BCB BANCORP INC (BCBP) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Estimates
Critical accounting estimates 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.”
Allowance for Loan Losses
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 allowance for loan loss required by regulators would have a negative impact on our earnings.
Other-than-Temporary Impairment of Securities
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 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 generally disclosed in the notes to the consolidated financial statements.
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.
Goodwill
The Company accounts for goodwill and other intangible assets in accordance with FASB ASC Topic 350, “Intangibles – Goodwill and Other,” which allows an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. Based on a qualitative assessment, management determined that the Company’s recorded goodwill totaling $5.2 million, is not impaired as of December 31, 2022.
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Financial Condition at December 31, 2022 and 2021
Total assets increased by $578.7 million, or 19.5 percent, to $3.546 billion at December 31, 2022, from $2.968 billion at December 31, 2021. The increase in total assets was mainly related to increases in total loans.
Total cash and cash equivalents decreased by $182.3 million, or 44.3 percent, to $229.4 million at December 31, 2022 from $411.6 million at December 31, 2021. This decrease was primarily due to the redeployment of cash and cash equivalents into loans.
Loans receivable, net, increased by $740.4 million, or 32.1 percent, to $3.045 billion at December 31, 2022 from $2.305 billion at December 31, 2021. Total loan increases for 2022 included increases of $625.1 million in commercial real estate and multi-family loans, $90.9 million in commercial business loans, $25.6 million in residential one-to-four family loans and $6.4 million in home equity loans, partly offset by decreases of $9.0 million in construction loans and $477 thousand in consumer loans. The allowance for loan losses decreased $4.7 million to $32.4 million, or 633.6 percent of non-accruing loans and 1.05 percent of gross loans, at December 31, 2022 as compared to an allowance for loan losses of $37.1 million, or 249.3 percent of non-accruing loans and 1.58 percent of gross loans, at December 31, 2021.
Total investment securities decreased by $972,000, or 0.88 percent, to $109.4 million at December 31, 2022 from $110.4 million at December 31, 2021, representing repayments, calls and maturities, and unrealized losses, partly offset by purchases of $27.5 million, and sales of $1.2 million.
Deposit liabilities increased by $250.2 million, or 9.8 percent, to $2.812 billion at December 31, 2022 from $2.561 billion at December 31, 2021. Total increases for 2022 included $25.7 million in non-interest-bearing deposit accounts, $89.4 million in NOW deposit accounts, and $166.7 million in certificates of deposit, including listing service and brokered deposit accounts. The increase in deposits was partly offset by a decrease of $31.6 million in money market accounts.
Debt obligations increased by $310.8 million to $419.8 million at December 31, 2022 from $109.0 million at December 31, 2021. The weighted average interest rate of FHLB advances was 4.07 percent at December 31, 2022 and 1.39 percent at December 31, 2021. The weighted average maturity of FHLB advances as of December 31,2022 was 1.10 years. The fixed interest rate of our subordinated debt balances was 5.625 percent at December 31, 2022 and December 31, 2021.
Stockholders’ equity increased by $17.2 million, or 6.3 percent, to $291.3 million at December 31, 2022 from $274.0 million at December 31, 2021. The increase was primarily attributable to the increase in retained earnings of $33.9 million, or 41.8 percent, to $115.1 million at December 31, 2022 from $81.2 million at December 31, 2021, related to net income less dividends paid for the twelve months ended December 31, 2022. The increase was partly offset by a decrease of $7.9 million in additional paid-in-capital for preferred stock, an increase in accumulated other comprehensive losses of $7.6 million, and an increase in treasury stock of $3.4 million. The decrease in additional paid-in-capital for preferred stock was primarily related to the redemption of $9.4 million of the Company’s then-outstanding Series D 4.5% Noncumulative Perpetual Preferred Stock and $5.3 million of the Company’s then-outstanding Series G 6% Noncumulative Perpetual Preferred Stock, partially offset by the issuance of $6.8 million of Series I Noncumulative Perpetual Preferred Stock. The decrease in accumulated other comprehensive income over the prior year was based upon unfavorable market conditions related to the Company’s available-for-sale debt securities, caused by the recent increase in interest rates generally. The increase in treasury stock was due to the Company’s stock repurchase program.
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Analysis of Net Interest Income
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.
The following table sets forth average balance sheets, 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.
