BCB BANCORP INC - Quarter Report: 2020 June (Form 10-Q)

bcbp-20200630x10q

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, 2020

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

For the transition period from ___________ to ___________

Commission File Number: 0-50275

BCB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

New Jersey		26-0065262
(State or other jurisdiction of incorporation or organization)		(IRS Employer I.D. No.)

104-110 Avenue C Bayonne, New Jersey		07002
(Address of principal executive offices)		(Zip Code)

(201) 823-0700

(Registrant’s telephone number, including area code)

Not Applicable

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

Securities registered pursuant to section 12(b) of the Securities and Exchange Act of 1934:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	BCBP	The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. T Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). x Yes o No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “accelerated filer, larger accelerated filer, non-accelerated filer, smaller reporting company, or emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	o	Accelerated Filer	x

Non-Accelerated Filer	o	Smaller Reporting Company	x

		Emerging Growth Company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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). o Yes T 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, 2020, BCB Bancorp, Inc., had 17,057,368 shares of common stock, no par value, outstanding.

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BCB BANCORP INC. AND SUBSIDIARIES

INDEX



	Page
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition as of June 30, 2020 (unaudited) and December 31, 2019 (unaudited)		1
Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019 (unaudited)		2
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019 (unaudited)		3
Consolidated Statement of Changes in Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019 (unaudited)		4
Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (unaudited)		6
Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		34
Item 3. Quantitative and Qualitative Disclosures about Market Risk		44
Item 4. Controls and Procedures		44

PART II. OTHER INFORMATION		44
Item 1. Legal Proceedings		44
Item 1A. Risk Factors		45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 3. Defaults Upon Senior Securities		45
Item 4. Mine Safety Disclosures		45
Item 5. Other Information		45
Item 6. Exhibits		46

PART I. CONSOLIDATED FINANCIAL INFORMATION

ITEM I. CONSOLIDATED FINANCIAL STATEMENTS

BCB BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

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



	June 30,		December 31,
	2020		2019

ASSETS
Cash and amounts due from depository institutions	$	18,799	$	24,985
Interest-earning deposits		393,450		525,368
Total cash and cash equivalents		412,249		550,353

Interest-earning time deposits		735		735
Debt securities available for sale		127,518		91,613
Equity investments		12,683		2,500
Loans held for sale		760		917
Loans receivable, net of allowance for loan losses
of $28,842 and $23,734 respectively		2,343,593		2,178,407
Federal Home Loan Bank of New York stock, at cost		13,529		13,821
Premises and equipment, net		18,653		19,920
Accrued interest receivable		16,569		8,318
Other real estate owned		1,623		1,623
Deferred income taxes		11,339		11,180
Goodwill and other intangibles		5,519		5,552
Operating lease right-of-use assets		13,335		13,246
Other assets		8,771		9,283
Total Assets	$	2,986,876	$	2,907,468

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Non-interest -bearing deposits	$	390,912	$	271,702
Interest bearing deposits		2,051,321		2,090,361
Total deposits		2,442,233		2,362,063
FHLB advances		242,800		245,800
Subordinated debentures		36,926		36,810
Operating lease liability		13,521		13,380
Other liabilities		10,377		9,942
Total Liabilities		2,745,857		2,667,995

STOCKHOLDERS' EQUITY
Preferred stock: $0.01 par value, 10,000,000 shares authorized; issued and outstanding 8,634 shares of series C 6%, series D 4.5%, series G 6%, series H 3.5%, (liquidation value $10,000 per share) and series F 6% (liquidation value $1,000 per share), noncumulative perpetual convertible preferred stock at June 30, 2020 and 8,340 shares of series C 6%, series D 4.5%, series G 6% (liquidation value $10,000 per share) and Series F 6% (liquidation value $1,000 per share) noncumulative perpetual preferred stock at December 31, 2019		-		-
Additional paid-in capital preferred stock		27,956		25,016
Common stock: no par value; 40,000,000 shares authorized; issued 19,524,586 and 19,484,046
at June 30, 2020 and December 31, 2019, respectively, outstanding 17,057,368 shares and
17,516,828 shares, at June 30, 2020 and December 31, 2019, respectively		-		-
Additional paid-in capital common stock		191,160		190,294
Retained earnings		48,097		48,429
Accumulated other comprehensive income (loss)		724		(2,218)
Treasury stock, at cost, 2,467,218 and 1,967,218 shares at June 30, 2020 and December 31, 2019, respectively		(26,918)		(22,048)
Total Stockholders' Equity		241,019		239,473
Total Liabilities and Stockholders' Equity	$	2,986,876	$	2,907,468

See accompanying notes to unaudited consolidated financial statements.

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BCB BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, Except for Per Share Amounts, Unaudited)



	Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019

Interest and dividend income:
Loans, including fees	$	26,123	$	28,634	$	52,937	$	56,867
Mortgage-backed securities		494		738		1,057		1,508
Other investment securities		246		197		254		325
FHLB stock and other interest earning assets		343		1,173		2,377		2,520
Total interest income		27,206		30,742		56,625		61,220

Interest expense:
Deposits:
Demand		1,562		1,750		3,770		3,326
Savings and club		106		110		211		223
Certificates of deposit		5,695		6,097		12,127		12,087
		7,363		7,957		16,108		15,636
Borrowings		1,852		1,920		3,748		3,817
Total interest expense		9,215		9,877		19,856		19,453

Net interest income		17,991		20,865		36,769		41,767
Provision for loan losses		3,300		755		4,800		1,644

Net interest income after provision for loan losses		14,691		20,110		31,969		40,123

Non-interest income:
Fees and service charges		537		802		1,263		1,685
Gain on sales of loans		57		437		118		755
Gain on bulk sale of impaired loans held in portfolio		-		-		-		107
Gain on sales of other real estate owned		-		45		-		53
Gain on sale of investment securities		40		21		40		21
Unrealized gain (loss) on equity investments		442		(26)		2		265
Other		32		49		368		102
Total non-interest income		1,108		1,328		1,791		2,988

Non-interest expense:
Salaries and employee benefits		5,682		6,918		13,071		13,833
Occupancy and equipment		2,910		2,649		5,734		5,279
Data processing and service fees		951		731		1,889		1,452
Professional fees		398		473		868		1,006
Director fees		365		316		723		634
Regulatory assessments		251		417		572		874
Advertising and promotional		26		123		87		196
Other real estate owned, net		21		124		47		108
Other		1,348		2,143		3,325		4,289
Total non-interest expense		11,952		13,894		26,316		27,671

Income before income tax provision		3,847		7,544		7,444		15,440
Income tax provision		1,121		2,317		2,197		4,762

Net Income	$	2,726	$	5,227	$	5,247	$	10,678
Preferred stock dividends		341		342		682		659
Net Income available to common stockholders	$	2,385	$	4,885	$	4,565	$	10,019

Net Income per common share-basic and diluted
Basic	$	0.14	$	0.30	$	0.26	$	0.62
Diluted	$	0.14	$	0.30	$	0.26	$	0.62

Weighted average number of common shares outstanding
Basic		17,179		16,413		17,340		16,245
Diluted		17,183		16,471		17,366		16,290

See accompanying notes to unaudited consolidated financial statements.

BCB BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands, Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019


Net Income	$	2,726	$	5,227	$	5,247	$	10,678
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale debt securities:
Unrealized holding gains arising during the period		603		1,935		3,912		4,201
Tax Effect		(150)		(485)		(970)		(1,054)
Other comprehensive income		453		1,450		2,942		3,147
Comprehensive income	$	3,179	$	6,677	$	8,189	$	13,825

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)


	Preferred ‎Stock		Common ‎Stock		Additional ‎Paid-In ‎Capital		Retained ‎Earnings		Treasury ‎Stock		Accumulated ‎Other ‎Comprehensive ‎Income ‎(Loss)		Total

Balance at January 1, 2020	$	-	$	-	$	215,310	$	48,429	$	(22,048)	$	(2,218)	$	239,473
Net income		-		-		-		5,247		-		-		5,247
Other comprehensive income		-		-		-		-		-		2,942		2,942
Costs for issuance of common stock		-		-		(126)		-		-		-		(126)
Issuance of Series H Preferred Stock		-		-		3,080		-		-		-		3,080
Redemption of Series D Preferred Stock		-		-		(140)		-		-		-		(140)
Exercise of stock options (500 shares)		-		-		5		-		-		-		5
Stock-based compensation expense		-		-		559		-		-		-		559
Treasury stock purchases (500,000 shares)		-		-		-		-		(4,870)		-		(4,870)
Dividends payable on Series C 6%, Series D 4.5%, Series F 6%, and Series G 6% noncumulative perpetual preferred stock		-		-		-		(682)		-		-		(682)
Cash dividends on common stock ($0.14 per share declared)		-		-		-		(4,688)		-		-		(4,688)
Dividend reinvestment plan		-		-		209		(209)		-		-		-
Stock purchase plan		-		-		219		-		-		-		219
Balance at June 30, 2020	$	-	$	-	$	219,116	$	48,097	$	(26,918)	$	724	$	241,019

	Preferred ‎Stock		Common ‎Stock		Additional ‎Paid-In ‎Capital		Retained ‎Earnings		Treasury ‎Stock		Accumulated Other Comprehensive Income		Total

Balance at April 1, 2020	$	-	$	-	$	215,534	$	48,168	$	(23,335)	$	271	$	240,638
Net income		-		-		-		2,726		-		-		2,726
Other comprehensive income		-		-		-		-		-		453		453
Issuance of Series H Preferred Stock		-		-		3,080		-		-		-		3,080
Stock-based compensation expense		-		-		280		-		-		-		280
Treasury stock purchases (372,942 shares)		-		-		-		-		(3,583)		-		(3,583)
Dividends payable on Series C 6%, Series D 4.5%, Series F 6%, and Series G 6% noncumulative perpetual preferred stock		-		-		-		(341)		-		-		(341)
Cash dividends on common stock ($0.14 per share declared)		-		-		-		(2,351)		-		-		(2,351)
Dividend reinvestment plan		-		-		105		(105)		-		-		-
Stock purchase plan		-		-		117		-		-		-		117
Balance at June 30, 2020	$	-	$	-	$	219,116	$	48,097	$	(26,918)	$	724	$	241,019

See accompanying notes to unaudited financial statements.
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BCB BANCORP INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity

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


	Preferred ‎Stock		Common ‎Stock		Additional ‎Paid-In ‎Capital		Retained ‎Earnings		Treasury ‎Stock		Accumulated ‎Other ‎Comprehensive ‎Income ‎(Loss)		Total

Balance at January 1, 2019	$	-	$	-	$	195,206	$	38,405	$	(28,320)	$	(5,076)	$	200,215
Net income		-		-		-		10,678		-		-		10,678
Other comprehensive income		-		-		-		-		-		3,147		3,147
Issuance of common stock		-		-		6,239		-		-		-		6,239
Issuance of Series G Preferred Stock		-		-		5,310		-		-		-		5,310
Stock-based compensation expense		-		-		397		-		-		-		397
Treasury stock allocated to Common Stock issuance		-		-		(5,707)		(565)		6,272		-		-
Dividends payable on Series C 6%, Series D 4.5%, Series F 6%, and Series G 6% noncumulative perpetual preferred stock		-		-		-		(659)		-		-		(659)
Cash dividends on common stock ($0.14 per share declared)		-		-		-		(4,326)		-		-		(4,326)
Dividend reinvestment plan		-		-		186		(186)		-		-		-
Stock purchase plan		-		-		152		-		-		-		152
Balance at June 30, 2019	$	-	$	-	$	201,783	$	43,347	$	(22,048)	$	(1,929)	$	221,153



	Preferred ‎Stock		Common ‎Stock		Additional ‎Paid-In ‎Capital		Retained ‎Earnings		Treasury ‎Stock		Accumulated ‎Other ‎Comprehensive ‎Income ‎(Loss)		Total

Balance at April 1, 2019	$	-	$	-	$	201,395	$	40,750	$	(22,048)	$	(3,379)	$	216,718
Net income		-		-		-		5,227		-		-		5,227
Other comprehensive loss		-		-		-		-		-		1,450		1,450
Stock-based compensation expense		-		-		207		-		-		-		207
Dividends payable on Series C 6%, Series D 4.5%, Series F 6%, and Series G 6% noncumulative perpetual preferred stock		-		-		-		(342)		-		-		(342)
Cash dividends on common stock ($0.14 per share declared)		-		-		-		(2,190)		-		-		(2,190)
Dividend reinvestment plan		-		-		98		(98)		-		-		-
Stock purchase plan		-		-		83		-		-				83
Balance at June 30, 2019	$	-	$	-	$	201,783	$	43,347	$	(22,048)	$	(1,929)	$	221,153

See accompanying notes to unaudited financial statements.

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BCB BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands, Unaudited)


	Six Months Ended June 30,
	2020		2019
Cash Flows from Operating Activities :
Net Income	$	5,247	$	10,678
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment		1,469		1,424
Amortization and accretion, net		(1,148)		(1,542)
Provision for loan losses		4,800		1,644
Deferred income tax benefit		(1,129)		(569)
Loans originated for sale		(7,093)		(8,560)
Proceeds from sales of loans		7,368		10,468
Gain on sales of loans originated for sale		(118)		(755)
Gain on sales of other real estate owned		-		(53)
Gain on sales of securities available for sale		(40)		(21)
Unrealized gain on equity investments		(2)		(265)
Gain on bulk sale of impaired loans held in portfolio		-		(107)
Stock-based compensation expense		559		397
Increase in interest receivable		(8,251)		(937)
Decrease (Increase) in other assets		512		(1,311)
(Decrease) Increase in accrued interest payable		(216)		288
Increase in other liabilities		651		34
Net Cash Provided by Operating Activities		2,609		10,813
Cash flows from investing activities:
Proceeds from repayments, calls, and maturities on securities available for sale		13,631		8,328
Purchases of securities		(56,515)		(1,153)
Proceeds from sales of other real estate owned		-		1,058
Proceeds from bulk sale of impaired loans held		-		402
Proceeds from sales of securities		564		2,057
Purchase of loans		(48,360)		-
Net increase in loans receivable		(120,091)		(22,312)
Additions to premises and equipment		(202)		(613)
Redemption (Purchase) of Federal Home Loan Bank of New York stock		292		(416)
Net Cash Used In Investing Activities		(210,681)		(12,649)
Cash flows from financing activities:
Net increase in deposits		80,170		27,498
Proceeds from Federal Home Loan Bank of New York advances		27,000		-
Repayments of Federal Home Loan Bank of New York advances		(30,000)		-
Purchases of treasury stock		(4,870)		-
Cash dividends paid on common stock		(4,688)		(4,326)
Cash dividends paid on preferred stock		(682)		(659)
Net proceeds from issuance of common stock		93		6,391
Net proceeds from issuance of preferred stock		3,080		5,310
Net payment on redemption of preferred stock		(140)		-
Exercise of stock options		5		-
Net Cash Provided by Financing Activities		69,968		34,214

Net (Decrease) Increase In Cash and Cash Equivalents		(138,104)		32,378
Cash and Cash Equivalents-Beginning		550,353		195,264

Cash and Cash Equivalents-Ending	$	412,249	$	227,642

Supplementary Cash Flow Information:
Cash paid during the year for:
Income taxes	$	2,964	$	6,342
Interest		20,072		19,165
Non-cash items:
Transfer of loans to other real estate owned	$	-	$	907

See accompanying notes to unaudited consolidated financial statements

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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, Pamrapo Service Corporation, Special Asset REO I, LLC., and Special Asset REO II, LLC. 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 consolidated 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, 2020 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, 2019, 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 December 31, 2019 and the date these consolidated financial statements were issued.

