NorthEast Community Bancorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. The filing is unaudited.
Business context and reporting period
The company is the holding company for NorthEast Community Bank, a community-oriented bank operating in New York and Massachusetts. Its lending is concentrated in construction, commercial real estate, multifamily, and commercial and industrial loans. On July 12, 2021, after quarter-end, the company completed its second-step conversion and sold 9.78 million shares at $10 per share, raising $97.8 million gross. The $74.9 million stock-subscription liability reported at June 30 related to the offering and is not the same as the subsequent completed sale.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Interest income | $11.676 | $12.315 | $23.496 | $24.996 |
| Net interest income | $10.378 | $9.508 | $20.733 | $18.961 |
| Provision for loan losses | $0 | $0.518 | $0.017 | $0.532 |
| Non-interest income | $0.778 | $0.541 | $1.221 | $1.423 |
| Non-interest expense | $6.309 | $6.301 | $12.864 | $12.371 |
| Net income | $3.721 | $2.478 | $6.966 | $5.734 |
| Diluted EPS | $0.31 | $0.21 | $0.58 | $0.48 |
| Net interest margin | 4.49% | 4.31% | 4.54% | 4.37% |
- Balance sheet at June 30: Total assets were $1,076.5 million, up 11.2% from December 31, 2020. Net loans were $825.2 million, deposits $798.8 million, and stockholders’ equity $160.8 million.
- Loan mix and credit: Construction loans were $572.0 million of $830.0 million total loans. The allowance for loan losses was $5.1 million, or 0.61% of loans. Nonperforming loans were $3.6 million (0.43% of loans); nonperforming assets were $5.6 million (0.52% of assets).
- Cash flow, first half: Operating activities provided $7.2 million; investing activities used $14.0 million; financing activities provided $101.5 million. Cash and cash equivalents ended at $163.8 million, with the financing inflow largely reflecting $74.9 million of stock subscriptions.
- Borrowings and liquidity: FHLB advances were $28.0 million, unchanged from year-end. The company reported $41.2 million of additional FHLB borrowing capacity and an $8.0 million ACBB facility with no amount outstanding. Bank regulatory capital ratios exceeded “well capitalized” thresholds; total risk-based capital was 13.58%.
Material changes versus comparable periods
- Q2 net income increased 50% year over year; first-half net income increased 21%. Net interest income rose 9% in Q2 and 9% for the first half, as sharply lower deposit costs more than offset lower interest income and asset yields.
- Net interest margin improved 18 basis points in Q2 and 17 basis points for the first half. Management attributed the improvement to liabilities repricing faster than interest-earning assets and a shift toward non-interest-bearing deposits.
- Provision expense fell to zero in Q2 and $17,000 for the first half, versus $518,000 and $532,000, respectively, in 2020. The allowance itself remained near year-end levels.
- First-half non-interest income declined 14%, mainly because equity securities produced a $62,000 unrealized loss versus a $299,000 gain in 2020. First-half expenses rose 4%, including higher salaries, consulting, occupancy, and equipment costs.
- Total deposits rose 3.5% from year-end, including growth in non-interest-bearing demand accounts; certificates of deposit declined. Construction loans increased $26.2 million, while commercial and industrial loans declined $10.6 million.
- Premises and equipment rose $4.5 million, primarily from acquiring a site for a new branch in Monsey, New York. The company declared $0.03 per share in dividends for the first half, compared with $0.06 in the prior-year half; no Q2 2021 dividend was declared.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management said the duration and financial effects of COVID-19 remained uncertain and could adversely affect results, financial condition, liquidity, and regulatory capital.
- Two loans totaling $9.5 million remained in COVID-related deferral status at June 30. One was a $672,000 restaurant loan; the other was an $8.8 million apartment-complex loan with deferral through November 1, 2021. The restaurant borrower resumed regular payments in August 2021.
- The largest credit concentration is construction lending. The filing reports $349.4 million of unfunded construction commitments, $315.7 million of commitments to originate loans, $113.6 million of unfunded lines of credit, and $7.0 million of standby letters of credit.
- One $3.6 million non-residential real estate loan was nonaccrual and in foreclosure, subject to Connecticut’s foreclosure moratorium. A parking easement affects the collateral valuation. The bank also held one foreclosed Pennsylvania office property valued at $2.0 million; further real estate value declines could result in impairment.
- Management considers the allowance estimate subjective and sensitive to economic conditions, borrower performance, collateral values, and regulatory review. The company expects to adopt CECL on January 1, 2023; the potential impact was not yet determined and could be material.
- Interest-rate simulations indicated estimated one-year net interest income increases of 15.58% to 31.32% under rising-rate scenarios and a 4.65% decrease under a 100-basis-point decline. These are model estimates based on assumptions, not forecasts; management said exposures remained within policy guidelines.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. Routine legal claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Post-quarter conversion details, final share count, use of proceeds, and the effect of the offering on capital and per-share measures.
- Subsequent performance and repayment status of the two COVID-deferral loans, particularly the $8.8 million apartment loan.
- Construction-loan concentration, unfunded commitments, and the bank’s capacity to fund them under adverse deposit or credit conditions.
- Progress and resolution of the $3.6 million foreclosure, including updated collateral appraisals and the impact of the parking easement.
- Allowance adequacy and the eventual CECL adoption impact, alongside changes in nonperforming loans and criticized loan grades.
- Deposit retention and funding costs, liquidity after the conversion, and the realized effects of interest-rate changes versus the filing’s simulation scenarios.