2008
ANNUAL REPORT
To Our Shareholders and Friends:
This represents our third annual report which covers our first 31 months of operation and shows the continued
fine results of Bancorp of New Jersey, Inc. and Bank of New Jersey.
Even in this darkest of our nation’s economic times our banking company has:
•
Increased our solid initial capital from $43.6 million to total year-end capital of $50.2 million providing
safety for our depositors;
• Posted total year-end assets of $304.1 million an annual increase of $43.9 million or 16.9%;
•
•
Increased deposits by $41.0 million or 19.3%;
Increased total loans by $51.3 million or 28.0%;
• We have reported a profit in every month since August, 2006, even after reserving $2.4 million in the
Allowance for Loan Losses;
• Your company and bank have no sub-prime mortgages, no mortgage-backed securities, no FNMA or
FHLMC stock and no dealings with any of the companies which either failed or were bailed out;
• We neither accepted nor applied for any T.A.R.P. (Troubled Asset Rescue Plan) money, since we have
built a safe, profitable institution without government intervention; and
• We opened our fifth office, in Haworth, NJ on September 8, 2008 and expect to open our sixth, located
in Harrington Park, NJ on April 8, 2009.
2009 is expected to be another challenging year. Costs of taxation and of FDIC Insurance have skyrocketed and
the Federal Reserve’s fiscal policy dictates rates which are difficult to manage. Nevertheless, we are up to the
challenge; we will continue to follow a conservative lending and investment policy and our doors are open to
qualified businesses and individuals to include residential mortgages.
We expect to be careful in our selection of new branches and protective of the high degree of safety which we
feature.
We thank our shareholders, directors and dedicated staff for our fine performance.
A happy, healthy and profitable 2009 to all.
Albert F. Buzzetti
President
TABLE OF CONTENTS
PAGE
Forward-Looking Statements .................................................................................................... 1
Consolidated Balance Sheets ..................................................................................................... 2
Consolidated Statements of Income .......................................................................................... 3
Consolidated Statements of Stockholders’ Equity and Comprehensive Income ....................... 4
Consolidated Statements of Cash Flows .................................................................................... 5
Notes to Consolidated Financial Statements ............................................................................. 6
Report of Independent Registered Public Account Firm ......................................................... 34
Management’s Discussion and Analysis of Financial Condition and Results of Operations .. 35
Business ................................................................................................................................... 54
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities ............................................................................... 62
Directors and Executive Officers ............................................................................................. 63
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements, in addition to historical information. Forward looking
statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,”
“estimate,” “project,” and variations of such words and similar expressions, or future or conditional verbs such as
“will,” “would,” “should,” “could,” “may,” or similar expressions. The U.S. Private Securities Litigation Reform
Act of 1995 provides a safe harbor in regard to the inclusion of forward-looking statements in this document and
documents incorporated by reference.
You should note that many factors, some of which are discussed elsewhere in this document and in the documents
that are incorporated by reference, could affect the future financial results of Bancorp of New Jersey, Inc. and its
subsidiary and could cause those results to differ materially from those expressed in the forward-looking statements
contained or incorporated by reference in this document. These factors include, but are not limited, to the following:
Increased credit risk and risks associated with the real estate market;
• Current economic crisis affecting the financial industry;
• Volatility in interest rates and shape of the yield curve;
•
• Operating, legal and regulatory risk;
• Economic, political and competitive forces affecting the Company’s line of business; and
• The risk that management’s analysis of these risks and forces could be incorrect, and/or that the strategies
developed to address them could be unsuccessful.
Bancorp of New Jersey, Inc., referred to as “we” or the “Company,” cautions that these forward-looking statements
are subject to numerous assumptions, risks and uncertainties, all of which change over time, and we assume no duty
to update forward-looking statements, except as may be required by applicable law or regulation. We caution
readers not to place undue reliance on any forward-looking statements. These statements speak only as of the date
made, and they advise readers that various factors, including those described above, could affect our financial
performance and could cause actual results or circumstances for future periods to differ materially from those
anticipated or projected. Except as required by applicable law or regulation, we do not undertake, and specifically
disclaim any obligation, to publicly release any revisions to any forward-looking statements to reflect the occurrence
of anticipated or unanticipated events or circumstances after the date of such statements.
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007
(Dollars in thousands, except share data)
Assets
Cash and due from banks
Interest bearing deposits in banks
Federal funds sold
Total cash and cash equivalents
Securities available for sale
Securities held to maturity (fair value approximates $2,014 at
December 31, 2007)
Restricted investment in bank stock, at cost
Loans
Deferred loan fees and costs, net
Allowance for loan losses
Net loans
Premises and equipment, net
Accrued interest receivable
Other assets
Total assets
Liabilities and Stockholders’ Equity
Deposits :
Noninterest-bearing demand deposits
Interest bearing deposits:
Savings, money market and time deposits
Time deposits of $100 or more
Total deposits
Short term borrowings
Accrued expenses and other liabilities
Total liabilities
Commitments and contingencies
2008
2007
$ 304
40,107
69
40,480
$ 8,481
543
57,091
66,115
17,731
–
346
234,846
90
(2,371)
232,565
10,284
847
1,851
$ 304,104
–
1,996
328
183,460
76
(1,912)
181,624
8,300
613
1,269
$ 260,245
$ 28,187
$ 23,292
102,144
123,675
254,006
853
1,381
256,240
–
96,948
92,701
212,941
–
1,464
214,405
–
Stockholders’ equity :
Common stock, no par value. Authorized 20,000,000
shares; issued and outstanding 5,065,283 shares at
December 31, 2008; and 4,970,090 at December 31, 2007
Retained Earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
47,133
45,689
678
53
47,864
$ 304,104
151
–
45,840
$ 260,245
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2008 and 2007
(Dollars in thousands, except per share data)
Interest income:
Loans, including fees
Securities
Federal funds sold and other
Total interest income
Interest expense:
Savings and money markets
Time deposits
Short term borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non interest income
Fees and service charges on deposit accounts
Fees earned from mortgage referrals
Gains on sale of securities
Total non interest income
Non interest expense:
Salaries and employee benefits
Occupancy and equipment expense
Advertising and marketing expenses
Data processing
Legal fees
Other operating expenses
Total other expenses
Income before income taxes
Income tax expense
Net Income
Earnings per share:
Basic
Diluted
2008
2007
$ 12,977
708
770
14,455
$ 10,087
264
215
10,566
1,260
6,273
11
7,544
6,911
459
6,452
220
15
2
237
3,276
1,124
44
303
46
949
5,742
947
420
1,964
2,132
339
4,435
6,131
1,046
5,085
152
12
4
168
2,451
810
51
181
156
714
4,363
890
74
$ 527
$ 816
$ 0.10
$ 0.10
$ 0.17
$ 0.17
All share data has been adjusted to reflect the 10% stock distribution paid during January 2007 and the 2 for 1
stock split effective December 31, 2007.
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
Years ended December 31, 2008 and 2007
(Dollars in Thousands)
Common
Stock
Additional
Paid – In
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
(loss)income
Total
Balance at December 31, 2006
$ 23,998
$ 19,667
$ (665)
$ 39
$ 43,039
Exchange of common stock –
holding company reorganization
Exercise of stock options (22,000 shares)
Exercise of warrants (104,936 shares)
Recognition of stock option expense
Issuance of common stock (43,478 shares)
Comprehensive income:
Net income
Unrealized losses on securities available for sale
Total comprehensive income
19,667
(19,667)
200
1,141
183
500
–
–
–
–
–
–
–
–
–
–
–
–
–
816
–
–
–
–
–
–
–
(39)
Balance at December 31, 2007
$45,689
$ –
$ 151
$ –
Exercise of warrants (76,195 shares)
Exercise of stock options (19,998 shares)
Recognition of stock option expense
Comprehensive income:
Net income
Unrealized gains on securities available for sale
Total comprehensive income
821
230
393
–
–
–
–
–
–
–
–
–
–
527
–
–
–
–
–
53
–
200
1,141
183
500
816
(39)
777
$45,840
821
230
393
527
53
580
Balance at December 31, 2008
$47,133
$ –
$ 678
$ 53
$47,864
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2008 and 2007
(In Thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
Operating activities:
Provision for loan losses
Deferred tax benefit
Depreciation and amortization
Recognition of stock option expense
Fees earned from mortgage referrals
Gain on sale of securities
Changes in operating assets and liabilities:
Increase in accrued interest receivable
Increase in other assets
(Decrease)Increase in accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of securities available for sale
Proceeds from maturity of securities held to maturity
Proceeds from called and matured securities available for sale
Proceeds from sales of securities available for sale
Purchase of restricted investment in bank stock
Net increase in loans
Purchases of premises and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net increase in deposits
Net increase in short term borrowings
Proceeds from issuance of common stock
Proceeds from exercise of stock options
Proceeds from exercise of warrants
Net cash provided by financing activities
2008
2007
$ 527
$ 816
459
(206)
345
393
(15)
(2)
(234)
(398)
(82)
787
(32,641)
1,996
13,000
2,002
(18)
(51,400)
(2,329)
(69,390)
41,064
853
–
821
230
42,968
1,046
(607)
193
183
(12)
(4)
(174)
(8)
323
1,756
–
–
–
9,565
(228)
(102,851)
(3,881)
(97,395)
151,074
–
500
200
1,141
152,915
(Decrease) Increase in cash and cash equivalents
(25,635)
57,276
Cash and cash equivalents at beginning of year
66,115
8,839
Cash and cash equivalents at end of year
$ 40,480
$ 66,115
Supplemental information:
Cash paid during the year for:
Interest
Taxes
$7,920
$3,558
$
372
$
578
See accompanying notes to consolidated financial statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of Bancorp of New
Jersey, Inc. (the “Company”), and its direct wholly-owned subsidiary, Bank of New Jersey (the
“Bank”). All significant inter-company accounts and transactions have been eliminated in
consolidation.
The Company was incorporated under the laws of the Sate of New Jersey to serve as a holding
company for the Bank and to acquire all the capital stock of the Bank.
These financial statements include the effect of the holding company reorganization which took
place on July 31, 2007 pursuant to a plan of acquisition that was approved by the boards of directors
of the Company and the Bank and adopted by the stockholders of the Bank at a special meeting held
July 19, 2007. The holding company reorganization is accounted for as a reorganization under
common control and the assets, liabilities, and stockholders’ equity of the Bank immediately prior to
the holding company reorganization have been carried forward on the Company’s consolidated
financial statements at the amounts carried on the Bank’s financial statements at the effective date of
the holding company reorganization. The consolidated capitalization, assets, liabilities, results of
operations and other financial data of the Company immediately following the reorganization were
substantially the same as those of the Bank immediately prior to the holding company
reorganization. Accordingly, these consolidated financial statements of the Company include the
Bank’s historical recorded values.
The Company’s class of common stock has no par value and the Bank’s class of common stock had
a par value of $10 per share. As a result of the holding company reorganization, amounts previously
recognized as additional paid in capital on the Bank’s financial statements were reclassified into
common stock in the Company’s consolidated financial statements.
Certain amounts in the prior period’s financial statements have been reclassified to conform to the
December 31, 2008 presentation. These reclassifications did not have an impact on income.
Nature of Operations
The Company’s primary business is ownership and supervision of the Bank. The Bank commenced
operations as of May 10, 2006. The Company, through the Bank, conducts a traditional commercial
banking business, accepting deposits from the general public, including individuals, businesses, non-
profit organizations, and governmental units. The Bank makes commercial loans, consumer loans,
and both residential and commercial real estate loans. In addition, the Bank provides other customer
services and makes investments in securities, as permitted by law.
Use of Estimates
Material estimates that are particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the valuation of the deferred tax asset, the
determination of other-than-temporary impairment on securities, and the potential impairment of
restricted stock. While management uses available information to recognize estimated losses on
loans, future additions may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process, periodically review the
Bank’s allowance for loan losses on loans. These agencies may require the Bank to recognize
additions to the allowance based on their judgements of information available to them at the time of
their examination.
The financial statements have been prepared in conformity with U.S. generally accepted accounting
principles. In preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period indicated. Actual results could differ significantly
from those estimates.
9
Significant Group of Concentration of Credit Risk
Bancorp of New Jersey, Inc.’s activities are, primarily, with customers located within Bergen
County, New Jersey. The Company does not have any significant concentration to any one industry
or customers within its primary service area. Note 3 describes the types of lending the Company
engages in. Although the Company actively manages the diversification of the loan portfolio, a
substantial portion of the debtors’ ability to honor their contracts is dependent on the strength of the
local economy.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest bearing deposits in banks, and
federal funds sold, which are generally sold for one-day periods.
Interest-bearing deposits in banks
Interest bearing deposits from banks are carried at cost.
Regulators
The Bank is subject to Federal and New Jersey Statutes aplicable to banks chartered under the New
Jersey banking laws. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation
(FDIC). Accordingly, the Bank is subject to regulation, supervision, and examination by the New
Jersey State Department of Banking and Insurance and the FDIC. The Company is subject to
regulation, supervision and examination by the Federal Reserve Bank of New York.
Securities
Investment securities purchased with the intent and ability to hold until maturity are classified as
securities held-to-maturity (“HTM”) and are carried at cost, adjusted for the amortization of
premiums and accretion of discounts using a method that approximates the level-yield method over
the terms of the securities. Investment securities are carried at the principal amount outstanding
because the Bank has the ability and the intent to hold these securities to maturity. All other
securities, including equity securities, are classified as available-for-sale (“AFS”). These securities
are reported at fair value with changes in the carrying value included in accumulated other
comprehensive income which is a separate component of stockholders’ equity. Gains or losses on
sales of securities available for sale are based upon the specific identification method. The Bank has
not acquired or held securities for the purpose of engaging in trading activities.
Purchase premiums and discounts are recognized in interest income using the interest method over
the terms of the securities. Declines in the fair value of held to maturity and available for sale
securities below their cost that are deemed to be other than temporary are reflected in earnings as
realized losses. In determining whether other-than-temporary impairment exists, management
considers many factors, including (1) the length of time and the extent to which the fair value has
been less than the cost, (2) the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value.
Premises and Equipment
Premises and equipment are stated at historical cost, less accumulated depreciation and amortization.
Depreciation of fixed assets is accumulated on a straight-line basis over the estimated useful lives of
the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of
their estimated useful lives or the term of the related lease. The estimated lives of our premises and
equipment range from 3 years for computer related equipment to 30 years for building costs
associated with newly constructed buildings. Maintenance and repairs are charged to expense in the
year incurred.
10
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 deferred loan origination fees and costs
and an allowance for loan losses.
The allowance for loan losses is maintained at a level believed adequate by management to absorb
probable losses in the loan portfolio. Management’s determination of the adequacy of the allowance
is based on an evaluation of the portfolio, past loan loss experience, current economic conditions,
volume, growth, and composition of the loan portfolio, and other relevant factors. The allowance is
increased by provisions for loan losses charged against income. Decreases in the allowance result
from management’s determination that the allowance for loan losses exceeds their estimates of
probable loan losses. This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as additional or updated information becomes available.
A loan is considered impaired when, based on current information and events, it is probable the
Company will be unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement. The Bank accounts for its impaired loans
in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” as
amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income
Recognition and Disclosure,” which requires that a creditor measure impairment based on the
present value of expected future cash flows discounted at the loan’s effective interest rate, except
that as a practical expedient, a creditor may measure impairment based on a loan’s observable
market price, or the fair value of the collateral if the loan is collateral-dependent. Regardless of the
measurement method, a creditor must measure impairment based on the fair value of the collateral
when the creditor determines that foreclosure is probable.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual consumer and residential loans for
impairment disclosures, unless such loans are the subject of a restructuring agreement. As of
December 31, 2008, there is one residential mortgage loan which is non-accrual and has been
reviewed for impairment. There are no loans which have been considered for a restructuring
agreement.
Interest on loans is accrued and credited to income based upon the principal amount outstanding.
Accrual of interest is discontinued on a loan when management believes that the borrower’s
financial condition is such that collection of interest is doubtful and generally when a loan becomes
90 days past due as to principal or interest. When interest accruals are discontinued, interest credited
to income in the current year is reversed and interest accrued in the prior year is charged to the
allowance for loan losses.