Risks and Uncertainties - We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as the response to the pandemic is in its early stages and information is rapidly evolving. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic.

The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be adversely impacted. As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.

Note 2 - Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses ASU 2016-13, and related guidance, requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the consolidated financial statements. The amendments are effective for the Company in 2023. The Company has begun evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements and results of operations. The effect of this change cannot be ascertained at this point, and will depend upon factors including asset components, asset quality and market conditions at the adoption date. The Company has created a Current Expected Credit Loss (“CECL”) task group comprised of members of its finance, credit administration, lending, internal audit, loan operations, compliance, and information systems units. The CECL task group has become familiar with the provisions of ASU 2016-13 and is in the process of implementing the new guidance, which includes, but is not limited to: (1) identifying segments and sub-segments within the loan portfolio that have similar risk characteristics; (2) determining the appropriate methodology for each segment; (3) implementing changes that are necessary to its core operating system and interfaces to be able to capture appropriate data requirements; and (4) evaluating qualitative and economic factors to develop appropriate forecasts for integration into the model. The Company is currently evaluating the effect this guidance may have on its operating results and/or financial position, including assessing any potential impact on its capital.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement as a result of a broader disclosure project. The Update amends the disclosure requirements for fair value measurements to improve the effectiveness of the disclosure. The Update removes and modifies certain disclosure requirements, as well as adds requirements for public business entities. The ASU is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This ASU only affected the Company’s disclosures and did not have a financial statement impact.

Note 3 – Reclassification

Certain amounts as of December 31, 2019 and for the three-month and six-month periods ended June 30, 2019 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 4 – Equity Incentive Plans

Equity Incentive Plans

The Company, under the plan approved by its shareholders on April 26, 2018 (“2018 Equity Incentive Plan”), authorized the issuance of up to 1,000,000 shares of common stock of the Company pursuant to grants of stock options and restricted stock units. Employees and directors of the Company and the Bank are eligible to participate in the 2018 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 December 14, 2018, a grant of 300,000 options was declared for members of the Board of Directors of the Bank and the Company which vest at a rate of 50% per year, over two years, commencing on the first anniversary of the grant date. The exercise price was recorded as of close of business on December 14, 2018. On December 14, 2018, an award of 54,000 shares of restricted stock was declared for members of the Board of Directors of the Bank and the Company, which vest over a 2-year period, commencing on the anniversary of the award date. On December 14, 2018, an award of 13,321 shares of restricted stock was declared for certain executive officers of the Bank and the Company, which vest over a 2-year period, commencing on the anniversary of the award date.

On June 14, 2019, a grant of 68,750 options was declared for members of the Board of Directors of the Bank and the Company which vest at a rate of 50% per year, over two years, commencing on the first anniversary of the grant date. The exercise price was recorded as of close of business on June 14, 2019. On June 14, 2019, a grant of 30,125 options was declared for certain executive officers of the Bank and the Company, which vest over a 2-year period, commencing on the anniversary of the award date. The exercise price was recorded as of the close of business on June 14, 2019. On June 14, 2019, an award of 33,110 shares of restricted stock was declared for members of the Board of Directors of the Bank and the Company, which vest over a 2-year period, commencing on the anniversary of the award date. On June 14, 2019, an award of 14,508 shares of restricted stock was declared for certain executive officers of the Bank and the Company, which vest over a 2-year period, commencing on the anniversary of the award date.

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.

‎

Note 4 – Equity Incentive Plans (Continued)

The following table presents a summary of the status of the Company’s restricted shares as of June 30, 2020 and 2019.


	Number of Shares Awarded		Weighted Average Grant Date Fair Value
Non-vested at January 1, 2020	81,278	$	11.96
Granted	-		-
Vested	23,809		12.46
Forfeited	-		-
Non-vested at June 30, 2020	57,469	$	11.76


	Number of Shares Awarded		Weighted Average Grant Date Fair Value
Non-vested at January 1, 2019	67,321	$	11.26
Granted	47,618		12.46
Vested	-		-
Forfeited	-		-
Non-vested at June 30, 2019	114,939	$	11.86

Expected future expenses relating to the non-vested restricted shares outstanding as of June 30, 2020 was approximately $411,000 over a weighted average period of 0.71 years.

The following tables present a summary of the status of the Company’s outstanding stock option awards as of June 30, 2020 and 2019.


	Number of Option Shares		Range of Exercise Prices		Weighted Average Exercise Price

Outstanding at January 1, 2020	1,200,975	$	8.93 - 13.32	$	11.45

Options granted	-		-		-
Options exercised	(500)		10.55		10.55
Options forfeited	-		-		-
Options expired	-		-		-

Outstanding at June 30, 2020	1,200,475	$	8.93 - 13.32	$	11.45

As of June 30, 2020, stock options which were granted and were exercisable totaled 565,238 stock options.

It is Company policy to issue new shares upon share option exercise. Expected future compensation expense relating to the 635,237 shares of unvested options outstanding as of June 30, 2020 was $1.3 million over a weighted average period of 4.73 years.



	Number of Option Shares		Range of Exercise Prices		Weighted Average Exercise Price

Outstanding at January 1, 2019	1,104,600	$	8.93-13.32	$	11.36

Options granted	98,875		12.46		12.46
Options exercised	-		-		-
Options forfeited	(1,000)		10.55		10.55
Options expired	-		-		-

Outstanding at June 30, 2019	1,202,475	$	8.93-13.32	$	11.45

As of June 30, 2019, stock options which were granted and were exercisable totaled 268,633 stock options.

Note 5 – 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 and six months ended June 30, 2020 and 2019, 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 and six months ended June 30, 2020 and 2019 the weighted average number of outstanding options considered to be anti-dilutive were 0, 16,328, 58,302, and 45,479 respectively. At June 30, 2020, the Company has 6,465 shares of its Series F 6% noncumulative perpetual preferred stock (“Series F shares”) issued and outstanding, which are convertible into the Company’s common stock. The conversion of Series F shares to common shares was not included in the computation of diluted earnings per share as they would be anti-dilutive.

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



	For the Three Months Ended June 30,
	2020					2019
		Income	Shares		Per Share		Income	Shares		Per Share
		(Numerator)	(Denominator)		Amount		(Numerator)	(Denominator)		Amount
	(In Thousands, except per share data)

Net income available to common stockholders	$	2,385				$	4,885

Basic earnings per share-
Income available to
Common stockholders	$	2,385	17,179	$	0.14	$	4,885	16,413	$	0.30


Effect of dilutive securities:
Stock options		-	4				-	58

Diluted earnings per share-
Income available to
Common stockholders	$	2,385	17,183	$	0.14	$	4,885	16,471	$	0.30


	For the Six Months Ended June 30,
	2020					2019
		Income	Shares		Per Share		Income	Shares		Per Share
		(Numerator)	(Denominator)		Amount		(Numerator)	(Denominator)		Amount
	(In Thousands, except per share data)

Net income available to common stockholders	$	4,565				$	10,019

Basic earnings per share-
Income available to
Common stockholders	$	4,565	17,340	$	0.26	$	10,019	16,245	$	0.62


Effect of dilutive securities:
Stock options		-	26				-	45

Diluted earnings per share-
Income available to
Common stockholders	$	4,565	17,366	$	0.26	$	10,019	16,290	$	0.62

‎

Note 6 - Securities

Equity Securities

Equity securities are defined to include (a) preferred, common and other ownership interests in entities including partnerships, joint ventures and limited liability companies and (b) rights to acquire or dispose of ownership interest in entities at fixed or determinable prices.

The Company follows ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities," which requires an entity to disaggregate the net gains and losses on the equity investments recognized in the income statement during a reporting period into realized and unrealized gains and losses. As a result, equity securities are no longer carried at fair value through other comprehensive income (OCI) or by applying the cost method to those equity securities that do not have readily determinable values. Equity securities are generally required to be measured at fair value with unrealized holding gains and losses reflected in net income. The Company adopted this standard as of January 1, 2018.

The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and six months ended June 30, 2020 and 2019:


	For the three months ended June 30,				For the six months ended June 30,
(In Thousands)	2020		2019		2020		2019
Net gains (losses) recognized during the period on equity securities	$	482	$	(47)	$	42	$	286
Less: Net gains recognized during the period on equity securities sold during the period		40		21		40		21
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date	$	442	$	(26)	$	2	$	265

Debt Securities Available for Sale

The following tables present by maturity the amortized cost, gross unrealized gains and losses on, and fair value of, securities available for sale as of June 30, 2020 and December 31, 2019:




	June 30, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In Thousands)
Residential Mortgage-backed securities:
More than one to five years	$	3,328	$	28	$	55	$	3,301
More than five to ten years		4,672		349		-		5,021
More than ten years		74,173		2,423		19		76,577
		82,173		2,800		74		84,899
Corporate Debt securities:
More than five to ten years	$	25,778	$	314	$	-	$	26,092

Municipal obligations:
Less than one year	$	12,048	$	-	$	-	$	12,048
More than ten years		4,260		219		-		4,479
	$	16,308	$	219	$	-	$	16,527

Total securities	$	124,259	$	3,333	$	74	$	127,518



	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In Thousands)
Residential Mortgage-backed securities:
More than one to five years	$	3,431	$	8	$	72	$	3,367
More than five to ten years		1,566		33		-		1,599
More than ten years		87,269		574		1,196		86,647
	$	92,266	$	615	$	1,268	$	91,613

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:



	12 Months or Less				More than 12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(In Thousands)
June 30, 2020
Residential mortgage-backed securities	$	1,670	$	19	$	1,945	$	55	$	3,615	$	74

December 31, 2019
Residential mortgage-backed securities	$	13,073	$	656	$	23,212	$	612	$	36,285	$	1,268

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Company intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery. At June 30, 2020 and December 31, 2019, management performed an assessment for possible OTTI of the Company’s residential mortgage-backed securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. The extent of individual analysis applied to each security depended on the size of the Company’s investment, as well as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management believes impairment of these securities, at June 30, 2020 and December 31, 2019, to be temporary.

Note 7 - Loans Receivable and Allowance for Loan Losses

The following tables present the recorded investment in loans receivable as of June 30, 2020 and December 31, 2019 by segment and class:



	June 30, 2020		December 31, 2019
		(In Thousands)
Residential one-to-four family	$	247,471	$	248,381
Commercial and multi-family		1,643,954		1,606,976
Construction		111,463		104,996
Commercial business⁽¹⁾		309,284		177,642
Home equity⁽²⁾		63,481		64,638
Consumer		603		682
		2,376,256		2,203,315

Less:
Deferred loan fees, net		(3,821)		(1,174)
Allowance for loan losses		(28,842)		(23,734)
Sub-total		(32,663)		(24,908)

Total Loans, net	$	2,343,593	$	2,178,407
(1) Includes business lines of credit and Paycheck Protection Plan (“PPP”) loans of $127.5 million
(2) Includes home equity lines of credit.

‎

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

Allowance for Loan Losses

The allowance for loan loss is evaluated regularly by management and reflects consideration of all significant factors that affect the collectability of the loan portfolio. 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 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:

Lending Policies and Procedures

Personnel responsible for the particular portfolio - relative to experience and ability of staff

Trend for past due, criticized and classified loans

Relevant economic factors

Quality of the loan review system

Value of collateral for collateral dependent loans

The effect of any concentrations of credit and the changes in the level of such concentrations

Other external factors

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 by loan class or loan type. The allowance for performing loans is evaluated based on historical loan loss experience with an adjustment for qualitative factors referred to above. Impaired loans are loans which are more than 90 days delinquent, troubled debt restructured, or adversely classified. These loans are individually evaluated for loan loss either by current appraisal, or net present value. Management reviews the overall estimate for feasibility and establishes the loan loss provision accordingly.

The loan portfolio is segmented into the following loan segments, 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 real estate loans decrease the interest rate risk to the Bank that is associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying properties 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 additional risks as compared with residential family property lending. Such loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience on such loans is typically dependent on the successful operation of the real estate project. The success of such projects is sensitive to changes in supply and demand conditions in the market for commercial real estate as well as economic conditions generally.

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

Commercial business lending, 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 many 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 value 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 Bank’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 decrease the interest rate risk to the Bank that is associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default.

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 affected by job loss, divorce, illness and personal bankruptcy. In many cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan.

An unallocated component is maintained to cover uncertainties that could affect management’s estimates of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

Note 7 - 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 June 30, 2020, and the related portion of the allowances for loan losses that is allocated to each loan class, as of June 30, 2020 (in thousands):


	Residential			Commercial & Multi-family	Construction		Commercial Business ⁽¹⁾		Home Equity ⁽²⁾		Consumer		Unallocated		Total
Allowance for loan losses:

Originated Loans:	$	2,787	$	14,867	$	1,105	$	3,004	$	621	$	5	$	1,762	$	24,151
Acquired loans initially recorded at fair value:		306		63		-		910		-		-		-		1,279
Acquired loans with deteriorated credit:		38		19		-		43		4		-		-		104
Beginning Balance, March 31, 2020		3,131		14,949		1,105		3,957		625		5		1,762		25,534
Recoveries:
Originated Loans:		-		-		-		-		-		4		-		4
Acquired loans initially recorded at fair value:		-		-		-		-		4		-		-		4
Sub-total:		-		-		-		-		4		4		-		8
Provisions:
Originated Loans:		(138)		1,830		229		154		59		(3)		727		2,858
Acquired loans initially recorded at fair value:		85		163		-		200		(4)		-		-		444
Acquired loans with deteriorated credit:		(2)		-		-		-		-		-		-		(2)
Sub-total:		(55)		1,993		229		354		55		(3)		727		3,300
Totals:
Originated Loans:		2,649		16,697		1,334		3,158		680		6		2,489		27,013
Acquired loans initially recorded at fair value:		391		226		-		1,110		-		-		-		1,727
Acquired loans with deteriorated credit:		36		19		-		43		4		-		-		102
Ending Balance, June 30, 2020	$	3,076	$	16,942	$	1,334	$	4,311	$	684	$	6	$	2,489	$	28,842

Ending Balance attributable to loans:
Individually evaluated for impairment	$	8,233	$	9,725	$	-	$	7,255	$	1,625	$	-	$	-	$	26,838
Collectively evaluated for impairment		239,238		1,634,229		111,463		302,029		61,856		603		-		2,349,418
Total Gross Loans:	$	247,471	$	1,643,954	$	111,463	$	309,284	$	63,481	$	603	$	-	$	2,376,256

Ending ALLL Attributed to loans individually evaluated for impairment	$	398	$	318	$	-	$	2,665	$	20	$	-	$	-	$	3,401
Ending ALLL Attributed to loans collectively evaluated for impairment		2,678		16,624		1,334		1,646		664		6		2,489		25,441
Total Ending ALLL:	$	3,076	$	16,942	$	1,334	$	4,311	$	684	$	6	$	2,489	$	28,842
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.

