Northfield Bank - An Undervalued Thrift With Tailwind

| About: Northfield Bancorp, (NFBK)

Northfield Bank (NASDAQ:NFBK) - Long @$11.88

Northfield Bank, with $2.8 billion in assets and more than 120 years in business, operates 30 branches in attractive markets of NY (Richmond and Kings Counties) and NJ (Middlesex and Union counties).

NFBK has 12 branches in Richmond and maintains 10% of the deposit market share. Richmond County has about 480,000 in population, 8.3% unemployment rate, median family income of $63k and a year-over-year total housing growth of 16%. In Kings County, NFBK has 9 branches and has 0.4% market share. Kings County has 2.5 million population, 10% unemployment rate, median family income of $63k and year-over total housing growth of 120%. In Union county, the bank has 4 branches with 1% market share. Union county has 9.7% unemployment rate, median family income of $90k and year-over-year total housing growth is 52%. In Middlesex County, the bank has 5 branches with .91% market share. Middlesex County has 8.5% unemployment rate, median family income of $104k and year-over-year total housing permits grew by 7%.

NFBK initially came public in 2007; however, NFBK completed their second step conversion in January of this year, raising $355 million. Most of this money went into the balance sheet, increasing its tangible equity to assets ratio to 26. Under the leadership of John Alexander, the bank has focused more on delivering exceptional customer experience. NFBK has made in-roads into sustainable customer loyalty with their technology products, partially responsible for a 31% Y-o-Y increase in deposits (14% CAGR over a 5yr period). The assets increased to $2.8 billion from $2.4 billion a year ago.

As evident from the 2012 10-K, NFBK is a very conservative and overcapitalized bank with loan to assets ratio around 43%. NFBK primarily deals with commercial real estate and multifamily loans. NFBK does not offer subprime or option ARM (negative amortization) loans. NFBK has 565 multi-family loans with an average loan balance of $1.1 million. The largest multi-family loan is $13.2 million. NFBK is very conservative in its approach as the loan amount does not exceed 75% appraised value of the property. It has a total of 334 commercial real estate loans with an average loan balance of $945k. The largest commercial real estate loan has a balance of $9.1 million. Finally, NFBK has 338 1-4 family residential loans with an average loan balance of $192k. On the negative side, the largest 1-4 family loan with a loan balance of $2.3 million is 31 days past due.

In 2013, the loan portfolio grew from $589 million in 2008 to $1.23 billion. Net charge-offs to average loans ratio hovers around 0.04%. 98% of the loan portfolio accounts for all real estate loans. Management worked over the years to reduce the CRE portion from 49% in 2008 to 26% in Q1, 2013 and to increase multi-family lending from 19% to 51%. Construction and land development loans, the riskiest of all real estate loans, account for less than 2% and 1-4 family residential loans accounted for 15%. REO and repossessed assets account for less than 1%. Non-performing assets stand at 1.87% of total assets compared to 2.5% for average thrifts.

As of March 31st 2013 (10-Q), its assets past due 30-89 days was 0.95% of total assets compared to 1.16% a year ago, assets past due 90 or more days was .35% compared to .37% a year ago and assets in non-accrual status are at .93% compared to 1.6% a year ago. The loan production is strong with a 16% increase in total loans, driven by 33% increase in multi-family loans.

Total deposits increased from $907 million to $1.6 billion in Q1, 2013. Management's emphasis on increasing non-certificate deposits led NFBK to reduce CDs (average yield rate 1.17%) from 41% in 2008 to 27% in Q1, 2013. Non-interest bearing deposits went up from 10% in 2008 to 13% in Q1, 2013.

Institutions own 33% of the outstanding stock. NFBK Management has been shareholder friendly with 5.4 million share repurchases over the past 5 years, representing 26% of the total outstanding. Moreover, management recently paid $0.25 per share one-time dividend (current dividend yield is 2%). Interestingly, famed value investors, Michael Price and John Keeley, recently bought 600k and 1.7 million shares of NFBK. Additionally, NFBK will reach one-year anniversary of its second step conversion next January. Restrictions on share buyback are usually lifted 1 year after second step conversion, leading to a more sizeable reduction in outstanding shares.

The bank is currently trading at 92 cents on the dollar of book value; a year ago it was trading at $1.56 on the dollar of book value and management is projecting the book value to grow at 5%. In the next five years based on management projections, the book value will grow to $1.28 on the dollar of book value. Conservative exit multiple has been around 1.2 times book, leading to a sale price of NFBK stock to $19.55. Additionally, recent acquisitions have paid out 6-10% premium on deposits of $1.6 billion, rendering a sale price in the range of $13.6 to $14.7.

Conservative investors interested in a reasonably stable regional bank should look closely at Northfield. Nonetheless, investors should be aware that the bank's loan portfolio is overweight in real estate loans and any downturn in real estate market or rise in interest rates will have a negative impact on the possibilities.

Keeping risks in mind, any entry point below $10 has more promise for a decent uptick in the stock price in the next 6 months to a year. Several possible catalysts such as announcement of share buybacks and/or possible acquisition by a competitor may have a higher exit multiple for an investor. Additionally, investors receive 2% dividend yield while waiting for the above corporate actions to work out.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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