ITEM 1. BUSINESS
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This report on Form 10-K contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of BCB Bancorp, Inc. and subsidiaries. This document may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identified by use of the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “seek,” “strive,” “try,” or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. Although we believe that our plans, intentions and expectations, as reflected in these forward-looking statements are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or realized. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed below and under “Risk Factors” in Part I, Item 1A
ITEM 1A. RISK FACTORS
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Our loan portfolio consists of a high percentage of loans secured by commercial real estate and multi-family real estate. These loans are riskier than loans secured by one- to four-family properties.
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At December 31, 2017, $1.26 billion, or 75.82%, of our loan portfolio consisted of commercial and multi-family real estate loans. We intend to continue to emphasize the origination of these types of loans. These loans generally expose a lender to greater risk of nonpayment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation and income stream of the collateral that is pledged. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.
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Commercial real estate and multi-family loans generally carry larger balances and can involve a greater degree of financial and credit risk than other loans. As a result, banking regulators continue to give greater scrutiny to lenders with a high concentration of commercial real estate loans in their portfolios, such as us, and such lenders are expected to implement stricter underwriting standards, internal controls, risk management policies, and portfolio stress testing, as well as higher capital levels and loss allowances. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties, and the increased difficulty of evaluating and monitoring these types of loans. During the last recession, financial institutions with high commercial real estate loan concentrations were more susceptible to failure. If we cannot effectively manage the risk associated with our high concentration of commercial real estate loans, our financial condition and results of operations may be adversely affected.
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We may not be able to successfully maintain and manage our growth.
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The Company has progressed on an organic branching initiative which is intended to mitigate the location risk of our strong Hudson County concentration, to develop our branch infrastructure in a manner more consistent with the expansion of lending markets and to fill in and grow our branch footprint in a more uniform and coherent fashion, which previously had grown predominately through merger and acquisition activity. To this end, the Company opened seven branches in 2016 and will be opening one more branch within the next year.
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We cannot be certain as to our ability to manage increased levels of assets and liabilities. We may be required to make additional investments in equipment and personnel to manage higher asset levels and loans balances, which may adversely impact our efficiency ratio, earnings and shareholder returns.
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If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
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Our loan customers may not repay their loans according to the terms of their loans, and the collateral securing the payment of their loans may be insufficient to assure repayment. We may experience significant credit losses, which could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions prove to be incorrect, our allowance for loan losses may not cover losses in our loan portfolio at the date of the financial statements. Material additions to our allowance would materially decrease our net income. At December 31, 2017, our allowance for loan losses totaled $17.4 million, representing 1.05% of total loans or 133.28% of non-performing loans.
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While we have only been operating for 17 years, we have experienced significant growth in our loan portfolio, particularly our loans secured by commercial real estate. Although we believe we have underwriting standards to manage normal lending risks, it is difficult to assess the future performance of our loan portfolio due to the relatively recent origination of many of these loans. We can give you no assurance that our non-performing loans will not increase or that our non-performing or delinquent loans will not adversely affect our future performance.
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In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a material adverse effect on our results of operations and financial condition.
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The asset quality of our loan portfolio may deteriorate if the economy falters, resulting in a portion of our loans failing to perform in accordance with their terms. Under such circumstances our profitability will be adversely affected.
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At December 31, 2017, we had $21.7 million in classified loans of which $49,000 were classified as losses, and $21.7 million were classified as substandard. In addition, at that date we had $13.0 million in non-accruing loans, or 0.78% of total loans. We have adhered to stringent underwriting standards in the origination of loans, but there can be no assurance that loans that we originated will not experience asset quality deterioration as a result of a downturn in the local economy. Should our local economy weaken, our asset quality may deteriorate resulting in losses to the Company.
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We depend primarily on net interest income for our earnings rather than fee income.
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Net interest income is the most significant component of our operating income. We have significantly less reliance on traditional sources of fee income utilized by some community banks, such as fees from sales of insurance, securities or investment advisory products or services. For the years ended December 31, 2017 and 2016, our net interest income was $61.9 million and $55.1 million, respectively. The amount of our net interest income is influenced by the overall interest rate environment, competition, and the amount of interest-earning assets relative to the amount of interest-bearing liabilities. In the event that one or more of these factors were to result in a decrease in our net interest income, we do not have significant sources of fee income to make up for decreases in net interest income.
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Changes in interest rates could hurt our profits.
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Our profitability, like most financial institutions, depends to a large extent upon our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds. Accordingly, our results of operations depend largely on movements in market interest rates and our ability to manage our interest-rate-sensitive assets and liabilities in response to these movements. Factors such as inflation, recession and instability in financial markets, among other factors beyond our control, may affect interest rates.
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If interest rates rise, and if rates on our deposits reprice upwards faster than the rates on our long-term loans and investments, we would experience compression of our interest rate spread, which would have a negative effect on our profitability. Conversely, decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such loan or securities proceeds into lower-yielding assets, which might also negatively impact our income.
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Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Further, a prolonged period of exceptionally low market interest rates, such as we are currently experiencing, limits our ability to lower our interest expense, while the average yield on our interest-earning assets may continue to decrease as our loans reprice or are originated at these low market rates. Accordingly, our net interest income may continue to decrease, which may have an adverse effect on our profitability. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results.
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While we pursue an asset/liability strategy designed to mitigate our risk from changes in interest rates, changes in interest rates can still have a material adverse effect on our financial condition and results of operations. Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. For further discussion of how changes in interest rates could impact us, see “Item 7A. - Quantitative and Qualitative Disclosure About Market Risk.”
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The building of market share through de novo branching and expansion of our commercial real estate and multi-family lending capacity could cause our expenses to increase faster than revenues.
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We intend to continue to build market share through de novo branching and expansion of our commercial real estate and multi-family lending capacity. Since January 1, 2015, we have opened nine de novo branches including two in 2015 and seven in 2016. Pursuant to our de novo branch expansion strategy, during the two years ended December 31, 2016 we hired 26 new full-time equivalent employees, primarily in the areas of business development, loan administration and customer service. There are considerable costs involved in opening branches and expansion of lending capacity that generally require a period of time to generate the necessary revenues to offset their costs, especially in areas in which we do not have an established presence. Accordingly, any such business expansion can be expected to negatively impact our earnings for some period of time until certain economies of scale are reached. Our expenses could be further increased if we encounter delays in the opening of any of our new branches. Finally, our business expansion may not be successful after establishment of the new branches.
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The Dodd-Frank Act has resulted in new laws and regulations that are expected to increase our costs of operations.
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The Dodd-Frank Act, among other things, has changed and will continue to change the bank regulatory framework. The legislation has also resulted in new regulations affecting the lending, funding, trading and investment activities of banks and bank holding companies. An independent Consumer Financial Protection Bureau has assumed the consumer protection responsibilities of the various federal banking agencies and has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as the Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. Banks and savings institutions with $10.0 billion or less in assets will continue to be examined by their applicable bank regulators. The legislation also gave state attorneys general the ability to enforce applicable federal consumer protection laws. The Dodd-Frank Act also required the federal banking agencies to promulgate rules requiring mortgage lenders to retain a portion of the credit risk related to securitized loans. These measures are likely to increase our costs of doing business and increase our costs related to regulatory compliance, and may have a significant adverse effect on our lending activities, financial performance and operating flexibility.
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We have become subject to more stringent capital requirements, which may adversely impact our return on equity, or constrain us from paying dividends or repurchasing shares.
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In July 2013, the FDIC and the Federal Reserve approved a new rule that substantially amended the regulatory risk-based capital rules applicable to the Bank and the Company. The final rule implemented the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.
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The final rule includes new minimum risk-based capital and leverage ratios, which became effective for the Bank and the Company on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a “capital conservation buffer” of 2.5%, and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. In 2018, the ratio will be 1.875% of risk-weighted assets. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.
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The application of more stringent capital requirements for the Bank and the Company could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were to be unable to comply with such requirements.
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New regulations could restrict our ability to originate and sell mortgage loans.
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The CFPB has issued a rule designed to clarify for lenders how they can avoid monetary damages under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the CFPB’s rule, a “qualified mortgage” loan must not contain certain specified features, including:
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excessive upfront points and fees (those exceeding 3% of the total loan amount, less "bona fide discount points" for prime loans);
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interest-only payments;
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negative-amortization; and
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terms longer than 30 years.
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Also, to qualify as a “qualified mortgage,” a borrower’s total debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The CFPB’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could limit our growth or profitability.
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Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.
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Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities investments, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches (including privacy breaches and cyber-attacks), but such events may still occur or may not be adequately addressed if they do occur. In addition, any compromise of our systems could deter customers from using our products and services. Although we take protective measures, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber attacks that could have an impact on information security.
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In addition, we outsource a majority of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
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There have been increasing efforts on the part of third parties, including through cyber attacks, to breach data security at financial institutions or with respect to financial transactions. There have been several recent instances involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information or the destruction or theft of corporate data. In addition, because the techniques used to cause such security breaches change frequently, often are not recognized until launched against a target and may originate from less regulated and remote areas around the world, we may be unable to proactively address these techniques or to implement adequate preventative measures. The ability of our customers to bank remotely, including online and through mobile devices, requires secure transmission of confidential information and increases the risk of data security breaches.
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The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.
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The Bank’s reliance on brokered deposits could adversely affect its liquidity and operating results.
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Among other sources of funds, we rely on brokered deposits to provide funds with which to make loans and provide for other liquidity needs. On December 31, 2017, brokered deposits totaled $60.2 million, or approximately 3.8% of total deposits. The Bank’s primary source for brokered money market deposits is the Certificate of Deposit Account Registry Service (“CDARS”).
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Generally brokered deposits may not be as stable as other types of deposits. In the future, those depositors may not replace their brokered deposits with us as they mature, or we may have to pay a higher rate of interest to keep those deposits or to replace them with other deposits or other sources of funds. Not being able to maintain or replace those deposits as they mature would adversely affect our liquidity. Paying higher deposit rates to maintain or replace brokered deposits would adversely affect our net interest margin and operating results.
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Strong competition within our market area may limit our growth and profitability.
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Competition is intense within the banking and financial services industry in New Jersey and New York. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources, higher lending limits and offer services that we do not or cannot provide. This competition makes it more difficult for us to originate new loans and retain and attract new deposits. Price competition for loans may result in originating fewer loans, or earning less on our loans and price competition for deposits may result in a reduction of our deposit base or paying more on our deposits.
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Adverse events in New Jersey, where our business is concentrated, could adversely affect our results and future growth.
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Our business, the location of our branches and the real estate collateralizing our real estate loans are concentrated in New Jersey. As a result, we are exposed to geographic risks. The occurrence of an economic downturn in New Jersey, or adverse changes in laws or regulations in New Jersey, could impact the credit quality of our assets, the business of our customers and our ability to expand our business.
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Our success significantly depends upon the growth in population, income levels, deposits and housing in our market area. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may be negatively affected. In addition, the economies of the communities in which we operate are substantially dependent on the growth of the economy in the State of New Jersey. To the extent that economic conditions in New Jersey are unfavorable or do not continue to grow as projected, the economy in our market area would be adversely affected. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our market area if they do occur.
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In addition, the market value of the real estate securing loans as collateral could be adversely affected by unfavorable changes in market and economic conditions. As of December 31, 2017, approximately 99% of our total loans were secured by real estate. Adverse developments affecting commerce or real estate values in the local economies in our primary market areas could increase the credit risk associated with our loan portfolio. In addition, a significant percentage of our loans are to individuals and businesses in New Jersey. Our business customers may not have customer bases that are as diverse as businesses serving regional or national markets. Consequently, any decline in the economy of our market area could have an adverse impact on our revenues and financial condition. In particular, we may experience increased loan delinquencies, which could result in a higher provision for loan losses and increased charge-offs. Any sustained period of increased non-payment, delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market area could adversely affect the value of our assets, revenues, results of operations and financial condition.
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We operate in a highly regulated environment and may be adversely affected by changes in federal, state and local laws and regulations.
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We are subject to extensive regulation, supervision and examination by federal and state banking authorities. Any change in applicable regulations or federal, state or local legislation could have a substantial impact on us and our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations. Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory authority may have a negative impact on our results of operations and financial condition.
Like other bank holding companies and financial institutions, we must comply with significant anti-money laundering and anti-terrorism laws. Under these laws, we are required, among other things, to enforce a customer identification program and file currency transaction and suspicious activity reports with the federal government. Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply with these laws or make required reports. Because we operate our business in the highly urbanized greater Newark/New York City metropolitan area, we may be at greater risk of scrutiny by government regulators for compliance with these laws.
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We could be adversely affected by failure in our internal controls.
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A failure in our internal controls could have a significant negative impact not only on our earnings, but also on the perception that customers, regulators and investors may have of us. We continue to devote a significant amount of effort, time and resources to continually strengthening our controls and ensuring compliance with complex accounting standards and banking regulations.
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Risks Relating to the Merger with IA Bancorp, Inc.
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If the merger is not consummated, IAB and BCB will have incurred substantial costs that may adversely affect IAB’s and BCB’s financial results and operations.
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IAB and BCB have incurred and will continue to incur substantial costs in connection with the proposed merger. These costs are primarily associated with the fees of their respective financial advisors, accountants and attorneys. If the merger is not consummated, IAB and BCB will have incurred these costs from which they will have received little or no benefit.
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Regulatory approvals, non-objections or waivers may not be received, may take longer than expected or impose conditions that are not presently anticipated.
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Before the merger may be completed, IAB and BCB must obtain various regulatory approvals, non-objections or waivers from, among others, the FDIC, the Federal Reserve and the Department. These regulators may impose conditions on consummation of the merger or require changes to the terms of the merger. Although we do not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying the effective time of the merger or imposing additional costs on or limiting the revenues of BCB following the merger. Furthermore, such conditions or changes may constitute a burdensome condition that may allow BCB to terminate the merger agreement and BCB may exercise its right to terminate the merger agreement. There can be no assurance as to whether the regulatory approvals will be received, the timing of those approvals, or whether any conditions will be imposed.
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IAB and BCB will be subject to business uncertainties and contractual restrictions while the merger is pending.
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Uncertainty about the effect of the merger on employees and customers may have an adverse effect on IAB and/or BCB. These uncertainties may impair IAB’s and/or BCB’s ability to attract, retain and motivate key personnel until the merger is completed and for a period of time thereafter, and could cause customers and others who deal with IAB or BCB to seek to change existing business relationships with IAB or BCB. IAB employee retention and recruitment may be particularly challenging prior to the effective time of the merger, as employees and prospective employees may experience uncertainty about their future roles with the combined company.
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The pursuit of the merger and the preparation for the integration may place a significant burden on management and internal resources. Any significant diversion of management attention away from ongoing business and any difficulties encountered in the transition and integration process could affect IAB’s and/or BCB’s financial results.
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In addition, the merger agreement requires that, subject to certain exceptions, each of IAB and BCB operate in the ordinary course of business consistent with past practice prior to the effective time of the merger or termination of the merger agreement.
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Risks Relating to BCB’s Business Following the Merger
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Combining the two companies may be more difficult, costly or time-consuming than expected.
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BCB and IAB have historically operated and, until the effective time of the merger, will continue to operate, independently. The success of the merger will depend, in part, on our ability to successfully combine the businesses of BCB and IAB. To realize these anticipated benefits, after the effective time of the merger, BCB expects to integrate IAB’s business into its own. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger. The loss of key employees could adversely affect BCB’s ability to successfully conduct its business in the markets in which IAB now operates, which could have an adverse effect on BCB’s financial results and the value of its common stock. If BCB experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause IAB or BCB to lose current customers or cause current customers to remove their accounts from IAB or BCB and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of IAB and BCB during this transition period and for an undetermined period after consummation of the merger.
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BCB may fail to realize the cost savings estimated for the merger.
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BCB estimates that it will achieve cost savings from the merger when the two companies have been fully integrated. While BCB continues to be comfortable with these expectations as of the date of this annual report on Form 10-K, it is possible that the estimates of the potential cost savings could turn out to be incorrect. The actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual growth and cost savings, if achieved, may be lower than what BCB expects and may take longer to achieve than anticipated. If BCB is not able to adequately address integration challenges, BCB may be unable to successfully integrate BCB’s and IAB’s operations or to realize the anticipated benefits of the integration of the two companies.
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BCB and IAB will incur significant transaction and merger-related costs in connection with the merger.
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BCB and IAB have incurred and expect to incur a number of non-recurring costs associated with the merger.
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These costs and expenses include fees paid to financial, legal and accounting advisors, severance, retention bonus and other potential employment-related costs, filing fees, printing expenses and other related charges. Some of these costs are payable by BCB and IAB regardless of whether the merger is completed. There are also a large number of processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the merger and the integration of the two companies’ businesses. While both BCB and IAB have assumed that a certain level of expenses would be incurred in connection with the merger, there are many factors beyond their control that could affect the total amount or the timing of the integration and implementation expenses.
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There may also be additional unanticipated significant costs in connection with the merger that BCB may not recoup. These costs and expenses could reduce the realization of efficiencies, strategic benefits and additional income BCB expects to achieve from the merger. Although BCB expects that these benefits will offset the transaction expenses and implementation costs over time, this net benefit may not be achieved in the near term or at all.
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ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
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None.
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ITEM 2.
ITEM 2. PROPERTIES
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The Bank conducts its business through an executive office, one administrative office, and 22 branch offices. 12 offices have drive-up facilities. The Bank has 29 automatic teller machines at its branch facilities and three other off-site locations. The following table sets forth information relating to each of the Bank’s offices as of December 31, 2017. The total net book value of the Bank’s premises and equipment at December 31, 2017 was $18.8 million.
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(1) Leased Property
(2) Includes off-site ATMs
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
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The Company is involved, from time to time, as plaintiff or defendant in various legal actions arising in the normal course of business. Other than as set forth below, as of December 31, 2017, we were not involved in any material legal proceedings the outcome of which, if determined in a manner adverse to the Company, would have a material adverse effect on our financial condition or results of operations.
The Company, as the successor to Pamrapo Bancorp, Inc., and in its own corporate capacity, was a named defendant in a shareholder class action lawsuit, Kube v. Pamrapo Bancorp, Inc., et al., filed in the Superior Court of New Jersey, Hudson County, Chancery Division, General Equity (the "Action”).
On September 21, 2015, the court entered an Order and Final Judgment (“Judgment”), whereby the Stipulation of Settlement ("Stipulation") agreed to by the plaintiff class, the Company and the remaining defendants was approved. Pursuant to the Judgment, and in consideration for the full settlement and release of all Released Claims (as that term is defined in the Stipulation) and the dismissal of the Action with prejudice as against the Company and the remaining defendants, the Company, on its own behalf and on behalf of the remaining defendants, would pay $1,950,000 to the Class. This settlement amount was paid in November 2015.
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Pursuant to the Stipulation, the plaintiff class's counsel reserved the right to seek an award of counsel fees and litigation expenses (“Fees Motion”). The maximum amount which could have been awarded as a result of the Fees Motion was $1,000,000. The plaintiff class’s counsel made a Fees Motion to the court seeking a final award of counsel fees and litigation expenses of approximately $1,000,000. The Company and the remaining defendants vigorously opposed that motion.
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By Order, dated July 5, 2017, the court awarded counsel fees and litigation expenses to the plaintiff’s class counsel in the amount of $1,000,000. The Company satisfied the Order by July 31, 2017.
The Company and the other defendants in the Action ("Plaintiffs") brought suit (the "Carrier Suit") against Progressive Insurance Company ("Progressive"), the Directors' and Officers' Liability insurance carrier for Pamrapo Bancorp, Inc., at the time of its merger with the Company on July 6, 2010, and Colonial American Insurance Company ("Colonial"), the Directors' and Officers' Liability insurance carrier for the Company at the time of the merger. The Carrier Suit sought, among other claims, indemnification, payment of and/or contribution toward the above settlement, payment of and/or contribution toward the award of attorney's fees to the plaintiff class's counsel, and reimbursement of the attorney's fees and defense costs incurred by the Plaintiffs in defending the Action and pursuing the Carrier Suit.
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Progressive made a motion to dismiss the Carrier Suit in 2014. The Plaintiffs opposed that motion. That motion was administratively terminated by Order of the court, dated December 3, 2014. By Order of the court, dated December 3, 2014, the Plaintiffs' motion to file an Amended Complaint was granted.
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On or about January 6, 2015, Progressive again made a motion to dismiss the Carrier Suit. The Plaintiffs opposed that motion. That motion was denied by oral decision on October 22, 2015, and by written Order, dated January 20, 2016.
A Mediation session ("Mediation") was held on March 11, 2015, among the parties. Following the Mediation, the Plaintiffs and Colonial agreed to settle the Plaintiffs’ claims against Colonial for $1,750,000. A Settlement Agreement and Release, dated June 30, 2015, was entered into by the Plaintiffs and Colonial. The Plaintiffs received the settlement amount of $1,750,000 from Colonial on July 9, 2015.
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The Plaintiffs and Progressive did not settle their respective claims at the Mediation. The Carrier Suit continued with respect to these parties.
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By Order of the court, dated August 10, 2016, the parties were granted permission to serve and file motions for summary judgment by November 9, 2016. Prior to consideration of these motions, a Settlement Conference was held before the court on November 16, 2016. The Plaintiffs and Progressive did not settle their respective claims at that Settlement Conference.
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The Plaintiffs filed a motion for partial summary judgment. Progressive filed a motion for summary judgment. These motions were returnable before the court on December 5, 2016.
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By Order, dated September 18, 2017, the court granted the Plaintiffs’ motion for partial summary judgment, and denied Progressive’s motion for summary judgment.
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A Status Conference was held before the court on October 26, 2017. As a result thereof, a Settlement Conference was scheduled for December 1, 2017, before the court.
A Settlement Conference in the Carrier Suit was conducted on December 1, 2017, before the court. At the Settlement Conference, the terms of a preliminary settlement were discussed by the Plaintiffs and Progressive. A proposed Settlement Agreement and Release (“Release”) was circulated among the parties for review.
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The last party to the Carrier Suit executed the Release on February 20, 2018. Pursuant to the Release, in consideration for the full settlement and release of all claims (as that term is defined in the Release) and the dismissal of the Carrier Suit with prejudice, Progressive agreed to pay the Company $2,200,000 by, on, or about March 10, 2018.
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ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURE
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Not applicable.
PART II
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ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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The Company’s common stock trades on the Nasdaq Global Market under the symbol “BCBP.”
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The following table sets forth the high and low closing prices for the Company’s common stock for the periods indicated. As of December 31, 2017, there were 15,042,179 shares of the Company’s common stock outstanding. At March 1, 2018, the Company had approximately 2,500 stockholders of record.
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Please see “Item 1. Business-Bank Regulation-Dividends” for a discussion of restrictions on the ability of the Bank to pay the Company dividends.
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Compensation Plans
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Set forth below is information as of December 31, 2017 regarding equity compensation plans that have been approved by shareholders. The Company has no equity based benefit plans that were not approved by shareholders.
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(1)
Consists of options to purchase 889,300 shares under the 2011 Stock Option Plan.
(2)
The weighted average exercise price reflects the exercise prices ranging from $8.93-$13.32 per share for options under the 2011 Stock Option Plan.
Set forth hereunder is a stock performance graph comparing (a) the cumulative total return on the common stock for the period beginning with the closing sales price on January 1, 2013 through December 31, 2017, (b) the cumulative total return on all publicly traded commercial bank stocks over such period, as repriced on the SNL Banks Index, and (c) the cumulative total return of the Nasdaq Market Index over such period. Cumulative return assumes the reinvestment of dividends, and is expressed in dollars based on an assumed investment of $100.
			 		
