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BKJ > SEC Filings for BKJ > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for BANCORP OF NEW JERSEY, INC.

Form 10-Q for BANCORP OF NEW JERSEY, INC.


14-Nov-2012

Quarterly Report

Management's Discussion and Analysis of

Financial Condition and Results of Operations

You should read this discussion and analysis in conjunction with the consolidated unaudited interim financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, and with our audited consolidated financial statements for the year ended December 31, 2011 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission.

Statements Regarding Forward Looking Information

This document contains forward-looking statements, in addition to historical information. Forward looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "project," and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may," or similar expressions. The U.S. Private Securities Litigation Reform Act of 1995 provides a safe harbor in regard to the inclusion of forward-looking statements in this document and any documents incorporated by reference.

You should note that many factors, some of which are discussed elsewhere in this document and in any documents that are incorporated by reference, could affect the future financial results of Bancorp of New Jersey, Inc. and its direct and indirect subsidiaries and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this document. These factors include, but are not limited, to the following:

          General economic conditions, either nationally or in our market area;

          Volatility in interest rates and shape of the yield curve;

          Increased credit risk and risks associated with the real estate
market;

          Operating, legal and regulatory risk;

          Economic, political and competitive forces affecting the Company's

business; and

That management's analysis of these risks and factors could be incorrect, and/or that the strategies developed to address them could be unsuccessful.


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Bancorp of New Jersey, Inc., referred to as "we" or the "Company," cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which change over time, and we assume no duty to update forward-looking statements, except as may be required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation, to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. We caution readers not to place undue reliance on any forward-looking statements. These statements speak only as of the date made, and we advise readers that various factors, including those described above, could affect our financial performance and could cause actual results or circumstances for future periods to differ materially from those anticipated or projected.

Critical Accounting Policies, Judgments and Estimates

The financial statements have been prepared in conformity with U.S. generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and revenues and expenses for the period indicated. Actual results could differ significantly from those estimates. Management believes the following critical accounting policies encompass the more significant judgments and estimates used in the preparation of the consolidated financial statements.

Allowance for Loan Losses

The allowance for loan losses ("ALLL") represents our best estimate of losses known and inherent in our loan portfolio that are both probable and reasonable to estimate. In determining the amount of the ALLL, we consider the losses inherent in our loan portfolio and changes in the nature and volume of our loan activities, along with general economic and real estate market conditions. We utilize a segmented approach which identifies: (1) performing loans, which are collectively evaluated and for which a general valuation allowance is established; (2) classified loans that are collectively evaluated and for which a higher general valuation allowance is established; and (3) impaired loans, which are individually evaluated and for which specific reserves are established. We maintain a loan review system which provides for a systematic review of the loan portfolios and with the goal of early identification of impaired loans. The review of residential real estate and home equity consumer loans, as well as other more complex loans, is triggered by identified evaluation factors, including delinquency status, size of loan, type of collateral and the financial condition of the borrower. All commercial loans are evaluated individually for impairment. Specific loan loss allowances are established for impaired loans based on a review of such information and/or appraisals of the underlying collateral. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management's judgment.

Although specific and general loan loss allowances are established in accordance with management's best estimates, actual losses are dependent upon future events, and as such, further provisions for loan losses may be necessary in order to increase the level of the allowance for loan losses. For example, our evaluation of the allowance includes consideration of current economic conditions, and a change in economic conditions could reduce the ability of borrowers to make timely repayments of their loans. This could result in increased delinquencies, increased non-performing loans, and additional probable losses, and thus a need to make additional provisions for loan losses. Any such additional provisions for loan losses would result in a reduction to our earnings. A change in economic conditions could also adversely affect the value of properties collateralizing real estate loans and reduced recoveries, resulting in additional provisions for loan losses. Furthermore, a change in the composition, or growth, of our loan portfolio could result in the need for additional provisions for loan losses. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. These agencies may require the Bank to make additional provisions for loan losses based on their judgements of information available to them at the time of their examination.


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Deferred Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the period in which the deferred tax asset or liability is expected to be settled or realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period in which the change occurs. Deferred tax assets are reduced, through a valuation allowance, if necessary, by the amount of such benefits that are not expected to be realized based on current available evidence.


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Results of Operations

Three Months and Nine Months Ended September 30, 2012 and 2011

Our results of operations depend primarily on net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Interest-earning assets consist principally of loans and investment securities, while interest-bearing liabilities consist primarily of deposits and borrowings. Net income is also affected by the provision for loan losses and the level of non-interest income as well as by non-interest expenses, including salaries and employee benefits, occupancy and equipment expense, and income tax expense.

