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BKJ > SEC Filings for BKJ > Form 10-K on 28-Mar-2013All Recent SEC Filings

Show all filings for BANCORP OF NEW JERSEY, INC. | Request a Trial to NEW EDGAR Online Pro

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


28-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and the notes thereto included in Part II, Item 8 of this report. When necessary, reclassifications have been made to prior years' data throughout the following discussion and analysis for purposes of comparability.

In addition to historical information, this discussion and analysis contains forward-looking statements. The forward-looking statements contained herein are subject to numerous assumptions, risks and uncertainties, all of which can change over time, and could cause actual results to differ materially from those projected in the forward-looking statements. We assume no duty to update forward-looking statements, except as may be required by applicable law or regulation. Important factors that might cause such a difference include, but are not limited to, those discussed in this section, and also include current economic conditions affecting the financial industry; changes in interest rates and shape of the yield curve; credit risk associated with our lending activities; risks relating to our market area, significant real estate collateral and the real estate market; operating, legal and regulatory risk; fiscal and monetary policy; 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, as well as a variety of other matters, most, if not all of which, are beyond the Company's control. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of the report. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after such date, except as may be required by applicable law or regulation.

OVERVIEW AND STRATEGY

Our bank charter was approved in April 2006 and the Bank opened for business on May 10, 2006. On July 31, 2007, the Company became the bank holding company of the Bank. On June 3, 2008, the Company's common stock was listed on the American Stock Exchange, now NYSE MKT LLC. We currently operate an eight branch network and have received FDIC and NJDOBI approval to open our ninth location. Our main office is located at 1365 Palisade Avenue, Fort Lee, NJ 07024 and our current seven additional offices are located at 204 Main Street, Fort Lee, NJ 07024, 401 Hackensack Avenue, Hackensack, NJ 07601, 458 West Street, Fort Lee, NJ 07024, 320 Haworth Avenue, Haworth, NJ 07641, 4 Park Street, Harrington Park, NJ 07640, and 104 Grand Avenue, Englewood, NJ 07631, 354 Palisade Avenue, Cliffside Park, NJ 07010. Our ninth location will be located at 585 Chestnut Ridge Road, Woodcliff Lake, NJ 07677 and is expected to open during the second quarter of 2013.

We conduct a traditional commercial banking business, accepting deposits from the general public, including individuals, businesses, non-profit organizations, and governmental units. We make commercial loans, consumer loans, and both residential and commercial real estate loans. In addition, we provide other customer services and make investments in securities, as permitted by law. We have sought to offer an alternative, community-oriented style of banking in an area, that is dominated by larger, statewide and national financial institutions. Our focus remains on establishing and retaining customer relationships by offering a broad range of traditional financial services and products, competitively-priced and delivered in a responsive manner to small businesses, professionals and individuals in the local market. As a locally operated community bank, we believe we provide superior customer service that is highly personalized, efficient and responsive to local needs. To better serve our customers and expand our market reach, we provide for the delivery of certain financial products and services to local customers and a broader market through the use of mail, telephone, internet, and electronic banking. We endeavor to deliver these products and services with the care and professionalism expected of a community bank and with a special dedication to personalized customer service.

Our specific objectives are:

To provide local businesses, professionals, and individuals with banking services responsive to and determined by the local market;

Direct access to Bank management by members of the community, whether during or after business hours;

To attract deposits and loans by competitive pricing; and


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To provide a reasonable return to shareholders on capital invested.

Critical Accounting Policies and Judgments

Our financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements included in Item 8 of this report. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect our reported results and financial position for the period or in future periods. Financial assets and liabilities required to be recorded at, or adjusted to reflect, fair value require the use of estimates, assumptions, and judgments. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our financial condition and results of operations.

