More annual reports from Bancorp of New Jersey, Inc.:
2017 ReportPeers and competitors of Bancorp of New Jersey, Inc.:
Waterstone Financial, IncTABLE 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.....................................................38-39 Management’s Discussion and Analysis of Financial Condition and Results of Operations .. 40 Business................................................................................................................................... 61 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ............................................................................... 72 Directors and Executive Officers ............................................................................................ 74 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, 2013 and 2012 (Dollars in thousands, except 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 $18,016 and $5,482 at December 31, 2013 and 2012, 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 real estate owned Other assets Total assets Liabilities and Stockholders' Equity Deposits: Noninterest-bearing demand deposits Interest-bearing deposits Demand, 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 5,340,266 at December 31, 2013 and 5,206,932 at December 31, 2012 Retained earnings Accumulated other comprehensive (loss) income Total stockholders' equity Total liabilities and stockholders' equity 2013 2012 $ 2,115 35,168 458 37,741 $ 765 29,852 461 31,078 1,000 68,048 18,011 792 472,465 (339) (5,775) 466,351 250 88,480 5,482 669 435,729 (180) (5,072) 430,477 10,427 1,456 964 6,001 610,791 $ 10,224 1,732 - 2,982 571,374 $ $ 69,620 $ 65,910 219,145 264,555 553,320 1,521 554,841 - 196,369 253,456 515,735 1,919 517,654 - 50,475 7,132 (1,657) 55,950 610,791 $ 49,689 3,747 284 53,720 571,374 $ See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2013 and 2012 (Dollars in thousands, except per share data) Provision for loan losses Net interest income after provision for loan losses Non interest income Fees and service charges on deposit accounts 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 Total interest expense Net interest income Fees earned from mortgage referrals Gains on sale of securities Total non interest income Non interest expense Salaries and employee benefits Occupancy and equipment expense 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 2013 2012 $ 23,635 $ 21,566 1,083 70 9 24,797 796 5,303 6,099 18,698 810 17,888 178 6 195 379 5,495 2,415 360 177 330 747 1,034 10,558 7,709 3,055 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 $ 4,654 $ 4,200 $ 0.88 $ 0.87 $ 0.81 $ 0.81 See accompanying notes to consolidated financial statements 4 5 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31, 2013 and 2012 (Dollars in Thousands) Net income Other comprehensive income: Net unrealized holding losses on securities available for sale arising during the period, net of income tax benefit of ($1,251) and ($109), respectively Reclassification adjustment for gain on sale of securities, net of income tax expense of $63 and $86, respectively Other comprehensive (loss) income Comprehensive income 2013 2012 $ 4,654 $ 4,200 (2,073) (187) 132 (1,941) 2,713 $ 157 (30) 4,170 $ See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Years ended December 31, 2013 and 2012 (Dollars in Thousands) Common Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Balance at January 1, 2012 2,046 314 51,906 Stock based compensation Dividends on common stock ($0.48 per share) Net income Total other comprehensive loss Exercise of stock options (53,334 shares) Stock based compensation Dividends on common stock ($0.24 per share) Net income Total other comprehensive loss 49,546 143 - - - - - - 614 172 Balance at December 31, 2012 49,689 3,747 (2,499) 4,200 (1,269) 4,654 - - - - - (30) 284 - - - - - - - (1,941) 143 (2,499) 4,200 (30) 53,720 614 172 (1,269) 4,654 (1,941) Balance at December 31, 2013 $ 50,475 $ 7,132 $ (1,657) $ 55,950 See accompanying notes to consolidated financial statements 6 7 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2013 and 2012 (Dollars in Thousands) Years ended December 31, 2013 and 2012 (In Thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by Operating activities: Provision for loan losses Amortization of securities premiums Deferred tax benefit Depreciation and amortization Stock based compensation Accretion of net loan origination fees Gain on sale of securities Changes in operating assets and liabilities: Decrease (increase) in accrued interest receivable (Increase) decrease in other assets (Decrease) increase 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 Proceeds from sales of securities available for sale Purchase of interest bearing time deposits Purchase of restricted investment in bank stock Net increase in loans Purchases of premises and equipment Net cash used in investing activities Cash flows from financing activities: Net increase in deposits Increase in short term borrowings Repayment of short term borrowing Proceeds from the exercise of options Dividends paid Net cash provided by financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental information: Cash paid during the year for: Interest Taxes Supplemental disclosure of non-cash investing and financing transactions: Loans transferred to other real estate owned 2013 2012 $ 4,654 $ 4,200 810 88 (354) 520 172 231 (195) 276 (1,477) (398) 4,327 (48,000) (24,008) 11,479 18,031 47,379 (750) (123) (37,879) (723) (34,594) 37,585 - - 614 (1,269) 36,930 6,663 31,078 37,741 $ 1,198 - (99) 490 143 114 (243) (217) 191 146 5,923 (100,676) (5,781) 5,086 51,294 17,737 - (120) (71,169) (511) (104,140) 99,572 19,000 (19,000) - (2,499) 97,073 (1,144) 32,222 31,078 $ $ $ 6,142 3,680 $ $ 6,005 2,747 $ 964 $ - See accompanying notes to consolidated financial statements. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. Summary of Significant Accounting Policies Basis of Financial Statement Presentation The accompanying consolidated financial statements include the accounts of Bancorp of New Jersey, Inc. (the “Company”), and its direct wholly-owned subsidiary, Bank of New Jersey (the “Bank”) 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, 2013 presentation. These reclassifications did not have an impact on income, stockholders’ equity or cash flows as previously reported. 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. GAAP. 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, 2013 Consolidated Financial Statements. Management believes there were no events that occurred after December 31, 2013, 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. 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, 2013 and 2012. 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 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. 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 loan 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 for loan losses 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 is 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 homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include: 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. 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 (“TDRs”) 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. Loans classified as TDRs are designated as impaired and evaluated for impairment until they are ultimately repaid in full or foreclosed and sold. 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. The Company accounts for stock options under these recognition and measurement principles. The Company recorded stock-based compensation expense of $172,000 and $143,000 during 2013 and 2012, respectively. At December 31, 2013, the Company had no unrecognized compensation expense related to stock options. At December 31, 2013, the Company had $867,000 of unrecognized compensation expense related to unvested restricted stock granted in 2013. 12 13 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 740, Income Taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Bank applied ASC Topic 740 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 $109 thousand and $119 thousand for 2013 and 2012, 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. Restricted Investment in Bank Stock 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 $692 thousand and $569 thousand and Atlantic Community Bankers Bank, formerly Atlantic Central Bankers Bank (ACBB) of $100 thousand and $100 thousand, as of December 31, 2013 and 2012, respectively. 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, 2013 and 2012. Management believes no impairment charge is necessary related to the FHLB or ACBB restricted stock as of December 31, 2013. 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, 2013 and 2012, these reserve balances amounted to $634 thousand and $1.7 million, respectively, and are reflected in interest bearing deposits in banks. NOTE 2. Securities A summary of securities held to maturity and securities available for sale at December 31, 2013 and 2012 is as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 10,014 $ - $ - $ 10,014 2013 Securities Held to Maturity: Obligations of states and political subdivisions Government sponsored enterprise obligations U.S. Treasury obligations Total securities held to maturity Securities Available for Sale: U.S. Treasury obligations Government sponsored enterprise obligations Total securities available for sale 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 3,998 3,999 18,011 6,733 64,000 70,733 17,985 70,051 88,036 Total securities $ 88,744 $ 10 $ (2,690) $ 86,064 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 5,482 $ - $ - $ 5,482 10 10 - - - - 285 488 773 - (5) (5) (414) (2,271) (2,685) 4,008 3,994 18,016 6,319 61,729 68,048 (93) (236) (329) 18,177 70,303 88,480 Total securities $ 93,518 $ 773 $ (329) $ 93,962 Securities with an amortized cost of $8.4 million and a fair value of $8.1 million were pledged to secure public funds on deposit at December 31, 2013. 