UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission file number 000-49925
CENTRAL JERSEY BANCORP
ter)
New Jersey
(Exact name of Registrant as specified in its charter)
New Jersey 22-3757709
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
627 Second Avenue, Long Branch, New Jersey 07740
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 571-1300
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Securities registered under Section 12(b) of the Act: None
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Securities registered under Section 12(g) of the Act:
Common Stock, par value $0.01
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(Title of class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |X|
Non-accelerated filer |_| Smaller reporting company |X|
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of June 30, 2007, the aggregate market value of the Registrant's common stock
held by non-affiliates was approximately $57,220,356.
As of March 7, 2008, 8,716,490 shares of the Registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Part III of this Annual Report on Form 10-K incorporates certain information by
reference from the Registrant's Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held on May 28, 2008. It is anticipated that the
Proxy Statement will be filed with the Securities and Exchange Commission by
April 29, 2008.
ii
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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Certain information included in this Annual Report on Form 10-K and other
filings of the Registrant under the Securities Act of 1933, as amended (the
"Securities Act"), and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as well as information communicated orally or in writing
between the dates of such filings, contains or may contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Such statements are subject to certain risks, trends
and uncertainties that could cause actual results to differ materially from
expected results. Among these risks, trends and uncertainties are the effect of
governmental regulation on Central Jersey Bank, National Association, a
nationally chartered commercial bank and wholly-owned subsidiary of the
Registrant, interest rate fluctuations, regional economic and other conditions,
the availability of working capital, the cost of personnel and technology and
the competitive markets in which Central Jersey Bank, N.A. operates.
In some cases, forward-looking statements can be identified by terminology such
as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms or other comparable terminology. Although the Registrant believes
that the expectations reflected in the forward-looking statements contained
herein are reasonable, the Registrant cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither the Registrant, nor any
other person, assumes responsibility for the accuracy and completeness of such
statements. The Registrant is under no duty to update any of the forward-looking
statements contained herein after the date of this Annual Report on Form 10-K.
iii
CENTRAL JERSEY BANCORP
INDEX TO FORM 10-K
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PART I PAGE
- ------ ----
Item 1. Business..................................................................................1
Item 1A. Risk Factors.............................................................................12
Item 1B. Unresolved Staff Comments................................................................17
Item 2. Properties...............................................................................17
Item 3. Legal Proceedings........................................................................18
Item 4. Submission of Matters to a Vote of Security Holders......................................18
PART II
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Item 5. Market for Registrant's Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities................................................19
Item 6. Selected Financial Data..................................................................21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................47
Item 8. Financial Statements and Supplementary Data..............................................48
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................................48
Item 9A. Controls and Procedures..................................................................48
Item 9B. Other Information........................................................................49
PART III
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Item 10.* Directors, Executive Officers and Corporate Governance...................................50
Item 11.* Executive Compensation...................................................................50
Item 12.* Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters..............................................................50
iv
Item 13.* Certain Relationships and Related Transactions, and Director Independence................50
Item 14.* Principal Accountant Fees and Services...................................................50
PART IV
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Item 15. Exhibits and Financial Statement Schedules...............................................51
Signatures .........................................................................................52
* The information required under this Item is to be contained in the
Registrant's Proxy Statement for the Annual Meeting of Shareholders
scheduled to be held on May 28, 2008, and is incorporated herein by
reference. It is anticipated that the Proxy Statement will be filed with
the Securities and Exchange Commission by April 29, 2008.
v
PART I
Item 1. Business
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About Our Company
Central Jersey Bancorp is a bank holding company headquartered in Long Branch,
New Jersey. The holding company was incorporated in New Jersey on March 7, 2000,
and became an active bank holding company on August 31, 2000 through the
acquisition of Monmouth Community Bank, National Association. On January 1,
2005, Central Jersey Bancorp completed its strategic business combination
transaction with Allaire Community Bank, a New Jersey state-chartered bank,
pursuant to which Allaire Community Bank became a wholly-owned bank subsidiary
of Central Jersey Bancorp. On the effective date of the combination, the name of
the holding company was changed from Monmouth Community Bancorp to Central
Jersey Bancorp.
Central Jersey Bancorp maintains an Internet website at www.cjbna.com. Through
our website, shareholders may access free of charge our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports, filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act. These documents are available as soon as reasonably
practicable after Central Jersey Bancorp electronically files these documents
with the Securities and Exchange Commission. We also post on our website our
Corporate Governance Guidelines, Code of Conduct/Ethics Policy, Chief Executive
and Chief Financial Officer Code of Ethics and Nominating and Corporate
Governance Committee Charter. These reports are also available in print by
contacting Mr. James S. Vaccaro, Chairman, President and Chief Executive
Officer, Central Jersey Bancorp, 627 Second Avenue, Long Branch, New Jersey
07740.
About Our Business
In August of 2005, Central Jersey Bancorp combined its two bank subsidiaries,
Monmouth Community Bank, N.A. and Allaire Community Bank, into a single banking
entity, named Central Jersey Bank, National Association. Central Jersey Bank,
N.A. offers a full range of retail and commercial banking services primarily to
customers located in Monmouth County and Ocean County, New Jersey. These
services include checking accounts, savings accounts, money market accounts,
certificates of deposit, installment loans, real estate mortgage loans,
commercial loans, wire transfers, money orders, traveler's checks, safe deposit
boxes, night depositories, federal payroll tax deposits, bond coupon redemption,
bank by mail, direct deposit, automated teller services and telephone and
internet banking. Central Jersey Bank, N.A. has debit card, merchant card and
international services available to its customers through correspondent
institutions. Central Jersey Bank, N.A. currently has twelve full-service branch
facilities located in Belmar, Bradley Beach, Long Branch (2), Manasquan, Point
Pleasant, Spring Lake Heights, Little Silver, Neptune City, Ocean Grove, and
Wall Township (2), New Jersey. A thirteenth branch, to be located in Ocean
Township, New Jersey, is expected to open in the Spring of 2008.
Central Jersey Bank, N.A. is a national association chartered by the Office of
the Comptroller of the Currency ("OCC"). The deposits of the bank subsidiary are
insured by the Federal Deposit Insurance Corporation ("FDIC"). Central Jersey
Bank, N.A. provides a broad range of financial products and services to
individual consumers, small businesses and professionals in its market area.
When a customer's loan requirements exceed Central Jersey Bank, N.A.'s lending
limit, the bank subsidiary may seek to arrange such loan on a participation
basis with other financial institutions. In addition, Central Jersey Bank, N.A.
participates in loans originated by other financial institutions.
1
Business Strategy
Central Jersey Bancorp's strategy is to provide a competitive range of community
banking services to its market area, in a professional environment, at fair and
reasonable interest rates and fees, at convenient operating hours, with a
commitment to prompt, quality and highly personalized service, which is both
efficient and responsive to local banking needs. Service to customers and a
commitment to the community are the basic and distinguishing features offered by
Central Jersey Bank, N.A., Central Jersey Bancorp's bank subsidiary.
Market Area
Central Jersey Bank, N.A. currently operates twelve full-service branch
facilities located in Belmar, Bradley Beach, Long Branch (2), Manasquan, Point
Pleasant, Spring Lake Heights, Little Silver, Ocean Grove, Neptune City and Wall
Township (2), New Jersey. A thirteenth branch, to be located in Ocean Township,
New Jersey, is expected to open in the Spring of 2008. Except for the Point
Pleasant branch, located in Ocean County, New Jersey, each branch is within
Monmouth County, New Jersey, the sixth largest county in the State of New
Jersey. The individual branch locations provide a great deal of exposure and are
well-situated to conveniently serve businesses, professionals and individuals
throughout Central Jersey Bancorp's market area.
Commercial activity within Central Jersey Bancorp's market area includes small
and medium sized businesses, corporate offices, professional offices, major
retail centers, resort and recreational businesses along the nearby oceanfront,
as well as numerous industrial establishments specializing in light
manufacturing, baking products, rubber and plastic products, surgical and
medical devices, electronics and telecommunications. In addition, the market
area contains a variety of major employers, including Monmouth Medical Center,
Jersey Shore University Medical Center and Monmouth University.
Services Offered
Central Jersey Bancorp's bank subsidiary, Central Jersey Bank, N.A., is
community oriented and offers services and products designed to meet the banking
needs of local individuals, businesses and professionals. Business people and
professionals are offered a broad spectrum of deposit and loan products designed
to satisfy their occupational and personal financial needs. In addition, Central
Jersey Bank, N.A. provides a broad array of consumer banking services to the
general public residing or working in its market area.
Deposits. In order to attract and retain stable deposit relationships with the
commercial establishments and other businesses within its market area, Central
Jersey Bank, N.A. offers competitive small business cash management services.
Central Jersey Bank, N.A. believes that the expertise and experience of its
management coupled with the introduction of new technologies enables the bank
subsidiary to maximize the growth of business related deposits. The primary
deposit services of Central Jersey Bank, N.A. offered to non-business customers
are comprised of demand deposits, savings deposits (including money markets),
time deposits and individual retirement accounts.
Loans. Central Jersey Bank N.A.'s loan portfolio consists primarily of
variable-rate and short-term fixed rate loans, with a significant concentration
in commercial purpose transactions. Central Jersey Bank, N.A. believes that the
familiarity of its management and the members of its Board of Directors
appointed to its Loan Committee with prospective local borrowers enables Central
Jersey Bank, N.A. to better evaluate the character, integrity and
creditworthiness of prospective borrowers.
2
Residential Mortgage Loans. In order to effectively penetrate the mortgage
market, Central Jersey Bank, N.A., through an unaffiliated third party vendor,
offers a range of residential mortgage products at competitive rates. Central
Jersey Bank, N.A. closes its originated residential mortgages in its name and
then sells its residential mortgage production to government agencies and
private investors in order to manage interest rate risk and liquidity. Central
Jersey Bank, N.A. believes that its policy of closing loans in a time frame that
meets the needs of its borrowers is important to its business.
Commercial Mortgage/Construction Loans. Central Jersey Bank, N.A. originates
various types of loans secured with real estate, including construction loans.
Central Jersey Bank, N.A.'s loan officers work closely with real estate
developers, individual builders and attorneys to offer construction loans and
services to the residential real estate market as well as to owner-occupied
commercial properties and investment properties. Construction lending
constitutes a minor portion of the loan portfolio. In some cases, Central Jersey
Bank, N.A. may originate loans larger than its lending or policy limits and will
participate these loans with other financial institutions.
Consumer Lending. Central Jersey Bank, N.A. offers a full menu of consumer loan
products that include home equity loans and lines of credit, secured and
unsecured personal loans and auto loans. During 2007, the Bank began offering a
service to consumers that would allow a consumer to apply for consumer loans via
the Internet and receive an answer on their loan request in approximately sixty
seconds. The ability to complete an application on-line allows Central Jersey
Bank, N.A. to compete with the national lenders on a local level.
Small Business Loans. Central Jersey Bank, N.A. generally targets businesses
with annual revenues of less than $25,000,000. Often, these businesses are
ignored by the larger lending institutions and have experienced the negative
effects of the bank consolidations. Central Jersey Bank, N.A. offers
responsiveness, flexibility and local decision-making for loan applications of
small business owners, thereby eliminating the delays generally associated with
non-local management. Central Jersey Bank, N.A. participates in the Small
Business Administration (SBA) programs through its SBA loan department
established in the fall of 2007, and in programs offered through the New Jersey
Economic Development Authority. As an independent community bank, Central Jersey
Bank, N.A. serves the special needs of professionals in the legal, medical,
accounting, insurance, and real estate industries. Lines of credit, term loans
and time loans are tailored to meet the borrowing needs of Central Jersey Bank,
N.A.'s customers in the professional community.
Other Services. To further attract and retain customer relationships, Central
Jersey Bank, N.A. provides an expanded array of financial services, including
the following: the issuance of money orders, cashier checks, certified checks
and gift checks, wire transfers, U.S. Savings Bonds sales and redemptions, debit
ATM cards, federal payroll tax deposits, safe deposit boxes, traveler's checks,
night depositories, bond coupon redemptions, bank-by-mail, direct deposit,
business sweep accounts, automated teller machines, online deposit account and
loan account applications and telephone and internet banking. Central Jersey
Bank, N.A. offers a variety of personal and business credit cards. These credit
cards are underwritten and managed by one or more third party unaffiliated
banking organizations. Central Jersey Bank, N.A. also maintains coin counting
machines, for the convenience of its customers, in each of its branch offices.
Competition
The banking business in New Jersey is very competitive. Central Jersey Bank,
N.A. actively competes for deposits and loans with existing New Jersey and
out-of-state financial institutions.
3
Central Jersey Bank, N.A.'s competition includes large financial service
companies and other entities, in addition to traditional banking institutions
such as savings banks, commercial banks, internet banks and credit unions. Such
competition includes community banks, with banking philosophies similar to those
of Central Jersey Bank, N.A., which are located within or near the market area
served by Central Jersey Bank, N.A.
Many of Central Jersey Bank, N.A.'s larger competitors have a greater ability to
finance wide ranging advertising campaigns through their greater capital
resources. Marketing efforts to attract prospective customers depend heavily
upon referrals from Central Jersey Bank, N.A.'s Board of Directors, advisory
boards, management and shareholders, selective advertising in local media and
direct mail solicitations. Central Jersey Bank, N.A. competes for business
principally on the basis of high quality, personal service to customers,
customer access to bank decision makers and competitive interest rates and fees.