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) impaired loans for which specific reserves are established; (2) classified loans for which the general valuation allowance for the respective loan type is deemed to be inadequate; and
(3) performing loans for which a general valuation allowance is established. We maintain a loan review system which provides for a systematic review of the loan portfolios and the 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. Specific reserves are established for impaired loans based on a review of such information and/or appraisals of the underlying collateral. General reserves 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 reserves 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 maintain the allowance for loan losses at an adequate level. 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 and increased non-performing loans, and thus a need to make additional provisions for loan losses. Any provision reduces our net income. While the allowance is increased by the provision for loan losses, it is decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. A change in economic conditions could adversely affect the value of properties collateralizing real estate loans, resulting in increased charges against the allowance and reduced recoveries, and require additional provisions for loan losses. Furthermore, a change in the composition, or growth, of our loan portfolio could require additional provisions for loan losses.

At December 31, 2012 and 2011, respectively, we consider the ALLL of $5.1 million and $4.5 million adequate to absorb probable losses inherent in the loan portfolio. For further discussion, see "Provision for Loan Losses", "Loan Portfolio", "Loan Quality", and "Allowance for Loan Losses" sections below in this discussion and analysis, as well as Note 1-Summary of Significant Accounting Policies and Note 3-Loans and Allowance for Loan Losses in the Notes to Financial Statements included in Part II, Item 8 of this annual report.

Deferred Tax Assets and Valuation Allowance

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


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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.

Impairment of Assets

Loans are considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to contractual terms of the loan agreement. The collection of all amounts due according to contractual terms means both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral-dependent. The fair value of collateral, which is discounted from the appraised value to estimate the selling price and costs, is used if a loan is collateral-dependent. At December 31, 2012 and 2011, the bank had sixteen and twelve impaired loans, respectively. All of these loans have been measured for impairment using various measurement methods, including fair value of collateral.

Periodically, we may need to assess whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. In any such instance, we would consider many factors including the severity and duration of the impairment, our intent to sell a debt security prior to recovery and/or whether it is more likely than not we will have to sell the debt security prior to recovery. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains (losses). Unrealized losses at December 31, 2012 consisted of losses on twelve investments in government sponsored enterprise obligations, and two in U. S. Treasury Securities, which were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2012. All of the investments with unrealized losses at December 31, 2012 were in a loss position for less than twelve months. At December 31, 2012 and 2011, respectively, we did not have any other-than-temporarily impaired securities.


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RESULTS OF OPERATIONS - 2012 versus 2011

Our results of operations depend primarily on our net interest income, which is the difference between the interest earned on its interest-earning assets and the interest paid on interest-bearing liabilities, primarily deposits, which support our assets. Net interest margin is net interest income expressed as a percentage of average interest earning assets. Net income is also affected by the amount of non-interest income and non-interest expenses, the provision for loan losses and income tax expense.

NET INCOME

For the year ended December 31, 2012, net income increased by $878 thousand, to $4.2 million from $3.3 million for the year ended December 31, 2011. The increase in net income for the year ended December 31, 2012 compared to 2011 was driven by an increase in our net interest income. The increase in net interest income is reflective of the growth in interest-earning assets as well as management's focus on disciplined pricing of the deposit portfolio. The increase in net interest income more than offset the increases in non-interest expenses and income tax expense.

On a per share basis, basic and diluted earnings per share for the year ended December 31, 2012 were $0.81 as compared to basic and diluted earnings per share of $0.64 for the year ended December 31, 2011.

Analysis of 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 average volumes of interest-earning assets and interest bearing liabilities and the yield earned or the interest paid on them. For the year ended December 31, 2012, net interest income increased by $2.2 million, or 14.8%, to $17.3 million from $15.1 million for the year ended December 31, 2011. This increase in net interest income was primarily the result of an increase in average loans of $62.9 million, or 18.6%, during 2012, as compared to 2011, as well as a decrease in the cost of interest bearing liabilities, which decreased by 3 basis points for 2011.