BCB Bancorp, Inc.
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The Company had no stock repurchase plan during the fourth quarter of 2017.
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ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
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The following tables set forth selected consolidated historical financial and other data of BCB Bancorp, Inc. at and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013. The information, at December 31, 2017 and 2016 and for the three year period ended December 31, 2017, is derived in part from, and should be read together with, the audited Consolidated Financial Statements and Notes thereto of BCB Bancorp, Inc. that appear in this annual report on Form 10-K. The other years presented in these tables are derived from audited consolidated financial statements that do not appear in this annual report on Form 10-K.
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(1) Ratios are for BCB Community Bank only.
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ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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General
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This discussion, and other written material, and statements management may make, may contain certain forward-looking statements regarding the Company’s prospective performance and strategies within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of said safe harbor provisions.
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Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in the Company’s Annual Report on Form 10-K and in other documents filed by the Company with the Securities and Exchange Commission. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by the use of the words “plan,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “may,” “will,” “should,” “could,” “predicts,” “forecasts,” “potential,” or “continue” or similar terms or the negative of these terms. The Company’s ability to predict results or the actual effects of its plans or strategies is inherently uncertain. Accordingly, actual results may differ materially from anticipated results.
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Factors that could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in market interest rates, general economic conditions, legislation, and regulation; changes in monetary and fiscal policies of the United States Government, including policies of the United States Treasury and Federal Reserve Board; changes in the quality or composition of the loan or investment portfolios; changes in deposit flows, competition, and demand for financial services, loans, deposits and investment products in the Company’s local markets; changes in accounting principles and guidelines; war or terrorist activities; and other economic, competitive, governmental, regulatory, geopolitical and technological factors affecting the Company’s operations, pricing and services.
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Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this discussion. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law or regulation, the Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.
Critical Accounting Policies
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Critical accounting policies are those accounting policies that can have a significant impact on the Company’s financial position and results of operations that require the use of complex and subjective estimates based upon past experiences and management’s judgment. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. Below are those policies applied in preparing the Company’s consolidated financial statements that management believes are the most dependent on the application of estimates and assumptions. For additional accounting policies, see Note 2 of “Notes to Consolidated Financial Statements.”
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Allowance for Loan Losses
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Loans receivable are presented net of an allowance for loan losses and net deferred loan fees. In determining the appropriate level of the allowance, management considers a combination of factors, such as economic and industry trends, real estate market conditions, size and type of loans in portfolio, nature and value of collateral held, borrowers’ financial strength and credit ratings, and prepayment and default history. The calculation of the appropriate allowance for loan losses requires a substantial amount of judgment regarding the impact of the aforementioned factors, as well as other factors, on the ultimate realization of loans receivable. In addition, our determination of the amount of the allowance for loan losses is subject to review by the New Jersey Department of Banking and Insurance and the FDIC, as part of their examination process. After a review of the information available, our regulators might require the establishment of an additional allowance. Any increase in the loan loss allowance required by regulators would have a negative impact on our earnings.
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Other-than-Temporary Impairment of Securities
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If the fair value of a security is less than its amortized cost, the security is deemed to be impaired. Management evaluates all securities with unrealized losses quarterly to determine if such impairments are “temporary” or “other-than-temporary” in accordance with Accounting Standards Codification (“ASC”) Topic 320, Investments - Debt and Equity Securities.
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Accordingly, temporary impairments are accounted for based upon the classification of the related securities as either available for sale or held to maturity. Temporary impairments on available for sale securities are recognized, on a tax-effected basis, through Other Comprehensive Income (“OCI”) with offsetting entries adjusting the carrying value of the securities and the balance of deferred taxes. Conversely, the carrying values of held to maturity securities are not adjusted for temporary impairments. Information concerning the amount and duration of temporary impairments on both available for sale and held to maturity securities is generally disclosed in the notes to the consolidated financial statements.
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Other-than-temporary impairments are accounted for based upon several considerations. First, other-than-temporary impairments on debt securities that the Company has decided to sell as of the close of a fiscal period, or will, more likely than not, be required to sell prior to the full recovery of fair value to a level equal to or exceeding amortized cost, are recognized in earnings. If neither of these conditions regarding the likelihood of the sale of debt securities are applicable, then the other-than-temporary impairment is bifurcated into credit-related and noncredit-related components. A credit-related impairment represents the amount by which the present value of the cash flows that are expected to be collected on a debt security fall below its amortized cost. The noncredit-related component represents the remaining portion of the impairment not otherwise designated as credit-related. Credit-related other-than-temporary impairments are recognized in earnings and noncredit-related other-than-temporary impairments are recognized in OCI. Equity securities on which there is an unrealized loss that is deemed other-than-temporary are written down to fair value with the write-down recognized in earnings.
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Deferred Income Taxes
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The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the consolidated financial statements or the consolidated and separate entity tax returns; (ii) are attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled.
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In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will not be realized. In making this assessment, management considers the profitability of current core operations, future market growth, forecasted earnings, future taxable income, and ongoing, feasible and permissible tax planning strategies. Deferred tax assets have been reduced by a valuation allowance for all portions determined not likely to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. The valuation allowance is adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant.
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On December 22, 2017 the Tax Cut and Jobs Act was signed into law. ASC 740 (Income Taxes) requires the recognition of the effect of changes in tax laws or rates in the period in which the legislation is enacted. The changes in the deferred tax assets and liabilities remeasured at the new 21% federal tax rate are reflected in income tax expense for fiscal year 2017.
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Fair Value Measurements
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Management uses its best judgment in estimating fair value measurements of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Management utilized various inputs to determine fair value including but not limited to the use of, valuation techniques based on various assumptions, including, but not limited to cash flows, discount rates, rate of return, adjustments for nonperformance and liquidity, quoted market prices, and appraisals. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these consolidated financial statements to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.
Financial Condition at December 31, 2017 and 2016
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Total assets increased by $234.6 million, or 13.7%, to $1.943 billion at December 31, 2017 from $1.708 billion at December 31, 2016. Total assets increased primarily as a result of increases in net loans receivable, total cash and cash equivalents, and securities available for sale, partially offset by decreases in deferred income taxes, other real estate owned properties, and loans held for sale. Management is focusing on maintaining adequate liquidity in anticipation of funding loans in the loan pipeline as well as seeking opportunities to purchase loans in the secondary market that provide competitive returns but meet our internal underwriting guidelines. It is our intention to grow our assets at a measured pace consistent with our capital levels and as business opportunities permit.
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Net loans receivable increased by $158.5 million, or 10.7%, to $1.644 billion at December 31, 2017 from $1.485 billion at December 31, 2016. The increase resulted primarily from a $142.7 million increase in real estate mortgages consisting of commercial and multi-family loans, an increase of $31.9 million in residential real estate loans , an increase of $2.9 million in commercial business loans, an increase of $1.4 million in home equity and home equity lines of credit, partly offset by a decrease of $20.4 million in construction loans and an increase in the allowance for loan losses of $166,000. As of December 31, 2017, the allowance for loan losses was $17.4 million, or 133.28%, of non-performing loans and 1.05% of gross loans, as compared to $17.2 million or 110.6% of non-performing loans and 1.14% of gross loans at December 31, 2016. As a result of the loans acquired in the business combination transactions being recorded at their fair value, the balances in the allowance for loan losses that were on the balance sheets of the former Pamrapo Bancorp, Inc., and Allegiance Community Bank are precluded from being reported in the allowance balance previously discussed, consistent with generally accepted accounting principles.
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Total cash and cash equivalents increased by $59.2 million, or 91.0%, to $124.2 million at December 31, 2017 from $65.0 million at December 31, 2016, primarily related to the Company’s goal of further strengthening its liquidity position.
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Securities available for sale increased $27.8 million, or 29.4%, to $122.6 million at December 31, 2017 from $94.8 million at December 31, 2016. As part of our growth and liquidity strategies, the Bank sought to further strengthen our balance sheet by increasing our investment portfolio.
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Deposit liabilities increased by $177.2 million, or 12.7%, to $1.569 billion at December 31, 2017 from $1.392 billion at December 31, 2016. The increase resulted primarily from an increase of $123.8 million in certificates of deposit, an increase of $22.4 million in money market interest-bearing deposits, an increase of $17.2 million in non-interest-bearing deposits, an increase of $15.3 million in interest-bearing checking deposits, partially offset by a decrease of $1.5 million in savings and club deposits. Recognizing this shift in the mix of our deposits, the attraction and retention of non-interest bearing commercial deposits, and longer dated maturity deposits remains a focus of our retail deposit gathering philosophy.
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The Company had no short-term borrowings at December 31, 2017 and $20.0 million at December 31, 2016. Long-term borrowings increased by $30.0 million, or 19.4%, to $185.0 million at December 31, 2017 from $155.0 million at December 31, 2016. The purpose of the borrowings reflected the use of long term and short term FHLB advances to augment deposits as the Company’s funding source for originating loans and investing in GSE investment securities.
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Stockholders’ equity increased $45.4 million, or 34.6%, to $176.5 million at December 31, 2017 from $131.1 million at December 31, 2016, primarily as a result of the $42.8 million of proceeds from Company’s common stock equity raise that took place in the third quarter of the year.
Analysis of Net Interest Income
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Net interest income is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Net interest income depends on the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them, respectively.
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The following tables set forth balance sheets, average yields and costs, and certain other information for the years indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, discounts and premiums, which are included in interest income.
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(1) Excludes allowance for loan losses.
(2) Includes Federal Home Loan Bank of New York stock.
(3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.
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Analysis of Net Interest Income (Continued)
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(1) Excludes allowance for loan losses.
(2) Includes Federal Home Loan Bank of New York stock.
(3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.
Rate/Volume Analysis
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The table below sets forth certain information regarding changes in our interest income and interest expense for the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in average volume (changes in average volume multiplied by old rate); (ii) changes in rate (change in rate multiplied by old average volume); (iii) changes due to combined changes in rate and volume; and (iv) the net change.
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Results of Operations for the Years Ended December 31, 2017 and 2016
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Net income was $10.0 million for the year ended December 31, 2017, compared with $8.0 million for the year ended December 31, 2016. Net income increased due to higher interest income, lower interest expense, higher non-interest income, and lower non-interest expense, partially offset by an increase in the provision for loan losses and higher income tax expense for the year ended December 31, 2017, as compared with the year ended December 31, 2016.
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Net interest income increased by $6.8 million, or 12.4%, to $61.9 million for the year ended December 31, 2017 from $55.1 million for the year ended December 31, 2016. The increase in net interest income resulted primarily from an increase in the average balance of interest-earning assets of $115.4 million, or 7.0%, to $1.773 billion for the year ended December 31, 2017 from $1.658 billion for year ended December 31, 2016, as well as an increase in the average yield on interest-earning assets of 7 basis points to 4.37% for the year ended December 31, 2017 from 4.30% for the year ended December 31, 2016. The average balance of interest-bearing liabilities increased by $79.3 million, or 5.6%, to $1.484 billion for the year ended December 31, 2017 from $1.405 billion for the year ended December 31, 2016, and the average cost of interest bearing liabilities decreased by 10 basis points to 1.06% for year ended December 31, 2017 from 1.16% for the year ended December 31, 2016. The net interest margin was 3.49% for the year ended December 31, 2017, and 3.32 % for the year ended December 31, 2016.
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Interest income on loans receivable increased by $3.9 million, or 5.7%, to $73.4 million for the year ended December 31, 2017 from $69.4 million for the year ended December 31, 2016. The increase was primarily attributable to an increase in the average balance of loans receivable of $141.5 million, or 9.8%, to $1.591 billion for the year ended December 31, 2017 from $1.450 billion for the year ended December 31, 2016, partially offset by a decrease in the average yield on loans receivable to 4.61% for the year ended December 31, 2017 from 4.79% for the year ended December 31, 2016. The increase in the average balance of loans receivable was the result of our comprehensive loan growth strategy. The decrease in average yield on loans reflected the competitive price environment prevalent in the Company’s primary market area on loan facilities as well as the repricing downward of certain variable rate loans.
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Interest income on securities increased by $1.7 million, or 138.6%, to $2.9 million for the year ended December 31, 2017 from $1.2 million for the year ended December 31, 2016. This increase was primarily due to an increase in the average balance of securities of $65.6 million, or 168.7%, to $104.5 million for the year ended December 31, 2017 from $38.9 million for the year ended December 31, 2016, partly offset by a decrease in the average yield of securities to 2.78% for the year ended December 31, 2017 from 3.13% for the year ended December 31, 2016.
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Interest income on other interest-earning assets increased by $580,000, or 79.2%, to $1.3 million for the year ended December 31, 2017 from $732,000 for the year ended December 31, 2016. This increase was primarily due to an increase in the average yield on other interest-earning assets to 1.70% for the year ended December 31, 2017 from 0.43% for the year ended December 31, 2016, partially offset by a decrease in the average balance of other interest-earning assets of $91.7 million, or 54.2%, to $77.4 million for the year ended December 31, 2017 from $169.1 million for the year ended December 31, 2016.
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Total interest expense decreased by $608,000, or 3.7%, to $15.7 million for the year ended December 31, 2017 from $16.3 million for the year ended December 31, 2016. The increase resulted primarily from an increase in the average balance of interest-bearing liabilities of $79.3 million, or 5.6%, to $1.484 billion for the year ended December 31, 2017 from $1.405 billion for the year ended December 31, 2016 as well as a decrease in the average cost of interest-bearing liabilities of 10 basis points to 1.06% for the year ended December 31, 2017 from 1.16% for the year ended December 31, 2016.
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The provision for loan losses totaled $2.1 million and $27,000 for the years ended December 31, 2017 and 2016, respectively. The provision for loan losses is established based upon management’s review of the Company’s loans and consideration of a variety of factors including, but not limited to, (1) the risk characteristics of the loan portfolio, (2) current economic conditions, (3) actual losses previously experienced, (4) the activity and fluctuating balance of loans receivable, and (5) the existing level of reserves for loan losses that are probable and estimable. During the year ended December 31, 2017, the Company experienced $1.9 million in net charge-offs (consisting of $2.14 million in charge-offs and $200,000 in recoveries). During the year ended December 31, 2016, the Company experienced $860,000 in net charge-offs (consisting of $1.08 million in charge-offs and $221,000 in recoveries). The Company had non-performing loans totaling $13.4 million, or .80%, of gross loans at December 31, 2017 and $18.5 million, or 1.23%, of gross loans at December 31, 2016. The allowance for loan losses was $17.3 million, or 1.05%, of gross loans at December 31, 2017 as compared to $17.2 million, or 1.14%, of gross loans at December 31, 2016. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in the aforementioned criteria. In addition various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require the Company to recognize additional provisions based on their judgment of information available to them at the time of their examination. Management believes that the allowance for loan losses was adequate at both December 31, 2017 and December 31, 2016.
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Total non-interest income increased by $1.4 million, or 22.2%, to $7.5 million for the year ended December 31, 2017 compared with $6.1 million for the year ended December 31, 2016. The increase was primarily attributable to income gained from the sales of other real estate owned properties of $1.6 million for the year ended December 31, 2017 with no comparable gain for the year ended December 31, 2016, a loss on a bulk sale of impaired loans held in the portfolio of $373,000 for the year ended December 31, 2016 with no comparable loss for the year ended December 31, 2017, an increase in sales of investment securities of $97,000 for the year ended December 31, 2017 with no comparable sale for the year ended December 31, 2016, and an increase in other non-interest income of $249,000, or 264.9%, to $343,000 for the year ended December 31, 2017 from $94,000 for the year ended December 31, 2016. The increase in other non-interest income related to $237,000 of proceeds from a legal settlement in the second quarter of 2017. The increase in total non-interest income was partly offset by a decrease in gains on sales of loans of $969,000, or 29.1%, to $2.4 million for the year ended December 31, 2017 from $3.3 million for the year ended December 31, 2016. The sales of loans and other real estate owned properties is generally based on market conditions.
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Total non-interest expense decreased by $851,000, or 1.8%, to $47.0 million for the year ended December 31, 2017 from $47.9 million for the year ended December 31, 2016. Salaries and employee benefits expense decreased by $1.6 million, or 6.2%, to $23.7 million for the year ended December 31, 2017 from $25.3 million for the year ended December 31, 2016. This decrease in both salaries and employee benefits was mainly attributable to a decrease of 51 average full-time equivalent employees, or 14.0%, to 314 for the year ended December 31, 2017 from 365 for the year ended December 31, 2016. Advertising expense decreased by $1.2 million, or 73.0%, to $433,000 for the year ended December 31, 2017 from $1.6 million for the year ended December 31, 2016, partly related to advertising efforts with the opening of several de novo branches in 2016. Regulatory assessment expense decreased by $441,000, or 28.1%, to $1.1 million for the year ended December 31, 2017 from $1.6 million for the year ended December 31, 2016, primarily related to lower FDIC rates. Net other real estate owned (“OREO”) expense decreased by $75,000, or 33.9%, to $146,000 for the year ended December 31, 2017 from $221,000 for the year ended December 31, 2016. The decrease in total non-interest expense was partly offset by an increase in professional fees of $1.0 million, or 57.3%, to $2.8 million for the year ended December 31, 2017 from $1.8 million for the year ended December 31, 2016 and merger related costs of $802,000 for the year ended December 31, 2017 with no comparable figure for the year ended December 31, 2016. The increase in professional fees primarily related to counsel fees and litigation expenses awarded to a plaintiff’s class counsel of $1.0 million in the matter of Kube v. Pamrapo Bancorp, Inc. et al. Data processing expense increased $148,000, or 5.7%, to $2.7 million for the year ended December 31, 2017 from $2.6 million for the year ended December 31, 2016. Occupancy and equipment expense increased by $106,000, or 1.3%, to $8.3 million for the year ended December 31, 2017 from $8.2 million for the year ended December 31, 2016. Director fees increased by $21,000, or 3.1%, to $691,000 for the year ended December 31, 2017 from $670,000 for the year ended December 31, 2016. The increase in Directors Fees primarily related to the addition of one new director to the Bank’s Board of Directors. Other non-interest expense increased by $295,000, or 4.9%, to $6.3 million for the year ended December 31, 2017 from $6.0 million for the year ended December 31, 2016. Other non-interest expense consists of loan expense, stationary, forms and printing, check printing, correspondent bank fees, telephone and communication, and other fees and expenses.
