BCB BANCORP INC (BCBP) FY 2024 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 Credit losses
On January 1, 2023, the Company adopted ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with a current expected credit losses (“CECL”) model 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, 2024.
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Financial Condition at December 31, 2024 and 2023
Total assets decreased by $233.3 million, or 6.1 percent, to $3.599 billion at December 31, 2024, from $3.832 billion at December 31, 2023. The decrease in total assets was due to a decrease in loans of $283.4 million, offset by an increase of $37.8 million in cash and cash equivalents. The decrease in loans was primarily from loan sales and payoffs/paydowns that exceeded loan originations.
Total cash and cash equivalents increased by $37.8 million, or 13.5 percent, to $317.3 million at December 31, 2024, from $279.5 million at December 31, 2023. The increase was primarily due to loan sales and payoffs/paydowns that exceeded loan originations.
Loans receivable, net, decreased by $283.4 million, or 8.6 percent, to $2.996 billion at December 31, 2024, from $3.280 billion at December 31, 2023. Total loan decreases during the period included decreases of $187.4 million in commercial real estate multi-family loans, $57.4 million in construction loans, $29.4 million in commercial business loans, $8.4 million in residential 1-4 family loans, and $1.4 million in consumer loans. Home equity loans increased $438 thousand. The allowance for credit losses on loans increased $1.2 million to $34.8 million, or 77.8 percent of non-accruing loans and 1.15 percent of gross loans, at December 31, 2024, as compared to an allowance for credit losses on loans of $33.6 million, or 178.9 percent of non-accruing loans and 1.01 percent of gross loans, at December 31, 2023.
Total investment securities increased by $14.3 million, or 14.8 percent, to $111.2 million at December 31, 2024, from $96.9 million at December 31, 2023, as excess liquidity has been deployed into the securities portfolio.
Deposits decreased by $228.2 million, or 7.7 percent, to $2.751 billion at December 31, 2024, from $2.979 billion at December 31, 2023. A majority of the decline was due to a decrease in certificates of deposit of $193.5 million. The reduction in certificates of deposit was mainly caused by the withdrawal of brokered deposits which was partially offset by an increase in retail time deposits.
Total borrowings decreased by $12.1 million to $498.3 million at December 31, 2024 from $510.4 million at December 31, 2023. The decrease in borrowings was primarily due to the maturity of $18.0 million of FHLB debt that was paid off during 2024. The weighted average interest rate of the Company’s outstanding FHLB advances was 4.35 percent at December 31, 2024 and 4.21 percent at December 31, 2023. The weighted average maturity of such FHLB advances as of December 31, 2024 was 0.97 years. The interest rate of the Company’s subordinated debt balances was 9.25 percent at December 31, 2024 and 8.36 percent at December 31, 2023.
Stockholders’ equity increased by $9.9 million, or 3.1 percent, to $323.9 million at December 31, 2024, from $314.1 million at December 31, 2023. The increase was primarily attributable to the increase in retained earnings of $5.9 million, or 4.4 percent, to $141.9 million at December 31, 2024 from $135.9 million at December 31, 2023. The increase in retained earnings was due to current year net income of $18.6 million offset primarily by $12.3 million in dividends paid.
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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. No tax-equivalent yield adjustments have been made as the amounts are not significant. The yields set forth below include the effect of deferred fees, discounts and premiums, which are included in interest income.
| Year ended December 31, 2024 | Year ended December 31, 2023 | Year ended December 31, 2022 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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) | $ | 3,196,538 | $ | 172,046 | 5.38 | % | $ | 3,281,334 | $ | 169,559 | 5.17 | % | $ | 2,626,710 | $ | 123,577 | 4.70 | % | ||||||||
| Investment securities (3) | 99,733 | 5,331 | 5.35 | 100,000 | 5,106 | 5.11 | 109,604 | 4,731 | 4.32 | |||||||||||||||||
| Interest-earning deposits | 308,248 | 16,632 | 5.40 | 270,659 | 13,695 | 5.06 | 274,649 | 3,133 | 1.14 | |||||||||||||||||
