NorthEast munity Bancorp(NECB) - 2023 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION This section encompasses the company's unaudited consolidated financial statements and related notes, along with management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including the statements of financial condition, income, comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, regulatory capital, and specific financial instrument details Consolidated Statements of Financial Condition This section presents the company's financial position, detailing assets, liabilities, and equity at specific reporting dates Total Assets: | Date | Amount (in thousands) | | :--- | :--- | | Sep 30, 2023 | $1,719,945 | | Dec 31, 2022 | $1,424,963 | Net Loans: | Date | Amount (in thousands) | | :--- | :--- | | Sep 30, 2023 | $1,503,403 | | Dec 31, 2022 | $1,212,219 | Total Deposits: | Date | Amount (in thousands) | | :--- | :--- | | Sep 30, 2023 | $1,365,634 | | Dec 31, 2022 | $1,121,955 | Total Stockholders' Equity: | Date | Amount (in thousands) | | :--- | :--- | | Sep 30, 2023 | $272,413 | | Dec 31, 2022 | $261,989 | Consolidated Statements of Income This section outlines the company's financial performance over specific periods, reporting revenues, expenses, and net income Net Income: | Period | 2023 (in thousands) | 2022 (in thousands) | Change (YoY) | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $11,843 | $7,542 | +57.0% | | Nine Months Ended Sep 30 | $34,175 | $16,580 | +106.1% | Net Interest Income: | Period | 2023 (in thousands) | 2022 (in thousands) | Change (YoY) | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $25,129 | $17,460 | +43.9% | | Nine Months Ended Sep 30 | $71,985 | $42,928 | +67.7% | Earnings Per Common Share – Basic: | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $0.80 | $0.49 | | Nine Months Ended Sep 30 | $2.42 | $1.07 | Consolidated Statements of Comprehensive Income This section reports the company's total comprehensive income, including net income and other comprehensive income items Total Comprehensive Income: | Period | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $11,850 | $7,565 | | Nine Months Ended Sep 30 | $34,197 | $16,644 | Consolidated Statements of Changes in Stockholders' Equity This section details the changes in the company's equity accounts over specific periods, reflecting net income, dividends, and stock transactions - Total stockholders' equity increased to $272,413 thousand at September 30, 2023, from $261,989 thousand at December 31, 2022[18] - Net income for the nine months ended September 30, 2023, contributed $34,175 thousand to stockholders' equity[18] - Stock repurchases totaled $(23,388) thousand and cash dividends declared were $(2,544) thousand for the nine months ended September 30, 2023[18] Consolidated Statements of Cash Flows This section categorizes the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Net Cash Provided by Operating Activities: | Period | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Nine Months Ended Sep 30 | $30,866 | $14,447 | Net Cash Used in Investing Activities: | Period | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Nine Months Ended Sep 30 | $(280,099) | $(156,566) | Net Cash Provided by Financing Activities: | Period | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Nine Months Ended Sep 30 | $260,648 | $44,782 | Net Increase (Decrease) in Cash and Cash Equivalents: | Period | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Nine Months Ended Sep 30 | $11,415 | $(97,337) | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1 — Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the financial statements - Northeast Community Bancorp, Inc. operates NorthEast Community Bank, a New York State-chartered savings bank, primarily originating construction, commercial and industrial, and multifamily/mixed-use real estate loans[22][23][25] - Effective January 1, 2023, the company adopted ASC 326 (CECL), resulting in a $99,000 (net of tax) reduction to retained earnings[36][37][38] Impact of ASC 326 Adoption on ACL (January 1, 2023): | Component | Pre-adoption (in thousands) | Adoption Impact (in thousands) | As Reported (in thousands) | | :--- | :--- | :--- | :--- | | ACL on debt securities held-to-maturity | $0 | $132 | $132 | | ACL on loan receivables | $5,474 | $(1,631) | $3,843 | | ACL for off-balance sheet exposure | $0 | $1,586 | $1,586 | | Total | $5,474 | $134 | $5,608 | Note 2 — Regulatory Capital This note details the company's compliance with regulatory capital requirements and its capital adequacy ratios - The Bank met all capital adequacy requirements as of September 30, 2023, and December 31, 2022, and was categorized as "well capitalized" by the FDIC[55][57] Regulatory Capital