XNAS:BCBP BCB Bancorp Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012.

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 Number: 0-50275

 

 

BCB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

     
New Jersey   26-0065262

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

I.D. No.)

   
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)

 

(Former name, former address and former fiscal year if changed since last report)

 

 

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.   T   Yes    £   No

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 larger accelerated filer” in Rule 12b-2 of the Exchange Act.

 

             
Large Accelerated Filer   £   Accelerated Filer S
       
Non-Accelerated Filer   £   Smaller Reporting Company    £  
               

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).    £  Yes    T  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    S   Yes    £   No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 1, 2012, BCB Bancorp, Inc., had 8,725,218 shares of common stock, no par value, outstanding.

 

 
 

 

 

BCB BANCORP INC. AND SUBSIDIARIES

INDEX

 

         
    Page  
PART I. CONSOLIDATED FINANCIAL INFORMATION        
   
Item 1. Consolidated Financial Statements        
   
Consolidated Statements of Financial Condition as of June 30, 2012 and December 31, 2011 (unaudited)     1  
   
Consolidated Statements of Income for the three and six months ended June 30, 2012 and June 30, 2011 (unaudited)     2  
         
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and June 30, 2011 (unaudited)        4  
   
Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2012 (unaudited)     5  
         

Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and June 30, 2011 (unaudited)

    6  
   
Notes to Unaudited Consolidated Financial Statements     7  
         
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations     33  
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk     37  
   
Item 4. Controls and Procedures     37  
   
PART II. OTHER INFORMATION     38  
   
Item 1. Legal Proceedings     38  
   
Item 1A. Risk Factors     38  
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds     38  
   
Item 3. Defaults Upon Senior Securities     38  
   
Item 4. Mine Safety Disclosures     38  
   
Item 5. Other Information     38  
   
Item 6. Exhibits     38  

 

1

 

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

BCB BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(In Thousands, Except Share and Per Share Data, Unaudited)

 

  June 30,
2012
   December 31,
2011
 
ASSETS          
           
Cash and amounts due from depository institutions  $7,939   $8,692 
Interest-earning deposits   95,228    108,395 
           
Total Cash and Cash equivalents   103,167    117,087 
           
Securities available for sale   1,230    1,045 
Securities held to maturity, fair value $207,822 and $213,903; respectively   200,053    206,965 
Loans held for sale   2,996    5,856 
Loans receivable, net of allowance for loan losses of $11,413 and $10,509; respectively   825,761    840,763 
Premises and equipment   13,842    13,576 
Federal Home Loan Bank of New York stock   6,933    7,498 
Interest receivable   4,240    4,997 
Other real estate owned   6,068    6,570 
Deferred income taxes   10,081    9,940 
Other assets   4,629    2,611 
           
Total Assets  $1,179,000   $1,216,908 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
LIABILITIES          
Non-interest bearing deposits  $81,381   $78,589 
Interest bearing deposits   883,449    899,034 
           
Total deposits   964,830    977,623 
           
Long-term debt   114,124    129,531 
Other Liabilities   11,205    9,706 
           
Total Liabilities   1,090,159    1,116,860 
           
STOCKHOLDERS’ EQUITY          
Preferred stock: 10,000,000 shares authorized; none issued and outstanding        
Common stock; $0.064; stated value; 20,000,000 shares authorized,
  10,831,340 and 10,817,901 shares respectively, issued; 8,817,653 shares
  and 9,520,056 shares, respectively, outstanding
   693    692 
Additional paid-in capital   91,773    91,715 
Treasury stock, at cost, 2,013,687 and 1,297,845 shares, respectively   (23,720)   (16,327)
Retained earnings   21,237    25,255 
Accumulated other comprehensive loss, net of taxes   (1,142)   (1,287)
           
Total Stockholders’ equity   88,841    100,048 
           
Total Liabilities and Stockholders’ equity  $1,179,000   $1,216,908 

See accompanying notes to consolidated financial statements.

 

 

2

 

BCB BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In Thousands, except for per share amounts, Unaudited)

 

   Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2012   2011   2012   2011 
Interest income:                    
Loans  $11,756   $11,090   $23,729   $22,351 
Investments, taxable   1,519    2,129    3,052    3,882 
Investment, non-taxable   12    13    25    25 
Other interest-earning assets   34    18    65    46 
                     
Total interest income   13,321    13,250    26,871    26,304 
                     
Interest expense:                    
Deposits:                    
Demand   160    222    354    447 
Savings and club   135    275    302    544 
Certificates of deposit   1,542    1,638    3,111    3,305 
    1,837    2,135    3,767    4,296 
Borrowed money   1,236    1,233    2,559    2,454 
                     
Total interest expense   3,073    3,368    6,326    6,750 
                     
Net interest income   10,248    9,882    20,545    19,554 
Provision for loan losses   1,200    450    1,800    800 
                     
Net interest income after provision for loan losses   9,048    9,432    18,745    18,754 
                     
Non-interest income (loss):                    
Fees and service charges   608    243    1,098    462 
Gain on sales of loans originated for sale   316    226    669    404 
Gain on sale of SBA loans acquired           286     
Loss on bulk sale of impaired loans held in portfolio   (7,342)       (7,342)    
Gain (loss) on sale of real estate owned   38    (80)   (99)   (136)
Gain on sale of securities   66    18    193    18 
Other   41    22    66    158 
                     
Total non-interest (loss) income   (6,273)   429    (5,129)   906 
                     
Non-interest expense:                    
Salaries and employee benefits   3,891    2,900    7,823    5,907 
Occupancy expense of premises   887    723    1,732    1,502 
Equipment   1,151    1,068    2,599    2,091 
Professional fees   595    258    1,026    461 
Directors’ fees   182    180    392    299 
Regulatory assessments   295    355    606    793 
Advertising   129    106    246    178 
Merger related expenses       256        256 
Other   907    711    1,858    1,723 
                     
Total non-interest expense   8,037    6,557    16,282    13,210 
                     
Income (loss) before income tax (benefit) provision   (5,262)   3,304    (2,666)   6,450 
Income tax (benefit) provision   (1,900)   1,352    (892)   2,577 
                     
Net Income (loss)  $(3,362)  $1,952   $(1,774)  $3,873 
                     
Net Income (loss) per common share:                    
Basic  $(0.37)  $0.21   $(0.19)  $0.41 
Diluted  $(0.37)  $0.21   $(0.19)  $0.41 
                     
Weighted average number of common shares outstanding:                    
Basic   9,142    9,356    9,289    9,375 
Diluted   9,142    9,374    9,289    9,394 

See accompanying notes to consolidated financial statements.

 

3

BCB BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Consolidated Comprehensive Income (Loss) 

(In Thousands, Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2011   2012   2011 
                 
                 
Net Income (loss)  $(3,362)  $1,952   $(1,774)  $3,873 
                     
Other comprehensive income, net of tax:                    
                     
       Unrealized gains on available-for-sale securities:                    
                     
            Unrealized holding gains arising during the period (a)   24    34    111    130 
            Less: reclassification adjustment for gains included in net income (b)                
       Benefit plans (c)   34        34     
                     
                     
Other comprehensive income   58    34    145    130 
                     
Comprehensive income (loss)  $(3,304)  $1,986   $(1,629)  $4,003 

 

 

(a)      Represents the net change of the unrealized gain on available-for-sale securities. Represents unrealized gains of $40,000, $57,000, $185,000, and $216,000, respectively, less deferred taxes of $16,000, $23,000, $74,000, and $86,000, respectively.  

 

(b)     No sales of available-for-sale securities occurred during the three and six months ended June 30, 2012 and 2011.  

 

(c)      Represents the net change of unrecognized loss included in net periodic pension cost. Represents gross change of $56,000 less deferred taxes of $22,000 for the three and six months ending June 30, 2012. See accompanying notes to consolidated financial statements.

 

 

 

4

 

 

BCB BANCORP INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity

(In Thousands, except share and per share data, Unaudited)

 

  Common Stock   Additional
Paid-In Capital
   Treasury
Stock
   Retained
Earnings
   Accumulated
Other
Comprehensive
Loss
   Total 
Beginning Balance at January 1, 2012  $692   $91,715   $(16,327)  $25,255   $(1,287)  $100,048 
                               
Exercise of Stock Options (13,439 shares)   1    54                55 
                               
Stock compensation expense,       4                4 
                               
Treasury Stock Purchases (715,842 shares)           (7,393)           (7,393)
                               
Cash dividends ($0.24 per share) declared               (2,244)       (2,244)
                               
Net loss               (1,774)       (1,774)
Other comprehensive income                   145    145 
                               
Ending Balance at June 30, 2012  $693   $91,773   $(23,720)  $21,237   $(1,142)  $88,841 

 

See accompanying notes to consolidated financial statements.

 

5

 

BCB BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In Thousands, Unaudited) 

         
   Six Months Ended
June 30,
 
   2012   2011 
Cash flows from operating activities:          
Net Income (loss)  $(1,774)  $3,873 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation of premises and equipment   560    505 
Amortization and accretion, net   856    767 
Provision for loan losses   1,800    800 
Deferred income tax benefit   (238)   (226)
Loans originated for sale   (26,533)   (10,143)
Proceeds from sale of loans   27,916    12,447 
Gain on sales of loans originated for sale   (669)   (404)
Loss on sale of real estate owned   99    136 
Gain on sales of securities held to maturity   (193)   (18)
Gain on sales of SBA loans acquired   (286)    
Loss on bulk sale of impaired loans held in portfolio   7,342     
Stock compensation expense   4     
Decrease (increase) in interest receivable   757    (184)
(Increase) decrease in other assets   (2,018)   2,929 
Increase (decrease) in accrued interest payable   1    (34)
Increase in other liabilities   1,555    1,628 
           
Net cash provided by operating activities   9,179    12,076 
           
           
Cash flows from investing activities:          
Proceeds from repayments and calls on securities held to maturity   33.693    34,831 
Purchases of securities held to maturity   (47,924)   (90,552)
Proceeds from sales of securities held to maturity   20,018    2,438 
Proceeds from sale of SBA loans acquired   10,836     
Proceeds from sales of participation interests in loans       2.437 
Proceeds from sales of real estate owned   2,835    656 
Proceeds from bulk sale of impaired loans held in portfolio   10,235     
Purchases of loans   (2,267)   (847)
Net (Increase) decrease in loans receivable   (12,423)   6,004 
Improvements to other real estate owned   (59)   (5)
Additions to premises and equipment   (826)   (1,930)
Redemption of Federal Home Loan Bank of New York stock   565    45 
           
           
Net cash provided by (used in) investing activities   14,683    (46,923)
           
Cash flows from financing activities:          
Net decrease in deposits   (12,793)   (8,675)
Repayment of long-term debt   (15,407)    
Purchases of treasury stock   (7,393)   (1,418)
Cash dividends paid   (2,244)   (2,254)
Exercise of stock options   55    207 
           
Net cash (used in) financing activities   (37,782)   (12,140)
           
Net decrease in cash and cash equivalents   (13,920)   (46,987)
Cash and cash equivalents-beginning   117,087    121,127 
           
Cash and cash equivalents-ending  $103,167   $74,140 
           
           
Supplemental disclosure of cash flow information:          
Cash paid during the year for:          
Income taxes  $1,929   $54 
Interest  $6,325   $6,784 
           
Non-cash items:          
Transfer of loans to other real estate owned  $2,373   $2,316 
Loans to facilitate sale of other real estate owned  $616   $942 
Reclassification of loans originated for sale to held to maturity  $2,146   $1,524 

See accompanying notes to consolidated financial statements.

