BCB Bancorp: A 4.4% Dividend Yield With A Sub 35% Payout Ratio

Summary

• 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.
• Looking for a helping hand in the market? Members of European Small-Cap Ideas get exclusive ideas and guidance to navigate any climate. Learn More »

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Introduction

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.

Data by YCharts

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.

Investment thesis

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.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Gorion]

So overall a thrift like situation? How would you think about this vs Nycb? Similar multiple there

[whatsfordinner]

Do you think this is a merger candidate...to be gobbled up by a bigger fish/bank? One issue I try to say out of places like NJ on small banks. Thoughts?

[Bellmaz]

@whatsfordinner Not the if but the when. Divy ok but better out there. when earnings get pressured they will sell. In the mean time they try to increase TB and reward themselves with salary and options.

[linkdonald]

@whatsfordinner There has been a steady bank consolidation over the past decade and a number of smaller banks have been takeovers. They appear to go for about 115-129 % of BV. Considering the stock price of BCBP and its payout ratio, it is not inconceivable that it could also be the acquiring bank.

[Bellmaz]

@linkdonald Yes possible but they would have to start being aggressive in acquiring other banks and have something to offer the bank they are acquiring ex. future business model for growth.

[Robin Heiderscheit]

Good writeup as usual but its just a credit bond substitute, with very similar risk-adjusted returns to, say, a garden variety junk bond CEF. Totally a bet that this management's underwriting is better than average. The market is chock full of similar community banks that focus on commercial loans trading at a 10-11% earnings yield.

[linkdonald]

I spotted this one about six months ago and took a small position. Will add more on dips. Probably not a barn burner but at yield and book value it's a good hold for income, reasonable growth and possible takeover.

[Bellmaz]

@linkdonald I did also along with TBNK, PWOD, MSBI had done rea; well with FFIC and ESBK