Northeast Community Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; balance-sheet comparisons are to December 31, 2021. The company is the holding company for NorthEast Community Bank, a community bank focused primarily on construction lending, with operations in New York and Massachusetts. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2022 / September 30, 2022 | Comparable period / prior date |
|---|---|---|
| Interest income | $19.4 | $12.1 in Q3 2021 |
| Net interest income | $17.5; net interest margin 5.88% | $10.9 and 4.26% in Q3 2021 |
| Net income; diluted EPS | $7.5; $0.49 | $0.7; $0.05 in Q3 2021 |
| Net interest income after loan-loss provision | $17.5; no provision recorded | $7.3; $3.6 provision in Q3 2021 |
| Total assets | $1,284.9 | $1,225.1 at December 31, 2021 |
| Net loans | $1,112.5 | $968.1 at December 31, 2021 |
| Deposits | $987.6 | $927.2 at December 31, 2021 |
| Cash and cash equivalents | $54.9 | $152.3 at December 31, 2021 |
| FHLB advances | $21.0 | $28.0 at December 31, 2021 |
| Stockholders’ equity | $260.0 | $251.4 at December 31, 2021 |
For the first nine months, net interest income was $42.9 million versus $31.6 million, net income was $16.6 million versus $7.7 million, and diluted EPS was $1.07 versus $0.48. Net interest margin was 4.85%, up from 4.44% in the prior-year period. The allowance for loan losses was $5.5 million, or 0.49% of loans; there were no nonaccrual loans or loans past due 90 days or more at September 30.
For the first nine months, operating cash flow was $14.4 million, investing cash outflow was $156.6 million, and financing cash inflow was $44.8 million. Cash and equivalents declined by $97.3 million, mainly as funds were deployed into loan growth and securities. The Bank reported capital ratios above minimum requirements and was categorized as well capitalized. At September 30, its total risk-based capital ratio was 13.86% and Tier 1 leverage ratio was 16.91%.
Material changes and notable items
- Net loans grew 14.9% from year-end, led by construction loans, which increased to $862.5 million from $683.8 million. Construction lending represented about 77% of total loans.
- Q3 net interest income rose 60% year over year as average earning assets and their yield increased. Interest expense also increased, reflecting higher deposit costs and balances.
- No loan-loss provision was recorded in 2022; the prior-year comparison included a $3.6 million provision associated with a fully charged-off nonresidential bridge loan. The company reported $242,000 of loan recoveries during the first nine months of 2022.
- Noninterest income was $0.3 million in Q3 and $0.9 million for the first nine months, reduced by unrealized equity-security losses of $0.6 million and $1.6 million, respectively. The company attributed the losses to rising market interest rates.
- Noninterest expense increased 14% in Q3 and 12% for the first nine months, with higher legal and other operating costs, branch-related expenses, and real-estate-owned costs. A $189,000 write-down reduced the value of a foreclosed property.
- The company repurchased 250,288 shares in Q3 for approximately $3.2 million under a program authorizing repurchases of up to 10% of outstanding shares. A new equity incentive plan was approved; awards to directors included restricted stock and options, with vesting over five years.
Outlook, risks, and contingencies
- The filing provides no specific earnings or growth guidance. Management said its interest-rate simulations indicated one-year net interest income could increase 10.94% to 21.85% under modeled rising-rate scenarios and decrease 11.80% under a modeled 100-basis-point decline. These are model estimates, not forecasts, and depend on assumptions about balances, repricing, and prepayments.
- Interest-rate, inflation, economic, real-estate-market, competitive, and credit-quality changes are identified as risks. Management noted that COVID-19 disruptions could adversely affect results, financial position, liquidity, and regulatory capital if they continue. No loans remained in COVID-related payment deferral at September 30, 2022.
- Liquidity includes $18.1 million of available FHLB borrowing capacity, plus an $8.0 million ACBB line with no outstanding balance. Significant contractual and contingent funding needs include $554.4 million of unfunded construction commitments, $391.7 million of commitments to originate loans, $130.0 million of unfunded lines of credit, and $9.1 million of standby letters of credit. Certificates of deposit totaling $133.8 million were scheduled to mature within one year.
- Held-to-maturity securities had a $3.8 million aggregate unrealized loss at September 30, 2022, attributed by management to interest-rate volatility rather than credit deterioration; management stated it had the ability and intent to hold them long enough to recover amortized cost.
- The company plans to adopt the CECL credit-loss standard on January 1, 2023 and was conducting parallel model calculations; the financial impact was not yet quantified. Management said legal claims arising in the normal course were not expected to have a material adverse impact. Risk factors were reported as not materially changed from the 2021 Form 10-K. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether construction-loan growth, concentration, underwriting, and large unfunded commitments remain manageable as projects progress and funding is drawn.
- Deposit retention and funding costs, particularly for the $133.8 million of certificates maturing within one year and in a changing rate environment.
- Credit performance, collateral values, and adequacy of the allowance, including the effects of adopting CECL in 2023.
- How unrealized losses on equity and held-to-maturity securities, and the foreclosed-property valuation, evolve with market rates and property conditions.
- Progress and remaining authorization under the share-repurchase program, and the eventual expense and dilution from equity awards.