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. For the year ended December 31, 2013, the Company sold sixteen securities from its available for sale portfolio. It recognized a gain of approximately $541 thousand from the sale of seven securities, a loss of approximately $346 thousand from the sale of eight securities and no gain or loss from the sale of one security, resulting in net gains of approximately $195 thousand from the transactions. The Company did not sell any securities from its held to maturity portfolio in 2013. 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 14 15 thousand from the transactions. The Company did not sell any securities from its held to maturity portfolio in 2012. The unrealized losses, categorized by the length of time of continuous loss position, and the fair value of related securities available for sale at December 31, 2013 and 2012 are as follows (in thousands): 2013 Securities Held to Maturity: U.S. Treasury obligations Securities Available for Sale: U.S. Treasury obligation Government Sponsored Enterprise obligations Total securities available for sale Less than 12 Months Unrealized Losses Fair Value More than 12 Months Unrealized Losses Fair Value Total Fair Value Unrealized Losses $ 3,994 $ 5 $ - $ - $ 3,994 $ 5 - - 6,319 414 6,319 414 41,757 41,757 1,243 1,243 16,972 23,291 1,028 1,442 58,729 65,048 2,271 2,685 Total securities $ 45,751 $ 1,248 $ 23,291 $ 1,442 $ 69,042 $ 2,690 2012 U.S. Treasury obligation Government Sponsored Enterprise obligations Total securities available for sale Less than 12 Months Unrealized Losses $ Fair Value 6,749 $ 93 More than 12 Months Unrealized Losses $ - Fair Value $ - Total Fair Value $ 6,749 Unrealized Losses $ 93 NOTE 3. Loans and Allowance for Loan Losses Loans at December 31, 2013 and 2012, are summarized as follows (in thousands): 32,765 39,514 $ 236 329 $ - - $ - $ - 32,765 39,514 $ 236 329 $ Unrealized losses at December 31, 2013 consisted of losses on twenty five investments in government sponsored enterprise obligations, and three in U. S. Treasury Securities, all of which were caused by interest rate increases. Nine of the investments with unrealized losses at December 31, 2013 were in a loss position for more than twelve months. 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, 2013. 16 17 The following table sets forth as of December 31, 2013, the maturity distribution of the Company’s held to maturity and available for sale portfolios (in thousands): 2013 Securities Held to Maturity Securities Available for Sale Amortized Cost Fair Value Amortized Cost Fair Value 1 year or less $ 10,014 $ 10,014 $ - $ - After 1 year to 5 years 7,997 8,002 After 5 years to 10 years After 10 years - - - - 29,000 41,733 - 28,573 39,475 - $ 18,011 $ 18,016 $ 70,733 $ 68,048 Commercial real estate Residential mortgages Commercial Home equity Consumer 2013 2012 $ 298,548 $ 246,545 53,601 57,634 61,204 1,478 54,332 64,900 68,737 1,215 $ 472,465 $ 435,729 The Bank grants 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 designs its lending policies and procedures to manage the exposure to such risks and that the allowance for loan losses is maintained at a level which is believed to be 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 investment in loan receivables as of and for the year ended December 31, 2013 (in thousands): Commercial Real Estate Residential Mortgages Commercial Home Equity Consumer Unallocated Total Allowance for loan losses: Beginning Balance 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 $ $ 3,150 (89) - 646 3,707 $ $ 322 - - 3 325 $ 1,033 - 4 (68) 969 $ $ $ $ 383 - - 210 593 24 (22) - 24 26 $ $ 160 - - (5) 155 5,072 (111) 4 810 5,775 $ $ $ $ 237 $ 56 $ 50 $ 261 $ - $ - $ 604 $ 3,470 $ 269 $ 919 $ 332 $ 26 $ 155 $ 5,171 $ 298,548 $ 53,601 $ 57,634 $ 61,204 $ 1,478 $ - $ 472,465 $ 4,204 $ 5,661 $ 50 $ 1,733 $ - $ - $ 11,648 $ 294,344 $ 47,940 $ 57,584 $ 59,471 $ 1,478 $ - $ 460,817 As of December 31, 2013 and 2012 the Bank had no accruing loans greater than 90 days delinquent. The following table presents the activity in the allowance for loan losses and recorded investment in loan receivables as of and for the year ended December 31, 2012 (in thousands): Commercial Real Estate Residential Mortgages Commercial Home Equity Consumer Unallocated Total 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, 2013 and 2012 (in thousands): 2013 Commercial real estate Residential mortgages Commercial Home equity Consumer Total 2012 Commercial real estate Residential mortgages Commercial Home equity Consumer Total - - - 160 119 - - 10 - - - 35 184 - - - 30-59 Days 60-89 Days Greater than Total Past Total Loans Nonaccrual Past Due $ - Past Due $ - 90 Days Due Current Receivables Loans $ 1,700 $ 1,700 $ 296,848 $ 298,548 $ 1,700 2,608 50 673 - 2,608 50 833 35 50,993 57,584 60,371 1,443 53,601 57,634 61,204 1,478 2,608 50 673 - $ 160 $ 35 $ 5,031 $ 5,226 $ 467,239 $ 472,465 $ 5,031 30-59 Days 60-89 Days Greater than Total Past Total Loans Nonaccrual Past Due $ - Past Due $ - 90 Days Due Current Receivables Loans $ 1,704 $ 1,704 $ 244,841 $ 246,545 $ 1,704 2,509 325 1,408 - 2,693 444 1,408 10 51,639 64,456 67,329 1,205 54,332 64,900 68,737 1,215 2,509 325 1,408 - $ 129 $ 184 $ 5,946 $ 6,259 $ 429,470 $ 435,729 $ 5,946 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, 2013 and 2012 (in thousands): 2013 Mortgages Commercial Home Equity Consumer Total Commercial Real Estate Residential $ 294,741 $ 48,120 $ 56,084 $ 59,531 $ 1,478 $ 459,954 2,107 1,700 - 2,873 2,608 - 1,500 50 - 1,000 673 - $ 298,548 $ 53,601 $ 57,634 $ 61,204 $ 1,478 $ 472,465 2012 Mortgages Commercial Home Equity Consumer Total Commercial Real Estate Residential $ 241,682 $ 51,823 $ 63,075 $ 67,329 $ 1,215 $ 425,124 4,863 - - 2,509 - - 1,500 325 - 1,408 - - $ 246,545 $ 54,332 $ 64,900 $ 68,737 $ 1,215 $ 435,729 - - - - - - 7,480 5,031 - 1,500 9,105 - Pass Special Mention Substandard Doubtful Total Pass Special Mention Substandard Doubtful Total $ 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 18 19 Allowance for loan losses: Beginning Balance 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 470 (168) - 20 322 827 (340) 3 543 1,033 368 (101) - 116 383 21 $ - - 3 24 $ 380 - - (220) 160 4,474 (609) 9 1,198 5,072 $ 2,408 - 6 736 3,150 $ $ $ $ $ $ $ $ $ $ $ The following tables provide information about the Bank’s impaired loans as of and for the years ended December 31, 2013 and 2012 (in thousands): 2013 Impaired loans with specific reserves: Commercial real estate Residential mortgages Commercial Home equity Recorded Investment $ 957 974 50 1,594 Unpaid Principal Balance $ 957 1,185 50 1,594 Total impaired loans with specific reserves 3,575 3,786 Impaired loans with no specific reserves: Commercial real estate Residential mortgages Home equity Total impaired loans with no specific reserves 3,247 4,687 139 8,073 3,247 4,687 240 8,174 Related Allowance $ 237 56 50 261 604 - - - - Total impaired loans $ 11,648 $ 11,960 $ 604 2012 Impaired loans with specific reserves: Commercial real estate Residential mortgages Commercial Home equity Recorded Investment Unpaid Principal Balance Related Allowance $ 957 $ 957 $ 258 629 50 523 840 50 523 Total impaired loans with specific reserves 2,159 2,370 Impaired loans with no specific reserves: Commercial real estate Residential mortgages Commercial Home equity Total impaired loans with no specific reserves 4,304 1,880 275 885 7,344 4,304 1,880 275 986 7,445 7 50 12 327 - - - - - Year Ended December 31, 2013 Average Recorded Investment Interest Income Received Year Ended December 31, 2012 Average Recorded Investment Interest Income Received $ 957 $ $ 958 $ - - - 9 9 201 18 - 3 222 Impaired loans with specific reserves: Commercial real estate Residential mortgages Commercial Home equity Total impaired loans with specific reserves Impaired loans with no specific reserves: Commercial real estate Residential mortgages Commercial Home equity 975 50 1,383 3,365 2,963 4,107 165 711 7,946 - - - 42 42 51 164 - 3 218 Total impaired loans with no specific reserves Total impaired loans $ 11,311 $ 260 $ 6,953 $ 231 The following table presents TDR loans as of December 31, 2013 and 2012 (in thousands): 2013 Residential mortgages Commercial real estate Home equity 2012 Residential mortgages Commercial real estate Commercial Home equity $ 3,256 $ 7,766 Accrual Number of Nonaccrual Number of Status Loans Status Loans $ 3,053 397 1,060 $ 4,510 Status $ - 3,557 - - $ 2,514 742 - $ 2,285 746 275 730 2 1 2 5 2 2 - - - Accrual Number of Nonaccrual Number of Loans Status Loans Total $ 5,567 1,139 1,060 Total $ 2,285 4,303 275 730 $ 3,557 $ 4,036 $ 7,593 764 50 523 2,295 1,792 1,722 275 869 4,658 - 4 1 5 3 1 1 1 6 Total impaired loans $ 9,503 $ 9,815 $ 327 20 21 The following table summarizes information in regards to troubled debt restructurings that occurred during the years ended December 31, 2013 and 2012 (in thousands): 2013 Number of Loans Residential mortgages Home equity 1 1 2 2012 Number of Loans Residential mortgages Commercial real estate Commercial loan Home equity 1 2 1 1 5 Pre-Modification Outstanding Recorded Investments Post- Modification Outstanding Recorded Investments $ $ $ $ 179 60 239 179 60 239 Pre-Modification Outstanding Recorded Investments Post- Modification Outstanding Recorded Investments $ $ 1,656 3,906 275 730 6,567 1,656 3,906 275 730 6,567 $ $ The following table displays the nature of modifications during the years ended December 31, 2013 and 2012 (in thousands): NOTE 5. Deposits 2013 Pre-modification outstanding recorded investment: Residential mortgages Home equity 2012 Pre-modification outstanding recorded investment: Residential mortgages Commercial real estate Commercial Home equity Rate Modification Term Modification Interest Only Modification Payment Modification Combination Modification Total Modifications $ $ 179 60 239 $ $ - - - - $ - $ - $ $ - - - $ $ - - - $ $ 179 60 239 Rate Modification Term Modification Interest Only Modification Payment Modification Combination Modification Total Modifications $ - $ - $ - $ - $ - $ - $ - $ - $ $ 1,656 3,906 275 730 6,567 1,656 3,906 275 730 6,567 $ $ During the the year ended December 31, 2013, the Bank had one residential mortgage loan meeting the definition of a TDR which had a payment default. This loan had an accumulated unpaid principal balance of $250 thousand at December 31, 2013. This loan also had a total of $15 thousand of specific reserves. 