Business Context and Reporting Period
ECB Bancorp, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The Company was formed on March 7, 2022 as the proposed holding company for Everett Co-operative Bank in connection with a mutual-to-stock conversion. As of June 30, 2022, ECB Bancorp had no assets, liabilities, or operating activity other than organizational activity; the reported financial statements principally represent the Bank and its subsidiary.
The mutual-to-stock conversion and related stock offering were completed on July 27, 2022, after the reporting period.
Financial Highlights
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|---|---|---|---|
| Total interest and dividend income | $6.1 million | $5.6 million | $11.7 million | $11.0 million |
| Net interest and dividend income | $5.4 million | $4.6 million | $10.3 million | $9.0 million |
| Provision for loan losses | $754,000 | $90,000 | $875,000 | $180,000 |
| Noninterest income | $690,000 | $263,000 | $941,000 | $554,000 |
| Noninterest expense | $3.6 million | $2.9 million | $6.8 million | $5.6 million |
| Net income | $1.4 million | $1.4 million | $2.8 million | $2.7 million |
| Net interest margin | 3.12% | 3.06% | 3.10% | 3.03% |
At June 30, 2022, total assets were $782.0 million, up 17.3% from December 31, 2021. Net loans were $624.0 million, up 20.7%, while total deposits were $663.4 million, up 16.0%. Total equity was $80.0 million, compared with $77.3 million at year-end 2021.
Cash and cash equivalents were $55.0 million at June 30, 2022, compared with $53.0 million at December 31, 2021. Federal Home Loan Bank advances increased to $30.5 million from $9.0 million. The Bank reported unused borrowing capacity of $118.1 million with the Federal Home Loan Bank and $10.0 million with Atlantic Community Bankers Bank.
Six-month operating cash flow was $1.6 million, compared with $4.0 million in the prior-year period. Investing activities used $112.8 million, primarily because net loan originations and principal collections used $107.6 million. Financing activities provided $113.2 million, principally from deposit growth and increased short-term Federal Home Loan Bank advances.
Material Changes Versus Prior Comparable Period
- Second-quarter net income was substantially stable at $1.4 million. Six-month net income increased 2.7% to $2.8 million.
- Net interest income increased 16.2% in the second quarter and 14.8% for the six-month period, supported by loan growth and lower deposit funding costs.
- The net interest margin increased to 3.12% in the quarter and 3.10% for the six months, despite lower loan and interest-earning asset yields.
- The provision for loan losses increased materially, primarily due to loan portfolio growth. The allowance for loan losses increased to $5.1 million from $4.2 million at December 31, 2021.
- Noninterest income benefited from a $440,000 gain on bank-owned life insurance death benefits. The gain was unusual and non-taxable, contributing to lower effective tax rates of 18.9% for the quarter and 22.8% for the six months.
- Noninterest expense increased 25.4% in the quarter and 19.7% for the six months, driven primarily by additional employees, compensation increases, professional fees, and a $166,000 survivor benefit plan expense.
- Loan growth was concentrated in multifamily, one- to four-family residential, commercial real estate, and construction lending. Multifamily loans increased 79.2% from year-end 2021 to $106.7 million.
- Core deposits, excluding $75.5 million of offering-related subscription funds, increased 5.2% from year-end 2021. Certificates of deposit totaling $138.6 million were scheduled to mature within one year of June 30, 2022.
Conversion, Offering, Outlook, and Risks
The July 27, 2022 stock offering generated gross proceeds of $89.2 million from the sale of 8,915,247 shares at $10 per share. Net proceeds were approximately $86.6 million after offering expenses. Approximately $50.0 million was contributed to the Bank, $7.3 million funded a loan to the employee stock ownership plan, $600,000 plus 260,000 shares were contributed to the charitable foundation, and approximately $29.3 million was retained by the Company and deposited with the Bank. Management expects the proceeds to support liquidity, capital, and future loan growth.
Management expects increased staffing and strategic growth initiatives to continue raising compensation and benefits expense. The filing does not provide formal earnings or revenue guidance.
The Bank was categorized as well capitalized at June 30, 2022. Actual regulatory ratios included total risk-based capital of 14.41%, common equity Tier 1 capital of 13.50%, and Tier 1 leverage capital of 11.20%.
- Interest-rate changes could reduce margins, loan yields, mortgage banking revenue, securities values, or loan demand, and could increase deposit and borrowing costs.
- Loan growth increases credit exposure, particularly in real estate and construction lending. At June 30, 2022, $723,000 of loans were on nonaccrual status, and $1.2 million were past due.
- Deposit retention and funding costs are risks, particularly for certificates of deposit maturing within one year and the Bank’s reliance on Federal Home Loan Bank advances.
- The Bank had $161.2 million of off-balance-sheet commitments, including $54.5 million of commitments to originate loans, $52.8 million of unused lines of credit, and $53.9 million of unadvanced construction loans.
- The Bank plans to adopt the current expected credit loss standard on January 1, 2023. The filing does not provide a clear estimate of the adoption impact.
- Other cited risks include real estate market conditions, competition, inflation, regulatory changes, cybersecurity, third-party service providers, employee retention, geopolitical conditions, and broader economic effects of COVID-19.
Important Facts for Investors to Verify
- Verify the post-quarter conversion, offering close, final offering costs, net proceeds, and allocation of proceeds.
- Assess whether rapid loan growth, especially in multifamily and construction lending, is accompanied by adequate credit quality and allowance coverage.
- Monitor the effect of rising interest rates on deposit pricing, Federal Home Loan Bank borrowing, net interest margin, securities valuations, and liquidity.
- Review the retention and repricing of the $138.6 million of certificates of deposit maturing within one year.
- Separate recurring earnings from the $440,000 bank-owned life insurance death-benefit gain and the defined-benefit-plan withdrawal benefit.
- Evaluate the effect of the January 1, 2023 expected-credit-loss adoption on equity, earnings, and regulatory capital.
- Confirm the fulfillment and funding requirements associated with the $161.2 million of off-balance-sheet commitments.