CBNJ Cape Bancorp, Inc.

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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 FORM 10-Q  

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

 

For the quarterly period ended June 30, 2015

 

OR

 

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

 

For the transition period from                      to                     

 

Commission File No. 001-33934

 

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 Cape Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

(609) 465-5600

(Registrant’s telephone number)

 

N/A

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

 

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

 

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

 

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

 

Large accelerated filer  ☐	Accelerated filer  ☒	Non-accelerated filer  ☐	Smaller Reporting Company  ☐
		(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  ☐    NO  ☒

 

As of August 10, 2015 there were 14,156,810 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

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CAPE BANCORP, INC.

FORM 10-Q

 

Index

 

				Page
Part I. Financial Information
Item 1.		Financial Statements		3
		Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014		3
		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and June 30, 2014 (unaudited)		4
		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and June 30, 2014 (unaudited)		5
		Consolidated Statements of Changes in Stockholders’ Equity for the Year Ended December 31, 2014 and Six Months Ended June 30, 2015 (unaudited)		6
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and June 30, 2014 (unaudited)		7
		Notes to Consolidated Financial Statements (unaudited)		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		42
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		55
Item 4.		Controls and Procedures		57
Part II. Other Information
Item 1.		Legal Proceedings		58
Item 1A.		Risk Factors		58
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		58
Item 3.		Defaults upon Senior Securities		58
Item 4.		Mine Safety Disclosures		58
Item 5.		Other Information		58
Item 6.		Exhibits		59
		Signature Page		60

 

 

Item 1. Financial Statements

 

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS 

(unaudited)

 

		June 30,				December 31,
		2015				2014
		(in thousands)
ASSETS
Cash & due from financial institutions		$	10,298			$	6,785
Interest-bearing bank balances			13,157				24,687
Cash and cash equivalents			23,455				31,472
Interest-bearing time deposits			8,902				9,538
Investment securities available for sale, at fair value			258,034				147,788
Investment securities held to maturity, at amortized cost (fair value of $15,389 and $17,746, respectively)			15,432				17,924
Loans, net of allowance of $10,313 and $9,387, respectively			1,114,592				770,289
Loans held for sale			441				-
Accrued interest receivable			4,697				3,196
Premises and equipment, net			28,740				19,672
Other real estate owned			3,704				5,279
Federal Home Loan Bank (FHLB) stock, at cost			5,850				7,053
Deferred income taxes			16,097				10,062
Bank owned life insurance (BOLI)			46,577				31,305
Goodwill			22,575				22,575
Intangible assets, net			1,071				330
Other assets			4,985				3,411
Total assets		$	1,555,152			$	1,079,894
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Interest-bearing deposits		$	1,121,431			$	710,788
Noninterest-bearing deposits			153,651				86,268
Federal funds purchased and repurchase agreements			9,964				9,956
Federal Home Loan Bank borrowings			89,288				126,386
Advances from borrowers for taxes and insurance			2,002				711
Accrued interest payable			115				120
Other liabilities			5,917				4,787
Total liabilities			1,382,368				939,016
Stockholders' Equity
Common stock, $.01 par value: authorized 100,000,000 shares; issued 16,073,709 at June 30, 2015 and 13,344,776 shares at December 31, 2014; outstanding 14,154,450 shares at June 30, 2015 and 11,475,396 shares at December 31, 2014			161				133
Additional paid-in capital			155,459				128,630
Treasury stock at cost: 1,919,259 shares at June 30, 2015 and 1,869,380 shares December 31, 2014			(18,531	)			(18,077	)
Unearned ESOP shares			(7,463	)			(7,676	)
Accumulated other comprehensive loss, net			(1,820	)			(1,483	)
Retained earnings			44,978				39,351
Total stockholders' equity			172,784				140,878
Total liabilities & stockholders' equity		$	1,555,152			$	1,079,894

 

See accompanying notes to unaudited consolidated financial statements.

 

 

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME 

(unaudited)

 

		For the three months ended June 30,								For the six months ended June 30,
		2015				2014				2015				2014
		(dollars in thousands, except share data)
Interest income:
Interest on loans		$	12,354			$	9,291			$	21,197			$	18,623
Interest and dividends on investments
Taxable			582				378				993				804
Tax-exempt			105				89				204				178
Interest on mortgage-backed securities			690				411				1,008				863
Total interest income			13,731				10,169				23,402				20,468
Interest expense:
Interest on deposits			1,034				658				1,724				1,262
Interest on borrowings			591				612				1,206				1,210
Total interest expense			1,625				1,270				2,930				2,472
Net interest income before provision for loan losses			12,106				8,899				20,472				17,996
Provision for loan losses			2,213				115				2,213				2,327
Net interest income after provision for loan losses			9,893				8,784				18,259				15,669
Non-interest income:
Service fees			1,049				724				1,731				1,380
Net gains on sale of loans			23				129				53				245
Net increase from BOLI			326				220				546				443
Gain on sale of investment securities available for sale, net			(15	)			78				99				1,967
Net gain (loss) on sale of OREO			(225	)			(232	)			(226	)			(240	)
Bargain purchase gain			5,955				-				5,955				-
Other			618				84				751				336
Total non-interest income			7,731				1,003				8,909				4,131
Non-interest expense:
Salaries and employee benefits			4,997				3,389				8,840				6,987
Occupancy expenses, net			671				463				1,220				959
Equipment expenses			336				261				584				483
Federal insurance premiums			285				208				471				416
Data processing			449				303				743				576
Loan related expenses			261				253				500				478
Advertising			257				251				434				449
Telecommunications			342				298				612				567
Professional services			315				132				494				392
Merger related expenses			1,700				-				1,966				-
OREO expenses			449				164				1,351				416
Other operating			1,289				780				2,046				1,515
Total non-interest expense			11,351				6,502				19,261				13,238
Income before income taxes			6,273				3,285				7,907				6,562
Income tax expense			132				1,253				745				2,502
Net income		$	6,141			$	2,032			$	7,162			$	4,060
Earnings per share (see Note 13):
Basic		$	0.46			$	0.19			$	0.60			$	0.37
Diluted		$	0.45			$	0.19			$	0.59			$	0.37
Weighted average number of shares outstanding:
Basic			13,360,255				10,955,918				12,043,108				10,978,897
Diluted			13,516,172				11,097,564				12,171,283				11,114,150

 

See accompanying notes to unaudited consolidated financial statements.

 

 

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(unaudited)

 

		For the three months ended June 30,
		2015												2014
		Before Tax Amount				Tax Expense (Benefit)				Net of Tax Amount				Before Tax Amount				Tax Expense (Benefit)				Net of Tax Amount
		(in thousands)
Net income		$	6,273			$	132			$	6,141			$	3,285			$	1,253			$	2,032
Other comprehensive income:
Unrealized holding gains (losses) arising during the period on AFS securities			(1,873	)			(748	)			(1,125	)			1,327				531				796
Amortization of previously unrealized loss on AFS securities transferred to HTM			(2	)			(1	)			(1	)			71				28				43
Less reclassification adjustment for (gain) loss on sales of securities realized in net income			15				6				9				(78	)			(31	)			(47	)
Unrealized holding gains (losses) arising during the period on interest rate swap			326				130				196				(279	)			(111	)			(168	)
Total other comprehensive income (loss)			(1,534	)			(613	)			(921	)			1,041				417				624
Total comprehensive income		$	4,739			$	(481	)		$	5,220			$	4,326			$	1,670			$	2,656

 

 

		For the six months ended June 30,
		2015												2014
		Before Tax Amount				Tax Expense (Benefit)				Net of Tax Amount				Before Tax Amount				Tax Expense (Benefit)				Net of Tax Amount
		(in thousands)
Net income		$	7,907			$	745			$	7,162			$	6,562			$	2,502			$	4,060
Other comprehensive income:
Unrealized holding gains (losses) arising during the period on AFS securities			(536	)			(214	)			(322	)			4,781				1,911				2,870
Amortization of previously unrealized loss on AFS securities transferred to HTM			103				41				62				106				42				64
Less reclassification adjustment for (gain) loss on sales of securities realized in net income			(99	)			(40	)			(59	)			(1,967	)			(786	)			(1,181	)
Unrealized holding gains (losses) arising during the period on interest rate swap			(30	)			(12	)			(18	)			(279	)			(111	)			(168	)
Total other comprehensive income (loss)			(562	)			(225	)			(337	)			2,641				1,056				1,585
Total comprehensive income		$	7,345			$	520			$	6,825			$	9,203			$	3,558			$	5,645

 

See accompanying notes to unaudited consolidated financial statements.

 

 

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Year ended December 31, 2014 and six months ended June 30, 2015

(unaudited)

 

		Common Stock				Additional Paid-In Capital				Treasury Stock				Unearned ESOP Shares				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Total Stockholders' Equity
		(in thousands)
Balance, December 31, 2013		$	133			$	128,193			$	(12,035	)		$	(8,102	)		$	(2,951	)		$	35,189			$	140,427
Net income			-				-				-				-				-				6,784				6,784
Other comprehensive income			-				-				-				-				1,468				-				1,468
Stock option compensation expense			-				448				-				-				-				-				448
Restricted stock compensation expense			-				23				-				-				-				-				23
Exercise of stock options			-				(40	)			173				-				-				-				133
Cash dividends declared on common stock ($0.24 per share)			-				-				-				-				-				(2,622	)			(2,622	)
Common stock repurchased - 602,389 shares			-				-				(6,215	)			-				-				-				(6,215	)
ESOP shares earned			-				6				-				426				-				-				432
Balance, December 31, 2014			133				128,630				(18,077	)			(7,676	)			(1,483	)			39,351				140,878
Net income			-				-				-				-				-				7,162				7,162
Other comprehensive income (loss)			-				-				-				-				(337	)			-				(337	)
Acquisition of Colonial Financial			28				27,138				(1,079	)			-				-				-				26,087
Stock option compensation expense			-				225				-				-				-				-				225
Restricted stock compensation expense			-				33				-				-				-				-				33
Exercise of stock options			-				(24	)			97				-				-				-				73
Issuance of restricted stock			-				(528	)			528				-				-				-				-
Cash dividends declared on common stock ($0.12 per share)			-				-				-				-				-				(1,535	)			(1,535	)
ESOP shares earned			-				(15	)			-				213				-				-				198
Balance, June 30, 2015		$	161			$	155,459			$	(18,531	)		$	(7,463	)		$	(1,820	)		$	44,978			$	172,784

 

See accompanying notes to unaudited consolidated financial statements.

 

 

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(unaudited) 

 

		For the six months ended June 30,
		2015				2014
		(in thousands)
Cash flows from operating activities
Net income		$	7,162			$	4,060
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			2,213				2,327
Net gains on the sale of loans			(53	)			(245	)
Net loss on the sale of other real estate owned			226				240
Write-down of other real estate owned			1,143				99
Net gains on sale of investment securities			(99	)			(1,967	)
Increase in cash surrender value of BOLI			(546	)			(443	)
Proceeds from loan sales			345				2,241
Depreciation and amortization			1,736				1,235
ESOP and stock-based compensation expense			456				470
Deferred income taxes			(5,812	)			(4	)
Bargain purchase gain			(5,955	)			-
Changes in assets and liabilities that (used) provided cash:
Accrued interest receivable			(134	)			(118	)
Other assets			6,111				(298	)
Accrued interest payable			(17	)			22
Other liabilities			95				(2,741	)
Net cash (used in) provided by operating activities			6,871				4,878
Cash flows from investing activities
Proceeds from sales of AFS securities			88,263				4,759
Proceeds from calls of investments held to maturity			570				-
Proceeds from calls, maturities, and principal repayments of AFS securities			23,566				11,489
Purchases of AFS securities			(9,974	)			(16,723	)
Purchases of HTM securities			-				(1,177	)
Redemption (Purchase) of Federal Home Loan Bank stock			1,706				627
Proceeds from sale of other real estate owned			2,238				2,787
Proceeds from bank owned life insurance			-				761
(Increase) decrease in interest-bearing time deposits			636				(356	)
(Increase) decrease in loans, net			(5,592	)			(5,024	)
Proceeds from sales of loans held for sale			8,503				5,323
Purchases of premises and equipment			(696	)			(276	)
Purchase of loans			(88,442	)			-
Cash acquired, net of cash paid for Colonial acquisition			27,847				-
Net cash (used in) provided by investing activities			48,625				2,190
Cash flows from financing activities
Net increase (decrease) in deposits			(24,663	)			14,826
Increase in advances from borrowers for taxes and insurance			212				44
Repayments of long-term borrowings			-				-
Increase (decrease) in short-term borrowings			(27,600	)			(26,900	)
Increase (decrease) in long-term borrowings			(10,000	)			11,000
Purchase of Treasury stock			-				(4,464	)
Proceeds from exercise of shares from stock options			73				35
Dividends paid on common stock			(1,535	)			(1,433	)
Net cash provided by (used in) financing activities			(63,513	)			(6,892	)
Net increase (decrease) in cash and cash equivalents			(8,017	)			176
Cash and cash equivalents at beginning of year			31,472				24,861
Cash and cash equivalents at end of period		$	23,455			$	25,037
Supplementary disclosure of cash flow information:
Cash paid during period for:
Interest		$	2,930			$	2,450
Income taxes, net of refunds		$	15			$	-
Supplementary disclosure of non-cash investing activities:
AFS investment security sales that will settle after quarter-end		$	-			$	1,710
AFS investment security purchase commitments that settled during the period		$	-			$	(4,189	)
Transfers between loans and loans held for sale, net		$	441			$	4,550
Transfers from loans to other real estate owned		$	752			$	115

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

Notes to Consolidated Financial Statements (Unaudited) 

 

 

NOTE 1 – ORGANIZATION

 

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

 

Cape Bank (the “Bank”) is a New Jersey-chartered stock savings bank. The Bank provides a complete line of business and personal banking products. Following its April 1, 2015 acquisition of Colonial Financial Services, Inc. (“Colonial”). and Colonial Bank FSB (“Colonial Bank”), Vineland, New Jersey, Cape Bank operates through its twenty-one full service offices located throughout Atlantic, Cape May, Cumberland and Gloucester counties in New Jersey, including its main office located at 225 North Main Street, Cape May Court House, New Jersey, one drive-up teller/ATM operation in Atlantic County, three market development offices (“MDOs”) located in Burlington, Cape May and Atlantic Counties in New Jersey, and two MDOs in Pennsylvania servicing the five county Philadelphia market located in Radnor, Delaware County and in Philadelphia (opened in Center City in January 2015). On March 31, 2015, the Bank entered into an agreement to purchase Sun National Bank’s branch located in Hammonton, New Jersey. The branch purchase, subject to the satisfaction of customary closing conditions is expected to be completed in August 2015.

 

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

 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

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

 

The consolidated financial statements include the accounts of Cape Bancorp, Inc. and its subsidiaries, all of which are wholly-owned. Significant intercompany balances and transactions have been eliminated. Certain prior period amounts may have been reclassified to conform to current year presentations. The consolidated financial statements, as of and for the periods ended June 30, 2015 and 2014, have not been audited by the Company’s independent registered public accounting firm. In the opinion of management, all accounting entries and adjustments, including normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations for the periods presented have been made. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements through the date of the filing of the consolidated financial statements with the SEC.

 

Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

 

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 $1.6 million as of June 30, 2015, and $659,000 as of December 31, 2014 are included in these balances.

 

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

 

Investment Securities: The Bank classifies investment securities as either available-for-sale (“AFS”) or held-to-maturity (“HTM”). Investment securities classified as AFS are carried at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of equity, net of related income tax effects. Investment securities classified as HTM are carried at cost, adjusted for amortization of premium and accretion of discount over the term of the related investments, using the level yield method. Investment securities are classified as HTM when management has the positive intent and ability to hold them to maturity. In March 2014, the Bank reclassified a portion of AFS securities to HTM as these securities may have been particularly susceptible to changes in fair value as a result of market volatility. Gains and losses on sales of investment securities are recognized upon realization utilizing the specific identification method.

  

 

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

 

On February 27, 2014, the Company sold its remaining portion of collateralized debt obligation (“CDO”) securities with a book value of zero, resulting in a pre-tax gain of $1.9 million.

