2023-07-19 21:00:03 ET
Summary
- Certificates of deposits will likely continue to pressurize the margin this year, resulting in lower earnings for the year.
- The large balance of commercial and multi-family loans is the biggest source of risk.
- BCBP is offering a high dividend yield of 5.2% at an estimated payout ratio of only 29% for 2023.
- The December 2023 target price suggests a high upside from the current market price.
Earnings of BCB Bancorp, Inc. ( BCBP ) will most probably dip this year because of continued margin contraction. Moderate loan growth will likely counter the effect of the margin pressure. Overall, I’m expecting the company to report earnings of $2.21 per share for 2023, down 15% year-over-year. Compared to my last report on the company, I've reduced my earnings estimate because I've decreased my margin estimate. BCB Bancorp is currently offering a high dividend yield and an attractive price upside. As a result, I’m maintaining a buy rating on BCB Bancorp.
Continued Rise in CD Cost to Hurt the Margin
Interest expenses jumped from $9 million in the fourth quarter of 2022 to $15 million in the first quarter of 2023. As a result, the net interest margin got squeezed by 61 basis points during the quarter. This was worse than my expectation mentioned in my last report on the company. The sudden surge in expenses was attributed both to a large growth of certificates of deposits (“CD”) and a surge in interest rates on CDs and money market accounts.
SEC Filings
SEC Filings
BCB Bancorp’s deposit growth has trailed loan growth since the first quarter of 2022, which shows that the management is facing problems in growing its deposit book. As a result, I think the management will need to continue to attract depositors through promotional, high rates. This means that further margin pressure can be expected in the near term.
Loan re-pricing will most probably counter some of the anticipated increase in the deposit cost. As of the end of December 2022, floating or adjustable-rate loans made up a whopping 61% of total loans, as mentioned in the 10-K Filing (BCB has not updated this item for the first quarter). I’m expecting the fed funds rate to increase by a further 25-50 basis points in the remainder of 2023. These rate hikes will boost the interest income earned from loans.
Overall, I’m expecting the margin to dip by fifteen basis points in the last nine months of 2023. Compared to my last report on the company, I’ve reduced my margin estimate for this year because the first quarter’s performance missed my expectations. Further, my outlook is now worse than before because the CD balance has already increased by more than my previous anticipation.
Loan Growth Likely to Decline Towards a Normal Level
BCB Bancorp’s loan growth remained above average from the first quarter of 2022 till the first quarter of 2023. Growth will likely dip to a more normal level over the next few quarters because of regional economic factors. BCB Bancorp operates in the states of New York and New Jersey and focuses on commercial and multi-family loans. As can be seen in the chart below, the economic activity index for New Jersey has stagnated in recent months, while the index for New York is still on a gentle uptrend.
Further, growth will slow down because interest rates are higher now compared to last year. High borrowing costs will discourage borrowing.
Considering these factors, I’m expecting the loan portfolio to grow by 9% in 2023. In line with the trend witnessed since the first quarter of 2022, I’m expecting loan growth to outpace deposit growth this year. The following table shows my balance sheet estimates.
Financial Position | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net Loans | 2,278 | 2,178 | 2,228 | 2,305 | 3,045 | 3,330 |
Growth of Net Loans | 38.6% | (4.4)% | 2.3% | 3.5% | 32.1% | 9.3% |
Other Earning Assets | 305 | 621 | 360 | 514 | 329 | 361 |
Deposits | 2,181 | 2,362 | 2,318 | 2,561 | 2,812 | 2,932 |
Borrowings and Sub-Debt | 282 | 296 | 243 | 122 | 434 | 603 |
Common equity | 181 | 214 | 223 | 245 | 270 | 298 |
Book Value Per Share ($) | 11.5 | 13.1 | 13.1 | 14.2 | 15.6 | 17.3 |
Tangible BVPS ($) | 11.2 | 12.7 | 12.7 | 13.9 | 15.3 | 17.0 |
Source: SEC Filings, Earnings Releases, Author's Estimates(In USD million unless otherwise specified) |
Earnings Likely to Dip by 15%
After a sequential dip in the first quarter of 2023, I’m expecting operating expenses to trend upward due to inflation. Despite the ongoing disinflation that started in the latter part of last year, inflation is still quite high in the country. There are new inflationary threats on the horizon as well because Russia has recently quit the black sea grain deal, according to news sources . Signed last year, the United Nations credited the deal with helping lower food prices by 20%. As a result, I’m expecting operating expenses to grow at an annualized rate of 4% in the last nine months of 2023.
