# BCB BANCORP INC (BCBP) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from BCB BANCORP INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1228454/000122845424000003/bcbp-20231231x10k.htm
Accession: 0001228454-24-000003
Filing date: 2024-03-08
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BCBP/
All MD&A years: /company/BCBP/mda/
Previous year: /company/BCBP/mda/fy2022/ (FY 2022)
Next year: /company/BCBP/mda/fy2024/ (FY 2024)

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 Credit losses

On January 1, 2023, the Company adopted ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. Loans receivable are presented net of an allowance for credit 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 credit losses relies on econometric models to estimate the quantitative reserves and also the use of qualitative factors to supplement the quantitative calculation. The process of establishing allowance for credit losses is complex and 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 credit 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. Refer to Note 5 of the accompanying consolidated financial statements for additional information on the Company’s allowance for credit loss process.

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, 2023.

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Financial Condition at December 31, 2023 and 2022

Total assets increased by $286.2 million, or 8.1 percent, to $3.832 billion at December 31, 2023, from $3.546 billion at December 31, 2022. The increase in total assets was mainly related to increases in total loans and in cash and cash equivalents.

Total cash and cash equivalents increased by $50.2 million, or 21.9 percent, to $279.5 million at December 31, 2023, from $229.4 million at December 31, 2022. The increase was primarily due to an increase in Federal Home Loan Bank (“FHLB”) borrowings and in deposits.

Loans receivable, net, increased by $234.4 million, or 7.7 percent, to $3.280 billion at December 31, 2023, from $3.045 billion at December 31, 2022. Total loan increases during 2023 included increases of $90.2 million in commercial business loans, $88.9 million in commercial real estate and multi-family loans, $47.9 million in construction loans and $9.8 million in home equity and consumer loans. 1-4 family residential loans decreased $1.8 million. The allowance for credit losses increased $1.2 million to $33.6 million, or 178.9 percent of non-accruing loans and 1.01 percent of gross loans, at December 31, 2023, as compared to an allowance for credit losses of $32.4 million, or 633.6 percent of non-accruing loans and 1.05 percent of gross loans, at December 31, 2022.

Total investment securities decreased by $12.5 million, or 11.5 percent, to $96.9 million at December 31, 2023, from $109.4 million at December 31, 2022, representing unrealized losses, calls and maturities, and repayments.

Deposit liabilities increased by $167.5 million, or 6.0 percent, to $2.979 billion at December 31, 2023, from $2.812 billion at December 31, 2022. Certificates of deposits and money market accounts increased $417.9 million and $65.4 million, respectively, offset by interest bearing demand, non-interest bearing and savings and club accounts which declined $315.8 million during the twelve months of 2023.

Debt obligations increased by $90.7 million to $510.4 million at December 31, 2023 from $419.7 million at December 31, 2022. The weighted average interest rate of FHLB advances was 4.21 percent at December 31, 2023 and 4.07 percent at December 31, 2022. The weighted average maturity of FHLB advances as of December 31, 2023 was 1.93 years. The interest rate of our subordinated debt balances was 8.36 percent at December 31, 2023 and 5.62 percent at December 31, 2022 due to the fixed-rate period on such debt ending as of July 31, 2023.

Stockholders’ equity increased by $22.8 million, or 7.8 percent, to $314.1 million at December 31, 2023, from $291.3 million at December 31, 2022. The increase was primarily attributable to the increase in retained earnings of $20.8 million, or 18.1 percent, to $135.9 million at December 31, 2023 from $115.1 million at December 31, 2023.

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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.