Losses on loans are charged to the allowance for loan losses. Additions to this allowance are made
by recoveries of loans previously charged off and by a provision charged to expense. The
determination of the balance of the allowance for loan losses is based on an analysis of the loan
portfolio, economic conditions and other factors warranting recognition. Management believes that
the allowance for loan losses is maintained at a sufficient level to provide for losses inherent in the
loan portfolio. While management uses available information to recognize losses on loans, future
additions may be necessary based on changes in economic conditions, particularly in Bergen
County, New Jersey. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank’s allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
Loan origination fees and certain direct origination costs are deferred and recognized over the life of
the loan as an adjustment to yield using the level yield method.
11
Stock-Based Compensation
In December, 2004, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No.
123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”). SFAS No. 123(R) addresses
the accounting for share-based payment transactions in which an enterprise receives employee
service in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the
fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity
instruments. SFAS No. 123(R) requires an entity to recognize the grant-date fair value of stock
options and other equity-based compensation issued to employees within the income statement using
a fair-value-based method, eliminating the intrinsic value method of accounting previously
permissible under APB No. 25, “Accounting for Stock Issued to Employees”, and related
interpretations. The Company accounts for stock options under the recognition and measurement
principles of SFAS No. 123(R).
As a result of adopting SFAS No.123(R), the Company recorded compensation expense of $393,000
and $183,000 during 2008 and 2007, respectively. At December 31, 2008, the Company had
unrecognized compensation expense amounting to approximately $1,037,000 related to un-vested
options. The unrecognized expense will be recognized over the remaining vesting terms.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year 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.
The Company adopted the provisions of FASB Interpretation 48 (“FIN 48”), Accounting for
Uncertainty in Income Taxes, on January 1, 2007. Previously, the Bank had accounted for tax
contingencies in accordance with Statement of Financial Accounting Standards 5, Accounting for
Contingencies. As required by FIN 48, which clarifies SFAS 109, Accounting for Income Taxes,
the Company recognizes the financial statement benefit of a tax position only after determining that
the relevant tax authority would more likely than not sustain the position following an audit. For tax
positions meeting the more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon
ultimate settlement with the relevant tax authority. At the adoption date, the Bank applied FIN 48 to
all tax positions for which the statute of limitations remained open. As a result of the adoption of
FIN 48, there was no material effect on the Company’s consolidated financial position or results of
operations and no adjustment to retained earnings.
Earnings Per Share
Basic earnings per share excludes dilution and represents the effect of earnings upon the weighted
average number of shares outstanding for the period. Diluted earnings per share reflects the effect of
earnings upon weighted average shares including the potential dilution that could occur if securities
or contracts to issue common stock were converted or exercised, utilizing the treasury stock method.
All per share data has been restated to reflect changes due to stock distributions and stock splits.
Comprehensive Income
Comprehensive income consists of net income or loss for the current period and income, expenses,
or gains and losses not included in the income statement and which are reported directly as a
separate component of equity. The Company includes the required disclosures in the statement of
stockholders’ equity.
12
Advertising
The Company expenses advertising costs as incurred.
Transfer of Financial Assets
Transfers of financial assets, including loan and loan participation sales, are accounted for as sales,
when control over the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right
(free of conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and (3) the Bank does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Restricted Investment in Bank Stock
Restricted stock, is comprised of stock in the Federal Home Loan Bank of New York and Atlantic
Central Bankers’ Bank. Federal law requires a member institution of the Federal Home Loan Bank
to hold stock according to a predetermined formula. All restricted stock is recorded at cost as of
December 31, 2008 and 2007.
Management evaluates the restricted stock for impairment in accordance with Statement of Position
(SOP) 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend
to or Finance the Activities of Others. Management’s determination of whether these investments
are impaired is based on their assessment of the ultimate recoverability of their cost rather than by
recognizing temporary declines in value. The determination of whether a decline affects the ultimate
recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net
assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this
situation has persisted, (2) commitments by the FHLB to make payments required by law or
regulation and the level of such payments in relation to the operating performance of the FHLB, and
(3) the impact of legislative or regulatory changes on institutions and, accordingly, on the customer
base of the FHLB.
Management believes no impairment charge is necessary related to the FHLB restricted stock as of
December 31, 2008.
13
NOTE 2.
Securities
The Company held no securities in the held to maturity category at December 31, 2008.
A summary of securities available for sale at December 31, 2008 is as follows (in thousands):
December 31, 2008
Government Sponsored
Enterprise obligations
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$ 17,641
$ 90
$ –
$ 17,731
The Company held no securities in the available for sale category at December 31, 2007.
A summary of securities held to maturity at December 31, 2007 is as follows (in thousands):
December 31, 2007
U.S. Treasury Obligations
Amortized
Cost
$ 1,996
Gross
Unrealized
Gains
$ 18
Gross
Unrealized
Losses
$ –
Fair
Value
$ 2,014
Securities with an amortized cost of $2.0 million, and a fair value of $2.0 million, were pledged to
secure public funds on deposit at December 31, 2008. Securities with an amortized cost of $1.9
million, and a fair value of $2.0 million, were pledged to secure public funds on deposit at December
31, 2007.
During 2008, the Company sold a security from its AFS portfolio and recognized a gain of
$2,000 from the transaction. During 2007, the Company sold its entire AFS portfolio in
order to fund loan growth and recognized a gain of $4,000 from the transaction.
The following tables set forth as of December 31, 2008, the maturity distribution of the Company’s
available for sale portfolio (in thousands):
Amortized
Cost
Within 1 year
–
Fair
Value
–
1 to 5 years
Over 5 years
$ 13,391
$ 13,478
$ 4,250
$ 4,253
$ 17,641
$ 17,731
14
NOTE 3.
Loans and Allowance for Loan Losses
Loans at December 31, 2008 and 2007, respectively, are summarized as follows (in thousands):
Real estate
Commercial
Credit lines
Consumer
December 31,
2008
$159,058
33,319
37,962
4,507
2007
$123,335
27,056
28,133
4,936
$234,846
$183,460
The Bank grants commercial, mortgage and installment loans to those New Jersey residents and
businesses within its local trading area. Its borrowers’ abilities to repay their obligations are
dependent upon various factors, including the borrowers’ income and net worth, cash flows
generated by the underlying collateral, value of the underlying collateral and priority of the Bank’s
lien on the property. Such factors are dependent upon various economic conditions and individual
circumstances beyond the Bank’s control; the Bank is therefore subject to risk of loss. The Bank
believes its lending policies and procedures adequately minimize the potential exposure to such risks
and that adequate provisions for loan losses are provided for all known and inherent risks.
The activity in the allowance for loan losses is as follows (in thousands):
Years ended December 31,
2007
2008
Balance at beginning of year
$ 1,912
$ 866
Provision charged to expense
Loans charged off
Recoveries
459
–
–
1,046
–
–
Balance at end of year
$ 2,371
$ 1,912
At December 31, 2008, the Bank had one impaired (non-accrual) residential mortgage loan of
approximately $2.0 million, with a specific reserve of approximately $20 thousand. The specific
reserve was determined based on the fair value of collateral and expected future cash flows. Interest
income on such loans is recognized only when actually collected. During the year ended December
31, 2008, the Bank recognized interest income of approximately $45 thousand. Interest income that
would have been record had the loan been on the accrual status, amounted to approximately $90
thousand.
NOTE 4.
Premises and Equipment
At December 31, premises and equipment consists of the following (in thousands):
Land
Building
Furniture and fixtures
Equipment
2008
2007
$ 5,152
4,642
507
576
10,877
$ 3,350
4,409
375
414
8,548
Less accumulated depreciation and
amortization
Total premises and equipment, net
593
248
$ 10,284
$ 8,300
Depreciation expense amounted to $345 thousand and $193 thousand for the years ended December
31, 2008 and 2007, respectively.
15
NOTE 5.
Deposits
At December 31, 2008 and 2007, respectively, a summary of the maturity of time deposits (which
includes certificates of deposit and individual retirement account (IRA) certificates) is as follows (in
thousands):
Three months or less
Over three months through twelve months
Over 1 year through 2 years
Over 2 years through 3 years
Over 3 years through 4 years
Over 4 years through 5 years
Over 5 years
2008
2007
$ 48,760
113,028
1,815
127
–
1,800
–
$165,530
$ 20,408
112,475
921
141
12
47
–
$134,004
NOTE 6.
Short Term Borrowings
At December 31, 2008, we drew down approximately $853 thousand through our overnight line of credit at
Atlantic Central Bankers Bank. We have a $12 million overnight line of credit facility available with First
Tennessee Bank and a $10 million overnight line of credit with Atlantic Central Bankers Bank for the
purchase of federal funds in the event that temporary liquidity needs arise. Additionally, we were approved
as a member of the Federal Home Loan Bank of New York (FHLBNY) in November, 2007. The
FHLBNY relationship could provide additional sources of liquidity, if required. We believe that our
current sources of funds provide adequate liquidity for our current cash flow needs.
16
NOTE 7.
Income Taxes
Income tax expense from operations for the years ended December 31 is as follows (in thousands):
Federal:
Current
Deferred
State:
Current
Deferred
2008
2007
$ 480
(160)
146
(46)
$ 519
(349)
162
(258)
Income tax expense
$ 420
$ 74
The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities as of December 31 are as follows (in thousands):
Deferred tax assets:
Start up expenses
Allowance for loan losses
Accrued expenses
Stock compensation plans
2008
2007
$ 433
854
76
162
$ 468
744
50
39
Total gross deferred tax assets
1,525
1,301
Deferred tax liabilities:
Deferred loan costs
Prepaid expenses
Unrealized gains on AFS securities
Other
(68)
(57)
(36)
(23)
(63)
(36)
–
(31)
Total gross deferred tax liabilities
(184)
(130)
Net deferred tax asset
$ 1,341
$ 1,171
The realizability of deferred tax assets is dependent upon a variety of factors, including the generation of
future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities
and tax planning strategies. During 2007 and 2008, the Company sustained continued profitability,
continued to pay taxes, and recognized deferred tax benefits. Based upon these and other factors,
management believes it is more likely than not that the Company will realize the benefits of these
remaining deferred tax assets. The net deferred tax asset is included in other assets on the consolidated
balance sheet.
17
Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of
34% to income taxes as a result of the following (in thousands):
Computed “expected” tax expense
Increase(decrease) in taxes resulting from:
State taxes, net of federal income tax (benefit)expense
Non-deductible penalties
Stock-based compensation
Meals and entertainment
Change in valuation allowance
2008
$ 322
66
–
29
3
–
$ 420
2007
$ 303
(63)
5
28
3
(202)
$ 74
The Company is subject to income taxes in the U.S. and various state and local jurisdictions. Tax
regulations are subject to interpretation of the related tax laws and regulations and require significant
judgment to apply. Corporate tax returns for the years 2005 through 2008 remain open to examination by
taxing authorities.
NOTE 8.
Leases
The Bank leases banking facilities under operating leases which expire at various dates through December
31, 2026. These leases do contain certain options to renew the leases. Rental expense amounted to
$454,000 and $430,000, respectively, for the years ended December 31, 2008 and December 31, 2007.
The following is a schedule of future minimum lease payments (exclusive of payments for maintenance,
insurance, taxes and any other costs associated with offices) for operating leases with initial or remaining
terms in excess of one year from December 31, 2008 (in thousands):
Year ending December 31:
2009
2010
2011
2012
2013
Thereafter
$437
330
262
269
277
2,941
$4,516
18
NOTE 9.
Related-party Transactions
The Bank has made, and expects to continue to make, loans in the future to our directors and
executive officers and their family members, and to firms, corporations, and other entities in which
they and their family members maintain interests. All such loans require the prior approval of our
board of directors. None of such loans at December 31, 2008 and 2007, respectively, were
nonaccrual, past due, restructured or potential problems, and all of such loans were made in the
ordinary course of business, on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable loans with persons not related to the Company or the
Bank and did not involve more than the normal risk of collectibility or present other unfavorable
features.
The following table represents a summary of related-party loans during 2008 (in thousands)
Outstanding loans at beginning of the year
New Loans
Repayments
Outstanding loans at end of the year
$ 13,849
11,959
(6,003)
$ 19,805
Two of our directors have acted as the Bank’s counsel on several loan closings. During 2008, and
2007 the total cost of such work has been reimbursed by the respective loan customers and totals
$88,000 and $149,000, respectively. Additionally, one of these directors has acted as legal counsel
to the Bank on several matters. The total amount paid for legal fees, for non-loan related matters
was approximately $11,000 in 2008 and approximately $10,000 in 2007.
The Company’s or the Bank’s commercial insurance policy, as well as other policies, has been
placed with various insurance carriers by an insurance agency of which one of our directors is the
President. Gross insurance premiums paid to carriers through this agency was approximately
$87,000 and $73,000 in 2008 and 2007, respectively.
One of our directors provided appraisal services on several loan closings. Although certain of these
payments are reimbursed by our customer, the total amount paid for appraisal services during 2008
and 2007 was approximately $24,000 and $13,000, respectively.
Our disinterested directors have reviewed all transactions and relationships with directors and the
businesses in which they maintain interests, have determined that each is on arm’s-length terms, and
have approved each such transaction and relationship.
19
NOTE 10.
Earnings Per Share
All weighted average, actual shares and per share information have been adjusted retroactively for the
effects of the 2007 10% stock distribution and the 2007 2 for 1 stock split. The Company’s calculation of
earnings per share in accordance with SFAS No. 128 is as follows:
(In thousands, except per share data)
For the Year Ended
December 31,
2008 2007
Net income applicable to common stock
Weighted average number of common
shares outstanding – basic
$527
5,023
$ 816
4,856
Basic earnings per share
$0.10
$ 0.17
Net income applicable to common stock
$527
$ 816
Weighted average number of common
shares outstanding - diluted
Weighted average number of
common
shares outstanding
5,023
4,856
Effect of dilutive warrants
Weighted average number of common
shares outstanding
67
24
5,090
4,880
Diluted earnings per share
$0.10
$0.17
Stock options for 614,968 and 658,300 shares of common stock were not considered in computing diluted
earnings per common share for 2008 and 2007, respectively, because they were anti-dilutive.
20
NOTE 11.
Stockholders’ Equity and Dividend Restrictions
Under its initial stock offering which closed in 2005, the Bank sold 4,798,594 shares of common
stock at $9.09 per share, as adjusted for the subsequent 10% stock distribution and the 2 for 1 stock
split. The stock offering resulted in net proceeds of $42,684,000. For every five shares of common
stock purchased in the offering, one warrant to purchase one additional share of the Bank’s common
stock was issued, exercisable at any time through May 10, 2009. Subsequent to year end, the
Company has extended the expiration date of the warrants to September 15, 2009. 959,720 warrants
were issued to purchase common stock at $10.91 per share, as adjusted for the 10% stock
distribution and the 2 for 1 stock split. Between 2006 and 2008, there were 181,131 warrants
exercised for total proceeds of $1,974,000. As part of the holding company reorganization on July
31, 2007, all outstanding warrants were exchanged to purchase Bancorp of New Jersey, Inc.
common stock. At December 31, 2008, there were 778,488 warrants outstanding.
During 2007, the Company sold 43,478 shares of common stock at $11.50 per share, as adjusted for
the 10% stock distribution and the 2 for 1 stock split, to one of its directors for total proceeds of
$500,000.
The Company declared a 2 for 1 stock split during the fourth quarter of 2007. This split was payable
on December 31, 2007.
The Bank declared a 10% stock distribution and paid that distribution during January 2007 by
issuing 436,336 shares.
Under applicable New Jersey law, the Company will not be permitted to pay dividends on its capital
stock if, following the payment of the dividend, it would be unable to pay its debts as they become
due in the usual course of business, or its total assets would be less than its total liabilities. Further, it
is the policy of the Federal Reserve Bank that bank holding companies should pay dividends only
out of current earnings and only if future retained earnings would be consistent with the holding
company’s capital, asset quality and financial condition. Because it will have no significant
independent sources of income, the ability of the Company to pay dividends will be dependent on its
ability to receive dividends from the Bank.
Under the New Jersey Banking Act of 1948, as amended, the Bank may declare and pay dividends
only if, after payment of the dividend, the capital stock of the Bank will be unimpaired and either the
Bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will
not reduce the Bank’s surplus. The FDIC prohibits payment of cash dividends if, as a result, the
Bank would be undercapitalized. Further, during the first three years of operation, cash dividends
shall only be paid from net operating income, and only after an appropriate allowance for loan losses
is established and overall capital is adequate.
21
NOTE 12.