 

6

 

BCB Bancorp Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of BCB Bancorp, Inc. (the “Company”) and the Company’s wholly owned subsidiaries, BCB Community Bank (the “Bank”), BCB Holding Company Investment Company, and Pamrapo Service Corporation. The Company’s business is conducted principally through the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation S-X and, therefore, do not necessarily include all information that would be included in audited financial statements. The information furnished reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of consolidated financial condition and results of operations. All such adjustments are of a normal recurring nature. The results of operations for the six months ended June 30, 2012 include one-time charges reflecting the sale of approximately $17.3 million in non-performing loans during the three months ended June 30, 2012. The sale resulted in a pre-tax loss of approximately $7.3 million. Management continues to evaluate its non-performing loans and, based upon market conditions and the ability to obtain satisfactory pricing, may consider sales of a portion of its non-performing loan portfolio in the future. These results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2012 or any other future period. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2011, which are included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

In preparing these consolidated financial statements, BCB Bancorp, Inc., evaluated the events and transactions that occurred between June 30, 2012, and the date these consolidated financial statements were issued.

 

Note 2 – Acquisition of Allegiance Bancorp, Inc.

 

On October 14, 2011, the Company acquired all of the outstanding common shares of Allegiance Community Bank (“Allegiance”) and thereby acquired all of Allegiance Community Bank’s two branch locations. Under the terms of the merger agreement, Allegiance stockholders received 0.35 of a share of BCB Bancorp, Inc. common stock at a price of $9.57 per share in exchange for each share of Allegiance common stock, resulting in BCB Bancorp, Inc. issuing 644,434 common shares of BCB Bancorp, Inc. common stock with an acquisition date fair value of $6.2 million. ASC 805 “Business Combinations,” permits the use of provisional amounts for the assets acquired and liabilities assumed when the information at acquisition date is incomplete. During the measurement period, which is one year from the acquisition date, amounts provisionally assigned to the acquisition may be adjusted based on new information obtained during the measurement period. Under no circumstances may the measurement period exceed one year from the acquisition date.

 

Note 3 – Pension and Other Postretirement Plans

The Company assumed, through the merger with Pamrapo Bancorp, Inc., a non-contributory defined benefit pension plan covering all eligible employees of Pamrapo Savings Bank. Effective January 1, 2010, the defined benefit pension plan (“Pension Plan”), was frozen by Pamrapo Savings Bank. All benefits for eligible participants accrued in the “Pension Plan” to the freeze date have been retained. Accordingly, no employees are permitted to commence participation in the Pension Plan and future salary increases and future years of service are not considered when computing an employee’s benefits under the Pension Plan. The Pension Plan is funded in conformity with the funding requirements of applicable government regulations. The Company also acquired through the merger with Pamrapo Bancorp, Inc. a supplemental executive retirement plan (“SERP”) in which certain former employees of Pamrapo Savings Bank are covered. A SERP is an unfunded non-qualified deferred retirement plan. Participants who retire at the age of 65 ( the “Normal Retirement Age”), are entitled to an annual retirement benefit equal to 75% of compensation reduced by their retirement plan annual benefits. Participants retiring before the Normal Retirement Age receive the same benefits reduced by a percentage based on years of service to the Company and the number of years prior to the Normal Retirement Age that participants retire.

 

Periodic pension and SERP cost, which is recorded as part of salaries and employee benefits expense in our Consolidated Statements of Income, is comprised of the following, (In Thousands):

 

                 
   Three months ended
June 30
   Six Months ended
June 30
 
   2012   2011   2012   2011 
                 
Pension plan:                    
Interest cost  $111   $117   $222   $234 
Expected return on plan assets   (100)   (94)   (200)   (188)
Amortization of unrecognized loss   28        56     
                     
Net periodic pension cost  $39   $23   $78   $46 
                     
                
SERP plan:                    
Interest cost  $5   $7   $10   $14 
                     
                
Net periodic postretirement cost  $5   $7   $10   $14 
                     

 

7

 

Note 3 – Pension and Other Postretirement Plans (Continued)

 

Stock-Based Compensation Plan

The Company, under the plan approved by its shareholders on April 28, 2011 (“2011 Stock Plan”), authorized the issuance of up to 900,000 shares of common stock of BCB Bancorp, Inc. pursuant to grants of stock options. Employees and directors of BCB Bancorp, Inc. and BCB Community Bank are eligible to participate in the 2011 Stock Plan. All stock options will be granted in the form of either "incentive" stock options or "non-qualified" stock options. Incentive stock options have certain tax advantages that must comply with the requirements of Section 422 of the Internal Revenue Code.  Only employees are permitted to receive incentive stock options. On September 29, 2011, a grant of 60,000 options was declared for certain members of the Board of Directors. The exercise price was recorded as of the close of business on September 29, 2011 and a Form 4 was filed for each Director as of that date with the Securities and Exchange Commission consistent with their filing requirements. No stock options were granted during the three months and six months ended June 30, 2012.

 

A summary of stock option activity, adjusted to retroactively reflect subsequent stock dividends, follows:

 

   Number of
Option Shares
   Range of Exercise
Prices
   Weighted
Average Exercise
Price
 
Outstanding at December 31, 2011   317,976     $5.29-29.25   $11.61 
                
Options forfeited   (6,000)   18.41-29.25    23.83 
Options exercised   (18,258)   5.29-9.34    5.89 
Options granted            
                
Outstanding at June 30, 2012   293,718     $5.29-29.25   $11.69 

 

As of June 30, 2012, stock options which are granted and were exercisable totaled 238,718 stock options.

 

8

Note 4 – Earnings Per Share

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. The diluted net income (loss) per common share is computed by adjusting the weighted average number of shares of common stock outstanding to include the effects of outstanding stock options, if dilutive, using the treasury stock method. Dilution is not applicable in periods of net loss. For the three and six months ended 2011, the weighted average of outstanding options considered to be anti-dilutive were 180,684 and were therefore excluded from the diluted net income per common share calculation.

 

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations: 

 

   For the Three Months Ended June 30, 
   2012   2011 
   Income (Loss)   Shares   Per Share   Income   Shares   Per Share 
   (Numerator)   (Denominator)   Amount   (Numerator)   (Denominator)   Amount 
   (In Thousands, Except per share data) 
                         
Net income (loss)  $(3,362)            $1,952           
                               
Basic earnings per share.                              
   Income (loss) available to                              
   Common stockholders  $(3,362)   9,142   $(0.37)  $1,952    9,356   $0.21 
Effect of dilutive securities:                              
    Stock options:                    18      
                               
Income (loss) available to                              
Common stockholders  $(3,362)   9,142   $(0.37)  $1,952    9,374   $0.21 

 

 

   For the Six Months Ended June 30, 
   2012   2011 
   Income (Loss)   Shares   Per Share   Income   Shares   Per Share 
   (Numerator)   (Denominator)   Amount   (Numerator)   (Denominator)   Amount 
   (In Thousands, Except per share data) 
Net income (loss)  $(1,774)            $3,873           
                               
Basic earnings per share.                              
   Income (loss) available to                              
   Common stockholders  $(1,774)   9,289   $(0.19)  $3,873    9,375   $0.41 
Effect of dilutive securities:                              
   Stock options:                    19      
                               
Income (loss) available to                              
Common stockholders  $(1,774)   9,289   $(0.19)  $3,873    9,394   $0.41 

 

9

 

Note 5 – Securities Available for Sale

 

  June 30, 2012 
  Cost   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
   (In Thousands) 
Equity Securities-Financial Institutions  $1,097   $133   $   $1,230 
                    

 

 

  December 31, 2011  
  Cost     Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
 
   (In Thousands)  
Equity Securities-Financial Institutions   $ 1,097     $ 70     $ 122     $ 1,045  
                                 

There were no sales of securities available for sale for the six months ended June 30, 2012 and 2011.

The unrealized losses, categorized by the length of time of continuous loss position, and fair value of related securities available for sale were as follows:

 

  Less than 12 Months    More than 12 Months    Total 
  Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 
   (In Thousands)
June 30, 2012                              
Equity Securities-Financial Institutions  $   $   $   $   $   $ 
December 31, 2011                              
Equity Securities-Financial Institutions  $878   $122   $   $   $878   $122 

 

 

 

10

 

 

Note 6 – Securities Held to Maturity

 

                 
   June 30, 2012 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
   (In Thousands) 
                 
Residential mortgage-backed securities:                    
Due after one year through five years  $4   $   $   $4 
Due after five years through ten years   17,636    222    15    17,843 
Due after ten years   180,671    7,514    45    188,140 
                     
                     
    198,311    7,736    60    205,987 
                     
                     
Municipal obligations:                    
Due after five to ten years   389    29        418 
Due after ten years   977    59        1,036 
    1,366    88        1,454 
 
 
Trust originated preferred security:
                    
Due after ten years   376    5        381 
                     
                     
    1,742    93        1,835 
    

 

 

                
                     
   $200,053   $7,829   $60   $207,822 
                     

 

The amortized cost and carrying values shown above are by contractual final maturity. Actual maturities will differ from contractual final maturities due to scheduled monthly payments related to mortgage–backed securities and due to the borrowers having the right to prepay obligations with or without prepayment penalties. As of June 30, 2012 and December 31, 2011, all residential mortgage backed securities held in the portfolio were Government Sponsored Enterprise securities.

Management has periodically decided to sell certain mortgage-backed securities that were issued by the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”). While these securities were classified as held to maturity, ASC 320 (formerly FAS 115) allows sales of securities so designated, provided that a substantial portion (at least 85%) of the principal balance has been amortized prior to the sale. During the six months ended June 30, 2012, proceeds from sales of securities held to maturity totaled approximately $20.0 million and resulted in gross gains of approximately $242,000 and gross losses of approximately $49,000. During the six months ended June 30, 2011, proceeds from sales of securities held to maturity totalled approximately $2.4 million and resulted in gross gains of approximately $25,000 and gross losses of approximately $7,000.

