Attached files
file | filename |
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EX-32 - EXHIBIT 32 - Cape Bancorp, Inc. | c16221exv32.htm |
EX-31.1 - EXHIBIT 31.1 - Cape Bancorp, Inc. | c16221exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Cape Bancorp, Inc. | c16221exv31w2.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2011
OR
o | 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
Cape Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 26-1294270 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) | |
225 North Main Street, Cape May Court House, New Jersey | 08210 | |
(Address of Principal Executive Offices) | Zip Code |
(609) 465-5600
(Registrants telephone number)
(Registrants telephone number)
N/A
(Former name or former address, if changed since last report)
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 þ NO o
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 o No o
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 o | Accelerated filer þ | Non-accelerated filer o | Smaller Reporting Company o | |||
(Do not check if 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 o NO þ
As of May 4, 2011 there were 13,313,521 shares of the Registrants common stock, par value
$0.01 per share, outstanding.
CAPE BANCORP, INC.
FORM 10-Q
FORM 10-Q
Index
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45 | ||||||||
46 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
2
Table of Contents
Item 1. | Financial Statements |
CAPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited) | ||||||||
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
ASSETS |
||||||||
Cash & due from financial institutions |
$ | 11,590 | $ | 10,181 | ||||
Interest-bearing bank balances |
14,926 | 4,816 | ||||||
Cash and cash equivalents |
26,516 | 14,997 | ||||||
Interest-bearing time deposits |
9,612 | 9,361 | ||||||
Investment securities available for sale, at fair value (amortized
cost of $156,296 and $165,877 respectively) |
148,546 | 157,407 | ||||||
Loans held for sale |
947 | 1,224 | ||||||
Loans, net of allowance of $13,032 and $12,538 respectively |
764,685 | 772,318 | ||||||
Accrued interest receivable |
4,088 | 4,029 | ||||||
Premises and equipment, net |
24,883 | 25,212 | ||||||
Other real estate owned |
3,981 | 3,255 | ||||||
Federal Home Loan Bank (FHLB) stock, at cost |
8,028 | 8,721 | ||||||
Prepaid FDIC insurance premium |
2,902 | 3,195 | ||||||
Deferred income taxes |
13,725 | 6,054 | ||||||
Bank owned life insurance (BOLI) |
28,499 | 28,252 | ||||||
Goodwill |
22,575 | 22,575 | ||||||
Intangible assets, net |
417 | 445 | ||||||
Assets held for sale |
| 479 | ||||||
Other assets |
2,235 | 3,518 | ||||||
Total assets |
$ | 1,061,639 | $ | 1,061,042 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Liabilities |
||||||||
Deposits |
||||||||
Noninterest-bearing deposits |
$ | 70,505 | $ | 68,267 | ||||
Interest-bearing deposits |
690,459 | 684,801 | ||||||
Borrowings |
154,238 | 169,637 | ||||||
Advances from borrowers for taxes and insurance |
608 | 554 | ||||||
Accrued interest payable |
580 | 714 | ||||||
Other liabilities |
4,145 | 4,915 | ||||||
Total liabilities |
920,535 | 928,888 | ||||||
Stockholders Equity |
||||||||
Common stock, $.01 par value: authorized 100,000,000 shares;
issued 13,324,521 shares;
outstanding 13,313,521 shares |
133 | 133 | ||||||
Additional paid-in capital |
126,989 | 126,864 | ||||||
Treasury stock at cost 11,000 shares |
(85 | ) | (85 | ) | ||||
Unearned ESOP shares |
(9,274 | ) | (9,380 | ) | ||||
Accumulated other comprehensive loss, net |
(5,115 | ) | (5,590 | ) | ||||
Retained earnings |
28,456 | 20,212 | ||||||
Total stockholders equity |
141,104 | 132,154 | ||||||
Total liabilities & stockholders equity |
$ | 1,061,639 | $ | 1,061,042 | ||||
See accompanying notes to consolidated financial statements.
3
Table of Contents
CAPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
For the three months ended March 31, | ||||||||
2011 | 2010 | |||||||
(dollars in thousands, except share data) | ||||||||
Interest income: |
||||||||
Interest on loans |
$ | 10,835 | $ | 11,606 | ||||
Interest and dividends on investments |
||||||||
Taxable |
636 | | ||||||
Tax-exempt |
233 | 314 | ||||||
Interest on mortgage-backed securities |
408 | 645 | ||||||
Total interest income |
12,112 | 12,565 | ||||||
Interest expense: |
||||||||
Interest on deposits |
1,672 | 2,381 | ||||||
Interest on borrowings |
1,354 | 1,587 | ||||||
Total interest expense |
3,026 | 3,968 | ||||||
Net interest income before provision for loan losses |
9,086 | 8,597 | ||||||
Provision for loan losses |
2,400 | 244 | ||||||
Net interest income after provision for loan losses |
6,686 | 8,353 | ||||||
Non-interest income: |
||||||||
Service fees |
828 | 763 | ||||||
Net gains on sale of loans |
42 | 12 | ||||||
Net income from BOLI |
247 | 252 | ||||||
Net rental income |
61 | 58 | ||||||
Gain on sale of investment securities held for sale, net |
148 | | ||||||
Net gain (loss) on sale of OREO |
63 | 265 | ||||||
Other |
78 | 66 | ||||||
Gross other-than-temporary impairment losses |
305 | (2,422 | ) | |||||
Less: Portion of loss recognized in other comprehensive
income |
(516 | ) | (149 | ) | ||||
Net other-than-temporary impairment losses |
(211 | ) | (2,571 | ) | ||||
Total non-interest income |
1,256 | (1,155 | ) | |||||
Non-interest expense: |
||||||||
Salaries and employee benefits |
3,721 | 3,559 | ||||||
Occupancy and equipment |
848 | 1,030 | ||||||
Federal insurance premiums |
313 | 320 | ||||||
Data processing |
323 | 314 | ||||||
Loan related expenses |
286 | 218 | ||||||
Advertising |
99 | 95 | ||||||
Telecommunications |
240 | 233 | ||||||
Professional services |
200 | 202 | ||||||
OREO expenses |
105 | 308 | ||||||
Other operating |
983 | 815 | ||||||
Total non-interest expense |
7,118 | 7,094 | ||||||
Income before income taxes |
824 | 104 | ||||||
Income tax expense (benefit) |
(7,420 | ) | (531 | ) | ||||
Net income |
$ | 8,244 | $ | 635 | ||||
Earnings per share (see Note 10): |
||||||||
Basic |
$ | 0.67 | $ | 0.05 | ||||
Diluted |
$ | 0.67 | $ | 0.05 | ||||
Weighted average number of shares outstanding: |
||||||||
Basic |
12,393,888 | 12,338,966 | ||||||
Diluted |
12,396,463 | 12,338,966 |
See accompanying notes to unaudited consolidated financial statements.
4
Table of Contents
CAPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Year ended December 31, 2010 and three months ended March 31, 2011
(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, 2009 |
$ | 133 | $ | 126,695 | $ | | $ | (9,806 | ) | $ | (6,645 | ) | $ | 16,171 | $ | 126,548 | ||||||||||||
Net income |
| | | | | 4,041 | 4,041 | |||||||||||||||||||||
Stock option compensation expense |
| 268 | | | | | 268 | |||||||||||||||||||||
Restricted stock compensation expense |
| 8 | | | | | 8 | |||||||||||||||||||||
Net unrealized gains, net of
reclassification adjustments and taxes |
| | | | 1,055 | | 1,055 | |||||||||||||||||||||
Total comprehensive income |
5,372 | |||||||||||||||||||||||||||
Common stock repurchased 11,000 shares |
| | (85 | ) | | | | (85 | ) | |||||||||||||||||||
ESOP shares earned |
| (107 | ) | | 426 | | | 319 | ||||||||||||||||||||
Balance, December 31, 2010 |
133 | 126,864 | (85 | ) | (9,380 | ) | (5,590 | ) | 20,212 | 132,154 | ||||||||||||||||||
Net income |
| | | | | 8,244 | 8,244 | |||||||||||||||||||||
Stock option compensation expense |
| 124 | | | | 124 | ||||||||||||||||||||||
Restricted stock compensation expense |
| 4 | | | | 4 | ||||||||||||||||||||||
Net unrealized gains, net of
reclassification adjustments and taxes |
| | | | 475 | | 475 | |||||||||||||||||||||
Total comprehensive income |
8,847 | |||||||||||||||||||||||||||
ESOP shares earned |
| (3 | ) | | 106 | | | 103 | ||||||||||||||||||||
Balance, March 31, 2011 |
$ | 133 | $ | 126,989 | $ | (85 | ) | $ | (9,274 | ) | $ | (5,115 | ) | $ | 28,456 | $ | 141,104 | |||||||||||
See accompanying notes to unaudited consolidated financial statements.
5
Table of Contents
CAPE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 8,244 | $ | 635 | ||||
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
||||||||
Provision for loan losses |
2,400 | 244 | ||||||
Net gain on the sale of loans |
(42 | ) | (12 | ) | ||||
Net gain on the sale of other real estate owned |
(63 | ) | (265 | ) | ||||
Write-down of other real estate owned |
47 | 184 | ||||||
Loss on impairment of securities |
211 | 2,571 | ||||||
Net gain on sale of investments |
(148 | ) | | |||||
Earnings on BOLI |
(247 | ) | (252 | ) | ||||
Origination of loans held for sale |
(3,154 | ) | (1,479 | ) | ||||
Proceeds from sales of loans |
3,431 | 818 | ||||||
Depreciation and amortization |
413 | 502 | ||||||
ESOP and stock-based compensation expense |
231 | 72 | ||||||
Deferred income taxes |
(7,915 | ) | (1,173 | ) | ||||
Changes in assets and liabilities that (used) provided cash: |
||||||||
Accrued interest receivable |
(59 | ) | 623 | |||||
Other assets |
2,052 | 15 | ||||||
Accrued interest payable |
(134 | ) | (83 | ) | ||||
Other liabilities |
(770 | ) | 377 | |||||
Net cash provided by operating activities |
4,497 | 2,777 | ||||||
Cash flows from investing activities |
||||||||
Proceeds from sales of AFS securities |
10,166 | | ||||||
Proceeds from calls, maturities, and principal repayments of AFS securities |
17,812 | 22,069 | ||||||
Purchases of AFS securities |
(18,432 | ) | (22,383 | ) | ||||
Redemption of Federal Home Loan Bank stock |
693 | 1,481 | ||||||
Proceeds from sale of other real estate owned |
946 | 2,868 | ||||||
Increase in interest-bearing time deposits |
(251 | ) | (951 | ) | ||||
Decrease in loans, net |
3,541 | 4,932 | ||||||
Purchase of property and equipment, net |
(6 | ) | (16 | ) | ||||
Net cash provided by investing activities |
14,469 | 8,000 | ||||||
Cash flows from financing activities |
||||||||
Net increase in deposits |
7,899 | 30,016 | ||||||
Increase in advances from borrowers for taxes and insurance |
54 | 11 | ||||||
Increase in long-term borrowings |
10,000 | | ||||||
Repayments of long-term borrowings |
(20,000 | ) | (25,000 | ) | ||||
Net change in short-term borrowings |
(5,400 | ) | (7,900 | ) | ||||
Net cash used in financing activities |
(7,447 | ) | (2,873 | ) | ||||
Net increase in cash and cash equivalents |
11,519 | 7,904 | ||||||
Cash and cash equivalents at beginning of period |
14,997 | 13,513 | ||||||
Cash and cash equivalents at end of period |
$ | 26,516 | $ | 21,417 | ||||
Supplementary disclosure of cash flow information: |
||||||||
Cash paid during period for: |
||||||||
Interest |
$ | 3,161 | $ | 4,051 | ||||
Income taxes, net of refunds |
$ | | $ | | ||||
Supplementary disclosure of non-cash financing and investing activities: |
||||||||
Transfers from loans to other real estate owned |
$ | 1,655 | $ | 484 |
See accompanying notes to unaudited consolidated financial statements.
6
Table of Contents
Notes to Financial Statements (Unaudited)
NOTE 1 ORGANIZATION
Cape Bancorp (Company) is a Maryland corporation that was incorporated on September 14, 2007
for the purpose of becoming the holding company of Cape Bank (formerly Cape Savings Bank) in
connection with Cape Banks mutual-to-stock conversion, Cape Bancorps initial public offering and
simultaneous acquisition of Boardwalk Bancorp, Inc. (Boardwalk Bancorp), Linwood, New Jersey and
its wholly-owned New Jersey chartered bank subsidiary, Boardwalk Bank. As a result of these
transactions, Boardwalk Bancorp was merged with, and into, Cape Bancorp and Boardwalk Bank was
merged with, and into, Cape Bank. As of January 31, 2008, Cape Savings Bank changed its name to
Cape Bank.
Cape Bank (Bank) is a New Jersey-chartered stock savings bank. The Bank provides a complete
line of business and personal banking products through its sixteen full service branch offices
located throughout Atlantic and Cape May counties in southern New Jersey and a loan production
office in Burlington County (opened in February 2011). The Bank received regulatory approval for
the closing of one branch in Cape May County which was effective as of the close of business
February 4, 2011.
The Bank competes with other banking and financial institutions in its primary market areas.
Commercial banks, savings banks, savings and loan associations, credit unions and money market
funds actively compete for savings and time certificates of deposit and all types of loans. Such
institutions, as well as consumer financial and insurance companies, may be considered competitors
of the Bank with respect to one or more of the services it renders.
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 Banks 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).
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 U.S. generally accepted accounting principles (GAAP) pursuant to such
rules and regulations. In the opinion of management, the statements include all adjustments (which
include normal recurring adjustments) required for a fair statement of financial position, results
of operations and cash flows for the interim periods presented. 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 have been reclassified to conform to current
year presentations. The consolidated financial statements, as of and for the periods ended March
31, 2011 and 2010, have not been audited by the Companys 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 interim periods 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 accounting principles
generally accepted in the United States of America (or with U.S. generally accepted accounting
principles), 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 $756,000 as of March
31, 2011, and $657,000 as of December 31, 2010, 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.
7
Table of Contents
Investment Securities: Investment securities classified as available for sale 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. 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, an entity that intends to sell a security or is more likely than not to sell the
security before the recovery of the securitys 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 considered other-than-temporarily impaired.
The related other-than-temporary impairment 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 other-than-temporary losses, management
considers: the length of time and extent that fair value has been less than cost, the financial
condition and near term prospects of the issuer, cash flow, stress testing analysis on securities
when applicable, and the Companys ability and intent to hold the security for a period sufficient
to allow for any anticipated recovery in fair value.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of aggregate cost or market, as determined by outstanding commitments from
investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to
earnings. Gains and losses on sales of mortgage loans are based on the difference between the
selling price and the carrying value of the related loan sold.