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 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. NOTE 4. Premises and Equipment At December 31, 2013 and 2012, premises and equipment consists of the following (in thousands): Land Building Furniture and fixtures Equipment Less accumulated depreciation and amortization 2013 2012 $ 4,828 $ 4,828 6,127 765 1,595 13,315 2,888 5,791 637 1,336 12,592 2,368 Total premises and equipment, net $ 10,427 $ 10,224 Depreciation expense amounted to $520 thousand and $490 thousand for the years ended December 31, 2013 and 2012, respectively. At December 31, 2013 and 2012, 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 2013 2012 $ 61,181 $ 50,113 99,778 60,942 54,493 21,559 16,864 122,260 35,811 21,503 51,947 20,845 $ 314,817 $ 302,479 NOTE 6. Short Term Borrowings At December 31, 2013 and 2012, the Bank has no borrowed funds outstanding. The Bank has a $12 million overnight line of credit facility available with First Tennessee Bank and a $10 million overnight line of credit with Atlantic Community Bankers Bank for the purchase of federal funds in the event that temporary liquidity needs arise. Additionally, the Bank is 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, 2013 and 2012 is as follows (in thousands): Current tax expense: Federal State Deferred income tax benefit: Federal State 2013 2012 $ 2,659 750 $ 2,229 617 (252) (102) (42) (57) Income tax expense $ 3,055 $ 2,747 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, 2013 and 2012 are as follows (in thousands): Deferred tax assets: Start up expenses Allowance for loan losses Accrued expenses Stock compensation plans Unrealized loss on AFS securities Total gross deferred tax assets Deferred tax liabilities: Unrealized gain on AFS securities Deferred loan costs Prepaid expenses Other Total gross deferred tax liabilities 2013 2012 $ 257 2,248 272 428 1,028 4,233 $ 292 1,942 170 445 - 2,849 - (81) (78) (55) (214) (160) (82) (61) (69) (372) Net deferred tax asset $ 4,019 $ 2,477 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 2013 and 2012, 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 $ 2,621 $ 2,362 2013 2012 Increase (decrease) in taxes resulting from: State taxes, net of federal income tax expense Tax exempt income Stock-based compensation Meals and entertainment Other 428 (16) 20 7 (5) 370 (6) 18 6 (3) $ 3,055 $ 2,747 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 2010 through 2012 remain open to examination by taxing authorities. NOTE 8. Leases The Bank leases banking facilities under operating leases which expire at various dates through December 31, 2026. These leases do contain certain options to renew the leases. Rental expense amounted to $1.2 million and $979 thousand, respectively, for the years ended December 31, 2013 and December 31, 2012. 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, 2013 (in thousands): Year ending December 31, 2014 2015 2016 2017 2018 Thereafter 1,133 1,012 928 648 406 2,016 $ 6,143 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, 2013 and 2012, 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. 24 25 The following table represents a summary of related-party loan activity during the years ended December 31, 2013 and 2012 (in thousands): 2013 2012 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 year ended December 31, 2012, 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 year ended December 31, 2012. Outstanding loans at beginning of the year Advances Repayments Outstanding loans at end of the year $ 31,701 6,947 (4,639) 34,009 $ 37,568 5,359 (11,226) 31,701 $ $ Two of our directors have acted as the Bank’s counsel on several loan closings. During 2013 and 2012 the total cost of such work has been reimbursed by the respective loan customers and totals $326 thousand and $307 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 $22 thousand and $42 thousand for the years ended December 31, 2013 and 2012, respectively. 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 $153 thousand and $126 thousand for the years ended December 31, 2013 and 2012, respectively. The Bank rents office space from entitites related to some of the Company’s directors. The total amount of rent expense to these entities was $312 thousand and $162 thousand for the years ended December 31, 2013 and 2012, respectively. Our audit committee or the disinterested directors have reviewed all transactions and relationships with directors and the businesses in which they maintain interests and have approved each such transaction and relationship. NOTE 10. Earnings Per Share The Company’s calculation of earnings per share is as follows for the years ended December 31, 2013 and 2012 (in thousands except per share data):(cid:3) 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 2013 2012 $ 4,654 $ 4,200 5,289 0.88 $ 5,207 0.81 $ $ 4,654 $ 4,200 5,289 79 5,207 8 5,368 0.87 $ 5,215 0.81 $ Non-qualified options to purchase 331,334 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; incentive stock options to purchase 97,900 shares of common stock at a weighted average price of $9.09; and 80,000 unvested shares of restricted stock were included in the computation of diluted earnings per share for the year ended December 31, 2013. Non-qualified options to purchase 414,668 shares of common stock at a weighted average price of $11.50; and 26 27 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 approximately $42.7 million. In 2013, the Company declared four quarterly cash dividends in the amount of $0.06 per share. These cash dividends were paid to shareholders on March 31, 2013, June 28, 2013, September 30, 2013 and December 31, 2013, respectively, and the Company expects that comparable quarterly cash dividends will continue to be paid in the future. The cash dividends were paid from the retained earnings of the Company. In 2012, the Company declared four quarterly cash dividends. 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. 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 a non-recurring dividend. 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 Company’s stock on the date of grant. At December 31, 2013 and 2012, incentive stock options to purchase 210,900 shares have been granted to employees of the Bank. A summary of stock option activity under the 2006 Stock Option Plan during the year ended December 31, 2013 is presented below: Weighted Average Exercise Price per Share Aggregate Intrinsic Value (1) Number of Shares Weighted Average Remaining Contractual Term Outstanding at December 31, 2012 187,900 $ 10.24 Granted Forfeited Exercised - - - - - - Outstanding at December 31, 2013 187,900 $ 10.24 $ 591,070 Exercisable at December 31, 2013 187,900 $ 10.24 $ 591,070 3.44 3.44 (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, 2013. This amount changes based on the changes in the market value in the Company’s common stock. Under the 2006 Stock Option Plan, there were no unvested options at December 31, 2013. 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. The option price per share is the market value of the Company’s common stock on the date of grant. At December 31, 2013 and 2012, non-qualified options to purchase 331,334 and 414,668 shares of the Company’s stock were issued to non-employee directors of the Company. A summary of the stock option activity under the 2007 Non-Qualified Stock Option Plan for the year ended 2013 is as follows: Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price per Share $ 11.50 Number of Shares 414,668 Aggregate Intrinsic Value (1) - (30,000) (53,334) - 11.50 11.50 $ $ $ $ 56,700 100,801 Outstanding at December 31, 2012 Granted Forfeited Exercised Under the 2007 Directors Stock Option Plan, there were no unvested options at December 31, 2013. 2011 Equity Incentive Plan During 2011, the shareholders of the Company approved the Bancorp of New Jersey, Inc. 2011 Equity Incentive Plan. This plan authorizes the issuance of up to 250,000 shares of the Company’s common stock, subject to adjustment in certain circumstances described in the Plan, pursuant to awards of incentive stock options or non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units or performance awards. Employees, directors, consultants, and other service providers of the Company and its affiliates (primarily the Bank) are eligible to receive awards under the Plan, provided, that only employees are eligible to receive incentive stock options. During the year ended December 31, 2013, 90,000 shares of restricted stock were granted to the executive officers and directors of the Company subject to forfeiture during a five year vesting term and 10,000 of these shares were forfeited back to the Company. The awards have been recorded at their fair market value of $13.00 per share at the date of the grant and are being amortized to expense over the vesting period. For the twelve months ended December 31, 2013, $173,000 was recorded as expense for these awards and approximately $867,000 remains to be expensed over the next 50 months. At December 31, 2013, no shares were vested. 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 $69 thousand and $66 thousand during 2013 and 2012, 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, 2013 and 2012, 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. Outstanding at December 31, 2013 331,334 $ 11.50 $ 626,221 Exercisable at December 31, 2013 331,334 $ 11.50 $ 626,221 3.81 3.81 The following is a summary of the Bank’s actual capital amounts and ratios as of December 31, 2013 and 2012, compared to the FDIC minimum capital adequacy requirements and the FDIC requirements for classification as a well-capitalized institution (dollars in thousands): (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, 2013. This amount changes based on the changes in the market value in the Company’s common stock. 