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Income tax provision increased $5.0 million, or 94.6%, to $10.2 million for the year ended December 31, 2017 from $5.2 million for the year ended December 31, 2016. Of the total increase, $2.2 million related to remeasuring net deferred tax assets as revised by GAAP due to the change in corporate tax rate from 35% to the lower 21% rate as a result of the Tax Cut and Jobs Act law enacted in December 2017. The consolidated effective tax rate for the year ended December 31, 2017 was 50.6% compared to 39.7% for the year ended December 31, 2016.
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Results of Operations for the Years Ended December 31, 2016 and 2015
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Net income was $8.0 million for the year ended December 31, 2016, compared with $7.0 million for the year ended December 31, 2015. Net income increased due to higher interest income on interest earning assets, lower interest expense on borrowings, and a lower provision for loan loss, partially offset by increases in interest expense on deposits, lower non-interest income, and higher non-interest expense for the year ended December 31, 2016, as compared with the year ended December 31, 2015.
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Net interest income increased by $1.5 million, or 2.9%, to $55.1 million for the year ended December 31, 2016 from $53.6 million for the year ended December 31, 2015. The increase in net interest income resulted primarily from an increase in the average balance of interest-earning assets of $219.3 million, or 15.3%, to $1.658 billion for the year ended December 31, 2016 from $1.439 billion for year ended December 31, 2015, partly offset by a decrease in the average yield on interest-earning assets of 38 basis points to 4.30% for the year ended December 31, 2016 from 4.68% for the year ended December 31, 2015. The average balance of interest-bearing liabilities increased by $189.9 million, or 15.6%, to $1.405 billion for the year ended December 31, 2016 from $1.215 billion for the year ended December 31, 2015, and the average cost of interest bearing liabilities increased by 2 basis points to 1.16% for year ended December 31, 2016 from 1.14% for the year ended December 31, 2015. Net interest margin was 3.32% for the year ended December 31, 2016, and 3.72% for the year ended December 31, 2015.
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Interest income on loans receivable increased by $2.8 million, or 4.2%, to $69.4 million for the year ended December 31, 2016 from $66.6 million for the year ended December 31, 2015. The increase was primarily attributable to an increase in the average balance of loans receivable of $89.5 million, or 6.6%, to $1.450 billion for the year ended December 31, 2016 from $1.360 billion for the year ended December 31, 2015, partially offset by a decrease in the average yield on loans receivable to 4.79% for the year ended December 31, 2016 from 4.90% for the year ended December 31, 2015. The increase in the average balance of loans receivable was the result of our comprehensive loan growth strategy. The decrease in average yield on loans reflects the competitive price environment prevalent in the Company’s primary market area on loan facilities as well as the repricing downward of certain variable rate loans.
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Interest income on securities increased by $566,000, or 86.9%, to $1.2 million for the year ended December 31, 2016 from $651,000 for the year ended December 31, 2015. This increase was primarily due to an increase in the average balance of securities of $19.1 million, or 96.2%, to $38.9 million for the year ended December 31, 2016 from $19.8 million for the year ended December 31, 2015, partly offset by a decrease in the average yield of securities to 3.13% for the year ended December 31, 2016 from 3.28% for the year ended December 31, 2015.
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Interest income on other interest-earning assets increased by $631,000, or 624.8%, to $732,000 for the year ended December 31, 2016 from $101,000 for the year ended December 31, 2015. This increase was primarily due to an increase in the average balance of other interest earning assets of $110.7 million, or 189.6%, to $169.1 million for the year ended December 31, 2016 from $58.4 million for the year ended December 31, 2015 as well as an increase in the average yield on other interest-earning assets to 0.43% for the year ended December 31, 2016 from 0.17% for the year ended December 31, 2015.
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Total interest expense increased by $2.4 million, or 17.5%, to $16.3 million for the year ended December 31, 2016 from $13.9 million for the year ended December 31, 2015. The increase resulted primarily from an increase in in the average balance of interest-bearing liabilities of $189.9 million, or 15.6%, to $1.405 billion for the year ended December 31, 2016 from $1.215 billion for the year ended December 31, 2015 and an increase in the average cost of interest-bearing liabilities of 2 basis points to 1.16% for the year ended December 31, 2016 from 1.14% for the year ended December 31, 2015.
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The provision for loan losses totaled $27,000 and $2.3 million for the years ended December 31, 2016 and 2015, respectively. The provision for loan losses is established based upon management’s review of the Company’s loans and consideration of a variety of factors including, but not limited to, (1) the risk characteristics of the loan portfolio, (2) current economic conditions, (3) actual losses previously experienced, (4) the activity and fluctuating balance of loans receivable, and (5) the existing level of reserves for loan losses that are probable and estimable. During the year ended December 31, 2016, the Company experienced $860,000 in net charge-offs (consisting of $1.08 million in charge-offs and $221,000 in recoveries). During the year ended December 31, 2015, the Company experienced $389,000 in net charge-offs (consisting of $462,000 in charge-offs and $73,000 in recoveries). The Company had non-performing loans totaling $18.5 million, or 1.23, of gross loans at December 31, 2016 and $23.4 million, or 1.63%, of gross loans at December 31, 2015. The allowance for loan losses was $17.2 million, or 1.14%, of gross loans at December 31, 2016 as compared to $18.0 million, or 1.25%, of gross loans at December 31, 2015. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in the aforementioned criteria. In addition various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require the Company to recognize additional provisions based on their judgment of information available to them at the time of their examination. Management believes that the allowance for loan losses was adequate at both December 31, 2016 and December 31, 2015.
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Total non-interest income decreased by $942,000, or 13.3% to $6.1 million for the year ended December 31, 2016 compared with $7.0 million for the year ended December 31, 2015. Gains on sales of loans decreased $1.5 million to $3.3 million for the year ended December 31, 2016 from $4.9 million for the year ended December 31, 2015, partly offset by an increase in fees and service charges of $1.0 million to $3.1 million for the year ended December 31, 2016 from $2.1 million for the year ended December 31, 2015.
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Total non-interest expense increased by $1.4 million, or 3.1%, to $47.9 million for the year ended December 31, 2016 from $46.4 million for the year ended December 31, 2015. Salaries and employee benefits expense increased by $2.2 million, or 9.6%, to $25.3 million for the year ended December 31, 2016 from $23.1 million for the year ended December 31, 2015. This increase in both salaries and employee benefits was mainly attributable to an increase of 35 average full-time equivalent employees, or 10.8%, to 365 for the year ended December 31, 2016 from 330 for the year ended December 31, 2015. The increase in employees relates to the addition of business development and loan administration employees, and the openings and anticipated openings of new branch offices in 2015 and 2016. Occupancy and equipment expense increased by $533,000, or 7.0%, to $8.2 million for the year ended December 31, 2016 from $7.6 million for the year ended December 31, 2015. The increase in occupancy and equipment expense was related primarily to the openings of new branch offices in 2016 and 2015. Data processing expense decreased by $1.6 million, or 38.7%, to $2.6 million for the year ended December 31, 2016 from $4.2 million for the year ended December 31, 2015. The decrease in data processing expense was primarily related to efficiencies achieved with the conversion to a new core system. Professional fees increased by $511,000, or 39.6%, to $1.8 million for the year ended December 31, 2016 from $1.3 million for the year ended December 31, 2015. Director fees increased by $142,000, or 26.9%, to $670,000 for the year ended December 31, 2016 from $528,000 for the year ended December 31, 2015. Regulatory assessments increased by $350,000, or 28.7%, to $1.6 million for the year ended December 31, 2016 from $1.2 million for the year ended December 31, 2015, primarily related to asset growth. Advertising expense decreased by $616,000, or 27.8%, to $1.6 million for the year ended December 31, 2016 from $2.2 million for the year ended December 31, 2015. Net other real estate owned (“OREO”) expense decreased by $353,000, or
61.5%, to $221,000 for the year ended December 31, 2016 from $574,000 for the year ended December 31, 2015. Other non-interest expense increased by $306,000, or 5.4%, to $6.0 million for the year ended December 31, 2016 from $5.7 million for the year ended December 31, 2015. Other non-interest expense is comprised of loan expense, stationary, forms and printing, check printing, correspondent bank fees, telephone and communication, and other fees and expenses.
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The income tax provision increased by $444,000, or 9.2%, to $5.3 million for the year ended December 31, 2016 from $4.8 million for the year ended December 31, 2015. The increase in the income tax provision was a result of higher taxable income during the year ended December 31, 2016 as compared to the year ended December 31, 2015. The consolidated effective tax rate for the year ended December 31, 2016 was 39.7% compared to 40.7% for the year ended December 31, 2015.
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Liquidity and Capital Resources
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The overall objective of our liquidity management practices is to ensure the availability of sufficient funds to meet financial commitments and to take advantage of lending and investment opportunities. The Company manages liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings and other obligations as they mature, and to fund loan and investment portfolio opportunities as they arise.
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The Company’s primary sources of funds to satisfy its objectives are net growth in deposits (primarily retail), principal and interest payments on loans and investment securities, proceeds from the sale of originated loans and FHLB and other borrowings. The scheduled amortization of loans is a predictable source of funds. Deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional funds arises, including unsecured overnight lines of credit and other collateralized borrowings from the FHLB and other correspondent banks.
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At December 31, 2017, the Company had $0 in overnight borrowings outstanding with the FHLB compared to $20 million at December 31, 2016. The Company utilizes overnight borrowings from time to time to fund short-term liquidity needs. The Company had total borrowings with the FHLB of $189.1 million at December 31, 2017 as compared to $179.1 million at December 31, 2016.
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The Company had the ability at December 31, 2017 to obtain additional funding from the FHLB of $57.2 million, utilizing unencumbered loan collateral. The Company expects to have sufficient funds available to meet current loan commitments in the normal course of business through typical sources of liquidity. Time deposits scheduled to mature in one year or less totaled $419.6 million at December 31, 2017. Based upon historical experience data, management estimates that a significant portion of such deposits will remain with the Company.
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At December 31, 2017 and December 31, 2016, the capital ratios of the Bank and the Company exceeded the quantitative capital ratios required for an institution to be considered “well-capitalized”.
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Off-Balance Sheet Arrangements
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The Bank engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements. These transactions include commitments to extend credit and unused lines of credit. While these contractual obligations represent future cash requirements, a portion of our commitments to extend credit may expire without being drawn upon.
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Contractual Obligations and Commitments
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The following table sets forth our contractual obligations and commercial commitments at December 31, 2017.
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ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Management of Market Risk
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Qualitative Analysis. The majority of our assets and liabilities are monetary in nature. Consequently, one of our most significant forms of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established an Asset/Liability Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Senior management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee, which consists of senior management and outside directors operating under a policy adopted by the Board of Directors, meets as needed to review our asset/liability policies and interest rate risk position.
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Quantitative Analysis. The following table presents the Company’s net portfolio value (“NPV”). These calculations were based upon assumptions believed to be fundamentally sound, although they may vary from assumptions utilized by other financial institutions. The information set forth below is based on data that included all financial instruments as of December 31, 2017. Assumptions have been made by the Company relating to interest rates, loan prepayment rates, core deposit duration, and the market values of certain assets and liabilities under the various interest rate scenarios. Actual maturity dates were used for fixed rate loans and certificate accounts. Investment securities were scheduled at either the maturity date or the next scheduled call date based upon management’s judgment of whether the particular security would be called in the current interest rate environment and under assumed interest rate scenarios. Variable rate loans were scheduled as of their next scheduled interest rate repricing date. Additional assumptions made in the preparation of the NPV table include prepayment rates on loans and mortgage-backed securities, core deposits without stated maturity dates were scheduled with an assumed term of 48 months, and money market and noninterest bearing accounts were scheduled with an assumed term of 24 months. The NPV at “PAR” represents the difference between the Company’s estimated value of assets and estimated value of liabilities assuming no change in interest rates. The NPV for a decrease of 200 to 300 basis points has been excluded since it would not be meaningful in the interest rate environment as of December 31, 2017. The following sets forth the Company’s NPV as of December 31, 2017.
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bp-basis points
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The table above indicates that at December 31, 2017, in the event of a 100 basis point increase in interest rates, we would experience an 8.78% decrease in NPV, as compared to an 8.37% decrease at December 31, 2016.
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Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in NPV require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the NPV table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income, and will differ from actual results.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Report of Independent Registered Public Accounting Firm
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Board of Directors and Stockholders
BCB Bancorp, Inc.
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Opinions on the Financial Statements and Internal Control over Financial Reporting
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We have audited the accompanying consolidated statements of financial condition of BCB Bancorp, Inc. and subsidiaries (collectively the "Company") as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
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In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
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Basis for Opinion
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The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
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We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
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Definition and Limitations of Internal Control Over Financial Reporting
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A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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/s/ Baker Tilly Virchow Krause, LLP
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Iselin, New Jersey
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We have served as the Company’s auditor since 2000.
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March 6, 2018
BCB Bancorp, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
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See accompanying notes to consolidated financial statements.
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BCB Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
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See accompanying notes to consolidated financial statements.
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BCB Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
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See accompanying notes to consolidated financial statements.
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BCB Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
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See accompanying notes to consolidated financial statements.
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BCB Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
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BCB Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
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See accompanying notes to consolidated financial statements.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Organization and Stock Offerings
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BCB Bancorp, Inc. (the “Company”) is incorporated in the State of New Jersey and is a bank holding company. The common stock of the Company is listed on the NASDAQ Global Market and trades under the symbol “BCBP”.
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The Company’s primary business is the ownership and operation of BCB Community Bank (the “Bank”). The Bank is a New Jersey commercial bank which, as of December 31, 2016, operated at twenty-two locations in Bayonne, Carteret, Colonia, Edison, Fairfield, Hoboken, Holmdel, Jersey City, Lodi, Lyndhurst, Monroe Township, South Orange, Rutherford, Union, and Woodbridge New Jersey, and Staten Island, New York and is subject to regulation, supervision, and examination by the New Jersey Department of Banking and Insurance and the Federal Deposit Insurance Corporation. The Bank is principally engaged in the business of attracting deposits from the general public and using these deposits, together with borrowed funds, to invest in securities and to make loans collateralized by residential and commercial real estate and, to a lesser extent, consumer loans. BCB Holding Company Investment Corp. (the “New Jersey Investment Company”) was organized in January 2005 under New Jersey law as a New Jersey investment company primarily to hold investment and mortgage-backed securities. Pamrapo Service Corporation was organized in 1975 under New Jersey law to engage in the purchase and sale of real estate. In the 1990’s, the Pamrapo Service Corporation was engaged in the business of selling non-financial products, (annuities, mutual funds and stocks) to the public. The Pamrapo Service Corporation has been inactive since May 2010. BCB New York Management, Inc. (the “New York Management Company”) was organized in October 2012 under New York law as a New York investment company primarily to hold various loan products, investment and mortgage-backed securities. BCB New York Management, Inc. has been inactive since 2012.
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In September 2017, the Company issued and sold in a public offering an aggregate 3,265,306 shares of our common stock at a public offering price of $12.25 per share. The Shares were registered under the Securities Act of 1933, as amended, pursuant to the Company’s shelf registration statement on Form S-3 (Registration Statement No. 333-219617) which became effective on August 10, 2017. On September 19, 2017 the Company’s underwriters exercised, in part, their over-allotment option and purchased an additional 449,796 shares of common stock. The net proceeds totaled approximately $42.8 million, after deducting underwriting discounts and commissions and other offering expenses of $2.8 million payable by us.
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In March and April 2017, the Company closed a private placement of Series D Noncumulative Perpetual Preferred Stock, resulting in the issuance of 954 shares of Series D 4.5% Noncumulative Perpetual Preferred Shares for gross proceeds of $9.54 million. The costs associated with the private placement were approximately $42,500. The shares issued are callable by the Company after January 1st, 2020, at $10,000 per share (liquidation preference value). There is no ability to convert the preferred shares to common shares. Dividends on the preferred shares, if and when declared, will be paid quarterly in arrears.
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In March 2017, the Company amended its Restated Certificate of Incorporation to revise Article V to amend certain terms related to the Series C 6% Noncumulative Perpetual Preferred Stock and to create a new Series D 4.5% Noncumulative Perpetual Preferred Stock, which sets forth the number of shares to be included in such new series, and to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. Such amendment to the Restated Certificate of Incorporation was approved by the Board of Directors of the Company on January 18, 2017.