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. The allowance for loan losses is established through a provision for loan
losses charged to operations. 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 such interest 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 70
percent. 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.
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 on the cash basis or
cost-recovery method, 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 70%.
The allowance for loan losses is maintained at an amount management deems adequate to cover
probable incurred losses. In determining the level to be maintained, management evaluates many
factors including current economic trends, industry experience, historical loss experience,
industry loan concentrations, the borrowers ability to repay and repayment performance, estimated
collateral values, 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 adequate to absorb
probable loan losses. While management uses the best information available to make such
evaluations, future adjustments to the allowance may be necessary based on changes in economic
conditions or any of the other factors used in managements determination. In addition, various
regulatory agencies, as an integral part of their examination process, periodically review the
Banks 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 loans existing rate or at the fair value of collateral if repayment is
expected solely from the collateral. Included in the allowance for loan losses at March 31, 2011
was an impairment reserve for troubled debt restructurings (TDRs) in the amount of $418,000.
8
Table of Contents
Other Real Estate Owned: 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 lower of cost or estimated fair market value,
less the estimated cost to sell, at the date of foreclosure, thereby establishing a new cost basis.
If fair value declines subsequent to foreclosure, a valuation allowance is recorded through
expense. 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.
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 2011 will be performed in the fourth quarter.
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 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 of 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
Accounting Standards Codification (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 a multi-employer defined benefit 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) Plans eligibility requirements. The Banks
matching contribution under the Plan is equal to 100% of the participants contribution on up to 3%
of the participants salary contributed to the plan and 50% of contributions on the next 2% of
salary contributed by the participant, with a maximum potential matching contribution of 4%.
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. As of March 31, 2011, 127,809 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. 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.
9
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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 other-than-temporary impairment 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.
Beginning with the adoption of 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. Prior to the adoption of Interpretation 48, the Company
recognized the effect of income tax positions only if such positions were probable of being
sustained.
The Company records interest and penalties related to uncertain tax positions as non-interest
expense.
Earnings Per Share: Basic earnings (loss) 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.
Comprehensive Income (Loss): Comprehensive income 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 as follows:
Before Tax | Tax Benefit | Net of Tax | ||||||||||
Amount | (Expense) | Amount | ||||||||||
(in thousands) | ||||||||||||
Three months ended March 31, 2011 |
||||||||||||
Unrealized holding gains arising during the period |
$ | 140 | $ | (47 | ) | $ | 93 | |||||
Non-credit related unrealized gain on other-than-temporarily impaired CDOs |
516 | (175 | ) | 341 | ||||||||
Reclassification adjustment for gain on sale of AFS securities |
(148 | ) | 50 | (98 | ) | |||||||
Reclassification adjustment for credit related OTTI included in net income |
211 | (72 | ) | 139 | ||||||||
Other comprehensive income, net |
$ | 719 | $ | (244 | ) | $ | 475 | |||||
Three months ended March 31, 2010 |
||||||||||||
Unrealized holding gains arising during the period |
$ | 425 | $ | (178 | ) | $ | 247 | |||||
Non-credit related unrealized gain on other-than-temporarily impaired CDOs |
149 | (51 | ) | 98 | ||||||||
Reclassification adjustment for credit related OTTI included in net income |
2,571 | (874 | ) | 1,697 | ||||||||
Other comprehensive income, net |
$ | 3,145 | $ | (1,103 | ) | $ | 2,042 | |||||
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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.
Effect of Newly Issued Accounting Standards:
In December 2010, the FASB issued (ASU) 2010-28 IntangiblesGoodwill and Other (Topic 350)
covering when to perform step 2 of the Goodwill Impairment Test for reporting units with zero or
negative carrying amounts. This Update is intended to modify step 1 of the goodwill impairment test
for reporting units with zero or negative carrying amounts as these entities will be required to
perform step 2 of the goodwill impairment test if it is more likely than not that a goodwill
impairment exists. The amendments in this Update are effective for all entities that have
recognized goodwill and have one or more reporting units whose carrying amount for purposes of
performing step 1 of the goodwill impairment test is zero or negative. For public entities, the
amendments in this Update are effective for fiscal years and interim periods within those years,
beginning after December 15, 2010. Early adoption is not permitted. No significant impact to
amounts reported in the consolidated financial position or results of operations are expected from
the adoption of ASU 2010-28.
In December 2010, the FASB issued (ASU) 2010-29 Business Combinations (Topic 805) Disclosure
of Supplementary Pro Forma Information for Business Combinations. This Update specifies that if a
public entity presents comparative financial statements, the entity should disclose revenue and
earnings of the combined entity as though the business combination(s) that occurred during the
current year had occurred as of the beginning of the comparable prior annual reporting period only.
The amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to
include a description of the nature and amount of material, nonrecurring pro forma adjustments
directly attributable to the business combination included in the reported pro forma revenue and
earnings. The amendments in this Update are effective prospectively for business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2010. Early adoption is permitted. No significant impact to
amounts reported in the consolidated financial position or results of operations are expected from
the adoption of ASU 2010-29.
In January 2011, the FASB issued (ASU) 2011-01 Receivables (Topic 310) Deferral of the
Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. This Update
temporarily delays the effective date of the disclosures about troubled debt restructurings in
Update 2010-20 for public entities. The amendments in this Update delay the effective date of the
new disclosures about troubled debt restructurings for public entities and the coordination of the
guidance for determining what constitutes a troubled debt restructuring until interim and annual
periods ending after June 15, 2011. No significant impact to amounts reported in the consolidated
financial position or results of operations are expected from the adoption of ASU 2011-01.
NOTE 3 INVESTMENT SECURITIES
The amortized cost, gross unrealized gains or losses and the fair value of the Companys
investment securities available for sale are as follows:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
(in thousands) | ||||||||||||||||
March 31, 2011 |
||||||||||||||||
Investment securities available for sale |
||||||||||||||||
Debt securities |
||||||||||||||||
U.S. Government and agency
obligations |
$ | 65,475 | $ | 13 | $ | (957 | ) | $ | 64,531 | |||||||
Municipal bonds |
24,728 | 439 | (635 | ) | 24,532 | |||||||||||
Collateralized debt obligations |
9,518 | | (7,369 | ) | 2,149 | |||||||||||
Corporate bonds |
16,376 | 69 | (48 | ) | 16,397 | |||||||||||
Total debt securities |
$ | 116,097 | $ | 521 | $ | (9,009 | ) | $ | 107,609 | |||||||
Mortgage-backed securities |
||||||||||||||||
GNMA pass-through certificates |
$ | 2,290 | $ | 53 | $ | | $ | 2,343 | ||||||||
FHLMC pass-through certificates |
3,081 | 128 | | 3,209 | ||||||||||||
FNMA pass-through certificates |
10,835 | 491 | (52 | ) | 11,274 | |||||||||||
Collateralized mortgage obligations |
23,993 | 236 | (118 | ) | 24,111 | |||||||||||
Total mortgage-backed securities |
$ | 40,199 | $ | 908 | $ | (170 | ) | $ | 40,937 | |||||||
Total securities available for sale |
$ | 156,296 | $ | 1,429 | $ | (9,179 | ) | $ | 148,546 | |||||||
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Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
(in thousands) | ||||||||||||||||
December 31, 2010 |
||||||||||||||||
Investment securities available for sale |
||||||||||||||||
Debt securities |
||||||||||||||||
U.S. Government and agency
obligations |
$ | 72,470 | $ | 52 | $ | (787 | ) | $ | 71,735 | |||||||
Municipal bonds |
25,811 | 456 | (861 | ) | 25,406 | |||||||||||
Collateralized debt obligations |
9,715 | | (8,581 | ) | 1,134 | |||||||||||
Corporate bonds |
17,994 | 187 | (46 | ) | 18,135 | |||||||||||
Total debt securities |
$ | 125,990 | $ | 695 | $ | (10,275 | ) | $ | 116,410 | |||||||
Mortgage-backed securities |
||||||||||||||||
GNMA pass-through certificates |
$ | 2,318 | $ | 50 | $ | | $ | 2,368 | ||||||||
FHLMC pass-through certificates |
3,299 | 134 | | 3,433 | ||||||||||||
FNMA pass-through certificates |
16,542 | 765 | (41 | ) | 17,266 | |||||||||||
Collateralized mortgage obligations |
17,728 | 309 | (107 | ) | 17,930 | |||||||||||
Total mortgage-backed securities |
$ | 39,887 | $ | 1,258 | $ | (148 | ) | $ | 40,997 | |||||||
Total securities available for sale |
$ | 165,877 | $ | 1,953 | $ | (10,423 | ) | $ | 157,407 | |||||||
The table below indicates the length of time individual securities have been in a
continuous unrealized loss position at March 31, 2011.
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Description of Securities | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
U.S. Government and agency
obligations |
$ | 57,518 | $ | (957 | ) | $ | | $ | | $ | 57,518 | $ | (957 | ) | ||||||||||
Municipal bonds |
5,148 | (73 | ) | 2,420 | (562 | ) | 7,568 | (635 | ) | |||||||||||||||
Corporate bonds |
8,179 | (48 | ) | | | 8,179 | (48 | ) | ||||||||||||||||
Collateralized debt obligations |
20 | (366 | ) | 2,129 | (7,003 | ) | 2,149 | (7,369 | ) | |||||||||||||||
Mortgage-backed securities |
13,751 | (170 | ) | 14 | (0 | ) | 13,765 | (170 | ) | |||||||||||||||
Total temporarily impaired
investment securities |
$ | 84,616 | $ | (1,614 | ) | $ | 4,563 | $ | (7,565 | ) | $ | 89,179 | $ | (9,179 | ) | |||||||||
The table below indicates the length of time individual securities have been in a
continuous unrealized loss position at December 31, 2010.
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Description of Securities | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
U.S. Government and agency
obligations |
$ | 52,688 | $ | (787 | ) | $ | | $ | | $ | 52,688 | $ | (787 | ) | ||||||||||
Municipal bonds |
6,853 | (220 | ) | 2,916 | (641 | ) | 9,769 | (861 | ) | |||||||||||||||
Corporate bonds |
9,427 | (46 | ) | | | 9,427 | (46 | ) | ||||||||||||||||
Collateralized debt obligations |
35 | (364 | ) | 1,099 | (8,217 | ) | 1,134 | (8,581 | ) | |||||||||||||||
Mortgage-backed securities |
6,675 | (110 | ) | 3,140 | (38 | ) | 9,815 | (148 | ) | |||||||||||||||
Total temporarily impaired
investment securities |
$ | 75,678 | $ | (1,527 | ) | $ | 7,155 | $ | (8,896 | ) | $ | 82,833 | $ | (10,423 | ) | |||||||||
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Management evaluates investment securities to determine if they are
other-than-temporarily impaired 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.
At March 31, 2011, the Companys investment securities portfolio consisted of 319 securities,
91 of which were in an unrealized loss position. The gross unrealized losses in the Companys
investment securities portfolio related primarily to the collateralized debt obligation securities,
which are discussed in detail below, and accounted for 80.3% of the total gross unrealized losses
at March 31, 2011. The remaining securities with unrealized losses 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.
As of March 31, 2011, the book value of our pooled trust preferred collateralized debt
obligations totaled $9.5 million with an estimated fair value of $2.1 million and is comprised of
24 securities. Of those, 16 have been principally issued by bank holding companies (PreTSL deals,
MM Community I, and Alesco VI), and 8 have been principally issued by insurance companies (I-PreTSL
deals). All of our pooled securities are mezzanine tranches and possess credit ratings below
investment grade. As of March 31, 2011, 16 of our securities had no excess subordination and 8 of
our securities had excess subordination which ranged from 3.4% to 14.3% of the current performing
collateral. Excess subordination is the amount by which the underlying performing collateral
exceeds the outstanding bonds in the current class, plus all senior classes. It is a static
measure of credit enhancement, but does not incorporate structural elements of the CDO. Management
utilizes excess subordination as a measure to identify which tranches are at a greater risk for a
future break in cash flows. However, a current subordination deficit or zero excess
subordination does not indicate the tranche will not ultimately receive all principal and interest
due. For example, this measure does not consider the potential for recovery of issuers that are
currently deferring payments. Some issuers have elected to defer payments, which contractually
they are permitted to do for a period of up to 5 years, even though going concern issues may not
exist. This supports managements position that a deferral is not necessarily indicative of a
default or that a default is imminent. On average, deferring issuers underlying the bank issued
CDOs comprise approximately 60% of the total dollar value related to issuer defaults and deferrals.
As such, our assumptions used in the calculation of discounted cash flows anticipate a 15%
recovery rate on deferring issuers as compared to no recovery of issuers that have defaulted. The
recovery rate assumption represents managements best estimate based on current facts and
circumstances. In addition, due to projected discounted cash flows that do not support the receipt
of interest, the Company is not accruing interest on any of the bank issued CDO securities.
Accordingly, these securities are considered non-performing assets.
The following table provides additional information related to our pooled trust preferred
collateralized debt obligations as of March 31, 2011:
Pooled Trust Preferred Collateralized Debt Obligations
(dollars in thousands)
(dollars in thousands)
Amount of | ||||||||||||||||||||||||||||||||||||
Deferrals | Excess | |||||||||||||||||||||||||||||||||||
and | Subordination | |||||||||||||||||||||||||||||||||||
Current | Defaults | as a % of | ||||||||||||||||||||||||||||||||||
Number | Moodys/ | Number of | as a % of | Current | ||||||||||||||||||||||||||||||||
of | Book | Fair | Unrealized | Realized | Fitch | Performing | Current | Performing | ||||||||||||||||||||||||||||
Deal | Securities | Class | Value | Value | Loss | Loss | Ratings | Issuers | Collateral | Collateral | ||||||||||||||||||||||||||
PreTSL II |
2 | Mezzanine | $ | 431 | $ | 92 | $ | (339 | ) | $ | (635 | ) | Ca/C | 23 | 39.90 | % | 0.00 | % | ||||||||||||||||||
PreTSL VI |
1 | Mezzanine | 42 | 20 | (22 | ) | (16 | ) | Ca/D | 3 | 73.60 | % | 0.00 | % | ||||||||||||||||||||||
PreTSL XIX |
1 | Mezzanine | 966 | 243 | (723 | ) | (614 | ) | C/C | 53 | 24.30 | % | 0.00 | % | ||||||||||||||||||||||
I-PreTSL I |
2 | Mezzanine | 1,834 | 416 | (1,418 | ) | | NR/CCC | 16 | 17.40 | % | 9.55 | % | |||||||||||||||||||||||
I-PreTSL II |
2 | Mezzanine | 2,717 | 624 | (2,093 | ) | | NR/B | 29 | 4.90 | % | 14.33 | % | |||||||||||||||||||||||
I-PreTSL III |
3 | Mezzanine | 2,703 | 621 | (2,082 | ) | | B2/CCC | 24 | 11.20 | % | 11.32 | % | |||||||||||||||||||||||
I-PreTSL IV |
1 | Mezzanine | 439 | 113 | (326 | ) | | Ba2/CCC | 29 | 11.60 | % | 3.36 | % | |||||||||||||||||||||||
MM Comm I |
1 | Mezzanine | 386 | 20 | (366 | ) | (1,153 | ) | NR/C | 7 | 61.80 | % | 0.00 | % | ||||||||||||||||||||||
Total |
13 | $ | 9,518 | $ | 2,149 | $ | (7,369 | ) | $ | (2,418 | ) | |||||||||||||||||||||||||
13
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Lack of liquidity in the market for trust preferred collateralized debt obligations,
credit rating downgrades and market uncertainties related to the financial industry are factors
contributing to the impairment on these securities. The table above excludes 11 CDO securities
which have been completely written-off and, therefore, have no book value. The recognized loss
associated with these securities is $14.5 million.
