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NorthEast Community Bancorp, Inc./MD/ 10-K Analysis & Summary – 3/14/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

NorthEast Community Bancorp, In

Filing date:

03/14/2025

TLDR:

ELI5:

NorthEast Community Bancorp, a bank that focuses on construction loans, made a bit more money this year, but it cost them more to get that money. They’re doing well overall, but need to be careful about the types of loans they’re making and how rising interest rates could affect them.

Accession #:

0001558370-25-002975

Published on

Analyst Summary

  • Net income increased slightly, driven by growth in net interest income, but offset by a decrease in non-interest income.
  • Net interest margin decreased from 6.41% to 5.62% due to rising deposit costs outpacing asset yield increases.
  • The loan portfolio is heavily concentrated in construction loans, representing 78.68% of total loans.
  • Brokered deposits represent a significant portion of total deposits (26.1%), raising concerns about funding stability.
  • Non-performing assets remain low at 0.25% of total assets, indicating sound asset quality.
  • Management highlights a focus on construction lending in high-absorption areas and plans for branch expansion and technology investments.
  • The company’s Tier 1 Capital Ratio is 13.65%.
  • Revenue growth was 19.03%, while net income growth was 1.72%.

Opportunities and Risks

  • Opportunity: Expanding the branch network in growing communities could drive deposit and loan growth.
  • Opportunity: Effective capital management, including stock repurchases and dividend payments, could enhance shareholder value.
  • Opportunity: Investing in technology could improve efficiency and competitiveness.
  • Risk: High concentration in construction lending and commercial real estate loans increases credit risk.
  • Risk: Rising interest rates could negatively impact profitability and asset values.
  • Risk: Reliance on brokered deposits and potential for deposit outflows could strain liquidity.
  • Risk: Concentration of lending activities in the New York and Boston metropolitan areas exposes the company to regional economic risks.
  • Risk: Dependence on IT systems and third-party service providers creates operational vulnerabilities.
  • Risk: Changes in banking regulations could adversely affect the company’s operations and financial performance.

Potential Implications

Company Performance

  • Continued focus on construction lending could lead to further growth, but also increases credit risk exposure.
  • Decreasing net interest margin may pressure future profitability unless deposit costs are managed effectively.
  • Investments in technology and branch expansion could improve long-term efficiency and market share.
  • Strong capital position provides a buffer against potential losses and supports future growth initiatives.

Stock Price

  • High concentration in construction lending and reliance on brokered deposits could negatively impact investor sentiment.
  • Decreasing net interest margin may raise concerns about future earnings potential.
  • Positive developments in branch expansion and technology investments could boost investor confidence.
  • The company’s P/E ratio is 6.79, P/B ratio is 1.00, and P/S ratio is 1.97.

SEC Filing Report: NorthEast Community Bancorp, Inc. (NECB) 10-K for FY2024

Executive Summary

This report analyzes NorthEast Community Bancorp, Inc.’s (NECB) 10-K filing for the fiscal year ended December 31, 2024. NECB demonstrates continued growth, primarily driven by its focus on construction lending. While net income saw a slight increase, a deeper dive reveals shifts in deposit strategies, increased operating expenses, and a changing interest rate environment impacting net interest margin. The company maintains a strong capital position and asset quality, but the concentration in construction loans and reliance on brokered deposits present potential risks. Overall, a HOLD recommendation is suggested, pending further observation of the impact of interest rate fluctuations and the management of credit concentration risks.

Company Overview

NorthEast Community Bancorp, Inc. is a Maryland-based savings and loan holding company. Its primary subsidiary, NorthEast Community Bank, operates eleven branches in New York and Massachusetts, focusing on construction lending, commercial real estate, and retail banking services. The company completed its second-step conversion in July 2021. NECB’s strategy involves growing assets through construction loans, maintaining asset quality, expanding its branch network, and managing capital effectively.

Detailed Analysis

Financial Statement Analysis

Key Ratios and Trends

Ratio 2024 2023 Trend Interpretation
Net Interest Margin 5.62% 6.41% Decreasing Compression of margins due to rising deposit costs outpacing asset yield increases.
Return on Average Assets (ROAA) 2.50% 2.90% Decreasing Slight decrease, indicating less efficient asset utilization.
Return on Average Equity (ROAE) 15.83% 17.09% Decreasing Slight decrease, reflecting lower profitability relative to equity.
Non-Performing Assets / Total Assets 0.25% 0.33% Decreasing Improvement in asset quality.
Construction Loans / Total Loans 78.68% 76.85% Increasing Increased concentration in construction lending.