28 29 FDIC requirements Minimum Capital For Classification Bank actual Adequacy As Well Capitalized Amount Ratio Amount Ratio Amount Ratio $57,607 9.45% $24,376 4.00% $30,470 5.00% $57,607 $63,382 11.89% 13.08% $19,386 $38,773 4.00% 8.00% $29,079 $48,466 6.00% 10.00% $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% 2013 Leverage (Tier 1) capital Risk-based capital: Tier 1 Total 2012 Leverage (Tier 1) capital 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, 2013 totaled $104.2 million compared to $67.6 million at December 31, 2012. Most of the Bank’s lending activity is with customers located in Bergen County, New Jersey. At December 31, 2013 and 2012, the Bank had outstanding letters of credit to customers totaling $2.8 million and $2.4 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, 2013 and 2012, such amounts were deemed not material. NOTE 15. Financial Information of Parent Company The parent company, Bancorp of New Jersey, Inc, was incorporated during November, 2006. The holding company reorganization with Bank of New Jersey was consummated on July 31, 2007. The following information represents the parent only balance sheets as of December 31, 2013 and 2012, respectively, the Statements of Income for the twelve months ended December 31, 2013 and December 31, 2012, and the Statements of Cash Flows for the twelve months ended December 31, 2013 and December 31, 2012 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, 2013 2012 $ 55,950 $ 55,950 $ 53,720 $ 53,720 $ 55,950 $ 55,950 $ 53,720 $ 53,720 Equity in undistributed earnings of subsidiary bank Net income 2013 2012 $ 4,654 $ 4,654 $ 4,200 $ 4,200 Statement of Income Years ended December 31, (in thousands) 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 2013 2012 $ 4,654 $ 4,200 (4,654) - 1,269 1,269 (1,269) (1,269) - - (4,200) - 2,499 2,499 (2,499) (2,499) - - $ - $ - NOTE 16. Fair Value Measurement and Fair Value of Financial Instruments U. S. GAAP 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). 30 31 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. - - Description Securities available for sale: U.S. Treasury obligations Government sponsored enterprise obligations Description Securities available for sale: U.S. Treasury obligations Government sponsored enterprise obligations 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, 2013 and December 31, 2012, respectively, are as follows (in thousands): (Level 1) (Level 2) (Level 3) Quoted Prices in Active Markets Significant Other December 31, for Identical 2013 Assets Observable Inputs Significant Unobservable Inputs $ 6,319 $ - $ 6,319 $ - Total securities available for sale $ 68,048 $ - $ 68,048 $ 61,729 61,729 (Level 1) (Level 2) (Level 3) Quoted Prices in Active Markets Significant Other December 31, for Identical 2012 Assets Observable Inputs Significant Unobservable Inputs $ 18,177 $ - $ 18,177 $ - Total securities available for sale $ 88,480 $ - $ 88,480 $ 70,303 70,303 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, 2013 and December 31, 2012, 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 2013 Identical Assets Observable Inputs Unobservable Inputs $ 2,971 $ - $ - $ 2,971 (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 - - - - 32 33 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, 2013 Fair Value Estimate Valuation Techniques Unobservable Input Range (Weighted Average) Impaired loans $ 2,971 Appraisal of Collateral (1) Appriasal Adjustments (2) 0% - 28.1% (-15.8%) Liquidation Expenses (2) 0% - 41.8% (-21.2%) Financial assets: December 31, 2012 Impaired loans $ 1,982 Appraisal of Collateral (1) Appriasal Adjustments (2) 0% - 36.0% (-23.6%) 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. (2) Appriasals may be adjusted for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appriasal adjustments are presented as a percent of the appraisal. 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 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 presented in the table below at December 31, 2013 and 2012: Fair value estimates and assumptions are set forth below for the Company’s financial instruments at December 31, 2013 and 2012 (in thousands): (Level 1) (Level 2) (Level 3) December 31, 2013 Identical Assets Observable Inputs Inputs Carrying amount Estimated Fair Value Quoted Prices in Significant Active Markets for Significant Other Unobservable Cash and cash equivalents $ 37,741 $ 37,741 $ 37,741 $ - $ - Interest bearing time deposits 1,000 1,000 - 1,000 - Securities available for sale Securities held to maturity 68,048 68,048 - 68,048 18,011 18,016 - 18,016 Restricted investment in bank stock 792 792 - 792 - Net loans 466,351 468,463 - - 468,463 Accrued interest receivable 1,456 1,456 - 1,456 - Financial liabilities: Deposits Accrued interest payable 635 635 - 635 553,320 544,483 229,666 314,817 - - 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 - - Cash and Cash Equivalents and Interest Bearing Time Deposits 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. The carrying amount of restricted investment in bank stock approximates fair value, and considers the Restricted Investment in Bank Stock limited marketability of such securities. 34 35 Loans Receivable 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 approximate carrying values. Impaired loans Impaired loans are those for which the Company has measured impairment generally based on the fair value of the loan’s collateral or discounted cash flows based upon the expected proceeds. Fair value is generally based upon independent third-party appraisals of the properties. 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 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. The fair value of other real estate owned is based upon independent third party appraisal values of the collateral or management’s estimation of the value of the collateral. These assets are included as Level 3 fair values. Deposits 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. Limitation The preceding fair value estimates were made at December 31, 2013 and 2012 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, 2013 and 2012, no attempt was made to estimate the value of anticipated future business. Furthermore, certain tax implications related to the realization of the unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into the estimates. NOTE 17. Accumulated Other Comprehensive Income Reclassifications out of accumulated other comprehensive income for the year ended December 31, 2013 are as follows (in thousands): Details About Accumulated Other Comprehensive Income Components Year ended December 31, 2013 Available for Sale Securities Amount Reclassified from Accumulated Other Comprehensive Income Affected Line Item in the Statements of Income Realized gain on sale of securities $ 195 Gains on sale of securities (63) Income tax expense Total reclassifications $ 132 Net of tax NOTE 18. Recent Accounting Pronouncements 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. This ASU did not have a significant impact on the Company’s consolidated financial statements. ASU 2014-04; In January, 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. This ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The ASU also requires additional related interim and annual disclosures. The guidance in this ASU is effective for annual and interim periods beginning after December 15, 2014. The implementation of ASU 2014-01 should not have a material impact on our financial position or results of operation. 36 37 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Bancorp of New Jersey, Inc. We have audited the accompanying consolidated balance sheet of Bancorp of New Jersey, Inc. and subsidiary (the “Company”) as of December 31, 2013 and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit 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 audit provides 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 at December 31, 2013, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Bancorp of New Jersey, Inc. We have audited the accompanying consolidated balance sheet of Bancorp of New Jersey, Inc. and subsidiary (the “Company”) as of December 31, 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended. The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit 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 consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. New York, New York March 31, 2014 Wilkes-Barre, Pennsylvania March 28, 2013 38 39 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 economic conditions, particularly those 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 eight 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, 104 Grand Avenue, Englewood, NJ 07631, 354 Palisade Avenue, Cliffside Park, NJ 07010, and 585 Chestnut Ridge Road, Woodcliff Lake, NJ 07677. Our ninth location will be located at 750 East Palisade Avenue, Englewood Cliffs, NJ 07632 and is expected to open during 2014. 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 40 (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 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, growth or a change in the composition of our loan portfolio could require additional provisions for loan losses. At December 31, 2013 and 2012, respectively, we consider the ALLL of $5.8 million and $5.1 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 period in which the deferred tax asset or liability is expected to be settled or realized. The effect on 41 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, 2013 and 2012, the bank had eighteen and sixteen 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, 2013 consisted of losses on twenty five investments in government sponsored enterprise obligations, and three 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, 2013. Nine of the investments with unrealized losses at December 31, 2013 were in a loss position for more than twelve months. At December 31, 2013 and 2012, respectively, we did not have any other-than-temporarily impaired securities. RESULTS OF OPERATIONS - 2013 versus 2012 Our results of operations depend primarily on our net interest income, which is the difference between the interest earned on our 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 expense, the provision for loan losses and income tax expense. NET INCOME For the year ended December 31, 2013, net income increased by $454 thousand, to $4.7 million from $4.2 million for the year ended December 31, 2012. The increase in net income for the year ended December 31, 2013 compared to 2012 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, 2013 were $0.88 and $0.87, respectively, as compared to basic and diluted earnings per share of $0.81 for the year ended December 31, 2012. 