CBNJ Cape Bancorp, Inc.

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

 

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☒	Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2014

 

OR

 

☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                      to                     

 

Commission File No. 001-33934

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Cape Bancorp, Inc.

(Exact name of registrant as specified in its charter)

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Maryland	26-1294270
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
225 North Main Street, Cape May Court House, New Jersey	08210
(Address of Principal Executive Offices)	Zip Code

 

(609) 465-5600

(Registrant’s telephone number)

 

N/A

(Former name or former address, if changed since last report)

 

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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.    YES  ☒    NO  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐  (Do not check if smaller reporting company)		Smaller reporting company		☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

 

As of November 4, 2014 there were 11,475,396 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

 

 

CAPE BANCORP, INC.

FORM 10-Q

 

Index

 

		Page
Part I. Financial Information
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and September 30, 2013 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and September 30, 2013 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the Year Ended December 31, 2013 and Nine Months Ended September 30, 2014 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and September 30, 2013 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	53
Part II. Other Information
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	55
	Signature Page	56

 

 

Item 1. Financial Statements

 

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS 

(unaudited)

 

		September 30,				December 31,
		2014				2013
		(in thousands)
ASSETS
Cash & due from financial institutions		$	6,915			$	6,940
Interest-bearing bank balances			11,618				17,921
Cash and cash equivalents			18,533				24,861
Interest-bearing time deposits			9,540				9,185
Investment securities available for sale, at fair value (amortized cost of $159,439 and $161,907 respectively)			157,290				157,166
Investment securities held to maturity, at amortized cost (fair value of $17,538 and $8,906, respectively)			17,796				9,102
Loans held for sale			-				1,814
Loans, net of allowance of $9,799 and $9,330, respectively			772,397				780,127
Accrued interest receivable			3,297				3,235
Premises and equipment, net			19,812				20,024
Other real estate owned			5,299				7,449
Federal Home Loan Bank (FHLB) stock, at cost			6,873				7,747
Deferred income taxes			14,957				15,628
Bank owned life insurance (BOLI)			31,080				31,177
Goodwill			22,575				22,575
Intangible assets, net			343				298
Other assets			1,945				2,491
Total assets		$	1,081,737			$	1,092,879
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Interest-bearing deposits		$	710,045			$	715,934
Noninterest-bearing deposits			90,821				82,488
Federal funds purchased and repurchase agreements			9,952				9,940
Federal Home Loan Bank borrowings			122,133				133,995
Advances from borrowers for taxes and insurance			792				768
Accrued interest payable			123				102
Other liabilities			8,007				9,225
Total liabilities			941,873				952,452
Stockholders' Equity
Common stock, $.01 par value: authorized 100,000,000 shares; issued 13,344,776 shares at September 30, 2014 and December 31, 2013; outstanding 11,475,396 shares at September 30, 2014 and 12,059,785 shares at December 31, 2013			133				133
Additional paid-in capital			128,525				128,193
Treasury stock at cost: 1,869,380 shares at September 30, 2014 and 1,284,991 shares at December 31, 2013			(18,077	)			(12,035	)
Unearned ESOP shares			(7,783	)			(8,102	)
Accumulated other comprehensive loss, net			(1,759	)			(2,951	)
Retained earnings			38,825				35,189
Total stockholders' equity			139,864				140,427
Total liabilities & stockholders' equity		$	1,081,737			$	1,092,879

 

See accompanying notes to unaudited consolidated financial statements.

 

 

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2014				2013				2014				2013
		(dollars in thousands, except share data)
Interest income:
Interest on loans		$	9,241			$	9,284			$	27,864			$	27,491
Interest and dividends on investments
Taxable			403				414				1,207				1,220
Tax-exempt			94				122				272				395
Interest on mortgage-backed securities			410				469				1,273				1,384
Total interest income			10,148				10,289				30,616				30,490
Interest expense:
Interest on deposits			734				713				1,996				2,339
Interest on borrowings			625				561				1,835				1,726
Total interest expense			1,359				1,274				3,831				4,065
Net interest income before provision for loan losses			8,789				9,015				26,785				26,425
Provision for loan losses			153				449				2,480				1,059
Net interest income after provision for loan losses			8,636				8,566				24,305				25,366
Non-interest income:
Service fees			760				962				2,140				2,753
Net gains on sale of loans			179				346				424				929
Net increase from BOLI			222				240				665				713
Gain (loss) on sale of investment securities available for sale, net			133				-				2,100				290
Net gain (loss) on sale of OREO			(34	)			17				(274	)			57
Other			61				658				397				779
Total non-interest income			1,321				2,223				5,452				5,521
Non-interest expense:
Salaries and employee benefits			3,635				3,880				10,622				11,909
Occupancy expenses, net			487				437				1,446				1,278
Equipment expenses			267				289				750				849
Federal insurance premiums			176				215				592				735
Data processing			209				372				785				1,084
Loan related expenses			331				446				809				1,180
Advertising			188				121				637				467
Telecommunications			291				276				858				920
Professional services			538				182				930				561
OREO expenses			195				403				611				882
Other operating			888				902				2,403				2,686
Total non-interest expense			7,205				7,523				20,443				22,551
Income before income taxes			2,752				3,266				9,314				8,336
Income tax expense			1,049				1,362				3,551				3,337
Net income		$	1,703			$	1,904			$	5,763			$	4,999
Earnings per share (see Note 10):
Basic		$	0.16			$	0.16			$	0.53			$	0.41
Diluted		$	0.15			$	0.16			$	0.52			$	0.41
Weighted average number of shares outstanding:
Basic			10,765,209				11,612,431				10,957,768				12,128,458
Diluted			10,889,781				11,666,535				11,089,421				12,182,683

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

		For the three months ended September 30,
		2014												2013
		Before Tax Amount				Tax Expense (Benefit)				Net of Tax Amount				Before Tax Amount				Tax Expense (Benefit)				Net of Tax Amount
		(in thousands)
Net income		$	2,752			$	1,049			$	1,703			$	3,266			$	1,362			$	1,904
Other comprehensive income:
Unrealized holding gains (losses) arising during the period on AFS securities			(466	)			(187	)			(279	)			(117	)			(47	)			(70	)
Amortization of previously unrealized loss on AFS securities transferred to HTM			29				12				17				-				-				-
Less reclassification adjustment for (gain) loss on sales of securities realized in net income			(133	)			(53	)			(80	)			-				-				-
Unrealized holding gains (losses) arising during the period on interest rate swap			(85	)			(34	)			(51	)			-				-				-
Total other comprehensive income (loss)			(655	)			(262	)			(393	)			(117	)			(47	)			(70	)
Total comprehensive income		$	2,097			$	787			$	1,310			$	3,149			$	1,315			$	1,834

 

		For the nine months ended September 30,
		2014												2013
		Before Tax Amount				Tax Expense (Benefit)				Net of Tax Amount				Before Tax Amount				Tax Expense (Benefit)				Net of Tax Amount
		(in thousands)
Net income		$	9,314			$	3,551			$	5,763			$	8,336			$	3,337			$	4,999
Other comprehensive income:
Unrealized holding gains (losses) arising during the period on AFS securities			2,425				969				1,456				(4,717	)			(1,884	)			(2,833	)
Increase in fair value of AFS securities sold			1,889				754				1,135				-				-				-
Amortization of previously unrealized loss on AFS securities transferred to HTM			135				54				81				-				-				-
Less reclassification adjustment for (gain) loss on sales of securities realized in net income			(2,100	)			(839	)			(1,261	)			(290	)			(116	)			(174	)
Unrealized holding gains (losses) arising during the period on interest rate swap			(364	)			(145	)			(219	)			-				-				-
Total other comprehensive income (loss)			1,985				793				1,192				(5,007	)			(2,000	)			(3,007	)
Total comprehensive income		$	11,299			$	4,344			$	6,955			$	3,329			$	1,337			$	1,992

 

See accompanying notes to unaudited consolidated financial statements.

 

 

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Year ended December 31, 2013 and nine months ended September 30, 2014

(unaudited)

 

																		Accumulated
														Unearned				Other								Total
		Common				Paid-In				Treasury				ESOP				Comprehensive				Retained				Stockholders'
		Stock				Capital				Stock				Shares				Income (Loss)				Earnings				Equity
		(in thousands)
Balance, December 31, 2012		$	133			$	127,767			$	-			$	(8,528	)		$	(679	)		$	32,133			$	150,826
Net income			-				-				-				-				-				5,551				5,551
Other comprehensive loss			-				-				-				-				(2,272	)			-				(2,272	)
Stock option compensation expense			-				444				-				-				-				-				444
Restricted stock compensation expense			-				17				-				-				-				-				17
Issuance of stock for stock options			-				33				113				-				-				-				146
Issuance of restricted stock			-				(38	)			38				-				-				-				-
Cash dividends declared on common stock ($0.21 per share)			-				-				-				-				-				(2,495	)			(2,495	)
Common stock repurchased -1,301,116 shares			-				-				(12,186	)			-				-				-				(12,186	)
ESOP shares earned			-				(30	)			-				426				-				-				396
Balance, December 31, 2013			133				128,193				(12,035	)			(8,102	)			(2,951	)			35,189				140,427
Net income			-				-				-				-				-				5,763				5,763
Other comprehensive income (loss)			-				-				-				-				1,192				-				1,192
Stock option compensation expense			-				343				-				-				-				-				343
Restricted stock compensation expense			-				16				-				-				-				-				16
Issuance of stock for stock options			-				(42	)			173				-				-				-				131
Cash dividends declared on common stock ($0.18 per share)			-				-				-				-				-				(2,127	)			(2,127	)
Common stock repurchased - 602,389 shares			-				-				(6,215	)			-				-				-				(6,215	)
ESOP shares earned			-				15				-				319				-				-				334
Balance, September 30, 2014		$	133			$	128,525			$	(18,077	)		$	(7,783	)		$	(1,759	)		$	38,825			$	139,864

 

See accompanying notes to unaudited consolidated financial statements.

 

 

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		For the nine months ended September 30,
		2014				2013
		(in thousands)
Cash flows from operating activities
Net income		$	5,763			$	4,999
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			2,480				1,059
Net (gain) loss on the sale of loans			(424	)			(929	)
Net (gain) loss on the sale of assets held for sale			-				(569	)
Net (gain) loss on the sale of other real estate owned			274				(57	)
Write-down of other real estate owned			121				445
Net (gain) loss on sale of investments			(2,100	)			(290	)
Earnings on BOLI			(665	)			(713	)
Originations of loans held for sale			-				(33,874	)
Proceeds from sales of loans			2,241				41,059
Depreciation and amortization			1,835				2,044
ESOP and stock-based compensation expense			690				641
Deferred income taxes			(10	)			1,314
Changes in assets and liabilities that (used) provided cash:
Accrued interest receivable			(62	)			(2	)
Other assets			323				5,019
Accrued interest payable			20				(32	)
Other liabilities			(1,352	)			(1,824	)
Net cash (used in) provided by operating activities			9,134				18,290
Cash flows from investing activities
Proceeds from sales of AFS securities			8,036				13,140
Proceeds from calls, maturities, and principal repayments of AFS securities			20,425				34,009
Purchases of AFS securities			(31,788	)			(47,980	)
Purchases of HTM securities			(1,177	)			-
Redemption (Purchase) of Federal Home Loan Bank stock			874				(2	)
Proceeds from sale of assets held for sale			-				842
Proceeds from sale of other real estate owned			3,201				4,907
Proceeds from bank owned life insurance			761				-
(Increase) decrease in interest-bearing time deposits			(355	)			(402	)
(Increase) decrease in loans, net			(1,942	)			(55,580	)
Proceeds from sales of loans transferred from loans to loans held for sale			5,323				-
Purchases of premises and equipment			(477	)			(464	)
Net cash (used in) provided by investing activities			2,881				(51,530	)
Cash flows from financing activities
Net increase in deposits			2,444				43,805
Increase in advances from borrowers for taxes and insurance			24				(543	)
Repayments of long-term borrowings			-				(15,000	)
Increase (decrease) in short-term borrowings			(23,600	)			16,200
Increase (decrease) in long-term borrowings			11,000				-
Purchase of Treasury stock			(6,215	)			(11,031	)
Proceeds from exercise of shares from stock option			131				58
Dividends paid on common stock			(2,127	)			(1,951	)
Net cash provided by (used in) financing activities			(18,343	)			31,538
Net increase (decrease) in cash and cash equivalents			(6,328	)			(1,702	)
Cash and cash equivalents at beginning of year			24,861				24,228
Cash and cash equivalents at end of quarter		$	18,533			$	22,526
Supplementary disclosure of cash flow information:
Cash paid during period for:
Interest		$	2,450			$	4,097
Income taxes, net of refunds		$	-			$	(1,668	)
Supplementary disclosure of non-cash investing activities:
AFS investment security purchase commitments that settled during the period		$	(4,189	)		$	-
Transfers between loans and loans held for sale, net		$	4,550			$	-
Transfers from loans to other real estate owned		$	1,746			$	5,156
Transfers from AFS to HTM securities		$	-			$	10,148

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

Notes to Consolidated Financial Statements (Unaudited) 

 

 

NOTE 1 – ORGANIZATION

 

Cape Bancorp, Inc. (the “Company”) is a Maryland corporation that was incorporated on September 14, 2007 for the purpose of becoming the holding company of Cape Bank.

 

Cape Bank (the “Bank”) is a New Jersey-chartered stock savings bank. The Bank provides a complete line of business and personal banking products through its fourteen full service offices located throughout Atlantic and Cape May counties in Southern New Jersey, including its main office located at 225 North Main Street, Cape May Court House, New Jersey, one drive-up teller/ATM operation in Atlantic County, and two market development offices (“MDOs”) located in Burlington County, New Jersey and in Radnor, Pennsylvania, which services the five county Philadelphia market area.

 

The Bank faces significant competition in attracting deposits and originating loans. Our most direct competition for deposits historically has come from the many financial institutions operating in our market area, including commercial banks, savings banks, savings and loan associations and credit unions, and, to a lesser extent, from other financial service companies, such as brokerage firms and insurance companies. The Bank is subject to regulations of certain state and federal agencies, and accordingly, the Bank is periodically examined by such regulatory authorities. As a consequence of the regulation of commercial banking activities, the Bank’s business is particularly susceptible to future state and federal legislation and regulations.

 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Financial Statement Presentation: The accounting and reporting policies of the Bank conform to accounting principles generally accepted in the United States of America (“US GAAP” or “GAAP”).

 

We have prepared the consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). We have condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereto included in our latest Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

 

The consolidated financial statements include the accounts of Cape Bancorp, Inc. and its subsidiaries, all of which are wholly-owned. Significant intercompany balances and transactions have been eliminated. Certain prior period amounts may have been reclassified to conform to current year presentations. The consolidated financial statements, as of and for the periods ended September 30, 2014 and 2013, have not been audited by the Company’s independent registered public accounting firm. In the opinion of management, all accounting entries and adjustments, including normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations for the periods presented have been made. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements through the date of the filing of the consolidated financial statements with the SEC.

 

Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, deferred taxes, evaluation of investment securities for other-than-temporary impairment and fair values of financial instruments are particularly subject to change.

 

Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, overnight deposits, federal funds sold and interest-bearing bank balances. The Federal Reserve Bank required reserves of $760,000 as of September 30, 2014, and $732,000 as of December 31, 2013 are included in these balances.

 

Interest-Bearing Time Deposits: Interest-bearing time deposits are held to maturity, are carried at cost and have original maturities greater than three months.

 

Investment Securities: The Bank classifies investment securities as either available-for-sale (“AFS”) or held-to-maturity (“HTM”). Investment securities classified as AFS are carried at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of equity, net of related income tax effects. Investment securities classified as HTM are carried at cost, adjusted for amortization of premium and accretion of discount over the term of the related investments, using the level yield method. 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 a portion of the 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. Gains and losses on sales of investment securities are recognized upon realization utilizing the specific identification method.

 

 

When the fair value of a debt security has declined below the amortized cost at the measurement date, if an entity intends to sell a security or is more likely than not to sell the security before the recovery of the security’s cost basis, the entity must recognize the other-than-temporary impairment (OTTI) in earnings. For a debt security with a fair value below the amortized cost at the measurement date where it is more likely than not that an entity will not sell the security before the recovery of its cost basis, but an entity does not expect to recover the entire cost basis of the security, the security is classified as OTTI. The related OTTI loss on the debt security will be recognized in earnings to the extent of the credit losses, with the remaining impairment loss recognized in accumulated other comprehensive income. In estimating OTTI losses, management considers: the length of time and extent that fair value of the security has been less than the cost of the security, the financial condition and near term prospects of the issuer, cash flow, stress testing analysis on securities, when applicable, and the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

 

Loans Held for Sale (“HFS”): HFS consists of residential mortgage loans originated and intended for sale in the secondary market and, from time to time, certain loans transferred from the loan portfolio to HFS, all of which are carried at the lower of aggregate cost or fair market value. The fair value of residential mortgage loans is based on the price secondary markets are currently offering for similar loans using observable market data. The fair values of loans transferred from the loan portfolio to HFS are based on the amounts offered for these loans in currently pending sales transactions or as determined by outstanding commitments from investors. Write-downs on loans transferred to HFS are charged to the allowance for loan losses. Subsequent declines in fair value, if any, are charged to operating income and the HFS balance is reduced. Gains and losses on sales of loans are based on the difference between the selling price and the carrying value of the related loans sold. At September 30, 2014, there were no residential mortgages classified as HFS as the Bank exited the residential mortgage loan origination business effective December 31, 2013.

 

Loans and Allowance for Loan Losses: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, net of unearned interest, deferred loan fees and costs, and reduced by an allowance for loan losses. Interest on loans is accrued and credited to operations based upon the principal amounts outstanding. Loan origination fees and certain direct origination costs are deferred and amortized over the life of the related loans as an adjustment to the yield on loans receivable in a manner which approximates the interest method. The allowance for loan losses is established through a provision for loan losses charged to operations. The allowance for loan losses is comprised of both loan pool valuation allowances and individual valuation allowances. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely.