Average Balance Sheets

The following table sets forth certain information relating to our average assets and liabilities for the years ended December 31, 2012, 2011 and 2010, respectively, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense, on a tax-equivalent basis, by the average balance of assets or liabilities, respectively, for the periods shown. The taxable equivalent adjustment for 2012, 2011, and 2010 was $6, $3, and $2 thousand, respectively. Securities available for sale are reflected in the following table at amortized cost. Nonaccrual loans are included in the average loan balance. Amounts have been computed on a fully tax-equivalent basis, assuming a blended tax rate of 40% in 2012 and 2011, and 41% in 2010.


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For the years ended December 31,

(dollars in thousands)

                                        2012                                   2011                                   2010
                          Average                  Average       Average                  Average       Average                  Average
                          Balance     Interest    Yield/Cost     Balance     Interest    Yield/Cost     Balance     Interest    Yield/Cost
ASSETS:
Interest-Earning
Assets:
Loans                    $  400,854   $  21,566         5.38 %  $  337,932   $  18,903         5.59 %  $  279,500   $  16,233         5.81 %
Securities                   82,524       1,788         2.17        42,600         912         2.14        30,719         729         2.37
Federal Funds Sold            2,673           8         0.30         2,260           6         0.27         3,577          12         0.34
Interest-earning cash
accounts                     30,251          66         0.22        20,483          43         0.21        18,324          39         0.21
Total Interest-earning
Assets                      516,302      23,428         4.54 %     403,275      19,864         4.93 %     332,120      17,013         5.12 %
Non-interest earning
Assets                       16,389                                 16,706                                 16,146
Allowance for Loan
Losses                       (4,889 )                               (4,421 )                               (3,269 )
                         $  527,802                             $  415,560                             $  344,997

LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-Bearing
Liabilities:
Demand Deposits          $   16,158   $      38         0.24 %  $    9,741   $      27         0.28 %  $    8,558   $      23         0.27 %
Savings Deposits              8,259          41         0.50         7,011          29         0.41         4,753          18         0.38
Money Market Deposits        87,252         442         0.51        53,885         173         0.32        39,279         129         0.33
Time Deposits               303,128       5,554         1.83       248,529       4,513         1.82       207,723       4,166         2.01
Short Term Borrowings             3           -            -           222           3         1.35             -           -            -
Total Interest Bearing
Liabilities                 414,800       6,075         1.46 %     319,388       4,745         1.49 %     260,313       4,336         1.67 %
Non-Interest Bearing
Liabilities:
Demand Deposits              57,355                                 42,274                                 32,113
Other Liabilities             2,117                                  2,332                                  1,799
Total Non-Interest
Bearing Liabilities          59,472                                 44,606                                 33,912
Stockholders' Equity         53,530                                 51,566                                 50,772
LIABILITIES AND
STOCKHOLDERS' EQUITY:    $  527,802                             $  415,560                             $  344,997

Net Interest Income
(Tax Equivalent Basis)                $  17,353                              $  15,119                              $  12,677
Tax Equivalent Basis
adjustment                                   (6 )                                   (3 )                                   (2 )
Net Interest Income                   $  17,347                              $  15,116                              $  12,675
Net Interest Rate
Spread                                                  3.08 %                                 3.44 %                                 3.45 %
Net Interest Margin                                     3.36 %                                 3.75 %                                 3.82 %
Ratio of
Interest-Earning
Assets to
Interest-Bearing
Liabilities                    1.24                                   1.26                                   1.28


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Rate/Volume Analysis



The following table presents, by category, the major factors that contributed to
the changes in net interest income on a tax equivalent basis for the years ended
December 31, 2012 and 2011, respectively (in thousands):



                             Year ended December 31,              Year ended December 31,
                             2012 compared with 2011              2011 compared with 2010
                               Increase (Decrease)                  Increase (Decrease)
                             Due to Change in Average             Due to Change in Average
                          Volume         Rate       Net        Volume         Rate       Net
Interest income:
Loans                   $     3,336    $   (673 ) $  2,663   $     3,261    $   (591 ) $  2,670
Securities                      860          13        873           247         (65 )      182
Federal funds sold                1           1          2            (4 )        (2 )       (6 )
Interest bearing
deposits in banks                21           2         23             4           -          4
Total interest income         4,218        (657 )    3,561         3,508        (658 )    2,850

