UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended December 31, 2005
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ______________________
Commission File No. 000-50275
BCB BANCORP, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
New Jersey 26-0065262
- ------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
104-110 Avenue C, Bayonne, New Jersey 07002
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(201) 823-0700
---------------------------------------------------
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 406 of the Securities Act. YES [_] NO [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YE [_] NO [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X].
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [_] Accelerated Filer [_] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [_] NO [X]
As of March 6, 2006, there were issued and outstanding 5,002,581 shares of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the Common Stock as of June 30, 2005, ($15.48) was $46.8 million
(adjusted to reflect the five for four stock dividend paid on October 27, 2005).
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for the 2006 Annual Meeting of Stockholders of the
Registrant (Part III).
TABLE OF CONTENTS
Item Page Number
- ---- -----------
Item 1. Business.............................................................1
Item 1a. Risk factors.........................................................28
Item 1b. Unresolved staff comments............................................32
Item 2. Properties...........................................................32
Item 3. Legal proceedings....................................................32
Item 4. Submission of matters to a vote of security holders..................32
Item 5. Market for registrant's common equity, related stock holder
matters and issuer repurchases of equity securities..................32
Item 6. Selected consolidated financial data.................................33
Item 7. Management's discussion and analysis of financial condition
and results of operations...........................................34
Item 7a. Quantitative and qualitative disclosures about market risk...........49
Item 8. Financial statements and supplementary data..........................50
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure.............................................50
Item 9a. Controls and procedures..............................................51
Item 9b. Other information....................................................51
Item 10. Directors and executive officers of the registrant...................51
Item 11. Executive compensation...............................................52
Item 12. Security ownership of certain beneficial owners and management
and related stockholder matters........ ............................52
Item 13. Certain relationships and related transactions.......................52
Item 14. Principal accountant fees and services...............................52
Item 15. Exhibits and financial statement schedules...........................52
i
PART I
ITEM 1. BUSINESS
- ----------------
BCB Bancorp, Inc.
- -----------------
BCB Bancorp, Inc. (the "Company") is a New Jersey corporation, which on May
1, 2003 became the holding company parent of Bayonne Community Bank (the
"Bank"). The Company has not engaged in any significant business activity other
than owning all of the outstanding common stock of Bayonne Community Bank. Our
executive office is located at 104-110 Avenue C, Bayonne, New Jersey 07002. Our
telephone number is (201) 823-0700. At December 31, 2005 we had $466.2 million
in consolidated assets, $362.9 million in deposits and $47.8 million in
consolidated stockholders' equity. The Company is subject to extensive
regulation by the Board of Governors of the Federal Reserve System.
Recent Events
- -------------
BCB Bancorp, Inc. conducted a secondary public stock offering during the
fourth quarter of 2005. The Company sold 1,265,000 shares of its common stock
for an aggregate offering price of $19.3 million. The Company offered 1,100,000
shares of its common stock, (with an over-allotment option of 165,000 shares) to
the public at a price of $15.25. The stock offering was underwritten by Janney
Montgomery Scott LLC on a firm commitment basis. The Company's registration
statement on Form S-1 (Commission File No. 333-128214) was declared effective by
the Securities and Exchange Commission on December 13, 2005. The Company also
filed a rule 462 registration statement on Form S-1 (Commission File No.
333-130307) which was effective upon filing on December 14, 2005. The sale of
the 1.1 million shares was completed on December 19, 2005, and the
over-allotment was exercised in full on January 5, 2006. Expenses of the stock
offering (including the underwriter's discount) were $1.4 million and were paid
to the underwriters, underwriters' counsel, our counsel, our printer and our
transfer agent. Net proceeds from the stock offering of approximately $17.9
million will be available for contribution to capital, for use in lending and
investing activities, for branch expansion and for general corporate purposes.
In the short-term, the net proceeds have been invested in overnight funds until
we are able to deploy the proceeds as described above.
In connection with the secondary public stock offering, the Company was
approved for listing on the Nasdaq National Market. The Company began trading on
Nasdaq National Market on December 14, 2005 under the symbol "BCBP."
On October 27, 2005, the Company paid a 25% stock dividend to stockholders
of record as of the close of business on October 13, 2005.
Bayonne Community Bank
- ----------------------
Bayonne Community Bank was chartered as a New Jersey bank on October 27,
2000, and we opened for business on November 1, 2000. We operate through three
branches in Bayonne, New Jersey and through our executive office located at
104-110 Avenue C, Bayonne, New Jersey 07002. Our telephone number is (201)
823-0700. Our deposit accounts are insured by the Federal Deposit Insurance
Corporation and we are a member of the Federal Home Loan Bank System.
We are a community-oriented financial institution. Our business is to offer
FDIC-insured deposit products and invest funds held in deposit accounts at the
bank, together with funds generated from operations, in investment securities
and loans. We offer our customers:
o loans, including commercial and multi-family real estate loans, one-
to four-family mortgage loans, home equity loans, construction loans,
consumer loans and commercial business loans. In recent years the
primary growth in our loan portfolio has been in loans secured by
commercial real estate and multi-family properties;
o FDIC-insured deposit products, including savings and club accounts,
non-interest bearing accounts, money market accounts, certificates of
deposit and individual retirement accounts; and
o retail and commercial banking services including wire transfers, money
orders, traveler's checks, safe deposit boxes, a night depository,
federal payroll tax deposits, bond coupon redemption and automated
teller services.
Business Strategy
- -----------------
Our business strategy is to operate as a well-capitalized, profitable and
independent community-oriented financial institution dedicated to providing
quality customer service. Managements' and the Board of Directors' extensive
knowledge of the Hudson County market differentiates us from our competitors.
Our business strategy incorporates the following elements: maintaining a
community focus, focusing on profitability, continuing our growth, concentrating
on real estate based lending, capitalizing on market dynamics, providing
attentive and personalized service and attracting highly qualified and
experienced personnel.
Maintaining a community focus. Our management and Board of Directors have
strong ties to the Bayonne community. Many members of the management team are
Bayonne natives and are active in the community through non-profit board
membership, local business development organizations, and industry associations.
In addition, our board members are well established professionals and business
people in the Bayonne area. Management and the Board are interested in making a
lasting contribution to the Bayonne community and have succeeded in attracting
deposits and loans through attentive and personalized service.
Focusing on profitability. On an operational basis, we achieved
profitability in our tenth month of operation. For the year ended December 31,
2005, our return on average equity was 16.00% and our return on average assets
was 1.14%. Our earnings per diluted share increased from $0.43 for the year
ended December 31, 2002 to $1.20 for the year ended December 31, 2005, a
compound annual growth rate of 40.8%. We achieved this earnings growth by
focusing on low-cost deposits and by tightly controlling our non-interest
expenses. Management is committed to maintaining profitability by diversifying
the services we offer. We have a mortgage banking division as well as a leasing
division to increase our fee-based income.
Continuing our growth. We have consistently increased our assets. From
December 31, 2002 to December 31, 2005, our assets have increased from $183.1
million to $466.2 million. Over the same time period, our loan balances have
increased from $122.1 million to $284.5 million, while deposits have increased
from $163.5 million to $362.9 million. In addition, we have maintained our asset
quality ratios while growing the loan portfolio. At December 31, 2005, our
non-performing assets to total assets ratio was 0.22%.
2
Concentrating on real estate-based lending. A primary focus of our business
strategy is to originate loans secured by commercial and multi-family
properties. Such loans provide higher returns than loans secured by one- to
four-family real estate. As a result of our underwriting practices, including
debt service requirements for commercial real estate and multi-family loans,
management believes that such loans offer us an opportunity to obtain higher
returns.
Capitalizing on market dynamics. The consolidation of the banking industry
in Hudson County has created the need for a customer focused banking
institution. This consolidation has moved decision making away from local,
community-based banks to much larger banks headquartered outside of New Jersey.
Providing attentive and personalized service. Management believes that
providing attentive and personalized service is the key to gaining deposit and
loan relationships in Bayonne and its surrounding communities. Since inception,
our branches have been open 7 days per week.
Attracting highly experienced and qualified personnel. An important part of
our strategy is to hire bankers who have prior experience in the Hudson County
market as well as pre-existing business relationships. Our management team has
an average of 27 years of banking experience, while our lenders and branch
personnel have significant prior experience at community banks and regional
banks in Hudson County. It is a fundamental belief of management that having
knowledge of the Hudson County market is a critical element in the success of
Bayonne Community Bank. Management's extensive knowledge of the local
communities has allowed us to develop and implement a highly focused and
disciplined approach to lending and has enabled the bank to attract a high
percentage of low cost deposits.
Our Market Area
- ---------------
We are located in the City of Bayonne, Hudson County, New Jersey. The
Bank's locations are easily accessible to provide convenient services to
businesses and individuals throughout our market area.
Our market area includes the city of Bayonne, Jersey City and portions of
Hoboken, New Jersey. These areas are all considered "bedroom" or "commuter"
communities to Manhattan. Our market area is well-served by a network of
arterial roadways including Route 440 and the New Jersey Turnpike.
Our market area has a high level of commercial business activity.
Businesses are concentrated in the service sector and retail trade areas. Major
employers in our market area include Bayonne Medical Center and the Bayonne
Board of Education.
Competition
- -----------
The banking business in New Jersey is extremely competitive. We will
compete for deposits and loans with existing New Jersey and out-of-state
financial institutions that have longer operating histories, larger capital
reserves and more established customer bases. Our competition includes large
financial service companies and other entities in addition to
3
traditional banking institutions such as savings and loan associations, savings
banks, commercial banks and credit unions.
Our larger competitors have a greater ability to finance wide-ranging
advertising campaigns through their greater capital resources. Our marketing
efforts depend heavily upon referrals from officers and directors and
stockholders, selective advertising in local media and direct mail
solicitations. We compete for business principally on the basis of personal
service to customers, customer access to our officers and directors and
competitive interest rates and fees.
In the financial services industry in recent years, intense market demands,
technological and regulatory changes and economic pressures have eroded industry
classifications that were once clearly defined. Banks have been forced to
diversify their services, increase rates paid on deposits and become more cost
effective, as a result of competition with one another and with new types of
financial service companies, including non-banking competitors. Some of the
results of these market dynamics in the financial services industry have been a
number of new bank and non-bank competitors, increased merger activity, and
increased customer awareness of product and service differences among
competitors. These factors could affect our business prospects.
4
Lending Activities
Analysis of Loan Portfolio. Set forth below is selected data relating
to the composition of our loan portfolio by type of loan and in percentage of
the respective portfolio.
At December 31,
---------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
----------------- ----------------- ---------------- ---------------- -----------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Type of loans:
Real estate loans:
One-to four-family $ 34,901 12.11% $ 34,855 13.98% $ 33,913 17.74% $ 25,475 20.64% $ 9,099 20.04%
Construction 28,743 9.98 19,209 7.70 10,009 5.24 4,278 3.47 1,241 2.73
Home equity 24,297 8.43 20,629 8.27 16,825 8.80 14,106 11.43 9,374 20.64
Commercial and multi-family 185,170 64.26 158,755 63.68 115,160 60.25 65,842 53.34 21,883 48.19
Commercial business 14,578 5.06 15,123 6.07 14,048 7.35 12,934 10.48 2,988 6.58
Consumer 456 0.16 744 0.30 1,183 0.62 800 0.64 826 1.82
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total 288,145 100.00% 249,315 100.00% 191,138 100.00% 123,435 100.00% 45,411 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Deferred loan (costs) fees, net 604 429 239 117 26
Allowance for possible loan 3,090 2,506 2,113 1,233 412
-------- -------- -------- -------- --------
losses
Total loans, net $284,451 $246,380 $188,786 $122,085 $ 44,973
======== ======== ======== ======== ========
5
Loan Maturities. The following table sets forth the contractual maturity of
our loan portfolio at December 31, 2005. The amount shown represents outstanding
principal balances. Demand loans, loans having no stated schedule of repayments
and no stated maturity and overdrafts are reported as being due in one year or
less. Variable-rate loans are shown as due at the time of repricing. The table
does not include prepayments or scheduled principal repayments.
Due after 1
Due within through Due after
1 Year 5 Years 5 Years Total
------ ------- ------- -----
(In Thousands)
One-to four-family............ $ 1,071 $ 3,505 $ 30,325 $ 34,901
Construction.................. 27,375 664 704 28,743
Home equity................... 4,116 1,612 18,569 24,297
Commercial and multi-family... 10,620 61,480 113,070 185,170
Commercial business........... 11,738 1,662 1,178 14,578
Consumer...................... 229 227 -- 456
---------- ---------- ---------- ----------
Total amount due.............. $ 55,149 $ 69,150 $ 163,846 $ 288,145
========== ========== ========== ==========
Loans with Predetermined or Floating or Adjustable Rates of Interest. The
following table sets forth the dollar amount of all loans at December 31, 2005
that are due after December 31, 2006, and have predetermined interest rates and
that have floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
One- to four-family ................ $ 30,934 $ 2,896 $ 33,830
Construction ....................... 1,080 288 1,368
Home equity ........................ 20,181 -- 20,181
Commercial and multi-family ........ 108,769 65,781 174,550
Commercial business ................ 2,840 -- 2,840
Consumer ........................... 227 -- 227
------------ ------------ ------------
Total amount due ................... $ 164,031 $ 68,965 $ 232,996
============ ============ ============
Commercial and Multi-family Real Estate Loans. Our commercial and
multi-family real estate loans are secured by commercial real estate (for
example, shopping centers, medical buildings, retail offices) and multi-family
residential units, consisting of five or more units. Permanent loans on
commercial and multi-family properties are generally originated in amounts up to
75% of the appraised value of the property. Our commercial real estate loans are
secured by improved property such as office buildings, retail stores,
warehouses, church buildings and other non-residential buildings. Commercial and
multi-family real estate loans are generally made at rates that adjust above the
five year U.S. Treasury interest rate, with terms of up to 25 years, or are
balloon loans with fixed interest rates which generally mature in three to five
years with principal amortization for a period of up to 30 years. Our largest
commercial loan had a principal balance of $2.6 million at December 31, 2005,
and was secured by a mixed use property comprised of retail and office
facilities. Our largest multi-family loan had a principal balance of $1.5
million at December 31, 2005. Both loans were performing in accordance with
their terms on that date.
Loans secured by commercial and multi-family real estate are generally
larger and involve a greater degree of risk than one- to four-family residential
mortgage loans. The borrower's creditworthiness and the feasibility and cash
flow potential of the project is of
6
primary concern in commercial and multi-family real estate lending. Loans
secured by income properties are generally larger and involve greater risks than
residential mortgage loans because payments on loans secured by income
properties are often dependent on the successful operation or management of the
properties. As a result, repayment of such loans may be subject to a greater
extent than residential real estate loans to adverse conditions in the real
estate market or the economy. We intend to continue emphasizing the origination
of loans secured by commercial real estate and multi-family properties.
One- to Four-Family Lending. Our one- to four-family residential mortgage
loans are secured by property located in the State of New Jersey. We generally
originate one- to four-family residential mortgage loans in amounts up to 80% of
the lesser of the appraised value or selling price of the mortgaged property
without requiring mortgage insurance. We will originate loans with loan to value
ratios up to 90% provided the borrowers obtain private mortgage insurance. We
originate both fixed rate and adjustable rate loans. One- to four-family loans
may have terms of up to 30 years. The majority of one- to four-family loans we
originate for retention in our portfolio have terms no greater than 15 years. We
offer adjustable rate loans with fixed rate periods of up to five years, with
principal and interest calculated using a maximum 30-year amortization period.