| Year ended December 31, 2022 | Year ended December 31, 2021 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Daily Balance | Interest Earned/Paid | Average Yield/Rate | Average Daily Balance | Interest Earned/Paid | Average Yield/Rate | ||||||||||||
| (Dollars in Thousands) | |||||||||||||||||
| Interest-earning assets: | |||||||||||||||||
| Loans receivable (1) (2) | $ | 2,626,710 | $ | 123,577 | 4.70 | % | $ | 2,327,781 | $ | 107,660 | 4.63 | % | |||||
| Investment securities (3) | 109,604 | 4,731 | 4.32 | 108,545 | 3,954 | 3.64 | |||||||||||
| Interest-earning deposits | 274,649 | 3,133 | 1.14 | 377,209 | 959 | 0.25 | |||||||||||
| Total interest-earning assets | 3,010,963 | 131,441 | 4.37 | % | 2,813,535 | 112,573 | 4.00 | % | |||||||||
| Non-interest-earning assets | 106,712 | 106,039 | |||||||||||||||
| Total assets | $ | 3,117,675 | $ | 2,919,574 | |||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||
| Interest-bearing demand accounts | $ | 751,708 | $ | 2,970 | 0.40 | % | $ | 637,671 | $ | 2,657 | 0.42 | % | |||||
| Money market accounts | 350,207 | 2,313 | 0.66 | 335,824 | 1,678 | 0.50 | |||||||||||
| Savings accounts | 340,232 | 449 | 0.13 | 317,301 | 505 | 0.16 | |||||||||||
| Certificates of deposit | 614,346 | 6,889 | 1.12 | 673,233 | 6,160 | 0.92 | |||||||||||
| Total interest-bearing deposits | 2,056,493 | 12,621 | 0.61 | 1,964,029 | 11,000 | 0.56 | |||||||||||
| Borrowed funds | 149,354 | 4,875 | 3.26 | 173,341 | 4,180 | 2.41 | |||||||||||
| Total interest-bearing liabilities | 2,205,847 | 17,496 | 0.79 | % | 2,137,370 | 15,180 | 0.71 | % | |||||||||
| Non-interest-bearing liabilities | 636,217 | 524,668 | |||||||||||||||
| Total liabilities | 2,842,064 | 2,662,038 | |||||||||||||||
| Stockholders' equity | 275,611 | 257,536 | |||||||||||||||
| Total liabilities and stockholders' equity | 3,117,675 | 2,919,574 | |||||||||||||||
| Net interest income | $ | 113,945 | $ | 97,393 | |||||||||||||
| Net interest rate spread (4) | 3.57 | % | 3.29 | % | |||||||||||||
| Net interest margin (5) | 3.78 | % | 3.46 | % |
_______________
(1) Excludes allowance for loan losses.
(2) Includes non-accrual loans which are immaterial to the yield.
(3) Includes Federal Home Loan Bank of New York stock.
(4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of average interest-earning assets.
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Rate/Volume Analysis
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.
| Years Ended December 31, | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 vs. 2021 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||
| Increase (Decrease) Due to | Increase (Decrease) Due to | ||||||||||||||||||||||||||||||
| Volume | Rate | Rate/Volume | Total Increase (Decrease) | Volume | Rate | Rate/Volume | Total Increase (Decrease) | ||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||
| Interest income: | |||||||||||||||||||||||||||||||
| Loans receivable | $ | 13,825 | $ | 1,854 | $ | 238 | $ | 15,917 | $ | 371 | $ | 136 | $ | 0 | $ | 507 | |||||||||||||||
| Investment securities | 39 | 731 | 7 | 777 | (277) | 862 | (69) | 516 | |||||||||||||||||||||||
| Interest-earning deposits | (261) | 3,344 | (909) | 2,174 | (175) | (1,813) | 112 | (1,876) | |||||||||||||||||||||||
| Total interest-earning assets | 13,603 | 5,929 | (664) | 18,868 | (81) | (815) | 43 | (853) | |||||||||||||||||||||||
| Interest expense: | |||||||||||||||||||||||||||||||
| Interest-bearing demand accounts | 475 | (138) | (24) | 313 | 950 | (1,024) | (319) | (393) | |||||||||||||||||||||||
| Money market deposits | 72 | 540 | 23 | 635 | 144 | (1,494) | (69) | (1,419) | |||||||||||||||||||||||
| Savings deposits | 36 | (86) | (6) | (56) | 64 | - | - | 64 | |||||||||||||||||||||||
| Certificates of Deposits | (538) | 1,389 | (122) | 729 | (5,369) | (10,835) | 3,005 | (13,199) | |||||||||||||||||||||||
| Borrowings | (578) | 1,478 | (205) | 695 | (2,636) | (404) | 151 | (2,889) | |||||||||||||||||||||||
| Total interest-bearing liabilities | (533) | 3,183 | (334) | 2,316 | (6,847) | (13,757) | 2,768 | (17,836) | |||||||||||||||||||||||
| Change in net interest income | $ | 14,136 | $ | 2,746 | $ | (330) | $ | 16,552 | $ | 6,766 | $ | 12,942 | $ | (2,725) | $ | 16,983 |
Results of Operations for the Years Ended December 31, 2022 and 2021
Net income increased by $11.3 million, or 33.1 percent, to $45.6 million for the year ended December 31, 2022 from $34.2 million for the year ended December 31, 2021. The increase in net income was driven by an increase in total interest income and the credit for loan loss provision, which were partly offset by a decrease in non-interest income and increases in interest expense, non-interest expenses, and a higher income tax provision for 2022 as compared to 2021.
Net interest income increased by $16.6 million, or 17.0 percent, to $113.9 million for the year of 2022 from $97.4 million for the year of 2021. The increase in net interest income resulted from a $18.9 million increase in interest income, partly offset by an increase of $2.3 million in interest expense.
