NFBK - Northfield Bancorp's Huge Discount: Can You Stomach The Risk?

2023-04-27 14:45:39 ET

Summary

• We continue our coverage of regional banks looking for signs of a run on deposits in smaller community-oriented banks.
• Northfield Bancorp, Inc. (Staten Island, NY)'s Q1 earnings were lower than expected but loan demand remains robust, while net interest margins have peaked.
• Some deposit outflows were noted, but not a true "run on the bank."
• The Northfield Bancorp, Inc. dividend yield is 5% here.

This is a precarious time for the banking sector. The regional bank space is a mess. We have been covering a swath of regional banks to get an understanding of whether the contagion is contained to just a few banks, or if there is something deeper happening. While shares of many bank stocks have been in selloff mode for about three months, some banks are performing just fine. The smallest community-oriented regional banks have been a big question mark and we have paid specific attention here to these types of community banks as they could be extremely vulnerable to a run on the banks.

We have been covering the earnings of regional banks to get a sense of whether the sector is really in trouble, or if it's bank-specific issues and not some sort of contagion. Thus far, the damage appears limited. That said, while the higher interest rate environment had been boosting net interest margins, we think that those margins have largely hit their peak, because the cost of funds are increasing. To be clear, banks are seeing strong competition for deposit dollars from multiple sources, including other interest paying assets.

Today we continue our regional bank coverage today with Northfield Bancorp, Inc. (Staten Island, NY) ( NFBK ), a true community-oriented bank focused on traditional, simple community banking out of the Staten Island, New York area. It also does some business in Northeast New Jersey. The company just reported earnings , and the results were weaker than expected, at least on the headline numbers, missing expectations on both the top and bottom lines.

That said, we see no signs of broader concern for Northfield Bancorp's overall health. While it was a miss, NFBK stock has been crushed, but continues to pay a bountiful dividend yield. The dividend has been raised a few times in the last few years. We like that. The stock is also trading at a 25% discount-to-tangible book value. We think this may be an opportunity.

Northfield Bancorp Q1 headline misses

In Q1 , there was robust loan activity and overall loans were flat from the sequential quarter. There was some pressure on the return metrics thanks to deposit declines and higher costs to secure deposits. Revenues were down 0.9% from last year, to $38.22 million, but missed expectations slightly by $0.11 million. The return on average assets and return on average equity came in at 0.84% and 6.82%, respectively. This is a sizable decrease from the sequential quarter of 15 basis points and 126 basis points, respectively. This, in part, could explain a discount-to-book, but this discount is huge. Q1 earnings per share of $0.26 was a $0.02 miss against expectations.

In terms of valuation , it's attractive here at $10.5 per share and is now 25% below tangible book value of $14.12 at the end of Q1. That is a potential opportunity, but there is risk priced in due to their lending to commercial companies/rentals/multi-families etc. However, we do not see a crisis here.

That all said, deposits did decline, but not to the degree that a "run on the bank" would look like.

Loans about flat, deposits dip modestly

Average loans were flat at $4.2 billion. Office-related loans are about 5% of the loan portfolio, so there is some risk here. There was an increase in 1-4 family residential, home equity, and construction loans.

Total average deposits decreased from Q4. Deposits have been tough for banks as there is a lot of competition for customer deposits. Deposits were down $302.7 million, or 7.3%, in the quarter vs. a year ago. Deposits, excluding brokered deposits, decreased $64.7 million, or 1.7%. Excluding brokered deposits, was attributable to decreases of $70.8 million in transaction accounts and $109.3 million in money market accounts. These decreases were offset a bit by increases of $106.1 million in time deposits and $9.4 million in savings accounts.

So, there is more risk built into the share price given the outflows. However, the outflows are not incredibly dramatic, but it is a risk in conjunction with the commercial exposure.

Asset quality improves

Despite the negative news on deposits and the earnings performance, asset quality improved from the sequential quarter. The ratio of nonperforming assets to total assets fell to 0.17% from 0.18% in Q4. Further, the nonperforming loans to total loans ratio fell to 0.22% from 0.24% a year ago. One risk worth noting was an uptick in commercial and industrial loan delinquencies, which increased about 8%. This was primarily due to an increase in delinquencies in unsecured small business loans, and management has this as a top priority to monitor.

Dividend yielding 5% here

We like regional banks that pay a good dividend. It is good news that the board of Northfield Bancorp approved another $0.13 quarterly dividend, and that means the annualized dividend yield is 5% now. When considering this is trading far below book value, a 5% yield is enticing, as it is better than bonds, so the added equity risk is cushioned by this great dividend payer. However, investors need to decide if the commercial risk is too great, or if the Northfield Bancorp price is right. We think the price is right at $9-$10.

Final thoughts

The market has made a big run since March and we think the market will be tested later this year. Recessionary forces are building and, despite being cheap here, Northfield Bancorp shares could get even cheaper. Northfield Bancorp is now a near-5% yielding stock, and you can be paid to wait for a future bounce, but avoid it if you think the loan portfolio risk is too high. There is risk here, but the reward is sizable if Northfield Bancorp can navigate through this tough climate.

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