Note 7 - 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 six months ended June 30, 2020 (in thousands):


	Residential			Commercial & Multi-family	Construction		Commercial Business (1)			Home Equity (2)	Consumer		Unallocated		Total
Allowance for loan losses:

Originated Loans:	$	2,422	$	15,235	$	1,244	$	2,945	$	330	$	-	$	273	$	22,449
Acquired loans initially recorded at fair value:		261		58		-		803		-		-		-		1,122
Acquired loans with deteriorated credit:		39		79		-		42		3		-		-		163
Beginning Balance, December 31, 2019		2,722		15,372		1,244		3,790		333		-		273		23,734

Charge-offs:
Acquired loans initially recorded at fair value:		4		-		-		-		-		-		-		4
Sub-total:		4		-		-		-		-		-		-		4

Recoveries:
Originated Loans:		-		-		-		302		-		4		-		306
Acquired loans initially recorded at fair value:		-		-		-		-		6		-		-		6
Sub-total:		-		-		-		302		6		4		-		312

Provisions:
Originated Loans:		227		1,462		90		(89)		350		2		2,216		4,258
Acquired loans initially recorded at fair value:		134		168		-		307		(6)		-		-		603
Acquired loans with deteriorated credit:		(3)		(60)		-		1		1		-		-		(61)
Sub-total:		358		1,570		90		219		345		2		2,216		4,800

Totals:
Originated Loans:		2,649		16,697		1,334		3,158		680		6		2,489		27,013
Acquired loans initially recorded at fair value:		391		226		-		1,110		-		-		-		1,727
Acquired loans with deteriorated credit:		36		19		-		43		4		-		-		102
Ending Balance, June 30, 2020	$	3,076	$	16,942	$	1,334	$	4,311	$	684	$	6	$	2,489	$	28,842

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

Note 7 - 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 June 30, 2019 (in thousands).



	Residential			Commercial & Multi-family	Construction		Commercial Business ⁽¹⁾		Home Equity ⁽²⁾		Consumer		Unallocated		Total
Allowance for loan losses:

Originated Loans:	$	2,471	$	15,077	$	1,209	$	3,328	$	265	$	-	$	32	$	22,382
Acquired loans initially recorded at fair value:		404		-		-		-		-		-		-		404
Acquired loans with deteriorated credit:		32		144		-		39		3		-		-		218
Beginning Balance, March 31, 2019		2,907		15,221		1,209		3,367		268		-		32		23,004

Recoveries:
Originated Loans:		-		-		-		7		-		-		-		7
Acquired loans initially recorded at fair value:		3		-		10		2		8		-		-		23
Sub-total:		3		-		-		9		8		-		-		30

Provisions:
Originated Loans:		109		(826)		245		660		9		1		118		316
Acquired loans initially recorded at fair value:		324		-		(10)		(2)		(8)		-		-		304
Acquired loans with deteriorated credit:		114		(7)		-		28		-		-		-		135
Sub-total:		547		(833)		235		686		1		1		118		755

Totals:
Originated Loans:		2,580		14,251		1,454		3,995		274		1		150		22,705
Acquired loans initially recorded at fair value:		731		-		-		-		-		-		-		731
Acquired loans with deteriorated credit:		146		137		-		67		3		-		-		353
Ending Balance, June 30, 2019	$	3,457	$	14,388	$	1,454	$	4,062	$	277	$	1	$	150	$	23,789
_____________________________
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.

Note 7 - 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 six months ended June 30, 2019 (in thousands).


	Residential			Commercial & Multi-family	Construction		Commercial Business (1)			Home Equity (2)	Consumer		Unallocated		Total
Allowance for loan losses:

Originated Loans:	$	2,374	$	14,000	$	1,003	$	3,869	$	313	$	2	$	189	$	21,750
Acquired loans initially recorded at fair value:		335		-		-		-		-		-		-		335
Acquired loans with deteriorated credit:		39		168		-		64		3		-		-		274
Beginning Balance, December 31, 2018		2,748		14,168		1,003		3,933		316		2		189		22,359

Charge-offs:
Originated Loans:		-		111		-		145		-		-		-		256
Sub-total:		-		111		-		145		-		-		-		256

Recoveries:
Originated Loans:		-		-		-		15		-		-		-		15
Acquired loans recorded at fair value:		3		10		-		3		11		-		-		27
Sub-total:		3		10		-		18		11		-		-		42

Provisions:
Originated Loans:		206		362		451		256		(39)		(1)		(39)		1,196
Acquired loans initially recorded at fair value:		393		(10)		-		(3)		(11)		-		-		369
Acquired loans with deteriorated credit:		107		(31)		-		3		-		-		-		79
Sub-total:		706		321		451		256		(50)		(1)		(39)		1,644

Totals:
Originated Loans:		2,580		14,251		1,454		3,995		274		1		150		22,705
Acquired loans initially recorded at fair value:		731		-		-		-		-		-		-		731
Acquired loans with deteriorated credit:		146		137		-		67		3		-		-		353
Ending Balance, June 30, 2019	$	3,457	$	14,388	$	1,454	$	4,062	$	277	$	1	$	150	$	23,789

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

‎

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

The following table sets forth the amount recorded in loans receivable at December 31, 2019. The table also details the amount of total loans receivable that are evaluated individually, and collectively, for impairment and the related portion of the allowance for loan losses that is allocated to each loan class (in thousands).


		Residential		Commercial & Multi-family		Construction		Commercial Business ⁽¹⁾		Home Equity ⁽²⁾		Consumer		Unallocated		Total
Allowance for credit losses:
Originated Loans:	$	2,374	$	14,000	$	1,003	$	3,869	$	313	$	2	$	189	$	21,750
Acquired loans initially recorded at fair value:		335		-		-		-		-		-		-		335
Acquired loans with deteriorated credit:		39		168		-		64		3		-		-		274
Beginning Balance, December 31, 2018		2,748		14,168		1,003		3,933		316		2		189		22,359
Charge-offs:
Originated Loans:		1		111		-		145		-		-		-		257
Acquired loans initially recorded at fair value:		65		118		-		303		-		-		-		486
Sub-total:		66		229		-		448		-		-		-		743
Recoveries:
Originated Loans:		-		-		-		15		-		-		-		15
Acquired loans recorded at fair value:		3		10		-		5		16		-		-		34
Sub-total:		3		10		-		20		16		-		-		49
Provisions:
Originated Loans:		49		1,346		241		(794)		17		(2)		84		941
Acquired loans initially recorded at fair value:		(12)		166		-		1,101		(16)		-		-		1,239
Acquired loans with deteriorated credit:		-		(89)		-		(22)		-		-		-		(111)
Sub-total:		37		1,423		241		285		1		(2)		84		2,069
Totals:
Originated Loans:		2,422		15,235		1,244		2,945		330		-		273		22,449
Acquired loans initially recorded at fair value:		261		58		-		803		-		-		-		1,122
Acquired loans with deteriorated credit:		39		79		-		42		3		-		-		163
Ending Balance, December 31, 2019	$	2,722	$	15,372	$	1,244	$	3,790	$	333	$	-	$	273	$	23,734

Ending Balance attributable to loans:
Individually evaluated for impairment	$	8,455	$	13,231	$	-	$	3,938	$	1,288	$	-	$	-	$	26,912
Collectively evaluated for impairment		239,926		1,593,745		104,996		173,704		63,350		682		-		2,176,403
Total Gross Loans:	$	248,381	$	1,606,976	$	104,996	$	177,642	$	64,638	$	682	$	-	$	2,203,315

Ending ALLL Attributed to loans individually evaluated for impairment	$	380	$	342	$	-	$	2,518	$	24	$	-	$	-	$	3,264
Ending ALLL Attributed to loans collectively evaluated for impairment		2,342		15,030		1,244		1,272		309		-		273		20,470
Total Ending ALLL:	$	2,722	$	15,372	$	1,244	$	3,790	$	333	$	-	$	273	$	23,734

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.

‎

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

The following table summarizes the average recorded investment and interest income recognized on impaired loans with no related allowance recorded by portfolio class for the three and six months ended June 30, 2020 and 2019 (In thousands):


		Three Months Ended June 30,								Six Months Ended June 30,
		2020		2020		2019		2019		2020		2020		2019		2019

	Average		Interest		Average		Interest		Average			Interest	Average			Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
Originated loans	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
with no related allowance recorded:
Residential one-to-four family	$	1,976	$	20	$	2,818	$	18	$	1,987	$	40	$	2,753	$	46
Commercial and Multi-family		3,896		45		11,499		120		4,087		90		11,903		254
Commercial business⁽¹⁾		2,444		110		1,145		41		1,999		151		1,088		83
Home equity⁽²⁾		813		7		680		6		737		13		707		12
Sub-total:	$	9,129	$	182	$	16,142	$	185	$	8,810	$	294	$	16,451	$	395

Acquired loans initially recorded at fair value
with no related allowance recorded:

Residential one-to-four family	$	1,690	$	18	$	2,216	$	25	$	1,741	$	36	$	2,518	$	50
Commercial and Multi-family		3,966		47		3,917		55		4,111		94		3,932		110
Commercial business⁽¹⁾		-		-		51		1		-		-		52		2
Home equity⁽²⁾		255		3		336		3		61		-		291		6
Consumer		-		-		-		-		218		6		7		-
Sub-total	$	5,911	$	68	$	6,520	$	84	$	6,131	$	136	$	6,800	$	168

Acquired loans with deteriorated credit
with no related allowance recorded:

Residential one-to-four family⁽³⁾	$	815	$	14	$	929	$	14	$	819	$	28	$	960	$	30
Commercial and Multi-family⁽³⁾		718		7		5,461		7		1,516		14		5,850		13
Commercial business⁽¹⁾⁽³⁾		864		2		829		-		865		4		823		-
Home equity⁽²⁾⁽³⁾		34		-		45		-		35		-		46		-
Sub-total:	$	2,431	$	23	$	7,264	$	21	$	3,235	$	46	$	7,679	$	43

Total Impaired Loans
with no related allowance recorded:	$	17,471	$	273	$	29,926	$	290	$	18,176	$	476	$	30,930	$	606

__________

(1)Includes business lines of credit.

(2)Includes home equity lines of credit.

(3)Does not include accretable yield on loans acquired with deteriorated credit.

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

The following table summarizes the average recorded investment and interest income recognized on impaired loans with allowance recorded by portfolio class for the three months ended June 30, 2020 and 2019. (In thousands):




	Three Months Ended June 30,								Six Months Ended June 30,
		2020		2020		2019		2019		2020		2020		2019		2019

	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
Originated loans	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
with an allowance recorded:
Residential one-to-four family	$	914	$	2	$	2,452	$	24	$	933	$	10	$	2,775	$	49
Commercial and Multi-family		-		-		-		-		-		-		37		-
Commercial business⁽¹⁾		1,056		25		574		27		1,171		28		849		54
Home equity⁽²⁾		322		2		152		2		341		5		152		4
Sub-total:	$	2,292	$	29	$	3,178	$	53	$	2,445	$	43	$	3,813	$	107

Acquired loans initially recorded at fair value
with an allowance recorded:
Residential one-to-four family	$	2,371	$	4	$	3,245	$	28	$	2,340	$	30	$	3,169	$	52
Commercial and Multi-family		1,230		-		897		4		1,236		20		905		8
Commercial business⁽¹⁾		997		30		189		-		790		30		126		-
Home equity⁽²⁾		83		-		84		1		83		1		84		3
Sub-total:	$	4,681	$	34	$	4,415	$	33	$	4,449	$	81	$	4,284	$	63

Acquired loans with deteriorated credit
with an allowance recorded:
Residential one-to-four family⁽³⁾	$	520	$	-	$	447	$	7	$	521	$	7	$	420	$	12
Sub-total:	$	520	$	-	$	447	$	7	$	521	$	7	$	420	$	12

Total Impaired Loans
with an allowance recorded:	$	7,493	$	63	$	8,040	$	93	$	7,415	$	131	$	8,517	$	182

__________

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.

(3) Does not include accretable yield on loans acquired with deteriorated credit.

‎

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

The following table summarizes the recorded investment and unpaid principal balances where there is no related allowance on impaired loans by portfolio class at

June 30, 2020 and December 31, 2019. (In thousands):



		As of June 30, 2020						As of December 31, 2019
		Recorded		Unpaid Principal		Related		Recorded		Unpaid Principal		Related
Originated loans		Investment		Balance		Allowance		Investment		Balance		Allowance
with no related allowance recorded:
Residential one-to-four family	$	1,971	$	2,070	$	-	$	2,010	$	2,098	$	-
Commercial and multi-family		3,891		3,936		-		4,469		4,527		-
Commercial business⁽¹⁾		3,887		8,133		-		1,108		4,069		-
Home equity⁽²⁾		994		995		-		584		593		-
Sub-total:	$	10,743	$	15,134	$	-	$	8,171	$	11,287	$	-

Acquired loans initially recorded at fair
value with no related allowance
recorded:
Residential one-to-four family	$	1,548	$	1,638	$	-	$	1,843	$	1,950	$	-
Commercial and Multi-family		3,893		3,893		-		4,401		4,402		-
Commercial business⁽¹⁾		-		-		-		183		589		-
Home equity⁽²⁾		247		249		-		205		206		-
Sub-total:	$	5,688	$	5,780	$	-	$	6,632	$	7,147	$	-

Acquired loans with deteriorated
credit with no related allowance
recorded:
Residential one-to-four family	$	810	$	1,366	$	-	$	827	$	1,383	$	-
Commercial and Multi-family		715		1,769		-		3,113		4,166		-
Commercial business⁽¹⁾		862		5,048		-		867		5,052		-
Home equity⁽²⁾		33		45		-		37		47		-
Sub-total:	$	2,420	$	8,228	$	-	$	4,844	$	10,648	$	-

Total Impaired Loans
with no related allowance recorded:	$	18,851	$	29,142	$	-	$	19,647	$	29,082	$	-

__________

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

‎

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

The following table summarizes the recorded investment, unpaid principal balance, and the related allowance on impaired loans by portfolio class at June 30, 2020 and December 31, 2019. (In thousands):



		As of June 30, 2020						As of December 31, 2019
		Recorded		Unpaid Principal		Related		Recorded		Unpaid Principal		Related
Originated loans		Investment		Balance		Allowance		Investment		Balance		Allowance
with an allowance recorded:
Residential one-to-four family	$	911	$	911	$	38	$	973	$	973	$	48
Commercial business⁽¹⁾		1,025		1,768		960		1,403		3,037		1,029
Home equity⁽²⁾		269		274		17		379		382		20
Sub-total:	$	2,205	$	2,953	$	1,015	$	2,755	$	4,392	$	1,097

Acquired loans initially recorded at fair
value with an allowance
recorded:
Residential one-to-four family	$	2,474	$	2,506	$	357	$	2,278	$	2,293	$	325
Commercial and Multi-family		1,226		1,424		318		1,248		1,442		342
Commercial business⁽¹⁾		1,481		3,266		1,705		377		1,489		1,489
Home equity⁽²⁾		82		82		3		83		83		4
Sub-total	$	5,263	$	7,278	$	2,383	$	3,986	$	5,307	$	2,160

Acquired loans with deteriorated
credit with an allowance
recorded:
Residential one-to-four family	$	519	$	566	$	3	$	524	$	571	$	7
Sub-total:	$	519	$	566	$	3	$	524	$	571	$	7

Total Impaired Loans
with an allowance recorded:	$	7,987	$	10,797	$	3,401	$	7,265	$	10,270	$	3,264

Total Impaired Loans
with no related allowance recorded:	$	18,851	$	29,142	$	-	$	19,647	$	29,082	$	-

Total Impaired Loans:	$	26,838	$	39,939	$	3,401	$	26,912	$	39,352	$	3,264

__________

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.