Net Income

Net income for the third quarter of 2012 was $1.1 million compared to net income of $901 thousand for the third quarter of 2011, an increase of $241 thousand, or 26.7%. This increase was due in most part to an increase in net interest income of approximately $644 thousand, or 16.9%, and an increase in the gains on the sales of securities of $238 thousand, offset somewhat by increases in non-interest expenses, and income taxes of $525 thousand and $152 thousand, respectively.

Net income for the nine months ended September 30, 2012 was approximately $3.0 million compared to net income of approximately $2.4 million for the nine months ended September 30, 2011, an increase of $682 thousand, or 29.0%. The increase was due to increases in net interest income and gains on the sales of securities of $1.6 million and $238 thousand, respectively, and a decrease in the loss on the sale of other real estate owned ("OREO") of $203 thousand, offset somewhat by increases in non-interest expenses and income tax expense of $932 thousand and $409 thousand, respectively.

On a per share basis, basic and diluted earnings per share were $0.22 for the third quarter of 2012 as compared to basic and diluted earnings per share of $0.17 for the third quarter of 2011, an increase of $0.05 per share, or 29.4%. Basic and diluted earnings per share were $0.58 for the nine months ended September 30, 2012 as compared to basic and diluted earnings per share of $0.45 for the nine months ended September 30, 2011, an increase of $0.13 per share, or 28.9%.

Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. For the three month period ended September 30, 2012, the growth in net interest income has been, primarily, powered by increased interest income from loans, including fees. Interest income on loans increased by $716 thousand for the three months ended September 30, 2012 as compared to the same period last year. This increase in interest income was due to a $63.3 million increase in the average balance of loans during the quarter ended September 30, 2012, up to $409.7 million as compared to the third quarter of 2011 average loan balance of $346.4 million, offset somewhat by a decrease in the average rate earned on loans, from 5.53% for the three months ended September 30, 2011 down to 5.38% for the three months ended September 30, 2012, a decrease of 15 basis points. Interest expense increased by $361 thousand year over year and was due in most part to an increase in the average balance of interest bearing deposits of $106.2 million, up to $426.0 million during the quarter ended September 30, 2012 from $319.8 million on average for the quarter ended September 30, 2011. The average interest rate paid on interest bearing deposits decreased 4 basis points to 1.46% for the three months ended September 30, 2012, from 1.50% for the same period last year.


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During the nine months ended September 30, 2012, net interest income reached $12.8 million compared to $11.2 million for the nine months ended September 30, 2011, an increase of $1.6 million, or 14.4%. This increase is attributable to the increase in interest income from loans, including fees and is due in most part to the increase in average loans. Interest income from loans, including fees, securities and federal funds sold reached $17.3 million for the nine months ended September 30, 2012 from $14.6 million for the nine months ended September 30, 2011, an increase of $2.7 million or 18.7%. At the same time, interest expense increased from $3.4 million for the nine months ended September 30, 2011 to $4.5 million for the nine months ended September 30, 2012, an increase of approximately $1.1 million, or 33.0%. The Company's average rate paid on interest bearing deposits increased to 1.49% for the nine months ended September 30, 2012, from 1.45% for the nine months ended September 30, 2011.

Provision for Loan Losses

The provision for loan losses is a recorded expense that adjusts the allowance for loan losses to a level, which, in management's best estimate, is adequate to absorb probable losses within the existing loan portfolio. Through the application of our ALLL methodology, the provision for loan losses reflects loan quality trends, including, among other factors, the levels of and trends related to nonaccrual loans, past due loans, potential problem loans, criticized loans, net charge-offs or recoveries and growth in the loan portfolio. Accordingly, the amount of the provision reflects both the necessary increases in the allowance for loan losses related to new loans and newly identified criticized loans, as well as the actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools. The provision for loan losses was $260 thousand for the three months ended September 30, 2012 as compared to $300 thousand for the three months ended September 30, 2011, a decrease of $40 thousand. During the nine months ended September 30, 2012, the provision for loan losses was $885 thousand as compared to $898 thousand during the nine months ended September 30, 2011, a decrease of $13 thousand. At September 30, 2012, the Bank's ALLL was approximately $5.0 million, or 1.20% of total loans, as compared to $4.5 million and 1.23% of total loans at December 31, 2011. At September 30, 2012, the Bank had non-accruing loans of $5.9 million as compared to $6.2 million at December 31, 2011.