The following table provides additional information related to our pooled trust preferred
collateralized debt obligations as of December 31, 2010:
Pooled Trust Preferred Collateralized Debt Obligations
(dollars in thousands)
(dollars in thousands)
Amount of | ||||||||||||||||||||||||||||||||||||
Deferrals | Excess | |||||||||||||||||||||||||||||||||||
and | Subordination | |||||||||||||||||||||||||||||||||||
Current | Defaults | as a % of | ||||||||||||||||||||||||||||||||||
Number | Moodys/ | Number of | as a % of | Current | ||||||||||||||||||||||||||||||||
of | Book | Fair | Unrealized | Realized | Fitch | Performing | Current | Performing | ||||||||||||||||||||||||||||
Deal | Securities | Class | Value | Value | Loss | Loss | Ratings | Issuers | Collateral | Collateral | ||||||||||||||||||||||||||
PreTSL II |
2 | Mezzanine | $ | 419 | $ | 15 | $ | (403 | ) | $ | (635 | ) | Ca/C | 23 | 37.70 | % | 0.00 | % | ||||||||||||||||||
PreTSL VI |
1 | Mezzanine | 43 | 1 | (41 | ) | (16 | ) | Ca/D | 2 | 81.00 | % | 0.00 | % | ||||||||||||||||||||||
PreTSL XIX |
1 | Mezzanine | 1,168 | 20 | (1,148 | ) | (614 | ) | C/C | 52 | 24.60 | % | 0.00 | % | ||||||||||||||||||||||
I-PreTSL I |
2 | Mezzanine | 1,833 | 251 | (1,582 | ) | | NR/CCC | 16 | 17.36 | % | 9.11 | % | |||||||||||||||||||||||
I-PreTSL II |
2 | Mezzanine | 2,715 | 375 | (2,340 | ) | | NR/B | 29 | 4.87 | % | 14.33 | % | |||||||||||||||||||||||
I-PreTSL III |
3 | Mezzanine | 2,701 | 375 | (2,326 | ) | | B2/CCC | 24 | 11.16 | % | 10.75 | % | |||||||||||||||||||||||
I-PreTSL IV |
1 | Mezzanine | 439 | 63 | (376 | ) | | Ba2/CCC | 29 | 11.58 | % | 2.82 | % | |||||||||||||||||||||||
MM Comm I |
1 | Mezzanine | 399 | 35 | (364 | ) | (1,153 | ) | NR/C | 7 | 61.80 | % | 0.00 | % | ||||||||||||||||||||||
Total |
13 | $ | 9,715 | $ | 1,134 | $ | (8,581 | ) | $ | (2,418 | ) | |||||||||||||||||||||||||
On a quarterly basis, we evaluate our investment securities for other-than-temporary
impairment (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. The Company has evaluated these securities and determined that the
decreases in estimated fair value are temporary with the exception of 16 bank issued pooled trust
preferred CDO securities. The Companys estimate of projected cash flows it expected to receive was
less than the securities carrying value resulting in a net credit impairment charge to earnings
for the three months ended March 31, 2011 of $211,000.
Our CDOs are beneficial interests in securitized financial assets within the scope of FASB ASC
Topic No. 325, Investments Other, and are therefore evaluated for OTTI using managements
estimate of future cash flows. If these estimated cash flows determine that it is probable an
adverse change in cash flows has occurred, then OTTI would be recognized in accordance with FASB
ASC Topic No. 320. The Company uses a third party model (model) to assist in calculating the
present value of current estimated cash flows to the previous estimate. The present value of the
expected cash flows is calculated based on the contractual terms of the security, and is discounted
at a rate equal to the effective interest rate implicit in the security at the date of acquisition.
The model also takes into account individual defaults and deferrals that have already occurred
by any participating issuer within the pool of entities that make up the securitys underlying
collateral. With regard to expected defaults and deferrals, the Company performs an ongoing
analysis of these securities utilizing both readily available market data and analytical models
obtained from the third party. On a quarterly basis we evaluate the underlying collateral of each
pooled trust preferred security in our portfolio to determine the appropriate default/deferral
assumptions to use in our calculation of discounted cash flows. This process entails obtaining
each securitys issuer list which include the most recent financial and credit quality metrics. We
then identify issuers that have metrics that are similar to those that have defaulted or are
deferring payments. As part of our evaluation we consider such measures as liquidity, capital
adequacy, profitability, and credit quality and analyze ratios such as ROAA, net interest margin,
tier 1 risk based capital, tangible equity to tangible assets, texas ratio, reserves to loans and
non-performing loans to loans. Our evaluation also takes into consideration current economic
indicators as well as recent default/deferral trends of underlying issuers. Management then
develops a projected default/deferral rate for each security based on this analysis. This rate is
then applied to the cash flow model developed by the third party to calculate the present value of
discounted cash flows for each security. The model assumptions relative to expected recoveries of
defaulted issuers and deferring issuers were discussed earlier in this Note. Furthermore, we
perform back-testing by comparing actual default/deferral rates to previous projections. The
results are used to refine future projections on a continuous basis. Lastly, we continually
evaluate the securities for the potential of future impairment by reviewing the FDIC failed bank
list and deferral announcements made by the underlying issuers of each CDO security in our
portfolio.
14
Table of Contents
In general, CDOs are callable within five to ten years of issuance with a quarterly call
frequency. Due to current market conditions, the cost to refinance or issue capital at a lower
rate than what is currently outstanding, and the limited history of CDOs, prepayments are difficult
to predict. The model assumes that prepayments will be limited to those issuers that are acquired
by large banks with low financing costs. A 1% annual prepayment assumption has been used in the
model and is indicative of managements belief that consolidation in the banking industry will
occur over the next several years as market conditions begin to improve. Additionally, commencing
with a date ten years from the issuance date, the Trustee can solicit bids in an auction format for
the purchase of all the outstanding collateral securities. The highest bid will be accepted that
is at least equal to the sum of the outstanding liabilities at par plus accrued and unpaid
interest. However, given the uncertain future of the CDO market, credit quality issues with the
underlying issuers, and a decline in market value, the model assumes that a successful call auction
is highly unlikely. Therefore, the model expects that the securities will extend through their
full 30-year maturity.
The amortized cost and fair value of debt securities and mortgage-backed securities available
for sale at March 31, 2011, 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 | ||||||||
Amortized | ||||||||
Cost | Fair Value | |||||||
(in thousands) | ||||||||
Due within one year or less |
$ | 4,245 | $ | 4,269 | ||||
Due after one year but within five years |
86,882 | 86,199 | ||||||
Due after five years but within ten years |
5,854 | 5,977 | ||||||
Due after ten years |
19,116 | 11,164 | ||||||
Mortgage-backed securities |
40,199 | 40,937 | ||||||
Total investment securities |
$ | 156,296 | $ | 148,546 | ||||
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 March 31, 2011
and 2010 (in thousands):
For the three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Beginning balance of cumulative credit losses on CDO securities |
$ | (16,918 | ) | $ | (13,493 | ) | ||
Additional credit losses for which other than temporary impairment
was previously recognized |
(211 | ) | (2,571 | ) | ||||
Ending balance of cumulative credit losses on CDO securities, March 31, 2011 |
$ | (17,129 | ) | $ | (16,064 | ) | ||
15
Table of Contents
NOTE 4 LOANS RECEIVABLE
Loans receivable consist of the following:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Commercial mortgage |
$ | 408,389 | $ | 413,487 | ||||
Residential mortgage |
257,550 | 258,047 | ||||||
Construction |
14,228 | 15,191 | ||||||
Home equity loans and lines of credit |
47,436 | 47,875 | ||||||
Commercial business loans |
49,063 | 48,223 | ||||||
Other consumer loans |
1,277 | 2,207 | ||||||
Loans receivable, gross |
777,943 | 785,030 | ||||||
Less: |
||||||||
Allowance for loan losses |
13,032 | 12,538 | ||||||
Deferred loan fees |
226 | 174 | ||||||
Loans receivable, net |
$ | 764,685 | $ | 772,318 | ||||
Activity in the allowance for loan losses is as follows:
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Balance at beginning of period |
$ | 12,538 | $ | 13,311 | ||||
Provisions charged to operations |
2,400 | 244 | ||||||
Charge-offs |
(1,943 | ) | (2,164 | ) | ||||
Recoveries |
37 | 485 | ||||||
Balance at end of period |
$ | 13,032 | $ | 11,876 | ||||
The following table summarizes activity related to the allowance for loan losses by
category for the three months ended March 31, 2011:
At or for the three months ended March 31, 2011 | ||||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Commercial | Home Equity | |||||||||||||||||||||||||||||||||||
Secured by | Commercial | Other | Residential | & Lines | Other | |||||||||||||||||||||||||||||||
Real Estate | Term Loans | Construction | Commercial (1) | Mortgage | of Credit | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||
Balance at beginning
of period |
$ | 9,515 | $ | 84 | $ | 736 | $ | 464 | $ | 861 | $ | 195 | $ | 13 | $ | 670 | $ | 12,538 | ||||||||||||||||||
Charge-offs |
(1,051 | ) | (86 | ) | (606 | ) | | (83 | ) | (90 | ) | (27 | ) | | (1,943 | ) | ||||||||||||||||||||
Recoveries |
16 | | 5 | 5 | | | 11 | | 37 | |||||||||||||||||||||||||||
Provision for
loan losses |
836 | 93 | 729 | 505 | 132 | 114 | 11 | (20 | ) | 2,400 | ||||||||||||||||||||||||||
Balance at end of
period |
$ | 9,316 | $ | 91 | $ | 864 | $ | 974 | $ | 910 | $ | 219 | $ | 8 | $ | 650 | $ | 13,032 | ||||||||||||||||||
(1) | includes commercial lines of credit |
16
Table of Contents
Impaired loans at March 31, 2011 and December 31, 2010 were as follows:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Non-accrual loans (1) |
$ | 41,565 | $ | 40,827 | ||||
Loans delinquent greater than 90 days and
still accruing |
2,067 | 2,639 | ||||||
Troubled debt restructured loans |
8,163 | 7,732 | ||||||
Loans less than 90 days and still accruing |
7,852 | 8,514 | ||||||
Total impaired loans |
$ | 59,647 | $ | 59,712 | ||||
(1) | includes non-accruing TDRs paying in accordance with restructured terms totaling $11.6
million at March 31, 2011 and $11.8 million at December 31, 2010. |
Three months ended | Three months ended | |||||||
March 31, 2011 | March 31, 2010 | |||||||
(in thousands) | ||||||||
Average recorded investment of
impaired loans |
$ | 61,242 | $ | 39,889 | ||||
Interest income recognized during
impairment |
$ | 251 | $ | 94 | ||||
Cash basis interest income recognized |
$ | 149 | $ | 119 |
At March 31, 2011, non-performing loans had a principal balance of $43.6 million
compared to $43.5 million at December 31, 2010. 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 $2.1 million at March 31, 2011 and $2.6 million at December 31, 2010.
