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CBNJ > SEC Filings for CBNJ > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for CAPE BANCORP, INC.

Form 10-Q for CAPE BANCORP, INC.


8-Nov-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, home equity loans and lines of credit and construction loans. On October 24, 2013, the Company announced that it was exiting the residential mortgage loan origination business. 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 September 30, 2013, the Company had total assets of $1.074 billion, an increase of $33 million from the December 31, 2012 level of $1.041 billion. For the three months ended September 30, 2013 and 2012, the Company had total revenues (interest income plus non-interest income) of $12.5 million and $12.6 million, respectively. Net income for the three months ended September 30, 2013 totaled $1.9 million, or $0.16 per common and fully diluted share, compared to net income of $1.5 million, or $0.12 per common and fully diluted share for the three months ended September 30, 2012. For the nine months ended September 30, 2013 and 2012, the Company had total revenues of $36.0 million and $39.0 million, respectively. Net income for the nine months ended September 30, 2013 totaled $5.0 million, or $0.41 per common and fully diluted share, compared to net income of $4.1 million, or $0.33 per common and fully diluted share for the nine months ended September 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. 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 third 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 1.26% at September 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 September 30, 2013 was 22%, 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 1.66% at September 30, 2013 from 2.61% at December 31, 2012. For the periods ended, and as of September 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 1.29% at September 30, 2013, from 1.36% at December 31, 2012, while the ratio of our allowance for loan losses to non-performing loans increased to 102.37% at September 30, 2013 from 50.86% at December 31, 2012. For the three months ended September 30, 2013, loan charge-offs totaled $286,000 compared to loan charge-offs of $926,000 for the three months ended September 30, 2012. Of the $286,000 of loan charge-offs during the third 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 $774.6 million at September 30, 2013. Commercial loans increased $36.8 million, net of $3.9 million of commercial loans transferred to OREO and $857,000 of charge-offs during the first nine months, and residential mortgage loans increased $16.4 million, while consumer loans declined $3.0 million. At September 30, 2013, 90.4% of our loan portfolio was secured by real estate and 61.7% of our portfolio was commercial related loans. The increase in residential mortgage loans resulted from the Bank retaining a larger portion of mortgage loans originated during the first nine months in the portfolio. On October 24, 2013, the Company announced that it was exiting the residential mortgage loan origination business. This action was the result of a significant decline in the residential refinance business and added compliance costs, the residential mortgage department will be wound down during the fourth quarter of 2013. 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 $43.8 million from $784.6 million at December 31, 2012 to $828.4 million at September 30, 2013 primarily resulting from an increase in certificates of deposit of $27.9 million, of which $21.2 million was attributable to an increase in brokered certificates of deposit.
Interest-bearing checking accounts increased $14.4 million from December 31, 2012, while non-interest


bearing checking accounts increased $8.1 million, internal accounts increased $6.3 million and savings accounts increased $873,000 partially offset by a $13.8 million decline in money market deposit accounts.

We also maintain an investment portfolio. As part of our Asset/Liability monitoring process, with the approval of the Board of Directors, the Company, at September 30, 2013, reclassified $10.1 million of municipal bonds with extended maturities from "available for sale" securities to "held to maturity" securities which the bank has the ability and positive intent to hold to maturity. Additionally the bank expects to recover the recorded investment and thus realize no gains or losses when the issuer pays the amount promised through maturity. Each transfer was done at fair value and any previously unrealized gain or loss will be amortized or accreted to investment securities in the consolidated statements of operation. The unrealized holding gain or loss at September 30, 2013 related to this transfer, which shall continue to be reported in a separate component of shareholders equity and will be amortized or accreted over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization or accretion of any premium or discount, which will result in no net effect to the investment yield. Management's ongoing monitoring of the balance sheet may result in the reclassification of additional securities to "held to maturity".

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, construction loans, home equity loans and lines of credit and other types of commercial and consumer loans. At September 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 home equity loan and line of credit 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 11.0% and 8.0% respectively, as of August 2013 compared to 12.2% and 9.0%, respectively, as of August 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 the second quarter of 2013 in Cape May County and decreased in Atlantic County compared to the second quarter of 2012.

During 2012, and through the third 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 and into 2014 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 commercial loan portfolio and core deposits

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 becoming 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 and has paid a cash dividend through each successive quarter, increasing the dividend to $0.06 per common share to be paid in the fourth quarter of 2013. Also, on April 18, 2013, the Company announced that the Board of Directors authorized a stock repurchase plan of 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. The second stock repurchase plan was completed on October 3, 2013. The average repurchase price for both stock repurchase plans was $9.37 per share. Management will continue its efforts to prudently manage capital levels.

