BCB Bancorp, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. BCB is a community bank holding company operating primarily through BCB Community Bank in New Jersey and Staten Island, New York. Its lending is weighted toward commercial and multifamily real estate.
Financial performance and position
- Q2 earnings: Net income was $2.51 million, up 59% from $1.58 million a year earlier. Net income available to common shareholders was $2.35 million; basic and diluted EPS were each $0.21, versus $0.12.
- First-half earnings: Net income was $5.43 million, up 50% from $3.62 million. Income available to common shareholders was $5.14 million; basic EPS was $0.46 and diluted EPS was $0.45, versus $0.28 for both measures.
- Interest income and margins: Q2 interest income was $19.07 million, compared with $17.68 million; net interest income rose 12.7% to $15.06 million. Net interest margin was 3.45%, versus 3.19%. For the first half, interest income was $37.52 million and net interest income was $29.67 million, up 9.6%; net interest margin was 3.44%, versus 3.28%.
- Credit costs: Provision for loan losses rose to $776,000 in Q2 from $37,000, and to $1.27 million for the first half from $226,000. First-half net charge-offs were $519,000, compared with $70,000 in net recoveries a year earlier. At June 30, the allowance was $17.96 million, or 1.13% of gross loans; nonperforming loans were $15.46 million, or 0.97% of gross loans.
- Noninterest items and expenses: Q2 noninterest income was $2.02 million, up from $1.51 million; first-half noninterest income was $4.34 million, up from $3.16 million. First-half noninterest expense declined 0.8% to $23.71 million. The effective tax rate was 39.6% for Q2 and 39.8% for the first half.
- Balance sheet: Total assets were $1.816 billion, up 6.3% from year-end 2016. Net loans were $1.577 billion, up $92.0 million; deposits were $1.496 billion, up $104.1 million. Stockholders’ equity was $132.8 million, compared with $131.1 million at year-end.
- Funding and liquidity: Cash and cash equivalents totaled $75.0 million, up from $65.0 million at year-end. Short-term debt was $11.0 million and long-term debt was $163.0 million; subordinated debentures were $4.1 million. The reported weighted-average borrowing rate was 2.26%. BCB said it could obtain up to $65.5 million of additional FHLB funding using unencumbered loan collateral; $364.7 million of time deposits were due within one year.
- Cash flows: In the first half, operating activities provided $14.6 million, investing activities used $102.5 million, and financing activities provided $97.9 million. Cash increased $10.0 million to $75.0 million.
- Capital: The Bank exceeded regulatory capital requirements and the filing states that its capital ratios exceeded “well-capitalized” thresholds. At June 30, its total risk-based capital ratio was 10.88%, Tier 1 risk-based ratio 9.63%, common equity Tier 1 ratio 9.63%, and Tier 1 leverage ratio 7.65%.
Changes versus comparable periods
- Higher average earning assets, increased securities income, and lower borrowing costs supported net interest income and margin growth. Loan yields declined amid competitive pricing and variable-rate loan repricing.
- Loan growth was led by commercial and multifamily real estate. Gross loans were $1.597 billion at June 30, compared with $1.504 billion at December 31, 2016; commercial and multifamily loans accounted for $1.184 billion.
- Despite stronger earnings, the provision for credit losses increased substantially. Classified assets included $27.3 million of substandard assets and $14.9 million of special-mention assets.
- Deposit growth included certificates of deposit, including $31.8 million of listing-service CDs and $17.9 million of brokered CDs at June 30. Long-term debt rose $8.0 million and short-term debt fell $9.0 million from year-end.
Outlook, risks, contingencies, and unusual items
- Management described a measured-growth strategy, with liquidity maintained to fund the loan pipeline and selective securities purchases. It did not provide quantified earnings or revenue guidance.
- On June 7, 2017, BCB agreed to acquire IA Bancorp and its bank subsidiary. Consideration is structured to be approximately 80% BCB common stock and 20% cash, subject to agreement terms and adjustments. Closing was anticipated in Q4 2017, subject to regulatory and shareholder approvals.
- A July 5 court order required BCB to pay $1.0 million in plaintiff-class counsel fees and costs in the Kube shareholder action; the amount was accrued in Q2. BCB is pursuing recovery from its insurers in ongoing litigation, and the outcome is uncertain. Separately, Q2 other income included $237,000 from a legal settlement.
- First-half gains on sales of other real estate owned were $1.35 million, with no comparable gain in 2016. These gains, the legal settlement income, and the legal-fee accrual affected period-to-period results.
- Management identified credit quality, real estate collateral values, interest-rate movements, funding and deposit flows, competition, regulation, and the ability to integrate acquisitions among relevant risks. The filing notes that estimates, including the loan-loss allowance, may differ from actual outcomes and regulatory examinations could require additional provisions.
- Interest-rate sensitivity modeling showed a 7.90% decline in net portfolio value under a 100-basis-point rate increase; management cautioned that the model is assumption-dependent and is not a precise forecast of net interest income.
Important facts for investors to verify
- Track whether elevated loan-loss provisions and charge-offs persist, particularly given commercial real estate concentration, classified assets, and troubled debt restructurings.
- Assess the quality and sustainability of earnings, including OREO sale gains, legal settlement proceeds, and litigation-related expense.
- Monitor deposit pricing, reliance on listing-service and brokered CDs, debt funding, and available liquidity as the loan portfolio grows.
- Confirm merger approvals, final consideration and adjustments, expected closing timing, and integration plans for the IA Bancorp transaction.
- Follow the insurer litigation and any further costs or recoveries related to the Kube action; recovery of the accrued award is not assured.