UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2006.
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
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(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
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(Registrant's telephone number, including area code)
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(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.
[X] 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 [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court.
[ ] 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, 2006, BCB
Bancorp, Inc., had 5,005,754 shares of common stock, no par value, issued and
outstanding.
BCB BANCORP INC., AND SUBSIDIARY
INDEX
PART I. CONSOLIDATED FINANCIAL INFORMATION Page
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 2006 and December 31, 2005 (unaudited)......................1
Consolidated Statements of Income for the three and six months
ended June 30, 2006 and June 30, 2005 (unaudited)....................2
Consolidated Statement of Changes in Stockholders' Equity for
the six months ended June 30, 2006 (unaudited).......................3
Consolidated Statements of Cash Flow for the six months
ended June 30, 2006 and June 30, 2005 (unaudited)....................4
Notes to Unaudited Consolidated Financial Statements.................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.................................................16
Item 4. Controls and Procedures.....................................18
PART II. OTHER INFORMATION...................................................19
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENT
BCB BANCORP INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition at
June 30, 2006 and December 31, 2005
(Unaudited)
(in thousands except for share data)
At At
30-Jun-06 31-Dec-05
--------- ---------
ASSETS
------
Cash and amounts due from depository institutions ........... $ 2,810 $ 2,987
Interest-earning deposits ................................... 6,767 22,160
--------- ---------
Total cash and cash equivalents .......................... 9,577 25,147
--------- ---------
Securities held to maturity ................................. 149,877 140,002
Loans held for sale ......................................... 1,779 780
Loans receivable, net ....................................... 313,787 284,451
Premises and equipment ...................................... 5,377 5,518
Federal Home Loan Bank of New York stock .................... 3,274 2,778
Interest receivable, net .................................... 3,339 3,104
Subscriptions Receivable .................................... -- 2,353
Deferred income taxes ....................................... 1,180 997
Other assets ................................................ 753 1,112
--------- ---------
Total assets ............................................ 488,943 466,242
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
-----------
Deposits .................................................... 371,099 362,851
Long-term Debt .............................................. 64,124 54,124
Other Liabilities ........................................... 3,092 1,420
--------- ---------
Total Liabilities ....................................... 438,315 418,395
--------- ---------
STOCKHOLDERS' EQUITY
--------------------
Common stock, stated value $0.06
10,000,000 shares authorized; 5,060,480 and 5,050,552 shares,
respectively, issued ........................................ 324 323
Additional paid-in capital .................................. 45,611 45,518
Treasury stock, at cost, 54,820 and 51,316 shares,
respectively ................................................ (851) (795)
Retained Earnings ........................................... 5,544 2,801
--------- ---------
Total stockholders' equity .............................. 50,628 47,847
--------- ---------
Total liabilities and stockholders' equity ............. $ 488,943 $ 466,242
========= =========
See accompanying notes to consolidated financial statements.
1
BCB BANCORP INC. AND SUBSIDIARY
Consolidated Statements of Income
For the three and six months ended
June 30, 2006 and 2005
(Unaudited)
(in thousands except for per share data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2006 2005 2006 2005
----------------- -----------------
Interest income:
Loans .............................................. $ 5,717 $ 4,623 $11,059 8,882
Securities ......................................... 1,874 1,471 3,690 2,905
Other interest-earning assets ...................... 104 4 279 14
------- ------- ------- -------
Total interest income ........................... 7,695 6,098 15,028 11,801
------- ------- ------- -------
Interest expense:
Deposits:
Demand .......................................... 86 82 168 167
Savings and club ................................ 663 1,028 1,476 2,076
Certificates of deposit ......................... 1,757 821 3,272 1,503
------- ------- ------- -------
2,506 1,931 4,916 3,746
------- ------- ------- -------
Borrowed money .................................. 553 189 1,045 310
------- ------- ------- -------
Total interest expense ........................ 3,059 2,120 5,961 4,056
------- ------- ------- -------
Net interest income .................................. 4,636 3,978 9,067 7,745
Provision for loan losses ............................ 325 300 575 560
------- ------- ------- -------
Net interest income after provision for loan losses .. 4,311 3,678 8,492 7,185
------- ------- ------- -------
Non-interest income:
Fees and service charges .......................... 141 136 290 257
Gain on sales of loans originated for sale ........ 196 56 338 105
Gain on sale of securities ........................ -- 28 -- 28
Other ............................................. 6 6 13 12
------- ------- ------- -------
Total non-interest income ...................... 343 226 641 402
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits .................... 1,253 1,089 2,552 2,114
Occupancy expense of premises ..................... 220 163 438 325
Equipment ......................................... 442 367 892 734
Advertising ....................................... 95 39 156 78
Other ............................................. 392 314 725 621
------- ------- ------- -------
Total non-interest expense ..................... 2,402 1,972 4,763 3,872
------- ------- ------- -------
Income before income tax provision ................... 2,252 1,932 4,370 3,715