In the financial services industry in recent years, intense market demands,
technological and regulatory changes and economic pressures have eroded once
clearly defined financial service industry classifications. Existing banks have
been forced to diversify their services, increase rates paid on deposits,
provide competitive pricing on loans and become more cost effective, as a result
of competition with one another and with new types of financial service
companies, including non-banking competitors. Corresponding changes in the
regulatory framework have resulted in increasing homogeneity in the financial
services offered by financial institutions. Some of the results of these market
dynamics in the financial services industry have been a number of new bank and
non-bank competitors, increased merger activity, and increased customer
awareness of product and service differences among competitors. These factors
may be expected to affect the business prospects of Central Jersey Bank, N.A.
Employees
James S. Vaccaro (Chairman, President and Chief Executive Officer), Robert S.
Vuono (Senior Executive Vice President, Chief Operating Officer and Secretary),
and Anthony Giordano, III (Executive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary) currently are the executive officers of the
holding company, Central Jersey Bancorp, and its banking subsidiary, Central
Jersey Bank, N.A. Mr. Vaccaro, Mr. Vuono and Mr. Giordano III, as well as
officers Robert K. Wallace (Executive Vice President of Lending), Thomas J.
Garrity (Executive Vice President of Lending) and Lisa A. Borghese (Senior Vice
President of Lending), each have a change of control agreement. Including the
aforementioned officers, Central Jersey Bancorp had a total of 128 full time
equivalent employees as of December 31, 2007.
Holding Company Operations
Central Jersey Bancorp serves as the holding company for Central Jersey Bank,
N.A. The holding company has no assets or liabilities other than its investment
in Central Jersey Bank, N.A and its participation in MCBK Capital Trust I, a
special purpose business trust established in March 2004 for the purpose of
issuing $5.0 million of preferred capital securities. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Guaranteed Preferred Beneficial Interest in the Central Jersey Bancorp
Subordinated Debt." The holding company does not conduct, nor does management
believe that it will conduct, any business. All banking products and services
are, and will be, provided by Central Jersey Bancorp's bank subsidiary, Central
Jersey Bank, N.A. Moreover, on March 9, 2004, Monmouth Community Bank, N.A., the
original banking subsidiary of Central Jersey Bancorp, formed MCB Investment
Company, a New Jersey corporation. For state tax purposes, MCB Investment
Company was formed to hold and invest in investment securities in support of
Monmouth
4
Community Bank, N.A. Further, on January 10, 2001, Allaire Community Bank, a
former bank subsidiary of Central Jersey Bancorp that was combined with Monmouth
Community Bank, N.A. to form Central Jersey Bank, N.A. in August 2005, formed
Allaire Investment Co., Inc., a New Jersey corporation, for the same purposes
that Monmouth Community Bank, N.A. formed MCB Investment Company. Central Jersey
Bancorp combined the two New Jersey investment subsidiaries effective January 1,
2006. The name of the combined investment subsidiary is CJB Investment Company.
Government Regulation
Central Jersey Bancorp and its subsidiaries, including Central Jersey Bank,
N.A., operate within a system of banking laws and regulations intended to
protect bank customers and depositors. These laws and regulations govern the
permissible operations and management, activities, reserves, loans and
investments of Central Jersey Bancorp and its subsidiaries. In addition, Central
Jersey Bancorp is subject to federal and state securities laws and general
federal laws and regulations. Central Jersey Bancorp and its non-bank subsidiary
also are subject to the corporate laws and regulations of their respective
states of incorporation. The following descriptions summarize the key banking
and other laws and regulations to which Central Jersey Bancorp and Central
Jersey Bank, N.A. are subject. These descriptions are not intended to be
complete and are qualified in their entirety by reference to the full text of
the statutes and regulations discussed. Future changes in these laws and
regulations, or in the interpretation and application thereof by their
administering agencies, cannot be predicted, but could have a material effect on
the business and results of Central Jersey Bancorp and its subsidiaries.
Central Jersey Bancorp is a bank holding company under the Federal Bank Holding
Company Act of 1956, as amended by the 1999 financial modernization legislation
known as the Gramm-Leach-Bliley Act, and is subject to the supervision of the
Board of Governors of the Federal Reserve System. In general, the Bank Holding
Company Act limits the business of bank holding companies to banking, managing
or controlling banks, and performing certain servicing activities for
subsidiaries and, as a result of the Gramm-Leach-Bliley Act amendments to the
Bank Holding Company Act, permits bank holding companies that are also
designated as "financial holding companies" to engage in any activity, or
acquire and retain the shares of any company engaged in any activity, that is
either (1) financial in nature or incidental to such financial activity (as
determined by the Federal Reserve Board in consultation with the OCC, or (2)
complementary to a financial activity and does not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally (as determined by the Federal Reserve Board). In order for a bank
holding company to engage in the broader range of activities that are permitted
by the Bank Holding Company Act for bank holding companies that are also
financial holding companies, upon satisfaction of certain regulatory criteria,
the bank holding company must file a declaration with the Federal Reserve Board
that it elects to be a financial holding company. Central Jersey Bancorp does
not intend to seek a financial holding company designation at this time, and
does not believe that the current decision not to seek a financial holding
company designation will adversely affect its ability to compete in its chosen
markets. Central Jersey Bancorp does not believe that seeking such a designation
at this time would position it to compete more effectively in the offering of
its current products and services.
Central Jersey Bank, N.A., the banking subsidiary of Central Jersey Bancorp, is
a national association, and is subject to the regulation, supervision and
examination of the OCC. In addition, as a national bank, Central Jersey Bank,
N.A. was required to become a member bank of the Federal Reserve Bank of New
York, and is subject to examination and regulation by the Board of Governors of
the Federal Reserve System. The Federal Reserve Board regulates
5
aspects of activities conducted by Central Jersey Bancorp and its subsidiaries,
as discussed above.
Dividend Restrictions
Central Jersey Bancorp and its subsidiaries are separate legal entities whose
finances are in some ways interconnected. Central Jersey Bancorp's principal
source of funds to fulfill its guarantee of trust preferred securities issued by
MCBK Capital Trust I or to pay cash dividends on its common stock, if such
dividends were to be declared, is from cash dividends paid to it by Central
Jersey Bank, N.A. Certain federal statutes and regulations limit the payment of
dividends to Central Jersey Bancorp by its bank subsidiary without regulatory
approval.
As a national bank, Central Jersey Bank, N.A. must obtain prior approval from
the OCC to pay a cash dividend if the total of all cash dividends declared by
Central Jersey Bank, N.A. in any calendar year would exceed Central Jersey Bank,
N.A.'s net income for that year, combined with its retained net income for the
preceding two calendar years, less any transfers required by the OCC or to a
fund for retirement of preferred stock. Additionally, Central Jersey Bank, N.A.
may not declare dividends in excess of net profits on hand, after deducting the
amount by which the principal amount of all loans on which interest is past due
for a period of six months or more exceeds the reserve for credit losses.
The payment of dividends is limited further by applicable minimum capital
requirements. The Federal Reserve Board and the OCC have issued additional
guidelines and policy statements, applicable to Central Jersey Bancorp and
Central Jersey Bank, N.A., requiring bank holding companies and national banks
to continually evaluate the level of cash dividends in relation to their
respective operating income, capital needs, asset quality and overall financial
condition, and limiting dividends to payments out of current operating earnings.
As an insured depository institution, Central Jersey Bank, N.A. is subject to
the Federal Deposit Insurance Act which provides that no dividends may be paid
by an insured depository institution if it is in arrears in the payment of any
insurance assessment due to the FDIC. In addition, under the Federal Deposit
Insurance Act, an insured depository institution may not pay any dividend if the
institution is undercapitalized or if the payment of the dividend would cause
the institution to become undercapitalized, as further discussed below. A
payment of dividends that would have the effect of depleting a depository
institution's capital base to an inadequate level could constitute an unsafe and
unsound practice subject to a cease and desist order.
Prior to 2008, Central Jersey Bank, N.A. had never declared any cash dividends.
However, on January 15, 2008, Central Jersey Bancorp, the parent company of
Central Jersey Bank, N.A., announced that its Board of Directors authorized a
common stock repurchase program, which is expected to continue through the end
of 2009, or for such shorter or longer period of time as Central Jersey Bancorp
may determine. It is contemplated that during 2008, Central Jersey Bank, N.A.
will declare and pay cash dividends to Central Jersey Bancorp in order to
effectuate the common stock repurchase program.
Transactions with Affiliates
Banking laws and regulations impose certain restrictions on the ability of bank
holding companies and their non-bank subsidiaries to borrow from and engage in
other transactions with their subsidiary or affiliated banks. Generally, these
restrictions require that any extensions of credit must be secured by designated
amounts of specified collateral and are limited to (1) 10% of the bank's capital
stock and surplus per non-bank affiliated borrower, and (2) 20% of the bank's
capital stock and surplus aggregated as to all non-bank affiliated borrowers. In
addition,
6
certain transactions with affiliates must be on terms and conditions, including
credit standards, at least as favorable to the institution as those prevailing
for arms-length transactions. Central Jersey Bank, N.A. also must comply with
regulations which restrict loans made to directors, executive officers and
principal shareholders of Central Jersey Bancorp and its subsidiaries.
Liability of Commonly Controlled Institutions and "Source of Strength" Doctrine
The Federal Deposit Insurance Act contains a "cross-guarantee" provision that
could result in any insured depository institution owned by Central Jersey
Bancorp being assessed for losses incurred by the FDIC in connection with
assistance provided to, or the failure of, any other insured depository
institution owned by Central Jersey Bancorp. Also, under the Bank Holding
Company Act and Federal Reserve Board policy, bank holding companies are
expected to represent a source of financial and managerial strength to their
bank subsidiaries, and to commit resources to support bank subsidiaries in
circumstances where banks may not be in a self sufficient financial position.
Capital loans by a bank holding company to a bank subsidiary are subordinate in
right of repayment to deposits and other bank indebtedness. If a bank holding
company declares bankruptcy, any commitment made to a federal bank regulatory
agency by the bank holding company to sustain the capital of its subsidiary
banks will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
In addition, under the National Bank Act, as amended, if the capital stock of a
subsidiary national bank is impaired, by losses or otherwise, the OCC is
authorized to require payment of the deficiency by assessment upon the bank's
parent company, and to sell the stock of the bank if such assessment is not
satisfied within three months to the extent necessary to eliminate the
deficiency.
Federal Deposit Insurance Reform Act of 2005
As a result of the Federal Deposit Insurance Reform Act of 2005, the Bank
Insurance Fund and Savings Association Insurance Fund have been merged into a
new combined fund, called the Deposit Insurance Fund. The Federal Deposit
Insurance Reform Act also (1) increases deposit insurance coverage for
retirement accounts to $250,000, (2) indexes the current $100,000 insurance
coverage limit for standard accounts and the new $250,000 limit for retirement
accounts to reflect inflation (with adjustments for inflation every five years,
commencing January 1, 2011), (3) requires the FDIC to assess annual deposit
insurance premiums on all banks and savings institutions, (4) gives a one-time
insurance assessment credit totaling $4.7 billion to banks and savings
institutions in existence on December 31, 1996 that can be used to offset
premiums otherwise due, (5) imposes a cap on the level of the Deposit Insurance
Fund and provide for dividends or rebates when the fund grows beyond a specified
threshold, (6) adopts a historical basis concept for distributing the
aforementioned one-time credit and dividends (with each institution's historical
basis to be determined by a formula that looks back to the institution's
assessment base in 1996 and adds premiums paid since that time) and (7)
authorizes revisions to the current risk-based system for assessing premiums,
including replacing the current fixed reserve ratio requirement of 1.25% with a
range of between 1.15% and 1.50% of insured deposits.
Capital Adequacy
The Federal Reserve Board and the OCC have substantially similar risk-based
capital and leverage ratio guidelines for banking organizations. These
guidelines are intended to ensure that banking organizations have adequate
capital given the risk levels of their assets and off-balance sheet financial
instruments. Under the risk-based capital and leverage ratio guidelines, assets
and off-balance sheet items are assigned to broad risk categories, each with
appropriate weights.
7
The resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items. These risk-based capital
requirements identify concentration of credit risk, and facilitate management of
those risks.
To derive total risk-weighted assets, bank assets are given risk-weights of 0%,
20%, 50% and 100%. In addition, certain off-balance sheet items are converted to
asset equivalent amounts to which an appropriate risk-weight will apply. Most
loans are assigned to the 100% risk category, except for performing first
mortgage loans fully secured by residential property, which carry a 50%
risk-weighting. Most investment securities (including, primarily, general
obligation claims of states or other political subdivisions of the United
States) are assigned to the 20% category, except for municipal or state revenue
bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury
or obligations backed by the full faith and credit of the United States
government, which have a 0% risk-weight. In converting off-balance sheet items,
direct credit substitutes, including general guarantees and standby letters of
credit backing financial obligations, are given a 100% risk-weighting.
Transaction-related contingencies such as bid bonds, standby letters of credit
backing nonfinancial obligations, and undrawn commitments (including commercial
credit lines with an initial maturity or more than one year) have a 50%
risk-weighting. Short-term commercial letters of credit have a 20%
risk-weighting, and certain short-term unconditionally cancelable commitments
have a 0% risk-weighting.
Under the capital guidelines, a banking organization's total capital is divided
into tiers. "Tier I Capital" consists of common shareholders' equity, qualifying
preferred stock, and minority interests in the equity accounts of consolidated
subsidiaries, less certain goodwill items and other intangible assets. No more
than 25% of qualifying Tier I Capital may consist of trust preferred securities.
"Tier II Capital" consists of hybrid capital instruments, perpetual debt,
mandatory convertible debt securities, a limited amount of subordinated debt,
and preferred stock that does not qualify as Tier I Capital, plus a limited
amount of loan and lease loss allowances and a limited amount of unrealized
holding gains on equity securities. "Tier III Capital" consists of qualifying
unsecured subordinated debt. "Total Capital" is the sum of Tier I, Tier II and
Tier III Capital. The sum of Tier II and Tier III Capital may not exceed the
amount of Tier I Capital.