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, 2013, net interest income increased by $1.4 million, or 7.8%, to $18.7 million from $17.3 million for the year ended December 31, 2012. This increase in net interest income was primarily the result of an increase in average loans of $59.6 million, or 14.9%, during 2013, as compared to 2012, as well as a decrease in the cost of interest bearing liabilities, which decreased by 14 basis points for 2013. Average Balance Sheets The following table sets forth certain information relating to our average assets and liabilities for the years ended December 31, 2013, 2012 and 2011, 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 2013, 2012, and 2011 was $16, $6, and $3 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 2013, 2012 and 2011. 42 43 e g a r e v A t s o C / d l e i Y 1 1 0 2 t s e r e t n I e g a r e v A e c n a l a B e g a r e v A t s o C / d l e i Y e g a r e v A e c n a l a B e g a r e v A t s o C / d l e i Y % % 4 4 . 3 5 7 . 3 % % 8 0 . 3 6 3 . 3 6 2 . 1 4 2 . 1 5 2 . 1 % % 9 5 . 5 4 1 . 2 7 2 . 0 1 2 . 0 3 9 . 4 % % 8 2 . 0 1 4 . 0 2 3 . 0 2 8 . 1 5 3 . 1 9 4 . 1 7 2 9 2 3 7 1 3 1 5 , 4 3 5 4 7 , 4 $ ) 3 ( 9 1 1 , 5 1 6 1 1 , 5 1 $ $ 1 4 7 , 9 1 1 0 , 7 2 2 2 5 8 8 , 3 5 9 2 5 , 8 4 2 8 8 3 , 9 1 3 2 3 3 , 2 4 7 2 , 2 4 6 0 6 , 4 4 6 6 5 , 1 5 3 0 9 , 8 1 $ 2 3 9 , 7 3 3 $ % 6 3 4 2 1 9 4 6 8 , 9 1 0 0 6 , 2 4 0 6 2 , 2 3 8 4 , 0 2 ) 1 2 4 , 4 ( 6 0 7 , 6 1 5 7 2 , 3 0 4 0 6 5 , 5 1 4 $ % 8 3 . 5 7 1 . 2 0 3 . 0 2 2 . 0 4 5 . 4 4 2 . 0 0 5 . 0 1 5 . 0 3 8 . 1 - % 6 4 . 1 0 6 5 , 5 1 4 $ 2 0 8 , 7 2 5 $ $ % $ % 2 1 0 2 t s e r e t n I 8 8 7 , 1 6 6 5 , 1 2 8 6 6 8 2 4 , 3 2 $ 4 5 8 , 0 0 4 $ % 4 2 5 , 2 8 3 7 6 , 2 1 5 2 , 0 3 ) 9 8 8 , 4 ( 9 8 3 , 6 1 2 0 3 , 6 1 5 2 0 8 , 7 2 5 $ % 8 3 1 4 2 4 4 4 5 5 , 5 - 5 7 0 , 6 ) 6 ( 3 5 3 , 7 1 7 4 3 , 7 1 $ $ $ 9 5 2 , 8 8 5 1 , 6 1 2 5 2 , 7 8 8 2 1 , 3 0 3 3 0 0 8 , 4 1 4 7 1 1 , 2 5 5 3 , 7 5 2 7 4 , 9 5 0 3 5 , 3 5 3 1 . 5 1 4 . 1 4 4 . 0 1 2 . 0 2 3 . 4 2 2 . 0 7 6 . 0 7 5 . 0 1 7 . 1 - % 2 3 . 1 % % 0 0 . 3 6 2 . 3 3 1 0 2 t s e r e t n I 9 9 0 , 1 5 3 6 , 3 2 9 0 7 3 1 8 , 4 2 2 5 4 0 1 0 4 6 3 0 3 , 5 - 9 9 0 , 6 ) 6 1 ( 4 1 7 , 8 1 8 9 6 , 8 1 $ $ $ e g a r e v A e c n a l a B 2 9 4 , 0 6 4 $ 1 6 0 , 2 0 4 0 , 8 7 8 7 3 , 3 3 ) 3 2 4 , 5 ( 2 3 3 , 7 1 1 7 9 , 3 7 5 0 8 8 , 5 8 5 $ 8 3 5 , 3 2 7 1 6 , 5 1 6 0 4 , 2 1 1 9 4 3 , 9 0 3 1 1 1 9 , 0 6 4 2 6 5 , 7 6 1 5 4 , 2 3 1 0 , 0 7 6 5 9 , 4 5 $ , 1 3 r e b m e c e D d e d n e s r a e y e h t r o F ) s d n a s u o h t n i s r a l l o d ( s t n u o c c a h s a c g n i n r a e - t s e r e t n I s t e s s A g n i n r a e - t s e r e t n i l a t o T s t e s s A g n i n r a e t s e r e t n i - n o N s e s s o L n a o L r o f e c n a w o l l A d l o S s d n u F l a r e d e F : s t e s s A g n i n r a E - t s e r e t n I : S T E S S A s e i t i r u c e S s n a o L : Y T I U Q E ' S R E D L O H K C O T S : s e i t i l i b a i L g n i r a e B - t s e r e t n I D N A S E I T I L I B A I L s t i s o p e D t e k r a M y e n o M s g n i w o r r o B m r e T t r o h S s t i s o p e D e m T i s t i s o p e D d n a m e D s t i s o p e D s g n i v a S s e i t i l i b a i L g n i r a e B t s e r e t n I - n o N l a t o T s e i t i l i b a i L g n i r a e B t s e r e t n I l a t o T : s e i t i l i b a i L g n i r a e B t s e r e t n I - n o N s t i s o p e D d n a m e D s e i t i l i b a i L r e h t O y t i u q E ' s r e d l o h k c o t S D N A S E I T I L I B A I L 0 8 8 , 5 8 5 $ : Y T I U Q E ' S R E D L O H K C O T S t n e m t s u j d a s i s a B t n e l a v i u q E x a T ) s i s a B t n e l a v i u q E x a T ( e m o c n I t s e r e t n I t e N d a e r p S e t a R t s e r e t n I t e N n i g r a M t s e r e t n I t e N e m o c n I t s e r e t n I t e N o t s t e s s A g n i n r a E - t s e r e t n I f o o i t a R s e i t i l i b a i L g n i r a e B - t s e r e t n I 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, 2013 and 2012, respectively (in thousands): Total interest income 2,923 (1,548) Interest income: Loans Securities Federal funds sold Interest bearing deposits in banks 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, 2013 compared with 2012 Increase (Decrease) Due to Change in Average Year ended December 31, 2012 compared with 2011 Increase (Decrease) Due to Change in Average Volume Rate Net Volume Rate Net $ 3,009 $ (940) $ 2,069 $ 3,336 $ (673) $ 2,663 (92) (1) 7 17 46 141 114 - 318 (607) 2 (3) (3) 17 57 (365) (294) (699) 1 4 1,375 198 (251) 14 63 - 24 860 1 21 4,218 14 5 137 1,016 (3) 1,169 13 1 2 (657) (3) 7 132 25 - 161 873 2 23 3,561 11 12 269 1,041 (3) 1,330 $ 2,605 $ (1,254) $ 1,351 $ 3,049 $ (818) $ 2,231 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, 2013, the Company’s provision for loan losses was $810 thousand, a decrease of $388 thousand from the provision of $1.2 million for the year ended December 31, 2012. The overall credit quality of the loan portfolio and the stabilization of nonperforming loans is reflected in the provision decreasing for 2013 as compared to 2012. 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, 2013, was $379 thousand, a decrease of $36 thousand from the $415 thousand received during the year ended December 31, 2012. The decrease in non-interest income was primarily due to a $48 thousand decrease in gains on the sales of securities to $195 thousand in 2013 from of $243 thousand in 2012. NON-INTEREST EXPENSES Non-interest expenses for the year ended December 31, 2013 amounted to $10.6 million, an increase of $941 thousand, or 9.8% over the $9.6 million for the year ended December 31, 2012. This increase was due in most part to increases in salaries and employee benefits and occupancy and equipment expense of $524 thousand and $386 thousand, respectively. The increases in salaries and employee benefits and occupancy and equipment were primarily due to the opening of a branch, Cliffside Park, in March of 2012, with 2013 reflecting a full year of additional expenses. Occupancy and equipment expense for the year ended December 31, 2013 also include occupancy costs for the new location in Woodcliff Lake. 44 45 INCOME TAX EXPENSE The income tax provision, which includes both federal and state taxes, for the years ended December 31, 2013 and 2012 was $3.1 million and $2.7 million, respectively. The increase in income tax expense during 2013 resulted from the increased pre-tax income in 2013. The effective tax rate for 2013 was 39.6% compared to 39.5% for 2012. FINANCIAL CONDITION Total consolidated assets increased $39.4 million, or 6.9%, from $571.4 million at December 31, 2012 to $610.8 million at December 31, 2013. Total loans increased from $435.7 million at December 31, 2012 to $472.5 million at December 31, 2013, an increase of $36.7 million or 8.4%. Total deposits increased from $515.7 million on December 31, 2012 to $553.3 million at December 31, 2013, an increase of $37.6 million, or 7.3%. LOANS Our loan portfolio is the primary component of our assets. Total loans, excluding net deferred fees and costs and the allowance for loan losses, increased by 8.4% from $435.7 million at December 31, 2012, to $472.5 million at December 31, 2013. 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 home equity loans. Commercial loans are made for the purpose of providing working capital, financing the purchase of equipment or inventory, as well as for other business purposes. Real estate loans consist of loans secured by commercial or residential real property and loans for the construction of commercial or residential property. Consumer loans including home equity loans, are made for the purpose of financing the purchase of consumer goods, home improvements, and other personal needs, and are generally secured by the personal property being owned or being purchased. Our loans are primarily to businesses and individuals located in Bergen County, New Jersey. We have not made loans to borrowers outside of the United States. We have not made any sub-prime loans. Commercial lending activities are focused primarily on lending to small business borrowers. We believe that our strategy of customer service, competitive rate structures, and selective marketing have enabled us to gain market entry to local loans. Furthermore, we believe that bank mergers and lending restrictions at larger financial institutions with which we compete have also contributed to the success of our efforts to attract borrowers. Additionally, during this current economic climate, our capital position and safety has also become important to potential borrowers. 46 47 The following table sets forth the classification of the Company’s loans by major category as of December 31, 2013, 2012, 2011, 2010 and 2009 (in thousands): 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. Documentation, including a borrower’s credit history, materials establishing the value and liquidity of potential December 31, 2013 2012 2011 2010 2009 Commercial real estate Residential mortgages Commercial Home equity Consumer $ 298,548 53,601 57,634 61,204 1,478 $ 246,545 54,332 64,900 68,737 1,215 $ 186,187 52,595 57,464 67,895 1,019 $ 142,198 52,407 46,073 60,378 1,047 $ 121,504 55,527 36,036 49,969 895 Total Loans $ 472,465 $ 435,729 $ 365,160 $ 302,103 $ 263,931 The following table sets forth the maturity of fixed and adjustable rate loans as of December 31, 2013 (in thousands): Loans with Fixed Rate Commercial real estate Residential mortgages Commercial Home equity Consumer Loans with Adjustable Rate Commercial real estate Residential mortgages Commercial Home equity Consumer Within One Year 1 to 5 Years After 5 Years $ $ 20,513 1,635 3,955 220 264 11,948 - 40,679 333 124 $ 26,536 - 2,755 6,414 808 $ 3,943 - 3,940 1,500 - $ 235,608 51,037 5,391 3,454 282 - $ 929 914 49,283 - Total $ 282,657 52,672 12,101 10,088 1,354 15,891 929 45,533 51,116 124 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 past due 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. 