To Our Shareholders and Friends:
We welcome the opportunity to submit this, our seventh annual report which highlights the first 79 months’
results of Bancorp of New Jersey, Inc. and its wholly owned subsidiary, Bank of New Jersey.
Specifically, we are proud to report that:
(cid:120) Our record-breaking initial capital of $43.6 million has grown to $58.7 million providing an extra
measure of safety for our depositors;
(cid:120) Year-end assets have grown to $571.3 million; an increase of $101.5 million or 21.6% of 2011 totals;
(cid:120)
(cid:120)
Total deposits have surpassed 2011 totals by $99.5 million or 23.9%;
Our loan portfolio has grown by $70.5 million or 19.3% over year-end 2011 totals;
(cid:120) Our on-going stream of quarterly and annual profits has continued uninterrupted and our loan loss
reserve has grown to $5.0 million in 2012;
(cid:120) After-tax income for 2012 totaled $4.2 million, representing an increase of 27.2% over the 2012 total;
(cid:120) Where many other institutions have gone back to sub-prime lending and increased risk taking, we have
elected to maintain a conservative lending approach;
(cid:120)
In addition to the $0.30 per share special dividend in January, 2010, the $0.33 per share special dividend
in December, 2010 and the $0.40 special dividend in December, 2011, we have begun to issue quarterly
dividends of $0.06 per share, supplemented by an additional special dividend of $0.24 per share in
December, 2012. Naturally, all of that is consistent with our continued desire to enhance shareholder
value and continuation of our strong earnings.
(cid:120) We were again identified as one of the nation’s top 25 banks (three times in four years) with capital
under $2 billion by Sandler O’Neill Partners, one of the industry’s most prominent bank analysts;
(cid:120) We expect to open our ninth branch office at 585 Chestnut Ridge Road, Woodcliff Lake, NJ during
2013 and have filed an application for our tenth office at 750 Palisade Avenue, Englewood Cliffs, NJ;
(cid:120) We have one more branch planned for 2013;
(cid:120) We have added a Dividend Re-investment Plan for interested shareholders and we were proud to ring
the opening bell at the New York Stock Exchange on January 14, 2013;
(cid:120) We’re proud of our accomplishments in the face of the many challenges today and will endeavor to
continue and exceed these results;
Thanks to our shareholders, customers, directors and fine staff.
A happy, healthy and profitable 2013 to all.
Albert F. Buzzetti
Chairman and CEO
Michael Lesler
President and Vice Chairman
TABLE OF CONTENTS
PAGE
Forward-Looking Statements .................................................................................................... 3
Consolidated Balance Sheets..................................................................................................... 4
Consolidated Statements of Income .......................................................................................... 5
Consolidated Statements of Comprehensive Income ................................................................ 6
Consolidated Statements of Stockholders’ Equity..................................................................... 7
Consolidated Statements of Cash Flows.................................................................................... 8
Notes to Consolidated Financial Statements ............................................................................. 9
Report of Independent Registered Public Account Firm......................................................... 42
Management’s Discussion and Analysis of Financial Condition and Results of Operations .. 43
Business................................................................................................................................... 64
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities ............................................................................... 74
Directors and Executive Officers ............................................................................................ 76
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, Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended, provide 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 subsidiaries 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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Current economic conditions affecting the financial industry;
Changes in interest rates and shape of the yield curve;
Credit risk associated with our lending activities;
Risks relating to our market area, significant real estate collateral and the real estate market;
(cid:120) Operating, legal and regulatory risk;
Fiscal and monetary policy;
Economic, political and competitive forces affecting the Company’s business; and
That management’s analysis of these risks and factors 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, and 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. We
caution readers not to place undue reliance on any forward-looking statements. These statements speak
only as of the date made, and we 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.
2
3
CONSOLIDATED BALANCE SHEETS
December 31, 2012 and 2011
(Dollars in thousands, except share data)
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2012 and 2011
(Dollars in thousands, except per share data)
Assets
Cash and due from banks
Interest bearing deposits
Federal funds sold
Total cash and cash equivalents
Interest bearing time deposits
Securities available for sale
Securities held to maturity (fair value approximates $5,482 and $4,787,
at December 31, 2012 and 2011, respectively)
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
Accrued expenses and other liabilities
Total liabilities
Commitments and Contingencies
Stockholders' equity:
Common stock, no par value, authorized 20,000,000 shares;
issued and outstanding 5,206,932 at December 31, 2012
and December 31, 2011
Retained Earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
2012
2011
$
765
29,852
461
31,078
$
642
31,117
463
32,222
250
88,480
5,482
669
435,729
(180)
(5,072)
430,477
250
56,645
4,787
549
365,160
(66)
(4,474)
360,620
10,224
1,732
2,982
571,374
$
10,203
1,515
3,051
469,842
$
$
65,910
$
49,585
196,369
253,456
515,735
1,919
517,654
-
131,374
235,204
416,163
1,773
417,936
-
49,689
3,747
284
53,720
571,374
$
49,546
2,046
314
51,906
469,842
$
See accompanying notes to consolidated financial statements
Interest income:
Loans, including fees
Securities
Interest-earning deposits in banks
Federal funds sold
Total interest income
Interest expense:
Savings and money markets
Time deposits
Short term
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
Loss on sale of other real estate owned
Gains on sale of securities
Total non interest income
Non interest expense
Salaries and employee benefits
Occupancy and equipment expense
FDIC and state assessments
Legal fees
Professional fees
Data processing
Other operating expenses
Total non interest expenses
Income before income taxes
Income tax expense
Net income
Earnings per share:
Basic
Diluted
2012
2011
$
21,566
$
18,903
1,782
66
8
23,422
521
5,554
-
6,075
17,347
1,198
16,149
170
2
-
243
415
4,971
2,029
327
242
313
695
1,040
9,617
6,947
2,747
909
43
6
19,861
229
4,513
3
4,745
15,116
1,183
13,933
193
14
(203)
-
4
4,356
1,577
458
170
407
566
857
8,391
5,546
2,224
$
4,200
$
3,322
$
0.81
$
0.81
$
0.64
$
0.64
See accompanying notes to consolidated financial statements
4
5
CONSOLIDATED STATEMENTS OF COMPREHENISVE INCOME
Years ended December 31, 2012 and 2011
(Dollars in Thousands)
Net income
Other comprehensive income
Gross unrealized holding (losses) gains on securities available for sale, net of
deferred income tax expense (benefit) of $109 and $(224), respectively
Reclassification adjustment for gain on sale of securities, net of tax expense
benefit of $(86) and $0, respectively
Other comprehensive (loss) income
Comprehensive income
2012
2011
$
4,200
$
3,322
(187)
373
157
(30)
$
4,170
-
373
$
3,695
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended December 31, 2012 and 2011
(Dollars in Thousands)
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Total
Balance at January 1, 2011
807
(59)
50,138
Recognition of stock option expense
Dividends on common stock ($0.40 per share)
Net income
Total other comprehensive income
Balance at December 31, 2011
Recognition of stock option expense
Dividends on common stock ($0.48 per share)
Net income
Total other comprehensive loss
49,390
156
49,546
143
(2,083)
3,322
2,046
(2,499)
4,200
156
(2,083)
3,322
373
51,906
143
(2,499)
4,200
(30)
373
314
(30)
Balance at December 31, 2012
$
49,689
$
3,747
$
284
$
53,720
See accompanying notes to consolidated financial statements
6
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2012 and 2011
(In Thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
Summary of Significant Accounting Policies
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
Loss on sale of other real estate owned
Gain on sale of securities
Changes in operating assets and liabilities:
Increase in accrued interest receivable
Decrease in other assets
Decrease in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of securities available for sale
Purchases of securities held to maturity
Proceeds from maturities of securities held to maturity
Proceeds from called or matured securities available for sale
Purchase of interest bearing time deposits
Proceeds from sales of securities available for sale
Purchase of restricted investment in bank stock
Net increase in loans
Proceeds from sale of other real estate owned
Purchases of premises and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net increase in deposits
Increase in short term borrowings
Repayment of short term borrowing
Dividends Paid
Net cash provided by financing activities
2012
2011
$
4,200
$
3,322
1,198
(99)
490
143
-
(243)
(217)
191
146
5,809
(100,676)
(5,781)
5,086
51,294
-
17,737
(120)
(71,055)
-
(511)
(104,026)
99,572
19,000
(19,000)
(2,499)
97,073
1,183
(433)
430
156
203
-
(230)
564
327
5,522
(56,141)
(4,787)
3,728
28,016
(250)
-
(58)
(63,449)
1,484
(706)
(92,163)
97,742
19,000
(19,000)
(2,083)
95,659
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(1,144)
32,222
31,078
$
9,018
23,204
32,222
$
Supplemental information:
Cash paid during the year for:
Interest
Taxes
$
$
6,005
2,747
$
$
4,575
2,650
See accompanying notes to consolidated financial statements.
8
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”) and the Bank’s wholly-owned subsidiary, BONJ-New York Corp. All significant inter-
company accounts and transactions have been eliminated in consolidation.
The Company was incorporated under the laws of the State of New Jersey to serve as a holding
company for the Bank and to acquire all the capital stock of the Bank.
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, 2012 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.
Since opening in May, 2006, the Bank has established seven branch offices in addition to its main
office. The Bank expects to continue to seek additional strategically located branch locations within
Bergen County. Particular emphasis will be placed on presenting an alternative banking culture in
communities which are dominated by non-local competitors and where no community banking
approach exists or in locations which the Company perceives to be economically emerging.
During the second quarter of 2009, the Bank formed BONJ-New York Corporation. The New York
subsidiary is engaged in the business of acquiring, managing and administering portions of Bank of
New Jersey’s investment and loan portofolios.
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. 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.
Subsequent Events
The Company has evaluated subsequent events in preparing the December 31, 2012 Consolidated
Financial Statements. Management believes there were no events that occurred after December 31,
2012, but before the financial statements were available to be issued that would require disclosure.
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
9
or customers within its primary service area. Note 3 describes the types of lending in which the
Company engages.
than-temporary impairment should be amortized prospectively over the remaining life of the security
on the basis of the timing of future estimated cash flows of the security.
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 in 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 Board of Governors of the Federal Reserve System.
Securities
Management determines the appropriate classification of debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date.
Investments in debt securities that the Bank has the positive intent and ability to hold to maturity are
classified as held to maturity securities and reported at amortized cost. Debt and equity securities
that are bought and held principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized holding gains and losses included in
earnings. Debt and equity securities not classified as trading securities, nor as held to maturity
securities are classified as available for sale securities and reported at fair value, with unrealized
holding gains and losses, net of deferred income taxes, reported in the accumulated other
comprehensive income component of stockholders’ equity. The Bank held no trading securities at
December 31, 2012 and 2011. Discounts and premiums are accreted/amortized to income by use of
the level-yield method. Gain or loss on sales of securities available for sale is based on the specific
identification method.
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.
The Bank adopted guidance for other-than-temporary impairments of debt securities and expanded
the financial statement discloures for other-than-temporary impairment losses on debt and equity
securities. The recent guidance replaced the “intent and ability” indication in current guidance by
specifying that (a) if a company does not have the intent to sell a debt security prior to recovery and,
(b) it is more likely than not that it will not have to sell the debt security prior to recovery, the
security would not be considered other-than-temporarily impaired unless there is a credit loss.
When an entity does not intend to sell the security, and it is more likely than not, the entity will not
have to sell the security before recovery of its cost basis, it will recognize the credit component of an
other-than-temporary impairment of a debt security in earnings and the remaining portion in other
comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary
impairment recorded in other comprehensive income for the noncredit portion of a previous other-
10
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 certain 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.
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 their outstanding unpaid principal balances, net of an allowance for loan
losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance.
Loan origination fees, net of certain direct origination costs, are deferred and recognized as an
adjustment of the yield (interest income) of the related loans. The Company is generally amortizing
these amounts over the contractual life of the loan. Premiums and discounts on purchased loans are
amortized as adjustments to interest income using the effective yield method.
The loans receivable portfolio is segmented into commercial and consumer loans. Commercial loans
consist of the following classes: commercial and industrial (“commercial”), commercial real estate,
and commercial construction. Consumer loans consist of the following classes: residential mortgage
loans, home equity loans and other consumer loans.
For all classes of loans receivable, the accrual of interest is discontinued when the contractual
payment of principal or interest has become 90 days past due or management has serious doubts
about further collectability of principal or interest, even though the loan is currently performing. A
loan may remain on accrual status if it is in the process of collection and is either guaranteed or well
secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current
year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan
losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied
against principal or reported as interest income, according to management’s judgment as to the
collectability of principal. Generally, loans are restored to accrual status when the obligation is
brought current, has performed in accordance with the contractual terms for a reasonable period of
time (generally six months) and the ultimate collectability of the total contractual principal and
interest is no longer in doubt. The past due status of all classes of loans receivable is determined
based on contractual due dates for loan payments.
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded
lending commitments. The allowance for loan losses represents management’s estimate of losses
inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The
reserve for unfunded lending commitments represents management’s estimate of losses inherent in
its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet.
The allowance for credit losses is increased by the provision for loan losses, and decreased by
charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance
for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the
principal balance of loans receivable are charged off to the allowance as soon as it is determined that
the repayment of all, or part, of the principal balance is highly unlikely. Non-residential consumer
loans are generally charged off no later than 180 days past due on a contractual basis, earlier in the
event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are
immediately charged off, no portion of the allowance for loan losses is restricted to any individual
loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The allowance for credit losses is maintained at a level considered adequate to provide for losses that
are probable and reasonable to estimate. Management performs a quarterly evaluation of the
adequacy of the allowance. The allowance is based on the Company’s past loan loss experience,
known and inherent risks in the loan portfolio and unfunded commitments, adverse situations that
may affect the borrower’s ability to repay, the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions and other relevant factors. This
evaluation is inherently subjective as it requires material estimates that may be susceptible to
significant revision as more information becomes available.