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In January and February 2017, the Company exercised its option to call all of its outstanding Series A and Series B Noncumulative Perpetual Preferred Stock, resulting in an aggregate redemption price of approximately $1,172,000.
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In January and February 2016, the Company granted its Series A Noncumulative Perpetual Preferred Stock (“Series A Shares”) shareholders the option to have their shares redeemed, resulting in an aggregate redemption price of $1,710,000. Following the redemption of the 141 Series A Shares, 724 Series A Shares remain outstanding and subject to future redemption by the Company.
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In November 2015, the Company issued and sold in a public offering an aggregate of 2,760,000 shares of the Company’s common stock at $10.00 per share. The shares included in the Company’s offering (the “Offering”) were registered under the Securities Act pursuant to the Company’s registration statement filed with the Securities and Exchange Commission (“SEC”) on Form S-3 (File No. 333-199424) and was filed with the SEC on October 16, 2014 and declared effective on November 4, 2014. The Form S-3 registered certain types of the Company’s securities, including the Company’s common stock, up to a total dollar amount of $50.0 million. Sandler O’Neill & Partners, L.P. acted as book-running manager and as representatives of the underwriters. Janney Montgomery Scott LLC and Oppenheimer & Company Inc. acted as co-managers for the offering. The offering commenced on October 28, 2015 and terminated on November 4th, 2015.
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The offering resulted in $25.6 million of net proceeds, after deducting underwriting discounts and commissions and other offering expenses of $2.0 million payable by us. None of the underwriting discounts and commissions or other offering expenses were incurred or paid to the Company’s directors or officers or their associates or to persons owning 10% or more of the Company’s common stock or to any of the Company’s affiliates.
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On November 27, 2015, the Company closed a private placement of Series C Noncumulative Perpetual Preferred Stock, resulting in the issuance of 388 shares of Series C 6% Non-Cumulative Perpetual Preferred Shares (“Series C Shares”) for gross proceeds of $3.88 million through December 31, 2015. The costs associated with this private placement were approximately $32,000. The Series C Shares issued are callable by the Company after December 31st, 2017 at $10,000 per share (liquidation preference value). There is no ability to convert the Series C Shares to common shares. Dividends on the Series C Shares, if and when declared, will be paid quarterly in arrears.
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On October 30, 2013, the Company amended its Restated Certificate of Incorporation to revise Article V to amend certain terms related to the Series A 6% Noncumulative Perpetual Preferred Stock and to create a new Series B 6% Noncumulative Perpetual Preferred Stock, which sets forth the number of shares to be included in such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. Such amendment to the Restated Certificate of Incorporation was approved by the directors of the Company on February 20, 2013.
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On October 31, 2013, the Company closed a private placement of Series B Noncumulative Perpetual Preferred Stock, resulting in the issuance of 478 shares of Series B 6% Non-Cumulative Perpetual Preferred Shares for gross proceeds of $4.78 million through December 31, 2014. The costs associated with the private placement were approximately $24,000. The shares issued are callable by the Company after October 31, 2016, at $10,000 per share (liquidation preference value). There is no ability to convert the preferred shares to common shares. Dividends on the preferred shares, if and when declared, will be paid quarterly in arrears.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies
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Basis of Consolidated Financial Statement Presentation
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The consolidated financial statements which include the accounts of the Company and its wholly-owned subsidiaries, the Bank, the New Jersey Investment Company, the New York Management Company and Pamrapo Service Corporation, have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).. All significant intercompany accounts and transactions have been eliminated in consolidation.
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In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods then ended. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the identification of other-than-temporary impairment of securities, the determination as to whether deferred tax assets are realizable, and the determination of the fair value of financial instruments. Management believes that the allowance for loan losses is adequate; no securities in unrealized loss positions are other-than-temporarily impaired; net deferred tax assets have been reduced to an amount which is more-likely-than-not realizable, and the fair values of financial instruments are appropriate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the market area. Management’s assessment regarding impairment of securities is based on future projections of cash flow which are subject to change. The realizability of deferred tax assets is partially based on projections of future taxable income, which is subject to change. The determination of fair value requires the use of various inputs which are subject to frequent and ongoing changes.
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In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
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In preparing these consolidated financial statements, the Company evaluated the events that occurred between December 31, 2017 and the date these consolidated financial statements were issued.
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Cash and Cash Equivalents
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Cash and cash equivalents include cash and amounts due from depository institutions and interest-bearing deposits in other banks having original maturities of three months or less.
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Securities Available for Sale and Held to Maturity
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Investments in debt securities that the Bank has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized holding gains and losses included in earnings. Debt and equity securities not classified as trading securities or as held to maturity securities are classified as available for sale securities (“AFS”) and reported at fair value, with unrealized holding gains or losses, net of applicable deferred income taxes, reported in the accumulated other comprehensive income (loss) component of stockholders’ equity. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
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If the fair value of a security is less than its amortized cost, the security is deemed to be impaired. Management evaluates all securities with unrealized losses quarterly to determine if such impairments are “temporary” or “other-than-temporary” in accordance with Accounting Standards Codification (“ASC”) Topic 320, Investments - Debt and Equity Securities. Accordingly, temporary impairments are accounted for based upon the classification of the related securities as either available for sale or held to maturity. Temporary impairments on available for sale securities are recognized, on a tax-effected basis, through Other Comprehensive Income (“OCI”) with offsetting entries adjusting the carrying value of the securities and the balance of deferred taxes. Conversely, the carrying values of held to maturity securities are not adjusted for temporary impairments. Information concerning the amount and duration of temporary impairments on both available for sale and held to maturity securities is disclosed in the notes to the consolidated financial statements.
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Other-than-temporary impairments are accounted for based upon several considerations. First, other-than-temporary impairments on debt securities that the Company has decided to sell as of the close of a fiscal period, or will, more likely than not, be required to sell prior to the full recovery of fair value to a level equal to or exceeding amortized cost, are recognized in operations. If neither of these conditions regarding the likelihood of the sale of debt securities are applicable, then the other-than-temporary impairment is bifurcated into credit-related and noncredit-related components. A credit-related impairment generally represents the amount by which the present value of the cash flows that are expected to be collected on a debt security fall below its amortized cost. The noncredit-related component represents the remaining portion of the impairment not otherwise designated as credit-related. Credit-related, other-than-temporary impairments are recognized in earnings and noncredit-related, other-than-temporary impairments are recognized, net of deferred taxes, in OCI. Equity securities on which there is an unrealized loss that is deemed other-than-temporary impaired are written down to fair value with the write-down recognized in earnings.
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Premiums and discounts on all securities are amortized/accreted to maturity using the interest method. Interest and dividend income on securities, which includes amortization of premiums and accretion of discounts, are recognized in the consolidated financial statements when earned.
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Loans Held For Sale
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Loans held for sale consist primarily of residential mortgage loans intended for sale and are carried at the lower of cost or estimated fair market value using the aggregate method. These loans are generally sold with servicing rights released. Gains and losses recognized on loan sales are based upon the cash proceeds received and the cost of the related loans sold.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies
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Loans Receivable
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Loans receivable are stated at unpaid principal balances, less net deferred loan origination fees and the allowance for loan losses. Loan origination fees and certain direct loan origination costs are deferred and amortized/accreted, as an adjustment of yield, over the contractual lives of the related loans.
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The accrual of interest on loans that are contractually delinquent more than ninety days is discontinued and the related loans are placed on nonaccrual status. All payments received while in nonaccrual status, are applied to principal until the loan has performed as expected for a minimum of six (6) months or until the loan is determined to qualify for return to normal accruing status. Loans may be returned to accrual status when all the principal and interest contractually due are brought current and future payments are reasonably assured.
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Acquired Loans
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Loans that were acquired in acquisitions are recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.
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The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require an evaluation to determine the need for an allowance for credit losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount which is then reclassified as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. The evaluation of the amount of future cash flows that is expected to be collected is performed in a similar manner as that used to determine our allowance for credit losses. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment.
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Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Bank can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Bank expects to fully collect the new carrying value of the loans. As such, the Bank may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. The Bank has determined that it cannot reasonably estimate future cash flows on any such acquired loans that are past due 90 days or more and continue to treat them as non-accrual.
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Allowance for Loan Losses
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The allowance for loan losses is increased through provisions charged to operations and by recoveries, if any, on previously charged-off loans and reduced by charge-offs on loans which are determined to be a loss in accordance with Bank policy.
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The allowance for loan losses is maintained at a level considered adequate to absorb loan losses. Management, in determining the allowance for loan losses, considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with the general economic and real estate market conditions. The Bank utilizes a two tier approach: (1) identification of impaired loans and establishment of specific loss allowances on such loans; and (2) establishment of general valuation allowances on the remainder of its loan portfolio. The Bank maintains a loan review system which allows for a periodic review of its loan portfolio and the early identification of potentially impaired loans. Such a system takes into consideration, but is not limited to, delinquency status, size of loans, types and value of collateral, and financial condition of the borrowers. Specific loan loss allowances are established for impaired loans based on a review of such information and/or appraisals of the underlying collateral. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions, and management’s judgment.
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Although management believes that adequate specific and general allowances for loan losses are established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may be necessary.
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Impaired loans and performing TDRs are analyzed on an individual basis for collateral impairment or are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. A loan evaluated for impairment is deemed to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. The Bank does not aggregate such loans for evaluation purposes. Payments received on impaired loans are applied to principal.
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When a loan is placed on nonaccrual status, amounts previously accrued and recognized as income are reversed. All payments are applied to principal under the cost recovery method. Interest income on nonaccrual loans is recognized on a cash basis.
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Concentration of Risk
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Financial instruments which potentially subject the Company and its subsidiaries to concentrations of credit risk consist of cash and cash equivalents, investment and mortgage-backed securities and loans.
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Cash and cash equivalents include amounts placed with highly rated financial institutions. Securities include securities backed by the U.S. Government and other highly rated instruments. The Bank’s lending activity is primarily concentrated in loans collateralized by real estate in the State of New Jersey. As a result, credit risk related to loans is broadly dependent on the real estate market and general economic conditions in the State.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
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Premises and Equipment
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Land is carried at cost. Buildings, building improvements, leasehold improvements and furniture, fixtures and equipment are carried at cost, less accumulated depreciation and amortization. Significant renovations and additions are charged to the property and equipment account. Maintenance and repairs are charged to expense in the period incurred. Depreciation charges are computed on the straight-line method over the following estimated useful lives of each type of asset.
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Federal Home Loan Bank (“FHLB”) of New York Stock
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Federal law requires a member institution of the FHLB system to purchase and hold restricted stock of its district FHLB according to a predetermined formula. Such stock is carried at cost.
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Management evaluates the FHLB of New York stock for impairment in accordance with guidance on accounting by entities that lend to or finance the activities of others. Management’s determination of whether this investment is impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB of New York as compared to the capital stock amount for the FHLB of New York and the length of time this situation has persisted, (2) commitments by the FHLB of New York to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB of New York, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB of New York.
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No impairment charges were recorded related to the FHLB of New York stock during 2017, 2016, or 2015.
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Other Real Estate Owned
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Assets acquired through, or in lieu of, loan foreclosures are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs relating to development and improvement of property are capitalized, whereas costs relating to the holding of property are expensed. At December 31, 2017, the Bank owned four properties totaling $532,000. At December 31, 2016, the Bank owned nine properties totaling $3,525,000.
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Interest Rate Risk
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The Bank is principally engaged in the business of attracting deposits from the general public and using these deposits, together with other funds, to make loans secured by real estate and to purchase securities. The potential for interest-rate risk exists as a result of the difference in duration of the Bank’s interest-sensitive liabilities compared to its interest-sensitive assets. For this reason, management regularly monitors the maturity structure of the Bank’s interest-earning assets and interest-bearing liabilities in order to measure its level of interest-rate risk and to plan for future volatility.
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Income Taxes
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The Company and its subsidiaries file a consolidated federal income tax return. Income taxes are allocated to the Company and its subsidiaries based upon their respective income or loss included in the consolidated income tax return. Separate state income tax returns are filed by the Company and its subsidiaries.
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Federal and state income tax expense has been provided on the basis of reported income. The amounts reflected on the tax returns differ from these provisions due principally to temporary differences in the reporting of certain items for financial reporting and income tax reporting purposes. The tax effect of these temporary differences is accounted for as deferred taxes applicable to future periods. Deferred income tax expense or (benefit) is determined by recognizing deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. The realization of deferred tax assets is assessed and a valuation allowance provided, when necessary, for that portion of the asset which is not more likely than not to be realized.
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On December 22, 2017 the Tax Cut and Jobs Act was signed into law. ASC 740 (Income Taxes) requires the recognition of the effect of changes in tax laws or rates in the period in which the legislation is enacted. The changes in the deferred tax assets and liabilities remeasured at the new 21% federal tax rate are reflected in income tax expense for fiscal year 2017.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
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The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements in accordance with ASC Topic 740, Income Taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that has a likelihood of being realized on examination of more than 50 percent. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Under the “more-likely-than-not” threshold guidelines, the Company believes no significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-recognition of an existing tax benefit. The Company recognizes interest and penalties on unrecognized tax benefits in income taxes expense in the Consolidated Statement of Operations. The Company did not recognize any interest and penalties for the years ended December 31, 2017, 2016 and 2015. The tax years subject to examination by the Federal taxing authority are the years ended December 31, 2016, 2015, and 2014. The tax years subject to examination by the State taxing authority are the years ended December 31, 2016, 2015, 2014, and 2013. The Company was notified by the IRS in January 2017 that its 2014 consolidated income tax return was selected for examination, which began in March, 2017. The IRS will issue its final report in the first quarter of 2018. The preliminary findings are nominal.
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Net Income per Common Share
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Basic net income per common share is computed by dividing net income less dividends on preferred stock by the weighted average number of shares of common stock outstanding. The diluted net income per common share is computed by adjusting the weighted average number of shares of common stock outstanding to include the effects of outstanding stock options, if dilutive, using the treasury stock method. Dilution is not applicable in periods of net loss. For the years ended December 31, 2017, 2016 and 2015, the difference in the weighted average number of basic and diluted common shares was due solely to the effects of outstanding stock options. No adjustments to net income were necessary in calculating basic and diluted net income per share. For the years ended December 31, 2017, 2016 and 2015, the weighted average number of outstanding options considered to be anti-dilutive was 799,300, 418,500, and 260,500, respectively.
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Stock-Based Compensation Plans
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The Company, under plans approved by its stockholders in 2011, 2003 and 2002, has granted stock options to employees and outside directors. See note 12 for additional information as to option grants. Compensation expense recognized for all option grants is net of estimated forfeitures and is recognized over the awards’ respective requisite service periods. The fair values relating to all options granted are estimated using a Black-Scholes option pricing model. Expected volatilities are based on historical volatility of our stock and other factors, such as implied market volatility using the respective options’ expected term. The Company used the mid-point of the original vesting period and original option life to estimate the options’ expected term, which represents the period of time that the options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company recognizes compensation expense for the fair values of these option awards, which have graded vesting, on a straight-line basis over the requisite service period of these awards.
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Benefit Plans
