BCBP - BCB Bancorp: Massive Discount Here

2023-10-20 14:15:19 ET

Summary

• BCB Bancorp, Inc. is a little-known regional bank that is currently undervalued significantly.
• Shares are down for good reason, but management is taking steps to protect profits.
• Despite the decline in performance, the bank's loans are still growing and deposits are holding up, indicating potential for future returns.

Our coverage of the regional bank earnings season for the third quarter resumes with BCB Bancorp, Inc. (BCBP). This is a case where we think the market has crushed a sector nearly universally. It is not unfair, given the decline in margins and earnings in the space. Make no mistake, banking is hated right now for the most part, especially regionals. But not all banks are created equal. Sure, there is fear over future loan demand, the ability of borrowers to pay, and on margins.

That is basically the story for the entire sector, but this bank out of New Jersey, with branches in New York as well, is a buy. There is a bountiful 6% yield here, with a significant discount to book value. Simply put we are now more attractive on a valuation basis than we have seen in years. While it is not immune from what is happening in the macro environment, as evidenced by the mixed operational metrics, it offers a 6% payout while you wait for capital appreciation. The stock is falling again today with the market and this comes following the just-reported Q3 earnings.

Readers, the market has this one at a discount as it takes steps to preserve profitability and liquidity. It is a buy in our opinion for a 2024 turn.

Margin pressure

Revenue of $27.1 million down 16% from last year. This comes with the bank intentionally starting to slow lending and other activity to focus on profitability and. It also comes as the sector's net interest margins are under pressure due to the need to pay more for customer deposits.

The market is not wrong to sell down the bank stocks as they face near-term pressure. But it has been ongoing for many months. We believe you want to start scooping some of the banks that are making the right plans to get through this rough patch and pay bountiful dividends. That is what you get with BCB.

Overall, the stock is down because performance is down. Stands to reason. BCB reported net income of $7.1 million compared to $8.6 million last quarter. Earnings per share were $0.41 adjusted, compared to $0.50 last quarter. This comes as net interest margin is declining but we see a trough coming in the next quarter or two. However, loan quality and moderate levels of loan loss provisions have not been weighed. Net interest margin was 2.78% for the third quarter of 2023, compared to 2.92% last quarter and down dramatically from 4.18% a year ago.

Loans still growing, and deposits holding up

Loans increased by $240.4 million, or 7.9% to $3.286 billion up from $3.045 billion to start 2023. This includes another $99.7 million in commercial real estate and multi-family loans, $88.5 million in commercial business loans, $40.3 million in construction loans, $1.7 million in residential one-to-four family loans and $9.6 million in HELOC and consumer loans. Deposits have held up, though did dip to $2.82 billion from $2.86 billion last quarter. Further, the company is being more stringent in its lending, which should protect asset quality moving forward.

Provision for credit losses was $2.21 million on the entire loan book, which is pretty solid overall, but increased from $1.35 million from Q2, in large part due to more loans receivable but also risks on a macro level. However, the allowance for credit losses actually dipped as a percentage of non-accrual loans to 402.4% from 530.3%. However, with more loans held and the macro risk, the total non-accrual loans were $7.93 million up from $5.70 million in Q2, but is down from $8.51 million a year ago. So it is mixed overall. Obviously with the decline in margin, and decline in earnings, the return metrics fell again, but we stress, that we see the trough ahead and this is why we want to start buying up banks like this. Management is protecting the bank too:

We remain profitable with a favorable asset quality profile and solid liquidity and capital levels. The persistently high interest rate environment with a bias for staying elevated continues to adversely impact the availability and the pricing of liquidity for the banking industry. We have intentionally slowed down the growth of our balance sheet, as we are very focused on protecting our profitability, liquidity and capital position.

Take home

We understand it can be counterintuitive to buy stocks on not so great news. But that is how bottoms are made. We do believe we are approaching a bottom in performance in the next quarter or two, and see 2024 as much better than 2023 as we expect margins to stabilize and then expand.

BCB Bancorp, Inc. pays a great dividend while you wait and the valuation is relatively fair at $10 and a tangible book of $16.48. That is a massive discount that you just do not see often in this space. Loans are growing, deposits are holding up, and the bank is focused on protecting its positions. This is good news for future returns. We think you consider buying in.

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