Ratios (as of September 30, 2023): | Ratio | Actual Ratio | Minimum Capital Adequacy | For Classification as Well-Capitalized | | :--- | :--- | :--- | :--- | | Total capital (to risk weighted assets) | 13.50% | ≥8.00% | ≥10.00% | | Tier 1 capital (to risk weighted assets) | 13.16% | ≥6.00% | ≥8.00% | | Common equity tier 1 capital (to risk-weighted assets) | 13.16% | ≥4.50% | ≥6.50% | | Core (Tier 1) capital (to adjusted total assets) | 14.70% | ≥4.00% | ≥5.00% | Note 3 — Equity Securities This note provides information on the company's equity securities, including fair values and unrealized gains or losses Equity Securities, at Fair Value: | Date | Amount (in thousands) | | :--- | :--- | | Sep 30, 2023 | $17,714 | | Dec 31, 2022 | $18,041 | Unrealized Net Loss Recognized on Equity Securities: | Period | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $430 | $573 | | Nine Months Ended Sep 30 | $327 | $1,636 | Note 4 — Securities Available-for-Sale This note details the company's securities classified as available-for-sale, including their fair values Securities Available-for-Sale, at Fair Value: | Date | Amount (in thousands) | | :--- | :--- | | Sep 30, 2023 | $0 | | Dec 31, 2022 | $1 | Note 5 — Securities Held-to-Maturity This note provides information on the company's debt securities held with the intent and ability to hold to maturity Securities Held-to-Maturity (Amortized Cost): | Date | Amount (in thousands) | | :--- | :--- | | Sep 30, 2023 | $15,655 | | Dec 31, 2022 | $26,395 | - Total unrealized losses on held-to-maturity securities were $3,746 thousand at September 30, 2023, primarily due to market interest rate volatility, not credit quality[65][69] - The allowance for credit losses for held-to-maturity debt securities was $131 thousand at September 30, 2023[67] Note 6 — Loans Receivable and the Allowance for Credit Losses This note details the composition of loans receivable and the methodology and balances of the allowance for credit losses Total Loans (Gross): | Date | Amount (in thousands) | | :--- | :--- | | Sep 30, 2023 | $1,507,938 | | Dec 31, 2022 | $1,217,321 | Loan Composition (September 30, 2023): | Loan Type | Amount (in thousands) | | :--- | :--- | | Construction | $1,168,909 | | Residential real estate | $209,535 | | Commercial and industrial | $107,963 | | Non-residential real estate | $20,289 | | Consumer | $1,242 | Allowance for Credit Losses (ACL) - Loans: | Date | Amount (in thousands) | | :--- | :--- | | Sep 30, 2023 | $4,767 | | Dec 31, 2022 | $5,474 | - As of September 30, 2023, there were two individually evaluated non-accrual construction loans totaling $4,381 thousand, secured by the same multi-family project in the Bronx, New York[79][84] - The allowance for credit losses related to off-balance sheet commitments was $1,191 thousand at September 30, 2023[97] Note 7 — Real Estate Owned ("REO") This note provides information on properties acquired through foreclosure or deed in lieu of foreclosure - The company owned one foreclosed property, an office building in Pennsylvania, valued at $1,456 thousand at both September 30, 2023, and December 31, 2022[98] REO Expense (in thousands): | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $11 | $200 | | Nine Months Ended Sep 30 | $52 | $252 | Note 8 — Federal Home Loan Bank of New York ("FHLB") Advances This note details the company's borrowings from the Federal Home Loan Bank of New York and other secured borrowings FHLB Advances: | Date | Amount (in thousands) | Weighted Average Interest Rate | | :--- | :--- | :--- | | Sep 30, 2023 | $14,000 | 2.24% | | Dec 31, 2022 | $21,000 | 2.43% | - As of September 30, 2023, the company had $50,000 thousand in FRBNY borrowings at an interest rate of 5.5%, maturing December 22, 2023[102] - Available borrowing limits were $31.3 million from FHLB and $739.4 million from FRBNY as of September 30, 2023[101][102] Note 9 — Benefits Plans This note describes the company's employee benefit plans, including ESOP and SERP, and related expenses ESOP Compensation Expense (in thousands): | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $340 | $271 | | Nine Months Ended Sep 30 | $960 | $775 | - Total ESOP shares held by the Trustee were 1,333,797 at September 30, 2023[115] - SERP expenses for the nine months ended September 30, 2023, were $162 thousand, down from $361 thousand in 2022[105] Note 10 — Leases This note provides information on the company's operating leases, including right-of-use assets and lease liabilities Operating Lease Amounts (September 30, 2023, in thousands): | Item | Amount | | :--- | :--- | | ROU assets | $1,935 | | Lease liabilities | $1,991 | | Weighted-average remaining lease term | 5.80 years | Operating Lease Costs (in thousands): | Period | 2023 | 2022 | | :--- | :--- | :--- | | Nine Months Ended Sep 30 | $380 | $423 | Note 11 — Fair Value Disclosures This note details the fair value measurements of financial instruments, categorized by the fair value hierarchy - The fair value hierarchy categorizes inputs into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[126] Assets Carried at Fair Value on a Recurring Basis (September 30, 2023, in thousands): | Asset | Total | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Marketable equity securities | $17,714 | $17,714 | $0 | $0 | | Mortgage backed securities | $0 | $0 | $0 | $0 | Assets Carried at Fair Value on a Non-Recurring Basis (September 30, 2023, in thousands): | Asset | Total | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Loans individually evaluated | $4,381 | $0 | $0 | $4,381 | | Real estate owned | $1,456 | $0 | $0 | $1,456 | Note 12 — Revenue Recognition This note explains the company's policies for recognizing revenue, particularly non-interest income - The majority of the company's revenues, primarily interest income from loans and securities, are outside the scope of ASC 606[137] Non-Interest Income (Nine Months Ended September 30, in thousands): | Category | 2023 | 2022 | | :--- | :--- | :--- | | Deposit-related fees and charges | $42 | $53 | | Loan-related fees and charges | $652 | $861 | | Electronic banking fees and charges | $723 | $648 | | Income from bank owned life insurance | $857 | $450 | | Investment advisory fees | $343 | $364 | | Unrealized loss on equity securities | $(327) | $(1,636) | Note 13 — Other Non-Interest Expenses This note provides a breakdown of various non-interest expenses incurred by the company Total Other Non-Interest Expenses (in thousands): | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $2,646 | $2,237 | | Nine Months Ended Sep 30 | $7,064 | $6,220 | - Key increases for the nine months ended September 30, 2023, included miscellaneous other non-interest expense ($682 thousand), service contracts expense ($236 thousand), and directors compensation ($230 thousand)[227][230] Note 14 — Earnings Per Share This note presents the basic and diluted earnings per share calculations for the company Basic Earnings Per Share: | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $0.80 | $0.49 | | Nine Months Ended Sep 30 | $2.42 | $1.07 | Diluted Earnings Per Share: | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $0.80 | $0.49 | | Nine Months Ended Sep 30 | $2.41 | $1.07 | Note 15 — Stock Compensation Plans This note describes the company's stock-based compensation arrangements, including restricted stock and stock options - The 2022 Equity Incentive Plan, approved on September 29, 2022, reserved 1,369,771 shares for grants of incentive stock options, nonqualified stock options, restricted stock, and other awards[149] - Unrecognized compensation cost for non-vested restricted stock awards was $4.0 million and for stock option awards was $3.2 million at September 30, 2023, both expected to be recognized over the next 5 years[151][153] - Compensation expense for restricted stock was $723 thousand and for stock options was $576 thousand for the nine months ended September 30, 2023[151][153] Note 16 — Recent Accounting Pronouncements This note discusses the impact of recently adopted or issued accounting standards on the company's financial statements - The company adopted ASU 2023-03 in July 2023, which amends various SEC paragraphs but did not have a significant impact on its financial statements[154] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, including an analysis of balance sheet changes, results of operations for the three and nine months ended September 30, 2023, asset quality, liquidity, and capital resources. It also includes forward-looking statements and critical accounting policies Forward-Looking Statements This section discusses statements that are not historical facts and may constitute forward-looking statements, subject to various risks and uncertainties - Statements in the report that are not historical facts may constitute forward-looking statements, covered by safe harbor provisions[156] - Actual results may differ materially from predictions due to factors such as general economic conditions, changes in interest rates, increased competition, and regulatory changes[157] Critical Accounting Policies This section identifies the company's critical accounting policies, which involve significant judgments and assumptions - The Allowance for Credit Losses (ACL) is considered a critical accounting policy, involving significant judgments and assumptions[159] - The adoption of Topic 326 (CECL) on January 1, 2023, impacted the ACL for loans, held-to-maturity securities, and off-balance sheet credit exposures[159] Balance Sheet Analysis This