‎

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

A troubled debt restructured loan (“TDR”) is a loan that has been modified whereby the Company has agreed to make certain concessions to a borrower to meet the needs of both the borrower and the Company to maximize the ultimate recovery of a loan. A TDR occurs when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified using a concession that would otherwise not be granted to the borrower. A loan that was current at December 31, 2019 and modified due to the COVID-19 pandemic is not considered a TDR. The types of concessions granted generally include, but are not limited to, interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment of principal. All TDRs were considered impaired and therefore were individually evaluated for impairment in the calculation of the allowance for loan losses. Prior to their classification as TDRs, certain of these loans had been collectively evaluated for impairment in the calculation of the allowance for loan losses.


		At June 30, 2020		At December 31, 2019
		(In thousands)
Recorded investment in TDRs:
Accrual status	$	16,157	$	17,030
Non-accrual status		1,097		702
Total recorded investment in TDRs	$	17,254	$	17,732

There were no new TDRs for the three months ended June 30, 2020 and for the three months ended June 30, 2019.

TDRs for the six months ended June 30, 2020 totaled $208,352 for one loan and $1.2 million for three loans for the six months ended June 30, 2019.

There were no TDRs for which there was a payment default within twelve months of restructuring for the three or six months ended June 30, 2020.

The following table sets forth the delinquency status of total loans receivable as of June 30, 2020:



													Loans Receivable
	30-59 Days		60-90 Days		Greater Than		Total Past				Total Loans		>90 Days
	Past Due		Past Due		90 Days		Due		Current		Receivable		and Accruing
		(In Thousands)

Residential one-to-four family	$	813	$	956	$	450	$	2,219	$	245,252	$	247,471	$	-
Commercial and multi-family		998		-		829		1,827		1,642,127		1,643,954		-
Construction		-		-		-		-		111,463		111,463		-
Commercial business⁽¹⁾		2,514		134		2,360		5,008		304,276		309,284		-
Home equity⁽²⁾		446		76		427		949		62,532		63,481		-
Consumer		-		-		-		-		603		603		-
Total	$	4,771	$	1,166	$	4,066	$	10,003	$	2,366,253	$	2,376,256	$	-

_________

(1) Includes business lines of credit and PPP loans.

(2) Includes home equity lines of credit.

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

The table below sets forth the amounts and types of non-accrual loans in the Bank’s loan portfolio at June 30, 2020 and December 31, 2019, respectively. Loans are placed on non-accrual status when they become more than 90 days delinquent, or when the collection of principal and/or interest become doubtful. As of June 30, 2020 and December 31, 2019, non-accrual loans differed from the amount of total loans past due greater than 90 days due to loans which are maintained on non-accrual status for a minimum of six months until the borrower has demonstrated its ability to satisfy the terms of the restructured loan. There was $1.6 million in loans that were less than ninety days past due at June 30, 2020 and December 31, 2019, and $795,000 of loans which were more than ninety days past due and still accruing interest at December 31, 2019. Nonaccrual loans do not include loans acquired with deteriorated credit quality which were recorded at their fair value at acquisition and totaled $1.1 million at June 30, 2020, and $3.5 million at December 31, 2019. Loans subject to COVID-19-related modifications are not be reported as non-accrual, in accordance with regulatory guidance.



		As of June 30, 2020		As of December 31, 2019
		(In Thousands)		(In Thousands)
Non-Accruing Loans:

Originated loans:
Residential one-to-four family	$	788	$	590
Commercial and multi-family		218		761
Commercial business⁽¹⁾		1,129		1,428
Home equity⁽²⁾		608		347

Sub-total:		2,743		3,126

Acquired loans initially recorded at fair value:
Residential one-to-four family		544		291
Commercial and multi-family		631		217
Commercial business⁽¹⁾		513		513
Home equity⁽²⁾		64		13

Sub-total:		1,752		1,034

Total	$	4,495	$	4,160

_________

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.

Had non-accrual loans been performing in accordance with their original terms, the interest income recognized for the six months ended June 30, 2020 and December 31, 2019 would have been approximately $509,000 and $967,000, respectively. Interest income recognized on loans returned to accrual status was approximately $509,000 and $1.1 million, respectively. The Bank has not committed to lend additional funds to the borrowers whose loans have been placed on nonaccrual status. At June 30, 2020 and December 31, 2019, there were $0 and $795,000, respectively, of loans which were more than ninety days past due and still accruing interest.

‎

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

The following table sets forth the delinquency status of total loans receivable at December 31, 2019:



													Loans Receivable
	30-59 Days		60-90 Days		Greater Than		Total Past				Total Loans		>90 Days
	Past Due		Past Due		90 Days		Due		Current		Receivable		and Accruing
		(In Thousands)
Originated loans:
Residential one-to-four family	$	1,087	$	401	$	-	$	1,488	$	210,532	$	212,020	$	-
Commercial and multi-family		1,290		940		616		2,846		1,482,440		1,485,286		-
Construction		-		-		-		-		104,996		104,996		-
Commercial business⁽¹⁾		1,874		278		1,265		3,417		153,996		157,413		142
Home equity⁽²⁾		161		63		116		340		49,760		50,100		-
Consumer		-		-		-		-		674		674		-

Sub-total:	$	4,412	$	1,682	$	1,997	$	8,091	$	2,002,398	$	2,010,489	$	142

Acquired loans initially recorded at fair value:
Residential one-to-four family	$	265	$	217	$	330	$	812	$	34,198		35,010	$	97
Commercial and multi-family		318		-		631		949		117,628		118,577		556
Construction		-		-		-		-		-		-		-
Commercial business⁽¹⁾		300		-		513		813		18,506		19,319		-
Home equity⁽²⁾		190		75		-		265		14,037		14,302		-
Consumer		-		-		-		-		8		8		-

Sub-total:	$	1,073	$	292	$	1,474	$	2,839	$	184,377	$	187,216	$	653

Acquired loans with deteriorated credit:
Residential one-to-four family	$	-	$	-	$	-	$	-	$	1,351	$	1,351	$	-
Commercial and multi-family		-		-		2,500		2,500		613		3,113		-
Construction		-		-		-		-		-		-		-
Commercial business⁽¹⁾		-		-		856		856		54		910		-
Home equity⁽²⁾		37		199		-		236		-		236		-
Consumer		-		-		-		-		-		-		-

Sub-total:	$	37	$	199	$	3,356	$	3,592	$	2,018	$	5,610	$	-

Total	$	5,522	$	2,173	$	6,827	$	14,522	$	2,188,793	$	2,203,315	$	795

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.

‎

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

Criticized and Classified Assets

Company policies provide for a classification system for problem assets. Under this classification system, problem assets are classified as “substandard,” “doubtful,” or “loss.”

When the Company classifies problem assets, the Company may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. A portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining our regulatory capital. Specific valuation allowances for loan losses generally do not qualify as regulatory capital. As of June 30, 2020, we had $0 in assets classified as losses, and $13.6 million in assets classified as substandard, of which $13.6 million were classified as impaired. The loans classified as substandard are secured either by residential real estate, commercial real estate or heavy equipment. The loans that have been classified substandard were classified as such primarily due to payment status, because updated financial information has not been timely provided, or the collateral underlying the loan is in the process of being revalued.

The Company’s internal credit risk grades are based on the definitions currently utilized by the banking regulatory agencies. The grades assigned and definitions are as follows, and loans graded excellent, above average, good and watch list (risk ratings 1-5) are treated as “pass” for grading purposes. The “criticized” risk rating (6) and the “classified” risk ratings (7-9) are detailed below:

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

7 – Substandard- Loans that are inadequately protected by current sound worth, paying capacity, and collateral support. Loans on “nonaccrual” status. The loan needs special and corrective attention.

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

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

The following table presents the loan portfolio types summarized by the aggregate pass rating and the classified ratings of special mention and substandard within the Company’s internal risk rating system as of June 30, 2020 (in thousands). As of June 30, 2020, the Company had no loans with the classified rating of doubtful or loss.


	Pass		Special Mention		Substandard		Total

Originated loans:
Residential one-to-four family	$	211,258	$	1,049	$	788	$	213,095
Commercial and multi-family		1,529,731		1,978		1,193		1,532,902
Construction		111,463		-		-		111,463
Commercial business⁽¹⁾		283,772		1,476		4,566		289,814
Home equity⁽²⁾		50,932		-		658		51,590
Consumer		600		-		-		600
Sub-total:	$	2,187,756	$	4,503	$	7,205	$	2,199,464


Acquired loans initially recorded at fair value:
Residential one-to-four family	$	32,410	$	-	$	637	$	33,047
Commercial and multi-family		107,043		217		3,077		110,337
Commercial business⁽¹⁾		16,952		133		1,481		18,566
Home equity⁽²⁾		11,594		-		64		11,658
Consumer		3		-		-		3
Sub-total:	$	168,002	$	350	$	5,259	$	173,611

Acquired loans with deteriorated credit:
Residential one-to-four family	$	775	$	546	$	8	$	1,329
Commercial and multi-family		489		-		226		715
Commercial business⁽¹⁾		-		51		853		904
Home equity⁽²⁾		200		-		33		233
Sub-total:	$	1,464	$	597	$	1,120	$	3,181

Total Gross Loans	$	2,357,222	$	5,450	$	13,584	$	2,376,256

_________

(1) Includes business lines of credit and PPP loans.

(2) Includes home equity lines of credit.
‎

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

The following table presents the loan portfolio types summarized by the aggregate pass rating and the classified ratings of special mention and substandard within the Company’s internal risk rating system as of December 31, 2019. (In thousands). As of December 31, 2019, the Company had no loans with the classified rating of doubtful or loss.



	Pass		Special Mention		Substandard		Total
Originated loans:
Residential one-to-four family	$	210,094	$	1,336	$	590	$	212,020
Commercial and multi-family		1,478,472		4,043		2,771		1,485,286
Construction		104,996		-		-		104,996
Commercial business⁽¹⁾		153,464		1,796		2,153		157,413
Home equity⁽²⁾		49,753		-		347		50,100
Consumer		670		4		-		674
Sub-total:	$	1,997,449	$	7,179	$	5,861	$	2,010,489

Acquired loans initially recorded at fair value:
Residential one-to-four family	$	34,624	$	-	$	386		35,010
Commercial and multi-family		115,130		583		2,864		118,577
Commercial business⁽¹⁾		17,648		1,159		512		19,319
Home equity⁽²⁾		14,270		-		32		14,302
Consumer		8		-		-		8
Sub-total:	$	181,680	$	1,742	$	3,794	$	187,216

Acquired loans with deteriorated credit:
Residential one-to-four family	$	788	$	248	$	315		1,351
Commercial and multi-family		-		493		2,620		3,113
Commercial business⁽¹⁾		-		54		856		910
Home equity⁽²⁾		199		-		37		236
Sub-total:	$	987	$	795	$	3,828	$	5,610

Total Gross Loans	$	2,180,116	$	9,716	$	13,483	$	2,203,315

________

(1) Includes business lines of credit.

(2) Includes home equity lines of credit.

‎

Note 8 – Stockholders’ Equity

On July 13, 2020, the Company closed a private placement of Series H 3.5% Noncumulative Perpetual Preferred Stock, resulting in gross proceeds of $3,080,000 for 308 shares, effective June 29, 2020.

On December 30, 2019, the Company closed a public offering of 1,020,408 shares of its common stock. The offering resulted in gross proceeds of $12.5 million to the Company.

On February 25, 2019, the Company closed a private placement offering of 496,224 shares of its common stock, of which directors and officers of the Company purchased 286,244 shares. The offering resulted in gross proceeds of $6.272 million to the Company.

On January 30, 2019, the Company closed a private placement of Series G 6.0% Noncumulative Perpetual Preferred Stock, resulting in gross proceeds of $5,330,000 for 533 shares.

Note 9 – Goodwill and Other Intangible Assets

The Company’s intangible assets consist of goodwill and core deposit intangibles in connection with the acquisition of IA Bancorp, Inc. as of April 17, 2018. The initial recording of goodwill and other intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets and assumed liabilities. Goodwill is not amortized but is subject to annual tests for impairment or more often if events or circumstances indicate it may be impaired.

The Company’s core deposit intangibles are amortized on an accelerated basis using an estimated life of 10 years and in accordance with U.S. GAAP are evaluated annually for impairment. An impairment loss will be recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible asset is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset.

The Company believes that the fair values of our goodwill and other intangible assets were in excess of their carrying amounts and there was no impairment at June 30, 2020.

Amortization expense of the core deposit intangibles was $18,000 and $19,000 for the three months ended June 30, 2020 and 2019, respectively. The unamortized balance of the core deposit intangibles and the amount of goodwill at June 30, 2020 was $281,000 and $5.2 million, respectively. The unamortized balance of the core deposit intangibles and the amount of goodwill at June 30, 2019 was $352,000 and $5.2 million, respectively.

The temporary COVID-19 pandemic has clearly caused disruption to the global economy, but the extent and duration of the disruption is uncertain at this time. Accordingly, and in consideration of the relatively recent decline of the stock price below carrying value, management feels that it is not more likely than not that this circumstance indicates that the fair value of the Company is less than its carrying amount, including goodwill, as of June 30, 2020. Management will continue to monitor the activity for loan deferment requests and delinquencies on a regular basis. Given the evolving situation, the need for further goodwill impairment testing will likely be assessed again as of September 30, 2020.

‎

Note 10 – Fair Values of Financial Instruments

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

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

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

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

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

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


			(Level 1)		(Level 2)
			Quoted Prices in		Significant		(Level 3)
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
Description	Total		Assets		Inputs		Inputs
As of June 30, 2020:
Securities
Debt Securities Available for Sale	$	127,518	$	-	$	127,518	$	-
Marketable Equities	$	12,683	$	12,683	$	-	$	-
Total Securities	$	140,201	$	12,683	$	127,518	$	-

As of December 31, 2019:
Securities
Debt Securities Available for Sale	$	91,613	$	-	$	91,613	$	-
Marketable Equities	$	2,500	$	2,500	$	-	$	-
Total Securities	$	94,113	$	2,500	$	91,613	$	-

The Company’s policy is to recognize transfers between levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers of assets or liabilities into or out of Level 1, Level 2, or Level 3 of the fair value hierarchy during the three or six months ended June 30, 2020 and 2019.

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




			(Level 1)		(Level 2)
			Quoted Prices in		Significant		(Level 3)
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
Description	Total		Assets		Inputs		Inputs
As of June 30, 2020
Impaired Loans	$	4,586	$	-	$	-	$	4,586
Other real estate owned	$	1,623	$	-	$	-	$	1,623

As of December 31, 2019:
Impaired Loans	$	4,001	$	-	$	-	$	4,001
Other real estate owned	$	1,623	$	-	$	-	$	1,623

‎

Note 10 – Fair Values of Financial Instruments (Continued)

The following tables present additional quantitative information as of June 30, 2020 and December 31, 2019 about assets measured at fair value on a nonrecurring basis and for which the Company has utilized adjusted Level 3 inputs to determine fair value. (Dollars in thousands):


Quantitative Information about Level 3 Fair Value Measurements
		Fair Value	Valuation	Unobservable
		Estimate	Techniques	Input	Range
June 30, 2020:
Impaired Loans	$	4,586	Appraisal of collateral (1)	Appraisal adjustments (2)	0%-10%

Other real estate owned	$	1,623	Appraisal of collateral (1)	Appraisal adjustments (2)	0%-10%


		Fair Value	Valuation	Unobservable
		Estimate	Techniques	Input	Range
December 31, 2019:
Impaired Loans	$	4,001	Appraisal of collateral (1)	Appraisal adjustments (2)	0%-10%

Other real estate owned	$	1,623	Appraisal of collateral (1)	Appraisal adjustments (2)	0%-10%

(1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not objectively determinable.