 

Recognition of interest income is discontinued when, in the opinion of management, the collectability of the loan becomes doubtful. A commercial loan is classified as non-accrual when the loan is 90 days or more delinquent, or when in the opinion of management, the collectability of such loan is in doubt. Consumer and residential loans are classified as non-accrual when the loan is 90 days or more delinquent with a loan to value ratio greater than 60 percent.

 

All interest accrued, but not received, for loans placed on non-accrual, is reversed against interest income. Interest received on such loans is accounted for as a reduction of the principal balance until qualifying for return to accrual. Commercial loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Payments are generally applied to reduce the principal balance but, in certain situations, the application of payments may vary. Consumer and residential loans are returned to accrual status when their delinquency becomes less than 90 days and/or the loan to value ratio is less than 60 percent.

 

The allowance for loan losses is maintained at an amount management deems appropriate to cover probable incurred losses. In determining the level to be maintained, management evaluates many factors including historical loss experience, the borrowers’ ability to repay and repayment performance, current economic trends, estimated collateral values, industry experience, industry loan concentrations, changes in loan policies and procedures, changes in loan volume, delinquency and troubled asset trends, loan management and personnel, internal and external loan review, total credit exposure of the individual or entity, and external factors including competition, legal, regulatory and seasonal factors. In the opinion of management, the allowance is appropriate to absorb probable loan losses. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for losses on loans. Such agencies may require the Bank to recognize additions to the allowance based on their judgment about information available to them at the time of their examination. Charge-offs to the allowance are made when the loan is transferred to other real estate owned or a determination of loss is made.

 

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Included in the Company’s loan portfolio are modified loans. Per the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), Topic 310-40, “Troubled Debt Restructurings by Creditors” (“FASB ASC 310-40”), a loan restructuring is one in which the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that the creditor would not otherwise consider, such as providing for a below market interest rate and/or forgiving principal or previously accrued interest. This restructuring may stem from an agreement or may be imposed by law, and may involve a multiple note structure. Prior to the restructuring, if the loans which are modified as a troubled debt restructuring (“TDR”) are already classified as non-accrual, these loans may only be returned to performing (i.e. accrual status) after considering the borrower’s sustained repayment performance for a reasonable amount of time, generally six months. This sustained repayment performance may include the period of time just prior to the restructuring. At September 30, 2014, TDRs totaled $5.7 million, of which $4.8 million were accruing TDRs and $917,000 were non-accruing TDRs. This compares to $4.3 million of TDRs at December 31, 2013, of which $3.4 million were accruing TDRs and $881,000 were non-accruing TDRs. (See Note 4 – Loans Receivable).

 

 

In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on collateral. The following portfolio classes have been identified:

 

Commercial Secured by Real Estate: Commercial real estate properties primarily include office and medical buildings, retail space, restaurants, multifamily and warehouse or flex space. Some properties are considered “mixed use” as they are a combination of building types, such as an apartment building that may also have retail space. Multifamily loans are expected to be repaid from the cash flow of the underlying property so the collective amount of rents must be sufficient to cover all operating expenses, property management and maintenance, taxes and debt service. Increases in vacancy rates, interest rates or other changes in general economic conditions can all have an impact on the borrower and their ability to repay the loan. Commercial real estate loans are generally considered to have a higher degree of credit risk than multifamily loans as they may be dependent on the ongoing success and operating viability of a fewer number of tenants who are occupying the property and who may have a greater degree of exposure to economic conditions.

 

Commercial Term Loans: Commercial term loans are term loans to operating companies for business purposes. These loans are generally secured by real estate or business assets such as accounts receivable, inventory and equipment. These loans are typically repaid first by the cash flow generated by the borrower’s business operation. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and resulting positive cash flow. Factors that may influence a business’s profitability include, but are not limited to, demand for its products or services, quality and depth of management, degree of competition, regulatory changes, and general economic conditions. Commercial term and lines of credit loans are generally secured by business assets; however, the ability of the Bank to foreclose and realize sufficient value from the assets is often highly uncertain.

 

Construction: Construction loans are granted to experienced and reputable local builders and developers that have the capital and liquidity to carry a project to completion and stabilization. Construction loans are considered riskier than commercial financing on improved and established commercial real estate and loans for the purchase of existing residential properties. The risk of potential loss increases if the original cost estimates or estimated time to complete the project vary significantly from the actual costs or length of time in which the project was completed.

 

Other Commercial: The Bank provides commercial lines of credit loans to operating companies for business purposes. The loans are generally secured by business assets such as accounts receivable, inventory and equipment. These loans are typically repaid first by the cash flow generated by the borrower’s business operation. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and resulting positive cash flow. Factors that may influence a business’s profitability include, but are not limited to, demand for its products or services, quality and depth of management, degree of competition, regulatory changes, and general economic conditions. Commercial lines of credit loans are generally secured by business assets; however, the ability of the Bank to foreclose and realize sufficient value from the assets is often highly uncertain.

 

Residential Mortgage: Effective December 31, 2013, the Bank exited the residential mortgage loan origination business. Prior to December 31, 2013, the Bank originated one-to-four family residential mortgage loans within or near its primary geographic market area. The mortgage loans are secured by first liens on the primary residence or investment property. Primary risk characteristics associated with residential mortgage loans typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; divorce or death. In addition, residential mortgage loans that have adjustable rates could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential exposure for the Bank.

 

Home Equity & Lines of Credit: The Bank provides home equity loans and lines of credit in the form of amortizing home equity loans or revolving home equity lines of credit against one-to-four family residences within or near its primary geographic market. Primary risk characteristics associated with home equity lines of credit typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; divorce or death. In addition, home equity lines of credit typically are made with variable or floating interest rates, such as the Prime Rate, which could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential exposure for the Bank.

 

Other Consumer: These are loans to individuals for household, family and other personal expenditures. This also represents all other loans that cannot be categorized in any of the previous mentioned loan segments.

 

 

Other Real Estate Owned (“OREO”): Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned and is initially recorded at the estimated fair market value, less the estimated cost to sell, at the date of foreclosure, thereby establishing a new cost basis. If the fair value declines subsequent to foreclosure, an OREO write-down is recorded through expense and the OREO balance is lowered to reflect the current fair value. Operating costs after acquisition are expensed.

 

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 10 to 39 years. Furniture, fixtures and equipment are depreciated using the straight-line (or accelerated) method with useful lives ranging from 3 to 7 years.

 

Federal Home Loan Bank of New York (“FHLB”) Stock: The Bank is a member of the FHLB of New York. Members are required to own a certain amount of stock based on the level of borrowings and other factors. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Cash dividends are reported as income.

 

Derivative Instruments and Hedging Activities: Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. As part of its asset/liability management strategies, the Bank uses interest rate swaps to hedge variability in future cash flows caused by changes in interest rates. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income or loss and subsequently reclassified into earnings in the period during which the hedged forecasted transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We formally document our risk management objectives, strategy, and the relationship between the hedging instrument and the hedged item. We evaluate the effectiveness of the hedge relationship, both at inception of the hedge and on an ongoing basis, by comparing the changes in the cash flows of the derivative hedging instrument with the changes in the cash flows of the designated hedged item or transaction. Derivatives not designated as hedges do not meet the hedge accounting requirements under U.S. GAAP.

 

Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified. The annual goodwill assessment for 2014 will be performed in the fourth quarter. In the interim, the Company will continue to evaluate goodwill on a quarterly basis utilizing the methodology required for an annual goodwill assessment.

 

Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives, which range from 5 to 13 years. Other intangible assets also include loan servicing rights which are amortized on the level yield method over the life of the loan. Other intangible assets are assessed at least annually for impairment and any such impairment will be recognized in the period identified.

 

Bank Owned Life Insurance (“BOLI”): The Bank has an investment in bank owned life insurance. BOLI involves the purchasing of life insurance by the Bank on a chosen group of employees and directors. The Bank is the owner and beneficiary of the policies and in accordance with FASB ASC Topic 325, “Investments in Insurance Contracts”, the amount recorded is the cash surrender value, which is the amount realizable.

 

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

 

 

Defined Benefit Plan: The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (The “Pentegra DB Plan”), a tax-qualified defined benefit pension plan. The Pentegra DB Plan’s Employer Identification Number is 13-5645888, and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan.

 

The plan was amended to freeze participation to new employees commencing January 1, 2008. Employees who became eligible to participate prior to January 1, 2008, will continue to accrue a benefit under the plan. The Bank accrues pension costs as incurred. The plan was further amended to freeze benefits as of December 31, 2008 for all employees eligible to participate prior to January 1, 2008.

 

401(k) Plan: The Bank maintains a tax-qualified defined contribution plan for all salaried employees of Cape Bank who have satisfied the 401(k) Plan’s eligibility requirements. Effective January 1, 2012, the Bank eliminated the matching contribution formula and replaced it with a discretionary form of matching contribution.

 

Employee Stock Ownership Plan (“ESOP”): The cost of shares issued to the ESOP, but not yet earned is shown as a reduction of equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares are used to reduce the annual ESOP debt service. As of September 30, 2014, 206,145 shares have been allocated to eligible participants in the Cape Bank Employee Stock Ownership Plan.

 

Stock Benefit Plan: The Company has an Equity Incentive Plan (the “Stock Benefit Plan”) under which incentive and non-qualified stock options, stock appreciation rights (SARs) and restricted stock awards (RSAs) may be granted periodically to certain employees and directors. The fair value of the restricted stock is the market value of the stock on the date of grant. Under the fair value method of accounting for stock options, the fair value is measured on the date of grant using the Black-Scholes option pricing model with market assumptions. This amount is amortized as salaries and employee benefits expense on a straight-line basis over the vesting period. Option pricing models require the use of highly subjective assumptions, including expected stock price volatility, which, if changed, can significantly affect fair value estimates.

 

Income Taxes: Income taxes are accounted for under the asset and liability method. 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 and operating loss and tax credit carryforwards. The principal types of accounts resulting in differences between assets and liabilities for financial statement and tax purposes are the allowance for loan losses, deferred compensation, deferred loan fees, charitable contributions, depreciation and OTTI charges. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded against net deferred tax assets when management has concluded that it is not more likely than not that a portion or all will be realized. Management considers several factors in determining whether a portion, or all, of the valuation allowance should be reversed such as the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax assets are deductible and tax planning strategies.

 

Under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, included in FASB ASC Subtopic 740-10—Income Taxes—Overall, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

 

The Company records interest and penalties related to uncertain tax positions as non-interest expense.

 

Earnings Per Share: Basic earnings per common share is the net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are not considered outstanding for this calculation unless earned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock option and restricted stock awards, if any.

 

Comprehensive Income (Loss): Comprehensive income (loss) includes net income as well as certain other items which result in a change to equity during the period. Other comprehensive income includes unrealized gains and losses on securities available-for-sale which are also recognized as separate components of equity and unrealized holding gains and losses arising during the period on interest rate swaps. See the Consolidated Statement of Comprehensive Income.

 

 

Operating Segments: While the chief decision makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

 

Treasury Stock: Stock held in the treasury by the Company is accounted for using the cost method, which treats stock held in treasury as a reduction to total stockholders’ equity. As shares of treasury stock are reissued to satisfy stock option exercises, the shares are issued using the average cost basis of the shares in the treasury at the time of issuance.

 

On April 18, 2013, the Company announced that the Board of Directors authorized a stock repurchase plan under which the Company would repurchase up to 5%, or approximately 667,239 shares, of the Company’s issued and outstanding shares. The repurchase was completed on July 16, 2013. Furthermore, on July 19, 2013, the Company announced that the Board of Directors authorized a second repurchase program for the repurchase of up to 5%, or approximately 633,877 shares, of the Company’s issued and outstanding shares. The second repurchase plan was completed on October 3, 2013. On December 23, 2013, the Company announced that the Board of Directors authorized a third stock repurchase plan under which the Company would repurchase up to 5%, or approximately 602,989 shares, of the Company’s issued and outstanding shares. The third repurchase plan has been completed. The average repurchase price for the three stock repurchase plans was $9.67 per share.

 

Effect of Newly Issued Accounting Standards: In January 2014, the FASB issued ASU 2014-04 “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.”  The amendments in ASU 2014-04 are intended to reduce diversity in practice by clarifying when an in-substance repossession or foreclosure occurs, that is, when a creditor such as the Bank should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized.  Additionally, the amendments in ASU 2014-04 require interim and annual disclosure of both the amount of foreclosed residential real estate property held by a creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  For public entities, such as the Company, the amendments are effective for interim and annual reporting periods beginning after December 15, 2014.  Early adoption in 2014 is permitted.  ASU 2014-04 is not expected to have a material impact on the Company’s financial position, results of operations or disclosures.

 

In July 2013, the FASB issues ASU No. 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Federal Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus) of the FASB emerging Issues Task Force). The guidance permits the Federal Funds Effective Swap Rate to be used as a benchmark interest rate for hedge accounting purposes, in addition to interest rates on direct Treasury obligations and the London Interbank Offered Rate (“LIBOR”). The Company adopted this guidance on May 2, 2014 with no significant impact on the Company’s financial statements. 

 

 

NOTE 3 – INVESTMENT SECURITIES

 

The amortized cost, gross unrealized gains or losses and the fair value of the Bank’s investment securities available-for-sale and held-to-maturity at September 30, 2014 and December 31, 2013 are as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(in thousands)
September 30, 2014
Investment securities available-for-sale
Debt securities
U.S. Government and agency obligations		$	43,974			$	24			$	(791	)		$	43,207
Municipal bonds			8,680				37				(21	)			8,696
Collateralized debt obligations			-				-				-				-
Corporate bonds			23,229				51				(51	)			23,229
Total debt securities		$	75,883			$	112			$	(863	)		$	75,132
Equity securities
CRA Qualified Investment Fund		$	5,000			$	-			$	(224	)		$	4,776
Total equity securities		$	5,000			$	-			$	(224	)		$	4,776
Mortgage-backed securities
GNMA pass-through certificates		$	2,124			$	105			$	-			$	2,229
FHLMC pass-through certificates			4,658				80				(58	)			4,680
FNMA pass-through certificates			10,021				31				(154	)			9,898
Collateralized mortgage obligations			61,753				100				(1,278	)			60,575
Total mortgage-backed securities		$	78,556			$	316			$	(1,490	)		$	77,382
Total securities available-for-sale		$	159,439			$	428			$	(2,577	)		$	157,290
Investment securities held-to-maturity
Debt securities
U.S. Government and agency obligations		$	7,723			$	-			$	(346	)		$	7,377
Municipal bonds			10,073				141				(53	)			10,161
Total debt securities		$	17,796			$	141			$	(399	)		$	17,538
Total securities held-to-maturity		$	17,796			$	141			$	(399	)		$	17,538

 

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(in thousands)
December 31, 2013
Investment securities available-for-sale
Debt securities
U.S. Government and agency obligations		$	53,951			$	5			$	(2,350	)		$	51,606
Municipal bonds			6,090				116				(28	)			6,178
Collateralized debt obligations			-				-				-				-
Corporate bonds			13,059				44				(24	)			13,079
Total debt securities		$	73,100			$	165			$	(2,402	)		$	70,863
Equity securities
CRA Qualified Investment Fund		$	5,000			$	-			$	(300	)		$	4,700
Total equity securities		$	5,000			$	-			$	(300	)		$	4,700
Mortgage-backed securities
GNMA pass-through certificates		$	3,424			$	130			$	-			$	3,554
FHLMC pass-through certificates			5,101				78				(175	)			5,004
FNMA pass-through certificates			14,596				163				(495	)			14,264
Collateralized mortgage obligations			60,686				121				(2,026	)			58,781
Total mortgage-backed securities		$	83,807			$	492			$	(2,696	)		$	81,603
Total securities available-for-sale		$	161,907			$	657			$	(5,398	)		$	157,166
Investment securities held-to-maturity
Debt securities
Municipal bonds		$	9,102			$	42			$	(238	)		$	8,906
Total debt securities		$	9,102			$	42			$	(238	)		$	8,906
Total securities held-to-maturity		$	9,102			$	42			$	(238	)		$	8,906

 

 

Proceeds from sales of securities available for sale totaled $3.3 million for the three months ended September 30, 2014. There were no sales of securities for the three months ended September 30, 2013. Proceeds from sales of securities available for sale were $8.0 million and $13.1 million for the nine months ended September 30, 2014 and 2013, respectively. Gross gains of $133,000 were realized on security sales during the three months ended September 30, 2014. Gross gains of $2.1 million and $290,000 were realized on security sales during the nine months ended September 30, 2014 and 2013, respectively. Proceeds from security calls, maturities, and return of principal were $8.9 million and $5.9 million for the three months ended September 30, 2014 and 2013, respectively. Proceeds from security calls, maturities, and return of principal were $20.4 million and $34.0 million for the nine months ended September 30, 2014 and 2013, respectively.

 

Securities having a fair value of approximately $82.4 million and $50.6 million at September 30, 2014 and December 31, 2013, respectively, were pledged to secure public deposits, Federal Home Loan Bank and other borrowings. The Bank did not hold any trading securities during the nine months ended September 30, 2014, or during the twelve months ended December 31, 2013.

 

On March 3, 2014, $7.6 million of agency debt securities were transferred from available-for-sale to held-to-maturity at fair value which the Bank has the ability and positive intent to hold to maturity. These securities may be particularly susceptible to changes in fair value in the near term as a result of market volatility. 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 March 3, 2014 related to this transfer, will 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, and will result in no net effect to the investment yield. These securities had gross unrealized losses at the time of transfer of $377,000, of which $276,000 was in a loss position for less than 12 months. These securities had net unrealized losses of $377,000 at March 3, 2014.