We offer these loans with a fixed rate for the first five years with repricing
following every year after the initial period. Adjustable rate loans may adjust
up to 200 basis points annually and 600 basis points over the term of the loan.
In August 2003, through our mortgage banking division, we began to broker for a
third party lender one-to four-family residential loans, which were primarily
fixed rate loans with terms of 30 years. Our loan brokerage activities permit us
to offer customers longer-term fixed rate loans we would not otherwise originate
while providing a source of fee income. During 2005, we brokered $17.1 million
in one-to four-family loans and received $252,000 in fee income from the sale of
such loans.
All of our one- to four-family mortgages include "due on sale" clauses,
which are provisions giving us the right to declare a loan immediately payable
if the borrower sells or otherwise transfers an interest in the property to a
third party.
Property appraisals on real estate securing our single-family residential
loans are made by state certified and licensed independent appraisers approved
by our Board of Directors. Appraisals are performed in accordance with
applicable regulations and policies. At our discretion, we obtain either title
insurance policies or attorneys' certificates of title, on all first mortgage
real estate loans originated. We also require fire and casualty insurance on all
properties securing our one-to four-family loans. We also require the borrower
to obtain flood insurance where appropriate. In some instances, we charge a fee
equal to a percentage of the loan amount commonly referred to as points.
Construction Loans. We offer loans to finance the construction of various
types of commercial and residential property. We originated $35.8 million of
such loans during the year ended December 31, 2005. Construction loans to
builders generally are offered with terms of up to eighteen months and interest
rates are tied to prime rate plus a margin. These loans generally are offered as
adjustable rate loans. We will originate residential construction loans for
individual borrowers and builders, provided all necessary plans and permits are
in order. Construction loan funds are disbursed as the project progresses. At
December 31, 2005, our
7
largest construction loan was $2.2 million, of which $612,000 was disbursed.
This construction loan has been made for the construction of residential
properties. At December 31, 2005 this loan was performing in accordance with its
terms.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction and
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, we may
be required to advance funds beyond the amount originally committed to permit
completion of the project. Additionally, if the estimate of value proves to be
inaccurate, we may be confronted, at or prior to the maturity of the loan, with
a project having a value which is insufficient to assure full repayment.
Home Equity Loans and Home Equity Lines of Credit. We offer home equity
loans and lines of credit that are secured by the borrower's primary residence.
Our home equity loans can be structured as loans that are disbursed in full at
closing or as lines of credit. Home equity loans and lines of credit are offered
with terms up to 15 years. Virtually all of our home equity loans are originated
with fixed rates of interest and home equity lines of credit are originated with
adjustable interest rates tied to the prime rate. Home equity loans and lines of
credit are underwritten under the same criteria that we use to underwrite one-
to four-family loans. Home equity loans and lines of credit may be underwritten
with a loan-to-value ratio of 80% when combined with the principal balance of
the existing mortgage loan. At the time we close a home equity loan or line of
credit, we file a mortgage to perfect our security interest in the underlying
collateral. At December 31, 2005, the outstanding balances of home equity loans
and lines of credit totaled $24.3 million, or 8.4% of our loan portfolio.
Commercial Business Loans. Our commercial business loans are underwritten
on the basis of the borrower's ability to service such debt from income. Our
underwriting standards for commercial business loans include a review of the
applicant's tax returns, financial statements, credit history and an assessment
of the applicant's ability to meet existing obligations and payments on the
proposed loan based on cash flow generated by the applicant's business.
Commercial business loans are generally made to small and mid-sized companies
located within the State of New Jersey. In most cases, we require collateral of
equipment, accounts receivable, inventory, chattel or other assets before making
a commercial business loan. Our largest commercial business loan at December 31,
2005 had a principal balance of $1.3 million and was secured by marketable
equity securities. We have also received personal guarantees from the borrower,
principals of the borrower and a director of BCB Bancorp, Inc.
Commercial business loans generally have higher rates and shorter terms
than one- to four-family residential loans, but they may also involve higher
average balances and a higher risk of default since their repayment generally
depends on the successful operation of the borrower's business.
8
Consumer Loans. We make various types of secured and unsecured consumer
loans and loans that are collateralized by new and used automobiles. Consumer
loans generally have terms of three years to ten years.
Consumer loans are advantageous to us because of their interest rate
sensitivity, but they also involve more credit risk than residential mortgage
loans because of the higher potential for default, the nature of the collateral
and the difficulty in disposing of the collateral.
The following table shows our loan origination, purchase, sale and
repayment activities for the periods indicated.
Years Ended December 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(In thousands)
Beginning of period ................... $249,315 $191,138 $123,435 $ 45,411 $ 1,481
-------- -------- -------- -------- --------
Originations by Type:
Real estate mortgage:
One- to four-family residential .. 4,299 4,103 22,768 20,000 9,318
Construction ..................... 35,765 19,326 6,392 2,737 902
Home equity ...................... 13,998 14,212 9,393 8,711 9,961
Commercial and multi-family ...... 70,471 64,219 62,966 47,676 16,883
Commercial business ................ 8,968 8,628 2,544 10,846 3,022
Consumer ........................... 203 284 924 537 973
-------- -------- -------- -------- --------
Total loans originated ......... 133,704 110,772 104,987 90,507 41,059
-------- -------- -------- -------- --------
Purchases:
Real estate mortgage:
One- to four-family residential .. -- -- -- -- --
Construction ..................... 3,645 4,289 2,223 300 338
Home equity ...................... -- -- -- -- --
Commercial and multi-family ...... -- 8,450 3,207 2,794 5,318
Commercial business ................ 1,000 -- -- -- --
Consumer ........................... -- -- -- -- --
-------- -------- -------- -------- --------
Total loans purchased .......... 4,645 12,739 5,430 3,094 5,656
-------- -------- -------- -------- --------
Sales:
Real estate mortgage:
One- to four-family residential .. -- -- -- -- --
Construction ..................... 1,273 959 -- -- --
Home equity ...................... -- -- -- -- --
Commercial and multi-family ........ -- 788 3,480 1,599 --
Commercial business ................ -- 1,128 -- -- --
Consumer ........................... -- -- -- -- --
-------- -------- -------- -------- --------
Total loans sold ............... 1,273 2,875 3,480 1,599 --
-------- -------- -------- -------- --------
Principal repayments ............... 98,246 62,459 39,234 13,978 2,785
-------- -------- -------- -------- --------
Total reductions ............... 99,519 65,334 42,714 15,577 2,785
-------- -------- -------- -------- --------
Increase (decrease) in other items, net -- -- -- -- --
-------- -------- -------- -------- --------
Net increase ................... 38,830 58,177 67,703 78,024 43,930
-------- -------- -------- -------- --------
Ending balance ................. $288,145 $249,315 $191,138 $123,435 $ 45,411
======== ======== ======== ======== ========
Loan Approval Authority and Underwriting. We establish various lending
limits for executive management and also maintain a loan committee. The loan
committee is comprised of the Chairman of the Board, the President, the Senior
Lending Officer and five non-employee members of the Board of Directors. The
President or the Senior Lending Officer, together with one other loan officer,
have authority to approve applications for real estate loans up to
9
$500,000, other secured loans up to $500,000 and unsecured loans up to $25,000.
The loan committee considers all applications in excess of the above lending
limits and the entire board of directors ratifies all such loans.
Upon receipt of a completed loan application from a prospective borrower, a
credit report is ordered. Income and certain other information is verified. If
necessary, additional financial information may be requested. An appraisal is
required for the underwriting of all one- to four-family loans. We may rely on
an estimate of value of real estate performed by our Senior Lending Officer for
home equity loans or lines of credit of up to $250,000. Appraisals are processed
by state certified independent appraisers approved by the Board of Directors.
An attorney's certificate of title is required on all newly originated real
estate mortgage loans. In connection with refinancing and home equity loans or
lines of credit in amounts up to $250,000, we will obtain a record owner's
search in lieu of an attorney's certificate of title. Borrowers also must obtain
fire and casualty insurance. Flood insurance is also required on loans secured
by property that is located in a flood zone.
Loan Commitments. Written commitments are given to prospective borrowers on
all approved real estate loans. Generally, we honor commitments for up to 60
days from the date of issuance. At December 31, 2005, our outstanding loan
origination commitments totaled $15.0 million, outstanding construction loans in
progress totaled $20.0 million and undisbursed lines of credit totaled $10.2
million.
Non-performing and Problem Assets
- ---------------------------------
Loan Delinquencies. We send a notice of nonpayment to borrowers when their
mortgage loan becomes 15 days past due. If such payment is not received by month
end, an additional notice of nonpayment is sent to the borrower. After 60 days,
if payment is still delinquent, a notice of right to cure default is sent to the
borrower giving 30 additional days to bring the loan current before foreclosure
is commenced. If the loan continues in a delinquent status for 90 days past due
and no repayment plan is in effect, foreclosure proceedings will be initiated.
Loans are reviewed and are placed on a non-accrual status when the loan
becomes more than 120 days delinquent or when, in our opinion, the collection of
additional interest is doubtful. Interest accrued and unpaid at the time a loan
is placed on nonaccrual status is charged against interest income. Subsequent
interest payments, if any, are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectability of the loan. At December 31, 2005, we had $787,000 in
non-accruing loans. Our largest exposure of non-performing loans at that date
consisted of two loans to a borrower, which in the aggregate had a principal
balance of $555,000. The loans comprising this lending relationship are secured
by a commercial building. In January 2005, we had an appraisal completed on the
commercial building. At that time, the property was appraised for $995,000. The
borrower has filed for bankruptcy protection. Consequently, we cannot be assured
that we will not incur a loss on our loans to this borrower. At December 31,
2005, we had two loans totaling $245,000 that were delinquent 90 days or more
and accruing.
10
A loan is considered impaired when it is probable the borrower will not
repay the loan according to the original contractual terms of the loan
agreement. We have determined that first mortgage loans on one-to four-family
properties and all consumer loans represent large groups of smaller-balance
homogeneous loans that are collectively evaluated. Additionally, we have
determined that an insignificant delay (less than 90 days) will not cause a loan
to be classified as impaired and a loan is not impaired during a period of delay
in payment, if we expect to collect all amounts due including interest accrued
at the contractual interest rate for the period of delay. We independently
evaluate all loans identified as impaired. We estimate credit losses on impaired
loans based on the present value of expected cash flows or the fair value of the
underlying collateral if the loan repayment is derived from the sale or
operation of such collateral. Impaired loans, or portions of such loans, are
charged off when we determine that a realized loss has occurred. Until such
time, an allowance for loan losses is maintained for estimated losses. Cash
receipts on impaired loans are applied first to accrued interest receivable
unless otherwise required by the loan terms, except when an impaired loan is
also a nonaccrual loan, in which case the portion of the receipts related to
interest is recognized as income. At December 31, 2005, we had three loans
totaling $705,000 which are classified as impaired and on which loan loss
allowances totaling $214,000 have been established. During 2005, interest income
of $7,000 was recognized on impaired loans.
The following table sets forth delinquencies in our loan portfolio as
of the dates indicated:
At December 31, 2005 At December 31, 2004
----------------------------------------- ------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
------------------- ------------------- ------------------- -------------------
Number Principal Principal Principal Principal
of Balance Number Balance Number Balance Number Balance
Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Real estate mortgage:
One- to four-
family residential ......... -- $ -- 1 $ 79 -- $ -- 1 $ 173
Construction ................ -- -- -- -- -- -- -- --
Home equity ................. -- -- -- -- 1 29 -- --
Commercial and multi-family . -- -- 4 803 -- -- 1 313
-------- -------- -------- -------- -------- -------- -------- --------
Total ....................... -- -- 5 882 1 29 2 486
Commercial business ........... -- -- 1 150 1 123 3 515
Consumer ...................... -- -- -- -- -- -- 1 3
-------- -------- -------- -------- -------- -------- -------- --------
Total delinquent loans . -- $ -- 6 $ 1,032 2 $ 152 6 $ 1,004
======== ======== ======== ======== ======== ======== ======== ========
Delinquent loans to total loans -- --% 0.36% 0.06% 0.40%
======== ======== ======== ======== ========
11
At December 31, 2003 At December 31, 2002
----------------------------------------- ------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
------------------- ------------------- ------------------- -------------------
Number Principal Principal Principal Principal
of Balance Number Balance Number Balance Number Balance
Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Real estate mortgage:
One- to four-
family residential ...... 1 $ 103 -- $ -- -- $ -- -- $ --
Construction .............. -- -- -- -- -- -- -- --
Home equity ............... -- -- -- -- -- -- -- --
Commercial and multi-family -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total ..................... 1 103 -- -- -- -- -- --
Commercial business ......... 3 355 3 386 -- -- 1 67
Consumer .................... -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total delinquent loans 4 $ 458 3 $ 386 -- $ -- 1 $ 67
======== ======== ======== ======== ======== ======== ======== ========
Delinquent loans to total
loans ...................... 0.24% 0.20% --% 0.05%
======== ======== ======== ========
At December 31, 2001
-----------------------------------------
60-89 Days 90 Days or More
------------------- -------------------
Number Principal Principal
of Balance Number Balance
Loans of Loans of Loans of Loans
-------- -------- -------- --------
Real estate mortgage:
One- to four-
family residential ...... -- $ -- -- $ --
Construction .............. -- -- -- --
Home equity ............... -- -- -- --
Commercial and multi-family -- -- -- --
-------- -------- -------- --------
Total ..................... -- -- -- --
Commercial business ......... 1 12 -- --
Consumer .................... 3 14 -- --
-------- -------- -------- --------
Total delinquent loans 4 $ 26 -- $ --
======== ======== ======== ========
Delinquent loans to total
loans ...................... 0.06% --%
======== --------
12
The table below sets forth the amounts and categories of non-performing
assets in the Bank's loan portfolio. Loans are placed on non-accrual status when
the collection of principal and/or interest become doubtful. For all years
presented, Bayonne Community Bank has had no troubled debt restructurings (which
involve forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates). Foreclosed assets
include assets acquired in settlement of loans.
At December 31,
----------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
(Dollars in thousands)
Non-accruing loans:
- -------------------
One- to four-family residential ......... $ -- $ 173 $ -- $ -- $ --
Construction ............................ -- -- -- -- --
Home equity ............................. -- -- -- -- --
Commercial and multi-family ............. 637 313 67 67 --
Commercial business ..................... 150 67 -- -- --
Consumer ................................ -- -- -- -- --
------ ------ ------ ------ ------
Total ................................. 787 553 67 67 --
------ ------ ------ ------ ------
Accruing loans delinquent more than 90 days:
- --------------------------------------------
One- to four-family residential ......... -- -- -- -- --
Construction ............................ -- -- -- -- --
Home equity ............................. -- -- -- -- --
Commercial and multi-family ............. 166 -- 319 -- --
Commercial business ..................... -- 448 -- -- --
Consumer ................................ 79 3 -- -- --
------ ------ ------ ------ ------
Total ................................. 245 451 319 -- --
------ ------ ------ ------ ------
Total non-performing loans ................. 1,032 1,004 386 67 --
Foreclosed assets .......................... -- 6 -- -- --
------ ------ ------ ------ ------
Total non-performing assets ................ $1,032 $1,010 $ 386 $ 67 $ --
====== ====== ====== ====== ======
Total non-performing assets as a percentage 0.22% 0.27% 0.13% 0.04% --%
====== ====== ====== ====== ======
of total assets
Total non-performing loans as a percent
of total loans ........................... 0.36% 0.40% 0.20% 0.05% --%
====== ====== ====== ====== ======
For the year ended December 31, 2005, gross interest income which would
have been recorded had our non-accruing loans been current in accordance with
their original terms amounted to $66,000. We received and recorded $10,000 in
interest income for such loans for the year ended December 31, 2005.