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, 2013 the Bank has twelve nonaccrual loans totaling approximately $5.0 million, of which nine loans totaling approximately $2.6 million have specific reserves of $454 thousand and three loans totaling approximately $2.5 million have no specific reserve. If interest had been accrued on these non-accrual loans, the interest income recognized would have been approximately $295 thousand for the year ended December 31, 2013. Within its nonaccrual loans at December 31, 2013, the Bank has four residential mortgage loans and one commercial real estate mortgage loan that met the definition of a 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, 2013, three of these residential TDR loans have a cumulative balance of $879 thousand, have specific reserves connected with them of $53 thousand and are not performing in accordance with their modified terms. The fourth residential loan classified as a TDR has an outstanding balance of $1.6 million, has no specific reserve and is not performing in accordance with its modified terms. The commercial real estate mortgage loan classified as a TDR has an outstanding balance of $746 thousand, has no specific reserve and is not performing in accordance with its modified terms. 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 for the year ended December 31, 2012. 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 TDR loan. 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 was 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 was 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 were not performing in accordance with their modified terms. 48 49 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, 2013, 2012, 2011, 2010 and 2009: ALLOWANCE FOR LOAN LOSSES Nonaccrual loans Commercial real estate Residential mortgages Commercial Home equity Total nonaccrual loans Performing troubled debt restructured loans Commercial real estate Residential mortgages Home equity Total performing troubled debt restructured loans Total nonperforming loans Other real estate owned Total nonperforming assets and performing troubled debt restructured loans 2013 2012 2011 2010 2009 1,700 2,608 50 673 5,031 397 3,053 1,060 4,510 9,541 964 $ 1,704 2,509 325 1,408 5,946 3,557 - - 3,557 9,503 - $ 1,733 2,487 325 1,253 5,798 - 254 - 254 6,052 - $ 1,580 554 - 25 2,159 - 972 - 972 3,131 1,938 $ 780 2,789 - 389 3,958 - - - - 3,958 - $ 10,505 $ 9,503 $ 6,052 $ 5,069 $ 3,958 In each of the years noted in the table above, the Bank had no loans greater than 90 days delinquent that were accruing interest. 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. Our ALLL totaled $5.8 million, $5.1 million and $4.5 million respectively, at December 31, 2013, 2012, and 2011. The growth of the allowance is primarily due to the growth and composition of the loan portfolio, including growth in commercial real estate loans as a percentage of the portfolio. The following is an analysis of the activity in the allowance for loan losses for the periods indicated (dollars in thousands): Balance, January 1 $ 5,072 $ 4,474 $ 3,749 $ 2,792 $ 2,371 2013 2012 2011 2010 2009 (168) (43) (160) - (219) (4) - - - - - (22) (89) 4 (101) (340) 6 3 - - - (25) (394) - - - 2 2 - - - - - 1 - - - - - 1 * Net charge-offs (107) (600) (458) (378) (3) Provision charged to expense Balance, December 31 810 1,198 1,183 1,335 424 $ 5,775 $ 5,072 $ 4,474 $ 3,749 $ 2,792 Ratio of net charge-offs to average loans Outstanding 0.02% 0.15% 0.14% 0.14% Charge-offs: Residential mortgages Consumer loans Home equity Commercial Commercial real estate Recoveries: Commercial real estate Commercial Consumer loans * Less than 0.01% 50 51 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 (dollars in thousands) : 2013 2012 % of Amount ALLL % of Total Loans % of Amount ALLL % of Total Loans $ 4,032 69.82% 74.54% 969 16.78% 12.20% 593 10.27% 12.95% 0.31% 26 0.45% $ 3,472 68.46% 69.05% 1,033 20.37% 14.89% 383 7.55% 15.78% 24 0.47% 0.28% Balance applicable to: Residential and commercial real estate Commercial Home equity Consumer Unallocated reserves 155 2.68% 160 3.15% 5,620 97.32% 100.00% 4,912 96.85% 100.00% $ 5,775 100.00% $ 5,072 100.00% 2011 2010 2009 % of Amount ALLL % of Total Loans % of Amount ALLL % of Total Loans % of Amount ALLL % of Total Loans $ 2,878 64.33% 65.39% 827 18.48% 15.74% 368 8.23% 18.59% 0.28% 21 0.47% $ 2,328 62.10% 65.25% 627 16.72% 23.37% 358 9.55% 10.72% 22 0.59% 0.66% $ 2,032 72.83% 80.92% 213 7.63% 8.48% 247 8.86% 9.92% 17 0.61% 0.68% Balance applicable to: Residential and commercial real estate Commercial Home equity Consumer Unallocated reserves 380 8.49% 414 11.04% 281 10.07% 4,094 91.51% 100.00% 3,335 88.96% 100.00% 2,509 89.93% 100.00% $ 4,474 100.00% $ 3,749 100.00% $ 2,790 100.00% The provision for loan losses represents our determination of the amount necessary to bring the ALLL to a level that we consider adequate to 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. $ 10,014 $ 10,014 $ 5,482 $ 5,482 $ 4,787 $ 4,787 3,998 3,999 18,011 4,008 3,994 18,016 - - - - - - - - 5,482 5,482 4,787 4,787 Total Investment Securities $ 88,744 $ 86,064 $ 93,518 $ 93,962 $ 60,935 $ 61,432 52 53 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 2013 and 2012, 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, 2013, total securities aggregated $86.0 million, of which $68.0 million were classified as AFS and $18.0 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, 2013, 2012, and 2011, respectively (in thousands): 2013 2012 2011 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value $ 64,000 $ 61,729 $ 70,051 $ 70,303 $ 45,069 $ 45,321 6,733 70,733 6,319 68,048 17,985 88,036 18,177 88,480 11,079 56,148 11,324 56,645 Available for Sale Government sponsored enterprise obligations U.S. Treasury obligations Total available for sale Held to Maturity Obligations of states and political subdivisions Government sponsored enterprise obligations U.S. Treasury obligations Total held to maturity The following tables set forth as of December 31, 2013 and 2012, the maturity distribution of the Company’s debt investment portfolio (in thousands): 2013 1 year or less Obligations of states and political subdivisions 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 Securities Held to Maturity Securities Available for Sale Amortized Cost Fair Value Amortized Cost Fair Value Weighted Average Yield (1) $ 10,014 10,014 $ 10,014 10,014 $ - - $ - - 0.58% 0.58% 3,999 3,998 7,997 3,994 4,008 8,002 - 29,000 29,000 - 28,573 28,573 - - - - - - 6,733 35,000 41,733 6,319 33,156 39,475 0.26% 0.88% 0.81% 1.10% 1.45% 1.40% Total $ 18,011 $ 18,016 $ 70,733 $ 68,048 1.06% 2012 1 year or less Obligations of states and political subdivisions U.S. Treasury obligations Government sponsored enterprise obligations 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 Securities Held to Maturity Securities Available for Sale Amortized Cost Fair Value Amortized Cost Fair Value $ 5,482 - - 5,482 $ 5,482 - - 5,482 $ - 1,001 1,000 2,001 $ - 1,005 1,015 2,020 - - - - - - 5,008 6,004 11,012 5,194 6,097 11,291 - - - - - - 11,976 47,047 59,023 11,978 47,234 59,212 - - - - 16,000 16,000 15,957 15,957 Weighted Average Yield (1) 0.66% 1.19% 4.00% 2.60% 1.80% 1.64% 1.71% 1.28% 1.89% 1.77% 2.93% 2.93% Total $ 5,482 $ 5,482 $ 88,036 $ 88,480 1.91% During 2013, the Company sold sixteen securities from its available for sale portfolio. It recognized gains of approximately $541 thousand from six of the securities sold and a loss of approximately $346 thousand from the sale of eight of the securities, resulting in net gains of approximately $195 thousand from the transactions. One security was sold at par and no gain or loss was recorded. 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 2013 or 2012. DEPOSITS Deposits are our primary source of funds. We experienced a growth of $37.6 million, or 7.3%, in deposits from $515.7 million at December 31, 2012 to $553.3 million at December 31, 2013. This increase consists of increases in savings accounts, time deposits, and noninterest-bearing demand accounts, which increased $22.2 million, $12.3 million, and $3.7 million, respectively, offset somewhat by a decrease in interest-bearing demand accounts, which decreased $702 thousand. 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 and money markets Savings Time deposits December 31, (dollars in thousands) 2013 2012 2011 Average Yield/Rate 0.50% 0.66% 1.71% Amount $ 69,620 137,782 31,101 314,817 $ 553,320 Amount $ 65,910 138,484 8,862 302,479 $ 515,735 Average Yield/Rate 0.47% 0.50% 1.83% Amount $ 49,585 77,330 8,126 281,122 $ 416,163 Average Yield/Rate 0.36% 0.51% 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, 2013 (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 $ 51,900 24,064 58,381 98,078 32,132 $ 264,555 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 Dividend Payout Ratio LIQUIDITY At or for the year ended December 31, 2013 2012 2011 0.79% 8.47% 9.16% 27.27% 0.80% 7.91% 9.40% 59.26% 0.80% 6.44% 11.05% 62.50% Our liquidity is a measure of our ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. In addition, if warranted, we would be able to borrow funds. Our total deposits equaled $553.3 million and $515.7 million, respectively, at December 31, 2013 and 2012. The growth in funds provided by deposit inflows during this period coupled with our cash position at the end of 2013 has been sufficient to provide for our loan demand. 