Under the Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the required minimum ratio of Total Capital (the sum of Tier I, Tier
II and Tier III Capital) to risk-weighted assets (including certain off-balance
sheet activities, such as standby letters of credit) is 8%. The required minimum
ratio of Tier I Capital to risk-weighted assets is 4%. At December 31, 2007,
Central Jersey Bancorp's ratios of Total Capital and Tier 1 Capital to
risk-weighted assets were 13.73% and 12.74%, respectively.
The Federal Reserve Board also requires bank holding companies to comply with
minimum leverage ratio guidelines. The leverage ratio is the ratio of a bank
holding company's Tier I Capital (excluding intangibles) to its total assets
(excluding loan loss reserve, goodwill, and certain other intangibles). Bank
holding companies normally must maintain a minimum leverage ratio of 4%, unless
the bank holding company has the highest supervisory rating or has implemented
the Federal Reserve Board's risk-adjusted measure for market risk, in which case
its minimum leverage ratio must be 3%. Banking organizations undergoing
significant growth or undertaking acquisitions must maintain even higher capital
positions. At December 31, 2007, Central Jersey Bancorp's leverage ratio was
9.08%. Central Jersey Bank, N.A. is subject to similar risk-based and leverage
capital guidelines, as adopted by the OCC.
Banking regulators currently are developing proposed revisions to their existing
capital adequacy regulations and standards, based on policy guidelines issued by
the Basel Committee on Banking Supervision, an international committee of
central banks and bank regulators from major
8
industrialized countries. Central Jersey Bank, N.A. is analyzing the potential
impact of these proposed revisions on its risk-based capital.
Prompt Corrective Action
The Federal Deposit Insurance Act requires federal banking regulators to take
prompt corrective action with respect to depository institutions that do not
meet minimum capital requirements. Failure to meet minimum requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have an adverse material effect on Central
Jersey Bancorp's financial condition. Under the Prompt Corrective Action
Regulations, Central Jersey Bank, N.A. must meet specific capital guidelines
that involve quantitative measures of its assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Prompt Corrective Action Regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." The Federal
Deposit Insurance Act imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the capital
category by which the institution is classified. Institutions categorized as
"undercapitalized" or worse may be subject to requirements to file a capital
plan with their primary federal regulator, prohibitions on the payment of
dividends and management fees, restrictions on asset growth and executive
compensation, and increased supervisory monitoring, among other things. Other
restrictions may be imposed on the institution by the regulatory agencies,
including requirements to raise additional capital, sell assets or sell the
entire institution. Once an institution becomes "critically undercapitalized,"
it generally must be placed in receivership or conservatorship within ninety
days.
The Prompt Corrective Action Regulations provide that an institution is "well
capitalized" if the institution has a total risk-based capital ratio of 10.0% or
greater, a Tier I risk-based capital ratio of 6.0% or greater, and a leverage
ratio of 5.0% or greater. The institution also may not be subject to an order,
written agreement, and capital directive or prompt corrective action directive
to meet and maintain a specific level for any capital measure. An institution is
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
greater, a Tier I risk-based capital ratio of 4.0% or greater, and a leverage
ratio of 4.0% or greater (or a leverage ratio of 3.0% or greater if the
institution is rated composite 1 in its most recent report of examination,
subject to appropriate federal banking agency guidelines), and the institution
does not meet the definition of a well-capitalized institution. An institution
is deemed "undercapitalized" if it has a total risk-based capital ratio that is
less than 8.0%, a Tier I risk-based capital ratio of less than 4.0%, or a
leverage ratio of less than 4.0% (or a leverage ratio of less than 3.0% if the
institution is rated composite 1 in its most recent report of examination,
subject to appropriate federal banking agency guidelines), and the institution
does not meet the definition of a significantly undercapitalized or critically
undercapitalized institution. An institution is "significantly undercapitalized"
if the institution has a total risk-based capital ratio that is less than 6.0%,
a Tier I risk-based capital ratio of less than 3.0%, or a leverage ratio less
than 3.0% and the institution does not meet the definition of a critically
undercapitalized institution, and is "critically undercapitalized" if the
institution has a ratio of tangible equity to total assets that is equal to or
less than 2.0%.
The appropriate federal banking agency may, under certain circumstances,
reclassify a well capitalized insured depository institution as adequately
capitalized. The appropriate agency is also permitted to require an adequately
capitalized or undercapitalized institution to comply with
9
the supervisory provisions as if the institution were in the next lower category
(but not to treat a significantly undercapitalized institution as critically
undercapitalized) based on supervisory information other than an institution's
capital levels.
At December 31, 2007, Central Jersey Bank, N.A. was "well capitalized" based on
the ratios and guidelines noted above. However, the capital categories of the
bank are determined solely for the purpose of applying the Prompt Corrective
Action Regulations and may not constitute an accurate representation of its
overall financial condition or prospects. Additional information on capital
amounts and ratios of Central Jersey Bancorp and Central Jersey Bank, N.A. is
found in Note (15) to our consolidated financial statements included herein.
Unsafe and Unsound Practices
Notwithstanding its Prompt Corrective Action category dictated by risk-based
capital ratios, the Federal Deposit Insurance Act permits the appropriate bank
regulatory agency to reclassify an institution if it determines, after notice
and a hearing, that the condition of the institution is unsafe or unsound, or if
it deems the institution to be engaging in an unsafe or unsound practice. Under
the Financial Institutions Supervisory Act, the OCC has the authority to
prohibit national banks from engaging in any activity in the conduct of their
business which the OCC believes constitutes an unsafe or unsound practice. The
Federal Reserve Board has similar authority with regard to bank holding
companies and their non-bank subsidiaries.
The USA PATRIOT Act
On October 26, 2001, the President signed into law certain comprehensive
anti-terrorism legislation known as the USA PATRIOT Act of 2001. Title III of
the USA PATRIOT Act substantially broadened the scope of the U.S.
anti-money-laundering laws and regulations by imposing significant new
compliance and due diligence obligations, creating new crimes and penalties and
expanding the extra-territorial jurisdiction of the United States. The U.S.
Treasury Department has issued a number of implementing regulations which apply
various requirements of the USA PATRIOT Act to financial institutions such as
Central Jersey Bank, N.A. Those regulations impose new obligations on financial
institutions to maintain appropriate policies, procedures and controls to
detect, prevent and report money laundering and terrorist financing.
Failure of a financial institution to comply with the USA PATRIOT Act's
requirements could have serious legal consequences for an institution and
adversely affect its reputation. Central Jersey Bancorp has adopted appropriate
policies, procedures and controls to address compliance with the requirements of
the USA PATRIOT Act under the existing regulations and will continue to revise
and update its policies, procedures and controls to reflect changes required by
the USA PATRIOT Act and by the Treasury Department regulations.
Community Reinvestment Act
The Federal Community Reinvestment Act requires banks to respond to the full
range of credit and banking needs within their communities, including the needs
of low and moderate-income individuals and areas. A bank's failure to address
the credit and banking needs of all socio-economic levels within its markets may
result in restrictions on growth and expansion opportunities for the bank,
including restrictions on new branch openings, relocation, formation of
subsidiaries, mergers and acquisitions. In the latest CRA examination report
with respect to Central Jersey Bank, N.A., dated November 10, 2003, Central
Jersey Bank, N.A. received a rating of satisfactory.
10
Consumer Privacy
The privacy provisions of the Gramm-Leach-Bliley Act generally prohibit
financial institutions, including Central Jersey Bancorp and Central Jersey
Bank, N.A., from disclosing or sharing nonpublic personal financial information
to third parties for marketing or other purposes not related to transactions,
unless customers have an opportunity to "opt out" of authorizing such
disclosure, and have not elected to do so. It has never been the policy of
Central Jersey Bancorp to release such information except as may be required by
law. The Fair Credit Reporting Act also restricts information sharing among
affiliates for marketing and other purposes.
Loans to One Borrower
Federal banking laws limit the amount a bank may lend to a single borrower to
15% of the bank's capital and surplus, plus an additional 10% of capital and
surplus if the amount over the 15% general limit is fully secured by adequate
amounts of readily marketable capital. However, no loan to one borrower may
exceed 25% of a bank's statutory capital, notwithstanding collateral pledged to
secure it. Well-qualified national banks also may be eligible for certain
preferred lending limits within specified loan categories.
Depositor Preference Statute
Under federal law, depositors, certain claims for administrative expenses and
employee compensation against an insured depository institution are afforded a
priority over other general unsecured claims against the institution, in the
event of a "liquidation or other resolution" of the institution by a receiver.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the President of the United States signed into law the
Sarbanes-Oxley Act of 2002. The stated goals of Sarbanes-Oxley Act of 2002 are
to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. The Sarbanes-Oxley Act of 2002
generally applies to all companies, both domestic and foreign, that file or are
required to file periodic reports with the Securities and Exchange Commission
under the Exchange Act.
The Sarbanes-Oxley Act of 2002 includes very specific disclosure requirements
and corporate governance rules, requires the Securities and Exchange Commission
and self regulatory organizations to adopt extensive additional disclosure,
corporate governance and other related rules and mandates further studies of
certain issues by the Securities and Exchange Commission and the Comptroller
General. The Sarbanes-Oxley Act of 2002 represents significant federal
involvement in matters traditionally left to state regulatory systems, such as
the regulation of the accounting profession, and to state corporate law, such as
the relationship between a board of directors and management and between a board
of directors and its committees.
The Sarbanes-Oxley Act of 2002 addresses, among other matters:
o audit committees for all reporting companies;
o certification of financial statements by the chief executive officer
and the chief financial officer;
11
o the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and
senior officers under certain circumstances;
o a prohibition on insider trading during pension plan black out
periods;
o disclosure of off-balance sheet transactions;
o expedited filing requirements for certain periodic and current
reports;
o disclosure of a code of ethics;
o "real time" filing of periodic reports;
o the formation of a public accounting oversight board;
o auditor independence; and
o various increased criminal penalties for violations of securities
laws.
Overall Impact of New Legislation and Regulations
Various legislative initiatives are from time to time introduced in Congress. It
cannot be predicted whether or to what extent the business and condition of
Central Jersey Bancorp and its subsidiaries will be affected by new legislation
or regulations, and legislation or regulations as yet to be proposed or enacted.
Impact of Monetary Policies
The earnings of Central Jersey Bank, N.A. 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 Federal Reserve Board have had,
and will likely continue to have, an important impact on the operating results
of banks through the Federal Reserve Board's power to implement national
monetary policy in order, among other things, to curb inflation or combat a
recession. The Federal Reserve Board 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 borrowing of member banks and the reserve requirements
against member bank deposits. It is not possible to predict the nature and
impact of future changes in monetary and fiscal policies.
Item 1A. Risk Factors
------------
The following is a discussion of certain significant risk factors that could
potentially adversely affect our financial condition and results of operations.
We compete for deposits and loan customers with larger financial institutions
whose customer bases are broader and whose lending limits exceed Central Jersey
Bank, N.A.'s lending limits. We also compete with similar banks focused on the
same markets and customers. Competition costs money, and competition could
reduce the number of customers using the banking services provided by us.
New Jersey is a competitive banking environment. Central Jersey Bank, N.A.
competes for deposits and for borrowers with larger and more established
in-state and out-of-state financial institutions, including large financial
service companies and other entities, in addition to traditional banking
institutions such as savings and loan associations, savings banks, commercial
banks and credit unions. Because of their greater capitalization and other
resources, larger institutions may have competitive advantages resulting from
their ability to offer more
12
convenient facilities and higher lending limits. Lending limits are primarily a
function of a bank's capital base. Accordingly, larger banks that have much
larger capital bases than Central Jersey Bank, N.A., have lending limits which
exceed those of Central Jersey Bank, N.A. Several larger banks with branches in
our market area have lending limits which exceed $1 billion. At December 31,
2007, Central Jersey Bank, N.A.'s legal lending limit was approximately $7.2
million.
Central Jersey Bank, N.A. also has community bank competitors with similar goals
and business territories. Three currently existing community banks commenced
operations within Central Jersey Bank, N.A.'s existing market area since 1996,
and two other community banks are expected to commence operations in such market
area in 2008.
We compete by offering personal, local service and extended hours of operation,
but we may also compete by offering lower interest rates and paying more to
attract deposits. Because we operate in a highly-competitive market, it is
likely that the cost of competing for market share is greater for us than it
would be for a small bank in a less competitive market. The cost of our
competitive efforts may impact profitability, and we can offer no assurance that
any of our competitive efforts will be successful. See "Item 1. Business -
Competition."
Use by other banks of advanced banking technologies creates more competition and
could result in increased costs to us in our effort to remain current.
Larger and more established banks may have access to more funding for
technological research, development and introduction of new technologies,
including internet banking, telephone banking and automated teller machine (ATM)
technologies. While Central Jersey Bank, N.A. offers access to each of these
technologies to its customers, additional capital investment will be required to
keep our technology current. Emerging technologies and innovations in existing
technologies make the continuing need to improve a constant challenge. Capital
expenditures for enhanced technologies may not represent long-term investments,
as these technologies quickly become obsolete. Such expenditures also may reduce
our profitability.
Competition for deposits may impact our profitability.
Deposits represent a source of funds for loans made by banks, and competition
for deposits could result in fewer funds available to make loans and to generate
other interest-earning opportunities. Other banks may compete more effectively
for deposits by offering more convenient depositary locations and by keeping
branches open for longer hours. We can pay higher rates of interest to attract
deposits, but this reduces Central Jersey Bank, N.A.'s net interest margin. We
also can pay more for advertising and other incentives to attract deposits.
However, any of these efforts could lower our profit margins, and we can offer
no assurance that they will succeed.