Income tax provision ................................. 838 723 1,627 1,361
------- ------- ------- -------
Net Income ........................................... $ 1,414 $ 1,209 $ 2,743 $ 2,354
======= ======= ======= =======
Net Income per common share-basic and diluted
basic ..................................... $ 0.28 $ 0.32 $ 0.55 $ 0.63
======= ======= ======= =======
diluted ................................... $ 0.27 $ 0.31 $ 0.53 $ 0.60
======= ======= ======= =======
Weighted average number of common shares outstanding-
basic ..................................... 5,003 3,736 5,003 3,739
======= ======= ======= =======
diluted ................................... 5,185 3,908 5,172 3,915
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
2
BCB BANCORP INC. AND SUBSIDIARY
Consolidated Statement of Changes in Stockholders' Equity
For the six months ended June 30, 2006
(Unaudited)
(in thousands)
Additional Treasury Retained
Common Stock Paid-In Capital Stock Earnings Total
------------ --------------- ----- -------- -----
Balance, December 31, 2005 ........... $ 323 $ 45,518 $ (795) $ 2,801 $ 47,847
Stock-based compensation .............. -- 20 -- -- 20
Exercise of Stock Options ............. 1 82 -- -- 83
Issuance of stock (stock offering costs) -- (9) -- -- (9)
Treasury Stock Purchases .............. -- -- (56) -- (56)
Net income for the six months ended
June 30, 2006 .................... -- -- -- 2,743 2,743
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2006 ................ $ 324 $ 45,611 $ (851) $ 5,544 $ 50,628
------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements.
3
BCB BANCORP INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the six months ended
June 30, 2006 and 2005
(Unaudited)
(in thousands)
Six Months Ended
June 30,
--------------------
2006 2005
--------------------
Cash flows from operating activities :
Net Income .......................................................................... $ 2,743 $ 2,354
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation .................................................................. 169 174
Amortization and accretion, net ............................................... (320) (210)
Provision for loan losses ..................................................... 575 560
Stock-based compensation ...................................................... 20 --
Deferred income tax ........................................................... (183) (182)
Loans originated for sale ..................................................... (19,033) (6,581)
Proceeds from sale of loans originated for sale ............................... 18,372 6,686
(Gain) on sale of loans originated for sale ................................... (338) (105)
(Gain) on sale of securities held to maturity ................................. -- (28)
(Increase) Decrease in interest receivable .................................... (235) 64
Decrease in subscriptions receivable .......................................... 2,353 --
(Increase) Decrease in other assets ........................................... 359 (9)
Increase in accrued interest payable .......................................... 129 --
Increase in other liabilities ................................................. 1,543 160
-------- --------
Net cash provided by operating activities .............................. 6,154 2,883
-------- --------
Cash flows from investing activities:
Purchase of FHLB stock ........................................................... (496) (164)
Proceeds from calls of securities held to maturity ............................... -- 18,755
Proceeds from maturation of securities held to maturity .......................... 5,000 --
Proceeds from sales of securities held to maturity ............................... -- 7,345
Purchases of securities held to maturity ......................................... (17,500) (20,315)
Proceeds from repayments on securities held to maturity .......................... 2,633 3,237
Net (increase) in loans receivable ............................................... (29,599) (29,352)
Additions to premises and equipment .............................................. (28) (100)
-------- --------
Net cash (used in) investing activities ................................... (39,990) (20,594)
-------- --------
Cash flows from financing activities:
Net increase in deposits ......................................................... 8,248 12,405
Net change in short-term debt .................................................... -- 6,300
Proceeds of long-term debt ....................................................... 10,000 --
Purchases of treasury stock ...................................................... (56) (422)
Net proceeds from sales of common stock .......................................... 83 14
Stock issuance costs ............................................................. (9) --
-------- --------
Net cash provided by financing activities ................................. 18,266 18,297
-------- --------
Net (decrease) increase in cash and cash equivalents ................................... (15,570) 586
Cash and cash equivalents-begininng .................................................... 25,147 4,534
-------- --------
Cash and cash equivalents-ending ....................................................... $ 9,577 $ 5,120
======== ========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Income taxes .................................................................. $ 797 $ 1,183
Interest ...................................................................... $ 5,832 $ 4,038
See accompanying notes to consolidated financial statements.
4
BCB Bancorp Inc., and Subsidiary
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, Bayonne Community Bank (the "Bank"), BCB Holding Company
Investment Company, and BCB Equipment Leasing Company. 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, 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 three and six months
ended June 30, 2006 are not necessarily indicative of the results to be expected
for the fiscal year ended December 31, 2006 or any other future interim period.
These statements should be read in conjunction with the Company's audited
consolidated financial statements and related notes for the year ended December
31, 2005, which are included in the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission.
Note 2 - Earnings Per Share
Basic net income per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. The diluted net
income 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.