11
The allowance consists of specific, general and unallocated components. The specific component relates
to loans that are classified as impaired. For loans that are classified as impaired, an allowance
established when the discounted cash flows (or collateral value or observable market price) of the impaired
loan is lower than the carrying value of that loan. The general component covers pools of loans by
loan
class including commercial loans not considered impaired, as well as smaller balance
loans, such as residential real estate, home equity and other consumer loans. These
evaluated for loss exposure based upon historical loss rates for each of these
adjusted for qualitative factors. These qualitative risk factors include:
homogeneous
pools of loans are
loans,
categories
of
is
1. Lending policies and procedures, including underwriting standards and collection, charge-off,
and recovery practices.
2. National, regional, and local economic and business conditions as well as the condition of
various market segments, including the value of underlying collateral for collateral dependent
loans.
3. Nature and volume of the portfolio and terms of loans.
4. Experience, ability, and depth of lending management and staff.
5. Volume and severity of past due, classified and nonaccrual loans as well as and other loan
modifications.
6. Quality of the Company’s loan review system, and the degree of oversight by the Company’s
board of directors.
7. Existence and effect of any concentrations of credit and changes in the level of such
concentrations.
8. Effect of external factors, such as competition and legal and regulatory requirements.
Each factor is assigned a value to reflect improving, stable or declining conditions based on
management’s best judgment using relevant information available at the time of the evaluation.
Adjustments to the factors are supported through documentation of changes in conditions in a
narrative accompanying the allowance for loan loss calculation.
An unallocated component is maintained to cover uncertainties that could affect management’s
estimate of probable losses. The unallocated component of the allowance reflects the margin of
imprecision inherent in the underlying assumptions used in the methodologies for estimating specific
and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan
basis for commercial loans, commercial real estate loans and commercial construction loans by
either the present value of expected future cash flows discounted at the loan’s effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its
estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans
are measured based on the estimated fair value of the loan’s collateral.
For commercial loans secured by real estate, estimated fair values are determined primarily through
third-party appraisals. When a real estate secured loan becomes impaired, a decision is made
regarding whether an updated certified appraisal of the real estate is necessary. This decision is
based on various considerations, including the age of the most recent appraisal, the loan-to-value
ratio based on the original appraisal and the condition of the property. Appraised values are
discounted to arrive at the estimated selling price of the collateral, which is considered to be the
estimated fair value. The discounts also include estimated costs to sell the property.
For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory
and equipment, estimated fair values are determined based on the borrower’s financial statements,
inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of
value from these sources are generally discounted based on the age of the financial information or
the quality of the assets.
12
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual residential mortgage loans, home
equity loans and other consumer loans for impairment disclosures, unless such loans are the subject
of a troubled debt restructuring agreement.
Loans whose terms are modified are classified as troubled debt restructurings if the Company grants
such borrowers concessions and it is deemed that those borrowers are experiencing financial
difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary
reduction in interest rate or an extension of a loan’s stated maturity date. Nonaccrual troubled debt
restructurings are restored to accrual status if principal and interest payments, under the modified
terms, are current for six consecutive months after modification.
The Company’s methodology for the determination of the allowance for loan losses includes further
segregation of loan classes into risk rating categories. The borrower’s overall financial condition,
repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for
commercial loans or when credit deficiencies arise, such as delinquent loan payments, for
commercial and consumer loans. Credit quality risk ratings include regulatory classifications of
special mention, substandard, doubtful and loss. Loans criticized special mentions have potential
weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may
result in deterioration of the repayment prospects. Loans classified substandard have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are
inadequately protected by the current sound net worth and paying capacity of the obligor or of the
collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans
classified substandard with the added characteristic that collection or liquidation in full, on the basis
of current conditions and facts, is highly improbable. Loans classified as a loss are considered
uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.
In addition to the Company’s methodology, Federal regulatory agencies, as an integral part of their
examination process, periodically review the Company’s allowance for loan losses and may require
the Company to recognize additions to the allowance based on their judgments about information
available to them at the time of their examination, which may not be currently available to
management. Based on management’s comprehensive analysis of the loan portfolio, management
believes the current level of the allowance for loan losses was adequate.
Other Real Estate Owned
Other real estate owned consists of real estate acquired by foreclosure and is initially recorded at fair
value, less estimated selling costs. Subsequent to foreclosure, revenues are included in Non-interest
income and expenses from operations and lower of cost or market changes in the valuation are
included in non-interest expenses.
Stock-Based Compensation
ASC Topic 718 Compensation-Stock Compensation 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. Guidance
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. The Company accounts
for stock options under the recognition and measurement principles of ASC Topic 718.
The Company recorded compensation expense of $143,000 and $156,000 during 2012 and 2011,
respectively. At December 31, 2012, the Company had no unrecognized compensation expense
related to unvested options.
13
Restrictions on Cash and Amounts Due From Banks
The Bank is required to maintain average balances on hand or with the Federal Reserve Bank of
New York. At December 31, 2012 and 2011, these reserve balances amounted to $1.7 million and
$1.2 million, respectively, and are reflected in interest bearing deposits in banks.
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.
As required by ASC Topic 790, 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. Corporate tax returns for the years 2008 through 2011
remain open to examination by taxing authorities. 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% likelihood of being realized upon ultimate settlement with the relevant tax
authority. The Bank applied ASC Topic 790 to all tax positions for which the statute of limitations
remained open. There was no material effect on the Company’s consolidated financial position or
results of operations and no adjustment to retained earnings.
The Company recognizes interest and penalties on income taxes as a component of income tax.
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.
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 statements of
comprehensive income.
Advertising
The Company expenses advertising costs as incurred. Advertising expenses totaled $119 thousand
and $93 thousand for 2012 and 2011, respectively.
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, or the ability to unilaterally cause the
holder to return specific assets. At December 31, 2012 and 2011, the Bank did not have any OREO.
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, 2012 and 2011.
Restricted investment in bank stocks which represent required investments in the common stock of
correspondent banks, is carried at cost and consists of the common stock of the Federal Home Loan
Bank (FHLB) of $569 thousand and $449 thousand and Atlantic Central Bankers Bank (ACBB) of
$100 thousand and $100 thousand, as of December 31, 2012 and 2011, respectively.
Management believes no impairment charge is necessary related to the FHLB or ACBB restricted
stock as of December 31, 2012.
14
15
The unrealized losses, categorized by the length of time of continuous loss position, and the fair
value of related securities available for sale are as follows (in thousands):
Less than 12 Months
Fair
Value
Unrealized
Losses
$
6,749
$
93
More than 12 Months
Fair
Value
Unrealized
Losses
$
-
$
-
Total
Fair
Value
Unrealized
Losses
$
6,749
$
93
December 31, 2012
U.S. Treasury obligation
Government Sponsored
Enterprise obligations
Total securities available for sale
$
39,514
$
329
$
$
-
$
39,514
$
329
32,765
236
-
32,765
236
-
-
December 31, 2011
Government Sponsored
Enterprise obligations
Total securities available for sale
Less than 12 Months
Fair
Value
Unrealized
Losses
More than 12 Months
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$
4,985
$
15
$
4,985
$
15
$
$
-
-
$
-
$
-
$
4,985
$
15
$
4,985
$
15
At December 31, 2012, and 2011, the Company held no securities held to maturity with unrealized
losses.
The following table sets forth as of December 31, 2012, the maturity distribution of the Company’s
held to maturity and available for sale portfolios (in thousands):
December 31, 2012
Securities Held to Maturity
Securities Available for Sale
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
After 1 year to 5 years
After 5 years to 10 years
After 10 years
-
-
-
-
-
-
11,012
59,023
16,000
11,291
59,212
15,957
$
5,482
$
5,482
$
88,036
$
88,480
NOTE 2.
Securities
A summary of securities held to maturity and securities available for sale at December 31, 2012 and
December 31, 2011 is as follows (in thousands):
December 31, 2012
Securities Held to Maturity:
Obligations of states and
political subdivisions
Securities Available for Sale:
U.S. Treasury obligations
Government Sponsored
Enterprise obligations
Total securities available for sale
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
5,482
$
-
$
-
$
5,482
17,985
70,051
88,036
285
488
773
(93)
(236)
(329)
18,177
70,303
88,480
Total securities
$
93,518
$
773
$
(329)
$
93,962
December 31, 2011
Securities Held to Maturity:
Obligations of states and
political subdivisions
Securities Available for Sale:
U.S. Treasury obligations
Government Sponsored
Enterprise obligations
Total securities available for sale
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
4,787
$
-
$
-
$
4,787
11,079
45,069
56,148
245
267
512
-
(15)
(15)
11,324
45,321
56,645
Total securities
$
60,935
$
512
$
(15)
$
61,432
1 year or less
$
5,482
$
5,482
$
2,001
$
2,020
Securities with an amortized cost of $13.1 million and a fair value of $13.6 million were pledged to
secure public funds on deposit at December 31, 2012. Securities with an amortized cost of $8.0
million and a fair value of $8.3 million, were pledged to secure public funds on deposit at December
31, 2011.
During 2012, the Company sold five securities from its available for sale portfolio. It recognized
gains of approximately $252 thousand from two of the securities sold and a loss of approximately $9
thousand from the sale of three of the securities, resulting in net gains of approximately $243
thousand from the transactions. The Company did not sell any securities from its held to maturity
portfolio in 2012. During 2011, the Company did not sell any securities from its available for sale or
held to maturity portfolios.
Government Sponsored Enterprise obligations. Unrealized losses at December 31, 2012 consisted
of losses on twelve investments in government sponsored enterprise obligations, and two
investments in U. S. Treasury securities, which were caused by interest rate increases. The
contractual terms of those investments do not permit the issuer to settle the securities at a price less
than the amortized cost basis of the investments. Because the Company does not intend to sell the
investments and it is not more likely than not that the Company will be required to sell the
investments before recovery of their amortized cost basis, which may be maturity, the Company
does not consider those investments to be other-than-temporarily impaired at December 31, 2012.
All of the investments with unrealized losses at December 31, 2012 were in a loss position for less
than twelve months.
16
17
NOTE 3.
Loans and Allowance for Loan Losses
Loans at December 31, 2012 and 2011, respectively, are summarized as follows (in thousands):
Commercial real estate
Residential mortgages
Commercial
Home equity
Consumer
December 31, 2012
December 31, 2011
$ 246,545
$ 186,187
54,332
64,900
68,737
1,215
52,595
57,464
67,895
1,019
$ 435,729
$ 365,160
The Bank grants commercial, mortgage, home equity, and installment loans primarily to New Jersey
residents and businesses within its local market 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 manage the exposure to such risks
and that the allowance for loan losses is maintained at a level which is adequate to provide for losses
known and inherent in our loan portfolio that are both probable and reasonable to estimate.
The following table presents the activity in the allowance for loan losses and recorded investments in
loans for the year ended December 31, 2012 (in thousands):
Commercial
Residential
Real Estate
Mortgages Commercial Home Equity Consumer Unallocated
Total
Beginning Balance
$
2,408
$
470
$
827
$
368
$
21
$
380
$
4,474
-
6
736
(168)
-
20
(340)
3
543
(101)
-
116
-
-
3
-
-
(220)
(609)
9
1,198
$
3,150
$
322
$
1,033
$
383
$
24
$
160
$
5,072
$
258
$
7
$
50
$
12
$
-
$
-
$
327
$
2,892
$
315
$
983
$
371
$
24
$
160
$
4,745
$
246,545
$
54,332
$
64,900
$
68,737
$
1,215
$
-
$
435,729
$
4,863
$
2,509
$
325
$
1,408
$
-
$
-
$
9,105
$
241,682
$
51,823
$
64,575
$
67,329
$
1,215
$
-
$
426,624
The following table presents the balance in the allowance for loan losses and recorded investments
in loans for the year ended December 31, 2011 (in thousands):
Commercial
Residential
Real Estate
Mortgages Commercial Home Equity Consumer Unallocated
Total
Beginning Balance
$
1,962
$
366
$
627
$
358
$
22
$
414
$
3,749
(394)
2
838
(43)
-
147
-
-
200
(25)
-
35
-
2
(3)
-
-
(34)
(462)
4
1,183
$
2,408
$
470
$
827
$
368
$
21
$
380
$
4,474
$
160
$
117
$
50
$
-
$
-
$
-
$
327
$
2,248
$
353
$
777
$
368
$
21
$
380
$
4,147
$
186,187
$
52,595
$
57,464
$
67,895
$
1,019
$
-
$
365,160
$
2,130
$
2,487
$
325
$
1,253
$
-
$
-
$
6,195
$
184,057
$
50,108
$
57,139
$
66,642
$
1,019
$
-
$
358,965
Allowance for loan
losses:
Charge-offs
Recoveries
Provisions
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Loan receivables:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Allowance for loan
losses:
Charge-offs
Recoveries
Provisions
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Loan receivables:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
18
19
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of
the loans receivable as determined by the length of time a recorded payment is past due. The
following tables present the classes of the loan portfolio summarized by the past due status as of
December 31, 2012 and 2011 (in thousands):
December 31, 2012
Commercial real estate
Residential mortgages
Commercial
Home equity
Consumer
Total
December 31, 2011
Commercial real estate
Residential mortgages
Commercial
Home equity
Consumer
Total
30-59 Days
Past Due
$
60-89 Days
Past Due
$
$
$
30-59 Days
Past Due
$
60-89 Days
Past Due
$
Greater than
90 Days
Total Past
Due
$
$
1,704
2,509
325
1,408
-
5,946
$
$
1,704
2,693
444
1,408
10
6,259
Greater than
90 Days
Total Past
Due
$
$
1,733
2,487
325
1,253
-
5,798
$
$
1,733
2,487
325
1,433
27
6,005
Current
$
$
244,841
51,639
64,456
67,329
1,205
429,470
Current
$
$
184,454
50,108
57,139
66,462
992
359,155
Total Loans
Receivables
$
246,545
54,332
64,900
68,737
1,215
435,729
$
Total Loans
Receivables
186,187
$
52,595
57,464
67,895
1,019
365,160
$
-
184
-
-
-
184
-
-
-
-
-
-
-
-
119
-
10
129
-
-
-
180
27
207
$
$
The following tables present the classes of the loan portfolio summarized by the aggregate pass
rating and the classified ratings of special mention, substandard and doubtful within the Bank’s
internal risk rating system as of December 31, 2012 and 2011 (in thousands):
December 31, 2012
Commercial
Real Estate
Residential
Mortgages Commercial
Home Equity
Consumer
Total
Pass
Special Mention
Substandard
Doubtful
Total
$
$
241,682
-
4,863
-
246,545
$
$
51,823
-
2,509
-
54,332
$
$
63,075
1,500
325
-
64,900
$
$
67,329
-
1,408
-
68,737
$
$
1,215
-
-
-
1,215
$
$
425,124
1,500
9,105
-
435,729
December 31, 2011
Commercial
Real Estate
Residential
Mortgages Commercial
Home Equity
Consumer
Total
Total nonaccrual loans with no specific reserves
Total nonaccrual loans
$
5,946
$
6,258
$
327
$
6,121
$
31
Pass
Special Mention
Substandard
Doubtful
Total
$
$
180,897
3,160
2,130
-
186,187
$
$
50,108
-
2,487
-
52,595
$
$
57,139
-
325
-
57,464
$
$
66,642
-
1,253
-
67,895
$
$
1,019
-
-
-
1,019
$
$
355,805
3,160
6,195
-
365,160
As of December 31, 2012 the Bank had fourteen nonaccrual loans totaling approximately $5.9
million, of which six loans totaling approximately $2.2 million had specific reserves of $327
thousand and eight loans totaling approximately $3.8 million had no specific reserve. If interest had
been accrued on these non-accrual loans, the interest income would have been approximately $354
thousand and $310 thousand, respectively, for the years ended December 31, 2012 and 2011,
respectively. Within its nonaccrual loans at December 31, 2012, the Bank had three residential
mortgage loans, one commercial real estate mortgage loan, one home equity loan and one
commercial loan that met the definition of a troubled debt restructuring (“TDR”) loan. TDRs are
loans where the contractual terms of the loan have been modified for a borrower experiencing
financial difficulties. These modifications could include a reduction in the interest rate of the loan,
20
payment extensions, forgiveness of principal or other actions to maximize collection. At December
31, 2012, two of these residential TDR loans had a cumulative balance of $629 thousand, had a
specific reserve connected with them for $7 thousand and were not performing in accordance with
their modified terms. The third residential loan classified as a TDR had an outstanding balance of
$1.7 million, had no specific reserve and is not performing in accordance with its modified terms.
