- BCB Bancorp appears to be cheap, trading at book value and at just 8 times its earnings.
- The net interest income remains strong, but the loan book is geared towards commercial loans and multi-family loans.
- The risk/reward ratio appears to be positive, but I'm not going long just yet.
- The dividend yield is appealing as well, especially considering the payout ratio is rather low.
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I like small regional banks and although they sometimes carry a higher risk due to being more geographically concentrated, the more focused approach sometimes helps to nip credit risks in the bud. BCB Bancorp (NASDAQ:BCBP) is headquartered in New Jersey and the bank has 29 branch offices in New Jersey and three branches in New York. I wanted to have a closer look at this small-cap bank with a market capitalization of just around $250M.
The net interest income remains strong, and loan loss provisions are low
Most banks make their money on the interest spread as they try to pay as little as possible on the deposits from their customers while deploying the cash in mortgages and other loans. The net interest income is obviously very important for any bank out there, but risk management is also a very important portion of the bigger picture. It’s easy enough to have superior interest margins if a bank is willing to accept an above-average financial risk by lending money to borrowers that perhaps don’t have the best credit profiles.
In the third quarter, BCB Bancorp announced a total interest income of just over $28.1M, which is about 1% lower than in the third quarter of last year. That’s nothing to be too alarmed about as the bank’s interest expenses decreased by more than 50% to just $3.5M, resulting in a net interest income of $24.6M, which is an increase of more than 15% compared to Q3 last year.
Source: Financial statements
The bank also reported a $1.3M non-interest income and a $13.5M non-interest expense, resulting in a net non-interest expense of just over $12M. This means the pre-loan loss provision and pre-tax income was approximately $12.4M. That’s actually less than the $14.5M in Q3 last year, but during that quarter, BCB Bancorp recorded a non-recurring $4.4M gain on the sale of premises. So on a more normalized basis and excluding these non-recurring items, BCB Bancorp actually saw its financial performance improve in the third quarter of this year.
The net profit came in at $8.04M which is approximately $0.47 per share. In the first nine months of the year, the EPS was approximately $1.33 based on the current share count of just over $17M shares.
The quarterly net income handsomely covers the quarterly dividend of $0.16 as the payout ratio is just over 30%. Meanwhile, the dividend yield is almost 4% and this makes BCB Bancorp interesting from an income perspective as the dividend yield looks attractive while the payout ratio is actually pretty conservative.
BCBP's share price is likely held back by the loan book
And that intrigued me. Although BCB Bancorp generated $1.33/share in net income in the first nine months of the year and appears to be well on its way to post a full-year net income of $1.75-1.80 per share, the share price seems to be stuck around or even just under the $15 level. The market is clearly doubting BCB’s earnings power and perhaps the quality of the assets and more specifically the loan book will help to explain why this local bank appears to be quite cheap.
Looking at the balance sheet, the total asset base is just under $3B, of which about $443M is held in cash and interest-earning deposits with other banks. While most banks have a decent chunk of their assets invested in debt securities, BCB Bancorp only has invested less than $83M in those and the $2.29B loan book is determining the interest income and the risk level of the balance sheet.
Source: financial statement
Looking at the breakdown of the loan book, it appears to be mainly geared towards commercial loans and multi-family loans, as this represents about 75% of the total loan book.
Source: footnotes to the financial statement
Interestingly, the vast majority of the loans are current. In total, only $17M of the loans are past due, and that’s less than 0.75% of the total loan book. The majority of the loans past due are more than 90 days past due.
Source: footnotes to the financial statement
With a total loan loss provision of almost $40M (1.64% of the loan book), I consider the loans past due to be very well-covered, especially as the bank will usually be able to recoup at least a portion of the principal amount.
The market is clearly not fully trusting the bank’s decision to focus on commercial and multi-family loans and that explains why the bank is currently trading at just about 8 times earnings and at roughly its book value.
That being said, the bank is adding about $1/share to its book value on an annual basis, simply by retaining a portion of the profits it is not paying out as a dividend. In the near future, we can expect the dividend payments to at least remain stable although I do expect additional dividend hikes down the road. And while I’m not particularly charmed by BCB’s balance sheet and exposure to commercial loans, I do see upside potential as the book value per share will likely be close to $16/share by the end of next year.
It all boils down to risk management as the BCB Bancorp management will have to manage the risks of its loan book well. The high amount of loan loss provisions on the balance sheet is encouraging as this reduces the possibility the bank will suddenly be caught off-guard.
I currently don’t have a position in BCB Bancorp, but I am adding the bank to my watch list. It’s an interesting bank, but I’ll have to keep my eye on its developments for a few more months or quarters as I get more familiar with the bank’s approach.
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This article was written by
The Investment Doctor is a financial writer, highlighting European small-caps with a 5-7 year investment horizon. He strongly believes a portfolio should consist of a mixture of dividend and growth stocks.He is the leader of the investment group European Small Cap Ideas which offers exclusive access to actionable research on appealing Europe-focused investment opportunities not found elsewhere. The a focus is on high-quality ideas in the small-cap space, with emphasis on capital gains and dividend income for continuous cash flow. Features include: two model portfolios - the European Small Cap Ideas portfolio and the European REIT Portfolio, weekly updates, educational content to learn more about the European investing opportunities, and an active chat room to discuss the latest developments of the portfolio holdings. Learn more.
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