Northeast Community Bancorp: Recent upside isn’t the end of the story (NASDAQ:NECB)

One of my best calls in recent months was a fairly small named bank Northeast Community Bancorp (NASDAQ: NECB). And by small, I mean very small. At the time of writing, the company has a market capitalization of $268.2 million. That doesn’t make it the smallest bank we’ve reviewed, but it’s certainly one of the smallest. At the time when I wrote about favorable business in May this year, the market capitalization was considerably lower. But the stock has soared 36% since then. That dwarfs the 7.3% gain seen by the S&P 500 over the same time window.

Given 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 go up so fast, but I’m happy it did. The big question we’re left with, though, is whether the stock still offers additional upside, and whether that upside is enough to justify maintaining the company’s “Strong Buy” rating, or whether it’s finally time for a downgrade to something more modest. After looking at the picture in detail, I think an additional advantage is warranted, commensurate with a “strong buy” candidate. In fact, I’d say that of all the banks I’ve looked at, this might be the most attractive.

Stellar performance

Not much 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 the first quarter of fiscal year 2024. The results now extend to the second quarter. For starters, we should probably touch on the income statement. During the second quarter, net interest income for the bank was $26.4 million. That’s a 12.8 percent increase from the $23.4 million the company reported just a year ago.

To be honest, I’m shocked that net interest income has grown this much after discovering that year-over-year net interest margin fell from 6.60% to 5.79%. Net interest margin declines have been common recently. The high interest rate environment we are dealing with is causing depositors to look elsewhere for opportunities. Even taking this into account, however, this contraction seems quite significant. It is indeed the result of an increase in interest-bearing liabilities. The average balance for the second quarter for these debts was just under $1.30 billion. This is a significant increase from the $928 million reported just a year earlier. Add on top of that the increase in the weighted average interest rate of these debts from 3.32% to 4.33% and we get an increase in interest expense from $7.7 million to $14 million.

The bank’s strong second quarter was instrumental in boosting net interest income for the first half of this year compared to the same period last year. However, not everything grew. Non-interest income ended up pretty weak. In the second quarter of 2023, it was $1 million. In the most recent quarter this year, it fell to $0.7 million. This was mainly due to declines in income from bank-owned life insurance and investment advisory fees. The drop in investment advisory fees can be attributed to the company’s decision last December to sell its investment advisory and financial planning services business to another firm. That deal ended in January of this year. Even though non-interest income was hit, net interest income still grew year-over-year, rising from $11.1 million to $12.8 million. This helped boost net profit for the first half of this year to $24.2 million, compared to $22.3 million reported last year.

Moving on to the balance sheet, I saw other very impressive results. By the end of the first quarter of this year, the company had $1.51 billion in deposits. They rose to $1.56 billion by the second quarter of this year. The value of the loans therefore a similar increase, rising from 1.65 billion dollars to 1.70 billion dollars. These are the major parts of the company’s balance sheet. The other components we could talk about are really not that significant. For example, at the end of the most recent quarter, Northeast Community Bancorp had just $33.4 million in securities on its books. That was down from the $33.8 million reported for the first quarter of this year. However, cash and cash equivalents increased from $107.4 million to $113.9 million. Even debt was down, coming in at $47.6 million last quarter. For context, in the first quarter of 2024, it was only slightly higher at $49.3 million.

What we have in Northeast Community Bancorp is a bank that consistently grows where it matters. Revenues and profits are growing nicely, while deposits and loans are also expanding. Debt is low and cash and cash equivalents are up somewhat. If we annualize the company’s earnings that we saw in the first half of this year, we also have the fact that the stock is 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 trade at a price-to-earnings multiple of 5.8. Many of the banks that I look at as prospects and find attractive are trading at multiples of 6 to 10 earnings.

In addition to being cheap in absolute terms, stocks are also cheap relative to similar financial institutions. In the chart, you can also see how five peer companies are valued on a price-to-earnings basis. Our candidate is cheaper than all of them. The picture changes somewhat if we use the reservation price and tangible price book approach. In the chart below, you can see that out of the five companies, four are cheaper than our candidate on a price-to-book basis. But that number drops to two out of five based on tangible book value.

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

Take away

Even though I didn’t expect Northeast Community Bancorp to appreciate as quickly as it did, I’m happy about it and feel validated. I think the easy money has probably been made by now. However, I suspect the stock will continue to rise from here in the long term. 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 that how low the debt is, and I think the “strong buy” rating I previously assigned the company should remain.