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The Company acquired, through the merger with Pamrapo Bancorp, Inc., a non-contributory defined benefit pension plan covering all eligible employees of Pamrapo Savings Bank. Effective January 1, 2010, the defined benefit pension plan (the “Pension Plan”), was frozen by Pamrapo Savings Bank. All benefits for eligible participants accrued in the Pension Plan to January 1, 2010 have been retained. The benefits are based on years of service and employee’s compensation. The Pension Plan is funded in conformity with funding requirements of applicable government regulations. Prior service costs for the Pension Plan generally are amortized over the estimated remaining service periods of employees. Additionally, with the merger with Pamrapo Bancorp, Inc., certain former employees of Pamrapo Savings Bank are covered under a Supplemental Executive Retirement Plan (“SERP”), an unfunded non-qualified deferred retirement plan. Participants who retire at the age of 65 (the “Normal Retirement Age”), are entitled to an annual retirement benefit equal to 75% of compensation reduced by their retirement plan annual benefits. Participants retiring before the Normal Retirement Age receive the same benefits reduced by a percentage based on years of service to the Company and the number of years prior to the Normal Retirement Age that participants retire.
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Comprehensive Income (Loss)
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The Company records unrealized gains and losses, net of deferred income taxes, on securities available for sale in accumulated other comprehensive income (loss). Realized gains and losses, if any, are reclassified to non-interest income upon sale of the related securities or upon the recognition of an impairment loss. Accumulated other comprehensive income (loss) also includes benefit plan amounts recognized in accordance with ASC 715, Compensation-Retirement Benefits, which reflect, net of tax, the unrecognized gains (losses) on the benefit plans.
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Reclassification
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Certain amounts as of and for the years ended December 31, 2016 and 2015 have been reclassified to conform to the current year’s presentation. These changes had no effect on the Company’s consolidated results of operations or financial position.
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Recent Accounting Pronouncements
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In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition. The ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year. The scope of ASC 606 excludes net interest income or other revenues associated with financial assets and liabilities, including loans, leases, securities and derivatives, which would then exclude the majority of the Company's revenues. However, the recognition and measurement of certain non-interest income items such as gain on sale of other real estate owned and deposit-related fees, could be affected by ASC 606. The Company adopted the guidance effective January 1, 2018, using the modified retrospective method. Implementation of the guidance will not have a material impact on the Company's consolidated financial statements.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will supersede the current lease requirements in Topic 840. The ASU requires lessees to recognize a right of use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of income. Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease related expenses in the statements of operations and cash flows will be generally consistent with the current guidance. The new guidance will be effective for the Company in 2019. Once effective, the standard will be applied using a modified retrospective transition method to the beginning of the earliest period presented. The Company is currently assessing the impacts this new standard will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the consolidated financial statements. The amendments are effective for the Company in 2020. The Company has begun evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements and results of operations. The effect of this change cannot be ascertained at this point, and will depend upon factors including asset components, asset quality and market conditions at the adoption date.
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In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”. The amendments in this update requires that an entity account for the effects of a modification unless the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. ASU 2017-09 is effective for the Company on a prospective basis in 2018. Due to prospective application, the new guidance is not expected to have an impact on the Company’s consolidated financial statements upon adoption.
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ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities." ASU 2017-08 was issued to enhance the accounting for the amortization of premiums for purchased callable debt securities. This amendment requires that the amortization premium be shortened to the earliest call date. For public business entities, ASU 2017-08 is effective for fiscal years after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoptions of ASU 2017-08 on its consolidated financial statements.
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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Note 3 - Related Party Transactions
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The Bank leases a property from New Bay LLC (“New Bay”), a limited liability company 100% owned by a majority of the Directors of the Bank. In conjunction with the lease, New Bay substantially removed the pre-existing structure on the site and constructed a new building suitable to the Bank for its banking operations. Under the terms of the lease, the cost of this project was reimbursed to New Bay by the Bank. The amount reimbursed, which occurred during the year 2000, was $943,000, and is included in property and equipment under the caption “Building and improvements” (see Note 7).
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On May 1, 2006, the Bank renegotiated the lease to a twenty-five year term. The Bank paid New Bay $165,000 a year ($13,750 per month) which is included in the Consolidated Statements of Operations for 2017, 2016, and 2015, within occupancy expense of premises. The rent is to be adjusted every five years thereafter at the fair market rental value at the end of each preceding five year period. The Bank expects to pay New Bay $165,000 for the year 2018.
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On February 8, 2012, the Bank entered into a two year lease, which has been extended, for a warehouse with a Director of the Bank. The purpose of the lease is to store documents, consumable supplies, equipment, and furniture not currently in use by the Bank. The Bank paid $20,400 a year, which is reflected in the Consolidated Statement of Operations for 2017, 2016 and 2015 within occupancy expense of premises. The Bank expects to pay $20,400 for the year 2018.
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The Bank leases a property in Woodbridge, New Jersey from ACB Development LLC, a portion of which is owned by two Directors of the Bank and the Company. Payments under the lease currently total $14,508 per month. The Bank paid $173,207, $172,352, and $190,580 in rent in the years 2017, 2016 and 2015, which is reflected in the Consolidated Statement of Operations for 2017, 2016 and 2015 within occupancy expense of premises. The Bank expects to pay $174,092 for the year 2018.
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On March 6, 2014, the Bank entered into a ten year lease of property in Rutherford, New Jersey with 190 Park Avenue, LLC, which is owned by two Directors of the Bank and the Company. The rent is $6,677 per month and lease payments of $92,635, $33,350 and $33,350 were made in years 2017, 2016 and 2015, which is reflected in the 2017, 2016, and 2015 Consolidated Statement of Operations within occupancy expense of premises. The Bank expects to pay $80,122 for the year 2018.
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On May 12th, 2016, the Bank entered into a 5 year lease of property in Lyndhurst, New Jersey with 734 Ridge Realty, LLC, which is owned by two Directors of the Bank and the Company. The rent is $7,350 per month and lease payments of $88,200 and $44,100 were made in years 2017 and 2016, which is reflected in the Consolidated Statement of Operations for 2017 and 2016 within occupancy expense of premises. The Bank expects to pay $88,200 for the year 2018.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4- Securities Available for Sale
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The following table presents by maturity the amortized cost and gross unrealized gains and losses on securities available for sale as of December 31, 2017 and December 31, 2016. The preferred stock does not have a maturity date.
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The expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.
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The unrealized losses, categorized by the length of time of continuous loss position, and fair value of related securities available for sale were as follows:
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Company intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery. At December 31, 2017 and 2016, management performed an assessment for possible OTTI of the Company’s residential mortgage-backed securities, municipal obligations, and preferred stock on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. The extent of individual analysis applied to each security depended on the size of the Company’s investment, as well as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management believes impairment of these residential mortgage-backed securities, at December 31, 2017 to be temporary.
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Note 5 - Loans Receivable and Allowance for Loan Losses
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The following table presents the recorded investment in loans receivable at December 31, 2017 and December 31, 2016 by segment and class:
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(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
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At December 31, 2017 and 2016, loans serviced by the Bank for the benefit of others totaled approximately $256.9 million and $184.1 million, respectively.
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
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The following table presents the unpaid principal balance and the related recorded investment of acquired loans included in loans receivable in accompanying Consolidated Statements of Financial Condition. (In Thousands):
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The following table presents changes in the accretable discount on loans acquired for the years ended December 31, 2017 and 2016. (In Thousands):
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The following table presents changes in the non-accretable yield on loans acquired for the years ended December 31, 2017 and 2016. (In Thousands):
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
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The Bank grants loans to its officers and directors and to their associates. The activity with respect to loans to directors, officers and associates of such persons, is as follows:
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Allowance for Loan Losses
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Management reviews the adequacy of the allowance on at least a quarterly basis to ensure that the provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is adequate based on management’s assessment of probable estimated losses. The Company’s methodology for assessing the adequacy of the allowance for loan losses consists of several key elements. These elements include a general allocated reserve for performing loans, a specific reserve for impaired loans and an unallocated portion.
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The Company consistently applies the following comprehensive methodology. During the quarterly review of the allowance for loan losses, the Company considers a variety of qualitative factors that include:
• General economic conditions.
• Trends in charge-offs.
• Trends and levels of delinquent loans.
• Trends and levels of non-performing loans, including loans over 90 days delinquent.
• Trends in volume and terms of loans.
• Levels of allowance for specific classified loans.
• Credit concentrations.
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The methodology includes the segregation of the loan portfolio into two divisions. Loans that are performing and loans that are impaired. Loans which are performing are evaluated homogeneously by loan class or loan type. The allowance for performing loans is evaluated based on historical loan experience, including consideration of peer loss analysis, with an adjustment for qualitative factors referred to above. Impaired loans are loans which are more than 90 days delinquent or troubled debt restructured. These loans are individually evaluated for loan loss either by current appraisal, or net present value. Management reviews the overall estimate for feasibility and bases the loan loss provision accordingly.
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The loan portfolio is segmented into the following loan classes, where the risk level for each class is analyzed when determining the allowance for loan losses:
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Residential single family real estate loans involve certain risks such as interest rate risk and risk of non-repayment. Adjustable-rate residential family real estate loans decreases the interest rate risk to the Bank that is associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. Repayment risk may be affected by a number of factors including, but not necessarily limited to, job loss, divorce, illness and personal bankruptcy of the borrower.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
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Construction lending is generally considered to involve a greater potential risk due to the concentration of principal in a limited number of loans and borrowers and the effects of the general economic conditions on developers and builders. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost (including interest) of the project. The nature of these loans is such that they are generally difficult to evaluate and monitor. In addition, speculative construction loans to a builder are not necessarily pre-sold and thus pose a greater potential risk to the Bank than construction loans to individuals on their personal residence.
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Commercial and multi-family real estate lending entails additional risks as compared with residential family property lending. Such loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience on such loans is typically dependent on the successful operation of the real estate project. The success of such projects is sensitive to changes in supply and demand conditions in the market for commercial real estate as well as economic conditions generally.
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Commercial business lending, including lines of credit, is generally considered to have greater potential risk due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on the business. Commercial business loans are primarily secured by inventories and other business assets. In most cases, any repossessed collateral for a defaulted commercial business loans will not provide an adequate source of repayment of the outstanding loan balance.
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Home equity lending entails certain risks such as interest rate risk and risk of non-repayment. The marketability of the underlying property may be adversely affected by higher interest rates, decreasing the collateral securing the loan. Repayment risk can be affected by job loss, divorce, illness and personal bankruptcy of the borrower. Home equity line of credit lending entails securing an equity interest in the borrower’s home. In many cases, the Bank’s position in these loans is as a junior lien holder to another institution’s superior lien. This type of lending is often priced on an adjustable rate basis with the rate set at or above a predefined index. Adjustable-rate loans decreases the interest rate risk to the Bank that is associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default.
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Other consumer loans generally have more credit risk because of the type and nature of the collateral and, in certain cases, the absence of collateral. Consumer loans generally have shorter terms and higher interest rates than other lending. In addition, consumer lending collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely effected by job loss, divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan.
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The Company also maintains an unallocated allowance. The unallocated allowance is used to cover any factors or conditions which may cause a potential loan loss but are not specifically identifiable. It is prudent to maintain an unallocated portion of the allowance because no matter how detailed an analysis of potential loan losses is performed, these estimates lack some element of precision. Management must make estimates using assumptions and information that is often subjective and changing rapidly.
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Criticized and Classified Assets. Our policies provide for a classification system for problem assets. Under this classification system, problem assets are classified as “substandard,” “doubtful,” or “loss.”
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When we classify problem assets, we may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. A portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining our regulatory capital. Specific valuation allowances for loan losses generally do not qualify as regulatory capital. As of December 31, 2017, we had $49,000 in assets classified as losses, of which $49,000 were classified as impaired, and $21.7 million in assets classified as substandard, of which $21.7 million were classified as impaired. The loans classified as substandard represent primarily commercial loans secured either by residential real estate, commercial real estate or heavy equipment. The loans that have been classified substandard were classified as such primarily due to payment status, because updated financial information has not been timely provided, or the collateral underlying the loan is in the process of being revalued.
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The Company’s internal credit risk grades are based on the definitions currently utilized by the banking regulatory agencies. The grades assigned and definitions are as follows, and loans graded excellent, above average, good and watch list (risk ratings 1-5) are treated as “pass” for grading purposes. The “criticized” risk rating (6) and the “classified” risk rating (7-9) are detailed below:
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6 - Special Mention- Loans currently performing but with potential weaknesses including adverse trends in borrower’s operations, credit quality, financial strength, or possible collateral deficiency.
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7 - Substandard- Loans that are inadequately protected by current sound worth, paying capacity, and collateral support. Loans on “nonaccrual” status. The loan needs special and corrective attention.
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8 - Doubtful- Weaknesses in credit quality and collateral support make full collection improbable, but pending reasonable factors remain sufficient to defer the loss status.
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9 - Loss- Continuance as a bankable asset is not warranted. However, this does not preclude future attempts at partial recovery.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
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The following table sets forth the activity in the Bank’s allowance for loan losses for the year ended December 31, 2017 and recorded investment in loans receivable at December 31, 2017. The table also details the amount of total loans receivable, that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan class (In Thousands):
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(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
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The following table sets forth the activity in the Bank’s allowance for loan losses for the year ended December 31, 2016 and recorded investment in loans receivable at December 31, 2016. The table also details the amount of total loans receivable, that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan class (In Thousands):
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(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
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The following table sets forth the activity in the Bank’s allowance for loan losses for the year ended December 31, 2015 and recorded investment in loans receivable at December 31, 2015. The table also details the amount of total loans receivable, that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan class (In Thousands):
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(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5- Loans Receivable and Allowance for Loan Losses (Continued)
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The table below sets forth the amounts and types of non-accrual loans in the Bank’s loan portfolio, at December 31, 2017 and 2016, respectively. Loans are placed on non-accrual status when they become more than 90 days delinquent, or when the collection of principal and/or interest become doubtful. As of December 31, 2017 and 2016, non-accrual loans differed from the amount of total loans past due greater than 90 days due to troubled debt restructuring of loans which are maintained on non-accrual status for a minimum of six months until the borrower has demonstrated its ability to satisfy the terms of the restructured loan.
﻿
﻿
﻿
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
﻿
Had non-accrual loans been performing in accordance with their original terms, the interest income recognized for the years ended December 31, 2017, 2016 and 2015 would have been approximately $919,000, $1.06 million and $1.13 million, respectively. Interest income recognized on such loans was approximately $622,000, $798,000 and $326,000 respectively. The Bank is not committed to lend additional funds to the borrowers whose loans have been placed on a nonaccrual status. At December 31, 2017 and 2016, there were $315,000 and $2.8 million, respectively, of loans which were more than ninety days past due and still accruing interest.
﻿
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﻿
﻿
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
﻿
The following table summarizes the recorded investment and unpaid principal balances where there is no related allowance on impaired loans by portfolio class for the years ended December 31, 2017 and December 31, 2016. (In Thousands):
﻿
﻿
﻿
﻿
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
﻿
The following table summarizes the recorded investment, unpaid principal balance, and the related allowance on impaired loans by portfolio class for the years ended December 31, 2017 and December 31, 2016. (In Thousands):
﻿
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
﻿
The following table summarizes the average recorded investment and actual interest income recognized on impaired loans with no related allowance recorded by portfolio class for the years ended December 31, 2017 and 2016. (In Thousands):
﻿
﻿
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
﻿
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
﻿
The following table summarizes the average recorded investment and actual interest income recognized on impaired loans with allowance recorded by portfolio class for the years ended December 31, 2017 and 2016. (In Thousands):
﻿
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
﻿
The following table presents the total troubled debt restructured loans at December 31, 2017, excluding the purchase impairment mark on the acquired loans with deteriorated credit:
﻿
﻿
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
﻿
All TDRs were considered impaired and therefore were individually evaluated for impairment in the calculation of the allowance for loan losses. Prior to their classification as TDRs, certain of these loans had been collectively evaluated for impairment in the calculation of the allowance for loan losses.
﻿
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
﻿
The following table presents the total troubled debt restructured loans at December 31, 2016, excluding the purchase impairment mark on the acquired loans with deteriorated credit:
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
