Northeast Community Bancorp: Recent Upside Isn’t The End Of The Story (NASDAQ:NECB)

One of my best calls in recent months has been a rather small bank by the name of Northeast Community Bancorp (NASDAQ:NECB). And by small, I mean very small. As of this writing, the enterprise has a market capitalization of $268.2 million. That doesn’t make it the smallest bank I have analyzed, but it’s certainly one of the smallest. Back when I wrote about the business favorably in May of this year, the market cap was considerably lower. But shares have skyrocketed higher to the tune of 36% since then. That dwarfs the 7.3% increase seen by the S&P 500 over the same window of time.

Considering that I rated the company a ‘strong buy’, I can only call this a home run. In my original article about the company, I called it a stellar prospect that made sense for value investors. I didn’t think that the stock would rise so much so quickly, but I am happy that it did. The big question that we are left with, though, is whether shares still offer additional upside and whether that upside is enough to justify keeping the company rated a ‘strong buy’ or if it’s finally time for a downgrade to something more modest. After looking at the picture in detail, I believe that additional upside commensurate with a ‘strong buy’ candidate is warranted. In fact, I would say that, out of all of the banks I have looked at, this might be the most attractive.

Stellar performance

Not a lot has happened from a fundamental perspective at Northeast Community Bancorp since I wrote about it a few months ago. At that time, we only had data covering through the first quarter of the 2024 fiscal year. Results now extend through the second quarter. To start with, we should probably touch on the income statement. During the second quarter, net interest income for the bank came in at $26.4 million. That’s an increase of 12.8% over the $23.4 million the company reported just one year earlier.

To be honest with you, I am shocked that net interest income rose by this much after discovering that, year over year, the firm’s net interest margin has dropped from 6.60% to 5.79%. Declines in net interest margin have been common recently. The high interest rate environment that we are dealing with is causing depositors to look elsewhere for opportunities. Even taking that into consideration, though, this contraction does seem rather significant. It really is the result of a surge in interest-bearing liabilities. The average balance for the second quarter for these liabilities was just under $1.30 billion. That is a significant increase over the $928 million reported just one year earlier. Add on top of this the rise in the weighted average interest rate of these liabilities from 3.32% to 4.33%, and we get an increase in interest expense from $7.7 million to $14 million.

The strong second quarter showing for the bank was instrumental in pushing up net interest income for the first half of this year relative to the same time last year. However, not everything has been rising. Non-interest income has come in quite weak. In the second quarter of 2023, it was $1 million. In the most recent quarter of this year, it had fallen to $0.7 million. This was mostly because of declines in earnings on bank owned life insurance and in investment advisory fees. The drop in investment advisory fees can be chalked up to the company’s decision, in December of last year, to sell off it’s an investment advisory and financial planning services business to another firm. That deal closed in January of this year. Even though non-interest income took a hit, net interest income has still risen year over year, climbing from $11.1 million to $12.8 million. That has helped to push net profits for the first half of this year up to $24.2 million, compared to the $22.3 million reported last year.

Moving on to the balance sheet, we have seen some other very impressive results. By the end of the first quarter of this year, the company had deposits of $1.51 billion. Those grew to $1.56 billion by the second quarter of this year. The value of loans so a similar increase, rising from $1.65 billion to $1.70 billion. These are the major parts of the company’s balance sheet. The other components that we could talk about really aren’t that significant. For instance, at the end of the most recent quarter, Northeast Community Bancorp had only $33.4 million in securities on its books. This was down from the $33.8 million reported for the first quarter of this year. Cash and cash equivalents, however, expanded from $107.4 million to $113.9 million. Even debt has been low, coming in at $47.6 million in the most recent quarter. For context, in the first quarter of 2024, it was only marginally higher at $49.3 million.

What we have in Northeast Community Bancorp is a bank that is growing consistently where it counts. Revenue and profits are climbing nicely, while deposits and loans are also expanding. Debt is low and cash and cash equivalents have ticked up somewhat. If we annualize the earnings for the company that we have seen for the first half of this year, we also have the fact that shares are very cheap. In the chart below, you can see that the company is trading at a price to forward earnings multiple of only 5.3. Even if we were to use historical results from 2023, the bank would still be trading at a price to earnings multiple of 5.8. Many of the banks that I look for as prospects and consider to be attractive are trading at price to earnings multiples of between 6 and 10.

In addition to shares being cheap on an absolute basis, they are also cheap relative to similar financial institutions. In the chart, you can also see how five similar companies are valued on a priced earnings basis. Our candidate is cheaper than all of them. The picture does change somewhat if we use the price to book and priced tangible book approach. In the chart below, you can see that, of the five companies, four are cheaper than our candidate on a price to book basis. But this number drops to two of the five on a price to tangible book basis.

Another thing that the institution has going for it is high asset quality. In the first chart below, you can see the return on assets for Northeast Community Bancorp, as well as for the same five companies I am comparing it to already. With a rating of 2.70%, our candidate is leagues above the competition. In the subsequent chart, you can see the same type of analysis using the return on equity. Once again, the 17.28% achieved by Northeast Community Bancorp places it far above the competition. In my book, these asset quality measures easily make up for the relatively high price to book value outcome.

Takeaway

Even though I did not expect Northeast Community Bancorp to appreciate as quickly as it did, I am happy about that and I feel validated. I do think the easy money has probably been made by this point. However, I suspect that shares will continue to rise from here over the long haul. The stock is incredibly cheap, especially on an absolute basis. Asset quality is high, and the institution is growing in all the right places. Add on top of this how low debt is, and I do believe that the ‘strong buy’ rating I assigned the company previously should still hold.