BCB Bancorp: Outlook Remains Positive on Loan Growth (NASDAQ: BCBP)

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EXTREME-PHOTOGRAPHER

Moderately strong loan growth will boost earnings for BCB Bancorp, Inc. (NASDAQ: BCBP) through the end of 2023. On the other hand, higher operating expenses will limit earnings growth. Meanwhile, the margin will likely remain unchanged despite the ongoing rate hike cycle. Overall I expect BCB Bancorp will report earnings of $2.62 per share for 2022 and $2.73 per share for 2023. Compared to my last report on the company, I have increased my earnings estimates for both years, primarily because that I have increased my loan growth estimate for 2022 Next year’s target price suggests a strong upside from the current market price. Therefore, I maintain a buy rating on BCB Bancorp.

Further margin expansion is unlikely

BCB Bancorp’s net interest margin increased by 44 basis points in the third quarter after increasing by 28 basis points in the second quarter of 2022. This contrasts sharply with the trend of previous years. BCB Bancorp’s margin actually declined during the last rate hike cycle from the fourth quarter of 2015 to the fourth quarter of 2018, as shown below. Therefore, I’m not confident that the margin will continue to expand in the coming quarters.

Interest rate sensitivity BCB Bancorp

SEC Filings

One of the main reasons BCB Bancorp was able to increase its margin this time around is that it was able to keep its funding costs moderate. The average funding cost for the third quarter of 2022 was reported at 0.64%, which is lower than the average cost of 0.66% for the third quarter of 2021, as mentioned in the third quarter file 10-Q . In my view, society cannot sustain this cost any longer as depositors may be tempted to switch to more appeasable banks. In addition, a large portion of the deposit book is made up of adjustable rate deposits. These deposits, namely savings, interest-bearing demand and money market accounts, accounted for 55% of total deposits in the quarter ended September 2022.

Given these factors, I expect the margin to remain unchanged through the end of 2023, compared to 4.18% in the third quarter of 2022.

Loan growth must remain at a decent level even after declining

BCB Bancorp’s loan growth remained well above the historical average during the third quarter of 2022, maintaining the exceptional growth momentum seen so far this year. However, high borrowing costs will likely soon trigger a reversal in the trend of loan growth. Residential real estate loans, which represent 9% of total loans, are likely to be the most affected by rising borrowing costs.

On the other hand, satisfactory economic activity will prevent loan growth from plunging too low. BCB Bancorp operates in the states of New York and New Jersey. With the exception of New York, most of New York State is doing quite well. New Jersey also has an unemployment rate above the national average.

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Additionally, BCB Bancorp has entered into an agreement with Q2 to enhance its digital capabilities, as mentioned in a press release. I expect this investment in the digital banking platform to slowly and steadily grow the balance sheet. The ease of obtaining credit will encourage borrowers to return to BCB Bancorp for their financial needs in the future. However, I do not expect this initiative to serve as a sudden and unusual catalyst.

Overall, I expect the loan portfolio to grow by 1% each quarter through the end of 2023. This will lead to loan growth of 22% for 2022 and 4% for 2023. By Compared to my last report on BCB Bancorp, I’ve revised my loan growth estimate for 2022 upwards, primarily because third-quarter growth exceeded my expectations.

Meanwhile, I expect other balance sheet items to grow mostly in line with lending. The following table shows my balance sheet estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
Financial situation
Net loans 2,278 2,178 2,228 2,305 2,815 2,929
Net loan growth 38.6% (4.4)% 2.3% 3.5% 22.1% 4.1%
Other productive assets 305 621 360 514 325 338
Deposits 2,181 2,362 2,318 2,561 2,740 2,851
Loans and sub-debts 282 296 243 122 264 275
Common Equity 181 214 223 245 267 300
Book value per share ($) 11.5 13.1 13.1 14.2 15.4 17.3
Tangible BVPS ($) 11.2 12.7 12.7 13.9 15.1 17.0
Source: SEC Filings, Earnings Releases, Author’s Estimates (in millions of dollars, unless otherwise noted)

Profits are expected to increase by 37% in 2022

The expected loan additions discussed above will likely be the main driver of earnings through the end of 2023. On the other hand, high inflation will boost non-interest spending, which in turn will limit profit growth. In addition, investments in technology and digital platforms will also keep non-interest expenses high in the coming quarters. Due to high inflation and investments, I expect the efficiency ratio (operating expenses divided by total revenues) to increase to 46.0% by the fourth quarter of 2023, compared to 41.5% in the third quarter of 2022.