17
Table of Contents
The following table presents impaired loans at March 31, 2011:
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
March 31, 2011 | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Impaired loans with a related allowance |
||||||||||||||||||||
Commercial secured by real estate |
$ | 21,658 | $ | 21,879 | $ | 3,293 | $ | 19,106 | $ | 170 | ||||||||||
Commercial secured by other |
| | | | | |||||||||||||||
Construction |
3,398 | 3,398 | 719 | 3,398 | 16 | |||||||||||||||
Other commercial |
900 | 900 | 550 | 900 | | |||||||||||||||
Residential mortgage |
147 | 191 | 17 | 147 | | |||||||||||||||
Home equity loans and lines of credit |
200 | 200 | 52 | 200 | | |||||||||||||||
Other consumer loans |
| | | | | |||||||||||||||
Unallocated |
| | | | | |||||||||||||||
Impaired loans with a related allowance |
$ | 26,303 | $ | 26,568 | $ | 4,631 | $ | 23,751 | $ | 186 | ||||||||||
Impaired loans with no related allowance |
||||||||||||||||||||
Commercial secured by real estate |
$ | 20,335 | $ | 25,680 | $ | | $ | 23,801 | $ | 21 | ||||||||||
Commercial secured by other |
| | | | | |||||||||||||||
Construction |
3,299 | 5,709 | | 3,827 | | |||||||||||||||
Other commercial |
3,410 | 4,272 | | 3,469 | | |||||||||||||||
Residential mortgage |
5,985 | 6,457 | | 6,028 | 37 | |||||||||||||||
Home equity loans and lines of credit |
315 | 393 | | 366 | 7 | |||||||||||||||
Other consumer loans |
| | | | | |||||||||||||||
Unallocated |
| | | | | |||||||||||||||
Impaired loans with no related
allowance |
$ | 33,344 | $ | 42,511 | $ | | $ | 37,491 | $ | 65 | ||||||||||
Total impaired loans |
||||||||||||||||||||
Commercial secured by real estate |
$ | 41,993 | $ | 47,559 | $ | 3,293 | $ | 42,907 | $ | 191 | ||||||||||
Commercial secured by other |
| | | | | |||||||||||||||
Construction |
6,697 | 9,107 | 719 | 7,225 | 16 | |||||||||||||||
Other commercial |
4,310 | 5,172 | 550 | 4,369 | | |||||||||||||||
Residential mortgage |
6,132 | 6,648 | 17 | 6,175 | 37 | |||||||||||||||
Home equity loans and lines of credit |
515 | 593 | 52 | 566 | 7 | |||||||||||||||
Other consumer loans |
| | | | | |||||||||||||||
Unallocated |
| | | | | |||||||||||||||
Total impaired loans |
$ | 59,647 | $ | 69,079 | $ | 4,631 | $ | 61,242 | $ | 251 | ||||||||||
18
Table of Contents
The following table presents impaired loans at December 31, 2010:
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
December 31, 2010 | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Impaired loans with a related allowance |
||||||||||||||||||||
Commercial secured by real estate |
$ | 21,449 | $ | 21,689 | $ | 3,510 | $ | 21,826 | $ | 273 | ||||||||||
Commercial secured by other |
| | | | | |||||||||||||||
Construction |
4,966 | 4,966 | 603 | 4,623 | | |||||||||||||||
Other commercial |
2,223 | 2,249 | 67 | 2,166 | | |||||||||||||||
Residential mortgage |
619 | 663 | 19 | 183 | 5 | |||||||||||||||
Home equity loans and lines of credit |
66 | 66 | 35 | 66 | | |||||||||||||||
Other consumer loans |
| | | | | |||||||||||||||
Unallocated |
| | | | | |||||||||||||||
Impaired loans with a related allowance |
$ | 29,323 | $ | 29,633 | $ | 4,234 | $ | 28,864 | $ | 278 | ||||||||||
Impaired loans with no related allowance |
||||||||||||||||||||
Commercial secured by real estate |
$ | 18,923 | $ | 24,426 | $ | | $ | 20,999 | $ | 84 | ||||||||||
Commercial secured by other |
86 | 411 | | 337 | | |||||||||||||||
Construction |
3,980 | 6,671 | | 2,790 | | |||||||||||||||
Other commercial |
2,162 | 3,398 | | 2,362 | | |||||||||||||||
Residential mortgage |
4,508 | 4,903 | | 4,600 | 21 | |||||||||||||||
Home equity loans and lines of credit |
730 | 772 | | 576 | | |||||||||||||||
Other consumer loans |
| | | | | |||||||||||||||
Unallocated |
| | | | | |||||||||||||||
Impaired loans with no related
allowance |
$ | 30,389 | $ | 40,581 | $ | | $ | 31,664 | $ | 105 | ||||||||||
Total impaired loans |
||||||||||||||||||||
Commercial secured by real estate |
$ | 40,372 | $ | 46,115 | $ | 3,510 | $ | 42,825 | $ | 357 | ||||||||||
Commercial secured by other |
86 | 411 | | 337 | | |||||||||||||||
Construction |
8,946 | 11,637 | 603 | 7,413 | | |||||||||||||||
Other commercial |
4,385 | 5,647 | 67 | 4,528 | | |||||||||||||||
Residential mortgage |
5,127 | 5,566 | 19 | 4,783 | 26 | |||||||||||||||
Home equity loans and lines of credit |
796 | 838 | 35 | 642 | | |||||||||||||||
Other consumer loans |
| | | | | |||||||||||||||
Unallocated |
| | | | | |||||||||||||||
Total impaired loans |
$ | 59,712 | $ | 70,214 | $ | 4,234 | $ | 60,528 | $ | 383 | ||||||||||
19
Table of Contents
The following table presents loans by past due status at March 31, 2011:
90 Days | ||||||||||||||||||||||||||||
or More | Total | |||||||||||||||||||||||||||
30-59 Days | 60-89 Days | Delinquent | Delinquent | Total | ||||||||||||||||||||||||
March 31, 2011 | Delinquent | Delinquent | and Accruing | and Accruing | Non-accrual | Current | Loans | |||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||||||
Commercial mortgage |
$ | 8,844 | $ | 5,831 | $ | | $ | 14,675 | $ | 27,357 | $ | 366,357 | $ | 408,389 | ||||||||||||||
Residential mortgage |
1,167 | 254 | 1,973 | 3,394 | 2,720 | 251,436 | 257,550 | |||||||||||||||||||||
Construction |
1,799 | | | 1,799 | 5,037 | 7,392 | 14,228 | |||||||||||||||||||||
Home equity loans
and lines of credit |
106 | 98 | 94 | 298 | 421 | 46,717 | 47,436 | |||||||||||||||||||||
Commercial business
loans |
914 | 74 | | 988 | 6,030 | 42,045 | 49,063 | |||||||||||||||||||||
Other consumer loans |
16 | | | 16 | | 1,261 | 1,277 | |||||||||||||||||||||
Total |
$ | 12,846 | $ | 6,257 | $ | 2,067 | $ | 21,170 | $ | 41,565 | $ | 715,208 | $ | 777,943 | ||||||||||||||
The following table presents loans by past due status at December 31, 2010:
90 Days | ||||||||||||||||||||||||||||
or More | Total | |||||||||||||||||||||||||||
30-59 Days | 60-89 Days | Delinquent | Delinquent | Total | ||||||||||||||||||||||||
December 31, 2010 | Delinquent | Delinquent | and Accruing | and Accruing | Non-accrual | Current | Loans | |||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||||||
Commercial mortgage |
$ | 1,305 | $ | 94 | $ | | $ | 1,399 | $ | 27,781 | $ | 384,307 | $ | 413,487 | ||||||||||||||
Residential mortgage |
796 | 477 | 2,207 | 3,480 | 2,449 | 252,118 | 258,047 | |||||||||||||||||||||
Construction |
| | | | 3,980 | 11,211 | 15,191 | |||||||||||||||||||||
Home equity loans
and lines of credit |
164 | 103 | 432 | 699 | 363 | 46,813 | 47,875 | |||||||||||||||||||||
Commercial business
loans |
| | | | 6,254 | 41,969 | 48,223 | |||||||||||||||||||||
Other consumer loans |
| 16 | | 16 | | 2,191 | 2,207 | |||||||||||||||||||||
Total |
$ | 2,265 | $ | 690 | $ | 2,639 | $ | 5,594 | $ | 40,827 | $ | 738,609 | $ | 785,030 | ||||||||||||||
Our policies provide for the classification of loans based on an analysis
of the credit conditions of the borrower and the value of the collateral when appropriate.
There is no specific credit metrics used to determine the risk rating.
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 and the industry of the borrower.
Risk Rating 6 Watch List 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 three discrete
classes: RR 7.0 performing substandard loans; RR 7.5; and RR 7.9
Risk Rating 7.0 The class is mostly populated by customers that have a history of repayment
(less than 2 delinquencies in the past year) but exhibit some signs of weakness manifested in
either cash flow or collateral. In some cases, while cash flow is below the policy levels,
the customer is in a cash business and has never presented financial reports that reflect
sufficient cash flow for a global cash flow coverage ratio of 1.20.
Risk Rating 7.5 These are loans that share many of the characteristics of the RR 7.0 loans
as they relate to cash flow and/or collateral, but have the further negative of historic
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.
20
Table of Contents
Risk Rating 7.9 These loans have undergone a FASB ASC Topic No. 310 Receivables analysis or
have a specific reserve. 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.
The following table presents commercial loans by credit quality indicator at March 31, 2011.
Risk Ratings | ||||||||||||||||||||||||
Grades | Grade | Grade | Grade | Grade | ||||||||||||||||||||
March 31, 2011 | 1-5 | 6 | 7 | 7.5 | 7.9 | Total | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Commercial secured
by real estate |
$ | 344,488 | $ | 12,931 | $ | 17,188 | $ | 9,134 | $ | 35,303 | $ | 419,044 | ||||||||||||
Commercial term loans |
5,140 | 12 | 9 | | | 5,161 | ||||||||||||||||||
Construction |
5,034 | | 2,400 | | 6,794 | 14,228 | ||||||||||||||||||
Other commercial |
26,054 | 988 | 1,073 | 822 | 4,310 | 33,247 | ||||||||||||||||||
$ | 380,716 | $ | 13,931 | $ | 20,670 | $ | 9,956 | $ | 46,407 | $ | 471,680 | |||||||||||||
The following table presents commercial loans by credit quality indicator at
December 31, 2010.
Risk Ratings | ||||||||||||||||||||||||
Grades | Grade | Grade | Grade | Grade | ||||||||||||||||||||
December 31, 2010 | 1-5 | 6 | 7 | 7.5 | 7.9 | Total | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Commercial secured
by real estate |
$ | 348,166 | $ | 12,064 | $ | 23,720 | $ | 14,248 | $ | 26,730 | $ | 424,928 | ||||||||||||
Commercial term loans |
4,887 | 14 | | | 86 | 4,987 | ||||||||||||||||||
Construction |
3,725 | 120 | 2,400 | | 8,946 | 15,191 | ||||||||||||||||||
Other commercial |
24,262 | 1,252 | 3,297 | 822 | 2,162 | 31,795 | ||||||||||||||||||
$ | 381,040 | $ | 13,450 | $ | 29,417 | $ | 15,070 | $ | 37,924 | $ | 476,901 | |||||||||||||
The following table presents consumer loans by credit quality indicator at March 31,
2011.
30-89 Days | Impaired | |||||||||||||||||||
March 31, 2011 | Current | Delinquent | Non-accrual | Loans | Total | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||
Residential mortgage |
$ | 250,134 | $ | 1,421 | $ | 2,720 | $ | 3,275 | $ | 257,550 | ||||||||||
Home equity loans
and lines of credit |
46,717 | 204 | 421 | 94 | 47,436 | |||||||||||||||
Other consumer loans |
1,261 | 16 | | 1,277 | ||||||||||||||||
Total consumer
loans |
$ | 298,112 | $ | 1,641 | $ | 3,141 | $ | 3,369 | $ | 306,263 | ||||||||||
21
Table of Contents
The following table presents consumer loans by credit quality indicator at December 31,
2010.
30-89 Days | Impaired | |||||||||||||||||||
December 31, 2010 | Current | Delinquent | Non-accrual | Loans | Total | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||
Residential mortgage |
$ | 252,118 | $ | 1,273 | $ | 2,449 | $ | 2,207 | $ | 258,047 | ||||||||||
Home equity loans
and lines of credit |
46,813 | 267 | 363 | 432 | 47,875 | |||||||||||||||
Other consumer loans |
2,191 | 16 | | | 2,207 | |||||||||||||||
Total consumer
loans |
$ | 301,122 | $ | 1,556 | $ | 2,812 | $ | 2,639 | $ | 308,129 | ||||||||||
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 entitys own assumptions
about the assumptions that market participants would use in pricing an asset or liability.
The fair values of securities available for sale are determined by obtaining quoted prices on
nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a
mathematical technique widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities but rather by relying on the securities
relationship to other benchmark quoted securities (Level 2 inputs).
Collateralized debt obligation securities which are issued by financial institutions and
insurance companies were historically priced using Level 2 inputs. The decline in the level of
observable inputs and market activity in this class of investments by the measurement date has been
significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when
available, vary widely. The once active market has become comparatively inactive. As such, these
investments are now priced using Level 3 inputs.
The Company obtained the pricing for these securities from an independent third party who
prepared the valuations using a market valuation approach. Information such as historical and
current performance of the underlying collateral, deferral/default rates, collateral coverage
ratios, break in yield calculations, cash flow projections, liquidity and credit premiums required
by a market participant, and financial trend analysis with respect to the individual issuing
financial institutions and insurance companies, is utilized in determining individual security
valuations. Due to current market conditions as well as the limited trading activity of these
securities, the market value of the securities is highly sensitive to assumption changes and market
volatility.
The fair value of impaired loans with specific allocations of the allowance for loan losses 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 are typically significant
and result in a Level 3 classification of the inputs for determining fair value.
22
Table of Contents
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 | Fair Value Measurements | |||||||||||||||||||||||
at March 31, 2011 | at December 31, 2010 | |||||||||||||||||||||||
Quoted | Quoted | |||||||||||||||||||||||
Prices | Prices | |||||||||||||||||||||||
in Active | Significant | Significant | in Active | Significant | Significant | |||||||||||||||||||
Markets for | Other | Other | Markets for | Other | Other | |||||||||||||||||||
Identical | Observable | Observable | Identical | Observable | Observable | |||||||||||||||||||
Assets | Inputs | Inputs | Assets | Inputs | Inputs | |||||||||||||||||||
(Level 1) | (Level 2) | (Level 3) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Investment securities
available
for sale: |
||||||||||||||||||||||||
U.S. Government and agency
obligations |
$ | | $ | 64,531 | $ | | $ | | $ | 71,735 | $ | | ||||||||||||
Municipal bonds |
| 24,532 | | | 25,406 | | ||||||||||||||||||
Collateralized debt
obligations |
| | 2,149 | | | 1,134 | ||||||||||||||||||
Corporate bonds |
| 16,397 | | | 18,135 | | ||||||||||||||||||
Mortgage-backed securities |
| 40,937 | | | 40,997 | | ||||||||||||||||||
Total securities
available for
sale |
$ | | $ | 146,397 | $ | 2,149 | $ | | $ | 156,273 | $ | 1,134 | ||||||||||||
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 months ended March 31, 2011 and March 31, 2010.