Benefit Plans
2006 Stock Option Plan
During 2006, the Bank’s stockholders approved the 2006 Stock Option Plan. At the time of the
holding company reorganization, the 2006 Stock Option Plan was assumed by the Company. The
plan allows directors and employees of the Company to purchase up to 239,984 shares of the
Company’s common stock, in each case as adjusted following our ten percent (10%) stock
distribution in January 2007 and the 2 for 1 stock split effective December 31, 2007. The option
price per share is the market value of the Bank’s stock on the date of grant. The option price and
number of shares underlying options outstanding on the date of our ten percent (10%) stock
distribution in January 2007 and the December 2007 2 for 1 stock split have been equitably adjusted
to account for such stock distributions. At December 31, 2008, incentive stock options to purchase
220,300 shares have been issued to employees of the Bank.
During 2006, the Bank awarded Incentive Stock Options (ISO) which vested over a 2 year period
and ISO options which vested over a 3 year period. The per share weighted-average fair values of
stock options granted during 2006, which vested over a 2 year period and a 3 year period, were
$1.26 and $2.17, respectively, on the date of grant using the Black Scholes option-pricing model, as
adjusted for the 2007 stock distribution and the 2007 stock split. The options which vested over a 2
year period used the following assumptions in determining the grant date fair value of the 2006
option grants: expected dividend yields of 0.00%, risk-free interest rates of 4.77%, expected
volatility of 16.00%; and average expected lives of 2 years. The options which vested over a 3 year
period used the following assumptions used in determining the grant date fair value of the 2006
option grants: expected dividend yields of 0.00%, risk-free interest rates of 4.77%, expected
volatility of 22.00%; and average expected lives of 3.5 years.
During 2007, the Company awarded Incentive Stock Options (ISO) which vest over a 5 year period.
The per share weighted average fair values of ISO stock options granted during 2007 were $3.07 on
the date of the grant using the Black Scholes option-pricing model, as adjusted for the 2007 stock
distribution and the 2007 stock split. These options used the following assumptions in determining
the grant date fair value of the 2007 option grants: expected dividend yield of 0.00%, risk-free
interest rate of 3.28%, expected volatility of 21.69%, and average expected lives of 5.15 years.
22
A summary of stock option activity under the 2006 Stock Option Plan during 2008 and 2007 is
presented below:
Number of
Shares
Weighted Average
Exercise price
per share
Average
Intrinsic
Value (1)
Outstanding at December 31, 2006
124,300
$9.09
Granted
Forfeited
Exercised
96,000
–
(22,000)
$11.50
$9.09
Outstanding at December 31, 2007
198,300
$10.26
$246,543
Granted
Forfeited
Exercised
–
(9,400)
–
$10.37
–
–
Outstanding at December 31, 2008
188,900
$10.26
Exercisable at December 31, 2008
106,673
$9.53
$139,786
$156,810
(1) The aggregate instirinsic value of a stock option in the table above represents the total pre-tax
intrinsic value (the amount by which the current market value of the underlying stock exceeds the
exercise price of the option) that would have been received by the option holders had they exercised
their options on December 31, 2008. This amount changes based on the changes in the market value
in the Company’s stock.
Information pertaining to options outstanding under the 2006 Stock Option Plan at December 31,
2008 is as follows:
Range of Exercise Prices
$9.09
$11.50
Number
Outstanding
Weighted Average
Remaining
Contractual life (years)
Weighted
Average
Exercise Price
97,900
91,000
188,900
7.83
8.92
$9.09
$11.50
Under the 2006 Stock Option Plan, there were a total of 82,227 unvested options at December 31,
2008, and approximately $252,000 remains to be recognized in expense over the next four years.
There were no options related to the 2006 Stock Option Plan exercised during 2008. The total
intrinsic value for options that were exercised during 2007 was approximately $53,000.
23
2007 Director Plan
During 2007, the Bank’s stockholders approved the 2007 Non-Qualified Stock Option Plan for
Directors. At the time of the holding company reorganization, the 2007 Non-Qualified Stock Option
Plan was assumed by the Company. This plan provides for 480,000 options to purchase shares of the
Company’s common stock to be issued to non-employee directors of the Company. At December
31, 2008, non-qualified options to purchase 414,668 shares of the Company’s stock were issued to
non-employee directors of the Company.
During 2007, the Company awarded Non-Qualified Stock Options (NQO) to its Non-Employee
Board members which vest over a 34 month period and NQO options which vest over a 5 year
period. The per share weighted average fair values of NQO stock options granted during 2007,
which vested over a 34 month period and a 5 year period, were $2.26 and $3.03, respectively, on the
date of the grant using the Black Scholes option-pricing model, as adjusted for the 2007 stock
distribution and the 2007 stock split. The options which vest over a 34 month period used the
following assumptions in determining the grant date fair value of the 2007 option grants: expected
dividend yield of 0.00%, risk-free interest rate of 4.05%, expected volatility of 14.33%, and average
expected lives of 4.01 years. The options which vest over a 5 year period used the following
assumptions in determining the grant date fair value of the 2007 option grants: expected dividend
yield of 0.00%, risk-free interest rate of 3.28%, expected volatility of 21.69%, and average expected
lives of 5.03 years.
A summary of the stock option activity during 2008 is as follows:
Weighted
Average
Exercise
price per
share
Number
of
Shares
Average
Intrinsic
Value (1)
Weighted Average
Remaining
Contractual life
(years)
Outstanding at December 31, 2007
460,000
$11.50
$ –
8.81
Granted
Forfeited
Exercised
–
(23,334)
(21,998)
–
$11.50
$11.50
Outstanding at December 31, 2008
414,668
$11.50
$ –
Exercisable at December 31, 2008
86,658
(1) The aggregate instirinsic value of a stock option in the table above represents the total pre-tax
intrinsic value (the amount by which the current market value of the underlying stock exceeds the
exercise price of the option) that would have been received by the option holders had they exercised
their options on December 31, 2008 and 2007, respectively. This amount changes based on the
changes in the market value in the Company’s stock.
Under the 2007 Directors Stock Option Plan, there were a total of 414,668 outstanding options at
December 31, 2008, and approximately $757,000 remains to be recognized in expense over the next
four years. During 2008, no Director Options were granted.
24
NOTE 12.
Benefit Plans (continued)
Weighted Average Assuptions for options granted
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Dividend yield
Expected life
Expected volatility
Risk-free interest rate
2007 Director Plan
2006 Stock Option Plan
0.00%
0.00%
4.50 years
2.44 years
17.72%
3.70%
17.75%
4.77%
There were no options granted during 2008.
The dividend yield assumpton is based on the Company’s expectation of dividend payouts. The
expected life is based upon historical and expected exercise experience. The expected volatility is
based on historical volatiltiy of a peer group over a similar period. The risk-free interest rates for
periods within the contractual life of the awards is based upon the U.S. Treasury yield curve in effect
at the time of the grant.
Defined Contribution Plan
The Company currently offers a 401(k) profit sharing plan covering all full-time employees, wherein
employees can invest up to 15% of their pretax earnings, up to the legal limit. The Company
matches a percentage of employee contributions at the board’s discretion. The Company made a
matching contribution of approximately $41,000 and $33,000 during 2008 and 2007, respectively.
25
NOTE 13.
Regulatory Capital Requirements
The Company and the Bank are subject to various capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory –
and possible additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.
The Bank’s capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy require the Company
and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier
1 capital (as defined in the regulations) to risk-wieghted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). As of December 31, 2008, management believes that the
Company and the Bank meet all capital adequacy requirements to which they are subject.
Further, the most recent FDIC notification categorized the Bank as a well-capitalized institution
under the prompt corrective action regulations. There have been no conditions or events since that
notification that management believes have changed the Bank’s capital classification.
The following is a summary of the Bank’s actual capital amounts and ratios as of December 31,
2008 and 2007, respectively, compared to the FDIC minimum capital adequacy requirements and the
FDIC requirements for classification as a well-capitalized institution (dollars in thousands):
FDIC requirements
Minimum capital
adequacy
For classification
as well capitalized
Ratio
Amount
Ratio
Amount
Ratio
Bank actual
Amount
$47,811
16.95%
$ 11,281
4.00%
$14,101
5.00%
$47,811
$50,182
21.16%
22.20%
$ 9,040
$18,080
4.00%
8.00%
$13,560
$22,600
6.00%
10.00%
$45,840
22.27%
$ 8,235
4.00%
$10,293
5.00%
$45,840
$47,752
25.06%
26.11%
$ 7,315
$14,631
4.00%
8.00%
$10,973
$18,289
6.00%
10.00%
December 31, 2008:
Leverage (Tier 1)
Capital
Risk-based capital:
Tier 1
Total
December 31, 2007:
Leverage (Tier 1)
Capital
Risk-based capital:
Tier 1
Total
The Bank’s capital amounts (in thousands) and ratios as presented in the table above are similar to
those of the Company.
In addition to the above, as part of the Bank’s application for deposit insurance with the FDIC and as
part of the bank charter approval by the New Jersey Department of Banking, the Bank is required to
maintain not less than 8% Tier 1 Capital to total assets, as defined, through the first three years of
operation.
26
NOTE 14.
Financial Instruments with Off-Balance Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of
business in order to meet the financing needs of its customers. These financial instruments consist
of commitments to extend credit and letters of credit and involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the accompanying consolidated
balance sheets.
The Bank uses the same credit policies and collateral requirements in making commitments and
conditional obligations as it does for on-balance-sheet loans. Commitments to extend credit are
agreements to lend to customers as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since the commitments may expire without being drawn upon, therefore,
the total commitment amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s
credit evaluation of the borrower. Outstanding available loan commitments, primarily for
commercial real estate, construction, and land development loans at December 31, 2008 totaled
$30.9 million compared to $48.6 million at December 31, 2007.
Most of the Bank’s lending activity is with customers located in Bergen County, New Jersey. At
December 31, 2008 and 2007, the Bank had outstanding letters of credit to customers totaling
$574,000 and $1,103,000, respectively, whereby the Bank guarantees performance to a third party.
These letters of credit generally have fixed expiration dates of one year or less. The fair value of
these letters of credits is estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements. At December 31, 2008 and 2007, such
amounts were deemed not material.
NOTE 15.
Financial Information of Parent Company
The parent company, Bancorp of New Jersey, Inc, was incorporated during November, 2006. The
holding company reorganization with Bank of New Jersey was consummated on July 31, 2007.
Accordingly, the financial information of the parent company, Bancorp of New Jersey, Inc, for 2007
is only available as of and for the five month period ended December 31, 2007. The following
information represents the parent only Balance Sheets as of December 31, 2008 and 2007,
respectively, and the Statements of Income for the twelve months ended December 31, 2008 and for
the five months ended December 31, 2007 and should be read in conjunction with the notes to the
consolidated financial statements.
Balance Sheet
(in thousands)
December 31,
2008 2007
Assets:
Investment in subsidiary, net
$ 47,864
$ 45,840
Total assets
$ 47,864
$ 45,840
Stockholders’ equity:
$ 47,864
$ 45,840
27
Statement of Income
For the twelve month period ended December 31, 2008 and
the five month period ended December 31, 2007
(in thousands)
Equity in undistributed
earnings of subsidiary bank
Net income
2008
2007
$ 527
$ 527
$ 816
$ 816
Statement of Cash Flow
For the twelve months ended December 31, 2008 and
the five months ended December 31, 2007
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of the
subsidiary bank
Decrease in other assets, net
Net cash provided by operating activities
Cash flows from investing activities:
Capital contributed to subsidiary bank
Net cash used in financing activities
Cash flows from financing activities:
Proceeds from exercise of warrants
Proceeds from issuance of common stock
Net cash provided by financing
activities
Net change in cash for the period
Net cash at beginning of year
2008
2007
$ 527
$ 816
(527)
–
–
(816)
–
–
(1,051)
(1,051)
(1,585)
(1,585)
821
230
1,051
–
–
1,085
500
1,585
–
–
Net cash at end of year
$ –
$ –
28
NOTE 16.
Fair Value Measurement and Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of the Company’s financial instruments,
however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all
financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the
Company could have realized in sales transaction on the dates indicated. The estimated fair value amounts
have been measured as of their respective year-ends and have not been re-evaluated or updated for
purposes of these financial statements subsequent to those respective dates. As such, the estimated fair
values of these financial instruments subsequent to the respective reporting dates may be different than the
amounts reported at each year-end.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, Fair
Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair
value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies to other
accounting pronouncements that require or permit fair value measurements. The Company adopted SFAS
157 effective for its fiscal year beginning January 1, 2008.
In December 2007, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157
(“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and
liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. As such,
the Company only partially adopted the provisions of SFAS 157, and will begin to account and report for
non-financial assets and liabilities in 2009. In October, 2008, the FASB issued FASB Staff Position 157-3,
Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active (“FSP 157-
3”), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would
determine fair value in an inactive market. FSP 157-3 is effective immediately and applies to the
Company’s December 31, 2008 consolidated financial statements. The adoption of SFAS 157 and FSP
157-3 had no impact on the amounts reported in the financial statements.
SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy under SFAS 157 are as follows:
• Level 1 Inputs - Unadjusted quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities.
• Level 2 Inputs - Quoted prices in markets that are not active, or inputs that are observable either
directly or indirectly, for substantially the full term of the asset or liability.
• Level 3 Inputs - Prices or valuation techniques that require inputs that are both significant to the
fair value measurement and unobservable (i.e. supported with little or no market activity).
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement.
29
For financial assets measured at fair value on a recurring basis, the fair value measurements by level
within the fair value hierarchy used at December 31, 2008 are as follows:
(Level 1)
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 2)
(Level 3)
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
December 31,
2008
$17,731
$ –
$17,731
$ –
Description
Securities
available for sale
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by
level within the fair value hierarchy used at December 31, 2008 are as follows:
Description
December 31,
2008
Impaired loans
$1,977
(Level 1)
Quoted
Prices in
Active
Markets for
Identical
Assets
$ –
(Level 2)
(Level 3)
Significant
Other
Observable
Inputs
$ –
Significant
Unobservable
Inputs
$1,977
As discussed above, the Company has delayed its disclosure requirements of non-financial assets
and liabilities.
The following information should not be interpreted as an estimate of the fair value of the entire
Company since a fair value calculation is only provided for a limited portion of the Company’s
assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity
used in making the estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful. The following methods and assumptions were used to estimate
the fair values of the Company’s finanical instruments at December 31, 2008 and 2007:
Cash and Cash Equivalents (Carried at cost)
The carrying amounts reported in the balance sheet for cash and cash equivalents approximate
those assets’ fair values.
30
Securities
The fair value of securities available for sale (carried at fair value) and held to maturity (carried
at amortized cost) are determined by obtaining market prices on nationally recognized securities
exchanges (level 1), or matrix pricing (Level 2), which is a mathematical technique used widely
in the industry to value debt securities without relying exclusively on quoted market prices for
the specific securities but rather by relying on the securities’ relationship to other benchmark
quoted prices. For certain securities which are not traded in active markets or are subject to
transfer restrictions, valuations are adjusted to reflect illiquiditiy and/or non-transferability, and
such adjustments are generally based on available market evidence (Level 3). In the absence of
such evidence, management’s best estimate is used. Management’s best estimate consists of
both internal and external support on certain Level 3 investments. Internal cash flow models
using a present value formula that includes assumptions market participants would use along
with indicative exit pricing obtained from broker/dealers (where available) were used to support
fair values of certain Level 3 investments.
Restricted Investment in Bank Stock (Carried at Cost)
The carrying amount of restricted investment in bank stock approximates fair value, and
considers the limited marketability of such securities.
Loans Receivable (Carried at Cost)
The fair value of loans are estimated using discounted cash flow analyses, using market rates at
the balance sheet date that reflect the credit and the interest rate-risk inherent in the loans.
Projected future cash flows are calculated based upon contractual maturity or call dates,
projected repayments and prepayments of principal. Generally, for variable rate loans that
reprice frequently and with no significant change in credit risk, fair values are based on carrying
values.
Impaired loans
Impaired loans are those that are accounted for under FASB Statement No. 114, Accounting by
Creditors for Impairment of a Loan (“SFAS 114”), in which the Company has measured
impairment generally based on the fair value of the loan’s collateral. Fair value is generally
deteremined based upon independent third-party appraisals of the properties, or discounted cash
flows based upon the expected proceeds. These assets are included as Level 3 fair values, based
upon the lowest level of input that is significant to the fair value measurements.
The fair value consists of the loan balance of $1,997,000 net of a specific reserve of $20,000.
Additonal provisions for loan losses of $439,000 were recorded during the year.
Accrued Interest Receivable and Payable (Carried at Cost)
The carrying amount of accrued interest receivable and accrued interest payable approximates
fair value.
