UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

 

(Mark One)

For the quarterly period ended March 31, 2015

Or

 

For the transition period from                      to                     

Commission File Number: 0-50275

 

BCB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

(201) 823-0700

(Registrant’s telephone number, including area code)

 

 

Not Applicable

 (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.    ☒   Yes    *   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).    ☒   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.

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).      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 May 5, 2015, BCB Bancorp, Inc., had 8,409,144 shares of common stock, no par value, outstanding.

 

---

 

 

 

 

 

 

BCB BANCORP INC. AND SUBSIDIARIES

INDEX

 

 

 

 

---

 

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)

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

 

 

---

 

 

BCB BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Income 

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

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

---

 

BCB BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In Thousands, Unaudited)

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

---

 

 

 

BCB BANCORP INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity

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

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

---

 

 

BCB BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In Thousands, Unaudited)

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

---

 

 

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, BCB New York Asset Management, Inc. 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. These results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2015 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, 2014, 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, the Company evaluated the events and transactions that occurred between March 31, 2015, and the date these consolidated financial statements were issued.

 

 

Recent Accounting Pronouncements

 

Accounting Standards Update 2014-14: Receivables – Troubled Debt Restructurings by Creditors (Topic 310-40) – Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure 

 

This ASU was issued as a result of the diversity in practice related to how creditors classify government-guaranteed mortgage loans upon foreclosure. The amendments in this ASU require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure when the following conditions are met: 1) the loan has a government guarantee that is not separable from the loan before foreclosure, 2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim and 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor.

 

The amendments in this ASU were effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The amendments in this ASU should be adopted on either a prospective transition method or a modified retrospective transition method. However, a reporting entity must apply the same method of transition as elected under ASU 2014-04.  Early adoption, including adoption in an interim period, is permitted if the reporting entity has adopted ASU 2014-04. The adoption of ASU 2014-14 did not have a significant impact on the Company’s financial condition, results of operations, or cash flows.

 

Accounting Standards Update 2014-09: Revenue from Contracts with Customers (Topic 606)

 

ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.

 

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

For a public business entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Financial Accounting Standards Board (“FASB”) has proposed a one year deferral of this standard update until annual reporting periods beginning after December 31, 2017.

 

An entity should apply the amendments in this ASU using one of the following two methods:

 

Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients:

 

 

 

---

 

Retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. If an entity elects this transition method it also should provide the additional disclosures in reporting periods that include the date of initial application of:

The Company is currently evaluating the impact of ASU 2014-09 on our Consolidated Financial Statements.

 

Accounting Standards Update 2014-14:  Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure

 

The objective of this ASU is to reduce the diversity in practice of when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan and when the related loan receivable should be derecognized and the real estate owned recognized.

 

This amendment clarifies that an in substance repossession or foreclosure occurs when either a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Upon completion of either of these two events the creditor is considered to have received physical possession of residential real estate property and therefore should derecognize the loan receivable and recognize the real estate owned.

 

Additionally, this amendment requires interim and annual disclosure of both a) the amount of foreclosed residential real estate property held by the creditor and b) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. At March 31, 2015 the amount of foreclosed 1-4 family residential properties held by the Company was $270,000.  As of March 31, 2015 the amount of 1-4 family residential loans in the process of foreclosure was $6.4 million.  

 

 

The provisions of this ASU are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. This ASU can be adopted using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. The adoption of ASU 2014-14 did not have a significant impact on the Company’s financial condition, results of operations, or cash flows.

 

 

Proposed Accounting Standards Update (Exposure Draft):  Financial Instruments (Topic 825-15) - Credit Losses

 

The Board is currently in the process of redeliberating significant issues raised through feedback received from comment letters and outreach activities. FASB expects to issue this proposed accounting standards update in late 2015. An effective date has yet to be discussed.

 

Impairment model - The Board will continue to refine the Current Expected Credit Loss (CECL) model in the December 2012 proposed Update.

Measurement of expected credit losses - The guidance in the proposed Update regarding an entity’s estimate of expected credit losses will be clarified as follows:

 

 

Accounting for purchased credit impaired (PCI) financial assets - An entity would be required to allocate to each individual financial asset the non-credit-related discount or premium resulting from acquiring a pool of PCI financial assets.

