BCB Bancorp, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated results include BCB Community Bank, the company’s principal operating subsidiary. Unless otherwise noted, financial amounts are in millions of dollars.
Business context and financial position
BCB is a community-oriented bank serving New Jersey and Staten Island, with 17 branches in New Jersey and two in Staten Island. Its loan portfolio is concentrated in commercial and multifamily real estate. At June 30, 2016, assets were $1,738.3 million, deposits $1,394.3 million, and stockholders’ equity $132.3 million.
| Metric | June 30, 2016 | Prior comparison |
|---|---|---|
| Total assets | $1,738.3 | $1,618.4 at Dec. 31, 2015 |
| Net loans | $1,424.9 | $1,420.1 at Dec. 31, 2015 |
| Deposits | $1,394.3 | $1,273.9 at Dec. 31, 2015 |
| Cash and cash equivalents | $235.8 | $132.6 at Dec. 31, 2015 |
| Borrowed funds | $200.0 | $200.0 at Dec. 31, 2015 |
| Subordinated debentures | $4.1 | $4.1 at Dec. 31, 2015 |
Results, cash flow and margins
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Interest income | $17.7 | $17.0 | $35.5 | $32.6 |
| Net interest income | $13.4 | $13.7 | $27.1 | $26.3 |
| Provision for loan losses | $0.04 | $1.13 | $0.23 | $1.85 |
| Non-interest income | $1.5 | $1.8 | $3.2 | $3.0 |
| Non-interest expense | $12.2 | $11.2 | $23.9 | $21.1 |
| Net income | $1.6 | $1.9 | $3.6 | $3.7 |
| Basic EPS | $0.12 | $0.20 | $0.28 | $0.40 |
| Net interest margin | 3.19% | 3.88% | 3.28% | 3.87% |
For the six months ended June 30, operating cash flow was $2.8 million, investing cash outflow $15.0 million, and financing cash inflow $115.3 million. Cash and cash equivalents increased $103.1 million, largely alongside $120.4 million of deposit growth.
Material changes versus comparable periods
- Q2 net income fell $0.3 million year over year. Net interest income declined 2.4%, non-interest income declined 15.7%, and non-interest expense rose 9.0%; the much lower loan-loss provision partly offset these pressures.
- Six-month net income declined $0.1 million. Net interest income rose 2.9% and non-interest income rose 5.6%, but non-interest expense increased 13.0%.
- Net interest margin contracted in both comparisons. Management attributed the pressure to competition, lower loan yields, and higher deposit costs. For Q2, average interest-bearing liability cost increased to 1.21% from 1.12%.
- Deposits grew 9.4% from year-end, while net loans grew only 0.3%. Management reported $42.0 million of listing-service CDs and $21.9 million of brokered CDs at quarter-end.
Outlook, risks and unusual items
- Management plans measured asset growth, expects organic growth under its strategic plan, and anticipated opening additional branches in 2016. It was holding elevated cash to support the loan pipeline and considering securities purchases; no quantified earnings or financial guidance was provided.
- Credit metrics included $21.1 million of non-performing loans, or 1.46% of gross loans, versus $23.4 million, or 1.63%, at year-end. The allowance was $18.3 million, 1.27% of gross loans and 75.6% of non-performing loans. Management considered it adequate but noted estimates may differ from actual losses and regulators may require additional provisions.
- Loans classified as substandard totaled $33.6 million and special mention loans $17.7 million; there were no loans classified doubtful or loss. Commercial and multifamily loans totaled $1,078.0 million of gross loans, creating material real-estate concentration exposure.
- A $0.285 million loss was recorded on a bulk sale of impaired portfolio loans in Q2. Lower Q2 provision expense reflected $0.133 million of net recoveries; the six-month period had $0.070 million of net recoveries.
- Liquidity was supported by cash, deposits, loan and securities repayments, loan-sale proceeds, and borrowing facilities. The company reported $12.4 million of additional FHLB capacity against unencumbered collateral and $476.1 million of time deposits maturing within one year. Management expected to meet normal-course loan commitments.
- The Bank exceeded regulatory minimums and was “well-capitalized.” At June 30, its total risk-based capital ratio was 11.65%, Tier 1 risk-based ratio 10.40%, and Tier 1 leverage ratio 7.88%.
- Interest-rate sensitivity modeling estimated a 9.22% decline in net portfolio value under a 100-basis-point rate increase. Management cautioned that the model depends on assumptions and is not a precise forecast of net interest income.
- A shareholder class-action settlement was approved in 2015; class counsel seeks up to $1.0 million in fees and expenses, which the company opposes. A related insurance recovery action continues against Progressive; the company received $1.75 million from Colonial in 2015. Expedited discovery was due to conclude by September 30, 2016.
- The filing identifies CECL as a future risk: adoption is expected for fiscal years beginning after December 15, 2019, and may require higher loan-loss allowances and additional data and expense. Management was still assessing the impact.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether margin pressure and rising deposit costs continue, and how deposit growth and promotional or brokered funding affect profitability.
- Credit quality trends in commercial real estate, classified loans, non-performing assets, and the adequacy of the allowance.
- Whether elevated cash is deployed into loans or securities as intended, and whether liquidity remains adequate as large time deposits mature.
- The outcome and potential cost of the disputed attorney-fee motion and ongoing Progressive insurance litigation.
- The sensitivity of earnings and asset values to interest-rate changes, and the eventual effect of CECL adoption.