 

 

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at September 30, 2014:

 

		Less Than 12 Months								12 Months or Longer								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
										(in thousands)
U.S. Government and agency obligations		$	6,962			$	(38	)		$	33,893			$	(1,099	)		$	40,855			$	(1,137	)
Municipal bonds			7,718				(68	)			727				(6	)			8,445				(74	)
Corporate bonds			12,092				(51	)			-				-				12,092				(51	)
CRA Qualified Investment Fund			-				-				4,776				(224	)			4,776				(224	)
Mortgage-backed securities			22,149				(182	)			41,718				(1,308	)			63,867				(1,490	)
Total temporarily impaired investment securities		$	48,921			$	(339	)		$	81,114			$	(2,637	)		$	130,035			$	(2,976	)

 

 

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2013:

 

		Less Than 12 Months								12 Months or Longer								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
										(in thousands)
U.S. Government and agency obligations		$	45,771			$	(2,184	)		$	1,834			$	(166	)		$	47,605			$	(2,350	)
Municipal bonds			7,936				(244	)			1,220				(22	)			9,156				(266	)
Corporate bonds			4,029				(24	)			-				-				4,029				(24	)
CRA Qualified Investment Fund			-				-				4,700				(300	)			4,700				(300	)
Mortgage-backed securities			59,729				(2,452	)			2,569				(244	)			62,298				(2,696	)
Total temporarily impaired investment securities		$	117,465			$	(4,904	)		$	10,323			$	(732	)		$	127,788			$	(5,636	)

 

 

Management evaluates investment securities to determine if they are OTTI on at least a quarterly basis. The evaluation process applied to each security includes, but is not limited to, the following factors: whether the security is performing according to its contractual terms, determining if there has been an adverse change in the expected cash flows for investments within the scope of FASB Accounting Standards Codification (ASC) Topic 325, “Investments Other”, the length of time and the extent to which the fair value has been less than cost, whether the Company intends to sell, or would more likely than not be required to sell an impaired debt security before a recovery of its amortized cost basis, credit rating downgrades, the percentage of performing collateral that would need to default or defer to cause a break in yield and/or a temporary interest shortfall, and a review of the underlying issuers. Additionally, and consistent with FDIC regulations, management, prior to acquiring and periodically thereafter, evaluates various factors of corporate securities that may include but is not limited to the following; evaluate that the risk of default is low and consistent with bonds of similar quality, evaluate the capacity to pay, understand applicable market demographics/economics and understand current levels and trends in operating margins, operating efficiency, profitability, return on assets and return on equity.

 

At September 30, 2014, the Company’s investment securities portfolio consisted of 255 securities, 108 of which were in an unrealized loss position. The securities consist of investments that are backed by the U.S. Government or U.S. sponsored agencies which the government has affirmed its commitment to support, and municipal obligations which had unrealized losses that were caused by changing credit spreads in the market as a result of the current economic environment. Because the Company has no intention to sell these securities, nor is it more likely than not that we will be required to sell the securities, the Company does not consider these investments to be OTTI.

 

On a quarterly basis, we evaluate our investment securities for OTTI. As required by FASB ASC Topic No. 320, “Investments – Debt and Equity Securities,” if we do not intend to sell a debt security, and it is not more likely than not that we will be required to sell the security, an OTTI write-down is separated into a credit loss portion and a portion related to all other factors. The credit loss portion is recognized in earnings as net OTTI losses, and the portion related to all other factors is recognized in accumulated other comprehensive income, net of taxes. The credit loss portion is defined as the difference between the amortized cost of the security and the present value of the expected future cash flows for the security. If the intent is to sell a debt security or if it is more likely than not that we will be required to sell the security, then the security is written down to its fair market value as a net OTTI loss in earnings. The Company has evaluated these securities and determined that the decreases in estimated fair value are temporary. The Company’s estimate of projected cash flows it expected to receive was more than the securities’ carrying value, resulting in no impairment charge to earnings for the nine months ended September 30, 2014.

 

 

In December 2013, prompted by the “Volcker Rule”, the Company sold a portion of its portfolio of bank and insurance trust preferred collateral debt obligation (“CDO”) securities that had a cost basis greater than zero. The sale of these securities resulted in net securities losses totaling $851,000 which was reported in gains and losses on the sale of securities in the year 2013. On February 27, 2014, the Company sold its remaining portion of CDOs having a zero book balance which resulted in a pre-tax gain of $1.9 million.

 

The amortized cost and fair value of debt, equity and mortgage-backed securities available for sale at September 30, 2014, by contractual maturities, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		Available for Sale								Held to Maturity
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(in thousands)								(in thousands)
Due within one year or less		$	1,215			$	1,219			$	-			$	-
Due after one year but within five years			47,295				47,219				1,754				1,748
Due after five years but within ten years			27,373				26,694				13,980				13,689
Due after ten years			-				-				2,062				2,101
Equity securities			5,000				4,776				-				-
Mortgage-backed securities			78,556				77,382				-				-
Total investment securities		$	159,439			$	157,290			$	17,796			$	17,538

 

 

The following table presents a summary of the cumulative credit related OTTI charges recognized as components of earnings for CDO securities still held by the Company at September 30, 2014 and September 30, 2013:

 

		For the three months ended September 30,
		2014				2013
Beginning balance of cumulative credit losses on CDO securities		$	-			$	(18,383	)
Additional credit losses for which other than temporary impairment was previously recognized			-				-
Sale of OTTI securities			-				-
Credit loss recognized due to change to intent to sell			-				-
Ending balance of cumulative credit losses on CDO securities		$	-			$	(18,383	)

 

 

		For the nine months ended September 30,
		2014				2013
Beginning balance of cumulative credit losses on CDO securities		$	(14,501	)		$	(18,383	)
Additional credit losses for which other than temporary impairment was previously recognized			-				-
Sale of OTTI securities			14,501				-
Credit loss recognized due to change to intent to sell			-				-
Ending balance of cumulative credit losses on CDO securities		$	-			$	(18,383	)

 

 

NOTE 4 – LOANS RECEIVABLE

 

Loans receivable consist of the following:

 

		September 30,				December 31,
		2014				2013
		(in thousands)
Commercial secured by real estate		$	427,087			$	422,829
Commercial term loans			19,346				23,203
Construction			18,614				10,852
Other commercial			39,499				37,772
Residential mortgage			232,996				250,698
Home equity loans and lines of credit			44,097				43,468
Other consumer loans			911				977
Loans receivable, gross			782,550				789,799
Less:
Allowance for loan losses			9,799				9,330
Deferred loan fees			354				342
Loans receivable, net		$	772,397			$	780,127

 

The following table summarizes activity related to the allowance for loan losses by category for the three months ended September 30, 2014:

 

		At or for the three months ended September 30, 2014
		(in thousands)
		Commercial Secured by Real Estate				Commercial Term Loans				Construction				Other Commercial (1)				Residential Mortgage				Home Equity & Lines of Credit				Other Consumer				Unallocated				Total
Balance at beginning of period		$	6,958			$	343			$	118			$	683			$	996			$	174			$	8			$	450			$	9,730
Charge-offs			(85	)			-				-				-				-				(5	)			(13	)			-				(103	)
Write-downs on loans transferred to HFS			-				-				-				-				-				-				-				-				-
Recoveries			14				-				-				-				-				-				5				-				19
Provision for loan losses			(180	)			23				5				60				184				48				13				-				153
Balance at end of period		$	6,707			$	366			$	123			$	743			$	1,180			$	217			$	13			$	450			$	9,799
Impairment evaluation
Allowance for loan losses
Individually evaluated		$	169			$	-			$	-			$	-			$	27			$	-			$	-			$	-			$	196
Collectively evaluated			6,538				366				123				743				1,153				217				13				450				9,603
Total allowance for loan losses		$	6,707			$	366			$	123			$	743			$	1,180			$	217			$	13			$	450			$	9,799
Loans
Individually evaluated		$	9,903			$	-			$	-			$	303			$	2,085			$	547			$	-			$	-			$	12,838
Collectively evaluated			417,184				19,346				18,614				39,196				230,911				43,550				911				-				769,712
Total loans		$	427,087			$	19,346			$	18,614			$	39,499			$	232,996			$	44,097			$	911			$	-			$	782,550

(1) includes commercial lines of credit

 

 

The following table summarizes activity related to the allowance for loan losses by category for the nine months ended September 30, 2014:

 

		At or for the nine months ended September 30, 2014
		(in thousands)
		Commercial Secured by Real Estate				Commercial Term Loans				Construction				Other Commercial (1)				Residential Mortgage				Home Equity & Lines of Credit				Other Consumer				Unallocated				Total
Balance at beginning of year		$	6,554			$	420			$	227			$	600			$	865			$	160			$	4			$	500			$	9,330
Charge-offs			(360	)			-				-				-				(11	)			(92	)			(57	)			-				(520	)
Write-downs on loans transferred to HFS			-				(825	)			-				(965	)			-				-				-				-				(1,790	)
Recoveries			276				-				-				-				-				1				22				-				299
Provision for loan losses			237				771				(104	)			1,108				326				148				44				(50	)			2,480
Balance at end of period		$	6,707			$	366			$	123			$	743			$	1,180			$	217			$	13			$	450			$	9,799
Impairment evaluation
Allowance for loan losses
Individually evaluated		$	169			$	-			$	-			$	-			$	27			$	-			$	-			$	-			$	196
Collectively evaluated			6,538				366				123				743				1,153				217				13				450				9,603
Total allowance for loan losses		$	6,707			$	366			$	123			$	743			$	1,180			$	217			$	13			$	450			$	9,799
Loans
Individually evaluated		$	9,903			$	-			$	-			$	303			$	2,085			$	547			$	-			$	-			$	12,838
Collectively evaluated			417,184				19,346				18,614				39,196				230,911				43,550				911				-				769,712
Total loans		$	427,087			$	19,346			$	18,614			$	39,499			$	232,996			$	44,097			$	911			$	-			$	782,550

(1) includes commercial lines of credit 

 

 

During the first quarter of 2014, the Bank transferred $5.3 million of classified commercial loans to loans held for sale. The loans were written-down $1.8 million to the value of the collateral supporting the loans, as the Bank was pursuing the sale of these assets. These assets were sold during the second quarter and, as a result, the Bank recorded an additional $16,000 write-down on these assets in the second quarter.

 

The following table summarizes activity related to the allowance for loan losses by category for the year ended December 31, 2013:

 

		At or for the year ended December 31, 2013
		(in thousands)
		Commercial Secured by Real Estate				Commercial Term Loans				Construction				Other Commercial (1)				Residential Mortgage				Home Equity & Lines of Credit				Other Consumer				Unallocated				Total
Balance at beginning of period		$	6,321			$	457			$	58			$	815			$	1,300			$	249			$	17			$	635			$	9,852
Charge-offs			(2,085	)			-				-				(106	)			(205	)			(109	)			(40	)			-				(2,545	)
Write-downs on loans transferred to HFS			(241	)			-				-				-				-				-				-				-				(241	)
Recoveries			214				-				-				10				-				1				28				-				253
Provision for loan losses			2,345				(37	)			169				(119	)			(230	)			19				(1	)			(135	)			2,011
Balance at end of period		$	6,554			$	420			$	227			$	600			$	865			$	160			$	4			$	500			$	9,330
Impairment evaluation
Allowance for loan losses
Individually evaluated		$	148			$	-			$	-			$	6			$	70			$	22			$	-			$	-			$	246
Collectively evaluated			6,406				420				227				594				795				138				4				500				9,084
Total allowance for loan losses		$	6,554			$	420			$	227			$	600			$	865			$	160			$	4			$	500			$	9,330
Loans
Individually evaluated		$	8,223			$	-			$	-			$	303			$	2,215			$	461			$	-			$	-			$	11,202
Collectively evaluated			414,606				23,203				10,852				37,469				248,483				43,007				977				-				778,597
Total loans		$	422,829			$	23,203			$	10,852			$	37,772			$	250,698			$	43,468			$	977			$	-			$	789,799

(1) includes commercial lines of credit

 

 

The following table summarizes activity related to the allowance for loan losses by category for the three months ended September 30, 2013:

 

		At or for the three months ended September 30, 2013
		(in thousands)
		Commercial Secured by Real Estate				Commercial Term Loans				Construction				Other Commercial (1)				Residential Mortgage				Home Equity & Lines of Credit				Other Consumer				Unallocated				Total
Balance at beginning of period		$	6,707			$	439			$	99			$	663			$	1,169			$	200			$	9			$	500			$	9,786
Charge-offs			(162	)			-				-				-				(70	)			(45	)			(9	)			-				(286	)
Write-downs on loans transferred to HFS			-				-				-				-				-				-				-				-				-
Recoveries			47				-				-				4				-				-				7				-				58
Provision for loan losses			257				12				34				59				59				30				(2	)			-				449
Balance at end of period		$	6,849			$	451			$	133			$	726			$	1,158			$	185			$	5			$	500			$	10,007
Impairment evaluation
Allowance for loan losses
Individually evaluated		$	113			$	-			$	-			$	-			$	78			$	-			$	-			$	-			$	191
Collectively evaluated			6,736				451				133				726				1,080				185				5				500				9,816
Total allowance for loan losses		$	6,849			$	451			$	133			$	726			$	1,158			$	185			$	5			$	500			$	10,007
Loans
Individually evaluated		$	9,946			$	-			$	—			$	304			$	2,790			$	753			$	-			$	-			$	13,793
Collectively evaluated			404,333				23,861				5,923				38,408				245,660				42,026				845				-				761,056
Total loans		$	414,279			$	23,861			$	5,923			$	38,712			$	248,450			$	42,779			$	845			$	-			$	774,849

(1) includes commercial lines of credit 

 

 

The following table summarizes activity related to the allowance for loan losses by category for the nine months ended September 30, 2013:

 

		At or for the nine months ended September 30, 2013
		(in thousands)
		Commercial Secured by Real Estate				Commercial Term Loans				Construction				Other Commercial (1)				Residential Mortgage				Home Equity & Lines of Credit				Other Consumer				Unallocated				Total
Balance at beginning of year		$	6,321			$	457			$	58			$	815			$	1,300			$	249			$	17			$	635			$	9,852
Charge-offs			(750	)			-				-				(107	)			(183	)			(69	)			(18	)			-				(1,127	)
Write-downs on loans transferred to HFS			-				-				-				-				-				-				-				-				-
Recoveries			188				-				-				10				-				1				24				-				223
Provision for loan losses			1,090				(6	)			75				8				41				4				(18	)			(135	)			1,059
Balance at end of period		$	6,849			$	451			$	133			$	726			$	1,158			$	185			$	5			$	500			$	10,007
Impairment evaluation
Allowance for loan losses
Individually evaluated		$	113			$	-			$	-			$	-			$	78			$	-			$	-			$	-			$	191
Collectively evaluated			6,736				451				133				726				1,080				185				5				500				9,816
Total allowance for loan losses		$	6,849			$	451			$	133			$	726			$	1,158			$	185			$	5			$	500			$	10,007
Loans
Individually evaluated		$	9,946			$	-			$	—			$	304			$	2,790			$	753			$	-			$	-			$	13,793
Collectively evaluated			404,333				23,861				5,923				38,408				245,660				42,026				845				-				761,056
Total loans		$	414,279			$	23,861			$	5,923			$	38,712			$	248,450			$	42,779			$	845			$	-			$	774,849

(1) includes commercial lines of credit

 

 

Impaired loans at September 30, 2014 and December 31, 2013 were as follows:

 

		September 30,				December 31,
		2014				2013
		(in thousands)
Non-accrual loans (1)		$	7,287			$	6,885
Loans delinquent greater than 90 days and still accruing			429				458
Troubled debt restructured loans			4,763				3,452
Loans less than 90 days and still accruing			359				407
Total impaired loans		$	12,838			$	11,202

 

(1)

Non-accrual loans in the table above include TDRs totaling $917,000 at September 30, 2014 and $881,000 at December 31, 2013. Total impaired loans do not include loans held for sale. Loans held for sale include $1.6 million of loans that were on non-accrual status at December 31, 2013. There were no loans held for sale at September 30, 2014.

 

		For the three months ended September 30,								For the nine months ended September 30,
		2014				2013				2014				2013
		(in thousands)								(in thousands)
Average recorded investment of impaired loans		$	11,794			$	13,294			$	11,121			$	12,792
Interest income recognized during impairment		$	86			$	101			$	244			$	266
Cash basis interest income recognized		$	-			$	-			$	-			$	-

 

 

At September 30, 2014, non-performing loans had a principal balance of $7.7 million compared to $7.3 million at December 31, 2013. Loan balances past due 90 days or more and still accruing interest, but which management expects will eventually be paid in full, amounted to approximately $429,000 at September 30, 2014 and $458,000 at December 31, 2013.

 

Impaired loans include loans whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. In accordance with applicable accounting guidance (FASB ASC 310-40), these modified loans are considered TDRs. See Note 2 of the Notes to Consolidated Financial Statements for further information regarding TDRs.

 

 

 

The following table provides a summary of TDRs by performing status:

 

		September 30, 2014												December 31, 2013
Troubled Debt Restructurings		Non-accruing				Accruing				Total				Non-accruing				Accruing				Total
		(in thousands)												(in thousands)
Commercial secured by real estate		$	647			$	3,545			$	4,192			$	688			$	2,392			$	3,080
Residential mortgage			270				1,218				1,488				193				1,060				1,253
Total TDRs		$	917			$	4,763			$	5,680			$	881			$	3,452			$	4,333

 

 

The following tables present new TDRs for the three and nine months ended September 30, 2014 and 2013:

 

		For the three months ended September 30, 2014												For the three months ended September 30, 2013
Troubled Debt Restructurings		Number of Contracts				Pre-Modification Recorded Investment				Post-Modification Recorded Investment				Number of Contracts				Pre-Modification Recorded Investment				Post-Modification Recorded Investment
		(dollars in thousands)
Commercial secured by real estate			3			$	1,199			$	1,197				-			$	-			$	-
Residential mortgage			2				287				287				-				-				-
Total TDRs			5			$	1,486			$	1,484				-			$	-			$	-

 

 

		For the nine months ended September 30, 2014												For the nine months ended September 30, 2013
Troubled Debt Restructurings		Number of Contracts				Pre-Modification Recorded Investment				Post-Modification Recorded Investment				Number of Contracts				Pre-Modification Recorded Investment				Post-Modification Recorded Investment
		(dollars in thousands)
Commercial secured by real estate			4			$	3,377			$	3,367				3			$	2,371			$	2,359
Residential mortgage			4				1,066				1,066				3				1,023				1,017
Total TDRs			8			$	4,443			$	4,433				6			$	3,394			$	3,376

 

 

The identification of the troubled debt restructured loans described above did not have a significant impact on the allowance for loan losses for the periods presented.