 

11

Note 6 – Securities Held to Maturity (Continued)

                 
   December 31, 2011 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
   (In Thousands) 
                 
U.S. Government Agencies:                    
Due within one year  $3,315   $38   $   $3,353 
Due after ten years   3,000    12        3,012 
                     
                     
    6,315    50        6,365 
                     
                     
Residential mortgage-backed securities:                    
Due within one year   9            9 
Due after one year through five years   1,325    32    3    1,354 
Due after five years through ten years   37,034    417    44    37,407 
Due after ten years   160,509    6,464    73    166,900 
                     
                     
    198,877    6,913    120    205,670 
                     
                     
Municipal obligations:                    
Due after five to ten years   391    30        421 
Due after ten years   979    59        1,038 
                     
                     
    1,370    89        1,459 
                     
Trust originated preferred security:                    
Due after ten years   403    6        409 
                     
                     
   $206,965   $7,058   $120   $213,903 
                     
12

 

 

Note 6 – Securities Held to Maturity (Continued)

 

 

The unrealized losses, categorized by the length of time of continuous loss position, and fair value of related securities held to maturity were as follows:

 

                         
   Less than 12 Months   More than 12 Months   Total 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 
   (In Thousands) 
June 30, 2012                              
                               
Residential mortgage-backed securities  $13,621   $49   $1,779   $11   $15,400   $60 
                               
   $13,621   $49   $1,779   $11   $15,400   $60 
                               
                               
December 31, 2011                              
                               
Residential mortgage-backed securities  $16,949   $82   $5,942   $38   $22,891   $120 
                               
   $16,949   $82   $5,942   $38   $22,891   $120 
                               

 

Management does not believe that any of the unrealized losses as of June 30, 2012, (which are related to sixteen residential mortgage-backed securities including two that have been in an unrealized loss for more than twelve months) represent an other-than-temporary impairment as they are primarily related to market interest rates and not related to the underlying credit quality of the issuers of the securities as all these securities were issued by U.S. Agencies. Additionally, the Company has the ability, and management has the intent, to hold such securities for the time necessary to recover cost and does not have the intent to sell the securities, and it is more likely than not that it will not have to sell the securities before recovery of their cost.

 

13

 

Note 7 - Loans Receivable and Allowance for Loan Losses

The following table presents the recorded investment in loans receivable as of June 30, 2012 and December 31, 2011 by segment and class.

 

   June 30, 2012   December 31, 2011 
   (In Thousands) 
Real estate mortgage:          
       Residential  $200,010   $218,085 
       Commercial and multi-family   493,827    472,424 
       Construction   23,150    17,000 
           
    716,987    707,509 
           
Commercial:          
       Business loans   19,216    30,290 
       Lines of credit   37,086    44,283 
           
    56,302    74,573 
           
Consumer:          
       Passbook or certificate   809    809 
       Home equity lines of credit   18,228    18,923 
       Home equity   45,749    50,152 
       Automobile   69    103 
       Personal   267    301 
           
    65,122    70,288 
           
Deposit overdrafts   339    95 
           
                       Total Loans   838,750    852,465 
           
Deferred loan fees, net   (1,576)   (1,193)
           
Allowance for loan losses   (11,413)   (10,509)
    (12,989)   (11,702)
           
                       Net Loans  $825,761   $840,763 

 

 

14

 

Note 7 - Loans Receivable and Allowance for Loan Losses (Continued)

 

Allowance for Loan Losses

 

Management reviews the adequacy of the allowance on at least a quarterly basis to ensure that the provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is adequate based on management’s assessment of probable estimated losses.  The Company’s methodology for assessing the adequacy of the allowance for loan losses consists of several key elements.  These elements include a general allocated reserve for impaired loans, a specific reserve for impaired loans and an unallocated portion.  

 

The Company consistently applies the following comprehensive methodology.  During the quarterly review of the allowance for loan losses, the Company considers a variety of factors that include:

 

  General economic conditions.

 

  Trends in charge-offs.

 

  Trends and levels of delinquent loans.

 

  Trends and levels of non-performing loans, including loans over 90 days delinquent.

 

  Trends in volume and terms of loans.

 

  Levels of allowance for specific classified loans.

 

  Credit concentrations.

 

The methodology includes the segregation of the loan portfolio by loans that are performing and loans that are impaired. Loans which are performing are evaluated collectively by loan class or loan type. The allowance for performing loans is evaluated based on historical loan loss experience, including consideration of peer loss analysis, with an adjustment for qualitative factors due to economic conditions in the Bank’s market. Impaired loans are loans which are 90 days or more delinquent or troubled debt restructured. These loans are individually evaluated for impairment either by current appraisal or net present value of expected cash flows. Management reviews the overall estimate of this allowance for reasonableness and bases the loan loss provision accordingly.

 

The portfolio of performing loans is segmented into the following loan classes, where the risk level for each class is analyzed when determining the allowance for these loans:

 

Residential single family real estate loans involve certain risks such as interest rate risk and risk of non-repayment. Adjustable-rate residential family real estate loans decreases the interest rate risk to the Bank that is associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. Repayment risk can be affected by job loss, divorce, illness and personal bankruptcy of the borrower.

  

Commercial and multi-family real estate lending entails significant additional risks as compared with residential family property lending. Such loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience on such loans is typically dependent on the successful operation of the real estate project. The success of such projects is sensitive to changes in supply and demand conditions in the market for commercial real estate as well as economic conditions generally.

 

Construction lending is generally considered to involve a high risk due to the concentration of principal in a limited number of loans and borrowers and the effects of the general economic conditions on developers and builders. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost (including interest) of the project. The nature of these loans is such that they are generally difficult to evaluate and monitor. In addition, speculative construction loans to a builder are not necessarily pre-sold and thus pose a greater potential risk to the Bank than construction loans to individuals on their personal residence.

 

Commercial business lending is generally considered higher risk due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on the business. Commercial business loans and lines of credit are primarily secured by inventories and other business assets. In most cases, any repossessed collateral for a defaulted commercial business loans will not provide an adequate source of repayment of the outstanding loan balance.

 

Home equity lending entails certain risks such as interest rate risk and risk of non-repayment. The marketability of the underlying property may be adversely affected by higher interest rates, decreasing the collateral securing the loan. Repayment risk can be affected by job loss, divorce, illness and personal bankruptcy of the borrower.

 

Home equity line of credit lending entails securing an equity interest in the borrower’s home. The risk associated with this type of lending is the marketability of the underlying property may be adversely affected by higher interest rates. Repayment risk can be affected by job loss, divorce, illness and personal bankruptcy of the borrower. This type of lending is often priced on an adjustable rate basis with the rate set at or above a predefined index. Adjustable-rate loans decreases the interest rate risk to the Bank that is associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default.

 

Consumer loans generally have more credit risk because of the type and nature of the collateral and, in certain cases, the absence of collateral. Consumer loans generally have shorter terms and higher interest rates than other lending. In addition, consumer lending collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely effected by job loss, divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan.

 

15

 

Note 7 - Loans Receivable and Allowance for Loan Losses (Continued)

The Company also maintains an unallocated allowance.  The unallocated allowance is used to cover any factors or conditions which may cause a potential loan loss but are not specifically identifiable.  It is prudent to maintain an unallocated portion of the allowance because no matter how detailed an analysis of potential loan losses is performed, these estimates lack some element of precision.  Management must make estimates using assumptions and information that is often subjective and changing rapidly. In addition, as an integral part of their examination process, the Federal Deposit Insurance Corporation will periodically review the allowance for loan losses and may require us to adjust the allowance based on their analysis of information available to it at the time of its examination.

 

Classified Assets. The Company’s 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, or a portion thereof, 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 the Company classifies problem loans, it 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. As of June 30, 2012, we had $9.6 million in assets classified as doubtful, $29.8 million in assets classified as substandard, and $27.2 million in assets classified as special mention. The loans classified as substandard represent primarily commercial loans secured either by 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 provided timely, or the collateral underlying the loan is in the process of being revalued.

The Company’s internal credit risk grades are based on the definitions currently utilized by the banking regulatory agencies.  The grades assigned and definitions are as follows, and loans graded excellent, above average, good and watch list (risk ratings 1-4) are treated as “pass” for grading purposes:

 

5 – Special Mention- Loans currently performing but with potential weaknesses including adverse trends in borrower’s operations, credit quality, financial strength, or possible collateral deficiency.

 

6 – Substandard- Loans that are inadequately protected by current sound worth, paying capacity, and collateral support. The loan needs special and corrective attention.

 

7 – Doubtful- Weaknesses in credit quality and collateral support make full collection improbable, but pending reasonable factors remain sufficient to defer the loss status.

 

8 – Loss- Continuance as a bankable asset is not warranted. However, this does not preclude future attempts at partial recovery.

The current methodology for this calculation is determined with the Company’s specific Historical Loss Percentage (“HLP”) for each loan type, using 2 years of prior Bank data (or 8 quarters). The relative weights of prior quarters are decayed logarithmically and are further adjusted based on the trend of the historical loss percentage at the time. Also, instead of applying consistent percentages to each of the credit risk grades, the current methodology applies a higher factor to classified loans based on a delinquency risk trend and concentration risk trend by using the past due and non-accrual as a percentage of the specific loan category.

 

16

Note 7 - Loans Receivable and Allowance for Loan Losses (Continued)

The following table sets forth the activity in the Bank’s allowance for loan losses by loan class for the three months ended June 30, 2012 (In Thousands):

  

Residential

  

 

 

Commercial
&
Multi-family

   Construction   Commercial
Business (1)
   Home equity (2)   Consumer   Unallocated   Total 
Allowance for loan losses:                                
Beginning balance
March 31, 2012
  $2,749   $5,840   $503   $1,075   $677   $28   $64   $10,936 
                                         
Charge-offs  $142   $522   $   $40   $19   $   $   $723 
Recoveries  $   $   $   $   $   $   $   $ 
Provisions  $170   $1,159   $474   $(134)  $(468)  $(22)  $21   $1,200 
Ending balance  $2,777   $6,477   $977   $901   $190   $6   $85   $11,413 
June 30, 2012
                                        

 

 

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.  

17

 

Note 7 - Loans Receivable and Allowance for Loan Losses (Continued)

The following table sets forth the activity in the Bank’s allowance for loan losses for the six months ended June 30, 2012 and recorded investment in loans receivable as of June 30, 2012. Net deferred loan fees of $1,576,000 at June 30, 2012, are not included in table amounts. The following table also details the amount of total loans receivable, that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan class (In Thousands):

   Residential   Commercial
&
Multi-family
   Construction   Commercial
Business (1)
   Home equity (2)   Consumer   Unallocated   Total 
Allowance for loan losses:                                        
Beginning balance-
December 31, 2011
  $2,679   $5,798   $304   $1,041   $677   $10   $   $10,509 
                                         
Charge-offs  $199   $533   $35   $110   $19   $   $   $896 
Recoveries  $   $   $   $   $   $   $   $ 
Provisions  $297   $1,212   $708   $(30)  $(468)  $(4)  $85   $1,800 
Ending balance-
June 30, 2012
  $2,777   $6,477   $977   $901   $190   $6   $85   $11,413 
Ending balance: individually
evaluated for impairment
  $715   $831   $201   $438   $145   $   $   $2,330 
Ending balance: collectively
evaluated for impairment
  $1,876   $5,235   $776   $463   $34   $6   $85   $8,475 
Ending balance: loans
acquired with deteriorated
credit quality
  $186   $411   $   $   $11   $   $   $608 
Loans receivables:                                        
Ending balance  $200,010   $493,827   $23,150   $56,302   $63,977   $1,484   $   $838,750 
Ending balance: individually
evaluated for impairment
  $12,903   $25,991   $3,439   $4,006   $2,375   $   $   $48,714 
Ending balance: collectively
evaluated for impairment
  $181,706   $463,203   $19,661   $52,055   $61,122   $1,484   $   $779,231 
Ending balance: loans
acquired with deteriorated
credit quality
  $5,401   $4,633   $50   $241   $480   $   $   $10,805 

 

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.  

