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CBNJ > SEC Filings for CBNJ > Form 10-Q on 5-Aug-2013All Recent SEC Filings

Show all filings for CAPE BANCORP, INC.

Form 10-Q for CAPE BANCORP, INC.


5-Aug-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.

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 9.0% 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 13 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, and certificates of deposit with terms ranging from 30 days to 84 months and savings accounts.

At June 30, 2013, the Company had total assets of $1.050 billion compared to $1.041 billion at December 31, 2012. For the three months ended June 30, 2013 and 2012, the Company had total revenues (interest income plus non-interest income) of $11.7 million and $13.6 million, respectively. Net income for the three months ended June 30, 2013 totaled $1.6 million, or $0.13 per common and fully diluted share, compared to net income of $1.0 million, or $0.08 per share, for the three months ended June 30, 2012. For the six months ended June 30, 2013 and 2012, the Company had total revenues of $23.5 million and $26.5 million, respectively. Net income for the six months ended June 30, 2013 totaled $3.1 million, or $0.25 per common and fully diluted share, compared to net income of $2.6 million, or $0.21 per share, for the six months ended June 30, 2012.

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 County, New Jersey and in Radnor, Pennsylvania, servicing the five county Philadelphia market area. The Mercer County, New Jersey MDO was closed during the second quarter of 2013. 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 second 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 1.90% at June 30, 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 June 30, 2013 was 25%, 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 2.09% at June 30, 2013 from 2.67% at December 31, 2012. For the periods ended, and as of June 30, 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 1.32% at June 30, 2013, from 1.36% at December 31, 2012, while the ratio of our allowance for loan losses to non-performing loans increased to 69.34% at June 30, 2013 from 50.86% at December 31, 2012. For the three months ended June 30, 2013, loan charge-offs totaled $344,000 compared to loan charge-offs of $962,000 for the three months ended June 30, 2012. Of the $344,000 of loan charge-offs during the second 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 $743.5 million at June 30, 2013. Commercial loans increased $15.7 million, net of $3.0 million of commercial loans transferred to OREO and $694,000 of charge-offs during the first six months, and residential mortgage loans increased $6.3 million, while consumer loans declined $2.7 million. At June 30, 2013, 90.8% of our loan portfolio was secured by real estate and 61.4% 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 six months 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 increased $10.5 million from $784.6 million at December 31, 2012 to $795.1 million at June 30, 2013 primarily resulting from an increase in certificates of deposit of $14.2 million, of which $18.2 million was attributable to an increase in brokered certificates of deposit. Interest-bearing checking accounts decreased $12.8 million while non-interest bearing checking accounts increased $8.8 million and savings accounts increased $279,000. We also maintain an investment portfolio.

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 primary 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 June 30, 2013, our market area primarily included the area surrounding our 14 offices located in Cape May and Atlantic Counties, New Jersey and our MDOs located in Burlington County, 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 12.7% and 11.7% respectively, as of May 2013 compared to 12.4% and 11.9%, respectively, as of May 2012. Traditionally, unemployment rates are favorably influenced by the summer season. Median sale prices of single-family homes sold during the first quarter of 2013 decreased compared to the same period in 2012 in both Atlantic and Cape May Counties. The median sale prices decreased by 5.7% and 6.1%, in Atlantic and Cape May Counties, respectively, while the number of homes sold decreased 4.6% and 1.7% in Atlantic and Cape May Counties. The number of residential building permits issued increased in 2013 in Cape May County compared to the first quarter of 2012 while the number of residential building permits issued in Atlantic County declined during the same period.

During 2012, and through the second 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 go through the work-out 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, in February 2013 and May 2013, the Company declared a $0.05 per common share cash dividends. Those dividends were paid on March 22, 2013 and June 6, 2013 to shareholders of record on March 8, 2013 and May 22, 2013, respectively. And, on July 15, 2013, the Board of Directors of the Company declared a $0.05 per common share cash dividend to shareholders of record as of July 29, 2013, payable on August 12, 2013. Also, on April 18, 2013, the Company announced that the Board of Directors authorized a stock repurchase plan under which the Company would repurchase up to 5%, or approximately 667,239 shares, of the Company's issued and outstanding shares. The stock repurchase was completed on July 16, 2013. On July 19, 2013, the Company announced that the Board of Directors authorized a second stock repurchase program for the repurchase of up to 5%, or approximately 633,877 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-economic 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.