Fair Value Measurements | ||||||||
Using Significant | ||||||||
Unobservable Inputs | ||||||||
(Level 3) | ||||||||
CDO Securities | ||||||||
Available for Sale | ||||||||
(in thousands) | ||||||||
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Beginning balance |
$ | 1,134 | $ | 1,456 | ||||
Accretion of discount |
14 | 56 | ||||||
Payments received |
| | ||||||
Unrealized holding gain (loss) |
1,212 | 2,644 | ||||||
Other-than-temporary impairment
included in earnings |
(211 | ) | (2,571 | ) | ||||
Ending balance |
$ | 2,149 | $ | 1,585 | ||||
23
Table of Contents
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 | Fair Value Measurements | |||||||||||||||||||||||
at March 31, 2011 | at December 31, 2010 | |||||||||||||||||||||||
Quoted | Quoted | |||||||||||||||||||||||
Prices | Prices | |||||||||||||||||||||||
in Active | Significant | Significant | in Active | Significant | Significant | |||||||||||||||||||
Markets for | Other | Other | Markets for | Other | Other | |||||||||||||||||||
Identical | Observable | Unobservable | Identical | Observable | Unobservable | |||||||||||||||||||
Assets | Inputs | Inputs | Assets | Inputs | Inputs | |||||||||||||||||||
(Level 1) | (Level 2) | (Level 3) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Impaired loans: |
||||||||||||||||||||||||
Commercial secured by real estate |
$ | | $ | 26,397 | $ | 15,596 | $ | | $ | 35,891 | $ | 4,481 | ||||||||||||
Commercial secured by other |
| | | | 86 | | ||||||||||||||||||
Construction |
| 3,934 | 2,763 | | 8,657 | 289 | ||||||||||||||||||
Other commercial |
| 1,674 | 2,636 | | 3,947 | 438 | ||||||||||||||||||
Residential mortgage |
| 5,820 | 312 | | 5,127 | | ||||||||||||||||||
Home equity loans |
| 515 | | | 796 | | ||||||||||||||||||
Total impaired loans |
$ | | $ | 38,340 | $ | 21,307 | $ | | $ | 54,504 | $ | 5,208 | ||||||||||||
Other real estate owned: |
||||||||||||||||||||||||
Commercial |
$ | | $ | 2,976 | $ | | $ | | $ | 2,257 | $ | | ||||||||||||
Residential mortgage |
| 1,005 | | | 998 | | ||||||||||||||||||
Total other real estate owned |
$ | | $ | 3,981 | $ | | $ | | $ | 3,255 | $ | | ||||||||||||
Loans held for sale |
$ | | $ | 947 | $ | | $ | | $ | 1,224 | $ | | ||||||||||||
Assets held for sale |
$ | | $ | | $ | | $ | | $ | 479 | $ | | ||||||||||||
Goodwill |
$ | | $ | | $ | 22,575 | $ | | $ | | $ | 22,575 | ||||||||||||
Other intangibles |
$ | | $ | | $ | 417 | $ | | $ | | $ | 445 |
Other real estate owned properties are recorded at the lower of cost or 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.
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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 March 31, 2011 | At December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
(in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents |
$ | 26,516 | $ | 26,516 | $ | 14,997 | $ | 14,997 | ||||||||
Interest-bearing time deposits |
$ | 9,602 | $ | 9,675 | $ | 9,361 | $ | 9,440 | ||||||||
Investment securities |
$ | 148,546 | $ | 148,546 | $ | 157,407 | $ | 157,407 | ||||||||
Loans held for sale |
$ | 947 | $ | 947 | $ | 1,224 | $ | 1,224 | ||||||||
Loans receivable |
$ | 764,685 | $ | 772,794 | $ | 772,318 | $ | 780,277 | ||||||||
FHLB Stock |
$ | 8,028 | $ | 8,028 | $ | 8,721 | $ | 8,721 | ||||||||
Bank owned life insurance |
$ | 28,499 | $ | 28,499 | $ | 28,252 | $ | 28,252 | ||||||||
Accrued interest receivable |
$ | 4,088 | $ | 4,088 | $ | 4,029 | $ | 4,029 | ||||||||
Liabilities |
||||||||||||||||
Savings deposits |
$ | 83,730 | $ | 83,730 | $ | 84,312 | $ | 84,312 | ||||||||
NOW, checking and MMDA
deposits |
$ | 352,911 | $ | 352,911 | $ | 361,973 | $ | 361,973 | ||||||||
Certificates of deposit |
$ | 324,323 | $ | 327,180 | $ | 306,783 | $ | 309,897 | ||||||||
Borrowings |
$ | 154,238 | $ | 158,369 | $ | 169,637 | $ | 174,553 | ||||||||
Accrued interest payable |
$ | 580 | $ | 580 | $ | 714 | $ | 714 |
The carrying amount is the estimated fair value for cash and cash equivalents, interest
bearing deposits, and accrued interest receivable and payable.
Investment securities The fair value is determined as previously described.
Loans held for sale 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.
Loans The fair values of all loans are estimated by discounting the estimated future cash
flows using the Companys 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 Ownership in equity securities of FHLB of New York is restricted and there is no
established market for their resale. The carrying amount is a reasonable estimate of fair value.
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.
The Companys 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 March 31, 2011 and December 31, 2010. 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 March 31, 2011 and,
therefore, current estimates of fair value may differ significantly from the amounts presented
herein.
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NOTE 6 OTHER REAL ESTATE OWNED
At March 31, 2011, other real estate owned (OREO) totaled $4.0 million, net of an allowance
for losses of $277,000, and consisted of three residential properties and eight commercial
properties. At December 31, 2010, OREO totaled $3.3 million, net of an allowance for losses of
$305,000, and consisted of three residential and eight commercial properties.
For the three months ended March 31, 2011, the Company sold four commercial OREO properties
and one residential OREO property with an aggregate carrying value totaling $928,000. The Company
recorded net gains on the sale of OREO of $63,000 in the first quarter of 2011 compared to net
gains of $265,000 recorded in the first quarter of 2010. Also, during the current quarter, the
Company added four commercial properties and one residential property to OREO with aggregate
carrying values of $1.6 million and $100,000, respectively.
Net expenses applicable to OREO were $34,000 for the three month period ending March 31, 2011,
which included a provision for losses on OREO of $47,000 and net gains on the sale of OREO of
$63,000. For the three months ended March 31, 2010, net expenses applicable to OREO of $43,000
included net gains on the sale of OREO of $265,000 and a provision for losses on OREO totaling
$184,000. As of the date of this filing, the Company has agreements of sale for three OREO
properties with an aggregate carrying value totaling $1.4 million.
NOTE 7 DEPOSITS
Deposits are as follows:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Savings accounts |
$ | 83,730 | $ | 84,312 | ||||
NOW accounts and money market funds |
282,407 | 293,706 | ||||||
Non-interest bearing checking |
70,504 | 68,267 | ||||||
Certificates
of deposit of less than $100,000 |
171,422 | 170,524 | ||||||
Certificates of deposit of $100,000 or more |
152,901 | 136,259 | ||||||
$ | 760,964 | $ | 753,068 | |||||
NOTE 8 INCOME TAXES
Income tax benefit for the three months ended March 31, 2011 was primarily impacted by the
reversal of $7.7 million of the deferred tax asset valuation allowance. The balance of the valuation allowance remaining after the reduction was approximately $6.1 million as of March 31, 2011. The release of the
valuation allowance was based on a pattern of earnings exhibited by the Company over the most
recent 6 quarters, projected future taxable income and the recently announced business planning
strategy which would result in the recognition of a capital gain. Based on these factors
management has determined that it is more likely than not that a greater portion of its deferred
tax assets are realizable and has adjusted the valuation allowance accordingly.
For the three months ended March 31, | ||||||||
Income taxes | 2011 | 2010 | ||||||
Pre-tax income |
$ | 824 | $ | 104 | ||||
Income tax benefit |
$ | (7,420 | ) | $ | (531 | ) |
For more information about our income taxes, read Note 11, Income Taxes, in our 2010 Annual
Report to Shareholders.
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NOTE 9 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.
Under the fair value method of accounting for stock options, the fair value for all stock
options granted under the Equity Incentive Plan 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 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.
During 2010, the Company issued 740,000 incentive stock options to certain employees at prices
ranging from $7.27 per share to $8.50 per share. In addition, in 2010, 23,600 non-qualified stock
options were issued to directors at a price of $7.68 per share.
Stock option activity for the three months ended March 31, 2011 was as follows:
Weighted | ||||||||||||
Weighted | Average | |||||||||||
Average | Remaining | |||||||||||
Number of | Exercise | Contractual | ||||||||||
Options | Price | Life | ||||||||||
Outstanding at January 1, 2011 |
763,600 | $ | 7.30 | | ||||||||
Granted |
| | | |||||||||
Forfeited |
(10,000 | ) | $ | 7.27 | | |||||||
Outstanding at March 31, 2011 |
753,600 | $ | 7.30 | 9.2 years | ||||||||
Exercisable at March 31, 2011 |
| $ | | | ||||||||
Aggregate Intrinsic Value at
March 31, 2011 |
| |||||||||||
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 Companys
common stock as well as the historical volatility of the stocks of the Companys peer banks. The
expected dividend yield is based on the expected dividend yield over the life of the option and the
Companys historical information.
On July 1, 2010, the Company issued 11,000 restricted stock awards to directors at a price of
$7.68 per share. The restricted stock awards will vest in five equal annual installments, with the
first installment becoming exercisable on the first anniversary of the date of grant, or July 1,
2011.
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Restricted stock activity for the three months ended March 31, 2011 was as follows:
Restricted | Weighted Average | |||||||
Common | Fair Value at | |||||||
Shares | Grant Date | |||||||
Outstanding at January 1, 2011 |
11,000 | $ | 7.68 | |||||
Granted |
| | ||||||
Forfeited |
| | ||||||
Outstanding at March 31, 2011 |
11,000 | $ | 7.68 | |||||
At March 31, 2011, unrecognized compensation costs on unvested stock options and
restricted stock awards was $2.2 million 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 unvested stock options and restricted stock awards for the three months ended March
31, 2011 was as follows. There was no stock-based compensation expense for the three month period
ended March 31, 2010.
Three months ended | ||||
March 31, 2011 | ||||
(in thousands) | ||||
Compensation expense: |
||||
Common stock options |
$ | 124 | ||
Restricted common stock |
4 | |||
Total compensation expense |
128 | |||
Tax benefit |
3 | |||
Net income effect |
$ | 125 | ||
At March 31, 2011, 753,600 options were outstanding, leaving 567,752 options available to
be issued. As of March 31, 2011, based on the option agreements, there were no vested or
exercisable options.
NOTE 10 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 March 31, 2011, options to purchase 753,600 shares were outstanding, and accordingly,
were included in determining diluted earnings per common share. In addition, 11,000 shares of
restricted stock were outstanding and included in the earnings per share calculation. There were no
options or restricted stock outstanding in the comparable 2010 period. The following is the
calculation of basic earnings per share for the three months ended March 31, 2011 and March 31, 2010.
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
(in thousands, except share data) | ||||||||
Net income |
$ | 8,244 | $ | 635 | ||||
Weighted average shares outstanding |
12,393,888 | 12,338,966 | ||||||
Basic earnings per share |
$ | 0.67 | $ | 0.05 | ||||
Diluted weighted average shares
outstanding |
12,396,463 | 12,338,966 | ||||||
Diluted basic earnings per share |
$ | 0.67 | $ | 0.05 |
NOTE 11 SALE OF BANK PREMISES
On April 11, 2011, the Company entered into an Agreement of Sale to sell the Cape Bank main
office complex and an adjoining vacant lot located in Cape May Court House, NJ. The Company will
lease back the portion of the complex it currently occupies. The sale is subject to customary
closing conditions and is anticipated to occur in the second quarter of 2011. The sale price is
$7.2 million with a book value of approximately $3.7 million as of March 31, 2011. The Company
anticipates a pre-tax gain of approximately $3.2 million after all costs are recorded. The gain
will be recorded over the initial three-year lease term.
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Item 2. | Managements 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 Companys financial performance and could cause the Companys
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 is a Maryland corporation that was incorporated on September 14, 2007
for the purpose of becoming the holding company of Cape Bank (formerly Cape Savings Bank) in
connection with Cape Banks mutual-to-stock conversion, Cape Bancorps initial public offering and
simultaneous acquisition of Boardwalk Bancorp, Inc. (Boardwalk Bancorp), Linwood, New Jersey and
its wholly-owned New Jersey chartered bank subsidiary, Boardwalk Bank. The Company disclosed that
the stockholders of Boardwalk Bancorp, Inc. and the depositors of Cape Savings Bank approved the
merger by the requisite vote required by state law and federal law. As a result of these
transactions, Boardwalk Bancorp was merged with, and into, Cape Bancorp and Boardwalk Bank was
merged with and into Cape Bank. As of January 31, 2008, Cape Savings Bank changed its name to Cape
Bank.
The merger of Cape Bank and Boardwalk Bank on January 31, 2008 created the largest community
bank headquartered in Atlantic and Cape May Counties, with a total of 18 branches providing
complimentary branch coverage. The merger resulted in a well-capitalized community oriented bank
with a significant commercial loan presence. For the three years prior to the merger both banks had
experienced strong asset quality and financial performance. The severe economic recession has
affected the merged financial institution as a whole, as well as the loan portfolios of each of the
constituent banks to the merger. Subsequently, the Bank received regulatory approval for the
closing of two branches in Cape May County, effective on December 3, 2010 and February 4, 2011.
At March 31, 2011, the Company had total assets of $1.062 billion compared to $1.061 billion
at December 31, 2010. For the three months ended March 31,
2011 and 2010, the Company had total
revenues of $13.4 million and $11.4 million, respectively. Net income for the three months ended
March 31, 2011, totaled $8.2 million compared to net income of $635,000 for the three months ended
March 31, 2010.
Cape Bank is a New Jersey chartered savings bank originally founded in 1923. We are a
community bank focused on providing deposit and loan products to retail customers and to small and
mid-sized businesses from our main office located at 225 North Main Street, Cape May Court House,
New Jersey 08210, and 15 branch offices located in Atlantic and Cape May Counties, New Jersey and a
loan production office (opened in February 2011) located in Burlington County, New Jersey. The Bank
received regulatory approval for the closing of two branches in Cape May County, which were
effective on December 3, 2010 and February 4, 2011. 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 and construction
loans. Our retail and business banking deposit products include savings accounts, checking
accounts, money market accounts, and certificates of deposit with terms ranging from 30 days to 84
months. At March 31, 2011, 93.1% of our loan portfolio was secured by real estate and over 60.6% of
our portfolio was commercial related loans. We also maintain an investment portfolio.
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We offer banking services to individuals and businesses predominantly located in our primary
market area of Cape May and Atlantic Counties, New Jersey. The Company opened a loan production
office in Burlington County, New Jersey in February 2011. Our business and results of operations
are significantly affected by local and national economic conditions, as well as market interest
rates. The severe recession of 2008 and 2009, and the continued economic weakness throughout 2010
in the local and national economies has significantly increased our level of non-performing loans
and assets and loan foreclosure activity. Non-performing loans as a percentage of total loans
increased to 5.61% at March 31, 2011 from 5.54% at December 31, 2010. Non-performing assets
(non-performing loans, other real estate owned and non-accruing investment securities) as a
percentage of total assets increased to 4.55% at March 31, 2011 from 4.41% at December 31, 2010.
The ratio of our allowance for loan losses to total loans increased to 1.68% at March 31, 2011 from
1.60% at December 31, 2010. Loan charge-offs were $1.9 million for the three months ended March
31, 2011 compared to $1.1 million for the three months ended March 31, 2010. Of the $1.9 million of
loans charged-off during the current period, $2.0 million were fully reserved for as of December
31, 2010. Our total loan portfolio decreased from $784.8 million at December 31, 2010 to $777.7
million at March 31, 2011, as a result of the $1.9 million in charge-offs, transfers to OREO of $1.7 million, payoffs and normal amortization. We believe our existing loan underwriting
practices are appropriate in the current market environment while continuing to address the local
credit needs. Total deposits increased $7.9 million from $753.1 million at December 31, 2010 to
$761.0 at March 31, 2011. Increases in certificates of deposit of $17.5 million and non-interest
bearing checking accounts of $2.2 million more than offset a decline in NOW and money market
accounts of $11.3 million.