18

Note 7 - Loans Receivable and Allowance for Loan Losses (Continued)

The following table sets forth the Bank’s allowance for loan losses and recorded investment in loans receivable at December 31, 2011. Net deferred loan fees of $1,193,000 at December 31, 2011 are not included in the table amounts. The table also details the amount of total loans receivable that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan class. (In Thousands):

   Residential   Commercial &
Multi-family
   Construction   Commercial
Business (1)
   Home equity (2)   Consumer   Unallocated   Total 
Ending balance-
December 31, 2011
  $2,679   $5,798   $304   $1,041   $677   $10   $   $10,509 
Ending balance: individually
evaluated for impairment
  $550   $2,674   $   $95   $72   $   $   $3,391 
Ending balance: collectively
evaluated for impairment
  $1,548   $2,654   $189   $792   $572   $10   $   $5,765 
Ending balance: loans
acquired with deteriorated
credit quality
  $581   $470   $115   $154   $33   $   $   $1,353 
                                         
Loans receivables:                                        
Ending balance  $218,085   $472,424   $17,000   $74,573   $69,075   $1,308   $   $852,465 
Ending balance: individually
evaluated for impairment
  $14,006   $39,461   $1,513   $4,307   $1,850   $   $   $61,137 
Ending balance: collectively
evaluated for impairment
  $194,862   $429,355   $13,236   $70,012   $66,613   $1,308   $   $775,386 
Ending balance: loans
acquired with deteriorated
credit quality
  $9,217   $3,608   $2,251   $254   $612   $   $   $15,942 

 

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.  

19

Note 7 - Loans Receivable and Allowance for Loan Losses (Continued)

The following table sets forth the activity in the Bank’s allowance for loan losses for the three months ended June 30, 2011. (In Thousands):

   Residential   Commercial
  &
Multi-family
   Construction   Commercial
Business (1)
   Home equity (2)   Consumer   Unallocated   Total 
Allowance for loan losses:                                        
Beginning balance
March 31, 2011
  $221   $5,799   $464   $1,534   $206   $18   $145   $8,387 
                                         
Charge-offs  $122   $   $   $24   $   $   $   $146 
Recoveries  $   $25   $   $   $   $   $   $25 
Provisions  $555   $(546)  $(109)  $(18)  $156   $(11)  $423   $450 
Ending balance
June 30, 2011
  $654   $5,278   $355   $1,492   $362   $7   $568   $8,716 

 

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.  

The following table sets forth the activity in the Bank’s allowance for loan losses for the six months ended June 30, 2011. (In Thousands):

   Residential   Commercial
  &
Multi-family
   Construction   Commercial
Business (1)
   Home equity (2)   Consumer   Unallocated   Total 
Allowance for loan losses:                                        
Beginning balance
December 31, 2010
  $171   $6,179   $426   $1,286   $204   $18   $133   $8,417 
                                         
Charge-offs  $122   $380   $   $24   $   $   $   $526 
Recoveries  $   $25   $   $   $   $   $   $25 
Provisions  $605   $(546)  $(71)  $230   $158   $(11)  $435   $800 
Ending balance
June 30, 2011
  $654   $5,278   $355   $1,492   $362   $7   $568   $8,716 
                                         

 

 

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.  

20

Note 7 - Loans Receivable and Allowance for Loan Losses (Continued)

The tables below sets forth the amounts and types of non-accrual loans in the Bank’s loan portfolio, as of June 30, 2012 and December 31, 2011. Loans are placed on non-accrual status when they become more than 90 days delinquent, or when the collection of principal and/or interest become doubtful. As of June 30, 2012 and December 31, 2011, total non-accrual loans differed from the amount of total loans past due greater than 90 days due to troubled debt restructuring of loans which are maintained on non-accrual status for a minimum of six months until the borrower has demonstrated its ability to satisfy the terms of the restructured loan.

  

  

As of June 30, 2012

 

(In Thousands)

 
Non-accruing loans:     
Residential  $6,279 
Construction   1,621 
Commercial business (1)    3,174 
Commercial and multi-family   21,424 
Home equity(2)    1,988 
Consumer    
Total  $34,486 

 

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.

 

     
  

As of December 31, 2011

 

(In Thousands)

 
Non-accruing loans:     
Residential  $15,511 
Construction   4,040 
Commercial business(1)    4,265 
Commercial and multi-family   22,280 
Home equity(2)    1,729 
Consumer    
Total  $47,825 

 

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.

 

21

 

Note 7-Loans Receivable and Allowance for Loan Losses ( Continued)  

 

The following table summarizes the recorded investment, unpaid principle balance, and the related allowance on impaired loans by portfolio class for the three and six months ended June 30, 2012 and 2011. (In Thousands):

 

   As of June 30, 2012   As of December 31, 2011 
   Recorded   Unpaid Principle   Related   Recorded   Unpaid Principle   Related 
   Investment   Recognized   Allowance   Investment   Recognized   Allowance 
With no related allowance recorded:                              
                               
Residential Mortgages  $2,895   $2,895   $   $6,142   $6,142   $ 
Commercial and Multi-family   14,406    14,406        23,417    23,417     
Construction   3,107    3,107        1,513    1,513     
Commercial Business (1)   1,431    1,431        2,366    2,366     
Home Equity (2)   1,837    1,837        1,301    1,301     
Consumer                        
 
With an allowance recorded:
                              
                               
Residential Mortgages  $11,129   $11,129   $902   $7,864   $7,864   $550 
Commercial and Multi-family   12,339    12,339    1,242    16,044    16,044    2,674 
Construction   332    332    201             
Commercial Business (1)   2,575    2,575    438    1,941    1,941    95 
Home Equity (2)   597    597    155    549    549    72 
Consumer                        
 
Total:
                              
                               
Residential Mortgages  $14,024   $14,024   $902   $14,006   $14,006   $550 
Commercial and Multi-family   26,745    26,745    1,242    39,461    39,461    2,674 
Construction   3,439    3,439    201    1,513    1,513     
Commercial Business (1)   4,006    4,006    438    4,307    4,307    95 
Home Equity (2)   2,434    2,434    155    1,850    1,850    72 
Consumer                        

 

 

22

 

Note 7-Loans Receivable and Allowance for Loan Losses ( Continued)

 

The following table summarizes the average recorded investment and interest income recognized on impaired loans by portfolio class for the three and six months ended June 30, 2012 and 2011. (In Thousands):

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2012   2011   2011   2012   2012   2011   2011 
   Average   Interest   Average   Interest   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized   Investment   Recognized   Investment   Recognized 
With no related allowance recorded:                                        
                                         
Residential Mortgages  $4,645   $47   $847   $   $5,144   $70   $594   $ 
Commercial and Multi-family   20,778    90    20,340    118    21,658    253    16,796    244 
Construction   2,154    102    3,368        1,940    102    3,215     
Commercial Business (1)   2,081    5    1,363    12    2,176    17    1,235    22 
Home Equity (2)   2,157    9    349        1,872    24    295    1 
Consumer   5                3             
                                         
With an allowance recorded:                                        
                                         
Residential Mortgages  $11,024   $127   $286   $   $9,970   $282   $286   $ 
Commercial and Multi-family   13,698    132    14,070    107    14,480    299    15,284    247 
Construction   320    6    330        213    6    330     
Commercial Business (1)   2,177    17    1,802        2,098    20    1,811     
Home Equity (2)   586    6    113    2    574    11    136    5 
Consumer                                
                                         
Total:                                        
                                         
Residential Mortgages  $15,669   $174   $1,133   $   $15,114   $352   $880   $ 
Commercial and Multi-family   34,476    222    34,410    225    36,138    552    32,080    491 
Construction   2,474    108    3,698        2,153    108    3,545     
Commercial Business (1)   4,258    22    3,165    12    4,274    37    3,046    22 
Home Equity (2)   2,743    15    462    2    2,446    35    431    6 
Consumer   5                3             

 

23

Note 7 - Loans Receivable and Allowance for Loan Losses (Continued)

The following table summarizes information in regards to troubled debt restructurings for the three months ended June 30, 2012, (In thousands):

   Number of
Contracts
  Pre-Modification
Outstanding Recorded
Investments
   Post-Modification
Outstanding Recorded
Investments
 
Troubled Debt Restructurings               
                
Residential   2   $523   $523 
Commercial and multi-family   4   $1,908   $1,908 
Construction      $   $ 
Commercial business   1   $531   $531 
 
Home equity
   1   $58   $58 
Consumer      $   $ 

 

The loans included above are considered TDR’s as a result of the Bank implementing one or more of the following concessions: granting a material extension of time, issuing a forbearance agreement, adjusting the interest rate, accepting interest only for a period of time or a change in amortization period. For the three months ending June 30, 2012, new TDR’s totaled $3.0 million. All TDR’s were considered impaired and therefore were individually evaluated for impairment in the calculation of the allowance for loan losses.

 

The following table summarizes information in regard to troubled debt restructurings entered into during the last twelve months for which there was a payment default during the three months ended June 30, 2012. (In thousands):

 

   Number of
Contracts
  Recorded Investment 
Troubled Debt Restructurings          
That Subsequently Defaulted          
           
Residential   1   $227 
Commercial and multi-family   1   $375 
Construction      $ 
Commercial business      $ 
Home equity   1   $242 
Consumer      $ 

 

24

 

Note 7 - Loans Receivable and Allowance for Loan Losses (Continued)

The following table summarizes information in regards to troubled debt restructurings for the six months ended June 30, 2012, (In thousands):

   Number of
Contracts
  Pre-Modification
Outstanding Recorded
Investments
   Post-Modification
Outstanding Recorded
Investments
 
Troubled Debt Restructurings               
                
Residential   11   $4,080   $4,080 
Commercial and multi-family   13   $7,277   $7,277 
Construction      $   $ 
Commercial business   1   $531   $531 
 
Home equity
   3   $258   $258 
Consumer      $   $ 

 

The loans included above are considered TDR’s as a result of the Bank implementing one or more of the following concessions: granting a material extension of time, issuing a forbearance agreement, adjusting the interest rate, accepting interest only for a period of time or a change in amortization period. For the six months ending June 30, 2012, new TDR’s totaled $12.1 million. All TDR’s were considered impaired and therefore were individually evaluated for impairment in the calculation of the allowance for loan losses. 

