance expense increased $450,000, or 276.1%, driven by both increases in assessment rates charged by the FDIC as well as an increase in our asset size; and
• Professional fees increased $402,000, or 71.8%, driven by increased costs related to operating as a public company.

The table below sets forth our noninterest expense for the nine months ended September 30, 2023 and 2022:

(Dollars in thousands)

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.

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.

(Dollars in thousands)

(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.

(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.

(In thousands)

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.

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.

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.