In October 2005, the Company's Board of Directors authorized a 25% stock
dividend to stockholders of record on October 13, 2005. Such dividend was
distributed on October 27, 2005. The weighted average number of common shares
outstanding and the net income per share data for the three and six months ended
June 30, 2005, have been restated to give the retroactive effect to the stock
dividend.
Note 3 - Stock Compensation Plans
The Company has two stock-related compensation plans, the 2002 Stock
Option Plan and the 2003 Stock Option Plan, which are described in Note 11 to
the Company's Consolidated Financial Statements included in its Annual Report on
Form 10-K for the year ended December 31, 2005. Through December 31, 2005, the
Company accounted for its stock option plans using the intrinsic value method
set forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," ("APB No. 25") and related interpretations. Under APB No.
25, generally, when the exercise price of the Company's stock options equaled
the market price of the underlying stock on the date of the grant, no
compensation expense was recognized. As described in Note 11 to the Company's
Consolidated Financial Statements included in its Annual Report on Form 10-K for
the year ended December 31, 2005, the Company's Board of Directors approved, on
December 14, 2005, the acceleration of vesting for all 218,195 outstanding
unvested options so that all such options would become fully vested effective
December 20, 2005. Absent the acceleration of vesting, these options would have
become vested from time to time through 2008. As required, the Company has
estimated the number of options that will be exercised in the future which would
not have been exercisable under their original vesting terms and recorded an
expense therefore. This estimate will be updated on a quarterly basis and is not
expected to be significant.
The Company adopted SFAS No. 123R, using the modified-prospective
transition method, beginning on January 1, 2006, and therefore, began to expense
the fair value of all outstanding options over their remaining vesting periods
to the extent the options were not fully vested as of the adoption date and
instituted a procedure to expense the fair value of all options granted
subsequent to December 31, 2005 over their requisite service periods.
5
Since all outstanding options were fully vested by December 31, 2005, no
expenses were recorded for stock-based compensation during the six months ended
June 30, 2006, except for $20,000 recorded during the quarter ended March 31,
2006, related to a revision of the termination rate estimate to 12% annually as
it relates to the previously discussed option vesting acceleration.
SFAS No. 123R also requires that the benefits of realized tax
deductions in excess of previously recognized tax benefits on compensation
expense is to be reported as a financing cash flow (none recognized during the
six months ended June 30, 2006) rather than an operating cash flow, as
previously required. In accordance with Staff Accounting Bulletin ("SAB") No.
107, the Company classifies share-based compensation within salaries and
employee benefits and directors compensation expenses to correspond with the
same line item as the cash compensation paid to such individuals.
Options granted generally vest over a four-year service period 20%
immediately upon grant and an additional 20% at each of the four succeeding
grant anniversary dates. Compensation expense recognized for all option grants
is net of estimated forfeitures and is recognized over the awards' respective
requisite service periods. The fair values relating to all options granted were
estimated using a Black-Scholes option pricing model. Expected volatilities are
based on historical volatility of our stock and other factors, such as implied
market volatility. As permitted by SAB No. 107, we used the mid-point of the
original vesting period and original option life to estimate the options'
expected term, which represents the period of time that the options granted are
expected to be outstanding. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant. We will recognize compensation expense for the fair
values of these awards, which have graded vesting, on a straight-line basis over
the requisite service period of these awards. We did not grant any options
during the six months ended June 30, 2006 and 2005.
During the six months ended June 30, 2006, the Company recorded $20,000
of share-based compensation expense, all of which related to the aforementioned
revision of the estimated termination rate. The Company does not expect to
record significant share-based compensation expense in fiscal 2006. This
estimate may be impacted by potential changes to the structure of the Company's
share-based compensation plans which could impact the number of stock options
granted in fiscal 2006, changes in valuation assumptions, and changes in the
market price of the Company's common stock, among other things and, as a result,
the actual share-based compensation expense in fiscal 2006 may differ from the
Company's current estimate.
The following table illustrates the impact of share-based compensation
on reported amounts:
Three and six months ended June 30, 2006
(in thousands,except per share data)
Impact of Share-Based
As Reported Compensation
Quarter YTD Quarter YTD
Income before income taxes $ 2,252 $ 4,370 $ -- $ (20)
Net Income $ 1,414 2,743 $ -- (20)
Earnings per share:
Basic $ 0.28 0.55 $ 0.00 (0.01)
Diluted $ 0.27 0.53 $ 0.00 0.00
6
A summary of the Company's stock option activity and related information for its
option plans for the six months ended June 30, 2006, was as follows:
Wtd. Avg. Wtd. Avg. Rem. Aggregate
Options Exercise Price Contractual Term Intrinsic Value
Outstanding at 12/31/2005 428,454 $ 9.79
Granted 0 0.00
Exercised (9,958) 8.19
Forfeited or Cancelled 0 0.00
-------
Outstanding at 6/30/2006 418,496 $ 9.83 7.3 years $ 2,338,000
Exercisable at 6/30/2006 418,496 $ 9.83 7.3 years $ 2,338,000
The total intrinsic value of the options exercised during the three and
six months ended June 30, 2006, was $26,000 and $73,000, respectively. There
were no stock options granted during the six months ended June 30, 2006 and
2005. The Company had no non-vested options outstanding as of June 30, 2006, and
during the six months then ended.
