Northeast Community Bancorp, Inc. annual report, FY2022

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Northeast Community Bancorp, Inc. — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022; the filing reports full-year results, not standalone fourth-quarter results. The company is the holding company for a community bank operating in New York and Massachusetts, focused primarily on construction lending.

Financial performance and position

  • Profitability: Net income was $24.8 million, versus $11.9 million in 2021; basic EPS was $1.61 versus $0.75. Return on average assets rose to 1.95% from 1.13%, and return on average equity to 9.60% from 6.03%.
  • Net interest: Net interest income increased 47.5% to $63.9 million. Net interest margin was 5.32%, up from 4.40%; the average yield on interest-earning assets rose to 6.00% from 4.92%, while the average cost of interest-bearing liabilities increased to 1.26% from 0.90%.
  • Credit costs and other income: Provision for loan losses fell to $439,000 from $3.6 million. Non-interest income declined to $1.7 million from $2.4 million, primarily reflecting a $1.6 million net loss on equity securities.
  • Expenses and taxes: Non-interest expense rose 15.9% to $30.7 million. It included a $451,000 goodwill impairment and $623,000 of real-estate-owned expense, including a $540,000 property write-down. Income tax expense was $9.6 million; the effective tax rate increased to 27.8% from 23.6%.
  • Growth and funding: Total assets increased 16.3% to $1.425 billion; net loans rose 25.2% to $1.212 billion, and deposits increased 21.0% to $1.122 billion. Stockholders’ equity was $262.0 million.
  • Loan concentration: Construction loans were $930.6 million, or 76.4% of total loans, and were concentrated in the New York metropolitan area. The allowance for loan losses was $5.5 million, equal to 0.45% of year-end loans, versus 0.54% in 2021.
  • Cash flow and liquidity: Operating activities provided $27.5 million; investing activities used $256.6 million; financing activities provided $172.1 million. Cash and cash equivalents fell $57.0 million to $95.3 million. FHLB advances were $21.0 million, with $31.5 million of additional FHLB borrowing capacity and $8.0 million available from ACBB.
  • Capital: The Bank was classified as well capitalized. At year-end, its total risk-based capital ratio was 13.66%, common equity Tier 1 ratio 13.33%, and Tier 1 leverage ratio 16.50%.

Changes versus 2021

  • Earnings increased substantially, mainly because higher rates and asset growth lifted interest income faster than funding costs; lower loan-loss provision also contributed.
  • Loan growth was led by construction lending, while non-residential real estate and commercial and industrial balances declined. Construction loans increased to 76.4% of loans from 70.3%.
  • Deposit balances grew, but their composition and pricing changed: savings balances and non-interest-bearing demand deposits increased, while NOW/money-market balances declined. Average interest-bearing deposit costs rose.
  • Cash declined as funds supported loan growth and securities purchases. The company repurchased $9.3 million of shares and paid or declared $6.5 million in dividends during 2022, including a one-time $0.18-per-share special dividend.

Outlook, risks and notable items

  • Management plans continued construction lending and branch expansion, and opened a Sullivan County, New York branch in 2022. The filing provides no specific earnings or growth guidance.
  • Management identifies construction and commercial real estate concentrations, local real-estate conditions, borrower/project performance, interest-rate movements, competition, and deposit retention and pricing as material risks. Construction loans in five New York counties represented 70.1% of total loans.
  • Uninsured deposits totaled $672.8 million, including $205.8 million of uninsured certificates of deposit. Brokered deposits were $114.2 million, or 10.2% of total deposits.
  • At year-end, unfunded construction commitments were $637.4 million; additional loan commitments were $164.9 million, unused lines of credit $133.9 million, and standby letters of credit $12.5 million. Certificates of deposit of $258.9 million were scheduled to mature within one year.
  • The company reported no non-performing loans, but had $946,000 of multifamily loans 60–89 days past due and $1.8 million of criticized loans. Two performing troubled-debt-restructured loans totaling $855,000 were sold in January 2023 at an $86,000 loss.
  • The company adopted the expected-credit-loss (CECL) standard on January 1, 2023; management was finalizing its qualitative analysis and working with an outside consultant. The filing does not quantify the adoption impact.
  • Rising rates also contributed to a $1.9 million unrealized loss on equity securities and write-downs of goodwill and foreclosed real estate. The filing’s interest-rate model estimated one-year net interest income would rise 9.98%–19.92% under +100 to +200 basis-point shocks and fall 10.75% under a −100 basis-point shock; management cautions that these are model estimates, not forecasts.
  • Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the financial statements but was not engaged to opine on internal-control effectiveness. Routine legal proceedings were described as immaterial.

Investor verification priorities

  1. Assess the concentration, underwriting, geography and undisbursed exposure of the construction portfolio, including the $637.4 million in loans in process.
  2. Review deposit stability and repricing, especially uninsured and brokered deposits and the $258.9 million of certificates maturing within one year.
  3. Verify CECL’s January 2023 transition impact on reserves, earnings and capital; the filing gives no clear quantified estimate.
  4. Track criticized and past-due loans, the January 2023 TDR loan sale, and the carrying value and disposition plan for the foreclosed property.
  5. Monitor net interest margin and actual rate sensitivity against the filing’s modeled scenarios, along with securities valuation changes.
  6. Consider the effect of share repurchases, dividends, equity awards and branch expansion on capital and per-share results.