 

Accounting for troubled debt restructurings (TDRs) - The guidance in the proposed Update regarding the cost basis adjustment for troubled debt restructurings will be clarified to require an entity to increase the cost basis of the restructured financial asset through a corresponding increase in the entity’s allowance for expected credit losses in certain TDRs.

 

An entity may consider prepayment expectations and prospectively reflect an adjusted yield if prepayment speeds are different than expected. (This decision is contingent on the Board’s review of staff prepared examples illustrating this approach.)

 

Nonaccrual of interest income - The Board decided that the final Accounting Standards Update issued for this project will not provide guidance on when an entity ceases to accrue interest income. However, the Board decided to consider adding as pre-agenda research whether U.S. GAAP should provide nonaccrual guidance. The Company is currently evaluating the impact of this update.

 

Proposed Accounting Standards Update (Exposure Draft):  Leases (Topic 842) - A Revision of the 2010 Proposed FASB Accounting Standards Update, Leases (Topic 840)

 

The FASB decided on a dual approach for lessee accounting in which a lessee will determine lease classification in accordance with the principle in existing lease requirements.  Lessees would account for most existing capital or financing type leases as Type A leases and most existing operating leases as Type B leases.  Both Type A and Type B leases result in the lessee recognizing a right-of-use asset and a lease liability.  Type A leases will recognize amortization of the right-of-use asset separately from interest expense on the lease liability while Type B leases will recognize a single total lease expense in the income statement. The IASB decided on a single approach for lessee accounting under which the lessee would account for all leases as Type A leases. The FASB and IASB are currently deliberating the disclosure requirements under this amendment. An effective date has yet to be discussed.

 

Interim Final Rule on Basel III Conforming Amendments

 

---

 

The Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System issued an Interim Final Rule on Basel III Conforming Amendments. In summary, each agency has issued an interim final rule with request for comments (final rule) that makes technical and conforming amendments to its regulations governing national banks and federal savings associations. The final rule, which was effective March 31, 2014, amends various regulations in order to make those regulations consistent with the recently adopted Basel III Capital Framework. The Basel III final rule revised the regulatory capital rules, adding a new common equity tier 1 requirement, revising the definitions of tier 1 and tier 2 capital, and integrating federal savings associations into 12 CFR part 3 and 12 CFR part 6 (Prompt Corrective Action). The final rule made technical, clarifying, and conforming amendments to the OCC's rules, by providing cross-references to new capital rules, where necessary, and deleting obsolete references. The final rule also made changes to subordinated debt rules to clarify the requirements subordinated debt must meet and the procedures required to issue and redeem subordinated debt.

 

A summary of technical and conforming amendments and subordinated debt rules include:

 

Technical and conforming amendments:

 

Historically, regulatory capital requirements have served as a measure for numerous statutory and regulatory limits used as supervisory tools for safety and soundness purposes, including lending limits and investment securities. The final rule amends the rules to replace cross-references to the current regulatory capital rules with cross-references to the Basel III final rule, where appropriate.

 

The Basel III Capital Framework provides different mandatory compliance dates for advanced approaches national banks and federal savings associations and non-advanced approaches national banks and federal savings associations.1 Advanced approaches institutions must comply with the Basel III Capital Framework beginning on January 1, 2014, while non-advanced approaches institutions must comply with the framework beginning on January 1, 2015. In order to accommodate these different compliance dates, the existing regulatory capital rules for calendar year 2014 were retained for non-advanced approaches national banks and federal savings associations.

 

The Basel III Capital Framework integrated federal savings associations into 12 CFR part 6, "Prompt Corrective Action." This final rule replaces cross-references in various rules to 12 CFR part 165, the Prompt Corrective Action rule formerly applicable to federal savings associations, with cross-references to 12 CFR part 6, which applies to both national banks and federal savings associations effective January 1, 2014.

 

 

 

 

---

 

 

Note 2 – Reclassification

 

Certain amounts as of December 31, 2014 and the three month period ended March 31, 2014 have been reclassified to conform to the current period’s presentation. These changes had no effect on the Company’s results of operations or financial position.

