NorthEast Community Bancorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; filed August 12, 2022. The company is a bank holding company whose community bank primarily originates construction loans, alongside commercial and industrial and real-estate loans, and gathers retail deposits.
Financial performance and position
| Metric | Q2 2022 / June 30, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net income | $5.4 million; diluted EPS $0.35 | Q2 2021: $3.7 million; $0.23 |
| Six-month net income | $9.0 million; diluted EPS $0.58 | First half 2021: $7.0 million; $0.43 |
| Net interest income | Q2: $13.5 million; first half: $25.5 million | Q2 2021: $10.4 million; first half 2021: $20.7 million |
| Net interest margin | Q2: 4.58%; first half: 4.33% | Q2 2021: 4.49%; first half 2021: 4.54% |
| Assets | $1.222 billion | December 31, 2021: $1.225 billion |
| Net loans | $1.019 billion | December 31, 2021: $968.1 million |
| Deposits / FHLB advances | $928.6 million / $21.0 million | December 31, 2021: $927.2 million / $28.0 million |
| Cash and cash equivalents | $86.2 million | December 31, 2021: $152.3 million |
Q2 net income rose 45% year over year, and first-half net income rose 30%. Higher net interest income was the main driver, partly offset by weaker non-interest income, higher operating expenses, and higher taxes. First-half net interest margin declined 21 basis points year over year, despite growth in net interest income.
Q2 non-interest income was $0.5 million versus $0.8 million; first-half non-interest income was $0.6 million versus $1.2 million. Unrealized equity-security losses were $0.4 million in Q2 and $1.1 million in the first half, attributed primarily to rising interest rates. Non-interest expense increased 11% in Q2 and 11% in the first half year over year, reflecting, among other items, branch-related costs, public-company legal and regulatory costs, and data processing.
For the first half, operating cash flow was $7.3 million, investing cash outflow was $62.7 million, and financing cash outflow was $10.6 million; cash decreased by $66.0 million. Management attributed the decline in cash primarily to loan growth, securities purchases, branch property and equipment, and repayment of FHLB advances.
Material changes, outlook and risks
- Loans increased 5.2% from year-end, with construction loans rising to $780.9 million from $683.8 million. Construction loans represented about 76% of total loans at June 30.
- Non-interest-bearing deposits increased $31.6 million, while certificates of deposit decreased $48.7 million. Total deposits were nearly unchanged from year-end.
- The allowance for loan losses was $5.5 million, or 0.53% of loans; no provision was recorded in the first half. The filing notes that the allowance is judgmental and future provisions could materially affect results.
- Non-performing assets were $2.8 million, including two non-accrual non-residential loans totaling $769,000 secured by one property in foreclosure after a maturity default. There were no non-accrual loans at year-end 2021.
- Held-to-maturity securities had a carrying amount of $27.2 million and fair value of $24.4 million, including $2.8 million of unrealized losses. Management viewed the losses as temporary and stated it had the ability and intent to hold the securities until recovery.
- Unfunded construction-loan commitments were $491.1 million; commitments to originate loans were $258.2 million; lines of credit were $139.9 million; and standby letters of credit were $7.3 million. Certificates of deposit totaling $158.1 million were scheduled to mature within one year.
- At June 30, the Bank was categorized as well capitalized; its total risk-based capital ratio was 14.79%. The company reported $24.1 million of additional FHLB borrowing capacity and an $8.0 million ACBB facility, with no ACBB borrowings outstanding.
- Management’s interest-rate simulation estimated one-year net interest income increases of 12.55% to 25.13% under +100 to +200 basis-point shocks, and a 13.41% decrease under a -100 basis-point shock. These are model-based estimates, not forecasts; management said exposures were within policy limits.
- No specific earnings or financial guidance was provided. Management said COVID-19 effects remained uncertain and could adversely affect operations, liquidity, credit quality, and regulatory capital if disruptions continued. Other cited risks include inflation, interest-rate changes, real-estate values, competition, and economic conditions.
- CECL adoption was deferred to January 1, 2023; management said the potential impact could be material but was not yet known. The filing reported effective disclosure controls, no material change in internal controls, and no expected material adverse impact from ordinary-course legal matters.
Important facts for investors to verify
- Construction-loan underwriting, concentration, unfunded commitments, and the ability of borrowers to complete projects and repay.
- Performance and resolution of the two non-accrual loans and the foreclosure, as well as the adequacy of the loan-loss allowance.
- Deposit retention and pricing, including the $158.1 million of certificates maturing within one year, and the effect on funding costs and margin.
- Interest-rate exposure and the assumptions behind management’s simulation; monitor the unrealized losses on held-to-maturity and equity securities.
- The eventual CECL allowance impact and whether branch expansion and other operating costs are matched by sustainable revenue growth.