NECB - Northeast Community Bancorp: Strong Upside Potential As Bottom Line Results Impress

2023-08-30 09:57:20 ET

Summary

• Northeast Community Bancorp Inc. has seen triple-digit growth in its bottom line due to higher interest rates.
• NECB operates in the regional bank industry and has a small market cap, making its share price volatile.
• The company offers financial services and loans, with a focus on construction and residential real estate. Loan growth and increasing dividends make NECB an appealing investment.

Introduction

In late July we got the last earnings report from Northeast Community Bancorp Inc (NECB) which had investors impressed as the share price has rallied immensely since then. The bottom line saw triple-digit growth as the higher interest rates are making a clear positive impact on it right now. The valuation remains appealing though and I think that NECB can provide investors with a lot of value still, especially as the rising net margins are likely to result in a raise to the dividend. If NECB gets an earnings multiple that's the same as the sector, then the upside potential is nearly 100%.

The market cap is small, just barely above the $200 million mark which means that the share price is likely to continue being quite volatile in the coming quarters, and allocating a smaller portion to the company might be advisable. Nonetheless, I am issuing a buy rating for NECB and see the current upside as very favorable.

Company Structure

NECB operates in the regional bank industry where it has built up a small presence. The company has a small market cap and seems to be largely affected by how the winds turn in the sector, but lately, the strong operational performance has enticed investors and the share price rose nearly 50% in the span of a few months as the bottom line continues to impress for NECB.

The company is a holdings company for NorthEast Community Bank which provides financial services for both individuals and businesses in the United States. The company has diversified its offerings to serve a larger market and grow efficiently because of it. The company offers regular savings accounts and checking accounts among others too.

As a bank, the company also offers loans that are mainly aimed at construction and residential real estate, but also regular consumer loans. The recent uptrend of interest rates in the US has led to far better earnings potential for NECB and this has been quite clearly shown in the last report when the bottom line reached $5.7 million for the quarter. The loans-in-process and commitments for the company landed at $815 million and NECB now trades at a p/b of just 0.82. For companies in the financial sector, a factor to look for often is a p/b below 1. This indicates you aren't overpaying for the book value of the business and the potential for a better ROI increases.

As for the loan portfolio of the company, the largest amount is coming from the construction market where over $1 billion is made up. In comparison to the total loan portfolio, a value of $1.39 billion which is a substantial amount, and some worries of being over-reliant I think are warranted. But as interest rates go down, the incentives to expand and invest in construction increase and I don't think any of the loans face an unproportionate amount of delinquencies or risks for defaulting. Interest income continues to rise for NECB and I don't see signs of weakness for it yet either.

Looking on the positive side though, the total loans are increasing at a very steady pace since December 31, 2022, nearly $200 million, which would be an increase of over 15%. That is impressive and showcases that NECB is experiencing a lot of momentum still. For the Q3 report, this will be a key thing to watch out for. If the loan growths start to stagnate the share price could quickly fall. As the trading volumes are quite low the likelihood of that is still quite high, no matter how solid the fundamentals of the business might be.

Valuation & Comparison

The GGM model above reveals that right now NECB is offering a solid entry point for investors. The company has a price target of $24 for the FY2023 and that is well above where the company is right now. The dividend I think can increase the way I predict because of the rising interest rates and possible scenario where they remain elevated for some time. If NECB also continues to see loan growth the way it has then more earnings can be generated and diverted to increasing the dividend, boosting shareholder returns.

Risk Associated

A significant proportion of the loans issued by the company are directed toward construction projects, a sector that carries both inherent risks and promising growth opportunities. Notably, construction ventures can be characterized by their blend of risk and reward. While investing in construction can be promising, it's crucial to recognize the associated risks. The construction industry is susceptible to various external factors such as economic fluctuations, regulatory changes, and supply chain disruptions. The delicate balance between these risks and the potential for high returns underscores the challenging nature of the sector.

A current concern that has come to our attention is the relatively low credit allowance, a factor that I believe carries a certain level of risk. This is particularly relevant in the context of the ongoing economic dynamics, where unexpected challenges can arise. It's crucial to maintain a robust credit allowance to cushion the potential impact of defaults or delinquencies.

Investor Takeaway

For NCEB right now, the share price has been quite volatile as the market cap is small and earnings reports and future potential largely dictate how the price goes. The valuation still looks appealing though and the current price is below my target for 2023. The company is also increasing its buyback program which further adds to the value for investors. The company authorized earlier in 2023 that it could acquire around 10% of the outstanding shares. If executed the potential returns for shareholders could exceed that of a regular index fund, which is partly why I think NECB right now is so intriguing. The impressive loan growths recently further add to my bullish view of the business and I will be issuing a buy rating for NECB right now.

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