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BKJ > SEC Filings for BKJ > Form 10-Q on 15-May-2013All Recent SEC Filings

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

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


15-May-2013

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, 2012 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, 2012, 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,
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, provide a safe harbor in regard to the inclusion of forward-looking statements in this document and documents incorporated by reference.

You should note that many factors, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference, could affect the future financial results of Bancorp of New Jersey, Inc. and its 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:

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.

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, and except as 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


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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) impaired loans for which a specific loan loss allowance is established; and (2) performing and classified loans for which a general loan loss allowance is 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 and increased non-performing loans, and thus a need to make increased provisions to the allowance for loan losses. Any such increase in provisions 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, resulting in increased charges against the allowance and reduced recoveries, and require increased provisions to the allowance for loan losses. Furthermore, a change in the composition, or growth, of our loan portfolio could result in the need for additional provisions. 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 effect certain changes that result in additions to the allowance based on their judgments about information available to them at the time of their examinations.

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 Ended March 31, 2013 compared to Three Months Ended March 31, 2012

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. 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 other expenses, and income tax expense.

Net Income

Net income for the first quarter of 2013 was $1.1 million, an increase of $248 thousand, or 27.6 %, over the first quarter of 2012 net income of $897 thousand. This increase was driven primarily by an increase of $575 thousand, or 14.4%, in net interest income, and a decrease in the provision for loan losses, offset somewhat by an increase in non-interest expenses of $386 thousand. On a per share basis, basic earnings per share reached $0.22 for the first quarter of 2013 compared to $0.17 per share for the first quarter in 2012, an increase of 29.4%. Diluted earnings per share for the first quarter of 2013 reached $0.21, an increase of $0.04, or 23.5%, over the first quarter 2012 per share amount of $0.17.

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 March 31, 2013, the growth in net interest income has been, primarily, powered by increased interest income from loans, including fees. Interest income on loans increased by $623 thousand in the first three months of 2013, as compared to the same period last year. This increase in income was due to a $66.6 million increase in the average balance of loans during the quarter ended March 31, 2013, up to $439.0 million as compared to the first quarter of 2012 average loan balance of $372.4 million, offset somewhat by a decrease in the average rate earned on loans, from 5.44% for the three months ended March 31, 2012 down to 5.24% for the three months ended March 31, 2013, a decrease of 20 basis points. Interest expense increased by $49 thousand year over year due to an increase in the average balance of interest bearing deposits of $59.5 million, to $449.0 million during the quarter ended March 31, 2013 from $389.5 million during the quarter ended March 31, 2012. The average interest rate paid on interest bearing deposits decreased by 14 basis points to 1.36% for the quarter ended March 31, 2013, from 1.50% for the same period last year.

Provision for Loan Losses

The provision for loan losses was $140 thousand for the three months ended March 31, 2013 as compared to $295 thousand for the three months ended March 31, 2012. The decrease in the provision reflects the overall credit quality of the loan portfolio and the stabilization of nonperforming loans, as well as other factors reflected in our allowance for loan losses methodology.


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Non-interest Income

Non-interest income, increased by $64 thousand to $104 thousand for the three months ended March 31, 2013 from $40 thousand for the three months ended March 31, 2012. The increase was primarily attributable to gains on the sales of securities which were $53 thousand for the March 31, 2013 period compared to no gains on the sale of securities for the same period one year ago.

Non-interest Expense

Non-interest expense grew to $2.6 million during the first quarter of 2013 compared to $2.3 million in the first quarter of 2012, an increase of approximately $386 thousand. This increase was due in most part to increases in occupancy and equipment expense, salaries and professional fees of $125 thousand, $94 thousand and $80 thousand, respectively. The increases in occupancy and equipment and salaries were primarily due to the opening of a branch, Cliffside Park, in March of 2012, which expenses were only partially recognized for the three months ended March 31, 2012 but were fully recognized during the three months ended March 31, 2013. There have also been occupancy costs for the new location in Woodcliff Lake, which is expected to open sometime during the second quarter of 2013. The increase in professional fees was due in part to the Bank's increase in asset size and locations as well as the implementation of XBRL reporting.

Income Tax Expense

The income tax provision increased $160 thousand to $742 thousand for the quarter ended March 31, 2013, as compared to $582 thousand for the quarter ended March 31, 2012. The increase in the income tax expense for the quarter ended March 31, 2013 as compared to the quarter ended March 31, 2012, was due primarily to the increase in the Company's pre-tax income which increased $408 thousand. The effective tax rate for the first quarter of 2013 was 39.3% compared to 39.4% for the first quarter of 2012.


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FINANCIAL CONDITION

Total consolidated assets decreased $9.9 million, or approximately 1.7%, from $571.4 million at December 31, 2012 to $561.5 million at March 31, 2013. Loans receivable, or "total loans," increased from $435.7 million at December 31, 2012 to $445.5 million at March 31, 2013, an increase of approximately $9.8 million, or 2.3%. Total deposits decreased from $515.7 million at December 31, 2012 to $505.1 million at March 31, 2013, a decrease of $10.6 million, or approximately 2.1%.

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 2.3% to reach $445.5 million at March 31, 2013 from $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 our customer service and competitive rate structures.

Our loan portfolio consists of commercial loans, commercial and residential real estate loans, consumer loans and home equity loans. 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 and home equity 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.

For more information on the loan portfolio, see Note 6 in Notes to the Financial Statements in Part I, Item 1of this Quarterly Report on Form 10-Q.


