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CBNJ > SEC Filings for CBNJ > Form 10-Q on 3-May-2013All Recent SEC Filings

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

Form 10-Q for CAPE BANCORP, INC.


3-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Certain statements contained herein are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.

Cape Bancorp wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.


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Overview

Cape Bancorp, Inc. ("Cape Bancorp" or the "Company") is a Maryland corporation that was incorporated on September 14, 2007 for the purpose of becoming the holding company of Cape Bank (formerly Cape Savings Bank) (the "Bank") in connection with Cape Bank's mutual-to-stock conversion, Cape Bancorp's initial public offering and simultaneous acquisition of Boardwalk Bancorp, Inc. ("Boardwalk Bancorp"), Linwood, New Jersey and its wholly-owned New Jersey chartered bank subsidiary, Boardwalk Bank.

The merger of Cape Bank and Boardwalk Bank on January 31, 2008 resulted in a well-capitalized community oriented bank with a significant commercial loan presence. For the three years prior to the merger both banks had experienced strong asset quality and financial performance. At the time of this merger, the United States was in the early stages of what has become one of the most severe recessions in its history. Interest rates have subsequently dropped to historically low levels, the national unemployment rate increased to above 9% and has remained at elevated levels for an extended period of time. The federal government provided direct financial assistance to major corporations as well as provided significant liquidity to the financial markets.

Cape Bank is a New Jersey chartered savings bank originally founded in 1923. We are a community bank focused on providing deposit and loan products to retail customers and to small and mid-sized businesses from our main office located at 225 North Main Street, Cape May Court House, New Jersey 08210, our 14 branch offices located in Atlantic and Cape May Counties, New Jersey and our market development offices ("MDOs"). We attract deposits from the general public and use those funds to originate a variety of loans, including commercial mortgages, commercial business loans, residential mortgage loans, home equity loans and lines of credit and construction loans. Our retail and business banking deposit products include checking accounts, money market accounts, certificates of deposit with terms ranging from 30 days to 84 months and savings accounts.

At March 31, 2013, the Company had total assets of $1.033 billion compared to $1.041 billion at December 31, 2012. For the three months ended March 31, 2013 and 2012, the Company had total revenues (interest income plus non-interest income) of $11.8 million and $12.9 million, respectively. Net income for each of the three months ended March 31, 2013 and 2012 totaled $1.5 million, or $0.12 per common and fully diluted share, respectively.

We offer banking services to individuals and businesses predominantly located in our primary market area of Cape May and Atlantic Counties, New Jersey and through our MDOs located in Burlington and Mercer Counties, New Jersey and in Radnor, Pennsylvania, servicing the five county Philadelphia market area. Our business and results of operations are significantly affected by local and national economic conditions, as well as market interest rates. The continued economic weakness in the local and national economies during 2012 and through the first quarter of 2013 has affected our level of non-performing assets and loan foreclosure activity. However, we have made progress in improving our credit quality ratios. Non-performing loans as a percentage of total gross loans decreased to 2.46% at March 31, 2013 from 2.67% at December 31, 2012. The Company's Adversely Classified Asset Ratio (Classified Assets/Tier I Capital plus the allowance for loan losses) at March 31, 2013 was 27%, an improvement from 30% at December 31, 2012. Non-performing assets (non-performing loans, other real estate owned and non-accruing investment securities) as a percentage of total assets decreased to 2.38% at March 31, 2013 from 2.61% at December 31, 2012. For the periods ended, and as of March 31, 2013 and December 31, 2012, loans held for sale ("HFS") are excluded from delinquencies, non-performing loans, non-performing assets, impaired loans and all related ratio calculations. The ratio of our allowance for loan losses to total loans decreased to 1.33% at March 31, 2013, from 1.36% at December 31, 2012, while the ratio of our allowance for loan losses to non-performing loans increased to 53.79% at March 31, 2013 from 50.86% at December 31, 2012. For the three months ended March 31, 2013, loan charge-offs totaled $497,000 compared to loan charge-offs of $1.0 million for the three months ended March 31, 2012. Of the $497,000 of loan charge-offs during the first quarter of 2013, none of these were fully reserved for as of December 31, 2012. Our total loan portfolio increased from $724.2 million at December 31, 2012 to $730.3 million at March 31, 2013. Commercial loans increased $4.5 million, net of $1.7 million of commercial loans transferred to OREO during the quarter and $435,000 of charge-offs, and residential mortgage loans increased $3.3 million, while consumer loans declined $1.6 million. At March 31, 2013, 91.3% of our loan portfolio was secured by real estate and 61.0% of our portfolio was commercial related loans. The increase in mortgage loans resulted from the Bank retaining a larger portion of mortgage loans originated during the first quarter in the portfolio. We believe our existing loan underwriting practices are appropriate in the current market environment while continuing to address the local credit needs. Total deposits decreased $6.1 million from $784.6 million at December 31, 2012 to $778.5 million at March 31, 2013 primarily resulting from a decline of $8.6 million in certificates of deposit partially offset by increases in non-interest bearing accounts of $2.3 million. We also maintain an investment portfolio.