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 offer personal and business checking accounts, commercial mortgage loans, residential mortgage
loans, construction loans, home equity loans and lines of credit and other types of commercial and
consumer loans. At March 31, 2011, our retail market area primarily included the area surrounding
our 16 offices located in Cape May and Atlantic Counties, New Jersey. In addition, the Company
opened a loan production office in Burlington County, New Jersey in February 2011.
During the remainder of 2011, Cape Bank will continue to emphasize the following:
1) | Managing our credit underwriting and administration through the economic
recovery. |
2) | Managing non-performing assets to performing status or disposal. |
3) | Managing net interest income and interest rate risk in an uncertain rate
environment. |
Managing our credit underwriting and administration through the economic recovery:
Based on our experience during the credit crisis and economic downturn, we have taken steps to
improve our credit underwriting and administration. Changes in the Commercial Loan and Credit
Departments were significant during the latter part of 2010 as each of our new Chief Lending
Officer (CLO) and Chief Credit Officer (CCO) had the opportunity to introduce their new approaches
and credit culture. The CLO has undertaken and completed a review of all credit files to update
and reanalyze the credits. The CCO has taken over the active management of all credits that are
rated Substandard.
In the third quarter of 2010, the new CLO and CCO undertook a reassessment of the Banks loan
risk rating system. This has led to the adoption of a more traditional approach to credit rating
and the categorization of more loans as Classified.
The Bank also has a Watch List meeting two months every quarter to review criticized loans
over $500 thousand, in addition to a quarterly report to the Board of Directors.
The CLO has introduced a more rigorous program of external credit training and has actively
mentored our relationship managers. The training has inculcated the cash flow approach to the
credit culture and created a more uniform approach to credit presentations to the Management Loan Committee, the Directors Loan Committee and the Board of Directors.
Beginning in 2009, the Bank has continued to de-emphasize extensions of credit to both the
hospitality and restaurant industries. The current loan portfolio has high concentrations in both
segments which have experienced considerable weakness during the economic downturn.
For 2011, we anticipate a gradual decrease in the amount of problem assets based on
improvement of national and local economic trends, including the local unemployment rate declining,
residential building permits leveling off and the economic activity occurring in the Atlantic City
area related to casinos. The Banks local market has had specific economic development with the
Revel Casino hotel obtaining permanent financing with expected completion by the summer of 2012.
It is anticipated that this construction project may produce approximately 2,000 jobs and the
finished project may result in approximately 5,500 jobs within the Banks market area.
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Table of Contents
Loan demand within our market area is expected to remain moderate during 2011. Median home
sales prices in Atlantic County declined from 2009 to 2010 by 5.3% while in Cape May County the
median home sales price increased by 13.1% for the same period. The number of home sales in both
counties decreased from the third quarter of 2009 compared to the third quarter of 2010.
Additionally, we have been able to sell some of our other real estate owned properties, which may
indicate that potential purchasers believe that market values are not likely to decrease further.
Managing non-performing assets to performing status or disposal:
Our non-performing assets began to increase in 2008, and continued to increase through 2010
and into 2011. The deterioration in our local real estate market began during the first quarter of
2008 and continued to decline through 2009. Median home sales prices are mixed within our market
area as noted previously. Residential building permits for Atlantic and Cape May Counties have
leveled off for both Atlantic and Cape May Counties in 2010 at 2009 levels, although still below
2008 levels, which may be an indication that a floor has been reached. Unemployment has also
affected non-performing assets and has increased from December 2008 to December 2010 in both
Atlantic and Cape May Counties by 31% and 10% respectively, although the unemployment rate did
decline in such counties from 2009 to 2010. These negative economic trends have contributed to a
significant increase in non-performing assets from $3.95 million at December 31, 2007 to $48.0
million at March 31, 2011. This increase was affected by the sustained national recession and by
the significant increase in our total loan portfolio during the period. The ratio of our allowance
for loan losses to non-performing loans decreased from 102.85% in 2007 to 29.87% at March 31, 2011;
net charge-offs to average loans increased from 0.06% in 2007 to 0.97% for the first quarter 2011;
impaired loans increased from $4.0 million in 2007 to $59.6 million at March 31, 2011; and
delinquent loans increased from $15.7 million at December 31, 2007 to $48.1 million at March 31,
2011. Delinquent loans also increased in number during this same time period.
Management has given significant attention to these assets over the past year, including
adding experienced staff, and has developed processes to actively manage delinquencies from their
inception at 15 days delinquent to their resolution, either through charge-off or foreclosure or
working with borrowers to bring their loans current. Our approach is to identify impaired loans,
determine the loss amount if any, and recognize the appropriate loss at that time.
Reducing the level of non-performing assets during 2011 will improve our results of operations
by converting non-earning assets to earning assets and reducing the expense of managing
non-performing assets, which will benefit our interest income, net interest margin and net income.
While loan demand is expected to remain moderate during 2011, there is some evidence that continued
economic deterioration may have leveled off or slightly improved during the fourth quarter of 2010
through the beginning of 2011. Moreover, residential building permits have stabilized and
unemployment within Atlantic and Cape May Counties did decline from 2009 to 2010 by 10.1% and 19.5%
respectively.
Managing net interest income and interest rate risk in a potentially rising rate environment:
The potential exists for the Federal Reserve Bank to raise the target Fed Funds rate in 2011.
An increase in interest rates will present us with the challenge of managing interest rate risk
with a cumulative one year liability sensitive balance sheet. As detailed in Net Interest Income
Analysis, a rising interest rate environment indicates that net interest income would decrease
over a one-year horizon. This analysis assumes instantaneous and sustained rate shock intervals of
100 and 200 basis points on a static balance sheet. Management will focus on several strategies to
negate such effects, such as extending long-term liabilities, increasing core deposit balances,
reducing the amount of long term fixed rate loans in the portfolio, and shortening the average life
of investments within the investment portfolio.
2011 Overview
Our market area has been significantly affected by the severe economic recession which has
affected unemployment and real estate values. Unemployment in Atlantic and Cape May County was
13.9% and 17.0% respectively as of February 2011. Median home sales prices have declined in
Atlantic County but increased in Cape May County when comparing Q3 2009 to Q3 2010, while
residential building permits, which have been declining since 2008, have leveled off in both
counties from 2009 to 2010.
During 2011, Cape Bank will be focusing on core banking practices with an emphasis on managing
non-performing assets. We intend to adhere to our existing loan underwriting practices, which we
believe are appropriate in the current market. The recognition of additional goodwill impairment
is dependent on many variables, some of which are not directly controllable by Cape Bank. However,
with expected decreases in non-performing assets and a steady net interest margin and efficiency
ratio, additional goodwill impairment is not probable. Our capital remains strong at Cape Bank and
there is no expectation of raising additional capital through government programs or by any other
means during 2011.
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Our market area has been significantly affected by the severe economic recession which has
affected unemployment and real estate values. Unemployment in Atlantic and Cape May Counties was
13.9% and 17.0%, respectively, as of February 2011, which while still higher than the New Jersey or
national levels, they are 2.1% and 3.4% lower, respectively, than February 2010. As of August 2010,
unemployment in Atlantic and Cape May Counties was 11.5% and 7.3% respectively, an improvement from
August of 2009 of 2.5% and 3.9%, respectively. These rates were favorably influenced by the summer
season. Home sales prices have declined in both counties from 2008 to 2009, sales volume showed
improvement year-over-year for the first half of 2010, but did decline during the third quarter of
2010. Median sale prices improved during 2010 in both Atlantic and Cape May counties from the prior
twelve month period ended September 30, 2010. Seasonal businesses enjoyed a very good season with
the weather providing ideal conditions. Local lodging facilities based on the barrier islands
appear to have had a strong 2010 season with little indication of discounting needed to keep hotels
fully occupied. Seasonal merchants have indicated a better season in 2010 than in 2009, however
not as strong a result as the crowds may have implied. Early indications from local lodging owners
indicate a stronger pre-booking season in 2011 than experienced in 2010.
During the past two and a half years the Banks yield curve has steepened as rates tied to the
prime rate have decreased as the Federal Reserve has decreased the targeted Fed Funds Rate from a
high of 5.25% in 2007 to its current low of 0.25%. Mid and long-term rates have remained in a
tighter range than short-term rates during the past two years. As the yield curve steepened during
the past two and a half years, our net interest margin increased; although we incurred a loss in
both 2008 and 2009, we recorded net income of $4.0 million for the twelve month period ended
December 31, 2010 and $8.2 million for the three-month period ended March 31, 2011. The losses
incurred in 2008 and 2009 were primarily the result of expenses related to OTTI, goodwill
impairment, provision for loan losses and a deferred tax asset valuation allowance. These items and
others are discussed in more detail later in this report.
The Banks net interest margin for the twelve month period ended December 31, 2008, 2009 and
2010 was 3.48%, 3.54% & 3.66%, respectively. For the three-month period ended March 31, 2011, the
Banks net interest margin was 3.78%.
This improvement is the result of our cost
of funds declining 140 basis points offset in part by the yield on our earning assets declining 94
basis points from 2008 to March 31, 2011. During the period from 2008 to March 31, 2011 our yield
curve steepened as a result of short-term rates dropping consistent with the decline in the Fed
Funds rate. Commercial loans tied to the prime rate were affected most significantly during this
period of declining short-term interest rates. The cost of funds during the same period dropped
significantly in conjunction with the decrease in the Fed Funds Rate. Borrowing rates at the FHLB
of NY declined during this time and our average FHLB borrowing costs decreased from 3.40% in 2008
to 3.23% for the three month period ended March 31, 2011. In addition, average certificates of
deposit costs decreased from 3.55% in 2008 to 1.53% for the three month period ended March 31,
2011.
The historically low interest rate environment, which has been significantly influenced by the
target Fed Funds rate of 0.0% to 0.25% set by the Federal Reserve in the fourth quarter of 2008,
has benefited the Banks net interest income as our cost of funds decreased more than the decrease
in the yield on our assets during the twelve month period ended December 31, 2010 and the three
month period ended March 31, 2011. We do not expect to continue to benefit significantly from the
downward repricing of our liabilities during the remainder of 2011; however we do expect our net
interest margin to be maintained at or near its current level. The full positive impact of the
variable yield curve has been mitigated by the significant increase in our non-performing loans and
assets, which has reduced our net interest income.
The anticipated increase in market interest rates, driven by the target Fed Funds rate set by
the Federal Reserve, would cause compression in the Banks net interest margin. The magnitude of
this potential change is discussed in more detail in Item 3Quantitative and Qualitative
Disclosures About Market Risk.
For the remainder of 2011, Cape Bank will be focusing on core banking practices with an
emphasis on managing non-performing assets. We intend to adhere to our existing prudent loan
underwriting practices, which we believe are appropriate in the current market.
The recognition of goodwill impairment is dependent on many variables, some of which are not
directly controllable by Cape Bank. However, with non-performing assets expected to remain stable
and continued earnings, additional goodwill impairment is not probable.
Comparison of Financial Condition at March 31, 2011 and December 31, 2010
At March 31, 2011, the Companys total assets were $1.062 billion, an increase of $597,000
from the December 31, 2010 level of $1.061 billion.
Cash and cash equivalents increased $11.5 million, or 76.8%, to $26.5 million at March 31,
2011 from $15.0 million at December 31, 2010. The majority of this increase is attributable to
higher interest-bearing cash balances due to proceeds from maturities and sales of investment securities that had not been completely reinvested by March 31, 2011.
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Interest-bearing deposits increased to $9.6 million at March 31, 2011 from $9.4 million at
December 31, 2010, an increase of $241,000 or 2.6%. 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 $777.7 million at March 31, 2011 from $784.8 million at December 31,
2010, a decrease of $7.1 million or 0.91%. Net loans decreased $7.6 million, net of an increase in
the allowance for loan losses of $494,000. Delinquent loans increased $13.4 million to $48.1
million or 6.18% of total gross loans at March 31, 2011 from $34.7 million, or 4.43% of total gross
loans at December 31, 2010. Total delinquent loans by portfolio at March 31, 2011 were $41.2
million of commercial mortgage and commercial business loans, $6.1 million of residential mortgage
loans and $715,000 of consumer loans. At March 31, 2011, delinquent loan balances by number of days
delinquent were: 31 to 59 days $12.8 million; 60 to 89 days $6.3 million; and 90 days and
greater $29.0 million. The increase in delinquencies is primarily attributable to borrowers who have commercial real
estate investments and are experiencing reduced cash flows due to the current economic environment.
These loans have been previously past due at times, but are continuing to make payments, albeit
slower than in recent quarters. Our Special Assets group is actively managing these credits.
At March 31, 2011, the Company had $43.6 million in non-performing loans or 5.61% of total
gross loans, an increase of $86,000 from $43.5 million, or 5.61% of total gross loans at December
31, 2010. At March 31, 2011, non-performing loans by loan portfolio category were as follows: $38.4
million of commercial loans, $4.7 million of residential mortgage loans, and $495,000 of consumer
loans. Of these stated delinquencies, the Company had $2.1 million of loans that were 90 days or
more delinquent and still accruing (12 residential mortgage loans for $2.0 million and 3 consumer
loans for $94,000). These loans are well secured and we anticipate no losses will be incurred.
At March 31, 2011, commercial non-performing loans had collateral type concentrations of $12.1
million (10 loans or 32%) secured by B&B and hotels, $11.2 million (23 loans or 29%) secured by
commercial buildings and equipment, $5.7 million (21 loans or 15%) secured by residential, duplex
and multi-family properties, $4.9 million (10 loans or 13%) secured by restaurant properties, $2.8
million (9 loans or 7%) secured by land and building lots, $843,000 (5 loans or 2%) secured by
retail stores, and $646,000 (2 loans or 2%) secured by marina properties. The three largest
commercial non-performing loans are $11.6 million, $4.1 million, and $2.8 million.
We believe we have appropriately charged-off or established adequate loss reserves on problem
loans that we have identified. For the remainder of 2011, we anticipate a gradual decrease in the
amount of problem assets. This improvement is due, in part, to our disposing of assets
collateralizing loans that have gone through foreclosure. We are aggressively managing all loan
relationships, and where necessary, we will continue to apply our loan work-out experience to
protect our collateral position and actively negotiate with mortgagors to resolve these
non-performing loans.