(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments as of June 30, 2020 and December 31, 2019.

Cash and Cash Equivalents and Interest-Earning Time Deposits (Carried at Cost)

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

Securities Available for Sale

The fair value of securities available for sale (carried at fair value) are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

Equity Securities

The fair values of available-for-sale securities are based on quoted market prices (Level 1).

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

The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for specific attributes of that loan. Loans held for sale are carried at the lower of cost or fair value.

Loans Receivable (Carried at Cost)

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

Note 10 – Fair Values of Financial Instruments (Continued)

Impaired Loans (Generally Carried at Fair Value)

Impaired loans are those for which the Company has measured and recorded an impairment generally based on the fair value of the loan’s collateral, less estimated costs to sell. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value at June 30, 2020 and December 31, 2019 consisted of the loan balances of $8.0 million net of a valuation allowance of $3.4 million and $7.3 million net of a valuation of loan allowance of $3.3 million, respectively.

Other Real Estate Owned (Generally Carried at Lower of Cost or Fair Value)

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

FHLB of New York Stock (Carried at Cost)

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

Interest Receivable and Payable (Carried at Cost)

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

Deposits (Carried at Cost)

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

Borrowings and Subordinated Debt (Carried at Cost)

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

Off-Balance Sheet Financial Instruments (Carried at Cost)

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

‎

Note 10 – Fair Values of Financial Instruments (Continued)

The carrying values and estimated fair values of financial instruments were as follows as of June 30, 2020 and December 31, 2019:


		As of June 30, 2020

					Quoted Prices in Active		Significant		Significant
	Carrying				Markets for Identical Assets		Other Observable Inputs		Unobservable Inputs
	Value		Fair Value		(Level 1)		(Level 2)		(Level 3)

	(In Thousands)
Financial assets:
Cash and cash equivalents	$	412,249	$	412,249	$	412,249	$	-	$	-
Interest-earning time deposits		735		735		-		735		-
Debt securities available for sale		127,518		127,518		-		127,518		-
Equity investments		12,683		12,683		12,683		-		-
Loans held for sale		760		760		-		760		-
Loans receivable, net		2,343,593		2,406,615		-		-		2,406,615
FHLB of New York stock, at cost		13,529		13,529		-		13,529		-
Accrued interest receivable		16,569		16,569		-		16,569		-
Other Real Estate Owned		1,623		1,623		-		-		1,623

Financial liabilities:
Deposits		2,442,233		2,452,965		1,456,240		996,725		-
Borrowings		242,800		245,481		-		245,481		-
Subordinated debentures		36,926		37,199		-		37,199		-
Accrued interest payable		2,492		2,492		-		2,492		-


		As of December 31, 2019

					Quoted Prices in Active		Significant		Significant
	Carrying				Markets for Identical Assets		Other Observable Inputs		Unobservable Inputs
	Value		Fair Value		(Level 1)		(Level 2)		(Level 3)

	(In Thousands)
Financial assets:
Cash and cash equivalents	$	550,353	$	550,353	$	550,353	$	-	$	-
Interest-earning time deposits		735		735		-		735		-
Debt securities available for sale		91,613		91,613		-		91,613		-
Equity investments		2,500		2,500		2,500		-		-
Loans held for sale		917		917		-		917		-
Loans receivable, net		2,178,407		2,199,497		-		-		2,199,497
FHLB of New York stock, at cost		13,821		13,821		-		13,821		-
Accrued interest receivable		8,318		8,318		-		8,318		-
Other Real Estate Owned		1,623		1,623		-		-		1,623

Financial liabilities:
Deposits		2,362,063		2,375,089		1,231,658		1,143,431		-
Borrowings		245,800		245,176		-		245,176		-
Subordinated debentures		36,810		36,947		-		36,947		-
Accrued interest payable		2,708		2,708		-		2,708		-

‎

Note 11 – Subordinated debt

On July 30, 2018, the Company issued $33.5 million of fixed-to-floating rate subordinated debentures (the “Notes”) in a private placement. The Notes have a ten-year term and bear interest at a fixed annual rate of 5.625% for the first five years of the term (the "Fixed Interest Rate Period"). From and including August 1, 2023, the interest rate will adjust to a floating rate based on the three-month LIBOR plus 2.72% until redemption or maturity (the "Floating Interest Rate Period"). The Notes are scheduled to mature on August 1, 2028. Subject to limited exceptions, the Company cannot redeem the Notes for the first five years of the term. The Company will pay interest in arrears semi-annually during the Fixed Interest Rate Period and quarterly during the Floating Interest Rate Period during the term of the Notes. The Notes constitute an unsecured and subordinated obligation of the Company and rank junior in right of payment to any senior indebtedness and obligations to general and secured creditors. The Notes qualify as Tier 2 capital for the Company for regulatory purposes, when applicable, and the portion that the Company contributes to the Bank will qualify as Tier 1 capital for the Bank. The additional capital will be used for general corporate purposes including organic growth initiatives. Subordinated debt includes associated deferred costs of $698,000 and $814,000 at June 30, 2020 and December 31, 2019, respectively.

The Company also has $4,124,000 of mandatory redeemable trust preferred securities. The interest rate on these floating rate junior subordinated debentures adjusts quarterly, equal to the three-month LIBOR and 2.65%.

As it is anticipated that LIBOR will be discontinued after 2021, the Company is reviewing the agreements for the above debentures to determine alternative reference rates, and does not anticipate there will be a significant financial statement impact.

Note 12 – Lease Obligations

The Company leases 28 of our offices under various operating lease agreements. The leases have remaining terms of one year to 13 years. The leases contain provisions for the payment by the Company of its pro-rata share of real estate taxes, insurance, common area maintenance and other variable expenses. The Company will allocate payments made under such leases between lease and non-lease components. Some leases contain renewal options and options to purchase the assets.

The Company has elected not to recognize a lease liability and a right of use asset for leases with a lease term of 12 or fewer months.

The following tables present certain information related to the Company’s leases (in thousands):


		Three Months Ended June 30, 2020		Three Months Ended June 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Operating lease cost	$	854	$	812	$	1,709	$	1,562
Variable lease cost-operating leases	$	196	$	170	$	398	$	302

		At June 30, 2020		At December 31, 2019
Supplemental balance sheet information related to leases:
Operating Leases
Operating lease right-of-use assets	$	13,335	$	13,246

Current liabilities	$	2,731	$	2,590
Operating lease liabilities (noncurrent portion)		10,790		10,790
Total operating lease liabilities	$	13,521	$	13,380

The weighted average remaining lease term for operating leases at June 30, 2020 and December 31, 2019 was 6.70 years and 6.69 years, respectively. The weighted average discount rate for operating leases at June 30, 2020 and December 31, 2019 was 3.09 percent and 3.16 percent, respectively.

The following table summarizes the Company’s maturity of lease obligations for operating leases at June 30, 2020 and December 31, 2019. (in thousands):


Maturities of lease liabilities:
		At June 30, 2020		At December 31, 2019
		Operating Leases		Operating Leases
One year or less	$	2,731	$	2,590
Over one year through three years		4,528		4,713
Over three years through five years		2,615		2,736
Over five years		3,647		3,341
Total	$	13,521	$	13,380

Note 13 – Subsequent Events

On July 31, 2020 the Company announced that on August 31, 2020, it will redeem all 6,465 outstanding shares of its Series F 6% Noncumulative Perpetual Preferred Stock, par value $0.01 per share (the Series F shares”). The Series F shares will be redeemed at their face value amount of $1,000 per share plus accrued and unpaid dividends from and including July 31, 2020, up to August 31, 2020 for an aggregate redemption amount of $6.5 million.

On July 17, 2020, the Bank opened its newest branch location at 269 Ferry Street in Newark, New Jersey.

On July 10, 2020, the Company announced that on August 10, 2020, the Company will redeem all 388 outstanding shares of its Series C 6% Noncumulative Perpetual Preferred Stock, par value $0.01 per shares. The Series C shares will be redeemed at their face value amount of $10,000 per share plus a prorated dividend for an aggregate redemption of $3.9 million

On July 8, 2020, the Board of Directors of the Company declared a common stock dividend of $0.14 per share to shareholders of record on August 7, 2020 with a payment date of August 21, 2020.

The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business. While the Company did not incur significant disruptions during the three and six months ended June 30, 2020 from the COVID-19 pandemic, it is unable to predict the impact that the COVID-19 pandemic will have on its financial condition, results of operations and cash flows for future periods due to numerous uncertainties.

ITEM 2.

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

Forward-Looking Statements

This report on Form 10-Q contains “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995, or the PSLRA. Such forward-looking statements, in addition to historical information, involve risk and uncertainties, and are based on the beliefs, assumptions and expectations of our management team. Words such as “expects,” “believes,” “should,” “plans,” “anticipates,” “will,” “potential,” “could,” “intend,” “may,” “outlook,” “predict,” “project,” “would,” “estimated,” “assumes,” “likely,” and variation of such similar expressions are intended to identify such forward-looking statements. Forward-looking statements speak only as of the date they are made. Because forward-looking statements are subject to assumptions and uncertainties, actual results or future events could differ, possibly materially, from those that we anticipated in our forward-looking statements and future results could differ materially from historical performance.

Factors that could cause future results to vary from current management expectations as reflected in our forward-looking statements include, but are not limited to:

unfavorable economic conditions in the United States generally and particularly in our primary market area;

the effects of declines in housing markets and real estate values that may adversely impact the collateral underlying our loans;

increase in unemployment levels and slowdowns in economic growth;

our level of non-performing assets and the costs associated with resolving any problem loans including litigation and other costs;

the impact of changes in interest rates and the credit quality and strength of underlying collateral and the effect of such changes on the market value of our loan and investment securities portfolios;

the credit risk associated with our loan portfolio;

changes in the quality and composition of the Bank’s loan and investment portfolios;

changes in our ability to access cost-effective funding;

deposit flows;

legislative and regulatory changes, including increases in Federal Deposit Insurance Corporation, or FDIC, insurance rates;

monetary and fiscal policies of the federal and state governments;

changes in tax policies, rates and regulations of federal, state and local tax authorities;

inflation;

demands for our loan products;

demand for financial services;

competition;

changes in the securities or secondary mortgage markets;

changes in management’s business strategies;

our ability to enter new markets successfully;

our ability to successfully integrate acquired businesses;

changes in consumer spending;

our ability to retain key employees;

the effects of any reputational, credit, interest rate, market, operational, legal, liquidity, or regulatory risk;

expanded regulatory requirements as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which could adversely affect operating results;

the global spread of the Coronavirus Disease 2019 (“COVID-19”) and the impact that it is having on the United States, in general, and New Jersey and New York, in particular (see Item 1.A. Risk Factors); and

other factors discussed elsewhere in this report, and in other reports we filed with the SEC, including under “Risk Factors” in Part I, Item 1A of our annual Report on Form 10-K, in Part II, Item 1A of our quarterly reports on Form 10-Q, and our other periodic reports that we file with the SEC.

You should not place undue reliance on these forward-looking statements, which reflect our expectations only as of the date of this Form 10-Q. We do not assume any obligation to revise forward-looking statements except as may be required by law.

Overview

BCB Bancorp, Inc. is a New Jersey corporation, and is the holding company parent of BCB Community Bank, or the Bank. The Company has not engaged in any significant business activity other than owning all of the outstanding common stock of BCB Community Bank. Our executive office is located at 104-110 Avenue C, Bayonne, New Jersey 07002. At June 30, 2020, we had approximately $2.987 billion in consolidated assets, $2.442 billion in deposits and $241.0 million in consolidated stockholders’ equity.

BCB Community Bank opened for business on November 1, 2000 as Bayonne Community Bank, a New Jersey chartered commercial bank. The Bank changed its name from Bayonne Community Bank to BCB Community Bank in April 2007. At June 30, 2020 the Bank operated through 31 branches in Bayonne, Carteret, Colonia, Edison, Jersey City, Hoboken, Fairfield, Holmdel, Lodi, Lyndhurst, Maplewood, Monroe Township, Newark, Parsippany, Plainsboro, River Edge, Rutherford, South Orange, Union, and Woodbridge, New Jersey, as well as three branches in Hicksville and Staten Island, NY, and through executive offices located at 104-110 Avenue C and an administrative office located at 591-595 Avenue C, Bayonne, New Jersey 07002. The Bank’s deposit accounts are insured by the FDIC, and the Bank is a member of the Federal Home Loan Bank System.

We are a community-oriented financial institution. Our business is to offer FDIC-insured deposit products and to invest funds held in deposit accounts at the Bank, together with funds generated from operations, in loans and investment securities. We offer our customers:

loans, including commercial and multi-family real estate loans, one- to four-family mortgage loans, home equity loans, construction loans, consumer loans and commercial business loans. In recent years the primary growth in our loan portfolio has been in loans secured by commercial real estate and multi-family properties;

FDIC-insured deposit products, including savings and club accounts, interest and non-interest bearing demand accounts, money market accounts, certificates of deposit and individual retirement accounts; and

retail and commercial banking services including wire transfers, money orders, safe deposit boxes, a night depository, debit cards, online banking, mobile banking, gift cards, fraud detection (positive pay), and automated teller services.

Critical Accounting Policies

The preparation of the Consolidated Financial Statements in accordance with U.S. GAAP requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses. We regularly evaluate these estimates and assumptions including those used to determine the allowance for loan losses, deferred taxes, fair value measurements, goodwill and other intangible assets. We base our estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Although our current estimates contemplate current economic conditions and how we expect them to change in the future, for the remainder of 2020, it is reasonably possible that actual conditions may be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Actual results may differ from these estimates under different assumptions or conditions.

See further discussion of these critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2019 and Note 1, Basis of Presentation, to the unaudited Consolidated Financial Statements. There has been no change in critical accounting policies since the Company’s last annual report on Form 10-K.

COVID-19 Overview

With the global outbreak of COVID-19 and the declaration of a pandemic by the World Health Organization on March 11, 2020, the Company remains focused on protecting the health and wellbeing of its employees and the communities in which it operates while assuring the continuity of its business operations.

The Company activated its dedicated pandemic team that proactively implemented its business continuity plans and has taken a variety of measures to ensure the ongoing availability of services, while taking health and safety measures, including enhanced cleaning and hygiene protocols in all of its facilities and remote work policies, where possible. To date, as a result of these business continuity measures, the Company has not experienced significant disruptions in its operations.

We believe we have sufficient liquidity on hand to continue business operations during this volatile period. As of June 30, 2020, the Company had over $400 million of cash on hand and available wholesale borrowing capacity of over $700 million.

COVID-19 Response

Operational Initiatives

oThe pandemic response team meets on a weekly basis and actively monitors guidance released by regulators, and banking associations.

oIn-person meetings are closely managed and are held on an as needed basis only.

oEmployees are working remotely, temporarily relocated or are working alternate days to increase social distancing.

oBranch and operational offices are cleaned and sanitized weekly. This practice will continue until further notice. Employees have access to masks, gloves and disinfectant.

oMost branch lobbies are open to the public. Masks are required for entry and social distancing is strictly enforced.

oManagement provides updates to employees on a regular basis.

oThe Call Center is open seven days a week to assist with customer inquiries.