The commercial real estate mortgage loan classified as a TDR had an outstanding balance of $747
thousand, had no specific reserve and is not performing in accordance with its modified terms. The
home equity loan and the commercial loan, each classified as a TDR, had outstanding balances of
$730 thousand and $275 thousand, respectively, had no specific reserves and are not performing in
accordance with their modified terms. As of December 31, 2011 the Bank had eleven non-accrual
loans totaling approximately $6.2 million, of which five loans totaling approximately $1.8 million
had specific reserves of $327 thousand and six loans totaling approximately $4.4 million had no
specific reserve. If interest had been accrued on these non-accrual loans, the interest income would
have been approximately $310 thousand for the year ended December 31, 2011. Within its
nonaccrual loans at December 31, 2011, the Bank had three mortgage loans, two residential and one
commercial mortgage that met the definition of a troubled debt restructuring (“TDR”) loan. TDRs
are loans where the contractual terms of the loan have been modified for a borrower experiencing
financial difficulties. At December 31, 2011, one of these residential TDR loans had an outstanding
balance of $490 thousand, had a specific reserve connected with it for $12 thousand and was not
performing in accordance with its modified terms. The second residential loan classified as a TDR
had an outstanding balance of $310 thousand, had a specific reserve of $105 thousand connected to
it and is performing in accordance with its modified terms. The commercial mortgage had an
outstanding balance of $398 thousand, had no specific reserve connected with it and is also
performing in accordance with its modified terms.
The following tables provide information about the Bank’s nonaccrual loans at December 31, 2012
and 2011 (in thousands):
December 31, 2012
Nonaccrual loans with specific reserves:
Commercial real estate
Residential mortgage
Commercial
Home equity
Commercial real estate
Residential mortgages
Commercial
Home equity
Total nonaccrual loans with specific reserves
Nonaccrual loans with no specific reserves:
December 31, 2011
Nonaccrual loans with specific reserves:
Commercial real estate
Residential mortgage
Commercial
Total nonaccrual loans with specific reserves
Nonaccrual loans with no specific reserves:
Commercial real estate
Residential mortgages
Commercial
Home equity
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
957
$
957
$
258
$
957
$
-
840
50
523
2,370
747
1,880
275
986
3,888
843
50
1,850
1,173
1,687
275
1,253
4,388
7
50
12
327
-
-
-
-
-
-
-
-
-
-
117
50
327
764
50
523
2,294
961
1,722
275
869
3,827
515
10
1,789
1,016
1,163
115
752
3,046
-
-
-
-
-
9
9
22
22
23
2
34
32
24
13
13
82
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
957
$
957
$
160
$
1,264
$
9
629
50
523
2,159
747
1,880
275
885
3,787
800
50
1,807
1,173
1,687
275
1,253
4,388
21
Total nonaccrual loans with no specific reserves
Total nonaccrual loans
$
6,195
$
6,238
$
327
$
4,835
$
116
As of December 31, 2012, the Bank had sixteen impaired loans totaling approximately $9.5 million,
of which fourteen loans totaling approximately $5.9 million were nonaccruing. The additional loans
classified as impaired are a residential mortgage and a commercial real estate mortgage that each
meet the definition of a TDR. At December 31, 2012, these loans had a cumulative outstanding
balance of $3.6 million, had no specific reserves connected with them and are performing in
accordance with their modified terms.
The following tables provide information about the Bank’s impaired loans at December 31, 2012
and 2011 (in thousands):
December 31, 2012
Impaired loans with specific reserves:
Commercial real estate
Residential mortgage
Commercial
Home equity
Total impaired loans with specific reserves
Impaired loans with no specific reserves:
Commercial real estate
Residential mortgage
Commercial
Home equity
Total impaired loans with no specific reserves
Total impaired loans
December 31, 2011
Impaired loans with specific reserves:
Commercial real estate
Residential mortgage
Commercial
Total impaired loans with specific reserves
Impaired loans with no specific reserves:
Commercial real estate
Residential mortgage
Commercial
Home equity
Total impaired loans with no specific reserves
Total impaired loans
Recorded
Investment
$
957
629
50
523
2,159
4,304
1,880
275
885
7,344
9,503
$
Recorded
Investment
$
957
800
50
1,807
1,174
1,941
275
1,253
4,643
6,450
$
Unpaid
Principal
Balance
$
957
840
50
523
2,370
4,304
1,880
275
986
7,445
9,815
$
Unpaid
Principal
Balance
$
957
843
50
1,850
1,174
1,941
275
1,253
4,643
6,493
$
Related
Allowance
$
258
7
50
12
327
-
-
-
-
-
327
$
Related
Allowance
$
160
117
50
327
-
-
-
-
-
327
$
Average
Recorded
Investment
$
958
764
50
523
2,295
1,792
1,722
275
869
4,658
6,953
$
Average
Recorded
Investment
$
896
497
50
1,443
1,177
1,838
275
1,253
4,543
5,986
$
Interest
Income
Recognized
$
-
-
-
9
9
201
18
-
3
222
231
$
Interest
Income
Recognized
$
9
23
2
34
32
24
13
13
82
116
$
The Company’s policy for interest income recognition on impaired loans is to recognize income on
current and performing restructured loans under the accrual method. The Company recognizes
income on impaired loans under the accrual basis when the principal payments on the loans become
current and the collateral on the loan is sufficient to cover the outstanding obligation to the
Company. If these factors do not exist, the Company does not recognize income. There was $231
thousand of income recognized in 2012 on loans that were impaired. There was $116 thousand of
income recognized in 2011 on loans that were impaired. Interest income that would have been
recorded had the loans been on accrual status amounted to approximately $354 thousand and
approximately $310 thousand for the years ended December, 31 2012 and 2011, respectively.
At December 31, 2012, the Bank had a total of eight loans, two accruing and six nonaccruing, which
meet the definition of a TDR and as such were also classified as impaired. At December 31, 2011
the Bank had four loans, one accruing and three non-accruing, which met the definition of a TDR.
The following table presents TDR loans as of December 31, 2012 and 2011 (in thousands):
The following table summarizes information in regards to troubled debt restructurings that occurred
during the years ended December 31, 2012 and 2011, respectively, (in thousands):
December 31, 2012
Residential mortgages
Commercial real estate
Commercial
Home equity
December 31, 2011
Residential mortgages
Commercial real estate
December 31, 2012
Troubled Debt Restructurings
Residential mortgages
Commercial real estate
Commercial loan
Home equity
December 31, 2011
Troubled Debt Restructurings
Commercial real estate
Residential mortgages
Accrual
Status
$
-
3,557
Nonaccrual
Status
$
2,285
Total
Modifications
$
2,285
4,303
275
730
$
3,557
$
4,036
$
7,593
Accrual
Status
Nonaccrual
Status
$
255
$
800
Total
Modifications
$
1,055
398
$
255
$
1,198
$
1,453
746
275
730
398
Pre-Modification
Outstanding
Recorded
Investments
Post-
Modification
Outstanding
Recorded
Investments
Number of
Contracts
$
1,656
$
1,656
3,906
275
730
3,906
275
730
$
6,567
$
6,567
Pre-Modification
Outstanding
Recorded
Investments
Post-
Modification
Outstanding
Recorded
Investments
Number of
Contracts
$
398
$
398
244
255
$
642
$
653
-
-
-
1
2
1
1
5
1
1
2
As indicated in the table above, the Bank modified two commercial real estate mortgages, one home
equity loan, one commercial loan and one residential mortgage during the year ended December 31,
2012. As a result of the modified terms of the new loans, the effective interest rate of the new terms
of the modified loans were reduced when compared to the interest rate of the original terms of the
modified loans. The Bank did not record an impairment due to the fair value of the underlying
collateral of each loan being greater than the amount of the modified loan. One of the commercial
real estate borrowers has remained current since the modification, while one borrower with three
loans, a commercial real estate mortgage, a home equity loan and a commercial loan, has not
remained current to the modified terms of the agreements. The residential mortgage borrower has
not remained current to the modified terms of the agreement.
22
23
During the the year ended December 31, 2012, the Bank had three residential mortgages meeting the
definition of a TDR which had payment defaults. These loans had an accumulated unpaid principal
balance of $2.5 million at December 31, 2012, and incurred charge-offs totaling $168 thousand
during the fourth quarter of 2012, reducing the net balance of the loans to $2.3 million. Two of these
loans also had a total of $7 thousand of specific reserves.
At December 31, 2012, the Bank had two commercial real estate mortgages that meet the definition
of a TDR and which were performing to their modified terms.
The following table displays troubled debt restructurings as of December 31, 2012 and 2011,
respectively, which were performing according to agreement (in thousands):
December 31, 2012
Pre-modification outstanding
recorded investment:
Commercial real estate
December 31, 2011
Pre-modification outstanding
recorded investment:
Residential mortgage
Commercial real estate
Rate
Modification
Term Modification
Interest Only
Modification
Payment
Modification
Combination
Modification
Total
Modifications
$
-
-
-
$
-
-
$
-
$
-
-
$
3,557
3,557
$
3,557
3,557
NOTE 6.
Short Term Borrowings
Rate
Modification
Term Modification
Interest Only
Modification
Payment
Modification
Combination
Modification
Total
Modifications
$
$
-
-
-
-
$
-
$
-
-
$
-
$
-
$
$
-
-
-
$
$
564
398
962
$
$
564
398
962
NOTE 4.
Premises and Equipment
At December 31, premises and equipment consists of the following (in thousands):
Land
Building
Furniture and fixtures
Equipment
Less accumulated depreciation and
amortization
Total premises and equipment, net
2012
2011
$
4,828
5,791
637
1,336
12,592
$
4,828
5,559
589
1,105
12,081
2,368
10,224
$
1,878
10,203
$
Depreciation expense amounted to $490 thousand and $430 thousand for the years ended December
31, 2012 and 2011, respectively.
24
25
NOTE 5.
Deposits
At December 31, 2012 and 2011, 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):
3 months or less
Over 3 months through 12 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
2012
2011
$
50,113
$
57,911
122,260
35,811
21,503
51,947
20,845
109,761
39,904
7,394
12,558
53,594
$
302,479
$
281,122
At December 31, 2012 and 2011, the Bank had no borrowed funds outstanding. 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 are a member of the Federal Home
Loan Bank of New York (FHLBNY) . The FHLBNY relationship could provide additional sources
of liquidity, if required.
NOTE 7.
Income Taxes
Income tax expense from operations for the years ended December 31 is as follows (in thousands):
Current tax expense:
Federal
State
Federal
State
Deferred income tax benefit:
2012
2011
$
2,229
$
2,076
617
(42)
(57)
581
(340)
(93)
Income tax expense
$
2,747
$
2,224
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
Total gross deferred tax assets
Deferred tax liabilities:
Unrealized gain on AFS securities
Deferred loan costs
Prepaid expenses
Other
Total gross deferred tax liabilities
2012
2011
$
292
1,942
170
445
2,849
$
328
1,750
199
410
2,687
(160)
(82)
(61)
(69)
(372)
(183)
(78)
(51)
(20)
(332)
Net deferred tax asset
$
2,477
$
2,355
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 2012 and 2011, 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.
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
expense
Tax exempt income
Stock-based compensation
Meals and entertainment
Other
2012
2011
$
2,362
$
1,886
370
(6)
18
6
(3)
2,747
$
322
(11)
20
7
-
2,224
$
The Company is subject to income taxes in the U.S. and various states. 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 2008 through 2012 remain open to examination by taxing
authorities.