 

Loans Held for Sale (“HFS”): From time to time, certain commercial loans are transferred from the loan portfolio to HFS, and are carried at the lower of aggregate cost or fair market value. The fair values are based on the amounts offered for these loans in currently pending sales transactions, or as determined by outstanding commitments from investors. Write-downs on loans transferred to HFS are charged to the allowance for loan losses. Subsequent declines in fair value, if any, are charged to operating income and the HFS balance is reduced. Gains and losses on sales of loans are based on the difference between the selling price and the carrying value of the related loans sold.

 

On April 1, 2015, the Bank transferred $441,000, net of $728,000 in write-downs, from loans to loans held for sale.

 

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

 

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

 

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

 

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

  

 

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Included in the Company’s loan portfolio are modified loans. Per the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), Topic 310-40, “Troubled Debt Restructurings by Creditors” (“FASB ASC 310-40”), a loan restructuring is one in which the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that the creditor would not otherwise consider, such as providing for a below market interest rate and/or forgiving principal or previously accrued interest. This restructuring may stem from an agreement or may be imposed by law, and may involve a multiple note structure. Prior to the restructuring, if the loans which are modified as a troubled debt restructuring (“TDR”) are already classified as non-accrual, these loans may only be returned to performing (i.e. accrual status) after considering the borrower’s sustained repayment performance for a reasonable amount of time, generally six months. This sustained repayment performance may include the period of time just prior to the restructuring. At June 30, 2015, TDRs totaled $4.4 million, of which $3.8 million were accruing TDRs and $645,000 were non-accruing TDRs. This compares to $5.7 million of TDRs at December 31, 2014, of which $4.9 million were accruing TDRs and $819,000 were non-accruing TDRs. (See Note 4 – Loans Receivable).

 

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

 

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

 

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

 

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

 

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

 

Non-Profit: The Bank provides a variety of types of loans, real estate based, term, and, or lines of credit to non-profit organizations. These loans are consistent with the criteria indicated previously for these similar types of loans, although a non-profit organization may have additional sources of financial support in the form of foundations and, or, endowments. As these loans are exposed to the same economic conditions as other similarly structured loans, the additional financial resources results in a lower risk profile.

  

  

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified. The annual goodwill assessment for 2015 will be performed in the fourth quarter. In the interim, the Company will continue to evaluate goodwill on a quarterly basis utilizing the methodology required for an annual goodwill assessment. There was no goodwill associated with the acquisition of Colonial. The Company recorded a $5.955 million bargain purchase gain on the acquisition of Colonial.

 

Other intangible assets consist of core deposit 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. The acquisition of Colonial resulted in an additional core deposit intangible totaling $798,000 which will be amortized over ten years.

  

 

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

 

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

 

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

 

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

 

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

 

Employee Stock Ownership Plan (“ESOP”): The cost of shares issued to the ESOP, but not yet earned is shown as a reduction of equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares are used to reduce the annual ESOP debt service. As of June 30, 2015, 222,138 shares have been allocated to eligible participants in the Cape Bank Employee Stock Ownership Plan.

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

Treasury Stock: Stock held in the treasury by the Company is accounted for using the cost method, which treats stock held in treasury as a reduction to total stockholders’ equity. As shares of treasury stock are reissued to satisfy stock option exercises, the shares are issued using the average cost basis of the shares in the treasury at the time of issuance. At June 30, 2015, 1,919,259 shares were held in the treasury at an average price of $9.66 per share.

 

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

 

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

 

          In May 2014, the FASB issued an update (ASU 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, “Revenue from Contracts with Customers”.  The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts).  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The guidance provides steps to follow to achieve the core principle.  An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.  The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2016.  The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

  

 

NOTE 3 – ACQUISITION

 

On September 10, 2014, the Company, entered into an Agreement and Plan of Merger (the “Agreement”) with Colonial Financial Services, Inc. The Agreement provided that, upon the terms and subject to the conditions set forth therein, Colonial would merge with and into Cape Bancorp, with Cape Bancorp continuing as the surviving entity. Thereafter, Colonial Bank, FSB a wholly-owned subsidiary of Colonial, would merge with and into Cape Bank, with Cape Bank continuing as the surviving Bank. Under the Agreement, each shareholder of Colonial, subject to potential adjustments at closing, was entitled to elect to receive either $14.50 per share in cash or 1.412 shares of Cape Bancorp’s common stock, subject to 50% of the shares being exchanged for stock and 50% for cash.

  

 

On April 1, 2015, the Company announced that it had successfully completed its acquisition of Colonial and Colonial Bank. At closing, two members of the Colonial Board of Directors, Gregory J. Facemyer and Hugh J. McCaffrey were added to the Boards of Directors of Cape and Cape Bank.

 

The assets acquired and liabilities assumed have been accounted for under the purchase method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of April 1, 2015 based on management’s best estimate using the information available as of the acquisition date. The application of purchase accounting resulted in a bargain purchase gain of $5.955 million and a core deposit intangible of $798,000. As of April 1, 2015, Colonial had total assets with a carrying value of approximately $569.8 million, including gross loans with a carrying value of approximately $273.8 million, and total deposits with a carrying value of approximately $502.0 million. The bargain purchase gain primarily results from the interest rate fair value adjustment applied to Colonial’s lower yielding asset base and the write-up of the Colonial premises acquired to fair market value.

 

The table below summarizes the amounts recognized as of the merger date for each major class of assets acquired and liabilities assumed, the estimated fair value adjustments and the amounts recorded in the Company’s financial statements at fair value as of April 1, 2015:

 

  

  

		Colonial 04/01/15 Book Value				Fair Value Adjustments					Colonial 04/01/15 Fair Value Acquisition
		(in thousands)
Cash paid for acquisition											$	28,028
Value of stock issued												26,087
Total Purchase Price											$	54,115
Cash and cash equivalents		$	55,875			$	-				$	55,875
Investment securities			210,883				-					210,883
Restricted stock			503				-					503
Loans			258,756				(4,949	)	(a)			253,807
Loans held for sale			12,872				(3,771	)				9,101
Bank owned life insurance			15,134				-					15,134
Premises and equipment			7,292				1,724		(b)			9,016
Accrued interest receivable			1,390				(23	)				1,367
Core deposit and other intangibles			-				798		(c)			798
Other real estate owned			2,177				(895	)	(d)			1,282
Deferred taxes			3,443				2,295		(e)			5,738
Other assets			1,508				-					1,508
Deposits			(502,047	)			(769	)	(f)			(502,816	)
Accrued interest payable			(12	)			-					(12	)
Advances for taxes and insurance			(1,079	)			-					(1,079	)
Other liabilities			(907	)			(129	)				(1,036	)
Total identifiable net assets		$	65,789			$	(5,719	)			$	60,070
Bargain purchase gain											$	(5,955	)

 

The following provides an explanation of certain fair value adjustments presented in the above table:

 

a) Represents the elimination of Colonial’s allowance for loan losses, deferred fees, deferred costs and an adjustment of the amortized cost of loans to estimated fair value, which includes an interest rate mark and credit mark.

b) Represents an adjustment to reflect the fair value of land and buildings.

c) Represents intangible assets recorded to reflect the fair value of core deposits. The core deposit asset was recorded as an identifiable intangible asset and will be amortized on an accelerated basis over the estimated average life of the deposit base.

d) Represents the fair value adjustment for other real estate owned.

e) Consist primarily of adjustments in net deferred tax assets resulting from the fair value adjustments related to acquired assets, liabilities assumed and identifiable intangibles recorded.

f) Represents fair value adjustment on time deposits as the weighted average interest rates of time deposits assumed exceeded the costs of similar funding available in the market at the time of the acquisition.

 

Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired from Colonial were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimated future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. For collateral dependent loans with deteriorated credit quality, fair value was estimated by analyzing the value of the underlying collateral, assuming the fair values of the loan were derived from the eventual sale of the collateral. These values were discounted using marked derived rate of returns, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of Colonial’s allowance for loan losses associated with the loans that were acquired, as the loans were initially recorded at fair value on April 1, 2015.

 

 

The acquired loan portfolio subject to purchased credit impairment accounting guidance (ASC 310-30) as of April 1, 2015 was comprised of collateral dependent loans with deteriorated credit quality as follows:

 

		ASC 310-30
		Loans
		(in thousands)
Contractual principal and accrued interest at acquisition		$	8,262
Principal not expected to be collected (non-accretable discount)			5,726
Expected cash flows at acquisition			2,536
Interest component of expected cash flows (accretable discount)			(163	)
Fair value of acquired loans		$	2,373

 

The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years utilizing the sum of the years method of amortization.

 

The fair value of retail demand and interest bearing deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities.

 

Direct acquisition and integration costs of the merger were expensed as incurred and totaled $2.0 million for the six months ended June 30, 2015. These items were recorded as merger-related expenses on the consolidated statements of income.

 

The following table presents selected unaudited pro forma financial information reflecting the merger assuming it was completed as of January 1, 2015 and January 1, 2014. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the merger actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full fiscal year period. Pro forma basic and fully diluted earnings per share were calculated using the Company’sactual weighted average shares outstanding for the periods presented, plus the incremental shares issued, assuming the merger occurred at the beginning of the periods presented. The unaudited pro forma information is based on the actual financial statements of the Company for the periods presented, and on the actual financial statements of the Company for the 2014 period presented and in 2015 until the date of the merger, at which time Colonial’s results of operations were included in the Company’s financial statements.

 

The unaudited pro forma information, for the six months ended June 30, 2015 and 2014, set forth below reflects the adjustments related to (a) purchase accounting fair value adjustments; (b) amortization of core deposit and other intangibles; and (c) adjustments to interest income and expense due to amortization of premiums and accretion discounts. The unaudited pro forma information give effect to the merger as if it occurred on January 1, 2015 with respect to the pro forma information for the six months ended June 30, 2015 and on January 1, 2014 with respect to the pro forma information for the six months ended June 30, 2014. In the table below, merger-related expenses of $2.0 million were excluded from pro forma non-interest expenses for the six months ended June 30, 2015. Income taxes were also adjusted to exclude income tax benefits of $263,000 related to the non-tax deductible merger expenses for the six months ended June 30, 2015. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue enhancement opportunities or anticipated cost savings.

  

 

  

		Pro Forma Selected Financial Data
		For the six months ended June 30,
		2015				2014
		(in thousands, except per share amounts)
Net interest income after loan loss provision		$	22,517			$	21,237
Non-interest income:
Gain (loss) on sale of securities		$	155			$	2,463
All other non-interest income		$	3,229			$	2,966
Non-interest expense		$	20,781			$	19,740
Net income		$	3,783			$	4,646
Pro forma earnings per share:
Basic		$	0.31			$	0.39
Diluted		$	0.31			$	0.38

 

The Company has determined that it is impractical to report amounts of revenue and earnings of Cape Bancorp since the acquisition date, April 1, 2015. The back-office systems conversions of the combined entity took place on May 9, 2015. Accordingly, reliable and separate complete revenue and earnings information are no longer available. In addition, such amounts would require significant estimates related to the proper allocation of merger cost saves that cannot be objectively made. The Company is still in the process of evaluating the final purchase accounting allocation specifically pertaining to deferred tax assets conforming with Section 382.  Any adjustment resulting from the evaluation is not expected to be material.  In accordance with FASB ASC 805-10 (Subtopic 25-15), the Company has up to one year from the date of acquisition to complete this assessment.

 

  

NOTE 4 – INVESTMENT SECURITIES

 

The amortized cost, gross unrealized gains or losses and the fair value of the Bank’s investment securities available-for-sale and held-to-maturity at June 30, 2015 and December 31, 2014 are as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(in thousands)
June 30, 2015
Investment securities available-for-sale
Debt securities
U.S. Government and agency obligations		$	57,136			$	49			$	(334	)		$	56,851
Municipal bonds			9,896				2				(61	)			9,837
Corporate bonds			25,694				36				(33	)			25,697
Total debt securities		$	92,726			$	87			$	(428	)		$	92,385
Equity securities
CRA Qualified and Asset Mgmt Funds		$	8,891			$	-			$	(254	)		$	8,637
Total equity securities		$	8,891			$	-			$	(254	)		$	8,637
Mortgage-backed securities
SBA Loan Pools		$	10,153			$	2			$	-			$	10,155
GNMA pass-through certificates			7,104				9				(7	)			7,106
FHLMC pass-through certificates			14,484				4				(80	)			14,408
FNMA pass-through certificates			32,415				17				(246	)			32,186
Collateralized mortgage obligations			94,261				73				(1,177	)			93,157
Total mortgage-backed securities		$	158,417			$	105			$	(1,510	)		$	157,012
Total securities available-for-sale		$	260,034			$	192			$	(2,192	)		$	258,034
Investment securities held-to-maturity
Debt securities
U.S. Government and agency obligations		$	5,964			$	-			$	(75	)		$	5,889
Municipal bonds			9,468				96				(64	)			9,500
Total securities held-to-maturity		$	15,432			$	96			$	(139	)		$	15,389

  

  

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(in thousands)
December 31, 2014
Investment securities available-for-sale
Debt securities
U.S. Government and agency obligations		$	39,978			$	16			$	(560	)		$	39,434
Municipal bonds			8,288				46				(17	)			8,317
Corporate bonds			23,836				15				(73	)			23,778
Total debt securities		$	72,102			$	77			$	(650	)		$	71,529
Equity securities
CRA Qualified and Asset Mgmt Funds		$	5,000			$	-			$	(183	)		$	4,817
Total equity securities		$	5,000			$	-			$	(183	)		$	4,817
Mortgage-backed securities
GNMA pass-through certificates		$	2,103			$	113			$	-			$	2,216
FHLMC pass-through certificates			3,464				7				(13	)			3,458
FNMA pass-through certificates			9,729				33				(16	)			9,746
Collateralized mortgage obligations			56,757				62				(797	)			56,022
Total mortgage-backed securities		$	72,053			$	215			$	(826	)		$	71,442
Total securities available-for-sale		$	149,155			$	292			$	(1,659	)		$	147,788
Investment securities held-to-maturity
Debt securities
U.S. Government and agency obligations		$	7,859			$	-			$	(261	)		$	7,598
Municipal bonds			10,065				139				(56	)			10,148
Total securities held-to-maturity		$	17,924			$	139			$	(317	)		$	17,746

  

Proceeds from sales of securities available for sale were $78.6 million and $2.9 million for the three months ended June 30, 2015 and 2014, respectively. Gross gains of $141,000 and gross losses of $156,000 were realized on security sales during the three months ended June 30, 2015 and gross gains of $78,000 were realized on security sales during the three months ended June 30, 2014. Proceeds from security calls, maturities, and return of principal were $11.1 million and $5.5 million for the three months ended June 30, 2015 and 2014, respectively. Proceeds from sales of securities available for sale were $88.3 million and $4.8 million for the six months ended June 30, 2015 and 2014, respectively. Gross gains of $255,000 and gross losses of $156,000 were realized on security sales during the six months ended June 30, 2015. Gross gains of $2.0 million were realized on security sales during the six months ended June 30, 2014. Proceeds from security calls, maturities, and return of principal were $23.6 million and $11.5 million for the six months ended June 30, 2015 and 2014, respectively.

 

Securities having a fair value of approximately $25.1 million and $79.9 million at June 30, 2015 and December 31, 2014, respectively, were pledged to secure public deposits, Federal Home Loan Bank and other borrowings. The Bank did not hold any trading securities during the six months ended June 30, 2015 or during the twelve months ended December 31, 2014.

 

On March 3, 2014, $7.6 million of agency debt securities were transferred from available-for-sale (“AFS”) to held-to-maturity (“HTM”) at fair value which the Bank has the ability and positive intent to hold to maturity. Additionally, the Bank expects to recover the recorded investment and thus realize no gains or losses when the issuer pays the amount promised through maturity. Each transfer was done at fair value and any previously unrealized gain or loss will be amortized or accreted to investment securities in the consolidated statements of operation. The unrealized holding gain or loss at March 3, 2014 related to this transfer, will continue to be reported in a separate component of shareholders’ equity and will be amortized or accreted over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization or accretion of any premium or discount, and will result in no net effect to the investment yield. These securities had gross unrealized losses at the time of transfer of $377,000 of which $276,000 was in a loss position for less than 12 months. There were no securities transferred from AFS to HTM during the six month period ending June 30, 2015.