Continue efforts to reduce non-performing assets:

Management was able to reduce the level of non-performing assets during 2012 and through the second quarter of 2013 and believes that continued efforts to reduce them further will provide value to the Company's shareholders. Several of the larger troubled credits have moved to OREO as the Bank attempts to move these properties off of the Company's balance sheet promptly. Management will continue to focus on improving the level of non-performing assets 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 2013. 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 3.76% for the six months ended June 30, 2013, an increase of 3 basis points from the six months ended June 30, 2012. The increase of 3 basis points was the result of the cost of funds on interest-bearing liabilities declining 43 basis points while the yield on interest-earning assets declined 36 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 June 30, 2013 and December 31, 2012

At June 30, 2013, the Company's total assets were $1.050 billion, an increase of $9.7 million, or 0.94%, from the December 31, 2012 level of $1.041 billion.

Cash and cash equivalents increased $658,000, or 2.72%, to $24.9 million at June 30, 2013 from $24.2 million at December 31, 2012.

Interest-bearing time deposits increased $991,000, or 10.70%, from $9.3 million at December 31, 2012 to $10.3 million at June 30, 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 $743.5 million at June 30, 2013 from $724.2 million at December 31, 2012, an increase of $19.3 million or 2.66%. Net loans increased $19.3 million, net of a decrease in the allowance for loan losses of $66,000, primarily resulting from increases in commercial loans of $15.7 million and increases in mortgage loans totaling $6.3 million partially offset by a decline in consumer loans of $2.7 million. Delinquent loans decreased $2.5 million to $13.5 million, or 1.81% of total gross loans, at June 30, 2013 from $16.0 million, or 2.20% of total gross loans at December 31, 2012. Total delinquent loans by portfolio at June 30, 2013 were $9.1 million of commercial mortgage and $307,000 commercial business loans, $2.9 million of residential mortgage loans, $1.0 million of consumer loans and $141,000 of construction loans. At June 30, 2013, delinquent loan balances by number of days delinquent were: 31 to 59 days
- $1.3 million; 60 to 89 days - $654,000; and 90 days and greater - $11.5 million.

At June 30, 2013, the Company had $14.1 million in non-performing loans, or 1.90% of total gross loans, a decrease of $5.3 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 $856,000 of loans that are on non-accrual status. At June 30, 2013, non-performing loans by loan portfolio category were as follows: $11.3 million of commercial loans, $1.9 million of residential mortgage loans, and $921,000 of consumer loans. Of these stated delinquencies, the Company had $1.1 million of loans that were 90 days or more delinquent and still accruing (10 residential mortgage loans for $731,000 and 8 consumer loans totaling $389,000). These loans are well secured, in the process of collection and we anticipate no losses will be incurred.

At June 30, 2013, commercial non-performing loans had collateral type concentrations of $4.7 million (13 loans or 42%) secured by retail stores, $1.4 million (8 loans or 12%) secured by residential related commercial loans, $1.4 million (2 loans or 13%) secured by restaurant properties, $1.3 million (8 loans or 12%) secured by commercial buildings and equipment, $1.2 million (1 loan or 10%) secured by marina/recreational properties, $1.1 million (3 loans or 10%) secured by hotels and B&B's and $172,000 (1 loan or 1%) secured by land and building lots. The three largest commercial non-performing loan relationships are $1.8 million, $1.3 million, and $1.2 million.

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 $3.9 million, or 2.3%, to $167.0 million at June 30, 2013 from $170.9 million at December 31, 2012. At June 30, 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 six months ended June 30, 2012 and recorded an $8,000 charge to earnings related to the credit loss portion of impairment. There was no OTTI for the six months ended June 30, 2013.


Other real estate owned ("OREO") increased $177,000 from $7.2 million at December 31, 2012 to $7.4 million at June 30, 2013, and consisted at June 30, 2013 of fourteen commercial properties and twenty-nine residential properties (including twenty-two building lots). During the quarter ended June 30, 2013, the Company added three commercial properties and four residential properties to OREO with an aggregate carrying value of $1.1 million. In addition, three commercial OREO properties and seven residential OREO properties with aggregate carrying values totaling $1.1 million were sold during the quarter ended June 30, 2013 with recognized net gains of $19,000. As of the date of this filing, the Company has agreements of sale for nineteen OREO properties, including fourteen residential building lots, with an aggregate carrying value totaling $1.9 million, although there can be no assurance that these sales will be completed.