31
Deposits (Carried at Cost)
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook
savings and money market accounts) are, by definition, equal to the amount payable on demand
at the reporting date (i.e., their carrying amounts). Fair values for fixed rate certificates of
deposit are estimated using a discounted cash flow calculation that applies interest rates
currently being offered in the market on certificates to a schedule of aggregated expected
monthly maturities of time deposits.
Federal Funds Purchased and Short-Term Borrowings (Carried at Cost)
The carrying amount of federal funds purchased approximates fair value.
Fair value estimates and assumptions are set forth below for the Company’s financial instruments at
December 31, 2008 and 2007 (in thousands):
2008
2007
Carrying
amount
Estimated
Fair Value
Carrying
amount
Estimated
Fair Value
Financial assets:
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Restricted investment in bank stock
Net loans
Accrued interest receivable
$ 40,480
17,641
–
346
232,565
847
$ 40,480
17,731
–
346
232,744
847
$ 66,115
$ 66,115
–
–
1,996
328
181,624
613
2,014
328
181,068
613
Financial liabilities:
Deposits
Federal funds purchased
Accrued interest payable
Limitation
254,005
853
541
255,935
853
541
212,941
212,933
–
917
–
917
The preceding fair value estimates were made at December 31, 2008 and 2007 based on
pertinent market data and relevant information on the financial instrument. These estimates do
not include any premium or discount that could result from an offer to sell at one time the
Company’s entire holdings of a particular financial instrument or category thereof. Since no
market exists for a substantial portion of the Company’s financial instruments, fair value
estimates were necessarily based on judgments regarding future expected loss experience,
current economic conditions, risk assessment of various financial instruments, and other factors.
Given the innately subjective nature of these estimates, the uncertainties surrounding them and
the matter of significant judgment that must be applied, these fair value estimates cannot be
calculated with precision. Modifications in such assumptions could meaningfully alter these
estimates.
Since these fair value approximations were made solely for on- and off-balance-sheet financial
instruments at December 31, 2008 and 2007, no attempt was made to estimate the value of
anticipated future business. Furthermore, certain tax implications related to the realization of
the unrealized gains and losses could have a substantial impact on these fair value estimates and
have not been incorporated into the estimates.
32
NOTE 17.
Quarterly Financial Data (unaudited)
The following represents summarized unaudited quarterly financial data of the Company.
Three Months Ended
(in thousands, except per share data)
December 31 September 30 June 30
March 31
2008
Interest income
Interest expense
Net interest income
Provision for loan losses
Other expense, net
Provision for federal and state
income taxes
Net income
Earnings per share:
Basic
Diluted
$ 3,653
1,779
1,874
146
1,422
$ 3,543
1,689
1,854
88 67
1,349
$ 3,530 $ 3,729
2,214
1,862
1,515
1,668
158
1,312
1,422
132
$ 174
179
$ 238
32
77
$ 102 $ 13
$ 0.03
$ 0.03
$ 0.05
$ 0.05
$ 0.02 $ 0.00
$ 0.02 $ 0.00
2007
Interest income
Interest expense
Net interest income
Provision for loan losses
Other expense, net
Provision(benefit) for federal and state
income taxes
Net income
Earnings per share:
Basic
Diluted
$ 3,328
1,649
1,679
140
1,290
$ 2,886
1,242
1,644
278
1,066
$ 2,391 $ 1,965
641
903
1,324
1,488
389
239
880
963
111
$ 138
(144)
$ 444
27
80
$ 206 $ 28
$ 0.03
$ 0.03
$ 0.09
$ 0.09
$ 0.04 $ 0.01
$ 0.04 $ 0.01
33
NOTE 18.
Recent Accounting Pronouncements
FASB statement No. 141 (R) “Business Combinations” was issued in December of 2007. This Statement
establishes principles and requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquired entity. The Statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the business combination. The
guidance will become effective as of the beginning of a company’s fiscal year beginning after December
15, 2008. This new pronouncement will impact the Company’s accounting for business combinations
completed beginning January 1, 2009.
FASB statement No. 160 “Non-controlling Interests in Consolidated Financial Statements—an amendment
of ARB No. 51” was issued in December of 2007. This Statement establishes accounting and reporting
standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective as of the beginning of a company’s fiscal year beginning after December
15, 2008. This statement is not expected to have a material impact on the Company’s consolidated financial
statements.
Staff Accounting Bulletin No. 110 (SAB 110) amends and replaces Question 6 of Section D.2 of Topic 14,
“Share-Based Payment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14
expresses the views of the staff regarding the use of the “simplified” method in developing an estimate of
expected term of “plain vanilla” share options and allows usage of the “simplified” method for share option
grants prior to December 31, 2007. SAB 110 allows public companies which do not have historically
sufficient experience to provide a reasonable estimate to continue use of the “simplified” method for
estimating the expected term of “plain vanilla” share option grants after December 31, 2007. SAB 110
became effective January 1, 2008 and did not have a material impact on the consolidated financial
statements.
Staff Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded at Fair Value
Through Earnings" expresses the views of the staff regarding written loan commitments that are accounted
for at fair value through earnings under generally accepted accounting principles. To make the staff's views
consistent with current authoritative accounting guidance, the SAB revises and rescinds portions of SAB
No. 105, "Application of Accounting Principles to Loan Commitments." Specifically, the SAB revises the
Securities and Exchange Commission staff's views on incorporating expected net future cash flows related
to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains
the staff's views on incorporating expected net future cash flows related to internally-developed intangible
assets in the fair value measurement of a written loan commitment. The staff expects registrants to apply
the views in Question 1 of SAB 109 to derivative loan commitments issued or modified in fiscal quarters
beginning after December 15, 2007. The guidance in SAB 109 became effective on January 1, 2008 and
did not have a material impact on the Company’s financial statements.
In February 2008, the FASB issued a FASB Staff Position ("FSP") FAS 140-3, Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions. This FSP addresses the issue
of whether or not these transactions should be viewed as two separate transactions or as one "linked"
transaction. The FSP includes a "rebuttable presumption" that presumes linkage of the two transactions
unless the presumption can be overcome by meeting certain criteria. The FSP will be effective for fiscal
years beginning after November 15, 2008 and will apply only to original transfers made after that date;
early adoption was not allowed. Management does not expect the implementation of this FSP to have a
material impact on the Company’s consolidated financial statements.
34
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities--an amendment of FASB Statement No. 133, (Statement 161). SFAS No. 161 requires
entities that utilize derivative instruments to provide qualitative disclosures about their objectives and
strategies for using such instruments, as well as any details of credit-risk-related contingent
features contained within derivatives. SFAS No. 161 also requires entities to disclose additional
information about the amounts and location of derivatives located within the financial statements, how the
provisions of SFAS No. 133 have been applied, and the impact that hedges have on an entity's financial
position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged. Management does not
expect the implementation of this FSP to have a material impact on the Company’s consolidated financial
statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. The hierarchy of authoritative accounting guidance is not expected to
change current practice but is expected to facilitate the FASB's plan to designate as authoritative its
forthcoming codification of accounting standards. This Statement is effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board's ("PCAOB") related amendments to AU
Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles,
to remove the GAAP hierarchy from its auditing standards. The hierarchical guidance provided by SFAS
No. 162 is not expected to have a significant impact on the Company's consolidated financial condition or
results of operations.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 requires issuers of
convertible debt that may be settled wholly or partly in cash to account for the debt and equity components
separately. The FSP is effective for financial statements issued for fiscal years beginning after December
15, 2008 and interim periods within those years, and must be applied retrospectively to all periods
presented. Early adoption was prohibited. FSP APB 14-1 is not expected to have a significant impact on
the Company’s consolidated financial condition or results of operations.
In June 2008, the EITF of the FASB discussed public comments received on EITF Issue No. 08-3,
Accounting by Lessees for Nonrefundable Maintenance Deposits. The Task Force reached a consensus
that lessees should account for nonrefundable maintenance deposits as deposit assets if it is probable that
maintenance activities will occur and the deposit is therefore realizable. Amounts on deposit that are not
probable of being used to fund future maintenance activities should be charged to expense. The consensus
is effective for fiscal years beginning after December 15, 2008, and should be initially applied by recording
a cumulative-effect adjustment to opening retained earnings in the period of adoption. Early application is
not permitted. EITF Issue No. 08-3 is not expected to have a significant impact on the Company’s
consolidated financial condition or results of operations.
In September 2008, the FASB issued FSP 133-1 and FIN 45-4, Disclosures about Credit Derivatives and
Certain Guarantees: An Amendment of FASB Statement No.133 and FASB Interpretation No. 45; and
Clarification of the Effective Date of FASB Statement No. 161 (FSP 133-1 and FIN 45-4). FSP 133-1 and
FIN 45-4 amend and enhance disclosure requirements for sellers of credit derivatives and financial
guarantees. They also clarify that the disclosure requirements of SFAS No. 161 are effective for quarterly
periods beginning after November 15, 2008, and fiscal years that include those periods. FSP 133-1 and
FIN 45-4 is effective for reporting periods (annual or interim) ending after November 15, 2008. The
implementation of this standard did not have a material impact on the Company's consolidated financial
condition or results of operations.
35
In September 2008, the FASB ratified EITF Issue No. 08-5, Issuer's Accounting for Liabilities Measured at
Fair Value With a Third-Party Credit Enhancement (EITF 08-5). EITF 08-5 provides guidance for
measuring liabilities issued with an attached third-party credit enhancement (such as a guarantee). It
clarifies that the issuer of a liability with a third-party credit enhancement should not include the effect of
the credit enhancement in the fair value measurement of the liability. EITF 08-5 is effective for the first
reporting period beginning after December 15, 2008. The implementation of this standard did not have a
material impact on the Company's consolidated financial condition or results of operations.
In October 2008, the FASB issued FSP SFAS No. 157-3, Determining the Fair Value of a Financial Asset
When The Market for That Asset Is Not Active (FSP 157-3), to clarify the application of the provisions of
SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP
157-3 was effective immediately and applied to our September 30, 2008 financial statements. The
application of the provisions of FSP 157-3 did not materially affect the Company's consolidated financial
condition or results of operations as of and for the year ended December 31, 2008.
36
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Bancorp of New Jersey, Inc.
We have audited the consolidated balance sheets of Bancorp of New Jersey, Inc. and subsidiary (the
“Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income,
stockholders’ equity and comprehensive income, and cash flows for each of the years in the two-year
period ended December 31, 2008. The Company’s management is responsible for these consolidated
financial statements. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Bancorp of New Jersey, Inc. and subsidiary as of December 31, 2008 and
2007, and the results of their operations and their cash flows for each of the years in the two year period
ended December 31, 2008, in conformity with accounting principles generally accepted in the United States
of America.
/s/ Beard Miller Company LLP
Malvern, Pennsylvania
March 31, 2009
37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion and analysis of financial condition and results of operations should be read in
conjunction with the Company’s consolidated financial statements and the notes thereto included in this
report. When necessary, reclassifications have been made to prior years’ data throughout the following
discussion and analysis for purposes of comparability.
In addition to historical information, this discussion and analysis contains forward-looking statements. The
forward-looking statements contained herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected in the forward-looking statements. Important factors
that might cause such a difference include, but are not limited to, those discussed in this section, and also
include the current economic crisis affecting the financial industry; volatility in interest rates and shape of
the yield curve; increased credit risk and risks associated with the real estate market; operating, legal, and
regulatory risk; economic, political, and competitive forces affecting the Company’s line of business; and
the risk that management’s analysis of these risks and forces could be incorrect, and/or that the strategies
developed to address them could be unsuccessful as well as a variety of other matters, most, if not all of
which, are beyond the Company’s control. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management’s analysis only as of the date of the report. The
Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect
events and circumstances that arise after such date, except as may be required by applicable law or
regulation.
OVERVIEW AND STRATEGY
Our Bank charter was approved in April 2006 and the Bank opened for business on May 10, 2006. On July
31, 2007, the Company became the bank holding company of the Bank pursuant to a plan of acquisition
that was approved by the boards of directors of the Company and the Bank and adopted by the shareholders
of the Bank at a special meeting held July 19, 2007. On June 3, 2008, the Company’s common stock was
listed on a national stock exchange. We currently operate a 5 branch network and await FDIC approval to
open our sixth location during the first quarter of 2009. Our main office is located at 1365 Palisade
Avenue, Fort Lee, NJ 07024 and our current four additional offices are located at 204 Main Street, Fort
Lee, NJ 07024, 401 Hackensack Avenue, Hackensack, NJ 07601, 458 West Street, Fort Lee, NJ 07024,
and 320 Haworth Avenue, Haworth, NJ 07641. All current branches are located in Bergen County, NJ.
We conduct a traditional commercial banking business, accepting deposits from the general public,
including individuals, businesses, non-profit organizations, and governmental units. We make commercial
loans, consumer loans, and both residential and commercial real estate loans. In addition, we provide other
customer services and make investments in securities, as permitted by law. We have sought to offer an
alternative, community-oriented style of banking in an area, which is presently dominated by larger,
statewide and national institutions. Our focus remains on establishing and retaining customer relationships
by offering a broad range of traditional financial services and products, competitively-priced and delivered
in a responsive manner to small businesses, professionals and individuals in the local market. As a locally
owned and operated community bank, we believe we provide superior customer service that is highly
personalized, efficient and responsive to local needs. To better serve our customers and expand our market
reach, we provide for the delivery of certain financial products and services to local customers and a
broader market through the use of mail, telephone, internet, and electronic banking. We endeavor to
deliver these products and services with the care and professionalism expected of a community bank and
with a special dedication to personalized customer service.
Our specific objectives are:
• To provide local businesses, professionals, and individuals with banking services responsive
to and determined by the local market;
• Direct access to Bank management by members of the community, whether during or after
business hours;
• To attract deposits and loans by competitive pricing; and
• To provide a reasonable return to shareholders on capital invested.
38
Critical Accounting Policies and Judgments
Our financial statements are prepared based on the application of certain accounting policies, the most
significant of which are described in Note 1 “Summary of Significant Accounting Policies” in the Notes to
the Financial Statements. Certain of these policies require numerous estimates and strategic or economic
assumptions that may prove inaccurate or subject to variation and may significantly affect our reported
results and financial position for the period or in future periods. The use of estimates, assumptions, and
judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to
reflect, fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair
values and information used to record valuation adjustments for certain assets and liabilities are based on
either quoted market prices or are provided by other independent third-party sources, when available.
When such information is not available, management estimates valuation adjustments. Changes in
underlying factors, assumptions, or estimates in any of these areas could have a material impact on our
future financial condition and results of operations.
Allowance for Loan Losses
The allowance for loan losses, sometimes referred to as the “ALLL,” is established through periodic
charges to income. Loan losses are charged against the ALLL when management believes that the future
collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. If the ALLL is
considered inadequate to absorb future loan losses on existing loans, based on, but not limited to, increases
in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan
portfolio, then the allowance for loan losses is increased by a provision charged against income.
At December 31, 2008 and 2007, respectively, we consider the ALLL of $2,371 and $1,912 thousand
adequate to cover probable losses inherent in the loan portfolio that may become uncollectible. Our
evaluation considers such factors as changes in the composition and volume of the loan portfolio, the
impact of changing economic conditions on the credit worthiness of our borrowers, and the overall quality
of the loan portfolio. For further discussion, see “Provision for Loan Losses”, “Loan Portfolio”, “Loan
Quality”, and “Allowance for Loan Losses” sections below in this discussion and analysis, as well as Note
1-Summary of Significant Accounting Policies and Note 3-Loans and Allowance for Loan Losses in the
Notes to Financial Statements included in Part II, Item 8 of this annual report.
Deferred Tax Assets and Valuation Allowance
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the
period in which the deferred tax asset or liability is expected to be settled or realized. The effect on
deferred taxes of a change in tax rates is recognized in income in the period in which the change occurs.
Deferred tax assets are reduced, through a valuation allowance, if necessary, by the amount of such benefits
that are not expected to be realized based on current available evidence. During 2007, as a result of our
sustained profitability, we reversed the valuation allowance, which was recorded during 2006, as we had
sufficient evidence that we would, more likely than not, realize our asset.