Interest income increased by $18.9 million, or 16.8 percent, to $131.4 million for 2022, from $112.6 million for 2021. The average balance of interest-earning assets increased $197.4 million, or 7.0 percent, to $3.011 billion for 2022, from $2.814 for 2021, while the average yield increased 37 basis points to 4.37 percent for 2022, from 4.00 percent for 2021. The increase in the average balance of interest-earning assets mainly related to an increase in the Company’s level of average loans receivable for 2022, as compared to 2021.
The increase in interest income mainly related to an increase in the average balance of loans receivable of $298.9 million to $2.627 billion for 2022, from $2.328 billion for 2021. The increase in the average balance on loans receivable was a result of the continued strength of the Company’s loan pipeline. Interest income on loans for 2022 also included $1.4 million of amortization of purchase credit fair value adjustments related to a prior acquisition, which added approximately five basis points to the average yield on interest earning assets.
Interest expense increased by $2.3 million, or 15.3 percent, to $17.5 million for 2022, from $15.2 million for 2021. This increase resulted primarily from an increase in the average rate on interest-bearing liabilities of 8 basis points to 0.79 percent for 2022, from 0.71 percent for 2021, and an increase in the average balance of interest-bearing liabilities of $68.5 million, or 3.2 percent, to $2.206 billion 2022, from $2.137 billion for 2021. The increase in the average cost of funds primarily resulted from the higher interest rate environment in 2022.
Net interest margin was 3.78 percent for 2022, compared to 3.46 percent for 2021. The increase in the net interest margin compared to the prior period was the result of an increase in the average volume of loans receivable as well as an increase in the yield on loans partially offset by the increase in the Company’s cost of funds.
During the year ended December 31, 2022, the Company experienced $1.7 million in net charge offs compared to $375,000 in net charge offs for the year ended December 31, 2021. The Bank had non-accrual loans totaling $5.1 million, or 0.17 percent, of gross loans at December 31, 2022 as compared to $14.9 million, or 0.64 percent of gross loans at December 31, 2021. The allowance for loan losses was $32.4 million, or 1.05 percent of gross loans at December 31, 2022, and $37.1 million, or 1.58 percent of gross loans at December 31, 2021. The credit for loan losses was $3.1 million for 2022 compared to loan loss provision expense of $3.9 million for 2021. The credit for provision for 2022 reflected the improving asset quality and more favorable economic metrics compared to the COVID-19 environment in 2021. Management believes that the allowance for loan losses was adequate at December 31, 2022 and December 31, 2021.
Noninterest income decreased by $7.1 million, or 81.7 percent, to $1.6 million for 2022 from $8.7 million for 2021. The decrease was mainly related to a decrease of $6.4 million in the realized and unrealized gains and losses on equity securities (from a gain of $147,000 in 2021 to a loss of $6.3 million in 2022), as well as a decrease of $538,000 in gain on sale of loans, $371,000 in gain on sale of premises, and $391,000 in other income. The realized and unrealized gains or losses on equity securities are based on market conditions.
Noninterest expense increased by $1.5 million, or 2.8 percent, to $55.5 million for the year ended December 31, 2022 from $54.0 million for the year ended December 31, 2021. The increase in operating expenses for 2022 was driven higher by a consulting fee expense of $1.6 million for which there was no comparable expense in 2021. Other factors that contributed to the increase in operating expenses for 2022 included higher salaries and employee benefits and higher advertising and promotion expenses compared to 2021. The increase in salaries related to normal compensation increases, higher commission expenses from strong loan production, and hiring of additional staff. The number of full-time equivalent employees for the year ended December 31, 2022 was 301, as compared with 292 for the same period in 2021. Occupancy and equipment expense decreased by $733,000 to $10.7 million for the year ended December 31, 2022 from $11.4 million for the year ended December 31, 2021, mainly related to costs associated with branch closures in 2021.
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The income tax provision increased by $3.5 million or 25.1 percent, to $17.5 million for 2022 from $14.0 million in 2021. The increase in the income tax provision was a result of the higher taxable income for the year ended December 31, 2022 compared to the year ended December 31, 2021. The consolidated effective tax rate was 27.8% for 2022 compared to 29.0 percent for 2021.
Liquidity and Capital Resources
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.
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.
At December 31, 2022 and December 31, 2021, the Company had $60 million in overnight borrowings outstanding with the FHLB. The Company utilizes overnight borrowings from time to time to fund short-term liquidity needs. The Company had total outstanding borrowings of $419.8 million at December 31, 2022 as compared to $109.0 million at December 31, 2021.
At December 31, 2022, the Company had the ability to obtain additional funding from the FHLB of $289.5 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 $766.8 million at December 31, 2022. Based upon historical experience data, management estimates that a significant portion of such deposits will remain with the Company.
The Company was well-positioned with adequate levels of cash and liquid assets as of December 31, 2022, as well as wholesale borrowing capacity of over $1.161 billion.
At December 31, 2022 and December 31, 2021, the capital ratios of the Bank exceeded the quantitative capital ratios required for an institution to be considered “well-capitalized”.