26
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 $979 thousand and $618 thousand, respectively, annually, for the years ended
December 31, 2012 and December 31, 2011.
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, 2012 (in thousands):
Year ending December 31,
2013
2014
2015
2016
2017
Thereafter
1,125
1,049
927
839
556
2,336
$
6,832
NOTE 9.
Related-party Transactions
The Bank has made, and expects to continue to make, loans in the future to its 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 the
Bank’s board of directors. None of such loans at December 31, 2012 and 2011, respectively, were
nonaccrual, past due, or restructured, 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 2012 and 2011 (in
thousands):
Outstanding loans at beginning of the year
$
37,568
$
34,750
New Loans
Repayments
Retirement of a Director
Outstanding loans at end of the year
$
31,701
$
37,568
2012
2011
5,359
(5,207)
(6,019)
7,139
(4,321)
-
Two of our directors have acted as the Bank’s counsel on several loan closings. During 2012 and
2011 the total cost of such work has been reimbursed by the respective loan customers and totals
$307 thousand and $204 thousand respectively. Additionally, these directors have acted as legal
counsel to the Bank on several matters. The total amount paid for legal fees, for non-loan related
matters was approximately $42 thousand in 2012 and approximately $14 thousand in 2011.
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 $126
thousand and $102 thousand in 2012 and 2011, respectively.
27
One of our directors, who provided appraisal services on several loan closings in 2011, stopped
providing these services for the Bank in 2012. Although certain of these payments are reimbursed
by our customer, the total amount paid for appraisal services 2011 was approximately $7 thousand.
One of the Company’s directors is a principal in a company that the Bank rents office space from.
The total amount paid for rent to this company for 2012 and 2011 was approximately $2 thousand,
and $4 thousand, respectively.
One of the Company’s directors is a principal in a company that the Bank has entered into a lease
with for the rental of office space. No money was paid during 2011 as the contract was not in effect
until 2012. In 2012, the total amount paid for rent was approximately $160 thousand.
Our audit committee or the 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.
NOTE 10.
Earnings Per Share
The Company’s calculation of earnings per share in accordance with ASC Topic 260, Earnings per Share,
is as follows:(cid:3)
(In thousands except per share data)
Net income applicable to common stock
Weighted average number of common
shares outstanding - basic
Basic earnings per share
Net income applicable to common stock
Weighted average number of common
shares outstanding
Effect of dilutive options
Weighted average number of common
shares outstanding- diluted
Diluted earnings per share
For the Year Ended
December 31,
2012
2011
$
4,200
$
3,322
5,207
0.81
$
5,207
0.64
$
$
4,200
$
3,322
5,207
8
5,207
7
5,215
0.81
$
5,214
0.64
$
Non-qualified options to purchase 414,668 shares of common stock at a weighted average price of
$11.50; and incentive stock options to purchase 90,000 shares of common stock at a weighted
average price of $11.50 were not included in the computation of diluted earnings per share for the
years ended December 31, 2012, and 2011, respectively, because they were anti-dilutive. Incentive
stock options to purchase 97,900 shares of common stock at a weighted average price of $9.09 were
included in the computation of diluted earnings per share for the years ended December 31, 2012,
and December 31, 2011, respectively.
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. The stock offering resulted in net proceeds of $42,684,000.
In February 2012, the Company announced an intention to pay a quarterly cash dividend. During
2012, the Company declared four quarterly cash dividends of $0.06 per share and a special cash
divdend of $0.24 per share, totaling $0.48 per share. These dividends were all paid in 2012, and
were all paid from the retained earnings of the Company. During the fourth quarter of 2011, the
Company declared a cash dividend of $0.40 per share. The cash dividend was paid on December 14,
2011 to all shareholders as of record date October 17, 2011. The cash dividend was paid from the
retained earnings of the Company.
The decision to pay, as well as the timing and amount of any future dividends to be paid by the
Company will be determined by the board of directors, giving consideration to the Company’s
earnings, capital needs, financial condition, and other relevant factors.
Under applicable New Jersey law, the Company is permitted to pay dividends on its capital stock if,
following the payment of the dividend, it is able to pay its debts as they become due in the usual
course of business, or its total assets are greater 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.
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. The Bank is in compliance with all regulatory requirements
related to cash dividends.
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. The option price per share is the market value of the Bank’s stock on
the date of grant. At December 31, 2012 and 2011, incentive stock options to purchase 210,900
shares have been issued to employees of the Bank.
During 2006, the Bank awarded 119,900 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. 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 91,000 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. 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.
28
29
A summary of stock option activity under the 2006 Stock Option Plan during 2012 and 2011 is
presented below
Outstanding at December 31, 2010
Granted
Forfeited
Exercised
Number of
Shares
187,900
Weighted
Average Price
per Share
$
10.24
Average
Intrinsic Value
(1)
$
211,464
-
-
-
$
-
-
-
Outstanding at December 31, 2011
187,900
$
10.24
$
10,769
Granted
Forfeited
Exercised
-
-
-
-
-
-
Outstanding at December 31, 2012
187,900
$
10.24
Exercisable at December 31, 2012
187,900
$
10.24
$
705,689
(1) The aggregate intrinsic 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, 2012. 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,
2012 is as follows:
Range of Exercise Prices
Number
Of Shares
Outstanding
Weighted Average
Remaining Contractual
Life (Years)
Weighted
Average
Exercise Price
$9.09
$11.50
97,900
90,000
187,900
3.92
5.00
$9.09
$11.50
Under the 2006 Stock Option Plan, there were no unvested options at December 31, 2012, and
nothing remains to be recognized in expense over the next year. There were no options related to the
2006 Stock Option Plan granted or exercised during 2012 or 2011.
30
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, 2012 and 2011, 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. 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 2012 and 2011 is as follows:
Weighted
Number of
Average Price
Average Intrinsic
Contractual Life
Shares
414,668
per Share
Value (1)
$
11.50
$
-
(Years)
6.81
Weighted
Average
Remaining
Outstanding at December 31, 2010
Outstanding at December 31, 2011
414,668
$
11.50
$
-
5.81
Granted
Forfeited
Exercised
Granted
Forfeited
Exercised
-
-
-
-
-
-
Outstanding at December 31, 2012
414,668
$
11.50
Exercisable at December 31, 2012
414,668
$
1,036,670
4.81
(1) The aggregate intrinsic 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, 2012 and 2011, 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 no unvested options at December 31, 2012,
and nothing remains to be recognized in expense over the next year. During 2012 and 2011,
respectively, no Director Options were granted.
2011 Equity Incentive Plan
During 2011, the Bank’s stockholders approved the 2011 Equity Incentive Plan. This plan provides
for the issuance of up to 250,000 shares of the Company’s common stock in respect of awards,
which may be options, stock appreciation rights, restricted stock, restricted stock units or
performance awards, to be issued to employees, directors, consultants or other service providers of
the Company. Only options granted to employees may be granted as incentive stock options. The
option price per share is the market value of the Bank’s stock on the date of grant. At December 31,
2012, no awards had been issued through this plan.
-
-
-
-
-
-
31
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 Stock Option 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 2012 and 2011, respectively.
The dividend yield assumption 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 $66 thousand and $56 thousand during 2012 and 2011,
respectively.
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, 2012 and 2011, 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,
2012 and 2011, 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
For Classification
Bank actual
Adequacy
As Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Leverage (Tier 1) Capital
$53,436
9.63%
$22,189
4.00%
$27,737
5.00%
$53,436
$58,508
12.07%
13.21%
$17,716
$35,431
4.00%
8.00%
$26,573
$44,289
6.00%
10.00%
Leverage (Tier 1) Capital
$51,592
11.37%
$18,153
4.00%
$22,691
5.00%
$51,592
$56,066
14.01%
15.23%
$14,728
$29,455
4.00%
8.00%
$22,092
$36,819
6.00%
10.00%
December 31, 2012:
Risk-based capital:
Tier 1
Total
December 31, 2011:
Risk-based capital:
Tier 1
Total
The Company’s capital amounts and ratios are similar to those of the Bank.
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, 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, 2012 totaled $67.6 million compared to
$61.6 million at December 31, 2011.
Most of the Bank’s lending activity is with customers located in Bergen County, New Jersey. At
December 31, 2012 and 2011, the Bank had outstanding letters of credit to customers totaling $2.4
million and $1.7 million, 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, 2012 and 2011, such
amounts were deemed not material.
32
33
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. The
following information represents the parent only Balance Sheets as of December 31, 2012 and 2011,
respectively, the Statements of Income for the twelve months ended December 31, 2012 and
December 31, 2011, and the Statements of Cash Flows for the twelve months ended December 31,
2012 and December 31, 2011 and should be read in conjunction with the notes to the consolidated
financial statements.
Balance Sheet
(in thousands)
Assets:
Investment in subsidiary, net
Total assets
Liabilities and stockholders' equity:
Stockholders' equity
December 31,
2012
2011
$
$
53,720
53,720
$
$
51,906
51,906
$
$
53,720
53,720
$
$
51,906
51,906
Statement of Income
Years ended December 31,
(in thousands)
Equity in undistributed earnings of
subsidiary bank
Net income
2012
2011
$
$
4,200
4,200
$
$
3,322
3,322
Statement of Cash Flow
Years ended December 31,
(in thousands)
Cash flow 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
Net cash provided by operating activities:
Cash flows from investing activites:
Cash dividends received from subsidiary bank
Net cash used in financing activities
Cash flows from financing activities:
Cash dividends paid
Net cash provided by financing activities
Net change in cash for the period
Net cash at beginning of year
Net cash at end of year
2012
2011
$
4,200
$
3,322
(4,200)
-
2,499
2,499
(2,499)
(2,499)
-
-
(3,322)
-
2,083
2,083
(2,083)
(2,083)
-
-
$
-
$
-
34
35
NOTE 16.
Fair Value Measurement and Fair Value of Financial Instruments
Under ASC Topic 820, fair value measurements are not adjusted for transaction costs. ASC Topic 820
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair
value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets and liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3
measurements). The three levels of the fair value hierarchy are described below.
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 period end 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 period end.
The three levels of the fair value hierarchy are as follows
(cid:120)
(cid:120)
(cid:120)
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.
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, 2012 and December 31, 2011, respectively, are as follows (in
thousands):
(Level 1)
(Level 2)
(Level 3)
Impaired Loans
$ 1,982
(1)
(2)
0% - 36.0% (-23.6%)
Description
Securities available for sale:
U.S. Treasury obligations
Government Sponsored
Enterprise obligations
Total securities available for sale
December 31,
2012
Quoted Prices in
Active Markets
for Identical
Assets
Significant Other
Observable
Inputs
Significant
Unobservable Inputs
$
18,177
$
-
$
18,177
$
-
70,303
88,480
-
$
-
$
$
70,303
88,480
$
-
-
(Level 1)
(Level 2)
(Level 3)
The range and weighted average of liquidation expenses and other appriasal adjustments are presented as a percent
(2) Appriasals may be adjusted for qualitative factors such as economic conditions and estimated liquidation expenses.
Description
Securities available for sale:
U.S. Treasury obligations
Government Sponsored
Enterprise obligations
Total securities available for sale
December 31,
2011
Quoted Prices in
Active Markets
for Identical
Assets
Significant Other
Observable
Inputs
Significant
Unobservable Inputs
$
11,324
$
-
$
11,324
$
-
45,321
56,645
-
$
-
$
$
45,321
56,645
$
-
-
of the appraisal.
36
37
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, 2012 and December 31, 2011, repectively, are as
follows (in thousands):
(Level 1)
(Level 2)
(Level 3)
Quoted Prices in
December 31,
Active Markets for
Significant Other
Significant
Description
Impaired Loans
2012
Identical Assets
Observable Inputs
Unobservable Inputs
$
1,982
$
-
$
-
$
1,982
Total impaired loans
$
1,982
$
-
$
-
$
1,982
(Level 1)
(Level 2)
(Level 3)
Quoted Prices in
December 31,
Active Markets for
Significant Other
Significant
Description
Impaired Loans
2011
Identical Assets
Observable Inputs
Unobservable Inputs
$
1,480
$
-
$
-
$
1,480
Total impaired loans
$
1,480
$
-
$
-
$
1,480
The following table presents additional quantitative information about assets measured at fair value on a
nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value (in
thousands):
December 31, 2012
Fair Value
Estimate
Valuation
Techniques
Unobservable
Input
Range (Weighted Average)
Appraisal
Appriasal
of Collateral
Adjustments
Liquidation
Expenses (2)
0% - 43.0% (-20.4%)
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally
include various Level 3 inputs which are not identifiable.
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, 2012 and 2011:
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.
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 re-price 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 ASC Sub-topic 310-40, Troubled Debt Restructurings
by Creditors, 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.
Accrued Interest Receivable and Payable (Carried at Cost)
The carrying amount of accrued interest receivable and accrued interest payable approximates fair value.
Other real estate owned
Other real estate owned assets are adjusted to fair value less estimated selling costs upon transfer of the
loans to other real estate owned. Subsequently, other real estate owned assets are carried at the lower of
carrying value
38
or fair value. Fair value is based upon independent market prices, appraised values of the collateral or
management’s estimation of the value of the collateral. These assets are included as Level 3 fair values.
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.
Fair value estimates and assumptions are set forth below for the Company’s financial instruments at
December 31, 2012 and 2011 (in thousands):
(Level 1)
(Level 2)
(Level 3)
December 31, 2012
Identical Assets
Observable Inputs
Inputs
Carrying amount
Estimated Fair Value
Quoted Prices in
Significant
Active Markets for
Significant Other
Unobservable
Financial assets:
Cash and cash equivalents
$ 31,078
$ 31,078
$ 31,078
$ -
$ -
Interest bearing time deposits
250
250
-
250
-
Securities available for sale
Securities held to maturity
88,480
88,480
-
88,480
5,482
5,482
-
5,482
Restricted investment in bank stock
669
669
-
669
-
Net loans
430,477
433,268
-
-
433,268
Accrued interest receivable
1,732
1,732
-
1,732
-
Financial liabilities:
Deposits
Accrued interest payable
678
678
-
678
515,735
514,744
207,826
306,918
-
-
December 31, 2011
Carrying amount
Estimated Fair Value
Financial assets:
Cash and cash equivalents
$ 32,222
$ 32,222
Interest bearing time deposits
250
250
Securities available for sale
Securities held to maturity
56,645
56,645
4,787
4,787
Restricted investment in bank stock
549
549
Net loans
360,620
363,026
Accrued interest receivable
1,515
1,515
Financial liabilities:
Deposits
Accrued interest payable
416,163
414,445
608
608
Limitation
The preceding fair value estimates were made at December 31, 2012 and 2011 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, 2012 and 2011, no attempt was made to estimate the value of anticipated future business.