Total deposits increased $10.5 million, or 1.34% from $784.6 million at December 31, 2012 to $795.1 million at June 30, 2013 primarily resulting from an increase in certificates of deposit of $14.2 million, of which $18.2 million was attributable to an increase in brokered certificates of deposit. Certificates of deposit totaled $252.8 million at June 30, 2013 compared to $238.6 million at December 31, 2012. Non-interest bearing deposits increased $8.8 million, or 10.23%, from $86.3 million at December 31, 2012 to $95.1 million at June 30, 2013. Interest-bearing checking accounts decreased $12.8 million, or 3.53% to $350.7 million at June 30, 2013 from $363.5 million at December 31, 2012.
Savings accounts increased $279,000 to $96.4 million at June 30, 2013 from $96.2 million at December 31, 2012.

Borrowings increased $6.0 million from $97.9 million at December 31, 2012 to $103.9 million at June 30, 2013.

Cape Bancorp's total equity decreased $5.2 million, or 3.45%, to $145.6 million at June 30, 2013 from $150.8 million at December 31, 2012, which primarily resulted from a $4.5 million decrease related to the previously mentioned stock repurchase program, an increase in the accumulated other comprehensive loss, partially offset by a net increase of $1.8 million (earnings less dividends declared). At June 30, 2013, stockholders' equity totaled $145.6 million, or 13.86% of period-end assets and tangible equity totaled $122.8 million, or 11.95% of period-end tangible assets. At June 30, 2013, Cape Bank's regulatory capital ratios for Tier I Leverage Ratio, Tier I Risk-Based Capital and Total Risk-Based Capital were 10.12%, 13.72% and 14.97%, 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.

                                                                           For the three months ended June 30,
                                                                 2013                                                2012
                                                               Interest                                             Interest
                                              Average           Income/           Average          Average           Income/          Average
                                              Balance           Expense            Yield           Balance           Expense           Yield
                                                                                  (dollars in thousands)
Assets
Interest-earning deposits                   $     24,000       $      25              0.42 %     $     16,598       $      30             0.73 %
Investments                                      178,021             937              2.11 %          189,611           1,154             2.43 %
Loans                                            735,365           9,131              4.98 %          734,586           9,751             5.34 %
Total interest-earning assets                    937,386          10,093              4.32 %          940,795          10,935             4.67 %
Noninterest-earning assets                       108,358                                              126,259
Allowance for loan losses                         (9,715 )                                            (12,322 )
Total assets                                $  1,036,029                                         $  1,054,732
Liabilities and Stockholders' Equity
Interest-bearing demand accounts            $    200,878       $     115              0.23 %     $    157,204             150             0.38 %
Savings accounts                                  97,309              16              0.07 %           91,414              44             0.19 %
Money market accounts                            162,513              66              0.16 %          165,663             183             0.44 %
Certificates of deposit                          234,356             590              1.01 %          270,663             792             1.18 %
Borrowings                                        96,817             555              2.30 %          135,139           1,052             3.13 %
Total interest-bearing liabilities               791,873           1,342              0.68 %          820,083           2,221             1.09 %
Noninterest-bearing deposits                      85,213                                               79,740
Other liabilities                                  8,951                                                6,513
Total liabilities                                886,037                                              906,336
Stockholders' equity                             149,992                                              148,396
Total liabilities & stockholders' equity    $  1,036,029                                         $  1,054,732
Net interest income                                            $   8,751                                            $   8,714
Net interest spread                                                                   3.64 %                                              3.58 %
Net interest margin                                                                   3.74 %                                              3.73 %
Net interest income and margin (tax
equivalent basis) (1)                                          $   8,818              3.77 %                        $   8,805             3.76 %
Ratio of average interest-earning assets to
average interest-bearing liabilities              118.38 %                                             114.72 %

(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 equivalent adjustment has been computed using a Federal income tax rate of 35%, and has the effect of increasing interest income by $67,000 and $91,000 for the three month period ended June 30, 2013 and 2012, respectively. The average yield on investments increased to 2.25% from 2.11% for the three month period ended June 30, 2013 and increased to 2.63% from 2.43% for the three month period ended June 30, 2012.


                                                                              For the six months ended June 30,
                                                                  2013                                                 2012
                                                                 Interest                                             Interest
                                               Average            Income/          Average          Average            Income/          Average
. . .
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