Business context and reporting period
BCB Bancorp, Inc. is a New Jersey bank holding company operating through BCB Community Bank. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018. The company completed its acquisition of IA Bancorp, Inc. (IAB) on April 17, 2018; IAB’s results are included from that date.
Financial performance and condition
Unless otherwise noted, amounts are in millions. Comparisons are with the corresponding 2017 period for income and cash flow, and December 31, 2017 for balance-sheet figures.
- Second quarter: Net interest income rose 32.7% to $20.0; net income declined 8.0% to $2.3, and income available to common shareholders was $2.1. Basic and diluted EPS were $0.13 versus $0.21. Net interest margin was 3.52% versus 3.45%.
- First six months: Net interest income rose 22.8% to $36.4; net income increased 28.0% to $6.9, and income available to common shareholders was $6.5. Basic EPS was $0.43 versus $0.46; diluted EPS was $0.42 versus $0.45. Net interest margin was 3.46% versus 3.44%.
- Income and costs: Second-quarter total interest income was $25.7 versus $19.1; interest expense increased to $5.7 from $4.0. The six-month figures were $46.6 versus $37.5 and $10.2 versus $7.9, respectively. Provision for loan losses was $2.1 in the quarter and $3.4 for six months, compared with $0.8 and $1.3. Non-interest expense was $16.0 in the quarter and $28.0 for six months, including merger costs of $2.0 and $2.2, respectively.
- Balance sheet: Total assets were $2,516.6, up 29.5%; net loans were $2,119.8, up 29.0%; deposits were $1,984.9, up 26.5%; and stockholders’ equity was $194.1, up 10.0%. Cash and cash equivalents totaled $180.4. FHLB advances were $320.0, compared with $185.0 at year-end; subordinated debentures were $4.1.
- Credit quality: The allowance for loan losses was $20.6, or 0.96% of gross loans, versus $17.4, or 1.04%, at year-end. Management reported non-performing loans of $22.4, or 1.05% of gross loans, versus $13.4, or 0.80%, at year-end. The separate non-accrual table reports $10.8 and excludes $11.6 of acquired credit-impaired loans.
- Cash flow, six months: Operating activities provided $8.6, compared with $13.2. Investing activities used $300.1, principally reflecting a $296.8 net increase in loans; financing activities provided $347.7, including deposit growth and net FHLB advances. Cash and cash equivalents increased $56.2 to $180.4.
- Capital and liquidity: The Bank reported capital ratios above regulatory minimums and well-capitalized thresholds at June 30; total capital to risk-weighted assets was 10.83% and Tier 1 leverage was 8.44%. The company reported up to $110.0 of additional FHLB funding capacity and $631.0 of time deposits scheduled to mature within one year.
Material changes and unusual items
- IAB acquisition consideration was approximately $20.0, including common and preferred shares and cash. It added $182.5 of loans, $178.4 of deposits and $5.3 of goodwill. Purchase accounting and fair-value estimates remain subject to adjustment for up to one year after closing.
- Loan growth reflected both the acquisition and organic expansion, particularly in commercial real estate and multifamily lending. Management attributed higher loan yields partly to rising rates and margin improvement to selective loan pricing and management of funding costs.
- Six-month non-interest income included approximately $2.0 from a legal settlement in the first quarter. Second-quarter 2017 non-interest income had included $0.237 from a legal settlement. The six-month comparison also reflects lower gains on sales of other real estate owned.
- Available-for-sale securities had a $2.5 after-tax unrealized loss in the first six months, compared with a $1.4 gain in 2017; accumulated other comprehensive loss rose to $5.8 from $3.1 at year-end. Management considered the securities impairment temporary.
- On July 30, 2018, the company issued $33.5 of subordinated debentures due 2028, with a 5.625% fixed rate for five years and then a rate of three-month LIBOR plus 2.72%. The filing says proceeds are for general corporate purposes, including growth initiatives.
Outlook, commentary and risks
The filing provides no quantified earnings or revenue guidance. Management said it expects sufficient funds to meet current loan commitments through normal liquidity sources and considered the loan-loss allowance adequate, while noting that future provisions may be required and regulatory review could lead to additional provisions. Management cautioned that actual results may differ from estimates and that economic conditions could be worse than anticipated.
Key disclosed risks include credit exposure, particularly commercial real estate and multifamily loans; collateral and housing-market values; rising interest rates and funding costs; deposit flows and access to cost-effective funding; competition and regulatory changes; and timely integration of IAB. The company’s modeled net portfolio value fell 14.32% under a 100-basis-point rate increase and 30.71% under a 200-basis-point increase; management cautioned that the model’s assumptions limit its predictive value. No material legal proceeding or change to the prior annual report’s risk factors was reported. Disclosure controls were judged effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported asset, loan and deposit growth is attributable to IAB versus continuing organic growth, and how integration and purchase-accounting adjustments progress.
- Trends in non-performing and non-accrual loans, acquired credit-impaired loans, criticized assets, TDR payment defaults, and the adequacy of the allowance as the portfolio expands.
- Funding mix and sensitivity to deposit pricing: the filing reports $202.3 of brokered deposits, $41.5 of listing-service deposits, and $631.0 of time deposits maturing within one year.
- Whether recurring earnings can absorb merger and operating costs and offset higher deposit and borrowing costs; distinguish the $2.0 legal settlement from ongoing non-interest income.
- Effects of the July 2018 $33.5 subordinated debt issuance on capital, interest expense and liquidity, and the assumptions behind the reported interest-rate sensitivity analysis.