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Our principal business is generating both commercial and retail loans in the communities surrounding our offices and MDOs and using the deposits we acquire from the same market areas as a funding source. We offer personal and business checking, savings and money market accounts, commercial mortgage loans, residential mortgage loans, construction loans, home equity loans and lines of credit and other types of commercial and consumer loans. At March 31, 2013, our market area primarily included the area surrounding our 15 offices located in Cape May and Atlantic Counties, New Jersey and our MDOs located in Burlington and Mercer Counties, New Jersey and Radnor, Pennsylvania. Additionally, on-line account opening is available for the following consumer deposit products:
checking, savings, money market deposit and certificates of deposit and we offer an on-line mortgage application service.

2013 Outlook

Our market area has been affected by the recession and the modest recovery. Unemployment in Atlantic and Cape May County was 14.8% and 18.8% respectively, as of February 2013 compared to 14.1% and 17.2%, respectively, as of February 2012. Median sale prices of single-family homes sold during the fourth quarter of 2012 increased compared to the same period in 2011 in both Atlantic and Cape May Counties. The median sale prices increased by 10.7% and 2.1%, in Atlantic and Cape May Counties, respectively, while the number of homes sold increased 18.8% in Cape May County but decreased 13.7% in Atlantic County. The number of residential building permits issued increased in 2012 in both Atlantic and Cape May Counties.

During 2012 and the first quarter of 2013, Cape Bank was able to make significant strides in reducing non-performing assets and classified items. Many troubled credits finally made their way through the slow foreclosure process, permitting the bank to take title and sell the collateral. This helped reduce non-earning assets and the costs relating to problem loans. Management intends to continue these efforts for the remainder of 2013 with the goal of reducing classified items to levels that would fall more within industry norms.

Management believes that more effort needs to be placed in expense control. In this regard, if management is successful in reducing troubled credits as planned, there will be a corresponding reduction in the costs related to these loans as they work through the foreclosure process.

During the remainder of 2013, Cape Bank will continue to focus on the following initiatives:

Continue efforts to effectively manage the Bank's capital

Build core earnings

Continue efforts to reduce non-performing assets

Complete the transition to a new core processing provider and broaden digital delivery

Increase net income through growth in our loan portfolio

Continue efforts to effectively manage the Company's capital:

Despite the Company's problems with credit since the recession, we were able to maintain a strong capital position. With troubled assets posing a reduced concern, the Company reassessed its capital position and determined that a more active management of its capital was warranted. In the fourth quarter of 2012, the Company paid its first cash dividend of $0.05 per common share. In addition, on February 22, 2013, the Company declared a $0.05 per common share cash dividend to shareholders of record on March 8, 2013. The dividend was payable on March 22, 2013. Also, on April 18, 2013, the Company announced that the Board of Directors authorized a stock repurchase plan under which the Company will repurchase up to 5%, or approximately 667,239 shares of the Company's issued and outstanding shares.

