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Background
Welcome back to the fourth edition of Bank Buzz, where we cover the community bank sector, with a specific focus on mutual conversions, our favorite niche within a niche.
As a reminder, we like this space, as many of these little banks are inexpensive and possess the levers to materially increase shareholder value.
The key is to find banks trading below tangible book value (TBV) with overcapitalized balance sheets, solid asset quality, and shareholder-friendly management teams.
And then wait.
In this issue, we will share a handful of brief insights and then spotlight Northeast Community Bancorp (NASDAQ:NECB), which becomes an acquisition candidate this summer.
Comp Table & Quick Takes
For our mutual conversion universe, we are about halfway through earnings season, with ten of our 21 banks reporting 4Q results. Overall, results were better than expected, with robust TBV per share growth largely across the board.
However, share prices for both regional and community banks have been knocked down recently, due primarily to investors’ concern around the potential for commercial loan quality deterioration. The good news is our peer group has indicated no signs of trouble thus far.
SEC Filings & Internal Analysis
- MSVB jumped 30% following the announcement of its intent to be acquired by Beacon Credit Union. As mentioned, many times, this was not a surprise. Most mutuals (roughly 70%) are acquired within five years of conversion.
- MSBI increased its quarterly dividend by a penny and now offers a 5.0% yield. The bank is a reasonable holding for pure dividend investors, but trading at over TBV, we see better total return opportunities elsewhere.
- Serial share repurchaser, HONE, dropped 11% due to a goodwill impairment charge of its mortgage business as well as concerns around the bank’s exposure to commercial real estate. On the plus side, TBV per share grew 3% q/q and the stock now trades at 90% of TBV while offering a 2.9% dividend yield. In 4Q, the loan quality held up. We weren’t dying to own HONE when it traded over TBV, but the recent reset appears to have created an opportunity.
- Although most mutuals are eventually acquired, there is a three-year sale restriction period post-conversion. In July, four banks will become takeover candidates. They are Blue Foundry Bancorp (BLFY), TC Bancshares (TCBC), Texas Community Bancshares (TCBS), and Northeast Community Bancorp (NECB).
Let’s review one of our favorites, NECB.
Introduction
Headquartered in White Plains, NY, NECB is the holding company for Northeast Community Bank, which maintains eleven branch offices located in counties within New York state (Bronx, New York, Orange, Rockland, and Sullivan), and Massachusetts (Essex, Middlesex, and Norfolk).
The bank also utilizes three loan production offices in New City, NY, White Plains, NY, and Danvers, MA.
NECB operates the traditional community bank business model – attracting retail deposits and using those funds to originate loans secured by residential and nonresidential real estate.
However, it is important to note that relative to our peer set (included above), NECB focuses more on construction lending, with a specific emphasis on multi-family projects.
Our Investment Thesis
We are excited to own NECB due to the following:
- At Friday’s close ($15.91), the stock trades at only 84% of TBV ($13.67 per share) – a proxy for liquidation value.
- Asset quality is excellent with non-performing loans to total loans of 0.28%, as of December 31, 2023.
- With a tangible capital to asset (TC/A) ratio of over 15%, NECB possess a war chest of firepower. And this substantial liquidity is key to driving shareholder value as it provides the wherewithal to pay dividends, repurchase shares, and ramp loan growth.
- Management has an “all of the above” strategy – driving loan growth, issuing dividends (1.5% yield currently) and aggressively repurchasing shares below book value. At the current valuation, we expect the bank to be actively picking up shares.
- There is a good chance NECB is eventually acquired. Due to a unique set of regulations, thrifts must wait three years after their conversion date to sell the business. For NECB, the magic anniversary date is in July 2024.
Valuation & Risks
Historically, the average thrift is acquired at ~130% of tangible book value. To be conservative, we typically model an exit multiple of 120% of tangible book value.
In this case, we have targeted a tangible book value of ~$20 per share in June 2025, indicating an acquisition price of ~$24 per share or a ~50% return (prior to dividends) over the next ~16 months.
Potential risks to our thesis include:
- Quality of the loan portfolio deteriorates. As a small community bank, NECB is significantly exposed to the economic conditions within its regional footprint.
- Leadership changes course and elects to hold excess capital (versus returning to shareholders via dividends and buybacks) or pursue a buyside acquisition.
- Material change in the local competitive environment could slow growth or reduce profitability.
Final Thoughts
Down 10% YTD and trading at 84% of TBV, NECB looks attractive.
We believe management will continue to follow the proven, shareholder-friendly “thrift game plan” which includes conservative organic growth, dividends, prudent buybacks, and ultimately a sale.
Although there are no guarantees in the equity market, we view NECB as a low downside holding, which conservatively offers a total return of approximately 50% over the next 16–18 months.
Previous Editions of Bank Buzz
Missed an issue? Our previous commentary can be found here.
NB Bancorp Looks Inexpensive With Multiple Catalysts To Deliver Returns
2 Value Plays With Near-Term Catalysts
Buyback Bonanza At Small Cap Banks William Penn And Northeast Community
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