13
The following table sets forth an analysis of the Bank's allowance for loan
losses.
Years Ended December 31,
---------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of period ............... $2,506 $2,113 $1,233 $ 412 $ 30
------ ------ ------ ------ ------
Charge-offs:
- ------------
One- to four-family residential ........... -- -- -- -- --
Construction .............................. -- -- -- -- --
Home equity ............................... -- -- -- -- --
Commercial and multi-family ............... -- -- -- -- --
Commercial business ....................... 522 332 -- 10 --
Consumer .................................. 24 -- -- 12 --
------ ------ ------ ------ ------
Total charge-offs ............................ 546 332 -- 22 --
------ ------ ------ ------ ------
Recoveries ................................... 12 35 -- -- --
------ ------ ------ ------ ------
Net charge-offs .............................. 534 297 -- 22 --
------ ------ ------ ------ ------
Provisions charged to operations ............. 1,118 690 880 843 382
------ ------ ------ ------ ------
Ending balance ............................... $3,090 $2,506 $2,113 $1,233 $ 412
====== ====== ====== ====== ======
Ratio of non-performing assets to total assets
at the end of period ...................... 0.22% 0.27% 0.13% 0.04% --%
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to
loans outstanding during the period ....... 0.20% 0.13% --% 0.03% --%
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to
non-performing loans ...................... 51.74% 29.58% --% 32.84% --%
====== ====== ====== ====== ======
Classified Assets. Our policies provide for a classification system for
problem assets. Under this classification system, problem assets are classified
as "substandard," "doubtful," "loss" or "special mention." An asset is
considered substandard if it is inadequately protected by its current net worth
and paying capacity of the borrower or of the collateral pledged, if any.
Substandard assets include those characterized by the "distinct possibility"
that "some loss" will be sustained if the deficiencies are not corrected. Assets
classified as doubtful have all the weaknesses inherent in those classified
substandard with the added characteristic that the weakness present makes
"collection or liquidation in full" on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as loss are those considered "uncollectible" and of such little value that their
continuance as assets without the establishment of a specific loss reserve is
not warranted, and the loan is charged-off. Assets may be designated special
mention because of potential weaknesses that do not currently warrant
classification in one of the aforementioned categories.
When we classify problem assets, we may establish general allowances for
loan losses in an amount deemed prudent by management. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. A portion of general loss
allowances established to cover possible losses related to assets classified as
substandard or doubtful may be included in determining our regulatory capital.
Specific valuation allowances for loan losses generally do not qualify as
regulatory capital. At December 31, 2005, we had $150,000 in assets classified
as doubtful, $1.0 million in assets classified as substandard and $637,000 in
assets classified as special mention. The loans classified as doubtful and
substandard represent primarily commercial loans secured either by
14
residential real estate, commercial real estate or heavy equipment. The loans
that have been classified substandard were classified as such primarily because
either updated financial information has not been timely provided, or the
collateral underlying the loan is in the process of being revalued.
In addition to loans that have been classified, management has identified a
lending relationship that merits additional scrutiny for reasons unrelated to
the performance of the loans. This borrowing relationship consists of six loans,
which had a total principal balance at December 31, 2005 of $1.8 million. The
largest single loan had a total principal balance at December 31, 2005 of
$402,000. The six loans are secured by mixed-use real estate. The loans in the
aggregate have a loan value ratio of 70%. These loans are currently performing
in accordance with their terms.
Allowances for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the losses that may be incurred
in our loan portfolio. The evaluation, including a review of all loans on which
full collectability of interest and principal may not be reasonably assured,
considers: (1) the risk characteristics of the loan portfolio; (2) current
economic conditions; (3) actual losses previously experienced; (4) the level of
loan growth; and (5) the existing level of reserves for loan losses that are
possible and estimable.
We monitor our allowance for loan losses and make additions to the
allowance as economic conditions dictate. Although we maintain our allowance for
loan losses at a level that we consider adequate for the inherent risk of loss
in our loan portfolio, future losses could exceed estimated amounts and
additional provisions for loan losses could be required. 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.
15
Allocation of the Allowance for Loan Losses. The following table
illustrates the allocation of the allowance for loan losses for each category of
loan. The allocation of the allowance to each category is not necessarily
indicative of future loss in any particular category and does not restrict our
use of the allowance to absorb losses in other loan categories.
At December 31,
----------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------ ----------------- ------------------ ------------------- ------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
each each each each each
Category Category Category Category Category
in Total in Total in Total in Total in Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Type of loan:
One- to four-family .............. $ 76 12.11% $ 78 13.98% $ 105 17.74% $ 64 20.64% $ 52 20.04%
Construction ..................... 329 9.98 217 7.70 125 5.24 53 3.47 16 2.73
Home equity ...................... 91 8.43 82 8.27 50 8.80 64 11.43 70 20.64
Commercial and multi-family ...... 2,180 64.26 1,669 63.68 1,178 60.25 658 53.34 225 48.19
Commercial business .............. 401 5.06 444 6.07 649 7.35 376 10.48 33 6.58
Consumer ......................... 13 0.16 16 0.30 6 0.62 18 0.64 16 1.82
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ........................... $3,090 100.00% $2,506 100.00% $2,113 100.00% $1,233 100.00% $ 412 100.00%
====== ====== ====== ------ ====== ====== ====== ====== ====== ======
16
Allowance for Loan Losses. The following table sets forth information with
respect to our allowance for loan losses:
At or for the year ended December 31,
--------------------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
(Dollars in Thousands)
Total loans outstanding ....... $ 288,145 $ 249,315 $ 191,138 $ 123,435 $ 45,411
========= ========= ========= ========= =========
Average loans outstanding ..... $ 271,405 $ 221,257 $ 155,145 $ 83,734 $ 19,129
========= ========= ========= ========= =========
Allowance balance at beginning
of period ..................... $ 2,506 $ 2,113 $ 1,233 $ 412 $ 30
--------- --------- --------- --------- ---------
Provision:
Real estate loans ............. 630 588 619 476 337
Commercial business ........... 468 92 273 353 31
Consumer ...................... 20 10 (12) 14 14
--------- --------- --------- --------- ---------
Total provision ............. 1,118 690 880 843 382
--------- --------- --------- --------- ---------
Charge-offs:
Real estate loans ............. -- -- -- -- --
Commercial business ........... 522 332 -- 10 --
Consumer ...................... 24 -- -- 12 --
--------- --------- --------- --------- ---------
Total charge-offs ........... 546 332 -- 22 --
--------- --------- --------- --------- ---------
Recoveries:
Real estate loans ............. -- -- -- -- --
Commercial business ........... 11 35 -- -- --
Consumer ...................... 1 -- -- -- --
--------- --------- --------- --------- ---------
Total recoveries ............ 12 35 -- -- --
--------- --------- --------- --------- ---------
Allowance balances at end of
period ........................ $ 3,090 $ 2,506 $ 2,113 $ 1,233 $ 412
========= ========= ========= ========= =========
Allowance for loan losses as a
percent of total loans
outstanding ................... 1.07% 1.01% 1.11% 1.00% 0.91%
========= ========= ========= ========= =========
Net loans charged off as
percent of average loans
outstanding ................... 0.20% 0.13% --% 0.03% --%
========= ========= ========= ========= =========
Investment Activities
- ---------------------
Investment Securities. We are required under federal regulations to
maintain a minimum amount of liquid assets that may be invested in specified
short-term securities and certain other investments. The level of liquid assets
varies depending upon several factors, including: (i) the yields on investment
alternatives, (ii) our judgment as to the attractiveness of the yields then
available in relation to other opportunities, (iii) expectation of future yield
levels, and (iv) our projections as to the short-term demand for funds to be
used in loan origination and other activities. Investment securities, including
mortgage-backed securities, are classified at the time of purchase, based upon
management's intentions and abilities, as securities held-to-maturity or
securities available for sale. Debt securities acquired with the intent and
ability to hold to maturity are classified as held-to-maturity and are stated at
cost and adjusted for amortization of premium and accretion of discount, which
are computed using the level yield method and recognized as adjustments of
interest income. All other debt securities are classified as available for sale
to serve principally as a source of liquidity.
Current regulatory and accounting guidelines regarding investment
securities require us to categorize securities as "held-to-maturity," "available
for sale" or "trading." As of December 31, 2005, we had $140.0 million of
securities classified as "held-to-maturity," and no securities classified as
available for sale or trading. Securities classified as "available for sale" are
reported for financial reporting purposes at the fair market value with net
changes in the
17
market value from period to period included as a separate component of
stockholders' equity, net of income taxes. At December 31, 2005, our securities
classified as held-to-maturity had a market value of $137.8 million. Changes in
the market value of classified as securities held-to-maturity do not affect our
income. Management has the intent and we have the ability to hold securities
classified as held-to-maturity. During the year ended December 31, 2005, we had
securities sales of $7.3 million consisting of mortgage-backed securities and
U.S. Government and agency securities. The sales were made in reliance upon
guidance set forth in SFAS 115 relating to the sale of securities classified as
held-to-maturity, when over 85% of the original principal balance of the
securities had been repaid, or where there was a significant probability of the
securities being called within three months.
At December 31, 2005, our investment policy allowed investments in
instruments such as: (i) U.S. Treasury obligations; (ii) U.S. federal agency or
federally sponsored agency obligations; (iii) mortgage-backed securities; and
(iv) certificates of deposit. The board of directors may authorize additional
investments. At December 31, 2005 our U.S. Government agency securities totaled
$109.1 million, all of which were classified as held-to-maturity and which
primarily consisted of callable securities issued by government sponsored
enterprises.
As a source of liquidity and to supplement our lending activities, we have
invested in residential mortgage-backed securities. Mortgage-backed securities
generally yield less than the loans that underlie such securities because of the
cost of payment guarantees or credit enhancements that reduce credit risk.
Mortgage-backed securities can serve as collateral for borrowings and, through
repayments, as a source of liquidity. Mortgage-backed securities represent a
participation interest in a pool of single-family or other type of mortgages.
Principal and interest payments are passed from the mortgage originators,
through intermediaries (generally government-sponsored enterprises) that pool
and repackage the participation interests in the form of securities, to
investors, like us. The government-sponsored enterprises guarantee the payment
of principal and interest to investors and include Freddie Mac, Ginnie Mae, and
Fannie Mae.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgage loans that have interest
rates that are within a set range and have varying maturities. The underlying
pool of mortgages can be composed of either fixed rate or adjustable rate
mortgage loans. Mortgage-backed securities are generally referred to as mortgage
participation certificates or pass-through certificates. The interest rate risk
characteristics of the underlying pool of mortgages (i.e., fixed rate or
adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
18
Securities Portfolio. The following table sets forth the carrying value of
our securities portfolio and Federal funds at the dates indicated.
At December 31,
------------------------------
2005 2004 2003
-------- -------- --------
(In Thousands)
Securities held to maturity:
U.S. Government and Agency securities $109,090 $ 78,020 $ 71,982
Mortgage-backed securities ........ 30,912 39,016 18,331
-------- -------- --------
Total securities held to maturity 140,002 117,036 90,313
Money market funds .................... 18,500 -- 6,000
FHLB stock ............................ 2,778 944 1,250
-------- -------- --------
Total investment securities ........... $161,280 $117,980 $ 97,563
======== ======== ========
The following table shows our securities held-to-maturity purchase, sale
and repayment activities for the periods indicated.
Years Ended December 31,
---------------------------
2005 2004 2003
------- ------- -------
(In thousands)
Purchases:
Fixed-rate .................. $55,815 $75,823 $75,947
------- ------- -------
Total purchases ........... $55,815 $75,823 $75,947
------- ------- -------
Sales:
Fixed-rate .................. $ 7,345 $ -- $ --
------- ------- -------
Total sales ............... $ 7,345 $ -- $ --
------- ------- -------
Principal Repayments:
Repayment of principal ...... $25,531 $49,112 $36,282
------- ------- -------
Increase in other items, net 27 12 46
------- ------- -------
Net increases ............. $22,966 $26,723 $39,711
======= ======= =======
19
Maturities of Securities Portfolio. The following table sets forth
information regarding the scheduled maturities, carrying values, estimated
market values, and weighted average yields for the Bank's securities portfolio
at December 31, 2005 by contractual maturity. The following table does not take
into consideration the effects of scheduled repayments or the effects of
possible prepayments.
As of December 31, 2005
---------------------------------------------------------------------------------------------------
More than More than five to Total investment
Within one year One to five years ten years More than ten years securities
--------------- ----------------- --------- ------------------- ----------
Carrying Average Carrying Average Carrying Average Carrying Average Market Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
U.S. government agency
securities .................. $ 6,500 4.00% $ 12,999 4.40% $ 47,295 4.97% $ 42,296 5.76% $107,372 $109,090 5.15%
Mortgage-backed securities ..... -- -- 483 6.02 366 6.00 30,063 4.93 30,388 30,912 4.96
FHLB stock ..................... 2,778 5.25 -- -- -- -- -- -- 2,778 2,778 5.25
-------- -------- -------- -------- -------- --------
Total investmentsecurities ... $ 9,278 4.37% $ 13,482 4.46% $ 47,661 4.98% $ 72,359 5.42% $140,538 $142,780 5.11%
======== ======== ======== ======== ======== ======== =
20
Sources of Funds
- ----------------
Our major external source of funds for lending and other investment
purposes are deposits. Funds are also derived from the receipt of payments on
loans and prepayment of loans and maturities of investment securities and
mortgage-backed securities and borrowings. Scheduled loan principal repayments
are a relatively stable source of funds, while deposit inflows and outflows and
loan prepayments are significantly influenced by general interest rates and
market conditions.
Deposits. Consumer and commercial deposits are attracted principally from
within our primary market area through the offering of a selection of deposit
instruments including demand, NOW, savings and club accounts, money market
accounts, and term certificate accounts. Deposit account terms vary according to
the minimum balance required, the time period the funds must remain on deposit,
and the interest rate.
The interest rates paid by us on deposits are set at the direction of our
senior management. Interest rates are determined based on our liquidity
requirements, interest rates paid by our competitors, and our growth goals and
applicable regulatory restrictions and requirements. At December 31, 2005, we
had no brokered deposits.
Deposit Accounts. The following table sets forth the dollar amount of
savings deposits in the various types of deposit programs we offered as of the
dates indicated.
December 31,
-----------------------------------------------------------
2005 2004 2003
----------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Rate(1) Amount Rate(1) Amount Rate(1) Amount
------ -------- ------- -------- ------- --------
(Dollars in thousands)
Demand .................. --% $ 30,143 --% $ 20,557 --% $ 16,626
NOW ..................... 1.36 20,827 1.42 23,155 1.37 17,201
Money market ............ 1.97 1,623 1.98 2,483 2.01 2,163
Savings and club accounts 2.16 167,534 2.20 197,868 2.28 162,832
Certificates of deposit . 3.21 142,724 2.68 93,180 2.51 54,828
-------- -------- --------
Total ............... 2.30% $362,851 2.14% $337,243 2.11% $253,650
======== ======== ========
- ----------
(1) Represents the average rate paid during the year.
The following table sets forth our savings flows during the periods
indicated.