Build core earnings:

During the economic downturn, Bank values were often a reflection of the perceived adequacy of equity often through the metric of tangible book value. Uncertainty with the economy in general, and with credit in particular, made capital a handy heuristic to gauge the soundness of a Bank.

These macro concerns have been receding as more financial institutions appear to have improved their financial position. As a result, valuations have begun to focus on earnings as a driver of value. In particular, it appears that core earnings are becoming an increasingly important metric.

Management recognizes this development and has made growth in core earnings an integral part of the Company's 2013 Strategic Plan.


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Continue efforts to reduce non-performing assets:

Management was able to reduce the level of non-performing assets during 2012 and in the first quarter of 2013 and believes that continued efforts to reduce them further will provide value to the shareholders. Several of the larger troubled credits have moved to OREO as the Bank attempts to move these properties promptly. Management will continue to focus on this strategy for the remainder of 2013.

Complete the transition to a new core processing provider and broaden digital delivery:

The contract with the Bank's core processor ends in October 2013. Throughout 2012, the Bank conducted a review of processors and systems features, and in late 2012 signed a contract with FISERV. Work has begun on orchestrating a smooth transition to this new system and we expect completion in the month of October. As consumers increasingly embrace digital channels, we focused our due diligence on systems that will further digital delivery of consumer services.

Increase net income through growth in our loan portfolio:

Net interest income will benefit if we are successful in increasing earning assets through growth in the loan portfolio. Early signs of activity are positive but with a fragile recovery, exogenous factors could undermine our efforts.

The net interest margin increased to 3.79% for the first quarter ended March 31, 2013, an increase of 5 basis points from the first quarter ended March 31, 2012. The increase of 5 basis points was the result of the yield on interest earning assets declining 37 basis points while the cost of funds on interest bearing liabilities declined 44 basis points.

The impact of changes in interest rates on the Bank's net interest income is discussed in more detail in Item 3 - Quantitative and Qualitative Disclosures About Market Risk.

Comparison of Financial Condition at March 31, 2013 and December 31, 2012

At March 31, 2013, the Company's total assets were $1.033 billion, a decrease of $7.6 million, or 0.73%, from the December 31, 2012 level of $1.041 billion.

Cash and cash equivalents decreased $4.6 million, or 19.03%, to $19.6 million at March 31, 2013 from $24.2 million at December 31, 2012.

Interest-bearing time deposits increased $992,000, or 10.71%, from $9.3 million at December 31, 2012 to $10.3 million at March 31, 2013. The Company invests in time deposits of other banks generally for terms of one year to five years and not to exceed $250,000, which is the amount currently insured by the Federal Deposit Insurance Corporation.

Total loans increased to $730.3 million at March 31, 2013 from $724.2 million at December 31, 2012, an increase of $6.1 million or 0.84%. Net loans increased $6.2 million, net of a decrease in the allowance for loan losses of $171,000, primarily resulting from increases in commercial loans of $4.5 million and increases in mortgage loans totaling $3.3 million partially offset by a decline in consumer loans of $1.6 million. Delinquent loans increased $1.0 million to $17.0 million, or 2.32% of total gross loans, at March 31, 2013 from $16.0 million, or 2.20% of total gross loans at December 31, 2012. Total delinquent loans by portfolio at March 31, 2013 were $11.3 million of commercial mortgage and $500,000 commercial business loans, $3.9 million of residential mortgage loans, $1.1 million of home equity loans and $141,000 of construction loans. At March 31, 2013, delinquent loan balances by number of days delinquent were: 31 to 59 days - $1.2 million; 60 to 89 days - $2.5 million; and 90 days and greater
- $13.3 million.