 

The following table summarizes information in regard to troubled debt restructurings entered into during the last twelve months for which there was a payment default during the six months ended June 30, 2012. (In thousands):

 

   Number of
Contracts
  Recorded Investment 
Troubled Debt Restructurings          
That Subsequently Defaulted          
           
Residential   3   $443 
Commercial and multi-family   3   $1,515 
Construction      $ 
Commercial business   1   $844 
Home equity   3   $537 
Consumer      $ 

 

25

Note 7 - Loans Receivable and Allowance for Loan Losses (Continued)

The following table sets forth the delinquency status of total loans receivable as of June 30, 2012: 

   30-59 Days
Past Due
   60-90
Days Past
Due
   Greater
Than 90 Days
   Total
Past Due
   Current   Total Loans
Receivable
   Loans
Receivable >90
Days and
Accruing
 
   (In Thousands) 
 Residential  $2,851   $1,280   $3,311   $7,442   $192,568   $200,010   $ 
 Commercial and multi-family   3,525    2,066    14,089    19,680    474,147    493,827     
 Construction       2,706    1,621    4,327    18,823    23,150     
Commercial business(1)   2,551        2,174    4,725    51,577    56,302     
Home equity(2)   602    8    1,931    2,541    61,436    63,977     
 Consumer   1            1    1,483    1,484     
 
Total
  $9,530   $6,060   $23,126   $38,716   $800,034   $838,750   $ 

 

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.

 

The following table sets forth the delinquency status of total loans receivable at December 31, 2011:

   30-59 Days
Past Due
   60-90
Days Past
Due
   Greater
Than 90 Days
   Total
Past Due
   Current   Total Loans
Receivable
   Loans
Receivable >90
Days and
Accruing
 
   (In Thousands) 
 Residential  $3,272   $1,381   $10,473   $15,126   $202,959   $218,085   $ 
 Commercial and multi-family   11,112    1,839    19,866    32,817    439,607    472,424     
 Construction   130        3,660    3,790    13,210    17,000     
Commercial business(1)   536    499    1,286    2,321    72,252    74,573     
Home equity(2)   1,738    242    1,099    3,079    65,996    69,075     
 Consumer   10            10    1,298    1,308     
 
Total
  $16,798   $3,961   $36,384   $57,143   $795,322   $852,465   $ 

 

 

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.

26

 

Note 7 - Loans Receivable and Allowance for Loan Losses (Continued)

The following table presents the loan portfolio types summarized by the aggregate pass rating and the classified ratings of special mention, substandard, doubtful, and loss within the Company’s internal risk rating system as of June 30, 2012 (In Thousands):

   Pass   Special
Mention
   Substandard   Doubtful   Loss   Total 
                         
Residential  $184,267   $7,354   $5,236   $3,153   $   $200,010 
 
Commercial and multi-family
   457,763    15,363    16,661    4,040        493,827 
Construction   18,566        4,404    180        23,150 
Commercial business(1)   49,104    3,504    1,546    2,148         56,302 
Home equity(2)   60,951    995    1,903    128         63,977 
Consumer   1,480        4            1,484 
 
Total
  $772,131   $27,216   $29,754   $9,649   $   $838,750 

 

 

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.

The following table presents the loan portfolio types summarized by the aggregate pass rating and the classified ratings of special mention, substandard, doubtful, and loss within the Company’s internal risk rating system as of December 31, 2011 (In Thousands):

 

   Pass   Special
Mention
   Substandard   Doubtful   Loss   Total 
                         
Residential  $203,317   $5,316   $7,632   $1,437   $383   $218,085 
 
Commercial and multi-family
   426,983    19,620    23,618    2,203        472,424 
Construction   13,697        2,619    684        17,000 
Commercial business(1)   67,593    2,827    1,245    2,784    124    74,573 
Home equity(2)   67,126    468    1,412        69    69,075 
Consumer   1,308                    1,308 
 
Total
  $780,024   $28,231   $36,526   $7,108   $576   $852,465 

 

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.

27

 

Note 7 - Loans Receivable and Allowance for Loan Losses (Continued)

The following table presents the unpaid principal balance and the related recorded investment of acquired loans included in our Consolidated Statements of Financial Condition. (In Thousands):

 

   June 30,   December 31, 
   2012   2011 
     
Unpaid principal balance  $352,224   $410,057 
Recorded investment   348,205    405,951 

 

The following table presents changes in the accretable discount on loans acquired for the six months ended June 30, 2012 and 2011, (In Thousands):

 

   June 30,   June 30, 
   2012   2011 
     
Beginning Balance  $180,722   $205,491 
     Accretion   (28,049)   (23,714)
           
Ending Balance  $152,673   $181,777 

No interest income is being recognized on loans acquired where the fair value of the loan was based on the cash flows expected to be received from the foreclosure and sale of the underlying collateral. The carrying value of these loans as of June 30, 2012, December 31, 2011, and June 30, 2011, was $8.9 million, $13.3 million, and $11.0 million, respectively.

 

28

 

Note 8 – Fair Values of Financial Instruments

 

Guidance on fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

The only assets or liabilities that the Company measured at fair value on a recurring basis were as follows (In Thousands):

 

Description  Total   (Level 1)
Quoted Prices in
Active Markets
for Identical
Assets
   (Level 2)
Significant
Other
Observable
Inputs
   (Level 3)
Significant
Unobservable
Inputs
 
As of June 30, 2012:                    
                     
Securities available for sale — Equity Securities  $1,230   $1,230   $   $ 
                     
As of December 31, 2011:                    
                     
Securities available for sale — Equity Securities  $1,045   $1,045   $   $ 

There were no transfers of assets or liabilities into or out of Level 1, Level 2, or Level 3 of the fair value hierarchy during the six months ended June 30, 2012.

The Company’s policy is to recognize transfers between levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers of assets or liabilities into or out of Level 1, Level 2, or Level 3 of the fair value hierarchy during the six months ended June 30, 2012.

The only assets or liabilities that the Company measured at fair value on a nonrecurring basis were as follows (In Thousands):

 

Description  Total   (Level 1)
Quoted Prices in
Active Markets
for Identical
Assets
   (Level 2)
Significant
Other
Observable
Inputs
   (Level 3)
Significant
Unobservable
Inputs
 
As of June 30, 2012:                    
                     
Impaired loans  $24,034   $   $   $24,034 
                     
                     
As of December 31, 2011:                    
                     
Impaired Loans  $23,007   $   $   $23,007 
Real estate owned  $300   $   $   $300 

 

29

Note 8 – Fair Values of Financial Instruments (Continued) 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized adjusted Level 3 inputs to determine fair value, (Dollars in thousands):

 

Quantitative Information about Level 3 Fair Value Measurements
 

Fair Value

Estimate

Valuation

Techniques

Unobservable

Input

Range

 

June 30, 2012:        
Impaired Loans $  24,034 Appraisal of collateral (1) Appraisal adjustments (2) 0%-10%
      Liquidation expenses (3) 0%-10%

 

(1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
(3)Includes qualitative adjustments by management and estimated liquidation expenses.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments as of` June 30, 2012 and December 31, 2011.

  

Cash and Cash Equivalents (Carried at Cost)

The carrying amounts reported in the consolidated statements of financial condition for cash and short-term instruments approximate those assets’ fair values.

Securities

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets and/or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.

Loans Held for Sale (Carried at Lower of Cost or Fair Value)

The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for specific attributes of that loan. Loans held for sale are carried at their cost as of June 30, 2012 and December 31, 2011.

Loans Receivable (Carried at Cost)

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (Generally Carried at Fair Value)

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the loans observable market price or the fair value of the collateral if the loan is collateral dependent. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances of $26,972,000 and $26,398,000, net of a valuation allowance of $2,938,000 and $3,391,000 as of June 30, 2012 and December 31, 2011, respectively.

 

30

Note 8 – Fair Values of Financial Instruments (Continued)

 

Real Estate Owned (Generally Carried at Fair Value)

Real Estate Owned is generally carried at fair value, when the carry value is written down to fair value, which is determined based upon independent third-party appraisals of the properties, or based upon the expected proceeds from a pending sale. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

FHLB of New York Stock (Carried at Cost)

The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.

Interest Receivable and Payable (Carried at Cost)

The carrying amount of interest receivable and interest payable approximates its fair value.

Deposits (Carried at Cost)

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Long-Term Debt (Carried at Cost)

Fair values of long-term debt are estimated using discounted cash flow analysis, based on quoted prices for new long-term debt with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-Balance Sheet Financial Instruments

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and unused lines of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these commitments was deemed immaterial and is not presented in the accompanying table.

 

31

Note 8 – Fair Values of Financial Instruments (Continued)

 

The carrying values and estimated fair values of financial instruments were as follows as of June 30, 2012 and December 31, 2011:

 

                     
   Carrying
Value
   Fair Value   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
       (In Thousands) 
                     
Financial assets:                         
Cash and cash equivalents  $103,167   $103,167   $103,167         
Securities available for sale   1,230    1,230    1,230         
Securities held to maturity   200,053    207,822        207,822     
Loans held for sale   2,996    3,083        3,083     
Loans receivable   825,761    876,152            876,152 
FHLB of New York stock   6,933    6,933    6,933         
Interest receivable   4,240    4,240    4,240         
                          
Financial liabilities:                        
Deposits   964,830    969,759    519,949    449,810     
Long-term debt   114,124    128,538        128,538     
Interest payable   814    814    814         
                          

 

   December 31, 
   2011 
   Carrying
Value
   Fair Value 
     
         
Financial assets:          
Cash and cash equivalents  $117,087   $117,087 
Securities available for sale   1,045    1,045 
Securities held to maturity   206,965    213,903 
Loans held for sale   5,856    6,020 
Loans receivable   840,763    890,215 
FHLB of New York stock   7,498    7,498 
Interest receivable   4,997    4,997 
           
Financial liabilities:          
Deposits   977,623    982,500 
Long-term debt   129,531    141,108 
Interest payable   813    813 
           

 

32

 

Note 9 – New Accounting Pronouncements

 

In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This standard indefinitely defers certain provisions of ASU 2011-05 (described below). The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance did not result in a change in the presentation of comprehensive income in the Company’s consolidated financial statements.

  

In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income. The ASU eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and will require it be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement format would include the traditional income statement and the components of total other comprehensive income as well as total comprehensive income. In the two statement approach, the first statement would be the traditional income statement which would be immediately followed by a separate statement which includes the components of other comprehensive income, total other comprehensive income and total comprehensive income. The amendments in this ASU will be applied retrospectively. For public companies, they are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. Adoption of ASU 2011-05 did not have a significant impact on the Company’s consolidated financial statements.

 

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Some of the amendments in this update clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  This update is effective during interim and annual periods beginning on or after December 15, 2011 and is to be applied prospectively and early adoption is not permitted.  Adoption of ASU 2011-04 did not have a significant impact on the Company’s consolidated financial statements.

 

 

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Completion of Acquisition

 

On October 14, 2011, the Bank completed its merger with Allegiance Community Bank, as contemplated by the Agreement and Plan of Merger by and between BCB Bancorp, and Allegiance Community Bank dated April 4, 2011 (the “Agreement”). Under the terms of the Agreement, each share of Allegiance Community Bank stock was converted into 0.35 of a share of BCB Bancorp common stock. The transaction is valued at approximately $6.2 million based on BCB Bancorp’s closing share price of $9.57 per share on October 13, 2011, resulting in the issuance of 644,434 shares.