Interest rate fluctuations beyond our control influence our profitability. As a
result, our financial performance could suffer, despite our best efforts.
Our profitability depends in large part on the difference between the interest
Central Jersey Bank, N.A. pays on funds available to it, and the interest
Central Jersey Bank, N.A. earns on funds it makes available to others. The price
of funds may depend on many factors beyond our control, including federal
economic, fiscal and monetary policies, and general economic conditions. These
factors may be influenced by national and international economic and political
trends and events, including inflation, recession, unemployment and
international conflicts. Any of these events could trigger an increase in
interest rates, which will increase our cost of funds.
13
Fluctuations in interest rates paid by Central Jersey Bank, N.A. for funds it
needs could affect our operating performance and condition, by affecting the
margin or "spread" between what Central Jersey Bank, N.A. pays for funds and
what it earns by charging interest to lend funds. Interest rates were recently
at historically low levels. The Federal Reserve has decreased the federal funds
rate several times. Consequently, Central Jersey Bank, N.A. has experienced
compression of its interest rate spread and net interest margin, which has had,
and likely will continue to have, a negative effect on profitability.
Our small market area increases the potential impact of regional economic and
other conditions, so that localized problems could have unmitigated consequences
for us.
Our current primary market is coastal Monmouth County, New Jersey. Our branches
serve only a portion of this market. Potential problems directly affecting our
region, including regional disasters such as floods, or economic problems such
as office or plant closings and layoffs, could hinder our growth and hurt our
performance, because we may not have branches in unaffected areas to offset
localized problems. This could result in losses or make us less profitable.
Our newer relationships with smaller customers, and our smaller overall customer
base size, could result in larger loan loss experience.
To compete with larger lending institutions, we attempt to attract customers
seeking new banking relationships. Customers that are not larger businesses or
high net-worth individuals may have less capacity to repay loans during economic
down-turns or other adverse events. This fact exposes Central Jersey Bank, N.A.
to the risk of non-payment or late payment of loans and could result in
collection expenses and loan losses. Our experienced lenders and underwriters
take into account these considerations, and our strict credit policies, loan
approval process and loan monitoring offers additional safeguards. While many of
the loans that we approve may be new to our institution, the relationships are
known to our staff and have been actively managed by our lenders during their
tenure at other financial institutions. However, until our loan portfolio
matures, its quality will be difficult to measure, and even after it matures, we
can offer no assurance that Central Jersey Bank, N.A. will not incur collection
expenses and loan losses.
Central Jersey Bank, N.A. participates in loans originated by other financial
institutions. Central Jersey Bank, N.A. reviews the credit risk associated with
its participation in such loans under the same credit policies that it applies
to loans it initiates. The application of these policies may reduce, but does
not eliminate, the risk of loan losses.
Regulations and regulatory developments may impact our performance by increasing
our costs of compliance or increasing competition.
Central Jersey Bank, N.A. is subject to extensive governmental supervision,
regulation and control. Future legislation and government policy could adversely
affect lending trends and practices, deposit volume, the operations of Central
Jersey Bank, N.A. and the banking industry as a whole. The statutes and
regulations governing financial institutions have been substantially modified
during recent years, and likely will continue to be the subject of future
modification. Changes in the regulations that govern our operations may increase
our costs of compliance, and may give rise to industry-wide changes which could
result in other cost increases for Central Jersey Bank, N.A.
For example, many of the recent regulatory changes have increased competition
between banks and nonbanks, which now may offer similar products and services.
They have also increased merger activity between banks and nonbanks, and
elevated customer awareness of differences among competitors in products,
services and fees. These changes may result in increased
14
competitive efforts by Central Jersey Bank, N.A., resulting in increased costs
to Central Jersey Bank, N.A.
We compete with larger financial institutions for personnel, and we may have
difficulties attracting and retaining qualified employees if larger and more
profitable banks and other financial institutions offer more compensation and
other benefits than we do. Also, we are dependent on certain key employees,
whose loss could hinder our development.
Experienced and service-oriented personnel are important to success in the
financial services industry. Our business is managed by a team of executives and
officers with substantial experience and community contacts in our market area.
We are particularly dependent to a significant degree upon the skill and
experience of certain executive officers and skilled employees. In addition, our
current staff consists of well-trained, qualified employees. We intend to
continue to motivate our existing staff and to hire similarly qualified
candidates; however, there can be no assurance that we will be successful in
doing so, especially since larger and more profitable banks and other financial
institutions generally have greater resources to offer more compensation and
other benefits than we do.
Increased emphasis on commercial lending may expose us to increased lending
risks.
At December 31, 2007, $269.8 million, or 85.6%, of Central Jersey Bank, N.A.'s
total loans consisted of commercial, industrial and commercial real estate
loans. These types of loans generally expose a lender to greater risk of
non-payment and loss than the one-to-four family residential mortgage loans
because repayment of the loans often depends on the successful operation of the
property and the income stream of the borrowers. Such loans typically involve
larger loan balances to single borrowers or groups of related borrowers as
compared to one-to-four- family residential mortgage loans. Also, many of our
borrowers have more than one loan outstanding. Consequently, an adverse
development with respect to one loan or one credit relationship can expose
Central Jersey Bank, N.A. to a significantly greater risk of loss compared to an
adverse development with respect to a one-to-four family residential loan.
We may not be able to continue to grow our business, which may adversely impact
our results of operations.
During the last five years, our total assets have grown substantially from
$118.0 million at December 31, 2002 to $503.5 million at December 31, 2007,
through internal growth and the combination with Allaire Community Bank. Our
business strategy calls for continued expansion, but we do not anticipate growth
to continue at this rate. Our ability to continue to grow depends, in part, upon
our ability to open new branch locations, successfully attract deposits to
existing and new branches, and identify favorable loan and investment
opportunities. In the event that we do not continue to grow, our results of
operations could be adversely impacted.
Unmanaged growth may adversely impact our financial results.
As part of our expansion strategy, we plan to open new branches in our existing
and target markets. However, we may be unable to identify attractive locations
on terms favorable to us or to hire qualified management to operate the new
branches. In addition, the organizational and overhead costs may be greater than
we anticipated or we may not be able to obtain the regulatory approvals
necessary to open new branches. New branches may take longer than expected to
reach profitability, and we cannot assure that they will become profitable. The
additional costs of starting new branches may adversely impact our financial
results.
15
Our ability to manage growth successfully will depend on whether we can continue
to fund this growth while maintaining cost controls and asset quality, as well
as on factors beyond our control, such as national and regional economic
conditions and interest rate trends. If we are not able to control costs and
maintain asset quality, such growth could adversely impact our earnings and
financial condition.
For our continued growth and possible expansion, we may need to raise additional
capital in the future, which may be unavailable or available at terms
unacceptable to us.
Central Jersey Bancorp is required by federal regulatory authorities to maintain
adequate levels of capital to support its operations. We may at some point need
to raise additional capital to support continued growth. Our ability to raise
additional capital, if needed, will depend on conditions in the capital markets
at that time, which are outside Central Jersey Bancorp's control, and on its
financial performance. Accordingly, we cannot assure you of our ability to raise
additional capital if needed or on terms acceptable to us. If Central Jersey
Bancorp cannot raise additional capital when needed, the ability to further
expand its operations could be materially impaired.
If our allowance for loan losses is not sufficient to cover actual loan losses,
our earnings would decrease.
In an attempt to mitigate any loan losses we may incur, we maintain an allowance
for loan losses based on, among other things, national and regional economic
conditions, and historical loss experience and delinquency trends among loan
types. However, we cannot predict loan losses with certainty and we cannot
assure you that charge offs in future periods will not exceed the allowance for
loan losses. In addition, regulatory agencies, as an integral part of their
examination process, review our allowance for loan losses and may require
additions to the allowance based on their judgment about information available
to them at the time of their examination. Factors that require an increase in
our allowance for loan losses could reduce our earnings.
Our hardware and software systems are vulnerable to damage that could harm our
business.
We rely upon our existing information systems for operating and monitoring all
major aspects of our business, including deposit and loan information, as well
as various internal management functions. These systems and our operations are
vulnerable to damage or interruption from natural disasters, power loss, network
failure, improper operation by our employees, security breaches, computer
viruses or intentional attacks by third parties. Any disruption in the operation
of our information systems could adversely impact our operations, which may
affect our results of operations and financial condition.
Our continuing concentration of loans in our primary market area may increase
our risk.
Our success depends primarily on the general economic conditions in central New
Jersey. Unlike some larger banks that are more geographically diversified, we
provide banking and financial services to customers primarily in central New
Jersey. The local economic conditions in central New Jersey have a significant
impact on our construction loans, commercial mortgage loans and commercial
loans, the ability of the borrowers to repay these loans and the value of the
collateral securing these loans. A significant decline in general economic
conditions, caused by inflation, recession, unemployment or other factors beyond
our control, would impact local economic conditions and could negatively affect
the financial results of our banking operations.
16
We target our business development and marketing strategy for loans to serve
primarily the banking and financial services needs of small- to medium-sized
businesses in central New Jersey. These small- to medium-sized businesses
generally have fewer financial resources in terms of capital or borrowing
capacity than larger entities. If general economic conditions negatively impact
these businesses, our results of operations and financial condition may be
adversely affected.
Recent developments in the housing sector and related markets and the economy
may adversely affect our business and financial results.
Throughout the course of 2007, the housing market experienced a variety of
worsening economic conditions, due in large part to the collapse of the
sub-prime mortgage market. While we did not invest in sub-prime mortgages and
related investments, our lending business is tied, in large part, to the housing
market. The housing slump may result in reduced demand for the construction of
new housing, declining or flat home prices, and increased delinquencies on
construction and residential and commercial mortgage loans. These conditions may
also cause a reduction in loan demand, and an increase in our non-performing
assets, net charge-offs and provision for loan losses. These negative economic
conditions could adversely impact our prospects for growth, asset and goodwill
valuations and our results of operations.
Item 1B. Unresolved Staff Comments
-------------------------
None.
Item 2. Properties
----------
Bank Buildings
The main office and the original branch of Central Jersey Bank, N.A. is located
in the City of Long Branch, New Jersey at 627 Second Avenue. On August 1, 2003,
Central Jersey Bank, N.A. purchased the land and building of this branch.
Central Jersey Bank, N.A. also leases office space or owns the buildings at the
following branch locations:
o 700 Allaire Road, Spring Lake Heights, New Jersey.
o 700 Branch Avenue, Little Silver, New Jersey.
o 61 Main Avenue, Ocean Grove, New Jersey.
o 444 Ocean Boulevard, Long Branch, New Jersey.
o 2200 Highway 35, Sea Girt, New Jersey.
o 155 Main Street, Manasquan, New Jersey.
o Shark River Plaza, 300 West Sylvania Avenue, Route 33, Neptune City,
New Jersey.
o 2201 Bridge Avenue, Point Pleasant, New Jersey.
o 501 Main Street, Bradley Beach, New Jersey.
o 611 Main Street, Belmar, New Jersey
o Shop Rite Plaza, 2445 Highway 34, Manasquan, New Jersey.
17
Effective September 14, 2007, Central Jersey Bank, N.A. closed two of its branch
offices - Route 35, Neptune City and Highway 33, Neptune Township. The customer
relationships from both of these branch offices were moved to the branch office
at 300 West Sylvania Avenue, Neptune City.
In addition, Central Jersey Bank, N.A. leases approximately 5,000 square feet of
office, storage and conference space at 6 West End Court, Long Branch, New
Jersey. Central Jersey Bank N.A. is in the process of completing construction on
a 12,000 square foot office building for its new corporate headquarters and full
service branch located on Route 35 and Dow Avenue, Ocean Township, New Jersey.
Central Jersey Bank N.A anticipates opening this location in the Spring of 2008.
Central Jersey Bank N.A. also leases property on Hurley Pond Road, Wall
Township, New Jersey.
Item 3. Legal Proceedings
-----------------
There are no material legal, governmental, administrative or other proceedings
pending against Central Jersey Bancorp or Central Jersey Bank, N.A.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
18
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
---------------------------------------------------------------------
and Issuer Purchases of Equity Securities
-----------------------------------------
Effective February 1, 2007, the common stock of Central Jersey Bancorp commenced
trading on the NASDAQ Global Market under the ticker symbol "CJBK." Prior
thereto, the common stock of Central Jersey Bancorp traded on the NASDAQ Capital
Market.
The following table sets forth, for the periods indicated, the high and low last
sale information for Central Jersey Bancorp's common stock, as reported on the
NASDAQ Capital Market for the period commencing January 1, 2006 through January
31, 2007, and as reported on the NASDAQ Global Market for the period commencing
February 1, 2007 through December 31, 2007. Please note that the information set
forth below reflects inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions, and has been adjusted to
reflect 5% stock dividends paid on July 2, 2007 and July 1, 2006.
Year Ended December 31, 2007 High Low
------ ------
First Quarter.............................. $10.51 $8.28
Second Quarter............................. 10.76 8.08
Third Quarter.............................. 8.65 7.06
Fourth Quarter............................. 8.10 6.64
Year Ended December 31, 2006 High Low
------ ------
First Quarter.............................. $13.79 $11.17
Second Quarter............................. 12.18 8.71
Third Quarter.............................. 10.86 8.66
Fourth Quarter............................. 9.95 8.55
As of March 2, 2008, the following were market makers for Central Jersey
Bancorp's common stock: UBS Securities LLC; Citadel Derivatives Group LLC;
Citigroup Global Markets Inc.; Susquehanna Capital Group; Sandler, O' Neill &
Partners, L.P.; Knight Equity Markets, L.P.; Keefe, Bruyette & Woods, Inc.;
Sterne, Agee & Leach, Inc.; NASDAQ Execution Services LLC; Automated Trading
Desk; Archipelago Stock Exchange; and Stifel Nicolaus & Co.
