Business context and reporting period
NorthEast Community Bancorp, Inc. is the holding company for a New York-chartered community bank operating in New York and Massachusetts. Its lending is primarily construction loans, with additional commercial and industrial, multifamily, mixed-use and other real estate lending. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022.
Financial results and position
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $31.7 | $14.8 | $60.2 | $28.1 |
| Net interest income | $24.0 | $13.5 | $46.9 | $25.5 |
| Provision for credit losses | $0.6 | $0 | $0.6 | $0 |
| Non-interest income | $1.0 | $0.5 | $2.1 | $0.6 |
| Non-interest expense | $8.9 | $7.0 | $17.1 | $14.2 |
| Net income | $11.1 | $5.4 | $22.3 | $9.0 |
| Diluted earnings per share | $0.75 | $0.35 | $1.56 | $0.58 |
| Net interest margin | 6.60% | 4.58% | 6.62% | 4.33% |
- At June 30, total assets were $1.616 billion, up 13.4% from year-end; net loans were $1.387 billion, up 14.5%. Construction loans were $1.099 billion, about 79% of total loans.
- Deposits were $1.316 billion, up $193.9 million since year-end. Interest-bearing deposits rose to $986.6 million, while non-interest-bearing deposits fell to $329.2 million. The increase was driven largely by certificates of deposit.
- Cash and cash equivalents were $119.9 million. Federal Home Loan Bank advances were $14.0 million, down $7.0 million from year-end; the company also reported $8.0 million of available ACBB borrowing capacity. Stockholders’ equity was $269.6 million.
- For the six months, operating cash flow was $17.9 million, investing cash outflow was $163.7 million, and financing cash inflow was $170.3 million; cash and cash equivalents increased $24.6 million.
- The Bank’s total capital ratio was 13.99% and its leverage ratio was 15.75% at June 30. The Bank met regulatory capital requirements and was classified as well capitalized.
Material changes versus comparable periods
- Q2 net income increased 105.6% year over year; six-month net income increased 147.1%. Higher loan balances and yields drove interest income growth, while higher deposit costs substantially increased interest expense.
- Q2 interest-earning asset yield rose to 8.72% from 5.02%; the cost of interest-bearing liabilities rose to 3.32% from 0.84%. Management attributed the changes to loan growth and rising market rates. Net interest margin expanded in both the quarter and six-month comparison.
- Non-interest expense rose 26.7% in Q2 and 20.0% for the six-month period, mainly reflecting higher staffing and employee benefits, equity-award expense, branch and data-processing costs, and advertising.
- Non-interest income benefited from approximately $404,000 of additional bank-owned life insurance income associated with two death claims. Six-month results also improved against the prior-year unrealized equity-securities loss.
- Deposits grew, but their mix shifted toward higher-cost certificates of deposit. Certificates scheduled to mature within one year totaled $466.3 million at June 30.
Outlook, risks, contingencies and unusual items
- The filing gives no specific earnings, growth, margin or other financial guidance. Management describes liquidity and interest-rate risk as within policy limits, while cautioning that actual outcomes can differ from simulation assumptions.
- Credit quality warrants attention: non-accrual loans were $4.353 million at June 30, all construction loans, versus none at year-end. Two loans totaling $4.4 million were secured by the same Bronx project. Three other construction loans totaling $10.6 million were sold in July 2023 at a $159,000 loss, charged against the allowance. No interest income was recognized on non-accrual loans in the period.
- The loan allowance was $4.4 million, or 0.32% of loans; additional allowances were $1.5 million for off-balance-sheet commitments and $135,000 for held-to-maturity securities. Management notes that estimates may change with economic conditions and regulatory review. Construction-related commitments include $513.7 million of unfunded construction loans and $164.2 million of outstanding commitments to originate loans.
- CECL was adopted January 1, 2023, reducing retained earnings by $99,000 net of tax. The adoption changed the loan allowance and established allowances for held-to-maturity securities and off-balance-sheet exposures.
- Held-to-maturity securities had a fair value of $12.8 million against $15.9 million amortized cost. Management attributed unrealized losses primarily to interest-rate volatility and stated it had the ability and intent to hold the securities until recovery.
- The company’s liquidity ratios averaged 7.2% for cash liquidity, 10.6% for on-balance-sheet liquidity, and 13.8% including borrowing capacity during the six months. Its stated targets are 2%, 8%, and 20%, respectively; the last measure was below target. Management says significant nonrenewal of maturing deposits could require alternative funding or lower liquid assets.
- The Board authorized a repurchase program of up to 1,509,218 shares, or 10% of outstanding shares, beginning May 30. The company repurchased 55,241 shares under the program during Q2. The six-month cash-flow statement reports $14.4 million of total stock repurchases.
- Management cites sensitivity to interest rates, inflation, competition, real estate values, loan and deposit demand, and regulatory or economic changes. It reports no material change in risk factors from prior filings. Routine legal claims are not expected by management to materially affect financial condition.
Important facts for investors to verify
- Construction-loan concentration, borrower/project exposures, the status and collateral of the two Bronx non-accrual loans, and the outcome of the July loan sale.
- Deposit retention and repricing, especially the $466.3 million of certificates maturing within one year, and the effect of funding costs on net interest margin.
- Unfunded construction and other loan commitments, available borrowing capacity, and liquidity performance relative to the company’s stated targets.
- The adequacy and assumptions underlying the CECL allowances, including those for loans and off-balance-sheet commitments, as credit conditions evolve.
- The sustainability of earnings growth, including the contribution from rising rates, loan growth, and the nonrecurring BOLI death-claim income.
- Execution and remaining authorization under the new share-repurchase program, alongside capital and liquidity needs.