Balance Sheet: Total assets increased by 13.9% driven by loan growth. The loan portfolio is heavily weighted towards construction loans. Deposits increased significantly, particularly in certificates of deposit, indicating a shift towards higher-cost funding sources. Borrowings decreased, reflecting a paydown of FHLB and FRB advances.

Income Statement: Net interest income increased, but the net interest margin decreased due to rising deposit costs. Non-interest income decreased due to the sale of the wealth management division and lower BOLI income. Non-interest expenses increased, primarily due to higher salaries and employee benefits.

Cash Flow: Operating cash flow increased. Investing activities used more cash due to net loan originations. Financing activities provided cash, mainly from deposit growth.

Uncommon Metrics

  • Brokered Deposits / Total Deposits: 26.1% in 2024. High reliance on brokered deposits can impact funding stability and increase costs.
  • Construction Loans / Total Risk-Based Capital: 485% in 2024. This concentration exceeds regulatory guidance and warrants close monitoring.

Management’s Discussion and Analysis (MD&A) Insights

Management highlights the company’s focus on construction lending in high-absorption areas, strong asset quality, and growth in non-interest-bearing deposits. They also mention plans for branch expansion and investments in infrastructure and technology. The MD&A acknowledges the competitive landscape and the need to manage credit and interest rate risks.

Red Flags

  • Decreasing Net Interest Margin: The compression of the net interest margin is a concern, indicating that rising deposit costs are outpacing the increase in asset yields.
  • High Concentration in Construction Lending: The significant concentration in construction loans, particularly in specific geographic areas, exposes the company to potential risks from regional economic downturns or changes in real estate demand.
  • Reliance on Brokered Deposits: The high percentage of brokered deposits raises concerns about funding stability and the potential for increased funding costs.

Risk and Opportunity Assessment

Risks

  • Credit Risk: High concentration in construction lending and commercial real estate loans increases credit risk.
  • Interest Rate Risk: Rising interest rates could negatively impact profitability and asset values.
  • Liquidity Risk: Reliance on brokered deposits and potential for deposit outflows could strain liquidity.
  • Geographic Concentration: Concentration of lending activities in the New York and Boston metropolitan areas exposes the company to regional economic risks.
  • Operational Risk: Dependence on IT systems and third-party service providers creates operational vulnerabilities.
  • Regulatory Risk: Changes in banking regulations could adversely affect the company’s operations and financial performance.

Opportunities

  • Branch Expansion: Expanding the branch network in growing communities could drive deposit and loan growth.
  • Capital Management: Effective capital management, including stock repurchases and dividend payments, could enhance shareholder value.
  • Technological Advancements: Investing in technology could improve efficiency and competitiveness.

Conclusion and Actionable Insights

NECB demonstrates continued growth, but faces challenges related to interest rate fluctuations, credit concentration, and funding costs. While the company maintains a strong capital position and asset quality, the identified risks warrant close monitoring.

Recommendations

  • Diversify Loan Portfolio: Reduce concentration in construction lending by expanding into other asset classes.
  • Manage Deposit Costs: Explore strategies to attract and retain lower-cost core deposits.
  • Monitor Interest Rate Risk: Implement strategies to mitigate the impact of rising interest rates on net interest margin and asset values.
  • Strengthen Risk Management: Enhance risk management practices to address credit concentration and operational vulnerabilities.

Financial Analysis of NorthEast Community Bancorp, Inc. (NECB)

1. Commentary

NorthEast Community Bancorp’s financial performance in 2024 shows a slight improvement in net income, driven by increased net interest income, but offset by a decrease in non-interest income. Loan growth remains a key driver, particularly in construction loans, but this is coupled with a decrease in the allowance for credit losses as a percentage of total loans. The company maintains strong capital ratios, exceeding regulatory requirements. Non-performing assets remain low, indicating sound asset quality.

2. Financial Ratio and Metric Analysis

Profitability

  • Gross Profit Margin: Not applicable for banks.
  • Operating Profit Margin:

    • Metric: (Net Income + Income Tax Expense + Non-Interest Expense) / Total Revenue = ($47,074 + $18,699 + $39,062) / ($160,013 + $2,783) = 64.25%
  • Net Profit Margin:

    • Metric: Net Income / Total Revenue = $47,074 / ($160,013 + $2,783) = 28.85%
  • Return on Assets (ROA):

    • Metric: Net Income / Average Total Assets = $47,074 / (($2,009,581 + $1,764,135)/2) = 2.50%
  • Return on Equity (ROE):

    • Metric: Net Income / Average Total Equity = $47,074 / (($318,341 + $279,325)/2) = 15.83%
  • Earnings Per Share (EPS) – Basic:

    • Metric: $3.58
  • Earnings Per Share (EPS) – Diluted:

    • Metric: $3.52

Liquidity

  • Current Ratio:

    • Metric: Current Assets / Current Liabilities. Need to calculate current assets and liabilities.