For purposes of pro forma disclosures, the estimated fair value of the
stock are amortized to expense over their assumed vesting periods. The following
table illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of SFAS No. 123, to all
stock-related compensation prior to January 1, 2006.
Three and six months ended June 30, 2005
(in thousands, except per share data)
Net income, as reported $ 1,209 $ 2,354
Add: Stock related compensation expense included in
reported net income, net of income taxes 0 0
Deduct: Stock related compensation expense determined
under the fair value method, net of income taxes (121) (242)
--------- ---------
Pro forma net income $ 1,088 $ 2,112
--------- ---------
Earnings per share:
Basic, as reported $ 0.32 $ 0.63
Basic, pro forma $ 0.29 $ 0.56
Diluted, as reported $ 0.31 $ 0.60
Diluted, pro forma $ 0.29 $ 0.54
7
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
Total assets increased by $22.7 million or 4.9% to $488.9 million at June 30,
2006 from $466.2 million at December 31, 2005 as the Bank continued to grow
assets primarily through the origination of real estate loans funded primarily
through cash flow provided by retail deposit growth, repayments and prepayments
of loans as well as the mortgage backed security portfolio and the utilization
of Federal Home Loan Bank advances. Asset growth has stabilized as management is
concentrating on controlled loan growth as opposed to increasing assets through
the purchase of investments. Growth is expected to occur at a more measured pace
than in the past and in a manner consistent with our capital levels.
Total cash and cash equivalents decreased by $15.5 million or 61.8% to $9.6
million at June 30, 2006 from $25.1 million at December 31, 2005. This decrease
was primarily attributable to the deployment of the proceeds of the common stock
offering that the Company conducted during the fourth quarter of 2005.
Securities classified as held-to-maturity increased by $9.9 million or 7.1% to
$149.9 million at June 30, 2006 from $140.0 million at December 31, 2005. The
increase was primarily attributable to the purchase of $17.5 million of callable
agency securities during the six months ended June 30, 2006, partially offset by
the maturity of a $5.0 million agency security and $2.6 million of repayments
and prepayments in the mortgage backed securities portfolio.
Loans receivable increased by $29.3 million or 10.3% to $313.8 million at June
30, 2006 from $284.5 million at December 31, 2005. The increase resulted
primarily from a $28.7 million or 11.5% increase in real estate mortgages
comprising residential, commercial, construction and participation loans with
other financial institutions, net of amortization, and a $3.8 million or 15.5%
increase in consumer loans, net of amortization, partially offset by a $1.5
million decrease in commercial loans comprising business loans and commercial
lines of credit, net of amortization and a $507,000 or 16.4% net increase in the
allowance for loan losses to $3.6 million at June 30, 2006 from $3.1 million at
December 31, 2005. At June 30, 2006, the allowance for loan losses was $3.6
million or 240.0% of non-performing loans.
Deposits increased by $8.2 million or 2.3% to $371.1 million at June 30, 2006
from $362.9 million at December 31, 2005. The increase resulted primarily from
an increase during the six months ended June 30, 2006 of $38.6 million in time
deposit accounts and an increase of $674,000 in transaction accounts, partially
offset by a $31.1 million decrease in savings and club accounts as the Bank has
experienced a change in the composition of deposits with savings and club
balances being reduced in favor of higher cost time deposits. Time deposit rates
have continued to rise commensurate with
8
increases in short term rates by the Federal Reserve during the six months ended
June 30, 2006 and the resultant increase in competitive rates by financial
institutions.
Borrowed money increased by $10.0 million or 18.5% to $64.1 million at June 30,
2006 from $54.1 million at December 31, 2005. The increase in borrowings
reflects the use of Federal Home Loan Bank advances to augment deposits as the
Bank's funding source for originating loans as well as assisting in the
facilitation of a leverage transaction the Bank engaged in during the six months
ended June 30, 2006.
Stockholders' equity increased by $2.8 million or 5.9% to $50.6 million at June
30, 2006 from $47.8 million at December 31, 2005. The increase was primarily
attributable to net income for the six months ended June 30, 2006 of $2.7
million and $83,000 received from the proceeds of certain individuals exercising
stock options, partially offset by $56,000 utilized to repurchase 3,504 shares
of common stock under the Company's stock repurchase plan. At June 30, 2006 the
Bank's Tier 1, Tier 1 Risk-Based and Total Risk Based Capital Ratios were
10.65%, 16.56% and 17.73% respectively.
Results of Operations
Three Months
Net income increased by $205,000 or 17.0% to $1.4 million for the three months
ended June 30, 2006 from $1.2 million for the three months ended June 30, 2005.