Non-interest Income (Loss)

Non-interest income (loss) consists primarily of fees and service charges, gains on the sales of securities and a loss on the sale of OREO. For the three months ended September 30, 2012, non-interest income increased by $234 thousand as compared to the three months ended September 20, 2011. The increase was due to a gain from the sales of securities during the 2012 third quarter in the amount of $238 thousand. For the nine months ended September 30, 2012, non-interest income increased by $403 thousand when compared to the same period in 2011. This gain was due to the above mentioned gains on the sales of securities in the third quarter of 2012 and a loss on the sale of OREO of $203 thousand during the first nine months of 2011.

Non-interest Expense

Non-interest expense grew to $2.6 million during the third quarter of 2012 compared to $2.1 million in the third quarter of 2011, an increase of approximately $525 thousand, or 25.4%. This increase was due in most part to increases in occupancy and equipment expense, salaries and employee benefits, and data processing of $174 thousand, $138 thousand and $41 thousand, respectively. During the nine months ended September 30, 2012, non-interest expense reached approximately $7.2 million from approximately $6.3 million for the nine months ended September 30, 2011, an increase of $932 thousand, or 14.8%. The nine month increase was due in most part to increases in salaries and employee benefits, occupancy and equipment and data processing of $506 thousand, $340 thousand and $136 thousand, respectively. For both periods the increases in salaries, occupancy and equipment expense and data processing fees were


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primarily due to the opening of two new branches, Englewood, in September of 2011, and Cliffside Park, in March of 2012.

Income Tax Expense

The income tax provision reached $745 thousand for the quarter ended September 30, 2012 as compared to $593 thousand for the quarter ended September 30, 2011, representing an increase of $152 thousand, or 25.6%. For the nine months ended September 30, 2012, income tax expense was $2.0 million as compared to $1.6 million for the nine months ended September 30, 2011, representing an increase of $409 thousand, or 26.0%. The income tax provision is reflective of our pre-tax income and the effect of permanent differences between financial and tax reporting. These permanent tax differences include the recognition of non-deductible stock option expense as required under applicable accounting guidance (FASB ASC 718). The effective tax rate for the three and nine month periods ended September 30, 2012, were 39.5% and 39.5%, respectively, compared to 39.7% and 40.1%, respectively, for the same periods in 2011.

FINANCIAL CONDITION

Total consolidated assets increased $79.0 million, or approximately 16.8%, from $469.8 million at December 31, 2011 to $548.8 million at September 30, 2012. Total deposits increased from $416.2 million at December 31, 2011 to $492.5 million at September 30, 2012, an increase of $76.3 million, or approximately 18.3%. Loans receivable, or "total loans," increased from $365.2 million at December 31, 2011 to $418.1 million at September 30, 2012, an increase of $52.9 million, or approximately 14.5%.

Loans

Our loan portfolio is the primary component of our assets. Total loans, which exclude net deferred fees and costs and the allowance for loan losses, increased by 14.5% to reach $418.1 million at September 30, 2012 from $365.2 million at December 31 2011. This growth in the loan portfolio continues to be primarily attributable to recommendations and referrals from members of our board of directors, our shareholders, our executive officers, and selective marketing by our management and staff. We believe that we will continue to have opportunities for loan growth within the Bergen County market of northern New Jersey, due in part, to our customer service, and competitive rate structures.

Our loan portfolio consists of commercial real estate loans, residential mortgages, commercial loans, home equity loans and consumer loans. Commercial real estate loans consist of loans secured by commercial real property and loans for the construction of commercial or residential property. Residential mortgages are loans secured by residential real property. Commercial loans are made for the purpose of providing working capital, financing the purchase of equipment or inventory, as well as for other business purposes. Home equity and consumer loans are made for the purpose of financing the purchase of consumer goods, home improvements, and other personal needs, and are generally secured by the personal property being owned or being purchased.

Our loans are primarily to businesses and individuals located in Bergen County, New Jersey. We have not made loans to borrowers outside of the United States. We have not made any sub-prime loans. Commercial lending activities are focused primarily on lending to small business borrowers. We believe that our strategy of customer service, competitive rate structures, and selective marketing have enabled us to gain market entry to local loans. Furthermore, we believe that bank mergers and lending restrictions at larger financial institutions with which we compete have also contributed to the success of our efforts to attract borrowers. Additionally, during this current economic climate, our capital position and safety has also become important to potential borrowers.


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For more information on the loan portfolio, see Note 6 in Notes to the Financial Statements in this Quarterly Report on Form 10-Q.

Loan Quality

As mentioned above, our principal assets are our loans. Inherent in the lending function is the risk of the borrower's inability to repay a loan under its existing terms. Risk elements include nonaccrual loans, past due and restructured loans, potential problem loans, loan concentrations, and other real estate owned.