As of March 2, 2008, the approximate number of registered holders of Central
Jersey Bancorp's common stock was 649.
Central Jersey Bancorp has not paid any cash dividends on its common stock and
does not presently intend to declare or pay cash dividends. Our dividend policy
is subject to certain regulatory considerations and the discretion of our Board
of Directors and depends upon a number of factors, including operating results,
financial condition and general business conditions. Holders of common stock are
entitled to receive dividends as, if and when declared by our Board of Directors
out of funds legally available therefore, subject to the restrictions set forth
under the Federal Bank Holding Company Act. We may pay cash dividends without
regulatory approval if net income available to shareholders fully funds the
proposed dividends, and the expected rate of earnings retention is consistent
with capital needs, asset quality and overall financial condition.
Central Jersey Bancorp did not repurchase any shares of its common stock during
the period covered by this report. However, on January 15, 2008, Central Jersey
Bancorp announced that
19
its Board of Directors authorized a common stock repurchase program, which is
expected to continue through the end of 2009, or for such shorter or longer
period of time as Central Jersey Bancorp may determine. It is contemplated that
during 2008, Central Jersey Bank, N.A. will declare and pay cash dividends to
Central Jersey Bancorp in order to effectuate the common stock repurchase
program.
20
Item 6. Selected Financial Data
-----------------------
The following selected consolidated financial data of Central Jersey Bancorp as
of and for the years ended December 31, 2003 through 2007 are derived from the
audited consolidated financial statements of Central Jersey Bancorp. The
selected consolidated financial data as of and for the years ended December 31,
2007, 2006 and 2005 should be read in conjunction with the consolidated
financial statements of Central Jersey Bancorp and the related notes thereto and
management's discussion and analysis thereof appearing elsewhere in this
document.
CENTRAL JERSEY BANCORP - Summarized Statements of Operations
(in thousands, except per share amounts)
Year Ended
December 31,
-----------------------------------------------------------------
2007 2006 2005 2004(1) 2003(1)
-------- -------- -------- -------- --------
Interest and dividend income $ 30,488 $ 29,419 $ 24,947 $ 11,551 $ 9,111
Interest expense 13,782 12,456 7,502 3,046 2,612
-------- -------- -------- -------- --------
Net interest income 16,706 16,963 17,445 8,505 6,499
Provision for loan losses 165 500 426 260 150
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses 16,541 16,463 17,019 8,245 6,349
-------- -------- -------- -------- --------
Other (loss) income (217) 1,740 1,624 849 780
Operating expenses, including salaries
and employee benefits, professional
and application fees, occupancy
expenses, etc. 14,370 14,309 14,550 7,098 6,325
-------- -------- -------- -------- --------
Income before provision for income taxes 1,954 3,894 4,093 1,996 804
Income taxes 1,110 1,428 1,461 778 322
-------- -------- -------- -------- --------
Net income $ 844 $ 2,466 $ 2,632 $ 1,218 $ 482
======== ======== ======== ======== ========
Net income per share (2)
Basic $ 0.10 $ 0.28 $ 0.30 $ 0.29 $ 0.11
Diluted $ 0.09 $ 0.27 $ 0.27 $ 0.27 $ 0.10
(1) Does not include the results of operations of Allaire Community Bank which
combined with Central Jersey Bancorp on January 1, 2005.
(2) All per share amounts have been restated to reflect the 5% stock
distributions paid on December 31, 2003, 2002, 2001 and 2000, the
six-for-five stock split, in the form of a stock dividend, for
shareholders of record on July 15, 2004, the two-for-one stock split, in
the form of a stock dividend, for shareholders of record on June 15, 2005,
the 5% stock dividend paid on July 1, 2006 and the 5% stock dividend paid
on July 2, 2007.
21
CENTRAL JERSEY BANCORP - Summarized Balance Sheets
(in thousands)
At
December 31,
------------------------------------------------------------------------
2007 2006 2005 2004(1) 2003(1)
--------- --------- --------- --------- ---------
Assets:
Cash and due from banks $ 11,198 $ 16,162 $ 21,228 $ 9,169 $ 9,689
Federal funds sold 3,679 21,634 -- 9,425 4,675
Investment securities held-to-maturity 17,430 20,820 22,567 16,484 15,079
Investment securities available-for-sale,
at market value 114,824 95,735 111,175 73,668 68,196
Loans held-for-sale 658 242 3,127 -- --
Loans, net 311,765 312,093 307,168 139,697 115,805
Premises and equipment 4,626 5,357 6,006 2,496 2,171
Bank owned life insurance 3,565 3,447 3,338 -- --
Goodwill 26,957 26,957 27,229 -- --
Core deposit intangibles 1,926 2,478 3,097 -- --
Other assets 6,878 7,847 9,628 3,176 2,037
Due from broker -- 3,527 -- -- 4,961
--------- --------- --------- --------- ---------
Total assets $ 503,506 $ 516,299 $ 514,563 $ 254,115 $ 222,613
========= ========= ========= ========= =========
Liabilities and Shareholders' Equity:
Deposits $ 403,290 $ 427,277 $ 407,554 $ 232,853 $ 207,234
Accrued expenses and other liabilities 1,611 1,273 1,885 252 480
Other borrowings 24,564 17,099 38,191 -- --
Subordinated debentures 5,155 5,155 5,155 5,155 --
--------- --------- --------- --------- ---------
Total liabilities 434,620 450,804 452,785 238,260 207,714
--------- --------- --------- --------- ---------
Shareholders' equity:
Common stock 87 87 86 40 20
Additional paid-in capital 60,791 60,505 59,995 15,216 15,237
Accumulated other comprehensive income
(loss) 848 (1,409) (2,153) (619) (358)
Retained earnings 7,160 6,316 3,850 1,218 --
--------- --------- --------- --------- ---------
Total shareholders' equity 68,886 65,495 61,778 15,855 14,899
--------- --------- --------- --------- ---------
Total liabilities and shareholders' equity $ 503,506 $ 516,299 $ 514,563 $ 254,115 $ 222,613
========= ========= ========= ========= =========
(1) Does not include the assets, liabilities and shareholders' equity of
Allaire Community Bank which combined with Central Jersey Bancorp on
January 1, 2005.
22
Item 7. Management's Discussion and Analysis of Financial Condition and
--------------------------------------------------------------------
Results of Operations
---------------------
The following discussion and analysis is intended to provide information about
Central Jersey Bancorp's financial condition for the years ended December 31,
2007 and 2006 and results of operations for the years ended December 31, 2007,
2006 and 2005 The following information should be read in conjunction with
Central Jersey Bancorp's audited consolidated financial statements for the years
ended December 31, 2007, 2006 and 2005 including the related notes thereto,
which begin on page F-1 of this report.
General
Central Jersey Bancorp (formerly Monmouth Community Bancorp) is a bank holding
company headquartered in Long Branch, New Jersey. The holding company was
incorporated in New Jersey on March 7, 2000, and became an active bank holding
company on August 31, 2000 through the acquisition of Central Jersey Bank, N.A.
(formerly Monmouth Community Bank, N.A.). On January 1, 2005, Central Jersey
Bancorp completed its strategic business combination transaction with Allaire
Community Bank, a New Jersey state-chartered bank, pursuant to which Allaire
Community Bank became a wholly-owned bank subsidiary of Central Jersey Bancorp.
On the effective date of the combination, the name of the holding company was
changed from Monmouth Community Bancorp to Central Jersey Bancorp. In addition,
as a part of the combination, each outstanding share of common stock of Allaire
Community Bank was exchanged for one share of Central Jersey Bancorp common
stock.
Critical Accounting Policies
Note 1 to our consolidated financial statements for the years ended December 31,
2007, 2006 and 2005, contained elsewhere in this report, includes a summary of
our significant accounting policies. We believe our policy, with respect to the
methodology for our determination of the allowance for loan losses, involves a
high degree of complexity and requires management to make difficult and
subjective judgments which often requires assumptions or estimates about
uncertain matters. Changes in these judgments, assumptions or estimates could
cause reported results to differ materially. This critical policy and its
application are periodically reviewed by Central Jersey Bancorp's Audit
Committee and Board of Directors.
Additional critical accounting policies relate to judgments about other asset
impairments, including goodwill, investment securities and deferred tax assets.
Central Jersey Bancorp performs an annual analysis to test the aggregate balance
of goodwill for impairment in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. For purposes
of goodwill impairment evaluation, Central Jersey Bancorp is identified as the
reporting unit. The fair value of goodwill is determined in the same manner as
goodwill recognized in a business combination and uses standard valuation
methodologies including a review of comparable transactions. If the carrying
amount of goodwill pursuant to this analysis were to exceed the implied fair
value of goodwill, an impairment loss would be recognized. No impairment loss
was required to be recognized for the years ended December 31, 2007, 2006 and
2005. At each of December 31, 2007 and 2006, Central Jersey Bancorp had $27.0
million of goodwill related to the combination with Allaire Community Bank.
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and overnight federal funds sold. Federal funds
sold are generally sold for one-day periods.
23
Investment securities held-to-maturity are comprised of debt securities that
Central Jersey Bank, N.A. has the positive intent and ability to hold to
maturity. Such securities are stated at cost, adjusted for amortization of
premiums and accretion of discounts over the estimated remaining lives of the
securities as an adjustment to the yield using the level-yield method.
Securities to be held for indefinite periods of time and not intended to be
held-to-maturity, including all equity securities, are classified as
available-for-sale. Securities available-for-sale include securities that
management intends to use as part of its asset/liability management strategy and
that may be sold in response to changes in interest rates, resultant prepayment
risk and other factors related to interest rate and resultant prepayment risk
changes. Securities available-for-sale are carried at estimated fair value.
Unrealized holding gains and losses on such securities available-for-sale are
excluded from earnings and reported as a separate component of shareholders'
equity. Gains and losses on sales of securities are based on the specific
identification method and are accounted for on a trade date basis.
On a quarterly basis, Central Jersey Bank, N.A. evaluates investment securities
for other-than-temporary impairment. For individual investment securities
classified as either available-for-sale or held-to-maturity, a determination is
made as to whether a decline in fair value below the amortized cost basis is
other than temporary. If the decline in fair value is judged to be other than
temporary, the cost basis of the individual investment security shall be written
down to fair value as a new cost basis and the amount of the write-down shall be
recognized in earnings. Subsequent increases in the fair value of
available-for-sale securities shall be included as a separate component of
equity; subsequent decreases in fair value, if not an other-than-temporary
impairment, also shall be included as a separate component of equity.
Loans are stated at unpaid principal balances, less unearned income and deferred
loan fees and costs.
Interest on loans is credited to operations based upon the principal amount
outstanding.
Loan origination and commitment fees and certain direct loan origination costs
are deferred, and the net amount is amortized over the estimated life of the
loan as an adjustment to the loan's yield using the level-yield method.
A loan is considered impaired when, based on current information and events, it
is probable that Central Jersey Bank, N.A. will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Impaired loans are
measured based on the present value of expected future cash flows, or, as a
practical expedient, at the loan's observable market price, or the fair value of
the underlying collateral, if the loan is collateral dependent. Conforming
residential mortgage loans, home equity and second mortgages, and loans to
individuals are excluded from the definition of impaired loans as they are
characterized as smaller balance, homogeneous loans and are collectively
evaluated.
The accrual of income on loans, including impaired loans, is generally
discontinued when a loan becomes more than 90 days delinquent as to principal or
interest or when other circumstances indicate that collection is questionable,
unless the loan is well secured and in the process of collection. Income on
non-accrual loans, including impaired loans, is recognized only in the period in
which it is collected, and only if management determines that the loan principal
is fully collectible. Loans are returned to an accrual status when a loan is
brought current as to principal and interest and reasons indicating doubtful
collection no longer exists.
A loan is considered past due when a payment has not been received in accordance
with the contractual terms. Generally, commercial loans are placed on
non-accrual status when they are 90 days past due unless they are well secured
and in the process of collection or, regardless of the
24
past due status of the loan, when management determines that the complete
recovery of principal and interest is in doubt. Commercial loans are generally
charged off after an analysis is completed which indicates that collectibility
of the full principal balance is in doubt. Consumer loans are generally charged
off after they become 120 days past due. Mortgage loans are not generally placed
on a non-accrual status unless the value of the real estate has deteriorated to
the point that a potential loss of principal or interest exists. Subsequent
payments are credited to income only if collection of principal is not in doubt.
If principal and interest payments are brought contractually current and future
collectibility is reasonably assured, loans are returned to accrual status.
Mortgage loans are generally charged off when the value of the underlying
collateral does not cover the outstanding principal balance. Loan origination
and commitment fees less certain costs are deferred and the net amount amortized
as an adjustment to the related loan's yield. Loans held-for-sale are recorded
at the lower of aggregate cost or market value.
The allowance for loan losses is based upon management's evaluation of the
adequacy of the allowance, including an assessment of: (a) known and inherent
risks in the loan portfolio, (b) the size and composition of the loan portfolio,
(c) actual loan loss experience, (d) the level of delinquencies, (e) the
individual loans for which full collectibility may not be assured, (f) the
existence and estimated net realizable value of any underlying collateral and
guarantees securing the loans, and (g) the current economic and market
conditions. Although management uses the best information available, the level
of the allowance for loan losses remains an estimate that is subject to
significant judgment and short-term change. Various regulatory agencies, as an
integral part of their examination process, periodically review 'Central Jersey
Bank, N.A.'s allowance for loan losses. Such agencies may require Central Jersey
Bank, N.A. to make additional provisions for loan losses based upon information
available to them at the time of their examination. Furthermore, the majority of
'Central Jersey Bank, N.A.'s loans are secured by real estate in the State of
New Jersey. Accordingly, the collectibility of a substantial portion of the
carrying value of 'Central Jersey Bank, N.A.'s loan portfolio is susceptible to
changes in local market conditions and may be adversely affected should real
estate values decline or the Central New Jersey area experience an adverse
economic climate. Future adjustments to the allowance for loan losses may be
necessary due to economic, operating, regulatory and other conditions beyond
'Central Jersey Bank, N.A.'s control. Management believes that the allowance for
loan losses is adequate.