 

 

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):

 

 

 

 

---

 

Note 3 – Pension and Other Postretirement Plans (Continued) 

 

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 the Company pursuant to grants of stock options. Employees and directors of the Company and the 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 March 7, 2014, a grant of 110,000 options and on January 17, 2013, a grant of 130,000 options was declared for certain members of the Board of Directors which vest at a rate of 10% per year, over ten years commencing on the first anniversary of the grant date. The exercise price was recorded as of the close of business on March 7, 2014 and January 17, 2013, respectively and a Form 4 was filed for each Director who received a grant with the Securities and Exchange Commission consistent with its filing requirements. There were 6,000 stock options granted to employees in the fourth quarter of 2014, which vest at a rate of 20% per year. During the third quarter of 2013, there were 29,928 stock options granted which vested immediately. The exercise price was recorded as of the close of business on August 7, 2013.

 

There was no stock option activity in the three months ended March 31, 2015.

 

 

 

 

As of March 31, 2015, stock options which were granted and were exercisable totaled 74,220 stock options.

 

 

It is Company policy to issue new shares upon share option exercise. Expected future compensation expense relating to the 215,500 shares underlying unexercised options outstanding as of March 31, 2015 is $587,244 over a weighted average period of 8.24 years. 

 

 

 

 

 

 

 

 

 

As of March 31, 2014, stock options which are granted and were exercisable totaled 158,036 stock options.

 

 

It is Company policy to issue new shares upon share option exercise. Expected future compensation expense relating to the 174,000 shares underlying unexercised options outstanding as of March 31, 2014 is $258,046 over a weighted average period of 8.96 years. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

---

 

 

Note 4 – Net Income per Common Share

 

Basic net income per common share is computed by dividing net income less dividends on preferred stock 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. Dilution is not applicable in periods of net loss. For the three months ended March 31, 2015 and 2014, the difference in the weighted average number of basic and diluted common shares was due solely to the effects of outstanding stock options. No adjustments to net income were necessary in calculating basic and diluted net income per share. For the three months ended March 31, 2015 and 2014, the weighted average number of outstanding options considered to be anti-dilutive were 127,000, and 213,482, respectively.  

 

 

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

 

 

 

 

 

 

 

---

 

 

 

Note 5 – Securities Available for Sale

 

The following tables present by maturity the amortized cost and gross unrealized gains and losses on securities available for sale as of March 31, 2015 and December 31, 2014: 

 

 

 

 

 

 

 

 

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:

 

 

 

 

Management does not believe that any of the unrealized losses as of March 31, 2015, (which are related to three residential mortgage-backed securities) 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, including FNMA, FHLMC and GNMA. 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.

 

 

 

 

 

 

 

 

 

 

---

 

 

Note 6 - Loans Receivable and Allowance for Loan Losses

The following table presents the recorded investment in loans receivable as of March 31, 2015 and December 31, 2014 by segment and class:

 

 

 

__________

(1) Includes business lines of credit.
(2) Includes home equity lines of credit.

 

---

 

Note 6 - 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 performing 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 qualitative factors that include:

 

The methodology includes the segregation of the loan portfolio into two divisions.  Loans that are performing and loans that are impaired. Loans which are performing are evaluated homogeneously by loan class or loan type. The allowance for performing loans is evaluated based on historical loan experience, including consideration of peer loss analysis, with an adjustment for qualitative factors referred to above. Impaired loans are loans which are more than 90 days delinquent or troubled debt restructured.  These loans are individually evaluated for loan loss either by current appraisal, or net present value of cash flows. Management reviews the overall estimate for feasibility and bases the loan loss provision accordingly.

 

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

 

Residential one-to-four 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 Company 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 may be affected by a number of factors including, but not necessarily limited to, 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 be 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 Company than construction loans to individuals on their personal residence.

 

Commercial business lending, including lines of credit, 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 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. In many cases, the Company’s position in these loans is as a junior lien holder to another institution’s superior lien. 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 Company 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.

 

Other 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.