39
Impairment of Assets
Loans are considered impaired when, based on current information and events, it is probable that the Bank
will be unable to collect all amounts due according to contractual terms of the loan agreement. The
collection of all amounts due according to contractual terms means both the contractual interest and
principal payments of a loan will be collected as scheduled in the loan agreement. Impaired loans are
measured based on the present value of expected future cash flows discounted at the loan’s effective
interest rate, or, as a practical expedient, at the loan’s observable market price, or the fair value of the
underlying collateral. The fair value of collateral, reduced by costs to sell on a discounted basis, is used if a
loan is collateral dependent. Conforming one-to-four family residential mortgage loans, home equity and
second mortgages, and consumer loans are pooled together as homogeneous loans and, accordingly, are not
covered by Statement of Financial Accounting Standards (SFAS) No.114 “Accounting by Creditors for
Impairment of a Loan.” At December 31, 2008, we had one impaired loan which is reported at the fair
value of the underlying collateral as repayment is expected solely from the collateral. At December 31,
2007, we did not have any impaired loans.
Investment Securities Impairment
Periodically, we may need to assess whether there have been any events or economic circumstances to
indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis.
In any such instance, we would consider many factors including the severity and duration of the
impairment, our intent and ability to hold the security for a period of time sufficient for a recovery in value,
recent events specific to the issuer or industry, and for debt securities, external credit ratings and recent
downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are
written down to fair value with the write-down recorded as a realized loss in securities gains (losses). At
December 31, 2008 and 2007, respectively, we did not have any other than temporary impaired securities.
40
RESULTS OF OPERATIONS - 2008 versus 2007
The Company’s results of operations depend primarily on its net interest income, which is the difference
between the interest earned on its interest-earning assets and the interest paid on funds borrowed to support
those assets, primarily deposits. Net interest margin is the difference between the weighted average rate
received on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, as well
as the average level of interest-earning assets as compared with that of interest-bearing liabilities. Net
income is also affected by the amount of non-interest income and other operating expenses.
NET INCOME
For the year ended December 31, 2008, net income decreased by $289 thousand, to $527 thousand from
$816 thousand for the year ended December 31, 2007. The decrease in net income for the year ended
December 31, 2008 compared to 2007 was directly attributable costs associated with the growth of the
Company and the expansion of the branch network. Additionally, net income in 2007 included the effect of
a $202 thousand adjustment to reverse the valuation allowance previously recorded on our net deferred tax
asset.
On a per share basis, basic earnings per share for the year ended December 31, 2008 were $0.10 as
compared to basic earnings per share of $0.17 for the year ended December 31, 2007. All share data has
been restated to reflect all stock dividends and stock splits through December 31, 2008.
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on
interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and
interest bearing liabilities and yield earned or the interest paid on them. For the year ended December 31,
2008, net interest income increased by $756 thousand or 12.3%, to $6.9 million from $6.2 million for the
year ended December 31, 2007. This increase in net interest income is primarily the result of a 28.0%
increase in total loans during the year. Total loans reached $234.8 million at December 31, 2008 from
$183.5 million at December 31, 2007.
Average Balance Sheets
We commenced banking operations on May 10, 2006. The following table sets forth certain information
relating to our average assets and liabilities for the years ended December 31, 2008 and 2007, respectively,
and for the period from May 10, 2006 through December 31, 2006, and reflects the average yield on assets
and average cost of liabilities for the period indicated. Such yields are derived by dividing income or
expense, on a tax-equivalent basis, by the average balance of assets or liabilities, respectively, for the
periods shown. Securities available for sale are reflected in the following table at amortized cost. Non-
accrual loans are included in the average loan balance. Amounts have been computed on a fully tax-
equivalent basis, assuming a blended tax rate of 42% in 2008, 2007, and 2006, respectively.
41
For the years ended December 31,
(dollars in thousands)
Average
Balance
2008
Interest
Average
Yield/Cost
Average
Balance
2007
Interest
Average
Yield/Cost
Average
Balance
2006
Interest
Average
Yield/Cost
ASSETS :
Interest-Earning Assets:
Loans
Securities
Federal Funds Sold
Interest-earning cash accounts*
Total Interest-earning Assets
Non-interest earning Assets
Allowance for Loan Losses
TOTAL ASSETS
LIABILITIES AND
STOCKHOLDERS’ EQUITY
Interest-Bearing Liabilities :
Demand Deposits
Savings Deposits
Money Market Deposits
Time Deposits
Short Term Borrowings
Total Interest-Bearing Liabilities
Non-Interest Bearing Liabilities:
Demand Deposits
Other Liabilities
Total Non-Interest Bearing Liabilities
Stockholders’ Equity
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY
Net Interest Income
(Tax Equivalent Basis)
Tax Equivalent Basis adjustment
Net Interest Income
Net Interest Rate Spread
Net Interest Margin
Ratio of Interest-Earning Assets to
Interest-Bearing Liabilities
$ 12,977
708
725
45
14,455
6.19%
4.13
3.00
0.49
5.56%
$ 63
8
1,189
6,273
11
7,544
1.12%
0.26
2.21
4.71
2.91
3.85%
$209,498
17,147
24,185
9,091
259,921
12,074
(2,135)
$269,860
$ 5,632
3,016
53,831
133,266
378
196,123
25,361
1,541
26,902
46,835
$269,860
$ 10,111
264
199
16
10,590
7.24%
5.03
4.89
1.54
7.06%
$ 194
13
1,757
2,132
339
4,435
2.61%
0.51
4.53
5.18
5.27
4.60%
$139,546
5,249
4,072
1,038
149,905
12,297
(1,863)
$160,339
$ 7,447
2,569
38,781
41,114
6,432
96,343
18,920
1,031
19,951
44,045
$160,339
$ 1,983
260
818
0
3,061
6.77%
4.99
5.64
0.00
6.26%
$ 60
5
422
77
0
564
2.30%
0.81
3.89
3.44
0.00
3.46%
$ 43,971
7,915
21,752
-
73,638
5,011
(486)
$78,163
$ 3,910
930
16,216
3,360
0
24,416
10,384
164
10,548
43,199
$78,163
$ 6,911
0
$ 6,911
1.71%
2.56%
$ 6,155
0
$ 6,155
2.46%
4.10%
$2,497
0
$2,497
2.80%
3.39%
1.33
1.56
3.02
* Interest-earning cash accounts includes funds held at the FRB as the FRB began paying interest on deposits during the fourth quarter of 2008.
42
Rate/Volume Analysis
The following table presents, by category, the major factors that contributed to the changes in net interest income on
a tax equivalent basis for the years ended December 31, 2008 and 2007, respectively.
Year Ended
December 31,
2008 versus
2007
Increase (Decrease)
due to change in
Average
Year Ended
December 31,
2007 versus
2006
Increase (Decrease)
due to change in
Average
Volume Rate
Net
Volume Rate
Net
Interest Income :
Loans
Securities
Fed Funds Sold
Interest earning cash accounts
Total Interest Income
$ 5,064
598
984
124
6,770
$ (2,198)
(154)
(458)
(95)
(2,905)
$ 2,866
444
526
29
3,865
$ 7,472
2
(589)
16
6,901
Interest Expense :
Demand Deposits
Savings Deposits
Money Market Deposits
Time Deposits
Short Term Borrowings
(47)
2
682
4,773
(319)
181
6
654
(2,719)
658
134
8
1,336
2,054
339
111
15
1,088
1,339
339
$ 656
2
(30)
0
628
23
(7)
248
715
0
$ 8,128
4
(619)
16
7,529
134
8
1,336
2,054
339
Total Interest Expense
5,091
(1,220)
3,871
2,892
979
3,871
Net change in Interest Income
$ 1,679
$ (1,685)
$ (6)
$ 4,009
$ (351)
$ 3,658
PROVISION FOR LOAN LOSSES
For the year ended December 31, 2008, the Company’s provision for loan losses was $459,000, a decrease of
$587,000 from the provision of $1,046,000 for the year ended December 31, 2007. The decreased provision is
primarily the result of slower loan growth, which experienced an increase of 28.0% in 2008 compared to 127.5% in
2007.
OTHER INCOME
Other income, which was primarily attributable to service fees received from deposit accounts, for the year ended
December 31, 2008, was $237,000, an increase of $93,000 above the $144,000 received during the year ended
December 31, 2007. The increase in other income reflects the combination of an increase in the number of
accounts, an increase average deposit levels, and the level of activity in the deposit accounts.
OTHER EXPENSES
Other expenses for the year ended December 31, 2008 amounted to $5,742,000, an increase of $1,379,000 or 31.6%
over the $4,363,000 for the year ended December 31, 2007. This increase is related, primarily, to the effect of
twelve months of operation for three branches which were opened during the second half of 2007 as well as data
processing costs associated with the Company’s growth during 2007 and costs associated with opening a fourth
branch during the fourth quarter of 2008.
43
INCOME TAX EXPENSE
The income tax provision, which includes both federal and state taxes, for the years ended December 31, 2008 and
2007 was $420,000 and $74,000, respectively. The increase in income tax expense during 2008 resulted from the
combination of increased pre-tax income in 2008 and the effect of an adjustment to reverse the valuation allowance
previously recorded on our net deferred tax asset in 2007.
FINANCIAL CONDITION
Total consolidated assets increased $43.9 million, or 16.8%, from $260.2 million at December 31, 2007 to $304.1
million at December 31, 2008. Total loans increased from $183.5 million at December 31, 2007 to $234.8 million at
December 31, 2008, an increase of 28.0%. Total deposits increased from $212.9 million on December 31, 2007 to
$254.0 million at December 31, 2008, an increase of $41.1 million, or 19.3%.
LOANS
Our loan portfolio is the primary component of our assets. Total loans, which exclude net deferred fees and costs
and the allowance for loan losses, increased by 28.0% from $183.5 million at December 31, 2007, to $234.8 million
at December 31, 2008. This growth in the loan portfolio continues to be primarily attributable to recommendations
and referrals from members of our board of directors, our shareholders, our executive officers, and selective
marketing by our management and staff. We believe that we will continue to have opportunities for loan growth
within the Bergen County market of northern New Jersey, due in part, to consolidation and closing of banking
institutions within our market. We believe that it is not cost-efficient for large institutions, many of which are
headquartered out of state, to provide the level of personal service to small business borrowers that these customers
seek and that we intend to provide.
Our loan portfolio consists of commercial loans, real estate loans, and consumer loans. Commercial loans are made
for the purpose of providing working capital, financing the purchase of equipment or inventory, as well as for other
business purposes. Real estate loans consist of loans secured by commercial or residential real property and loans
for the construction of commercial or residential property. Consumer loans are made for the purpose of financing
the purchase of consumer goods, home improvements, and other personal needs, and are generally secured by the
personal property being owned or being purchased.
Our loans are primarily to businesses and individuals located in Bergen County, New Jersey. We have not made
loans to borrowers outside of the United States. We have not made any sub-prime loans. Commercial lending
activities are focused primarily on lending to small business borrowers. We believe that our strategy of customer
service, competitive rate structures, and selective marketing have enabled us to gain market entry to local loans.
Furthermore, we believe that bank mergers and lending restrictions at larger financial institutions with which we
compete have also contributed to the success of our efforts to attract borrowers. Additionally, during this current
economic climate, our capital position and safety has also become important to potential borrowers.
The following table sets forth the classification of the Company’s loans by major category as of December 31, 2008,
2007, and 2006, respectively (in thousands):
Real Estate
Commercial
Credit Lines
Consumer
Total Loans
December 31,
2008
2007
2006
$159,056
33,319
37,962
4,507
$123,335
27,056
28,133
4,936
$ 50,787
14,678
13,519
1,654
$234,844
$183,460
$ 80,638
44
The following table sets forth the maturity of fixed and adjustable rate loans as of December 31, 2008 (in
thousands):
Loans with Fixed Rate
Commercial
Real Estate
Credit Lines
Consumer
Loans with Adjustable Rate
Commercial
Real Estate
Credit Lines
Consumer
Within
One Year
1 to 5
Years
After 5
Years
$ 7,204
13,412
46
647
$ 17,339
31,918
127
–
$ 5,596
60,600
–
1,974
$ 960
931
–
–
$ 2,220
51,290
–
1,886
$ –
905
37,789
–
Total
$ 15,020
125,302
46
4,507
$ 18,299
33,754
37,916
–
LOAN QUALITY
As mentioned above, our principal assets are our loans. Inherent in the lending function is the risk of the borrower’s
inability to repay a loan under its existing terms. Risk elements include non-accrual loans, past due and restructured
loans, potential problem loans, loan concentrations, and other real estate owned.
Non-performing assets include loans that are not accruing interest (non-accrual loans) as a result of principal or
interest being in default for a period of 90 days or more and accruing loans that are 90 days past due. When a loan is
classified as non-accrual, interest accruals discontinue and all past due interest, including interest applicable to prior
years, is reversed and charged against current income. Until the loan becomes current, any payments received from
the borrower are applied to outstanding principal until such time as management determines that the financial
condition of the borrower and other factors merit recognition of such payments of interest.
We attempt to minimize overall credit risk through loan diversification and our loan approval procedures. Due
diligence begins at the time we begin to discuss the origination of a loan with a borrower. Documentation, including
a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the
loan, the source and timing of the repayment of the loan, and other factors are analyzed before a loan is submitted
for approval. Loans made are also subject to periodic audit and review.
At December 31, 2008, the Bank had one non-accrual residential mortgage loan of approximately $2.0 million. . If
interest had been accrued, such income would have been approximately $135 thousand for the year ended December
31, 2008. This loan was considered impaired and was evaluated in accordance with SFAS No.114 “Accounting by
Creditors for Impairment of a Loan.” After evaluation, a specific reserve of $20 thousand was deemed necessary.
At December 31, 2007 and 2006, there were no non-performing assets and no information about possible credit
problems of borrowers which would cause us to have serious doubts as to the ultimate ability to collect their loans.
While we do attempt to minimize credit risk, these conditions are partially attributable to our limited operating
history.
As of December 31, 2008, 2007, and 2006, respectively, there were no concentrations of loans exceeding 10% of the
Bank’s total loans and the Bank had no foreign loans. The Bank’s loans are primarily to businesses and individuals
located in Bergen County, New Jersey.
The Bank maintains an external independent loan review auditor. The loan review auditor performs examinations of
a sample of commercial loans after the Bank has extended credit. The loan review auditor also monitors the
integrity of our credit risk rating system. This review process is intended to identify adverse developments in
individual credits, regardless of payment history. The loan review auditor reports directly to the audit committee of
45
our Board of Directors and provides the audit committee with reports on asset quality. The loan review audit reports
may be presented to our Board of Directors by the audit committee for review, as appropriate.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents a critical accounting policy. The allowance is a reserve established through
charges to earnings in the form of a provision for loan losses. We maintain an allowance for loan losses which we
believe is adequate to provide for probable losses inherent in the loan portfolio. While we apply the methodology
discussed below in connection with the establishment of our allowance for loan losses, it is subject to critical
judgments on the part of management. Loan losses are charged directly to the allowance when they occur and any
recovery is credited to the allowance. Risks within the loan portfolio are analyzed on a continuous basis by our
officers, by external independent loan review function, and by our audit committee. A risk system, consisting of
multiple grading categories, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the
risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated
economic conditions and considers such factors as the financial condition of the borrower, past and expected loss
experience, and other factors which management feels deserve recognition in establishing an appropriate reserve.
These estimates are reviewed at least quarterly, and, as adjustments become necessary, they are realized in the
periods in which they become known. Additions to the allowance are made by provisions charged to the expense
and the allowance is reduced by net-chargeoffs, which are loans judged to be uncollectible, less any recoveries on
loans previously charged off. Although management attempts to maintain the allowance at an adequate level, future
additions to the allowance may be required due to the growth of our loan portfolio, changes in asset quality, changes
in market conditions and other factors. Additionally, various regulatory agencies, primarily the FDIC, periodically
review our allowance for loan losses. These agencies may require additional provisions based upon their judgment
about information available to them at the time of their examination. Although management uses what it believes to
be the best information available, the level of the allowance for loan losses remains an estimate which is subject to
significant judgment and short term change.
We commenced banking operations in May, 2006, and our allowance for loan losses totaled $2,371,000, and
$1,912,000, respectively, at December 31, 2008, and 2007. The growth of the allowance is primarily due to the
growth and composition of the loan portfolio.
