NorthEast Community Bancorp, Inc. — Q1 2022 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2022, compared with Q1 2021 for earnings and cash flows, and with December 31, 2021 for balance-sheet changes. The company operates NorthEast Community Bank, a community lender focused primarily on construction loans, alongside commercial and real estate lending and deposit services. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $11.925 | $10.355 in Q1 2021 |
| Net income | $3.645; diluted EPS $0.23 | $3.245; diluted EPS $0.20 in Q1 2021 |
| Net interest margin | 4.08% | 4.59% in Q1 2021 |
| Total assets | $1,281.4 | $1,225.1 at Dec. 31, 2021 |
| Net loans | $1,002.2 | $968.1 at Dec. 31, 2021 |
| Total deposits | $991.9 | $927.2 at Dec. 31, 2021 |
| Cash and cash equivalents | $174.7 | $152.3 at Dec. 31, 2021 |
| FHLB advances | $21.0 | $28.0 at Dec. 31, 2021 |
| Allowance for loan losses | $5.328; 0.53% of loans | $5.242; 0.54% at Dec. 31, 2021 |
| Operating cash flow | $0.828 | $4.598 in Q1 2021 |
- Interest income rose 12.3% to $13.273 million, while interest expense fell 8.0% to $1.348 million. Net interest income increased 15.2% year over year. The average yield on interest-earning assets fell to 4.54% from 5.24%; the cost of interest-bearing liabilities declined to 0.85% from 1.02%.
- Non-interest income was $0.058 million, down from $0.443 million, mainly reflecting a $0.634 million unrealized loss on equity securities. Non-interest expense rose 10.2% to $7.220 million, with higher other operating costs and employee expenses. The effective tax rate was 23.5%, versus 23.2%.
- Cash flow from investing was negative $35.591 million, principally due to $34.514 million of net loan growth and $1.883 million of premises and equipment purchases. Financing provided $57.178 million, led by deposit growth, partly offset by $7.0 million of FHLB repayments and $0.983 million of dividends paid.
- Stockholders’ equity was $254.4 million. The Bank’s total risk-based capital ratio was 15.03% and its core capital-to-adjusted-assets ratio was 16.03%; the filing says the Bank met applicable requirements and was categorized as well capitalized. The holding company was not subject to consolidated capital requirements while assets remained below $3 billion.
Material changes and portfolio developments
- Assets grew 4.6% from year-end, as net loans increased $34.1 million and cash rose $22.4 million. Deposits grew 7.0%, including a $50.4 million rise in non-interest-bearing deposits. Equity securities declined $0.634 million in value.
- Loans increased 3.5%. Construction loans reached $736.7 million, about 73% of total loans, up $52.9 million from year-end. The company originated $121.8 million of loans in the quarter, including $112.8 million in construction loans.
- Non-performing loans and loans 90 days past due were zero. Real estate owned remained $1.996 million. Four performing troubled debt restructurings totaled $1.631 million; two performing non-residential loans totaling $0.766 million were classified as substandard.
- Q1 2022 included no loan-loss provision, compared with $17,000 in Q1 2021. The allowance increased to $5.328 million, reflecting $96,000 of recoveries and $10,000 of charge-offs.
- Held-to-maturity securities had $1.860 million of gross unrealized losses at March 31, 2022, versus $0.327 million at year-end. Management attributed the losses primarily to interest-rate movements and stated it had the ability and intent to hold the securities until recovery.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management says the interest-rate risk model estimates one-year net interest income would increase 16.41% under a 100-basis-point rate rise and 32.88% under a 200-basis-point rise, but decline 8.59% under a 100-basis-point fall. These are model scenarios, not forecasts, and depend on assumptions about balances, repricing and prepayments.
- Management identifies interest-rate changes, economic conditions, real estate values, competition, loan and deposit demand, borrower credit quality, COVID-19 impacts, regulatory changes and third-party service performance as risks. COVID-19 payment deferrals had ended by March 31, 2022; management cautions that continued disruption could affect results, liquidity and capital.
- Unfunded construction commitments were $435.7 million, commitments to originate loans $263.8 million, lines of credit $131.3 million and standby letters of credit $7.3 million. Certificates of deposit of $188.1 million were scheduled to mature within one year.
- The company expects to adopt CECL on January 1, 2023. Management says the effect could be material but remains unknown. LIBOR/reference-rate transition effects were still under evaluation.
- Legal proceedings arise in the ordinary course; management does not expect them to have a material adverse impact. The company reported no material change to the risk factors in its 2021 Form 10-K, and disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether rapid growth in construction lending and the large unfunded commitment balance are consistent with the Bank’s risk appetite, liquidity and underwriting capacity.
- How deposit growth, deposit mix and upcoming certificate maturities affect funding costs and liquidity as market rates change.
- Whether the decline in net interest margin persists, and how actual results compare with the filing’s interest-rate sensitivity scenarios.
- Whether the $5.328 million loan-loss allowance remains adequate as the portfolio expands and CECL adoption approaches; assess the eventual CECL impact when disclosed.
- Whether the equity-security losses and held-to-maturity unrealized losses remain temporary, and whether management’s stated intent and ability to hold securities continues.
- How operating cash flow, higher expenses and branch-related investment develop in subsequent quarters; Q1 operating cash flow was substantially below Q1 2021.