Years Ended December 31,
------------------------------
2005 2004 2003
-------- -------- --------
(Dollars in thousands)
Beginning of period ................. $337,243 $253,650 $163,519
-------- -------- --------
Net deposits ........................ 17,696 77,108 85,873
Interest credited on deposit accounts 7,912 6,485 4,258
-------- -------- --------
Total increase in deposit accounts 25,608 83,593 90,131
-------- -------- --------
Ending balance ...................... $362,851 $337,243 $253,650
======== ======== ========
Percent increase .................... 7.59% 32.96% 55.12%
21
Jumbo Certificates of Deposit. The following table indicates the amount of
our certificates of deposit of $100,000 or more by time remaining until
maturity.
At December 31, 2005
--------------------
Maturity Period (In Thousands)
---------------
Within three months ............... $ 6,451
Three through twelve months ....... 20,371
Over twelve months ................ 32,595
-------
Total ............................. $59,417
=======
The following table presents, by rate category, our certificate of deposit
accounts as of the dates indicated.
At December 31,
-----------------------------------------------------------------
2005 2004 2003
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Certificate of deposit rates:
1.00% - 1.99% .......... $ -- --% $ 2,510 2.69% $ 1,876 3.42%
2.00% - 2.99% .......... 21,056 14.75 48,915 52.50 44,546 81.25
3.00% - 3.99% .......... 59,391 41.61 41,725 44.78 8,406 15.33
4.00% - 4.99% .......... 62,045 43.48 30 0.03 -- --
5.00% - 5.99% .......... 232 0.16 -- -- -- --
6.00% - 6.99% .......... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total ............... $142,724 100.00% $ 93,180 100.00% $ 54,828 100.00%
======== ======== ======== ======== ======== ========
The following table presents, by rate category, the remaining period to
maturity of certificate of deposit accounts outstanding as of December 31, 2005.
Maturity Date
--------------------------------------------------------------
1 Year Over 1 Over 2 Over
or Less to 2 Years to 3 Years 3 Years Total
---------- ---------- ---------- ---------- ----------
(In thousands)
Interest rate:
2.00% - 2.99% .. $ 20,936 $ 86 $ 15 $ 19 $ 21,056
3.00% - 3.99% .. 42,448 13,206 2,990 747 59,391
4.00%-4.99% .... 21,840 11,889 14,871 13,445 62,045
5.00%-5.99% .... 216 16 -- -- 232
---------- ---------- ---------- ---------- ----------
Total ...... $ 85,440 $ 25,197 $ 17,876 $ 14,211 $ 142,724
========== ========== ========== ========== ==========
Borrowings. Our advances from the FHLB of New York are secured by a pledge
of our stock in the FHLB of New York, and investment securities. Each FHLB
credit program has its own interest rate, which may be fixed or adjustable, and
range of maturities. If the need arises, we may also access the Federal Reserve
Bank discount window to supplement our supply of funds that we can loan and to
meet deposit withdrawal requirements. During the years ended December 31, 2005
and 2004, we had average short-term borrowings, consisting of FHLB advances, of
$9.7 million and $23.4 million, respectively, with a weighted average cost of
3.14% and 1.54%, respectively. Our maximum short-term borrowings outstanding
during 2005 and 2004 was $21.4 million and $25.0 million, respectively.
Employees
- ---------
At December 31, 2005, we had 63 full-time and 27 part-time employees. None
of our employees is represented by a collective bargaining group. We believe
that our relationship with our employees is good.
22
Subsidiaries
- ------------
We have two non-bank subsidiaries. BCB Holding Company Investment Corp. was
established in 2004 for the purpose of holding and investing in securities. Only
securities authorized to be purchased by Bayonne Community Bank are held by BCB
Holding Company Investment Corp. At December 31, 2005, this company held $140.0
million in securities.
Our other subsidiary, BCB Equipment Leasing LLC, is a participant in a
joint venture for the purpose of assisting in financing arrangements for
companies entering into equipment leases. The activities of this subsidiary have
been nominal to date. The impact of this subsidiary on our financial condition
and results of operation has not been material.
Supervision and Regulation
- --------------------------
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended to protect
depositors, not shareholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect on the business
and prospects of the Company and the Bank.
Bank Holding Company Regulation
- -------------------------------
As a bank holding company registered under the Bank Holding Company Act,
the Company is subject to the regulation and supervision applicable to bank
holding companies by the Board of Governors of the Federal Reserve System. The
Company is required to file with the Federal Reserve annual reports and other
information regarding its business operations and those of its subsidiaries.
The Bank Holding Company Act requires, among other things, the prior
approval of the Federal Reserve in any case where a bank holding company
proposes to (i) acquire all or substantially all of the assets of any other
bank, (ii) acquire direct or indirect ownership or control of more than 5% of
the outstanding voting stock of any bank (unless it owns a majority of such
company's voting shares) or (iii) merge or consolidate with any other bank
holding company. The Federal Reserve will not approve any acquisition, merger,
or consolidation that would have a substantially anti-competitive effect, unless
the anti-competitive impact of the proposed transaction is clearly outweighed by
a greater public interest in meeting the convenience and needs of the community
to be served. The Federal Reserve also considers capital adequacy and other
financial and managerial resources and future prospects of the companies and the
banks concerned, together with the convenience and needs of the community to be
served, when reviewing acquisitions or mergers.
The Bank Holding Company Act generally prohibits a bank holding company,
with certain limited exceptions, from (i) acquiring or retaining direct or
indirect ownership or control of more than 5% of the outstanding voting stock of
any company which is not a bank or bank holding company, or (ii) engaging
directly or indirectly in activities other than those of banking, managing or
controlling banks, or performing services for its subsidiaries, unless such
non-
23
banking business is determined by the Federal Reserve to be so closely related
to banking or managing or controlling banks as to be properly incident thereto.
The Bank Holding Company Act has been amended to permit bank holding
companies and banks, which meet certain capital, management and Community
Reinvestment Act standards, to engage in a broader range of non-banking
activities. In addition, bank holding companies which elect to become financial
holding companies may engage in certain banking and non-banking activities
without prior Federal Reserve approval. Finally, the Financial Modernization Act
imposes certain privacy requirements on all financial institutions and their
treatment of consumer information. At this time, the Company has elected not to
become a financial holding company, as it does not engage in any activities not
permissible for banks.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution is in danger of default. Under a policy of the Federal Reserve with
respect to bank holding company operations, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. The Federal Reserve
also has the authority under the Bank Holding Company Act to require a bank
holding company to terminate any activity or to relinquish control of a non-bank
subsidiary upon the Federal Reserve's determination that such activity or
control constitutes a serious risk to the financial soundness and stability of
any bank subsidiary of the bank holding company.
Capital Adequacy Guidelines for Bank Holding Companies
- ------------------------------------------------------
The Federal Reserve has adopted risk-based capital guidelines for bank
holding companies. The risk-based capital guidelines are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, to account for off-balance sheet
exposure, and to minimize disincentives for holding liquid assets. Under these
guidelines, assets and off-balance sheet items are assigned to broad risk
categories each with appropriate weights. The resulting capital ratios represent
capital as a percentage of total risk-weighted assets and off-balance sheet
items.
The minimum ratio of total capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) is 8%.
At least 4% of the total capital is required to be "Tier I Capital," consisting
of common shareholders' equity and qualifying preferred stock, less certain
goodwill items and other intangible assets. The remainder ("Tier II Capital")
may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted
assets, (b) non-qualifying preferred stock, (c) hybrid capital instruments, (d)
perpetual debt, (e) mandatory convertible securities, and (f) qualifying
subordinated debt and intermediate-term preferred stock up to 50% of Tier I
capital. Total capital is the sum of Tier I and Tier II capital less reciprocal
holdings of other banking organizations' capital instruments, investments in
unconsolidated subsidiaries and any other deductions as determined by the
Federal Reserve (determined on a case by case basis or as a matter of policy
after formal rule-making).
24
Bank holding company assets are given risk-weights of 0%, 20%, 50% and
100%. In addition, certain off-balance sheet items are given similar credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for performing first mortgage loans fully secured by residential property which
carry a 50% risk-weighting and loans secured by deposits in the Bank which carry
a 20% risk-weighting. Most investment securities (including, primarily, general
obligation claims of states or other political subdivisions of the United
States) are assigned to the 20% category, except for municipal or state revenue
bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury
or obligations backed by the full faith and credit of the U.S. Government, which
have a 0% risk-weight. In converting off-balance sheet items, direct credit
substitutes including general guarantees and standby letters of credit backing
financial obligations are given a 100% risk-weighting. Transaction related
contingencies such as bid bonds, standby letters of credit backing nonfinancial
obligations, and undrawn commitments (including commercial credit lines with an
initial maturity of more than one year) have a 50% risk-weighting. Short-term
commercial letters of credit have a 20% risk-weighting and certain short-term
unconditionally cancelable commitments have a 0% risk-weighting.
In addition to the risk-based capital guidelines, the Federal Reserve has
adopted a minimum Tier I capital (leverage) ratio, under which a bank holding
company must maintain a minimum level of Tier I capital to average total
consolidated assets of at least 3% in the case of a bank holding company that
has the highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a leverage ratio of at least 100 to 200 basis points above the
stated minimum.
Bank Regulation
- ---------------
As a New Jersey-chartered commercial bank, the Bank is subject to the
regulation, supervision, and examination of the New Jersey Department of Banking
and Insurance. As an FDIC-insured institution, we are subject to the regulation,
supervision and examination of the FDIC, an agency of the federal government.
The regulations of the FDIC and the New Jersey Department of Banking and
Insurance impact virtually all of our activities, including the minimum level of
capital we must maintain, our ability to pay dividends, our ability to expand
through new branches or acquisitions and various other matters.
Insurance of Deposits. Our deposits are insured up to a maximum of $100,000
per depositor under the Bank Insurance Fund of the FDIC. The FDIC has
established a risk-based assessment system for all insured depository
institutions. Under the risk-based assessment system, deposit insurance premium
rates range from 0-27 basis points of assessed deposits.
On February 15, 2006, federal legislation to reform federal deposit
insurance was signed into law. This law requires, among other things, the merger
of the Savings Association Insurance Fund and the Bank Insurance Fund into a
unified insurance deposit fund, an increase in the amount of federal deposit
insurance coverage from $100,000 to $130,000 (with a cost of living adjustment
to become effective in five years), and the reserve ratio to be modified to
provide for a range between 1.15% and 1.50% of estimated insured deposits. The
law requires the FDIC to issue implementing regulations and the changes required
by the law will not become
25
effective until final regulations have been issued, which must be no later than
270 days from February 15, 2006.
Capital Adequacy Guidelines. The FDIC has promulgated risk-based capital
guidelines, which are designed to make regulatory capital requirements more
sensitive to differences in risk profile among banks, to account for off-balance
sheet exposure, and to minimize disincentives for holding liquid assets. Under
these guidelines, assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items. These guidelines are substantially similar to the Federal Reserve
guidelines discussed above.
In addition to the risk-based capital guidelines, the FDIC has adopted a
minimum Tier 1 capital (leverage) ratio. This measurement is substantially
similar to the Federal Reserve leverage capital measurement discussed above. At
December 31, 2005, the Bank's ratio of total capital to risk-weighted assets was
12.62%. Our Tier 1 capital to risk-weighted assets was 11.59%, and our Tier 1
capital to average assets was 7.75%.
Dividends. The Bank may pay dividends as declared from time to time by the
Board of Directors out of funds legally available, subject to certain
restrictions. Under the New Jersey Banking Act of 1948, the Bank may not pay a
cash dividend unless, following the payment, the Bank's capital stock will be
unimpaired and the Bank will have a surplus of no less than 50% of the Bank
capital stock or, if not, the payment of the dividend will not reduce the
surplus. In addition, the Bank cannot pay dividends in amounts that would reduce
the Bank's capital below regulatory imposed minimums.
The USA PATRIOT Act
- -------------------
In response to the terrorist events of September 11, 2001, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on
October 26, 2001. The USA PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. For years, financial institutions such as the Bank have
been subject to federal anti-money laundering obligations. As such, the bank
does not believe the USA PATRIOT Act will have a material impact on its
operations.
Sarbanes-Oxley Act of 2002
- --------------------------
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), contains a broad range
of legislative reforms intended to address corporate and accounting fraud. In
addition to the establishment of a new accounting oversight board that will
enforce auditing, quality control and independence standards and will be funded
by fees from all publicly traded companies, Sarbanes-Oxley places certain
restrictions on the scope of services that may be provided by accounting firms
to their public company audit clients. Any non-audit services being provided to
a public company audit client will require preapproval by the company's audit
committee. In addition, Sarbanes-Oxley makes certain changes to the requirements
for audit partner rotation after a period of time. Sarbanes-Oxley requires chief
executive officers and chief financial
26
officers, or their equivalent, to certify to the accuracy of periodic reports
filed with the Securities and Exchange Commission, subject to civil and criminal
penalties if they knowingly or willingly violate this certification requirement.
The Company's Chief Executive Officer and Chief Financial Officer have signed
certifications to this Form 10-K as required by Sarbanes-Oxley. In addition,
under Sarbanes-Oxley, counsel will be required to report evidence of a material
violation of the securities laws or a breach of fiduciary duty by a company to
its chief executive officer or its chief legal officer, and, if such officer
does not appropriately respond, to report such evidence to the audit committee
or other similar committee of the board of directors or the board itself.
Under Sarbanes-Oxley, longer prison terms will apply to corporate
executives who violate federal securities laws; the period during which certain
types of suits can be brought against a company or its officers is extended; and
bonuses issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading the company's
securities during retirement plan "blackout" periods, and loans to company
executives (other than loans by financial institutions permitted by federal
rules and regulations) are restricted. In addition, a provision directs that
civil penalties levied by the Securities and Exchange Commission as a result of
any judicial or administrative action under Sarbanes-Oxley be deposited to a
fund for the benefit of harmed investors. The Federal Accounts for Investor
Restitution provision also requires the Securities and Exchange Commission to
develop methods of improving collection rates. The legislation accelerates the
time frame for disclosures by public companies, as they must immediately
disclose any material changes in their financial condition or operations.
Directors and executive officers must also provide information for most changes
in ownership in a company's securities within two business days of the change.
Sarbanes-Oxley also increases the oversight of, and codifies certain
requirements relating to, audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit Committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a "financial expert"
(as such term is defined by the Securities and Exchange Commission) and if not,
why not. Under Sarbanes-Oxley, a company's registered public accounting firm is
prohibited from performing statutorily mandated audit services for a company if
such company's chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions had been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. Sarbanes-Oxley also
prohibits any officer or director of a company or any other person acting under
their direction from taking any action to fraudulently influence, coerce,
manipulate or mislead any independent accountant engaged in the audit of the
company's financial statements for the purpose of rendering the financial
statements materially misleading. Sarbanes-Oxley also requires the Securities
and Exchange Commission to prescribe rules requiring inclusion of any internal
control report and assessment by management in the annual report to
shareholders. Sarbanes-Oxley requires the company's registered public accounting
firm that issues the audit report to attest to and report on management's
assessment of the company's internal controls.
27
Under Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to
conduct a comprehensive review and assessment of the adequacy of our existing
financial systems and controls at December 31, 2007, and our auditors must
attest to our assessment. This is expected to result in additional expenses in
2006 and 2007.
AVAILABILITY OF ANNUAL REPORT
Our Annual Report is available on our website, www.bcbbancorp.com. We
------------------
will also provide our Annual Report on Form 10-K free of charge to shareholders
who write to the Corporate Secretary at 104-110 Avenue C, Bayonne, New Jersey
07002.