Interest expense:
Demand deposits                  14          (3 )       11             3           1          4
Savings deposits                  5           7         12             9           2         11
Money market deposits           137         132        269            48          (4 )       44
Time deposits                 1,016          25      1,041           669        (322 )      347
Short-term borrowings            (3 )         -         (3 )           3           -          3
Total interest
expense                       1,169         161      1,330           732        (323 )      409
Change in net
interest income         $     3,049    $   (818 ) $  2,231   $     2,776    $   (335 ) $  2,441

PROVISION FOR LOAN LOSSES

The provision for loan losses represents our determination of the amount necessary to bring our allowance for loan losses to the level that we consider adequate to absorb probable losses inherent in our loan portfolio. See "Allowance for Loan Losses" for additional information about our allowance for loan losses and our methodology for determining the amount of the allowance. For the year ended December 31, 2012, the Company's provision for loan losses was $1.2 million, an increase of $15 thousand from the provision of $1.2 million for the year ended December 31, 2011. The overall credit quality of the loan portfolio and the stabilization of nonperforming loans is reflected in the provision basically staying flat for 2012 as compared to 2011.

NON-INTEREST INCOME

Non-interest income, which consists primarily of service fees received from deposit accounts, gains on the sales of securities, and the net loss on the sale of the other real estate owned ("OREO") property, for the year ended December 31, 2012, was $415 thousand, an increase of $411 thousand from the $4 thousand received during the year ended December 31, 2011. The increase in non-interest income was primarily due to gains on the sales of securities of $243 thousand in 2012 and no corresponding gains in 2011, and the loss on the sale of OREO property in 2011 of $203 thousand compared to no such loss in 2012.

NON-INTEREST EXPENSES

Non-interest expenses for the year ended December 31, 2012 amounted to $9.6 million, an increase of $1.2 million or 14.6% over the $8.4 million for the year ended December 31, 2011. This increase was due in most part to increases in salaries and employee benefits, occupancy and equipment expense, data processing fees and legal fees of $615 thousand, $452 thousand, $129 thousand, and $72 thousand, respectively, offset somewhat by decreases in FDIC and state assessments and professional fees of $131 thousand and $94 thousand, respectively. Salaries and employee benefits, occupancy and equipment expenses, and data processing expenses increased in part due to the opening and operating of the Englewood branch in the third quarter of 2011 and the opening and operating of the Cliffside Park branch in the first quarter of 2012.


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INCOME TAX EXPENSE

The income tax provision, which includes both federal and state taxes, for the years ended December 31, 2012 and 2011 was $2.7 million and $2.2 million, respectively. The increase in income tax expense during 2012 resulted from the increased pre-tax income in 2012. The effective tax rate for 2012 was 39.5% compared to 40.1% for 2011.


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FINANCIAL CONDITION

Total consolidated assets increased $101.5 million, or 21.6%, from $469.8 million at December 31, 2011 to $571.4 million at December 31, 2012. Total loans increased from $365.2 million at December 31, 2011 to $435.7 million at December 31, 2012, an increase of $70.6 million or 19.3%. Total deposits increased from $416.2 million on December 31, 2011 to $515.7 million at December 31, 2012, an increase of $99.6 million, or 23.9%.

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 19.3% from $365.2 million at December 31, 2011, to $435.7 million at December 31, 2012. 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 future consolidation of banking institutions within our market, which we expect to see as a result of increased regulatory standards, market pressures, and the overall economy. We believe that it is not cost-efficient for large institutions, many of which are headquartered out of state, to provide the level of personal service to small business borrowers that these customers seek and that we intend to provide.

Our loan portfolio consists of commercial loans, real estate loans, consumer loans and credit lines. 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. Real estate loans consist of loans secured by commercial or residential real property and loans for the construction of commercial or residential property. Consumer loans including credit lines, 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 . . .

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