 

Financial Condition

Total assets decreased by $37.9 million or 3.1% to $1.179 billion at June 30, 2012 from $1.217 billion at December 31, 2011. The decrease in total assets occurred primarily as a result of decreases in loans receivable of $15.0 million, securities held to maturity of $6.9 million, loans held for sale of $2.9 million and cash and cash equivalents of $13.9 million. Management is concentrating on controlled balance sheet growth and maintaining adequate liquidity in the anticipation of funding loans in the loan pipeline as well as seeking opportunities in the secondary market that provide reasonable returns. During the second quarter, the composition of the Bank’s statement of financial condition remained relatively similar to the composition of the statement of financial condition at year end December 31, 2011, with the exception of a decrease of $15.0 million or 1.8% in the balance of loans receivable to $825.8 million at June 30, 2012, from $840.8 million at December 31, 2011. During the three months ended June 30, 2012 the Bank sold a portion of the non-performing loan portfolio which totaled approximately $17.6 million. Additionally, the Company took advantage of favorable market conditions to prepay certain advances from the Federal Home Loan Bank of New York during the six months ended June 30, 2012 that were acquired through the business combination transaction with Allegiance Community Bank. This decrease totaled $15.4 million or 11.9% to $114.1 million at June 30, 2012 from $129.5 million at December 31, 2011. It is our intention to grow at a measured pace consistent with our capital levels and as business opportunities permit.

 

Total cash and cash equivalents decreased by $13.9 million or 11.9% to $103.2 million at June 30, 2012 from $117.1 million at December 31, 2011. Investment securities classified as held-to-maturity decreased by $6.9 million or 3.3% to $200.1 million at June 30, 2012 from $207.0 million at December 31, 2011. This decrease in investment securities resulted primarily from purchases of $47.9 million for the six months ended June 30, 2012 more than offset by allowable sales of $19.8 million of mortgage-backed securities from the held-to-maturity portfolio, $27.4 million of repayments and prepayments in the mortgage-backed securities portfolio, $3.3 million in maturities of certain Government Sponsored Enterprise bonds and $3.0 million of call options exercised on certain callable agency securities for the six months ended June 30, 2012.

 

Loans receivable decreased by $15.0 million or 1.8% to $825.8 million at June 30, 2012 from $840.8 million at December 31, 2011. The decrease resulted primarily from the sale of certain commercial loans acquired from Allegiance Community Bank totaling approximately $10.8 million. This sale resulted in a gain on sale of loans of approximately $286,000. Further, as previously mentioned, the Bank sold approximately $17.6 million of loans from the loan portfolio that were non-performing loans. The sale of this sub-set of the non-performing loan portfolio resulted in a pre-tax loss of approximately $7.3 million. The balance in the loan pipeline at June 30, 2012 totaled $72.1 million. As of June 30, 2012, the allowance for loan losses was $11.4 million or 33.1% of non-performing loans and 1.36% of gross loans. As a result of the loans acquired in the recent business combination transactions being recorded at their fair value, the balance in the allowance for loan losses that were on the balance sheet of the former Pamrapo Bancorp, Inc., and Allegiance Community Bank are precluded from being reported in the allowance balance previously discussed, consistent with generally accepted accounting principles.

 

Deposit liabilities decreased by $12.8 million or 1.3% to $964.8 million at June 30, 2012 from $977.6 million at December 31, 2011. The decrease resulted primarily from a $15.6 million decrease in interest bearing deposits which more than offset a $2.8 million increase in non-interest bearing deposits. During the six months ended June 30, 2012, the Federal Open Market Committee (FOMC) has continued its low interest rate accommodative monetary philosophy. This has resulted in persistent low short term market rates that have further resulted in low time deposit account yields which in turn has had the effect of decreasing interest expense.

 

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The balance of borrowed money decreased by $15.4 million or 11.9% to $114.1 million at June 30, 2012 from $129.5 million at December 31, 2011. The decrease in borrowed money resulted primarily from the pre-payment of $15.4 million in Federal Home Loan Bank Advances that were acquired in the business combination transaction with Allegiance Community Bank. As a result, a pre-payment penalty of $49,000 was recognized in interest expense. The purpose of the 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 GSE investment securities.

 

Stockholders’ equity decreased by $11.21 million or 11.2% to $88.84 million at June 30, 2012 from $100.05 million at December 31, 2011. The decrease in stockholders’ equity is primarily attributable to the repurchase of 715,842 shares of the Company’s common stock at a cost of $7.4 million, consistent with the 10b5-1 stock repurchase plan in place during the six months ended June 30, 2012, as well as the payment of a two quarterly cash dividends totaling $2.2 million, along with a net loss for the six months ended June 30, 2012 of $1.8 million, partially offset by an increase of $55,000 resulting from the exercise of stock options totaling 18,258 shares, and a $145,000 decrease in accumulated other comprehensive loss. As of June 30, 2012, the Bank’s Tier 1, Tier 1 Risk-Based and Total Risk Based Capital Ratios were 7.75%, 13.37% and 14.58% respectively.

 

Three Months of Operations

Net income decreased by $5.31 million or 272.3% to a net loss of $3.36 million for the three months ended June 30, 2012 compared with net income of $1.95 million for the three months ended June 30, 2011. The decrease in net income was due to increases in non-interest expense and the provision for loan losses and a decrease in non-interest income, partially offset by an increase in net interest income and a decrease in income taxes. Net interest income increased by $366,000 or 3.7% to $10.25 million for the three months ended June 30, 2012 from $9.88 million for the three months ended June 30, 2011. The increase in net interest income resulted primarily from an increase in the average balance of interest earning assets of $96.0 million or 8.9% to $1.175 billion for the three months ended June 30, 2012 from $1.079 billion for the three months ended June 30, 2011, partially offset by a decrease in the average yield on interest earning assets of thirty-eight basis points to 4.53% for the three months ended June 30, 2012 from 4.91% for the three months ended June 30, 2011. The average balance of interest bearing liabilities increased by $89.0 million or 9.6% to $1.012 billion for the three months ended June 30, 2012 from $923.0 million for the three months ended June 30, 2011, and the average cost of interest bearing liabilities decreased by twenty-five basis points to 1.21% for the three months ended June 30, 2012 from 1.46% for the three months ended June 30, 2011. The decrease of thirty-eight basis points in the average yield of interest earning assets more than offset the decrease of twenty-five basis points on the average cost of interest bearing liabilities. As a consequence and in contrast to the increase in net interest income, our net interest margin decreased to 3.49% for the three months ended June 30, 2012 from 3.66% for the three months ended June 30, 2011. The increase in the average balance of interest earning assets and the average balance of interest bearing liabilities reflects the completion of the business combination transaction with Allegiance Community Bank.

 

Interest income on loans receivable increased by $666,000 or 6.0% to $11.76 million for the three months ended June 30, 2012 from $11.09 million for the three months ended June 30, 2011. The increase was primarily attributable to an increase in the average balance of loans receivable of $71.0 million or 9.1% to $855.0 million for the three months ended June 30, 2012 from $784.0 million for the three months ended June 30, 2011, partially offset by a decrease in the average yield on loans receivable to 5.50% for the three months ended June 30, 2012 from 5.66% for the three months ended June 30, 2011. The increase in the average balance of loans is primarily attributable to the acquisition of Allegiance Community Bank. The decrease in average yield reflects the competitive price environment prevalent in the Bank’s primary market area on loan facilities as well as the repricing downward of variable rate loans.

 

Interest income on securities decreased by $611,000 or 28.6% to $1.52 million for the three months ended June 30, 2012 from $2.13 million for the three months ended June 30, 2011. This decrease was primarily due to a decrease in the average yield of securities held-to-maturity to 2.89% for the three months ended June 30, 2012 from 3.64% for the three months ended June 30, 2011.The decrease in the average yield reflects the continuing low interest rate environment during the three months ended June 30, 2012. Also contributing to the decrease was a decrease in the average balance of securities held-to-maturity of $23.2 million or 7.9% to $211.9 million for the three months ended June 30, 2012 from $235.1 million for the three months ended June 30, 2011.

 

Interest income on other interest-earning assets increased by $16,000 or 88.9% to $34,000 for the three months ended June 30, 2012 from $18,000 for the three months ended June 30, 2011. This increase was primarily due to an increase of $48.6 million or 81.1% in the average balance of other interest-earning assets to $108.5 million for the three months ended June 30, 2012 from $59.9 million for the three months ended June 30, 2011. The average yield on other interest-earning assets increased slightly to 0.13% for the three months ended June 30, 2012 from 0.12% for the three month ended June 30, 2011. The static nature of the average yield on other interest earning assets reflects the philosophy by the FOMC of keeping short term interest rates at historically low levels for the last two years. The increase in the average balance of other interest earning assets is primarily attributable to the completion of the acquisition of Allegiance Community Bank.

 

Total interest expense decreased by $295,000 or 8.8% to $3.07 million for the three months ended June 30, 2012 from $3.37 million for the three months ended June 30, 2011. The decrease resulted primarily from a decrease in the average cost of interest bearing liabilities of twenty-five basis points to 1.21% for the three months ended June 30, 2012 from 1.46% for the three months ended June 30, 2011, partially offset by an increase in the balance of average interest bearing liabilities of $89.0 million or 9.6% to $1.012 billion for the three months ended June 30, 2012 from $923.0 million for the three months ended June 30, 2011. The increase in the balance of average interest bearing liabilities is primarily attributable to the completion of the acquisition of Allegiance Community Bank. The decrease in the average cost reflects the Company’s reaction to the lower short term interest rate environment and our ability to reduce our pricing on a select number of retail deposit products.

 

The provision for loan losses totaled $1.2 million and $450,000 for the three month periods ended June 30, 2012 and 2011, 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) our level of loan growth and (5) the existing level of reserves for loan losses that are probable and estimable. During the three months ended June 30, 2012, the Bank experienced $723,000 in net charge-offs, (consisting of $723,000 in charge-offs and no recoveries). During the three months ended June 30, 2011, the Bank experienced $121,000 in net charge-offs, (consisting of $146,000 in charge-offs and $25,000 in recoveries). The Bank had non-performing loans totaling $34.5 million or 4.11% of gross loans at June 30, 2012, $47.8 million or 5.61% of gross loans at December 31, 2011 and $42.5 million or 5.49% of gross loans at June 30, 2011. The decrease in non-performing loans resulted primarily from the sale of approximately $17.6 million in non-performing loans during the three months ended June 30, 2012. The sale resulted in a pre-tax loss of approximately $7.3 million. Management continues to evaluate its non-performing loans and, based upon market conditions and the ability to obtain satisfactory pricing, may consider sales of a portion of its non-performing loan portfolio in the future. The allowance for loan losses was $11.4 million or 1.36% of gross loans at June 30, 2012, $10.5 million or 1.23% of gross loans at December 31, 2011 and $8.7 million or 1.13% of gross loans at June 30, 2011. 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 losses 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 as of June 30, 2012, December 31, 2011 and June 30, 2011.