ITEM 1A. RISK FACTORS
- ---------------------
Risks Associated with our Business
Our loan portfolio consists of a high percentage of loans secured by commercial
real estate and multi-family real estate. These loans are riskier than loans
secured by one- to four-family properties.
At December 31, 2005, $185.2 million, or 64.3% of our loan portfolio
consisted of commercial and multi-family real estate loans. We intend to
continue to emphasize the origination of these types of loans. These loans
generally expose a lender to greater risk of nonpayment and loss than one- to
four-family residential mortgage loans because repayment of the loans often
depends on the successful operation and income stream of the borrower's
business. Such loans typically involve larger loan balances to single borrowers
or groups of related borrowers compared to one- to four-family residential
mortgage loans. Consequently, an adverse development with respect to one loan or
one credit relationship can expose us to a significantly greater risk of loss
compared to an adverse development with respect to a one- to four-family
residential mortgage loan.
We may not be able to successfully maintain and manage our growth.
Since December 31, 2002, our assets have grown at a compound annual growth
rate of 36.6%, our loan balances have grown at a compound annual growth rate of
32.6% and our deposits have grown at a compound annual growth rate of 30.4%. We
intend to use a portion of the proceeds of our recently completed stock offering
to support further growth of our assets and deposits and the number of branches
we operate. Our ability to continue to grow depends, in part, upon our ability
to expand our market presence, successfully attract core deposits, and identify
attractive commercial lending opportunities.
We cannot be certain as to our ability to manage increased levels of assets
and liabilities. We may be required to make additional investments in equipment
and personnel to manage higher asset levels and loans balances, which may
adversely impact our efficiency ratio, earnings and shareholder returns.
28
If our allowance for loan losses is not sufficient to cover actual loan losses,
our earnings could decrease.
Our loan customers may not repay their loans according to the terms of
their loans, and the collateral securing the payment of their loans may be
insufficient to assure repayment. We may experience significant credit losses,
which could have a material adverse effect on our operating results. We make
various assumptions and judgments about the collectability of our loan
portfolio, including the creditworthiness of our borrowers and the value of the
real estate and other assets serving as collateral for the repayment of many of
our loans. In determining the amount of the allowance for loan losses, we review
our loans and our loss and delinquency experience, and we evaluate economic
conditions. If our assumptions prove to be incorrect, our allowance for loan
losses may not cover inherent losses in our loan portfolio at the date of the
financial statements. Material additions to our allowance would materially
decrease our net income. At December 31, 2005, our allowance for loan losses
totaled $3.1 million, representing 1.07% of total loans.
While we have only been operating for five years, we have experienced
significant growth in our loan portfolio, particularly our loans secured by
commercial real estate. Although we believe we have underwriting standards to
manage normal lending risks, and although we had $1.0 million, or 0.22% of total
assets consisting of non-performing assets at December 31, 2005, it is difficult
to assess the future performance of our loan portfolio due to the relatively
recent origination of many of these loans. We can give you no assurance that our
non-performing loans will not increase or that our non-performing or delinquent
loans will not adversely affect our future performance.
In addition, federal and state regulators periodically review our allowance
for loan losses and may require us to increase our allowance for loan losses or
recognize further loan charge-offs. Any increase in our allowance for loan
losses or loan charge-offs as required by these regulatory agencies could have a
material adverse effect on our results of operations and financial condition.
We depend primarily on net interest income for our earnings rather than fee
income.
Net interest income is the most significant component of our operating
income. We do not rely on traditional sources of fee income utilized by some
community banks, such as fees from sales of insurance, securities or investment
advisory products or services. For the years ended December 31, 2005 and 2004,
our net interest income was $15.9 million and $13.8 million, respectively. The
amount of our net interest income is influenced by the overall interest rate
environment, competition, and the amount of interest earning assets relative to
the amount of interest bearing liabilities. In the event that one or more of
these factors were to result in a decrease in our net interest income, we do not
have significant sources of fee income to make up for decreases in net interest
income.
29
Fluctuations in interest rates could reduce our profitability.
We realize income primarily from the difference between the interest we
earn on loans and investments and the interest we pay on deposits and
borrowings. The interest rates on our assets and liabilities respond differently
to changes in market interest rates, which means our interest-bearing
liabilities may be more sensitive to changes in market interest rates than our
interest-earning assets, or vice versa. In either event, if market interest
rates change, this "gap" between the amount of interest-earning assets and
interest-bearing liabilities that reprice in response to these interest rate
changes may work against us, and our earnings may be negatively affected.
We are unable to predict fluctuations in market interest rates, which are
affected by, among other factors, changes in the following:
o inflation rates;
o business activity levels;
o money supply; and
o domestic and foreign financial markets.
The value of our investment portfolio and the composition of our deposit
base are influenced by prevailing market conditions and interest rates. Our
asset-liability management strategy, which is designed to mitigate the risk to
us from changes in market interest rates, may not prevent changes in interest
rates or securities market downturns from reducing deposit outflow or from
having a material adverse effect on our results of operations, our financial
condition or the value of our investments.
Adverse events in New Jersey, where our business is concentrated, could
adversely affect our results and future growth.
Our business, the location of our branches and the real estate
collateralizing our real estate loans are concentrated in New Jersey. As a
result, we are exposed to geographic risks. The occurrence of an economic
downturn in New Jersey, or adverse changes in laws or regulations in New Jersey
could impact the credit quality of our assets, the business of our customers and
our ability to expand our business.
Our success significantly depends upon the growth in population, income
levels, deposits and housing in our market area. If the communities in which we
operate do not grow or if prevailing economic conditions locally or nationally
are unfavorable, our business may be negatively affected. In addition, the
economies of the communities in which we operate are substantially dependent on
the growth of the economy in the State of New Jersey. To the extent that
economic conditions in New Jersey are unfavorable or do not continue to grow as
projected, the economy in our market area would be adversely affected. Moreover,
we cannot give any
30
assurance that we will benefit from any market growth or favorable economic
conditions in our market area if they do occur.
In addition, the market value of the real estate securing loans as
collateral could be adversely affected by unfavorable changes in market and
economic conditions. As of December 31, 2005, approximately 94.8% of our total
loans were secured by real estate. Adverse developments affecting commerce or
real estate values in the local economies in our primary market areas could
increase the credit risk associated with our loan portfolio. In addition,
substantially all of our loans are to individuals and businesses in New Jersey.
Our business customers may not have customer bases that are as diverse as
businesses serving regional or national markets. Consequently, any decline in
the economy of our market area could have an adverse impact on our revenues and
financial condition. In particular, we may experience increased loan
delinquencies, which could result in a higher provision for loan losses and
increased charge-offs. Any sustained period of increased non-payment,
delinquencies, foreclosures or losses caused by adverse market or economic
conditions in our market area could adversely affect the value of our assets,
revenues, results of operations and financial condition.
We operate in a highly regulated environment and may be adversely affected by
changes in federal, state and local laws and regulations.
We are subject to extensive regulation, supervision and examination by
federal and state banking authorities. Any change in applicable regulations or
federal, state or local legislation could have a substantial impact on us and
our operations. Additional legislation and regulations that could significantly
affect our powers, authority and operations may be enacted or adopted in the
future, which could have a material adverse effect on our financial condition
and results of operations. Further, regulators have significant discretion and
authority to prevent or remedy unsafe or unsound practices or violations of laws
by banks and bank holding companies in the performance of their supervisory and
enforcement duties. The exercise of regulatory authority may have a negative
impact on our results of operations and financial condition.
Like other bank holding companies and financial institutions, we must
comply with significant anti-money laundering and anti-terrorism laws. Under
these laws, we are required, among other things, to enforce a customer
identification program and file currency transaction and suspicious activity
reports with the federal government. Government agencies have substantial
discretion to impose significant monetary penalties on institutions which fail
to comply with these laws or make required reports. Because we operate our
business in the highly urbanized greater Newark/New York City metropolitan area,
we may be at greater risk of scrutiny by government regulators for compliance
with these laws.
We expect to incur additional expense in connection with our compliance with
Sarbanes-Oxley.
Under Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to
conduct a comprehensive review and assessment of the adequacy of our existing
financial systems and controls at December 31, 2007, and our auditors must
attest to our assessment. This is expected to result in additional expenses in
2006 and 2007. Moreover, a review of our financial systems
31
and controls may uncover deficiencies in existing systems and controls. If that
is the case, we would have to take the necessary steps to correct any
deficiencies, which may be costly and may strain our management resources and
negatively impact earnings. We also would be required to disclose any such
deficiencies, which could adversely affect the market price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
- -----------------------------------
None.
ITEM 2. PROPERTIES
- --------------------
At December 31, 2005, we conducted our business from our executive office
located at 104-110 Avenue C, Bayonne, New Jersey, and our two branch offices,
both of which are located in Bayonne. The aggregate book value of our premises
and equipment was $5.5 million at December 31, 2005. We own our executive office
facility and lease our two branch offices. In August 2005, we entered into a
lease for a future branch facility to be located in Hoboken, New Jersey. This
facility is expected to open for business during the second quarter of 2006.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
We are involved, from time to time, as plaintiff or defendant in various
legal actions arising in the normal course of its business. At December 31,
2005, we were not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
- --------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------
On December 14, 2005, BCB Bancorp, Inc. began trading on the Nasdaq
National Market under the symbol "BCBP." In order to list common stock on the
Nasdaq National Market, the presence of at least three registered and active
market makers is required and BCB Bancorp, Inc. has at least three market
makers. BCB Bancorp, Inc. common stock was previously traded on the Over the
Counter Electronic Bulletin Board under the symbol "BCBP."
The following table sets forth the high and low bid quotations for BCB
Bancorp, Inc. common stock for the periods indicated. No cash dividends have
been paid on the common stock to date. These quotations represent prices between
dealers and do not include retail markups, markdowns, or commissions and do not
reflect actual transactions. The information presented reflects common stock
dividends paid by the Company on January 29, 2003, of 10%, November 17, 2003, of
10%, November 22, 2004, of 25% and October 27, 2005, of 25%. As of
32
December 31, 2005, there were 4,999,236 shares of BCB Bancorp, Inc. common stock
issued and outstanding. At December 31, 2005, BCB Bancorp, Inc. had
approximately 1,562 stockholders of record.
Cash Dividend
Fiscal 2005 High Bid Low Bid Declared
- --------------------------------------------------------------------------------------------------
Quarter Ended December 31, 2005............. $ 19.49 $ 14.60 $ --
Quarter Ended September 30, 2005............ 17.12 15.40 --
Quarter Ended June 30, 2005................. 15.80 14.00 --
Quarter Ended March 31, 2005................ 16.80 14.92 --
Cash Dividend
Fiscal 2004 High Bid Low Bid Declared
- --------------------------------------------------------------------------------------------------
Quarter Ended December 31, 2004............. $ 16.26 $ 12.32 $ --
Quarter Ended September 30, 2004............ 12.80 11.36 --
Quarter Ended June 30, 2004................. 17.58 11.04 --
Quarter Ended March 31, 2004................ 17.92 13.44 --
On April 27, 2005, our Board of Directors approved a stock repurchase
program for the repurchase of up to 149,677 shares (approximately 187,096 shares
on a split-adjusted basis) of our common stock. To date, we have repurchased
41,053 shares (approximately 51,316 shares on a split-adjusted basis) of our
common stock, including 23,838 shares on a split adjusted basis during the
fourth quarter of 2005. Please see "ITEM I-- Business-- Recent Events" for a
description of the use of proceeds from our offering.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- ----------------------------------------------
The following tables set forth selected consolidated historical financial
and other data of BCB Bancorp, Inc. at and for December 31, 2005, 2004 and 2003,
and for Bayonne Community Bank at and for years prior to December 31, 2003. The
information is derived in part from, and should be read together with, the
audited Consolidated Financial Statements and Notes thereto of BCB Bancorp, Inc.
Per share data has been adjusted for all periods to reflect the 25% and 10%
common stock dividends paid by the Company and Bank.
Selected financial condition data at December 31,
---------------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
(In thousands)
Total assets ...................... $ 466,242 $ 378,289 $ 300,676 $ 183,108 $ 113,224
Cash and cash equivalents ......... 25,147 4,534 11,786 5,144 27,168
Securities, held to maturity ...... 140,002 117,036 90,313 50,602 38,562
Loans receivable .................. 284,451 246,380 188,786 122,085 44,973
Deposits .......................... 362,851 337,243 253,650 163,519 101,749
Borrowings ........................ 54,124 14,124 25,000 -- --
Stockholders' equity .............. 47,847 26,036 21,167 18,772 11,303
Selected operating data for the year ended December 31,
---------------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
(In thousands, except for per share amounts)
Net interest income ............... $ 15,920 $ 13,755 $ 9,799 $ 5,960 $ 1,787
Provision for loan losses ......... 1,118 690 880 843 382
Non-interest income ............... 878 623 480 336 152
Non-interest expense .............. 8,206 7,661 5,390 3,272 2,006
Income tax (benefit) .............. 2,745 2,408 1,614 872 (173)
--------- --------- --------- --------- ---------
Net income (loss) ................. $ 4,729 $ 3,619 $ 2,395 $ 1,309 $ (276)
========= ========= ========= ========= =========
Net income (loss) per share:
Basic .......................... $ 1.25 $ 0.97 $ 0.67 $ 0.43 $ (0.14)
--------- --------- --------- --------- ---------
Diluted ........................ $ 1.20 $ 0.93 $ 0.64 $ 0.43 $ (0.14)
--------- --------- --------- --------- ---------
33
At or for the Years Ended December 31,
------------------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
Selected Financial Ratios and Other Data:
Return on average assets (ratio of net
income to average total assets) ....... 1.14% 1.01% 1.03% 0.86% (0.38)%
Return on average stockholders' equity
(ratio of net income to average
stockholders' equity) ................. 16.00 15.45 11.97 8.68 (3.28)
Non-interest income to average assets ... 0.21 0.17 0.21 0.22 0.21
Non-interest expense to average assets .. 1.98 2.15 2.32 2.16 2.77
Net interest rate spread during the
period ................................ 3.69 3.73 4.03 3.60 1.97
Net interest margin (net interest income
to average interest earning assets) ... 3.98 3.96 4.34 4.03 2.59
Ratio of average interest-earning assets
to average interest-bearing liabilities 112.33 111.63 116.42 118.87 118.73
Asset Quality Ratios:
Non-performing loans to total loans at
end of period ......................... 0.36 0.40 0.20 0.05 --
Allowance for loan losses to
non-performing loans at end of period . 299.42 249.60 547.48 1,840.73 --
Allowance for loan losses to total loans
at end of period ...................... 1.07 1.01 1.11 1.00 0.91
Capital Ratios:
Stockholders' equity to total assets at
end of period ......................... 10.26 6.88 7.04 10.25 9.98
Average stockholders' equity to average
total assets .......................... 7.14 6.57 8.62 9.94 11.61
Tier 1 capital to average assets ........ 7.75 7.75 7.02 10.25 9.98
Tier 1 capital to risk weighted assets .. 11.59 11.84 10.47 15.01 15.09
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- --------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
General
- -------
BCB Bancorp, Inc., completed its acquisition of Bayonne Community Bank on
May 1, 2003. Information at and for the twelve months ended December 31, 2003
reflects the consolidated financial information of BCB Bancorp Inc. Prior to the
completion of the acquisition, BCB Bancorp, Inc. had no assets, liabilities or
operations. Consequently the information provided below at and for the years
ended December 31, 2002 and prior is for Bayonne Community Bank on a stand-alone
basis.
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.
34
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.
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
35
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.
