Northeast Community Bancorp (NECB): Solid Fundamentals, Reasonable Valuation

Northeast Community Bancorp, Inc. (NASDAQ: NECB) exudes durability in a highly volatile market environment. This bank maintains a robust performance with its solid revenues and margins. Its well-diversified portfolio remains one of its strongholds that help drive its growth. Even better, it maintains an excellent liquidity position, allowing it to increase its operating capacity without sacrificing its cash reserves. The bank can take more risk to derive more returns, making it a secure company amidst macroeconomic changes.

Moreover, it stays capable of sustaining its still low but consistent dividends. It can even raise payouts even without increasing its financial leverage. Likewise, the stock price affirms the bullish view as it shows potential undervaluation.

Company Performance

Northeast Community Bancorp, Inc. operates in a highly cyclical market. But it stays successful in sustaining its impeccable performance while hedging risks. The past two years have hampered its potential. Yet today, it continues to bounce back as it navigates the environment with ease and prudence. It benefits from interest rate hikes and maximizes it as the inflation lull continues.

The core operating revenue of the company is mainly composed of interest income. It amounts to 19.38 million, a 59% year-over-year growth. We can attribute this dramatic growth to several factors. First, its solid loan portfolio sustains its solid growth with no non-accruals and deferrals. Thanks to the continued interest rate increases, matched with the higher loan demand and originations. Also, we can see its prudent loan portfolio diversification. A substantial portion of loans goes to construction, which can be risky yet promising. As of mid-4Q 2022, construction starts have already increased by 17%. It may remain almost unchanged, although with a little increase despite worries over a potential economic slowdown. I will discuss more of it in the succeeding parts. The smaller portion is occupied by C&I and residential real estate loans.

Second, it manages the other earning and interest-sensitive assets with prudence and efficiency. Its deposits to other banks generate more yields as interest rate hikes. It serves many purposes as it can increase returns and can be immediately withdrawn to improve liquidity at the same time. The bank can also withdraw it for lending to maintain cash reserves. Interest income from securities is also higher, which should not be surprising. After all, almost all its securities are backed by the government. These are in the form of government-backed mortgage securities and municipal bonds. So, they are more flexible to inflation and can hedge potential valuation reductions better.

Meanwhile, interest expense also increases with interest rate hikes, reaching $1.92 million. These are mainly driven by deposits, 64% are interest-bearing. Despite this, net interest income stays in the uptrend, amounting to $17 million. Even better, non-interest expenses are relatively stable despite inflation. This aspect shows two things. First, the company handles and diversifies its interest-sensitive portfolio prudently. Second, it enhances its core operational efficiency to keep up with the rising prices. With that, the operating margin is now 51%, a massive increase from 8.3% in the comparative quarter.

This year, I expect it to sustain its solid performance. Inflation continues to lull while interest rates hikes persist. Its focus on loan growth, especially in construction, may remain fruitful. Also, its excess liquidity can sustain growth across all portfolios. Other revenue components may stay robust due to their nature. Likewise, I expect margins to keep expanding as inflation decreases. It can help the company manage non-interest expenses better to improve efficiency.

How Northeast Community Bancorp, Inc. May Sustain Its Growth

I expect Northeast Community Bancorp, Inc. to remain durable, although near-term growth may not be as robust as in 2022. I stay optimistic as its performance and fundamentals show. It can withstand the potential recession and emerge unfazed. The quality of its portfolio and liquidity levels also offers increased flexibility to market changes. As such, NECB is well-prepared for a potential slowdown. But I don’t think there will be a recession. If it happens, it may not be destructive due to several reasons. First, inflation is more demand-pull than cost-push. The elevated prices are driven by pent-up demand, making supply inadequate. But now that supply chains across industries improve, we are seeing the end of the backlog. Also, the inflation lull is better than initially expected. It is now at 6.5%, about 30% lower than its 2022 peak. In turn, I expect interest rates to keep increasing, but increments may cool down. I also expect it to peak at 4.5-4.8% instead of the consensus of 5-5.25%.

With regard to construction and real estate loans, I believe the company may be safe. Although near-term growth may cool down, demand may still be higher. Note that there are tons of pending projects poised to break ground. As such, its increased focus on loans for cost-friendly residential units in high demand-high absorption places is strategic. I also don’t buy the rampant concerns about the second-largest property crash since The Great Depression. Let’s face it, property inventories remain low, and cannot meet demand. The rising property prices are more driven by demand than the cost of labor and materials. We can see that construction has not ramped up since the Global Financial Crisis. The real estate and construction industry have been conservative, which may help avoid the potential crash. As sales cool down, mortgage rates may follow the pattern. The decrease may create another demand surge, making NECB a hundred steps ahead of the market.

Moreover, NECB is an excellent company, well-positioned for market opportunities and against headwinds. Loans are now 22% higher than in the previous year, but yields rose by 57%. These comprise 1.7% of loans compared to 1.2% in the comparative quarter. Thanks to prudent loan management and diversification, matching interest rate hikes. It knows the niche to optimize to maximize its potential. The worry we have now is the low credit allowance, which I find a bit risky. Also, the loan-to-deposit ratio remains over 1x, so there may be limited reserves during defaults or delinquencies. Despite this, it can offer higher rates to attract deposits and ensure liquidity. It has excess liquidity and viability, so it has more room to handle potential expense increases. Even better, its cash levels are already twice as much as the value in the comparative quarter. Investment securities are reported lower but remain high. Meanwhile, borrowings are 24% lower, which may help maintain liquidity amidst higher interest rates. Hence, cash and investment securities can cover the total liabilities net of deposits in a single payment. This excess liquidity proves the maintained balance between growth and fundamental stability.

Stock Price Assessment

The stock price of Northeast Bancorp, Inc. has been in an uptrend. It does not convey any downward or dip potential. At $15.31, it remains 42% higher than its value last year. Even so, the stock price still shows undervaluation. The price-earnings multiple of 11.42x agrees that the stock price appears reasonable. If we multiply it by the estimated EPS of $1.47, the target price will be $16.79, a 9% upside. Likewise, NASDAQ has an optimistic view with its estimated EPS of $1.63-1.79 and a target price of $18.62-20.44, a 22-34% upside. The PTBV ratio of 0.84x agrees with the reasonability of the stock price.

Moreover, dividends are enticing, although payments only started in 2021. The stock price is acceptable, given the dividend yield of 2.38% and the dividend payout ratio of 32%. It is way better than the NASDAQ average of 1.3%. To assess the stock price better, we will use the DCF Model.

FCFF $9,800,000

Cash $14,180,000

Borrowings $23,700,000

Perpetual Growth Rate 4.8%

WACC 9.2%

Common Shares Outstanding 16,215,000

Stock Price $15.31

Derived Value $16.21

The derived value adheres to the supposition of a potential undervaluation. There may be a 5.8% upside in the next twelve months. The investor may consider it an ideal entry point, but the current stock price is near the target price.

Bottom line

Northeast Community Bancorp, Inc. maintains well-balanced revenue growth and fundamental stability. Its excellent liquidity may help it sustain its solid performance in a highly cyclical environment. Dividends are promising with decent yields and special payouts. Meanwhile, the stock price still appears undervalued but is approaching the target price. The recommendation is that Northeast Community Bancorp, Inc. is a buy.