section analyzes significant changes in the company's balance sheet items, including assets, liabilities, and stockholders' equity - Total assets increased by $295.0 million (+20.7%) to $1.7 billion at September 30, 2023, from $1.4 billion at December 31, 2022[160] - Net loans increased by $291.2 million (+24.0%) to $1.5 billion, primarily driven by $575.8 million in construction loan originations[165][166] - Total deposits increased by $243.7 million (+21.7%) to $1.4 billion, mainly due to a $364.3 million increase in certificates of deposit[173] - Stockholders' equity increased by $10.4 million (+4.0%) to $272.4 million, influenced by net income, equity plan amortization, and ESOP shares, partially offset by stock repurchases and dividends[178] Results of Operations for the Three Months Ended September 30, 2023 and 2022 This section analyzes the company's financial performance for the three months ended September 30, 2023, compared to the prior year, focusing on key income and expense drivers - Net income increased by $4.3 million (+57.0%) to $11.8 million for the three months ended September 30, 2023, compared to $7.5 million in the prior year[179] - Net interest income rose by $7.7 million (+43.9%) to $25.1 million, driven by an 81.3% increase in interest income from loans and interest-bearing deposits, and a rising interest rate environment[181][182][184] - Interest expense increased by $8.1 million (+420.2%) to $10.0 million, due to a 263 basis point increase in the cost of interest-bearing liabilities[185] - Provision for credit losses was $156 thousand in Q3 2023, compared to none in Q3 2022[187] - Non-interest expense increased by $1.1 million (+14.0%) to $8.9 million, primarily due to higher salaries and employee benefits and other operating expenses[195] Results of Operations for the Nine Months Ended September 30, 2023 and 2022 This section analyzes the company's financial performance for the nine months ended September 30, 2023, compared to the prior year, highlighting key trends in income, expenses, and profitability - Net income increased by $17.6 million (+106.1%) to $34.2 million for the nine months ended September 30, 2023, compared to $16.6 million in the prior year[208] - Net interest income increased by $29.1 million (+67.7%) to $72.0 million, driven by a 100.8% increase in interest income and a 329 basis point increase in the yield on interest-earning assets to 8.66%[209][211][213] - Interest expense increased by $18.8 million (+411.8%) to $23.4 million, with the cost of interest-bearing liabilities rising by 237 basis points to 3.35%[214] - Net interest margin increased by 169 basis points (+34.8%) to 6.54% for the nine months ended September 30, 2023[215] - Non-interest income increased by $1.5 million (+160.6%) to $2.4 million, primarily due to a decrease in unrealized loss on equity securities and an increase in BOLI income[222] - Non-interest expense increased by $3.9 million (+17.8%) to $26.0 million, mainly due to higher salaries and employee benefits and other operating expenses[225] Asset Quality This section assesses the quality of the company's assets, including non-performing assets, allowance for credit losses, and net charge-offs Total Non-Performing Assets: | Date | Amount (in thousands) | | :--- | :--- | | Sep 30, 2023 | $5,837 | | Dec 31, 2022 | $1,456 | - Non-performing assets at September 30, 2023, included $4,381 thousand in non-accrual construction loans[244] - The ratio of allowance to total loans decreased to 0.32% at September 30, 2023, from 0.45% at December 31, 2022[249] - Net charge-offs for the nine months ended September 30, 2023, totaled $286 thousand, including $159 thousand from construction loans sold at a loss[217][251] Liquidity and Capital Resources This section evaluates the company's liquidity position and capital adequacy, including borrowing capacity and unfunded commitments Average Liquidity Ratios (Nine Months Ended Sep 30, 2023 vs Year Ended Dec 31, 2022): | Ratio | 2023 Average | 2022 Average | | :--- | :--- | :--- | | Cash Liquidity | 7.1% | 11.2% | | On Balance Sheet Liquidity | 10.2% | 15.5% | | On Balance Sheet Liquidity & Borrowing Capacity | 19.4% | 19.0% | - Loan originations totaled $653.0 million for the nine months ended September 30, 2023, compared to $499.2 million in the prior year[260] - Available borrowing limits were $31.3 million from FHLB and $739.4 million from FRBNY as of September 30, 2023[261][262] - Unfunded commitments at September 30, 2023, included $464.1 million for construction and multi-family mortgage loans, and $123.9 million for outstanding commitments to originate loans[265] Off-Balance Sheet Arrangements This section discloses any off-balance sheet transactions that could materially affect the company's