﻿
A troubled debt restructuring (“TDR”) is a loan that has been modified whereby the Bank has agreed to make certain concessions to a borrower to meet the needs of both the borrower and the Bank to maximize the ultimate recovery of a loan. TDR occurs when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified using a modification that would otherwise not be granted to the borrower. The types of concessions granted are generally included, but not limited to interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment of principal.
﻿
The following table summarizes information in regards to troubled debt restructurings during the year ended December 31, 2017 (In thousands):
﻿
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
﻿
﻿
The following table summarizes information in regards to troubled debt restructurings during the year ended December 31, 2016 (In thousands):
﻿
﻿
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
﻿
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
﻿
The following table summarizes information in regards to troubled debt restructurings for which there was a payment default, within twelve months of restructuring, (In thousands):
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
﻿
The following table summarizes information in regards to troubled debt restructurings for which there was a payment default, within twelve months of restructuring, (In thousands):
﻿
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
﻿
The following table sets forth the delinquency status of total loans receivable at December 31, 2017:
﻿
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
﻿
The following table sets forth the delinquency status of total loans receivable at December 31, 2016:
﻿
﻿
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
﻿
The following table presents the loan portfolio types summarized by the aggregate pass rating and the classified ratings of special mention, substandard, doubtful, and loss within the Company’s internal risk rating system as of December 31, 2017. (In Thousands):
﻿
﻿
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
﻿
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable and Allowance for Loan Losses (Continued)
﻿
The following table presents the loan portfolio types summarized by the aggregate pass rating and the classified ratings of special mention, substandard, doubtful, and loss within the Company’s internal risk rating system as of December 31, 2016. (In Thousands):
﻿
﻿
__________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 - Premises and Equipment
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﻿
﻿
﻿
Depreciation and amortization expense for the years ended December 31, 2017, 2016 and 2015 was $2,522,000, $2,422,000 and $2,149,000, respectively.
Buildings and improvements include a building constructed on property leased from a related party (see Note 3).
﻿
Rental expenses, included in occupancy expense of premises, related to the occupancy of premises and related shared costs for common areas totaled $2,448,000, $2,410,000, and $1,990,000 for the years ended December 31, 2017, 2016, and 2015, respectively. The minimum obligation under non-cancelable lease agreements expiring through December 31, 2032, for each of the years ended December 31 is as follows (In Thousands):
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﻿
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Note 7 - Interest Receivable
﻿
The distribution of interest receivable at December 31, 2017 and 2016 was as follows:
﻿
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 8 - Deposits
﻿
The distribution of deposits at December 31, 2017 and 2016 were as follows:
﻿
﻿
﻿
Deposits of certain municipalities and local government agencies are collateralized by $63 million of investment securities and by a $46 million Municipal Letter of Credit with the Federal Home Loan Bank (“FHLB”).
﻿
At December 31, 2017 and 2016, certificates of deposit of $250,000 or more totaled approximately $198.5 million and $172.5 million, respectively.
﻿
At December 31, 2017, deposits from officers, directors and their associates totaled approximately $7.2 million.
﻿
The scheduled maturities of certificates of deposit at December 31, 2017, were as follows (In thousands):
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 9 - Short-Term Debt and Long-Term Debt
﻿
Information regarding short-term borrowings is as follows:
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﻿
﻿
﻿
Long-term debt consists of the following:
﻿
At December 31, 2017 and 2016 loans with carrying values of approximately $400.2 million and $403.5 million, respectively, were pledged to secure the above noted Federal Home Loan Bank of New York borrowings. No securities were pledged at December 31, 2017 and 2016.
﻿
At December 31, 2017, the Bank’s total credit exposure cannot exceed 50% of its total assets, or $970,953,500, based on the borrowing limitations outlined in the FHLB of New York’s member products guide. The total credit exposure limit of 50% of total assets is recalculated each quarter.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 10 - Subordinated Debentures (In Thousands):
﻿
The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust I at December 31, 2017.
﻿
﻿
The Trust Preferred floating rate junior subordinated debenture interest rate adjusts quarterly. The rate paid as of December 31, 2017 and 2016, respectively, was 4.250% and 3.643%.
﻿
The trust preferred debenture became callable, at the Company’s option, on June 17, 2009, and quarterly thereafter.
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11 - Regulatory Matters
﻿
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.
﻿
In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the new rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.
﻿
The final rule also requires unrealized gains and losses on certain available-for-sale securities holdings and defined benefit plan obligations to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The Bank exercised the opt-out election. The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.
﻿
The final rule became effective for the Bank and the Company on January 1, 2015. The capitalization buffer is being phased in which started at 0.625% in 2016 and increasing by 0.625% annually until it reaches 2.5% in 2019. The Bank and the Company currently comply with the minimum capital requirements set forth in the final rule. The Company’s capital adequacy guidelines are not materially different than the capital adequacy guidelines for the Bank.
﻿
Quantitative measures, established by regulation to ensure capital adequacy, require the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations), to risk-weighted assets, (as defined), Tier 1 capital to average assets (as defined) and Common Equity Tier 1 to risk-weighted assets. The following table presents information as to the Bank’s capital levels.
﻿
As of December 31, 2017 and 2016, the most recent notification from the Bank’s regulators categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events occurring since that notification that management believes have changed the Bank’s category.
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12- Benefits Plans
﻿
Pension Plan
﻿
The Company acquired, through the merger with Pamrapo Bancorp, Inc. a non-contributory defined benefit pension plan covering all eligible employees of Pamrapo Savings Bank. Effective January 1, 2010, the defined benefit pension plan (“Pension Plan”), was frozen by Pamrapo Savings Bank. All benefits for eligible participants accrued in the Pension Plan to the freeze date have been retained. The benefits are based on years of service and employee’s compensation. The Pension Plan is funded in conformity with funding requirements of applicable government regulations. Prior service costs for the Pension Plan generally are amortized over the estimated remaining service periods of employees.
﻿
The following tables set forth the Pension Plan's funded status at December 31, 2017 and 2016 and components of net periodic pension cost for the years ended December 31, 2017 and 2016:
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 - Benefits Plans (Continued)
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﻿
﻿
﻿
﻿
At December 31, 2017 and December 31, 2016, unrecognized net loss of $(2,245,000) and $(2,100,000), respectively, was included, net of deferred income tax, in accumulated other comprehensive loss in accordance with ASC 715-20 and ASC 715-30. None of the unrecognized net loss is expected to be recognized in net periodic pension expense for the year ended December 31, 2018.
﻿
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 - Benefits Plan (Continued)
﻿
Plan Assets
﻿
Investment Policies and Strategies
﻿
The primary long-term objective for the Pension Plan is to maintain assets at a level that will sufficiently cover future beneficiary obligations. The Pension Plan will be structured to include a volatility reducing component (the fixed income commitment) and a growth component (the equity commitment).
﻿
To achieve the Bank’s long-term investment objectives, the trustee will invest the assets of the Pension Plan in a diversified combination of asset classes, investment strategies, and pooled vehicles. The asset allocation guidelines in the table below reflect the Bank’s risk tolerance and long-term objectives for the Pension Plan. These parameters will be reviewed on a regular basis and subject to change following discussions between the Bank and the trustee.
﻿
Initially, the following asset allocation targets and ranges will guide the trustee in structuring the overall allocation in the Pension Plan’s investment portfolio. The Bank or the trustee may amend these allocations to reflect the most appropriate standards consistent with changing circumstances. Any such fundamental amendments in strategy will be discussed between the Bank and the trustee prior to implementation.
﻿
Based on the above considerations, the following asset allocation ranges will be implemented:
﻿
The parameters for each asset class provide the trustee with the latitude for managing the Pension Plan within a minimum and maximum range. The trustee will have full discretion to buy, sell, invest and reinvest in these asset segments based on these guidelines which includes allowing the underlying investments to fluctuate within the stated policy ranges. The Pension Plan will maintain a cash equivalents component (not to exceed 3% under normal circumstances) within the fixed income allocation for liquidity purposes.
﻿
The trustee will monitor the actual asset segment exposures of the Pension Plan on a regular basis and, periodically, may adjust the asset allocation within the ranges set forth above as it deems appropriate. Periodic reallocations of assets will be based on the trustee’s perception of the changing risk/return opportunities of the respective asset classes.
﻿
﻿
Determination of Long-Term Rate-of Return
﻿
The long-term rate-of-return-on assets assumption was set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the Pension Plan’s target allocation of asset classes. Equities and fixed income securities were assumed to earn real rates of return in the ranges of 5-9% and 2-6%, respectively. The long-term inflation rate was estimated to be 3%. When these overall return expectations are applied to the Pension Plan’s target allocation, the result is an expected rate of return of 6% to 11%.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 - Benefits Plan (Continued)
﻿
The fair values of the Pension Plan assets at December 31, 2017, by asset category (see Note 16 for the definitions of levels), are as follows:
﻿
﻿
The fair values of the Company’s pension plan assets at December 31, 2016, by asset category (see Note 16 for the definitions of levels), are as follows:
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﻿
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Note 12 - Benefits Plan (Continued)
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
﻿
a)
Large-value portfolios invest primarily in big U.S. companies that are less expensive or growing more slowly than other large-cap stocks. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap. Value is defined based on low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow.
b)
Some mid-cap value portfolios focus on medium-size companies while others land here because they own a mix of small-, mid-, and large-cap stocks. All look for U.S. stocks that are less expensive or growing more slowly than the market. The U.S. mid-cap range for market capitalization typically falls between $1 billion and $8 billion and represents 20% of the total capitalization of the U.S. equity market. Value is defined based on low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow).
c)
World-bond portfolios invest 40% or more of their assets in foreign bonds. Some world-bond portfolios follow a conservative approach, favoring high-quality bonds from developed markets. Others are more adventurous and own some lower-quality bonds from developed or emerging markets. Some portfolios invest exclusively outside the U.S., while others regularly invest in both U.S. and non- U.S. bonds.
d)
Multi Sector portfolios seek income by diversifying their assets among several fixed-income sectors, usually U.S. government obligations, foreign bonds, and high-yield domestic debt securities.
e)
This fund invests in 500 of the largest U.S. companies, which span many different industries and account for about three-fourths of the U.S. Stock Markets value.
f)
High Yield Bond funds invest at least 65% of assets in bonds rated below BBB. This fund seeks to provide shareholders with a high level of current income with capital growth as a secondary objective.
﻿
The Company expects to contribute, based upon actuarial estimates, approximately $0 to the Pension Plan in 2018.
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Benefit payments are expected to be paid for the years ended December 31 as follows (In thousands):
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
﻿
Note 12 - Benefits Plan (Continued)
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Supplemental Executive Retirement Plan
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The Company acquired through the merger with Pamrapo Bancorp, Inc. a supplemental executive retirement plan (“SERP”) in which certain former employees of Pamrapo Savings Bank are covered. A SERP is an unfunded non-qualified deferred retirement plan. Participants who retire at the age of 65 (the “Normal Retirement Age”), are entitled to an annual retirement benefit equal to 75% of compensation reduced by their retirement plan annual benefits. Participants retiring before the Normal Retirement Age receive the same benefits reduced by a percentage based on years of service to the Company and the number of years prior to the Normal Retirement Age that participants retire.
﻿
The following tables set forth the SERP's funded status and components of net periodic SERP cost:
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 - Benefits Plan (Continued)
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﻿
﻿
At December 31, 2017 and December 31, 2016, unrecognized net loss of $36,000 and $36,000, respectively, was included, net of deferred income tax, in accumulated other comprehensive income in accordance with ASC 715-20 and ASC 715-30. None of the unrecognized net loss is expected to be recognized in net periodic SERP cost for the year ended December 31, 2018.
﻿
The Company expects to contribute, based upon actuarial estimates, approximately $62,000 to the SERP plan in 2018.
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Benefit payments are expected to be paid for the years ended December 31 as follows (In thousands):
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 - Benefits Plan (Continued)
﻿
Stock Options
﻿
The Company, under the plan approved by its shareholders on April 28, 2011 (“2011 Stock Plan”), authorized the issuance of up to 900,000 shares of common stock of the Company pursuant to grants of stock options. Employees and directors of the Company and the Bank are eligible to participate in the 2011 Stock Plan. All stock options will be granted in the form of either "incentive" stock options or "non-qualified" stock options. Incentive stock options have certain tax advantages that must comply with the requirements of Section 422 of the Internal Revenue Code. Only employees are permitted to receive incentive stock options. On September 13th, 2017, a grant of 275,000 options and on September 16th, 2016, a grant of 110,000 options was declared for certain members of the Board of Directors of the Bank and the Company which vest at a rate of 10% per year, over ten years commencing on the first anniversary of the grant date. The exercise price was recorded as of the close of business on September 13th, 2017 and September 16th, 2016, respectively and a Form 4 was filed for each Director who received a grant with the Securities and Exchange Commission consistent with their filing requirements. There were 75,000 and 50,000 stock options granted to employees in the fourth quarters of 2017 and 2016, respectively, which vest at a rate of 20% and 33% per year, respectively.
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A summary of stock option activity, follows:
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It is Company policy to issue new shares upon share option exercise. Expected future compensation expense relating to the 723,233 shares underlying unexercised options outstanding as of December 31, 2017, is $1.6 million over a weighted average period of 7.36 years.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 - Benefits Plan (Continued)
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Dividend Restrictions
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Payment of cash dividends on common stock is conditional on earnings, financial condition, cash needs, capital considerations, the discretion of the Board of Directors of the Company, and compliance with regulatory requirements. State and federal law and regulations impose substantial limitations on the Bank’s ability to pay dividends to the Company. Under New Jersey law, the Company is permitted to declare dividends on its common stock only if, after payment of the dividend, the capital stock of the Bank will be unimpaired and either the Bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the Bank’s surplus. During 2017, 2016 and 2015, the Bank paid the Company total dividends of $7,951,000, $6,627,000, and $4,957,000, respectively. The Company’s ability to declare dividends is dependent upon the amount of dividends paid to the Company by the Bank.
﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 14 - Income Taxes
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The components of income tax expense are summarized as follows:
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(a) On December 22, 2017 the Tax Cut and Jobs Act was signed into law. ASC 740 (Income Taxes) requires the recognition of the effect of changes in tax laws or rates in the period in which the legislation is enacted. The revaluation of deferred tax assets and liabilities to the new 21% federal tax rate are materially complete and are reflected in income tax expense for fiscal year 2017.
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 14 - Income Taxes
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The tax effects of existing temporary differences that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities are as follows:
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In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In making this assessment, management has considered the profitability of current core operations, future market growth, forecasted earnings, future taxable income, and ongoing, feasible and permissible tax planning strategies. If the Company was to determine that it would not be able to realize a portion of its net deferred tax asset in the future for which there is currently no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period such determination was made. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and carry forwards are available.
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On December 22, 2017 the Tax Cut and Jobs Act was signed into law. ASC 740 (Income Taxes) requires the recognition of the effect of changes in tax laws or rates in the period in which the legislation is enacted. The changes in the deferred tax assets and liabilities remeasured at the new 21% federal tax rate are reflected in income tax expense for fiscal year 2017.
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At December 31, 2017 and 2016, gross deferred tax assets related to net operating loss carry forwards totaled $0 and $23,000, respectively, consisting of $23,000 federal assets acquired in a 2011 acquisition.
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In conjunction with the Company’s acquisition of Allegiance in 2011, the Company acquired a federal net operating loss carry forward of $1.2 million. This carry forward is available for use through 2030; however, in accordance with Internal Revenue Code Section 382, usage of the carry forward is limited to $235,000 annually on a cumulative basis (portions of the $235,000 not used in a particular year may be added to subsequent usage). At December 31, 2017 and 2016, the Company had approximately $0 and $23,000 remaining of this federal net operating loss carry forward available to offset future taxable income for federal tax reporting purposes.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 14 - Income Taxes (Continued)
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The following table presents a reconciliation between the reported income tax expense and the income tax expense which would be computed by applying the normal federal income tax rate of between 34 and 35% in 2017, 2016, and 2015 to income before income tax expense, with an adjustment for the tax effect of the new 21% federal tax rate on deferred assets and liabilities as of December 31, 2017 (a):
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(a) On December 22, 2017 the Tax Cut and Jobs Act was signed into law. ASC 740 (Income Taxes) requires the recognition of the effect of changes in tax laws or rates in the period in which the legislation is enacted. The changes in the deferred tax assets and liabilities remeasured at the new 21% federal tax rate are reflected in income tax expense for fiscal year 2017.
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15- Commitments and Contingencies
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The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to extend credit. The Bank’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
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Outstanding loan related commitments were as follows:
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Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but primarily includes residential real estate properties.
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The Company is involved, from time to time, as plaintiff or defendant in various legal actions arising in the normal course of business. Other than as set forth below, as of December 31, 2017, we were not involved in any material legal proceedings the outcome of which, if determined in a manner adverse to the Company, would have a material adverse effect on the Company’s consolidated financial condition or results of operations.
The Company, as the successor to Pamrapo Bancorp, Inc., and in its own corporate capacity, was a named defendant in a shareholder class action lawsuit, Kube v. Pamrapo Bancorp, Inc., et al., filed in the Superior Court of New Jersey, Hudson County, Chancery Division, General Equity (the "Action”).
On September 21, 2015, the court entered an Order and Final Judgment (“Judgment”), whereby the Stipulation of Settlement ("Stipulation") agreed to by the plaintiff class, the Company and the remaining defendants was approved. Pursuant to the Judgment, and in consideration for the full settlement and release of all Released Claims (as that term is defined in the Stipulation) and the dismissal of the Action with prejudice as against the Company and the remaining defendants, the Company, on its own behalf and on behalf of the remaining defendants, would pay $1,950,000 to the Class. This settlement amount was paid in November 2015.
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Pursuant to the Stipulation, the plaintiff class's counsel reserved the right to seek an award of counsel fees and litigation expenses (“Fees Motion”). The maximum amount which could have been awarded as a result of the Fees Motion was $1,000,000. The plaintiff class’s counsel made a Fees Motion to the court seeking a final award of counsel fees and litigation expenses of approximately $1,000,000. The Company and the remaining defendants vigorously opposed that motion.
