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BKJ > SEC Filings for BKJ > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for BANCORP OF NEW JERSEY, INC.

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


31-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and the notes thereto included in Part II, Item 8 of this report. When necessary, reclassifications have been made to prior years' data throughout the following discussion and analysis for purposes of comparability.

In addition to historical information, this discussion and analysis contains forward-looking statements. The forward-looking statements contained herein are subject to numerous assumptions, risks and uncertainties, all of which can change over time, and could cause actual results to differ materially from those projected in the forward-looking statements. We assume no duty to update forward-looking statements, except as may be required by applicable law or regulation. Important factors that might cause such a difference include, but are not limited to, those discussed in this section, and also include economic conditions, particularly those 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, as well as a variety of other matters, most, if not all of which, are beyond the Company's control. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of the report. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after such date, except as may be required by applicable law or regulation.

OVERVIEW AND STRATEGY

Our bank charter was approved in April 2006 and the Bank opened for business on May 10, 2006. On July 31, 2007, the Company became the bank holding company of the Bank. On June 3, 2008, the Company's common stock was listed on the American Stock Exchange, now NYSE MKT LLC. We currently operate an eight branch network and have received FDIC and NJDOBI approval to open our ninth location. Our main office is located at 1365 Palisade Avenue, Fort Lee, NJ 07024 and our current eight additional offices are located at 204 Main Street, Fort Lee, NJ 07024, 401 Hackensack Avenue, Hackensack, NJ 07601, 458 West Street, Fort Lee, NJ 07024, 320 Haworth Avenue, Haworth, NJ 07641, 4 Park Street, Harrington Park, NJ 07640, 104 Grand Avenue, Englewood, NJ 07631, 354 Palisade Avenue, Cliffside Park, NJ 07010, and585 Chestnut Ridge Road, Woodcliff Lake, NJ 07677. Our ninth location will be located at 750 East Palisade Avenue, Englewood Cliffs, NJ 07632 and is expected to open during 2014.

We conduct a traditional commercial banking business, accepting deposits from the general public, including individuals, businesses, non-profit organizations, and governmental units. We make commercial loans, consumer loans, and both residential and commercial real estate loans. In addition, we provide other customer services and make investments in securities, as permitted by law. We have sought to offer an alternative, community-oriented style of banking in an area, that is dominated by larger, statewide and national financial institutions. Our focus remains on establishing and retaining customer relationships by offering a broad range of traditional financial services and products, competitively-priced and delivered in a responsive manner to small businesses, professionals and individuals in the local market. As a locally operated community bank, we believe we provide superior customer service that is highly personalized, efficient and responsive to local needs. To better serve our customers and expand our market reach, we provide for the delivery of certain financial products and services to local customers and a broader market through the use of mail, telephone, internet, and electronic banking. We endeavor to deliver these products and services with the care and professionalism expected of a community bank and with a special dedication to personalized customer service.

Our specific objectives are:

To provide local businesses, professionals, and individuals with banking services responsive to and determined by the local market;

Direct access to Bank management by members of the community, whether during or after business hours;

To attract deposits and loans by competitive pricing; and


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To provide a reasonable return to shareholders on capital invested.

Critical Accounting Policies and Judgments

Our financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements included in Item 8 of this report. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect our reported results and financial position for the period or future periods. Financial assets and liabilities required to be recorded at, or adjusted to reflect, fair value require the use of estimates, assumptions, and judgments. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our financial condition and results of operations.

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 specific reserves are established; (2) classified loans for which the general valuation allowance for the respective loan type is deemed to be inadequate; and
(3) performing loans for which a general valuation allowance is established. We maintain a loan review system which provides for a systematic review of the loan portfolios and the 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. Specific reserves are established for impaired loans based on a review of such information and/or appraisals of the underlying collateral. General reserves 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 reserves 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 maintain the allowance for loan losses at an adequate level. 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 additional provisions for loan losses. Any provision reduces our net income. While the allowance is increased by the provision for loan losses, it is decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. A change in economic conditions could adversely affect the value of properties collateralizing real estate loans, resulting in increased charges against the allowance and reduced recoveries, and require additional provisions for loan losses. Furthermore, growth or a change in the composition of our loan portfolio could require additional provisions for loan losses.

At December 31, 2013 and 2012, respectively, we consider the ALLL of $5.8 million and $5.1 million adequate to absorb probable losses inherent in the loan portfolio. For further discussion, see "Provision for Loan Losses", "Loan Portfolio", "Loan Quality", and "Allowance for Loan Losses" sections below in this discussion and analysis, as well as Note 1-Summary of Significant Accounting Policies and Note 3-Loans and Allowance for Loan Losses in the Notes to Financial Statements included in Part II, Item 8 of this annual report.

Deferred Tax Assets

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


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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.

Impairment of Assets

Loans are considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to contractual terms of the loan agreement. The collection of all amounts due according to contractual terms means both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral-dependent. The fair value of collateral, which is discounted from the appraised value to estimate the selling price and costs, is used if a loan is collateral-dependent. At December 31, 2013 and 2012, the bank had eighteen and sixteen impaired loans, respectively. All of these loans have been measured for impairment using various measurement methods, including fair value of collateral.