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 and 2014 Strategic Plans.

Continue efforts to reduce non-performing assets:

Management was able to reduce the level of non-performing assets during 2012 and through the third 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 and throughout 2014.

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

The contract with the Bank's core processor ended in October 2013. Throughout 2012, the Bank conducted a review of processors and systems features, and in late 2012 signed a contract with FISERV as the Bank's new core processor. As consumers increasingly embrace digital channels, we focused our due diligence on systems that will further digital delivery of consumer services. The core system conversion to FISERV occurred the weekend of October 18, 2013.

Increase net income through growth in our commercial loan portfolio and core deposits:

Net interest income will benefit if we are successful in increasing earning assets through growth in the commercial loan portfolio and build core deposits. Early signs of activity are positive but with a fragile recovery, exogenous factors could undermine our efforts. Total net loans increased $50.2 million from December 31, 2012 for an annualized growth rate of 9.4%, while total deposits have increased $43.8 million from December 31, 2012 for an annualized growth rate of 7.4%.

The net interest margin increased to 3.76% for the nine months ended September 30, 2013, an increase of 1 basis point from the nine months ended September 30, 2012. The increase of 1 basis point was the result of the cost of funds on interest-bearing liabilities declining 40 basis points while the yield on interest-earning assets declined 34 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 September 30, 2013 and December 31, 2012

At September 30, 2013, the Company's total assets were $1.074 billion, an increase of $33 million, or 3.23%, from the December 31, 2012 level of $1.041 billion.

Cash and cash equivalents decreased $1.7 million, or 7.02%, to $22.5 million at September 30, 2013 from $24.2 million at December 31, 2012.

Interest-bearing time deposits increased $402,000, or 4.34%, to $9.7 million at September 30, 2013 from $9.3 million at December 31, 2012. 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 $774.6 million at September 30, 2013 from $724.2 million at December 31, 2012, an increase of $50.4 million or 6.95%. Net loans increased $50.2 million primarily resulting from increases in commercial loans of $36.8 million and increases in mortgage loans totaling $16.4 million partially offset by a decline in consumer loans of $3.0 million. Delinquent loans decreased $5.6 million to $10.4 million, or 1.34% of total gross loans, at September 30, 2013 from $16.0 million, or 2.20% of total gross loans at December 31, 2012. Total delinquent loans by portfolio at September 30, 2013 were $6.6 million of commercial loans,


$2.7 million of residential mortgage loans, and $1.1 million of consumer loans. At September 30, 2013, delinquent loan balances by number of days delinquent were: 31 to 59 days - $1.7 million; 60 to 89 days - $583,000; and 90 days and greater - $8.1 million.

At September 30, 2013, the Company had $9.8 million in non-performing loans, or 1.26% of total gross loans, a decrease of $9.6 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 $835,000 of loans that are on non-accrual status. At September 30, 2013, non-performing loans by loan portfolio category were as follows: $7.5 million of commercial loans, $1.5 million of residential mortgage loans, and $752,000 of consumer loans. Of these stated delinquencies, the Company had $757,000 of loans that were 90 days or more delinquent and still accruing (8 residential mortgage loans totaling $416,000 and 6 consumer loans totaling $341,000). These loans are well secured, in the process of collection and we anticipate no losses will be incurred.

At September 30, 2013, commercial non-performing loans had collateral type concentrations of $4.2 million (11 loans or 57%) secured by retail stores, $765,000 (5 loans or 10%) secured by residential related commercial loans, $412,000 (2 loans or 6%) secured by restaurant properties, $1.0 million (6 loans or 13%) secured by commercial buildings and equipment, and $1.1 million (1 loan or 14%) secured by marina/recreational properties. The three largest commercial non-performing loan relationships are $1.8 million, $1.1 million, and $517,000.

We believe we have appropriately charged-off, written-down or established adequate loss reserves on problem loans that we have identified. 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 $4.1 million, or 2.4%, to $166.7 million at September 30, 2013 from $170.8 million at December 31, 2012 is primarily represented by the decline in unrealized loss of $6.0 million during this nine month period. During the third quarter of 2013, the Company reclassified $10.1 million of municipal bonds with extended maturities from available-for-sale (AFS) securities to held-to-maturity (HTM) securities. At December 31, 2012, all of the Company's investment securities were classified as (AFS). The Company also experienced additional OTTI related to its bank-issued CDOs portfolio during the nine months ended September 30, 2012 and recorded an $8,000 charge to earnings related to the credit loss portion of impairment. There was no OTTI for the nine months ended September 30, 2013.

