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BCBP > SEC Filings for BCBP > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Form 10-K for BCB BANCORP INC


18-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

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.

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.

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.

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.

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Critical Accounting Policies

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."

Allowance for Loan Losses

Loans receivable are presented net of an allowance for loan losses. 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.

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 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 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 equity securities and 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.

Deferred Income Taxes

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.

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.

Fair Value Measurements

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 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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Financial Condition

Comparison at December 31, 2012 and at December 31, 2011

Total assets decreased by $45.6 million or 3.7% to $1.171 billion at December 31, 2012 from $1.217 billion at December 31, 2011. The decrease in total assets occurred primarily as a result of decreases in securities held to maturity of $42.3 million, loans held for sale of $4.3 million and cash and cash equivalents of $82.0 million which more than offset the increases in loans receivable of $81.5 million and other assets of $5.2 million. Management is concentrating on controlled balance sheet growth and maintaining adequate liquidity in anticipation of funding loans in the loan pipeline as well as seeking opportunities in the secondary market that provide reasonable returns. During the second and third quarters, the Bank sold a portion of the non-performing loan portfolio which totaled approximately $25.9 million resulting in a pre-tax loss of $10.8 million. Management continues to evaluate its non-performing loans, and based upon market conditions and the ability to obtain satisfactory pricing may consider future sales of a portion of its non-performing loan portfolio. It is our intention to grow our assets at a measured pace consistent with our capital levels and as business opportunities permit.

Total cash and cash equivalents decreased by $82.0 million or 70.0% to $35.1 million at December 31, 2012 from $117.1 million at December 31, 2011. The decrease in cash and cash equivalents resulted primarily from funding new loans and deposit outflow. Investment securities classified as held-to-maturity decreased by $42.3 million or 20.4% to $164.6 million at December 31, 2012 from $207.0 million at December 31, 2011. This decrease in investment securities resulted primarily from purchases of $57.3 million offset by allowable sales of $30.6 million of mortgage-backed securities from the held-to-maturity portfolio, $61.2 million of repayments and prepayments in the mortgage-backed securities portfolio, $3.3 million in maturities of certain Government Sponsored Enterprise bonds and $3.0 million of call options exercised on certain callable agency securities during the year ended December 31, 2012.

Loans receivable increased by $81.5 million or 9.7% to $922.3 million at December 31, 2012 from $840.8 million at December 31, 2011. The increase resulted primarily from a $107.0 million increase in real estate mortgages comprising residential, commercial and multi-family, construction and participation loans with other financial institutions partially offset by a $14.9 million decrease in commercial loans comprising business loans and commercial lines of credit, net of amortization, and a $8.4 million decrease in consumer loans, net of amortization partially offset by a $1.9 million increase in the allowance for loan losses. The increase was partially off-set by the sale of certain commercial loans obtained as part of the Allegiance Community Bank acquisition in April 2011 totaling approximately $10.8 million. The sale of the aforementioned in loans receivable resulted in a gain on sale of loans of approximately $286,000. Further, during the year ended December 31, 2012, the Bank sold approximately $25.9 million of loans that were classified as non-performing loans. The $25.9 million of non-performing loans sold included $9.1 million of residential mortgage loans, $14.6 million of commercial and multi-family loans, $1.1 million of home equity loans, $781,000 of commercial business loans, and $313,000 of construction loans. The primary reason for this transaction was the elimination of ongoing carrying costs associated with these non-interest earning assets. The sale of this sub-set of the non-performing loan portfolio resulted in a pre-tax loss of approximately $10.8 million. As of December 31, 2012, the allowance for loan losses was $12.4 million or 54.0% of non-performing loans and 1.32% of gross loans. As a result of the loans acquired in the business combination transactions being recorded at their fair value, the balance in the allowance for loan losses that were on the balance sheet 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.

