Northeast Community Bancorp, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2021. The company is the holding company for NorthEast Community Bank, a community bank operating in New York and Massachusetts, focused principally on construction lending, alongside commercial and industrial and real estate lending. On July 12, 2021, it completed its second-step conversion and public stock offering.
Key financial results
Amounts are in millions of dollars unless otherwise indicated.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $12.1 | $12.0 | $35.6 | $37.0 |
| Net interest income | $10.9 | $9.8 | $31.6 | $28.8 |
| Provision for loan losses | $3.6 | $0.2 | $3.6 | $0.8 |
| Non-interest income | $0.5 | $0.5 | $1.8 | $2.0 |
| Non-interest expense | $6.9 | $6.0 | $19.7 | $18.4 |
| Net income | $0.7 | $3.1 | $7.7 | $8.9 |
| Diluted earnings per share | $0.05 | $0.19 | $0.48 | $0.55 |
| Net interest margin | 4.26% | 4.41% | 4.44% | 4.39% |
- Q3 net income fell substantially, primarily because of the $3.6 million loan-loss provision and higher operating expenses. Net interest income rose 11.3% as lower deposit costs more than offset reduced asset yields.
- For the first nine months, net interest income increased 10.0%, but net income declined, reflecting higher credit provision and expenses and lower non-interest income. Net interest margin improved 5 basis points for the nine-month period but fell 15 basis points in Q3.
- At September 30, total assets were $1.108 billion, versus $968.2 million at year-end 2020. Gross loans were $909.5 million; net loans were $904.6 million. Construction loans were $633.3 million, the largest portfolio segment.
- Deposits were $816.8 million, up 5.8% from year-end. Non-interest-bearing deposits rose to $306.6 million, while interest-bearing deposits declined. FHLB advances remained $28.0 million.
- Cash and cash equivalents were $108.0 million, compared with $69.2 million at year-end. Stockholders’ equity increased to $248.7 million from $153.8 million.
- Nine-month operating cash flow was $12.7 million, investing cash outflow was $105.2 million, and financing cash inflow was $131.3 million. Cash increased by $38.8 million, including proceeds from the stock offering.
Material changes and unusual items
- The second-step conversion offering sold 9.8 million shares at $10 per share for gross proceeds of $97.8 million. The filing attributes an $88.4 million net increase in equity to the offering; prior share information was adjusted for the conversion exchange ratio.
- The company charged off a $3.6 million non-residential bridge loan secured by commercial property in Greenwich, Connecticut. An updated appraisal valued the property at zero, citing a parking easement. The company is pursuing recovery from personal guarantors, but timing and outcome are uncertain.
- The allowance for loan losses was $5.2 million, or 0.58% of loans, compared with $5.1 million, or 0.62%, at year-end. There were no non-performing loans at quarter-end; non-performing assets were $2.0 million, consisting of real estate owned.
- Salaries and benefits rose, reflecting additional personnel, loan-production bonuses, and ESOP compensation associated with the conversion. Non-interest income for the nine-month period was affected by an unrealized loss on equity securities, compared with a gain in the prior-year period.
Liquidity, capital, outlook and risks
- Average liquidity ratios for the first nine months were 11.9% for cash liquidity, 14.7% for on-balance-sheet liquidity, and 21.2% including borrowing capacity; stated policy targets were 2%, 8%, and 20%, respectively. The bank reported $39.0 million of available FHLB borrowing capacity, net of advances, and an $8.0 million ACBB facility with no outstanding balance.
- The Bank exceeded regulatory capital requirements and was categorized as well capitalized. At September 30, its total risk-based capital ratio was 15.91%, common equity tier 1 ratio 15.48%, and leverage ratio 17.07%.
- Commitments included $373.9 million of unfunded construction loans, $259.4 million of commitments to originate loans, $138.8 million of unfunded lines of credit, and $6.9 million of standby letters of credit. Certificates of deposit totaling $190.4 million were scheduled to mature within one year.
- Two loans totaling $8.9 million remained in COVID-related payment deferral at quarter-end. Management said it was monitoring borrower conditions and the pandemic’s potential impact on credit quality, operations, liquidity, and capital. All nine branches had resumed normal operations.
- No specific earnings or financial guidance is provided. Management described modeled one-year net interest income sensitivity as positive in rising-rate scenarios and negative in a 100-basis-point decline; the filing cautions that simulations depend on assumptions and are not forecasts.
- Key risks include credit performance, particularly in construction and commercial real estate lending; economic and real estate market conditions; interest-rate and deposit competition; and uncertainty associated with COVID-19. The allowance for loan losses is based on estimates that may change. Adoption of CECL is scheduled for January 1, 2023, and its impact was not yet determined.
- Management said ordinary-course legal claims were not expected to have a material adverse effect. Previously disclosed risk factors were reported as not materially changed. Disclosure controls were judged effective, with no material change in internal controls reported for the quarter.
Important facts for investors to verify
- Follow the status and recoverability of the charged-off $3.6 million bridge loan, including any guarantor recovery or subsequent allowance and income effects.
- Assess credit quality and concentration in construction lending, including the large unfunded construction and other loan commitments.
- Monitor the two deferred loans totaling $8.9 million, borrower performance, and any changes in allowance assumptions or non-performing assets.
- Evaluate whether deposit growth, funding costs, and deployment of offering proceeds support sustainable net interest income and margins.
- Review CECL implementation disclosures and any resulting change in credit-loss reserves, earnings, or capital when the standard is adopted.