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BKJ > SEC Filings for BKJ > Form 10-Q on 14-Nov-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.


14-Nov-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 consolidated 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 consolidated unaudited financial statements have been prepared in conformity with U.S. generally accepted accounting principles. In preparing the consolidated unaudited 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


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could differ significantly from those estimates. Management believes the following critical accounting policies encompass the more significant judgments and estimates used in the preparation of the consolidated unaudited 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 September 30, 2013 and 2012 and Nine Months Ended September 30, 2013 and 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 and borrowings. 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 income tax expense.

Net Income

Net income for the third quarter of 2013 was $1.2 million compared to net income of $1.1 million for the third quarter of 2012, an increase of $83 thousand, or 7.3%. This increase was primarily due to an increase in net interest income, which increased approximately $335 thousand, or 7.5%, and a decrease in the provision for loan losses of $35 thousand, or 13.5%, offset by a decrease in gains on the sales of investment securities of $240 thousand, or 101%, and an increase in income taxes of $62 thousand, or 8.3%.

Net income for the nine months ended September 30, 2013 was approximately $3.5 million compared to net income of approximately $3.0 million for the nine months ended September 30, 2012, an increase of $454 thousand, or 15.0%. The increase was due to an increase in net interest income of $1.2 million and a decrease in the provision for loan losses of $200 thousand, offset by increases in non-interest expenses and income tax expense of $608 thousand and $296 thousand, respectively.

On a per share basis, basic and diluted earnings per share were $0.23 for the third quarter of 2013 as compared to basic and diluted earnings per share of $0.22 for the third quarter of 2012, an increase of $0.01 per share, or 4.5%. Basic and diluted earnings per share were $0.66 and $0.65, respectively, for the nine months ended September 30, 2013 as compared to basic and diluted earnings per share of $0.58 for the nine months ended September 30, 2012, an increase of $.08, or 13.8% for basic earnings per share, and $.07, or 12.1%, per share for diluted earnings per share.

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 September 30, 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 $551 thousand for the three months ended September 30, 2013 as compared to the same period last year. This increase in interest income was due to a $60.4 million increase in the average balance of loans during the quarter ended September 30, 2013, up to $469.9 million as compared to the third quarter of 2012 average loan balance of $409.5 million, offset somewhat by a decrease in the average rate earned on loans, from 5.38% for the three months ended September 30, 2012 down to 5.16% for the three months ended September 30, 2013, a decrease of 22 basis points. Interest expense decreased by $43 thousand year over year and was due in most part to the decrease in the average rate paid on interest bearing deposits of 14 basis points, down to 1.32% for the three months ended September 30, 2013 from 1.46% for the three months ended September 30, 2012, offset somewhat by an increase in the average balance of interest bearing deposits of $36.1 million up to $462.1 million for the quarter ended September 30, 2013 from $426.0 million for the quarter ended September 30, 2012.


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During the nine months ended September 30, 2013, net interest income reached $14.0 million compared to $12.8 million for the nine months ended September 30, 2012, an increase of $1.2 million, or 9.3%. This increase is attributable to the increase in interest income from loans, including fees and is due in most part to the increase in average loans. Interest income from loans, including fees, securities and federal funds sold reached $18.5 million for the nine months ended September 30, 2013 from $17.3 million for the nine months ended September 30, 2012, an increase of $1.2 million, or 7.0%. At the same time, total interest expense increased by $23 thousand for the nine months ended September 30, 2013 from the nine months ended September 30, 2012. The increase in interest expense was primarily due to the increase in the average balance of interest bearing deposits of $46.7 million, up to $455.3 million for the nine months ended September 30, 2013 from $408.6 million on average for the nine months ended September 30, 2012. The increase in the average balance of interest bearing deposits was offset by a decrease in the average rate paid on interest bearing deposits for the nine months ended September 30, 2013 of 14 basis points to 1.34% from 1.48% for the same period last year.

Provision for Loan Losses

The provision for loan losses is a recorded expense that adjusts the allowance for loan losses to a level, which, in management's best estimate, is necessary to absorb probable losses within the existing loan portfolio. Through the application of our ALLL methodology, the provision for loan losses reflects loan quality trends, including, among other factors, the levels of and trends related to nonaccrual loans, past due loans, potential problem loans, criticized loans, net charge-offs or recoveries and growth in the loan portfolio. Accordingly, the amount of the provision reflects both the necessary increases in the allowance for loan losses related to new loans and newly identified criticized loans, as well as the actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools. The provision for loan losses was $225 thousand for the three months ended September 30, 2013 as compared to $260 thousand for the three months ended September 30, 2012, a decrease of $35 thousand. During the nine months ended September 30, 2012, the provision for loan losses was $685 thousand as compared to $885 thousand during the nine months ended September 30, 2012, a decrease of $200 thousand. At September 30, 2013, the ALLL was approximately $5.6 million, or 1.19% of total loans, as compared to $5.1 million and 1.16% of total loans at December 31, 2012. In both the three and nine month periods, the decrease in the provision for loan losses reflects the overall credit quality of the loan portfolio and the stabilization of nonperforming loans, as well as other factors impacting allowances for loan losses methodology and calculation. Nonaccruing loans totaled $5.7 million, or 1.20% of total loans at September 30, 2013, $5.9 million, or 1.36% of total loans at December 31, 2012, and $5.9 million, or 1.42% of total loans at September 30, 2012.