39
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.
NOTE 17.
Quarterly Financial Data (unaudited)
NOTE 18.
Recent Accounting Pronouncements
The following represents summarized unaudited quarterly financial data of the Company.
2012
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
2011
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
Three Months Ended
(in thousands, except per share data)
December. 31
September. 30
June. 30
March. 31
$
6,110
1,542
4,568
313
2,322
$
6,019
1,559
4,460
260
2,313
$
5,848
1,515
4,333
330
2,355
$
5,445
1,459
3,986
295
2,212
$
766
1,167
$
745
1,142
$
654
994
$
582
897
$
$
0.23
0.23
$
$
0.22
0.22
$
$
0.19
0.19
$
$
0.17
0.17
$
5,281
1,337
3,944
285
2,036
$
5,014
1,198
3,816
300
2,022
$
4,899
1,127
3,772
212
2,225
$
4,667
1,083
3,584
386
2,104
$
652
971
$
593
901
$
523
812
$
456
638
$
$
0.19
0.19
$
$
0.17
0.17
$
$
0.16
0.16
$
$
0.12
0.12
This section provides a summary description of recent accounting standards that have significant
implications (elected or required) within the consolidated financial statements, or that management expects
may have a significant impact on financial statements issued in the near future.
ASU 2013-02 (Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income)
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220); Reporting of
Amounts Reclassified Out of Accumulated Other Comprehensive Income. The objective of this Update is to
improve the reporting of reclassifications out of accumulated other comprehensive income. The
amendments in this Update require an entity to report the effect of significant reclassifications out of
accumulated other comprehensive income on the respective line items in net income if the amount being
reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its
entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their
entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures
required under U.S. GAAP that provide additional detail about those amounts. For public entities, the
amendments are effective prospectively for reporting periods beginning after December 15, 2012. The
Company does not expect this ASU to have a significant impact on its consolidated financial statements.
40
41
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, 2012 and 2011, and the related consolidated statements of income,
comprehensive income, stockholders’ equity, and cash flows for the years then ended. 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,
2012 and 2011, and the results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America.
ParenteBeard LLC
Philadelphia, Pennsylvania
March 28, 2013
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 Part II,
Item 8 of 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 numerous assumptions, risks and uncertainties,
all of which can change over time, and could cause actual results to differ materially from those projected
in the forward-looking statements. We assume no duty to update forward-looking statements, except as
may be required by applicable law or regulation. Important factors that might cause such a difference
include, but are not limited to, those discussed in this section, and also include current economic conditions
affecting the financial industry; changes in interest rates and shape of the yield curve; credit risk associated
with our lending activities; risks relating to our market area, significant real estate collateral and the real
estate market; operating, legal and regulatory risk; fiscal and monetary policy; economic, political and
competitive forces affecting the Company’s business; and that management’s analysis of these risks and
factors 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. On June 3, 2008, the Company’s
common stock was listed on the American Stock Exchange, now NYSE MKT LLC. We currently operate
an eight branch network and have received FDIC and NJDOBI approval to open our ninth location. Our
main office is located at 1365 Palisade Avenue, Fort Lee, NJ 07024 and our current seven 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, 320 Haworth Avenue, Haworth, NJ 07641, 4 Park Street, Harrington
Park, NJ 07640, and 104 Grand Avenue, Englewood, NJ 07631, 354 Palisade Avenue, Cliffside Park, NJ
07010. Our ninth location will be located at 585 Chestnut Ridge Road, Woodcliff Lake, NJ 07677 and is
expected to open during the second quarter of 2013.
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 that is dominated by larger, statewide and
national financial 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
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:
(cid:120)
To provide local businesses, professionals, and individuals with banking services responsive to and
determined by the local market;
(cid:120) Direct access to Bank management by members of the community, whether during or after business
hours;
(cid:120)
To attract deposits and loans by competitive pricing; and
42
43
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.
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, 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. The fair value
of collateral, which is discounted from the appraised value to estimate the selling price and costs, is used if
a loan is collateral-dependent. At December 31, 2012 and 2011, the bank had sixteen and twelve impaired
loans, respectively. All of these loans have been measured for impairment using various measurement
methods, including fair value of collateral.
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 to sell a debt security prior to recovery and/or whether it is more likely than not we
will have to sell the debt security prior to recovery. 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). Unrealized losses at December 31, 2012 consisted of losses on
twelve investments in government sponsored enterprise obligations, and two in U. S. Treasury Securities,
which were caused by interest rate increases. The contractual terms of those investments do not permit the
issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the
Company does not intend to sell the investments and it is not more likely than not that the Company will be
required to sell the investments before recovery of their amortized cost basis, which may be maturity, the
Company does not consider those investments to be other-than-temporarily impaired at December 31,
2012. All of the investments with unrealized losses at December 31, 2012 were in a loss position for less
than twelve months. At December 31, 2012 and 2011, respectively, we did not have any other-than-
temporarily impaired securities.
(cid:120)
To provide a reasonable return to shareholders on capital invested.
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
Consolidated Financial Statements included in Item 8 of this report. 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. Financial assets and liabilities required to be recorded at, or adjusted to reflect, fair value require
the use of estimates, assumptions, and judgments. 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 financial condition and results of operations.
Allowance for Loan Losses
The allowance for loan losses (“ALLL”) represents our best estimate of losses known and inherent in our
loan portfolio that are both probable and reasonable to estimate. In determining the amount of the ALLL,
we consider the losses inherent in our loan portfolio and changes in the nature and volume of our loan
activities, along with general economic and real estate market conditions. We utilize a segmented approach
which identifies: (1) impaired loans for which specific reserves are established; (2) classified loans for
which the general valuation allowance for the respective loan type is deemed to be inadequate; and (3)
performing loans for which a general valuation allowance is established. We maintain a loan review system
which provides for a systematic review of the loan portfolios and the identification of impaired loans. The
review of residential real estate and home equity consumer loans, as well as other more complex loans, is
triggered by identified evaluation factors, including delinquency status, size of loan, type of collateral and
the financial condition of the borrower. Specific reserves are established for impaired loans based on a
review of such information and/or appraisals of the underlying collateral. General reserves are based upon a
combination of factors including, but not limited to, actual loan loss experience, composition of the loan
portfolio, current economic conditions and management’s judgment.
Although specific and general reserves are established in accordance with management’s best estimates,
actual losses are dependent upon future events, and as such, further provisions for loan losses may be
necessary in order to maintain the allowance for loan losses at an adequate level. For example, our
evaluation of the allowance includes consideration of current economic conditions, and a change in
economic conditions could reduce the ability of borrowers to make timely repayments of their loans. This
could result in increased delinquencies and increased non-performing loans, and thus a need to make
additional provisions for loan losses. Any provision reduces our net income. While the allowance is
increased by the provision for loan losses, it is decreased by charge-offs, net of recoveries. Loans deemed
to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance. A change in economic conditions could adversely affect the value of properties
collateralizing real estate loans, resulting in increased charges against the allowance and reduced
recoveries, and require additional provisions for loan losses. Furthermore, a change in the composition, or
growth, of our loan portfolio could require additional provisions for loan losses.
At December 31, 2012 and 2011, respectively, we consider the ALLL of $5.1 million and $4.5 million
adequate to absorb probable losses inherent in 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
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
44
45
RESULTS OF OPERATIONS - 2012 versus 2011
Our results of operations depend primarily on our net interest income, which is the difference between the
interest earned on its interest-earning assets and the interest paid on interest-bearing liabilities, primarily
deposits, which support our assets. Net interest margin is net interest income expressed as a percentage of
average interest earning assets. Net income is also affected by the amount of non-interest income and non-
interest expenses, the provision for loan losses and income tax expense.
NET INCOME
For the year ended December 31, 2012, net income increased by $878 thousand, to $4.2 million from $3.3
million for the year ended December 31, 2011. The increase in net income for the year ended December
31, 2012 compared to 2011 was driven by an increase in our net interest income. The increase in net
interest income is reflective of the growth in interest-earning assets as well as management’s focus on
disciplined pricing of the deposit portfolio. The increase in net interest income more than offset the
increases in non-interest expenses and income tax expense.
On a per share basis, basic and diluted earnings per share for the year ended December 31, 2012 were $0.81
as compared to basic and diluted earnings per share of $0.64 for the year ended December 31, 2011.
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 average volumes of interest-earning
assets and interest bearing liabilities and the yield earned or the interest paid on them. For the year ended
December 31, 2012, net interest income increased by $2.2 million, or 14.8%, to $17.3 million from $15.1
million for the year ended December 31, 2011. This increase in net interest income was primarily the result
of an increase in average loans of $62.9 million, or 18.6%, during 2012, as compared to 2011, as well as a
decrease in the cost of interest bearing liabilities, which decreased by 3 basis points for 2011.
Average Balance Sheets
The following table sets forth certain information relating to our average assets and liabilities for the years
ended December 31, 2012, 2011 and 2010, respectively, and reflect the average yield on assets and average
cost of liabilities for the periods 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. The
taxable equivalent adjustment for 2012, 2011, and 2010 was $6, $3, and $2 thousand, respectively.
Securities available for sale are reflected in the following table at amortized cost. Nonaccrual loans are
included in the average loan balance. Amounts have been computed on a fully tax-equivalent basis,
assuming a blended tax rate of 40% in 2012 and 2011, and 41% in 2010.
46
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47
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, 2012 and 2011, respectively (in thousands):
INCOME TAX EXPENSE
The income tax provision, which includes both federal and state taxes, for the years ended December 31, 2012 and
2011 was $2.7 million and $2.2 million, respectively. The increase in income tax expense during 2012 resulted
from the increased pre-tax income in 2012. The effective tax rate for 2012 was 39.5% compared to 40.1% for 2011.
Interest income:
Loans
Securities
Federal funds sold
Interest bearing deposits in banks
Total interest income
Interest expense:
Demand deposits
Savings deposits
Money market deposits
Time deposits
Short-term borrowings
Total interest expense
Change in net interest income
Year ended December 31,
2012 compared with 2011
Increase (Decrease)
Due to Change in Average
Rate
Volume
Year ended December 31,
2011 compared with 2010
Increase (Decrease)
Due to Change in Average
Rate
Net
Net
Volume
$
$
3,336
860
1
21
4,218
14
5
137
1,016
(3)
1,169
(673)
13
1
2
(657)
(3)
7
132
25
-
161
$
$
2,663
873
2
23
3,561
11
12
269
1,041
(3)
1,330
3,261
247
(4)
4
3,508
3
9
48
669
3
732
$
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(65)
(2)
-
(658)
1
2
(4)
(322)
-
(323)
$
2,670
182
(6)
4
2,850
4
11
44
347
3
409
$
3,049
$
(818)
$
2,231
$
2,776
$
(335)
$
2,441
PROVISION FOR LOAN LOSSES
The provision for loan losses represents our determination of the amount necessary to bring our allowance for loan
losses to the level that we consider adequate to absorb probable losses inherent in our loan portfolio. See
“Allowance for Loan Losses” for additional information about our allowance for loan losses and our methodology
for determining the amount of the allowance. For the year ended December 31, 2012, the Company’s provision for
loan losses was $1.2 million, an increase of $15 thousand from the provision of $1.2 million for the year ended
December 31, 2011. The overall credit quality of the loan portfolio and the stabilization of nonperforming loans is
reflected in the provision basically staying flat for 2012 as compared to 2011.
NON-INTEREST INCOME
Non-interest income which consists primarily of service fees received from deposit accounts and gains on the sales
of securities for the year ended December 31, 2012, was $415 thousand, an increase of $411 thousand from the $4
thousand received during the year ended December 31, 2011. The increase in non-interest income was primarily
due to gains on the sales of securities of $243 thousand in 2012 and no corresponding gains in 2011, and the loss on
the sale of OREO property in 2011 of $203 thousand compared to no such loss in 2012.
NON-INTEREST EXPENSES
Non-interest expenses for the year ended December 31, 2012 amounted to $9.6 million, an increase of $1.2 million
or 14.6% over the $8.4 million for the year ended December 31, 2011. This increase was due in most part to
increases in salaries and employee benefits, occupancy and equipment expense, data processing fees and legal fees
of $615 thousand, $452 thousand, $129 thousand, and $72 thousand, respectively, offset somewhat by decreases in
FDIC and state assessments and professional fees of $131 thousand and $94 thousand, respectively. Salaries and
employee benefits, occupancy and equipment expenses, and data processing expenses increased in part due to the
opening and operating of the Englewood branch in the third quarter of 2011 and the opening and operating of the
Cliffside Park branch in the first quarter of 2012.
48
49
FINANCIAL CONDITION
Total consolidated assets increased $101.5 million, or 21.6%, from $469.8 million at December 31, 2011 to $571.4
million at December 31, 2012. Total loans increased from $365.2 million at December 31, 2011 to $435.7 million at
December 31, 2012, an increase of $70.6 million or 19.3%. Total deposits increased from $416.2 million on
December 31, 2011 to $515.7 million at December 31, 2012, an increase of $99.6 million, or 23.9%.