In the meantime, I expect provisioning charges to be around 0.22% of total lending in 2023, which is close to the average of the past five years. Also, I expect the margin to remain unchanged from the third quarter level.

Given these factors, I expect BCB Bancorp to report earnings of $2.62 per share for 2022, up 37% year-over-year. For 2023, I expect earnings to grow 4% to $2.73 per share. The following table shows my income statement estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
income statement
Net interest income 78 83 80 97 116 131
Allowance for loan losses 5 2 9 4 (1) 6
Non-interest income 8 5 12 9 2 6
Non-interest charges 56 56 54 54 53 62
Net income – Common Sh. 16 20 20 33 45 47
BPA – Diluted ($) 1.01 1.20 1.14 1.92 2.62 2.73
Source: SEC Filings, Earnings Releases, Author’s Estimates (in millions of dollars, unless otherwise noted)

In my last report on BCB Bancorp, I estimated earnings at $2.41 per share for 2022 and $2.54 per share for 2023. I have increased my earnings estimates for both years primarily because I increased my estimates for loan balances.

Please note that actual earnings may differ materially from estimates due to normal forecast risks and uncertainties.

Maintain a purchase note

BCB Bancorp offers a dividend yield of 3.3% at the current quarterly dividend rate of $0.16 per share. Earnings and dividend estimates suggest a payout ratio of 23% for 2023, well below the five-year average of 52%. There is therefore room for an increase in the dividend. Nevertheless, I do not expect an increase in the level of dividend as the company rarely changes its distribution.

I use historical price/tangible accounting (“P/TB”) and price/earnings (“P/E”) multiples to value BCB Bancorp. The stock has traded at an average P/TB ratio of 1.02 in the past, as shown below.

EX18 FY19 FY20 FY21 Medium
T. Book value per share ($) 11.2 12.7 12.7 13.9
Average market price ($) 14.4 12.7 10.0 14.2
Historical P/TB 1.29x 1.00x 0.79x 1.02x 1.02x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $17.0 yields a target price of $17.4 for the end of 2023. This price target implies a decline of 9.8% compared to the closing price on November 3. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 0.82x 0.92x 1.02x 1.12x 1.22x
TBVPS – Dec 2023 ($) 17.0 17.0 17.0 17.0 17.0
Target price ($) 14.0 15.7 17.4 19.1 20.8
Market price ($) 19.3 19.3 19.3 19.3 19.3
Up/(down) (27.4)% (18.6)% (9.8)% (0.9)% 7.9%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 10.3x in the past, as shown below.

EX18 FY19 FY20 FY21 Medium
Earnings per share ($) 1.01 1.20 1.14 1.92
Average market price ($) 14.4 12.7 10.0 14.2
Historical PER 14.3x 10.6x 8.8x 7.4x 10.3x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple by the expected earnings per share of $2.73 yields a price target of $28.1 for the end of 2023. This price target implies a 45.9% upside from at the November 3 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 8.3x 9.3x 10.3x 11.3x 12.3x
EPS 2023 ($) 2.73 2.73 2.73 2.73 2.73
Target price ($) 22.6 25.4 28.1 30.8 33.6
Market price ($) 19.3 19.3 19.3 19.3 19.3
Up/(down) 17.5% 31.7% 45.9% 60.1% 74.3%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $22.7, implying an 18.1% upside from the current market price. Adding the forward dividend yield gives an expected total return of 21.4%. Therefore, I maintain a buy rating on BCB Bancorp.

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