At March 31, 2013, the Company had $18.0 million in non-performing loans, or 2.46% of total gross loans, a decrease of $1.4 million from $19.4 million, or 2.67% of total gross loans at December 31, 2012. Non-performing loans do not include loans held for sale. Loans held for sale include $885,000 of loans that are on non-accrual status. At March 31, 2013, non-performing loans by loan portfolio category were as follows: $13.8 million of commercial loans, $3.4 million of residential mortgage loans, and $764,000 of consumer loans. Of these stated delinquencies, the Company had $1.2 million of loans that were 90 days or more delinquent and still accruing (13 residential mortgage loans for $906,000 and 6 consumer loans for $279,000). These loans are well secured, in the process of collection and we anticipate no losses will be incurred.

At March 31, 2013, commercial non-performing loans had collateral type concentrations of $1.8 million (12 loans or 13%) secured by commercial buildings and equipment, $1.5 million (11 loans or 11%) secured by residential related commercial loans, $1.4 million (2 loans or 10%) secured by restaurant properties, $170,000 (1 loan or 1%) secured by land and building lots, $5.6 million (15 loans or 40%) secured by retail stores, $2.3 million (5 loans or 17%) secured by hotels and B&B's and $1.1 million (1 loan or 8%) secured by marina/recreational properties. The three largest commercial non-performing loan relationships are $1.8 million, $1.3 million, and $1.2 million.


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We believe we have appropriately charged-off, written-down or established adequate loss reserves on problem loans that we have identified. For 2013, we anticipate a gradual decrease in the amount of problem assets. This improvement is due, in part, to our disposing of assets collateralizing loans that have gone through foreclosure. We are aggressively managing all loan relationships, and where necessary, we will continue to apply our loan work-out experience to protect our collateral position and actively negotiate with mortgagors to resolve these non-performing loans.

Total investment securities decreased $822,000, or 0.48%, to $170.0 million at March 31, 2013 from $170.9 million at December 31, 2012. At March 31, 2013 and December 31, 2012 all of the Company's investment securities were classified as available-for-sale (AFS). The Company also experienced additional OTTI related to its bank-issued CDOs portfolio during the three months ended March 31, 2012 and recorded an $8,000 charge to earnings related to the credit loss portion of impairment. There was no OTTI for the three months ended March 31, 2013.

Other real estate owned ("OREO") decreased $1.1 million from $7.2 million at December 31, 2012 to $6.1 million at March 31, 2013, and consisted at March 31, 2013 of fourteen commercial properties and thirty-two residential properties (including twenty-seven building lots). During the quarter ended March 31, 2013, the Company added three commercial properties to OREO with an aggregate carrying value of $1.7 million. In addition, two commercial OREO properties and three residential OREO properties with aggregate carrying values totaling $2.6 million were sold during the quarter ended March 31, 2013 with recognized net gains of $21,000. As of the date of this filing, the Company has agreements of sale for twenty-seven OREO properties with an aggregate carrying value totaling $2.3 million.

Total deposits decreased $6.1 million, or 0.78% from $784.6 million at December 31, 2012 to $778.5 million at March 31, 2013 primarily resulting from a decline of $8.6 million in certificates of deposit partially offset by increases in non-interest bearing accounts of $2.3 million. Certificates of deposit decreased $8.6 million, or 3.63%, to $230.0 million at March 31, 2013 from $238.6 million at December 31, 2012. Non-interest bearing deposits increased $2.3 million, or 2.63%, from $86.2 million at December 31, 2012 to $88.5 million at March 31, 2013. NOW and money market accounts increased $146,000 and savings deposits increased $97,000.

Borrowings decreased $64,000 from $97.965 million at December 31, 2012 to $97.901 million at March 31, 2013.

Cape Bancorp's total equity increased to $151.3 million at March 31, 2013 from $150.8 million at December 31, 2012, an increase of $520,000, or 0.34%. The increase in equity is primarily attributable to the net income of $1.5 million partially offset by an increase in accumulated other comprehensive loss, net of tax of $607,000, the payment of dividends and net increases related to stock-based compensation plans. At March 31, 2013, stockholders' equity totaled $151.3 million, or 14.65% of period-end assets and tangible equity totaled $128.5 million, or 12.72% of period-end tangible assets. At March 31, 2013, Cape Bank's regulatory capital ratios for Tier I Leverage Ratio, Tier I Risk-Based Capital and Total Risk-Based Capital were 10.42%, 14.11% and 15.36%, respectively, all of which exceed well capitalized status.