Allowance for Loan Losses (“ALLL”)

oAlthough several of the Company’s asset quality metrics have not been adversely affected in a significant manner during the first six months of 2020, management determined it is prudent to increase its loan loss reserves through the addition of $3.3 million and $4.8 million in loan loss provisions for the three and six-month periods ended June 30, 2020, respectively, due primarily to the economic downturn as a result of the COVID-19 pandemic. This compares to $755,000 and $1.6 million in loan loss provisions for the three and six-month periods ended June 30, 2019, respectively. The loan loss reserve to total loans ratio was 1.22 percent at June 30, 2020 compared to 1.02 percent at June 30, 2019. The increased reserve includes provisions taken in response to changes in risks associated with loan classification assignments and a declining economy in New Jersey and New York.

oThe Bank considered qualitative factors, such as changes in underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral and the financial strength of borrowers. All of these factors are likely to be affected by the COVID-19 pandemic. Individual deferred loans were stress tested to assess potential credit risks. The impact of COVID-19 is likely to be felt over the next several quarters. Adjustments to the ALLL may be required as the full impact of COVID-19 on the Bank’s borrowers’ capacity to make payments and the value of the underlying collateral becomes known.

Loan Deferments

oThe Bank, like other financial institutions, has received a significant number of requests to defer principal and/or interest payments, and has agreed to such deferrals or is in the process of doing so on a case by case basis. The banking regulatory agencies, through an Interagency Statement dated April 7, 2020, are encouraging financial institutions to work prudently with borrowers who request loan modifications or deferrals as a result of COVID-19.

oThe Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. A financial institution can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”), and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes. These loans are accruing interest and the Bank is considering the loans within the overall allowance for loan loss analysis.

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COVID-19 Response (Continued)

oThe Bank began receiving requests for loan deferments on March 13, 2020. The forbearance period provided by the Bank is generally three months with the Bank retaining the sole option to extend the forbearance period for an additional three months. Payments received upon the expiration of the forbearance period will first be applied to interest accrued, then towards escrow advances, and any remaining amount towards principal.

The following is a summary of deferment requests by loan type as of June 30, 2020 and July 21, 2020 (dollars in thousands):


	June 30, 2020					July 21, 2020
	Number of Loans	Principal Balance		Weighted Average Interest Rate		Number of Loans	Principal Balance		Weighted Average Interest Rate
Residential one-to-four family	131	$	50,073	4.3	%	69	$	27,979	4.5	%
Commercial and multi-family	371		473,861	4.4		284		384,736	4.4
Construction	3		17,959	5.5		4		13,645	5.5
Commercial business⁽¹⁾	81		32,185	5.7		63		33,077	5.7
Home equity⁽²⁾	35		4,388	4.6		20		2,229	4.8
	621	$	578,466	4.6	%	440	$	461,666	4.5	%
(1) Includes business lines of credit.
(2) Includes home equity lines of credit.

Loan deferments peaked at $730.1 million in mid-June. The Company has worked diligently with our customers by reaching out to them as the end of the three-month deferral term was approaching, and to understand the need for any prudent requests of an extension of the deferral period. The Company has been encouraged with the results as we have experienced a 37% decline in loan deferment balances through July 21, 2020 since the peak in June.

Loan Deferment maturities for the remainder of the year are as follows (in thousands):


		Through July 31		August		September		October		November		Total
1st Deferment	$	26,723	$	232,532	$	43,270	$	8,573	$	409	$	311,507
2nd Deferment		-		13,595		10,516		95,757		30,291		150,159
Total Deferments	$	26,723	$	246,127	$	53,786	$	104,330	$	30,700	$	461,666

Management continues to perform detail stress testing of loan deferments related to various loan to value and cash flow scenarios. The specific ALLL reserves allocated to these stress tests are adequate and will continue to be analyzed as the economic conditions progress.

Paycheck Protection Program (PPP)

oAs a qualified Small Business Association (“SBA”) lender, we were automatically authorized to originate PPP loans.

oDue to the volume of applications received, the Bank had to suspend accepting any additional requests for PPP loans as of April 10, 2020, but resumed the program shortly thereafter.

oThrough July 15, 2020, the Bank had closed and funded approximately $127 million for almost 1,000 PPP loans.

oThe Company had received approximately $4.2 million of processing fees from the SBA through June 30, 2020. These fees, net of direct costs relating to the origination of these loans, have been deferred and are being amortized over the life of the loans. The amount of net deferred fees recorded to interest income through June 30, 2020 was approximately $275,000. Loan forgiveness payments will be treated as prepayments and recognized as they occur. It is now likely that the majority of loan forgiveness will occur in 2021, as the SBA recently extended the period that borrowers can spend the funds from eight weeks to 24 weeks. Once the customer applies for the forgiveness, the Company then has 60 days to approve and then the SBA has 90 days to approve on its end. The Company anticipates recognizing $370,000 of net deferred fee income in each of the third and fourth quarters in 2020, excluding any amounts resulting from loan forgiveness.

Main Street lending Program

oThe Main Street Lending Program is a program announced on April 9, 2020, under which the Federal Reserve will purchase loans that banks give to small and mid-sized businesses. The Federal Reserve will purchase 95% of each loan.

oThe program is designed to keep credit flowing to small and mid-sized businesses that were in good financial standing before the onset of the COVID-19 crisis, but which are now under extreme stress due to stay-at-home and business closure orders from state and local governments. The Bank has been approved as an eligible lender, and has received inquiries since the program became operational on July 8, 2020.

Industry Exposure

oThe Company has identified various industries that may be particularly adversely impacted by the COVID-19 pandemic. Though the hotspots may change through the progression of the pandemic, the following sectors are currently being disproportionately impacted: Strip Retail, Hospitality/Hotels, Golf Courses and Banquet Halls, Restaurants, and Retail. At June 30, 2020, the Bank’s portfolio and deferment balances for these industries, as a percent of the total loan portfolio, were as follows:


Description	Portfolio Balance ($000s)		Percentage of Loan Portfolio		Deferment Balance ($000s)		Percentage of Loan Portfolio
Strip Retail	$	124,831		5%	$	68,134		3%
Hospitality/Hotel		71,407		3		32,032		1
Golf Courses and Banquet Halls		49,835		2		17,789		1
Restaurant (standalone)		43,972		2		17,261		1
Retail (one-to-three units)		71,519		3		14,158		1
	$	361,564		15%	$	149,374		7%

COVID-19 Response (Continued)

IT Changes

oTo protect the well-being of our staff and customers, the Company has set up resources for some employees to work from home. To facilitate the move, we allocated laptop computers to staff and enhanced our ability to access the network offsite.

Liquidity and Capital Resources

oThe Company was well positioned with adequate levels of cash and liquid assets as of June 30, 2020, as well as wholesale borrowing capacity of over $700 million, to cover the lack of payments for COVID-19 loan deferments. At June 30, 2020, the Company’s equity to asset ratio was 8.1% and the Bank’s capital was in excess of regulatory requirements. The Company issued $3.1 million of Series H 3.5% preferred stock in the second quarter of 2020, which will serve to replace most of the scheduled redemption of $3.9 million of Series C 6.0% preferred stock in August, 2020. The Company had $4.9 million of stock repurchases for the first six months of 2020, and the program concluded in May, 2020. The Company will continue to monitor the effects of COVID-19 in determining future cash dividends and any requirement for additional capital each quarter.

Financial Condition

Total assets increased by $79.4 million, or 2.7 percent, to $2.987 billion at June 30, 2020 from $2.907 billion at December 31, 2019. The increase in total assets was mainly related to increases in loans receivable and investment securities, partly offset by a decrease in total cash and cash equivalents.

Total cash and cash equivalents decreased by $138.1 million, or 25.1 percent, to $412.2 million at June 30, 2020 from $550.3 million at December 31, 2019. This decrease was mainly related to increases in loans receivable and investment securities, partly offset by an increase in deposits.

Loans receivable, net increased by $165.2 million, or 7.6 percent, to $2.344 billion at June 30, 2020 from $2.178 billion at December 31, 2019. The increase in loans included $48.4 million of purchased loans and $127.0 million from the Company’s participation in the federal PPP loan program. Total loan increases for the first half of 2020 included $131.6 million in commercial business loans, which included PPP loans, $37.0 million in commercial real estate and multi-family loans, and $6.4 million in construction loans, partly offset by decreases of $1.1 million in home equity loans, $910,000 in residential one-to-four family loans, and $79,000 in consumer loans. The allowance for loan losses increased $5.1 million to $28.8 million, or 641.6 percent of non-accruing loans and 1.22 percent of gross loans, at June 30, 2020 as compared to an allowance for loan losses of $23.7 million, or 570.5 percent of non-accruing loans and 1.08 percent of gross loans, at December 31, 2019.

Total investment securities increased by $46.1 million, or 49.0 percent, to $140.2 million at June 30, 2020 from $94.1 million at December 31, 2019, representing purchases of $56.5 million in securities, partly offset by repayments, calls, and maturities.

Deposit liabilities increased by $80.2 million, or 3.4 percent, to $2.442 billion at June 30, 2020 from $2.362 billion at December 31, 2019. The increase in deposit liabilities mainly related to the continued maturation of the branches opened over the last four years as well as the funds provided to certain depositors as a result of the PPP loan program. Total increases for the first half of 2020 included $119.2 million in non-interest-bearing deposit accounts, $78.0 million in NOW deposit accounts, $15.0 million in savings and club accounts, and $13.3 million in money market checking accounts, partly offset by a decrease of $145.4 million in certificates of deposit, including listing service and brokered deposit accounts. Listing service and brokered reciprocal certificates of deposit, which were used as additional sources of deposit liquidity to fund loan growth, totaled $3.9 million and $69.1 million, respectively, at June 30, 2020.

Debt obligations decreased by $2.9 million, or 1.0 percent, to $279.7 million at June 30, 2020 from $282.6 million at December 31, 2019. The weighted average interest rate of FHLB advances was 2.08 percent at June 30, 2020 and 2.16 percent at December 31, 2019. The fixed interest rate of subordinated debt balances was 5.625 percent at June 30, 2020 and December 31, 2019.

Stockholders’ equity increased by $1.5 million, or 0.6 percent, to $241.0 million at June 30, 2020 from $239.5 million at December 31, 2019. Additional paid-in-capital for preferred stock increased $2.9 million to $28.0 million at June 30, 2020 from $25.0 million at December 31, 2019, primarily related to the issuance of $3.1 million of Series H preferred stock. Treasury stock increased $4.9 million to $26.9 million at June 30, 2020 from $22.0 million at December 31, 2019, related to the repurchase of Company common shares. Retained earnings decreased by $332,000 to $48.1 million at June 30, 2020 from $48.4 million at December 31, 2019, related to the net effect of dividends paid and net income for the first six months of the year. Accumulated other comprehensive income increased $2.9 million to $724,000 at June 30, 2020 from a loss of $2.2 million at December 31, 2019, related to significant improvements in the value of available-for-sale securities, as a result of the general decrease in market interest rates.

Net Interest Income Analysis

Net interest income represents the difference between income earned on our interest-earning assets and the expense incurred on our interest-bearing liabilities, and is analyzed and monitored by the Company on a regular basis. The following tables set forth average balance sheets, yields, and costs. The yields include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or expense.


		Three Months Ended June 30,
		2020					2019
		Average Balance		Interest Earned/Paid	Average Yield/Rate (3)		Average Balance		Interest Earned/Paid	Average Yield/Rate (3)
		(Dollars in thousands)
Interest-earning assets:
Loans Receivable	$	2,276,740	$	26,123	4.59%	$	2,329,209	$	28,634	4.92%
Investment Securities		106,777		740	2.77%		124,520		935	3.00%
Interest-earning deposits		550,929		343	0.25%		184,266		1,173	2.55%
Total Interest-earning assets		2,934,446		27,206	3.71%		2,637,995		30,742	4.66%
Non-interest-earning assets		83,651					78,478
Total assets	$	3,018,097				$	2,716,473
Interest-bearing liabilities:
Interest-bearing demand accounts	$	466,565	$	797	0.68%	$	341,418	$	648	0.76%
Money market accounts		327,533		765	0.93%		253,633		1,102	1.74%
Savings accounts		269,299		106	0.16%		259,398		110	0.17%
Certificates of Deposit		1,029,281		5,695	2.21%		1,056,375		6,097	2.31%
Total interest-bearing deposits		2,092,677		7,363	1.41%		1,910,824		7,957	1.67%
Borrowed funds		287,347		1,852	2.58%		283,424		1,920	2.71%
Total interest-bearing liabilities		2,380,024		9,215	1.55%		2,194,248		9,877	1.80%
Non-interest-bearing liabilities		399,638					304,680
Total liabilities		2,779,662					2,498,928
Stockholders' equity		238,435					217,545
Total liabilities and stockholders' equity	$	3,018,097				$	2,716,473
Net interest income			$	17,991				$	20,865
Net interest rate spread⁽¹⁾					2.16%					2.86%
Net interest margin⁽²⁾					2.45%					3.16%

(1)Net interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.

(2)Net interest margin represents net interest income divided by average total interest-earning assets.

(3)Annualized.

Net Interest Income Analysis (Continued)


		Six Months Ended June 30,
		2020					2019
		Average Balance		Interest Earned/Paid	Average Yield/Rate (3)		Average Balance		Interest Earned/Paid	Average Yield/Rate (3)
		(Dollars in thousands)
Interest-earning assets:
Loans Receivable	$	2,230,683	$	52,937	4.75%	$	2,322,674	$	56,867	4.90%
Investment Securities		99,542		1,311	2.63%		125,139		1,833	2.93%
Interest-earning deposits		565,776		2,377	0.84%		185,368		2,520	2.72%
Total Interest-earning assets		2,896,001		56,625	3.91%		2,633,181		61,220	4.65%
Non-interest-earning assets		79,193					70,550
Total assets	$	2,975,194				$	2,703,731
Interest-bearing liabilities:
Interest-bearing demand accounts	$	436,952	$	1,655	0.76%	$	341,538	$	1,252	0.73%
Money market accounts		324,383		2,115	1.30%		245,368		2,074	1.69%
Savings accounts		264,510		210	0.16%		259,958		223	0.17%
Certificates of Deposit		1,074,671		12,128	2.26%		1,070,757		12,087	2.26%
Total interest-bearing deposits		2,100,516		16,108	1.53%		1,917,621		15,636	1.63%
Borrowed funds		286,089		3,748	2.62%		283,442		3,817	2.69%
Total interest-bearing liabilities		2,386,605		19,856	1.66%		2,201,063		19,453	1.77%
Non-interest-bearing liabilities		349,707					290,511
Total liabilities		2,736,312					2,491,574
Stockholders' equity		238,882					212,157
Total liabilities and stockholders' equity	$	2,975,194				$	2,703,731
Net interest income			$	36,769				$	41,767
Net interest rate spread⁽¹⁾					2.25%					2.88%
Net interest margin⁽²⁾					2.54%					3.17%

(1)Net interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.

(2)Net interest margin represents net interest income divided by average total interest-earning assets.

(3)Annualized.