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By Order, dated July 5, 2017, the court awarded counsel fees and litigation expenses to the plaintiff’s class counsel in the amount of $1,000,000. The Company satisfied the Order by July 31, 2017.
The Company and the other defendants in the Action ("Plaintiffs") brought suit (the "Carrier Suit") against Progressive Insurance Company ("Progressive"), the Directors' and Officers' Liability insurance carrier for Pamrapo Bancorp, Inc., at the time of its merger with the Company on July 6, 2010, and Colonial American Insurance Company ("Colonial"), the Directors' and Officers' Liability insurance carrier for the Company at the time of the merger. The Carrier Suit sought, among other claims, indemnification, payment of and/or contribution toward the above settlement, payment of and/or contribution toward the award of attorney's fees to the plaintiff class's counsel, and reimbursement of the attorney's fees and defense costs incurred by the Plaintiffs in defending the Action and pursuing the Carrier Suit.
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Progressive made a motion to dismiss the Carrier Suit in 2014. The Plaintiffs opposed that motion. That motion was administratively terminated by Order of the court, dated December 3, 2014. By Order of the court, dated December 3, 2014, the Plaintiffs' motion to file an Amended Complaint was granted.
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On or about January 6, 2015, Progressive again made a motion to dismiss the Carrier Suit. The Plaintiffs opposed that motion. That motion was denied by oral decision on October 22, 2015, and by written Order, dated January 20, 2016.
A Mediation session ("Mediation") was held on March 11, 2015, among the parties. Following the Mediation, the Plaintiffs and Colonial agreed to settle the Plaintiffs’ claims against Colonial for $1,750,000. A Settlement Agreement and Release, dated June 30, 2015, was entered into by the Plaintiffs and Colonial. The Plaintiffs received the settlement amount of $1,750,000 from Colonial on July 9, 2015.
﻿
The Plaintiffs and Progressive did not settle their respective claims at the Mediation. The Carrier Suit continued with respect to these parties.
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By Order of the court, dated August 10, 2016, the parties were granted permission to serve and file motions for summary judgment by November 9, 2016. Prior to consideration of these motions, a Settlement Conference was held before the court on November 16, 2016. The Plaintiffs and Progressive did not settle their respective claims at that Settlement Conference.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Plaintiffs filed a motion for partial summary judgment. Progressive filed a motion for summary judgment. These motions were returnable before the court on December 5, 2016.
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By Order, dated September 18, 2017, the court granted the Plaintiffs’ motion for partial summary judgment, and denied Progressive’s motion for summary judgment.
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A Status Conference was held before the court on October 26, 2017. As a result thereof, a Settlement Conference was scheduled for December 1, 2017, before the court.
A Settlement Conference in the Carrier Suit was conducted on December 1, 2017, before the court. At the Settlement Conference, the terms of a preliminary settlement were discussed by the Plaintiffs and Progressive. A proposed Settlement Agreement and Release (“Release”) was circulated among the parties for review.
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The last party to the Carrier Suit executed the Release on February 20, 2018. Pursuant to the Release, in consideration for the full settlement and release of all claims (as that term is defined in the Release) and the dismissal of the Carrier Suit with prejudice, Progressive agreed to pay the Company $2,200,000 by, on, or about March 10, 2018.
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Note 16 - Fair Value Measurements and Fair Values of Financial Instruments
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Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.
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ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
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Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
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Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
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Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
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An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
For assets and liabilities measured at fair value on a recurring basis, the fair value measurements, by level, within the fair value hierarchy are as follows:
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
﻿
﻿
For assets and liabilities measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy are as follows:
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 - Fair Value Measurements and Fair Values of Financial Instruments (Continued)
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The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized adjusted Level 3 inputs to determine fair value, (Dollars in thousands):
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(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2)
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 - Fair Value Measurements and Fair Values of Financial Instruments (Continued)
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The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at December 31, 2017 and 2016:
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Cash and Cash Equivalents (Carried at Cost)
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The carrying amounts reported in the consolidated statements of financial condition for cash and interest-earning deposits approximate those assets’ fair values.
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Securities Available for Sale
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The fair value of securities available for sale (carried at fair value) is determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.
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Loans Held for Sale (Carried at Cost)
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The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for specific attributes of that loan. Loans held for sale are carried at their cost.
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Loans Receivable (Carried at Cost)
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The fair values of loans, except for certain impaired loans, are estimated using discounted cash flow analyses, using market rates at the date of the Statement of Financial Condition that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
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Impaired Loans (Generally Carried at Fair Value)
﻿
Impaired loans are those for which the Company has measured and recorded an impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value at December 31, 2017 and 2016 consists of the loan balances of $12,402,000 and $14,050,000 net of a valuation allowance of $2,033,000 and $3,530,000, respectively.
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FHLB of New York Stock (Carried at Cost)
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The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.
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Accrued Interest Receivable and Payable (Carried at Cost)
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The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
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Deposits (Carried at Cost)
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The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
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Debt Including Subordinated Debentures (Carried at Cost)
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Fair values of debt are estimated using discounted cash flow analysis, based on quoted prices for new long-term debt with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.
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Off-Balance Sheet Financial Instruments (Disclosed at Cost)
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Fair values for the Bank’s off-balance sheet financial instruments (lending commitments and unused lines of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these commitments was deemed immaterial and is not presented in the accompanying table.
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﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 - Fair Value Measurements and Fair Values of Financial Instruments (Continued)
﻿
The carrying values and estimated fair values of financial instruments were as follows at December 31, 2017 and 2016:
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17- Accumulated Other Comprehensive Loss
﻿
The components of accumulated other comprehensive loss included in stockholders' equity are as follows:
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 18- Parent Only Condensed Financial Information
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﻿
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BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 18- Parent Only Condensed Financial Information (Continued)
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﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 18 - Parent Only Condensed Financial Information (Continued)
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﻿
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 19 - Quarterly Financial Data (Unaudited)
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Note 20 - Definitive Merger Agreement
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On June 7, 2017, the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with IA Bancorp, Inc. ("IAB"), providing for, among other things, the merger of IAB with and into the Company (the "Merger"), with the Company as the surviving entity. The Agreement also provides for the merger of Indus-American Bank, a New Jersey chartered bank and wholly owned subsidiary of IAB, with and into the Bank, with the Bank as the surviving entity. The Agreement has been unanimously approved by the boards of directors of each of the Company and IAB.
﻿
Subject to the terms and conditions of the Agreement, at the effective time of the Merger (the "Effective Time"), IAB shareholders will have the right to receive, for each share of IAB common stock, either (i) 0.189 of a share of the Company’s common stock, or (ii) $3.05 in cash, at the election of such holder, subject to adjustment if IAB's tangible common equity falls below a certain level. All such elections are subject to adjustment on a pro rata basis, so that approximately 20% of the aggregate consideration paid to IAB shareholders will be cash and approximately 80% will be the Company’s common stock. In addition, the Company is issuing two series of preferred stock in exchange for two outstanding series of IAB preferred stock. The two series of the Company’s preferred stock will have terms substantially similar to the terms of the two series of IAB preferred stock.
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At the Effective Time, each option granted by IAB to purchase shares of IAB common stock under IAB's equity plan that is unexpired, unexercised and outstanding, whether vested or unvested, will be canceled and converted into the right to receive a cash payment equal to the difference, if positive, between $3.05 and the exercise price of the option.
BCB Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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The Agreement contains certain termination rights for both the Company and IAB and further provides that a termination fee of $800,000 will be payable by IAB to the Company upon termination of the Agreement under certain specified circumstances. Subject to regulatory and shareholder approval, the Company anticipates the Merger to close in the second quarter of 2018.
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Direct costs related to the acquisition were expensed as incurred. During the twelve months ended December 31, 2017, the Company incurred $802,000 in merger related expenses for the pending acquisition.
Note 21 - Common Stock Offering
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On September 12, 2017, the Company issued and sold in a public offering an aggregate 3,265,306 shares of our common stock at a public offering price of $12.25 per share. The Shares were registered under the Securities Act of 1933, as amended, pursuant to the Company’s shelf registration statement on Form S-3 (Registration Statement No. 333-219617) which became effective on August 10, 2017. On September 19, 2017 the Company’s underwriters exercised, in part, their over-allotment option and purchased an additional 449,796 shares of common stock. The net proceeds totaled approximately $42.8 million, after deducting underwriting discounts and commissions and other offering expenses of $2.8 million payable by us.
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Keefe, Bruyette & Woods, A Stifel Company, and D.A. Davidson & Co. served as joint book-running managers for the offering. Oppenheimer & Co. acted as co-manager for the offering. None of the underwriting discounts and commissions or other offering expenses were incurred or paid to our directors or officers or their associates or to persons owning 10% or more of our common stock or to any of our affiliates.
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Note 22- Subsequent Events
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As defined in FASB ASC 855, "Subsequent Events", subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. Financial statements are considered issued when they are widely distributed to stockholders and other financial statement users for general use and reliance in a form and format that complies with GAAP.
On January 17, 2018, the Company declared a cash dividend of $0.14 per share and was paid to stockholders on February 20, 2018, with a record date of February 5, 2018.
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On February 20, 2018, the last party to the Progressive Insurance Company Suit relating to the Kube v. Pamrapo Bancorp, Inc., et al.,executed the Settlement Agreement and Release (see Legal Proceedings). Pursuant to the Release, in consideration for the full settlement and release of all claims and the dismissal of the Carrier Suit with prejudice, Progressive agreed to pay the Company $2.2 million by March 10, 2018.
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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Not applicable.
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ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
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(a)
Evaluation of disclosure controls and procedures.
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Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2017 (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings.
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(b)
Management’s Annual Report on Internal Control over Financial Reporting.
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Management of BCB Bancorp, Inc., and subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s system of internal control is designed under the supervision of management, including our Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
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Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures are made only in accordance with the authorization of management and the Board of Directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections on any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate.
﻿
As of December 31, 2017, management assessed the effectiveness of the Company’s internal control over financial reporting based upon the framework established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon its assessment, management believes that the Company’s internal control over financial reporting as of December 31, 2017 is effective and meets the criteria of the Internal Control - Integrated Framework (2013).
﻿
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fourth fiscal quarter of 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Baker Tilly Virchow Krause, LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements, has issued an audit report on the Company’s internal control over financial reporting as of December 31, 2017 that appears in Item 8 of this Form 10-K.
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ITEM 9B.
ITEM 9B. OTHER INFORMATION
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None.
PART III
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ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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The Company has adopted a Code of Ethics that applies to the Company’s Chief Executive Officer, Chief Financial Officer, or Controller or persons performing similar functions. The Code of Ethics is available for free by writing to: President and Chief Executive Officer, BCB Bancorp, Inc., 104-110 Avenue C, Bayonne, New Jersey 07002. The Code of Ethics was filed as an exhibit to the Form 10-K for the year ended December 31, 2004.
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The “Proposal I-Election of Directors” section of the Company’s definitive Proxy Statement for the Company’s 2018 Annual Meeting of Stockholders (the “2017 Proxy Statement”) is incorporated herein by reference.
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The information concerning directors and executive officers of the Company under the caption “Proposal I-Election of Directors” and information under the captions “Section 16(a) Beneficial Ownership Compliance” and “The Audit Committee” of the 2018 Proxy Statement is incorporated herein by reference.
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There have been no changes during the last year in the procedures by which security holders may recommend nominees to the Company’s board of directors.
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ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
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The “Executive Compensation” section of the Company’s 2018 Proxy Statement is incorporated herein by reference.
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ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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The “Proposal I-Election of Directors” section of the Company’s 2018 Proxy Statement is incorporated herein by reference.
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ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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The “Transactions with Certain Related Persons” section and “Proposal I-Election of Directors-Board Independence” of the Company’s 2018 Proxy Statement is incorporated herein by reference.
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ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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Information required by Item 14 is incorporated by reference to the Company’s Proxy Statement for the 2018 Annual Meeting of Stockholders, “Proposal II-Ratification of the Appointment of Independent Auditors-Fees Paid to Baker Tilly Virchow Krause, LLP.”
PART IV
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ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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(a)(1) Financial Statements
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The exhibits and financial statement schedules filed as a part of this Form 10-K are as follows:
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(A) Report of Independent Registered Public Accounting Firm
(B) Consolidated Statements of Financial Condition as of December 31, 2017 and 2016
(C) Consolidated Statements of Operations for each of the Years in the Three-Year period ended December 31, 2017
(D) Consolidated Statements of Comprehensive Income for each of the Years in the Three-Year period ended December 31, 2017
(E) Consolidated Statements of Changes in Stockholders’ Equity for each of the Years in the Three-Year period ended December 31, 2017
(F) Consolidated Statements of Cash Flows for each of the Years in the Three-Year period ended December 31, 2017
(G) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated statements or the notes thereto.
(b) Exhibits
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2.1
Agreement and Plan of Reorganization by and between BCB Bancorp, Inc., and IA Bancorp, Inc., dated as of June 7, 2017 (15)
3.1
Restated Certificate of Incorporation of BCB Bancorp, Inc. (1)
3.2
Bylaws of BCB Bancorp, Inc. (2)
3.3
Certificate of Amendment to Restated Certificate of Incorporation (14)
3.4
Certificate of Amendment to Restated Certificate of Incorporation (16)
Specimen Stock Certificate (3)
10.1
BCB Community Bank 2002 Stock Option Plan (4)
10.2
BCB Community Bank 2003 Stock Option Plan (5)
10.3
Amendment to 2002 and 2003 Stock Option Plans (6)
10.4
2005 Director Deferred Compensation Plan (7)
10.5
Employment Agreement with Thomas M. Coughlin (8)
10.6
BCB Bancorp, Inc. 2011 Stock Option Plan (9)
10.7
Employment Agreement with Thomas Keating (12)
10.8
Employment Agreement with Joseph Javitz (13)
10.9
Employment Agreement with John J. Brogan (17)
10.10
Employment Agreement with Sandra Sievewright (18)
10.11
Addendum to Employment Agreement with Thomas M. Coughlin (19)
Code of Ethics (10)
Subsidiaries of the Company (11)
Consent of Independent Registered Public Accounting Firm
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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_______
(1)
Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (Commission File Number 000-50275) filed with the Securities and Exchange Commission on July 14, 2015.
(2)
Incorporated by reference to Exhibit 3 to the Form 8-K filed with the Securities and Exchange Commission on October 12, 2007.
(3)
Incorporated by reference to Exhibit 4 to the Form 8-K-12g3 filed with the Securities and Exchange Commission on May 1, 2003.
(4)
Incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 26, 2004.
(5)
Incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 26, 2004.
(6)
Incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2006.
(7)
Incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1, as amended, (Commission File Number 333-128214) originally filed with the Securities and Exchange Commission on September 9, 2005.
(8)
Incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange Commission on September 11, 2015.
(9)
Incorporated by reference to Appendix A to the proxy statement for the Company’s Annual Meeting of Shareholders (File No. 000-50275), filed by the Company with the Securities and Exchange Commission on Schedule 14A on March 28, 2011.
(10)
Incorporated by reference to Exhibit 14 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2004.
(11)
Incorporated by reference to Exhibit 21 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2014.
(12)
Incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange Commission on June 28, 2017.
(13)
Incorporated by reference to Exhibit 10.4 to the Form 8-K filed with the Securities and Exchange Commission on July 3, 2017.
(14)
Incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the Securities and Exchange Commission on November 5, 2013.
(15)
Incorporated by reference to Exhibit 2.1 to the Form 8-K filed with the Securities and Exchange Commission on June 21, 2017.
(16)
Incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the Securities and Exchange Commission on March 31, 2017.
(17)
Incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange Commission on July 3, 2017.
(18)
Incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the Securities and Exchange Commission on July 3, 2017.
(19)
Incorporated by reference to Exhibit 10.3 to the Form 8-K filed with the Securities and Exchange Commission on July 3, 2017.
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ITEM 16. FORM 10-K SUMMARY
None.
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Signatures
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Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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BCB BANCORP, INC.
						