Income taxes are accounted for under the asset and liability method. Current
income taxes are provided for based upon amounts estimated to be currently
payable, for both federal and state income taxes. Deferred federal and state tax
assets and liabilities are recognized for the expected future tax consequences
of existing differences between financial statement and tax basis of existing
assets and liabilities. Deferred tax assets are recognized for future deductible
temporary differences and tax loss carry forwards if their realization is
"more-likely-than-not." The effect of a change in the tax rate on deferred taxes
is recognized in the period of the enactment date.
Comprehensive income is segregated into net income and other comprehensive
income. Other comprehensive income includes items previously recorded directly
to equity, such as unrealized gains and losses on securities available-for-sale.
Comprehensive income is presented in the Statements of Changes in Shareholders'
Equity.
Central Jersey Bank, N.A.'s operations are solely in the financial services
industry and include providing to its customers traditional banking and other
financial services. Central Jersey Bank, N.A. operates primarily in the
geographical region of Central New Jersey. Management makes operating decisions
and assesses performance based on an ongoing review of Central Jersey Bank,
N.A.'s consolidated financial results. Therefore, Central Jersey Bancorp has a
single operating segment for financial reporting purposes.
25
Intangible assets of Central Jersey Bank, N.A., consist of goodwill and core
deposit premiums. Goodwill represents the excess of the purchase price over the
estimated fair value of identifiable net assets acquired through purchase
acquisitions. In accordance with SFAS No. 142, goodwill with an indefinite
useful life is not amortized, but is evaluated for impairment on an annual
basis.
Core deposit premiums represent the intangible value of depositor relationships
assumed in purchase acquisitions and are amortized on an accelerated basis over
a period of ten years. The amortization of the core deposit premium is recorded
in other operating expenses.
Long-lived assets including goodwill and certain identifiable intangibles are
periodically evaluated for impairment in value. Long-lived assets and deferred
costs are typically measured whenever events or circumstances indicate that the
carrying amount may not be recoverable. No such events have occurred during the
periods reported. Certain identifiable intangibles and goodwill are evaluated
for impairment at least annually utilizing the "market approach" as prescribed
by SFAS No. 142, Goodwill and Other Intangible Assets. Asset impairment is
recorded when required.
The determination of whether deferred tax assets will be realizable is predicted
on estimates of future taxable income. Such estimates are subject to
management's judgment. A valuation reserve is established when management is
unable to conclude that it is more likely than not that it will realize deferred
tax assets based on the nature and timing of these items.
Overview
Net income for the year ended December 31, 2007 was $844,000, or $0.10 per basic
share and $0.09 per diluted share, as compared to net income of $2.5 million, or
$0.28 per basic share and $0.27 per diluted share, for the year ended December
31, 2006. The modest net income reported for year ended December 31, 2007 is due
to the balance sheet restructuring initiative, which resulted in a one-time
pre-tax charge of approximately $1.96 million, as described below.
During 2007, Central Jersey Bancorp executed a balance sheet restructuring
strategy involving approximately $88.6 million of investment securities held in
the available-for-sale investment portfolio. The restructuring resulted in a
one-time pre-tax impairment charge of approximately $1.96 million, which was
reflected in Central Jersey Bancorp's consolidated financial statements for the
three months ended March 31, 2007. Available-for-sale investment securities,
consisting primarily of lower yielding fixed rate callable agency investment
securities were sold during the second quarter of 2007 and replaced with higher
yielding investment securities with a comparable to modestly shorter aggregate
weighted average life. The market value loss that these investment securities
carried at March 31, 2007, was recorded as an other-than-temporary impairment
since Central Jersey Bancorp did not have the intent to hold these securities to
recovery. The investment securities Central Jersey Bancorp identified as
impaired were primarily fixed rate government sponsored agency bonds that either
had a below market interest rate coupon or a longer than desired maturity term.
Central Jersey Bancorp realized a gain on the sale of available-for-sale
securities of $87,000, pre-tax, in conjunction with the balance sheet
restructuring during the year ended December 31, 2007.
For the year ended December 31, 2007, income tax expense was $1.1 million on
income before taxes of $2.0 million, resulting in an effective tax rate of
56.8%, as compared to income tax expense of $1.4 million on income before taxes
of $3.9 million for the year ended December 31, 2006, resulting in an effective
tax rate of 36.7%.
26
The Company's effective tax rate of 56.8% for the year ended December 31, 2007,
resulted from the fact that the majority of the investment securities for which
the previously-mentioned $1.96 million other-than-temporary impairment was
recorded were held by CJB Investment Company, a wholly-owned subsidiary of
Central Jersey Bank, N.A. A full valuation allowance was recorded for the
deferred tax assets associated with the impairment of the investment securities
sold by CJB Investment Company. The impairment of the investment securities at
the investment company level was considered a capital loss for tax purposes
while the impairment of the investment securities held by Central Jersey Bank,
N.A. was considered an ordinary loss for tax purposes. CJB Investment Company
does not, at this time, have the ability to generate capital gains and utilize
the capital losses and thus a full valuation allowance was required for the
deferred tax assets associated with the investment company's available-for-sale
securities which were identified as other-than-temporarily impaired.
The net interest margin was 3.58% for the year ended December 31, 2007, as
compared to 3.67% for the year ended December 31, 2006. The net interest margin
compression experienced during the year ended December 31, 2007, is due to the
competitive loan and deposit pricing environment and recent reductions in the
Prime Rate of interest. The yield on interest-earning assets increased to 6.54%
for the year ended December 31, 2007, as compared to 6.36% for the year ended
December 31, 2006. The increase was due primarily to the previously disclosed
balance sheet restructuring initiative. The average cost of deposits and
interest-bearing liabilities was 3.77% for the year ended December 31, 2007, as
compared to 3.42% for the year ended December 31, 2006. The increase was due to
the aforementioned competitive environment for deposits, which exacerbated the
net interest margin compression.
Effective September 14, 2007, Central Jersey Bancorp closed two of its branch
offices - Highway 35, Neptune City and Highway 33, Neptune Township. The
customer relationships from both of these branch offices were transferred to the
West Sylvania Avenue, Neptune City branch office. As a result of the closing of
these two branch offices, Central Jersey Bancorp recorded during the year ended
December 31, 2007 one-time charges for abandonment of leasehold improvements
totaling $137,000, pre-tax, and lease payment accruals totaling $53,000, pre-tax
(included in net occupancy expense), in accordance with SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities. In addition, for the year
ended December 31, 2007, Central Jersey Bancorp recorded $35,000, pre-tax
(included in salaries and employee benefits expense), in one-time employee
termination expenses related to the branch office consolidations in accordance
with SFAS No. 146.
Per share earnings have been adjusted in all periods to reflect the two-for-one
stock split, in the form of a stock dividend, paid to shareholders of record on
June 15, 2005, and for the five percent stock dividends paid on July 1, 2006 and
July 2, 2007.
Total assets of $503.5 million at December 31, 2007 were comprised primarily of
$132.3 million in investment securities, $311.8 million in net loans and $14.9
million in cash and cash equivalents, as compared to total assets of $516.3
million at December 31, 2006, which were comprised primarily of $116.6 million
in investment securities, $312.1 million in net loans and $37.8 million in cash
and cash equivalents. Total assets at December 31, 2007 were funded primarily
through deposits totaling $403.3 million, a $24.0 million, or 5.6%, decrease
from deposits totaling $427.3 million at December 31, 2006.
At December 31, 2007, non-accrual loans totaled $214,000, as compared to $91,000
at December 31, 2006. There were no loans ninety days or greater past due and
still accruing interest at December 31, 2007 or 2006. There were $88,000 in loan
charge-offs during the year ended December 31, 2007, as compared to $455,000 in
2006. The decrease in loan charge-offs for the
27
year ended December 31, 2007 is due primarily to the charge-off of $409,000 in
unsecured loans during the year ended December 31, 2006. Subsequent to the
$409,000 charge-off, Central Jersey Bancorp recorded a recovery related to those
unsecured loans totaling $90,000 on March 7, 2007.
At or For the
Year Ended December 31,
-------------------------------------------
Performance Ratios: 2007 2006 2005
---- ---- ----
Return on average assets 0.16% 0.48% 0.54%
Return on average tangible assets 0.17% 0.51% 0.58%
Return on average equity 1.27% 3.88% 4.31%
Return on average tangible equity 2.27% 7.32% 8.51%
Shareholders' equity to total assets 13.68% 12.69% 12.01%
Results of Operations
General
Central Jersey Bancorp's principal source of revenue is derived from Central
Jersey Bank, N.A.'s net interest income, which is the difference between
interest income on earning assets and interest expense on deposits and other
borrowings. Interest-earning assets consist principally of loans, securities and
federal funds sold, while the sources used to fund such assets consist primarily
of deposits. Central Jersey Bancorp's net income is also affected by Central
Jersey Bank, N.A.'s provision for loan losses, other income (loss) and operating
expenses. Other income (loss) consists primarily of service charges and fees and
the impairment of available-for-sale securities. Operating expenses consist
primarily of salaries and employee benefits, occupancy costs and other operating
related expenses.
For the years ended December 31, 2007 and 2006
Net Interest Income
Net interest income for Central Jersey Bank, N.A. totaled $16.7 million for the
year ended December 31, 2007, as compared to $17.0 million for the year ended
December 31, 2006. Net interest income for the year ended December 31, 2007 was
comprised primarily of $1.5 million in interest on federal funds sold and due
from banks, $23.0 million in interest and fees on loans and $6.0 million in
interest on securities, less interest expense on deposits of $12.6 million,
interest expense on other borrowings of $746,000 and interest expense on
subordinated debentures of $439,000, whereas net interest income for the year
ended December 31, 2006 was comprised primarily of $804,000 in interest on
federal funds sold and due from banks, $23.2 million in interest on loans and
$5.5 million in interest on securities, less interest expense on deposits of
$10.8 million, interest expense on other borrowings of $1.3 million and interest
expense on subordinated debentures of $429,000.
Average interest-earning assets totaled $466.4 million for the year ended
December 31, 2007, a $4.1 million, or 0.9%, increase over average
interest-earning assets of $462.3 million for the year ended December 31, 2006.
Interest-earning assets for such periods were funded primarily by deposit
inflows and the proceeds from borrowed funds. Deposits for the year ended
December 31, 2007 averaged $417.4 million, of which $337.5 million, or 80.9%,
were interest-bearing. This number represents a 0.5% increase over average total
deposits of $415.3 million for the year ended December 31, 2006, of which $330.9
million, or 79.7%, were interest-bearing.
28
Subordinated debentures and other borrowings for the year ended December 31,
2007, averaged $5.2 million and $22.4 million, respectively, as compared to $5.2
million and $28.7 million, respectively, for the year ended December 31, 2006.
The net interest margin was 3.58% for the year ended December 31, 2007, as
compared to 3.67% for the year ended December 31, 2006. The net interest margin
compression experienced during the year ended December 31, 2007, is due to the
competitive loan and deposit pricing environment and recent reductions in the
Prime Rate of interest. The yield on interest-earning assets increased to 6.54%
for the year ended December 31, 2007, as compared to 6.36% for the year ended
December 31, 2006. The increase was due primarily to the previously disclosed
balance sheet restructuring initiative. The average cost of deposits and
interest-bearing liabilities was 3.77% for the year ended December 31, 2007, as
compared to 3.42% for the year ended December 31, 2006. The increase was due to
the aforementioned competitive environment for deposits, which exacerbated the
net interest margin compression.
The following table presents a summary of the principal components of average
interest-earning assets and average interest-bearing liabilities with the
related interest income and interest expense for the years ended December 31,
2007, 2006 and 2005. No tax equivalent adjustments were made:
(dollars in thousands) Year ended December 31, 2007 Year ended December 31, 2006 Year ended December 31, 2005
---------------------------- ----------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- -------- ------- --------- -------- ------ --------- -------- ------
Interest earning assets:
Federal funds sold $ 27,039 $ 1,369 5.06% $ 11,441 $ 590 5.16% $ 2,129 $ 48 2.25%
Loans receivable, gross 314,195 22,975 7.31% 316,609 23,159 7.31% 278,243 18,726 6.73%
Deposits with banks 3,739 161 4.31% 4,611 214 4.64% 2,766 191 6.91%
Securities 121,442 5,983 4.93% 129,655 5,456 4.21% 144,831 5,982 4.13%
-------- -------- ---- --------- -------- ---- --------- -------- ----
Total interest earning assets 466,415 30,488 6.54% 462,316 29,419 6.36% 427,969 24,947 5.83%
Cash and due from banks 8,956 14,787 18,082
Allowance for loan losses (3,424) (3,328) (2,982)
Other assets 41,244 40,802 44,444
-------- --------- ---------
Total assets $513,191 $ 514,577 $ 487,512
======== ========= =========
Interest bearing liabilities:
Interest bearing demand $ 91,159 $ 2,864 3.14% $ 85,295 $ 2,414 2.83% $ 88,301 $ 1,596 1.81%
Money market 27,641 1,185 4.29% 32,983 1,117 3.39% 24,905 447 1.79%
Savings 71,810 1,464 2.04% 71,167 1,231 1.73% 71,282 676 0.95%
Time 146,934 7,084 4.82% 141,449 5,998 4.24% 127,744 3,896 3.05%
-------- -------- ---- --------- -------- ---- --------- -------- ----
Total interest bearing deposits 337,544 12,597 3.73% 330,894 10,760 3.25% 312,232 6,615 2.12%
Other borrowings 22,402 746 3.33% 28,650 1,267 4.42% 18,216 547 3.00%
Subordinated debentures 5,155 439 8.52% 5,155 429 8.32% 5,155 340 6.60%
-------- -------- ---- --------- -------- ---- --------- -------- ----
Total interest-bearing liabilities 365,101 13,782 3.77% 364,699 12,456 3.42% 335,603 7,502 2.24%
Non-interest bearing demand 79,828 84,444 88,435
Other liabilities 1,915 1,894 2,467
Shareholders' equity 66,347 63,540 61,007
-------- --------- ---------
Total liabilities and shareholders'
equity $513,191 $ 514,577 $ 487,512
======== ========= =========
Net interest income $ 16,706 $ 16,963 $ 17,445
======== ======== ========
Net interest rate spread(1) 2.77% 2.94% 3.59%
Net interest margin(2) 3.58% 3.67% 4.08%
- --------------
(1) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
29
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected Central Jersey Bank, N.A.'s interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (1) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (2) changes attributable to changes in rate
(changes in rate multiplied by prior volume); and (3) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate (in thousands).