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans and loans held for sale were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. Yields and rates have been annualized.


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                                                                 For the three months ended March 31,
                                                          2013                                          2012
                                                         Interest                                      Interest
                                          Average         Income/       Average         Average         Income/       Average
                                          Balance         Expense        Yield          Balance         Expense        Yield
                                                                        (dollars in thousands)
Assets
Interest-earning deposits               $    25,639      $      28          0.44 %    $    19,513      $      39          0.80 %
Investments                                 175,741          1,004          2.29 %        196,630          1,333          2.71 %
Loans                                       726,380          9,076          5.07 %        731,418          9,917          5.45 %

Total interest-earning assets               927,760         10,108          4.42 %        947,561         11,289          4.79 %
Noninterest-earning assets                  110,170                                       125,927
Allowance for loan losses                    (9,945 )                                     (12,925 )

Total assets                            $ 1,027,985                                   $ 1,060,563

Liabilities and Stockholders' Equity
Interest-bearing demand accounts        $   190,055            120          0.26 %    $   161,748            152          0.38 %
Savings accounts                             95,485             16          0.07 %         88,462             45          0.20 %
Money market accounts                       173,992             90          0.21 %        164,429            186          0.45 %
Certificates of deposit                     231,093            613          1.08 %        275,217            905          1.32 %
Borrowings                                   95,354            610          2.59 %        141,720          1,181          3.35 %

Total interest-bearing liabilities          785,979          1,449          0.75 %        831,576          2,469          1.19 %
Noninterest-bearing deposits                 84,082                                        75,936
Other liabilities                             6,402                                         5,873

Total liabilities                           876,463                                       913,385
Stockholders' equity                        151,522                                       147,178

Total liabilities & stockholders'
equity                                  $ 1,027,985                                   $ 1,060,563

Net interest income                                      $   8,659                                     $   8,820

Net interest spread                                                         3.67 %                                        3.60 %
Net interest margin                                                         3.79 %                                        3.74 %
Net interest income and margin (tax
equivalent basis) (1)                                    $   8,731          3.82 %                     $   8,921          3.79 %

Ratio of average interest-earning
assets to average interest-bearing
liabilities                                  118.04 %                                      113.95 %

(1) In order to present pre-tax income and resultant yields on tax-exempt investments on a basis comparable to those on taxable investments, a tax equivalent yield adjustment is made to interest income. The tax equilvalent adjustment has been computed using a Federal income tax rate of 35%, and has the effect of increasing interest income by $72,000, and $101,000 for the three month period ended March 31, 2013 and 2012, respectively. The average yield on investments increased to 2.45% from 2.29% for the three month period ended March 31, 2013 and increased to 2.92% from 2.71% for the three month period ended March 31, 2012.

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The average rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The average volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net change column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.


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                                                    For the three months ended March 31, 2013
                                                            compared to March 31, 2012
                                                      Increase (decrease) due to changes in:
                                              Average               Average                  Net
                                              Volume                 Rate                   Change
                                                                  (in thousands)
Interest-Earning Assets
Interest-earning deposits                   $        10           $       (21 )         $          (11 )
Investments                                        (139 )                (190 )                   (329 )
Loans                                               (75 )                (766 )                   (841 )

Total interest income                              (204 )                (977 )                 (1,181 )

Interest-Bearing Liabilities
Interest-bearing demand accounts                     23                   (55 )                    (32 )
Savings accounts                                      4                   (33 )                    (29 )
Money market accounts                                10                  (106 )                    (96 )
Certificates of deposit                            (135 )                (157 )                   (292 )
Borrowings                                         (337 )                (234 )                   (571 )

Total interest expense                             (435 )                (585 )                 (1,020 )

Total net interest income                   $       231           $      (392 )         $         (161 )

. . .

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