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Total non-interest income (loss) decreased by $6.7 million to a $6.3 million loss for the three months ended June 30, 2012 from income of $429,000 for the three months ended June 30, 2011. The decrease in non-interest income resulted primarily from the aforementioned $7.3 million loss on the sale of non-performing loans partially offset by a $384,000 or 144.9% increase in fees and service charges and other non-interest income to $649,000 for the three months ended June 30, 2012 from $265,000 for the three months ended June 30, 2011, an increase in gain on sale of securities of $48,000 or 266.7% to $66,000 for the three months ended June 30, 2012 from $18,000 for the three months ended June 30, 2011 and an increase of $90,000 or 39.8% in gain on sale of loans to $316,000 for the three months ended June 30, 2012 from $226,000 for the three months ended June 30, 2011. The increase in gain on sale of loans occurred primarily as a result of the active local market for refinancing one-to four-family residential mortgages, aided in large part by the low interest rate environment. The Bank also recorded an increase on gain (loss) on sale of real estate owned of $118,000 or 147.5% to $38,000 for the three months ended June 30, 2012 from a loss of $80,000 for the three months ended June 30, 2011. Loss on sale of loans held in portfolio increased to $7.3 million for the three months ended June 30, 2012 from no such corresponding entry for the three months ended June 30, 2011. As previously discussed, the Bank sold approximately $17.4 million of loans previously categorized as non-performing and realized a pre-tax loss of $7.3 million. The primary reason for this transaction was the elimination of carrying and legacy costs associated with these non-interest earning assets.

Total non-interest expense increased by $1.48 million or 22.6% to $8.04 million for the three months ended June 30, 2012 from $6.56 million for the three months ended June 30, 2011. Unless specified otherwise, the increase in the categories of non-interest expense occurred primarily as a result of the acquisition of Allegiance Community Bank. Salaries and employee benefits expense increased by $991,000 or 34.2% to $3.89 million for the three months ended June 30, 2012 from $2.90 million for the three months ended June 30, 2011. This increase occurred primarily as a result of an increase in the number of full time equivalent employees to 205 at June 30, 2012, from 168 at June 30, 2011. Occupancy expense increased by $164,000 or 22.7% to $887,000 for the three months ended June 30, 2012 from $723,000 for the three months ended June 30, 2011. Equipment expense increased by $83,000 or 7.8% to $1.15 million for the three months ended June 30, 2012 from $1.07 million for the three months ended June 30, 2011. The primary component of this expense item is data service provider expense which increases with the growth in the Bank’s assets. Professional fees increased by $337,000 or 130.6% to $595,000 for the three months ended June 30, 2012 from $258,000 for the three months ended June 30, 2011. The increase is due to the various legal actions the Bank is involved with during the normal course of business. Directors’ fees increased by $2,000 or 1.1% to $182,000 for the three months ended June 30, 2012 from $180,000 for the three months ended June 30, 2011. Regulatory assessments decreased by $60,000 or 16.9% to $295,000 for the three months ended June 30, 2012 from $355,000 for the three months ended June 30, 2011 primarily due to the new assessment base methodology pursuant to the Dodd- Frank Act which lowered the Bank’s insurance premium. Advertising expense increased by $23,000 or 21.7% to $129,000 for the three months ended June 30, 2012 from $106,000 for the three months ended June 30, 2011. Other non-interest expense increased by $196,000 or 27.6% to $907,000 for the three months ended June 30, 2012 from $711,000 for the three months ended June 30, 2011. Other non-interest expense is comprised of loan expense, stationary, forms and printing, check printing, correspondent bank fees, telephone and communication, and other fees and expenses.

Income taxes decreased by $3.25 million or 240.7% to a tax benefit of $1.9 million for the three months ended June 30, 2012 compared with a tax provision of $1.35 million for the three months ended June 30, 2011, reflecting decreased taxable income during the three months ended June 30, 2012 primarily as a result of the previously mentioned non-performing loan sale completed during the three months ended June 30, 2012. The consolidated effective tax rate for the three months ended June 30, 2012 was a tax benefit of 36.1% compared to a tax provision of 40.9% for the three months ended June 30, 2011.

 

Six Months of Operations

 

Net income decreased by $5.65 million or 145.7% to a net loss of $1.77 million for the six months ended June 30, 2012 compared with net income of $3.87 million for the six months ended June 30, 2011. The decrease in net income was due to increases in the non-interest expense and provision for loans losses, and a decrease in non-interest income (loss) partially offset by an increase in net interest income and a decrease in income taxes. Net interest income increased by $991,000 or 5.1% to $20.55 million for the six months ended June 30, 2012 from $19.55 million for the six months ended June 30, 2011. This increase in net interest income resulted primarily from an increase of $102.0 million or 9.4% in the average balance of interest earning assets to $1.184 billion for the six months ended June 30, 2012 from $1.082 billion for the six months ended June 30, 2011, partially offset by a decrease in the average yield on interest earning assets to 4.54% for the six months ended June 30, 2011 from 4.86% for the six months ended June 30, 2011. The average balance of interest bearing liabilities increased by $99.1 million or 10.7% to $1.026 billion for the six months ended June 30, 2012 from $926.9 million for the six months ended June 30, 2011, while the average cost of interest bearing liabilities decreased to 1.23% for the six months ended June 30, 2012 from 1.46% for the six months ended June 30, 2011. As a consequence of the aforementioned, our net interest margin decreased to 3.47% for the six months ended June 30, 2012 from 3.62% for the six months ended June 30, 2011. The increase in the average balance of interest earning assets and the average balance of interest bearing liabilities reflects the completion of the business combination transaction with Allegiance Community Bank.

 

Interest income on loans receivable increased by $1.38 million or 6.2% to $23.73 million for the six months ended June 30, 2012 from $22.35 million for the six months ended June 30, 2011. The increase was primarily attributable to an increase in the average balance of loans receivable of $69.9 million or 8.9% to $859.3 million for the six months ended June 30, 2012 from $789.4 million for the six months ended June 30, 2011, partially offset by a decrease in the average yield on loans receivable to 5.52% for the six months ended June 30, 2012 from 5.66% for the six months ended June 30, 2011. The increase in the average balance of loans is primarily attributable to the completion of the business combination transaction with Allegiance Community Bank. The decrease in average yield reflects the competitive price environment prevalent in the Bank’s primary market area on loan facilities as well as the repricing downward of variable rate loans.

Interest income on securities decreased by $830,000 or 21.2% to $3.08 million for the six months ended June 30, 2012 from $3.91 million for the six months ended June 30, 2011. This decrease was primarily due to a decrease in the average balance of securities held-to-maturity of $3.8 million or 1.7% to $214.7 million for the six months ended June 30, 2012 from $218.5 million for the six months ended June 30, 2011, as well as a decrease in the average yield of securities held-to-maturity to 2.87% for the six months ended June 30, 2012 from 3.58% for the six months ended June 30, 2011. The decrease in the average yield reflects the low interest rate environment during the six months ended June 30, 2012.

 

Interest income on other interest-earning assets increased by $19,000 or 41.3% to $65,000 for the six months ended June 30, 2012 from $46,000 for the six months ended June 30, 2011. This increase was primarily due to an increase of $36.6 million or 49.5% in the average balance of other interest-earning assets to $110.5 million for the six months ended June 30, 2012 from $73.9 million for the six months ended June 30, 2011. The average yield on other interest-earning assets remained static at 0.12% for the six months ended June 30, 2012 and June 30, 2011. The static nature of the average yield on other interest-earning assets reflects the philosophy by the FOMC of keeping short term interest rates at historically low levels for the last two years.

 

Total interest expense decreased by $424,000 or 6.3% to $6.33 million for the six months ended June 30, 2012 from $6.75 million for the six months ended June 30, 2011. The decrease resulted primarily from a decrease in the average cost of interest-bearing liabilities of twenty-three basis points to 1.23% for the six months ended June 30, 2012 from 1.46% for the six months ended June 30, 2011, partially offset by an increase in the balance of average interest-bearing liabilities of $99.1 million or 10.7% to $1.026 billion for the six months ended June 30, 2012 from $926.9 million for the six months ended June 30, 2011. The increase in the balance of average interest- bearing liabilities is primarily attributable to the completion of the business combination transaction with Allegiance Community Bank. The decrease in the average cost reflects the Company’s reaction to the lower short term interest rate environment and our ability to reduce our pricing on a select number of retail deposit products.

The provision for loan losses totaled $1.8 million for the six months ended June 30, 2012 and $800,000 for the six months ended June 30, 2011. 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 dynamic activity and fluctuating balance of loans receivable, and (5) the existing level of reserves for loan losses that are probable and estimable. During the six months ended June 30, 2012, the Bank experienced $896,000 in net charge-offs (consisting of $896,000 in charge-offs and no recoveries). During the six months ended June 30, 2011, the Bank experienced $501,000 in net charge-offs (consisting of $526,000 in charge-offs and $25,000 in recoveries). The Bank had non-performing loans totaling $34.5 million or 4.11% of gross loans at June 30, 2012, $47.8 million or 5.61% of gross loans at December 31, 2011 and $42.5 million or 5.49% of gross loans at June 30, 2011. The decrease in non-performing loans resulted primarily from the sale of approximately $17.6 million in non-performing loans during the second quarter of 2012. The sale resulted in a pre-tax loss of approximately $7.3 million.

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Management continues to evaluate its non-performing loans and, based upon market conditions and the ability to obtain satisfactory pricing, may consider sales of a portion of its non-performing loan portfolio in the future. The allowance for loan losses was $11.4 million or 1.36% of gross loans at June 30, 2012, $10.5 million or 1.23% of gross loans at December 31, 2011 and $8.7 million or 1.13% of gross loans at June 30, 2011. 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 losses 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 June 30, 2012, December 31, 2011 and June 30, 2011.

 

Total non-interest income (loss) decreased by $6.0million for the six months ended June 30, 2012 from $906,000 for the six months ended June 30, 2011. The decrease in non-interest income resulted primarily from the aforementioned $7.3 million loss on the sale of non-performing loans partially offset by an increase of $551,000 or 136.4% in gain on sale of loans originated for sale to $669,000 for the six months ended June 30, 2012 from $404,000 for the six months ended June 30, 2011. The increase in gain on sale of loans originated for sale occurred primarily as a result of the active local market for refinancing one-four family residential mortgages, aided in large part by the low interest rate environment. In addition, the Bank sold approximately $10.7 million of commercial business loans acquired in the Allegiance Community Bank acquisition which resulted in a gain of approximately $286,000. Gain on sale of securities held to maturity increased by $175,000 or 972.2% to $193,000 for the six months ended June 30, 2012 from $18,000 for the six months ended June 30, 2011. Fees and service charges and other non-interest income increased by $544,000 or 87.7% to $1.16 million for the six months ended June 30, 2012 from $620,000 for the six months ended June 30, 2011. The aforementioned increases were partially offset by a $99,000 loss on the sale of certain REO properties for the six months ended June 30, 2012 compared to $136,000 loss for the six months ended June 30, 2011.

