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CBNJ > SEC Filings for CBNJ > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for CAPE BANCORP, INC.

Form 10-Q for CAPE BANCORP, INC.


6-Aug-2014

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 (the "Bank").

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 fourteen full service branch offices located in Atlantic and Cape May Counties, New Jersey, including our main office located at 225 North Main Street, Cape May Court House, New Jersey 08210, one drive-up teller/ATM operation in Atlantic County and our two market development offices ("MDOs") located in Burlington County, New Jersey and in Radnor, Pennsylvania, which serves the five county Philadelphia market area. 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 ("HELOC") and construction loans. Effective December 31, 2013, the Company exited the residential mortgage loan origination business which will allow for more resources to be focused on commercial lending. Our retail and business banking deposit products include checking accounts, money market accounts, savings accounts, and certificates of deposit with terms ranging from 30 days to 84 months.

At June 30, 2014, the Company had total assets of $1.092 billion compared to $1.093 billion at December 31, 2013. For the three months ended June 30, 2014 and 2013, the Company had total revenues (interest income plus non-interest income) of $11.2 million and $11.7 million, respectively. Net income for the three months ended June 30, 2014 totaled $2.0 million or $0.19 per common and fully diluted share, compared to net income of $1.6 million, or $0.13 per common and fully diluted share, for the three months ended June 30, 2013. For the six months ended June 30, 2014 and 2013, the Company had total revenues (interest income plus non-interest income) of $24.6 million and $23.5 million, respectively. Net income for the six months ended June 30, 2014 totaled $4.1 million, or $0.37 per common and fully diluted share, compared to net income of $3.1 million, or $0.25 per common and fully diluted share, for the six months ended June 30, 2013.

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. Our business and results of operations are significantly affected by local and national economic conditions, as well as market interest rates. With the local and national economic conditions continuing to improve during 2013, and through the first half of 2014, the Bank experienced significant declines in its level of non-performing assets as well as making progress in improving its credit quality ratios. At June 30, 2014, non-performing loans as a percentage of total gross loans totaled 1.01% compared to 0.93% of total gross loans at December 31, 2013 and 1.90% of total gross loans at June 30, 2013. The Company's Adversely Classified Asset Ratio (Classified Assets/Tier I Capital plus the allowance for loan losses) at June 30, 2014 was 17%, an improvement from 26% at December 31, 2013 and 25% at June 30, 2013. Non-performing assets (non-performing loans, other real estate owned and non-accruing investment securities) as a percentage of total assets decreased to 1.12% at June 30, 2014 from 1.35% at December 31, 2013, and 2.09% at June 30, 2013. For the periods ended, and as of, June 30, 2014 and December 31, 2013, 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 gross loans increased to 1.24% at June 30, 2014, from 1.18% at December 31, 2013, while the ratio of our allowance for loan losses to non-performing loans decreased to 122.66% at June 30, 2014 from 127.05% at December 31, 2013. For the three months ended June 30, 2014, loan charge-offs and write-downs on loans transferred to held for sale totaled $172,000 compared to loan charge-offs of $344,000 for the three months ended June 30, 2013. Of the $172,000 of loan charge-offs during the second quarter of 2014, none of these were fully reserved for as of December 31, 2013. Our total loan portfolio decreased from $789.5 million at December 31, 2013 to $786.7 million at June 30, 2014 resulting from


decreases in residential mortgage loans totaling $7.5 million and in consumer loans totaling $506,000, partially offset by an increase of $4.5 million in commercial loans. Commercial loan closings totaling $54.3 million during the first six months of 2014 more than offset the transfer of $5.3 million of classified commercial loans to loans held for sale, charge-offs and write-downs of loans transferred to loans held for sale totaling $2.0 million, normal amortizations, and several large early payoffs (including the payoff of a $6.5 million classified loan relationship). The decline in residential mortgage loans reflects the effect of the Company exiting the residential mortgage loan origination business effective December 31, 2013. At June 30, 2014, 91.9% of our loan portfolio was secured by real estate and 62.4% of our portfolio was commercial related loans. We believe our existing loan underwriting practices are appropriate in the current market environment while continuing to address the local credit needs of our customers.

Total deposits increased $14.8 million from $798.4 million at December 31, 2013 to $813.2 million at June 30, 2014 primarily resulting from an increase of $19.5 million in certificates of deposit and an increase of $5.1 million in non-interest bearing checking accounts,, partially offset by decreases in interest-bearing checking accounts and money market deposit accounts of $2.6 million and $5.5 million, respectively. In addition, savings accounts decreased $1.7 million. We also maintain an investment portfolio.

