Business Context and Reporting Period
ECB Bancorp, Inc. was formed on March 7, 2022 to become the holding company for Everett Co-operative Bank as part of a mutual-to-stock conversion. The conversion was not complete as of March 31, 2022; accordingly, the financial statements primarily present Everett Co-operative Bank and its subsidiary. ECB Bancorp had no assets, liabilities, or operating activity other than organizational activities at quarter-end. This unaudited Form 10-Q covers the three months ended March 31, 2022, with comparison to March 31, 2021.
The conversion plan was approved by the required depositor vote on May 5, 2022, subject to remaining regulatory approvals and completion of the offering. No shares of ECB Bancorp common stock were outstanding as of June 23, 2022.
Key Financial Metrics
| Metric | March 31, 2022 / Q1 2022 | Comparable period or prior year-end |
|---|---|---|
| Total assets | $688.6 million | $666.5 million at December 31, 2021; up 3.3% |
| Net loans | $534.8 million | $517.1 million at December 31, 2021; up 3.4% |
| Total deposits | $591.3 million | $571.7 million at December 31, 2021; up 3.4% |
| Federal Home Loan Bank advances | $10.5 million | $9.0 million at December 31, 2021 |
| Total equity | $78.7 million | $77.3 million at December 31, 2021 |
| Cash and cash equivalents | $51.8 million | $53.0 million at December 31, 2021 |
| Net interest and dividend income | $4.9 million | $4.3 million in Q1 2021; up 13.2% |
| Net income | $1.4 million | $1.3 million in Q1 2021; up 7.3% |
| Effective tax rate | 26.4% | 26.8% in Q1 2021 |
| Net interest margin | 3.08% | 3.00% in Q1 2021 |
- Total interest and dividend income was $5.6 million, up 3.5% year over year.
- Total interest expense was $690,000, down 35.7%, primarily because the weighted-average rate on interest-bearing deposits declined to 0.54% from 0.94%.
- Provision for loan losses was $121,000, compared with $90,000 in Q1 2021. The allowance for loan losses was $4.4 million at March 31, 2022.
- Noninterest income declined 13.1% to $251,000, including $45,000 of loan-sale gains versus $120,000 in the prior-year quarter.
- Noninterest expense increased 13.9% to $3.2 million. Salaries and employee benefits rose 18.5% to $2.0 million.
- Comprehensive income was $1.4 million, including $15,000 of other comprehensive income.
Cash Flow, Debt and Liquidity
- Operating activities generated $878,000 of cash, compared with $2.1 million in Q1 2021.
- Investing activities used $23.1 million, principally reflecting net loan originations and collections of $17.7 million and purchases of held-to-maturity securities of $8.8 million.
- Financing activities provided $21.0 million, including a $21.9 million increase in demand, NOW and savings deposits, partly offset by a $2.4 million reduction in time deposits.
- Cash and cash equivalents decreased $1.2 million during the quarter to $51.8 million.
- The Bank had $119.3 million of unused Federal Home Loan Bank borrowing capacity at March 31, 2022.
- Certificates of deposit maturing within one year totaled $139.6 million, or 23.6% of deposits. Management expected to retain a significant portion but identified potential reliance on brokered deposits or additional borrowings if deposit runoff occurs.
- Off-balance-sheet commitments totaled $137.4 million, consisting of $55.5 million of commitments to originate loans, $46.1 million of unused lines of credit, $35.8 million of unadvanced construction loans, and $13,000 of letters of credit.
- The Bank was categorized as well capitalized. At March 31, 2022, total risk-based capital was 18.05%, common equity Tier 1 capital was 17.05%, and Tier 1 leverage was 11.78%.
Material Changes Versus Comparable Period
- Average interest-earning assets increased $56.2 million to $642.3 million, while the average loan portfolio increased $46.9 million to $527.1 million.
- Loan yields declined to 4.05% from 4.36%, but lower funding costs and higher asset balances increased the interest-rate spread to 2.96% from 2.81% and the net interest margin to 3.08% from 3.00%.
- Loan growth was concentrated in one- to four-family residential, multi-family, and commercial real estate loans. Total loans increased to $539.5 million from $521.8 million at December 31, 2021.
- Nonperforming credit exposure remained limited: total past-due loans were $780,000 and nonaccrual loans were $740,000 at March 31, 2022, compared with $1.0 million and $982,000, respectively, at December 31, 2021.
- There were no charge-offs, recoveries, new troubled debt restructurings, or loans still subject to COVID-19-related modification agreements during the quarter.
- Noninterest expense rose primarily because of additional employees, salary increases, professional fees, and other expenses. The quarter included a $341,000 benefit related to the planned withdrawal from the multi-employer defined benefit pension plan; the final withdrawal liability was subsequently set at $1.4 million, with an additional $241,000 benefit recorded in May 2022.
Outlook, Commentary, Risks and Unusual Items
- Management stated that it expected sufficient liquidity to meet current funding commitments and anticipated retaining a significant portion of maturing time deposits.
- The mutual-to-stock conversion and related subscription offering remained subject to regulatory approvals and other completion conditions. Offering costs were approximately $792,000 at March 31, 2022; if the conversion is not completed, deferred costs would be charged to operations.
- The planned charitable foundation is to receive $600,000 in cash and 260,000 shares of holding-company common stock, with an aggregate stated value of $3.2 million.
- The Bank intends to adopt the current expected credit loss standard, ASU 2016-13, on January 1, 2023. Management was assessing data and model requirements and expected to conduct a parallel run beginning in the second half of 2022. The filing does not provide a quantified expected adoption impact.
- Management identified risks related to credit quality, real estate values, deposit retention and funding costs, interest-rate changes, loan demand, competition, inflation, COVID-19 conditions, securities markets, regulation, technology, cybersecurity, third-party providers, employee retention, geopolitical conditions, and operational and market risk.
- Held-to-maturity securities had $3.7 million of aggregate unrealized losses at March 31, 2022, compared with $634,000 at December 31, 2021. Management attributed the losses to market interest-rate changes and concluded they were not other-than-temporary because the Bank intended and was able to hold the securities to maturity.
- Management reported that disclosure controls and procedures were effective and that no material changes occurred in internal control over financial reporting during the quarter.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
Important Facts to Verify
- Confirm completion of the mutual-to-stock conversion, remaining regulatory approvals, offering size and proceeds, and the date ECB Bancorp became the Bank’s holding company.
- Verify the effect of the conversion offering, charitable foundation funding, offering costs, and any resulting changes in shares outstanding and regulatory capital.
- Monitor deposit retention, the $139.6 million of certificates of deposit maturing within one year, brokered deposits of $19.9 million, and available borrowing capacity.
- Assess whether loan growth, particularly in residential, multi-family, commercial real estate, and construction lending, changes credit risk or requires higher provisions.
- Track the adoption of CECL in 2023, including the model, data assumptions, and cumulative-effect adjustment.
- Verify the final pension withdrawal accounting and the May 2022 $241,000 benefit in subsequent financial statements.
- Evaluate the sensitivity of net interest margin and securities valuations to rising interest rates and changes in funding costs.