BCB Bancorp, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. BCB Bancorp is a community-oriented bank holding company operating primarily through BCB Community Bank in New Jersey and New York. Amounts below are in millions unless noted. The IA Bancorp acquisition closed April 17, 2018, so its results are included from that date.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $20.1 | $15.6 | $56.5 | $45.2 |
| Provision for loan losses | $0.9 | $0.5 | $4.3 | $1.8 |
| Non-interest income | $1.9 | $1.6 | $6.8 | $6.0 |
| Non-interest expense | $14.4 | $11.3 | $42.4 | $35.0 |
| Net income | $4.6 | $3.2 | $11.5 | $8.6 |
| Net income available to common shareholders | $4.3 | $3.1 | $10.8 | $8.2 |
| Basic earnings per share | $0.27 | $0.25 | $0.70 | $0.71 |
- Q3 net income rose 42.8%; nine-month net income rose 33.5%. Higher loan interest income, growth in interest-earning assets, and a lower tax provision contributed; higher funding costs, credit provisions, and expenses partly offset the increases.
- Net interest margin was 3.22% for Q3 versus 3.50% a year earlier, and 3.34% for the nine-month period versus 3.46%. Management attributed the compression to funding costs rising faster than asset yields. Q3 average cost of interest-bearing liabilities increased to 1.51% from 1.03%.
- At September 30, assets were $2,637.9, up 35.8% from year-end 2017; net loans were $2,225.0, deposits $2,116.6, and stockholders’ equity $195.8. Gross loans grew 35.2% from year-end, including $182.6 of acquired loans and substantial organic growth, particularly in commercial real estate and multifamily lending.
- Cash and cash equivalents were $206.7, up from $124.2 at year-end. For the nine months, operating cash flow was $13.5, investing cash outflow $396.4, and financing cash inflow $465.3. Net loan growth used $401.9 of investing cash; deposit growth provided $368.8 of financing cash.
- Borrowings totaled $312.3, including $275.8 of FHLB advances and $36.5 of subordinated debt. The company issued $33.5 of ten-year subordinated notes in July, fixed at 5.625% for five years and then floating at three-month LIBOR plus 2.72%.
- The allowance for loan losses was $21.5, or 0.96% of gross loans, compared with $17.4 and 1.05% at year-end 2017. Nonaccrual loans were $11.1, or 0.49% of gross loans, compared with $13.0 at year-end. The filing separately reports $10.8 of acquired credit-deteriorated loans, excluded from its nonaccrual total.
- Bank regulatory capital ratios exceeded the stated well-capitalized thresholds: total risk-based capital was 12.19%, Tier 1 risk-based capital 11.16%, and Tier 1 leverage 9.05%.
Material changes and unusual items
- The IA Bancorp acquisition added approximately $215.8 of assets, including $182.6 of loans and $178.4 of deposits. Consideration was approximately $20.0, and $5.2 of goodwill was recorded. The acquisition expanded the company’s footprint and added new markets.
- Nine-month merger-related expense was $2.3, including $2.0 of early termination fees for the acquired bank’s core-system provider. The filing also reports $0.8 of merger costs in Q4 2017.
- Nine-month non-interest income included a $2.0 legal settlement received in Q1. The year-earlier period included $1.6 of gains on sales of other real estate owned, making the comparison affected by nonrecurring items.
- The company recorded a $0.2 loss on equity investments in the first nine months under new accounting guidance. Available-for-sale securities had $6.5 of gross unrealized losses at quarter-end; management considered the impairment temporary.
- The effective tax rate fell to 30.8% for Q3 and 30.6% for the nine months, from 40.4% and 40.1%, respectively, largely reflecting the federal corporate tax rate reduction under the Tax Cuts and Jobs Act.
Liquidity, outlook, and risks
- Management said it expected sufficient funds to meet current loan commitments through normal liquidity sources. The company reported up to $110.1 of additional FHLB funding capacity against unencumbered loan collateral. Time deposits maturing within one year totaled $768.5; management expected a significant portion to remain.
- No numerical earnings or growth guidance is provided. Management’s forward-looking statements are subject to risks including economic weakness, real-estate values and collateral, credit quality, interest rates, funding costs and deposit flows, competition, regulation, and successful integration of acquired businesses.
- The loan portfolio is concentrated in commercial and multifamily real estate. Management highlighted risks in commercial real estate, construction, and commercial business lending. At September 30, $30.2 of assets were classified substandard and none as loss; $28.1 of recorded investment was in troubled debt restructurings.
- Interest-rate sensitivity analysis estimated net portfolio value of $215.0 at unchanged rates and $186.9 under a 100-basis-point rate increase, a 13.1% decline. The filing cautions that these modeled results depend on assumptions and are not a precise forecast.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material legal proceedings and no changes to the risk factors in the 2017 Form 10-K.
Important facts for investors to verify
- Whether acquired and organic loan growth can be sustained without weakening underwriting, especially given the commercial real estate concentration.
- Credit performance and reserve adequacy, including acquired credit-deteriorated loans, nonaccruals, substandard assets, and troubled debt restructurings.
- Whether deposit pricing, brokered and listing-service deposits, and borrowing costs continue to pressure net interest margin.
- Integration progress and realized costs or benefits from IA Bancorp, including the impact of merger expenses and purchase-accounting adjustments.
- Durability of reported earnings after considering the $2.0 legal settlement and other period-specific items, and the company’s capacity to fund growth while maintaining liquidity and capital.