Non-interest Income

For the three months and nine months ended September 30, 2013, non-interest income decreased by $241 thousand and $27 thousand, respectively, as compared to the three months and nine months ended September 30, 2012. For each of the periods noted, the decreases were primarily due to decreases in the realized gains on the sales of securities. For the three months ended September 30, 2013, the Company recorded a loss of $2 thousand on the sale of securities compared to a gain of $238 thousand on the sale of securities for the three months ended September 30, 2012, a decrease of $240 thousand. For the nine months ended September 30, 2013, the gain on the sale of securities decreased by $43 thousand to $195 thousand from $238 thousand for the nine months ended September 30, 2012.

Non-interest Expense

Non-interest expense totaled $2.6 million during the third quarter of 2013, and 2012, basically staying flat. Salaries and employee benefits and occupancy and equipment expense increased by $134 thousand and $53 thousand, respectively, to $1.4 million and $587 thousand, respectively, for the three months ended September 30, 2013, from $1.3 million and $534 thousand, respectively, for the three months ended


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September 30, 2012. These increases in salaries and employee benefits and occupancy and equipment expense were due in part to general increases in staff, salaries and benefits as well as occupancy costs associated with the new location in Woodcliff Lake. Offsetting these increases somewhat were decreases in other expenses and professional fees, down to $214 thousand and $83 thousand, respectively, for the three months ended September 30, 2013, from $335 thousand and $180 thousand for the three months ended September 30, 2012.

During the nine months ended September 30, 2013, non-interest expense reached approximately $7.9 million from approximately $7.2 million for the nine months ended September 30, 2012, an increase of $608 thousand, or 8.4%. The nine month increases were due in most part to increases in salaries and benefits and occupancy and equipment expenses of $366 thousand and $269 thousand, respectively. The increases in salaries and employee benefits and occupancy and equipment were primarily due to the opening of a branch, Cliffside Park, in March of 2012, which expenses were only partially recognized for the nine months ended September 30, 2012 but were fully recognized during the nine months ended September 30, 2013. Occupancy and equipment expense for the nine months ended September 30, 2013 also include occupancy costs for the new location in Woodcliff Lake.

Income Tax Expense

The income tax provision reached $807 thousand for the quarter ended September 30, 2013 as compared to $745 thousand for the quarter ended September 30, 2012, representing an increase of $62 thousand, or 8.3%. For the nine months ended September 30, 2013, income tax expense was $2.3 million as compared to $2.0 million for the nine months ended September 30, 2012, representing an increase of $296 thousand, or 14.9%. The increase in the income tax expense for both periods of 2013 as compared to 2012 was due to the increase in pretax income for both 2013 periods as compared to the 2012 periods. The effective tax rate for the three and nine month periods ended September 30, 2013, were 39.7% and 39.5%, respectively, compared to 39.5% and 39.5%, respectively, for the same periods in 2012.


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FINANCIAL CONDITION

Total consolidated assets increased $14.6 million, or approximately 2.6%, from $571.4 million at December 31, 2012 to $586.0 million at September 30, 2013. Total deposits increased from $515.7 million at December 31, 2012 to $528.2 million at September 30, 2013, an increase of $12.5 million, or approximately 2.4%. Loans receivable, or "total loans," increased from $435.7 million at December 31, 2012 to $474.2 million at September 30, 2013, an increase of $38.5 million, or approximately 8.8%.

Loans

Our loan portfolio is the primary component of our total assets. Total loans, which exclude net deferred fees and costs and the allowance for loan losses, increased by 8.8% to reach $474.2 million at September 30, 2013 from $435.7 million at December 31 2012. The growth in the loan portfolio was primarily in commercial real estate loans, which increased by $48.4 million, or 19.6%, offset somewhat by decreases in home equity loans and commercial loans of $5.3 million and $4.8 million, respectively. The decreases in home equity loans and commercial loans were due to loan pay downs and payoffs, some of which are attributable to refinancing of loans at other financial institutions. Residential mortgages and consumer loans basically stayed flat. 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 Consolidated Financial Statements in Part I, Item 1of this Quarterly Report on Form 10-Q.

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


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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 September 30, 2013 the Bank had twelve nonaccrual loans totaling approximately $5.7 million, of which seven loans totaling approximately $2.0 million had specific reserves of $322 thousand and five loans totaling approximately $3.7 million had no specific reserve. If interest had been accrued, such income would have been approximately $74 thousand and $248 thousand, respectively, for the three and nine month periods ended September 30, 2013 and $86 thousand and $260 thousand for the three and nine month periods ended September 30, 2012. Acutal interest income recognized on these loans during the three and nine months ended September 30, 2013 was $0. Actual interest income recognized on these loans during the three and nine months ended September 30, 2012, was $1 thousand and $9 thousand, respectively.

Within its nonaccrual loans at September 30, 2013, the Bank had four residential mortgage loans, one commercial real estate loan, and one home equity loan that met the definition of a troubled debt restructuring ("TDR"). TDRs are loans where the contractual terms of the loan have been modified to grant a concession to a borrower experiencing financial difficulties. These modifications could include a reduction in the interest rate of the loan, payment extensions, forgiveness of principal or other actions to maximize collection. At September 30, 2013, nonaccruing TDR loans had an outstanding balance of $4.0 million and had specific reserves of $50 thousand. None of these loans were performing in accordance with their modified terms.

During the nine months ended September 30, 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 three months ended September 30, 2013, the Bank had no new loans classified as TDRs. During the three and nine month periods ended September 30, 2012, the Bank had no new loans classified as TDRs.

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 September 30, 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 $54.4 million at September 30, 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 $47.3 million of securities along with the maturity or call of an additional $18.0 million, offset somewhat by the purchase of $34.0 million of securities during the nine months ended September 30, 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 $16.1 million to $21.6 million at September 30, 2013 from $5.5 million at December 31, 2012 as a result of securities purchased.


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Deposits

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