Deposit liabilities decreased by $36.8 million or 3.8% to $940.8 million at December 31, 2012 from $977.6 million at December 31, 2011. The decrease resulted primarily from a $39.8 million decrease in certificate of deposits, a decrease of $8.7 million in savings and club deposits and a decrease of $3.8 million in money market interest bearing deposits which more than offset a $7.4 million increase in non-interest bearing deposits and an increase of $8.2 million in NOW deposits. During the year ended December 31, 2012, the Federal Open Market Committee (FOMC) has continued its mindset of a continuing accommodative monetary policy. This has resulted in historically low short term market rates that have further resulted in low time deposit account yields which in turn has had the effect of decreasing interest expense.

Long-term borrowed money decreased by $15.4 million or 11.9% to $114.1 million at December 31, 2012 from $129.5 million at December 31, 2011. The decrease in borrowed money resulted primarily from the pre-payment of $15.4 million in Federal Home Loan Bank advances that were acquired in the business combination transaction with Allegiance Community Bank. As a result, a pre-payment penalty of $49,000 was recognized as interest expense. Short-term borrowed money increased by $17.0 million to $17.0 million at December 31, 2012 compared to no corresponding amount at December 31, 2011. The purpose of the borrowings reflects the use of long term and short term Federal Home Loan Bank advances to augment deposits as the Bank's funding source for originating loans and investing in investment securities.

Stockholders' equity decreased by $8.4 million or 8.4% to $91.6 million at December 31, 2012 from $100.0 million at December 31, 2011. The decrease in stockholders' equity is primarily attributable to the repurchase of 1,046,726 shares of the Company's common stock at a cost of $10.9 million, as well as the payment of cash dividends during the year totaling $4.3 million, along with a net loss for the year ended December 31, 2012 of $2.1 million, partially offset by the issuance of $8.6 million of Series A 6% noncumulative perpetual preferred stock in the fourth quarter of 2012 and an increase of $109,000 resulting from the exercise of stock options totaling 29,661 shares. As of December 31, 2012, the Bank's Tier 1, Tier 1 Risk-Based and Total Risk Based Capital Ratios were 8.38%, 12.78% and 14.03% respectively.

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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 tables set forth balance sheets, average yields and costs, and certain other information for the periods 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.

                                         At December 31, 2012                 Year ended December 31, 2012                        Year ended December 31, 2011
                                                         Actual                                            Average                                             Average
                                          Actual         Yield/         Average          Interest        Yield/Cost         Average          Interest        Yield/Cost
                                         Balance          Cost          Balance         earned/paid          (5)            Balance         earned/paid          (5)

                                                                                            (Dollars in Thousands)
Interest-earning assets:
Loans receivable (1)                  $      934,664        5.10 %   $     864,561     $      47,756            5.52 %   $     804,026     $      45,023            5.60 %
Investment securities(2)                     173,586        3.33           204,417             5,779            2.83           217,444             7,769            3.57
Interest-earning deposits                     28,891        0.39            88,798               112            0.13            78,814                87            0.11
Total interest-earning assets              1,137,141        4.71 %       1,157,776            53,647            4.63 %       1,100,284            52,879            4.81 %


Interest-earning liabilities:
Total interest-bearing
 demand deposits                      $      120,765        0.25 %   $     119,175     $         297            0.25 %   $      92,624     $         500            0.54 %
Money market deposits                         63,834        0.42            67,825               267            0.39            51,553               349            0.68
Savings deposits                             256,769        0.19           260,314               477            0.18           257,065             1,020            0.40
Certificates of deposit                      413,468        1.42           439,757             5,849            1.33           429,375             6,421            1.50
Borrowings                                   131,124        3.86           117,651             5,057            4.30           117,642             5,007            4.26
Total interest-bearing liabilities           985,960        1.21 %       1,004,722            11,947            1.19 %         948,259            13,297            1.41 %

Net interest income                                                                    $      41,700                                       $      39,582

Interest rate spread(3)                                     3.50 %                                              3.44 %                                              3.40 %
Net interest margin(4)                                      3.66 %                                              3.60 %                                              3.60 %
Ratio of interest-earning assets to
interest-bearing liabilities                  115.33 %                      115.23 %                                            116.03 %


(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.

(5) Average yields are computed using annualized interest income and expense for the periods.