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 19.3% from $365.2 million at December 31, 2011, to $435.7 million
at December 31, 2012. 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 future consolidation of banking institutions
within our market, which we expect to see as a result of increased regulatory standards, market pressures, and the
overall economy. 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, consumer loans and credit lines. 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 including credit
lines, 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, 2012,
2011, 2010, 2009 and 2008, respectively (in thousands):
December 31,
2012
2011
2010
2009
2008
Commercial real estate
Residential mortgages
Commercial
Home equity
Consumer
$
246,545
$
186,187
$
142,198
$
121,504
$
106,755
54,332
64,900
68,738
1,214
52,595
57,464
67,895
1,019
52,407
46,073
60,378
1,047
55,527
36,036
49,969
895
52,195
33,205
41,186
1,505
Total Loans
$
435,729
$
365,160
$
302,103
$
263,931
$
234,846
The following table sets forth the maturity of fixed and adjustable rate loans as of December 31, 2012 (in
thousands):
Within
One Year
1 to 5
Years
After 5
Years
Total
Commercial real estate
$
19,370
$
24,047
$
187,879
$
231,296
Commercial real estate
$
10,406
$
4,843
$
-
$
15,249
1,649
11,028
1,132
295
41,840
392
-
-
-
2,886
9,235
782
551
-
-
-
52,683
7,570
2,482
137
1,025
55,497
-
-
54,332
21,484
12,849
1,214
43,416
55,889
-
-
Loans with Fixed Rate
Residential mortgages
Commercial
Home equity
Consumer
Loans with Adjustable Rate
Residential mortgages
Commercial
Home equity
Consumer
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 nonaccrual 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 (nonaccrual 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, troubled debt
restructuring loans and foreclosed assets. When a loan is classified as nonaccrual, interest accruals discontinue and
all current year past due interest is reversed against loan interest income and any interest applicable to prior years, is
reversed against the allowance for loan losses. 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. In the case of modified loans that
meet the definition of a troubled debt restructuring loan (“TDR”), loan payments are applied as contractually agreed
to in the TDR modification (ASC 310-40).
We attempt to manage overall credit risk through loan diversification and our loan underwriting and approval
procedures. Due diligence begins at the time we begin to discuss the origination of a loan with a borrower.
50
51
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.
As of December 31, 2012 the Bank had fourteen nonaccrual loans totaling approximately $5.9 million, of which six
loans totaling approximately $2.2 million had specific reserves of $327 thousand and eight loans totaling
approximately $3.8 million had no specific reserve. If interest had been accrued on these non-accrual loans, the
interest income would have been approximately $354 thousand and $310 thousand, respectively, for the years ended
December 31, 2012 and 2011, respectively. Within its nonaccrual loans at December 31, 2012, the Bank had three
residential mortgage loans, one commercial real estate mortgage loan, one home equity loan and one commercial
loan that met the definition of a troubled debt restructuring (“TDR”) loan. TDRs are loans where the contractual
terms of the loan have been modified for a borrower experiencing financial difficulties. These modifications could
include a reduction in the interest rate of the loan, payment extensions, forgiveness of principal or other actions to
maximize collection. At December 31, 2012, two of these residential TDR loans had a cumulative balance of $629
thousand, had a specific reserve connected with them for $7 thousand and were not performing in accordance with
their modified terms. The third residential loan classified as a TDR had an outstanding balance of $1.7 million, had
no specific reserve and is not performing in accordance with its modified terms. The commercial real estate
mortgage loan classified as a TDR had an outstanding balance of $746 thousand, had no specific reserve and is not
performing in accordance with its modified terms. The home equity loan and the commercial loan, each classified
as a TDR, had outstanding balances of $730 thousand and $275 thousand, respectively, had no specific reserves and
are not performing in accordance with their modified terms.
As of December 31, 2011 the Bank had eleven nonaccrual loans totaling approximately $6.2 million, of which five
loans totaling approximately $1.8 million had specific reserves of $327 thousand and six loans totaling
approximately $4.4 million had no specific reserve. If interest had been accrued on these nonaccrual loans, the
interest income would have been approximately $310 thousand for the year ended December 31, 2011. Within its
nonaccrual loans at December 31, 2011, the Bank had three mortgage loans, two residential and one commercial
mortgage that met the definition of a TDR. At December 31, 2011, one of these residential TDR loans had an
outstanding balance of $490 thousand and a specific reserve of $12 thousand and was not performing in accordance
with its modified terms. The second residential loan classified as a TDR had an outstanding balance of $310
thousand and a specific reserve of $105 thousand and was performing in accordance with its modified terms. The
commercial mortgage had an outstanding balance of $398 thousand had no specific reserve and was also performing
in accordance with its modified terms. At December 31, 2011 there were no loans past due more than 90 days and
still accruing interest.
The following table sets forth certain information regarding the Company’s nonaccrual loans, troubled debt
restructured loans, accruing loans 90 days or more past due, and OREO as of December 31, 2012, 2011, 2010, 2009
and 2008:
Total loans ninety days or more past due
5,945
5,798
2,159
3,958
2,017
Performing troubled debt restructured loans
Loans accounted for on a nonaccrual basis:
Commercial real estate
Residential mortgages
Commercial
Home equity
Consumer
Commercial real estate
Residential mortgages
Commercial
Home equity
Consumer
Total nonperforming loans
Other real estate owned
2012
2011
2010
2009
2008
$
1,703
$
1,733
$
1,580
$
780
$
-
2,789
2,017
2,509
325
1,408
2,487
325
1,253
554
25
-
-
-
-
-
-
3,131
1,938
3,557
254
972
-
-
-
-
-
-
-
-
-
-
-
-
389
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
9,502
6,052
3,958
2,017
Total nonperforming assets and performing
troubledg debt restructured loans
$
9,502
$
6,052
$
5,069
$
3,958
$
2,017
The Bank maintains an external independent loan review auditor. The loan review auditor performs periodic
examinations of a sample of commercial loans after the Bank has extended credit. This review process is intended
to identify adverse developments in individual credits, regardless of payment history. The loan review auditor also
monitors the integrity of our credit risk rating system. The loan review auditor reports directly to the audit
committee of 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 (“ALLL”) represents our best estimate of losses known and inherent in our loan
portfolio that are both probable and reasonable to estimate. In determining the amount of the ALLL, we consider the
losses inherent in our loan portfolio and changes in the nature and volume of our loan activities, along with general
economic and real estate market conditions. We utilize a segmented approach which identifies: (1) impaired loans
for which specific reserves are established; (2) classified loans for which a higher allowance is established; and (3)
performing loans for which a general valuation allowance is established. We maintain a loan review system which
provides for a systematic review of the loan portfolios and the early identification of impaired loans. The review of
residential real estate and home equity consumer loans, as well as other more complex loans, is triggered by
identified evaluation factors, including delinquency status, size of loan, type of collateral and the financial condition
of the borrower. Specific loan loss allowances are established for impaired loans based on a review of such
information and/or appraisals of the underlying collateral. General loan loss allowances are based upon a
combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio,
current economic conditions and management’s judgment.
Although specific and general reserves are established in accordance with management’s best estimates, actual
losses are dependent upon future events, and as such, further provisions for loan losses may be necessary in order to
maintain the allowance for loan losses at an adequate level. For example, our evaluation of the allowance includes
consideration of current economic conditions, and a change in economic conditions could reduce the ability of
borrowers to make timely repayments of their loans. This could result in increased delinquencies and increased non-
performing loans, and thus a need to make additional provisions for loan losses. Any provision reduces our net
income. While the allowance is increased by the provision for loan losses, it is decreased by charge-offs, net of
recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent
recoveries, if any, are credited to the allowance. A change in economic conditions could adversely affect the value
of properties collateralizing real estate loans, resulting in increased charges against the allowance and reduced
recoveries, and require additional provisions for loan losses. Furthermore, a change in the composition, or growth, of
our loan portfolio could require additional provisions for loan losses.
52
53
Our ALLL totaled $5.1 million, $4.5 million and $3.7 million respectively, at December 31, 2012, 2011, and 2010.
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 (dollars in
thousands):
2012
2011
2010
2009
2008
Balance, January 1
$ 4,474
$ 3,749
$ 2,792
$ 2,371
$ 1,912
Charge-offs:
Residential mortgages
Consumer loans
Home equity
Commercial
Commercial real estate
Recoveries:
Commercial real estate
Commercial
Consumer loans
(168)
(43)
-
(101)
(340)
-
5
4
-
-
(25)
-
(394)
-
2
2
(160)
(219)
-
-
-
-
-
1
-
(4)
-
-
-
-
-
-
-
-
-
-
-
-
1
-
Net charge-offs
(600)
(458)
(378)
(3)
-
Provision charged to expense
Balance, December 31
1,198
$ 5,072
1,183
$ 4,474
1,335
$ 3,749
424
$ 2,792
459
$ 2,371
Ratio of net charge-offs to average
Outstanding
0.15%
0.14%
0.14%
*
N/A
*
Less than 0.01%
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
(dollars in thousands)
As of December 31,
Balance applicable to:
Real Estate
Commercial
Home Equity
Consumer
Amount ALLL
Amount ALLL
$ 3,472 68.46% 69.05%
$ 2,878 64.33%
1033 20.37% 14.89%
383
24
7.55%
0.47%
15.78%
0.28%
827 18.48%
368
21
8.23%
0.47%
Sub-total
4,912 96.85% 100.00%
4,094 91.51%
100.00%
Unallocated Reserves
160
3.15%
380
8.49%
TOTAL
$ 5,072 100.00%
$ 4,474 100.00%
2012
% of
% of
Total
Loans
2010
% of
% of
Total
Loans
2011
% of
2009
% of
% of
Total
Loans
65.39%
15.74%
18.59%
0.28%
% of
Total
Loans
8.48%
9.92%
0.68%
Balance applicable to:
Real Estate
Commercial
Home Equity
Consumer
Amount ALLL
Amount ALLL
Amount ALLL
$ 2,328 62.10% 65.25%
$ 2,032 72.83%
80.92%
$ 1,774 74.82%
627 16.72% 23.37%
358
22
9.55%
0.59%
10.72%
0.66%
213
247
17
7.63%
8.86%
0.61%
Sub-total
3,335 88.96% 100.00%
2,509 89.93%
100.00%
2,250
94.90% 100.00%
Unallocated Reserves
414 11.04%
281 10.07%
121
5.10%
TOTAL
$ 3,749 100.00%
$ 2,790 100.00%
$ 2,371 100.00%
2008
% of
244
205
27
10.29%
8.65%
1.14%
% of
Total
Loans
78.85%
10.84%
9.11%
1.20%
The provision for loan losses represents our determination of the amount necessary to bring the ALLL to a
level that we consider adequate to provide for 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, existing levels of the ALLL may ultimately prove inadequate
to absorb actual loan losses. However, we have determined, and believe, that the ALLL is at a level
adequate to absorb the probable loan losses in our loan portfolio as of the balance sheet dates.
54
55
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. During 2012
and 2011, the portfolio was composed of U.S. Treasury Securities, obligations of U.S. Government Agencies and
obligations of states and political subdivisions.
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 HTM 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 HTM 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, 2012, total securities aggregated $94.0 million, of which $88.5 million were classified as AFS and $5.5
million were classified as HTM. The Bank had no securities classified as trading.
The following table sets forth the carrying value of the Company’s security portfolio as of the December 31, 2012, 2011,
and 2010, respectively (in thousands):
2012
2011
2010
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
70,051
17,985
88,036
$
70,303
18,177
88,480
$
45,069
11,079
56,148
$
45,321
11,324
56,645
$
18,994
9,029
28,023
$
18,899
9,024
27,923
5,482
5,482
93,518
$
5,482
5,482
93,962
$
4,787
4,787
60,935
$
4,787
4,787
61,432
$
3,728
3,728
31,751
$
3,724
3,724
31,647
$
Available for Sale
Government Sponsored
Enterprise obligations
U.S. Treasury obligations
Total available for sale
Held to Maturity
Obligations of states and
political subdivisions
Total held to maturity
Total Investment Securities
The following tables set forth as of December 31, 2012 and December 31, 2011, the maturity distribution of the
Company’s debt investment portfolio (in thousands):
Maturity of Debt Investment Securities
December 31, 2012
Securities Held to Maturity
Securities Available for Sale
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Weighted
Average
Yield (1)
1 year or less
Obligations of states and political subdivisions
$ 5,482
$ 5,482
$ -
$ -
U.S. Treasury obligations
Government Sponsored Enterprise obligations
-
-
-
-
5,482
5,482
1,001
1,000
2,001
1,005
1,015
2,020
After 1 year to 5 years
U.S. Treasury obligations
Government Sponsored Enterprise obligations
After 5 years to 10 years
U.S. Treasury obligations
Government Sponsored Enterprise obligations
After 10 years
Government Sponsored Enterprise obligations
-
-
-
-
-
-
5,008
6,004
11,012
5,194
6,097
11,291
-
-
-
-
-
-
11,976
47,047
11,978
47,234
59,023
59,212
-
-
-
-
16,000
16,000
15,957
15,957
Total
$ 5,482
$ 5,482
$ 88,036
$ 88,480
1.91%
Maturity of Debt Investment Securities
December 31, 2011
Securities Held to Maturity
Securities Available for Sale
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Weighted
Average
Yield (1)
1 year or less
Obligations of states and political subdivisions
$ 4,787
$ 4,787
$ -
$ -
U.S. Treasury obligations
Government Sponsored Enterprise obligations
-
-
-
-
2,002
2,006
-
-
4,787
4,787
2,002
2,006
0.93%
After 1 year to 5 years
U.S. Treasury obligations
Government Sponsored Enterprise obligations
After 5 years to 10 years
U.S. Treasury obligations
Government Sponsored Enterprise obligations
-
-
-
-
-
-
6,015
14,017
20,032
6,248
14,210
20,458
-
-
-
-
-
-
3,062
31,052
3,071
31,110
34,114
34,181
Total
$ 4,787
$ 4,787
$ 56,148
$ 56,645
(1) Yields have been computed on a fully tax-equivalent basis, assuming a blended tax rate of 41% in 2012 and 2011.