The following is an analysis summary of the allowance for loan losses for the periods indicated:
2008
2007
2006
Balance, January 1
$ 1,912
$ 866
$ –
Total Charge-offs
Total Recoveries
Net charge-offs
–
–
–
–
–
–
–
–
–
Provision charged to expense
Balance, December 31
459
$ 2,371
1,046
$ 1,912
866
$ 866
Ratio of net charge-offs to average loans
Outstanding
N/A
N/A
N/A
46
The following table sets forth, for each of the Company’s major lending areas, the amount and percentage of the
Company’s allowance for loan losses attributable to such category, and the percentage of total loans represented by
such category, as of the periods indicated :
Allocation of the Allowance for Loan Losses by Category
As of December 31,
(dollars in thousands)
2008
2007
2006
Balance applicable to:
Real Estate
Commercial
Credit Lines
Consumer
Amount
% of ALL
$1,774
244
205
27
74.82%
10.29%
8.65%
1.14%
Sub-total
Unallocated Reserves
2,250
121
94.90%
5.10%
% of
Total
Loans
78.85%
10.84%
9.11%
1.20%
100.00%
% of
Total
Loans
67.23%
14.75%
15.34%
2.68%
100.00%
Amount
% of ALL
$1,373
241
152
5
71.81%
12.61%
7.95%
0.26%
1,771
141
92.63%
7.37%
% of
Total
Loans
62.98%
18.20%
16.77%
2.05%
100.00%
Amount
% of ALL
$ 479
197
69
25
55.31%
22.75%
7.97%
2.89%
770
96
88.92%
11.08%
TOTAL
$2,371
100.00%
100.00%
$1,912
100.00%
100.00%
$ 866
100.00%
100.00%
The provision for loan losses represents our determination of the amount necessary to bring the ALLL to a level that
we consider adequate to reflect the risk of probable losses inherent in our loan portfolio as of the balance sheet date.
We evaluate the adequacy of the ALLL by performing periodic, systematic reviews of the loan portfolio. While
allocations are made to specific loans and pools of loans, the total allowance is available for any loan losses.
Although the ALLL is our best estimate of the inherent loan losses as of the balance sheet date, the process of
determining the adequacy of the ALLL is judgmental and subject to changes in external conditions. Accordingly,
there can be no assurance that existing levels of the ALLL will ultimately prove adequate to absorb actual loan
losses. However, we have determined, and believe, that the ALLL is at a level adequate to cover the inherent loan
losses in our loan portfolio as of the balance sheet dates.
47
INVESTMENT SECURITIES
In addition to our loan portfolio, we maintain an investment portfolio which is available to fund increased loan
demand or deposit withdrawals and other liquidity needs, and which provides an additional source of interest
income. The portfolio is composed of U.S. Treasury Securities and obligations of U.S. Government Agencies.
Securities are classified as held-to-maturity, referred to as “HTM,” trading, or available for sale, referred to as
“AFS,” at the time of purchase. Securities are classified as held-to-maturity if management intends and we have the
ability to hold them to maturity. Such securities are stated at cost, adjusted for unamortized purchase premiums and
discounts. Securities which are bought and held principally for the purpose of selling them in the near term are
classified as trading securities, which are carried at market value. Realized gains and losses, as well as gains and
losses from marking trading securities to market value, are included in trading revenue. Securities not classified as
held-to-maturity or trading securities are classified as AFS and are stated at fair value. Unrealized gains and losses
on AFS securities are excluded from results of operations, and are reported as a component of accumulated other
comprehensive income, which is included in stockholders’ equity. Securities classified as AFS include securities
that may be sold in response to changes in interest rates, changes in prepayment risks, the need to increase
regulatory capital, or other similar requirements.
At December 31, 2008, total securities aggregated $17,731,000 and were classified as available for sale. At
December 31, 2008, the Company held no securities which it classified as held-to-maturity securities or trading
securities.
The following table sets forth the carrying value of the Company’s security portfolio as of the December 31, 2008,
2007, and 2006, respectively.
2008
2007
2006
Amortize
d
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Available for sale
U.S. Agency obligations
$ 17,641
$ 17,731
$ –
$ –
$ 9,560
$ 9,599
Total available for sale
$ 17,641
$ 17,731
$ –
$ –
$ 9,560
$ 9,599
Held to Maturity
U.S. Treasury obligation
$ –
$ –
$ 1,996
$ 2,014
$ 1,993
$ 2,002
Total held to maturity
$ –
$ –
$ 1,996
$ 2,014
$ 1,993
$ 2,002
Total Investment Securities
$ 17,641
$ 17,731
$ 1,996
$ 2,014
$11,553
$11,601
48
The following tables set forth as of December 31, 2008 and December 31, 2007, the maturity distribution of the
Company’s debt investment portfolio:
Maturity of Debt Investment Securities
December 31, 2008
(in thousands)
Securities Available for Sale
Amortized
Cost
Within 1 year
–
Fair
Value
–
Weighted
Average
Yield
–
1 to 5 years
$ 13,391
$ 13,478
3.61%
Over 5 years
$ 4,250
$ 4,253
4.12%
$ 17,641
$ 17,731
Maturity of Debt Investment Securities
December 31, 2007
(in thousands)
Securities Held to Maturity
Amortized
Cost
Fair
Value
Weighted
Average
Yield
Within 1 year
$ 1,996
$ 2,014
5.12%
1 to 5 years
Over 5 years
–
–
–
–
–
–
$ 1,996
$ 2,014
During 2008, the Company sold a security from its AFS portfolio and recognized a gain of $2,000 from the
transaction.
During 2007, the Company sold its entire AFS portfolio in order to fund loan growth and recognized a gain of
$4,000 from the transaction.
DEPOSITS
Deposits are our primary source of funds. We experienced a growth of $41.1 million, or 19.3%, in deposits from
$212.9 million at December 31, 2007 to $254.0 million at December 31, 2008. This market penetration was
accomplished through the combined effect of branches opening during 2007 and 2008 and the continued referrals of
our board of directors, stockholders, management, and staff. The Company has no foreign deposits, nor are there
any material concentrations of deposits.
49
The following table sets forth the actual amount of various types of deposits for each of the periods indicated :
December 31,
(Dollars in Thousands)
Non-interest Bearing Demand
Interest Bearing Demand
Savings
Time Deposits
2008
2007
2006
Amount
$ 28,187
57,645
2,644
165,530
$254,006
Average
Yield/Rate
–
2.11%
0.26%
4.39%
Amount
$ 23,292
52,215
3,430
134,004
$212,941
Average
Yield/Rate
–
4.26%
0.51%
5.18%
Average
Yield/Rate
–
3.58%
0.81%
3.44%
Amount
$ 10,244
38,794
1,873
10,956
$ 61,867
The Company does not actively solicit short-term deposits of $100,000 or more because of the liquidity risks posed
by such deposits. The following table summarizes the maturity of time deposits of denominations of $100,000 or
more as of December 31, 2008.
Three months or less
Over three months through twelve months
Over one year through three years
Over three years
Total
(in thousands)
$ 45,242
72,972
3,661
1,800
$ 123,675
RETURN ON EQUITY AND ASSETS
The following table summarizes our return on assets, or net income divided by average total assets, return on equity,
or net income divided by average equity, divided payout ratio, or dividends declared per share divided by net
income per share, and equity to assets ratio, or average equity divided by average total assets.
Selected Financial Ratios:
Return on Average Assets (ROA)
Return on Average Equity (ROE)
Equity to Total Assets at Year-End
Dividend Payout Ratio
At or for the year ended December 31,
2008
0.20%
1.13%
16.24%
N/A
2007
0.51%
1.85%
17.61%
N/A
2006
(0.72%)
(1.31%)
40.58%
N/A
50
LIQUIDITY
Our liquidity is a measure of our ability to fund loans, withdrawals or maturities of deposits, and other cash outflows
in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of
loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan
payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments
are greatly influenced by general interest rates, economic conditions, and competition. In addition, if warranted, we
would be able to borrow funds.
Our total deposits equaled $254,005,000 and $212,941,000, respectively, at December 31, 2008 and 2007. The
growth in funds provided by deposit inflows during this period coupled with our cash position at the end of 2007 has
been sufficient to provide for our loan demand.
Through the investment portfolio, we have generally sought to obtain a safe, yet slightly higher yield than would
have been available to us as a net seller of overnight federal funds, while still maintaining liquidity. Through our
investment portfolio, we also attempt to manage our maturity gap by seeking maturities of investments which
coincide as closely as possible with maturities of deposits. Securities available for sale would also be available to
provide liquidity for anticipated loan demand and liquidity needs.
Although we were a net seller of federal funds at December 31, 2008, we have a $12 million overnight line of credit
facility available with First Tennessee Bank and a $10 million overnight line of credit with Atlantic Central Bankers
Bank for the purchase of federal funds in the event that temporary liquidity needs arise. At December 31, 2008, we
had drawn approximately $853 thousand of our line at Atlantic Central Bankers Bank. We were approved as a
member of the Federal Home Loan Bank of New York, or “FHLBNY,” during November, 2007. The FHLBNY
relationship could provide additional sources of liquidity, if required.
We believe that our current sources of funds provide adequate liquidity for our current cash flow needs.
INTEREST RATE SENSITIVITY ANALYSIS
We manage our assets and liabilities with the objectives of evaluating the interest-rate risk included in certain
balance sheet accounts; determining the level of risk appropriate given our business focus, operating environment,
capital and liquidity requirements; establishing prudent asset concentration guidelines; and managing risk consistent
with guidelines approved by our board of directors. We seek to reduce the vulnerability of our operations to
changes in interest rates and to manage the ratio of interest-rate sensitive assets to interest-rate sensitive liabilities
within specified maturities or re-pricing dates. Our actions in this regard are taken under the guidance of the
asset/liability committee of our board of directors, or “ALCO.” ALCO generally reviews our liquidity, cash flow
needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.
One of the monitoring tools used by ALCO is an analysis of the extent to which assets and liabilities are interest rate
sensitive and measures our interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or re-price within that time period. A gap is considered positive when
the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive
assets. Accordingly, during a period of rising rates, a negative gap may result in the yield on assets increasing at a
slower rate than the increase in the cost of interest-bearing liabilities, resulting in a decrease in net interest income.
Conversely, during a period of falling interest rates, an institution with a negative gap would experience a re-pricing
of its assets at a slower rate than its interest-bearing liabilities which, consequently, may result in its net interest
income growing.
51
The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at the
periods indicated which we anticipated, based upon certain assumptions, will re-price or mature in each of the future
time periods presented. Except as noted, the amount of assets and liabilities which re-price or mature during a
particular period were determined in accordance with the earlier of the term to re-pricing or the contractual terms of
the asset or liability. Because we have no interest bearing liabilities with a maturity greater than five years, we
believe that a static gap for the over five year time period reflects an accurate assessment of interest rate risk. Our
loan maturity assumptions are based upon actual maturities within the loan portfolio. Equity securities have been
included in “Other Assets” as they are not interest rate sensitive. At December 31, 2008, we were within the target
gap range established by ALCO.
Cumulative Rate Sensitive Balance Sheet
December 31, 2008
(in thousands)
0 - 3
Months
0 – 6
Months
0 – 1
Year
0 – 5
Years
5 + Years
All Others
TOTAL
Securities, excluding
equity securities
Loans :
Commercial
Real Estate
Credit Lines
Consumer
Federal Funds Sold
Other Assets
$–
$–
$–
$13,477
$4,254
$–
$17,731
23,802
32,538
37,962
65
40,482
–
24,808
41,618
37,962
414
40,482
–
25,502
45,400
37,962
647
40,482
–
31,099
107,766
37,962
2,621
40,482
–
2,220
51,292
–
1,886
–
–
–
–
–
–
–
11,045
33,319
159,058
37,962
4,507
40,482
11,045
TOTAL ASSETS
$134,849
$145,284
$149,993
$233,407
$59,652
$11,045
$304,104
Transaction /
Demand Accounts
Money Market
Savings
Time Deposits
Other Liabilities
Equity
TOTAL LIABILITIES
AND EQUITY
Dollar Gap
Gap / Total Assets
Target Gap Range
RSA / RSL
(Rate Sensitive Assets to
Rate Sensitive Liabilities)
$6,104
51,541
2,644
48,760
853
–
$6,104
51,541
2,644
86,767
853
–
$6,104
51,541
2,644
161,788
853
–
$6,104
51,541
2,644
165,530
853
–
$–
–
–
–
–
–
$–
–
–
–
29,568
47,864
$6,104
51,541
2,644
165,530
30,421
47,864
$109,902
$147,909
$222,930
$226,672
$ -
$77,432
$304,104
$24,947
8.20%
+/- 35.00
122.70%
$(2,625)
(0.86%)
+/- 30.00
98.23%
$(72,937)
(23.98%)
+/- 25.00
67.28%
$ 6,735
2.21%
+/- 25.00
102.97%
52
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily
from interest rate risk inherent in our lending and deposit taking activities. Thus, we actively monitor and manage
our interest rate risk exposure.
Our profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in
interest rates may adversely impact our earnings to the extent that the interest rates borne by assets and liabilities do
not change at the same speed, to the same extent, or on the same basis. We monitor the impact of changing interest
rates on our net interest income using several tools. One measure of our exposure to differential changes in interest
rates between assets and liabilities is shown in our “Cumulative Rate Sensitive Balance Sheet” under the “Interest
Rate Sensitivity Analysis” caption in this discussion and analysis. In the future, we may use additional analyses,
including periodic “shock analysis” to evaluate the effect of interest rates upon our operations and our financial
condition and to manage our exposure to interest rate risk.
Our primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on
our net interest income and capital, while structuring our asset-liability structure to obtain the maximum yield-cost
spread on that structure. We rely primarily on our asset-liability structure to control interest rate risk.
We continually evaluate interest rate risk management opportunities. During 2008, we believed that available
hedging instruments were not cost-effective, and therefore, focused our efforts on increasing our yield-cost spread
through retail growth opportunities.
53
The following table discloses our financial instruments that are sensitive to change in interest rates, categorized by
expected maturity at December 31, 2008. Market risk sensitive instruments are generally defined as on- and off-
balance sheet financial instruments.
Expected Maturity/Principal Repayment
December 31, 2008
(Dollars in thousands)
Avg.
Int.
Rate
2009
2010
2011
2012
2013
There-
After
Total
Fair
Value
6.19%
$ 109,511
6,754
811
2,792
59,580
55,398
$234,846
$235,025
2,000
1,000
10,391
4,250
$ 17,641
$ 17,731
Interest Rate Sensitive
Assets:
Loans……….
Securities available for sale,
net of equity securities…..
Investment
Securities…………
Fed Funds
Sold……………….
Interest-earning
Cash……………….
Interest Rate Sensitive
Liabilities :
4.13%
N/A
–
–
3.00%
$ 69
0.49%
$ 40,107
Demand Deposits…….
1.12%
$ 6,104
Savings Deposits…….
0.26%
$ 2,644
Money Market
Deposits…….
2.21%
$51,541
Time Deposits…….
4.71%
$161,788
1,815
127
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,800
–
–
–
–
–
–
–
N/A
N/A
$ 69
$ 69
$ 40,107
$ 40,107
$ 6,104
$ 6,104
$ 2,644
$ 2,644
$51,547
$51,547
$165,530
$167,460
–
–
–
–
–
–
–
Our short term borrowings of $853 thousand, which consisted of a drawdown on an overnight line of credit, was
outstanding as of December 31, 2008 and was repaid during January, 2009.
Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in
different degrees to changes in market interest rates. The maturity of certain types of assets and liabilities may
fluctuate in advance of changes in market rates, while maturity of other types of assets and liabilities may lag behind
changes in market rates. In the event of a change in interest rates, prepayment and early withdrawal levels could
deviate significantly from the maturities assumed in calculating this table.
54
CAPITAL
A significant measure of the strength of a financial institution is its capital base. Our federal regulators have
classified and defined our capital into the following components: (1) Tier 1 Capital, which includes tangible
shareholders’ equity for common stock and qualifying preferred stock, and (2) Tier 2 Capital, which includes a
portion of the allowance for possible loan losses, certain qualifying long-term debt, and preferred stock which does
not qualify for Tier 1 Capital. Minimum capital levels are regulated by risk-based capital adequacy guidelines,
which require certain capital as a percent of our assets and certain off-balance sheet items, adjusted for predefined
credit risk factors, referred to as “risk-adjusted assets.”
We are required to maintain, at a minimum, Tier 1 Capital as a percentage of risk-adjusted assets of 4.0% and
combined Tier 1 and Tier 2 Capital, or “Total Capital,” as a percentage of risk-adjusted assets of 8.0%.
In addition to the risk-based guidelines, our regulators require that an institution which meets the regulator’s highest
performance and operation standards maintain a minimum leverage ratio (Tier 1 Capital as a percentage of tangible
assets) of 3.0%. For those institutions with higher levels of risk or that are experiencing or anticipating significant
growth, the minimum leverage ratio will be evaluated through the ongoing regulatory examination process. We are
currently required to maintain a leverage ratio of 4%.