Year ended December 31, 2007 Year ended December 31, 2006
Compared to Compared to
Year ended December 31, 2006 Year ended December 31, 2005
----------------------------------- -----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in: Total Due to Change in: Total
-------------------- Increase ---------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- ------- ---------- ------- ------- ---------
(in thousands)
Interest Income:
Loans receivable, gross $ (177) $ (7) $ (184) $ 2,719 $ 1,714 $ 4,433
Securities (362) 890 528 (637) 111 (526)
Deposits with banks (39) (14) (53) 100 (77) 23
Federal funds sold 789 (11) 778 323 219 542
----------------------------------- -----------------------------------
Total interest-earning assets 211 858 1,069 2,505 1,967 4,472
Interest Expense:
Interest-bearing demand 173 277 450 (56) 874 818
Savings deposits 11 222 233 (1) 556 555
Money market deposits (199) 267 68 180 490 670
Time deposits 240 846 1,086 453 1,649 2,102
----------------------------------- -----------------------------------
Total interest-bearing deposits 225 1,612 1,837 576 3,569 4,145
Other borrowings (244) (277) (521) 394 326 720
Subordinated debentures -- 10 10 -- 89 89
----------------------------------- -----------------------------------
Total interest-bearing liabilities (19) 1,345 1,326 970 3,984 4,954
----------------------------------- -----------------------------------
Net interest income $ 230 $ (487) $ (257) $ 1,535 $(2,017) $ (482)
=================================== ===================================
Provision for Loan Losses
The provision for loan losses was $165,000 for the year ended December 31, 2007,
as compared to $500,000 for 2006. The decrease in the provision for loan losses
for the year ended December 31, 2007 is due primarily to the charge-off of
$409,000 in unsecured loans during the year ended December 31, 2006. Subsequent
to the $409,000 charge-off, Central Jersey Bancorp recorded a recovery on those
unsecured loans totaling $90,000 on March 7, 2007.
Other Income (Loss)
Other income (loss) was ($217,000) for the year ended December 31, 2007, as
compared to $1.7 million for the year ended December 31, 2006. The other (loss)
recorded for the year ended December 31, 2007, is directly related to the
previously disclosed one-time balance sheet restructuring charge of $1.96
million, pre-tax, recorded in the first quarter of 2007.
Operating Expenses
Operating expenses include, among other costs and expenses, salaries, costs of
employee benefits, professional fees and occupancy expenses. Operating expenses
for the year ended December 31, 2007 were $14.4 million, as compared to $14.3
million for the prior year. Central
30
Jersey Bank, N.A. incurred $552,000 in core deposit intangible amortization
expense related to the combination with Allaire Community Bank for the year
ended December 31, 2007, as compared to $619,000 in 2006.
Effective September 14, 2007, Central Jersey Bancorp closed two of its branch
offices - Highway 35, Neptune City and Highway 33, Neptune Township. The
customer relationships from both of these branch offices were transferred to the
West Sylvania Avenue, Neptune City branch office. As a result of the closing of
these two branch offices, Central Jersey Bancorp recorded during the year ended
December 31, 2007 one-time charges for abandonment of leasehold improvements
totaling $137,000, pre-tax, and lease payment accruals totaling $53,000, pre-tax
(included in net occupancy expense), in accordance with SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities. In addition, for the year
ended December 31, 2007, Central Jersey Bancorp recorded $35,000, pre-tax
(included in salaries and employee benefits expense), in one-time employee
termination expenses related to the branch office consolidations in accordance
with SFAS No. 146.
Full-time equivalent employees totaled 128 at December 31, 2007, as compared to
147 at December 31, 2006. The table below presents operating expenses, by major
category, for the years ended December 31, 2007, 2006 and 2005, respectively (in
thousands):
Operating Expenses: 2007 2006 2005
- ------------------- ---- ---- ----
Salaries and employee benefits $ 7,146 $ 7,345 $ 7,287
Net occupancy expenses 1,821 1,687 1,718
Professional fees 938 759 687
Data processing fees 884 809 937
Outside service fees 856 866 1,017
Furniture, fixtures and equipment 626 690 599
Core deposit intangible amortization 552 619 688
Stationery, supplies and printing 251 269 288
Insurance expense 194 200 192
Telephone 161 153 134
Abandonment of leasehold improvements 137 -- --
Advertising 134 150 220
Other operating expenses 670 762 783
------- ------- -------
Total $14,370 $14,309 $14,550
======= ======= =======
Income Tax Expense
For the year ended December 31, 2007, income tax expense was $1.1 million on
income before taxes of $2.0 million, resulting in an effective tax rate of
56.8%, as compared to income tax expense of $1.4 million on income before taxes
of $3.9 million for the year ended December 31, 2006, resulting in an effective
tax rate of 36.7%.
The Company's effective tax rate of 56.8% for the year ended December 31, 2007,
resulted from the fact that the majority of the investment securities for which
the previously-mentioned $1.96 million other-than-temporary impairment was
recorded were held by CJB Investment Company, a wholly-owned subsidiary of
Central Jersey Bank, N.A. A full valuation allowance was recorded for the
deferred tax assets associated with the impairment of the investment securities
sold by CJB Investment Company. The impairment of the investment securities at
the investment company level was considered a capital loss for tax purposes
while the impairment of the investment securities held by Central Jersey Bank,
N.A. was considered an ordinary loss for
31
tax purposes. CJB Investment Company does not, at this time, have the ability to
generate capital gains and utilize the capital losses and thus a full valuation
allowance was required for the deferred tax assets associated with the
investment company's available-for-sale securities which were identified as
other-than-temporarily impaired.
For the years ended December 31, 2006 and 2005
Net Interest Income
Net interest income for Central Jersey Bank, N.A. was $17.0 million for the year
ended December 31, 2006, as compared to $17.4 million for the year ended
December 31, 2005. Net interest income for the year ended December 31, 2006 was
comprised primarily of $804,000 in interest on federal funds sold and due from
banks, $23.2 million in interest and fees on loans and $5.5 million in interest
on securities, less interest expense on deposits of $10.8 million, interest
expense on borrowed funds of $1.3 million and interest expense on subordinated
debentures of $429,000, whereas net interest income for the year ended December
31, 2005 was comprised primarily of $239,000 in interest on federal funds sold
and due from banks, $18.7 million in interest on loans and $6.0 million in
interest on securities, less interest expense on deposits of $6.6 million,
interest expense on borrowed funds of $547,000 and interest expense on
subordinated debentures of $340,000.
Average interest-earning assets were $462.3 million for the year ended December
31, 2006, an 8.0% increase over average interest-earning assets of $428.0
million for the year ended December 31, 2005. The increase in average
interest-earning assets was primarily due to an increase in the average balance
of gross loans, which increased to $316.6 million for the year ended December
31, 2006 from $278.2 million for the prior year. Interest-earning assets for
such periods were funded primarily by deposit inflows and the proceeds from
borrowed funds. Deposits for the year ended December 31, 2006 averaged $415.3
million, of which $330.9 million, or 79.7%, were interest-bearing. This number
represents a 3.7% increase over average total deposits of $400.7 million for the
year ended December 31, 2005, of which $312.2 million, or 77.9%, were
interest-bearing. Subordinated debt and other borrowings as of December 31,
2006, averaged $5.2 million and $28.7 million, respectively, as compared to $5.2
million and $18.2 million, respectively, for the year ended December 31, 2005.
Net interest margin, which represents net-interest income as a percentage of
average interest-earning assets, was 3.67% for the year ended December 31, 2006,
as compared to 4.08% for the year ended December 31, 2005. The net interest
margin compression was due primarily to an increase in interest rates paid on
deposits and borrowed funds, as evidenced by the cost of interest-bearing
liabilities, which increased to 3.42% for the year ended December 31, 2006, as
compared to 2.24% for the year ended December 31, 2005. The yield on
interest-earning assets only increased to 6.36% for the year ended December 31,
2006, as compared to 5.83% for the year ended December 31, 2005. During the year
ended December 31, 2006, Central Jersey Bancorp's liabilities re-priced more
quickly than its interest-earning assets, thus the inverted yield curve, where
short-term rates are higher than long-term rates, combined with the competitive
environment for deposits, has exacerbated the net interest margin compression.
Provision for Loan Losses
The provision for loan losses was $500,000 for the year ended December 31, 2006,
as compared to $426,000 for 2005. The increase was due primarily to the decision
to record a provision for $409,000 in unsecured loans that were charged-off as
of December 31, 2006. The repayment of these loans, which were made to several
individuals referred by Mr. Solomon Dwek, has been
32
adversely impacted by the May 2006 action commenced by PNC Bank against Mr.
Dwek. Mr. Dwek allegedly defrauded PNC Bank by depositing a $25.0 million check
drawn on a closed account with PNC Bank. In response to Mr. Dwek's alleged
fraud, PNC Bank commenced an action against Mr. Dwek, which resulted in a court
order freezing Mr. Dwek's assets. Recently, a U.S. Bankruptcy judge granted Mr.
Dwek's request to place his estate and properties into a voluntary bankruptcy
reorganization. Subsequent to the $409,000 charge-off at December 31, 2006,
Central Jersey Bancorp agreed to settle this matter with the unsecured borrowers
for a lump sum payment of $90,000, which was received on March 7, 2007. In
exchange for the $90,000 payment, Central Jersey Bancorp agreed to release the
unsecured borrowers from all present and future claims specifically related to
these loans. Central Jersey Bancorp retained its rights to pursue collection on
these loans from Mr. Dwek or any Mr. Dwek related entity.
Other Income
Other income was $1.7 million for the year ended December 31, 2006, as compared
to $1.6 million for the year ended December 31, 2005, an increase of $116,000,
or 7.1%. The increase was due primarily to the gain on sale of loans
held-for-sale which was $213,000 for the year ended December 31, 2006, as
compared to $105,000 for the year ended December 31, 2005.
Operating Expenses
Operating expenses include, among other costs and expenses, salaries, costs of
employee benefits, professional fees and occupancy expenses. Operating expenses
for the year ended December 31, 2006 were $14.3 million, as compared to
operating expenses of $14.6 million for the prior year. Central Jersey Bank,
N.A. incurred $619,000 in core deposit intangible amortization expense related
to the combination with Allaire Community Bank for the year ended December 31,
2006 as compared to $688,000 in 2005. Full-time equivalent employees totaled 147
at December 31, 2006 as compared to 152 at December 31, 2005. For the year ended
December 31, 2005, Central Jersey Bank, N.A.'s provision for loan losses was
$426 thousand, as compared to $260 thousand for the prior year.
Income Tax Expense
For the year ended December 31, 2006, income tax expense was $1.4 million on
income before taxes of $3.9 million, resulting in an effective tax rate of
36.7%, as compared to income tax expense of $1.5 million on income before taxes
of $4.1 million for the year ended December 31, 2005, resulting in an effective
tax rate of 35.7%.
Financial Condition
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, due from banks, and federal
funds sold. At December 31, 2007, cash and cash equivalents were $14.9 million,
as compared to $37.8 million at December 31, 2006, a decrease of $22.9 million,
or 60.6%. The decrease was due primarily to timing of cash flows related to
Central Jersey Bank, N.A.'s business activities.
Intangible Assets
Intangible assets of Central Jersey Bancorp consist of goodwill and core deposit
premiums. Goodwill represents the excess of the purchase price over the
estimated fair value of identifiable net assets acquired through purchase
acquisitions. In accordance with SFAS No. 142, goodwill with an indefinite
useful life is not amortized, but is evaluated for impairment on an annual
basis.
33
For each of the years ended December 31, 2007 and 2006, Central Jersey Bancorp
had $27.0 million of goodwill related to the combination with Allaire Community
Bank.
Core deposit premiums represent the intangible value of depositor relationships
assumed in purchase acquisitions and are amortized on an accelerated basis over
a period of ten years. The amortization of the core deposit premium is recorded
as a component of operating expenses. For the years ended December 31, 2007 and
2006, Central Jersey Bancorp had $1.9 million and $2.5 million, respectively, of
core deposit intangible related to the combination with Allaire Community Bank.
Investment Securities Portfolio
At December 31, 2007, Central Jersey Bank, N.A.'s investment securities
portfolio consisted of obligations of United States Government sponsored
agencies and mortgaged-backed securities of United States Government sponsored
agencies. Investment securities held-to-maturity totaling $17.4 million at
December 31, 2007, represented a decrease of $3.4 million from the year ended
December 31, 2006 total of $20.8 million. Investment securities
available-for-sale had a market value of $114.8 million at December 31, 2007,
representing an increase of $19.1 million over the December 31, 2006 total of
$95.7 million. The increase in investment securities available-for-sale is due
to the purchase of mortgage-backed securities during the year ended December 31,
2007.
