NorthEast Community Bancorp, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020. Unless otherwise noted, amounts below are in millions of dollars. The operating results are consolidated for NorthEast Community Bank and related entities. The newly incorporated holding company was not yet an operating company and had not issued shares; the filing reports 12.195 million shares outstanding at March 31 for the existing company.
Financial performance and position
| Metric | Q1 2021 | Comparable / prior date |
|---|---|---|
| Interest income | $11.820 | $12.679 in Q1 2020 |
| Net interest income | $10.355 | $9.451 in Q1 2020 |
| Net interest margin | 4.59% | 4.44% in Q1 2020 |
| Provision for loan losses | $0.017 | $0.014 in Q1 2020 |
| Non-interest income | $0.443 | $0.882 in Q1 2020 |
| Non-interest expense | $6.554 | $6.068 in Q1 2020 |
| Net income | $3.245 | $3.256 in Q1 2020 |
| Diluted earnings per share | $0.27 | $0.27 in Q1 2020 |
| Operating cash flow | $4.598 | $3.808 in Q1 2020 |
- Net interest income rose 9.6%, as the 54.6% reduction in interest expense more than offset lower interest income. Average interest-bearing liability cost fell to 1.02% from 2.06%; average earning-asset yield declined to 5.24% from 5.95%.
- Net income was nearly unchanged. Lower non-interest income and higher expenses offset stronger net interest income and slightly lower income-tax expense.
- At March 31, total assets were $965.1, down 0.3% from year-end; net loans were $830.9, up 1.4%. Construction loans rose $17.5 to $563.2 and represented the largest loan category.
- Deposits were $765.0, down 0.9%; FHLB advances remained $28.0. Stockholders’ equity increased 2.1% to $157.0. Cash and cash equivalents were $55.9, down from $69.2.
- Cash declined $13.3 during the quarter, compared with an $84.5 decline in Q1 2020. Investing activities used $11.3, principally reflecting loan growth; financing activities used $6.6, principally reflecting lower deposits.
- The allowance for loan losses was $5.1, or 0.61% of loans. Non-performing loans were $3.6 (0.43% of loans); non-performing assets were $5.6 (0.58% of assets). The Bank reported regulatory capital ratios above well-capitalized thresholds, including total risk-based capital of 14.04%.
Material changes and notable items
- Non-interest income fell by $0.439, mainly reflecting a $0.155 unrealized loss on equity securities versus a $0.206 gain a year earlier, and the absence of a $0.125 gain on a foreclosure-related loan sale recorded in Q1 2020.
- Non-interest expense increased $0.486, led by higher salaries and benefits ($0.380), occupancy ($0.095), and data processing ($0.062). Management attributed cost increases in part to COVID-related employee bonuses, office cleaning, and expanded remote-work and technology needs.
- Loan growth was funded amid a $6.7 decline in deposits and a $13.3 reduction in cash. Certificates of deposit declined $22.9 from year-end; non-interest-bearing demand deposits increased.
- The company granted COVID-related deferrals on 194 loans totaling $182.0 when deferrals were requested during 2020 and Q1 2021. Two loans totaling $1.2 remained in deferral at March 31. A separate $8.5 apartment loan deferral request was received in April and approved effective May 1, after the reporting date.
Outlook, risks and contingencies
- No numerical earnings or growth guidance is provided. Management said COVID-related disruption could adversely affect 2021 results, financial position, liquidity, and regulatory capital if it continues; its full impact could not be quantified.
- Credit risks include potential deterioration in construction, commercial and industrial, multifamily, mixed-use, and other commercial real-estate borrowers. The allowance is based on estimates and may need adjustment as economic conditions or borrower performance change.
- One $3.6 non-residential real-estate loan was on nonaccrual and in foreclosure, subject to Connecticut’s foreclosure moratorium. The property is subject to a parking easement, and updated appraisals were ordered. The Bank also held one foreclosed Pennsylvania office property valued at $2.0; further property-value declines could result in impairment.
- At March 31, unfunded construction commitments were $329.0, commitments to originate loans were $253.3, unused lines of credit were $107.6, and standby letters of credit were $7.0. CDs of $189.5 were scheduled to mature within one year. Available FHLB borrowing capacity was $45.8, in addition to an $8.0 ACBB facility.
- Average liquidity ratios for Q1 were 6.8% cash liquidity, 9.0% on-balance-sheet liquidity, and 16.3% including borrowing capacity, against stated targets of 2.0%, 8.0%, and 20.0%. Management noted that ratios can fall below thresholds at times as it manages interest-rate risk.
- The filing’s interest-rate simulation estimates one-year net interest income increases of 12.77% and 25.86% under +100 and +200 basis-point shocks, and a 4.47% decrease under a -100 basis-point shock. Actual results may differ; the analysis relies on assumptions about prepayments, deposit behavior, and a static balance sheet.
- The company had elected to defer CECL adoption until January 1, 2023; the eventual effect was undetermined and could be material. Management was also evaluating LIBOR/reference-rate transition impacts.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Routine legal claims were not expected to have a material adverse effect; risk factors were reported as not materially changed from the May 2021 prospectus.
Important facts for investors to verify
- Confirm the reporting-entity and share-count context: the filing describes a new holding company with no shares issued as of June 28, 2021, while consolidated March 31 statements report 12.195 million shares outstanding for the existing company.
- Reconcile apparent filing inconsistencies: MD&A says total assets increased, although the balance sheet shows a decrease from $968.2 to $965.1; MD&A also cites held-to-maturity securities of $3.9 at March 31, while the balance sheet reports $6.939.
- Monitor performance and collateral outcomes for the nonaccrual foreclosure loan, the foreclosed property, and COVID-related loan deferrals, including the later-approved apartment-loan deferral.
- Assess whether deposit retention, near-term CD maturities, substantial loan commitments, and liquidity below the stated 20% combined target remain manageable.
- Review the assumptions and interpretation of the rate-shock simulation alongside actual margin and funding-cost trends.