  

 

The following tables present, by class of loans, information regarding the types of concessions granted on accruing and non-accruing loans that were restructured during the nine months ended September 30, 2014 and during the year ended December 31, 2013:

 

		For the nine months ended September 30, 2014
		(dollars in thousands)
		Reductions in Interest Rate and Maturity Date								Reductions in Interest Rate and Principal Amount								Maturity Date Extension								Maturity Date Extension and Interest Rate Reduction								Deferral of Principal Amount Due								Total Concessions Granted
		No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount
Accruing TDRs:
Commercial secured by real estate			3			$	1,197				-			$	-				-			$	-				1			$	2,170				-			$	-				4			$	3,367
Residential mortgage			-				-				-				-				2				779				-				-				1				200				3				979
Total accruing TDRs			3			$	1,197				-			$	-				2			$	779				1			$	2,170				1			$	200				7			$	4,346
Non-accruing TDRs:
Commercial secured by real estate			-			$	-				-			$	-				-			$	-				-			$	-				-			$	-				-			$	-
Residential mortgage			-				-				-				-				-				-				-				-				1				87				1				87
Total non-accruing TDRs			-			$	-				-			$	-				-			$	-				-			$	-				1			$	87				1			$	87
Total TDRs:
Commercial secured by real estate			3			$	1,197				-			$	-				-			$	-				1			$	2,170				-			$	-				4			$	3,367
Residential mortgage			-				-				-				-				2				779				-				-				2				287				4				1,066
Total TDRs			3			$	1,197				-			$	-				2			$	779				1			$	2,170				2			$	287				8			$	4,433

  

 

		Year ended December 31, 2013
		(dollars in thousands)
		Reductions in Interest Rate and Maturity Date								Reductions in Interest Rate and Principal Amount								Maturity Date Extension								Maturity Date Extension and Interest Rate Reduction								Deferral of Principal Amount Due								Total Concessions Granted
		No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount
Accruing TDRs:
Commercial secured by real estate			-			$	-				-			$	-				1			$	54				1			$	2,194				-			$	-				2			$	2,248
Residential mortgage			-				-				-				-				2				805				1				212				-				-				3				1,017
Total accruing TDRs			-			$	-				-			$	-				3			$	859				2			$	2,406				-			$	-				5			$	3,265
Non-accruing TDRs:
Commercial secured by real estate			-			$	-				-			$	-				1			$	111				-			$	-				-			$	-				1			$	111
Residential mortgage			-				-				-				-				-				-				-				-				-				-				-				-
Total non-accruing TDRs			-			$	-				-			$	-				1			$	111				-			$	-				-			$	-				1			$	111
Total TDRs:
Commercial secured by real estate			-			$	-				-			$	-				2			$	165				1			$	2,194				-			$	-				3			$	2,359
Residential mortgage			-				-				-				-				2				805				1				212				-				-				3				1,017
Total TDRs			-			$	-				-			$	-				4			$	970				2			$	2,406				-			$	-				6			$	3,376

 

 

The following table presents TDRs that defaulted within the nine months ended September 30, 2014 and 2013, where the loan had been modified within twelve months:

 

		For the nine months ended September 30, 2014								For the nine months ended September 30, 2013
Troubled Debt Restructurings That Subsequently Defaulted		Number of Contracts				Recorded Investment				Number of Contracts				Recorded Investment
		(dollars in thousands)
Commercial secured by real estate			-			$	-				2			$	449
Residential mortgage			-				-				-				-
Total			-			$	-				2			$	449

 

 

The defaults that occurred during the periods presented did not have significant impact on the allowance for loan losses. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and may result in potential incremental losses. These potential incremental losses have been factored into our overall allowance for loan losses estimate. The level of any re-defaults will likely be affected by future economic conditions. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is repaid in full, reclassified to loans held for sale, foreclosed, sold or it meets the criteria to be removed from TDR status. Included in the allowance for loan losses at September 30, 2014 and December 31, 2013 was an impairment reserve for TDRs in the amount of $196,000 and $127,000, respectively. At September 30, 2014, there are no commitments to extend additional funds to loans that are TDRs.

 

 

The following table presents impaired loans at September 30, 2014:

 

		At September 30, 2014												For the nine months ended September 30, 2014
		Recorded Investment (1)				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		(in thousands)
Impaired loans with a related allowance
Commercial secured by real estate		$	3,397			$	3,397			$	169			$	2,387			$	109
Commercial term loans			-				-				-				-				-
Construction			-				-				-				-				-
Other commercial			-				-				-				-				-
Residential mortgage			195				195				27				199				6
Home equity loans and lines of credit			-				-				-				-				-
Other consumer loans			-				-				-				-				-
Impaired loans with a related allowance		$	3,592			$	3,592			$	196			$	2,586			$	115
Impaired loans with no related allowance
Commercial secured by real estate		$	6,506			$	8,051			$	-			$	6,173			$	61
Commercial term loans			-				-				-				-				-
Construction			-				-				-				-				-
Other commercial			303				376				-				303				-
Residential mortgage			1,890				2,076				-				1,671				65
Home equity loans and lines of credit			547				653				-				388				3
Other consumer loans			-				-				-				-				-
Impaired loans with no related allowance		$	9,246			$	11,156			$	-			$	8,535			$	129
Total impaired loans
Commercial secured by real estate		$	9,903			$	11,448			$	169			$	8,560			$	170
Commercial term loans			-				-				-				-				-
Construction			-				-				-				-				-
Other commercial			303				376				-				303				-
Residential mortgage			2,085				2,271				27				1,870				71
Home equity loans and lines of credit			547				653				-				388				3
Other consumer loans			-				-				-				-				-
Total impaired loans		$	12,838			$	14,748			$	196			$	11,121			$	244

 

 

(1)	the difference between the recorded investment and unpaid principal balance primarily results from partial charge-offs.

 

  

The following table presents impaired loans at December 31, 2013:

 

		At December 31, 2013												For the twelve months ended December 31, 2013
		Recorded Investment (1)(2)				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		(in thousands)
Impaired loans with a related allowance
Commercial secured by real estate		$	2,773			$	3,234			$	148			$	2,901			$	116
Commercial term loans			-				-				-				-				-
Construction			-				-				-				-				-
Other commercial			60				70				6				60				-
Residential mortgage			618				689				70				660				8
Home equity loans and lines of credit			220				232				22				223				-
Other consumer loans			-				-				-				-				-
Impaired loans with a related allowance		$	3,671			$	4,225			$	246			$	3,844			$	124
Impaired loans with no related allowance
Commercial secured by real estate		$	5,450			$	7,203			$	-			$	3,738			$	88
Commercial term loans			-				-				-				-				-
Construction			-				-				-				-				-
Other commercial			243				306				-				246				-
Residential mortgage			1,597				1,675				-				1,536				69
Home equity loans and lines of credit			241				242				-				157				9
Other consumer loans			-				-				-				-				-
Impaired loans with no related allowance		$	7,531			$	9,426			$	-			$	5,677			$	166
Total impaired loans
Commercial secured by real estate		$	8,223			$	10,437			$	148			$	6,639			$	204
Commercial term loans			-				-				-				-				-
Construction			-				-				-				-				-
Other commercial			303				376				6				306				-
Residential mortgage			2,215				2,364				70				2,196				77
Home equity loans and lines of credit			461				474				22				380				9
Other consumer loans			-				-				-				-				-
Total impaired loans		$	11,202			$	13,651			$	246			$	9,521			$	290

 

 

(1)	excludes HFS non-accruing loans of $1.6 million.

(2)	the difference between the recorded investment and unpaid principal balance primarily results from partial charge-offs.

 

 

 

The following table presents loans by past due status at September 30, 2014:

 

September 30, 2014		30-59 Days Delinquent				60-89 Days Delinquent				90 Days or More Delinquent and Accruing				Total Delinquent and Accruing				Non- accrual				Current				Total Loans
		(in thousands)
Commercial secured by real estate		$	1,814			$	470			$	-			$	2,284			$	6,000			$	418,803			$	427,087
Commercial term loans			-				-				-				-				-				19,346				19,346
Construction			-				-				-				-				-				18,614				18,614
Other commercial			-				-				-				-				303				39,196				39,499
Residential mortgage			838				547				328				1,713				539				230,744				232,996
Home equity loans and lines of credit			118				180				101				399				445				43,253				44,097
Other consumer loans			-				-				-				-				-				911				911
Total		$	2,770			$	1,197			$	429			$	4,396			$	7,287			$	770,867			$	782,550

 

 

The following table presents loans by past due status at December 31, 2013:

 

December 31, 2013		30-59 Days Delinquent				60-89 Days Delinquent				90 Days or More Delinquent and Accruing				Total Delinquent and Accruing				Non- accrual (1)				Current				Total Loans
		(in thousands)
Commercial secured by real estate		$	-			$	1,272			$	-			$	1,272			$	5,425			$	416,132			$	422,829
Commercial term loans			-				-				-				-				-				23,203				23,203
Construction			-				-				-				-				-				10,852				10,852
Other commercial			-				-				-				-				303				37,469				37,772
Residential mortgage			504				589				347				1,440				807				248,451				250,698
Home equity loans and lines of credit			392				192				111				695				350				42,423				43,468
Other consumer loans			-				7				-				7				-				970				977
Total		$	896			$	2,060			$	458			$	3,414			$	6,885			$	779,500			$	789,799

 

 

(1)	excludes HFS non-accruing loans of $1.6 million.

 

The Company categorizes loans, when the loan is initially underwritten, into risk categories based on relevant information about the ability of borrowers to service their debt. The assessment considers numerous factors including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Annually, this analysis includes all commercial loans with an outstanding balance greater than $250,000. The Company uses the following definitions for risk ratings:

 

Risk Rating 1-5—Acceptable credit quality ranging from High Pass (cash or near cash as collateral) to Management Attention/Pass (acceptable risk) with some deficiency in one or more of the following areas: management experience, debt service coverage levels, balance sheet leverage, earnings trends, the industry of the borrower and annual receipt of current borrower financial information.

 

Risk Rating 6— Special Mention reflects loans that management believes warrant special consideration and may be loans that are delinquent or current in their payments. These loans have potential weakness which increases their risk to the bank and have shown some signs of weakness but have fallen short of being a Substandard loan.

 

Management believes that the Substandard category is best considered in four discrete classes: RR 7; RR 8; RR 9; and RR 10.

 

Risk Rating 7—The class is mostly populated by customers that have a history of repayment (less than 2 delinquencies in the past year) but exhibit a well-defined weakness.

 

Risk Rating 8—These are loans that share many of the characteristics of the RR 7 loans as they relate to cash flow and/or collateral, but have the further negative of chronic delinquencies. These loans have not yet declined in quality to require a FASB ASC Topic No. 310 Receivables analysis, but nonetheless this class has a greater likelihood of migration to a more negative risk rating.

 

Risk Rating 9—These loans are impaired loans, are current and accruing, and in some cases are TDRs. They have had a FASB ASC Topic No. 310 Receivables analysis completed.

 

Risk Rating 10—These loans have undergone a FASB ASC Topic No. 310 Receivables analysis and are on non-accrual status. For those that have a FASB ASC Topic No. 310 Receivables analysis, no general reserve is allowed. More often than not, those loans in this class with specific reserves have had the reserve placed by Management pending information to complete a FASB ASC Topic No. 310 Receivables analysis. Upon completion of the FASB ASC Topic No. 310 Receivables analysis reserves are adjusted or charged-off.

 

For homogeneous loan pools, such as residential mortgages, home equity lines of credit and term loans, and other consumer loans, the Company uses payment status to identify the credit risk in these loan portfolios. Payment status is monitored by the Bank’s lending officers utilizing daily delinquency reports. On a monthly basis, with respect to determining the adequacy of the allowance for loan losses management reviews a month-end delinquency report for all loans, regardless of loan amount. The payment status of these homogeneous pools at September 30, 2014 and December 31, 2013 is included in the aging of the recorded investment of past due loans table. In addition, the total non-performing portion of these homogeneous loan pools at September 30, 2014 and December 31, 2013 is presented in the recorded investment in nonaccrual loans.

 

 

The following tables present commercial loans by credit quality indicator:

  

		Risk Ratings
September 30, 2014		Grades 1-5				Grade 6				Grade 7				Grade 8				Grade 9				Grade 10				Total
		(in thousands)
Commercial secured by real estate		$	411,970			$	5,766			$	1,360			$	598			$	1,393			$	6,000			$	427,087
Commercial term loans			19,346				-				-				-				-				-				19,346
Construction			18,614				-				-				-				-				-				18,614
Other commercial			39,196				-				-				-				-				303				39,499
		$	489,126			$	5,766			$	1,360			$	598			$	1,393			$	6,303			$	504,546

 

 

		Risk Ratings
December 31, 2013		Grades 1-5				Grade 6				Grade 7				Grade 8				Grade 9				Grade 10				Total
		(in thousands)
Commercial secured by real estate		$	397,398			$	10,669			$	4,729			$	1,809			$	2,799			$	5,425			$	422,829
Commercial term loans			20,899				-				2,304				-				-				-				23,203
Construction			10,852				-				-				-				-				-				10,852
Other commercial			35,859				510				1,100				-				-				303				37,772
		$	465,008			$	11,179			$	8,133			$	1,809			$	2,799			$	5,728			$	494,656

 

 

NOTE 5 – FAIR VALUE

 

FASB ASC Topic No. 820, “Fair Value Measurements and Disclosures” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

Fair value measurement of securities available for sale is based upon quoted prices, if available. If quoted prices are not available, fair values are generally measured using independent pricing models or other model-based valuation techniques that include market inputs, such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data and industry and economic events. Level 1 securities include an investment fund that is traded by dealers or brokers in active over-the-counter markets. Level 2 securities include securities issued by government sponsored agencies, securities issued by certain state and political subdivisions, residential mortgage-backed securities, collateralized mortgage obligations, and corporate bonds.

 

  

Assets and Liabilities Measured on a Recurring Basis

 

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

		Fair Value Measurements at September 30, 2014												Fair Value Measurements at December 31, 2013
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Observable Inputs (Level 3)				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Observable Inputs (Level 3)
		(in thousands)												(in thousands)
Investment securities available for sale
U.S. Government and agency obligations		$	-			$	43,207			$	-			$	-			$	51,606			$	-
Municipal bonds			-				8,696				-				-				6,178				-
Corporate bonds			-				23,229				-				-				13,079				-
CRA Qualified Investment Fund			4,776				-				-				4,700				-				-
Mortgage-backed securities			-				77,382				-				-				81,603				-
Total securities available for sale		$	4,776			$	152,514			$	-			$	4,700			$	152,466			$	-
Interest rate swaps			-				(364	)			-				-				-				-
Total measured on a recurring basis		$	4,776			$	152,150			$	-			$	4,700			$	152,466			$	-

 

 

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2014 and 2013:

 

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		CDO Securities Available for Sale
		For the three months ended September 30,
		2014				2013
		(in thousands)
Beginning balance		$	-			$	4,847
Accretion of discount			-				7
Payments received			-				-
Reduction in Accumulated OTTI on sale			-				-
Realized gain (loss) on sale/redemption			-				-
Unrealized holding gain (loss)			-				864
Other-than-temporary impairment included in earnings			-				-
Ending balance		$	-			$	5,718

 

 

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		CDO Securities Available for Sale
		For the nine months ended September 30,
		2014				2013
		(in thousands)
Beginning balance		$	-			$	4,682
Accretion of discount			-				21
Payments received			-				-
Reduction in Accumulated OTTI on sale			-				-
Realized gain (loss) on sale/redemption			-				-
Unrealized holding gain (loss)			-				1,015
Other-than-temporary impairment included in earnings			-				-
Ending balance		$	-			$	5,718

 

 

Assets and Liabilities Measured on a Non-Recurring Basis

 

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

 

		Fair Value Measurements at September 30, 2014												Fair Value Measurements at December 31, 2013
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)
		(in thousands)												(in thousands)
Assets:
Impaired loans (1):
Commercial secured by real estate		$	-			$	-			$	2,198			$	-			$	-			$	2,255
Commercial term loans			-				-				-				-				-				-
Construction			-				-				-				-				-				-
Other commercial			-				-				303				-				-				297
Residential mortgage			-				-				453				-				-				766
Home equity loans			-				-				221				-				-				198
Total impaired loans		$	-			$	-			$	3,175			$	-			$	-			$	3,516
Other real estate owned:
Commercial		$	-			$	100			$	4,313			$	-			$	1,505			$	3,388
Residential mortgage			-				56				830				-				790				1,766
Total other real estate owned		$	-			$	156			$	5,143			$	-			$	2,295			$	5,154
Loans held for sale		$	-			$	-			$	-			$	-			$	1,814			$	-
Assets held for sale		$	-			$	-			$	-			$	-			$	10			$	-

(1)	Includes non-accrual loans, loans delinquent greater than 90 days and still accruing, loans less than 90 days delinquent and still accruing and troubled debt restructured loans.

