Princeton Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2023. Princeton Bancorp became the holding company for The Bank of Princeton on January 10, 2023; prior-period information relates to the Bank. On May 19, 2023, the Company acquired and merged Noah Bank, expanding its presence in the Philadelphia, North New Jersey and New York City markets. The Bank operates 30 branches and provides commercial, residential and consumer lending and deposit services.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net income | $6.8 million vs. $6.3 million | $12.9 million vs. $12.3 million |
| Diluted EPS | $1.07 vs. $0.98 | $2.02 vs. $1.89 |
| Net interest income | $15.7 million vs. $16.3 million | $32.3 million vs. $32.1 million |
| Net interest margin | 3.95% vs. 4.19% | 4.25% vs. 4.14% |
| Provision for credit losses | $2.5 million vs. none | $2.7 million vs. none |
| Non-interest income | $11.6 million vs. $1.1 million | $12.9 million vs. $2.2 million |
| Non-interest expense | $17.8 million vs. $9.4 million | $27.6 million vs. $18.7 million |
| Effective tax rate | 2.3% vs. 20.6% | 13.8% vs. 20.9% |
Revenue was primarily interest-based. Loan interest income increased with higher average balances and yields, but deposit repricing significantly increased interest expense. The six-month net interest margin improved, while the second-quarter margin declined year over year.
- Total assets were $1.843 billion at June 30, 2023, up 15.1% from $1.602 billion at December 31, 2022, primarily from the Noah acquisition.
- Net loans were $1.482 billion, up 9.4% from $1.354 billion. Commercial real estate loans were $1.023 billion, construction loans $383.6 million and commercial and industrial loans $46.0 million.
- Total deposits were $1.573 billion, up 16.7% from $1.348 billion. The increase included $191.7 million of deposits assumed from Noah Bank.
- Cash and cash equivalents were $143.0 million, compared with $53.4 million at year-end.
- The Company had no borrowings at June 30, 2023, compared with $10.0 million at year-end.
- Stockholders’ equity was $228.9 million, and equity represented 12.4% of total assets versus 13.7% at December 31, 2022.
- Six-month cash flow from operating activities was $12.8 million. Investing activities provided $56.8 million, including a $56.1 million net decrease in loans and acquisition-related cash flows. Financing activities provided $20.0 million, principally from a $33.5 million net increase in deposits, partly offset by debt repayment and dividends.
Material changes versus prior comparable periods
- Second-quarter net income increased 7.3%, while six-month net income increased 4.3%.
- Second-quarter net interest income decreased $626,000 as deposit costs rose faster than asset yields. Interest expense on deposits increased $6.2 million year over year.
- The Noah transaction produced a $9.7 million non-taxable bargain purchase gain and $7.0 million of acquisition-related expenses. These items materially affected non-interest income, expenses and the effective tax rate.
- Credit costs increased following adoption of CECL on January 1, 2023, the Noah acquisition and loan charge-offs. The allowance for loan losses was $18.0 million, or 1.20% of period-end loans, at June 30.
- Net charge-offs were $1.8 million in both the quarter and six-month period, compared with net recoveries in the comparable 2022 periods.
- Non-performing assets increased to $9.8 million from approximately $0.3 million at year-end, including a $4.5 million commercial real estate loan, $2.9 million of construction loans and $2.5 million of acquired non-performing loans.
- Available-for-sale securities increased to $87.2 million, but carried $11.9 million of unrealized losses, primarily attributed to interest-rate changes rather than credit concerns.
Outlook, commentary, risks and unusual items
The filing provides no formal earnings or financial guidance. Management states that current funding sources are adequate for current cash-flow needs. At June 30, the Company reported $181.4 million of available FHLB borrowing capacity and $10.0 million of available short-term capacity with ACBB; no ACBB amounts were outstanding.
- Management identified inflation, higher interest rates, potential recession, deposit outflows, reduced loan originations, liquidity management, real estate conditions, credit risk, regulatory changes and acquisition integration as key risks.
- The Federal Reserve’s rate increases have raised funding costs and may pressure future net interest income and borrowers’ ability to service adjustable-rate loans.
- The Company had a large concentration in commercial real estate and construction lending; investors should monitor delinquencies, collateral values and non-performing assets.
- Goodwill of $8.9 million was tested quantitatively at May 31, 2023 and was not impaired, although the filing notes that the stock traded at 68.0% of book value and return on assets had declined.
- Acquisition fair-value estimates for Noah Bank remain subject to adjustment for up to one year after closing, which could change the recorded bargain purchase gain.
- A $0.30 per-share dividend was declared on July 20, 2023, payable August 31, 2023 to shareholders of record August 9, 2023.
- Management stated that disclosure controls were effective, there were no material changes in internal control over financial reporting, and no legal proceedings were reported.
Important facts for investors to verify
- Reconcile reported earnings excluding the $9.7 million bargain purchase gain and $7.0 million acquisition-related expenses.
- Review Noah Bank integration progress, final purchase accounting adjustments and realization of expected strategic or cost benefits.
- Track deposit pricing, deposit mix, uninsured deposits of approximately $393.9 million and the effect on funding costs.
- Assess commercial real estate and construction exposure, the $9.8 million of non-performing assets and future charge-offs.
- Evaluate the $11.9 million unrealized securities loss, accumulated other comprehensive loss of $8.5 million and potential effects of interest-rate movements.
- Confirm liquidity availability, borrowing capacity and regulatory capital; management reported the Bank as well capitalized, with a 14.604% total risk-based capital ratio and 13.426% Tier 1 leverage ratio at June 30, 2023.