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Date:
March 6, 2018
						
By:
/s/ Thomas Coughlin
						
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Thomas Coughlin
						
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President and Chief Executive Officer
						
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(Principal Executive Officer)
						
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(Duly Authorized Representative)
						
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Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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Signatures
						
Title
						
Date
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/s/ Thomas Coughlin
						
						
						
						
Thomas Coughlin
						
President, Chief Executive Officer and Director
						
March 6, 2018
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/s/ Thomas P. Keating
						
						
						
						
Thomas P. Keating
						
Chief Financial Officer
						
March 6, 2018
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(Principal Financial and Accounting Officer)
						
						
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/s/ Mark D. Hogan
						
						
						
						
Mark D. Hogan
						
Chairman of the Board
						
March 6, 2018
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/s/ Robert Ballance
						
						
						
						
Robert Ballance
						
Director
						
March 6, 2018
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/s/ Judith Q. Bielan
						
						
						
						
Judith Q. Bielan
						
Director
						
March 6, 2018
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/s/ Joseph J. Brogan
						
						
						
						
Joseph J. Brogan
						
Director
						
March 6, 2018
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/s/ James E. Collins
						
						
						
						
James E. Collins
						
Director
						
March 6, 2018
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/s/ Joseph Lyga
						
						
						
						
Joseph Lyga
						
Director
						
March 6, 2018
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/s/ August Pellegrini, Jr.
						
						
						
						
August Pellegrini, Jr.
						
Director
						
March 6, 2018
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/s/ James Rizzo
						
						
						
						
James Rizzo
						
Director
						
March 6, 2018
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/s/ Spencer B. Robbins
						
						
						
						
Spencer B. Robbins
						
Director
						
March 6, 2018
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﻿
						
						
						
						
/s/ Gary S. Stetz
						
						
						
						
Gary S. Stetz
						
Director
						
March 6, 2018
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