The following table summarizes the Bank’s risk-based capital and leverage ratios at December 31, 2008, as well as
regulatory capital category definitions:
Risk-Based Capital :
Tier 1 Capital Ratio
Total Capital Ratio
Leverage Ratio
December 31, 2008
21.16%
22.20%
16.95%
Minimum Requirements
to be
“Adequately
Capitalized”
Minimum Requirements
to be
“Well Capitalized”
4.0%
8.0%
4.0%
6.0%
10.0%
5.0%
The capital levels detailed above represent the continued effect of our successful stock subscription, in combination
with the profitability experienced during 2008 and 2007, respectively. As we continue to employ our capital and
continue to grow our operations, we expect that our capital ratios will decrease, but that we will remain a “well-
capitalized” institution.
55
CONTRACTUAL OBLIGATIONS
As of December 31, 2008, the Company had the following contractual obligations as provided in the table below (in
thousands):
Contractual Obligations
Minimum annual rental under
Non-cancelable operating leases
Short term borrowings
Remaining contractual maturities
of time deposits...................
Total Contractual Obligations
Payment due by Period
Less than 1
year
1 to 3
years
4 to 5
years
After 5
years
437
853
161,788
$163,078
592
–
1,942
2,534
546
–
1,800
2,346
2,941
–
–
2,941
Total
Amounts
Committed
$ 4,516
853
$165,530
$170,899
Additionally, the Bank had certain commitments to extend credit to customers. A summary of commitments to
extend credit at December 31, 2008 is provided as follows (in thousands):
Commercial real estate, construction, and
Land development secured by land……………… $13,001
17,871
Home Equity Loans………………………………..
574
Standby letters of credit and other.…………………
$31,446
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank’s commitments to extend credit and letters of credit constitute financial instruments with off-balance sheet
risk. See Note 14 of the notes to consolidated financial statements included in this report for additional discussion
of “Off-Balance Sheet” items.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and notes thereto, included in Part II, Item 8 of this annual
report, have been prepared in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the
increased cost of our operations. Unlike most industrial companies, nearly all of the assets and liabilities of the
Bank are monetary. As a result, interest rates have a greater impact on our performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to Note 18 of the Notes to Consolidated Financial Statements for discussion of recently issued accounting
standards.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, the Company is not required to provide the information otherwise required by this
Item.
56
BUSINESS
General
The Company is a one-bank holding company incorporated under the laws of the State of New Jersey in November,
2006 to serve as a holding company for Bank of New Jersey, referred to as the “Bank.” (Unless the context
otherwise requires, all references to the “Company” in this Annual Report shall be deemed to refer also to the Bank).
The Company was organized at the direction of the Board of Directors of the Bank for the purpose of acquiring all
of the capital stock of the Bank. On July 31, 2007, the Company became the bank holding company of the Bank
pursuant to a plan of acquisition that was approved by the boards of directors of the Company and the Bank and
adopted by the stockholders of the Bank at a special meeting held July 19, 2007.
Pursuant to the plan of acquisition, the holding company reorganization was affected through a contribution of all of
the outstanding shares of Bank’s class of common stock to the Company in a one-to-one exchange for shares of the
Company’s class of common stock. Upon consummation of the reorganization, the Bank became the wholly-owned
subsidiary of the Company and all of the former shareholders of the Bank became shareholders of the Company.
The Company did not engage in any operations, other than organizational activities, or issue any shares of its class
of common stock prior to consummation of the holding company reorganization. As a result, the financial
statements included in Part II, Item 8 of this annual report include the effect of the holding company reorganization
and represent consolidated financial statements. The only significant activities of the Company are the ownership
and supervision of the Bank.
The Bank is a commercial bank formed under the laws of the State of New Jersey on May 10, 2006. The Bank
operates from its main office at 1365 Palisade Avenue, Fort Lee, New Jersey, 07024, and its additional four branch
offices located at 204 Main Street, Fort Lee, New Jersey, 07024, 401 Hackensack Avenue, Hackensack, New Jersey,
07601, 458 West Street, Fort Lee, New Jersey, 07024, and 320 Haworth Avenue, Haworth, New Jersey, 07641. A
sixth location at 4 Park Street, Harrington Park, New Jersey, 07640, has received approval from the New Jersey
Department of Banking and Insurance. The Bank awaits approval from the Federal Deposit Insurance Corporation,
“FDIC”. The branch is expected to open during first quarter, 2009 upon receiving all regulatory approvals. All
branch locations are in Bergen County, New Jersey.
The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System,
referred to as the “FRB.” The Bank is supervised and regulated by the FDIC and the New Jersey Department of
Banking and Insurance, referred to as the “Department.” The Bank’s deposits are insured by the FDIC up to
applicable limits. The operation of the Company and the Bank are subject to the supervision and regulation of the
FRB, FDIC, and the Department. The principal executive offices of the Bank are located at 1365 Palisade Avenue,
Fort Lee, NJ, 07024 and the telephone number is (201) 944-8600.
Business of the Company
The Company’s primary business is ownership and supervision of the Bank. The Company, through the Bank,
conducts a traditional commercial banking business, accepting deposits from the general public, including
individuals, businesses, non-profit organizations, and governmental units. The Bank makes commercial loans,
consumer loans, and both residential and commercial real estate loans. In addition, the Bank provides other
customer services and makes investments in securities, as permitted by law. The Bank has sought to offer an
alternative, community-oriented style of banking in an area, which is presently dominated by larger, statewide and
national institutions. Our goal is to establish and retain customer relationships by offering a broad range of
traditional financial services and products, competitively-priced and delivered in a responsive manner to small
businesses, professionals, and individuals in the local market. As a locally owned and operated community bank,
the Bank seeks to provide superior customer service that is highly personalized, efficient, and responsive to local
needs. To better serve our customers and expand our market reach, we provide for the delivery of certain financial
products and services to local customers and to a broader market through the use of mail, telephone, and internet
banking. The Bank strives to deliver these products and services with the care and professionalism expected of a
community bank and with a special dedication to personalized customer service.
57
The specific objectives of the Bank are:
• To provide local businesses, professionals, and individuals with banking services responsive to and determined
by the local market;
• Direct access to Bank management by members of the community, whether during or after business hours;
• To attract deposits and loans by competitive pricing; and
• To provide a reasonable return to shareholders on capital invested.
Market Area
The principal market for deposit gathering and lending activities lies within Bergen County in New Jersey. The
market is dominated by offices of large statewide and interstate banking institutions. Our service and timely
response to customer needs are expected to fill a niche that has arisen due to a loss of local institutions.
Additionally, the market area has a relatively large affluent base for our services and a diversified mix of
commercial businesses and residential neighborhoods. In order to meet the demands of this market, the Company
operates its main office in Fort Lee, New Jersey and additional four branch offices, two in Fort Lee, one in
Hackensack, and one in Haworth, all in Bergen County, New Jersey.
Extended Hours
The Bank provides convenient full-service banking from 7:00 am to 7:00 pm weekdays and 9:00 am to 1:00 pm on
Saturday in all offices except Hackensack, which offers full service banking from 8am to 6pm weekdays but no
Saturdays.
Competition
The banking business remains highly competitive, and the profitability of the Company depends upon the Bank’s
ability to compete in its market area. The Bank continues to face considerable competition in its market area for
deposits and loans from other depository institutions. The Bank faces competition in attracting and retaining deposit
and loan customers, and with respect to the terms and conditions it offers on its deposit and loan products. Many of
its competitors have greater financial resources, broader geographic markets, and greater name recognition, and are
able to provide more services and finance wide-ranging advertising campaigns.
The Bank competes with local, regional, and national commercial banks, savings banks, and savings and loan
associations. The Bank also competes with money market mutual funds, mortgage bankers, insurance companies,
stock brokerage firms, regulated small loan companies, credit unions, and issuers of commercial paper and other
securities.
Concentration
The Company is not dependent for deposits or exposed by loan concentrations to a single customer or a small group
of customers the loss of any one or more of which would have a material adverse effect upon the financial condition
of the Company.
Employees
At December 31, 2008, the Company employed thirty four full-time equivalent employees. None of these
employees is covered by a collective bargaining agreement. The Company believes its relations with employees to
be good.
58
Supervision and Regulation
General
The Company and the Bank are each extensively regulated under both federal and state law. These laws restrict
permissible activities and investments and require compliance with various consumer protection provisions
applicable to lending, deposit, brokerage and fiduciary activities. They also impose capital adequacy requirements
and condition the Company’s ability to repurchase stock or to receive dividends from the Bank. The Company and
the Bank are also subject to comprehensive examination and supervision by the Board of Governors of the Federal
Reserve System (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”), respectively. These regulatory
agencies generally have broad discretion to impose restrictions and limitations on the operations of the Company
and the Bank. This supervisory framework could materially impact the conduct and profitability of the Company’s
activities.
To the extent that the following information describes statutory and regulatory provisions, it is qualified in its
entirety by reference to the particular statutory and regulatory provisions. Proposals to change the laws and
regulations governing the banking industry are frequently raised at both the state and federal level. The likelihood
and timing of any changes in these laws and regulations, and the impact such changes may have on the Company
and the Bank, are difficult to ascertain. A change in applicable laws and regulations, or in the manner such laws or
regulations are interpreted by regulatory agencies or courts, may have a material effect on our business, operations
and earnings.
Bank Holding Company Act
The Company is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended
(the “BHCA”), and is subject to regulation and supervision by the FRB. The BHCA requires the Company to secure
the prior approval of the FRB before it owns or controls, directly or indirectly, more than five percent (5%) of the
voting shares or substantially all of the assets of, any bank or thrift, or merges or consolidates with another bank or
thrift holding company. Further, under the BHCA, the activities of the Company and any nonbank subsidiary are
limited to those activities which the FRB determines to be so closely related to banking as to be a proper incident
thereto, and prior approval of the FRB may be required before engaging in certain activities. In making such
determinations, the FRB is required to weigh the expected benefits to the public such as greater convenience,
increased competition and gains in efficiency, against the possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest, and unsound banking practices.
The BHCA was substantially amended by the Gramm-Leach-Bliley Act (“GLBA”), which among other things
permits a “financial holding company” to engage in a broader range of non-banking activities, and to engage on less
restrictive terms in certain activities that were previously permitted. These expanded activities include securities
underwriting and dealing, insurance underwriting and sales, and merchant banking activities. To become a financial
holding company, the Company and the Bank must be “well capitalized” and “well managed” (as defined by federal
law), and have at least a “satisfactory” Community Reinvestment Act (“CRA”) rating. GLBA also imposes certain
privacy requirements on all financial institutions and their treatment of consumer information. At this time, the
Company has not elected to become a financial holding company, as we do not engage in any non-banking activities
which would require us to be a financial holding company.
There are a number of restrictions imposed on the Company and the Bank by law and regulatory policy that are
designed to minimize potential loss to the depositors of the Bank and the FDIC insurance funds in the event the
Bank should become insolvent. For example, FRB policy requires a bank holding company to serve as a source of
financial strength to its subsidiary depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. While the authority of the FRB to invoke this so-called
“source of strength doctrine” has been called into question, the FRB maintains that it has the authority to apply the
doctrine when circumstances warrant. The FRB also has the authority under the BHCA to require a bank holding
company to terminate any activity or to relinquish control of a non-bank subsidiary upon the FRB’s determination
that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary
of the bank holding company.
59
Any capital loan by the Company to the Bank is subordinate in right of payment to deposits and certain other
indebtedness of the Bank. In addition, in the event of the Company’s bankruptcy, any commitment by the Company
to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee
and entitled to a priority of payment.
The Federal Deposit Insurance Act (“FDIA”) provides that, in the event of the “liquidation or other resolution” of an
insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as a
subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have
priority over other general unsecured claims against the institution. If an insured depository institution fails, insured
and uninsured depositors, along with the FDIC will have priority in payment ahead of unsecured, nondeposit
creditors, including the Company, with respect to any extensions of credit they have made to such insured
depository institution.
Supervision and Regulation of the Bank
The operations and investments of the Bank are also limited by federal and state statutes and regulations. The Bank
is subject to the supervision and regulation by the New Jersey Department of Banking and Insurance and the FDIC.
The Bank is also subject to various requirements and restrictions under federal and state law, including requirements
to maintain reserves against deposits, restrictions on the types, amount and terms and conditions of loans that may
be originated, and limits on the type of other activities in which the Bank may engage and the investments it may
make. Under the GLBA, the Bank may engage in expanded activities (such as insurance sales and securities
underwriting) through the formation of a “financial subsidiary.” In order to be eligible to establish or acquire a
financial subsidiary, the Bank must be “well capitalized” and “well managed” and may not have less than a
“satisfactory” CRA rating. At this time, the Bank does not engage in any activity which would require it to maintain
a financial subsidiary.
The Bank is also subject to federal laws that limit the amount of transactions between the Bank and its nonbank
affiliates, including the Company. Under these provisions, transactions (such as a loan or investment) by the Bank
with any nonbank affiliate are generally limited to 10% of the Bank’s capital and surplus for all covered transactions
with such affiliate or 20% of capital and surplus for all covered transactions with all affiliates. Any extensions of
credit, with limited exceptions, must be secured by eligible collateral in specified amounts. The Bank is also
prohibited from purchasing any “low quality” assets from an affiliate.
Securities and Exchange Commission
The Company is also under the jurisdiction of the Securities and Exchange Commission for matters relating to the
offering and sale of its securities and is subject to the Securities and Exchange Commission’s rules and regulations
relating to periodic reporting, reporting to shareholders, proxy solicitations, and insider-trading regulations.
Monetary Policy
The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal
policies of the United States government and its agencies. The monetary policies of the FRB have a significant
effect upon the operating results of commercial banks such as the Bank. The FRB has a major effect upon the levels
of bank loans, investments and deposits through its open market operations in United States government securities
and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve
requirements against member banks’ deposits. It is not possible to predict the nature and impact of future changes in
monetary and fiscal policies.
Deposit Insurance
The deposits of the Bank are insured up to applicable limits per insured depositor by the FDIC. As an FDIC-insured
bank, the Bank is also subject to FDIC insurance assessments. Beginning in 2007, the FDIC adopted a revised risk-
based assessment system to determine the assessment rates to be paid by insured institutions. Under a final
rulemaking announced by the FDIC on March 4, 2009, and depending on the institution’s risk category, assessment
rates will range from 12 to 45 basis points. Institutions in the lowest risk category will be charged a rate between 12
and 16 basis points; these rates increase to 22, 32 and 45 basis points, respectively, for the remaining three risk
categories. These rates may be offset in the future by any dividends declared by the FDIC if the deposit reserve ratio
increases above a certain amount. Given the state of the current economic environment, it is unlikely that the FDIC
will lower these assessment rates, and such rates may in fact increase. Because FDIC deposit insurance premiums
60
are “risk-based,” higher premiums would be charged to banks that have lower capital ratios or higher risk profiles.
Consequently, a decrease in the Bank’s capital ratios, or a negative evaluation by the FDIC, as the Bank’s primary
federal banking regulator, may also increase the Bank’s net funding costs and reduce its net income.
Additionally, the FDIC recently adopted an interim rule that imposes a 20 basis point emergency special assessment
on all insured depository institutions on June 30, 2009. The special assessment will be collected September 30,
2009, at the same time that the risk-based assessments for the second quarter of 2009 are collected. The interim rule
also permits the FDIC to impose an emergency special assessment of up to 10 basis points on all insured depository
institutions whenever, after June 30, 2009, the FDIC estimates that the fund reserve ratio will fall to a level that the
FDIC believes would adversely affect public confidence or to a level close to zero or negative at the end of a
calendar quarter. Comments received during the public comment period may affect the content of the final rule on
this issue.
All FDIC-insured depository institutions must also pay an annual assessment to provide funds for the repayment of
debt obligations (commonly referred to as FICO bonds) issued by the Financing Corporation, a federal corporation,
in connection with the disposition of failed thrift institutions by the Resolution Trust Corporation. The assessment
rate for the first quarter of 2009 is set to approximately 1.14 cents per $100 of assessable deposits, and for second
quarter 2009 at 1.04 cents per $100 of assessable deposits.