Our principal business is acquiring deposits from individuals and businesses in the communities surrounding our offices and using these deposits to fund loans and other investments. We currently offer personal and business checking accounts, commercial mortgage loans, construction loans, home equity loans and lines of credit and other types of commercial loans.

2014 Outlook

Our market area has been affected by the recession and the modest recovery. Unemployment in Atlantic and Cape May County was 10.3% and 9.1%, respectively, as of May 2014, an improvement from 2013 levels of 12.7% and 11.7%, respectively. The number of residential building permits issued and values increased in Atlantic County from May 2013 to May 2014. In Cape May County, both the number of residential permits and the values decreased from May 2013 to May 2014. Median sale prices of single-family homes sold during the twelve month periods ended June 2014 and 2013 remained relatively flat in both Atlantic and Cape May Counties. The number of homes sold during those same periods increased 11.0% for Atlantic County, but decreased 2.0% for Cape May County. The number of new listings increased 17.7% in Atlantic County and 8.5% in Cape May County.

During 2013, and continuing through the second quarter of 2014, 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 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 on 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 work through the foreclosure process.

During the remainder of 2014, Cape Bank will continue to focus on the following initiatives:

- Core deposit gathering, both retail and commercial

- Continue building commercial loan relationships

- Continue efforts to effectively manage the Bank's capital

- Build core earnings

- Continue efforts to reduce non-performing assets

- Effectively utilize new core processors functionality with an emphasis on digital delivery

Core deposit gathering, both retail and commercial:

The Company recognizes the value associated with strong core deposits and has built company-wide incentive programs to achieve this initiative. Both retail and commercial deposits will be focused on through advertising, branch programs, commercial loan calling officers and digital media. Deposit products will be designed to attract new deposit customers and retain existing ones.


Continue building commercial loan relationships:

Cape Bank has had good success in building strong commercial loan relationships during the past several years. This has been the result of building a seasoned group of professional and knowledgeable staff combined with market driven products. The Company's expansion into Burlington County in 2010 and the Philadelphia metro market in 2013 has produced better than anticipated results. Efforts will be made to continue to attract quality commercial lending staff as well as maximizing the efforts of the existing staff, while remaining flexible with product structure to adapt to market conditions.

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 the level of capital and believed a continued active management of capital would be appropriate. The Company began paying a quarterly cash dividend in the fourth quarter of 2012 and increased that dividend from $.05 per share to $.06 per share in the fourth quarter of 2013. Additionally, during 2013, the Company completed two 5% stock buyback programs and announced a third 5% buyback program in December 2013. On January 20, 2014, the Company declared a $0.06 per common share cash dividend to shareholders of record on February 3, 2014. The dividend was paid on February 17, 2014. On April 28, 2014, the Company declared a $0.06 per common share cash dividend to shareholders of record on May 12, 2014. The dividend was paid on May 26, 2014. On July 21, 2014, the Company declared a $0.06 per share cash dividend to be paid on or about August18, 2014 to shareholders of record as of the close of business on August 8, 2014.

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 concerns have been receding as more institutions have gotten on sounder footing. As a result, valuations have begun to focus on earnings as a driver of value. In particular, core earnings are becoming an increasingly important metric.

Management recognizes this development and has made growth in core earnings an integral part of the 2014 Strategic Plan.

Continue efforts to reduce non-performing assets:

Management was able to reduce the level of non-performing assets during 2013 and through the second quarter of 2014 and believes that continued efforts to reduce them further will provide value to the shareholders. Several of the larger troubled credits have moved to OREO as the Bank attempts to move these properties promptly. This area will continue to receive attention during the remainder of 2014.

Effectively utilize new core processors functionality with an emphasis on digital delivery:

The Bank made a smooth transition to our new core processor, FISERV, in the fourth quarter of 2013. The Bank believes that customers are requiring access to, and communication from, their financial service providers through a multitude of both physical and electronic delivery channels. During the remainder of 2014, the Bank will continue to maximize its opportunities to provide products and services via multiple delivery channels offered through FISERV and other available sources.

Comparison of Financial Condition at June 30, 2014 and December 31, 2013

At June 30, 2014, the Company's total assets were $1.092 billion, a decrease of $1.2 million, or 0.11%, from the December 31, 2013 level of $1.093 billion.

Cash and cash equivalents increased $176,000, or 0.71%, to $25.0 million at June 30, 2014 from $24.9 million at December 31, 2013.