The increase in net income was due to increases in net interest income and
non-interest income partially offset by increases in non-interest expense, the
provision for loan losses and income taxes. Net interest income increased by
$658,000 or 16.5% to $4.6 million for the three months ended June 30, 2006 from
$4.0 million for the three months ended June 30, 2005. This increase resulted
primarily from an increase in average interest earning assets of $85.4 million
or 22.0% to $473.4 million for the three months ended June 30, 2006 from $388.0
million for the three months ended June 30, 2005, funded primarily through an
increase in average interest bearing liabilities of $58.6 million or 17.1% to
$400.7 million for the three months ended June 30, 2006 from $342.1 million for
the three months ended June 30, 2005 and an increase in average stockholders'
equity of $22.2 million or 80.7% to $49.7 million for the three months ended
June 30, 2006 from $27.5 million for the three months ended June 30, 2005,
partially offset by a decrease in the net interest margin to 3.92% for the three
months ended June 30, 2006 from 4.10% for the three months ended June 30, 2005.
Interest income on loans receivable increased by $1.1 million or 23.9% to $5.7
million for the three months ended June 30, 2006 from $4.6 million for the three
months ended June 30, 2005. The increase was primarily attributable to an
increase in average loans receivable of $46.9 million or 17.4% to $316.1 million
for the three months ended June 30, 2006 from $269.2 million for the three
months ended June 30, 2005, and an increase in the average yield on loans
receivable to 7.24% for the three months ended June 30, 2006 from 6.87% for the
three months ended June 30, 2005. The increase in average loans reflects
management's philosophy to deploy funds in higher yielding instruments,
specifically commercial real estate loans, in an effort to achieve higher
returns. The
9
increase in average yield reflects the increase in loan yields tied to the prime
lending rate which has been increasing consistent with the Federal Reserve's
more restrictive interest rate policy over the last twenty-four months.
Interest income on securities held-to-maturity increased by $403,000 or 27.4% to
$1.87 million for the three months ended June 30, 2006 from $1.47 million for
the three months ended June 30, 2005. This increase was primarily due to an
increase in the average balance of securities held-to-maturity of $29.8 million
or 25.8% to $145.5 million for the three months ended June 30, 2006 from $115.7
million for the three months ended June 30, 2005, and an increase in the average
yield on securities held-to-maturity to 5.15% for the three months ended June
30, 2006 from 5.09% for the three months ended June 30, 2005. The increase in
average balance reflects management's philosophy to deploy funds in investments,
absent an opportunity to originate higher yielding loans, in an effort to
achieve higher returns.
Interest income on other interest-earning assets increased by $100,000 to
$104,000 for the three months ended June 30, 2006 from $4,000 for the three
months ended June 30, 2005. This increase was primarily due to an $8.8 million
increase in the average balance of other interest-earning assets to $11.9
million for the three months ended June 30, 2006 from $3.1 million for the three
months ended June 30, 2005 and an increase in the average yield on other
interest-earning assets to 3.51% for the three months ended June 30, 2006 from
0.51% for the three months ended June 30, 2005. The increase in the average
yield reflects the higher short-term interest rate environment for overnight
deposits in 2006 as compared to 2005. The increase in the average balance
primarily reflects the, as yet, undeployed net proceeds from our offering of
common stock.
Total interest expense increased by $939,000 or 44.3% to $3.06 million for the
three months ended June 30, 2006 from $2.12 million for the three months ended
June 30, 2005. The increase resulted primarily from an increase in average
interest bearing liabilities of $58.6 million or 17.1% to $400.7 million for the
three months ended June 30, 2006 from $342.1 million for the three months ended
June 30, 2005, and an increase in the average cost of interest bearing
liabilities to 3.05% for the three months ended June 30, 2006 from 2.48% for the
three months ended June 30, 2005.
The provision for loan losses totaled $325,000 and $300,000 for the three-month
periods ended June 30, 2006 and 2005, 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) significant 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, 2006 and June 30, 2005, the
Bank recorded no charge-offs. The Bank had non-performing loans totaling $1.5
million or 0.47% of gross loans at June 30, 2006, $1.9 million or 0.58% of gross
loans at March 31, 2006 and $1.17 million or 0.42% of gross loans at June 30,
2005. The allowance for loan losses was $3.6 million or 1.13% of gross loans at
June 30, 2006, $3.3 million or 1.05% of gross loans at March 31, 2006 and $3.0
million or 1.07% of gross loans at June 30,
10
2005. 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, 2006, March 31, 2006 and June 30, 2005.
Total non-interest income increased by $117,000 or 51.8% to $343,000 for the
three months ended June 30, 2006 from $226,000 for the three months ended June
30, 2005. The increase in non-interest income resulted primarily from a $140,000
increase in gain on sales of loans originated for sale to $196,000 for the three
months ended June 30, 2006 from $56,000 for the three months ended June 30,
2005, and a $5,000 increase in general fees and service charges to $141,000 for
the three months ended June 30, 2006 from $136,000 for the three months ended
June 30, 2005, partially offset by a $28,000 decrease in gain on sales of
securities as the Bank did not engage in any securities sales during the quarter
ended June 30, 2006 as opposed to a gain of $28,000 recorded in the three months
ended June 30, 2005. As the sales consummated during the three months ended June
30, 2005 were from the held-to-maturity category, certain language located in
the text of FASB 115 was invoked to allow the sale of those securities to occur.