  

 

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2015:

 

		Less Than 12 Months								12 Months or Longer								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
										(in thousands)
U.S. Government and agency obligations		$	44,928			$	(308	)		$	7,898			$	(101	)		$	52,826			$	(409	)
Municipal bonds			11,579				(105	)			1,271				(20	)			12,850				(125	)
Corporate bonds			11,593				(33	)			-				-				11,593				(33	)
CRA Qualified and Asset Mgmt Mutual Funds			888				(3	)			7,749				(251	)			8,637				(254	)
Mortgage-backed securities			102,399				(1,021	)			16,697				(489	)			119,096				(1,510	)
Total temporarily impaired investment securities		$	171,387			$	(1,470	)		$	33,615			$	(861	)		$	205,002			$	(2,331	)

 

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2014:

 

		Less Than 12 Months								12 Months or Longer								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
										(in thousands)
U.S. Government and agency obligations		$	8,958			$	(42	)		$	34,214			$	(779	)		$	43,172			$	(821	)
Municipal bonds			3,098				(17	)			3,824				(56	)			6,922				(73	)
Corporate bonds			17,730				(73	)			-				-				17,730				(73	)
CRA Qualified and Asset Mgmt Mutual Funds			-				-				4,817				(183	)			4,817				(183	)
Mortgage-backed securities			15,903				(53	)			39,571				(773	)			55,474				(826	)
Total temporarily impaired investment securities		$	45,689			$	(185	)		$	82,426			$	(1,791	)		$	128,115			$	(1,976	)

 

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

 

At June 30, 2015, the Company’s investment securities portfolio consisted of 319 securities, 183 of which were in an unrealized loss position. The securities consist of investments that are backed by the U.S. Government or U.S. sponsored agencies which the government has affirmed its commitment to support, and municipal obligations which had unrealized losses that were caused by changing credit spreads in the market as a result of the current economic environment. Because the Company has no intention to sell these securities, nor is it more likely than not that we will be required to sell the securities, the Company does not consider these investments to be OTTI.

  

 

On a quarterly basis, we evaluate our investment securities for OTTI. As required by FASB ASC Topic No. 320, “Investments – Debt and Equity Securities,” if we do not intend to sell a debt security, and it is not more likely than not that we will be required to sell the security, an OTTI write-down is separated into a credit loss portion and a portion related to all other factors. The credit loss portion is recognized in earnings as net OTTI losses, and the portion related to all other factors is recognized in accumulated other comprehensive income, net of taxes. The credit loss portion is defined as the difference between the amortized cost of the security and the present value of the expected future cash flows for the security. If the intent is to sell a debt security or if it is more likely than not that we will be required to sell the security, then the security is written down to its fair market value as a net OTTI loss in earnings. The Company has evaluated these securities and determined that the decreases in estimated fair value are temporary. The Company’s estimate of projected cash flows it expected to receive was more than the securities’ carrying value, resulting in no impairment charge to earnings for the six months ended June 30, 2015.

 

On February 27, 2014, the Company sold its remaining portion of CDOs having a zero book balance which resulted in a pre-tax gain of $1.9 million.

 

The amortized cost and fair value of debt securities and mortgage-backed securities available for sale at June 30, 2015, by contractual maturities, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		Available for Sale								Held to Maturity
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(in thousands)								(in thousands)
Due within one year or less		$	303			$	303			$	-			$	-
Due after one year but within five years			67,109				66,965				2,451				2,445
Due after five years but within ten years			25,314				25,117				12,173				12,122
Due after ten years			-				-				808				822
Equity securities			8,891				8,637
Mortgage-backed securities			158,417				157,012				-				-
Total investment securities		$	260,034			$	258,034			$	15,432			$	15,389

 

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 June 30, 2015 and June 30, 2014:

 

		For the three months ended June 30,
		2015				2014
Beginning balance of cumulative credit losses on CDO securities		$	-			$	-
Additional credit losses for which other than temporary impairment was previously recognized			-				-
Sale of OTTI securities			-				-
Credit loss recognized due to change to intent to sell			-				-
Ending balance of cumulative credit losses on CDO securities		$	-			$	-

 

		For the six months ended June 30,
		2015				2014
Beginning balance of cumulative credit losses on CDO securities		$	-			$	(14,501	)
Additional credit losses for which other than temporary impairment was previously recognized			-				-
Sale of OTTI securities			-				14,501
Credit loss recognized due to change to intent to sell			-				-
Ending balance of cumulative credit losses on CDO securities		$	-			$	-

  

 

NOTE 5 – LOANS RECEIVABLE

 

Loans receivable consist of the following:

 

		June 30,				December 31,
		2015				2014
		(in thousands)
Commercial secured by real estate		$	583,359			$	422,194
Commercial term loans			37,023				25,366
Construction			24,601				19,399
Other commercial			60,799				33,314
Residential mortgage			348,315				234,561
Home equity loans and lines of credit			68,298				44,312
Other consumer loans			1,133				769
Loans receivable, gross			1,123,528				779,915
Less:
Allowance for loan losses			10,313				9,387
Deferred loan fees			(1,377	)			239
Loans receivable, net		$	1,114,592			$	770,289

 

Purchase Credit Impaired Loans

 

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows at June 30, 2015 and December 31, 2014.

 

		June 30,				December 31,
		2015				2014
		(in thousands)
Commercial secured by real estate		$	478			$	-
Commercial term loans			-				-
Construction			281				-
Other commercial			-				-
Residential mortgage			-				-
Home equity loans and lines of credit			-				-
Other consumer loans			-				-
Total carrying amount		$	759			$	-

 

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses for the six months ended June 30, 2015. There were no purchased impaired loans in the 2014 period. The table above excludes three loans that were purchase credit impaired at April 1, 2015 that subsequently paid off or were moved to other real estate owned.

 

 

The accretable yield, or income expected to be collected, on the purchased impaired loans above is as follows at June 30, 2015:

 

 

		For the three and six months ended
		June 30, 2015
		(in thousands)
Accretable yield, beginning balance		$	-
Acquisition of impaired loans			163
Accretion of income			(52	)
Reclassifications from non-accretable difference			-
Disposals			-
Accretable yield, end of period		$	111

 

The following table summarizes activity related to the allowance for loan losses by category for the three months ended June 30, 2015:

 

		At or for the three months ended June 30, 2015
		(in thousands)
		Commercial Secured by Real Estate				Commercial Term Loans				Construction				Other Commercial (1)				Residential Mortgage				Home Equity & Lines of Credit				Other Consumer				Unallocated				Total
Balance at beginning of period		$	5,819			$	402			$	147			$	601			$	1,549			$	289			$	7			$	350			$	9,164
Charge-offs			(177	)			-				-				-				(89	)			(88	)			(18	)			-				(372	)
Write-downs on loans transferred to HFS			(728	)			-				-				-				-				-				-				-				(728	)
Recoveries			19				-				-				7				-				4				6				-				36
Provision for loan losses			1,669				134				61				398				189				95				17				(350	)			2,213
Balance at end of period		$	6,602			$	536			$	208			$	1,006			$	1,649			$	300			$	12			$	-			$	10,313
Impairment evaluation
Allowance for loan losses
Individually evaluated		$	283			$	-			$	-			$	-			$	239			$	9			$	-			$	-			$	531
Collectively evaluated			6,319				536				208				1,006				1,410				291				12				-				9,782
PCI loans			-				-				-				-				-				-				-				-				-
Total allowance for loan losses		$	6,602			$	536			$	208			$	1,006			$	1,649			$	300			$	12			$	-			$	10,313
Loans
Individually evaluated		$	8,577			$	-			$	-			$	303			$	4,339			$	509			$	-			$	-			$	13,728
Collectively evaluated			574,304				37,023				24,320				60,496				343,976				67,789				1,133				-				1,109,041
PCI loans			478				-				281				-				-				-				-				-				759
Total loans		$	583,359			$	37,023			$	24,601			$	60,799			$	348,315			$	68,298			$	1,133			$	-			$	1,123,528

 

(1) includes commercial lines of credit

 

On April 1, 2015, the Bank transferred $441,000, net of $728,000 in write-downs, from loans to loans held for sale.

 

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

 

 

The following table summarizes activity related to the allowance for loan losses by category for the six months ended June 30, 2015:

 

		At or for the six months ended June 30, 2015
		(in thousands)
		Commercial Secured by Real Estate				Commercial Term Loans				Construction				Other Commercial (1)				Residential Mortgage				Home Equity & Lines of Credit				Other Consumer				Unallocated				Total
Balance at beginning of year		$	5,671			$	597			$	138			$	782			$	1,550			$	288			$	11			$	350			$	9,387
Charge-offs			(347	)			-				-				-				(143	)			(111	)			(24	)			-				(625	)
Write-downs on loans transferred to HFS			(728	)			-				-				-				-				-				-				-				(728	)
Recoveries			38				-				-				7				-				7				14				-				66
Provision for loan losses			1,968				(61	)			70				217				242				116				11				(350	)			2,213
Balance at end of period		$	6,602			$	536			$	208			$	1,006			$	1,649			$	300			$	12			$	-			$	10,313
Impairment evaluation
Allowance for loan losses
Individually evaluated		$	283			$	-			$	-			$	-			$	239			$	9			$	-			$	-			$	531
Collectively evaluated			6,319				536				208				1,006				1,410				291				12				-				9,782
PCI loans			-				-				-				-				-				-				-				-				-
Total allowance for loan losses		$	6,602			$	536			$	208			$	1,006			$	1,649			$	300			$	12			$	-			$	10,313
Loans
Individually evaluated		$	8,577			$	-			$	-			$	303			$	4,339			$	509			$	-			$	-			$	13,728
Collectively evaluated			574,304				37,023				24,320				60,496				343,976				67,789				1,133				-				1,109,041
PCI loans			478				-				281				-				-				-				-				-				759
Total loans		$	583,359			$	37,023			$	24,601			$	60,799			$	348,315			$	68,298			$	1,133			$	-			$	1,123,528

 

(1) includes commercial lines of credit

  

The following table summarizes activity related to the allowance for loan losses by category for the year ended December 31, 2014:

  

	At or for the Year ended December 31, 2014
	(in thousands)
	Commercial Secured by Real Estate			Commercial Term Loans			Construction			Other Commercial (1)			Residential Mortgage			Home Equity & Lines of Credit			Other Consumer			Unallocated			Total
Balance at beginning of period	$	6,554		$	420		$	227		$	600		$	865		$	160		$	4		$	500		$	9,330
Charge-offs		(1,276	)		-			-			-			(107	)		(100	)		(63	)		-			(1,546	)
Write-downs on loans transferred to HFS		-			(825	)		-			(965	)		-			-			-			-			(1,790	)
Recoveries		299			-			-			-			50			3			27			-			379
Provision for loan losses		94			1,002			(89	)		1,147			742			225			43			(150	)		3,014
Balance at end of period	$	5,671		$	597		$	138		$	782		$	1,550		$	288		$	11		$	350		$	9,387
Impairment evaluation
Allowance for loan losses
Individually evaluated	$	271		$	-		$	-		$	-		$	26		$	-		$	-		$	-		$	297
Collectively evaluated		5,400			597			138			782			1,524			288			11			350			9,090
Total allowance for loan losses	$	5,671		$	597		$	138		$	782		$	1,550		$	288		$	11		$	350		$	9,387
Loans
Individually evaluated	$	10,447		$	-		$	-		$	303		$	2,301		$	400		$	-		$	-		$	13,451
Collectively evaluated		411,747			25,366			19,399			33,011			232,260			43,912			769			-			766,464
Total loans	$	422,194		$	25,366		$	19,399		$	33,314		$	234,561		$	44,312		$	769		$	-		$	779,915

 

(1) includes commercial lines of credit

 

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

 

		At or for the three months ended June 30, 2014
		(in thousands)
		Commercial Secured by Real Estate				Commercial Term Loans				Construction				Other Commercial (1)				Residential Mortgage				Home Equity & Lines of Credit				Other Consumer				Unallocated				Total
Balance at beginning of period		$	7,020			$	433			$	107			$	805			$	744			$	122			$	5			$	500			$	9,736
Charge-offs			(98	)			-				-				-				(11	)			(19	)			(28	)			-				(156	)
Write-downs on loans transferred to HFS			-				(16	)			-				-				-				-				-				-				(16	)
Recoveries			42				-				-				-				-				-				9				-				51
Provision for loan losses			(6	)			(74	)			11				(122	)			263				71				22				(50	)			115
Balance at end of period		$	6,958			$	343			$	118			$	683			$	996			$	174			$	8			$	450			$	9,730
Impairment evaluation
Allowance for loan losses
Individually evaluated		$	128			$	-			$	-			$	-			$	27			$	-			$	-			$	-			$	155
Collectively evaluated			6,830				343				118				683				969				174				8				450				9,575
Total allowance for loan losses		$	6,958			$	343			$	118			$	683			$	996			$	174			$	8			$	450			$	9,730
Loans
Individually evaluated		$	8,866			$	-			$	-			$	303			$	2,141			$	575			$	-			$	-			$	11,885
Collectively evaluated			416,670				19,175				19,993				38,169				237,122				42,642				724				-				774,495
Total loans		$	425,536			$	19,175			$	19,993			$	38,472			$	239,263			$	43,217			$	724			$	-			$	786,380

 

(1) includes commercial lines of credit

 

 

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

 

	At or for the six months ended June 30, 2014
	(in thousands)
	Commercial Secured by Real Estate			Commercial Term Loans			Construction			Other Commercial (1)			Residential Mortgage			Home Equity & Lines of Credit			Other Consumer			Unallocated			Total
Balance at beginning of year	$	6,554		$	420		$	227		$	600		$	865		$	160		$	4		$	500		$	9,330
Charge-offs		(276	)		-			-			-			(11	)		(86	)		(44	)		-			(417	)
Write-downs on loans transferred to HFS		-			(825	)		-			(965	)		-			-			-			-			(1,790	)
Recoveries		262			-			-			-			-			1			17			-			280
Provision for loan losses		418			748			(109	)		1,048			142			99			31			(50	)		2,327
Balance at end of period	$	6,958		$	343		$	118		$	683		$	996		$	174		$	8		$	450		$	9,730
Impairment evaluation
Allowance for loan losses
Individually evaluated	$	128		$	-		$	-		$	-		$	27		$	-		$	-		$	-		$	155
Collectively evaluated		6,830			343			118			683			969			174			8			450			9,575
Total allowance for loan losses	$	6,958		$	343		$	118		$	683		$	996		$	174		$	8		$	450		$	9,730
Loans
Individually evaluated	$	8,866		$	-		$	-		$	303		$	2,141		$	575		$	-		$	-		$	11,885
Collectively evaluated		416,670			19,175			19,993			38,169			237,122			42,642			724			-			774,495
Total loans	$	425,536		$	19,175		$	19,993		$	38,472		$	239,263		$	43,217		$	724		$	-		$	786,380

 

(1) includes commercial lines of credit

  

Impaired loans at June 30, 2015 and December 31, 2014 were as follows:

 

		June 30,				December 31,
		2015				2014
		(in thousands)
Non-accrual loans (1)		$	9,139			$	7,857
Loans delinquent greater than 90 days and still accruing			502				401
Troubled debt restructured loans			3,782				4,855
Loans less than 90 days and still accruing			305				338
PCI loans (2)			759				-
Total impaired loans		$	14,487			$	13,451

 

(1)

Non-accrual loans in the table above include TDRs totaling $645,000 at June 30, 2015 and $819,000 at December 31, 2014.

(2)

All PCI loans are non-accrual.

 

		For the three months ended June 30,								For the six months ended June 30,
		2015				2014				2015				2014
		(in thousands)								(in thousands)
Average recorded investment of impaired loans		$	12,335			$	11,714			$	10,632			$	11,256
Interest income recognized during impairment		$	76			$	105			$	131			$	163
Cash basis interest income recognized		$	-			$	-			$	-			$	-

 

At June 30, 2015, non-performing loans had a principal balance of $10.4 million compared to $8.3 million at December 31, 2014. 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 $502,000 at June 30, 2015 and $401,000 at December 31, 2014.