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Results of Operations comparison for the Three Months Ended June 30, 2020 and 2019

Net income decreased by $2.5 million, or 47.8 percent, to $2.7 million for the three months ended June 30, 2020 from $5.2 million for the three months ended June 30, 2019. The decrease in net income was primarily related to a decrease in interest income, an increase in the provision for loan losses, and a decrease in non-interest income, partly offset by a decrease in interest expense, a decrease in non-interest expense and a decrease in the income tax provision for the three months ended June 30, 2020 as compared with the three months ended June 30, 2019.

Net interest income decreased by $2.9 million, or 13.8 percent, to $18.0 million for the three months ended June 30, 2020 from $20.9 million for the three months ended June 30, 2019. The decrease in net interest income resulted primarily from a decrease in the average yield on interest-earning assets of 95 basis points to 3.71 percent for the three months ended June 30, 2020 from 4.66 percent for the three months ended June 30, 2019, partly offset by an increase in the average balance of interest-earning assets of $296.5 million, or 11.2 percent, to $2.934 billion for the three months ended June 30, 2020 from $2.638 billion for the three months ended June 30, 2019. Interest expense decreased related to a decrease in the average rate on interest-bearing liabilities of 25 basis points to 1.55 percent for the three months ended June 30, 2020 from 1.80 percent for the three months ended June 30, 2019, partly offset by an increase in the average balance of interest-bearing liabilities of $185.8 million, or 8.5 percent, to $2.380 billion for the three months ended June 30, 2020 from $2.194 billion for the three months ended June 30, 2019. The lower rates for interest income and interest expense were driven by the reduction of the federal funds rate by 225 basis points during the second half of 2019 and the first three months of 2020.

Interest income on loans receivable decreased by $2.5 million, or 8.8 percent, to $26.1 million for the three months ended June 30, 2020 from $28.6 million for the three months ended June 30, 2019. The decrease was primarily attributable to a decrease in the average yield on loans of 33 basis points to 4.59 percent for the three months ended June 30, 2020 from 4.92 percent for the three months ended June 30, 2019, as well as a decrease in the average balance of loans receivable of $52.5 million, or 2.3 percent, to $2.277 billion for the three months ended June 30, 2020 from $2.329 billion for the three months ended June 30, 2019. The decrease in the average yield on loans followed the declining interest rate environment. The Company curtailed loan growth in the second half of 2019 and in the first three months of 2020, reducing the average balance of loans receivable for the three months ended June 30, 2020, compared to the three months ended June 30, 2019. Interest income on loans also included $271,000 of amortization of purchase credit fair value adjustments related to the acquisition of IAB for the three months ended June 30, 2020, which added approximately four basis points to the average yield on interest earning assets.

Interest income on securities decreased by $195,000 or 20.9 percent, to $740,000 for the three months ended June 30, 2020 from $935,000 for the three months ended June 30, 2019. This decrease was primarily due to a decrease in the average balance of securities of $17.7 million, or 14.2 percent, to $106.8 million for the three months ended June 30, 2020 from $124.5 million for the three months ended June 30, 2019, as well as a decrease in the average yield on securities of 23 basis points to 2.77 percent for the three months ended June 30, 2020 from 3.00 percent for the three months ended June 30, 2019. The decrease in the average balance of securities resulted from faster prepayment speeds, repayments, calls, and maturities, partly offset by purchases of new securities, while the decrease in the average yield on securities also followed current lower interest rate market conditions.

Interest income on other interest-earning assets decreased by $830,000, or 70.8 percent to $343,000 for the three months ended June 30, 2020 from $1.2 million for the three months ended June 30, 2019. This decrease was primarily due to a decrease in the average yield on other interest-earning assets of 230 basis points to 0.25 percent for the three months ended June 30, 2020 from 2.55 percent for the three months ended June 30, 2019, partly offset by an increase in the average balance of other interest earning assets of $366.7 million, or 199.0 percent, to $550.9 million for the three months ended June 30, 2020 from $184.2 million for the three months ended June 30, 2019. The decrease in the average yield on other interest-earning assets correlated to the decreases in the fed funds rate. The increase in the average balance of other interest-earning assets related to the curtailment of loan growth beginning in 2019, high levels of loan prepayments, an increase in deposits, and the Company’s strategy of maintaining strong levels of liquidity.

Total interest expense decreased by $662,000, or 6.7 percent, to $9.2 million for the three months ended June 30, 2020 from $9.9 million for the three months ended June 30, 2019. This decrease resulted primarily from a decrease in the average rate on interest-bearing liabilities of 25 basis points to 1.55 percent for the three months ended June 30, 2020 from 1.80 percent for the three months ended June 30, 2019, partly offset by an increase in the average balance of interest-bearing liabilities of $185.8 million, or 8.5 percent, to $2.380 billion for the three months ended June 30, 2020 from $2.194 billion for the three months ended June 30, 2019. The decrease in the average cost of funds related to the declining interest rate environment. The increase in the average balance of interest-bearing liabilities primarily resulted from increased deposits, including those from new branches opened over the last few years.

Total deposit interest expense decreased by $594,000, or 7.5 percent, to $7.4 million for the three months ended June 30, 2020 from $8.0 million for the three months ended June 30, 2019. This decrease resulted primarily from a decrease in the average rate on deposits of 26 basis points to 1.41 percent for the three months ended June 30, 2020 from 1.67 percent for the three months ended June 30, 2019, partly offset by an increase in the average balance of deposits of $181.9 million, or 9.5 percent, to $2.093 billion for the three months ended June 30, 2020 from $1.911 billion for the three months ended June 30, 2019. The increase in the average balance of deposits primarily resulted from new branches opened over the last few years. The decrease in the average rate paid on deposits was primarily due to repricing our deposit base to align with the recent Fed rate reductions. The Company has been aggressively managing the cost of funds and it anticipates the opportunity for further reductions. Approximately $480 million of certificates of deposit, with an average rate of 2.19%, will mature in the next four months and is projected to be replaced at significantly lower rates.

Total borrowing interest expense was $1.9 million for each of the three-month periods. The average balance of borrowings increased by $3.9 million, or 1.4 percent, to $287.3 million for the three months ended June 30, 2020 from $283.4 million for the three months ended June 30, 2019, partly offset by a decrease in the average rate on borrowings of 13 basis points to 2.58 percent for the three months ended June 30, 2020 from 2.71 percent for the three months ended June 30, 2019.

Net interest margin was 2.45 percent for the three months ended June 30, 2020 and 3.16 percent for the three months ended June 30, 2019. The decrease in the net interest margin was the result of the current volatile financial market attributable to the COVID-19 pandemic, the low interest rate environment and high levels of liquidity that are earning record low rates.

The provision for loan losses increased by $2.5 million, to $3.3 million for the three months ended June 30, 2020 from $755,000 for the three months ended June 30, 2019, primarily due to COVID-19 related factors. The provision for loan losses is established based upon management’s review of the Company’s loans and consideration of a variety of factors, including but not limited to: (1) the risk characteristics of the loan portfolio; (2) current economic conditions; (3) actual losses previously experienced; (4) the dynamic activity and fluctuating balance of loans receivable; and (5) the existing level of reserves for loan losses that are probable and estimable. During the three months ended June 30, 2020, the Company experienced $8,000 in net recoveries compared to $30,000 in net recoveries for the three months ended June 30, 2019. The Bank had non-accrual loans totaling $4.5 million, or 0.19 percent, of gross loans at June 30, 2020 as compared to $5.5 million, or 0.24 percent, of gross loans at June 30, 2019. The allowance for loan losses was $28.8 million, or 1.22 percent of gross loans at June 30, 2020, and $23.8 million, or 1.02 percent of gross loans at June 30, 2019. 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 Company 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, 2020 and June 30, 2019.

Total non-interest income decreased by $220,000, or 16.6 percent, to $1.1 million for the three months ended June 30, 2020 from $1.3 million for the three months ended June 30, 2019. The decrease in total non-interest income was mainly related to a decrease of $380,000 in gains on sales of loans, a decrease of $265,000 in fees and service charges, partly offset by a net increase of $468,000 in unrealized gains on equity securities. The lower level of loan sales was attributable to the curtailment of loan growth, while unrealized gains or losses on equity securities are based on market conditions. The decline in fees and service charges related in part to the current pandemic condition as well as lower servicing fee income resulting from fewer loan sales.

Total non-interest expense decreased by $1.9 million, or 14.0 percent, to $12.0 million for the three months ended June 30, 2020 from $13.9 million for the three months ended June 30, 2019.

Salaries and employee benefits expense decreased by $1.2 million, or 17.9 percent, to $5.7 million for the three months ended June 30, 2020 from $6.9 million for the three months ended June 30, 2019, primarily related to $1.1 million of costs deferred for PPP loans and fewer full-time equivalent employees, partly offset by normal compensation increases. The costs deferred represent current period salaries and benefit costs associated with direct PPP loan origination costs, which are amortized over the life of the loans. The number of full-time equivalent employees for the three months ended June 30, 2020 was 340, as compared with 366 for the same period in 2019.

Occupancy and equipment expense increased by $261,000, or 9.9 percent, to $2.9 million for the three months ended June 30, 2020 from $2.6 million for the three months ended June 30, 2019, largely related to costs incurred for a new de novo branch which opened in July, 2020, as well as the opening of two de novo branches and the relocation of one of our existing branches during 2019.

Data processing and service fees increased by $220,000, or 30.1 percent, to $951,000 for the three months ended June 30, 2020 from $731,000 for the three months ended June 30, 2019. The increase was largely attributable to additional branches and system applications.

Regulatory assessments decreased by $166,000, or 39.8 percent, to $251,000 for the three months ended June 30, 2020 from $417,000 for the three months ended June 30, 2019. The decrease was primarily due to a decrease in the FDIC assessment rate, partly offset by an increase in the FDIC assessment base.

Other non-interest expense decreased by $795,000, or 37.1 percent, to $1.3 million for the three months ended June 30, 2020 from $2.1 million for the three months ended June 30, 2019. Other non-interest expense consisted of loan expense, business development, office supplies, correspondent bank fees, telephone and communication and miscellaneous fees and expenses. The decrease in the current period was primarily related to a reduction of business development and loan-related expenses, largely attributable to the current pandemic condition.

There were also less significant variances in professional fee expense, advertising expense, other real estate owned expense, and directors’ fees, which netted to a decrease in expenses of $226,000 for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019.

The income tax provision decreased by $1.2 million, or 51.6 percent, to $1.1 million for the three months ended June 30, 2020 from $2.3 million for the three months ended June 30, 2019. The decrease in the income tax provision was a result of lower taxable income for the three months ended June 30, 2020 as compared with that same period for 2019. The consolidated effective tax rate for the three months ended June 30, 2020 was 29.1 percent compared to 30.7 percent for the three months ended June 30, 2019. The lower rate in the current period related primarily to a one percent reduction in the New Jersey surtax rate.

Results of Operations comparison for the Six Months Ended June 30, 2020 and 2019

Net income decreased by $5.5 million, or 50.9 percent, to $5.2 million for the six months ended June 30, 2020 from $10.7 million for the six months ended June 30, 2019. The decrease in net income was primarily related to a decrease in total interest income, an increase in total interest expense, an increase in the provision for loan losses, and a decrease in total non-interest income, partly offset by a decrease in total non-interest expense and a decrease in the income tax provision for the six months ended June 30, 2020 as compared with the six months ended June 30, 2019.

Net interest income decreased by $5.0 million, or 12.0 percent, to $36.8 million for the six months ended June 30, 2020 from $41.8 million for the six months ended June 30, 2019. The decrease in net interest income resulted primarily from a decrease in the average yield on interest-earning assets of 74 basis points to 3.91 percent for the six months ended June 30, 2020 from 4.65 percent for the six months ended June 30, 2019, partly offset by an increase in the average balance of interest-earning assets of $262.8 million, or 10.0 percent, to $2.896 billion for the six months ended June 30, 2020 from $2.633 billion for the six months ended June 30, 2019. Interest expense increased related to an increase in the average balance of interest-bearing liabilities of $185.5 million, or 8.4 percent, to $2.387 billion for the six months ended June 30, 2020 from $2.201 billion for the six months ended June 30, 2019, partly offset by a decrease in the average rate on interest-bearing liabilities of 11 basis points to 1.66 percent for the six months ended June 30, 2020 from 1.77 percent for the six months ended June 30, 2019. The lower rates for interest income and interest expense were driven by the reduction of the federal funds rate by 225 basis points during the second half of 2019 and first three months of 2020.

Interest income on loans receivable decreased by $3.9 million, or 6.9 percent, to $52.9 million for the six months ended June 30, 2020 from $56.8 million for the six months ended June 30, 2019. The decrease was primarily attributable to a decrease in the average balance of loans receivable of $92.0 million, or 4.0 percent, to $2.231 billion for the six months ended June 30, 2020 from $2.323 billion for the six months ended June 30, 2019, as well as a decrease in the average yield on loans of 15 basis points to 4.75 percent for the six months ended June 30, 2020 from 4.90 percent for the six months ended June 30, 2019. The Company curtailed loan growth in the second half of 2019 and in the first three months of 2020, reducing the average balance of loans receivable for the six months ended June 30, 2020, compared with the six months ended June 30, 2019. The decrease in the average yield on loans followed the declining interest rate environment. Interest income on loans also included $736,000 of amortization of purchase credit fair value adjustments related to the acquisition of IAB for the six months ended June 30, 2020, which added approximately four basis points to the average yield on interest earning assets.

Interest income on securities decreased by $522,000 or 28.5 percent, to $1.3 million for the six months ended June 30, 2020 from $1.8 million for the six months ended June 30, 2019. This decrease was primarily due to a decrease in the average balance of securities of $25.6 million, or 20.5 percent, to $99.5 million for the six months ended June 30, 2020 from $125.1 million for the six months ended June 30, 2019, as well as a decrease in the average yield on securities of 30 basis points to 2.63 percent for the six months ended June 30, 2020 from 2.93 percent for the six months ended June 30, 2019. The decrease in the average balance of securities resulted from faster prepayment speeds, repayments, calls, and maturities, partly offset by purchases of new securities, while the decrease in the average yield on securities also followed current market lower interest rate conditions.

Interest income on other interest-earning assets decreased by $143,000, or 5.7 percent to $2.4 million for the six months ended June 30, 2020 from $2.5 million for the six months ended June 30, 2019. This decrease was primarily due to a decrease in the average yield on other interest-earning assets of 188 basis points to 0.84 percent for the six months ended June 30, 2020, from 2.72 percent for the six months ended June 30, 2019, partly offset by an increase in the average balance of other interest earning assets of $380.4 million, or 205.2 percent, to $565.8 million for the six months ended June 30, 2020 from $185.4 million for the six months ended June 30, 2019. The decrease in the average yield on other interest-earning assets correlated to the decreases in the fed funds rate. The increase in the average balance of other interest-earning assets related to the curtailment of loan growth beginning in 2019, high levels of loan prepayments, an increase in deposits, and the Company’s strategy of maintaining strong levels of liquidity.

Total interest expense increased by $403,000, or 2.1 percent, to $19.9 million for the six months ended June 30, 2020 from $19.5 million for the six months ended June 30, 2019. This increase resulted primarily from an increase in the average balance of interest-bearing liabilities of $185.5 million, or 8.4 percent, to $2.387 billion for the six

months ended June 30, 2020 from $2.201 billion for the six months ended June 30, 2019, partly offset by a decrease in the average rate on interest-bearing liabilities of 11 basis points to 1.66 percent for the six months ended June 30, 2020 from 1.77 percent for the six months ended June 30, 2019. The increase in the average balance of interest-bearing liabilities primarily resulted from increased deposits, including those from new branches opened over the last few years. The decrease in the average cost of funds related to the declining interest rate environment.