 

Total non-interest expense increased by $3.07 million or 23.2% to $16.28 million for the six months ended June 30, 2012 from $13.21 million for the six months ended June 30, 2011. Unless specified otherwise, the increase in the categories of non-interest expense occurred primarily as a result of the acquisition of Allegiance Community Bank. Salaries and employee benefits expense increased by $1.91 million or 32.3% to $7.82 million for the six months ended June 30, 2012 from $5.91 million for the six months ended June 30, 2011. This increase occurred primarily as the result of an increase in the number of full time equivalent employees to 205 at June 30, 2012, from 168 at June 30, 2011. Occupancy expense increased by $230,000 or 15.3% to $1.73 million for the six months ended June 30, 2012 from $1.5 million for the six months ended June 30, 2011. Equipment expense increased by $508,000 or 24.3% to $2.6 million for the six months ended June 30, 2012 from $2.09 million for the six months ended June 30, 2011. The primary component of this expense item is data service provider expense which increases with the growth of the Bank’s assets. In addition, system conversion costs due to the acquisition of Allegiance Community Bank totaled approximately $250,000. Professional fees increased by $565,000 or 122.6% to $1.03 million for the six months ended June 30, 2012 from $461,000 for the six months ended June 30, 2011. The increase is due to the various legal actions the Bank is involved with during the normal course of business. Director fees increased by $93,000 or 31.1% to $392,000 for the six months ended June 30, 2012 from $299,000 for the six months ended June 30, 2011. Regulatory assessments decreased by $187,000 or 23.6% to $606,000 for the six months ended June 30, 2012 from $793,000 for the six months ended June 30, 2011 primarily due to the new assessment base methodology pursuant to the Dodd-Frank Act which lowered the Bank’s insurance premium. Advertising expense increased by $68,000 or 38.2% to $246,000 for the six months ended June 30, 2012 from $178,000 for the six months ended June 30, 2011. Merger related expenses decreased by $256,000 to no corresponding entry for the six months ended June 30, 2012 from $256,000 for the six months ended June 30, 2011. Other non-interest expense is also comprised of loan expense, stationary, forms and printing, check printing, correspondent bank fees, telephone and communication, and other fees and expenses.

 

Income taxes decreased by $3.47 million or 134.5% to an income tax benefit of $892,000 million for the six months ended June 30, 2012 compared with a tax provision of $2.58 million for the six months ended June 30, 2011, reflecting decreased taxable income during the six month period ended June 30, 2012. The consolidated effective tax rate for the six months ended June 30, 2012 was a tax benefit of 33.5% compared to tax provision of 40.0% for the six months ended

June 30, 2011.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Management of Market Risk

General. 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.

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 June 30, 2012. 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 non-interest 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 to 300 basis points has been excluded since it would not be meaningful, in the interest rate environment as of June 30, 2012. The following sets forth the Company’s NPV as of that date.

 

Change in   Net Portfolio     $ Change from     % Change from     NPV as a % of Assets  

Calculation

  Value     PAR     PAR      NPV Ratio     Change  
+300bp   $ 85,072     $ (38,897     -31.38%       7.53     -261 bps  
+200bp     105,350       (18,619      -15.02       9.05       -109 bps  
+100bp     118,515        (5,454)       -4.40       9.91       -23 bps  
PAR     123,969       —               10.14       —    
-100bp     131,363       7,394       5.96       10.56       42 bps  

bp – basis points

 

The table above indicates that as of June 30, 2012, in the event of a 100 basis point increase in interest rates, we would experience a 4.40% 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 4.

Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer the Company has evaluated the effectiveness of the design and operation of its 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 period covered by this quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

Under rules of the Securities and Exchange Commission promulgated under Section 404 of the Sarbanes-Oxley Act of 2002, we were required to furnish a report by our management on our internal control over financial reporting in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. In the course of our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2011, which assessment was conducted during the fourth quarter of 2011 and the first quarter of 2012 in connection with the preparation of 2011 consolidated financial statements and our Annual Report on Form 10-K, we identified a material weakness in our internal control over financial reporting resulting from (i) a failure to document that monitoring controls were in place with respect to outside service organizations, and that (ii) we failed to test the operating effectiveness of such controls as of December 31, 2011. The Company did test the operating effectiveness of its monitoring controls subsequent to December 31, 2011 and found them to be effective. The material weakness in our internal control over financial reporting, was described in Item 9A, Controls and Procedures, of our Annual Report on Form 10-K for the year ended December 31, 2011.

  

Subsequent to December 31, 2011 and through the first quarter of 2012, the Company received reports of operational controls from certain outside service organizations (SOC 1’s). Upon receipt, the Company, in conjunction with our Internal Auditors, read, reviewed, tested and confirmed, through a documented and comprehensive testing program, the operating effectiveness of our internal monitoring controls with respect to the use of those outside service organizations. As a result of this testing process, the operating effectiveness of our internal monitoring controls with respect to activities and processes with those outside service organizations was found to be fully effective. We have revised our internal control procedures and processes applicable to financial reporting, with respect to SOC 1’s issued by outside service organizations.

 

37

 

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved, from time to time, as plaintiff or defendant in various legal actions arising in the normal course of business. Other than as set forth below, as of June 30, 2012 we were not involved in any material legal proceedings, the outcome of which, if determined in a manner adverse to the Company, would have a material adverse affect on our financial condition or results of operations.

 

On or about December 2, 2009, BCB Bancorp, Inc. and BCB Community Bank became aware of a complaint filed in the Superior Court of New Jersey, Hudson County against Pamrapo Bancorp and Pamrapo Savings Bank and its Directors. The suit, Campbell vs. Pamrapo Bancorp, Inc. was brought by William Campbell, who was the largest shareholder of Pamrapo Bancorp and was Pamrapo Bank’s former president and chief executive officer until February 13, 2009. Campbell’s complaint alleges, among other things, that the Directors of Pamrapo Bancorp breached their fiduciary duties to shareholders in connection with the entry into the agreement and plan of merger with BCB, pursuant to which Pamrapo Bancorp and Pamrapo Savings Bank merged into BCB Bancorp and BCB Community Bank, with BCB as the surviving entity. Campbell unsuccessfully attempted to permanently enjoin the merger, and now seeks unspecified damages and his attorneys’ fees and costs associated with investigations by the Department of Justice and Office of Thrift Supervision into Campbell’s actions while he was the President and Chief Executive Officer of Pamrapo Bank. BCB Bancorp and BCB Community Bank are involved in the lawsuit by virtue of being the surviving entities following the merger. BCB Bancorp, BCB Community Bank and their Directors believe that the allegations in the complaint are without merit and intend to vigorously defend the claims and causes of action asserted in Campbell’s complaint.

 

The Company is a named defendant in the lawsuit Kontos v. Robbins et al filed in the Superior Court of New Jersey on May 15, 2012. The lawsuit alleges that Mr. Robbins, the former Chairman of the Board of Allegiance Community Bank and currently a director of the Company and others, defrauded Mr. Kontos with respect to his investment in a real estate project and induced Mr. Kontos to borrow money from Allegiance Community Bank, also a named defendant. The lawsuit seeks an unspecified dollar amount of damages, as well as equitable and other relief. Insurance coverage is currently in effect. The Company has filed its Answer to the lawsuit. The Company, after preliminary review, believes the lawsuit is without merit and frivolous. The Company intends to vigorously defend its interests in this litigation.

 

The Company is the successor to Pamrapo Bancorp, Inc., a named defendant in the lawsuit Brian Campbell v. Pamrapo Bancorp, Inc., et al, filed in the Superior Court of New Jersey in December 2010. The lawsuit alleges that Mr. Campbell sustained personal injuries in an automobile accident while on a work-related trip and should be compensated for his injuries. Insurance coverage is currently in effect. The Company believes that the lawsuit is without merit and it intends to vigorously defend its interests.

 

ITEM 1.A. RISK FACTORS

Other than as set forth below, there have been no changes to the risk factors set forth under Item 1.A Risk Factors as set fourth in the Company’s Form 10-K for the year ended December 31, 2011.

 

The asset quality of our loan portfolio may deteriorate if the economy falters, resulting in a portion of our loans failing to perform in accordance with their terms. Under such circumstances our profitability will be adversely affected.

 

At June 30, 2012, the Company had $66.6 million in classified assets of which $9.6 million were classified as doubtful, $29.8 million were classified as substandard and $27.2 million were classified as special mention. In addition, at that date we had $34.5 million in non-accruing loans. While we have adhered to stringent underwriting standards in the origination of loans, a large percentage of our loan portfolio was obtained in connection with our acquisition of Pamrapo Bancorp, Inc. and Allegiance Community Bank. In addition, there can be no assurance that loans that we originated will not experience asset quality deterioration as a result of a downturn in the local economy. Should our local economy weaken, our asset quality may deteriorate resulting in losses to the Company.

  

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Securities sold within the past three years without registering the securities under the Securities Act of 1933

On May 9, 2012, the Company announced a sixth stock repurchase plan to repurchase 5% or 462,800 shares of the Company’s common stock. On June 28, 2012, the Company announced a seventh stock repurchase plan to repurchase 5% or 440,000 shares of the Company’s common stock. The Company’s stock purchases for the three months ended June 30, 2012 are as follows:

 

Period  Shares
Purchased
   Average
Price
   Total Number of
Shares Purchased
   Maximum Number of Shares
That May Yet be Purchased
 
                 
April 1- April 30, 2012   89,274   $10.30    89,274    74,978 
May 1- May 31, 2012   86,915   $10.49    176,189    450,863 
June 1- June 30, 2012   359,382   $10.31    535,571    531,481 
                     
Total   535,571   $10.34    535,571    531,481 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFTEY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None.

 

38

ITEM 6. EXHIBITS

 

Exhibit 11.0 Computation of Earnings per Share.
Exhibit 31.1 and 31.2 Officers’ Certification filed pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32 Officers’ Certification filed pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 101.INS XBRL Instance Document
Exhibit 101.SCH XBRL Taxonomy Extension Schema
Exhibit 101.CAL XBRL Taxonomy Extension Calculation LinkBase
Exhibit 101.DEF XBRL Taxonomy Extension Definition LinkBase
Exhibit 101.LAB XBRL Taxonomy Extension Label LinkBase
Exhibit 101.PRE XBRL Taxonomy Extension Presentation LinkBase

 

39

 

 

 

Signatures

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

 

         
    BCB BANCORP, INC.
     
Date: August 9, 2012   By:  

/s/ Donald Mindiak

        Donald Mindiak
        President and Chief Executive Officer
     
Date: August 9, 2012   By:  

/s/ Kenneth D. Walter

        Kenneth D. Walter
        Chief Financial Officer

 

 

 

40

XNAS:BCBP BCB Bancorp Inc Quarterly Report 10-Q Filling

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