Non-performing assets include loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more and accruing loans that are 90 days past due, troubled debt restructuring loans and foreclosed assets. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest, including interest applicable to prior years, is reversed and charged against current income. Until the loan becomes current, any payments received from the borrower are applied to outstanding principal until such time as management determines that the financial condition of the borrower and other factors merit recognition of such payments of interest.

We attempt to manage overall credit risk through loan diversification and our loan underwriting and approval procedures. Due diligence begins at the time we begin to discuss the origination of a loan with a borrower. Documentation, including a borrower's credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source and timing of the repayment of the loan, and other factors are analyzed before a loan is submitted for approval. Loans made are also subject to periodic audit and review.

As of September 30, 2012 the Bank had eleven non-accrual loans totaling approximately $5.9 million, of which six loans totaling approximately $2.0 million had specific reserves of $497 thousand and five loans totaling approximately $3.9 million had no specific reserve. If interest had been accrued, such income would have been approximately $86 thousand and $260 thousand, respectively, for the three and nine month periods ended September 30, 2012. Within its non-accrual loans at September 30, 2012, the Bank had two residential mortgage loans that met the definition of a troubled debt restructuring ("TDR") loan. TDRs are loans where the contractual terms of the loan have been modified for a borrower experiencing financial difficulties. These modifications could include a reduction in the interest rate of the loan, payment extensions, forgiveness of principal or other actions to maximize collection. At September 30, 2012, these TDR loans had an outstanding balance of $797 thousand and had specific reserves of $127 thousand. One of the TDR loans had an outstanding balance of $310 thousand and was performing in accordance with its modified terms.

A loan is considered impaired, in accordance with the impairment accounting guidance (FASB ASC 310-10-35-16), when based on current information and events, it is probable that the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. At September 30, 2012, the Bank had 12 impaired loans totaling approximately $6.3 million, of which six loans totaling approximately $2.0 million had specific reserves of $497 thousand and six loans totaling approximately $4.3 million had no specific reserves. At September 30, 2012, three TDR loans had an outstanding balance of approximately $1.2 million and had specific reserves of $127 thousand. One residential mortgage loan with an outstanding balance of $387 thousand was not performing in accordance with its modified terms.

As a community bank, our market area is concentrated in Bergen County, New Jersey, and as a result we have a concentration of loans collateralized by real estate, primarily in our market area at September 30, 2012 and December 31, 2011. We have on occasion extended loans to customers that are secured by properties located in the New Jersey barrier islands and surrounding areas. These areas were severely damaged by Hurricane Sandy, which impacted the Mid-Atlantic and Northeastern regions of the United States from October 28, 2012 to October 30, 2012. On most collateral dependent loans, our exposure is limited due to the existence of flood and property insurance. We monitor our borrower's insurance coverage on a regular basis and force place insurance, as necessary. We are in the process of assessing the


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damage that may have occurred to the underlying properties and there is a risk that collateral for these loans has been damaged, however as of the date of this filing, the Company does not anticipate that the storm damage will have a material impact on its operations. The Bank's loan portfolio has no foreign loans and no sub-prime loans.

Investment Securities

Securities held as available for sale ("AFS") were approximately $83.2 million at September 30, 2012 compared to $56.6 million at December 31, 2011. This increase in the AFS category represented the purchase of securities during the period with funds in excess of federal funds sold. Securities held to maturity decreased $1.1 million to $3.7 million at September 30, 2012 from $4.8 million at December 31, 2011.

Deposits

Deposits remain our primary source of funds. Total deposits increased to $492.5 million at September 30, 2012 from $416.2 million at December 31, 2011, an increase of $76.3 million, or 18.3%. Savings and interest bearing checking accounts, time deposits and noninterest-bearing checking accounts grew $32.3 million, $26.7 million and $17.3 million, respectively. We believe this increase is due, in part, to the public perception of our safety and soundness. During this interest rate environment, our time deposit products, which have been attractive to customers, have allowed the Bank to increase its overall deposits while keeping its overall cost of deposits, excluding noninterest-bearing deposits, relatively flat, increasing 1 basis point for the nine months ended September 30, 2012, up to 1.48%. The Bank's cost of deposits, including noninterest-bearing deposits, decreased by 1 basis point for the nine months ended September 30, 2012 to 1.30% as compared to the nine months ended September 30, 2011 rate of 1.31%. The increase in deposits is also attributable to the continued referrals of our board of directors, stockholders, management, and staff. The Bank has no foreign deposits, nor are there any material concentrations of deposits.

Liquidity

Our liquidity is a measure of our ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. In addition, if warranted, we would be able to borrow funds. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by prevailing interest rates, economic conditions, and competition.

Our total deposits equaled $492.5 million and $416.2 million, respectively, at September 30, 2012 and December 31, 2011. The growth in funds provided by . . .

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