Stock Options
The Company had, through December 31, 2005, the choice to account for stock
options using either Accounting Principles Board Opinion No. 25 ("APB 25") or
SFAS No. 123, "Accounting for Stock-Based Compensation." For the year ended
December 31, 2005, the Company has elected to use the accounting method under
APB 25 and the related interpretations to account for its stock options. Under
APB 25, generally, when the exercise price of the Company's stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized. On December 14, 2005, the Board of Directors of the
Company approved the accelerated vesting and exercisability of all unvested and
unexercisable stock options granted as a part of the 2003 and 2002 Stock Option
Plans effective December 20, 2005. Had the Company elected to use SFAS No. 123
to account for its stock options under the fair value method, it would have been
required to record compensation expense and, as a result, diluted earnings per
share for the fiscal years ended December 31, 2005 and 2004 would have been
lower by $0.32 and $0.14 respectively. No stock options were granted prior to
2002. See Note 2 to "Notes to Consolidated Financial Statements." Effective
January 1, 2006, the Company will have to account for stock options pursuant to
SFAS No. 123 (revised 2004). The acceleration of vesting was done primarily to
avoid the recording of compensation expense in future years. See discussions
under Recent Accounting Pronouncements for our analysis of the impact of SFAS
No. 123 (revised 2004) on current and future operations.
Financial Condition
- -------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
Comparison at December 31, 2005 and at December 31, 2004
Since we commenced operations in 2000 we have sought to grow our assets and
deposit base consistent with our capital requirements. We offer competitive loan
and deposit products and seek to distinguish ourselves from our competitors
through our service and availability. Total assets increased by $87.9 million or
23.2% to $466.2 million at December 31, 2005 from $378.3 million at December 31,
2004 as the Company continued to grow the Bank's balance sheet with loans and
securities funded primarily through growth in the Bank's deposit base, the
utilization of wholesale funding sources, specifically Federal Home Loan Bank
advances and the net proceeds from our offering of common stock in December
2005.
Total cash and cash equivalents increased by $20.6 million or 457.8% to
$25.1 million at December 31, 2005 from $4.5 million at December 31, 2004 as the
Company, reflecting the successful completion of our recent offering of common
stock, and the attractiveness of liquid investments during the current flat
yield curve environment. Securities held-to-maturity increased by $23.0 million
or 19.7% to $140.0 million at December 31, 2005 from $117.0
36
million at December 31, 2004. The increase was primarily attributable to the
purchase of $55.8 million of callable agency securities partially offset by call
options exercised on $18.8 million of callable agency securities, sales of $6.0
million of callable agency securities and $1.3 million of mortgage backed
securities and $6.8 million of repayments and prepayments in the mortgage backed
securities portfolio during the year ended December 31, 2005. As the Company's
securities are exclusively categorized as held-to-maturity, the Bank relied on
an explanatory portion of Financial Accounting Standards Board Statement No. 115
(FASB 115) to engage in the specific sales of agency securities.
Specifically, FASB 115 recognizes sales of debt securities that meet either
of the following two conditions as maturities for purposes of the classification
of securities.
a. The sale of a security occurs near enough to its maturity date (or
call date if exercise of the call is probable) that interest rate risk
is substantially eliminated as a pricing factor. That is, the date of
sale is so near the maturity or call date (for example, within three
months) that changes in market interest rates would not have a
significant effect on the security's fair value.
b. The sale of a security occurs after the enterprise has already
collected a substantial portion (at least 85 percent) of the principal
outstanding at acquisition due either to prepayments on the debt
security or to scheduled payments on a debt security payable in equal
installments (both principal and interest) over its term.
In the case of the sale of the agency debt securities, FASB 115 was
satisfied because the sales of the debt securities occurred near enough to their
call dates, with the calls being probable, that interest rate risk was
substantially eliminated. In the case of the sale of the mortgage backed
securities, a substantial portion (over 85 percent) of the principal outstanding
at acquisition had been collected.
Loans receivable increased by $38.1 million or 15.5% to $284.5 million at
December 31, 2005 from $246.4 million at December 31, 2004. The increase
resulted primarily from a $36.0 million increase in real estate mortgages
comprising residential, commercial and construction loans, net of amortization,
and a $3.4 million increase in consumer loans, net of amortization, partially
offset by a $545,000 decrease in commercial loans consisting primarily of
business loans and commercial lines of credit and a $584,000 increase in the
allowance for loan losses. At December 31, 2005, the allowance for loan losses
was $3.1 million. The growth in loans receivable was primarily attributable to
competitive pricing in a lower than normal interest rate environment and a
vibrant local economy where real estate construction and rehabilitation remain
strong.
Deposit liabilities increased by $25.7 million or 7.6% to $362.9 million at
December 31, 2005 from $337.2 million at December 31, 2004. The increase
resulted primarily from an increase of $49.5 million or 53.1% in time deposits
to $142.7 million from $93.2 million and an increase of $6.4 million or 13.9% in
demand deposits to $52.6 million from $46.2 million, partially offset by a
decrease of $30.4 million or 15.4% in savings and club accounts to $167.5
37
million from $197.9 million. The decrease in savings and club account balances
resulted primarily from internal disintermediation brought on by the series of
Federal Open Market Committee short-term interest rate increases and the
increasingly competitive local market for deposit growth. The Bank has been able
to achieve these growth rates through competitive pricing on select deposit
products.
Borrowed money increased by $40.0 million or 283.7% to $54.1 million at
December 31, 2005 from $14.1 million at December 31, 2004. The increase in
borrowings reflects the use of long-term Federal Home Loan Bank advances to
augment deposits as the Bank's funding source for originating loans and
investing in Government Sponsored Enterprise (GSE) investment securities. During
July and August 2005, we obtained $50.0 million in long-term, fixed rate
advances from the Federal Home Loan Bank. Borrowings were at an average interest
rate of 3.37% with a final maturity of ten years, callable after one year.
Total stockholders' equity increased by $21.8 million or 83.8% to $47.8
million at December 31, 2005 from $26.0 million at December 31, 2004. The
increase primarily reflects the completion of our common stock offering which
raised $17.9 million in additional capital, as well as net income for the year
ended December 31, 2005 of $4.7 million. The net proceeds from the stock
offering will be used for lending and investment activity as well as branch
expansion and general corporate purposes. At December 31, 2005 the Bank's Tier 1
leverage, Tier 1 risk-based and Total risk-based capital ratios were 7.75%,
11.59%, and 12.62% respectively.
38
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, 2005 The year ended December 31, 2005 The year ended December 31, 2004
-------------------- -------------------------------- --------------------------------
Average
Actual Actual Yield/ Average Interest Average Average Interest Yield/
Balance Cost Balance earned/paid Yield/Cost(4) Balance earned/paid Cost (4)
------- ----- ------- ----------- ------------ ------- ----------- --------
Interest-earning assets: (Dollars in thousands)
Loans receivable ................. $284,451 7.05% $271,405 $ 18,797 6.93% $221,257 $ 14,784 6.68%
Investment securities(1) ......... 142,780 5.11 124,315 6,297 5.07 108,297 5,757 5.32
Interest-bearing deposits ........ 22,160 4.10 4,700 71 1.51 17,721 159 0.90
-------- -------- -------- -------- --------
Total interest-earning assets ... 449,391 6.29% 400,420 25,165 6.28% 347,275 20,700 5.96%
-------- -------- -------- -------- --------
Interest-earning liabilities:
Interest-bearing demand deposits . $ 20,827 1.36% $ 20,815 284 1.36% $ 21,105 299 1.42%
Money market deposits ............ 1,623 1.93 2,289 45 1.97 2,622 52 1.98
Savings deposits ................. 167,534 2.09 183,288 3,958 2.16 181,383 3,981 2.20
Certificates of deposit .......... 142,724 3.60 116,560 3,736 3.21 80,336 2,153 2.68
Borrowings ....................... 54,124 3.66 33,527 1,222 3.64 25,660 460 1.79
-------- -------- -------- -------- --------
Total interest-bearing
liabilities ................... 386,832 2.83% 356,479 9,245 2.59% 311,106 6,945 2.23%
-------- -------- -------- -------- --------
Net interest income ............... $ 15,920 $ 13,755
======== ========
Interest rate spread(2) ........... 3.46% 3.69% 3.73%
======== ======== ========
Net interest margin(3) ............ 3.98% 3.96%
======== ========
Ratio of interest-earning assets
to interest-bearing liabilities .. 116.17% 112.33% 111.63%
======== ======== ========
- -----------------------------
(1) Includes Federal Home Loan Bank of New York stock.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(4) Average yields are computed using annualized interest income and expense
for the periods.
39
The year ended December 31, 2003
--------------------------------
Average
Average Interest Yield/Cost
Balance earned/paid (4)
------- ----------- ---
Interest-earning assets:
Loans receivable ..................... $155,145 $ 10,745 6.93%
Investment securities(1) ............. 60,286 3,299 5.47
Interest-bearing deposits ............ 10,446 91 0.87
-------- --------
Total interest-earning assets ....... 225,877 14,135 6.26%
-------- --------
Interest-earning liabilities:
Interest-bearing demand deposits ..... $ 14,844 203 1.37%
Money market deposits ................ 2,287 46 2.01
Savings deposits ..................... 141,749 3,235 2.28
Certificates of deposit .............. 32,186 808 2.51
Borrowings ........................... 2,945 44 1.49
-------- --------
Total interest-bearing liabilities . 194,011 4,336 2.23%
-------- --------
Net interest income ................... $ 9,799
========
Interest rate spread(2) ............... 4.03%
========
Net interest margin(3) ................ 4.34%
========
Ratio of average interest-earning
assets to average interest-bearing
liabilities .......................... 116.42%
========
(1) Includes Federal Home Loan Bank of New York stock.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(4) Average yields are computed using annualized interest income and expense
for the periods.
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) the allocation of changes in
rate and volume; and (iv) the net change.
Years Ended December 31,
-----------------------------------------------------------------------------------
2005 vs. 2004 2004 vs. 2003
----------------------------- ----------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
----------------------------- Total ---------------------------- Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
------- ------- ------- ------- ------- ------- ------- -------
(In Thousands)
Interest income:
Loans receivable ....................... $ 3,351 $ 540 $ 122 $ 4,013 $ 4,580 $ (379) $ (162) $ 4,039
Investment securities .................. 851 (271) (40) 540 2,627 (94) (75) 2,458
Interest-bearing deposits
with other banks ..................... (117) 109 (80) (88) 63 3 2 68
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets .......... 4,085 378 2 4,465 7,270 (470) (235) 6,565
------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
Interest-bearing demand accounts ...... (4) (11) -- (15) 86 7 3 96
Money market ........................... (7) -- -- (7) 7 (1) -- 6
Savings and club ....................... 42 (64) (1) (23) 904 (113) (45) 746
Certificates of Deposits ............... 971 422 190 1,583 1,209 55 81 1,345
Borrowed funds ......................... 141 474 147 762 338 9 69 416
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ..... 1,143 821 336 2,300 2,544 (43) 108 2,609
------- ------- ------- ------- ------- ------- ------- -------
Change in net interest income ............ $ 2,942 $ (443) $ (334) $ 2,165 $ 4,726 $ (427) $ (343) $ 3,956
======= ======= ======= ======= ======= ======= ======= =======
40
Results of Operations
- ---------------------
Results of Operations for the Years Ended December 31, 2005 and 2004
Net income increased by $1.1 million or 30.6 % to $4.7 million for the year
ended December 31, 2005 from $3.6 million for the year ended December 31, 2004.
This increase in net income reflects increases in net interest income and
non-interest income, partially offset by increases in the provision for loan
losses, non-interest expense and income taxes. Net interest income increased by
$2.1 million or 15.2% to $15.9 million for the year ended December 31, 2005 from
$13.8 million for the year ended December 31, 2004. This increase resulted
primarily from an increase in average net interest earning assets of $7.7
million or 21.3% to $43.9 million for the year ended December 31, 2005 from
$36.2 million for the year ended December 31, 2004 and a slight increase in the
net interest margin to 3.98% for the year ended December 31, 2005 from 3.96% for
the year ended December 31, 2004. The slight increase in our net interest margin
resulted primarily from an increase in the average yield on loans receivable to
6.93% for the year ended December 31, 2005 from 6.68% for the year ended
December 31, 2004 partially offset by an increase in the cost of wholesale
borrowings to 3.64% for the year ended December 31, 2005 from 1.79% for the year
ended December 31, 2004.
Interest income on loans receivable increased by $4.0 million or 27.0% to
$18.8 million for the year ended December 31, 2005 from $14.8 million for the
year ended December 31, 2004. The increase was primarily due to an increase in
average loans receivable of $50.1 million or 22.6% to $271.4 million for the
year ended December 31, 2005 from $221.3 million for the year ended December 31,
2004 and an increase in the average yield on loans receivable to 6.93% for the
year ended December 31, 2005 from 6.68% for the year ended December 31, 2004.
The increase in the average balance of loans reflects management's philosophy of
deploying funds in higher yielding loans, specifically commercial real estate as
opposed to lower yielding investments in government securities. The increase in
average yield reflects the Bank's diligence in deploying funds into prime based
lending products whose yield increased as the Federal Open Market Committee
continued to increase short-term interest rates throughout 2005.
Interest income on securities increased by $540,000 or 9.4% to $6.3 million
for the year ended December 31, 2005 from $5.8 million for the year ended
December 31, 2004. The increase was primarily attributable to an increase in the
average balance of securities of $16.0 million or 14.8% to $124.3 million for
the year ended December 31, 2005 from $108.3 million for the year ended December
31, 2004, partially offset by a decrease in the average yield on securities to
5.07% for the year ended December 31, 2005 from 5.32% for the year ended
December 31, 2004. The increase in average balances reflects the on-going
leverage strategy with the use of the Federal Home Loan Bank advances.
Interest income on other interest-earning assets consisting primarily of
federal funds sold decreased by $88,000 or 55.3% to $71,000 for the year ended
December 31, 2005 from $159,000 for the year ended December 31, 2004. This
decrease was primarily due to a decrease in the average balance of other
interest-earning assets to $4.7 million for the year ended December 31, 2005
from $17.7 million for the year ended December 31, 2004 partially offset by an
increase in the average yield on other interest-earning assets to 1.51% for the
year ended December 31, 2005 from 0.90% for the year ended December 31, 2004.
During 2005, the Bank decided to actively
41
manage its liquid investments in order to redeploy its earning assets into
higher yielding loans and securities in an effort to maximize returns.
Total interest expense increased by $2.3 million or 33.3% to $9.2 million
for the year ended December 31, 2005 from $6.9 million for the year ended
December 31, 2004. This increase resulted from an increase in average total
interest bearing deposit liabilities of $37.6 million or 13.2% to $323.0 million
for the year ended December 31, 2005 from $285.4 million for the year ended
December 31, 2004, and an increase of $7.8 million in average borrowings to
$33.5 million at December 31, 2005, from $25.7 million for the year ended
December 31, 2004, as well as an increase in the average cost of interest
bearing liabilities to 2.59% for the year ended December 31, 2005 from 2.23% for
the year ended December 31, 2004.