 

At the time a loan is considered impaired, it is valued at the lower of cost or fair value. This value is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may relate to location, square footage, condition, amenities, market rate of leases, if any, as well as the timing of comparable sales. The fair value of the loan is compared to the carrying value to determine if any write-down or specific reserve is required. On a quarterly basis, impaired loans are evaluated for additional impairment and adjusted accordingly. Because the Company has a small amount of impaired loans and OREO measured at fair value, the impact of unobservable inputs on the Company’s financial statements is not material.

 

On an annual basis, management compares the actual selling price of any collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at the fair value for other properties. The most recent analysis performed indicated that a discount up to 7 percent should be applied to appraisals on properties. The discount is determined based on the nature of the underlying properties, aging of appraisal and other factors.

 

Fair valued impaired loans at September 30, 2014, had a carrying value of $3.2 million. There was no valuation allowance associated with these impaired loans. At December 31, 2013, fair value impaired loans had a carrying value of $3.5 million which were net of a valuation allowance of $119,000. These balances do not include $4.8 million and $3.4 million of impaired loans at September 30, 2014 and December 31, 2013, respectively, that are measured using the discounted cash flow method and are not collateral dependent.

 

Other real estate owned properties are recorded at the estimated fair market value, less the estimated cost to sell, at the date of foreclosure. Fair market value is estimated by using professional real estate appraisals subject to similar adjustments previously mentioned and may be subsequently adjusted based upon real estate broker opinions. Often these values are based on contract of sale or offers, which could result in a Level 2 assignment.

 

As discussed above, the fair value of impaired loans and other real estate owned is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable.

 

 

The following disclosure of estimated fair value amounts has been determined by the Bank using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

		At September 30, 2014
						Fair Value Measurements
						Quoted Prices
						in Active				Significant				Significant
						Markets				Other				Other
						for Identical				Observable				Unobservable
		Carrying				Assets				Inputs				Inputs
		Amount				(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Assets
Cash and cash equivalents		$	18,533			$	6,915			$	11,618			$	-
Interest-bearing time deposits		$	9,540			$	-			$	9,529			$	-
Loans receivable, net of allowance		$	772,397			$	-			$	-			$	774,307
Investment securities available for sale		$	157,290			$	4,776			$	152,514			$	-
Investment securities held to maturity		$	17,796			$	-			$	17,538			$	-
FHLB Stock		$	6,873			n/a				n/a				n/a
Accrued interest receivable		$	3,297			$	-			$	621			$	2,676
Liabilities
Savings deposits		$	92,733			$	-			$	92,733			$	-
Checking and money market deposits		$	450,333			$	90,821			$	359,512			$	-
Certificates of deposit		$	257,800			$	-			$	258,305			$	-
Borrowings		$	132,085			$	-			$	139,316			$	-
Accrued interest payable		$	123			$	-			$	123			$	-

 

 

		At December 31, 2013
						Fair Value Measurements
						Quoted Prices
						in Active				Significant				Significant
						Markets				Other				Other
						for Identical				Observable				Unobservable
		Carrying				Assets				Inputs				Inputs
		Amount				(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Assets
Cash and cash equivalents		$	24,861			$	6,940			$	17,921			$	-
Interest-bearing time deposits		$	9,185			$	-			$	9,185			$	-
Loans held for sale		$	1,814			$	-			$	1,814			$	-
Loans receivable, net of allowance		$	780,127			$	-			$	-			$	791,262
FHLB Stock		$	7,747			n/a				n/a				n/a
Accrued interest receivable		$	3,235			$	-			$	615			$	2,620
Liabilities
Savings deposits		$	96,029			$	-			$	96,029			$	-
Checking and money market deposits		$	433,205			$	82,488			$	350,717			$	-
Certificates of deposit		$	269,188			$	-			$	270,371			$	-
Borrowings		$	143,935			$	-			$	151,287			$	-
Accrued interest payable		$	102			$	-			$	102			$	-

 

The carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, and accrued interest receivable and payable. Noninterest-bearing cash and cash equivalents and noninterest-bearing deposit liabilities are classified as Level 1, whereas interest-bearing cash and cash equivalents and interest-bearing deposit liabilities are classified as Level 2. Accrued interest receivable and payable are classified as either Level 2 or Level 3 based on the classification level of the asset or liability with which the accrued interest is associated.

 

Loans held for sale — The fair value of residential mortgage loans is based on the price secondary markets are currently offering for similar loans using observable market data. The fair value is equal to the carrying value, since the time from when a loan is closed and settled is generally not more than two weeks. The fair value of loans transferred from the loan portfolio is based on the amounts offered for these loans in currently pending sales transactions, outstanding commitments from investors, or current market valuation appraisals. Loans held for sale are not included in non-performing loans.

 

 

Loans — The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. The fair values of loans not impaired is estimated by discounting the estimated future cash flows using the Company’s interest rates currently offered for loans with similar terms to borrowers of similar credit quality which is not an exit price under FASB ASC Topic No. 820, “Fair Value Measurements and Disclosures”. The carrying value and fair value of loans include the allowance for loan losses.

 

FHLB stock — It is not practical to determine the fair value of FHLB stock due to restrictions placed on transferability.

 

Deposits — The fair value of deposits with no stated maturity, such as money market deposit accounts, checking accounts and savings accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate currently offered by the Company for deposits of similar size, type and maturity.

 

Borrowings — The fair value of borrowings, which includes Federal Home Loan Bank of New York advances and securities sold under agreement to repurchase, is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate currently offered for borrowings of similar maturity and terms.

 

Derivatives — The fair value of the Company’s interest rate swap was estimated using Level 2 inputs. The fair value was determined using third party prices that are based on discounted cash flow analyses using observed market interest rate curves and volatilities.

 

The Company’s unused loan commitments, standby letters of credit and undisbursed loans have no carrying amount and have been estimated to have no realizable fair value. Historically, a majority of the unused loan commitments have not been drawn upon.

 

The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2014. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

 

 

NOTE 6 – OTHER REAL ESTATE OWNED

 

At September 30, 2014, other real estate owned (OREO) totaled $5.3 million and consisted of nine residential properties and nine commercial properties. At December 31, 2013, OREO totaled $7.4 million and consisted of twenty-three residential properties and eleven commercial properties.

 

For the three months ended September 30, 2014, the Company sold three residential OREO properties with an aggregate carrying value totaling $448,000. The Company recorded net losses on the sale of OREO of $34,000 in the third quarter of 2014 compared to net gains of $17,000 recorded in the third quarter of 2013. During the current quarter, the Company added two residential properties and one commercial property to OREO with an aggregate carrying value of $1.6 million. For the nine months ended September 30, 2014, the Company recorded net losses on the sale of OREO of $274,000 compared to net gains on the sale of OREO of $57,000 for the nine months ended September 30, 2013.

 

Expenses applicable to OREO were $195,000 for the three month period ending September 30, 2014, which included OREO valuation write-downs of $21,000, taxes and insurance totaling $72,000, and $102,000 of miscellaneous expenses. Net losses on the sale of OREO totaled $34,000 for the quarter. For the three months ended September 30, 2013, expenses applicable to OREO of $403,000 included OREO valuation write-downs totaling $275,000, taxes and insurance totaling $67,000, and $61,000 of miscellaneous expenses. Net gains on the sale of OREO totaled $17,000 for the quarter. For the nine months ended September 30, 2014, expenses applicable to OREO of $611,000 included OREO valuation write-downs of $121,000, taxes and insurance totaling $228,000, and $262,000 of miscellaneous expenses. Net losses on the sale of OREO totaled $274,000 for the nine months ended September 30, 2014. For the nine months ended September 30, 2013, expenses applicable to OREO of $882,000 included OREO valuation write-downs of $445,000, taxes and insurance totaling $227,000, and $210,000 of miscellaneous expenses. Net gains on the sale of OREO totaled $57,000 for the nine months ended September 30, 2013.

 

As of the date of this filing, the Company has an agreement of sale for one OREO property with a carrying value of $100,000, although there can be no assurance that this sale will be completed. In addition, from September 30, 2014 until the date of this filing, the Company has sold one residential OREO property with a carrying value of $56,000. No gain or loss was recorded by the Company related to this fourth quarter 2014 sale.

 

 

NOTE 7 – DEPOSITS

 

Deposits are as follows:  

 

		September 30,				December 31,
		2014				2013
		(in thousands)
Savings accounts		$	92,733			$	96,029
Interest-bearing checking and money market deposits (1)			359,512				350,717
Non-interest bearing checking			90,821				82,488
Certificates of deposit of less than $100,000			113,978				113,123
Certificates of deposit of $100,000 or more			143,822				156,065
Total deposits		$	800,866			$	798,422

 

(1)	Includes municipal deposit accounts totaling $81.9 million, or 10.2% of total deposits at September 30, 2014 and $88.9 million, or 11.1% of total deposits at December 31, 2013.

 

 

NOTE 8 – BORROWINGS

 

The Bank’s FHLB borrowings totaled $122.1 million and $134.0 million at September 30, 2014 and December 31, 2013, respectively, and repurchase agreements totaled $9.9 million for both periods.

 

 

NOTE 9 – DERIVATIVES AND HEDGING ACTIVITIES

 

The Bank is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. An interest rate swap was entered into to manage interest rate risk associated with the Bank’s variable rate borrowings. The interest rate swap on the variable rate borrowing was designated as a cash flow hedge and was a negotiated over the counter contract. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income or loss and subsequently reclassified into earnings in the period during which the hedged forecasted transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The unrealized holding loss on the interest rate swap was $85,000 and $364,000 for the three and nine months ended September 30, 2014, respectively. There was no reclassification from other comprehensive to interest income nor the ineffective portion through non-interest income for the three and nine months ended September 30, 2014. The contract was entered into by the Bank with a counterparty, and the specific agreement of terms were negotiated, including the amount, the interest rate, and the maturity.

 

The Bank is exposed to credit-related losses in the event of non-performance by the counterparties to the agreements. The Bank controls the credit risk through monitoring procedures and does not expect the counterparty to fail their obligations. The Bank only deals with primary dealers and believes that the credit risk inherent in this contract was not significant during and at period end.

 

At September 30, 2014, the Bank had a forecasted interest rate swap agreement to receive from the counterparty at 1 month LIBOR and to pay interest to the counterparty at a fixed rate of 3.368% on a notional amount of $19.0 million. The effective date of the transaction is May 17, 2017 and the maturity date is May 17, 2023. Beginning May 17, 2014, for the first three years, no cash flows will be exchanged and for the following seven years the Bank will pay a fixed interest rate of 3.368% and the counterparty will pay the Bank 1 month LIBOR. The hedging strategy converts the LIBOR based floating interest on a certain FHLB advance to a fixed interest rate, thereby protecting the Bank from floating interest rate variability. The following table presents information regarding our derivative financial instrument at September 30, 2014. The Bank had no derivative financial instruments at December 31, 2013.

 

		At September 30, 2014
		Notional Amount				Fair Value
		(in thousands)
Derivatives
Interest rate swap		$	19,000			$	(364	)

 

  

NOTE 10 – INCOME TAXES

 

For the three months ended September 30, 2014, the Company recorded a net tax expense of $1.0 million compared to a net tax expense of $1.4 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, the Company recorded a net tax expense of $3.6 million compared to a net tax expense of $3.3 million for the nine months ended September 30, 2013.

 

For more information about our income taxes, read Note 11, “Income Taxes,” in our 2013 Annual Report to Shareholders.

 

 

NOTE 11 – STOCK BENEFIT PLAN

 

The Company has an Equity Incentive Plan under which incentive and non-qualified stock options, stock appreciation rights (SARs), and restricted stock awards (RSAs) may be granted periodically to certain employees and directors. Generally, stock options are granted with an exercise price equal to fair market value at the date of grant and expire in 10 years from the date of grant. Generally, stock options granted vest over a five-year period commencing on the first anniversary of the date of grant. Under the plan, 1,331,352 stock options are available to be issued. Forfeited options are returned to the plan and are available for issuance. As of September 30, 2014, 937,450 options were issued and 571,212 options were available for issuance.

 

During the first nine months of 2014, the Company issued 20,000 incentive stock options to certain employees at a grant price ranging from $10.13 per share to $10.67 per share. During the first nine months of 2013, the Company issued 20,000 incentive stock options to certain employees at a grant price ranging from $8.93 per share to $9.19 per share. In addition, during the first nine months of 2013, the Company issued 8,850 non-qualified options to certain directors at a grant price of $9.04 per share.

 

Stock option activity for the nine months ended September 30, 2014 and 2013 was as follows:

 

		For the nine months ended September 30,
		2014												2013
										Weighted												Weighted
						Weighted				Average								Weighted				Average
						Average				Remaining								Average				Remaining
		Number of				Exercise				Contractual				Number of				Exercise				Contractual
		Options				Price				Life (in years)				Options				Price				Life (in years)
Outstanding at January 1			710,960			$	7.64								711,290			$	7.54
Granted			20,000			$	10.40								28,850			$	9.05
Forfeited			(16,000	)		$	7.27								(16,000	)		$	9.35
Exercised			(18,000	)		$	7.40								(8,000	)		$	7.28
Outstanding at September 30			696,960			$	7.81				6.2				716,140			$	7.66				6.9
Exercisable at September 30			488,258			$	7.54				5.8				387,574			$	7.50				6.8
Aggregate Intrinsic Value at September 30		$	921,600											$	643,800

 

(1)	Expected forfeitures are immaterial.

 

  

The expected average risk-free rate is based on the U.S. Treasury yield curve on the day of grant. The expected average life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and expected option exercise activity. Expected volatility is based on historical volatilities of the Company’s common stock as well as the historical volatility of the stocks of the Company’s peer banks. The expected dividend yield is based on the expected dividend yield over the life of the option and the Company’s historical information. The following table presents the weighted average per share fair value of options granted during the periods presented, and the assumptions used based on the Black-Sholes option pricing methodology.

 

		For the three months ended September 30,								For the nine months ended September 30,
Assumption		2014				2013				2014				2013
Expected average risk-free interest rate			1.95	%			2.01	%			1.99	%			1.73	%
Expected average life (in years)			6.5				6.5				6.5				6.5
Expected volatility			36.64	%			39.14	%			36.98	%			39.53	%
Expected dividend yield			2.47	%			2.25	%			2.41	%			2.24	%
Weighted average per share fair value		$	2.95			$	2.91			$	3.08			$	2.88

 

Restricted stock activity for the nine months ended September 30, 2014 and 2013 was as follows:

 

		For the nine months ended September 30,
		2014								2013
		Restricted Common Shares				Weighted Average Fair Value at Grant Date				Restricted Common Shares				Weighted Average Fair Value at Grant Date
Non-vested at January 1			7,425			$	8.44				4,950			$	7.68
Granted			-			$	-				4,125			$	9.04
Vested			(2,475	)		$	8.13				(1,650	)		$	7.68
Forfeited			-			$	-				-			$	-
Non-vested at September 30			4,950			$	8.59				7,425			$	7.68

 

At September, 2014, unrecognized compensation costs on stock options and restricted stock awards was $663,000 which will be amortized on a straight-line basis over the remaining vesting period. Stock-based compensation expense and related tax effects recognized in connection with stock options and restricted stock awards for the three and nine months ended September 30, 2014 and 2013 was as follows:

 

		For the three months ended September 30,								For the nine months ended September 30,
		2014				2013				2014				2013
		(in thousands)								(in thousands)
Compensation expense:
Common stock options		$	110			$	98			$	343			$	336
Restricted common stock			5				4				16				11
Total compensation expense			115				102				359				347
Tax benefit			3				2				7				7
Net income effect		$	112			$	100			$	240			$	340

 

  

NOTE 12 – EARNINGS PER SHARE

 

Basic earnings per common share is the net income (loss) divided by the weighted average number of common shares outstanding during the period. ESOP shares are not considered outstanding for this calculation unless earned. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock option and restricted stock awards, if any.

 

As of September 30, 2014, options to purchase 696,960 shares were outstanding and dilutive, and accordingly, were included in determining diluted earnings per common share. In addition, 4,950 shares of restricted stock were outstanding and dilutive, and accordingly, were included in determining diluted earnings per common share. As of September 30, 2013, options to purchase 716,140 shares were outstanding and dilutive, and accordingly, were included in determining diluted earnings per common share. In addition, 7,425 shares of restricted stock were outstanding and dilutive, and accordingly were included in determining diluted earnings per common share. The following is the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013.

 

		For the three months ended September 30,								For the nine months ended September 30,
		2014				2013				2014				2013
		(in thousands, except share data)								(in thousands, except share data)
Net income		$	1,703			$	1,904			$	5,763			$	4,999
Weighted average shares outstanding			10,765,209				11,612,431				10,957,768				12,128,458
Basic earnings per share		$	0.16			$	0.16			$	0.53			$	0.41
Diluted weighted average shares outstanding			10,889,781				11,666,535				11,089,421				12,182,683
Diluted earnings per share		$	0.15			$	0.16			$	0.52			$	0.41

 

 

NOTE 13 – REGULATORY MATTERS

 

As of September 30, 2014, the Bank was categorized as “Well-Capitalized” under the regulatory framework for prompt corrective action. To be categorized as “Well-Capitalized”, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios. The Bank’s capital ratios at September 30, 2014 were as follows: Tier I risk based capital 13.03%; Total risk based capital 14.28%; Tier I leverage ratio 9.60%.