Total non-interest expense increased by $430,000 or 21.8% to $2.40 million for
the three months ended June 30, 2006 from $1.97 million for the three months
ended June 30, 2005. Salaries and employee benefits expense increased by
$164,000 or 15.0% to $1.25 million for the three months ended June 30, 2006 from
$1.09 million for the three months ended June 30, 2005. This increase was
primarily attributable to annual salary increases in conjunction with annual
reviews and an increase in health care benefits expense. Equipment expense
increased by $75,000 to $442,000 for the three months ended June 30, 2006 from
$367,000 for the three months ended June 30, 2005. The primary component of this
expense item is data service provider expense which increases with the growth of
the Bank's assets. Occupancy expense increased by $57,000 to $220,000 for the
three months ended June 30, 2006 from $163,000 for the three months ended June
30, 2005 primarily as a result of the Bank securing a lease for the opening of a
branch office in Hoboken, New Jersey. It is anticipated that this office will
commence operations during the second half of 2006. Advertising expense
increased by $56,000 to $95,000 for the three months ended June 30, 2006 from
$39,000 for the three months ended June 30, 2005. The increase in advertising
expense relates to advertisements for deposit and loan promotions in an effort
to attract additional business during the three months ended June 30, 2006.
Other non-interest expense increased by $78,000 to $392,000 for the three months
ended June 30, 2006 from $314,000 for the three months ended June 30, 2005. The
increase in other non-interest expense is primarily attributable to increases in
expenses commensurate with a growing franchise. Other non-interest expense is
11
comprised of directors' fees, stationary, forms and printing, professional fees,
legal fees, check printing, correspondent bank fees, telephone and
communication, shareholder relations and other fees and expenses.
Income tax expense increased $115,000 to $838,000 for the three months ended
June 30, 2006 from $723,000 for the three months ended June 30, 2005 reflecting
increased pre-tax income earned during the three month time period ended June
30, 2006. The consolidated effective income tax rate for the three months ended
June 30, 2006 was 37.2% as compared to 37.4% for the three months ended June 30,
2005.
Six Months of Operations
Net income increased by $389,000 or 16.5% to $2.74 million for the six months
ended June 30, 2006 from $2.35 million for the six months ended June 30, 2005.
The increase in net income was due to increases in net interest income and
non-interest income partially offset by increases in the provision for loan
losses, non-interest expense and income taxes. Net interest income increased by
$1.32 million or 17.0% to $9.07 million for the six months ended June 30, 2006
from $7.75 million for the six months ended June 30, 2005. This increase
resulted primarily from an increase in average interest earning assets of $88.0
million or 23.1% to $468.7 million for the six months ended June 30, 2006 from
$380.7 million for the six months ended June 30, 2005 funded primarily through
an increase in average interest bearing liabilities of $61.8 million or 18.4% to
$398.3 million for the six months ended June 30, 2006 from $336.5 million for
the six months ended June 30, 2005 and an increase in average stockholders'
equity of $22.2 million or 82.2% to $49.2 million for the six months ended June
30, 2006 from $27.0 million for the six months ended June 30, 2005, partially
offset by a decrease in the net interest margin to 3.87% for the six months
ended June 30, 2006 from 4.07% for the six months ended June 30, 2005.
Interest income on loans receivable increased by $2.2 million or 24.7% to $11.1
million for the six months ended June 30, 2006 from $8.9 million for the six
months ended June 30, 2005. The increase was primarily attributable to an
increase in average loans receivable of $46.3 million or 17.6% to $309.0 million
for the six months ended June 30, 2006 from $262.7 million for the six months
ended June 30, 2005, and an increase in the average yield on loans receivable to
7.16% for the six months ended June 30, 2006 from 6.76% for the six months ended
June 30, 2005. The increase in average loans reflects management's philosophy to
deploy funds in higher yielding instruments, specifically commercial real estate
loans, in an effort to achieve higher returns.
Interest income on securities held-to-maturity increased by $785,000 or 27.0% to
$3.7 million for the six months ended June 30, 2006 from $2.9 million for the
six months ended June 30, 2005. The increase was primarily due to an increase in
the average balance of securities held-to-maturity of $29.6 million or 25.9% to
$144.0 million for the six months ended June 30, 2006 from $114.4 million for
the six months ended June 30, 2005 and an increase in the average yield on
securities held-to-maturity to 5.13% for the six months ended June 30, 2006 from
5.08% for the six months ended June 30, 2005. The
12
increase in average balance reflects management's philosophy to deploy funds in
investments absent the opportunity to invest in higher yielding loans in an
effort to achieve higher returns.