During 2012, the Company sold five securities from its available for sale portfolio. It recognized gains of approximately
$252 thousand from two of the securities sold and a loss of approximately $9 thousand from the sale of three of the
securities, resulting in net gains of approximately $243 thousand from the transactions. The Company did not sell any
securities from its held to maturity portfolio in 2012. During 2011, the Company did not sell any securities from its
available for sale or held to maturity portfolios.
0.66%
1.19%
4.00%
2.60%
1.80%
1.64%
1.71%
1.28%
1.89%
1.77%
2.93%
2.93%
1.08%
0.57%
1.70%
1.85%
1.80%
1.43%
2.26%
2.19%
1.92%
56
57
DEPOSITS
Deposits are our primary source of funds. We experienced a growth of $99.6 million, or 23.9%, in deposits from $416.2
million at December 31, 2011 to $515.7 million at December 31, 2012. This increase consists of increases in interest-
bearing demand accounts, time deposits, noninterest-bearing demand accounts, and savings accounts which increased
$61.2 million, $21.4 million, $16.3 million and $736 thousand, respectively. We believe the overall increase in deposits
reflects our competitive but disciplined rate structure and the public perception of our safety and soundness. During this
interest rate environment, our deposit products have allowed the Bank to increase its overall deposits while still being able
to reduce its overall cost of deposits. The increase is also attributable to the continued referrals of our board of directors,
stockholders, management, and staff.
The following table sets forth the actual amount of various types of deposits for each of the periods indicated:
Non-interest Bearing Demand
Interest Bearing Demand
Savings
Time Deposits
December 31,
(dollars in thousands)
2012
2011
2010
Average
Yield/Rate
0.47%
0.50%
1.83%
Amount
$
65,910
138,484
8,862
302,479
$
515,735
Amount
$
49,585
77,330
8,126
281,122
$
416,163
Average
Yield/Rate
0.36%
0.51%
1.82%
Amount
$
33,244
50,827
6,112
228,238
$
318,421
Average
Yield/Rate
-
0.33%
0.46%
1.82%
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, 2012 (in thousands):
Three months or less
Over three months through 6 months
Over six months through twelve months
Over one year through three years
Over three years
$
41,293
37,153
66,528
47,635
60,847
253,456
$
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, equity to assets ratio, or average equity divided by average total assets and
dividend payout ratio, or dividends declared per share divided by net income per share.
Selected Fiancial 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,
2012
2010
2011
0.80%
7.91%
9.40%
59.26%
0.80%
6.44%
11.05%
62.50%
0.62%
4.24%
13.54%
80.49%
58
59
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
LIQUIDITY
borrow funds.
Our total deposits equaled $515.7 million and $416.2 million, respectively, at December 31, 2012 and 2011. The growth
in funds provided by deposit inflows during this period coupled with our cash position at the end of 2012 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, 2012, 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, 2012, the Bank had
no borrowed funds outstanding. We are an approved member of the Federal Home Loan Bank of New York, or
“FHLBNY.” 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.
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, 2012, we were within the target gap range established by ALCO.
Cumulative Rate Sensitive Balance Sheet
December 31, 2012
(in thousands)
0-3
Months
0-6
Months
0-1
Year
0-5
Years
All
Others
TOTAL
$
700
$
2,720
$
7,503
$
18,794
$
75,168
$
93,962
57,949
24,203
55,888
933
30,563
-
58,687
27,630
55,888
1,277
30,563
-
59,994
48,946
55,888
1,427
30,563
-
62,324
240,801
55,888
11,447
30,563
-
2,576
60,074
-
2,619
-
11,120
64,900
300,875
55,888
14,066
30,563
11,120
Securities, excluding
equity securities
Loans:
Commercial
Real Estate
Home Equity
Consumer
Federal Funds sold and
Interest-Bearing Deposits
in Banks
Other Assets
TOTAL ASSETS
$
170,236
$
176,765
$
204,321
$
419,817
$
151,557
$
571,374
Transaction / Demand
Accounts
Money Market
Savings Deposits
Time Deposits
Other Liabilities
Equity
TOTAL LIABILITIES AND
EQUITY
$
29,121
109,363
8,862
50,113
-
-
$
29,121
109,363
8,862
92,569
-
-
$
29,121
109,363
8,862
172,373
-
-
$
29,121
109,363
8,862
302,479
-
-
$
-
-
-
-
67,829
53,720
$
29,121
109,363
8,862
302,479
67,829
53,720
$
197,459
$
239,915
$
319,719
$
449,825
$
121,549
$
571,374
Dollar Gap
Gap / Total Assets
Target Gap Range
RSA / RSL
$
(27,223)
-4.76%
+/- 35.00%
86.21%
$
(63,150)
-11.05%
+/- 30.00%
73.68%
$
(115,398)
-20.20%
+/- 25.00%
63.91%
$
(30,008)
-5.25%
+/- 25.00%
93.33%
Sensitive Assets to Rate Sensitive Liabilities)
The following table discloses our financial instruments that are sensitive to change in interest rates, categorized by
expected maturity at December 31, 2012. Market risk sensitive instruments are generally defined as on- and off- balance
sheet financial instruments.
Expected Maturity/Principal Repayment
December 31, 2012
(Dollars in thousands)
Avg. Int.
Rate
2013
2014
2015
2016
2017
Total
Fair Value
There-
After
5.37%
$166,255
$29,000
$16,306
$52,009
$106,889
$65,270
$435,729
$438,340
securities…..
2.16% 7,503
- 7,205 2,083 2,003 75,168 93,962 93,962
0.28% 461
0.22% 30,102
–
–
–
–
461 463
30,102 31,117
Interest Rate Sensitive
Assets:
Loans……….
Securities net of equity
Fed Funds
Sold……………….
Interest-earning
Cash……………….
Interest Rate Sensitive
Liabilities :
–
–
–
–
–
–
–
–
–
–
–
–
Demand Deposits…….
0.24% 29,121
–
–
9,645 9,645
Savings Deposits…….
0.50% 8,862
–
–
8,126 8,126
Money Market
Deposits…….
0.51% 109,363
67,685 67,685
(Rate
Time Deposits…….
1.83%
$172,373
$35,811
$21,503
$51,947
$20,845
–
$302,479
$306,918
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 2012, we believed that available hedging
instruments were not cost-effective, and therefore, focused our efforts on our yield-cost spread through retail growth
opportunities.
The Bank had no borrowed funds at December 31, 2012.
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.
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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
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 4.0%.
The following table summarizes the Bank’s risk-based capital and leverage ratios at December 31, 2012 and 2011, as well
as regulatory capital category definitions:
December 31, 2012
December 31, 2011
Minimum Requirements
to be
"Adequately
Capitalized"
Minimum Requirements
to be
“Well Capitalized”
12.07%
13.21%
9.63%
14.01%
15.23%
11.37%
4.00%
8.00%
4.00%
6.00%
10.00%
5.00%
Risk-Based Capital :
Tier 1 Capital Ratio
Total Capital Ratio
Leverage Ratio
The capital levels detailed above represent the continued effect of our successful stock subscription, in combination with
the profitability experienced during 2012 and 2011, 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.
The Bank’s capital ratios as presented in the table above are similar to those of the Company.
As of December 31, 2012, the Company had the following contractual obligations as provided in the table below (in
CONTRACTUAL OBLIGATIONS
thousands):
Payment due by Period
Less than
1 year
1 to 3
years
4 to 5
years
After 5
years
Total
Amounts
Committed
Minimum annual rental under
Remaining contractual maturities
non-cancelable operating leases
$
1,125
$
1,976
$
1,395
$
2,336
$
6,832
of time deposits.............................
172,373
57,314
72,792
-
302,479
Total Contractual Obligations
$
173,498
$
59,290
$
74,187
$
2,336
$
309,311
Additionally, the Bank had certain commitments to extend credit to customers. A summary of commitments to extend
credit at December 31, 2012 is provided as follows (in thousands):
Commercial real estate, construction, and
land development secured by land………
$
44,002
Home equities…...……………………………….
Standby letters of credit and other.………..
23,572
2,370
$
69,944
OFF-BALANCE SHEET ARRANGEMENTS
The Bank’s commitments to extend credit and letters of credit constitute financial instruments with off-balance sheet risk.
See Note 15 of the notes to consolidated financial statements included in this report for additional discussion of “Off-
Balance Sheet” items, which discussion is incorporated in this item by reference.
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.
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The Bank provides convenient full-service banking from 9:00 am to 5:00 pm weekdays and 9:00 am to 1:00 pm on
Saturday in all offices except Hackensack, which has no Saturday hours and Palisade Avenue and Main Street, both in
Fort Lee, which offer full service banking from 7:00 am to 7:00 pm weekdays and Saturday 9:00 am to 1:00 pm.
The banking business remains highly competitive and is increasingly more regulated. 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.
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. As a community bank however, our market area is concentrated in Bergen County, New Jersey, and 84.8% of
our loan portfolio was collateralized by real estate, primarily in our market area, as of December 31, 2012.
Extended Hours
Competition
Concentration
Employees
At December 31, 2012, the Company employed fifty-six full-time equivalent employees. None of these employees are
covered by a collective bargaining agreement. The Company believes its relations with employees to be good.
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.
During the second quarter of 2009, the Bank formed BONJ-New York Corp. The New York subsidiary is engaged in the
business of acquiring, managing and administering portions of Bank of New Jersey’s investment and loan portfolios.
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 seven 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, 320 Haworth Avenue, Haworth, New Jersey, 07641, 4 Park Street, Harrington
Park, New Jersey, 07640, 104 Grand Avenue, Englewood, NJ 07631, and 354 Palisade Avenue, Cliffside Park, NJ 07010.
A ninth location at 585 Chestnut Ridge Road, Woodcliff Lakes NJ 07677 has received approval from the New Jersey
Department of Banking and Insurance, sometimes referred to as “NJDOBI”, and the Federal Deposit Insurance
Corporation, or “FDIC”. The branch is expected to open in 2013.
The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System,
sometimes referred to as the “FRB.” The Bank is supervised and regulated by the FDIC and the NJDOBI. 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 NJDOBI. 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 continues to offer an alternative, community-oriented style of
banking in an area, which is presently dominated by larger, statewide and national institutions. Our goal remains 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.
The specific objectives of the Bank are:
(cid:120)
To provide local businesses, professionals, and individuals with banking services responsive to and determined by
the local market;
(cid:120) Direct access to Bank management by members of the community, whether during or after business hours;
(cid:120)
(cid:120)
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. 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 six additional branch offices,
two in Fort Lee, one in Hackensack, one in Haworth, one in Harrington Park, and one in Englewood, all in Bergen
County, New Jersey.
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Supervision and Regulation
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.
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 is also subject to
comprehensive examination and supervision by the FRB and the Bank is also subject to comprehensive examination and
supervision by NJDOBI and the FDIC. 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 and Bank’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 than 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.
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
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 NJDOBI 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. The Dodd-Frank Act imposed additional requirements on transactions with
affiliates, including an expansion of the definition of “covered transactions” and increasing the amount of time for which
collateral requirements regarding covered transactions must be maintained. These additional requirements became
effective on July 21, 2011.
Securities and Exchange Commission
The Company is also under the jurisdiction of the Securities and Exchange Commission (“SEC”) for matters relating to
the offering and sale of its securities and is subject to the SEC’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 Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Deposit
Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were
merged in 2006. Under the FDIC’s risk-based assessment system in effect through March 31, 2011, insured institutions
were assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other
factors. An institution’s assessment rate depended upon the category to which it is assigned, and certain potential
adjustments established by FDIC regulations, with less risky institutions paying lower assessments.
No institution may pay a dividend if in default of the federal deposit insurance assessment.
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On November 12, 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions,
to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and
2012. The FDIC also adopted a uniform three basis point increase in assessment rates effective on January 1, 2011.
On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act changed the assessment base for
federal deposit insurance from the amount of insured deposits held by the depository institution to the depository
institution’s average total consolidated assets less average tangible equity, eliminating the ceiling on the size of the
deposit insurance fund (“DIF”) and increasing the floor on the size of the DIF. The Dodd-Frank Act established a
minimum designated reserve ratio (“DRR”) of 1.35 percent of the estimated insured deposits, mandates the FDIC to adopt
a restoration plan should the DRR fall below 1.35 percent, and provides dividends to the industry should the DRR exceed
1.50 percent.
On February 7, 2011, the Board of Directors of the FDIC approved a final rule on Assessments, Dividend Assessment
Base and Large Bank Pricing (the “Final Rule”). The Final Rule implements the changes to the deposit insurance
assessment system as mandated by the Dodd-Frank Act. The Final Rule became effective April 1, 2011.
The Final Rule changed the assessment base for insured depository institutions from adjusted domestic deposits to the
average consolidated total assets during an assessment period less average tangible equity capital during that assessment
period. Tangible equity is defined in the Final Rule as Tier 1 Capital and shall be calculated monthly, unless, like us, the
insured depository institution has less than $1 billion in assets, then the insured depository institution will calculate the
Tier 1 Capital on an end-of-quarter basis. Parents or holding companies of other insured depository institutions are
required to report separately from their subsidiary depository institutions.
The Final Rule retains the unsecured debt adjustment, which lowers an insured depository institution’s assessment rate for
any unsecured debt on its balance sheet. In general, the unsecured debt adjustment in the Final Rule will be measured to
the new assessment base and will be increased by 40 basis points. The Final Rule also contains a brokered deposit
adjustment for assessments. The Final Rule provides an exemption to the brokered deposit adjustment to financial
institutions that are “well capitalized” and have composite CAMEL ratings of 1 or 2. CAMEL ratings are confidential
ratings used by the federal and state regulators for assessing the soundness of financial institutions. These ratings range
from 1 to 5, with a rating of 1 being the highest rating.
The Final Rule also creates a new rate schedule that intends to provide more predictable assessment rates to financial
institutions. The revenue under the new rate schedule will be approximately the same. Moreover, it indefinitely suspends
the requirement that it pay dividends from the insurance fund when it reaches 1.5 percent of insured deposits, to increase
the probability that the fund reserve ratio will reach a sufficient level to withstand a future crisis. In lieu of the dividend
payments, the FDIC has adopted progressively lower assessment rate schedules that become effective when the reserve
ratio exceeds 2 percent and 2.5 percent.