The provision for loan losses totaled $1.1 million and $690,000 for the
years ended December 31, 2005 and 2004, respectively. The provision for loan
losses is established based upon management's review of the Bank's loans and
consideration of a variety of factors including, but not limited to, (1) the
risk characteristics of the loan portfolio, (2) current economic conditions, (3)
actual losses previously experienced, (4) the significant level of loan growth
and (5) the existing level of reserves for loan losses that are possible and
estimable. During 2005, the Bank experienced $534,000 in net charge-offs
(consisting of $546,000 in charge-offs and $12,000 in recoveries) related
primarily to the foreclosure and bankruptcy of one lending relationship and two
commercial heavy equipment loans. During 2004, the Bank experienced $297,000 in
net charge-offs (consisting of $332,000 in charge-offs and $35,000 in
recoveries) related entirely to the liquidation of five commercial heavy
equipment loans. The Bank had non-accrual loans totaling $787,000 at December
31, 2005 and $553,000 at December 31, 2004. The allowance for loan losses stood
at $3.1 million or 1.07% of gross total loans at December 31, 2005 as compared
to $2.5 million or 1.01% of gross total loans at December 31, 2004. The amount
of the allowance is based on estimates and the ultimate losses may vary from
such estimates. Management assesses the allowance for loan losses on a quarterly
basis and makes provisions for loan losses as necessary in order to maintain the
adequacy of the allowance. While management uses available information to
recognize loses on loans, future loan loss provisions may be necessary based on
changes in the aforementioned criteria. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowance for loan losses and may require the Bank to recognize additional
provisions based on their judgment of information available to them at the time
of their examination. Management believes that the allowance for loan losses was
adequate at both December 31, 2005 and 2004.
Total non-interest income increased by $255,000 or 40.9% to $878,000 for
the year ended December 31, 2005 from $623,000 for the year ended December 31,
2004. The increase in non-interest income resulted primarily from a $116,000
increase in gain on sales of loans originated for sale, a $56,000 decrease in
losses on sales of non-performing loans as the Bank did not sell any such loans
or record any gain or loss therefrom during the year ended December 31, 2005 as
compared to a $56,000 loss recorded during the year ended December 31, 2004, a
$48,000 increase in fees and service charges, and a $28,000 gain on sale of
securities held-to-maturity in the current year. The aforementioned gain on sale
of securities was accomplished from securities originally designated as
held-to-maturity. Because certain language located in the text of FASB 115
specified earlier allows for the sale of securities designated as
held-to-maturity
42
if certain criteria are met, management undertook the research necessary to make
their determination that such sales were permitted. Upon scrutiny of the text
and concurrence and confirmation with the Company's independent external
auditor, the allowable transactions were consummated.
Total non-interest expense increased by $547,000 or 7.1% to $8.2 million
for the year ended December 31, 2005 from $7.7 million for the year ended
December 31, 2004. The increase in 2005 was primarily due to an increase of
$452,000 or 11.4% in salaries and employee benefits expense to $4.4 million for
the year ended December 31, 2005 from $4.0 million for the year ended December
31, 2004 as the Bank increased staffing levels and compensation in an effort to
service its growing customer base. Full time equivalent employees increased to
eighty-two (82) at December 31, 2005 from seventy-five (75) at December 31, 2004
and sixty-six (66) at December 31, 2003. An increase in the aggregate of
$202,000 or 9.0% was recorded in the categories of occupancy, equipment and
advertising expense to $2.4 million for the year ended December 31, 2005 from
$2.2 million for the year ended December 31, 2004 as these expense increases are
commensurate with a growing franchise. These increases were partially offset by
a decrease of $109,000 or 7.6% in other non-interest expense to $1.3 million for
the year ended December 31, 2005 from $1.4 million for the year ended December
31, 2004. Other non-interest expense is comprised of director fees, stationary,
forms and printing, professional fees, legal fees, check printing, correspondent
bank fees, telephone and communication, shareholder relations and other fees and
expenses. The decrease in other non-interest expense is primarily attributable
to decreased legal, professional and shareholder relation expense, as the
Company incurred expenses associated with a contested proxy contest initiated by
an opposing slate of directors during the year ended December 31, 2004. No such
additional expenses were incurred during the year ended December 31, 2005.
Income tax expense increased by $337,000 or 14.0% to $2.7 million for the
year ended December 31, 2005 from $2.4 million for the year ended December 31,
2004 reflecting pre-tax income of $7.5 million earned during the year ended
December 31, 2005 compared to pre-tax income of $6.0 million earned during the
year ended December 31, 2004, partially offset by the formation of BCB Holding
Company Investment Corp. (the Investment Company"). The Investment Company, a
New Jersey Investment Company wholly owned by the Bank, is subject to a state
income tax rate of 3.6% as compared to the 9.0% rate paid by the Company and the
Bank. The Investment Company was funded by a transfer of securities from the
Bank. The utilization of the Investment Company to hold investments during the
year ended December 31, 2005 reduced consolidated income tax expenses by
approximately $223,000 and reduced the consolidated effective income tax rate by
approximately 3.0%. The Company's effective tax rate was 36.7% for the year
ended December 31, 2005 as compared to 40.0% for the year ended December 31,
2004.
Results of Operations for the Years Ended December 31, 2004 and 2003
Net income increased by $1.2 million or 51.1% to $3.6 million for the year
ended December 31, 2004 from $2.4 million for the year ended December 31, 2003.
This increase in net income is as a result of increases in net interest income
and non-interest income and a decrease in the provision for loan losses
partially offset by increases in non-interest expense and income taxes. Net
interest income increased by $4.0 million or 40.4% to $13.8 million for the
43
year ended December 31, 2004 from $9.8 million for the year ended December 31,
2003. This increase resulted primarily from an increase in average net interest
earning assets of $4.3 million or 13.5% to $36.2 million for the year ended
December 31, 2004 from $31.9 million for the year ended December 31, 2003
partially offset by a decrease in the net interest margin to 3.96% for the year
ended December 31, 2004 from 4.34% for the year ended December 31, 2003. The
decrease in our net interest margin reflects the on-going philosophy of the
Federal Reserve Open Market Committee, specifically during the second half of
2004, to tighten monetary policy by raising short-term interest rates while long
term rates trended slightly downward during that same time period.
Interest income on loans receivable increased by $4.04 million or 37.6% to
$14.8 million for the year ended December 31, 2004 from $10.7 million for the
year ended December 31, 2003. The increase was primarily due to an increase in
average loans receivable of $66.1 million or 42.6% to $221.3 million for the
year ended December 31, 2004 from $155.1 million for the year ended December 31,
2003 partially offset by a decrease in the average yield on loans receivable to
6.68% for the year ended December 31, 2004 from 6.93% for the year ended
December 31, 2003. The increase in the average balance of loans reflects
management's philosophy to deploy funds in higher yielding loans, specifically
commercial real estate as opposed to lower yielding investments in government
securities. The decrease in average yield reflects the continuance of the lower
long-term interest rate environment in 2004.
Interest income on securities increased by $2.5 million or 74.5% to $5.8
million for the year ended December 31, 2004 from $3.3 million for the year
ended December 31, 2003. The increase was primarily attributable to an increase
in the average balance of securities of $48.0 million or 79.6% to $108.3 million
for the year ended December 31, 2004 from $60.3 million for the year ended
December 31, 2003, partially offset by a decrease in the average yield on
securities to 5.32% for the year ended December 31, 2004 from 5.47% for the year
ended December 31, 2003. The increase in average balances reflects the
redeployment of funds previously invested in short-term interest earning
deposits and the on-going leverage strategy done with the use of the Federal
Home Loan Bank advances.
Interest income on other interest-earning assets consisting primarily of
federal funds sold increased by $68,000 or 74.7% to $159,000 for the year ended
December 31, 2004 from $91,000 for the year ended December 31, 2003. This
increase was primarily due to an increase in the average balance of other
interest-earning assets to $17.7 million for the year ended December 31, 2004
from $10.4 million for the year ended December 31, 2003 partially offset by a
slight increase in the average yield on other interest-earning assets to 0.90%
for the year ended December 31, 2004 from 0.87% for the year ended December 31,
2003. As the Bank's loan pipeline consistently totaled over $30.0 million during
2004, the increase in average balance in other interest-earning assets is a
reflection of management's philosophy to accumulate liquidity to facilitate the
prompt closing of those loans.
Total interest expense increased by $2.6 million or 60.2% to $6.9 million
for the year ended December 31, 2004 from $4.3 million for the year ended
December 31, 2003. This increase resulted from an increase in average total
interest bearing deposit liabilities of $94.4 million or 49.4% to $285.4 million
for the year ended December 31, 2004 from $191.1 million
44
for the year ended December 31, 2003, and an increase of $22.7 million in
average borrowings to $25.7 million at December 31, 2004, from $2.9 million for
the year ended December 31, 2003. The average cost of total interest bearing
liabilities was 2.23% for both the years ended December 31, 2004 and 2003.
The provision for loan losses totaled $690,000 and $880,000 for the years
ended December 31, 2004 and 2003, respectively. The provision for loan losses is
established based upon management's review of the Bank's loans and consideration
of a variety of factors including, but not limited to, (1) the risk
characteristics of the loan portfolio, (2) current economic conditions, (3)
actual losses previously experienced, (4) the significant level of loan growth
and (5) the existing level of reserves for loan losses that are possible and
estimable. During 2004, the Bank experienced $297,000 in net charge-offs
(consisting of $332,000 in charge-offs and $35,000 in recoveries) related
entirely to the liquidation of five commercial heavy equipment loans. During
2003, there were no charge-offs or recoveries. The Bank had non-accrual loans
totaling $553,000 at December 31, 2004 and $67,000 at December 31, 2003. The
allowance for loan losses stood at $2.5 million or 1.01% of gross total loans at
December 31, 2004 as compared to $2.1 million or 1.11% of gross total loans at
December 31, 2003. The amount of the allowance is based on estimates and the
ultimate losses may vary from such estimates. Management assesses the allowance
for loan losses on a quarterly basis and makes provisions for loan losses as
necessary in order to maintain the adequacy of the allowance. While management
uses available information to recognize loses on loans, future loan loss
provisions may be necessary based on changes in the aforementioned criteria. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses and may require the
Bank to recognize additional provisions based on their judgment of information
available to them at the time of their examination. Management believes that the
allowance for loan losses was adequate at both December 31, 2004 and 2003.
Total non-interest income increased by $143,000 or 29.8% to $623,000 for
the year ended December 31, 2004 from $480,000 for the year ended December 31,
2003. The increase in non-interest income resulted primarily from a $150,000
increase in fees and service charges, a $42,000 increase in gain on sales of
loans originated for sale, and a $7,000 increase in other income partially
offset by a $56,000 loss in 2004 on the sale of the aforementioned
non-performing commercial heavy equipment loans.
Total non-interest expenses increased by $2.3 million or 42.1% to $7.7
million for the year ended December 31, 2004 from $5.4 million for the year
ended December 31, 2003. The increase in 2004 was primarily due to an increase
of $1.2 million or 41.3% in salaries and employee benefits expense to $4.0
million for the year ended December 31, 2004 from $2.8 million for the year
ended December 31, 2003 as the Bank increased staffing levels and compensation
in an effort to service its growing customer base. Full time equivalent
employees increased to seventy-five (75) at December 31, 2004 from sixty-six
(66) at December 31, 2003 and thirty-four (34) at December 31, 2002. Equipment
expense increased by $488,000 to $1.4 million for the year ended December 31,
2004 from $940,000 for the year ended December 31, 2003. The primary component
of this expense relates to the increased costs of the Bank's data service
provider reflecting the overall growth of the Bank's balance sheet. Occupancy
expense increased by $244,000 to $655,000 for the year ended December 31, 2004
from $411,000 for the
45
year ended December 31, 2003 as the Bank incurred a full year's worth of
occupancy expense on the two offices opened during 2003. Advertising expense
decreased by $8,000 to $161,000 for the year ended December 31, 2004 from
$169,000 for the year ended December 31, 2003. Other non-interest expense
increased by $384,000 to $1.44 million for the year ended December 31, 2004 from
$1.06 million for the year ended December 31, 2003. The increase in other
non-interest expense was primarily attributable to increased legal, professional
and shareholder relation expense as during the year ended December 31, 2004, the
Company incurred expenses associated with a proxy contest initiated by an
opposing slate of directors. Other non-interest expense is comprised of
directors' fees, stationary, forms and printing, professional fees, check
printing, correspondent bank fees, telephone and communication, shareholder
relations and other fees and expenses.
Income tax expense increased by $794,000 or 49.2% to $2.4 million for the
year ended December 31, 2004 from $1.6 million for the year ended December 31,
2003 reflecting pre-tax income of $6.0 million earned during the year ended
December 31, 2004 compared to pre-tax income of $4.0 million earned during the
year ended December 31, 2003. The Company's effective tax rates were 40.0% in
2004 and 40.3% in 2003.
Liquidity and Capital Resources
- -------------------------------
Our funding sources include income from operations, deposits and borrowings
and principal payments on loans and investment securities. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit outflows and mortgage prepayments are greatly influenced by the general
level of interest rates, economic conditions and competition.
Our primary investing activities are the origination of commercial and
multi-family real estate loans, one-to four-family mortgage loans, construction,
commercial business and consumer loans, as well as the purchase of
mortgage-backed and other investment securities. During 2005, loan originations
totaled $133.7 million compared to $110.8 million and $105.0 million for 2004
and 2003, respectively. The increase in loan originations reflects management's
efforts to increase our total assets, the continued focus on increasing
commercial and multi-family lending operations and the strong refinance market
in 2005.
During 2005, cash flow provided by the calls, sales, maturities and
principal repayments and prepayments received on securities held-to-maturity
amounted to $32.9 million compared to $49.1 million and $36.3 million in 2004
and 2003. Deposit growth provided $25.6 million, $83.6 million and $90.1 million
of funding to facilitate asset growth for the years ending December 31, 2005,
2004 and 2003, respectively. Borrowings increased $40.0 million in 2005 and in
addition to deposit growth served to fund asset growth and provide additional
capital. During 2004, we borrowed $4.1 million through the issuance of $4.1
million in trust preferred securities and repaid $15.0 million in FHLB
borrowings. During 2003, we borrowed $25.0 million in FHLB advances.
Loan Commitments. In the ordinary course of business the Bank extends
-----------------
commitments to originate residential and commercial loans and other consumer
loans. Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition
46
established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since the Bank
does not expect all of the commitments to be funded, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. Collateral
may be obtained based upon management's assessment of the customers'
creditworthiness. Commitments to extend credit may be written on a fixed rate
basis exposing the Bank to interest rate risk given the possibility that market
rates may change between the commitment date and the actual extension of credit.
The Bank had outstanding commitments to originate and fund loans of
approximately $45.2 million and $38.8 million at December 31, 2005 and 2004,
respectively.
The following tables sets forth our contractual obligations and commercial
commitments at December 31, 2005.
Payments due by period
Less than 1 1-3 3-5 More than 5
Contractual obligations Total Year Years Years Years
---------- --------- --------- --------- ---------
(In thousands)
Borrowed money.............................. $ 54,124 $ -- $ -- $ -- $ 54,124
Lease obligations........................... 982 244 424 314 --
Certificates of deposit with original
maturities of one year or more............ 82,593 25,300 43,073 14,220 --
---------- --------- --------- --------- ---------
Total....................................... $ 137,699 $ 25,544 $ 43,497 $ 14,534 $ 54,124
========== ========= ========= ========= =========
Recent Accounting Pronouncements
- --------------------------------
Accounting for Share-based Payments
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 123 (revised),
"Share-Based Payment". Statement No. 123 (revised) replaces Statement No. 123
and supersedes APB Opinion No. 25. Statement No. 123 (revised) requires
compensation costs related to share based payment transactions to be recognized
in the financial statements over the period that an employee provides service in
exchange for the award. Public companies are required to adopt the new standard
using a modified prospective method and may elect to restate prior periods using
the modified retrospective method. Under the modified prospective method,
companies are required to record compensation cost for new and modified awards
over the related vesting period of such awards prospectively and record
compensation cost prospectively for the unvested portion at the date of
adoption, of previously issued and outstanding awards over the remaining vesting
period of such awards. No change to prior periods presented is permitted under
the modified prospective method. Under the modified retrospective method,
companies record compensation costs for prior periods retroactively through
restatement of such periods using the exact pro forma amounts disclosed in the
companies' footnotes. Also, in the period of adoption and after, companies
record compensation cost based on the modified prospective method.