 

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

  

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

 

		June 30, 2015												December 31, 2014
Troubled Debt Restructurings		Non-accruing				Accruing				Total				Non-accruing				Accruing				Total
		(in thousands)												(in thousands)
Commercial secured by real estate		$	291			$	2,617			$	2,908			$	733			$	3,471			$	4,204
Residential mortgage			354				1,165				1,519				86				1,384				1,470
Total TDRs		$	645			$	3,782			$	4,427			$	819			$	4,855			$	5,674

 

The following table presents new TDRs for the three and six months ended June 30, 2015 and 2014:

 

		For the three months ended June 30, 2015												For the three months ended June 30, 2014
Troubled Debt Restructurings		Number of Contracts				Pre-Modification Recorded Investment				Post-Modification Recorded Investment				Number of Contracts				Pre-Modification Recorded Investment				Post-Modification Recorded Investment
		(dollars in thousands)
Commercial secured by real estate			-			$	-			$	-				-			$	-			$	-
Residential mortgage			1				76				76				2				779				779
Total TDRs			1			$	76			$	76				2			$	779			$	779

 

		For the six months ended June 30, 2015												For the six months ended June 30, 2014
Troubled Debt Restructurings		Number of Contracts				Pre-Modification Recorded Investment				Post-Modification Recorded Investment				Number of Contracts				Pre-Modification Recorded Investment				Post-Modification Recorded Investment
		(dollars in thousands)
Commercial secured by real estate			2			$	2,490			$	2,490				1			$	2,178			$	2,170
Residential mortgage			1				76				76				2				779				779
Total TDRs			3			$	2,566			$	2,566				3			$	2,957			$	2,949

 

The following tables present, by class of loans, information regarding the types of concessions granted on accruing and non-accruing loans that were restructured during the six months ended June 30, 2015 and during the year ended December 31, 2014:

 

		For the six months ended June 30, 2015
		(dollars in thousands)
		Reductions in Interest Rate and Maturity Date								Reductions in Interest Rate and Principal Amount								Maturity Date Extension								Maturity Date Extension and Interest Rate Reduction								Deferral of Principal Amount Due and Shortened Maturity Date								Total Concessions Granted
		No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount
Accruing TDRs:
Commercial secured by real estate			-			$	-				-			$	-				-			$	-				2			$	2,490				-			$	-				2			$	2,490
Residential mortgage			-				-				-				-				1				76				-				-				-				-				1				76
Total accruing TDRs			-			$	-				-			$	-				1			$	76				2			$	2,490				-			$	-				3			$	2,566
Non-accruing TDRs:
Commercial secured by real estate			-			$	-				-			$	-				-			$	-				-			$	-				-			$	-				-			$	-
Residential mortgage			-				-				-				-				-				-				-				-				-				-				-				-
Total non-accruing TDRs			-			$	-				-			$	-				-			$	-				-			$	-				-			$	-				-			$	-
Total TDRs:
Commercial secured by real estate			-			$	-				-			$	-				-			$	-				2			$	2,490				-			$	-				2			$	2,490
Residential mortgage			-				-				-				-				1				76				-				-				-				-				1				76
Total TDRs			-			$	-				-			$	-				1			$	76				2			$	2,490				-			$	-				3			$	2,566

  

  

		Year ended December 31, 2014
		(dollars in thousands)
		Reductions in Interest Rate and Maturity Date								Reductions in Interest Rate and Principal Amount								Maturity Date Extension								Maturity Date Extension and Interest Rate Reduction								Deferral of Principal Amount Due and Shortened Maturity Date								Total Concessions Granted
		No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount				No. of Loans				Amount
Accruing TDRs:
Commercial secured by real estate			3			$	1,197				-			$	-				1			$	45				1			$	2,170				-			$	-				5			$	3,412
Residential mortgage			-				-				-				-				2				779				-				-				1				200				3				979
Total accruing TDRs			3			$	1,197				-			$	-				3			$	824				1			$	2,170				1			$	200				8			$	4,391
Non-accruing TDRs:
Commercial secured by real estate			-			$	-				-			$	-				-			$	-				-			$	-				-			$	-				-			$	-
Residential mortgage			-				-				-				-				-				-				-				-				1				87				1				87
Total non-accruing TDRs			-			$	-				-			$	-				-			$	-				-			$	-				1			$	87				1			$	87
Total TDRs:
Commercial secured by real estate			3			$	1,197				-			$	-				1			$	45				1			$	2,170				-			$	-				5			$	3,412
Residential mortgage			-				-				-				-				2				779				-				-				2				287				4				1,066
Total TDRs			3			$	1,197				-			$	-				3			$	824				1			$	2,170				2			$	287				9			$	4,478

 

The following table presents TDRs that defaulted within the six months ended June 30, 2015 and 2014, where the loan had been modified within twelve months:

 

		For the six months ended June 30, 2015								For the six months ended June 30, 2014
Troubled Debt Restructurings That Subsequently Defaulted		Number of Contracts				Recorded Investment				Number of Contracts				Recorded Investment
		(dollars in thousands)
Commercial secured by real estate			-			$	-				-			$	-
Residential mortgage			2				273				-				-
Total			2			$	273				-			$	-

 

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and may result in potential incremental losses. These potential incremental losses have been factored into our overall allowance for loan losses estimate. The level of any re-defaults will likely be affected by future economic conditions. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is repaid in full, reclassified to loans held for sale, foreclosed, sold or it meets the criteria to be removed from TDR status. Included in the allowance for loan losses at June 30, 2015 and December 31, 2014 was an impairment reserve for TDRs in the amount of $188,000 and $192,000, respectively. At June 30, 2015, there are no commitments to extend additional funds to loans that are TDRs.

  

 

The following table presents impaired loans at June 30, 2015:

 

June 30, 2015 (1)		Recorded Investment (2)				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		(in thousands)
Impaired loans with a related allowance
Commercial secured by real estate		$	3,776			$	4,481			$	283			$	3,496			$	68
Commercial term loans			-				-				-				-				-
Construction			-				-				-				-				-
Other commercial			-				-				-				-				-
Residential mortgage			923				1,010				239				458				3
Home equity loans and lines of credit			86				88				9				29				-
Other consumer loans			-				-				-				-				-
PCI			-				-				-				-				-
Impaired loans with a related allowance		$	4,785			$	5,579			$	531			$	3,983			$	71
Impaired loans with no related allowance
Commercial secured by real estate		$	4,801			$	6,240			$	-			$	3,365			$	12
Commercial term loans			-				-				-				-				-
Construction			-				-				-				-				-
Other commercial			303				376				-				621				-
Residential mortgage			3,416				3,568				-				2,123				42
Home equity loans and lines of credit			423				465				-				274				6
Other consumer loans			-				-				-				-				-
PCI			759				3,209				-				266				-
Impaired loans with no related allowance		$	9,702			$	13,858			$	-			$	6,649			$	60
Total impaired loans
Commercial secured by real estate		$	8,577			$	10,721			$	283			$	6,861			$	80
Commercial term loans			-				-				-				-				-
Construction			-				-				-				-				-
Other commercial			303				376				-				621				-
Residential mortgage			4,339				4,578				239				2,581				45
Home equity loans and lines of credit			509				553				9				303				6
Other consumer loans			-				-				-				-				-
PCI			759				3,209				-				266				-
Total impaired loans		$	14,487			$	19,437			$	531			$	10,632			$	131

 

(1)

excludes HFS non-accruing loans of $441,000.

(2)

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

 

  

The following table presents impaired loans at December 31, 2014:

 

December 31, 2014		Recorded Investment (1)				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		(in thousands)
Impaired loans with a related allowance
Commercial secured by real estate		$	4,432			$	4,938			$	271			$	3,679			$	160
Commercial term loans			-				-				-				-				-
Construction			-				-				-				-				-
Other commercial			-				-				-				-				-
Residential mortgage			193				193				26				198				7
Home equity loans and lines of credit			-				-				-				-				-
Other consumer loans			-				-				-				-				-
Impaired loans with a related allowance		$	4,625			$	5,131			$	297			$	3,877			$	167
Impaired loans with no related allowance
Commercial secured by real estate		$	6,015			$	7,781			$	-			$	4,682			$	64
Commercial term loans			-				-				-				-				-
Construction			-				-				-				-				-
Other commercial			303				376				-				303				-
Residential mortgage			2,108				2,233				-				1,644				86
Home equity loans and lines of credit			400				507				-				354				4
Other consumer loans			-				-				-				-				-
Impaired loans with no related allowance		$	8,826			$	10,897			$	-			$	6,983			$	154
Total impaired loans
Commercial secured by real estate		$	10,447			$	12,719			$	271			$	8,361			$	224
Commercial term loans			-				-				-				-				-
Construction			-				-				-				-				-
Other commercial			303				376				-				303				-
Residential mortgage			2,301				2,426				26				1,842				93
Home equity loans and lines of credit			400				507				-				354				4
Other consumer loans			-				-				-				-				-
Total impaired loans		$	13,451			$	16,028			$	297			$	10,860			$	321

 

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

  

 

The following table presents loans by past due status at June 30, 2015:

 

June 30, 2015		30-59 Days Delinquent				60-89 Days Delinquent				90 Days or More Delinquent and Accruing				Total Delinquent and Accruing				Non- accrual (1)				PCI Loans (2)				Current				Total Loans
		(in thousands)
Commercial secured by real estate		$	572			$	40			$	-			$	612			$	5,654			$	478			$	576,615			$	583,359
Commercial term loans			-				-				-				-				-				-				37,023				37,023
Construction			-				-				-				-				-				281				24,320				24,601
Other commercial			337				-				-				337				303				-				60,159				60,799
Residential mortgage			513				756				312				1,581				2,863				-				343,871				348,315
Home equity loans and lines of credit			504				72				190				766				319				-				67,213				68,298
Other consumer loans			4				-				-				4				-				-				1,129				1,133
Total		$	1,930			$	868			$	502			$	3,300			$	9,139			$	759			$	1,110,330			$	1,123,528

 

(1)

excludes HFS non-accruing loans of $441,000.

(2)

All PCI loans are non-accrual

 

The following table presents loans by past due status at December 31, 2014:

 

December 31, 2014		30-59 Days Delinquent				60-89 Days Delinquent				90 Days or More Delinquent and Accruing				Total Delinquent and Accruing				Non- accrual				PCI Loans				Current				Total Loans
		(in thousands)
Commercial secured by real estate		$	769			$	402			$	-			$	1,171			$	6,638			$	-			$	414,385			$	422,194
Commercial term loans			-				-				-				-				-				-				25,366				25,366
Construction			-				-				-				-				-				-				19,399				19,399
Other commercial			-				-				-				-				303				-				33,011				33,314
Residential mortgage			2,047				253				171				2,471				745				-				231,345				234,561
Home equity loans and lines of credit			244				182				230				656				171				-				43,485				44,312
Other consumer loans			-				-				-				-				-				-				769				769
Total		$	3,060			$	837			$	401			$	4,298			$	7,857			$	-			$	767,760			$	779,915

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

For homogeneous loan pools, such as residential mortgages, home equity lines of credit and term loans, and other consumer loans, the Company uses payment status to identify the credit risk in these loan portfolios. Payment status is reviewed on a daily basis by the Bank’s collection area and on a monthly basis with respect to determining the adequacy of the allowance for loan losses. The payment status of these homogeneous pools at June 30, 2015 and December 31, 2014 is included in the aging of the recorded investment of past due loans table. In addition, the total non-performing portion of these homogeneous loan pools at June 30, 2015 and December 31, 2014 is presented in the recorded investment in nonaccrual loans.

 

The following tables present commercial loans by credit quality indicator:

 

		Risk Ratings
June 30, 2015		Grades 1-5				Grade 6				Grade 7				Grade 8				Grade 9				Grade 10				PCI Loans				Total
		(in thousands)
Commercial secured by real estate		$	565,297			$	6,561			$	1,202			$	3,677			$	490			$	5,654			$	478			$	583,359
Commercial term loans			35,878				1,145				-				-				-				-				-				37,023
Construction			24,320				-				-				-				-				-				281				24,601
Other commercial			57,691				2,735				70				-				-				303				-				60,799
		$	683,186			$	10,441			$	1,272			$	3,677			$	490			$	5,957			$	759			$	705,782

  

		Risk Ratings
December 31, 2014		Grades 1-5				Grade 6				Grade 7				Grade 8				Grade 9				Grade 10				PCI Loans				Total
		(in thousands)
Commercial secured by real estate		$	406,006			$	5,021			$	2,142			$	1,055			$	1,332			$	6,638			$	-			$	422,194
Commercial term loans			25,211				155				-				-				-				-				-				25,366
Construction			19,399				-				-				-				-				-				-				19,399
Other commercial			31,972				1,039				-				-				-				303				-				33,314
		$	482,588			$	6,215			$	2,142			$	1,055			$	1,332			$	6,941			$	-			$	500,273

 

NOTE 6 – FAIR VALUE

 

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

 

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

 

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

 

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

 

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

  

 

Assets and Liabilities Measured on a Recurring Basis

 

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

 

		Fair Value Measurements at June 30, 2015												Fair Value Measurements at December 31, 2014
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Observable Inputs (Level 3)				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Observable Inputs (Level 3)
		(in thousands)												(in thousands)
Investment securities available for sale:
U.S. Government and agency obligations		$	-			$	56,851			$	-			$	-			$	39,434			$	-
Municipal bonds			-				9,837				-				-				8,317				-
Corporate bonds			-				25,697				-				-				23,778				-
CRA Qualified and Asset Mgmt Funds			8,637				-				-				4,817				-				-
Mortgage-backed securities			-				157,012				-				-				71,442				-
Total securities available for sale		$	8,637			$	249,397			$	-			$	4,817			$	142,971			$	-
Interest rate swaps			-				(859	)			-				-				(829	)			-
Total measured on a recurring basis		$	8,637			$	248,538			$	-			$	4,817			$	142,142			$	-

  

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2015 and 2014:

 

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		CDO Securities Available for Sale
		For the three months ended June 30,								For the six months ended June 30,
		2015				2014				2015				2014
		(in thousands)								(in thousands)
Beginning balance		$	-			$	-			$	-			$	-
Accretion of discount			-				-				-				-
Increase in fair value of CDO investments sold							-								(1,889	)
Reduction in Accumulated OTTI on sale			-				-				-				-
Realized gain (loss) on sale/redemption			-				-				-				1,889
Unrealized holding gain (loss)			-				-				-				-
Other-than-temporary impairment included in earnings			-				-				-				-
Ending balance		$	-			$	-			$	-			$	-

 

  

Assets and Liabilities Measured on a Non-Recurring Basis

 

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

 

		Fair Value Measurements at June 30, 2015												Fair Value Measurements at December 31, 2014
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)
		(in thousands)												(in thousands)
Assets:
Impaired loans (1):
Commercial secured by real estate		$	-			$	-			$	2,010			$	-			$	-			$	3,761
Commercial term loans			-				-				-				-				-				-
Construction			-				-				-				-				-				-
Other commercial			-				-				60				-				-				60
Residential mortgage			-				-				1,294				-				-				176
Home equity loans			-				-				296				-				-				212
PCI loans			-				-				759				-				-				-
Total impaired loans		$	-			$	-			$	4,419			$	-			$	-			$	4,209
Other real estate owned:
Commercial		$	-			$	863			$	1,265			$	-			$	100			$	4,127
Residential mortgage			-				199				192				-				6				1,046
Total other real estate owned		$	-			$	1,062			$	1,457			$	-			$	106			$	5,173
Loans held for sale		$	-			$	441			$	-			$	-			$	-			$	-
Assets held for sale		$	-			$	80			$	-			$	-			$	-			$	-

 

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

 

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

 

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

 

Fair valued impaired loans with allocated allowance for loan losses at June 30, 2015, had a carrying amount of $4.4 million, which is made up of the outstanding balance of $4.8 million, net of a valuation allowance of $342,000. These balances do not include $3.7 million of impaired loans that are measured using the discounted cash flow method and are not collateral dependent.