Apart from the growth in operating expenses, the anticipated margin contraction will also hurt earnings this year. On the other hand, the expected loan growth will lift the bottom line. Overall, I’m expecting BCB Bancorp to report earnings of $2.21 per share for 2023, down 15% year-over-year.
Income Statement | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net interest income | 78 | 83 | 80 | 97 | 114 | 110 |
Provision for loan losses | 5 | 2 | 9 | 4 | (3) | 2 |
Non-interest income | 8 | 5 | 12 | 9 | 2 | 3 |
Non-interest expense | 56 | 56 | 54 | 54 | 56 | 56 |
Net income - Common Sh. | 16 | 20 | 20 | 33 | 45 | 38 |
EPS - Diluted ($) | 1.01 | 1.20 | 1.14 | 1.92 | 2.58 | 2.21 |
Source: SEC Filings, Earnings Releases, Author's Estimates(In USD million unless otherwise specified) |
In my last report on the company, I estimated earnings of $2.52 per share for 2023. I’ve reduced my earnings estimate mostly because I’ve slashed my margin estimate for the year.
Loan Book is the Main Source of Risk
BCB Bancorp’s loan portfolio is concentrated in the commercial and multi-family segment, which makes up around three-quarters of total loans. Loans secured by commercial and multi-family real estate are generally larger and involve a greater degree of risk than one-to-four-family residential mortgage loans. As a result, the loan portfolio’s risk level is higher than the industry average. Loans secured by office properties currently carry high risk because of the emergent remote work culture. As BCB Bancorp has not disclosed the balance in the office loan portfolio, this risk is difficult to judge. Further, the riskiness of the deposit book is also difficult to judge because BCB Bancorp has not disclosed the number of its uninsured and uncollateralized deposits.
As the securities portfolio is very small, the unrealized mark-to-market losses on the portfolio are also quite small. As of the end of March 2023, these unrealized losses amounted to only $7.9 million, which is just 3% of the total equity balance. Therefore, assets other than loans do not present much risk.
Overall, I would call BCB Bancorp’s risk level mostly moderate.
High Dividend Yield and Price Upside Justify a Buy Rating
BCB Bancorp is offering quite a high dividend yield of 5.2% at the current quarterly dividend rate of $0.16 per share. The earnings and dividend estimates suggest a payout ratio of 29% for 2023, which is much below the five-year average of 42%. Therefore, the dividend appears secure despite the earnings outlook.
I’m using the peer average price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value BCB Bancorp. Peers are trading at an average P/TB ratio of 1.0 and an average P/E ratio of 8.8, as shown below.
BCBP | SFST | VBNK | OBT | CVLY | Peer Average | |
P/E ("ttm") | 4.8 | 8.6 | 9.4 | 9.1 | 8.1 | 8.8 |
P/B ("ttm") | 0.75 | 0.74 | 0.85 | 1.40 | 1.10 | 1.0 |
P/TB ("ttm") | 0.77 | 0.74 | 0.87 | 1.46 | 1.12 | 1.0 |
Source: Seeking Alpha |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $17.0 gives a target price of $17.8 for the end of 2023. This price target implies a 44.7% upside from the July 18 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 0.85x | 0.95x | 1.05x | 1.15x | 1.25x |
TBVPS - Dec 2023 ($) | 17.0 | 17.0 | 17.0 | 17.0 | 17.0 |
Target Price ($) | 14.4 | 16.1 | 17.8 | 19.5 | 21.2 |
Market Price ($) | 12.3 | 12.3 | 12.3 | 12.3 | 12.3 |
Upside/(Downside) | 17.1% | 30.9% | 44.7% | 58.5% | 72.3% |
Source: Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $2.21 gives a target price of $19.4 for the end of 2023. This price target implies a 57.6% upside from the July 18 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 6.8x | 7.8x | 8.8x | 9.8x | 10.8x |
EPS 2023 ($) | 2.21 | 2.21 | 2.21 | 2.21 | 2.21 |
Target Price ($) | 15.0 | 17.2 | 19.4 | 21.6 | 23.9 |
Market Price ($) | 12.3 | 12.3 | 12.3 | 12.3 | 12.3 |
Upside/(Downside) | 21.8% | 39.7% | 57.6% | 75.5% | 93.4% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $18.6 , which implies a 51.2% upside from the current market price. Adding the forward dividend yield gives a total expected return of 56.3%.
In my last report, I gave BCB Bancorp a buy rating. Due to my updated total expected return, I think the company is still a good investment. Therefore, I’m maintaining a buy rating on BCB Bancorp.
For further details see:
BCB Bancorp: Attractively Valued With A High Dividend Yield, But Earnings Outlook Is Negative