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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 March 31, 2013 the Bank had fourteen nonaccrual loans totaling approximately $6.0 million, of which seven loans totaling approximately $1.8 million had specific reserves of $291 thousand and seven loans totaling approximately $4.2 million had no specific reserve. If interest had been accrued, such income would have been approximately $89 thousand for the three month period ended March 31, 2013. Within its non-accrual loans at March 31, 2013, the Bank had four residential mortgage loans, one commercial real estate loan, one home equity loan, and one commercial loan 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, a combination of these concessions or other actions to maximize collection. At March 31, 2013, nonaccruing TDR loans had an outstanding balance of $4.3 million and had specific reserves of $12 thousand connected with them. None of these loans were performing in accordance with their modified terms. In addition, during the first quarter of 2013, two loans totaling $239 thousand to the same person were modified as TDRs. One loan was a single family residential mortgage, and the second was a home equity loan. They are performing in accordance with their modified terms. Also during the first quarter of 2013, a loan that was classified as an accruing TDR at December 31, 2012, was modified into two loans. One of the loans is a single family residential mortgage and the second is a home equity loan. The fair value of the single family residential mortgage is greater than the carrying amount of the mortgage and therefore there was no recognition of an impairment. The home equity loan has a specific reserve of $150 thousand connected with it. Both loans are performing in accordance with their modified terms. During the quarter ended March 31, 2012, the Bank had no new loans classified as TDRs.

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 March 31, 2013, the Bank had nineteen impaired loans totaling approximately $10.6 million, of which eight loans totaling approximately $2.8 million had specific reserves of $441 thousand and eleven loans totaling approximately $7.7 million had no specific reserves. At March 31, 2013, twelve TDR loans had an outstanding balance of approximately $8.8 million and had specific reserves of $162 thousand.


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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 March 31, 2013 and December 31, 2012. 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 $50.9 million at March 31, 2013 compared to $88.5 million at December 31, 2012. This decrease in the AFS category was due in most part to the sale of $36.2 million of securities along with the maturity or call of an additional $12.0 million, offset somewhat by the purchase of $11.0 million of securities during the quarter ended March 31, 2013. The sale of the securities available for sale was due to the Bank's strategy to reduce its longer term securities as part of its overall interest rate risk management. Securities held to maturity increased $3.8 million to $9.3 million at March 31, 2013 from $5.5 million at December 31, 2012 as a result of securities purchased.

Deposits

Deposits remain our primary source of funds. Total deposits decreased to $505.1 million at March 31, 2013 from $515.7 million at December 31, 2012, a decrease of $10.6 million, or 2.1%. Savings and interest bearing transaction accounts and noninterest bearing accounts decreased by $10.8 million and $2.8 million, respectively, offset somewhat by an increase in time deposits of $2.9 million. The decrease in interest bearing transaction accounts was due in part to the curtailment of a campaign aimed at attracting interest bearing transaction accounts into the Bank through above market interest rates. This campaign was curtailed during the first quarter of 2013. The Company 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. 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. In addition, if warranted, we would be able to borrow funds.

Our total deposits equaled $505.1 million and $515.7 million, respectively, at March 31, 2013 and December 31, 2012. The decrease in deposits and the increase in loans were funded by the proceeds of the sales and maturities of securities.

Through the investment portfolio, we have generally sought to obtain a safe, yet slightly higher yield than would have been available to us as a net seller of overnight federal funds, while maintaining liquidity. Through our investment portfolio, we also attempt to manage our maturity gap, by seeking maturities of investments which coincide with maturities of deposits. The investment portfolio also includes securities available for sale to provide liquidity for anticipated loan demand and other liquidity needs.

As of March 31, 2013, we have a $12 million overnight line of credit with First Tennessee Bank and a $10 million overnight line of credit with Atlantic Central Bankers Bank for the purchase of federal funds in the event that temporary liquidity needs arise. There were no amounts outstanding under either facility at March 31, 2013. We are an approved member of the Federal Home Loan Bank of New York, or "FHLBNY." The FHLBNY relationship could provide additional sources of liquidity, if required.

We believe that our current sources of funds provide adequate liquidity for our current cash flow needs.


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Capital Resources

A significant measure of the strength of a financial institution is its capital base. Our federal regulators have classified and defined our capital into the following components: (1) Tier 1 Capital, which includes tangible shareholders' equity for common stock and qualifying preferred stock, and (2) Tier 2 Capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt, and preferred stock which does not qualify for Tier 1 Capital. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require certain capital as a percent of our assets and certain off-balance sheet items, adjusted for predefined credit risk factors, referred to as "risk-adjusted assets."

Pursuant to federal regulation we are required to maintain, at a minimum, Tier 1 Capital as a percentage of risk-adjusted assets of 4.0% and combined Tier 1 and Tier 2 Capital, or "Total Capital," as a percentage of risk-adjusted assets of 8.0%.

In addition to the risk-based guidelines, our regulators require that an institution which meets the regulator's highest performance and operation standards maintain a minimum leverage ratio (Tier 1 Capital as a percentage of tangible assets) of 3.0%. For those institutions with higher levels of risk or that are experiencing or anticipating significant growth, the minimum leverage ratio will be evaluated through the ongoing regulatory examination process. We are currently required to maintain a leverage ratio of 4.0%.

The following table summarizes the Bank's risk-based capital and leverage ratios at March 31, 2013, as well as the applicable minimum ratios:

                                          Minimum
                                         Regulatory
                       March 31, 2013   Requirements
Risk-Based Capital:
Tier 1 Capital Ratio            12.07 %         4.00 %
Total Capital Ratio             13.21 %         8.00 %
Leverage Ratio                   9.63 %         4.00 %

As we continue to employ our capital and grow our operations, we expect that our capital levels will decrease, but that we will remain a "well-capitalized" institution.

The Company is subject to similar regulatory capital requirements, and its capital ratios are similar to the Bank's capital ratios as presented in the table above.


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