Business context and reporting period
BCB Bancorp, Inc. is the holding company for BCB Community Bank, a community-focused New Jersey and New York metropolitan-area bank. This Form 10-K covers the fiscal year ended December 31, 2018; it is an annual report, not a standalone fourth-quarter filing. The Bank’s principal business is gathering deposits and making loans, especially commercial and multifamily real estate loans.
On April 17, 2018, the Company acquired IA Bancorp and Indus-American Bank for approximately $20.0 million in stock, preferred stock and cash. The acquired operations are included from the acquisition date. The Company reported 28 branches at year-end and opened a River Edge, New Jersey branch in February 2019.
Financial performance and condition
Amounts below are in millions except per-share figures and ratios.
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Net interest income | $77.7 | $61.9 | Up 25.5% |
| Provision for loan losses | $5.1 | $2.1 | Up $3.0 million |
| Non-interest income | $8.0 | $7.5 | Includes $2.2 million insurance settlement proceeds |
| Non-interest expense | $56.3 | $47.0 | Up 19.6%; includes $2.4 million merger-related costs |
| Income tax expense | $7.5 | $10.2 | 2017 included tax-reform remeasurement expense |
| Net income | $16.8 | $10.0 | Up 67.9% |
| Diluted earnings per share | $1.01 | $0.75 | — |
| Net interest margin | 3.31% | 3.49% | Down 18 basis points |
| Return on average assets / equity | 0.70% / 8.86% | 0.55% / 7.02% | Both improved |
Interest income rose with loan growth and higher yields, but deposit and borrowing costs increased faster, compressing the net interest margin. The effective tax rate was 30.9%, compared with 50.6% in 2017. The filing attributes the decrease primarily to the 2018 federal corporate tax rate and the 2017 deferred-tax remeasurement.
Fourth-quarter 2018 net income was $5.2 million, versus $1.3 million in fourth-quarter 2017. Fourth-quarter 2018 diluted EPS was $0.31, versus $0.04. Quarterly results are unaudited.
- Total assets were $2.675 billion, up 37.7% year over year; net loans were $2.278 billion, up 38.6%. The acquisition and organic loan growth contributed to the increases.
- Gross loans were $2.303 billion. Commercial and multifamily real estate loans totaled $1.698 billion, or 73.7% of the portfolio.
- Deposits were $2.181 billion, up 39.0%; certificates of deposit totaled $1.104 billion. The average rate paid on deposits rose to 1.25% from 0.79%.
- Cash and cash equivalents were $195.3 million. Available-for-sale debt securities were $119.3 million; reported unrealized losses were $4.0 million, which management considered temporary.
- Total borrowings were $282.4 million, including $245.8 million of FHLB advances and $36.6 million of subordinated debentures. The Company issued $33.5 million of 10-year subordinated notes in July 2018, initially bearing 5.625% fixed interest for five years.
- Stockholders’ equity was $200.2 million, or 7.49% of assets, compared with $176.5 million, or 9.08%, a year earlier. The Bank’s regulatory capital ratios exceeded well-capitalized thresholds: total risk-based capital 12.01%, Tier 1 risk-based capital 10.96%, and Tier 1 leverage 8.72%.
- Operating cash flow was $40.0 million; investing cash flow was negative $466.2 million, principally reflecting loan growth; financing cash flow was positive $497.2 million. Year-end cash increased by $71.0 million.
Asset quality and material changes
- Non-performing loans were $8.6 million, or 0.38% of loans, versus $13.4 million, or 0.80%, in 2017. Non-performing assets were $10.0 million, or 0.37% of assets, versus $13.9 million, or 0.71%.
- The allowance for loan losses was $22.4 million, or 0.97% of gross loans, compared with $17.4 million, or 1.05%, in 2017. Net charge-offs were $146,000, down from $1.9 million.
- Impaired loans totaled $42.4 million; troubled debt restructurings totaled $26.6 million, including $4.1 million on non-accrual status. Classified assets were $26.2 million, with no amounts classified as doubtful or loss.
- Deposit growth, loan growth and the IA Bancorp acquisition materially expanded the balance sheet. The acquisition added approximately $182.6 million of loans and $178.4 million of deposits at closing and generated $5.2 million of goodwill.
- The allowance provision rose substantially despite lower net charge-offs, reflecting portfolio growth and management’s assessment of estimated credit losses.
Outlook, risks, contingencies and unusual items
- Management intends to pursue organic branch growth and acquisitions, continue emphasizing commercial and multifamily real estate lending, manage expenses and maintain capital. The filing identifies plans for three branches within the following year; it does not provide earnings or revenue guidance.
- Interest-rate risk is material: management’s model estimated that a 100-basis-point rate increase would reduce net portfolio value by 12.70%. The filing cautions that modeling assumptions may not predict actual results.
- Key risks include the high commercial real estate concentration, local economic and property-market exposure, competition for deposits and loans, rising funding costs, reliance on brokered deposits, growth and acquisition integration, cyber and third-party technology risks, and regulatory capital requirements. Brokered deposits were $248.0 million, about 11.4% of deposits; $72.8 million were reciprocal deposits treated as non-brokered under the cited regulatory reform.
- Approximately $888.6 million of certificates of deposit of at least $100,000 were outstanding; $788.3 million of all certificates of deposit were scheduled to mature within one year. The Company reported $206.7 million of additional FHLB borrowing capacity using unencumbered loan collateral.
- At year-end, loan origination commitments were $27.9 million, undisbursed construction funds $96.7 million, unused lines of credit $112.2 million, and standby letters of credit $3.1 million. Commitments may not all be drawn.
- The Company received $2.2 million in 2018 to settle its insurance recovery action related to prior litigation. It also recorded a $622,000 unrealized loss on equity investments under newly adopted accounting guidance.
- Subsequent to year-end, the Company raised $6.3 million gross from a common-stock private placement in February 2019 and $5.33 million gross from a Series G preferred-stock placement in January 2019. The quarterly common dividend remained $0.14 per share; management stated an intention to continue that quarterly rate, subject to Board and regulatory constraints.
- The Company expects adoption of the lease standard to add approximately $15.0 million of right-of-use assets and lease liabilities in 2019. The expected effect of the 2020 expected-credit-loss standard was not yet determined.
The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at December 31, 2018. The filing reports no material legal proceeding expected to materially affect the Company’s financial condition or results.
Important facts for investors to verify
- How much of 2018 earnings growth is sustainable after separating the IA Bancorp contribution, the $2.2 million insurance settlement, merger expenses and purchase-accounting effects.
- Whether margin pressure continues as higher deposit costs and certificate maturities reprice, and whether liquidity remains adequate if brokered or large certificates do not renew.
- Credit trends within the commercial and multifamily portfolio, including acquired loans, criticized and classified balances, impaired loans, TDRs, and the adequacy of the allowance.
- Whether the planned branch and acquisition strategy generates returns sufficient to cover expansion, integration and operating costs while preserving capital.
- The terms and capital implications of the 2019 common and preferred-stock placements, and the sustainability and regulatory permissibility of the dividend.