Periodically, we may need to assess whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. In any such instance, we would consider many factors including the severity and duration of the impairment, our intent to sell a debt security prior to recovery and/or whether it is more likely than not we will have to sell the debt security prior to recovery. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains (losses). Unrealized losses at December 31, 2013 consisted of losses on twenty five investments in government sponsored enterprise obligations, and three in U. S. Treasury Securities, which were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2013. Nine of the investments with unrealized losses at December 31, 2013 were in a loss position for more than twelve months. At December 31, 2013 and 2012, respectively, we did not have any other-than-temporarily impaired securities.


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RESULTS OF OPERATIONS - 2013 versus 2012

Our results of operations depend primarily on our net interest income, which is the difference between the interest earned on our interest-earning assets and the interest paid on interest-bearing liabilities, primarily deposits, which support our assets. Net interest margin is net interest income expressed as a percentage of average interest earning assets. Net income is also affected by the amount of non-interest income and non-interest expense, the provision for loan losses and income tax expense.

NET INCOME

For the year ended December 31, 2013, net income increased by $454 thousand, to $4.7 million from $4.2 million for the year ended December 31, 2012. The increase in net income for the year ended December 31, 2013 compared to 2012 was driven by an increase in our net interest income. The increase in net interest income is reflective of the growth in interest-earning assets as well as management's focus on disciplined pricing of the deposit portfolio. The increase in net interest income more than offset the increases in non-interest expenses and income tax expense.

On a per share basis, basic and diluted earnings per share for the year ended December 31, 2013 were $0.88 and $0.87, respectively, as compared to basic and diluted earnings per share of $0.81 for the year ended December 31, 2012.

Analysis of 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 average volumes of interest-earning assets and interest bearing liabilities and the yield earned or the interest paid on them. For the year ended December 31, 2013, net interest income increased by $1.4 million, or 7.8%, to $18.7 million from $17.3 million for the year ended December 31, 2012. This increase in net interest income was primarily the result of an increase in average loans of $59.6 million, or 14.9%, during 2013, as compared to 2012, as well as a decrease in the cost of interest bearing liabilities, which decreased by 14 basis points for 2013.

Average Balance Sheets

The following table sets forth certain information relating to our average assets and liabilities for the years ended December 31, 2013, 2012 and 2011, and reflect the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense, on a tax-equivalent basis, by the average balance of assets or liabilities, respectively, for the periods shown. The taxable equivalent adjustment for 2013, 2012, and 2011 was $16, $6, and $3 thousand, respectively. Securities available for sale are reflected in the following table at amortized cost. Nonaccrual loans are included in the average loan balance. Amounts have been computed on a fully tax-equivalent basis, assuming a blended tax rate of 40% in 2013, 2012 and 2011.


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For the years ended December 31,

(dollars in thousands)

                                           2013                                   2012                                   2011
                             Average                 Average        Average                 Average        Average                 Average
                             Balance    Interest    Yield/Cost      Balance    Interest    Yield/Cost      Balance    Interest    Yield/Cost
ASSETS:
Interest-Earning Assets:
Loans                       $ 460,492      23,635         5.13 %   $ 400,854   $  21,566         5.38 %   $ 337,932   $  18,903         5.59 %
Securities                     78,040       1,099         1.41        82,524       1,788         2.17        42,600         912         2.14
Federal Funds Sold              2,061           9         0.44         2,673           8         0.30         2,260           6         0.27
Interest-earning cash
accounts                       33,378          70         0.21        30,251          66         0.22        20,483          43         0.21
Total interest-earning
Assets                        573,971      24,813         4.32 %     516,302      23,428         4.54 %     403,275      19,864         4.93 %
Non-interest earning
Assets                         17,332                                 16,389                                 16,706
Allowance for Loan Losses      (5,423 )                               (4,889 )                               (4,421 )
                            $ 585,880                              $ 527,802                              $ 415,560

LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-Bearing
Liabilities:
Demand Deposits             $  23,538   $      52         0.22 %   $  16,158   $      38         0.24 %   $   9,741   $      27         0.28 %
Savings Deposits               15,617         104         0.67         8,259          41         0.50         7,011          29         0.41
Money Market Deposits         112,406         640         0.57        87,252         442         0.51        53,885         173         0.32
Time Deposits                 309,349       5,303         1.71       303,128       5,554         1.83       248,529       4,513         1.82
Short Term Borrowings               1           -            -             3           -            -           222           3         1.35
Total Interest Bearing
Liabilities                   460,911       6,099         1.32 %     414,800       6,075         1.46 %     319,388       4,745         1.49 %
Non-Interest Bearing
Liabilities:
Demand Deposits                67,562                                 57,355                                 42,274
Other Liabilities               2,451                                  2,117                                  2,332
Total Non-Interest
Bearing Liabilities            70,013                                 59,472                                 44,606
Stockholders' Equity           54,956                                 53,530                                 51,566
LIABILITIES AND
STOCKHOLDERS' EQUITY:       $ 585,880                              $ 527,802                              $ 415,560