 

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

 

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

  

 

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

 

		At June 30, 2015
						Fair Value Measurements
						Quoted Prices
						in Active				Significant				Significant
						Markets				Other				Other
						for Identical				Observable				Unobservable
		Carrying				Assets				Inputs				Inputs
		Amount				(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Assets
Cash and cash equivalents		$	23,455			$	10,298			$	13,157			$	-
Interest-bearing time deposits		$	8,902			$	-			$	8,920			$	-
Loans held for sale		$	441			$	-			$	441			$	-
Loans receivable, net of allowance		$	1,114,592			$	-			$	-			$	1,119,142
Investment securities AFS		$	258,034			$	8,637			$	249,397			$	-
Investment securities HTM		$	15,432			$	-			$	15,389			$	-
FHLB Stock		$	5,850			n/a				n/a				n/a
Accrued interest receivable		$	4,697			$	-			$	879			$	3,818
Liabilities
Savings deposits		$	169,313			$	-			$	169,313			$	-
Checking and money market deposits		$	780,936			$	153,651			$	627,285			$	-
Certificates of deposit		$	324,833			$	-			$	324,474			$	-
Borrowings		$	99,252			$	-			$	101,480			$	-
Accrued interest payable		$	115			$	-			$	115			$	-

  

 

		At December 31, 2014
						Fair Value Measurements
						Quoted Prices
						in Active				Significant				Significant
						Markets				Other				Other
						for Identical				Observable				Unobservable
		Carrying				Assets				Inputs				Inputs
		Amount				(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Assets
Cash and cash equivalents		$	31,472			$	6,785			$	24,687			$	-
Interest-bearing time deposits		$	9,538			$	-			$	9,522			$	-
Loans receivable, net of allowance		$	770,289			$	-			$	-			$	773,636
Investment securities AFS		$	147,788			$	4,817			$	142,971			$	-
Investment securities HTM		$	17,924			$	-			$	17,746			$	-
FHLB Stock		$	7,053			n/a				n/a				n/a
Accrued interest receivable		$	3,196			$	-			$	639			$	2,557
Liabilities
Savings deposits		$	91,948			$	-			$	91,948			$	-
Checking and money market deposits		$	460,177			$	86,268			$	373,909			$	-
Certificates of deposit		$	244,931			$	-			$	245,301			$	-
Borrowings		$	136,342			$	-			$	139,463			$	-
Accrued interest payable		$	120			$	-			$	120			$	-

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2014. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

 

 

NOTE 7 – OTHER REAL ESTATE OWNED

 

At June 30, 2015, other real estate owned (OREO) totaled $3.7 million and consisted of fifteen residential properties (including five building lots) and fourteen commercial properties. Included in the $3.7 million were three residential properties and five commercial properties that were acquired in the April 1, 2015 acquisition of Colonial Bank. The aggregate carrying values of the Colonial properties were $185,000 and $1.0 million, respectively, at June 30, 2015 and December 31, 2014. At December 31, 2014, OREO totaled $5.3 million and consisted of nine residential properties (including five building lots) and ten commercial properties.

 

For the three months ended June 30, 2015, the Company added ten residential properties and eight commercial properties to OREO with aggregate carrying values of $411,000 and $1.5 million respectively. Of these totals, four residential properties and six commercial properties were former Colonial properties with aggregate carrying values of $228,000 and $1.1 million, respectively. During the second quarter of 2015, the Company sold four residential and four commercial OREO properties with an aggregate carrying value of $2.5 million. Included in these sales were one residential and one commercial OREO property that were former Colonial properties. These two sales had an aggregate carrying value of $142,000.

 

Net expenses applicable to OREO were $449,000 for the three month period ending June 30, 2015, which included OREO valuation write-downs of $344,000, taxes and insurance totaling $76,000, and $29,000 of miscellaneous expenses. Net losses on the sale of OREO totaled $225,000 for the three months ended June 30, 2015. For the three months ended June 30, 2014, net expenses applicable to OREO totaled $164,000 which included OREO valuation write-downs totaling $9,000, taxes and insurance totaling $74,000, and $81,000 of miscellaneous expenses. Net losses on the sale of OREO totaled $232,000 for the three months ended June 30, 2014.

 

For the six months ended June 30, 2015, net expenses applicable to OREO were $1.4 million which included OREO valuation write-downs of $1.1 million, taxes and insurance totaling $149,000, and $59,000 of miscellaneous expenses. Net losses on the sale of OREO totaled $226,000 for the six months ended June 30, 2015. For the six months ended June 30, 2014, net expenses applicable to OREO totaled $416,000 which included OREO valuation write-downs totaling $99,000, taxes and insurance totaling $156,000, and $161,000 of miscellaneous expenses. Net losses on the sale of OREO totaled $240,000 for the six months ended June 30, 2014.

 

As of the date of this filing, the Company has agreements of sale for four additional OREO properties with an aggregate carrying value totaling $1.1 million, although there can be no assurance that these sales will be completed. In addition, during the third quarter of 2015 through the date of this filing, the Company sold one residential OREO property with a carrying value of $199,000. The Company recorded a net gain of $11,000 related to this third quarter 2015 sale.

 

 

NOTE 8 – DEPOSITS

 

Deposits are as follows:

 

		June 30,				December 31,
		2015				2014
		(in thousands)
Savings accounts		$	169,313			$	91,948
Interest-bearing checking and money market deposits (1)			627,285				373,909
Non-interest bearing checking			153,651				86,268
Certificates of deposit $250,000 or less			279,604				194,641
Certificates of deposit more than $250,000			45,229				50,290
Total deposits		$	1,275,082			$	797,056

 

 

(1)	Includes municipal deposit accounts totaling $250.5 million, or 19.6% of total deposits at June 30, 2015 and $96.2 million, or 12.1% of total deposits at December 31, 2014.

  

  

NOTE 9 – BORROWINGS

 

The Bank’s FHLB borrowings totaled $89.3 million and $126.4 million at June 30, 2015 and December 31, 2014, respectively, and repurchase agreements totaled $10.0 million for both periods.

 

 

NOTE 10 – DERIVATIVES AND HEDGING ACTIVITIES

 

The Bank is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. An interest rate swap was entered into to manage interest rate risk associated with the Bank’s variable rate borrowings. The interest rate swap on the variable rate borrowing was designated as a cash flow hedge and was a negotiated over the counter contract. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income or loss and subsequently reclassified into earnings in the period during which the hedged forecasted transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. For the three months ended June 30, 2015 there was an unrealized holding gain on the interest rate swap of $326,000 and an unrealized loss of $30,000 for the six months ended June 30, 2015. There was no reclassification from other comprehensive to interest income nor the ineffective portion through non-interest income for the three and six months ended June 30, 2015. The contract was entered into by the Bank with a counterparty, and the specific agreement of terms were negotiated, including the amount, the interest rate, and the maturity.

 

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

 

At June 30, 2015, the Bank had a forecasted interest rate swap agreement to receive from the counterparty at 1 month LIBOR and to pay interest to the counterparty at a fixed rate of 3.368% on a notional amount of $19.0 million. The effective date of the transaction is May 17, 2017 and the maturity date is May 17, 2023. Beginning May 17, 2014, for the first three years, no cash flows will be exchanged and for the following seven years the Bank will pay a fixed interest rate of 3.368% and the counterparty will pay the Bank 1 month LIBOR. The hedging strategy converts the LIBOR based floating interest on a certain FHLB advance to a fixed interest rate, thereby protecting the Bank from floating interest rate variability. The following table presents information regarding our derivative financial instrument at June 30, 2015 and December 31, 2014.

 

		At June 30, 2015								At December 31, 2014
		Notional Amount				Fair Value				Notional Amount				Fair Value
		(in thousands)								(in thousands)
Derivatives
Interest rate swap		$	19,000			$	(859	)		$	19,000			$	(829	)

 

 

NOTE 11 – INCOME TAXES

 

The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the effect of changes in valuation allowances maintained against deferred tax benefits. Income tax expense for the three months ended June 30, 2015 was $132,000 compared to $1.3 million for the three months ended June 30, 2014 and was $745,000 for the six months ended June 30, 2015 compared to $2.5 million for the six month period ended June 30, 2014. The effective tax rate for the three months ended June 30, 2015 was 2.11% compared to 38.13% for the three months ended June 30, 2014. For the six month period ended June 30, 2015 the effective tax rate was 9.42% compared to 38.13% for the six month period ended June 30, 2014. The lower effective tax rate for the three and six month periods ended June 30, 2015 reflects the significant increase in nontaxable income attributable to the $5.955 million bargain purchase gain associated with the Colonial Financial Services Inc. acquisition.

 

For more information about our income taxes, read Note 12, “Income Taxes,” in our 2014 Annual Report to Shareholders.

  

  

NOTE 12 – STOCK BENEFIT PLAN

 

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

 

During the first six months of 2015, the Company issued 42,500 incentive stock options to certain employees at a grant price ranging from $9.15 per share to $9.54 per share. During the first six months of 2014, the Company issued 10,000 incentive stock options to certain employees at a grant price of $10.67 per share. In addition, as a result of the acquisition of Colonial, certain unvested options of Colonial were converted into unvested options of the Company. These unvested options have a remaining vesting period of two years, were adusted by the acquisition exchange ratio of 1.412, and total 38,661 at an grant price of $8.82 per share.

 

Stock option activity for the six months ended June 30, 2015 and 2014 was as follows:

 

		For the six months ended June 30,
		2015												2014
		Number of Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (in years)				Number of Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (in years)
Outstanding at January 1			696,960			$	7.79								710,960			$	7.64
Assumed in Colonial acquisition			38,661			$	8.82								-			$	-
Granted			42,500			$	9.31								10,000			$	10.67
Forfeited			(10,590	)		$	9.13								(8,000	)		$	7.27
Exercised			(10,000	)		$	7.27								(4,403	)		$	8.43
Outstanding at June 30 (1)			757,531			$	7.91				5.7				708,557			$	7.76				6.5
Exercisable at June 30			612,183			$	7.56				5.1				485,344			$	7.45				6.0
Aggregate Intrinsic Value at June 30		$	1,162,000											$	1,592,000

 

(1)

Expected forfeitures are immaterial.

 

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

 

		For the three months ended June 30,								For the six months ended June 30,
Assumption		2015				2014				2015				2014
Expected average risk-free interest rate			1.64	%			2.02	%			1.59	%			2.02	%
Expected average life (in years)			6.5				6.5				6.5				6.5
Expected volatility			36.38	%			37.32	%			36.48	%			37.32	%
Expected dividend yield			2.56	%			2.34	%			2.58	%			2.34	%
Weighted average per share fair value		$	2.63			$	3.29			$	2.61			$	3.29

  

During the first six months of 2015, the Company issued 56,000 restricted stock awards to non-employee directors at a price ranging from $8.75 per share to $9.54 per share. In addition, as a result of the acquisition of Colonial, certain unvested restricted stock awards of Colonial were converted into unvested restricted stock awards of the Company. These unvested restricted stock awards have a remaining vesting period of two years, were adjusted by the acquisition exchange ratio of 1.412, and total 9,088 at a grant price of $8.82 per share.

 

 

Restricted stock activity for the six months ended June 30, 2015 and 2014 was as follows:

 

		For the six months ended June 30,
		2015								2014
		Restricted Common Shares				Weighted Average Fair Value at Grant Date				Restricted Common Shares				Weighted Average Fair Value at Grant Date
Outstanding at January 1			4,950			$	8.44				7,425			$	8.44
Assumed in Colonial acquisition			9,088			$	8.82				-			$	-
Granted			56,000			$	9.40				-			$	-
Vested			-			$	-				-			$	-
Forfeited			(1,275	)		$	8.52				-			$	-
Outstanding at June 30			68,763			$	9.28				7,425			$	8.44

 

At June 30, 2015, unrecognized compensation costs on unvested stock options and restricted stock awards was $434,000 which will be amortized on a straight-line basis over the remaining vesting period.

 

Stock-based compensation expense and related tax effects recognized in connection with unvested stock options and restricted stock awards for the three and six months ended June 30, 2015 and 2014 was as follows:

 

		For the three months ended June 30,								For the six months ended June 30,
		2015				2014				2015				2014
		(in thousands)								(in thousands)
Compensation expense:
Common stock options		$	110			$	122			$	225			$	233
Restricted common stock			23				5				33				11
Total compensation expense			133				127				258				244
Tax benefit			10				2				14				4
Net income effect		$	123			$	125			$	244			$	240

 

As of June 30, 2015, 999,950 options were issued and 539,302 options were available for issuance. As of June 30, 2015, based on the option agreements, there were 612,183 incentive stock options exercisable.

 

 

NOTE 13 – 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 June 30, 2015, options to purchase 757,531 shares were outstanding and dilutive, and accordingly, were included in determining diluted earnings per common share. In addition, 68,763 shares of restricted stock were outstanding and dilutive, and accordingly, were included in determining diluted earnings per common share. As of June 30, 2014, options to purchase 708,557 shares were outstanding and dilutive, and accordingly, were included in determining diluted earnings per common share. In addition, 7,425 shares of restricted stock were outstanding and dilutive, and accordingly were included in determining diluted earnings per common share. The following is the calculation of basic earnings per share for the three and six months ended June 30, 2015 and 2014.

 

		For the three months ended June 30,								For the six months ended June 30,
		2015				2014				2015				2014
		(in thousands, except share data)								(in thousands, except share data)
Net income		$	6,141			$	2,032			$	7,162			$	4,060
Weighted average shares outstanding			13,360,255				10,955,918				12,043,108			$	10,978,897
Basic earnings per share		$	0.46			$	0.19			$	0.60			$	0.37
Diluted weighted average shares outstanding			13,516,172				11,097,564				12,171,283				11,114,150
Diluted basic earnings per share		$	0.45			$	0.19			$	0.59			$	0.37

 

 

NOTE 14 – REGULATORY MATTERS

 

As of June 30, 2015, 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 regulatory capital ratios. At June, 2015, Cape Bank’s regulatory capital ratios for Tier I Leverage Ratio, Common Equity Tier I Capital, Tier I Risk-Based Capital and Total Risk-Based Capital were 8.96%, 12.40%, 12.40% and 13.34%, respectively, all of which exceed well capitalized status.

 

 

NOTE 15 – OTHER COMPREHENSIVE INCOME

 

The following is a summary of the accumulated other comprehensive income (loss) balances, net of tax, for the three months ended June 30, 2015 and 2014:

 

		Balance at March 31, 2015				Other Comprehensive Income Before Reclassifications				Amount Reclassified from Accumulated Other Comprehensive Income				Amortization HTM Other Comprehensive Income				Other Comprehensive Income Three Months Ended June 30, 2015				Balance at June 30, 2015
		(in thousands)
Net unrealized holding gain (loss) on securities available for sale, net of tax		$	(187	)		$	(1,125	)		$	9			$	(1	)		$	(1,117	)		$	(1,304	)
Net unrealized holding gain (loss) on interest rate swap			(712	)			196				-				-				196				(516	)
Accumulated other comprehensive income (loss) net of tax		$	(899	)		$	(929	)		$	9			$	(1	)		$	(921	)		$	(1,820	)

 

		Balance at March 31, 2014				Other Comprehensive Income Before Reclassifications				Amount Reclassified from Accumulated Other Comprehensive Income				Amortization HTM Other Comprehensive Income				Other Comprehensive Income Three Months Ended June 30, 2014				Balance at June 30, 2014
		(in thousands)
Net unrealized holding gain (loss) on securities available for sale, net of tax		$	(1,990	)		$	796			$	(47	)		$	43			$	792			$	(1,198	)
Net unrealized holding gain (loss) on interest rate swap			-				(168	)			-				-				(168	)			(168	)
Accumulated other comprehensive income (loss) net of tax		$	(1,990	)		$	628			$	(47	)		$	43			$	624			$	(1,366	)

  

 

The following is a summary of the accumulated other comprehensive income (loss) balances, net of tax, for the six months ended June 30, 2015 and 2014:

 

		Balance at December 31, 2014				Other Comprehensive Income Before Reclassifications				Amount Reclassified from Accumulated Other Comprehensive Income				Amortization HTM Other Comprehensive Income				Other Comprehensive Income Six Months Ended June 30, 2015				Balance at June 30, 2015
		(in thousands)
Net unrealized holding gain (loss) on securities available for sale, net of tax		$	(985	)		$	(322	)		$	(59	)		$	62			$	(319	)		$	(1,304	)
Net unrealized holding gain (loss) on interest rate swap			(498	)			(18	)			-				-				(18	)			(516	)
Accumulated other comprehensive income (loss) net of tax		$	(1,483	)		$	(340	)		$	(59	)		$	62			$	(337	)		$	(1,820	)

 

		Balance at December 31, 2013				Other Comprehensive Income Before Reclassifications				Amount Reclassified from Accumulated Other Comprehensive Income				Amortization HTM Other Comprehensive Income				Other Comprehensive Income Six Months Ended June 30, 2014				Balance at June 30, 2014
		(in thousands)
Net unrealized holding gain (loss) on securities available for sale, net of tax		$	(2,951	)		$	1,736			$	(47	)		$	64			$	1,753			$	(1,198	)
Net unrealized holding gain (loss) on interest rate swap			-				(168	)			-				-				(168	)			(168	)
Accumulated other comprehensive income (loss) net of tax		$	(2,951	)		$	1,568			$	(47	)		$	64			$	1,585			$	(1,366	)

 

The following represents the reclassifications out of accumulated other comprehensive income for the three and six months ended June 30, 2015 and 2014:

 

		For the three months ended June 30,							Affected Line Item in Statements of Income
		2015				2014
		(in thousands)
Unrealized gains (losses) on securities available for sale:
Realized gain (loss) on securities sales		$	(15	)		$	78		Gain (loss) on sale of investment securities, net
Income tax expense			6				(31	)	Income taxes
Total reclassifications net of tax		$	(9	)		$	47

 

		For the six months ended June 30,							Affected Line Item in Statements of Income
		2015				2014
		(in thousands)
Unrealized gains (losses) on securities available for sale:
Realized gain on securities sales		$	99			$	78		Gain (loss) on sale of investment securities, net
Income tax expense			(40	)			(31	)	Income taxes
Total reclassifications net of tax		$	59			$	47

 

 

NOTE 16 – OTHER EVENTS

 

On March 31, 2015, the Company announced that Cape Bank entered into a definitive agreement with Sun National Bank ("Sun") to acquire Sun's branch location in Hammonton, New Jersey. The purchase includes approximately $34.1 million of deposits and approximately $4.9 million of loans. Subject to the receipt of regulatory approvals and the satisfaction of customary closing conditions, the branch purchase is expected to be completed in August of 2015. The Company received final regulatory approval on June 29, 2015.