Interest income on other interest-earning assets increased by $265,000 to
$279,000 for the six months ended June 30, 2006 from $14,000 for the six months
ended June 30, 2005. This increase was primarily due to an increase of $12.1
million in the average balance of other interest-earning assets to $15.7 million
for the six months ended June 30, 2006 from $3.6 million for the six months
ended June 30, 2005 and an increase in the average yield on other
interest-earning assets to 3.55% for the six months ended June 30, 2006 from
0.77% for the six months ended June 30, 2005. The increase in the average yield
reflects the higher short-term interest rate environment for overnight deposits
in 2006 as compared to 2005. The increase in the average balance primarily
reflects the undeployed portion of net proceeds from our offering of common
stock.
Total interest expense increased by $1.9 million or 46.3% to $6.0 million for
the six months ended June 30, 2006 from $4.1 million for the six months ended
June 30, 2005. The increase resulted primarily from an increase in average
interest bearing liabilities of $61.8 million or 18.4% to $398.3 million for the
six months ended June 30, 2006 from $336.5 million for the six months ended June
30, 2005, and an increase in the average cost of interest bearing liabilities to
2.99% for the six months ended June 30, 2006 from 2.41% for the six months ended
June 30, 2005.
The provision for loan losses totaled $575,000 and $560,000 for the six-month
periods ended June 30, 2006 and 2005, 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) significant level of loan growth and
(5) the existing level of reserves for loan losses that are probable and
estimable. During the six months ended June 30, 2006, the Bank recorded $68,000
in net loan charge-offs. During the six months ended June 30, 2005, the Bank
recorded $75,000 in loan charge-offs. The Bank had non-performing loans totaling
$1.5 million or 0.47% of gross loans at June 30, 2006, $1.03 million or 0.36% of
gross loans at December 31, 2005 and $1.17 million or 0.42% of gross loans at
June 30, 2005. The allowance for loan losses was $3.6 million or 1.13% of gross
loans at June 30, 2006, $3.1 million or 1.07% of gross loans at December 31,
2005 and $3.0 million or 1.07% of gross loans at June 30, 2005. 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
13
believes that the allowance for loan losses was adequate at June 30, 2006,
December 31, 2005 and June 30, 2005.
Total non-interest income increased by $239,000 or 59.5% to $641,000 for the six
months ended June 30, 2006 from $402,000 for the six months ended June 30, 2005.
The increase in non-interest income resulted primarily from a $233,000 increase
in gain on sales of loans originated for sale to $338,000 for the six months
ended June 30, 2006 from $105,000 for the six months ended June 30, 2005, and a
$33,000 increase in general fees and service charges to $290,000 for the six
months ended June 30, 2006 from $257,000 for the six months ended June 30, 2005,
partially offset by a $28,000 decrease in gain on sales of securities as the
Bank did not engage in any securities sales during the six months ended June 30,
2006 as opposed to a gain of $28,000 recorded during the six months ended June
30, 2005. As the sales consummated during the six months ended June 30, 2005
were from the held-to-maturity category, certain language located in the text of
FASB 115 was invoked to allow the sale of those securities to occur.
Total non-interest expense increased by $891,000 or 23.0% to $4.76 million for
the six months ended June 30, 2006 from $3.87 million for the six months ended
June 30, 2005. Salaries and employee benefits expense increased by $438,000 or
20.8% to $2.55 million for the six months ended June 30, 2006 from $2.11 million
for the six months ended June 30, 2005. This increase was primarily attributable
to annual salary increases in conjunction with annual reviews and an increase in
health care benefits expense as well as an increase in the number of full time
equivalent employees to 84 for the six months ended June 30, 2006 from 75 for
the six months ended June 30, 2005. Equipment expense increased by $158,000 to
$892,000 for the six months ended June 30, 2006 from $734,000 for the six months
ended June 30, 2005. The primary component of this expense item is data service
provider expense which increases with the growth of the Bank's assets. Occupancy
expense increased by $113,000 to $438,000 for the six months ended June 30, 2006
from $325,000 for the six months ended June 30, 2005 primarily as a result of
the Bank securing a lease for the opening of a branch office in Hoboken, New
Jersey. It is anticipated that this office will commence operations during the
second half of 2006. Advertising expense increased by $78,000 to $156,000 for
the six months ended June 30, 2006 from $78,000 for the six months ended June
30, 2005. The increase in advertising expense relates to advertisements for
deposit and loan promotions in an effort to attract additional business during
the six months ended June 30, 2006. Other non-interest expense increased by
$104,000 to $725,000 for the six months ended June 30, 2006 from $621,000 for
the six months ended June 30, 2005. The increase in other non-interest expense
is primarily attributable to increases in expenses commensurate with a growing
franchise. Other non-interest expense is comprised of directors' fees,
stationary, forms and printing, professional fees, legal fees, check printing,
correspondent bank fees, telephone and communication, shareholder relations and
other fees and expenses.