Net Interest Income
(Tax Equivalent Basis)                  $  18,714                              $  17,353                              $  15,119
Tax Equivalent Basis
adjustment                                    (16 )                                   (6 )                                   (3 )
Net Interest Income                     $  18,698                              $  17,347                              $  15,116
Net Interest Rate Spread                                  3.00 %                                 3.08 %                                 3.44 %
Net Interest Margin                                       3.26 %                                 3.36 %                                 3.75 %
Ratio of Interest-Earning
Assets to
Interest-Bearing
Liabilities                      1.25                                   1.24                                   1.26


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Rate/Volume Analysis



The following table presents, by category, the major factors that contributed to
the changes in net interest income on a tax equivalent basis for the years ended
December 31, 2013 and 2012, respectively (in thousands):



                              Year ended December 31,                              Year ended December 31,
                              2013 compared with 2012                              2012 compared with 2011
                                 Increase (Decrease)                                  Increase (Decrease)
                               Due to Change in Average                             Due to Change in Average
                   Volume                Rate                Net       Volume                 Rate                Net
Interest
income:
Loans             $   3,009   $                     (940 ) $ 2,069   $    3,336    $                     (673 ) $  2,663
Securities              (92 )                       (607 )    (699 )        860                            13        873
Federal funds
sold                     (1 )                          2         1            1                             1          2
Interest
bearing
deposits in
banks                     7                           (3 )       4           21                             2         23
Total interest
income                2,923                       (1,548 )   1,375        4,218                          (657 )    3,561

Interest
expense:
Demand deposits          17                           (3 )      14           14                            (3 )       11
Savings
deposits                 46                           17        63            5                             7         12
Money market
deposits                141                           57       198          137                           132        269
Time deposits           114                         (365 )    (251 )      1,016                            25      1,041
Short-term
borrowings                -                                      -           (3 )                           -         (3 )
Total interest
expense                 318                         (294 )      24        1,169                           161      1,330
Change in net
interest income
                  $   2,605   $                   (1,254 ) $ 1,351   $    3,049    $                     (818 ) $  2,231

PROVISION FOR LOAN LOSSES

The provision for loan losses represents our determination of the amount necessary to bring our allowance for loan losses to the level that we consider adequate to absorb probable losses inherent in our loan portfolio. See "Allowance for Loan Losses" for additional information about our allowance for loan losses and our methodology for determining the amount of the allowance. For the year ended December 31, 2013, the Company's provision for loan losses was $810 thousand, a decrease of $388 thousand from the provision of $1.2 million for the year ended December 31, 2012. The overall credit quality of the loan portfolio and the stabilization of nonperforming loans is reflected in the provision decreasing for 2013 as compared to 2012.

NON-INTEREST INCOME

Non-interest income which consists primarily of service fees received from deposit accounts and gains on the sales of securities for the year ended December 31, 2013, was $379 thousand, a decrease of $36 thousand from the $415 thousand received during the year ended December 31, 2012. The decrease in non-interest income was primarily due to a $48 thousand decrease in gains on the sales of securities to $195 thousand in 2013 from of $243 thousand in 2012.

NON-INTEREST EXPENSES

Non-interest expenses for the year ended December 31, 2013 amounted to $10.6 million, an increase of $941 thousand, or 9.8% over the $9.6 million for the year ended December 31, 2012. This increase was due in most part to increases in salaries and employee benefits and occupancy and equipment expense of $524 thousand and $386 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, with 2013 reflecting a full year of additional expenses. Occupancy and equipment expense for the year ended December 31, 2013 also include occupancy costs for the new location in Woodcliff Lake.


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INCOME TAX EXPENSE

The income tax provision, which includes both federal and state taxes, for the years ended December 31, 2013 and 2012 was $3.1 million and $2.7 million, respectively. The increase in income tax expense during 2013 resulted from the increased pre-tax income in 2013. The effective tax rate for 2013 was 39.6% compared to 39.5% for 2012.


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FINANCIAL CONDITION

Total consolidated assets increased $39.4 million, or 6.9%, from $571.4 million at December 31, 2012 to $610.8 million at December 31, 2013. Total loans increased from $435.7 million at December 31, 2012 to $472.5 million at December 31, 2013, an increase of $36.7 million or 8.4%. Total deposits increased from $515.7 million on December 31, 2012 to $553.3 million at December 31, 2013, an increase of $37.6 million, or 7.3%.

LOANS

Our loan portfolio is the primary component of our assets. Total loans, excluding net deferred fees and costs and the allowance for loan losses, increased by 8.4% from $435.7 million at December 31, 2012, to $472.5 million at December 31, 2013. 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 future consolidation of banking institutions within our market, which we expect to see as a result of increased regulatory standards, market pressures, and the overall economy. We believe that it is not cost-efficient for large institutions, many of which are headquartered out of state, to provide the level of personal service to small business borrowers that these customers seek and that we intend to provide.

Our loan portfolio consists of commercial loans, 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 including 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. . . .

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