[[GREPCENT_TABLE]]
[["","","Year ended December 31, 2023","","","","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","","Average Daily Balance","","Interest Earned/Paid","","Average Yield/Rate"],["","(Dollars in Thousands)"],["Interest-earning assets:"],["Loans receivable (1) (2)","$","3,281,334","","$","169,559","","5.17","%","","$","2,626,710","","$","123,577","","4.70","%","","$","2,327,781","","$","107,660","","4.63","%"],["Investment securities (3)","","100,000","","","5,106","","5.11","","","","109,604","","","4,731","","4.32","","","","108,545","","","3,954","","3.64"],["Interest-earning deposits","","270,659","","","13,695","","5.06","","","","274,649","","","3,133","","1.14","","","","377,209","","","959","","0.25"],["Total interest-earning assets","","3,651,993","","","188,360","","5.16","%","","","3,010,963","","","131,441","","4.37","%","","","2,813,535","","","112,573","","4.00","%"],["Non-interest-earning assets","","123,651","","","","","","","","","106,712","","","","","","","","","106,039"],["Total assets","$","3,775,644","","","","","","","","$","3,117,675","","","","","","","","$","2,919,574"],["Interest-bearing liabilities:"],["Interest-bearing demand accounts","$","658,023","","$","8,426","","1.28","%","","$","751,708","","$","2,970","","0.40","%","","$","637,671","","$","2,657","","0.42","%"],["Money market accounts","","334,353","","","8,489","","2.54","","","","350,207","","","2,313","","0.66","","","","335,824","","","1,678","","0.50"],["Savings accounts","","305,778","","","620","","0.20","","","","340,232","","","449","","0.13","","","","317,301","","","505","","0.16"],["Certificates of deposit","","980,617","","","39,157","","3.99","","","","614,346","","","6,889","","1.12","","","","673,233","","","6,160","","0.92"],["Total interest-bearing deposits","","2,278,771","","","56,692","","2.49","","","","2,056,493","","","12,621","","0.61","","","","1,964,029","","","11,000","","0.56"],["Borrowed funds","","594,564","","","27,606","","4.64","","","","149,354","","","4,875","","3.26","","","","173,341","","","4,180","","2.41"],["Total interest-bearing liabilities","","2,873,335","","","84,298","","2.93","%","","","2,205,847","","","17,496","","0.79","%","","","2,137,370","","","15,180","","0.71","%"],["Non-interest-bearing liabilities","","602,691","","","","","","","","","636,217","","","","","","","","","524,668"],["Total liabilities","","3,476,026","","","","","","","","","2,842,064","","","","","","","","","2,662,038"],["Stockholders' equity","","299,618","","","","","","","","","275,611","","","","","","","","","257,536"],["Total liabilities and stockholders' equity","","3,775,644","","","","","","","","","3,117,675","","","","","","","","","2,919,574"],["Net interest income","","","","$","104,062","","","","","","","","$","113,945","","","","","","","","$","97,393"],["Net interest rate spread (4)","","","","","","","2.22","%","","","","","","","","3.57","%","","","","","","","","3.29","%"],["Net interest margin (5)","","","","","","","2.85","%","","","","","","","","3.78","%","","","","","","","","3.46","%"]]
[[/GREPCENT_TABLE]]

_______________

(1) Excludes allowance for credit losses.

(2) Includes nonaccrual 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.

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","","2023 vs. 2022","","","2022 vs. 2021","","","2021 vs. 2020"],["","","Increase (Decrease) Due to","","","Increase (Decrease) Due to","","Increase (Decrease) Due to"],["","Volume","Rate","Rate/ Volume","Total Increase (Decrease)","","Volume","Rate","Rate/ Volume","Total Increase (Decrease)","","Volume","Rate","Rate/ Volume","Total Increase (Decrease)"],["","(In thousands)"],["Interest income:"],["Loans receivable","$","30,798","$","12,155","$","3,029","$","45,982","","$","13,825","$","1,854","$","238","$","15,917","","$","371","$","136","$","-","$","507"],["Investment securities","","(415)","","865","","(76)","","374","","","39","","731","","7","","777","","","(277)","","862","","(69)","","516"],["Interest-earning deposits","","(45)","","10,764","","(156)","","10,563","","","(261)","","3,344","","(909)","","2,174","","","(175)","","(1,813)","","112","","(1,876)"],["Total interest-earning assets","","30,338","","23,784","","2,797","","56,919","","","13,603","","5,929","","(664)","","18,868","","","(81)","","(815)","","43","","(853)"],["Interest expense:"],["Interest-bearing demand accounts","","(370)","","6,656","","(830)","","5,456","","","475","","(138)","","(24)","","313","","","950","","(1,024)","","(319)","","(393)"],["Money market deposits","","(105)","","6,579","","(298)","","6,176","","","72","","540","","23","","635","","","144","","(1,494)","","(69)","","(1,419)"],["Savings deposits","","(46)","","241","","(24)","","171","","","36","","(86)","","(6)","","(56)","","","64","","-","","-","","64"],["Certificates of Deposits","","4,107","","17,643","","10,519","","32,269","","","(538)","","1,389","","(122)","","729","","","(5,369)","","(10,835)","","3,005","","(13,199)"],["Borrowings","","14,532","","2,060","","6,139","","22,731","","","(578)","","1,478","","(205)","","695","","","(2,636)","","(404)","","151","","(2,889)"],["Total interest-bearing liabilities","","18,118","","33,179","","15,506","","66,803","","","(533)","","3,183","","(334)","","2,316","","","(6,847)","","(13,757)","","2,768","","(17,836)"],["Change in net interest income","$","12,220","$","(9,395)","$","(12,709)","$","(9,884)","","$","14,136","$","2,746","$","(330)","$","16,552","","$","6,766","$","12,942","$","(2,725)","$","16,983"]]
[[/GREPCENT_TABLE]]

Results of Operations for the Years Ended December 31, 2023 and 2022

Net income decreased by $16.1 million, or 35.3 percent, to $29.5 million for the year ended December 31, 2023 from $45.6 million for the year ended December 31, 2022. The decrease in net income was primarily driven by less net interest income and an increased provision for credit losses on loans being recorded.

