NorthEast Community Bancorp, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. The community banking company reported unaudited results for the three months ended March 31, 2023, compared with the three months ended March 31, 2022. Its primary business is community banking, with lending concentrated in construction loans, alongside commercial and industrial and multifamily lending.
Financial performance and position
- Profit and income: Net income was $11.2 million, up 208.5% from $3.6 million. Basic and diluted earnings per share were $0.77, versus basic EPS of $0.23 in Q1 2022. Interest income rose to $28.5 million from $13.3 million; net interest income increased 91.5% to $22.8 million. Net interest margin was 6.63%, versus 4.08%.
- Interest rates and costs: Average yield on interest-earning assets increased to 8.28% from 4.54%, while the cost of interest-bearing liabilities rose to 2.74% from 0.85%. Interest expense increased to $5.7 million from $1.3 million.
- Other income and expenses: Non-interest income was $1.1 million, versus $58,000, including a $225,000 unrealized gain on equity securities compared with a $634,000 loss a year earlier. Non-interest expense rose 13.4% to $8.2 million, including higher salaries and employee benefits, partly reflecting stock-based compensation and staffing and branch expansion. Income tax expense was $4.5 million; the effective tax rate was 28.7%, versus 23.5%.
- Assets and lending: Total assets were $1.503 billion at March 31, up 5.5% from year-end. Net loans increased 8.1% to $1.311 billion. Construction loans were $1.009 billion of $1.315 billion in total loans. Q1 loan originations were $214.7 million, including $176.4 million of construction loans; the filing says about 31.5% of those construction-loan funds were disbursed at closing.
- Deposits, liquidity and debt: Deposits increased 7.7% to $1.208 billion. Interest-bearing deposits rose while non-interest-bearing deposits declined 12.2% to $330.6 million. Cash and cash equivalents fell to $77.0 million from $95.3 million. FHLB advances decreased to $14.0 million from $21.0 million; no ACBB borrowings were outstanding. The company reported $35.5 million of available FHLB borrowing capacity, net of outstanding advances, and an additional $8.0 million ACBB facility.
- Cash flow and capital: Operating activities provided $10.9 million; investing activities used $98.5 million, primarily reflecting loan growth; financing activities provided $69.3 million, including $86.4 million of net deposit growth. The bank’s total risk-based capital ratio was 14.11%, and its leverage ratio was 16.21%; it met applicable requirements and was categorized as well capitalized.
- Credit quality: There were no non-accrual, non-performing, or past-due loans at March 31. Non-performing assets of $1.456 million consisted of one foreclosed property. The loan allowance was $4.066 million, or 0.31% of loans. CECL adoption also resulted in a $1.386 million allowance for off-balance-sheet exposures and a $136,000 allowance for held-to-maturity securities.
Material changes versus the prior period
- Profit and net interest income grew substantially, driven by higher loan balances and asset yields; higher deposit costs partly offset the increase.
- Loans grew rapidly, especially construction lending. Deposits increased, but the mix shifted: interest-bearing deposits rose as non-interest-bearing deposits declined.
- Cash decreased amid loan funding, repayment of FHLB advances, and $10.5 million of stock repurchases. The company repurchased 723,626 shares during the quarter.
- Effective January 1, 2023, the company adopted CECL. The transition reduced retained earnings by $99,000 net of tax and reallocated reserves across loans, securities, and off-balance-sheet commitments; prior-year figures were not restated.
Outlook, risks and unusual items
- The filing provides no specific earnings or growth guidance. Management described liquidity as adequate and interest-rate risk as within policy limits.
- Management disclosed $578.5 million of unfunded construction-loan commitments, $132.1 million of unfunded lines of credit, $115.2 million of commitments to originate loans, and $10.6 million of standby letters of credit. Certificates of deposit totaling $376.3 million were scheduled to mature within one year; retention is not assured.
- The company reported $112.0 million of available liquidity, including $77.0 million in cash, and said this was sufficient to cover uninsured deposits. It cautioned that significant deposit outflows could harm financial results and could result in the Bank’s closure. It also noted potential higher FDIC assessments and possible tighter capital or liquidity rules following bank failures.
- Interest-rate simulations estimated one-year net interest income increases of 9.06% to 18.09% under +100 to +200 basis-point shocks, and decreases of 9.83% to 19.44% under −100 to −200 basis-point shocks. These are model estimates based on assumptions, not forecasts.
- Two restructured loans totaling $855,000 were sold in January 2023 at an $86,000 loss. The filing reports no new borrower modifications in the quarter. Management said ordinary-course legal matters were not expected to have a material adverse impact.
Important facts for investors to verify
- Whether rapid construction-loan growth and the portfolio’s concentration remain consistent with underwriting standards and borrower repayment capacity.
- Deposit retention, uninsured-deposit exposure, liquidity availability, and the cost of renewing certificates of deposit.
- How deposit pricing and asset repricing affect net interest margin as rates and competition change; review the assumptions behind the interest-rate simulations.
- Whether CECL allowances adequately reflect loan, securities, and unfunded-commitment risks, and how the new methodology affects comparisons with earlier periods.
- The financial impact of stock repurchases, remaining repurchase authorization, and potential FDIC assessments or regulatory changes.