54 55 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, 2013, 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 Community Bankers Bank for the purchase of federal funds in the event that temporary liquidity needs arise. At December 31, 2013, 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, 2013, we were within the target gap range established by ALCO. Cumulative Rate Sensitive Balance Sheet December 31, 2013 (in thousands) 0-3 Months 0-6 Months 0-1 Year 0-5 Years All Others TOTAL $ 10,014 $ 10,014 $ 10,014 $ 46,585 $ 39,474 $ 86,059 51,603 21,772 51,933 24 36,625 - 51,813 31,070 51,933 253 36,625 - 111,432 31,101 31,181 - - 111,432 31,101 90,428 - - 52,213 55,741 51,933 589 36,625 - 111,432 31,101 160,959 - - 54,420 294,272 51,933 7,810 36,625 - 111,432 31,101 314,817 - - 3,214 57,877 2,939 15,642 - - - - - 71,141 55,950 57,634 352,149 51,933 10,749 36,625 15,642 111,432 31,101 314,817 71,141 55,950 $ 26,350 $ 26,350 $ 26,350 $ 26,350 $ - $ 26,350 Securities, excluding equity securities Loans: Commercial Real Estate Home Equity Consumer Federal Funds sold and Interest-Bearing Deposits in Banks Other Assets Transaction / Demand Accounts Money Market Savings Deposits Time Deposits Other Liabilities Equity TOTAL LIABILITIES AND TOTAL ASSETS $ 171,971 $ 181,708 $ 207,115 $ 491,645 $ 119,146 $ 610,791 EQUITY $ 200,064 $ 259,311 $ 329,842 $ 483,700 $ 127,091 $ 610,791 Dollar Gap Gap / Total Assets Target Gap Range RSA / RSL $ (28,093) $ (77,603) $ (122,727) $ 7,945 -4.60% +/- 35.00% 85.96% -12.71% +/- 30.00% 70.07% -20.09% +/- 25.00% 62.79% 1.30% +/- 25.00% 101.64% (Rate Sensitive Assets to Rate Sensitive Liabilities) 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 2013, we believed that available hedging instruments were not cost-effective, and therefore, focused our efforts on our yield-cost spread through retail growth opportunities. 56 57 The following table discloses our financial instruments that are sensitive to change in interest rates, categorized by expected maturity at December 31, 2013. Market risk sensitive instruments are generally defined as on- and off- balance sheet financial instruments. CAPITAL Expected Maturity/Principal Repayment December 31, 2013 (Dollars in thousands) Avg. Int. Rate 2014 2015 2016 2017 2018 There- After Total Fair Value 5.13% $160,477 $22,296 $42,286 $77,344 $106,031 $64,031 $472,465 $474,238 1.41% 10,014 8,985 12,979 1,987 12,620 39,474 86,059 86,059 Interest Rate Sensitive Assets: Loans…………………. Securities net of equity securities……………… Fed Funds Sold…………………… Interest-earning cash and time deposits…….. Interest Rate Sensitive Liabilities : Interest bearing demand deposits and money market accounts……. 0.34% 458 – 0.22% 36,168 – – – – – – – – – – – – – – 458 458 – 36,168 36,168 – – 137,782 26,350 31,101 31,101 Savings deposits……. 0.67% 31,101 0.22% 137,782 – – 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, 2013 and 2012, as well as regulatory capital category definitions: December 31, 2013 December 31, 2012 Minimum Requirements to be "Adequately Capitalized" Minimum Requirements to be “Well Capitalized” 11.89% 13.08% 9.45% 12.07% 13.21% 9.63% 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 2013 and 2012, 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- Time deposits……….. 1.71% $160,959 $60,942 $54,493 $21,559 $16,864 – $314,817 $317,353 capitalized” institution. The Bank had no borrowed funds at December 31, 2013. The Bank’s capital ratios as presented in the table above are similar to those of the Company. 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. See “Regulatory Capital Changes” in Part I, Item 1 of this report for additional information regarding regulatory capital requirements. 58 59 CONTRACTUAL OBLIGATIONS As of December 31, 2013, the Company had the following contractual obligations as provided in the table below (in thousands): ITEM 1. BUSINESS General 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 non-cancelable operating leases Remaining contractual maturities of time deposits............................. Total Contractual Obligations $ 1,133 $ 1,940 $ 1,054 $ 2,016 $ 6,143 portfolios. 160,959 162,092 $ 115,435 117,375 $ 38,423 39,477 $ - 2,016 $ 314,817 320,960 $ Additionally, the Bank had certain commitments to extend credit to customers. A summary of commitments to extend credit at December 31, 2013 is provided as follows (in thousands): Commercial real estate, construction, and land development secured by land Home equities Standby letters of credit and other $ 80,658 23,499 2,771 106,928 $ 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 14 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 accounting principles generally accepted in the United States of America, 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 our assets and liabilities 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. 60 61 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 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 eight 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, 354 Palisade Avenue, Cliffside Park, NJ 07010, and 585 Chestnut Ridge Road, Woodcliff Lake, NJ 07677. A tenth location at 750 East Palisade Avenue, Englewood Cliffs, NJ, 07632 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 2014. 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: 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; To attract deposits and loans by competitive pricing; and To provide a reasonable return to shareholders on capital invested. (cid:120) (cid:120) (cid:120) Market Area The principal market for our 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 eight additional branch offices, two in Fort Lee, one in Hackensack, one in Haworth, one in Harrington Park, one in Englewood, one in Cliffside Park, and one in Woodcliff Lake, all in Bergen County, New Jersey. Supervision and Regulation Extended Hours 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. Competition 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. Concentration The Company is not dependent for deposits or exposed by loan concentrations to a single customer or a small group of customers the loss of any one or more of which would have a material adverse effect upon the financial condition of the Company. As a community bank however, our market area is concentrated in Bergen County, New Jersey, and 87.5% of our loan portfolio was collateralized by real estate, primarily in our market area, as of December 31, 2013. Employees At December 31, 2013, the Company employed sixty-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. General activities. 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 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. 62 63 Any capital loan by the Company to the Bank is subordinate in right of payment to deposits and certain other indebtedness of the Bank. In addition, in the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. The Federal Deposit Insurance Act (“FDIA”) provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as a subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC will have priority in payment ahead of unsecured, nondeposit creditors, including the Company, with respect to any extensions of credit they have made to such insured depository institution. Supervision and Regulation of the Bank The operations and investments of the Bank are also limited by federal and state statutes and regulations. The Bank is subject to the supervision and regulation by the 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. 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. No institution may pay a dividend if in default of the federal deposit insurance assessment. 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. 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 64 65 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. (cid:120) A minimum leverage ratio of 4%. 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. Risk-Based Capital Requirements The federal banking regulators have adopted certain risk-based capital guidelines to assist in the assessing capital adequacy of a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit, and recourse agreements, which are recorded as off-balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit-equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain US Treasury securities, to 100% for assets with relatively high credit risk, such as business loans. A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off-balance-sheet items, against both total qualifying capital, the sum of Tier 1 capital and limited amounts of Tier 2 capital, and Tier 1 capital. (cid:120) (cid:120) “Tier 1”, or core capital, includes common equity, perpetual preferred stock and minority interest in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions. “Tier 2”, or supplementary capital, includes, among other things, limited life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less restricted deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Banks and bank holding companies subject to the risk-based capital guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4.00% and a ratio of total capital to risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant. At December 31, 2013, the Company met both requirements with Tier 1 and Total capital ratios of 11.89% and 13.08%. In addition to risk-based capital, banks and bank holding companies are required to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage capital ratio, of at least 4.00%. At December 31, 2013, the Company’s leverage ratio was 9.45%. Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions including: (cid:120) (cid:120) limitations on its ability to pay dividends; the issuance by the applicable regulatory authority of a capital directive to increase capital, and in the case of depository institutions, the termination of deposit insurance by the FDIC, as well as to the measures described under FDICIA as applicable to undercapitalized institutions. In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends to the Company. Regulatory Capital Changes In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations begins January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1, 2014. The final rules call for the following capital requirements: (cid:120) A minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5%. (cid:120) A minimum ratio of tier 1 capital to risk-weighted assets of 6%. (cid:120) A minimum ratio of total capital to risk-weighted assets of 8% (no change from the current rule). In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments. The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations will begin on January 1, 2016. Under the proposed rules, accumulated other comprehensive income (AOCI) would have been included in a banking organization’s common equity tier 1 capital. The final rules allow community banks to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The opt-out election must be made in the first call report or FR Y-9 series report that is filed after the financial institution becomes subject to the final rule. The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the tier 1 capital of banking organizations with total consolidated assets less than $15 billion as of December 31, 2009 and banking organizations that were mutual holding companies as of May 19, 2010. The proposed rules would have modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to divide residential mortgage exposures into two categories in order to determine the applicable risk weight. In response to commenter concerns about the burden of calculating the risk weights and the potential negative effect on credit availability, the final rules do not adopt the proposed risk weights but retain the current risk weights for mortgage exposures under the general risk-based capital rules. Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures, which is based on external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these exposures. Alternatively, banking organizations may use the existing gross-up approach to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250 percent risk weight. Under the new rules, mortgage servicing assets (MSAs) and certain deferred tax assets (DTAs) are subject to stricter limitations than those applicable under the current general risk-based capital rule. The new rules also increase the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors. The Company is in the process of assessing the impact of these changes on the regulatory ratios of the Bank and the Company on the capital, operations, liquidity and earnings of the Bank and the Company. 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 66 67 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, 2013, 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. industry. The CFPB 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 CFPB on July 21, 2011. While the CFPB 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 CFPB 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 laws. Community Reinvestment Act The Dodd-Frank Act also: 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, 2013, 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. Dodd-Frank Act The Dodd-Frank Act became law on July 21, 2010. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape. The Dodd-Frank Act creates the CFPB of Consumer Financial Protection (“CFPB”), which is an independent CFPB 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 68 (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (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; 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; 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 69 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. Ability to Repay and Qualified Mortgage Rule Pursuant to the Dodd Frank Act, the Consumer Financial Protection Bureau issued a final rule on January 10, 2013 (which became effective January 10, 2014), amending Regulation Z as implemented by the Truth in Lending Act, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Mortgage lenders are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) current or reasonably expected income or assets; current employment status; the monthly payment on the covered transaction; the monthly payment on any simultaneous loan; the monthly payment for mortgage-related obligations; current debt obligations, alimony, and child support; the monthly debt-to-income ratio or residual income; and credit history. Alternatively, the mortgage lender can originate “qualified mortgages,” which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Loans which meet these criteria will be considered qualified mortgages, and as a result generally protect lenders from fines or litigation in the event of foreclosure. Qualified mortgages that are “higher-priced” (e.g. subprime loans) garner a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g. prime loans) are given a safe harbor of compliance. The final rule, as issued, is not expected to have a material impact on our lending activities or our results of operations or financial condition. Jumpstart Our Business Startups (JOBS) Act In April 2012, the JOBS Act became law. The JOBS Act is aimed at facilitating capital raising by smaller companies and banks and bank holding companies by implementing the following changes: 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) Raising the threshold requiring registration under the Securities Exchange Act of 1934 (Exchange Act) for banks and bank holding companies from 500 to 2,000 holders of record; Raising the threshold for triggering deregistration under the Exchange Act for banks and bank holding companies from 300 to 1,200 holders of record; Raising the limit for Regulation A offerings from $5 million to $50 million per year and exempting some Regulation A offerings from state blue sky laws; Permitting advertising and general solicitation in Rule 506 and Rule 144A offerings; (cid:120) (cid:120) Allowing private companies to use “crowd funding” to raise up to $1 million in any 12-month period, (cid:120) subject to certain conditions; and Creating a new category of issuer, called an “Emerging Growth Company”, for companies with less than $1 billion in annual gross revenue, which will benefit from certain changes that reduce the cost and burden of carrying out an equity initial public offering (IPO) and complying with public company reporting obligations for up to five years. 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 70 71 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Securities Authorized for Issuance under Equity Compensation Plans 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, 2013 Fourth quarter Third quarter Second quarter First quarter Year Ended December 31, 2012 Fourth quarter Third quarter Second quarter First quarter High Low $ $ 14.41 15.59 15.00 14.62 14.00 10.95 9.81 10.22 $ $ 12.74 13.39 12.55 12.50 10.00 9.16 9.05 8.59 Holders As of March 18, 2014 there were approximately 1,018 shareholders of our common stock, which includes an estimate of shareholders who hold their shares in street name. Dividends In 2013, the Company declared four quarterly cash dividends in the amount of $0.06 per share. These cash dividends were paid to shareholders on March 31, 2013, June 28, 2013, September 30, 2013 and December 31, 2013, respectively, and the Company currently expects that comparable quarterly cash dividends will continue to be paid in the future. In 2012, the Company declared four quarterly cash dividends. 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. 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 and non-recurring dividend. 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. The following tables summarize our equity compensation plan information as of December 31, 2013: 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 331,334 $11.50 43,334 2011 Equity Incentive Plan Equity compensation plans not approved by security holders - - N/A - 170,000 - Total 519,234 $11.11 243,418 2013 Weighted Average Number Grant Date of Shares Fair Value 90,000 (10,000) - - N/A 13.00 13.00 - Non-vested resticted stock, beginning of year Granted Forfeited Vested Non-vested resticted stock, end of year 80,000 $ 13.00 72 73 BANCORP OF NEW JERSEY, INC. Directors and Executive Officers Board of Directors Gerald A. Calabrese, Jr. Chairman of the Board, President, Century 21 Calabrese Realty Michael Bello President, Michael Bello Insurance Agency John K. Daily President and COO, C.A. Shea & Co. Commercial Surety Michael Lesler Vice Chairman, President and CEO, Bank of New Jersey Joel P. Paritz, CPA President Paritz & Company, P.A. Christopher M. Shaari MD Physician Jay Blau President, Imperial Sales & Sourcing, Inc. Anthony M. Lo Conte President and CEO, Anthony L and S, LLC Shoe Import and Distribution Anthony Siniscalchi CPA Partner, A. Uzzo & Co., CPAS, P.C. Albert L. Buzzetti, Esq. Managing Partner, A. Buzzetti and Associates, LLC Carmelo Luppino, Jr. Real Estate Developer Mark J. Sokolich, Esq. Attorney at Law Stephen Crevani President, Aniero Concrete Rosario Luppino Real Estate Developer Diane M. Spinner Executive Vice President and Chief Administrative Officer, Bank of New Jersey Executive Officers Michael Lesler Vice Chairman, President and Chief Executive Officer Leo J. Faresich Executive Vice President and Chief Lending Officer Diane M. Spinner Executive Vice President and Chief Administrative Officer Officers Michael Lesler President and Chief Executive Officer Richard A. Capone Senior Vice President Chief Financial Officer Robert L. Cusick Senior Vice President Commercial Lending Rosemarie Yaverian Senior Vice President Branch Administration Allison Peterson Vice President Branch Manager Jamie Cariddi Vice President Branch Manager Lidia Sofia Vice President Branch Manager Kimberley Tapken Assistant Vice President Lending Department Elizabeth Ranalli Assistant Vice President Lending Department Leo J. Faresich Executive Vice President Chief Lending Officer Stephanie A. Caggiano Senior Vice President Consumer Lending Paul A. Meyer Senior Vice President Commercial Lending Anna Maria Alberga Vice President Branch Manager Tamara A. Francis Vice President Branch Manager Alejandra Pazmino Vice President Business Development Ryan Petrillo Vice President Branch Manager Kinga Mikos Assistant Vice President Operations Rosemarie Fuchs Assistant Vice President Lending Department Diane M. Spinner Executive Vice President Chief Administrative Officer 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 Cornelia Brummer Vice President Marketing Director Suzanne Wirth Assistant Vice President Assistant Branch Manager Anthony Cozzitorto Assistant Vice President Lending Department Connie Caltabellatta Corporate Secretary Independent Auditors ParenteBeard LLC 1200 Atwater Drive STE 4500 Malvern, PA 19355 Independent Auditors BDO USA, LLP 100 Park Avenue New York, New York 10017 Common Stock Date Common Stock is traded on NYSE MKT 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 08543-4276 New York, NY 10038 74 75 (This page has been left blank intentionally.)
Continue reading text version or see original annual report in PDF format above