 

On May 20, 2015, Cape Bank purchased approximately $86.5 million of Philadelphia metropolitan area based commercial loans and loan commitments from a financial institution. The composition of loans included commercial real estate loans, commercial and industrial loans, as well as lines of credit, which have interest rate structures that are either fixed or variable. The aggregate yield on the purchased loans is 3.90% with a weighted average maturity of 6.5 years and was purchased at a price of 102 percent of unpaid principal balance.

 

On July 20, 2015, the Board of Directors approved the closing of our English Creek Banking Center, a drive-up teller/ATM operation located in Egg Harbor Township, New Jersey. The branch will cease operations as of the close of business on Friday, November 6, 2015. Applicable notifications have been filed with the regulatory agencies. The Bank will continue to utilize the property for our customer call center activities.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

Certain statements contained herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.

 

Cape Bancorp wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

 

Overview

 

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

 

Cape Bank is a New Jersey chartered savings bank originally founded in 1923. We are a community bank focused on providing deposit and loan products to retail customers and to small and mid-sized businesses from twenty-one full service branch offices located in Atlantic, Cape May, Cumberland and Gloucester counties, New Jersey, including our main office located at 225 North Main Street, Cape May Court House, New Jersey 08210, one drive-up teller/ATM operation in Atlantic County, our three market development offices (“MDOs”) located in Burlington, Cape May and Atlantic Counties in New Jersey, and two MDOs in Pennsylvania located in Radnor, Delaware County and in Philadelphia (opened in Center City in January 2015). We attract deposits from the general public and use those funds to originate a variety of loans, including commercial mortgages, commercial business loans, home equity loans and lines of credit (“HELOC”) and construction loans. Effective December 31, 2013, the Company exited the residential mortgage loan origination business which will allow for more resources to be focused on commercial lending. Our retail and business banking deposit products include checking accounts, money market accounts, savings accounts, and certificates of deposit with terms ranging from 30 days to 84 months.

 

At June 30, 2015, the Company had total assets of $1.555 billion compared to $1.080 billion at December 31, 2014. For the three months ended June 30, 2015 and 2014, the Company had total revenues (interest income plus non-interest income) of $21.5 million and $11.2 million, respectively. Net income for each of the three months ended June 30, 2015 totaled $6.1 million, or $0.46 per basic share and $0.45 per fully diluted share, compared to net income of $2.0 million, or $0.19 per basic and fully diluted share for the three months ended June 30, 2014.

 

We offer banking services to individuals and businesses predominantly located in our primary market area of Cape May, Atlantic, Cumberland and Gloucester counties, New Jersey and through our MDOs. Our business and results of operations are significantly affected by local and national economic conditions, as well as market interest rates. With the local and national economic conditions continuing to improve during 2014 and through the first six months of 2015, non-performing assets (non-performing loans, other real estate owned and non-accruing investment securities) as a percentage of total assets decreased to 0.91% at June 30, 2015 from 1.25% at December 31, 2014, and 1.12% at June 30, 2014, the Company’s Adversely Classified Asset Ratio (Classified Assets/Tier I Capital plus the allowance for loan losses) at June 30, 2015 was 16%, an improvement from 17% at December 31, 2014 and 17% at June 30, 2014, while non-performing loans as a percentage of total gross loans decreased to 0.93% at June 30, 2015 compared to 1.06% of total gross loans at December 31, 2014, and 1.01% at June 30, 2014. For the periods ended, and as of June 30, 2015 and December 31, 2014, loans held for sale (“HFS”) are excluded from delinquencies, non-performing loans, non-performing assets, impaired loans and all related ratio calculations. At June 30, 2015, loans HFS totaled $441,000 compared to no loans held for sale at December 31, 2014. The ratio of our allowance for loan losses to total loans decreased to 0.92% at June 30, 2015, from 1.20% at December 31, 2014, while the ratio of our allowance for loan losses to non-performing loans decreased to 98.97% at June 30, 2015 from 113.67% at December 31, 2014. For the three months ended June 30, 2015, loan charge-offs and write-downs on loans transferred to HFS totaled $1.1 million compared to loan charge-offs and write-downs on loans transferred to held for sale for the second quarter of 2014 of $172,000. Of the $1.1 million of loan charge-offs and write-downs during the second quarter of 2015, none were fully reserved at December 31, 2014. Our total loan portfolio increased from $779.7 million at December 31, 2014 to $1.1 billion at June 30, 2015 primarily resulting from the Colonial acquisition and the previously disclosed commercial loan portfolio purchase. Commercial loans increased $213.5 million to $707.0 million at June 30, 2015 from $493.5 million at December 31, 2014, while mortgage loans increased $107.4 million to $348.4 million at June 30, 2015, from $241.0 million at December 31, 2014 and consumer loans increased $24.3 million to $69.5 million at June 30, 2015 from $45.1 million at December 31, 2014. At June 30, 2015, 90.5% of our loan portfolio was secured by real estate and 62.8% of our portfolio was commercial related loans. We believe our existing loan underwriting practices are appropriate in the current market environment while continuing to address the local credit needs of our customers.

 

 

At June 30, 2015, deposits totaled $1.275 billion compared to $797.1 million at December 31, 2014, an increase of $478.0 million, or 59.97%, primarily resulting from the Colonial acquisition. At June 30, 2015, core deposits totaled $946.2 million which represented an increase of $396.1 million, or 72.01%, from the December 31, 2014 level of $550.1 million. Interest-bearing checking accounts increased $207.0 million, money market deposit accounts increased $46.3 million, and savings accounts increased $77.4 million and non-interest bearing checking accounts increased $65.4 million.. Certificates of deposit totaled $324.8 million, an increase of $79.9 million, or 32.62%, from the December 31, 2014 total of $244.9 million. We also maintain an investment portfolio.

 

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

 

 

 

2015 Outlook

 

Our market area has been affected by the recession and the modest recovery. Unemployment in Atlantic and Cape May County was 10.1% and 10.5%, respectively, as of May 2015, as compared to 2014 levels of 13.1% and 16.1%, respectively. The number of residential building permits issued decreased slightly in Atlantic and Cape May Counties from May 2014 to May 2015 as did the values of those permits. Median sale prices of single-family homes sold during the twelve month periods ended May 2015 and 2014 decreased in Cape May and Gloucester Counties and increased in Atlantic and Cumberland Counties. The number of homes sold during those same periods in all four counties increased: Atlantic County 6%, Cape May County 16.2%, Cumberland County 17.9% and Gloucester County 16.4%. The number of new listings increased 8.7%, 8.4%, and 6.6% in Atlantic, Cumberland and Gloucester Counties, respectively. Cape May County decreased 1.2%.

 

 During 2014 and continuing through the first six months of 2015, Cape Bank was able to make significant strides in reducing non-performing assets and classified items. Many troubled credits finally made their way through the slow foreclosure process, permitting the bank to take title and sell the collateral. This helped reduce non-earning assets and the costs relating to problem loans. Management intends to continue these efforts for the remainder of 2015 with the goal of reducing classified items to levels that would fall more within industry norms.

 

Management believes that more effort needs to be placed on expense control. In this regard, if management is successful in reducing troubled credits as planned, there will be a corresponding reduction in the costs related to these loans as they work through the foreclosure process.

 

During 2015, Cape Bank will focus on the following initiatives:

 

•

The successful integration of Colonial Bank;

 

•

Continuation of the Bank’s westward expansion to include further development of the metropolitan Philadelphia market;

 

•

Loan growth, particularly growth of the commercial loan portfolio; and

 

•

Core deposit growth.

 

 

Successful integration of Colonial Bank:

 

Successful integration of Colonial Bank into Cape Bank provides opportunities for significant financial rewards for Cape’s shareholders including both the reduction of operating expenses including the conversion of Colonial’s data processing system and reduced staffing levels.. Considerable time and resources have been committed to this endeavor and management believes it is well positioned to realize the integration goals.

 

  

Continuation of the westward expansion:

 

Four years ago, management began to seek business outside the traditional footprint of Atlantic and Cape May Counties. The MDO in Burlington County has successfully developed a commercial portfolio and commercial deposit base since that time. An office in the western suburbs of Philadelphia was opened two years ago and currently houses the Bank’s Commercial Real Estate lending team. Finally, in January we brought in an experienced commercial lending team to focus on the Center City Philadelphia market. The western New Jersey expansion will be further augmented by the purchase of a Sun National Bank branch in Hammonton, New Jersey, a transaction that was announced in the second quarter and is scheduled to close in August of this year. These initiatives along with the Colonial Bank purchase underscore the commitment to new markets. In light of the weakness in the gaming industry and the seasonality of the legacy markets, these steps should enhance shareholder value.

 

Loan growth:

 

Management believes that the most effective earning asset for a community bank like Cape is commercial lending. This product offers a market yield and can come coupled with deposit relationships. The shorter term of commercial loans make them less exposed to interest rate risk and quicker to reprice in a rising interest rate environment than residential mortgage loans. While a target, management recognizes the highly competitive market for commercial loans makes growth a challenge.

 

Core deposits:

 

For many years, core deposits were a key driver of value for community banks. With the high level liquidity available since the recession, banks were able to have sufficient deposit levels to fund the modest demand for loans. Management believes that this may be changing particularly in light of a potential increase in rates stemming from a policy shift at the FOMC. In response, the ability to establish and grow core deposits is another tool in creating shareholder value. 

 

Comparison of Financial Condition at June 30, 2015 and December 31, 2014

 

At June 30, 2015, the Company’s total assets were $1.555 billion, an increase of $475.3 million, or 44.01%, from the December 31, 2014 level of $1.080 billion primarily resulting from the Colonial acquisition.

 

Cash and cash equivalents decreased $8.0 million, or 25.47%, to $23.5 million at June 30, 2015 from $31.5 million at December 31, 2014.

 

Interest-bearing time deposits decreased $636,000, or 6.67%, from $9.5 million at December 31, 2014 to $8.9 million at March 31, 2015. 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 gross loans increased from $779.7 million at December 31, 2014 to $1.1 billion at June 30, 2015 primarily resulting from the Colonial acquisition and the previously discussed commercial loan portfolio purchase. Total net loans increased $344.3 million from $770.3 million at December 31, 2014 to $1.1 billion at June 30, 2015. Commercial loans increased $213.5 million to $707.0 million at June 30, 2015 from $493.5 million at December 31, 2014, while mortgage loans increased $107.4 million to $348.4 million at June 30, 2015 from $241.0 million at December 31, 2014 and consumer loans increased $24.3 million to $69.5 million at June 30, 2015 from $45.1 million at December 31, 2014. The allowance for loan losses increased $926,000 and totaled 0.92% of gross loans at June 30, 2015, compared to 1.20% at December 31, 2014. Excluding the Colonial loans for which there is no allowance at June 30, 2015 because of the credit mark taken on the date of acquisition, the allowance represents 1.17% of total gross loans on the remainder of the portfolio. Delinquent loans decreased $1.0 million to $10.8 million, or 1.20% of total gross loans, at June 30, 2015 from $11.8 million, or 1.51% of total gross loans at December 31, 2014. Total delinquent loans by portfolio at June 30, 2015 were $5.4 million of commercial mortgage and $639,000 commercial business loans, $3.5 million of residential mortgage loans, $962,000 of home equity loans, and $281,000 of construction loans.   At June 30, 2015, delinquent loan balances by number of days delinquent were: 31 to 59 days – $2.4 million; 60 to 89 days – $1.2 million; and 90 days and greater – $7.2 million.

 

At June 30, 2015, the Company had $10.4 million in non-performing loans, or 0.93% of total gross loans, an increase of $2.1 from $8.3 million, or 1.06% of total gross loans at December 31, 2014. Non-performing loans do not include loans held for sale. At June 30, 2015, there was $441,000 of non-performing loans held for sale. There were no loans held for sale at December 31, 2015.  Included in non-performing loans are troubled debt restructurings totaling $645,000 at June 30, 2015 and $819,000 at December 31, 2014. At June 30, 2015, non-performing loans by loan portfolio category were as follows: $6.1 million of commercial mortgage loans, $3.2 million of residential mortgage loans, $303,000 of commercial business loans, $510,000 of consumer loans, and $281,000 of construction loans.  Of these stated delinquencies, the Company had $502,000 of loans that were 90 days or more delinquent and still accruing (7 residential mortgage loans for $312,000 and 2 consumer loans for $190,000).  These loans are well secured, in the process of collection and we anticipate no losses will be incurred.

 

 

At June 30, 2015, commercial non-performing loans had collateral type concentrations of $3.6 million (7 loans or 54%) secured by retail stores; $1.2 million (8 loans or 18%) secured by residential, duplex and multi-family properties; $489,000 (1 loan or 7%) secured by land and building lots; $1.2 million (4 loans or 18%) secured by commercial buildings and equipment; and $205,000 (1 loan or 3%) secured by restaurant properties.  The three largest commercial non-performing loan relationships are $1.8 million, $617,000 and $577,000. 

 

We believe we have appropriately charged-off, written-down or established adequate loss reserves on problem loans that we have identified. For 2015, we anticipate a gradual decrease in the amount of problem assets. This improvement is due, in part, to our disposing of assets collateralizing loans that have gone through foreclosure. We are aggressively managing all loan relationships, and where necessary, we will continue to apply our loan work-out experience to protect our collateral position and actively negotiate with mortgagors to resolve these non-performing loans.

 

Total investment securities increased $107.8 million, or 65.02%, to $273.5 million at June 30, 2015 from $165.7 million at December 31, 2014 primarily resulting from the Colonial acquisition. At June 30, 2015, AFS securities totaled $258.0 million and HTM securities totaled $15.5 million. At December 31, 2014, AFS securities totaled $147.8 million and HTM securities totaled $17.9 million. During the most recent quarter, the Company sold approximately $61.2 million of securities acquired in the Colonial acquisition at a loss of approximately $19,000. The proceeds from these lower yielding investments were used for the purchase of the highter yielding commercial loan portfolio. Investment securities are classified as HTM when management has the positive intent and ability to hold them to maturity. In March 2014, the Bank reclassified $7.6 million of its AFS securities as HTM, as these securities may have been particularly susceptible to changes in fair value in the near term, as a result of market volatility. On February 27, 2014, the Company sold its remaining portion of collateralized debt obligation securities (“CDOs”) with a book value of zero, resulting in $1.9 million gain.