Dividend Restrictions
Under applicable New Jersey law, the Company is not permitted to pay dividends on its capital stock if, following
the payment of the dividend, (1) it would be unable to pay its debts as they become due in the usual course of
business or (2) its total assets would be less than its total liabilities. Further, it is the policy of the FRB that bank
holding companies should pay dividends only out of current earnings and only if future retained earnings would be
consistent with the Company’s capital, asset quality and financial condition.
Since it has no significant independent sources of income, the ability of the Company to pay dividends is dependent
on its ability to receive dividends from the Bank. Under the New Jersey Banking Act of 1948, as amended (the
“Banking Act”), a bank may declare and pay dividends only if, after payment of the dividend, the capital stock of
the bank will be unimpaired and either the bank will have a surplus of not less than 50% of its capital stock or the
payment of the dividend will not reduce the bank’s surplus. The FDIC prohibits payment of cash dividends if, as a
result, the institution would be undercapitalized or the Bank is in default with respect to any assessment due to the
FDIC. Further, during the first three years of operation, cash dividends shall only be paid from net operating income,
and only after an appropriate allowance for loan and lease losses is established and overall capital is adequate. These
restrictions would not materially influence the Company or the Bank’s ability to pay dividends at this time.
Capital Adequacy Guidelines
The FRB and the FDIC has promulgated substantially similar risk-based capital guidelines applicable to banking
organizations which they supervise. These guidelines are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among banks, to account for off balance sheet exposures, and to minimize
disincentives for holding liquid assets. Under those guidelines, assets and off-balance sheet items are assigned to
broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of
total risk-weighted assets and off-balance sheet items.
Bank assets are given risk-weights of 0%, 20%, 50%, and 100%. In addition, certain off-balance sheet items are
given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-
weighting will apply. Those computations result in the total risk-weighted assets. Most loans are assigned to the
100% risk category, except for performing first mortgage loans fully secured by residential property, which carry a
50% risk-weighting. Most investment securities (including, primarily, general obligation claims of states or other
political subdivisions of the United States) are assigned to the 20% category, except for municipal or state revenue
bonds, which have a 50% risk-weighting, and direct obligations of the U.S. Treasury or obligations backed by the
full faith and credit of the U.S. Government, which have a 0% risk-weighting. In converting off-balance sheet
items, direct credit substitutes, including general guarantees and standby letters of credit backing financial
obligations, are given a 100% risk-weighting. Transaction-related contingencies such as bid bonds, standby letters
of credit backing non-financial obligations, and undrawn commitments (including commercial credit lines with an
initial maturity of more than one year), have a 50% risk-weighting. Short-term commercial letters of credit have a
20% risk-weighting, and certain short-term unconditionally cancelable commitments have a 0% risk weighting.
61
The minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least 4% of the total capital is required to be “Tier 1 Capital,” consisting of
shareholders’ equity and qualifying preferred stock, less certain goodwill items and other intangible assets. The
remainder, or “Tier 2 Capital,” may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted
assets, (b) excess of qualifying preferred stock, (c) hybrid capital instruments, (d) perpetual debt, (e) mandatory
convertible securities, and (f) qualifying subordinated debt and intermediate-term preferred stock up to 50% of Tier
1 Capital. Total capital is the sum of Tier 1 Capital and Tier 2 Capital less reciprocal holdings of other banking
organization’s capital instruments, investments in unconsolidated subsidiaries, and any other deductions as
determined by the FDIC. At December 31, 2008, the Bank’s Tier 1 and Total Capital ratios were 21.16 percent and
22.20 percent, respectively.
In addition, the FRB and FDIC have established minimum leverage ratio requirements for banking organizations
they supervise. For banks and bank holding companies that meet certain specified criteria, including having the
highest regulatory rating and not experiencing significant growth or expansion, these requirements provide for a
minimum leverage ratio of Tier 1 Capital to adjusted average quarterly assets equal to three percent. Other banks
and bank holding companies generally are required to maintain a leverage ratio of four to five percent. At December
31, 2008, the Company’s, and the Bank’s, leverage ratio were 16.95 percent. As part of the Bank’s application for
deposit insurance with the FDIC and as part of the bank charter approval by the New Jersey Department of Banking,
the Bank is required to maintain not less than 8% Tier 1 Capital to total assets, as defined, through the first three
years of operation.
As an additional means to identify problems in the financial management of depository institutions, the FDIA
requires federal bank regulatory agencies to establish certain non-capital safety and soundness standards for
institutions for which they are the primary federal regulator. The standards relate generally to operations and
management, asset quality, interest rate exposure and executive compensation. The agencies are authorized to take
action against institutions that failed to meet such standards.
Prompt Corrective Action
In addition to the required minimum capital levels described above, Federal law establishes a system of “prompt
corrective actions” which Federal banking agencies are required to take, and certain actions which they have
discretion to take, based upon the capital category into which a Federally regulated depository institution falls.
Regulations set forth detailed procedures and criteria for implementing prompt corrective action in the case of any
institution which is not adequately capitalized. Under the rules, an institution will be deemed “well capitalized” or
better if it’s leverage ratio exceeds 5%, its Tier 1 risk based capital ratio exceeds 6%, and if the Total risk based
capital ratio exceeds 10%. An institution will be deemed to be “adequately capitalized” or better if it exceeds the
minimum Federal regulatory capital requirements. However, it will be deemed “undercapitalized” if it fails to meet
the minimum capital requirements; “significantly undercapitalized” if it has a total risk based capital ratio that is less
than 6%, a Tier 1 risk based capital ratio that is less than 3%, or a leverage ratio that is less than 3%, and “critically
undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%.
The prompt corrective action rules require an undercapitalized institution to file a written capital restoration plan,
along with a performance guaranty by its holding company or a third party. In addition, an undercapitalized
institution becomes subject to certain automatic restrictions including a prohibition on payment of dividends, a
limitation on asset growth and expansion, in certain cases, a limitation on the payment of bonuses or raises to senior
executive officers, and a prohibition on the payment of certain “management fees” to any “controlling person.”
Institutions that are classified as undercapitalized are also subject to certain additional supervisory actions,
including: increased reporting burdens and regulatory monitoring; a limitation on the institution’s ability to make
acquisitions, open new branch offices, or engage in new lines of business; obligations to raise additional capital;
restrictions on transactions with affiliates; and restrictions on interest rates paid by the institution on deposits. In
certain cases, bank regulatory agencies may require replacement of senior executive officers or directors, or sale of
the institution to a willing purchaser. If an institution is deemed to be “critically undercapitalized” and continues in
that category for four quarters, the statute requires, with certain narrowly limited exceptions, that the institution be
placed in receivership.
As of December 31, 2008, the Bank was classified as “well capitalized.” This classification is primarily for the
purpose of applying the federal prompt corrective action provisions and is not intended to be and should not be
interpreted as a representation of overall financial condition or prospects of the Bank.
62
Community Reinvestment Act
The CRA requires that banks meet the credit needs of all of their assessment area (as established for these purposes
in accordance with applicable regulations based principally on the location of branch offices), including those of low
income areas and borrowers. The CRA also requires that the FDIC assess all financial institutions that it regulates to
determine whether these institutions are meeting the credit needs of the community they serve. Under the CRA,
institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve” or “unsatisfactory”. The
Bank’s record in meeting the requirements of the CRA will be made publicly available and will be taken into
consideration in connection with any applications with Federal regulators to engage in certain activities, including
approval of a branch or other deposit facility, mergers and acquisitions, office relocations, or expansions into non-
banking activities. As of December 31, 2008, the bank maintains a “satisfactory” CRA rating.
USA Patriot Act
Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism (USA PATRIOT) Act, financial institutions are subject to prohibitions against specified financial
transactions and account relationships as well as enhanced due diligence and “know your customer” standards in
their dealings with foreign financial institutions and foreign customers. Under the USA PATRIOT Act, financial
institutions must establish anti-money laundering programs meeting the minimum standards specified by the Act
and implementing regulations. The USA PATRIOT Act also requires the Federal banking regulators to consider the
effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank
holding company acquisitions.
The Bank has implemented the required internal controls to ensure proper compliance with the USA PATRIOT Act.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 comprehensively revised the laws affecting corporate governance, auditing and
accounting, executive compensation and corporate reporting for entities, such as the Company, with equity or debt
securities registered under the Securities Exchange Act of 1934. Among other things, Sarbanes-Oxley and its
implementing regulations have established new membership requirements and additional responsibilities for our
audit committee, imposed restrictions on the relationship between the Company and its outside auditors (including
restrictions on the types of non-audit services our auditors may provide to us), imposed additional responsibilities
for our external financial statements on our chief executive officer and chief financial officer, and expanded the
disclosure requirements for our corporate insiders. The requirements are intended to allow stockholders to more
easily and efficiently monitor the performance of companies and directors. The Company and its Board of Directors
have, as appropriate, adopted or modified the Company’s policies and practices in order to comply with these
regulatory requirements and to enhance the Company’s corporate governance practices.
Pursuant to Sarbanes-Oxley, the Company has adopted a Code of Conduct and Ethics applicable to its Board,
executives and employees. This Code of Conduct can be found on the Company’s website at www.bonj.net.
Federal Home Loan Bank Membership
The Bank is a member of the Federal Home Loan Bank of New York (“FHLBNY”). Each member of the FHLBNY
is required to maintain a minimum investment in capital stock of the FHLBNY. The Board of Directors of the
FHLBNY can increase the minimum investment requirements in the event it has concluded that additional capital is
required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment
requirements outside of specified ranges requires the approval of the Federal Housing Finance Agency. Because the
extent of any obligation to increase our investment in the FHLBNY depends entirely upon the occurrence of a future
event, potential payments to the FHLBNY is not determinable.
Additionally, in the event that the Bank fails, the right of the FHLBNY to seek repayment of funds loaned to the
Bank shall take priority (a “super lien”) over all other creditors.
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Other Laws and Regulations
The Company and the Bank are subject to a variety of laws and regulations which are not limited to banking
organizations. For example, in lending to commercial and consumer borrowers, and in owning and operating its own
property, the Bank is subject to regulations and potential liabilities under state and federal environmental laws.
Future Legislation and Regulation
In light of current conditions in the U.S. and global financial markets and the U.S. and global economy, regulators
have increased their focus on the regulation of the financial services industry. Proposals that could substantially
intensify the regulation of the financial services industry are expected to be introduced in the U.S. Congress, in state
legislatures and from applicable regulatory authorities. These proposals may change banking statutes and regulation
and our operating environment in substantial and unpredictable ways. If enacted, these proposals could increase or
decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among
banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any of these
proposals will be enacted and, if enacted, the effect that it, or any implementing regulations, would have on our
business, results of operations or financial condition.
64
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Commencing on June 3, 2008, the Company’s Common Stock began trading on the American Stock Exchange
under the symbol “BKJ”. Subsequently, the American Stock Exchange was acquired by the New York Stock
Exchange. Today, the Company’s stock trades on the NYSE-Amex exchange.
Prior to June 3, 2008, our common stock was not listed for quotation on any exchange or market system and there
was no established public trading market for our common stock. However, there were a limited number of trades of
our common stock since our initial offering and capitalization. The following table sets forth the high and low
prices at which trades of our common stock have occurred during the indicated periods. The prices are adjusted to
reflect our ten percent (10%) stock distribution in January 2007 and the 2 for 1 stock split which was effective
December 31, 2007.
Year Ended December 31, 2008
Fourth quarter
Third quarter
Second quarter
First quarter
Year Ended December 31, 2007
Fourth quarter
Third quarter
Second quarter
First quarter
High
$12.30
15.97
25.25
11.50
$11.50
11.50
11.50
11.50
Low
$ 8.48
10.51
13.44
11.50
$11.50
11.50
11.50
9.09
Holders
As of March 10, 2009, there were approximately 1,186 shareholders of our common stock, which includes an
estimate of shares held in street name.
Dividends
We have not paid any cash dividends since our inception. The decision to pay, as well as the timing and amount of
any dividends to be paid by the Company will be determined by our Board of Directors, giving consideration to our
earnings, capital needs, financial condition, and other relevant factors.
Under applicable New Jersey law, the Company will not be permitted to pay dividends on its capital stock if,
following the payment of the dividend, it would be unable to pay its debts as they become due in the usual course of
business, or its total assets would be less than its total liabilities. Further, it is the policy of the FRB that bank
holding companies should pay dividends only out of current earnings and only if future retained earnings would be
consistent with the holding company’s capital, asset quality and financial condition. Because it will have no
significant independent sources of income, the ability of the Company to pay dividends will be dependent on its
ability to receive dividends from the Bank.
Under the New Jersey Banking Act of 1948, as amended, the Bank may declare and pay dividends only if, after
payment of the dividend, the capital stock of the Bank will be unimpaired and either the Bank will have a surplus of
not less than 50% of its capital stock or the payment of the dividend will not reduce the Bank’s surplus. The FDIC
prohibits payment of cash dividends if, as a result, the Bank would be undercapitalized. Further, during the first
three years of operation, cash dividends shall only be paid from net operating income, and only after an appropriate
allowance for loan losses is established and overall capital is adequate.
65
BANCORP OF NEW JERSEY, INC.
Directors and Executive Officers
Board of Directors
Albert F. Buzzetti
Chairman of the Board
President and CEO,
Bank of New Jersey
John K. Daily
Executive Vice President
C.A. Shea & Co.
Josephine Mauro
Realtor and Owner,
Mauro Realty Company
Michael Bello
President,
Michael Bello Insurance Agency
Armand Leone, Jr., MD, JD
Partner,
Britcher, Leone and Roth
Joel P. Paritz, CPA
President,
Paritz & Company, P.A.
Jay Blau
President
Imperial Sales & Sourcing, Inc.
Anthony M. Lo Conte
President and CEO,
Anthony L and S, LLC
Christopher M. Shaari, MD
Physician
Albert L. Buzzetti, Esq.
Managing Partner,
A. Buzzetti and Associates, LLC
Carmelo Luppino, Jr.
Real Estate Developer
Anthony Siniscalchi, CPA
Partner,
A. Uzzo & Co., CPAs, P.C.
Gerald A. Calabrese, Jr.
President
Century 21 Calabrese Realty
Rosario Luppino
Real Estate Developer
Mark Sokolich, Esq.
Managing Partner,
Sokolich & Macri
Stephen Crevani
President, Aniero Concrete
Howard Mann
President, Carolace Industries
Diane M. Spinner
Executive Vice President and
Chief Administrative Officer,
Bank of New Jersey
Executive Officers
Albert F. Buzzetti
President and
Chief Executive Officer
Michael Lesler
Executive Vice President and
Chief Financial Officer
Leo J. Faresich
Executive Vice President and
Chief Lending Officer
Diane M. Spinner
Executive Vice President and
Chief Administrative Officer
66
BANCORP OF NEW JERSEY, INC.
Officers
Albert F. Buzzetti
President and
Chief Executive Officer
Michael Lesler
Executive Vice President and
Chief Financial Officer
Stephanie A. Caggiano
Senior Vice President
Consumer Lending
Leo J. Faresich
Executive Vice President and
Chief Lending Officer
Diane M. Spinner
Executive Vice President and
Chief Administrative Officer
Ronald M. Urtiaga
Senior Vice President
Commercial Lending
Anna Maria Alberga
Vice President
Branch Manager – Main Street
Rosemarie Yaverian
Vice President
Branch Manager – Palisade Ave.
Connie Caltabellatta
Corporate Secretary
Independent Auditors
Beard Miller Company, LLP
1200 Atwater Drive STE 225
Malvern, PA 19355
General Counsel
Albert L. Buzzetti & Associates
467 Sylvan Avenue
Englewood Cliffs, NJ 07632
Regulatory Counsel
Donald Readlinger, Esq.
Pepper Hamilton LLP
STE 400 – 301 Carnegie Center
Princeton, NJ 08543-5276
Common Stock Data
Common Stock is traded on
The NYSE-Amex Exchange
Under the symbol: BKJ
Registrar and Transfer Agent
American Stock Transfer
and Trust Co.
59 Maiden Lane
New York, NY 10038
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Bank of New Jersey
Branch Offices
1365 Palisade Avenue
(MAIN OFFICE)
Fort Lee, N.J. 07024
(201) 944-8600
204 Main Street
Fort Lee, N.J. 02024
(201) 944-7200
458 West Street
Fort Lee, N.J. 07024
(201) 944-7222
401 Hackensack Avenue
Hackensack, N.J. 07601
(201) 968-0008
4 Park Street
Harrington Park, N.J. 07640
(201) 750-9970
320 Haworth Avenue
Haworth, N.J. 07641
(201) 387-9910
68