      Current Assets = Cash and cash equivalents + Equity securities + Securities held-to-maturity + Accrued interest receivable = $78,259 + $21,994 + $14,616 + $13,481 = $128,350

      Current Liabilities = Deposits + Advance payments by borrowers for taxes and insurance + Accounts payable and accrued expenses = $1,670,375 + $1,618 + $14,530 = $1,686,523

      Current Ratio = $128,350 / $1,686,523 = 0.076
  • Quick Ratio (Acid-Test Ratio):

    • Metric: (Current Assets – Inventory) / Current Liabilities. Since banks do not have inventory, this is the same as the current ratio.

      Quick Ratio = $128,350 / $1,686,523 = 0.076
  • Cash Ratio:

    • Metric: (Cash and Cash Equivalents) / Current Liabilities = $78,259 / $1,686,523 = 0.046

Solvency/Leverage

  • Debt-to-Equity Ratio:

    • Metric: Total Liabilities / Total Equity = $1,691,240 / $318,341 = 5.31
  • Debt-to-Assets Ratio:

    • Metric: Total Liabilities / Total Assets = $1,691,240 / $2,009,581 = 0.84
  • Interest Coverage Ratio (Times Interest Earned):

    • Metric: EBIT / Interest Expense = (Net Income + Income Tax Expense + Interest Expense) / Interest Expense = ($47,074 + $18,699 + $57,221) / $57,221 = 2.15

Activity/Efficiency

  • Asset Turnover:

    • Metric: Total Revenue / Average Total Assets = ($160,013 + $2,783) / (($2,009,581 + $1,764,135)/2) = 0.086

Valuation

  • Price-to-Earnings Ratio (P/E):

    • Metric: Market Cap / Net Income. Market Cap = Shares Outstanding * Stock Price = 14,016,254 * $22.82 = $319,851,107. Net Income = $47,074,000.

      P/E Ratio = $319,851,107 / $47,074,000 = 6.79
  • Price-to-Book Ratio (P/B):

    • Metric: Market Cap / Book Value of Equity. Book Value of Equity = $318,341,000

      P/B Ratio = $319,851,107 / $318,341,000 = 1.00
  • Price-to-Sales Ratio (P/S):

    • Metric: Market Cap / Total Revenue. Total Revenue = $160,013,000 + $2,783,000 = $162,796,000

      P/S Ratio = $319,851,107 / $162,796,000 = 1.97
  • Enterprise Value to EBITDA (EV/EBITDA):

    • Metric: (Market Cap + Total Debt – Cash) / EBITDA. Total Debt = Borrowings + Lease Liability – Operating + Lease Liability – Financing = $0 + $4,108 + $609 = $4,717,000. Cash = $78,259,000. EBITDA = Net Income + Interest Expense + Taxes + Depreciation = $47,074 + $57,221 + $18,699 + $1,186 = $124,180,000

      EV/EBITDA = ($319,851,107 + $4,717,000 – $78,259,000) / $124,180,000 = 2.07

Growth Rates

  • Revenue Growth:

    • Metric: (Current Year Revenue – Prior Year Revenue) / Prior Year Revenue = (($160,013 + $2,783) – ($132,488 + $3,743)) / ($132,488 + $3,743) = 19.03%
  • Net Income Growth:

    • Metric: (Current Year Net Income – Prior Year Net Income) / Prior Year Net Income = ($47,074 – $46,276) / $46,276 = 1.72%
  • EPS Growth:

    • Metric: (Current Year EPS – Prior Year EPS) / Prior Year EPS = ($3.58 – $3.32) / $3.32 = 7.83%

Other Relevant Metrics

  • Non-Performing Assets to Total Assets:
    • Metric: Total Non-Performing Assets / Total Assets = $5,120 / $2,009,581 = 0.25%
  • Efficiency Ratio:
    • Metric: Non-Interest Expense / (Net Interest Income + Non-Interest Income) = $39,062 / ($102,792 + $2,783) = 37.05%
  • Net Interest Margin:
    • Metric: Net Interest Income / Average Interest-Earning Assets = $102,792 / $1,829,131 = 5.62%
  • Tier 1 Capital Ratio:
    • Metric: Tier 1 Capital / Risk-Weighted Assets = $285,272 / $2,092,675 = 13.65%

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️