financial condition or results of operations - The company did not engage in any off-balance sheet transactions reasonably likely to have a material adverse effect on its financial condition, results of operations, or cash flows during the nine months ended September 30, 2023[267] Impact of Inflation and Changing Prices This section discusses the effects of inflation and changing prices on the company's financial performance - Changes in market interest rates have a greater impact on the company's performance than the effects of inflation, as its assets and liabilities are primarily monetary in nature[268] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section details the company's approach to managing interest rate risk through income and economic value simulation analyses. It assesses the impact of hypothetical interest rate changes on net interest income and net portfolio value, concluding that risk levels are within policy guidelines - Interest rate risk is managed using both income simulation (short-term net interest income) and economic value simulation (long-term market value of portfolio equity)[272][275] Twelve-Month Net Interest Income Sensitivity (September 30, 2023): | Change in Interest Rates (Basis Points) | Percent of Change | | :--- | :--- | | +200 | 14.72% | | +100 | 7.40% | | -100 | (8.81)% | | -200 | (17.86)% | Net Portfolio Value Sensitivity (September 30, 2023, in thousands): | Change in Interest Rates (Basis Points) | Estimated NPV | Percent of Change | | :--- | :--- | :--- | | +200 | $307,428 | 3.80% | | +100 | $302,827 | 2.25% | | 0 | $296,164 | 0% | | -100 | $286,634 | (3.22)% | | -200 | $274,942 | (7.17)% | - The company's interest rate risk results are within established policy guidelines as of September 30, 2023[283] Item 4. Controls and Procedures The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, ensuring timely and accurate reporting of material information - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2023[284] - The controls ensure that information required for SEC reports is recorded, processed, summarized, and reported within specified time periods[284] PART II — OTHER INFORMATION This section includes legal proceedings, risk factors, equity security sales, and other miscellaneous disclosures Item 1. Legal Proceedings The company is involved in various legal actions and claims arising in the normal course of business, which management does not expect to have a material adverse impact on its financial condition - Legal actions and claims are not expected to materially adversely impact the company's financial condition[286] Item 1A. Risk Factors The company refers to previously disclosed risk factors in its Annual Report on Form 10-K and Quarterly Report on Form 10-Q, stating that no material changes have occurred as of September 30, 2023 - No material changes to the company's risk factors have occurred since the Annual Report on Form 10-K for 2022 and the Quarterly Report on Form 10-Q for Q1 2023[287] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase program, authorized in May 2023, to acquire up to 10% of its outstanding common stock. It provides information on shares repurchased during the third quarter of 2023 - A stock repurchase program was authorized on May 30, 2023, to acquire up to 1,509,218 shares (10%) of the company's common stock[288] Common Stock Repurchases (Three Months Ended September 30, 2023): | Period | Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July 1 - 31, 2023 | 0 | $0 | | August 1 - 31, 2023 | 331,064 | $16.23 | | September 1 - 30, 2023 | 224,260 | $15.47 | | Total | 555,324 | | - As of September 30, 2023, 898,653 shares remained available for purchase under the program[289] Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period - Not applicable[290] Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - Not applicable[291] Item 5. Other Information There is no other information to report under this item - None[292] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, and XBRL formatted financial statements and taxonomy documents - The exhibits include Rule 13a-14(a)/15d-14(a) Certifications of the Chief Executive Officer and Chief Financial Officer[298] - Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 is also included[298] - XBRL formatted financial statements (Consolidated Financial Condition, Income, Comprehensive Income, Changes in Stockholder's Equity, Cash Flows) and related taxonomy documents are filed[298] Signatures This section contains the official certifications and signatures of the company's executive officers - The report was signed by Kenneth A. Martinek, Chairman and Chief Executive Officer, and Donald S. Hom, Executive Vice President and Chief Financial Officer, on November 13, 2023[301]