 

 

Other real estate owned (“OREO”) decreased $1.6 million from $5.3 million at December 31, 2014 to $3.7 million at June 30, 2015, and consisted at June 30, 2015 fourteen commercial properties and fifteen residential properties (including five building lots). Included in the $3.7 million were three residential properties and five commercial properties that were acquired in the April 1, 2015 acquisition of Colonial Bank. The aggregate carrying values of the Colonial properties were $185,000 and $1.0 million respectively. During the quarter ended June 30, 2015, the Company added ten residential properties and eight commercial properties to OREO with aggregate carrying values of $411,000 and $1.5 million, respectively. Of these totals, four residential properties and six commercial properties were former Colonial properties with aggregate carrying values of $228,000 and $1.1 million, respectively. During the current quarter, the Company sold four residential and four commercial OREO properties with an aggregate carrying value of $2.5 million. Included in these sales were one residential and one commercial OREO property that were former Colonial properties. These two sales had an aggregate carrying value of $142,000.

 

Total deposits increased $478.0 million, or 59.97%, from $797.1 million at December 31, 2014 to $1.275 billion at June 30, 2015, primarily resulting from the acquisition of Colonial. At June 30, 2015, core deposits totaled $946.2 million which represented an increase of $396.1 million, or 72.01%, from the December 31, 2014 level of $550.1 million. Interest-bearing checking accounts increased $207.0 million, money market deposit accounts increased $46.3 million, and savings accounts increased $77.4 million and non-interest bearing checking accounts increased $65.4 million. Certificates of deposit totaled $324.8 million, an increase of $79.9 million, or 32.62%, from the December 31, 2014 total of $244.9 million.

 

Borrowings decreased $37.1 million from $136.3 million at December 31, 2014 to $99.2 million at June 30, 2015.

 

Cape Bancorp’s total equity increased $31.9 million, or 22.65%, to $172.8 million at June 30, 2015 from $140.9 million at December 31, 2014 primarily from increases in common stock and additional paid-in capital resulting from the Colonial acquisition and an increase in retained earnings of $5.6 million (earnings less dividends declared). Tangible equity to tangible assets decreased to 9.74% at June 30, 2015 compared to 11.16% at December 31, 2014. At June 30, 2015, Cape Bank’s regulatory capital ratios for Tier I Leverage Ratio, Common EquityTier I, Risk-Based Capital and Total Risk-Based Capital were 8.96%, 12.40%, 12.40% and 13.34%, respectively, all of which exceed well capitalized status.

 

 

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans and loans held for sale were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. Yields and rates have been annualized.

 

		For the three months ended June 30,
		2015												2014
		Average Balance				Interest Income/ Expense				Average Yield				Average Balance				Interest Income/ Expense				Average Yield
		(dollars in thousands)
Assets
Interest-earning deposits		$	34,419			$	36				0.42	%		$	24,491			$	24				0.39	%
Investments			319,019				1,342				1.68	%			183,524				854				1.86	%
Loans			1,087,606				12,354				4.56	%			786,294				9,291				4.74	%
Total interest-earning assets			1,441,044				13,732				3.82	%			994,309				10,169				4.10	%
Noninterest-earning assets			142,187												104,889
Allowance for loan losses			(9,480	)											(9,755	)
Total assets		$	1,573,751											$	1,089,443
Liabilities and Stockholders' Equity
Interest-bearing demand accounts		$	434,211				291				0.27	%		$	212,779				96				0.18	%
Savings accounts			213,324				33				0.06	%			95,023				13				0.05	%
Money market accounts			177,779				105				0.24	%			133,474				73				0.22	%
Certificates of deposit			314,064				605				0.77	%			277,392				476				0.69	%
Borrowings			113,342				591				2.09	%			137,780				612				1.78	%
Total interest-bearing liabilities			1,252,720				1,625				0.52	%			856,448				1,270				0.59	%
Noninterest-bearing deposits			135,229												81,419
Other liabilities			11,218												9,993
Total liabilities			1,399,167												947,860
Stockholders' equity			174,584												141,583
Total liabilities & stockholders' equity		$	1,573,751											$	1,089,443
Net interest income						$	12,107											$	8,899
Net interest spread											3.30	%											3.51	%
Net interest margin											3.37	%											3.59	%
Net interest income and margin (tax equivalent basis) (1)						$	12,161				3.38	%						$	8,944				3.61	%
Ratio of average interest-earning assets to average interest-bearing liabilities			115.03	%											116.10	%

 

---

---

(1) In order to present pre-tax income and resultant yields on tax-exempt investments on a basis comparable to those on taxable investments, a tax equivalent yield adjustment is made to interest income. The tax equivalent adjustment has been computed using a Federal income tax rate of 35%, and has the effect of increasing interest income by $54,000, and $45,000 for the three month period ended June 30, 2015 and 2014, respectively. The average yield on investments increased to 1.75% from 1.68% for the three month period ended June 30, 2015 and increased to 1.96% from 1.86% for the three month period ended June 30, 2014.

 

  

		For the six months ended June 30,
		2015												2014
		Average Balance				Interest Income/ Expense				Average Yield				Average Balance				Interest Income/ Expense				Average Yield
		(dollars in thousands)
Assets
Interest-earning deposits		$	39,578			$	72				0.37	%		$	23,611			$	47				0.40	%
Investments			242,053				2,134				1.76	%			182,321				1,798				1.97	%
Loans			930,278				21,197				4.59	%			789,061				18,623				4.76	%
Total interest-earning assets			1,211,909				23,403				3.89	%			994,993				20,468				4.15	%
Noninterest-earning assets			122,003												105,147
Allowance for loan losses			(9,422	)											(9,558	)
Total assets		$	1,324,490											$	1,090,582
Liabilities and Stockholders' Equity
Interest-bearing demand accounts		$	336,049				390				0.23	%		$	213,862				193				0.18	%
Savings accounts			153,179				47				0.06	%			95,375				26				0.05	%
Money market accounts			155,574				189				0.24	%			136,488				135				0.20	%
Certificates of deposit			276,002				1,098				0.80	%			271,124				908				0.68	%
Borrowings			123,970				1,206				1.96	%			142,337				1,210				1.71	%
Total interest-bearing liabilities			1,044,774				2,930				0.57	%			859,186				2,472				0.58	%
Noninterest-bearing deposits			112,369												82,281
Other liabilities			8,769												7,191
Total liabilities			1,165,912												948,658
Stockholders' equity			158,578												141,924
Total liabilities & stockholders' equity		$	1,324,490											$	1,090,582
Net interest income						$	20,473											$	17,996
Net interest spread											3.32	%											3.57	%
Net interest margin											3.41	%											3.65	%
Net interest income and margin (tax equivalent basis) (1)						$	20,577				3.42	%						$	18,087				3.67	%
Ratio of average interest-earning assets to average interest-bearing liabilities			116.00	%											115.81	%

 

---

---

(1) In order to present pre-tax income and resultant yields on tax-exempt investments on a basis comparable to those on taxable investments, a tax equivalent yield adjustment is made to interest income. The tax equivalent adjustment has been computed using a Federal income tax rate of 35%, and has the effect of increasing interest income by $104,000, and $91,000 for the six month period ended June 30, 2015 and 2014, respectively. The average yield on investments increased to 1.85% from 1.76% for the six month period ended June 30, 2015 and increased to 2.07% from 1.97% for the six month period ended June 30, 2014.

 

 

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 June 30, 2015
		compared to June 30, 2014
		Increase (decrease) due to changes in:
		Average				Average				Net
		Volume				Rate				Change
						(in thousands)
Interest-Earning Assets
Interest-earning deposits		$	10			$	2			$	12
Investments			566				(78	)			488
Loans			3,436				(373	)			3,063
Total interest income			4,012				(449	)			3,563
Interest-Bearing Liabilities
Interest-bearing demand accounts			133				62				195
Savings accounts			18				2				20
Money market accounts			26				6				32
Certificates of deposit			67				62				129
Borrowings			(118	)			97				(21	)
Total interest expense			126				229				355
Total net interest income		$	3,886			$	(678	)		$	3,208

 

		For the six months ended June 30, 2015
		compared to June 30, 2014
		Increase (decrease) due to changes in:
		Average				Average				Net
		Volume				Rate				Change
						(in thousands)
Interest-Earning Assets
Interest-earning deposits		$	29			$	(4	)		$	25
Investments			521				(185	)			336
Loans			3,237				(663	)			2,574
Total interest income			3,787				(852	)			2,935
Interest-Bearing Liabilities
Interest-bearing demand accounts			132				65				197
Savings accounts			18				3				21
Money market accounts			20				34				54
Certificates of deposit			16				174				190
Borrowings			(167	)			163				(4	)
Total interest expense			19				439				458
Total net interest income		$	3,768			$	(1,291	)		$	2,477

 

 

Comparison of Operating Results for the Three and Six Months Ended June 30, 2015 and 2014

 

General. Net income for the three months ended June 30, 2015 was $6.1 million, or $0.46 per basic share and $0.45 per fully diluted share, compared to net income of $2.0 million, or $0.19 per basic and fully diluted share for the three months ended June 30, 2014. The increase was the result of a $3.2 million increase in net interest income, a $6.7 million increase in non-interest income and a $1.1 million reduction in income tax expense, offset by a $2.1 million increase in the loan loss provision and a $4.8 million increase in non-interest expense. The results were most significantly impacted by the acquisition of Colonial on April 1, 2015, which resulted in a $5.955 million bargain purchase gain included in non-interest income and $1.7 million in merger related expenses included in non-interest expense. The gain is excluded from taxable income. Additional increases in non-interest income and non-interest expense generally reflect the inclusion of Colonial and the consolidation of operations. For the six months ended June 30, 2015, net income totaled $7.2 million, or $0.60 per basic share and $0.59 per fully diluted share. The increase was the result of a $2.5 million increase in net interest income, a $4.8 million increase in non-interest income, a $1.8 million reduction in income tax expense, and a $114,000 reduction in the loan loss provision, offset by a $6.0 million increase in non-interest expense which included $2.0 million in merger related expenses.

 

Details of the changes in the various components of net income are further discussed below.

 

Interest Income. Interest income increased $3.6 million, or 35.03%, to $13.7 million for the three months ended June 30, 2015, from $10.2 million for the three months ended June 30, 2014. The increase consists of a $3.1 increase in interest income on loans and a $500,000 increase in interest income on investment securities. Average loan balances for the three month period ended June 30, 2015 increased $301.3 million, or 38.32%, to $1.088 million from $786.3 million for the three month period ended June 30, 2014. The average yield on the loan portfolio declined 18 basis points to 4.56% for the three months ended June 30, 2015 from 4.74% for the three months ended June 30, 2014. The increase in the average loan balance reflects the addition of approximately $260.0 million resulting from the Colonial acquisition and approximately $43.7 million from the commercial loan portfolio purchase. The average balance of the investment portfolio for the three month period ended June 30, 2015 increased $135.5 million, or 73.83%, to $319.9 million from $183.5 million for the three month period ended June 30, 2014 primarily resulting from the addition of the Colonial portfolio less securities sold to fund the loan purchase. The average yield on the investment portfolio declined 18 basis points to 1.68% for the three months ended June 30, 2015 from 1.86% for the three months ended June 30, 2014.

 

Interest income increased $2.9 million, or 14.33%, to $23.4 million for the six months ended June 30, 2015, from $20.5 million for the six months ended June 30, 2014. The increase consists of a $2.6 increase in interest income on loans and a $300,000 increase in interest income on investment securities. Average loan balances for the six month period ended June 30, 2015 increased $141.2 million, or 17.90%, to $930.3 million from $789.1 million for the six month period ended June 30, 2014. The average yield on the loan portfolio declined 17 basis points to 4.59% for the six months ended June 30, 2015 from 4.76% for the six months ended June 30, 2014. The increase in the average loan balance reflects the addition of approximately $130.8 million resulting from the Colonial acquisition and approximately $21.8 million from the commercial loan portfolio purchase. The average balance of the investment portfolio for the six month period ended June 30, 2015 increased $59.7 million, or 32.76%, to $242.0 million from $182.3 million for the six month period ended June 30, 2014 primarily resulting from the addition of the Colonial portfolio less securities sold to fund the loan purchase. The average yield on the investment portfolio declined 21 basis points to 1.76% for the six months ended June 30, 2015 from 1.97% for the six months ended June 30, 2014.

 

 

Interest Expense. Interest expense increased $355,000, or 27.95%, to $1.6 million for the three months ended June 30, 2015, from $1.3 million for the three months ended June 30, 2014. The increase resulted primarily from increased balances from the Colonial acquisition and higher interest rates being paid on deposits.

 

Average interest-bearing demand accounts increased $221.4 million, or 104.07% to $434.2 million for the three month period ended June 30, 2015 from $212.8 million for the three month period ended June 30, 2014 while the average rate paid on interest-bearing demand accounts increased 9 basis points to 0.27% for the three months ended June 30, 2015 from 0.18% for the three months ended June 30, 2014 resulting in a combined interest expense increase of $195,000. Approximately $200.7 million of the increase in average interest-bearing demand accounts was attributable to the Colonial acquisition. The average rate paid on certificates of deposit increased 8 basis points to 0.77% for the three months ended June 30, 2015 from 0.69% for the three months ended June 30, 2014 while the average balance of certificates of deposit increased $36.7 million, or 13.22%, to $314.1 million from $277.4 million for the same period, resulting in a combined interest expense increase of $129,000. The increase in average certificates of deposits results primarily from the addition of Colonial (approximately $75.0 million) partially offset by decreases in municipal and brokered certificates of deposit. The average balance of money market accounts increased $44.3 million (approximately $43.1 million attributable to the Colonial acquisition) for the three months ended June 30, 2015 compared to the same period in 2014 while the average interest rate increased 2 basis points.

 

The average balance of borrowings decreased $24.4 million, or 17.74%, to $113.3 million for the three months ended June 30, 2015 from $137.7 million for the three months ended June 30, 2014, and the average cost of borrowings increased 31 basis points from 1.78% for the three months ended June 30, 2014 to 2.09% for the three months ended June 30, 2015.

 

For the six months ended June 30, 2015, interest expense increased $458,000, or 18.53%, to $2.9 million for the six months ended June 30, 2015, from $2.5 million for the six months ended June 30, 2014. The increase resulted primarily from increased balances from the Colonial acquisition and higher interest rates being paid on deposits.

 

Average interest-bearing demand accounts increased $122.2 million, or 57.13% to $336.0 million for the six month period ended June 30, 2015 from $213.8 million for the six month period ended June 30, 2014 while the average rate paid on interest-bearing demand accounts increased 5 basis points to 0.23% for the six months ended June 30, 2015 from 0.18% for the six months ended June 30, 2014 resulting in a combined interest expense increase of $197,000. Approximately $100.9 million of the increase in average interest-bearing demand accounts was attributable to the Colonial acquisition. The average rate paid on certificates of deposit increased 12 basis points to 0.80% for the six months ended June 30, 2015 from 0.68% for the six months ended June 30, 2014 while the average balance of certificates of deposit increased $4.9 million, or 1.80%, to $276.0 million from $271.1 million for the same period, resulting in a combined interest expense increase of $190,000. The increase in average certificates of deposits results primarily from the addition of Colonial (approximately $45.9 million) partially offset by decreases in municipal and brokered certificates of deposit. The average balance of money market accounts increased $19.1 million (approximately $21.7 million attributable to the Colonial acquisition) for the six months ended June 30, 2015 compared to the same period in 2014 while the average interest rate increased 4 basis points resulting in a combined increase in interest expense totaling $54,000.

 

The average balance of borrowings decreased $18.4 million, or 12.90%, to $124.0 million for the six months ended June 30, 2015 from $142.4 million for the six months ended June 30, 2014, and the average cost of borrowings increased 25 basis points from 1.71% for the six months ended June 30, 2014 to 1.96% for the six months ended June 30, 2015.

 

 

 

Net Interest Income.   Net interest income increased $3.2 million to $12.1 million for the three months ended June 30, 2015 compared to $8.9 million for the three months ended June 30, 2014. The net interest margin decreased 22 basis points from 3.59% for the quarter ended June 30, 2014 to 3.37% for the quarter ended June 30, 2015. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 115.03% for the three months ended June 30, 2015, from 116.10% for the three months ended June 30, 2014. For the six months ended June 30, 2015, net interest income increased $2.5 million to $20.5 million from $18.0 million for the six months ended June 30, 2014. The net interest margin decreased 24 basis points from 3.65% for the six months ended June 30, 2014 to 3.41% for the six months ended June 30, 2015. The ratio of average interest-earning assets to average interest-bearing liabilities increased to 116.00% for the six months ended June 30, 2015, from 115.81% for the six months ended June 30, 2014. Net interest income in both the three and six months ended June 30, 2015 was impacted by the Colonial acquisition as discussed in the interest income and interest expense section above.