The Dodd-Frank Act made permanent the $250,000 limit for federal deposit insurance and increased the cash limit of
Securities Investor Protection Corporation protection from $100,000 to $250,000 and provided unlimited federal deposit
insurance until December 31, 2012 for noninterest-bearing demand transaction accounts at all insured depository
institutions. The unlimited coverage for noninterest-bearing demand transaction accounts was not renewed.
In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late
1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established
quarterly and, during the four quarters ended December 31, 2012, averaged one basis point of assessable deposits.
The FDIC has authority to increase insurance assessments. A significant increase in insurance assessments would likely
have an adverse effect on our operating expenses and results of operations. Management cannot predict what insurance
assessment rates will be in the future.
Deposit insurance may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed the FDIC.
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 cash 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. These restrictions do not
materially influence the Company or the Bank’s ability to pay dividends at this time.
Capital Adequacy Guidelines
The Dodd-Frank Act requires the Federal Reserve Board to apply consolidated capital requirements to a bank holding
company that are no less stringent than those currently applied to depository institutions. Under these standards, trust
preferred securities are excluded from Tier I capital unless such securities were issued prior to May 19, 2010 by a bank
holding company with less than $15 billion in assets. The Dodd-Frank Act additionally requires capital requirements to
be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times
of economic contraction, consistent with safety and soundness.
The FRB and the FDIC have 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 assigned
certain 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. Exceptions include 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.
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, 2012, the Bank’s
Tier 1 and Total Capital ratios were 12.07% and 13.21%, 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 3%. Other banks and bank holding
companies generally are required to maintain a leverage ratio of 4-5%. At December 31, 2012, the Company’s, and the
Bank’s, leverage ratio were 9.63% and 9.63%, respectively.
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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 its 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, 2012, 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.
laws.
The Dodd-Frank Act also:
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 is made publicly available and is 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, 2012, 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, as amended (“Exchange Act”). 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.
The Dodd-Frank Act became law on July 21, 2010. The Dodd-Frank Act implements far-reaching changes across the
Dodd-Frank Act
financial regulatory landscape.
The Dodd-Frank Act creates the Bureau of Consumer Financial Protection (“Bureau”), which is an independent bureau
within the Federal Reserve System with broad authority to regulate the consumer finance industry including regulated
financial institutions such as us, and non-banks and others who are involved in the consumer finance industry. The
Bureau has exclusive authority through rulemaking, orders, policy statements, guidance and enforcement actions to
administer and enforce federal consumer finance laws, to oversee non federally regulated entities, and to impose its own
regulations and pursue enforcement actions when it determines that a practice is unfair, deceptive or abusive (“UDA”).
The federal consumer finance laws and all of the functions and responsibilities associated with them were transferred to
the Bureau on July 21, 2011. While the Bureau has the exclusive power to interpret, administer and enforce federal
consumer finance laws and UDA, the Dodd-Frank Act provides that the FDIC continues to have examination and
enforcement powers over us relating to the matters within the jurisdiction of the Bureau because it has less than $10
billion in assets. The Dodd-Frank Act also gives state attorneys general the ability to enforce federal consumer protection
(cid:120) Applies the same leverage and risk-based capital requirements to most bank holding companies (“BHCs”) that
apply to insured depository institutions;
Requires BHCs and banks to be both well-capitalized and well-managed in order to acquire banks located
outside their home state and requires any BHC electing to be treated as a financial holding company to be both
well-managed and well-capitalized;
Changes the assessment base for federal deposit insurance from the amount of insured deposits held by the
depository institution to the depository institution’s average total consolidated assets less tangible equity,
eliminates the ceiling on the size of the DIF and increases the floor of the size of the DIF;
(cid:120) Makes permanent the $250,000 limit for federal deposit insurance and increases the cash limit of Securities
Investor Protection Corporation protection from $100,000 to $250,000. Unlimited federal deposit insurance for
noninterest-bearing demand transaction accounts at all insured depository institutions was terminated at
December 31, 2012;
Eliminates all remaining restrictions on interstate banking by authorizing national and state banks to establish de
novo branches in any state that would permit a bank chartered in that state to open a branch at that location;
(cid:120)
(cid:120)
(cid:120)
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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.
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.
We are heavily regulated by regulatory agencies at the federal and state levels. We, like most of our competitors, have
faced and expect to continue to face increased regulation and regulatory and political scrutiny, which creates significant
uncertainty for us and the financial services industry in general.
Future Legislation and Regulation
Regulators have increased their focus on the regulation of the financial services industry in recent years. Proposals that
could substantially intensify the regulation of the financial services industry have been and are expected to continue 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.
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Repeals Regulation Q, the federal prohibitions on the payment of interest on demand deposits thereby
permitting depository institutions to pay interest on business transaction and other accounts;
Enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal
Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of
time for which collateral requirements regarding covered transactions must be maintained;
Expands insider transaction limitations through the strengthening of loan restrictions to insiders and the
expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase
agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are
also placed on certain asset sales to and from an insider to an institution, including requirements that such sales
be on market terms and, in certain circumstances, approved by the institution’s board of directors; and
Strengthens the previous limits on a depository institution’s credit exposure to one borrower which limited a
depository institution’s ability to extend credit to one person (or group of related persons) in an amount
exceeding certain thresholds. The Dodd-Frank Act expanded the scope of these restrictions to include credit
exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing
transactions.
While designed primarily to reform the financial regulatory system, the Dodd Frank Act also contains a number of
corporate governance provisions that will affect public companies with securities registered under the Exchange Act. The
Dodd-Frank Act requires the Securities and Exchange Commission to adopt rules which may affect our executive
compensation policies and disclosure. It also exempts smaller issuers, such as us, from the requirement, originally
enacted under Section 404(b) of the Sarbanes-Oxley Act of 2002, that our independent auditor also attest to and report on
management’s assessment of internal control over financial reporting.
Although a significant number of the rules and regulations mandated by the Dodd-Frank Act have been finalized,
including rules regulating compensation of residential mortgage loan originators and mortgage loan servicing practices,
and defining qualified mortgage loans, many of the new requirements called for have yet to be implemented and will
likely be subject to implementing regulations over the course of several years. Given the uncertainty associated with the
manner in which the provisions of the Dodd-Frank Act will be implemented by the various agencies, the full extent of the
impact such requirements will have on financial institutions’ operations is unclear. The Dodd-Frank Act could require us
to make material expenditures, in particular personnel training costs and additional compliance expenses, or otherwise
adversely affect our business, financial condition, results of operations or cash flow. It could also require us to change
certain of our business practices, adversely affect our ability to pursue business opportunities that we might otherwise
consider pursuing, cause business disruptions and/or have other impacts that are as of yet unknown to us. Failure to
comply with these laws or regulations, even if inadvertent, could result in negative publicity, fines or additional expenses,
any of which could have an adverse effect on our business, financial condition, results of operations, or cash flow.
Basel III Proposed Changes in Capital Requirements.
In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity
regulation (''Basel III"). Basel III requires bank holding companies and their bank subsidiaries to maintain more capital,
with a greater emphasis on common equity. Implementation is presently scheduled to be phased in between 2013 and
2019, although it is possible that implementation may be delayed as a result of multiple factors including the current
condition of the banking industry within the U.S. and abroad. Basel III also provides for a "countercyclical capital
buffer," in the range of 0% to 2.5% when fully implemented.
On June 7, 2012, the U.S. banking agencies requested comment on the three proposed rules that, taken together, would
establish an integrated regulatory capital framework implementing Basel III in the U.S. As proposed, U.S.
implementation of Basel III would lead to significantly higher capital requirements and more restrictive leverage and
liquidity ratios than those currently in place. Once adopted, these new capital requirements would be phased in over time.
Comments to the proposed rules were requested by September 7, 2012 in order to begin the gradual integration of the
proposed rules on January 1, 2013. U.S. banking agencies have delayed implementation of the proposed new rules as
they continue to weigh views expressed during the comment period. The ultimate impact that the U.S. implementation of
the new capital and liquidity standards would have on us is currently being reviewed. At this point, we cannot determine
the ultimate effect that any final regulations, if enacted, would have upon our earnings or financial condition. In addition,
important questions remain as to how the numerous capital and liquidity mandates of the Dodd-Frank Act will be
integrated.
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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The principal market in which the Company’s common stock is traded is the NYSE MKT LLC exchange, formerly
NYSE AMEX and the American Stock Exchange. The Company’s common stock trades under the symbol “BKJ”.
The following table sets forth the high and low sales prices for our common stock for each of the indicated periods.
Year Ended December 31, 2012
Fourth quarter
Third quarter
Second quarter
First quarter
Year Ended December 31, 2011
Fourth quarter
Third quarter
Second quarter
First quarter
High
Low
$
$
14.00
10.95
9.81
10.22
11.00
9.97
10.46
11.35
$
10.00
9.16
9.05
8.59
$
8.35
7.44
8.99
9.50
Holders
As of March 18, 2013 there were approximately 1,178 shareholders of our common stock, which includes an estimate of
shareholders who hold their shares in street name.
Dividends
In February 2012, the Company announced an intention to pay a quarterly cash dividend. Cash dividends of $0.06 per
share were paid to shareholders on March 31, 2012, June 29, 2012, September 28, 2012 and December 20, 2012, and the
Company currently expects that comparable quarterly cash dividends will continue to be paid in the future.
In addition, the Company also declared a special cash dividend of $0.24 per share to shareholders of record as of
December 10, 2012 which was paid on December 20, 2012. This was a special dividend and was a non-recurring
dividend. In September, 2011, the Company declared a special and non-recurring $0.40 cash dividend per share to
shareholders of record as of October 17, 2011. This special cash dividend was paid on December 14, 2011.
Future dividends will be subject to approval by the board of directors. The decision to pay, as well as the timing and
amount of any future dividends to be paid by the Company will be determined by the board of directors, giving
consideration to the Company’s earnings, capital needs, financial condition, and other relevant factors.
Under applicable New Jersey law, the Company is permitted to pay dividends on its capital stock if, following the
payment of the dividend, it is able to pay its debts as they become due in the usual course of business, or its total assets
are greater 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.
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.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes our equity compensation plan information as of December 31, 2012:
Number of shares
of common stock
to be issued upon
Weighted-average
exercise of
outstanding
exercise price of
future issuance
outstanding
options, warrants
options, warrants
and rights
and rights
Number of shares
of common stock
remaining
available for
under equity
compensation
plans
187,900
$10.24
30,084
Plan Category
Equity Compensation Plans approved by
security holders:
2006 Stock Option Plan
2007 Non-Qualified Stock Option Plan for
Directors
414,668
$11.50
43,334
2011 Equity Incentive Plan
Equity compensation plans not approved
by security holders
0
-
N/A
-
250,000
-
Total
602,568
$11.11
323,418
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BANCORP OF NEW JERSEY, INC.
Directors and Executive Officers
Board of Directors
Albert F. Buzzetti
Chairman of the Board
and CEO,
Bank of New Jersey
John K. Daily
President and COO
C.A. Shea & Co.
Commercial Surety
Josephine Mauro
Realtor and Owner,
Mauro Realty Company
Michael Bello
President,
Michael Bello Insurance
Agency
Michael Lesler
Vice Chairman, President
and COO,
Bank of New Jersey
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
Shoe Import and Distribution
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
Stephen Crevani
President, Aniero Concrete
Rosario Luppino
Real Estate Developer
Mark J. Sokolich, Esq.
Attorney at Law
Diane M. Spinner
Executive Vice President and
Chief Administrative Officer,
Bank of New Jersey
Executive Officers
Albert F. Buzzetti
Chairman of the Board and
Chief Executive Officer
Michael Lesler
Vice Chairman, President and
Chief Operating Officer
Leo J. Faresich
Executive Vice President and
Chief Lending Officer
Diane M. Spinner
Executive Vice President and
Chief Administrative Officer
Albert F. Buzzetti
Chairman and
Chief Executive
Officer
Michael Lesler
Vice Chairman, President
and Chief Operating Officer
Leo J. Faresich
Executive Vice President
Chief Lending Officer
Officers
Diane M. Spinner
Executive Vice President and
Chief Administrative Officer
Stephanie A. Caggiano
Senior Vice President
Consumer Lending
Rosemarie Yaverian
Vice President
Branch Manager
Allison Peterson
Vice President
Branch Manager
Jamie Cariddi
Vice President
Branch Manager
Lidia Sofia
Vice President
Branch Manager
Cornelia Brummer
Vice President
Marketing Director
Kimberley Tapken
Assistant Vice President
Lending
Richard A. Capone
Senior Vice President
Controller
Paul A. Meyer
Senior Vice President
Commercial Lending
Anna Maria Alberga
Vice President
Branch Manager
Tamara A. Francis
Vice President
Branch Manager
Ronald M. Urtiaga
Senior Vice President
Commercial Lending
Frank Greco
Senior Vice President
Commercial Lending
Kory Buczynski
Vice President
Branch Manager
Jakia Sultana
Vice President
Branch Manager
Suzanne Wirth
Assistant Vice President
Branch Manager
Ryan Petrillo
Assistant Vice President
Branch Manager
Alejandra Pazmino
Vice President
Business Development
Kinga Mikos
Assistant Vice President
Operations
Anthony Cozzitorto
Assistant Vice President
Lending Department
Connie Caltabellatta
Corporate Secretary
Independent Auditors
ParenteBeard LLC
1200 Atwater Drive STE 4500
Malvern, PA 19355
Common Stock Data
Common Stock is traded on
NYSE-Amex LLC Exchange
Under the symbol: BKJ
Regulatory Counsel
Pepper Hamilton LLP
Registrar and Transfer Agent
American Stock Transfer & Trust Co.
STE 400 – 301 Carnegie Center
59 Maiden Lane
Princeton, NJ 08543-5276
New York, NY 10038
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