BCB Bancorp, Inc. — Q1 2017 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. BCB is a community-oriented bank holding company operating primarily through BCB Community Bank, with 22 branches in New Jersey and two in Staten Island, New York. Its lending is concentrated in commercial real estate and multifamily properties. Financial statements are unaudited.
Financial performance and condition
Amounts are in millions of dollars unless otherwise noted.
- Income: Interest income was $18.5 million, up 3.5% from $17.8 million. Net interest income increased 6.6% to $14.6 million. Net income rose 43.1% to $2.9 million from $2.0 million; net income available to common shareholders was $2.8 million, or $0.25 per basic and diluted share, versus $1.8 million, or $0.16, a year earlier.
- Margins and expenses: Net interest margin was 3.43%, compared with 3.37%. Interest expense fell 6.8% to $3.9 million, while provision for loan losses rose to $498,000 from $189,000. Non-interest income increased to $2.3 million from $1.7 million; non-interest expense declined 1.5% to $11.6 million. The effective tax rate was 40.0%, versus 40.6%.
- Cash flow: Operating activities provided $9.6 million, investing activities used $54.0 million, and financing activities provided $93.8 million. Cash and cash equivalents increased $49.4 million during the quarter to $114.4 million.
- Balance sheet and liquidity: Total assets rose 5.7% to $1.805 billion. Net loans increased 2.9% to $1.529 billion; available-for-sale securities increased to $106.2 million. Deposits grew 8.7% to $1.514 billion. Management reported $41.2 million of additional FHLB borrowing capacity against unencumbered loan collateral; $357.0 million of time deposits were scheduled to mature within one year.
- Debt and capital: Long-term debt was $155.0 million, subordinated debentures $4.1 million, and short-term debt was repaid from its $20.0 million year-end balance. The reported weighted-average borrowing rate was 2.66%. Stockholders’ equity was $127.0 million, down from $131.1 million. The Bank and Company exceeded applicable regulatory capital requirements; the Bank’s total risk-based capital ratio was 10.69% and its Tier 1 leverage ratio was 7.51%.
- Credit quality: Nonaccrual loans were $17.0 million, or 1.10% of gross loans, versus $15.7 million at year-end. Classified substandard assets were $29.1 million; special-mention assets were $15.1 million. The loan allowance reported on the balance sheet was $17.5 million.
Material changes versus comparable periods
- Year-over-year net income improved, supported by higher net interest income and non-interest income and slightly lower operating expenses. Net interest income benefited from asset growth and lower average funding costs, while the average yield on loans declined 25 basis points.
- Non-interest income included a $1.2 million gain on sale of other real estate owned, with no comparable gain in Q1 2016. Loan-sale gains fell to $338,000 from $924,000.
- Loan growth and deposit growth expanded the balance sheet. Management cited promotional certificates of deposit and branch expansion as contributors to deposit growth; listing-service and brokered CDs totaled $33.8 million and $17.4 million, respectively.
- Equity declined principally because the Company redeemed $11.7 million of Series A and B preferred stock and issued $5.2 million of Series D preferred stock. Common dividends of $0.14 per share were declared.
Outlook, risks, contingencies and unusual items
- Management said it intends to grow assets at a measured pace consistent with capital and business opportunities, maintain adequate liquidity, and fund lending and investment opportunities. The filing provides no specific earnings or full-year financial guidance.
- Management identified interest-rate, credit, funding, deposit-flow, real-estate collateral, economic, competitive, regulatory and operational risks. It cautioned that actual conditions could differ from assumptions used in estimates. Interest-rate sensitivity modeling showed estimated net portfolio value down 7.79% under a 100-basis-point rate increase; management cautioned that the model is assumption-dependent and is not a precise forecast.
- Credit exposure is concentrated in commercial and multifamily real estate. The filing describes construction lending and commercial real estate lending as carrying heightened risks. The allowance is based on estimates and may require future provisions; regulators may also require additional reserves.
- A shareholder class action settlement was approved in 2015. Class counsel seeks approximately $1.0 million in fees and expenses, which the Company opposes. The Company’s related insurance-coverage action against Progressive remains unresolved; it previously received $1.75 million from Colonial under a separate settlement. The filing reports no decision on pending summary-judgment motions.
- Management stated that disclosure controls were effective and that there was no material change in internal control over financial reporting during the quarter. It reported no changes to the risk factors in the 2016 Form 10-K.
Most important facts for investors to verify
- Reconcile the allowance for loan losses: the balance sheet and loan note report $17.5 million, while MD&A also cites $18.2 million in its discussion of allowance balances and ratios.
- Assess the increase in nonaccrual loans and classified assets, the concentration in commercial and multifamily lending, and whether the allowance adequately reflects those risks.
- Determine how sustainable earnings are without the $1.2 million OREO-sale gain, given lower loan-sale gains and the higher loan-loss provision.
- Monitor the cost and retention of rapid deposit growth, including promotional, listing-service and brokered CDs, and the maturities of time deposits.
- Track the outcome and potential cost of the pending counsel-fee motion and insurance-coverage litigation.