| Total interest-earning assets | 3,604,519 | 194,009 | 5.38 | % | 3,651,993 | 188,360 | 5.16 | % | 3,010,963 | 131,441 | 4.37 | % | ||||||||||||||
| Non-interest-earning assets | 124,441 | 123,651 | 106,712 | |||||||||||||||||||||||
| Total assets | $ | 3,728,960 | $ | 3,775,644 | $ | 3,117,675 | ||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||
| Interest-bearing demand accounts | $ | 553,013 | $ | 9,701 | 1.75 | % | $ | 658,023 | $ | 8,426 | 1.28 | % | $ | 751,708 | $ | 2,970 | 0.40 | % | ||||||||
| Money market accounts | 372,205 | 12,457 | 3.35 | 334,353 | 8,489 | 2.54 | 350,207 | 2,313 | 0.66 | |||||||||||||||||
| Savings accounts | 264,430 | 620 | 0.23 | 305,778 | 620 | 0.20 | 340,232 | 449 | 0.13 | |||||||||||||||||
| Certificates of deposit | 1,153,235 | 55,442 | 4.81 | 980,617 | 39,157 | 3.99 | 614,346 | 6,889 | 1.12 | |||||||||||||||||
| Total interest-bearing deposits | 2,342,883 | 78,220 | 3.34 | 2,278,771 | 56,692 | 2.49 | 2,056,493 | 12,621 | 0.61 | |||||||||||||||||
| Borrowed funds | 511,916 | 23,768 | 4.64 | 594,564 | 27,606 | 4.64 | 149,354 | 4,875 | 3.26 | |||||||||||||||||
| Total interest-bearing liabilities | 2,854,799 | 101,988 | 3.57 | % | 2,873,335 | 84,298 | 2.93 | % | 2,205,847 | 17,496 | 0.79 | % | ||||||||||||||
| Non-interest-bearing liabilities | 554,037 | 602,691 | 636,217 | |||||||||||||||||||||||
| Total liabilities | 3,408,836 | 3,476,026 | 2,842,064 | |||||||||||||||||||||||
| Stockholders' equity | 320,124 | 299,618 | 275,611 | |||||||||||||||||||||||
| Total liabilities and stockholders' equity | 3,728,960 | 3,775,644 | 3,117,675 | |||||||||||||||||||||||
| Net interest income | $ | 92,021 | $ | 104,062 | $ | 113,945 | ||||||||||||||||||||
| Net interest rate spread (4) | 1.81 | % | 2.22 | % | 3.57 | % | ||||||||||||||||||||
| Net interest margin (5) | 2.55 | % | 2.85 | % | 3.78 | % |
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(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.
| Years Ended December 31, | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 vs. 2023 | 2023 vs. 2022 | 2022 vs. 2021 | ||||||||||||||||||||||||
| 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 | $ | (4,382) | $ | 7,051 | $ | (182) | $ | 2,487 | $ | 30,798 | $ | 12,155 | $ | 3,029 | $ | 45,982 | $ | 13,825 | $ | 1,854 | $ | 238 | $ | 15,917 | ||
| Investment securities | (13) | 239 | (1) | 225 | (415) | 865 | (76) | 374 | 39 | 731 | 7 | 777 | ||||||||||||||
| Interest-earning deposits | 1,902 | 909 | 126 | 2,937 | (45) | 10,764 | (156) | 10,563 | (261) | 3,344 | (909) | 2,174 | ||||||||||||||
| Total interest-earning assets | (2,493) | 8,199 | (57) | 5,649 | 30,338 | 23,784 | 2,797 | 56,919 | 13,603 | 5,929 | (664) | 18,868 | ||||||||||||||
| Interest expense: | ||||||||||||||||||||||||||
| Interest-bearing demand accounts | (1,345) | 3,117 | (497) | 1,275 | (370) | 6,656 | (830) | 5,456 | 475 | (138) | (24) | 313 | ||||||||||||||
| Money market deposits | 961 | 2,701 | 306 | 3,968 | (105) | 6,579 | (298) | 6,176 | 72 | 540 | 23 | 635 | ||||||||||||||
| Savings deposits | (84) | 97 | (13) | - | (46) | 241 | (24) | 171 | 36 | (86) | (6) | (56) | ||||||||||||||
| Certificates of Deposits | 6,893 | 7,985 | 1,407 | 16,285 | 4,107 | 17,643 | 10,519 | 32,269 | (538) | 1,389 | (122) | 729 | ||||||||||||||
| Borrowings | (3,837) | (1) | - | (3,838) | 14,532 | 2,060 | 6,139 | 22,731 | (578) | 1,478 | (205) | 695 | ||||||||||||||
| Total interest-bearing liabilities | 2,588 | 13,899 | 1,203 | 17,690 | 18,118 | 33,179 | 15,506 | 66,803 | (533) | 3,183 | (334) | 2,316 | ||||||||||||||
| Change in net interest income | $ | (5,081) | $ | (5,700) | $ | (1,260) | $ | (12,041) | $ | 12,220 | $ | (9,395) | $ | (12,709) | $ | (9,884) | $ | 14,136 | $ | 2,746 | $ | (330) | $ | 16,552 |
Results of Operations for the Years Ended December 31, 2024 and 2023
Net income decreased by $10.9 million, or 36.8 percent, to $18.6 million for the twelve months of 2024 from $29.5 million for the twelve months of 2023. The decrease in net income was driven, primarily, by a $12.0 million decrease in net interest income, or 11.6 percent, and an increase in the provision for credit losses by $5.5 million, partially offset by a $4.3 million decrease in the income tax provision and a $3.5 million decrease in non-interest expense.
Net interest income decreased by $12.0 million, or 11.6 percent, to $92.0 million for the first twelve months of 2024 from $104.1 million for the twelve months of 2023. The decrease in net interest income resulted from an increase in interest expense of $17.7 million, partly offset by an increase in interest income of $5.6 million.