 

 

NOTE 14 – OTHER COMPREHENSIVE INCOME

 

The following is a summary of the accumulated other comprehensive income (loss) balances, net of tax, for the three months ended September 30, 2014 and 2013:

 

		Balance at June 30, 2014				Other Comprehensive Income Before Reclassifications				Amount Reclassified from Accumulated Other Comprehensive Income				Amortization HTM Other Comprehensive Income				Other Comprehensive Income Three Months Ended September 30, 2014				Balance at September 30, 2014
		(in thousands)
Net unrealized holding gain (loss) on securities available for sale, net of tax		$	(1,198	)		$	(279	)		$	(80	)		$	17			$	(342	)		$	(1,540	)
Net unrealized holding gain (loss) on interest rate swap			(168	)			(51	)			-				-				(51	)			(219	)
Accumulated other comprehensive income (loss) net of tax		$	(1,366	)		$	(330	)		$	(80	)		$	17			$	(393	)		$	(1,759	)

 

 

		Balance at June 30, 2013				Other Comprehensive Income Before Reclassifications				Amount Reclassified from Accumulated Other Comprehensive Income				Amortization HTM Other Comprehensive Income				Other Comprehensive Income Three Months Ended September 30, 2013				Balance at September 30, 2013
		(in thousands)
Net unrealized holding gain (loss) on securities available for sale, net of tax		$	(3,616	)		$	(70	)		$	-			$	-			$	(70	)		$	(3,686	)
Accumulated other comprehensive income (loss) net of tax		$	(3,616	)		$	(70	)		$	-			$	-			$	(70	)		$	(3,686	)

 

 

The following is a summary of the accumulated other comprehensive income (loss) balances, net of tax, for the nine months ended September 30, 2014 and 2013:

 

		Balance at December 31, 2013				Other Comprehensive Income Before Reclassifications				Amount Reclassified from Accumulated Other Comprehensive Income				Amortization HTM Other Comprehensive Income				Other Comprehensive Income Nine Months Ended September 30, 2014				Balance at September 30, 2014
		(in thousands)
Net unrealized holding gain (loss) on securities available for sale, net of tax		$	(2,951	)		$	1,456			$	(126	)		$	81			$	1,411			$	(1,540	)
Increase in fair value of AFS securities sold			-				1,135				(1,135	)			-				-				-
Net unrealized holding gain (loss) on interest rate swap			-				(219	)			-				-				(219	)			(219	)
Accumulated other comprehensive income (loss) net of tax		$	(2,951	)		$	2,372			$	(1,261	)		$	81			$	1,192			$	(1,759	)

  

 

		Balance at December 31, 2012				Other Comprehensive Income Before Reclassifications				Amount Reclassified from Accumulated Other Comprehensive Income				Amortization HTM Other Comprehensive Income				Other Comprehensive Income Nine Months Ended September 30, 2013				Balance at September 30, 2013
		(in thousands)
Net unrealized holding gain (loss) on securities available for sale, net of tax		$	(679	)		$	(2,833	)		$	(174	)		$	-			$	(3,007	)		$	(3,696	)
Accumulated other comprehensive income (loss) net of tax		$	(679	)		$	(2,833	)		$	(174	)		$	-			$	(3,007	)		$	(3,696	)

 

The following represents the reclassifications out of accumulated other comprehensive income for the three and nine months ended September 30, 2014 and 2013:

 

		For the three months ended September 30,							Affected Line Item in Statements of Income
		2014				2013
		(in thousands)
Unrealized gains (losses) on securities available for sale:
Realized gain on securities sales		$	133			$	-		Gain (loss) on sale of investment securities, net
Previously unrealized loss on AFS securities transferred to HTM			-				-		Previously unrealized gain or loss
Income tax expense			(53	)			-		Income taxes
Total reclassifications net of tax		$	80			$	-

 

 

		For the nine months ended September 30,							Affected Line Item in Statements of Income
		2014				2013
		(in thousands)
Unrealized gains (losses) on securities available for sale:
Realized gain on securities sales		$	2,100			$	290		Gain (loss) on sale of investment securities, net
Previously unrealized loss on AFS securities transferred to HTM			-				-		Previously unrealized gain or loss
Income tax expense			(839	)			(116	)	Income taxes
Total reclassifications net of tax		$	1,261			$	174

 

NOTE 15 – PENDING ACQUISITION

 

On September 18, 2014, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with Colonial Financial Services, Inc. (“Colonial”) (NASDAQ: “COBK”). The Agreement provides that, upon the terms and subject to the conditions set forth therein, Colonial will merge with and into Cape Bancorp, with Cape Bancorp continuing as the surviving entity. Upon consummation of the transaction, Colonial Bank, FSB (“Colonial Bank”), a wholly-owned subsidiary of Colonial, will merge with and into Cape Bank, with Cape Bank continuing as the surviving Bank. Under the Agreement, each shareholder of Colonial, subject to potential adjustments at closing, will be entitled to elect to receive either $14.50 per share in cash or 1.412 shares of Cape Bancorp’s common stock, subject to 50% of the shares being exchanged for stock and 50% for cash. Based on Cape Bancorp’s stock price of $10.06, as of September 9, 2014, the transaction is valued at approximately $55.0 million. The transaction is subject to receipt of Colonial shareholder approval, Cape Bancorp shareholder approval and customary regulatory approvals. The Company expects the transaction to close in the first half of 2015. At closing, two current members of the Colonial Board of Directors, Mr. Gregory J. Facemyer and Hugh J. McCaffrey will be added to the Boards of Directors of Cape and Cape Bank. For additional information on the pending acquisition of Colonial, please refer to the Company’s Form 8K filed with the Securities and Exchange Commission on September 11, 2014.

 

 

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.

 

On September 10, 2014, the Company entered into an agreement and plan of merger to acquire Colonial Financial Services, Inc. (“Colonial”), the parent company of Colonial Bank, FSB. The transaction is subject to receipt of Colonial shareholder approval, Cape Bancorp shareholder approval and customary regulatory approvals. The transaction is expected to close in the first half of 2015. For additional information on the pending acquisition of Colonial, please refer to the Company’s Form 8K filed with the Securities and Exchange Commission on September 11, 2014.

 

At September 30, 2014, the Company had total assets of $1.082 billion compared to $1.093 billion at December 31, 2013. For the three months ended September 30, 2014 and 2013, the Company had total revenues (interest income plus non-interest income) of $11.5 million and $12.5 million, respectively. Net income for the three months ended September 30, 2014 totaled $1.7 million or $0.16 per common share and $0.15 per fully diluted share, compared to net income of $1.9 million, or $0.16 per common and fully diluted share, for the three months ended September 30, 2013. For the nine months ended September 30, 2014 and 2013, the Company had total revenues (interest income plus non-interest income) of $36.1 million and $36.0 million, respectively. Net income for the nine months ended September 30, 2014 totaled $5.8 million, or $0.53 per common share and $0.52 per fully diluted share, compared to net income of $5.0 million, or $0.41 per common and fully diluted share, for the nine months ended September 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 nine months ended September 30, 2014, the Bank experienced a significant decrease in its level of non-performing assets and made progress in improving its credit quality ratios. At September 30, 2014, non-performing loans as a percentage of total gross loans totaled 0.99% compared to 0.93% of total gross loans at December 31, 2013 and 1.26% of total gross loans at September 30, 2013. The Company’s Adversely Classified Asset Ratio (Classified Assets/Tier I Capital plus the allowance for loan losses) at September 30, 2014 was 16%, a significant improvement from 26% at December 31, 2013. Non-performing assets (non-performing loans, other real estate owned and non-accruing investment securities) as a percentage of total assets decreased to 1.20% at September 30, 2014 from 1.35% at December 31, 2013. For the periods ended, and as of, September 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 1.25% at September 30, 2014, from 1.18% at December 31, 2013, while the ratio of our allowance for loan losses to non-performing loans was 127.00% at September 30, 2014 compared to 127.05% at December 31, 2013. For the three months ended September 30, 2014, loan charge-offs totaled $103,000 compared to loan charge-offs of $286,000 for the three months ended September 30, 2013. Of the $103,000 of loan charge-offs during the third 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 $782.2 million at September 30, 2014 resulting from a decrease in residential mortgage loans totaling $15.0 million, partially offset by increases in commercial loans of $7.2 million and consumer loans of $560,000. Commercial loan closings during the first nine 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 $2.3 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 September 30, 2014, 91.6% of our loan portfolio was secured by real estate and 63.0% 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 $2.5 million from $798.4 million at December 31, 2013 to $800.9 million at September 30, 2014 primarily resulting from increases of $13.8 million in interest-bearing checking accounts and $9.5 million in non-interest bearing checking accounts partially offset by an $11.4 million decrease in certificates of deposit, a decrease in money market accounts of $5.0 million and a $3.3 million decrease in savings accounts. 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 9.3% and 6.3%, respectively, as of August 2014, an improvement from 2013 levels of 11.1% and 8.0%, respectively. The number of residential building permits issued and values decreased in both Atlantic and Cape May County from August 2013 to August 2014. Median sale prices of single-family homes sold during the twelve month periods ended September 2014 and 2013 increased 9.6% in Cape May County while Atlantic County decreased 4.8%. The number of homes sold during those same periods increased 1.7% for Cape May County, but decreased 3.6% for Atlantic County. The number of new listings increased 16.5% in Atlantic County and 1.6% in Cape May County.

 

During 2013, and continuing through the third 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

 

•

Continue preparing for the Colonial acquisition

 

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. In the third quarter of 2014, we created a Commercial Real Estate lending team operating out of our Radnor MDO primarily serving the Philadelphia metro market. 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 September 2, 2014, the third stock buyback program was completed. The average repurchase price for the three stock buyback programs was $9.67 per share.

 

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 shareholders of record as of the close of business on August 8, 2014. The dividend was paid on August 18, 2014. And, on October 20, 2014, the Company declared a cash dividend of $0.06 per common share to shareholders of record as of the close of business November 3, 2014. The dividend is expected to be paid on or about November 18, 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 third 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.

 

Continue preparing for the Colonial acquisition:

 

Management expects that merger teams will spend much of the remainder of the year planning for the pending acquisition of Colonial and the subsequent core system integration. The transaction is subject to receipt of Colonial shareholder approval, Cape Bancorp shareholder approval and customary regulatory approvals. The transaction is expected to close in the first half of 2015.

 

 

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

 

At September 30, 2014, the Company’s total assets were $1.082 billion, a decrease of $11.1 million, or 0.11%, from the December 31, 2013 level of $1.093 billion.

 

Cash and cash equivalents decreased $6.4million, or 25.45%, to $18.5 million at September 30, 2014 from $24.9 million at December 31, 2013.

 

 

Interest-bearing time deposits increased $355,000, or 3.86%, from $9.2 million at December 31, 2013 to $9.5 million at September 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 $782.2 million at September 30, 2014 from $789.5 million at December 31, 2013, a decrease of $7.3 million, or 0.92%. Net loans decreased $7.7 million, net of an increase in the allowance for loan losses of $469,000, resulting from decreases in residential mortgage loans totaling $15.0 million, partially offset by increases in commercial loans of $7.2 million and consumer loans of $560,000. Commercial loan closings during the first nine 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 $2.3 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 $1.4 million to $11.2 million, or 1.43% of total gross loans, at September 30, 2014 from $9.8 million, or 1.24% of total gross loans at December 31, 2013. Total delinquent loans by portfolio at September 30, 2014 were $7.9 million of commercial mortgage and $303,000 commercial business loans, $2.2 million of residential mortgage loans and $844,000 of home equity loans.   At September 30, 2014, delinquent loan balances by number of days delinquent were: 31 to 59 days – $2.8 million; 60 to 89 days – $1.2 million; and 90 days and greater – $7.2 million.

 

At September 30, 2014, the Company had $7.7 million in non-performing loans, or 0.99% of total gross loans, an increase of $373,000 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 included $1.6 million of loans that were on non-accrual status at December 31, 2013. There were no loans held for sale at September 30, 2014.  At September 30, 2014, non-performing loans by loan portfolio category were as follows: $6.0 million of commercial loans, $867,000 of residential mortgage loans, $303,000 of commercial business loans and $546,000 of consumer loans.  Of these stated delinquencies, the Company had $429,000 of loans that were 90 days or more delinquent and still accruing (5 residential mortgage loans for $328,000 and 4 consumer loans for $101,000).  These loans are well secured, in the process of collection and we anticipate no losses will be incurred.

 

At September 30, 2014, commercial non-performing loans had collateral type concentrations of $440,000 (2 loans or 7%) secured by commercial buildings and equipment, $916,000 (6 loans or 15%) secured by residential related commercial loans, $1.0 million (3 loans or 16%) secured by restaurant properties, $759,000 (3 loans or 12%) secured by land and building lots, and $3.2 million (6 loans or 50%) secured by retail stores.  The three largest commercial non-performing loan relationships are $1.8 million, $710,000 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 the remainder of 2014, we anticipate problem assets to remain relatively unchanged. 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 $8.8 million, or 5.30%, to $175.1 million at September 30, 2014 from $166.3 million at December 31, 2013. At September 30, 2014, AFS securities totaled $157.3 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 $2.1 million from $7.4 million at December 31, 2013 to $5.3 million at September 30, 2014, and consisted at September 30, 2014 of nine commercial properties and nine residential properties (including five building lots). During the quarter ended September 30, 2014, the Company added one commercial property and two residential properties to OREO with an aggregate carrying value of $1.6 million. In addition, three residential OREO properties with an aggregate carrying value totaling $448,000 were sold during the quarter ended September 30, 2014 with recognized net losses on the sale of OREO totaling $34,000. As of the date of this filing, the Company has agreements of sale for two OREO properties with an aggregate carrying value totaling $156,000, although there can be no assurance that these sales will be completed.

 

Total deposits increased $2.5 million, or 0.31%, from $798.4 million at December 31, 2013 to $800.9 million at September 30, 2014 primarily resulting from increases in interest-bearing checking accounts of $13.8 million and non-interest bearing accounts of $8.4 million while certificates of deposit decreased $11.4 million, money market deposits decreased $5.0 million and savings accounts decreased $3.3 million. Interest-bearing checking accounts increased $13.8 million, or 6.51%, to $225.4 million at September 30, 2014 from $211.6 million at December 31, 2013. Non-interesting bearing accounts totaled $90.8 million at September 30, 2014, an increase of $8.3 million, or 10.10%, from the December 31, 2013 total of $82.5 million. At September 30, 2014, certificates of deposit totaled $257.8 million, a decrease of $11.4 million, or 4.23%, from the December 31, 2013 total of $269.2 million. Money market accounts decreased $5.0 million, or 3.58%, to $134.1 million at September 30, 2014 from $139.1 million at December 31, 2013.

 

 

Borrowings decreased $11.8 million, or 8.23%, from $143.9 million at December 31, 2013 to $132.1 million at September 30, 2014.

 

Cape Bancorp’s total equity decreased $563,000, or 0.40%, to $139.9 million at September 30, 2014 from $140.4 million at December 31, 2013 primarily resulting from a net increase of $3.6 million in retained earnings (earnings less dividends declared), an improvement of $1.1 million in the accumulated other comprehensive loss, and increases in paid-in-capital and unearned ESOP shares totaling $651,000. These increases were offset by a $6.0 million decrease related to the Company’s stock repurchase program. Tangible equity to tangible assets increased to 11.04% at September 30, 2014 compared to 10.99% at December 31, 2013. At September 30, 2014, Cape Bank’s regulatory capital ratios for Tier I Leverage Ratio, Tier I Risk-Based Capital and Total Risk-Based Capital were 9.60%, 13.03% and 14.28%, 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 September 30,
		2014												2013
		Average Balance				Interest Income/ Expense				Average Yield				Average Balance				Interest Income/ Expense				Average Yield
		(dollars in thousands)
Assets
Interest-earning deposits		$	20,901			$	25				0.47	%		$	23,074			$	25				0.43	%
Investments			184,982				882				1.91	%			178,031				980				2.20	%
Loans			779,791				9,241				4.70	%			752,806				9,284				4.89	%
Total interest-earning assets			985,674				10,148				4.08	%			953,911				10,289				4.28	%
Noninterest-earning assets			104,641												105,706
Allowance for loan losses			(9,700	)											(9,891	)
Total assets		$	1,080,615											$	1,049,726
Liabilities and Stockholders' Equity
Interest-bearing checking accounts		$	221,987				102				0.18	%		$	204,174				100				0.19	%
Savings accounts			93,982				13				0.05	%			97,503				18				0.07	%
Money market accounts			134,872				103				0.30	%			158,310				63				0.16	%
Certificates of deposit			263,282				516				0.78	%			248,157				532				0.85	%
Borrowings			124,962				625				1.98	%			97,237				561				2.29	%
Total interest-bearing liabilities			839,085				1,359				0.64	%			805,381				1,274				0.63	%
Noninterest-bearing deposits			92,628												96,000
Other liabilities			8,088												6,197
Total liabilities			939,801												907,578
Stockholders' equity			140,814												142,148
Total liabilities and stockholders' equity		$	1,080,615											$	1,049,726
Net interest income						$	8,789											$	9,015
Net interest spread											3.44	%											3.65	%
Net interest margin											3.54	%											3.75	%
Net interest income and margin (tax equivalent basis) (1)						$	8,837				3.56	%						$	9,075				3.77	%
Ratio of average interest-earning assets to average interest bearing liabilities			117.47	%											118.44	%

 

(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 $48,000, and $63,000 for the three month period ended September 30, 2014 and 2013, respectively. The average yield on investments increased to 2.01% from 1.91% for the three month period ended September 30, 2014 and increased to 2.34% from 2.20% for the three month period ended September 30, 2013.