 

        Acquired loans added to portfolio via our purchase of banks are recorded at fair value with no carryover of a related allowance for loan losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

 

          We have acquired loans in two separate acquisitions.(Pamrapo Savings Bank in 2010 “Pamrapo” and Allegiance Community Bank in 2011 “Allegiance”) For each acquisition, we reviewed all acquired loans and considered the following factors as indicators that such acquired loan had evidence of deterioration in credit quality and was therefore in the scope of Accounting Standards Codification (“ASC”) 310-30:

---

 

Note 6 - Loans Receivable and Allowance for Loan Losses (Continued)

         Any acquired loans that were not individually in the scope of ASC 310-30 because they did not meet the criteria above were accounted for under ASC 310-20 (Nonrefundable fees and other costs.)  Charge-offs of the principal amount on acquired loans accounted for under ASC 310-20 would be charged off against the allowance for loan losses.   

 

Acquired loans accounted for under ASC 310-30

 

         We performed a fair market valuation on each of the loans and each loan was recorded at a discount which includes the establishment of an associated “Credit Mark” reducing the carrying value of that loan to its fair value at the time of acquisition. We determined that at least part of the discount on the acquired loans was attributable to credit quality by reference to the valuation model used to estimate the fair value of the loans. The valuation model incorporated lifetime expected credit losses into the loans’ fair valuation in consideration of factors such as evidence of credit deterioration since origination and the amounts of contractually required principal and interest that we did not expect to collect as of the acquisition date. The excess of expected cash flows from acquired loans over the estimated fair value of acquired loans at acquisition is referred to as the accretable discount and is recognized into interest income over the remaining life of the acquired loans using the interest method. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the acquired loans.

 

          Subsequent decreases to the expected cash flows require us to evaluate the need for an addition to the allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount which we then reclassify as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. Our evaluation of the amount of future cash flows that we expect to collect takes into account actual credit performance of the acquired loans to date and our best estimates for the expected lifetime credit performance of the loans using currently available information. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment. To the extent that we experience a deterioration in credit quality in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

 

          In accordance with ASC 310-30, recognition of income is dependent on having a reasonable expectation about the timing and amount of cash flows expected to be collected.  We perform such an evaluation on a quarterly basis on our acquired loans individually accounted for under ASC 310-30. Cash flows for acquired loans individually accounted for under ASC 310-30 are estimated on a quarterly basis.  Based on this evaluation, a determination is made as to whether or not we have a reasonable expectation about the timing and amount of cash flows.  Such an expectation includes cash flows from normal customer repayment, foreclosure or other collection efforts. To the extent that we cannot reasonably estimate cash flows, interest income recognition is discontinued. 

 

          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 and the New Jersey Department of Banking and Insurance 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 March 31, 2015, we had $30.075 million in loans classified as substandard,  $19.608 million in loans classified as special mention and no loans classified as doubtful or loss. 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 was in the process of being revalued.

The current methodology for this calculation is determined with the Company’s specific Historical Loss Percentage (“HLP”) for each loan class, using two years of prior Company data (or eight 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 loans as a percentage of the specific loan category.

---

 

Note 6 - Loans Receivable and Allowance for Loan Losses (Continued)

The following table sets forth the activity in the Company’s allowance for loan losses for the three months ended March 31, 2015 and recorded investment in loans receivable at March 31, 2015. 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):

 

 

 

_________

(1) Includes business lines of credit.
(2) Includes home equity lines of credit.

 

---

 

Note 6 - Loans Receivable and Allowance for Loan Losses (Continued)

 

The following table sets forth the activity in the Company’s allowance for loan losses for the year ended December 31, 2014 and recorded investment in loans receivable at December 31, 2014. 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):

________

(1) Includes business lines of credit.
(2) Includes home equity lines of credit.

 

---

 

Note 6 - Loans Receivable and Allowance for Loan Losses (Continued)

 

The following table sets forth the activity in the Company’s allowance for loan losses for the three months ended March 31, 2014 and recorded investment in loans receivable at March 31, 2014. 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):

 

 

 

 

 

 

__________

(1) Includes business lines of credit.
(2) Includes home equity lines of credit.

---

 

Note 6 - Loans Receivable and Allowance for Loan Losses (Continued)

The table below sets forth the amounts and types of non-accrual loans in the Company’s loan portfolio as of March 31, 2015 and December 31, 2014. 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 March 31, 2015 and December 31, 2014, 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 and until the borrower has demonstrated its ability to satisfy the terms of the restructured loan.   

 

 

 

 

__________

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.