On April 14, 2005, the Securities and Exchange Commission adopted a new
rule that amends the compliance dates for Statement No. 123 (revised). Under the
new rule, we are required to adopt Statement No. 123 (revised) in the first
annual period beginning after June 15, 2005. Early application of Statement No.
123 (revised) is encouraged, but not required. Accordingly, we are required to
record compensation expense for all new awards granted and
47
any awards modified after January 1, 2006. In addition, the transition rules
under SFAS No. 123 (revised 2004) will require that, for all awards outstanding
at January 1, 2006, for which the requisite service has not yet been rendered,
compensation cost be recorded as such service is rendered after January 1, 2006.
The pronouncement related to stock-based payments will not have any effect
on our existing historical consolidated financial statements as restatements of
previously reported periods will not be required. However, our stock option
awards generally require a service period which extends beyond the effective
date of SFAS No. 123 (revised 2004) and, accordingly, we will be required to
record compensation expense on such awards beginning on January 1, 2006. As a
result, the Board of Directors of BCB Bancorp, Inc. approved the accelerated
vesting and exercisiability of all unvested and unexercisable stock options
granted as a part of the 2003 and 2002 Stock Option Plans effective December 20,
2005. We do not expect a significant expense relating to existing stock options
will need to be recognized in 2006 or future years.
Accounting for Variable Interest Entities
In December 2003, FASB issued a revision to Interpretation 46,
"Consolidation of Variable Interest Entities," which established standards for
identifying a variable interest entity ("VIE") and for determining under what
circumstances a VIE should be consolidated with its primary beneficiary.
Application of this Interpretation is required in financial statements of public
entities that have interests in special-purpose entities for periods ending
after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of VIEs is required in financial
statements for periods ending after March 15, 2004. Small business issuers must
apply this interpretation to all other types of VIEs at the end of the first
reporting period ending after December 15, 2004. The adoption of this
Interpretation has not had and is not expected to have a material effect on our
financial position or results of operations.
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" (SFAS No. 150).
This Statement established standards for how a company classifies and measures
certain financial instruments with characteristics of both liabilities and
equity as well as their classification in the company's statement of financial
position. It requires that the company classify a financial instrument that is
within its scope as a liability when that instrument embodies an obligation of
the issuer. SFAS No. 150 did not have any impact on the Company's Consolidated
Financial Statements.
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
On April 30, 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. With a number of exceptions, SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003. The adoption of SFAS No.
149 did not have a material impact on the Company's consolidated financial
statements.
48
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others
In November 2002, FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor
entity, at the inception of a guarantee covered by the measurement provisions of
the interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. In addition, FIN 45 elaborates on
previously existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. The Company does not have
financial letters of credit as of December 31, 2005.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
Management of Market Risk
- -------------------------
Qualitative Analysis. The majority of our assets and liabilities are
monetary in nature. Consequently, one of our most significant forms of market
risk is interest rate risk. Our assets, consisting primarily of mortgage loans,
have longer maturities than our liabilities, consisting primarily of deposits.
As a result, a principal part of our business strategy is to manage interest
rate risk and reduce the exposure of our net interest income to changes in
market interest rates. Accordingly, our Board of Directors has established an
Asset/Liability Committee which is responsible for evaluating the interest rate
risk inherent in our assets and liabilities, for determining the level of risk
that is appropriate given our business strategy, operating environment, capital,
liquidity and performance objectives, and for managing this risk consistent with
the guidelines approved by the Board of Directors. Senior management monitors
the level of interest rate risk on a regular basis and the Asset/Liability
Committee, which consists of senior management and outside directors operating
under a policy adopted by the Board of Directors, meets as needed to review our
asset/liability policies and interest rate risk position.
Quantitative Analysis. The following table presents the Company's net
portfolio value ("NPV"). These calculations were based upon assumptions believed
to be fundamentally sound, although they may vary from assumptions utilized by
other financial institutions. The information set forth below is based on data
that included all financial instruments as of December 31, 2005. Assumptions
have been made by the Company relating to interest rates, loan prepayment rates,
core deposit duration, and the market values of certain assets and liabilities
under the various interest rate scenarios. Actual maturity dates were used for
fixed rate loans and certificate accounts. Investment securities were scheduled
at either the maturity date or the next scheduled call date based upon
management's judgment of whether the particular security would be called in the
current interest rate environment and under assumed interest rate scenarios.
Variable rate loans were scheduled as of their next scheduled interest rate
repricing date. Additional assumptions made in the preparation of the NPV table
include prepayment rates on loans and mortgage-backed securities, core deposits
without stated maturity dates were scheduled with an assumed term of 48 months,
and money market and noninterest bearing accounts were scheduled with an assumed
term of 24 months. The NPV at "PAR" represents the difference between the
Company's estimated value of assets and estimated value of liabilities assuming
no change in interest rates. The NPV for a decrease of 200 and 300 basis points
has
49
been excluded since it would not be meaningful, in the interest rate environment
as of December 31, 2005. The following sets forth the Company's NPV as of
December 31, 2005.
NPV as a % of Assets
Change in Net Portfolio $ Change from % Change from ------------------------------
calculation Value PAR PAR NPV Ratio Change
-------------- ------------- ------------- ------------- -------------- ------------
+300bp $ 28,550 $ (26,867) (48.48)% 6.82% (519) bp
+200bp 38,357 (17,060) (30.78) 8.87 (314) bp
+100bp 47,352 (8,065) (14.55) 10.60 (141) bp
PAR 55,417 -- -- 12.01 -- bp
-100bp 57,398 1,981 3.57 12.19 18 bp
-200bp 54,499 (918) (1.66) 11.41 (60) bp
- ----------
bp-basis points
The table above indicates that at December 31, 2005, in the event of a 100
basis point decrease in interest rates, we would experience a 3.57% increase in
NPV. In the event of a 100 basis point increase in interest rates, we would
experience a 14.55% decrease in NPV.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in NPV require making certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV table
presented assumes that the composition of our interest-sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured and assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration or
repricing of specific assets and liabilities. Accordingly, although the NPV
table provides an indication of our interest rate risk exposure at a particular
point in time, such measurements are not intended to and do not provide a
precise forecast of the effect of changes in market interest rates on our net
interest income, and will differ from actual results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
The financial statements identified in Item 15(a)(1) hereof are included as
Exhibit 13 and are incorporated hereunder.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
On April 1, 2005, Radics & Co. LLC, ("Radics") merged with Beard Miller
Company LLP ("Beard Miller") to become the Pine Brook, New Jersey office of
Beard Miller. As a result, on April 1, 2005, Radics resigned as independent
auditors of BCB Bancorp, Inc. On April 1, 2005, BCB Bancorp, Inc. engaged Beard
Miller as its successor independent audit firm. BCB Bancorp, Inc.'s engagement
of Beard Miller has been approved by our Audit Committee.
The reports of Radics on our consolidated financial statements as of and
for the fiscal year ended December 31, 2004, contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles.
During the years ended December 31, 2005 and 2004, and in connection with
the audit of our financial statements for such periods and until the date of
Radics' resignation, there were no
50
disagreements between us and Radics on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to the satisfaction of Radics, would have caused Radics
to make reference to such matter in connection with its audit reports on our
financial statements.
We provided Radics with a copy of the above disclosures in response to Item
304(a) of Regulation S-K. We requested that Radics deliver to us a letter
addressed to the Securities and Exchange Commission stating whether it agrees
with the statements made by us in response to Item 304(a) of Regulation S-K, and
if not, stating the respects in which it does not agree. A copy of Radics letter
is filed as Exhibit 16 to a Form 8-K/A filed on April 27, 2005.
ITEM 9A. CONTROLS AND PROCEDURES
- ---------------------------------
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act)
as of the end of the fiscal year (the "Evaluation Date"). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the Evaluation Date, our disclosure controls and procedures were
effective in timely alerting them to the material information relating to us (or
our consolidated subsidiaries) required to be included in our periodic SEC
filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
See the Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
ITEM 9B. OTHER INFORMATION
- ---------------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The Company has adopted a Code of Ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions. The Code of
Ethics is available for free by writing to: President and Chief Executive
Officer, BCB Bancorp, Inc., 104-110 Avenue C, Bayonne, New Jersey 07002. The
Code of Ethics is filed as an exhibit to this Form 10-K.
51
The "Proposal I--Election of Directors" section of the Company's definitive
Proxy Statement for the Company's 2006 Annual Meeting of Stockholders (the "2006
Proxy Statement") is incorporated herein by reference.
The information concerning directors and executive officers of the Company
under the caption "Proposal I-Election of Directors" and information under the
captions "Section 16(a) Beneficial Ownership Compliance" and "The Audit
Committee" of the 2006 Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The "Executive Compensation" section of the Company's 2006 Proxy Statement
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- ----------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
The "Proposal I--Election of Directors" section of the Company's 2006 Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The "Transactions with Certain Related Persons" section of the Company's
2006 Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ------------------------------------------------
Information required by Item 14 is incorporated by reference to the
Company's Proxy Statement for the 2006 Annual Meeting of Stockholders, "Proposal
II-Ratification of the Appointment of Independent Auditors- -Fees Paid to Beard
Miller Company LLP."
PART IV
-------
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
- ----------------------------------------------------
(a)(1) Financial Statements
--------------------
The exhibits and financial statement schedules filed as a part of this Form
10-K are as follows:
(A) Management Responsibility Statement
(B) Independent Auditors' Report
(C) Consolidated Statements of Financial Condition as of December 31,
2005 and 2004
(D) Consolidated Statements of Income for each of the Years in the
Three-Year period ended December 31, 2005
52
(E) Consolidated Statements of Changes in Stockholders' Equity for
each of the Years in the Three-Year period ended December 31,
2005
(F) Consolidated Statements of Cash Flows for each of the Years in
the Three-Year period ended December 31, 2005
(G) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
-----------------------------
All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated statements or the notes
thereto.
(b) Exhibits
--------
3.1 Certificate of Incorporation of BCB Bancorp, Inc.****
3.2 Bylaws of BCB Bancorp, Inc.**
3.3 Specimen Stock Certificate*
10.1 Bayonne Community Bank 2002 Stock Option Plan***
10.2 Bayonne Community Bank 2003 Stock Option Plan***
10.3 2005 Director Deferred Compensation Plan****
10.4 Change in Control Agreement with Donald Mindiak*****
10.5 Change in Control Agreement with James E. Collins*****
10.6 Change in Control Agreement with Thomas M. Coughlin*****
10.7 Change in Control Agreement with Olivia Klim*****
10.8 Change in Control Agreement with Amer Saleem*****
10.9 Executive Agreement with Donald Mindiak*****
10.10 Executive Agreement with James E. Collins*****
10.11 Executive Agreement with Thomas M. Coughlin*****
10.12 Executive Agreement with Olivia Klim*****
10.13 Executive Agreement with Amer Saleem*****
10.14 Amendment to 2002 and 2003 Stock Option Plans
53
13 Consolidated Financial Statements
14 Code of Ethics***
21 Subsidiaries of the Company****
23 Accountant's Consent to incorporate consolidated financial
statements in Form S-8
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
- ----------------
* Incorporated by reference to the Form 8-K-12g3 filed with the Securities
and Exchange Commission on May 1, 2003.
** Incorporated by reference to the Form 8-K filed with the Securities and
Exchange Commission on December 13, 2004.
*** Incorporated by reference to the Annual Report on Form 10-K for the year
ended December 31, 2004.
**** Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended, (Commission File Number 333-128214) originally filed with
the Securities and Exchange Commission on September 9, 2005.
***** Incorporated by reference to Exhibit 10.4, 10.5, 10.6, 10.7, 10.8, 10.9,
10.10, 10.11, 10.12 and 10.13 to the Current Report on Form 8-K filed with
the Securities and Exchange Commission on November 10, 2005.
54
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BCB BANCORP, INC.
Date: March 9, 2006 By: /s/ Donald Mindiak
------------------
Donald Mindiak
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Donald Mindiak President, Chief Executive March 13, 2006
- ------------------------------ Officer and Director (Principal
Donald Mindiak Executive Officer)
/s/ Thomas M. Coughlin Vice President, Chief Financial March 13, 2006
- ------------------------------ Officer (Principal Financial
Thomas M. Coughlin and Accounting Officer) and Director
/s/ Mark D. Hogan Chairman of the Board March 13, 2006
- ------------------------------
Mark D. Hogan
/s/ Robert Ballance Director March 13, 2006
- ------------------------------
Robert Ballance
/s/ Judith Q. Bielan Director March 13, 2006
- ------------------------------
Judith Q. Bielan
55
/s/ Joseph J. Brogan Director March 13, 2006
- ------------------------------
Joseph J. Brogan
/s/ James E. Collins Director March 13, 2006
- ------------------------------
James E. Collins
/s/ Joseph Lyga Director March 13, 2006
- ------------------------------
Joseph Lyga
/s/ Alexander Pasiechnik Director March 13, 2006
- ------------------------------
Alexander Pasiechnik
/s/ August Pellegrini, Jr. Director March 13, 2006
- ------------------------------
August Pellegrini, Jr.
56
EXHIBIT INDEX
-------------
3.1 Certificate of Incorporation of BCB Bancorp, Inc.****
3.2 Bylaws of BCB Bancorp, Inc.**
3.3 Specimen Stock Certificate*
10.1 Bayonne Community Bank 2002 Stock Option Plan***
10.2 Bayonne Community Bank 2003 Stock Option Plan***
10.3 2005 Director Deferred Compensation Plan****
10.4 Change in Control Agreement with Donald Mindiak*****
10.5 Change in Control Agreement with James E. Collins*****
10.6 Change in Control Agreement with Thomas M. Coughlin*****
10.7 Change in Control Agreement with Olivia Klim*****
10.8 Change in Control Agreement with Amer Saleem*****
10.9 Executive Agreement with Donald Mindiak*****
10.10 Executive Agreement with James E. Collins*****
10.11 Executive Agreement with Thomas M. Coughlin*****
10.12 Executive Agreement with Olivia Klim*****
10.13 Executive Agreement with Amer Saleem*****
10.14 Amendment to 2002 and 2003 Stock Option Plans
13 Consolidated Financial Statements
14 Code of Ethics***
21 Subsidiaries of the Company****
23 Accountant's Consent to incorporate consolidated financial
statements in Form S-8
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
57
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
- ------------------
* Incorporated by reference to the Form 8k-12g3 filed with the Securities
and Exchange Commission on May 1, 2003.
** Incorporated by reference to the Form 8-K filed with the Securities and
Exchange Commission on December 13, 2004.
*** Incorporated by reference to the Annual Report on Form 10-K for the year
ended December 31, 2004.
**** Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended, (Commission File Number 333-128214) originally filed with
the Securities and Exchange Commission on September 9, 2005.
***** Incorporated by reference to Exhibit 10.4, 10.5, 10.6, 10.7, 10.8, 10.9,
10.10, 10.11, 10.12 and 10.13 to the Current Report on Form 8-K filed with
the Securities and Exchange Commission on November 10, 2005.
58