BCBP - BCB Bancorp: High Yield Big Discount

2023-04-18 15:32:54 ET

Summary

• Regional bank stocks have been crushed, and largely over the fears of tightening lending conditions and a run on deposits.
• Our regional coverage thus far suggests no run on deposits in many banks, but net interest margins have peaked.
• BCB Bancorp, Inc. offers a 5.5% dividend yield and is trading at a big discount to tangible book.

Our coverage of the regional bank earnings season for the first quarter continues with BCB Bancorp, Inc. ( BCBP ). The company is headquartered in New Jersey. The bank has 27 branch offices in New Jersey , and three branches in Hicksville and Staten Island, New York .

BCB Bancorp is a very small player, and so a run on deposits could have crippled it. Why a run on banks? As we all know, the landscape for regional banks has been altered dramatically in the last few months as banks began to collapse. There has been a major concern over a flight of deposits out of banks, as well as the pressure on net interest margins from having to pay more to attract customer deposits. Banks are competing with each other for deposits and competing with bonds and money market funds, too. On top of that, there is a risk of banks tightening their lending standards. Right now, BCB is in fine shape, but some trends in key metrics are worth discussing.

The stock has actually pulled back a lot in the last few weeks and is now more attractive on a valuation basis. That said, it has mixed operational metrics, but offers a bountiful dividend yield of 5.5% . The stock is falling again today and this comes following the just-reported earnings.

BCB Bancorp's Q1 operational results were much weaker than expected, with some areas showing strength and others with some weaknesses. Let us discuss.

BCB Bancorp's earnings power and margins

Revenue of $25.8 million was up 5.4% from last year, but this missed estimates by a whopping $7 million. That said, this comes despite loan growth, while deposits were also up. So, not all regional banks are seeing outflows, and deposit growth is impressive considering the very competitive landscape for customer deposits. However, as we predicted , the sector's net interest margins have peaked due to the need to pay more for customer deposits.

BCB reported net income of $8.1 million compared to $12.1 million in Q4 2022, and $10.0 million in Q1 2022. Earnings per share were $0.46, compared to $0.69 in Q4 2022 and $0.56 in Q1 2022. It is worth noting $1.9 million in net income was lost to unrealized investment loss. Adjusting for that net income would have been flat year-over-year.

Net interest margin is declining. However, loan quality and moderate levels of loan loss provisions have not weighed. Margins should remain strong but are on the decline. Net interest margin was 3.15% and was down 61 basis points from the fourth quarter.

Loans and deposits grew in Q1

As we mentioned, BCB Bancorp, Inc. saw an increase in loans and deposits. Impressive, all things considered. This regional bank is focused on traditional banking in a few dozen towns and cities, so it is key that it did not see a run on deposits. The company saw loan growth of 6.1% from Q4. Total loans grew to $3.23 billion, up from $3.05 billion to start the quarter, and were up 34.9% from a year ago.

The bank is also taking in more deposits, and this helps quell fears of a run on deposits throughout the system, although we will look for more confirmation of this as earnings season continues. Deposits rose to $2.87 billion versus $2.81 billion to start the quarter, and up from $2.63 billion at the end of Q1 2022.

Asset quality declined

While we saw growth in BCB Bancorp's loans and deposits, there was a deterioration in asset quality metrics. Provision for credit losses was up over 20% from Q4 to $0.63 million. The allowance for credit losses as a percentage of non-accrual loans was 571% versus 633% in Q4, and up sizably from Q1 2022's 368%. In addition to quality metrics, return metrics fell. The return on average assets was 0.9%, down 56 basis points from Q4 2022. Ouch. The return on average equity was 11.0%, down from 17.0% sequentially. Finally, the efficiency ratio, while strong, did worsen to 53.7% from 51.3% in Q4.

Final thoughts on BCB Bancorp

BCB Bancorp, Inc. pays a great dividend. The valuation is relatively fair, but we think this market is heading lower, and if BCBP shares dip under $10, they would be a great buy. Deposits grew, as did loans.

This report is another regional bank that did not experience what was largely feared: a run on deposits. However, the report further confirms our thesis of peak net interest margins as the cost of deposits has surged. This has led to pressure on earnings and return metrics. The selloff, however, does appear to be a bit overdone, with BCB Bancorp, Inc. selling at a massive 31% discount-to-book.

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