Checking in on Northeast Community Bancorp

NECB reports the first full quarter of results subsequent to its second-step conversion

Greetings! I wrote about Northeast Community Bancorp (NECB) for the inaugural issue of Conversion Confidential back in November, 2021. It remains the most viewed post to date although that may have do with the fact I blasted it into the ether by tagging a number of known bank investors on Twitter.

Somehow, nearly four months have passed since then and as of today, there are now over 375 subscribers to this publication! I didn’t really know what to expect as far as how much traction a niche newsletter on thrifts would gain. This feels like a good start, but I’m not sure what to measure it against either. There’s also a decent possibility that the entire thrift-investor TAM has dried up and that every person who may be possibly interested has already come across this Substack. Just kidding…but seriously.

Anyway, I want to thank everyone for reading and for those who have reached out directly or left comments. It’s fun to interact with other investors and learn from them!

With that out of the way, NECB’s 4Q and FY21 results have been out for awhile, if only in a press release. I’ll add any relevant details when the 10-K and proxy come out, but this isn’t meant to be a comprehensive deep-dive and really only covers developments since my initial post.

Financial Results

My first priority is to always evaluate the asset quality of NECB given the mix of the loan portfolio. On that front, things look pretty solid. The ratio of NPAs to total assets stands at 0.16%. There are no loans past due or in foreclosure and they didn’t take any charge-offs or provisions in the quarter. Recall that there was one $3.6 million loan written off in the previous quarter however. It is secured by real estate in Greenwich, CT and is guaranteed by the two borrowers. A continuing foreclosure backlog delays whatever recovery may occur. Lastly, a single loan also remains on a Covid-19 related deferral but only totals $79,000.

Earnings look fine to me. The ROA for the quarter was strong, but you can see the effects of additional capital dropping the ROE vs. a year ago. The FY21 figures are a bit lower on the back of the aforementioned charge-off and additional assets in cash from the conversion. I consider the efficiency ratio in the mid 50’s to also be reasonable for a smaller bank.

In the release, NECB noted a faster repricing of interest bearing liabilities compared to interest earning assets, which you can see in the improved interest spread between 2021 and 2020 in the margin analysis (not included here). Since NECB essentially benefitted in the recent rate declining environment, it’ll likely be a headwind to earnings power if the situation reverses and rates increase rather quickly (which appears it will be the case).

Here’s a couple other tidbits:

• Loans grew 18% over 2021 and 83% of the originations were in construction.

• The LTD ratio remains over 100% at 105% which is higher than I’d like, but it is down a bit from 107% last year. Total deposits increased 20% over the year while CDs declined nearly 16%. Non-interest bearing deposits are 35.7% of total deposits!

• Coming off a second step conversion, the capital position remains strong with a TCE ratio of 20.5% and a 15.3% CET1 regulatory ratio.

• A quarterly dividend of $0.06 per share was also announced in December which was paid in February.

• At a recent share price of $11.80 per share, NECB still trades at a meaningful discount to tangible book value. I’m not sure that is entirely justified. My eyes will be on management and the board of directors to monitor the magnitude of a repurchase plan I expect them to initiate come later this summer.

Ownership Disclosures

It looks like there’s a new (or at least recently increased stake above regulatory disclosure thresholds), large shareholder involved with the company. Based on a 13G filed in February, as of YE21, M3 Funds, LLC now owns 8.4% of NECB.

There isn’t a ton out there about M3F, Inc. and although I don’t know much about them, I feel like I have potentially seen them as shareholders in other names in the bank/thrift space. Here’s what I do know:

• Long/short fund based out of Salt Lake City, UT with over $375 million in assets under management

• Focuses on the financial services industry and employs a value-oriented approach focusing on fundamental analysis

• Given they filed a 13G as opposed to a 13D, they intend to be along for the ride passively, not as an activist

• Regulatory restrictions make it tough for shareholders to go over the 10% ownership threshold so at 8.4%, it’s probably unlikely they are buying much more going forward

Beyond M3F, one insider bought shares on the open market since November. Director Kenneth Thomas purchased a total 601 shares at $11.01 per share in December. NECB sometimes catches flak on Twitter and elsewhere (rightfully so) for a board of directors that doesn’t have skin in the game. It is one of my concerns given they have the overwhelming construction loan exposure. And while any open market purchase is technically a step in the right direction, I don’t believe a ~$6,600 will do much to alter that perception with investors.

That’s all for this week folks. Thanks again for reading and have a nice weekend!

Disclaimer: I and others I advise are long NECB shares. This is not investment advice nor a recommendation to buy or sell the security. Everything written is for general educational purposes and I have not considered your specific financial situation.