Interest-bearing time deposits increased $356,000, or 3.88%, from $9.2 million at December 31, 2013 to $9.5 million at June 30, 2014. 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 decreased to $786.0 million at June 30, 2014 from $789.5 million at December 31, 2013, a decrease of $3.5 million, or 0.44%. Net loans decreased $3.8 million, net of an increase in the allowance for loan losses of $400,000, resulting from decreases in residential mortgage loans totaling $7.5 million and a decline in consumer loans totaling $506,000, partially offset by a $4.5 million increase in commercial loans.. Commercial loan closings totaling $54.3 million during the first six months more than offset the transfer of $5.3 million of classified commercial loans to loans held for sale, charge-offs and write-downs of loans transferred to loans held for sale totaling $2.2 million, normal amortizations, and several large early payoffs, including the payoff of a $6.5 million classified loan relationship in the first quarter. The decline in residential mortgage loans reflects the effect of the Company exiting the residential mortgage loan origination business effective December 31, 2013. Delinquent loans increased $1.3 million to $11.1 million, or 1.42% of total gross loans, at June 30, 2014 from $9.8 million, or 1.24% of total gross loans at December 31, 2013. Total delinquent loans by portfolio at June 30, 2014 were $6.6 million of commercial mortgage and $303,000 commercial business loans, $3.0 million of residential mortgage loans and $1.2 million of home equity loans. At June 30, 2014, delinquent loan balances by number of days delinquent were: 31 to 59 days - $1.8 million; 60 to 89 days - $1.9 million; and 90 days and greater - $7.4 million.

At June 30, 2014, the Company had $7.9 million in non-performing loans, or 1.01% of total gross loans, an increase of $589,000 from $7.3 million, or 0.93% of total gross loans at December 31, 2013. Non-performing loans do not include loans held for sale. Loans held for sale include $825,000 of loans that are on non-accrual status. At June 30, 2014, non-performing loans by loan portfolio category were as follows: $6.1 million of commercial loans, $924,000 of residential mortgage loans, $303,000 of commercial business loans and $575,000 of consumer loans. Of these stated delinquencies, the Company had $490,000 of loans that were 90 days or more delinquent and still accruing (5 residential mortgage loans for $363,000 and 5 consumer loans for $127,000). These loans are well secured, in the process of collection and we anticipate no losses will be incurred.

At June 30, 2014, commercial non-performing loans had collateral type concentrations of $459,000 (2loan or 7%) secured by commercial buildings and equipment, $949,000 (6 loans or 15%) secured by residential related commercial loans, $1.0 million (3 loans or 15%) secured by restaurant properties, $759,000 (3 loans or 12%) secured by land and building lots, and $3.2 million (7 loans or 51%) secured by retail stores. The three largest commercial non-performing loan relationships are $1.8 million, $741,000 and $666,000.

We believe we have appropriately charged-off, written-down or established adequate loss reserves on problem loans that we have identified. For 2014, 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 increased $8.2 million, or 4.92%, to $174.5 million at June 30, 2014 from $166.3 million at December 31, 2013. At June 30, 2014, AFS securities totaled $156.7 million and HTM securities totaled $17.8 million. At December 31, 2013, AFS securities totaled $157.2 million and HTM securities totaled $9.1 million. Investment securities are classified as HTM when management has the positive intent and ability to hold them to maturity. In March 2014, the Bank reclassified $7.6 million of its AFS securities as HTM, as these securities may be particularly susceptible to changes in fair value in the near term, as a result of market volatility. On February 27, 2014, the Company sold its remaining portion of collateralized debt obligation securities ("CDOs") with a book value of zero, resulting in $1.9 million gain.

Other real estate owned ("OREO") decreased $3.1 million from $7.4 million at December 31, 2013 to $4.3 million at June 30, 2014, and consisted at June 30, 2014 of eight commercial properties and ten residential properties (including five building lots). During the quarter ended June 30, 2014, the Company added two residential properties to OREO with an aggregate carrying value of $58,000. In addition, three commercial OREO properties with an aggregate carrying value totaling $2.1 million were sold during the quarter ended June 30, 2014 with recognized net losses of $232,000. In addition, in the third quarter of 2014, to date, the Company has sold one residential OREO property with an aggregate carrying value of $41,000 resulting in a gain of $2,000 and has added one commercial property to OREO with a carrying value of $825,000. As of the date of this filing, the Company has agreements of sale for two OREO properties with an aggregate carrying value of $222,000.