 

 

		For the nine months ended September 30,
		2014												2013
		Average Balance				Interest Income/ Expense				Average Yield				Average Balance				Interest Income/ Expense				Average Yield
		(dollars in thousands)
Assets
Interest-earning deposits		$	22,698			$	73				0.43	%		$	24,227			$	79				0.44	%
Investments			183,217				2,679				1.95	%			177,273				2,920				2.20	%
Loans			785,937				27,864				4.74	%			738,281				27,491				4.98	%
Total interest-earning assets			991,852				30,616				4.13	%			939,781				30,490				4.34	%
Noninterest-earning assets			104,982												108,070
Allowance for loan losses			(9,606	)											(9,850	)
Total assets		$	1,087,228											$	1,038,001
Liabilities and Stockholders' Equity
Interest-bearing checking accounts		$	216,600				295				0.18	%		$	198,421				334				0.23	%
Savings accounts			94,905				40				0.06	%			96,773				50				0.07	%
Money market accounts			135,943				238				0.23	%			164,881				219				0.18	%
Certificates of deposit			268,482				1,423				0.71	%			237,931				1,736				0.98	%
Borrowings			136,482				1,835				1.80	%			96,476				1,726				2.39	%
Total interest-bearing liabilities			852,412				3,831				0.60	%			794,482				4,065				0.68	%
Noninterest-bearing deposits			85,767												89,579
Other liabilities			7,493												6,079
Total liabilities			945,672												890,140
Stockholders' equity			141,556												147,861
Total liabilities and stockholders' equity		$	1,087,228											$	1,038,001
Net interest income						$	26,785											$	26,425
Net interest spread											3.53	%											3.66	%
Net interest margin											3.61	%											3.76	%
Net interest income and margin (tax equivalent basis) (1)						$	26,923				3.63	%						$	26,627				3.79	%
Ratio of average interest-earning assets to average interest bearing liabilities			116.36	%											118.29	%

 

(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 $138,000, and $202,000 for the nine month period ended September 30, 2014 and 2013, respectively. The average yield on investments increased to 2.05% from 1.95% for the nine month period ended September 30, 2014 and increased to 2.35% from 2.20% for the nine month period ended September 30, 2013.

 

 

Rate/Volume Analysis

 

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The average rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The average volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net change column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

 

		For the three months ended September 30, 2014 compared to the three months ended September 30, 2013
		Increase (decrease) due to changes in:
		Average				Average				Net
		Volume				Rate				Change
		(in thousands)
Interest Earning Assets
Interest-earning deposits		$	(2	)		$	2			$	0
Investments			33				(131	)			(98	)
Loans			327				(370	)			(43	)
Total interest income			358				(499	)			(141	)
Interest-Bearing Liabilities
Interest-bearing demand accounts			8				(6	)			2
Savings accounts			(1	)			(4	)			(5	)
Money market accounts			(10	)			50				40
Certificates of deposit			32				(48	)			(16	)
Borrowings			146				(82	)			64
Total interest expense			175				(90	)			85
Total net interest income		$	183			$	(409	)		$	(226	)

 

 

		For the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013
		Increase (decrease) due to changes in:
		Average				Average				Net
		Volume				Ra te				Change
		(in thousands)
Interest Earning Assets
Interest-earning deposits		$	(4	)		$	(2	)		$	(6	)
Investments			87				(328	)			(241	)
Loans			1,725				(1,352	)			373
Total interest income			1,808				(1,682	)			126
Interest-Bearing Liabilities
Interest-bearing demand accounts			29				(68	)			(39	)
Savings accounts			(1	)			(9	)			(10	)
Money market accounts			(43	)			62				19
Certificates of deposit			203				(516	)			(313	)
Borrowings			605				(496	)			109
Total interest expense			793				(1,027	)			(234	)
Total net interest income		$	1,015			$	(655	)		$	360

 

 

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2014 and 2013

 

General. Net income for the three months ended September 30, 2014 was $1.7 million, or $0.16 per common share and $0.15 per fully diluted share, compared to net income of $1.9 million, or $0.16 per common and fully diluted share for the three months ended September 30, 2013. The loan loss provision for the three months ended September 30, 2014 totaled $153,000 compared to $449,000 for the third quarter of 2013. Net interest income decreased $226,000 to $8.8 million in the third quarter of 2014 from $9.0 million in the third quarter of 2013. The net interest margin decreased 21 basis points from 3.75% for the quarter ended September 30, 2013 to 3.54% for the quarter ended September 30, 2014. Net gains on the sales of loans totaled $179,000 for the three months ended September 30, 2014 compared to $346,000 for the same period in 2013. Gains on the sale of Small Business Administration (“SBA”) loans increased $25,000, while net gains on the sale of residential loans declined $192,000 reflecting the Company’s decision to exit the residential mortgage origination business effective December 31, 2013. The third quarter of 2014 included net gains on sales of investment securities of $133,000 compared to no gains for the same period in 2013. Salaries and employee benefits totaled $3.6 million for the third quarter of 2014, a decrease of $245,000 from the third quarter 2013 of $3.9 million. Professional services totaled $538,000 for the third quarter of 2014 compared to $182,000 for the third quarter of 2013. The third quarter of 2014 included expenses related to the pending Colonial merger in the amount of $386,000, or $0.02 per fully diluted share.

 

For the nine months ended September 30, 2014, net income totaled $5.8 million, or $0.53 per common share and $0.52 per fully diluted share, compared to net income of $5.0 million, or $0.41 per common and fully diluted share, for the nine months ended September 30, 2013. The loan loss provision for the nine months ended September 30, 2014 totaled $2.5 million compared to $1.1 million for the nine months ended September 30, 2013. Net interest income increased $360,000 to $26.8 million for the nine months ended September 30, 2014 from $26.4 million for the nine months ended September 30, 2013. The net interest margin decreased 15 basis points from 3.76% for the nine months ended September 30, 2013 to 3.61% for the nine months ended September 30, 2014. The nine months ended September 30, 2014 included net gains on sales of investment securities of $2.1 million compared to $290,000 for the same period in 2013. On February 27, 2014, the Company sold its remaining portion of collateralized debt obligations (“CDOs”) with a book value of zero, resulting in the $1.9 million gain. Net gains on the sales of loans totaled $424,000 for the nine months ended September 30, 2014 compared to $929,000 for the same period in 2013. Gains on the sale of Small Business Administration (“SBA”) loans increased $162,000, while net gains on the sale of residential loans declined $667,000 reflecting the Company’s decision to exit the residential mortgage origination business effective December 31, 2013. Other operating income totaled $397,000 for the nine months ended September 30, 2014, a decrease of $382,000 from the nine months ended September 30, 2013 total of $779,000. The nine months ended September 30, 2014 included life insurance proceeds totaling $195,000 from bank owned life insurance. The three and nine months ended September 30, 2013 included a gain on the sale of a parcel of land, previously classified as assets held for sale, in the amount of $569,000. The nine months ended September 30, 2013 included an $83,000 write-down on an asset held for sale. In addition, the three and nine month periods of 2013 included fee income on loans sold to correspondents of $32,000 and $114,000, respectively. As a result of the Company’s decision to exit the residential mortgage origination business effective December 31, 2013, the 2014 three and nine month periods do not include this fee income.

 

Interest Income. Interest income decreased $141,000, or 1.37%, to $10.1 million for the three months ended September 30, 2014, from $10.3 million for the three months ended September 30, 2013. The decrease consists of a $43,000 decrease in interest income on loans and a $98,000 decrease in interest income on investment securities. Average loan balances for the three month period ended September 30, 2014 increased $27.0 million, or 3.58%, to $779.8 million from $752.8 million for the three month period ended September 30, 2013. The average yield on the loan portfolio declined 19 basis points to 4.70% for the three months ended September 30, 2014 from 4.89% for the three months ended September 30, 2013, reflecting a lower interest rate environment. The average balance of the investment portfolio increased $7.0 million, or 3.90%, to $185.0 million for the three month period ended September 30, 2014 from $178.0 million for the three month period ended September 30, 2013. The average yield on the investment portfolio decreased 29 basis points to 1.91% for the three months ended September 30, 2014 from 2.20% for the three months ended September 30, 2013. The decline in the investment portfolio yield is largely due to the impact of reinvesting proceeds from higher yielding securities into securities that have lower coupon rates.

 

For the nine months ended September 30, 2014, interest income totaled $30.6 million, an increase of $126,000, or 0.41%, from the nine months ended September 30, 2013 total of $30.5 million. The increase consists of a $373,000 increase in interest income on loans, partially offset by a $247,000 decrease in interest income on investment securities. Average loan balances for the nine month period ended September 30, 2014 increased $47.6 million, or 6.45%, to $785.9 million from $738.3 million for the nine month period ended September 30, 2013. The average yield on the loan portfolio declined 24 basis points to 4.74% for the nine months ended September 30, 2014 from 4.98% for the nine months ended September 30, 2013, reflecting a lower interest rate environment. The average balance of the investment portfolio increased $5.9 million, or 3.35%, to $183.2 million for the nine month period ended September 30, 2014 from $177.3 million for the nine month period ended September 30, 2013. The average yield on the investment portfolio decreased 25 basis points to 1.95% for the nine months ended September 30, 2014 from 2.20% for the nine months ended September 30, 2013.

 

 

Interest Expense. Interest expense increased $85,000, or 6.67%, to $1.36 million for the three months ended September 30, 2014, from $1.26 million for the three months ended September 30, 2013. The increase resulted primarily from higher interest rates paid on money market accounts. The average rate paid on money market accounts increased 14 basis points to 0.30% for the three months ended September 30, 2014 from 0.16% for the three months ended September 30, 2013 while the average balance of money market accounts decreased $23.4 million during the same period. The average rate paid on certificates of deposit decreased 7 basis points to 0.78% for the three months ended September 30, 2014 from 0.85% for the three months ended September 30, 2013 while the average balance of certificates of deposit increased $15.1 million, or 6.09%, to $263.3 million from $248.2 million for the same period. The average rate paid on interest-bearing checking accounts declined 1 basis point during the same period while the average balance increased $17.8 million and the average rate paid on savings accounts declined 2 basis points during the same period while the average balance decreased $3.5 million. The average balance of borrowings increased $27.7 million, or 28.51%, to $124.9 million for the three months ended September 30, 2014 from $97.2 million for the three months ended September 30, 2013, and the average cost of borrowings declined 31 basis points from 2.29% for the three months ended September 30, 2013 to 1.98% for the three months ended September 30, 2014. The increase in the average borrowings balance reflects the increased funding needs resulting from the increase in the average loan volume of $27.0 million.

 

For the nine months ended September 30, 2014, interest expense decreased $234,000, or 5.76%, to $3.83 million for the nine months ended September 30, 2014, from $4.06 million for the nine months ended September 30, 2013. The decrease resulted primarily from lower interest rates being paid on certificates of deposit and interest-bearing checking accounts. The average rate paid on certificates of deposit decreased 27 basis points to 0.71% for the nine months ended September 30, 2014 from 0.98% for the nine months ended September 30, 2013 while the average balance of certificates of deposit increased $30.6 million, or 12.84%, to $268.5 million from $237.9 million for the same period. The average rate paid on interest-bearing checking accounts declined 5 basis points during the same period while the average balance increased $18.2 million. The average rate paid on money market accounts increased 5 basis points to 0.23% for the nine months ended September 30, 2014 from 0.18% for the same nine month period in 2013 while the average balance of money market accounts declined $28.9 million during the same period. The average rate paid on savings accounts declined 1 basis point during the same period while the average balance decreased $1.9 million. The average balance of borrowings increased $40.0 million, or 41.47%, to $136.5 million for the nine months ended September 30, 2014 from $96.5 million for the nine months ended September 30, 2013, and the average cost of borrowings declined 59 basis points from 2.39% for the nine months ended September 30, 2013 to 1.80% for the nine months ended September 30, 2014. The increase in the average borrowings balance reflects the increased funding needs resulting from the increase in the average loan volume of $47.7 million.

 

Net Interest Income.   Net interest income decreased $226,000, or 2.51%, to $8.8 million for the three months ended September 30, 2014, from $9.0 million for the three months ended September 30, 2013. The net interest margin decreased 21 basis points from 3.75% for the quarter ended September 30, 2013 to 3.54% for the quarter ended September 30, 2014. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 117.47% for the three months ended September 30, 2014, from 118.44% for the three months ended September 30, 2013.

 

For the nine months ended September 30, 2014, net interest income increased $360,000, or 1.36%, to $26.8 million for the nine months ended September 30, 2014, from $26.4 million for the nine months ended September 30, 2013. The net interest margin decreased 15 basis points from 3.76% for the nine months ended September 30, 2013 to 3.61% for the nine months ended September 30, 2014. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 116.36% for the nine months ended September 30, 2014, from 118.29% for the nine months ended September 30, 2013.

 

Provision for Loan Losses. In accordance with FASB ASC Topic No. 450 Contingencies, we establish provisions for loan losses which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider, among other things, past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, external factors such as competition and regulations, adverse situations that may affect a borrower’s ability to repay a loan and the levels of delinquent loans.

 

The amount of the allowance is based on management’s judgment of probable losses, and the ultimate losses may vary from such estimates as more information becomes available or conditions change. We assess the allowance for loan losses and make provisions for loan losses on a quarterly basis.

 

 

The Company recorded a provision for loan losses of $153,000 for the three months ended September 30, 2014 compared to $449,000 for the three months ended September 30, 2013. Loan charge-offs for the three months ended September 30, 2014 totaled $103,000 compared to loan charge-offs of $286,000 for the third quarter of 2013. Loan loss recoveries for the three months ended September 30, 2014 were $19,000 compared to $58,000 for the three months ended September 30, 2013. For the nine months ended September 30, 2014, the loan loss provision totaled $2.5 million compared to $1.1 million for the nine months ended September 30, 2013. Loan charge-offs and write-downs on loans transferred to held for sale, totaled $2.3 million for the nine months ended September 30, 2014 compared to $1.1 million for the nine months ended September 30, 2013. Loan loss recoveries for the nine months ended September 30, 2014 were $299,000 compared to $223,000 for the nine months ended September 30, 2013. The ratio of the allowance for loan losses to non-performing loans (coverage ratio) totaled 127.00% at September 30, 2014, a slight decrease from 127.05% at December 31, 2013 and a significant increase from 102.37% at September 30, 2013. The amount of non-performing loans for which the full loss has been charged-off to total gross loans is 0.16%. The amount of non-performing loans for which the full loss has been charged-off to total non-performing loans is 16.20%.

 

The allowance for loan losses increased $469,000, or 5.03%, to $9.8 million at September 30, 2014, from $9.3 million at December 31, 2013. The ratio of our allowance for loan losses to total loans increased to 1.24% at September 30, 2014 from 1.18% of total loans at December 31, 2013. Certain impaired loans (troubled debt restructurings) have a valuation allowance determined by discounting expected cash flows at the respective loan’s effective interest rate. Included in the allowance for loan losses at September 30, 2014 was an impairment reserve for TDRs in the amount of $196,000 compared to $127,000 at December 31, 2013.

 

Non-Interest Income. Non-interest income decreased $902,000, or 40.58%, to $1.3 million for the three months ended September 30, 2014 from $2.2 million for the three months ended September 30, 2013. Net gains on the sales of loans totaled $179,000 for the three months ended September 30, 2014 compared to $346,000 for the same period in 2013. Gains on the sale of Small Business Administration (“SBA”) loans increased $25,000, while net gains on the sale of residential loans declined $192,000 reflecting the Company’s decision to exit the residential mortgage origination business effective December 31, 2013. The third quarter of 2014 included net gains on sales of investment securities of $133,000 compared to no gains for the same period in 2013. Service fee income decreased resulting from lower NSF/UCF income, a decrease in check card processing fees and ATM fees and a decrease in commercial loan service fee income. The three months ended September 30, 2014 included net losses on the sale of OREO of $34,000 compared to net gains on the sale of OREO of $17,000 for the three months ended September 30, 2013. Other operating income for the three months ended September 30, 2014 totaled $61,000, a decline of $597,000 from the three months ended September 30, 2013 total of $658,000. The three months ended September 30, 2013 included a gain on the sale of a parcel of land, previously classified as assets held for sale, in the amount of $569,000.

 

For the nine months ended September 30, 2014 non-interest income decreased $69,000, or 1.25%, to $5.452 million from $5.521 million for the nine months ended September 30, 2013. The nine months ended September 30, 2014 included net gains on sales of investment securities of $2.1 million compared to $290,000 for the same period in 2013. On February 27, 2014, the Company sold its remaining portion of collateralized debt obligations (“CDOs”) with a book value of zero, resulting in the $1.9 million gain. Net gains on the sales of loans totaled $424,000 for the nine months ended September 30, 2014 compared to $929,000 for the same period in 2013. Gains on the sale of Small Business Administration (“SBA”) loans increased $162,000, while net gains on the sale of residential loans declined $667,000 reflecting the Company’s decision to exit the residential mortgage origination business effective December 31, 2013. Service fee income decreased resulting from lower NSF/UCF income, a decrease in check card processing fees and ATM fees and a decrease in commercial loan service fee income. The nine months ended September 30, 2014 included net losses on the sale of OREO totaling $274,000 compared to net gains of $57,000 for the nine months ended September 30, 2013. Other operating income totaled $397,000 for the nine months ended September 30, 2014, a decrease of $382,000 from the nine months ended September 30, 2013 total of $779,000. The nine months ended September 30, 2014 included life insurance proceeds totaling $195,000 from bank owned life insurance. The three and nine months ended September 30, 2013 included a gain on the sale of a parcel of land, previously classified as assets held for sale, in the amount of $569,000. The nine months ended September 30, 2013 included an $83,000 write-down on an asset held for sale. In addition, the three and nine month periods of 2013 included fee income on loans sold to correspondents of $32,000 and $114,000, respectively. As a result of the Company’s decision to exit the residential mortgage origination business effective December 31, 2013, the 2014 three and nine month periods do not include this fee income.

