ECB Bancorp, Inc. — Form 10-K Summary
Business context and reporting period
Annual report for the year ended December 31, 2022, covering ECB Bancorp and its wholly owned subsidiary, Everett Co-operative Bank. ECB Bancorp was formed in March 2022 and became the Bank’s holding company upon completion of the mutual-to-stock conversion and initial public offering on July 27, 2022. The Company operates two full-service offices in Everett and Lynnfield, Massachusetts, serving the greater Boston market.
The Bank primarily gathers deposits and invests in residential, multifamily and commercial real estate, construction and land loans, home-equity loans, securities and other interest-earning assets.
Financial performance and condition
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total assets | $1.064 billion | $666.5 million | Up 59.7% |
| Net interest and dividend income | $23.6 million | $18.7 million | Up 26.4% |
| Provision for loan losses | $2.9 million | $0.4 million | Up $2.6 million |
| Net income | $2.7 million | $4.0 million | Down 32.7% |
| Basic and diluted EPS | $0.32 | Not applicable | Company had no shares outstanding in 2021 |
| Net interest margin | 3.10% | 3.08% | Up 2 basis points |
| Interest-rate spread | 2.87% | 2.90% | Down 3 basis points |
| Cash and cash equivalents | $62.1 million | $53.0 million | Up 17.1% |
| Total loans, net | $885.7 million | $517.1 million | Up 71.3% |
| Total deposits | $718.1 million | $571.8 million | Up 25.6% |
| FHLB advances | $174.0 million | $9.0 million | Up $165.0 million |
| Shareholders’ equity | $162.7 million | $77.3 million | Up 110.6% |
Interest and dividend income increased to $29.1 million from $22.4 million, while interest expense increased to $5.5 million from $3.7 million. Noninterest income was $1.4 million, including $828,000 from bank-owned life insurance and $84,000 of loan-sale gains. Noninterest expense increased to $18.6 million from $14.1 million, primarily because of a $3.2 million contribution to the Everett Co-operative Bank Charitable Foundation and higher professional and operating costs associated with becoming public and executing the growth strategy.
Operating cash flow was $7.8 million. Investing activities used $389.3 million, principally for loan originations and purchases, while financing activities provided $390.6 million from deposit growth, FHLB borrowings and the stock offering. The year-end cash balance was $62.1 million.
Loan composition at December 31, 2022 was $355.4 million of one- to four-family residential loans, $242.0 million of multifamily loans, $156.2 million of commercial real estate loans, $107.3 million of construction loans and $27.8 million of home-equity loans and lines of credit.
Asset quality remained strong: nonperforming assets were $656,000, or 0.06% of total assets, compared with $982,000, or 0.15%, in 2021. The allowance for loan losses increased to $7.2 million, or 0.81% of loans, from $4.2 million, also 0.81% of loans.
The Bank was categorized as well capitalized. At December 31, 2022, reported regulatory ratios included total risk-based capital of 16.40%, common equity Tier 1 capital of 15.49% and Tier 1 leverage capital of 13.89%.
Material changes versus the prior comparable period
- The mutual-to-stock conversion and IPO generated gross proceeds of approximately $89.2 million and net proceeds of approximately $79.2 million after offering costs.
- Loan growth accelerated, particularly in multifamily real estate, which increased from $59.5 million to $242.0 million, and commercial real estate, which increased from $100.0 million to $156.2 million.
- Deposits grew $146.4 million, but certificates of deposit increased to $319.8 million and brokered deposits increased to $100.8 million from $19.9 million.
- FHLB advances increased substantially to support loan growth, reaching $174.0 million at year-end.
- Net income declined despite higher net interest income because of the larger loan-loss provision, higher operating expenses and the charitable foundation contribution.
- The one- to four-family residential portfolio declined as a percentage of total loans from 49.8% to 39.8%, reflecting the increased focus on commercial and multifamily lending.
- The defined benefit plan was frozen and the Bank withdrew from the plan during 2022; the final withdrawal liability was $1.4 million and no related liability remained at year-end.
Guidance, outlook, commentary and risks
Management intends to continue expanding commercial real estate, multifamily and construction lending while maintaining residential lending as a core activity. The Company expects to invest further in lending personnel, technology, digital banking and commercial deposit products. It is also evaluating branch expansion opportunities.
Management expects FDIC assessment costs to increase beginning in 2023 and anticipates retaining a significant portion of maturing certificates of deposit. Certificates of deposit totaling $183.4 million mature during 2023, creating refinancing and deposit-pricing risk.
The Company adopted the Current Expected Credit Loss methodology on January 1, 2023. Management had not yet estimated the adoption impact and stated that the effect was expected to be significant.
Principal risks include concentration in greater Boston-area real estate, commercial and multifamily credit exposure, construction and speculative construction lending, interest-rate sensitivity, higher funding costs, reliance on FHLB advances and brokered deposits, deposit runoff, competition, changing real estate values, inflation, recession, regulatory changes, cybersecurity and operational disruptions. Management’s interest-rate model estimated that an immediate 200-basis-point rate increase would reduce first-year net interest income by 9.7% and reduce economic value of equity by 17.8%.
The Company does not currently pay cash dividends. Future dividends depend partly on dividends from the Bank, regulatory capital requirements and Federal Reserve guidance. There were no material pending legal proceedings reported.
Most important facts for investors to verify
- Whether rapid multifamily, commercial real estate and construction loan growth remains consistent with underwriting standards and produces acceptable credit performance.
- The quantified effect of CECL adoption on retained earnings, the allowance for credit losses and regulatory capital.
- Deposit retention and repricing for the $183.4 million of certificates of deposit maturing in 2023.
- The sustainability and cost of funding provided by $174.0 million of FHLB advances and $100.8 million of brokered deposits.
- Future net interest margin performance as deposit and wholesale funding costs rise.
- Exposure to declines in Boston-area residential, multifamily and commercial real estate values.
- Whether higher personnel, technology, public-company and regulatory costs are offset by revenue and balance-sheet growth.
- The timing and feasibility of initiating dividends, given the holding company’s dependence on subsidiary dividends and regulatory limits.