Total investment securities decreased $8.9 million, or 5.63%, to $148.5 million at March 31,
2011 from $157.4 million at December 31, 2010. At March 31, 2011 and December 31, 2010 all of the
Companys investment securities were classified as available-for-sale (AFS). The decrease in the
portfolio is primarily due to the sale of approximately $10.0 million in corporate bonds, MBS, and
municipal bond securities, which occurred in the month of March and resulted in a net gain of
$148,000. Most of the proceeds had not been reinvested as of March 31, 2011. Included in the
security sales were 2 securities (a private label CMO and a zero coupon municipal bond) which had
indications of potential credit losses in the first quarter of 2011. These factors were not apparent at December 31, 2010.
The securities were sold for a
combined loss of $261,000. Management decided to sell the securities rather than to weather future
volatility and risk the increasing likelihood of OTTI. The Company also experienced additional
OTTI related to its CDO portfolio during the current quarter. This segment of the portfolio has
been adversely impacted by the continued downturn in the economy which has caused many bank issuers
to fail and therefore default on their obligations while others have elected to defer future
payments of interest on such securities. At March 31, 2011, these securities had a cost basis of
$9.5 million and a fair market value of $2.1 million. For the three-month period ended March 31,
2011, the Company recorded a $211,000 charge to earnings related to the credit loss portion of
impairment.
At March 31, 2011, other real estate owned (OREO) totaled $4.0 million, net of an allowance for
losses of $277,000, and consisted of three residential properties and eight commercial properties.
At December 31, 2010, OREO totaled $3.3 million, net of an allowance for losses of $305,000 and
consisted of three residential and eight commercial properties. For the three months ended March
31, 2011, the Company sold four commercial OREO properties and one residential OREO property with
an aggregate carrying value totaling $928,000. Also, during the current quarter, the Company added
four commercial and one residential property to OREO with aggregate carrying values of $1.7
million. As of the date of this filing, the Company has agreements of sale for three OREO
properties with an aggregate carrying value totaling $1.4 million.
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At March 31, 2011, Cape Bancorps total deposits increased to $761.0 million from $753.1
million at December 31, 2010, an increase of $7.9 million or 1.05%. At March 31, 2011, NOW and
money market accounts totaled $282.4 million, a decrease of $11.3 million, or 3.85%, from
$293.7 million at December 31, 2010. Savings accounts decreased $582,000, or 0.69%, to $83.7 million
at March 31, 2011, from $84.3 million at December 31, 2010. Non-interest bearing deposits increased
$2.2 million, or 3.28%, to $70.5 million at March 31, 2011 from $68.3 million at December 31, 2010.
Certificates of deposit increased $17.5 million, or 5.72%, to $324.3 million at March 31, 2011 from
$306.8 million at December 31, 2010.
Borrowings decreased $15.4 million, or 9.08%, to $154.2 million at March 31, 2011 from $169.6
million at December 31, 2010. Funding sources originating primarily from an increase in deposits
and a decline in loan balances were used to pay down borrowings. At March 31, 2011, the Companys
borrowings to assets ratio decreased to 14.5% from 16.0% at December 31, 2010. Borrowings to total
liabilities decreased to 16.8% at March 31, 2011 from 18.3% at December 31, 2010.
At March 31, 2011, the Companys total equity increased to $141.1 million from $132.2 million
at December 31, 2010, an increase of $9.0 million, or 6.77%. The increase in equity is primarily
attributable to the net income of $8.2 million and a decrease in accumulated other comprehensive
loss, net of tax of $475,000. At March 31, 2011, stockholders equity totaled $141.1 million or
13.29% of period end assets, and tangible equity totaled $118.1 million or 11.37% of period end
tangible assets.
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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 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 March 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | Income/ | Average | Average | Income/ | Average | |||||||||||||||||||
Balance | Expense | Yield | Balance | Expense | Yield | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest-earning deposits |
$ | 18,335 | $ | 32 | 0.71 | % | $ | 12,456 | $ | 40 | 1.30 | % | ||||||||||||
Investments |
171,019 | 1,245 | 2.91 | % | 172,723 | 919 | 2.13 | % | ||||||||||||||||
Loans |
785,621 | 10,835 | 5.59 | % | 802,735 | 11,606 | 5.86 | % | ||||||||||||||||
Total interest-earning assets |
974,975 | 12,112 | 5.04 | % | 987,914 | 12,565 | 5.16 | % | ||||||||||||||||
Noninterest-earning assets |
99,722 | 101,420 | ||||||||||||||||||||||
Allowance for loan losses |
(12,897 | ) | (13,519 | ) | ||||||||||||||||||||
Total assets |
$ | 1,061,800 | $ | 1,075,815 | ||||||||||||||||||||
Liabilities and Stockholders
Equity |
||||||||||||||||||||||||
Interest-bearing demand accounts |
$ | 135,347 | 112 | 0.34 | % | $ | 112,395 | 105 | 0.38 | % | ||||||||||||||
Savings accounts |
83,396 | 54 | 0.26 | % | 79,467 | 87 | 0.44 | % | ||||||||||||||||
Money market accounts |
154,168 | 327 | 0.86 | % | 143,629 | 463 | 1.31 | % | ||||||||||||||||
Certificates of deposit |
312,081 | 1,179 | 1.53 | % | 359,917 | 1,726 | 1.94 | % | ||||||||||||||||
Borrowings |
170,074 | 1,354 | 3.23 | % | 182,784 | 1,587 | 3.52 | % | ||||||||||||||||
Total interest-bearing liabilities |
855,066 | 3,026 | 1.44 | % | 878,192 | 3,968 | 1.83 | % | ||||||||||||||||
Noninterest-bearing deposits |
67,825 | 62,892 | ||||||||||||||||||||||
Other liabilities |
5,483 | 5,730 | ||||||||||||||||||||||
Total liabilities |
928,374 | 946,814 | ||||||||||||||||||||||
Stockholders equity |
133,426 | 129,001 | ||||||||||||||||||||||
Total liabilities & stockholders
equity |
$ | 1,061,800 | $ | 1,075,815 | ||||||||||||||||||||
Net interest income |
$ | 9,086 | $ | 8,597 | ||||||||||||||||||||
Net interest spread |
3.60 | % | 3.33 | % | ||||||||||||||||||||
Net interest margin |
3.78 | % | 3.53 | % | ||||||||||||||||||||
Net interest income and margin (tax equivalent basis) (1) |
$ | 9,202 | 3.83 | % | $ | 8,735 | 3.59 | % | ||||||||||||||||
Ratio of average interest-earning assets to average
interest-bearing liabilities |
114.02 | % | 112.49 | % | ||||||||||||||||||||
(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 equilvalent adjustment has been computed using a Federal income tax
rate of 35%, and has the effect of increasing interest income by $116,000, and $138,000 for
the three month period ended March 31, 2011 and 2010, respectively. The average yield on
investments increased to 3.23% from 2.91% for the three month period ended March 31, 2011 and
increased to 2.48% from 2.13% for the three month period ended March 31, 2010. |
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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 March 31, 2011 | ||||||||||||
Compared to March 31, 2010 | ||||||||||||
Increase (decrease) due to changes in: | ||||||||||||
Average | Average | Net | ||||||||||
Volume | Rate | Change | ||||||||||
(in thousands) | ||||||||||||
Interest-Earning Assets |
||||||||||||
Interest-earning deposits |
$ | 14 | $ | (22 | ) | $ | (8 | ) | ||||
Investments |
(9 | ) | 335 | 326 | ||||||||
Loans |
(244 | ) | (527 | ) | (771 | ) | ||||||
Total interest income |
(239 | ) | (214 | ) | (453 | ) | ||||||
Interest-Bearing Liabilities |
||||||||||||
Interest-bearing demand
accounts |
20 | (13 | ) | 7 | ||||||||
Savings accounts |
4 | (37 | ) | (33 | ) | |||||||
Money market accounts |
32 | (168 | ) | (136 | ) | |||||||
Certificates of deposit |
(211 | ) | (336 | ) | (547 | ) | ||||||
Borrowings |
(106 | ) | (127 | ) | (233 | ) | ||||||
Total interest expense |
(261 | ) | (681 | ) | (942 | ) | ||||||
Total net interest income |
$ | 22 | $ | 467 | $ | 489 | ||||||
Comparison of Operating Results for the Three Months Ended March 31, 2011 and 2010
General. Net income for the three months ended March 31, 2011 was $8.2 million, or $.67 per
share, primarily resulting from the reversal of $7.7 million, or $.62 per share, of the deferred tax
asset valuation allowance. This compares to net income of $635,000, or $.05 per share for the
three months ended March 31, 2010. The following is a summary of certain significant pre-tax income
and expense events that occurred during the first quarter of 2011: an OTTI charge related to the
CDO investment portfolio of $211,000; net gains on the sale of investment securities of $148,000; a
provision for loan losses of $2.4 million; loan related expenses of $286,000 and OREO expenses
totaling $105,000. The three months ended March 31, 2010 included an OTTI charge related to the
CDO investment portfolio of $2.6 million, a provision for loan losses of $244,000, net gains on
OREO sales of $265,000, loan related expenses in the amount of $218,000, and OREO expenses totaling
$308,000 which included $184,000 for the establishment of an OREO valuation allowance. In
addition, the first quarter of 2010 included a reversal of interest income on non-earning CDOs in
the amount of $611,000.
Interest Income. Interest income decreased $453,000, or 3.6%, to $12.1 million for the three
months ended March 31, 2011, from $12.6 million for the three months ended March 31, 2010. The
decrease consists primarily of a $771,000 decrease related to interest income on loans partially
offset by a $326,000 increase in interest income on investments. Average loan balances for the
three month period ended March 31, 2011 decreased $17.1 million, or 2.1%, to $785.6 million from
$802.7 million for the three month period ended March 31, 2010. Due to the economic downturn, loan
demand has not been sufficient to offset monthly principal reductions, pay-offs, charge-offs and
the transfer of loans to OREO resulting in the decline in average loan balances. The average yield
on the investment portfolio increased from 2.13% for the three months ended March 31, 2010 to 2.91%
for the three months ended March 31, 2011. This increase was largely driven by interest income in
the prior year period being adversely impacted by the $590,000 write-off of interest receivables
related to non-performing bank issued CDO securities. This has been partially offset by the effect
of a strategy implemented over the past year and a half to shorten the duration of the investment
portfolio. As a result, interest income was adversely impacted by this strategy in the short-term
because longer duration, higher yielding mortgage-backed securities and municipal bonds have been
sold and partially replaced with callable, short-term U.S. Government and agency obligations and
corporate bonds, which have yields that are below the portfolio average. The average balance of
investment securities decreased $1.6 million, or 0.99%, to $171.0 million for the three months ended
March 31, 2011 compared to $172.7 million for the three months ended March 31, 2010.
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Interest Expense. Interest expense decreased $942,000, or 23.7%, to $3.0 million for the three
months ended March 31, 2011, from $4.0 million for the three months ended March 31, 2010, resulting
from a decline in interest expense on certificates of deposit of $547,000 or 31.7%, to $1.2 million
for the three months ended March 31, 2011, from $1.7 million for the three months ended March 31,
2010. This decline of interest expense is primarily the result of a reduction in interest rates
paid on certificates of deposit where the cost of these deposits declined from 1.94% for the three
months ended March 31, 2010 to 1.53% for the three months ended March 31, 2011 due to lower market
interest rates. Interest expense on borrowings (Federal Home Loan Bank of New York advances) was
$1.4 million for the three months ended March 31, 2011 compared to $1.6 million for the three
months ended March 31, 2010. Average borrowings for the three month period ended March 31, 2011
declined to $170.1 million from $182.8 million for the three month period ended March 31, 2010. The
cost of borrowings declined from 3.52% for the 2010 period to 3.23% for the three month period
ended March 31, 2011. This resulted from a higher average of lower cost overnight borrowing
balance for the three month period ended March 31, 2011 thereby driving down the cost of borrowings
for that period. The interest rate on these overnight advances ranged from 0.35% to 0.48% during
the three month period ended March 31, 2011.
Net Interest Income. Net interest income increased $489,000, or 5.7%, to $9.1
million for the three months ended March 31, 2011, from $8.6 million for the three months ended
March 31, 2010. The net interest margin increased 25 basis points to 3.78% for the three months
ended March 31, 2011 from 3.53% for the three months ended March 31, 2010. The ratio of average
interest-earning assets to average interest-bearing liabilities increased to 114.02% during the
three months ended March 31, 2011, from 112.49% for the three months ended March 31, 2010.
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 regulation, adverse situations that
may affect a borrowers ability to repay a loan and the levels of delinquent loans.
Generally, loans are placed on non-accrual status when payment of principal or interest is 90
days or more delinquent unless the loan is considered well secured and in the process of
collection. Loans are also placed on non-accrual status when they are less than 90 days delinquent,
if collection of principal or interest in full is in doubt. This determination is normally the
result of the review of the borrowers financial statements or other information that is obtained
by the Bank.
All loans that are on non-accrual status are reviewed by management monthly to determine if a
specific reserve or charge-off is appropriate. At this point in the delinquency collection
efforts, the primary consideration is collateral value. When the Bank has a current appraisal,
generally less than six months old, and management agrees that the property has not deteriorated in
value since the appraisal, then management will analyze the loan in accordance with FASB ASC Topic
No. 310 Receivables. When a current appraisal is not available, the Bank will request one. Upon
receipt of the appraisal, we will review the loan in accordance with FASB ASC Topic No. 310
Receivables. Prior to receipt of an appraisal, management will consider, based on its knowledge of
the market and other available information pertinent to the particular loan being reviewed,
allocating a specific reserve for that loan. Loans are charged-off partially or in full based upon
the results of a completed FASB ASC Topic No. 310 Receivables analysis. We also perform a FASB ASC
Topic No. 310 Receivables analysis on loans that are not collateralized by real estate.
The amount of the allowance is based on managements 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.
We recorded a provision for loan losses of $2.4 million for the three months ended March 31,
2011 compared to $244,000 for the three months ended March 31, 2010. The ratio of the allowance
for loan losses to non-performing loans (coverage ratio) decreased to 29.87% at March 31, 2011,
from 39.89% at March 31, 2010. For the three months ended March 31, 2011, charge-offs were $1.9
million compared to $2.2 for the three months ended March 31, 2010. Included in the 2011 charge-offs of $1.9 million were partial charge-offs totaling $1.3 million. The amount of
non-performing loans for which the full loss has been charged-off to total loans is 0.08%. The
amount of non-performing loans for which the full loss has been charged-off to total non-performing
loans is 0.87% which represents the charge-off rate for non-performing loans for which the full
loss has been charged-off. The coverage ratio is already net of loan charge-offs. Loan loss
recoveries for the three months ended March 31, 2011 were $37,000 compared to $485,000 for the
three months ended March 31, 2010.
