BCB Bancorp, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the quarter and nine months ended September 30, 2016, compared with the same 2015 periods. BCB is a community-oriented bank focused principally on commercial and multifamily real estate lending, with 20 branches in New Jersey and two in Staten Island.
Financial performance and condition
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Interest income | $17.7 | $17.2 | $53.2 | $49.8 |
| Net interest income | $13.6 | $13.5 | $40.7 | $39.8 |
| Provision (credit) for loan losses | ($0.3) | $0.1 | ($0.1) | $1.9 |
| Net income | $1.9 | $2.3 | $5.5 | $6.0 |
| Net income available to common shareholders | $1.7 | $2.0 | $4.8 | $5.4 |
| Diluted EPS | $0.15 | $0.24 | $0.43 | $0.63 |
| Net interest margin | 3.22% | 3.65% | 3.26% | 3.79% |
- Q3 pretax income was $3.1 million versus $3.7 million; nine-month pretax income was $9.2 million versus $10.0 million. Effective tax rates were 38.0% and 39.7% in 2016 for the quarter and nine-month periods, respectively.
- At September 30, assets were $1.679 billion, up $60.5 million (3.7%) from year-end 2015. Net loans were $1.431 billion, up $11.1 million; deposits were $1.380 billion, up $106.5 million; and stockholders’ equity was $132.3 million, down $1.2 million.
- Cash and cash equivalents were $137.7 million. Available-for-sale securities were $52.9 million, compared with $9.6 million at year-end, reflecting deployment of excess cash. Operating cash flow for the nine months was $6.9 million versus $11.1 million; investing cash flow was negative $56.6 million and financing cash flow was positive $54.8 million. Cash increased $5.1 million from year-end.
- Balance-sheet borrowed funds were $155.0 million, down $45.0 million from year-end; subordinated debentures were $4.1 million. Management separately reports total borrowings of $159.1 million at quarter-end; the filing text does not clearly reconcile this amount with the balance-sheet figure. The average borrowing rate was 2.66%.
- The allowance for loan losses was $17.6 million, or 1.21% of gross loans, versus $18.0 million and 1.25% at year-end. Nonperforming loans were $19.3 million, or 1.34% of gross loans, down from $23.4 million and 1.65% at year-end. Other real estate owned increased to $3.0 million from $1.6 million.
- Commercial and multifamily loans totaled $1.075 billion of $1.451 billion in gross loans, a substantial portfolio concentration. Loans classified substandard were $31.3 million and special mention were $17.8 million; none were classified doubtful or loss. Troubled debt restructurings totaled $26.8 million.
- Bank regulatory capital ratios at September 30 included total risk-based capital of 11.57%, Tier 1 risk-based capital of 10.32%, Common Equity Tier 1 of 10.32%, and Tier 1 leverage of 7.83%. The Bank reported exceeding applicable minimum requirements and qualifying as well-capitalized.
Material changes versus comparable periods
- Net income declined 16% in Q3 and 8% for the nine months. Common diluted EPS fell to $0.15 and $0.43, respectively; weighted average common shares increased to approximately 11.2 million from approximately 8.4 million in both comparisons.
- Net interest income edged up in Q3 and increased 2.1% year to date, but net interest margin contracted by 43 basis points in Q3 and 53 basis points year to date. Management attributed the pressure to competitive loan pricing, lower loan yields, and higher deposit costs.
- Noninterest income fell 22% in Q3 and 5% year to date. Lower loan-sale gains and losses on bulk sales of impaired loans contributed; the 2016 periods included bulk-sale losses of $0.1 million in Q3 and $0.4 million year to date. Higher service-charge income partly offset these declines.
- Noninterest expense rose 5.6% in Q3 and 10.4% year to date, principally from staffing, branch expansion, occupancy and other growth-related costs. Lower data-processing costs from conversion to a new core system partly offset the increases.
- The negative loan-loss provisions in 2016 reflected reversal of excess specific provisions on certain loans settled during the periods. Q3 net charge-offs were $0.4 million, compared with $0.1 million; nine-month net charge-offs were approximately $0.4 million in both years.
Outlook, commentary, risks and contingencies
- Management described plans for measured asset growth consistent with capital and business opportunities, continued loan and deposit growth, and additional branch openings during 2016. The filing provides no specific earnings or revenue guidance.
- Liquidity sources include deposits, loan and securities repayments, loan-sale proceeds, FHLB advances and correspondent-bank lines. The company reported $25.2 million of additional FHLB borrowing capacity against unencumbered collateral. Time deposits maturing within one year totaled $351.7 million; management expected a significant portion to remain.
- Interest-rate modeling estimated that a 100-basis-point rise would reduce net portfolio value 10.53%; rises of 200 and 300 basis points would reduce it 20.56% and 29.87%. The model is assumption-dependent and is not a precise forecast of net interest income.
- Key risks include real-estate and borrower credit quality, commercial real-estate concentration, interest-rate and funding costs, deposit flows, competition, liquidity, and regulatory changes. Management cautioned that actual economic conditions could be worse than assumptions used in estimates; regulators may require additional loan-loss provisions.
- Management assessed unrealized losses on available-for-sale mortgage-backed securities as temporary. Unrealized losses totaled $0.6 million at September 30, 2016.
- A pending shareholder-counsel fee motion seeks approximately $1.0 million, the stated maximum under the settlement of a class action. The company opposes the motion. Its related insurance recovery action against Progressive continues; Colonial previously paid $1.75 million to settle claims. A court settlement conference was scheduled for November 16, 2016.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It also disclosed upcoming accounting standards, including expected-credit-loss guidance, whose effects were still being assessed.
Important facts for investors to verify
- Whether margin pressure and rising deposit costs persist, and how they affect earnings as the balance sheet grows.
- Credit performance and collateral values in the commercial and multifamily portfolio; trends in classified, delinquent, nonperforming and restructured loans; and the adequacy of the allowance.
- Funding mix, retention of maturing certificates of deposit, brokered and listing-service deposits, and liquidity available beyond reported FHLB capacity.
- Whether branch expansion and staffing produce sufficient revenue to offset higher operating expenses, and the earnings impact of the larger common-share count.
- Resolution and potential financial effect of the pending attorney-fee motion and the continuing insurance litigation.