Income tax expense increased $266,000 or 19.5% to $1.63 million for the six
months ended June 30, 2006 from $1.36 million for the six months ended June 30,
2005 reflecting increased pre-tax income earned during the six month time period
ended June
14
30, 2006. The consolidated effective income tax rate for the six months ended
June 30, 2006 was 37.2% as compared to 36.6% for the six months ended June 30,
2005.
15
Item 3. Quantitative and Qualitative Analysis of Market Risk
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature.
Consequently, one of 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 March 31, 2006, the latest data for which this
information is available. 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 were
made in preparation of the NPV table includes prepayment rates on loans and
mortgage-backed securities, core deposits without stated maturity dates were
scheduled with an assumed term of 48 months, and money market and noninterest
bearing accounts were scheduled with an assumed term of 24 months. The NPV at
"PAR" represents the difference between the Company's estimated value of assets
and estimated value of liabilities assuming no change in interest rates. The NPV
for a decrease of 300 basis points has been excluded since it would not be
meaningful, in the interest rate environment as of March 31, 2006. The following
sets forth the Company's NPV as of March 31, 2006.
NPV as a % of Assets
Change in Net Portfolio $ Change from % Change from ---------------------
Calculation Value PAR PAR NPV Ratio Change
----------- ----- --- --- --------- ------
+300bp $ 35,061 $ (29,171) -45.41% 8.12% -541 bps
+200bp 45,478 (18,754) -29.20 10.21 -332 bps
+100bp 55,144 (9,088) -14.15 12.00 -153 bps
PAR 64,232 -- -- 13.53 -- bps
-100bp 70,528 6,296 9.80 14.46 93 bps
-200bp 68,228 3,996 6.22 13.85 32 bps
bp - basis points
16
The table above indicates that at March 31, 2006, in the event of a 100 basis
point decrease in interest rates, we would experience a 9.80% increase in NPV.
In the event of a 100 basis point increase in interest rates, we would
experience a 14.15% 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 rate 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.
17
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. There has been no change in the Company's
internal control over financial reporting during the most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
There have been no changes in the Company's risk factors since the filing of the
Annual Report on Form 10-K.
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 June 17, 2004 the Company sold $4.1 million in debentures in connection with
its participation in a pooled trust preferred offering. The proceeds of the
offering were used to fund asset growth and qualify as regulatory capital.
Other than as stated below, the Company has not sold any securities during the
past three years. In connection with the Plan of Acquisition completed on May 1,
2003 the Bank reorganized into the holding company form of ownership and each
share of Bank common stock became a share of Company common stock. No new
capital was received in the reorganization.
The Company conducted a secondary public stock offering during the fourth
quarter of 2005. The Company sold 1,265,000 shares of its common stock for an
aggregate offering price of $19.3 million. The Company offered 1,100,000 shares
of its common stock, (with an over-allotment option of 165,000 shares) to the
public at a price of $15.25. The stock offering was underwritten by Janney
Montgomery Scott LLC on a firm commitment basis. The Company's registration
statement on Form S-1 (Commission File No. 333-128214) was declared effective by
the Securities and Exchange Commission on December 13, 2005. The Company also
filed a rule 462 registration statement on Form S-1 (Commission File No.
333-130307) which was effective upon filing December 14, 2005. The sale of 1.1
million shares was completed on December 19, 2005, and the over-allotment was
exercised in full on January 5, 2006.
Last year, the Company announced a stock repurchase plan which provides for the
purchase of up to 187,096 shares, adjusted for the 25% stock dividend paid on
October 27, 2005. The Company's stock purchases during the last three months are
as follows:
19
Shares Average Total Number of Maximum Number of Shares
Period Purchased Price Shares Purchased That May Yet be Purchased
------ --------- ----- ---------------- -------------------------
4/1 - 4/30 -------- ----- --------- 134,280
5/1 - 5/31 2,004 $16.25 2,004 132,276
6/1 - 6/30 -------- ----- --------- 132,276
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders occurred on April 27, 2006. At this
meeting there were two items put to a vote of security holders; Election of
Directors and Ratification of the Independent Auditors. The number of shares
outstanding was 5,053,897, the number of shares entitled to vote was 5,002,581
and the number of shares present at the meeting or by proxy was 3,874,436.
1. The vote with respect to the election of four directors was as
follows:
NAME FOR WITHHELD
---- --- --------
Thomas M. Coughlin 3,792,076 82,360
Joseph Lyga 3,784,227 90,209
Alexander Pasiechnik 3,784,886 89,550
Joseph Tagliareni 3,790,941 83,495
2. The vote with respect to the ratification of Beard Miller
Company LLP as Independent Auditors for the Company for the
year ending December 31, 2006 was:
FOR AGAINST ABSTAIN
--- ------- -------
3,808,118 12,222 54,096
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit 31.1 and 31.2 Officers' Certification filed pursuant to section 302 of
the Sarbanes-Oxley Act of 2002.
20
Exhibit 32.1 Officers' Certification filed pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
21