Northeast Community Bancorp, Inc. quarterly report, Q3 FY2023

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NorthEast Community Bancorp, Inc. — Q3 2023 Form 10-Q

Reporting period: Three and nine months ended September 30, 2023; balance-sheet comparisons are against December 31, 2022. Amounts below are in U.S. dollars. The company operates NorthEast Community Bank, a New York-chartered community bank focused mainly on construction lending, alongside multifamily, commercial and industrial, and other real-estate lending.

Financial performance and position

  • Q3 earnings: Net income was $11.8 million, up 57.0% from $7.5 million a year earlier. Diluted EPS was $0.80, versus $0.49.
  • Year-to-date earnings: Net income was $34.2 million, up 106.1% from $16.6 million. Diluted EPS was $2.41, versus $1.07.
  • Net interest income and margin: Q3 net interest income rose 43.9% to $25.1 million; net interest margin was 6.40%, compared with 5.88%. For the first nine months, net interest income rose 67.7% to $72.0 million and net interest margin was 6.54%, compared with 4.85%.
  • Interest-rate and funding costs: Q3 interest income increased 81.3% to $35.1 million, while interest expense increased 420.2% to $10.0 million. The average cost of interest-bearing liabilities rose to 3.86% from 1.23% in Q3 2022. Management attributed higher income principally to loan growth and higher asset yields, and higher expense to deposit repricing and a shift toward certificates of deposit.
  • Other income and expenses: Q3 non-interest income was $221,000, down from $309,000; non-interest expense rose 14.0% to $8.9 million. Nine-month non-interest income rose to $2.4 million from $904,000, helped by smaller unrealized equity-security losses and BOLI death-claim proceeds. Nine-month non-interest expense increased 17.8% to $26.0 million, including higher salaries, regulatory assessments and data-processing costs.
  • Assets and lending: Total assets rose 20.7% to $1.720 billion. Net loans increased 24.0% to $1.503 billion. Construction loans were $1.169 billion, about 78% of total loans, representing significant portfolio concentration.
  • Deposits and borrowings: Deposits rose 21.7% to $1.366 billion, including a $364.3 million increase in certificates of deposit; non-interest-bearing deposits fell $67.1 million. Borrowings were $64.0 million, including $50.0 million from the Federal Reserve Bank of New York (FRBNY) at 5.5%, maturing December 22, 2023, and $14.0 million of FHLB advances.
  • Liquidity and capital: Cash and cash equivalents were $106.7 million. The bank reported $739.4 million of available FRBNY borrowing capacity and $31.3 million of available FHLB capacity. Average liquidity ratios for the first nine months were 7.1% cash liquidity, 10.2% on-balance-sheet liquidity, and 19.4% including borrowing capacity; company targets are 2.0%, 8.0%, and 20.0%, respectively. The Bank remained classified as well capitalized; its September 30 total risk-based capital ratio was 13.50% and leverage ratio was 14.70%. Stockholders’ equity was $272.4 million.
  • Cash flows, first nine months: Operating activities provided $30.9 million; investing activities used $280.1 million, primarily reflecting $319.0 million of net loan growth; financing activities provided $260.6 million, including $243.7 million of deposit growth and $50.0 million of FRBNY borrowing. Cash and cash equivalents increased $11.4 million to $106.7 million.

Material changes and credit quality

  • Effective January 1, 2023, the company adopted CECL. The transition reduced retained earnings by $99,000 net of tax; it reduced the loan allowance by $1.6 million while establishing allowances for held-to-maturity securities and off-balance-sheet exposures.
  • At September 30, the loan allowance was $4.8 million, or 0.32% of loans, versus $5.5 million, or 0.45%, at year-end 2022. The company also reported a $1.2 million allowance for off-balance-sheet commitments and a $131,000 allowance for held-to-maturity securities.
  • Nonperforming assets were $5.8 million, compared with $1.5 million at year-end. Two non-accrual construction loans totaling $4.4 million were secured by the same Bronx project; no interest income was recognized on them. There were no non-accrual loans at December 31, 2022.
  • Held-to-maturity securities had a $3.7 million gross unrealized loss and a fair value of $11.9 million against $15.7 million amortized cost. Management attributed the losses mainly to interest-rate volatility and stated it had the ability and intent to hold the securities until recovery.

Outlook, risks and unusual items

  • The filing provides no specific earnings, growth, margin or other forward guidance. Management says liquidity is monitored and describes interest-rate exposure as within policy limits; its modeled one-year net interest income rises 7.40% to 14.72% in rising-rate scenarios and falls 8.81% to 17.86% in declining-rate scenarios. These are model estimates, not forecasts.
  • Key disclosed risks include changing interest rates and net interest margins, deposit competition and retention, real-estate values, loan demand and credit quality, economic conditions, regulatory changes, and operational or cybersecurity disruptions. Management cautions that credit-loss estimates are judgmental and future provisions could materially affect results.
  • At September 30, certificates of deposit totaling $588.3 million were scheduled to mature within one year. Unfunded construction and multifamily loan commitments were $464.1 million; commitments to originate loans were $123.9 million; lines of credit were $110.0 million; standby letters of credit were $10.3 million.
  • The company repurchased 555,324 shares in Q3 under a program authorized for up to 10% of outstanding shares. BOLI death claims totaling $1.8 million contributed to nine-month BOLI income. Management says ordinary-course legal matters are not expected to have a material adverse effect and that risk factors were not materially changed from prior filings.

Important facts for investors to verify

  • Credit condition and collateral/project developments for the two non-accrual Bronx construction loans, as well as the broader construction-loan concentration.
  • Deposit retention, certificate-of-deposit renewal pricing, and funding needs given near-term maturities and the size of unfunded loan commitments.
  • Interest-rate sensitivity assumptions and the effect of deposit-cost increases on future net interest margins.
  • The fair-value gap in held-to-maturity securities and management’s ability and intent to hold them through recovery.
  • Reconciliation of stock-repurchase disclosures: the cash-flow statement reports $23.4 million of repurchases for the nine months, while MD&A cites $21.8 million.