 

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

 

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

 

The loan loss provision for the second quarter of 2015 totaled $2.2 million compared to $115,000 for the three months ended June 30, 2014. Loan charge-offs and write-downs on loans transferred to loans held for sale for the second quarter of 2015 totaled $1.1 million compared to loan charge-offs and write-downs on loans transferred to loans held for sale for the second quarter of 2014 of $173,000. Loan loss recoveries for the second quarter of 2015 totaled $35,000 compared to $51,000 for the second quarter of 2014. The loan loss provision totaled $2.2 million and $2.3 million for the six month periods ended June 30, 2015 and 2014, respectively. Loan charge-offs and write-downs on loans transferred to loans held for sale for the six months ended June 30, 2015 totaled $1.4 million compared to loan charge-offs and write-downs on loans transferred to loans held for sale for the six months ended June 30, 2014 of $2.2 million. Loan loss recoveries for the six months ended June 30, 2015 totaled $66,000 compared to $280,000 for the six months ended June 30, 2014. The ratio of the allowance for loan losses to non-performing loans (coverage ratio) totaled 98.97% at June 30, 2015, a decrease from 113.67% at December 31, 2014. The amount of non-performing loans for which the full loss has been charged-off to total gross loans is 0.03%. The amount of non-performing loans for which the full loss has been charged-off to total non-performing loans is 3.62%. The allowance for loan losses increased $926,000 or 9.86%, to $10.3 million at June 30, 2015, from $9.4 million at December 31, 2014. The ratio of our allowance for loan losses to total loans was 0.92% at June 30, 2015 compared to 1.20% of total loans at December 31, 2014. Certain impaired loans (troubled debt restructurings) have a valuation allowance determined by discounting expected cash flows at the respective loan’s effective interest rate. Included in the allowance for loan losses at June 30, 2015 was an impairment reserve for TDRs in the amount of $189,000 compared to $192,000 at December 31, 2014..

 

 

 

Non-Interest Income. Non-interest income increased $6.7 million to $7.7 million for the three months ended June 30, 2015 from $1.0 million for the three months ended June 30, 2014 primarily resulting from the previously mentioned bargain purchase gain of $5.955 million and the inclusion of Colonial for the second quarter of 2015. Increases in service fees, other income and the net increase from BOLI resulted from the acquisition of Colonial. For the six months ended June 30, 2015, non-interest income increased $4.8 million to $8.9 million from $4.1 million for the six months ended June 30, 2015 primarily resulting from the bargain purchase gain. The six months ended June 30, 2015 included net gains on sales of investment securities of $99,000 compared to $2.0 million for the same period in 2014. On February 27, 2014, the Company sold its remaining portion of collateralized debt obligations (“CDOs”) with a book value of zero, resulting in the $1.9 million gain. Net gains on the sales of loans totaled $53,000 for the six months ended June 30, 2015 compared to $245,000 for the same period in 2014, primarily resulting from a decrease of $187,000 in gains on the sale of Small Business Administration (“SBA”) loans. Other income for the six months ended June 30, 2015 and 2014 included life insurance proceeds totaling $241,000 and $195,000, respectively, from bank owned life insurance.

 

Non-Interest Expense. Non-interest expense increased $4.9 million, or 74.58%, to $11.4 million for the three months ended June 30, 2015 from $6.5 million for the three months ended June 30, 2014. For the six months ended June 30, 2015, non-interest expense increased $6.1 million, or 45.50%, to $19.3 million for the six months ended June 30, 2015 from $13.2 million for the six months ended June 30, 2014. The three and six months ended June 30, 2015 included merger related expenses resulting from the Colonial acquisition of $1.7 million and $2.0 million, respectively. Increases in most categories of non-interest expense reflect increased volume from the merger and integration of Colonial operations. Salaries and employee benefits increased $1.6 million and $1.9 million for the three and six months ended June 30, 2015, respectively. OREO expenses increased $285,000 and $935,000 for the three and six months ended June 30, 2015, respectively, resulting from higher OREO write-downs in the 2015 periods.

 

 

Income Tax Expense. The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the effect of changes in valuation allowances maintained against deferred tax benefits. Income tax expense for the three months ended June 30, 2015 was $132,000 compared to $1.3 million for the three months ended June 30, 2014 and was $745,000 for the six months ended June 30, 2015 compared to $2.5 million for the six month period ended June 30, 2014. The effective tax rate for the three months ended June 30, 2015 was 2.11% compared to 38.13% for the three months ended June 30, 2014. For the six month period ended June 30, 2015 the effective tax rate was 9.42% compared to 38.13% for the six month period ended June 30, 2014. The lower effective tax rate for the three and six month periods ended June 30, 2015 reflects the significant increase in nontaxable income attributable to the $6.0 million bargain purchase gain associated with the Colonial Financial Services Inc. acquisition.

 

For more information about our income taxes, read Note 12, “Income Taxes,” in our 2014 Annual Report to Shareholders.

 

Liquidity and Capital Resources

 

Liquidity refers to our ability to meet the cash flow requirements of depositors and borrowers as well as our operating cash needs with cost-effective funding. We generate funds to meet these needs primarily through our core deposit base and the maturity or repayment of loans and other interest-earning assets, including investments. Proceeds from the call, maturity, redemption, and return of principal of investment securities totaled $11.1 million at June 30, 2015 and were used either for liquidity, to reduce borrowings, or to invest in securities of similar quality as our current investment portfolio. We also have available unused wholesale sources of liquidity, including overnight federal funds and repurchase agreements, advances from the FHLB of New York, borrowings through the discount window at the Federal Reserve Bank of Philadelphia and access to certificates of deposit through brokers. We can also raise cash through the sale of earning assets, such as loans and marketable securities. As of June 30, 2015, the Company’s investment portfolio consisted of AFS securities with a fair market value of $258.0 million and HTM securities at amortized cost of $15.4 million. The Company has no intention to sell these securities, nor is it more likely than not that we will be required to sell any securities prior to their recovery in fair market value.

 

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

 

 

 

Cape Bank’s long-term liquidity source is a large core deposit base and a strong capital position. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. The level of deposits during any period is sometimes influenced by factors outside of management’s control, such as the level of short-term and long-term market interest rates and yields offered on competing investments, such as money market mutual funds. Deposits increased $478.0 million, or 59.97%, during the first six months of 2015 and comprised 92.24% of total liabilities at June 30, 2015, as compared to 84.88% at December 31, 2014. The increase in deposits primarily resulted from the Colonial acquisition.

 

Regulatory Matters. Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of June 30, 2015, 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. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. The Bank’s Board of Directors has established a Capital Plan to ensure the Bank is managed to provide an appropriate level of capital. This plan includes strategies which enable the Bank to maintain targeted capital ratios in excess of the regulatory definition of “well capitalized”, identify sources of additional capital and evaluate on a quarterly basis the impact on capital resulting from certain potential significant financial events (stress testing). Additionally, a Contingency Plan exists which identifies scenarios that require specific actions in the event capital falls below certain levels.

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total risk based capital, Common Equity Tier I (CET I) risk based capital, and Tier I risk based 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 June 30, 2015, 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, CET I risk based, Tier I risk based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category as of June 30, 2015.

 

On April 27, 2015, the Company declared a cash dividend of $0.06 per common share to shareholders of record as of the close of business May 11, 2015. The dividend was paid on May 26, 2015. On July 20, 2015, pending regulatory approval, the Company declared an increase in the quarterly cash dividend from $0.06 per common share to $0.10 per common share to shareholders of record as of the close of business August 3, 2015 to be paid on, or about, August 17, 2015. The Company received regulatory approval on July 24, 2015.

 

 

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)
June 30, 2015
Risk based capital ratios:
Tier I risk based capital		$	138,442				12.40	%		$	66,988				6.00	%		$	89,317				8.00	%
CET I risk-based capital		$	138,442				12.40	%		$	50,241				4.50	%		$	72,570				6.50	%
Total risk based capital		$	148,997				13.34	%		$	89,354				8.00	%		$	111,692				10.00	%
Tier I leverage ratio		$	138,442				8.96	%		$	61,530				4.00	%		$	76,912				5.00	%
December 31, 2014
Risk based capital ratios:
Tier I risk based capital		$	104,519				13.34	%		$	31,340				4.00	%		$	47,010				6.00	%
Total risk based capital		$	113,995				14.55	%		$	62,678				8.00	%		$	78,347				10.00	%
Tier I leverage ratio		$	104,519				9.94	%		$	42,060				4.00	%		$	52,575				5.00	%

 

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

 

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

 

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

 

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

 

 

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

 

Securities Impairment. On February 27, 2014, the Bank sold its remaining portion of CDOs with a book value of zero, resulting in the $1.9 million gain.

 

Securities that are in a loss position for 12 months or longer are reviewed to determine if there is other-than-temporary impairment (OTTI). If the market value of the security is equal to or greater than 90% of the book value, no action will be taken. If the market value of the security is less than 90% of the book value, management will research the security and evaluate the cause of the persistently depressed market value and document the findings. At June 30, 2015, there were no securities to be evaluated.

 

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

 

 

The Company and its subsidiaries file a consolidated federal income tax return and separate entity state income tax returns. The provision for federal and state income taxes is based on income and expenses, as reported in the consolidated financial statements, rather than amounts reported on the Company’s federal and state income tax returns. When income and expenses are recognized in different periods for tax purposes than for book purposes, applicable deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

 

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. The effective tax rate for the three months ended June 30, 2015 was 2.11% compared to 38.13% for the three months ended June 30, 2014. For the six month period ended June 30, 2015 the effective tax rate was 9.42% compared to 38.13% for the six month period ended June 30, 2014. The lower effective tax rate for the three and six month periods ended June 30, 2015 reflects the significant increase in nontaxable income attributable to the $5.955 million bargain purchase gain associated with the Colonial Financial Services Inc. acquisition.

 

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

 

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

 

General. The majority of our assets and liabilities are monetary in nature. Consequently, interest rate risk is a significant risk to our net interest income and earnings. Our assets, consisting primarily of loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Accordingly, Interest Rate Risk is a prominent responsibility of the Enterprise Risk Management Committee of the Board of Directors, as well as the management level Asset/Liability Committee. The Enterprise Risk Management Committee of the Board of Directors, which meets quarterly, is responsible for advising the Boards of Directors regarding the Company's risk exposures, including interest rate, funding/liquidity, regulatory compliance, credit, operational, and reputational risks. With regard to interest rate risk the Enterprise Risk Management 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 managing this risk consistent with the guidelines approved by the Board of Directors.

 

 

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

 

●

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

 

●

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

 

●

lengthening the terms of borrowings and deposits; and

 

●

focusing on core deposit growth.

 

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

 

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

 

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

 

The table below sets forth, as of June 30, 2015, our calculation of the estimated changes in our net interest income that would result from the designated instantaneous and sustained changes in interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

 

 

		Net Portfolio Value												Net Interest Income
Changes in						Increase (decrease) in												Increase (decrease) in
Interest Rates		Estimated NPV				Estimated NPV								Estimated Net				Estimated Net Interest Income
(basis points) (1)			(2)			Amount				Percent				Interest Income				Amount				Percent
(dollars in thousands)
+200		$	204,632			$	(24,804	)			-10.81	%		$	46,027			$	(3,087	)			-6.29	%
+100		$	220,491			$	(8,945	)			-3.90	%		$	47,659			$	(1,455	)			-2.96	%
0		$	229,436											$	49,114
-100		$	205,340			$	(24,096	)			-10.50	%		$	49,468			$	354				0.72	%
-200		$	175,521			$	(53,915	)			-23.50	%		$	49,219			$	105				0.21	%

 

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

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

 

The table above indicates that at June 30, 2015, in the event of a 100 basis point increase in interest rates, we would experience a $1.5 million decrease in net interest income. In the event of a 100 basis point decrease in interest rates, we would experience a $354,000 increase in net interest income.

 

Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in net portfolio value and net interest income. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value and net interest income information presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured, and assume 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 June 30, 2015 (the “Evaluation Date”). Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings.

 

(b)	Changes in internal controls

 

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

 

 

Part II – Other Information

 

 

Item 1. Legal Proceedings

 

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

 

 

 

 

Item 1A. Risk Factors

 

The Company does not believe its risks have materially changed from those risks included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2015.

 

 

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. Mine Safety Disclosures

 

Not applicable.

 

 

Item 5. Other Information

 

Not applicable

 

 

Item 6. Exhibits

 

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

 

EXHIBIT INDEX
Exhibit No.		Description
2.1		Agreement and Plan of Merger dated as of September 10, 2014 by and between Cape Bancorp, Inc. and Colonial Financial Services, Inc. (1)
3.1		Articles of Incorporation of Cape Bancorp, Inc. (2)
3.2		Amended and Restated Bylaws of Cape Bancorp, Inc. (3)
4		Form of Common Stock Certificate of Cape Bancorp, Inc. (2)
10.1		Form of Employee Stock Ownership Plan (2)
10.2		Employment Agreement for Michael D. Devlin (6)
10.3		Change in Control Agreement for Guy Hackney (4)
10.4		Change in Control Agreement for James McGowan, Jr. (4)
10.5		Change in Control Agreement for Michele Pollack (4)
10.6		Change in Control Agreement for Charles L. Pinto (5)
10.7		Form of Director Retirement Plan (2)
10.8		2008 Equity Incentive Plan (7)
10.9		Change in Control Agreement for Edward J. Geletka (8)
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following materials from Cape Bancorp, Inc.’s Quarterly Report on From 10-Q for the quarter ended June 30, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014, (ii) the Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and June 30, 2014 (unaudited), (iii) the Consolidated Statements of Comprehensive Income Three and Six Months Ended June 30 2015 and June 30, 2014 (unaudited), (iv) the Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2015 (unaudited) and Year Ended December 31, 2014, (v) the Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and June 30, 2014 (unaudited), and (vi) related Notes to Consolidated Financial Statements (unaudited).

 

(1)		Incorporated by reference to the Company’s Current Report on Form 8-K (file no. 001-33934) filed with the Securities and Exchange Commissions on September 11, 2014.
(2)		Incorporated by reference to the Registration Statement on Form S-1 of Cape Bancorp, Inc. (file no. 333-146178), originally filed with the Securities and Exchange Commission on September 19, 2007.
(3)		Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 17, 2013.
(4)		Incorporated by reference to the Company’s Current Report on Form 8-K filed on October 6, 2010.
(5)		Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 2011.
(6)		Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 25, 2012.
(7)		Incorporated by reference to the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on July 16, 2008.
(8)		Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 23, 2015.

 

 

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: August 10, 2015	/s/ Michael D. Devlin
	Michael D. Devlin
	President and Chief Executive Officer
Date: August 10, 2015	/s/ Guy Hackney
	Guy Hackney
	Executive Vice President and Chief Financial Officer

 

 

60

 

Exhibit 31.1

 

Certification of Principal Executive Officer

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

 

I, Michael D. Devlin, certify that:

 

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

 

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

 

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

 

4.

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

 

a)

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

 

b)

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

 

c)

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

 

d)

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

 

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

 

a)

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

 

b)

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

 

Date: August 10, 2015		/s/ Michael D. Devlin
		Michael D. Devlin
		President and Chief Executive Officer

 

 

Exhibit 31.2

 

Certification of Principal Financial Officer

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

 

I, Guy Hackney, certify that:

 

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

 

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

 

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

 

4.

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

 

a)

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

 

b)

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

 

c)

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

 

d)

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

 

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

 

a)

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

 

b)

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

 

Date: August 10, 2015		/s/ Guy Hackney
		Guy Hackney
		Executive Vice President and Chief Financial Officer

 

 

Exhibit 32

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), Michael D. Devlin, President and Chief Executive Officer of Cape Bancorp, Inc., a Maryland corporation (the “Company”) and Guy Hackney, Executive Vice President and Chief Financial Officer of the Company, each certify in his capacity as an officer of the Company that he has reviewed the Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (the “Report”) and that to the best of his knowledge:

 

1.

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

 

2.

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

 

Date: August 10, 2015		/s/ Michael D. Devlin
		Michael D. Devlin
		President and Chief Executive Officer

 

Date: August 10, 2015		/s/ Guy Hackney
		Guy Hackney
		Executive Vice President and Chief Financial Officer

 

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