 

Non-Interest Expense. Non-interest expense decreased $318,000, or 4.23%, to $7.2 million for the three months ended September 30, 2014 from $7.5 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, non-interest expense decreased $2.1 million, or 9.35%, to $20.4 million for the nine months ended September 30, 2014 from $22.5 million for the nine months ended September 30, 2013. Salaries and employee benefits for the three and nine months ended September 30, 2014 totaled $3.6 million and $10.6 million respectively, compared to $3.9 million and $11.9 million for the three and nine months ended September 30, 2013, respectively. The decrease in both the quarter and year-to-date periods is primarily attributable to reduced staffing levels related to the exiting of the residential loan origination business and a reduction in incentive based compensation programs. Federal deposit insurance premiums totaled $592,000 for the nine months ended September 30, 2014, a decrease of $143,000 from the $735,000 for the nine months ended September 30, 2013. For the nine months ended September 30, 2014, loan related expenses totaled $809,000 compared to $1.1 million for the nine months ended September 30, 2013. The decline in loan related expenses corresponds to the improvement in our asset quality metrics. OREO expenses totaled $195,000 and $611,000 for the three and nine months ended September 30, 2014, respectively, compared to $403,000 and $882,000 for the three and nine months ended September 30, 2013. The 2013 periods included higher OREO write-downs. The three and nine months ended September 30, 2014 reflects reductions in equipment, data processing and telecommunications expenses of $170,000 and $460,000, respectively, when compared to the three and nine months ended September 30, 2013. These reductions result primarily from the cost savings associated with changing to our new core processor in the fourth quarter of 2013. Other operating expenses declined $283,000 from $2.7 million for the nine months ended September 30, 2013 to $2.4 million for the nine months ended September 30, 2014, primarily resulting from a higher level of consulting related expenses and expenses on loans sold to correspondents in the 2013 period.

 

 

Income Tax Expense. For the three months ended September 30, 2014, the Company recorded a net tax expense of $1.0 million compared to a net tax expense of $1.4 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, income tax expense totaled $3.6 million compared to $3.3 million for the nine months ended September 30, 2013. Income tax expense reflects a lower effective tax rate in 2014.

 

Liquidity and Capital Resources

 

Liquidity refers to our ability to meet the cash flow requirements of depositors and borrowers as well as our operating cash needs with cost-effective funding. We generate funds to meet these needs primarily through our core deposit base and the maturity or repayment of loans and other interest-earning assets, including investments. Proceeds from the call, maturity, redemption, and return of principal of investment securities totaled $20.4 million through September 30, 2014 and were used either for liquidity, to reduce borrowings, or to invest in securities of similar quality as our current investment portfolio. We also have available unused wholesale sources of liquidity, including overnight federal funds and repurchase agreements, advances from the FHLB of New York, borrowings through the discount window at the Federal Reserve Bank of Philadelphia and access to certificates of deposit through brokers. We can also raise cash through the sale of earning assets, such as loans and marketable securities. As of September 30, 2014, the Company’s investment portfolio consisted of AFS securities with a fair market value of $157.3 million and HTM securities at amortized cost of $17.8 million. The Company has no intention to sell these securities, nor is it more likely than not that we will be required to sell any securities prior to their recovery in fair market value.

 

Liquidity risk arises from the possibility that we may not be able to meet our financial obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk, our Board of Directors has approved a Liquidity Management Policy and Contingency Funding Plan that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and quantifies minimum liquidity requirements based on approved limits. This policy designates our Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives. The ALCO, which includes members of executive management, reviews liquidity on a periodic basis and approves significant changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis by our Chief Financial Officer and our Treasury function. Liquidity stress testing is performed annually, unless circumstance dictates more frequently, and all testing results are reported to the Board of Directors through the ALCO minutes.

 

Cape Bank’s long-term liquidity source is a large core deposit base and a strong capital position. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. The level of deposits during any period is sometimes influenced by factors outside of management’s control, such as the level of short-term and long-term market interest rates and yields offered on competing investments, such as money market mutual funds. Deposits increased $2.5 million, or 0.31%, during the first nine months of 2014, and comprised 85.03% of total liabilities at September 30, 2014, as compared to 83.83% at December 31, 2013.

 

Regulatory Matters. Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of September 30, 2014, the Company and Bank meet all capital adequacy requirements to which it is subject.

 

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Bank’s Board of Directors has established a Capital Plan to ensure the Bank is managed to provide an appropriate level of capital. This plan includes strategies which enable the Bank to maintain targeted capital ratios in excess of the regulatory definition of “well capitalized”, identify sources of additional capital and evaluate on a quarterly basis the impact on capital resulting from certain potential significant financial events (stress testing). Additionally, a Contingency Plan exists which identifies scenarios that require specific actions in the event capital falls below certain levels.

 

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).

 

As of September 30, 2014, the Bank was categorized as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category as of September 30, 2014.

 

On July 21, 2014, the Company declared a cash dividend of $0.06 per common share to shareholders of record as of the close of business August 8, 2014. The dividend was paid on August 18, 2014. On October 20, 2014, the Company declared a cash dividend of $0.06 per common share to shareholders of record as of the close of business November 3, 2014. The dividend is expected to be paid on or about November 18, 2014.

 

The actual capital amounts, ratios and minimum regulatory guidelines for Cape Bank are as follows:

 

										Per Regulatory Guidelines
		Actual								Minimum								"Well Capitalized"
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(dollars in thousands)
September 30, 2014
Risk based capital ratios:
Tier I risk based capital		$	100,773				13.03	%		$	30,936				4.00	%		$	46,404				6.00	%
Total risk based capital		$	110,446				14.28	%		$	61,875				8.00	%		$	77,343				10.00	%
Tier I leverage ratio		$	100,773				9.60	%		$	41,989				4.00	%		$	52,486				5.00	%
December 31, 2013
Risk based capital ratios:
Tier I risk based capital		$	101,008				13.07	%		$	30,913				4.00	%		$	46,369				6.00	%
Total risk based capital		$	110,427				14.29	%		$	61,821				8.00	%		$	77,276				10.00	%
Tier I leverage ratio		$	101,008				9.53	%		$	42,396				4.00	%		$	52,995				5.00	%

  

Critical Accounting Policies. In the preparation of our consolidated financial statements, we have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States. Our significant accounting policies are described in Note 2- Summary of Significant Accounting Policies - of the Notes to Consolidated Financial Statements.

 

Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

 

Allowance for Loan Losses. We consider the allowance for loan losses to be a critical accounting policy. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment.

 

In evaluating the allowance for loan losses, management considers historical loss factors, the mix of the loan portfolio (types of loans and amounts), geographic and industry concentrations, current national and local economic conditions and other factors related to the collectability of the loan portfolio, including underlying collateral values and estimated future cash flows. All of these estimates are susceptible to significant change. Groups of homogeneous loans are evaluated in the aggregate under FASB ASC Topic No. 450 Contingencies, using historical loss factors adjusted for economic conditions and other environmental factors. Other environmental factors include trends in delinquencies and classified loans, loan concentrations by loan category and by property type, seasonality of the portfolio, internal and external analysis of credit quality, and single and total credit exposure. Certain loans that indicate underlying credit or collateral concerns may be evaluated individually for impairment in accordance with FASB ASC Topic No. 310 Receivables. If a loan is impaired and repayment is expected solely from the collateral, the difference between the outstanding balance and the value of the collateral will be charged-off. For potentially impaired loans where the source of repayment may include other sources of repayment from third parties, the evaluation may include these potential sources of repayment and indicate the need for a specific reserve for any potential shortfall. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available or as projected events change.

 

 

Management reviews the level of the allowance quarterly. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the FDIC and the New Jersey Department of Banking and Insurance, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. See Note 2 – Summary of Significant Accounting Policies - of the Notes to Consolidated Financial Statements.

 

Securities Impairment. In December 2013, the Bank sold all of its CDO securities principally issued by insurance companies as well as three remaining CDO securities that had been principally issued by bank holding companies. At the time of sale, these securities had an aggregate book value of $8.3 million and the Bank recorded an $851,000 loss on the sale. Additionally, on February 27, 2014, the Bank sold its remaining portion of CDOs with a book value of zero, resulting in the $1.9 million gain.

 

Securities that are in a loss position for 12 months or longer are reviewed to determine if there is other-than-temporary impairment (OTTI). If the market value of the security is equal to or greater than 90% of the book value, no action will be taken. If the market value of the security is less than 90% of the book value, management will research the security and evaluate the cause of the persistently depressed market value and document the findings. At September 30, 2014, there were no securities to be evaluated.

 

Income Taxes. The Company is subject to the income and other tax laws of the United States and the State of New Jersey. These laws are complex and are subject to different interpretations by the taxpayer and the various taxing authorities. In determining the provisions for income and other taxes, management must make judgments and estimates about the application of these inherently complex laws, related regulations and case law. In the process of preparing the Company provision and tax returns, management attempts to make reasonable interpretations of applicable tax laws. These interpretations are subject to challenge by the taxing authorities upon audit or to reinterpretation based on management’s ongoing assessment of facts and evolving case law.

 

The Company and its subsidiaries file a consolidated federal income tax return and separate entity state income tax returns. The provision for federal and state income taxes is based on income and expenses, as reported in the consolidated financial statements, rather than amounts reported on the Company’s federal and state income tax returns. When income and expenses are recognized in different periods for tax purposes than for book purposes, applicable deferred tax assets and liabilities are recognized for the future tax consequences attributable to the 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 to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. Deferred federal and state tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. For more information about our income taxes, read Note 11, “Income Taxes,” in our 2013 Annual Report to Shareholders.

 

On a quarterly basis, management assesses the reasonableness of its effective federal and state tax rate based upon its current best estimate of net income and the applicable taxes expected for the full year.

 

Effect of Newly Issued Accounting Standards:  See Note 2 – Summary of Significant Accounting Policies - of the Notes to Consolidated Financial Statements.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

General. The majority of our assets and liabilities are monetary in nature. Consequently, interest rate risk is a significant risk to our net interest income and earnings. Our assets, consisting primarily of loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Accordingly, we have an Enterprise Risk Management Committee (“ERM”) of the Board which focuses on interest rate risk management and meets quarterly, as well as an Asset/Liability Committee which meets monthly. The ERM is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for recommending to our Board of Directors the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.

 

 

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we currently use the following strategies to manage our interest rate risk:

 

●

originating commercial loans that generally tend to have shorter maturity or repricing characteristics;

 

●

obtaining general financing through lower cost deposits, brokered deposits and advances from the Federal Home Loan Bank;

 

●

lengthening the terms of borrowings and deposits;

 

●

focusing on core deposit growth; and

 

●

using interest rate swaps to hedge variability in future cash flows caused by changes in interest rates.

 

By shortening the average maturity of our interest-earning assets by increasing our investments in shorter term loans, as well as loans with variable interest rates, it helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates.

 

Net Portfolio Value Analysis. We compute amounts by which the net present value of our interest-earning assets and interest-bearing liabilities (net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. Our simulation model uses a discounted cash flow analysis to measure the interest rate sensitivity of net portfolio value. We estimate the economic value of these assets and liabilities under the assumption that interest rates experience an instantaneous and sustained increase of 100 or 200 basis points or decrease of 100 or 200 basis points.

 

Net Interest Income Analysis. In addition to NPV calculations, we analyze our sensitivity to changes in interest rates through our net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. In our model, we estimate what our net interest income would be for a twelve-month period. We then calculate what the net interest income would be for the same period under the assumption that interest rates experience an instantaneous and sustained increase of 100 or 200 basis points or decrease of 100 or 200 basis points.

 

The table below sets forth, as of September 30, 2014, our calculation of the estimated changes in our net interest income that would result from the designated instantaneous and sustained changes in interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

 

		Net Portfolio Value												Net Interest Income
Changes in						Increase (decrease) in												Increase (decrease) in
Interest Rates		Estimated NPV				Estimated NPV								Estimated Net				Estimated Net Interest Income
(basis points) (1)			(2)			Amount				Percent				Interest Income				Amount				Percent
(dollars in thousands)
+200		$	148,697			$	(17,715	)			-10.60	%		$	32,228			$	(2,176	)			-6.32	%
+100		$	159,593			$	(6,819	)			-4.10	%		$	33,404			$	(1,000	)			-2.91	%
0		$	166,412											$	34,404
-100		$	152,047			$	(14,365	)			-8.60	%		$	34,336			$	(68	)			-0.19	%
-200		$	134,754			$	(31,659	)			-19.00	%		$	33,975			$	(429	)			-1.25	%

 

(1)	Assumes an instantaneous and sustained uniform change in interest rates at all maturities.

(2)	NPV is the discounted present value of expected cash flows from interest-earning assets and interest-bearing liabilities.

 

The table above indicates that at September 30, 2014, in the event of a 100 basis point increase in interest rates, we would experience a $1.0 million decrease in net interest income. In the event of a 100 basis point decrease in interest rates, we would experience a $68,000 decrease in net interest income.

 

Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in net portfolio value and net interest income. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value and net interest income information presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured, and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although interest rate risk calculations provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

 

 

Item 4. Controls and Procedures

 

(a)	Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2014 (the “Evaluation Date”). Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings.

 

(b)	Changes in internal controls

 

There were no changes made in our internal control over financial reporting during the Company’s third fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

Part II – Other Information

  

Item 1. Legal Proceedings

 

The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

 

Subsequent to September 30, 2014, on October 14, 2014, a complaint was filed against Colonial Financial Services, Inc. (“Colonial”) and the members of its Board of Directors in the Circuit Court for Baltimore City, Maryland, seeking class action status and asserting that Colonial and the members of its Board had violated their duties to Colonial’s shareholders in connection with the proposed merger with the Company. The complaint alleges that Cape Bancorp, Inc. and Cape Bank aided and abetted the Colonial directors’ alleged violations of their fiduciary duties. The litigation is in its early stages, and Cape Bancorp and Cape Bank believe the complaint is without merit, and intend to vigorously defend the complaint.

 

 

Item 1A. Risk Factors

 

The Company does not believe its risks have materially changed from those risks included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2014.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)	There were no sales of unregistered securities during the period covered by this Report.

 

(b)	Not applicable.

 

(c)

On December 23, 2013, the Company announced that the Board of Directors authorized a stock repurchase plan under which the Company would repurchase up to 5%, or approximately 602,989 shares, of the Company’s issued and outstanding shares. During the third quarter of 2014, the Company repurchased a total of 170,127 shares of its common stock pursuant to the stock repurchase plan. The stock repurchase plan was completed on September 2, 2014.

 

PURCHASES OF EQUITY SECURITIES
										Total Number
										of Shares
		Total								Purchased as				Maximum Number
		Number of				Average				Part of Publicly				of Shares that May Yet
		Shares				Price Paid				Announced Plans				Be Purchased Under
Period		Purchased				per Share				or Programs				the Plans or Programs
July 1, 2014 - July 31, 2014			10,006			$	10.37				10,006				10,006
August 1, 2014 - August 31, 2014			150,095			$	10.29				160,101				160,101
September 1, 2014 - September 30, 2014			10,026			$	10.26				170,127				170,127
Total			170,127			$	10.29				170,127

 

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 

Item 5. Other Information

 

Not applicable.

 

 

Item 6. Exhibits

 

The following exhibits are either filed as part of this report or are incorporated herein by reference:

 

2	.1	Agreement and Plan of Merger dated as of September 10, 2014 by and between Cape Bancorp, Inc. and Colonial Financial Services, Inc. (1)
3	.1	Articles of Incorporation of Cape Bancorp, Inc. (2)
3	.2	Amended and Restated Bylaws of Cape Bancorp, Inc. (3)
4		Form of Common Stock Certificate of Cape Bancorp, Inc. (2)
10	.1	Form of Employee Stock Ownership Plan (2)
10	.2	Employment Agreement for Michael D. Devlin (6)
10	.3	Change in Control Agreement for Guy Hackney (4)
10	.4	Change in Control Agreement for James McGowan, Jr. (4)
10	.5	Change in Control Agreement for Michele Pollack (4)
10	.6	Change in Control Agreement for Charles L. Pinto (5)
10	.7	Form of Director Retirement Plan (2)
10	.8	2008 Equity Incentive Plan (7)
31	.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31	.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following financial information from Cape Bancorp, Inc.’s Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 2014 formatted in XBRL: (i) Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013; (ii) Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2014 and September 30, 2013 (unaudited); (iii) Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2014 and September 30, 2013 (unaudited); (iv) Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2014 (unaudited) and Year Ended December 31, 2013; (v) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and September 30, 2013; and (vi) Notes to Consolidated Financial Statements (unaudited)

 

---

(1)	Incorporated by reference to the Company’s Current Report on Form 8-K (file no. 001-33934) filed with the Securities and Exchange Commission on September 11, 2014.

(2)	Incorporated by reference to the Registration Statement on Form S-1 of Cape Bancorp, Inc. (file no. 333-146178), originally filed with the Securities and Exchange Commission on September 19, 2007.

(3)	Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 18, 2008.

(4)	Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2010.

(5)	Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 2011.

(6)	Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 25, 2012.

(7)	Incorporated by reference to the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on July 16, 2008.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	CAPE BANCORP, INC.
Date: November 4, 2014	/s/ Michael D. Devlin
	Michael D. Devlin
	President and Chief Executive Officer
Date: November 4, 2014	/s/ Guy Hackney
	Guy Hackney
	Executive Vice President and Chief Financial Officer

 

 

 

 

56

 

Exhibit 31.1

 

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Michael D. Devlin, certify that:

 

1.	I have reviewed this Quarterly Report on Form 10-Q of Cape Bancorp, Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s third fiscal quarter in the case of this quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 4, 2014		/s/ Michael D. Devlin
		Michael D. Devlin
		President and Chief Executive Officer

 

 

 

 

Exhibit 31.2

 

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Guy Hackney, certify that:

 

1.	I have reviewed this Quarterly Report on Form 10-Q of Cape Bancorp, Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s third fiscal quarter in the case of this quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 4, 2014		/s/ Guy Hackney
		Guy Hackney
		Executive Vice President and Chief Financial Officer

 

 

Exhibit 32

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002

 

Michael D. Devlin, Chief Executive Officer and President of Cape Bancorp, Inc., (the “Company”) and Guy Hackney, Executive Vice President and Chief Financial Officer of the Company, each certify in his capacity as an officer of the Company that he has reviewed the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (the “Report”) and that to the best of his knowledge:

 

1.

the Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 4, 2014		/s/ Michael D. Devlin
		Michael D. Devlin
		President and Chief Executive Officer

 

Date: November 4, 2014		/s/ Guy Hackney
		Guy Hackney
		Executive Vice President and Chief Financial Officer

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.