Northeast Community Bancorp, White Plains, NY (NECB)

The Case of a Gluttonous Bank en route to Morbid Obesity

Is there any hope Northeast Community Bancorp will check its overindulgence before it's too late? 

After reviewing the state of affairs at NECB, I have to agree with what the market is saying: the bank's directors have dissipated half of its value since it came public in 2006, and their expansion plans are only taking it down.

To watch how they gorge themselves at the expense of shareholders is just plain revolting. The two Kennies in charge ought to be ashamed of themselves, cut their salaries, dispose of their far-flung branches, take the rest of the bank's shares public, buy back what stock they can, sell to the highest bidder, and spare us their ugliness.

Disclosure: As of this posting, I do not own shares of NECB but may subsequently purchase them.

Prospective Buyers
Customers Bancorp, Wyomissing, PA (privately held) - Recently purchased CMS Bancorp (CMSB) of White Plains and has expressed intentions to continue growing in New York
Hudson Valley Holding, Younkers, NY (HVB) - Five times bigger than NECB with overlapping branches 
Peoples United Financial, Bridgeport, CT (PBCT) - An acquisitive bank with overlapping branches
Financial Snapshot
(as of 06/30/2012)

Total assets:
Tangible book value per share:
NPAs to assets:
Price to book:
Market cap:
Dividend yield:
Trailing 12-month return on assets:
Trailing 12-month return on equity:
Kenneth Martinek, Chairman, President, and CEO
Kenneth H. Thomas, Director and "Consultant"
Salvatore Randazzo, CFO and Executive VP
Jose Collazo, COO, CIO, and Executive VP

Red Flags
NECB isn't earning anything close to a reasonable return
  • Decent banks make 10% on equity or can at least articulate a plan for getting there
  • The most NECB ever made was about 0.8% ($6M on $240M in assets) in the three years prior to going public (2003-2005)
  • In contrast, Lake Shore Bancorp (LSBK), a bank of almost identical asset size, is nearly five times more profitable
  • NECB's stock is trading at half where it was when it came public, while rival LSBK is still trading where it came public
NECB's expansion plan is delusional
  • The more NECB has grown over the past decade, the less it has earned
  • After more than doubling its assets, NECB netted a mere $1.5M, 0.01% return — a spectacular 79% drop in performance from before going public in 2006
NECB is grossly overcompensating its executives
  • The executive team of Northeast Community Bancorp earns more in personal compensation than the bank earns as a corporation 
  • NECB's CEO pays himself $340K per year — more than three times the national average of $110K estimated by Career Builder
  • Kenneth Martinek's compensation is 40% higher then that paid to Daniel P. Reininga, CEO of way-better-performing Lake Shore Bancorp (LSBK)
NECB is putting self-dealing above insider ownership
  • Bank Director Kenneth Thomas has been receiving compensation from NECB for 34 years!
  • NECB has paid Thomas over $500K in the past five years alone, presumably for expansion consulting services that clearly haven't served the bank or its shareholders
  • The self-proclaimed bank analyst has at least $2.5M to toss around in bids after failed bank branches, but doesn't believe enough in his own bank after all these years to own more than $50K worth of stock
  • Last week this whiny sore loser loose cannon of a Director lost a bid to purchase a bank branch in Doral, FL and filed a lawsuit against the winning bidder

Franklin Financial Services, Chambersburg, PA (FRAF)

The Case of a Deeply-Rooted Pennsylvania Money Tree

If you're looking for a safe place to earn a solid dividend at a bargain price, Franklin Financial Services might just be your money tree. 

You can buy this undervalued bank's stock today at $13.60, earn a 5% dividend for the foreseeable future, and obtain a reasonable chance of doubling your money.

Disclosure: As of this posting, I own shares of FRAF and may subsequently either dispose of them or purchase more.

Prospective Buyers
F.N.B. Corp, Hermitage, PA (FNB)
M&T Bank Corp, Buffalo, NY (MTB)
PNC Financial Services, Pittsburgh, PA (PNC)
Financial Snapshot
(as of 3/31/2012)

Total assets:
Book value per share:
NPAs to assets:
Price to book:
Market cap:
Dividend yield:
Trailing 12-month return on assets:
Trailing 12-month return on equity:
The Crew
G Warren Elliott, Chairman
William Snell Jr, President and CEO
Mark Hollar, Senior VP, Treasurer, and CFO
The Skinny
How undervalued is FRAF's stock price?
  • Over the past 12 months, the KBW Bank Index climbed 12.2%, while FRAF stock fell 17%
  • The average bank in the KBW Index trades at 124% of book value, while investors can now buy FRAF at 61% of book value
  • The average bank in the KBW Index trades at 15x earnings, while FRAF is trading at 8x earnings
  • Therefore, Franklin Financial Services is effectively trading at a 50% discount 
Why is FRAF so cheap?
  • Most investors have never heard of it
  • FRAF recently cut its dividend so many people who did own it appear to be selling
  • Current EPS of $1.60 is well below historical level of $2.50
  • NPAs were still rising in Q1 and may not have peaked
  • Brokerage firms do not appear to be following FRAF
What would make the stock price double?
  • When NPAs start to decline…
  • Then earnings and book value will grow…
  • And people will start to trust that the dividend will not be cut again…
  • Then FRAF could trade at book value 
What makes this stock relatively safe?
The bank has been around for over 100 years and is very conservative
  • Its managers don’t pay themselves exorbitant salaries or take big risks
  • It has maintained profitability through the Great Recession
  • It never took TARP
  • Regional unemployment is significantly below the national average