Total deposit interest expense increased by $472,000, or 3.0 percent, to $16.1 million for the six months ended June 30, 2020 from $15.6 million for the six months ended June 30, 2019. This increase resulted primarily from an increase in the average balance of deposits of $182.9 million, or 9.5 percent, to $2.101 billion for the six months ended June 30, 2020 from $1.918 billion for the six months ended June 30, 2019, partly offset by a decrease in the average rate on deposits of 10 basis points to 1.53 percent for the six months ended June 30, 2020 from 1.63 percent for the six months ended June 30, 2019. The increase in the average balance of interest-bearing liabilities primarily resulted from increased deposits, including those from new branches opened over the last few years. The decrease in the average rate paid on deposits was primarily due to repricing our deposit base to align with the recent Fed rate reductions.

Total borrowing interest expense was $3.7 million for the six months ended June 30, 2020 compared to $3.8 million for the six months ended June 30, 2019. The average rate on borrowings decreased by seven basis points to 2.62 percent for the six months ended June 30, 2020 from 2.69 percent for the six months ended June 30, 2019. The average balance of borrowings increased by $2.6 million, or 0.93 percent, to $286.1 million for the six months ended June 30, 2020 from $283.5 million for the six months ended June 30, 2019.

Net interest margin was 2.54 percent for the six months ended June 30, 2020 and 3.17 percent for the six months ended June 30, 2019. The decrease in the net interest margin was the result of the current volatile financial market attributable to the COVID-19 pandemic, the low interest rate environment and high levels of liquidity that are earning record low interest rates.

The provision for loan losses increased by $3.2 million to $4.8 million for the six months ended June 30, 2020 from $1.6 million for the six months ended June 30, 2019, primarily due to factors related to the COVID-19 pandemic. The provision for loan losses is established based upon management’s review of the Company’s loans and consideration of a variety of factors, including but not limited to: (1) the risk characteristics of the loan portfolio; (2) current economic conditions; (3) actual losses previously experienced; (4) the dynamic activity and fluctuating balance of loans receivable; and (5) the existing level of reserves for loan losses that are probable and estimable. During the six months ended June 30, 2020, the Company experienced $308,000 in net recoveries compared to $214,000 in net charge-offs for the six months ended June 30, 2019. The Bank had non-accrual loans totaling $4.5 million, or 0.19 percent, of gross loans at June 30, 2020 as compared to $5.5 million, or 0.24 percent, of gross loans at June 30, 2019. The allowance for loan losses was $28.8 million, or 1.22 percent of gross loans at June 30, 2020, and $23.8 million, or 1.02 percent of gross loans at June 30, 2019. 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 Company 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, 2020 and June 30, 2019.

Total non-interest income decreased by $1.2 million, or 40.1 percent, to $1.8 million for the six months ended June 30, 2020 from $3.0 million for the six months ended June 30, 2019. The decrease in total non-interest income was mainly related to a decrease of $637,000 in gains on sales of loans, a decrease of $422,000 in fees and service charges, a decrease of $263,000 in unrealized gains on equity securities, and a decrease of $107,000 in gains on sales of impaired loans, partly offset by an increase in other non-interest income of $266,000. The lower level of loan sales was attributable to the curtailment of loan growth, while unrealized gains or losses on equity securities were based on market conditions. The decline in fees and service charges related in part to the pandemic condition as well as lower servicing fee income resulting from fewer loan sales. The increase in other non-interest income related primarily to the reversal of certain liabilities previously recorded for IAB acquired loans that paid off in the first six months of 2020.

Total non-interest expense decreased by $1.4 million, or 4.9 percent, to $26.3 million for the six months ended June 30, 2020 from $27.7 million for the six months ended June 30, 2019.

Salaries and employee benefits expense decreased by $762,000, or 5.5 percent, to $13.1 million for the six months ended June 30, 2020 from $13.8 million for the six months ended June 30, 2019, primarily related to $1.1 million of costs deferred for PPP loans and fewer full-time equivalent employees, partly offset by normal compensation increases. The costs deferred represent current period salaries and benefit costs associated with direct PPP loan origination costs, which are amortized over the life of the loan. The number of full-time equivalent employees for the six months ended June 30, 2020 was 356, as compared with 363 for the same period in 2019.

Occupancy and equipment expense increased by $455,000, or 8.6 percent, to $5.7 million for the six months ended June 30, 2020 from $5.3 million for the six months ended June 30, 2019, largely related to costs incurred for a new de novo branch which opened in July, 2020, as well as the opening of two de novo branches and the relocation of one of our existing branches during 2019.

Data processing and service fees increased by $437,000, or 30.1 percent, to $1.9 million for the six months ended June 30, 2020 from $1.5 million for the six months ended June 30, 2019, largely attributable to additional branches and system applications.

Regulatory assessments decreased by $302,000, or 34.6 percent, to $572,000 for the six months ended June 30, 2020 from $874,000 for the six months ended June 30, 2019. The decrease was primarily due to a decrease in the assessment rate, partly offset by an increase in the assessment base.

Other non-interest expense decreased by $964,000, or 22.5 percent, to $3.3 million for the six months ended June 30, 2020 from $4.3 million for the six months ended June 30, 2019. Other non-interest expense consisted of loan expense, business development, office supplies, correspondent bank fees, telephone and communication and miscellaneous fees and expenses. The decrease in the current period was primarily related to a reduction of business development and loan-related expenses, largely attributable to the current pandemic condition.

There were also less significant variances in professional fee expense, advertising expense, other real estate owned expense, and directors’ fees, which netted to a decrease in expenses of $219,000 for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019.

The income tax provision decreased by $2.6 million, or 53.9 percent, to $2.2 million for the six months ended June 30, 2020 from $4.8 million for the six months ended June 30, 2019. The decrease in the income tax provision was a result of lower taxable income for the six months ended June 30, 2020 as compared to that same period for 2019. The consolidated effective tax rate for the six months ended June 30, 2020 was 29.5 percent compared to 30.8 percent for the six months ended June 30, 2019. The lower rate in the current period related primarily to a one percent reduction in the New Jersey surtax rate.

Liquidity and Capital Resources

Liquidity

The overall objective of our liquidity management practices is to ensure the availability of sufficient funds to meet financial commitments and to take advantage of lending and investment opportunities. The Company manages liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings and other obligations as they mature, and to fund loan and investment portfolio opportunities as they arise.

The Company’s primary sources of funds to satisfy its objectives are net growth in deposits (primarily retail), principal and interest payments on loans and investment securities, proceeds from the sale of originated loans and FHLB and other borrowings. The scheduled amortization of loans is a predictable source of funds. Deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional funds arises, including unsecured overnight lines of credit and other collateralized borrowings from the FHLB and other correspondent banks.

At June 30, 2020 and December 31, 2019, the Company had no overnight borrowings outstanding with the FHLB. The Company utilizes overnight borrowings from time to time to fund short-term liquidity needs. The Company had total borrowings of $279.7 million at June 30, 2020 and $282.6 million at December 31, 2019. The average rate of FHLB advances was 2.08 percent at June 30, 2020 and 2.16 percent at December 31, 2019. The subordinated debentures have a ten-year term and bears interest at a fixed annual rate of 5.625% for the first five years of the term. From and including August 1, 2023, the interest rate will adjust to a floating rate based on the LIBOR plus 2.72% until redemption or maturity. The Notes are scheduled to mature on August 1, 2028.

The Company had the ability at June 30, 2020 to obtain additional funding from the FHLB of up to $170.3 million, utilizing unencumbered loan collateral. The Company expects to have sufficient funds available to meet current loan commitments in the normal course of business through typical sources of liquidity. Time deposits scheduled to mature in one year or less totaled $846.8 million at June 30, 2020. Based upon historical experience, management estimates that a significant portion of such deposits will remain with the Company.

The Company was well positioned with adequate levels of cash and liquid assets as of June 30, 2020, as well as wholesale borrowing capacity of over $700 million, to cover the decrease in cash flow resulting from COVID-19 loan deferments.

At June 30, 2020 and December 31, 2019, the capital ratios of the Bank exceeded the quantitative capital ratios required for an institution to be considered “well-capitalized.”

Capital Resources

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

On September 17, 2019, the FDIC passed a final rule providing qualifying community banking organizations the ability to opt-in to a new community bank leverage ratio (“CBLR”) framework, (tier 1 capital to average consolidated assets) at 9% for institutions under $10 billion in assets that such institutions may elect to utilize in lieu of the general applicable risk-based capital requirements under Basel III. Such institutions that meet the CBLR and certain other qualifying criteria will automatically be deemed to be well-capitalized. On November 4, 2019, the FDIC, Office of the Comptroller of the Currency and the Federal Reserve Board jointly issued a final rule that permitted insured depository institutions and depository institution holding companies to implement the simplifications to the capital rule on January 1, 2020, rather than April 1, 2020. These banking organizations may elect to use the revised effective date of January 1, 2020, or wait until the quarter beginning April 1, 2020. The Bank has decided to opt-in to the new CBLR, effective for the quarter ended March 31, 2020. Pursuant to the CARES Act, the federal banking regulators in April, 2020 issued interim final rules to set the CBLR at 8% beginning in the second quarter of 2020 through the end of 2020. Beginning in 2021, the CBLR will increase to 8.5% for the calendar year. Community banks will have until January 1, 2022 before the CBLR requirement will return to 9%.

At June 30, 2020 and December 31, 2019, BCB Community Bank exceeded all of its regulatory capital requirements to which it was subject. The following table sets forth the regulatory capital ratios for BCB Community Bank as well as regulatory capital requirements for the periods presented.


		Actual				For Capital Adequacy Purposes				For Well Capitalized Under Prompt Corrective Action
	Dollars in Thousands
As of June 30, 2020:
Bank
Community Bank Leverage Ratio	$	269,340	8.96	%	$	210,657	7.00	%	$	240,751	8.00	%

As of December 31, 2019:
Bank
Common Equity Tier 1 Capital (to risk-weighted assets)	$	295,298	13.84	%	$	170,750	8.00	%	$	213,437	10.00	%
Tier 1 capital (to risk-weighted assets)		271,564	12.72			128,062	6.00			170,750	8.00
Common Equity Tier 1 Capital (to risk-weighted assets)		271,564	12.72			96,047	4.50			138,734	6.50
Tier 1 capital (to average assets)		271,564	9.51			114,174	4.00			142,718	5.00

The Company will continue to monitor the effects of COVID-19 in determining future cash dividends and any requirement for additional capital each quarter. The Company had $3.6 million of stock repurchases for the second quarter of 2020. The Company repurchased the maximum number of shares that may be repurchased under the program in the second quarter of 2020 and the program is now closed.

‎

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Management of Market Risk

General. The majority of our assets and liabilities are monetary in nature. Consequently, one of our most significant forms of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established an Asset/Liability Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Senior management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee, which consists of senior management and outside directors operating under a policy adopted by the Board of Directors, meets quarterly to review our asset/liability policies and interest rate risk position.

The following table presents the Company’s net portfolio value (“NPV”). These calculations were based upon assumptions believed to be fundamentally sound, although they may vary from assumptions utilized by other financial institutions. The information set forth below is based on data that included all financial instruments as of June 30, 2020. Assumptions have been made by the Company relating to interest rates, loan prepayment rates, core deposit duration, and the market values of certain assets and liabilities under the various interest rate scenarios. Actual maturity dates were used for fixed rate loans and certificate accounts. Investment securities were scheduled at either the maturity date or the next scheduled call date based upon management’s judgment of whether the particular security would be called in the current interest rate environment and under assumed interest rate scenarios. Variable rate loans were scheduled as of their next scheduled interest rate repricing date. Additional assumptions made in the preparation of the NPV table include prepayment rates on loans and mortgage-backed securities, core deposits without stated maturity dates were scheduled with an assumed term of 48 months, and money market and non-interest bearing accounts were scheduled with an assumed term of 24 months. The NPV at “PAR” represents the difference between the Company’s estimated value of assets and estimated value of liabilities assuming no change in interest rates. The NPV for a decrease of 200 to 300 basis points has been excluded since it would not be meaningful, in the interest rate environment as of June 30, 2020.

The following table sets forth the Company’s NPV as of that date (dollars in thousands).



							NPV as a % of Assets
Change in Calculation	Net Portfolio Value		$ Change from PAR		% Change from PAR		NPV Ratio		Change

+300bp	$	270,629	$	(30,072)	(10.00)	%	9.44	%	(44)	bp
+200bp		281,136		(19,565)	(6.51)		9.62		(26)	bp
+100bp		288,726		(11,975)	(3.98)		9.70		(18)	bp
PAR		300,701		-	-		9.88		-	bp
-100bp		337,894		37,193	12.37		10.85		97	bp

bp – basis points

The table above indicates that as of June 30, 2020, in the event of a 100 basis point increase in interest rates, we would experience a decrease to 9.70% in NPV.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in NPV require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the NPV table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income, and will differ from actual results.

ITEM 4.

Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved, from time to time, as plaintiff or defendant in various legal actions arising in the normal course of business. As of June 30, 2020, we were not involved in any material legal proceedings the outcome of which, if determined in a manner adverse to the Company, would have a material adverse effect on our financial condition or results of operations.

‎

ITEM 1.A. RISK FACTORS

There have been no material changes to the risk factors set forth under the Item 1.A. Risk Factors as set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 as supplemented by the Company’s subsequent Quarterly Reports on Form 10-Q.

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

The following table provides certain information related to shares repurchased by the Company during the six months ended June 30, 2020.


Period	Total Number of Shares Purchased		Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 - January 31, 2020	-	$	-	-	-
February 1 - February 29, 2020	-		-	-	-
March 1 - March 31, 2020	127,058		10.10	127,058	372,942
April 1 - April 30, 2020	141,724		9.77	141,724	231,218
May 1 - May 31, 2020	231,218		9.46	231,218	-
June 1 - June 30, 2020	-		-
Total	500,000	$	9.71	500,000	-

(1)The Company’s Board of Directors authorized a stock repurchase program on February 29, 2020 to acquire up to 500,000 shares, or 2.85% of the Company’s then-outstanding common stock. The Company repurchased the maximum number of shares that may be repurchased under the program in the second quarter of 2020 and the program is now closed.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFTEY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None.

‎

ITEM 6. EXHIBITS


Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32	Officers’ Certification filed pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 101.INS	XBRL Instance Document
Exhibit 101.SCH	XBRL Taxonomy Extension Schema
Exhibit 101.CAL	XBRL Taxonomy Extension Calculation LinkBase
Exhibit 101.DEF	XBRL Taxonomy Extension Definition LinkBase
Exhibit 101.LAB	XBRL Taxonomy Extension Label LinkBase
Exhibit 101.PRE	XBRL Taxonomy Extension Presentation LinkBase

‎

Signatures

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



	BCB BANCORP, INC.

Date: August 5, 2020	By:	/s/ Thomas Coughlin
		Thomas Coughlin
		President and Chief Executive Officer (Principal Executive Officer)

Date: August 5, 2020	By:	/s/ Thomas P. Keating
		Thomas P. Keating Senior Vice President and Chief Financial Officer
		(Principal Accounting and Financial Officer)