Total deposits increased $14.8 million, or 1.86%, from $798.4 million at December 31, 2013 to $813.2 million at June 30, 2014 primarily resulting from increases in certificates of deposit of $19.5 million and non-interest bearing checking accounts of $5.1 million, partially offset by decreases in interest-bearing checking accounts of $2.6 million, money market deposit accounts of $5.5 million, and savings accounts of $1.7 million. At June 30, 2014, certificates of deposit totaled $288.7 million, an increase of $19.5 million, or 7.25%, from the December 31, 2013 total of $269.2 million. Interest-bearing checking accounts declined $2.6 million, or 1.21%, to $209.0 million at June 30, 2014 from $211.6 million at December 31, 2013. Money market accounts declined $5.5 million, or 3.95%, to $133.6 million at June 30, 2014 from $139.1 million at December 31, 2013.

Borrowings decreased $15.4 million from $143.9 million at December 31, 2013 to $128.5 million at June 30, 2014.


Cape Bancorp's total equity increased $253,000, or 0.18%, to $140.7 million at June 30, 2014 from $140.4 million at December 31, 2013 primarily resulting from a net increase of $2.6 million in retained earnings (earnings less dividends declared), an improvement of $1.6 million in the accumulated other comprehensive loss, and increases in paid-in-capital and unearned ESOP shares totaling $463,000. These increases were offset by a $4.4 million decrease related to the Company's stock repurchase program. Tangible equity to tangible assets increased to 11.02% at June 30, 2014 compared to 10.99% at December 31, 2013. At June 30, 2014, Cape Bank's regulatory capital ratios for Tier I Leverage Ratio, Tier I Risk-Based Capital and Total Risk-Based Capital were 9.49%, 13.01% and 14.26%, 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,
                                                      2014                                        2013
                                                     Interest                                    Interest
                                       Average        Income/       Average        Average        Income/       Average
                                       Balance        Expense        Yield         Balance        Expense        Yield
                                                                   (dollars in thousands)
Assets
Interest-earning deposits            $    24,491     $      24          0.39 %   $    24,000     $      25          0.42 %
Investments                              183,524           854          1.86 %       178,021           937          2.11 %
Loans                                    786,294         9,291          4.74 %       735,365         9,131          4.98 %
Total interest-earning assets            994,309        10,169          4.10 %       937,386        10,093          4.32 %
Noninterest-earning assets               104,889                                     108,358
Allowance for loan losses                 (9,755 )                                    (9,715 )
Total assets                         $ 1,089,443                                 $ 1,036,029

Liabilities and Stockholders' Equity
Interest-bearing demand accounts     $   212,779            96          0.18 %   $   200,878           115          0.23 %
Savings accounts                          95,023            13          0.05 %        97,309            16          0.07 %
Money market accounts                    133,474            73          0.22 %       162,513            66          0.16 %
Certificates of deposit                  277,392           476          0.69 %       234,356           590          1.01 %
Borrowings                               137,780           612          1.78 %        96,817           555          2.30 %
Total interest-bearing liabilities       856,448         1,270          0.59 %       791,873         1,342          0.68 %
Noninterest-bearing deposits              81,419                                      85,213
Other liabilities                          9,993                                       8,951
Total liabilities                        947,860                                     886,037
Stockholders' equity                     141,583                                     149,992
Total liabilities and stockholders'
equity                               $ 1,089,443                                 $ 1,036,029
Net interest income                                  $   8,899                                   $   8,751
Net interest spread                                                     3.51 %                                      3.64 %
Net interest margin                                                     3.59 %                                      3.74 %
Net interest income and margin
  (tax equivalent basis) (1)                         $   8,944          3.61 %                   $   8,818          3.77 %
Ratio of average interest-earning
assets to average
  interest-bearing liabilities            116.10 %                                    118.38 %

(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 $45,000 and $67,000 for the three month period ended June 30, 2014 and 2013, respectively. The average yield on investments increased to 1.96% from 1.86% for the three month period ended June 30, 2014 and increased to 2.25% from 2.11% for the three month period ended June 30, 2013.


                                                              For the six months ended June 30,
                                                      2014                                        2013
                                                     Interest                                    Interest
                                       Average        Income/       Average        Average        Income/       Average
                                       Balance        Expense        Yield         Balance        Expense        Yield
                                                                   (dollars in thousands)
Assets
Interest-earning deposits            $    23,611     $      47          0.40 %   $    24,815     $      54          0.44 %
Investments                              182,321         1,798          1.97 %       176,886         1,940          2.19 %
Loans                                    789,061        18,623          4.76 %       730,898        18,207          5.02 %
Total interest-earning assets            994,993        20,468          4.15 %       932,599        20,201          4.37 %
. . .
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