Net interest income decreased by $9.9 million, or 8.7 percent, to $104.1 million for the year ended December 31, 2023 from $113.9 million for the year ended December 31, 2022. The decrease in net interest income resulted from a $66.8 million increase in interest expense, offset by an increase of $56.9 million in interest income.

The $56.9 million increase in interest income to $188.4 million for the twelve months of 2023, was a 43.3 percent increase from $131.4 million for the twelve months of 2022. The average balance of interest-earning assets increased $641.0 million, or 21.3 percent, to $3.652 billion for the twelve months of 2023, from $3.011 billion for the twelve months of 2022, while the average yield increased 79 basis points to 5.16 percent from 4.37 percent for the same comparable period. The increase in the average balance of interest-earning assets and in interest income mainly related to an increase in the average balance of loans receivable of $654.6 million to $3.281 billion for the twelve months of 2023, from $2.627 billion for the twelve months of 2022.

The $66.8 million increase in interest expense to $84.3 million for the twelve months of 2023, was a 381.8 percent increase from $17.5 million for the 2022 comparable period. This increase resulted primarily from an increase in the average rate on interest-bearing liabilities of 214 basis points to 2.93 percent for the twelve months of 2023, from 0.79 percent for the twelve months of 2022, and an increase in the average balance of interest-bearing liabilities of $667.5 million, or 30.3 percent, to $2.873 billion from $2.206 billion over the same comparable periods. The increase in the average cost of funds primarily resulted from the high interest rate environment and an increase in the level of borrowed funds in the twelve months of 2023 compared to the same period in 2022.

Net interest margin was 2.85 percent for the twelve months of 2023, compared to 3.78 percent for the twelve months of 2022. The decrease in the net interest margin compared to the prior period was primarily the result of an increase in the average volume of interest-bearing liabilities as well as an increase in the cost of interest-bearing liabilities.

During the twelve months of 2023, the Company recognized $704,000 in net-charge offs compared to $1.7 million in net-charge offs for the same period in 2022.

Non-interest income increased by $2.5 million to $4.1 million for the twelve months of 2023 from $1.6 million for the twelve months of 2022. The improvement in total non-interest income was mainly related to a $2.9 million decrease in the realized and unrealized losses on equity securities. The realized and unrealized losses on equity securities are based on market conditions.

Non-interest expense increased by $5.1 million, or 9.2 percent, to $60.6 million for the twelve months of 2023 from $55.5 million for the same period in 2022. The increase in operating expenses for 2023 was driven primarily by an increase in salaries and employee benefits, an increase in regulatory assessments, and higher data processing expenses. The 2023 salaries and benefits expense includes a one-time payment of $1.17 million to the Company’s former President and Chief Executive Officer.

The income tax provision decreased by $5.5 million or 31.7 percent, to $12.0 million for the twelve months of 2023 from $17.5 million for the same period in 2022. The decrease in the income tax provision was a result of the lower taxable income for the twelve months ended December 31, 2023 compared to the same period in 2022. The consolidated effective tax rate was 28.9 percent for the twelve months of 2023 compared to 27.8 percent for the twelve months of 2022.

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Results of Operations for the Years Ended December 31, 2022 and 2021

The results of operations comparison of 2022 compared to 2021 can be found in the Company’s previously filed Annual Report on Form 10-K for the year-ended December 31, 2022 under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”- Results of Operations for the Years Ended December 31, 2022 and 2021 on pages 28 and 29.

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 Federal Reserve Bank Discount Window, the FHLB and other correspondent banks. Our Asset / Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies.

At December 31, 2023 and 2022, the Company had $0 and $60 million in overnight borrowings outstanding with the FHLB, respectively. The Company utilizes overnight borrowings from time to time to fund short-term liquidity needs. The Company had total outstanding borrowings of $510.4 million at December 31, 2023 as compared to $419.8 million at December 31, 2022.

At December 31, 2023, the Company had the ability to obtain additional funding from the FHLB of $408.3 million and $309.2 million from the Federal Reserve Bank Discount Window, 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 $1.199 billion at December 31, 2023. 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, 2023 and a significant amount of available borrowing capacity with FHLB and Federal Reserve Bank Discount Window.

At December 31, 2023 and 2022, the capital ratios of the Bank exceeded the quantitative capital ratios required for an institution to be considered “well-capitalized” under prompt corrective action provisions.