Interest income increased by $5.6 million, or 3.0 percent, to $194.0 million for the twelve months of 2024, from $188.4 million for the twelve months of 2023. The increase was due to an increase of 22 basis points in the yield on interest earning assets, from 5.16 percent to 5.38 percent. Offsetting this, somewhat, was a decrease in average interest earning assets of $47.5 million, which was comprised of a decrease in average loans of $84.8 million offset by an increase in average other interest-earning assets of $37.6 million.
Interest expense increased by $17.7 million, or 21.0 percent, to $102.0 million for 2024, from $84.3 million for 2023. This increase resulted primarily from an increase in the average rate on interest-bearing liabilities of 64 basis points to 3.57 percent for the twelve months of 2024, from 2.93 percent for the twelve months of 2023. Offsetting this was a decrease in average interest-bearing liabilities of $18.5 million over the same comparable time period.
Net interest margin was 2.55 percent for the twelve months of 2024, compared to 2.85 percent for the twelve months of 2023. The decrease in the net interest margin compared to the prior period was largely the result of an increase in the cost of the Bank’s interest-bearing liabilities.
During the twelve months of 2024, the Company experienced $10.4 million in net charge offs compared to $704 thousand in net charge offs for the same period in 2023. The provision for credit losses was $11.6 million for the twelve months of 2024 compared to $6.1 million for the same period in 2023. The elevated charge-offs experienced during 2024 were driven by the deterioration experienced in the Bank’s business express loans as these loans moved through the interest-only maturity cycle during the year. Management has taken several steps to closely monitor, and address asset quality issues related to the business express loans. A strict policy of establishing specific reserves once the business express loans hit the 60-days delinquent status with a charge-off executed once the loans hit the 90-days delinquent mark ensures a proactive approach for dealing with credit quality issues in the portfolio. The business express loans have a relatively short loss history that started to develop during 2024. Management is committed in ensuring that its view on the lifetime losses embedded in the portfolio remains current as more empirical data becomes available. Management has also established a team of asset recovery experts who are closely working with the Bank’s business express loan customers to ensure a positive outcome for both our customers and the Bank. Although business express loans are charged-off once they reach the 90-days delinquent status, the Bank’s asset recovery and legal teams continue to work with these customers to recover losses recognized by the Bank. Refer to the Lending Activities section of this 10K for additional details on the business express loans.
Non-interest income decreased by $1.1 million to $2.9 million for the twelve months of 2024 from $4.1 million for the twelve months of 2023. The decrease was due to losses on sales of loans of $5.3 million in 2024. This was offset by realized and unrealized gains on equity investments of $379 thousand in 2024, which was $3.7 million greater than realized and unrealized loss incurred in 2023, and income on Bank-owned Life Insurance (BOLI), which was $883 thousand higher, in 2024. The realized and unrealized gains or losses on equity investments are based on prevailing market conditions.
Non-interest expense decreased by $3.5 million, or 5.7 percent, to $57.1 million for the twelve months of 2024 from $60.6 million for the same period in 2023. The decrease in operating expenses for 2024 was driven primarily by decreases in salaries and employee benefits of $2.6 million and advertising and promotional costs of $485 thousand. The 2023 salaries and benefits expense included a previously disclosed one-time payment of $1.17 million to a former executive officer.
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The income tax provision decreased by $4.3 million, or 36.6 percent to $7.6 million for the twelve months of 2024 from $12.0 million for the same period in 2023, due to reduced taxable income in 2024. The consolidated effective tax rate was 29.1 percent for the twelve months of 2024 compared to 28.9 percent for the twelve months of 2023.
Results of Operations for the Years Ended December 31, 2023 and 2022
The results of operations comparison of 2023 compared to 2022 can be found in the Company’s previously filed Annual Report on Form 10-K for the year-ended December 31, 2023 under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”- Results of Operations for the Years Ended December 31, 2023 and 2022 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, 2024 and 2023, the Company had no 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 $498.3 million at December 31, 2024 as compared to $510.4 million at December 31, 2023.
At December 31, 2024, the Company had the ability to obtain additional funding from the FHLB of $135.7 million and $333.0 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 $1.001 billion at December 31, 2024. 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, 2024 and a significant amount of available borrowing capacity with FHLB and Federal Reserve Bank Discount Window.
At December 31, 2024 and 2023, 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.
Forward-Looking Statements
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. 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. 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 this Annual Report on Form 10-K and in other documents filed with the Securities and Exchange Commission. 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, 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 our local markets; changes in accounting principles and guidelines; war or terrorist activities; and other economic, competitive, governmental, regulatory, geopolitical and technological factors affecting the our operations, pricing and services, and those discussed under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. You should not place undue reliance on these forward-looking statements, which reflect our expectations only as of the date of this report. We do not assume any obligation to revise forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, except as may be required by law.
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