Other real estate owned ("OREO") increased $139,000 to $7.3 million at September 30, 2013 from $7.2 million at December 31, 2012 , and consisted at September 30, 2013 of twelve commercial properties and twenty-five residential properties (including eighteen building lots). During the quarter ended September 30, 2013, the Company added one commercial property and two residential properties to OREO with an aggregate carrying value of $1.2 million. In addition, three commercial OREO properties and six residential OREO properties with aggregate carrying values totaling $1.1 million were sold during the quarter ended September 30, 2013 with recognized net gains of $17,000. As of the date of this filing, the Company has agreements of sale for sixteen OREO properties, including twelve 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 $43.8 million, or 5.58%, to $828.4 million at September 30, 2013 from $784.6 million at December 31, 2012, primarily resulting from an increase in certificates of deposit of $27.9 million, of which $21.2 million was attributable to an increase in brokered certificates of deposit.
Certificates of deposit totaled $266.6 million at September 30, 2013 compared to $238.6 million at December 31, 2012. Non-interest bearing deposits increased $14.4 million, or 16.69%, from $86.3 million at December 31, 2012 to $100.7 million at September 30, 2013. Interest-bearing checking accounts increased $607,000, or 0.17%, to $364.1 million at September 30, 2013 from $363.5 million at December 31, 2012. Savings accounts increased $874,000 to $97.0 million at September 30, 2013 from $96.2 million at December 31, 2012.

Borrowings increased $1.9 million from $98.0 million at December 31, 2012 to $99.9 million at September 30, 2013.

Cape Bancorp's total equity decreased $10.3 million, or 6.82%, to $140.5 million at September 30, 2013 from $150.8 million at December 31, 2012, which primarily resulted from a $11.0 million decrease related to the previously mentioned stock repurchase programs, an increase in the accumulated other comprehensive loss, partially offset by a net increase of $3.0 million (earnings less dividends declared). At September 30, 2013, stockholders' equity totaled $140.5 million, or 13.08% of period-end assets and tangible equity totaled $117.7 million, or 11.19% of period-end tangible assets. At September 30, 2013, Cape Bank's regulatory capital ratios for Tier I Leverage Ratio, Tier I Risk-Based Capital and Total Risk-Based Capital were 9.50%, 12.88% and 14.13%, respectively, all of which exceed the well capitalized classification.


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 September 30,
                                                              2013                                              2012
                                                             Interest                                           Interest
                                            Average           Income/         Average          Average           Income/        Average
                                            Balance           Expense          Yield           Balance           Expense         Yield
                                                                              (dollars in thousands)
Assets
Interest-earning deposits                 $     23,074       $      25            0.43 %     $     25,786       $      37           0.57 %
Investments                                    178,031             977            2.20 %          172,664           1,157           2.68 %
Loans                                          752,806           9,284            4.89 %          736,648           9,755           5.27 %
Total interest-earning assets                  953,911          10,286            4.28 %          935,099          10,949           4.66 %
Noninterest-earning assets                     105,706                                            117,914
Allowance for loan losses                       (9,891 )                                          (12,108 )
Total assets                              $  1,049,726                                       $  1,040,905
Liabilities and Stockholders' Equity
Interest-bearing demand accounts          $    204,174       $     100            0.19 %     $    157,868             130           0.33 %
Savings accounts                                97,503              18            0.07 %           94,546              42           0.18 %
Money market accounts                          158,310              63            0.16 %          170,656             178           0.41 %
Certificates of deposit                        248,157             532            0.85 %          250,118             719           1.14 %
Borrowings                                      97,237             561            2.29 %          121,644             828           2.71 %
Total interest-bearing liabilities             805,381           1,274            0.63 %          794,832           1,897           0.95 %
Noninterest-bearing deposits                    96,000                                             85,917
Other liabilities                                6,197                                             10,275
Total liabilities                              907,578                                            891,024
Stockholders' equity                           142,148                                            149,881
Total liabilities & stockholders' equity  $  1,049,726                                       $  1,040,905
Net interest income                                          $   9,012                                          $   9,052
. . .
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