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Our allowance for loans losses increased $494,000, or 3.9%, to $13.0 million at March 31,
2011, from $12.5 million at December 31, 2010. The ratio of our allowance for loan losses to total
loans increased to 1.68% at March 31, 2011, from 1.60% at December 31, 2010. This increase in the
ratio of the allowance for loan losses to total was primarily the result of the $7.6 million
decline in loans from December 31, 2010. The quarterly loan loss allowance methodology did not
require additional provisions to the loan loss allowance account for the $1.1 million of
charge-offs that were fully reserved. Certain impaired loans (troubled debt restructurings) have a
valuation allowance determined by discounting expected cash flows at the respective loans
effective interest rate. Included in the allowance for loan losses at March 31, 2011 was an
impairment reserve for TDRs in the amount of $418,000 compared to $431,000 at December 31, 2010.
Non-Interest Income. Non-interest income totaled $1.256 million for the three months ended
March 31, 2011 compared to the three months ended March 31, 2010 expense of $1.155 million. The
increase in non-interest income resulted from the Company recognizing an OTTI charge to
non-interest income on CDOs totaling $2.6 million for the three months ended March 31, 2010
compared to a similar charge of $211,000 for the three months ended March 31, 2011. In addition,
for the three months ended March 31, 2010, the Company recorded net gains from the sale of OREO of
$265,000 compared to net gains on OREO sales of $63,000 for the three months ended March 31, 2011,
and gains on the sale of investment securities were $148,000 for the three months ended March 31,
2011 compared to no gains for the three months ended March 31, 2010.
Non-Interest Expense. Non-interest expense increased $24,000 or 0.3%, to $7.118 million for
the three months ended March 31, 2011 from $7.094 million for the three months ended March 31,
2010. Increases in salaries and employee benefits ($162,000), loan related expenses ($68,000) and
other expenses ($168,000) were offset by a reduction in occupancy and equipment expenses ($182,000)
and a reduction in OREO expenses ($203,000). The increase in salaries and employee benefits
expense is primarily attributable to increased health care costs, stock option expense and an
increase in salary expense. The increase in other expenses results primarily from executive search
fees and increased consulting costs related to the Special Assets group. The decline in occupancy
and equipment expenses primarily resulted from higher snow removal and utility expense in the first
quarter of 2010 due to the harsh winter of 2010. Fewer OREO write-downs in the 2011 period versus
the 2010 period attributed to the reduction in OREO expenses.
Income Tax Expense (Benefit). For the three months ended March 31, 2011, the Company recorded
a net tax benefit of $7.4 million resulting from the reversal of $7.7 million of the deferred tax
asset valuation allowance. The release of a portion of the valuation allowance was based on a
pattern of earnings exhibited by the Company over the most recent 6 quarters, projected future
taxable income and the recently announced business planning strategy which would result in the
recognition of a capital gain. Management considered these items in determining the amount of the
deferred tax asset that was more likely than not realizable. This compared to a tax benefit of
$531,000 for the three months ended March 31, 2010 which also resulted from a reduction in the
valuation allowance.
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 maturity, redemption, and return
of principal of investment securities totaled $17.8 million through March 31, 2011 and were used
either for liquidity 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 March 31, 2011, the Companys entire investment portfolio, with a
fair market value of $148.5 million, was classified as available-for-sale.
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 established 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 limits
approved by our Board of Directors. 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 the Treasury Department.
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Cape Banks 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 managements 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 $7.9 million, or 1.1%, during the first three months of
2011, and comprised 82.67% of total liabilities at March 31, 2011, as compared to 81.07% at
December 31, 2010.
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 March 31, 2011, 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 Banks 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 Banks assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Banks capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
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 March 31, 2011 and December 31, 2010, 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 institutions category.
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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) | ||||||||||||||||||||||||
March 31, 2011 |
||||||||||||||||||||||||
Risk based capital
ratios: |
||||||||||||||||||||||||
Tier I |
$ | 101,514 | 12.35 | % | $ | 32,879 | 4.00 | % | $ | 49,319 | 6.00 | % | ||||||||||||
Total capital |
$ | 111,827 | 13.60 | % | $ | 65,781 | 8.00 | % | $ | 82,226 | 10.00 | % | ||||||||||||
Leverage ratio |
$ | 101,514 | 9.87 | % | $ | 41,140 | 4.00 | % | $ | 51,426 | 5.00 | % | ||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Risk based capital
ratios: |
||||||||||||||||||||||||
Tier I |
$ | 103,092 | 12.65 | % | $ | 32,598 | 4.00 | % | $ | 48,897 | 6.00 | % | ||||||||||||
Total capital |
$ | 113,313 | 13.90 | % | $ | 65,216 | 8.00 | % | $ | 81,520 | 10.00 | % | ||||||||||||
Leverage ratio |
$ | 103,092 | 9.96 | % | $ | 41,402 | 4.00 | % | $ | 51,753 | 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 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, 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, the evaluation
may factor 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.
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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. The Companys investment portfolio includes 24 securities in
pooled trust preferred collateralized debt obligations, 16 of which have been principally issued by
bank holding companies, and 8 of which have been principally issued by insurance companies. The
portfolio also includes 1 private label (non-agency) collateralized mortgage obligation (CMO).
With the exception of the non-agency collateralized mortgage obligation, all of the aforementioned
securities have below investment grade credit ratings. These investments may pose a higher risk of
future impairment charges by the Company as a result of the current downturn in the U.S. economy
and its potential negative effect on the future performance of the bank issuers and underlying
mortgage loan collateral.
Through March 31, 2011 all 16 of the bank-issued pooled trust preferred collateralized debt
obligation securities have had OTTI recognized in earnings due to credit impairment in this and prior periods. Of those
securities, 11 have been completely written off and the 5 remaining bank-issued CDOs have a total
book value of $1.8 million and a fair value of $374,000 at March 31, 2011. These write-downs were
a direct result of the impact that the credit crisis has had on the underlying collateral of the
securities. Consequently many bank issuers have failed causing them to default on their security
obligations while recent stress tests and potential recommendations by the U.S. Government and the
banking regulators have resulted in some bank trust preferred issuers electing to defer future
payments of interest on such securities. At March 31, 2011 the CDO securities principally issued
by insurance companies, none of which have been OTTI, had an aggregate book value of $7.7 million
and a fair value of $1.8 million. A continuation of issuer defaults and elections to defer
payments could adversely affect valuations and result in future impairment charges.
Approximately $879,000 of the collateralized mortgage obligations are non-agency and consist
of 1 security. This security had an unrealized gain of $32,000 at March 31, 2011. Since this
security has been performing according to its contractual terms, and has maintained a strong credit
rating the Company does not have immediate concerns about potential impairment. Should
deteriorating financial conditions cause delinquencies in the underlying mortgage loan collateral
to deteriorate such that we no longer receive monthly payments on the security, the likelihood of
OTTI will increase.
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 managements 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 Companys 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. As of March 31, 2011, a valuation allowance of approximately $6.1 million had been
established against the Companys deferred tax assets representing a decrease of $7.7 million from
December 31, 2010. Management considered several factors, discussed in Footnote 8 to the Financial
Statements, in determining the amount of the deferred tax asset that was more likely than not
realizable.
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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.
In December 2010, the FASB issued (ASU) 2010-28 IntangiblesGoodwill and Other (Topic 350)
covering when to perform step 2 of the Goodwill Impairment Test for reporting units with zero or
negative carrying amounts. This Update is intended to modify step 1 of the goodwill impairment test
for reporting units with zero or negative carrying amounts as these entities will be required to
perform step 2 of the goodwill impairment test if it is more likely than not that a goodwill
impairment exists. The amendments in this Update are effective for all entities that have
recognized goodwill and have one or more reporting units whose carrying amount for purposes of
performing step 1 of the goodwill impairment test is zero or negative. For public entities, the
amendments in this Update are effective for fiscal years and interim periods within those years,
beginning after December 15, 2010. Early adoption is not permitted. No significant impact to
amounts reported in the consolidated financial position or results of operations are expected from
the adoption of ASU 2010-28.
In December 2010, the FASB issued (ASU) 2010-29 Business Combinations (Topic 805) Disclosure
of Supplementary Pro Forma Information for Business Combinations. This Update specifies that if a
public entity presents comparative financial statements, the entity should disclose revenue and
earnings of the combined entity as though the business combination(s) that occurred during the
current year had occurred as of the beginning of the comparable prior annual reporting period only.
The amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to
include a description of the nature and amount of material, nonrecurring pro forma adjustments
directly attributable to the business combination included in the reported pro forma revenue and
earnings. The amendments in this Update are effective prospectively for business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2010. Early adoption is permitted. No significant impact to
amounts reported in the consolidated financial position or results of operations are expected from
the adoption of ASU 2010-29.
In January 2011, the FASB issued (ASU) 2011-01 Receivables (Topic 310) Deferral of the
Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. This Update
temporarily delays the effective date of the disclosures about troubled debt restructurings in
Update 2010-20 for public entities. The amendments in this Update delay the effective date of the
new disclosures about troubled debt restructurings for public entities and the coordination of the
guidance for determining what constitutes a troubled debt restructuring until interim and annual
periods ending after June 15, 2011. No significant impact to amounts reported in the consolidated
financial position or results of operations are expected from the adoption of ASU 2011-01.
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 mortgage-related assets, 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 Interest Rate Risk Committee of the Board as well as an
Asset/Liability Committee, comprised of our Chief Executive Officer, Chief Operating Officer, Chief
Financial Officer, Vice Presidents of Commercial and Residential Lending, Vice President of Retail
Funding and Treasurer. The Interest Rate Risk Committee 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 repricing or reset
periods and higher interest rates than residential mortgage loans; |
| investing in shorter duration investment grade corporate securities, U.S. Government
agency obligations and mortgage-backed securities; |
| obtaining general financing through lower cost deposits, brokered deposits and
advances from the Federal Home Loan Bank; |
| originating adjustable rate and short-term consumer loans; |
| selling a portion of our long-term fixed rate residential mortgage loans; and |
| lengthening the terms of borrowings and deposits. |
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, 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 Interest Income Analysis. 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.
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The table below sets forth, as of March 31, 2011, 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 Interest Income | ||||||||||||||
Change in | Estimated | Increase (Decrease) in | ||||||||||||
Interest Rates | Net Interest | Estimated Net Interest Income | ||||||||||||
(basis points)(1) | Income | Amount | Percent | |||||||||||
(dollars in thousands) | ||||||||||||||
+200 | $ | 33,800 | $ | (2,302 | ) | -6.38 | % | |||||||
+100 | $ | 35,013 | $ | (1,089 | ) | -3.02 | % | |||||||
0 | $ | 36,102 | $ | | | |||||||||
-100 | $ | 36,315 | $ | 213 | 0.59 | % | ||||||||
-200 | $ | 34,345 | $ | (1,757 | ) | -4.87 | % |
(1) | Assumes an instantaneous and sustained uniform change in interest rates
at all maturities. |
The table above indicates that at March 31, 2011, in the event of a 100 basis point increase
in interest rates, we would experience a $1.1 million decrease in net interest income. In the event
of a 100 basis point decrease in interest rates, we would experience a $213,000 increase in net
interest income.
Certain shortcomings are inherent in the methodologies used in determining interest rate risk
through changes in 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 interest income information presented assumes 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 March 31, 2011 (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
Companys first fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Companys 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 Companys financial
condition or results of operations.
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Table of Contents
Item 1A. | Risk Factors |
In addition to the other information contained in this Quarterly Report on Form 10-Q, the
following risk factor represents material updates and additions to the risk factors previously
disclosed in the Companys Annual Report on Form 10-K for the Year Ended December 31, 2010, as
filed with the Securities and Exchange Commission. Additional risks not presently known to us, or
that we currently deem immaterial, may also adversely affect our business, financial condition or
results of operations. Further, to the extent that any of the information contained in this
Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factors set forth
below also are cautionary statements identifying important factors that could cause our actual
results to differ materially from those expressed in any forward-looking statements made by or on
behalf of us.
Financial Reform Legislation will, among other things, tighten capital standards, create a new
Consumer Financial Protection Bureau, and result in new laws and regulations that are expected to
increase our cost of operations.
A wide range of regulatory initiatives directed at the financial services industry have been
proposed in recent months. One of those initiatives, the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (the Dodd-Frank Act), was signed into law by President Obama on
July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services
industry within the United States, establishes the new federal Bureau of Consumer Financial
Protection (the BCFP), and will require the BCFP and other federal agencies to implement many new
rules. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the
resulting regulations will impact the Companys business. However, compliance with these new laws
and regulations will result in additional costs, which may adversely impact the Companys results
of operations, financial condition or liquidity, any of which may impact the market price of the
Companys common stock. Additional risks not presently known to us, or that we currently deem
immaterial, may also adversely affect our business, financial condition or results of operations.
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) | There were no issuer repurchases of securities during the period covered by this Report. |
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | Reserved |
Item 5. | Other Information |
Not applicable
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Item 6. | Exhibits |
The following exhibits are either filed as part of this report or are incorporated herein by
reference:
3.1 | Articles of Incorporation of Cape Bancorp, Inc. * |
|||
3.2 | Amended and Restated Bylaws of Cape Bancorp, Inc. * * |
|||
4 | Form of Common Stock Certificate of Cape Bancorp, Inc. * |
|||
10.1 | Form of Employee Stock Ownership Plan * |
|||
10.2 | Form of Change in Control Agreement * |
|||
10.3 | Amended and Restated Phantom Incentive Stock Option Plan * |
|||
10.4 | Amended and Restated Phantom Restricted Stock Plan * |
|||
10.5 | Form of Director Retirement Plan * |
|||
10.6 | Benefit Equalization Plan * |
|||
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 |
* | Filed as exhibits to the Companys Registration Statement on Form S-1, and any amendments
thereto, with the Securities and Exchange Commission (Registration No. 333-146178). |
|
** | Filed as an exhibit to the Companys Current Report Form 8-K with the Securities and
Exchange Commission on July 18, 2008. |
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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: May 4, 2011
|
/s/ Michael D. Devlin
|
|||
President and Chief Executive Officer | ||||
Date: May 4, 2011
|
/s/ Guy Hackney
|
|||
Executive Vice President and Chief Financial Officer |
46