Table of Contents

Analysis of Net Interest Income (Continued)





                                                                       Year ended December 31, 2010
                                                                          (Dollars in Thousands)
Interest-earning assets:
Loans receivable (1)                                               $    605,269      $ 34,502       5.70 %
Investment securities(2)                                                153,006         5,481       3.58
Interest-earning deposits                                               107,369           117       0.11
Total interest-earning assets                                           865,644        40,100       4.63 %

Interest-earning liabilities:
Interest-bearing demand deposits                                   $     65,169      $    553       0.85 %
Money market deposits                                                    45,195           385       0.85
Savings deposits                                                        179,020         1,304       0.73
Certificates of deposit                                                 348,229         6,220       1.77
Borrowings                                                              114,778         5,206       4.54
Total interest-bearing liabilities                                      752,391        13,668       1.82 %

Net interest income                                                                  $ 26,432

Interest rate spread(3)                                                                             2.81 %
Net interest margin(4)                                                                              3.05 %
Ratio of interest-earning assets to interest-bearing liabilities         115.05 %


(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.

(5) Average yields are computed using annualized interest income and expense for the periods.

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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 periods 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,
                                                            2012 vs. 2011                                                   2011 vs. 2010
                                             Increase (Decrease) Due to                                      Increase (Decrease) Due to
                                                                                       Total                                                           Total
                                                                                      Increase                                                        Increase
                                      Volume           Rate        Rate/Volume       (Decrease)        Volume          Rate        Rate/Volume       (Decrease)

                                                                                           (In thousands)
Interest income:
Loans receivable                     $   3,390       $   (611 )   $         (46 )   $      2,733     $   11,330      $   (609 )   $        (200 )   $     10,521
Investment securities                     (465 )       (1,622 )              97           (1,990 )        2,308           (14 )              (6 )          2,288
Interest-earning deposits
with other banks                            11             12                 2               25            (31 )           1                 -              (30 )
Total interest-earning assets            2,936         (2,221 )              53              768         13,607          (622 )            (206 )         12,779

Interest expense:
Interest-bearing demand accounts           143           (269 )             (77 )           (203 )          233          (201 )             (85 )            (53 )
Money market                               110           (146 )             (46 )            (82 )           54           (79 )             (11 )            (36 )
Savings and club                            13           (549 )              (7 )           (543 )          569          (594 )            (259 )           (284 )
Certificates of Deposits                   155           (710 )             (17 )           (572 )        1,449        (1,012 )            (236 )            201
Borrowed funds                               -             50                 -               50            130          (321 )              (8 )           (199 )

Total interest-bearing liabilities         421         (1,624 )            (147 )         (1,350 )        2,435        (2,207 )            (599 )           (371 )
Change in net interest income        $   2,515       $   (597 )   $         200     $      2,118     $   11,172      $  1,585     $         393     $     13,150

Table of Contents

Results of Operations for the Years Ended December 31, 2012 and 2011

We experienced a net loss of $2.06 million for the year ended December 31, 2012 compared with net income of $6.05 million for the year ended December 31, 2011. The net loss was due to a decrease in the non-interest income primarily associated with losses incurred from the sale of non-performing loans in 2012, and increases in the provision for loans losses and in non-interest expense, partially offset by an increase in net interest income and a decrease in income taxes.

Net interest income increased by $2.12 million or 5.4% to $41.70 million for the year ended December 31, 2012 from $39.58 million for the year ended December 31, 2011. This increase in net interest income resulted primarily from an increase of $57.5 million or 5.3% in the average balance of interest earning assets to $1.16 billion for the year ended December 31, 2012 from $1.10 billion for the year ended December 31, 2011, partially offset by a decrease in the average yield on interest earning assets to 4.63% for the year ended December 31, 2012 from 4.81% for the year ended December 31, 2011. The average balance of interest bearing liabilities increased by $56.5 million or 6.0% to $1.01 billion for the year ended December 31, 2012 from $948.3 million for the year ended December 31, 2011, while the average cost of interest bearing liabilities decreased to 1.19% for the year ended December 31, 2012 from 1.41% for the year ended December 31, 2011. As a consequence of the aforementioned, our net interest margin remained . . .

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