The following table summarizes the maturity and weighted average yields in each
of Central Jersey Bank, N.A.'s investment securities portfolios at December 31,
2007:
Over Over
Maturities and weighted average yields: Within 1 to 5 5 to 10 Over 10
(dollars in thousands) 1 Year Years Years Years Total
----------- ----------- ----------- ----------- -----------
Securities held-to-maturity:
Mortgage-backed securities
Amortized cost $ -- $ 1,653 $ 1,543 $ 3,544 $ 6,740
Weighted average yield -- 4.17% 4.53% 4.96% 4.66%
Obligations of U.S. Government agencies
Amortized cost 1,998 4,373 2,419 1,900 10,690
Weighted average yield 4.00% 5.05% 4.42% 4.70% 4.65%
-----------------------------------------------------------------------------------
Total securities held-to-maturity
Amortized cost $ 1,998 $ 6,026 $ 3,962 $ 5,444 $ 17,430
Weighted average yield 4.00% 4.81% 4.46% 4.87% 4.65%
===================================================================================
Securities available-for-sale:
Mortgage-backed securities
Market value $ 1,991 $ 2,625 $ 21,982 $ 84,216 $ 110,814
Weighted average yield 4.32% 5.00% 5.09% 5.52% 5.40%
Other debt securities
Market value 4,010 -- -- -- 4,010
Weighted average yield 3.55% -- -- -- 3.55%
-----------------------------------------------------------------------------------
Total securities available-for-sale
Market value $ 6,001 $ 2,625 $ 21,982 $ 84,216 $ 114,824
Weighted average yield 3.81% 5.00% 5.09% 5.52% 5.34%
===================================================================================
Other-Than-Temporary Impairment
During 2007, Central Jersey Bancorp executed a balance sheet restructuring
strategy involving approximately $88.6 million of investment securities held in
the available-for-sale investment portfolio. The restructuring resulted in a
one-time pre-tax impairment charge of approximately $1.96 million, which was
reflected in Central Jersey Bancorp's consolidated financial statements
34
for the three months ended March 31, 2007. Available-for-sale investment
securities, consisting primarily of lower yielding fixed rate callable agency
investment securities were sold during the second quarter of 2007 and replaced
with higher yielding investment securities with a comparable to modestly shorter
aggregate weighted average life. The market value loss that these investment
securities carried at March 31, 2007, was recorded as an other-than-temporary
impairment since Central Jersey Bancorp did not have the intent to hold these
securities to recovery. The investment securities Central Jersey Bancorp
identified as impaired were primarily fixed rate government sponsored agency
bonds that either had a below market interest rate coupon or a longer than
desired maturity term. Central Jersey Bancorp realized a gain on the sale of
available-for-sale securities of $87,000, pre-tax, in conjunction with the
balance sheet restructuring during the year ended December 31, 2007.
Investment Policy
The Board of Directors has adopted an investment policy to govern the investment
function of Central Jersey Bank, N.A., which includes the purchase of investment
securities for the held-to-maturity and available-for-sale portfolios and the
sale of investment securities from the available-for-sale portfolio.
The basic objectives of the investment function are:
o to keep Central Jersey Bank, N.A.'s funds fully employed at the
maximum after-tax return;
o to minimize exposure to credit risk; and
o to provide liquidity required by current circumstances.
As used in our investment policy and in other policies of Central Jersey Bank,
N.A., the term "liquidity" refers to the expected cash flow from performing
assets and secondary to borrowings secured by performing assets. These two
sources of liquidity are expected to fund the operations of Central Jersey Bank,
N.A. For this reason, unless otherwise indicated, the term "liquidity" in
Central Jersey Bank, N.A.'s policies does not refer to proceeds from the sale of
assets, except for the sale of assets available-for-sale.
Investment management therefore emphasizes:
o preservation of principal;
o strong cash-flow characteristics;
o ready availability of credit information;
o appropriateness of size both as to Central Jersey Bank, N.A. and as
to an obligor's outstanding debt;
o eligibility as collateral for public-agency deposits and customer
repurchase-agreement accounts; and
o broad marketability, as an indicator of quality.
The purpose of bonds in the held-to-maturity portfolio is to provide earnings
consistent with the safety factors of quality, maturity and risk
diversification. This purpose is reflected in the accounting principle that
carrying a debt security at amortized cost is appropriate only if the
ALCO/Investment Committee of Central Jersey Bank, N.A. has the intent and
ability to hold that security to maturity. Management should be indifferent to
price fluctuations unrelated to the continuing ability of an investment security
to contribute to recurring income. For purposes of our investment policy, an
investment security shall be deemed to have matured if it is sold (1)
35
within three months of maturity or a call date if exercise of the call is
probable; or (2) after collection of at least 85% of the principal outstanding
at acquisition.
Debt securities that are not positively expected to be held-to-maturity, but
rather for indefinite periods of time, and equity securities, shall be booked to
the available-for-sale portfolio, which shall be monitored daily and reported at
fair value with unrealized holding gains and losses excluded from earnings and
reported as a tax-effected net amount in a separate component of shareholders'
equity. However, in calculating and reporting regulatory capital, only net
unrealized losses on marketable equity securities is deducted from Tier 1 or
core capital.
Loan Portfolio
Central Jersey Bank, N.A.'s primary policy goal is to establish a sound credit
portfolio that contributes, in combination with other earning assets, to a
satisfactory return on assets, return on shareholders' equity and capital to
asset ratio.
Central Jersey Bank, N.A. conducts both commercial and retail lending
activities. The loan approval process at Central Jersey Bank, N.A. is driven by
the aggregate indebtedness of the borrower and related entities. Executive
officers with lending authority and loan officers have various individual and
collective loan approval authorities up to $500,000. All credit accommodations
exceeding $500,000 are referred to Central Jersey Bank, N.A.'s Loan Committee
for review and approval. The Loan Committee is comprised of internal and outside
directors and the senior commercial loan officer. A loan officer with a loan
application for more than $500,000 (or from a borrowing relationship with
aggregate debt in excess of $500,000) presents a complete analysis of the
proposed credit accommodation to the members of the Loan Committee for their
consideration.
The analysis includes, among other things, the following:
o a description of the borrower;
o the loan purpose and use of proceeds;
o the requested loan amount;
o the recommended term;
o the recommended interest rate;
o primary, secondary and tertiary sources of repayment;
o proposed risk rating;
o full collateral description;
o fees (if any);
o full borrower financial analysis, including comparative balance
sheets, income statements and statements of cash flows; and
o inherent strengths and weaknesses of the requested credit
accommodation.
A similar analysis is prepared for those loan requests aggregating in excess of
$100,000 but less than the $500,000 threshold.
Central Jersey Bank, N.A. utilizes a comprehensive approach to loan
underwriting. The primary quantitative determinants in the underwriting process
include overall creditworthiness of the borrower, cash flow from operations in
relation to debt service requirements and the ability to secure the credit
accommodation with collateral of adequate value.
For commercial loans, the collateral is somewhat dependent on the loan type.
Commercial lines of credit, term loans and time notes are typically secured by a
general lien on business assets and
36
qualified (typically less than 90 days) accounts receivable (based upon an
acceptable advance rate). Commercial mortgage loans are secured by the
underlying property with an acceptable equity margin. Personal guarantees from
the principals of a business are generally required. In general, Central Jersey
Bank, N.A. requires that income available to service debt repayment requirements
be equal to at least 125% of those requirements.
Commercial loans are often subject to cyclical economic risks of the underlying
business(es) of the borrower. Such risks are generally reduced during the loan
approval process. For example, Central Jersey Bank, N.A. requires that a loan
amount be less than the value of the collateral securing the loan and that the
standard cash flow analysis of the commercial borrower shows an ample margin for
debt service even with significant business contraction. Commercial mortgage
underwriting also requires that available funds for debt service exceed debt
service requirements.
Retail or consumer loan credit accommodations include home equity loans, home
equity lines of credit, direct automobile loans and secured and unsecured
personal loans. Underwriting criteria for home equity products include a loan to
value not to exceed 80% and a debt service to income ratio not to exceed 45%.
Such criteria provide Central Jersey Bank, N.A. with underwriting comfort
without placing the institution in a position of competitive disadvantage.
There are a number of risks associated with the granting of consumer loans.
While income and equity or collateral values are primary determinants of the
loan approval process for consumer loans, Central Jersey Bank, N.A. also gives
much consideration to employment and debt payment history of the borrower(s). As
with the commercial underwriting process, consumer loans require both an income
cushion and a collateral cushion. Such criteria provide for a margin should a
borrower's income diminish or the collateral securing the loan depreciate in
value.
The granting of a loan, by definition, contains inherent risks. Central Jersey
Bank, N.A. attempts to mitigate risks through sound credit underwriting. Each
loan that Central Jersey Bank, N.A. approves undergoes credit scrutiny that
results in a quantification of risk and then the assignment of a risk rating.
Individual risk ratings carry with them a required reserve that is used to fund
Central Jersey Bank, N.A.'s allowance for loan losses. The inherent risk
associated with each loan is a function of loan type, collateral, cash flow,
credit rating, general economic conditions and interest rates.
Central Jersey Bank, N.A. is limited by regulation as to the total amount which
may be committed and loaned to a borrower and its related entities. Central
Jersey Bank, N.A.'s legal lending limit is equal to 15% of its capital funds,
including capital stock, surplus, retained earnings and the allowance for loan
losses. Central Jersey Bank, N.A. may lend an additional 10% of its capital
funds to a borrower and its related entities if the additional loan or extension
of credit is fully secured by readily marketable collateral having a market
value at least equal to the amount borrowed. The additional limitation is
separate from, and in addition to, the general limitation of 15%.
37
The following table summarizes net loans outstanding by loan category and amount
at December 31, 2007, 2006, 2005, 2004 and 2003.
(in thousands) 2007 2006 2005 2004 2003
---- ---- ---- ---- ----
- ------------------------------------------------------------------------------------------------------
Commercial and industrial loans $ 29,384 $ 35,476 $ 32,708 $ 22,392 $ 20,380
Real estate loans - commercial 240,370 237,234 232,570 96,291 77,799
1-4 family real estate loans 3,822 4,182 4,858 -- --
Home equity and second mortgages 37,832 35,573 38,153 22,014 17,734
Consumer loans 3,765 2,857 2,054 638 1,270
- ------------------------------------------------------------------------------------------------------
Total loans $315,173 $315,322 $310,343 $141,335 $117,183
Less allowance for loan losses 3,408 3,229 3,175 1,638 1,378
- ------------------------------------------------------------------------------------------------------
Net loans $311,765 $312,093 $307,168 $139,697 $115,805
======================================================================================================
Loans held-for-sale $ 658 $ 242 $ 3,127 $ 0 $ 0
======================================================================================================
Loans, net of the allowance for loan losses, totaled $311.8 million at December
31, 2007, a decrease of $300,000, or 0.1%, from the $312.1 million balance at
December 31, 2006. The decrease in loan balances is reflective of general
economic conditions resulting in a slowdown in loan origination volume
throughout the banking industry.
For the year ended December 31, 2007, commercial and industrial loans and
commercial real estate loans decreased by $2.9 million to $269.8 million, which
represents a 1.1% decrease from the balance of $272.7 million at December 31,
2006.
During 2007, home equity and second mortgages increased by $2.2 million to $37.8
million at December 31, 2007, which represents a 6.2% increase over the balance
of $35.6 million at December 31, 2006.
The following table summarizes the maturities of loans by category and whether
such loans are at a fixed or floating rate at December 31, 2007.
December 31, 2007
----------------------------------------------------------------------------------
Maturity and repricing data for loans: Within Over 1 to 3 Over 3 to 5 Over 5 to 15 Over 15
(in thousands) 1 Year Years Years Years Years Total
----------------------------------------------------------------------------------
Loans secured by 1-4 family residential properties
Fixed rate $ 1,723 $ 1,669 $ 4,623 $ 8,889 $ 4,315 $ 21,219
Adjustable rate 14,932 421 2,146 -- -- 17,499
All other loans secured by real estate
Fixed rate 16,348 47,344 41,342 31,347 31,146 167,527
Adjustable rate 79,235 6,314 23,379 -- -- 108,928
----------------------------------------------------------------------------------
Total $ 112,238 $ 55,748 $ 71,490 $ 40,236 $ 35,461 $ 315,173
==================================================================================
38
Non-Performing Loans
A loan is considered to be non-performing if it (1) is on a non-accrual basis,
(2) is past due ninety days or more and still accruing interest, or (3) has been
renegotiated to provide a reduction or deferral of interest or principal because
of a weakening in the financial position of the borrower. A loan, which is past
due ninety days or more and still accruing interest, remains on accrual status
only where it is both adequately secured as to principal and is in the process
of collection. Central Jersey Bank, N.A. had non-performing loans totaling
$214,000 and $91,000 at December 31, 2007 and 2006, respectively. If the
non-accrual loans had performed in accordance with their original terms,
interest income would have increased by $4,359, $477 and $6,365, for the years
ended December 31, 2007, 2006 and 2005, respectively. At December 31, 2007,
there are no commitments to lend additional funds to borrowers whose loans are
on non-accrual.
Potential Problem Loans
In addition to non-performing loans, Central Jersey Bank, N.A. maintains a
"watch list" of loans which are subject to heightened scrutiny and more frequent
review by management. Loans may be placed on the "watch list" because of
documentation deficiencies, or because management has identified "structural
weaknesses" which potentially could cause such loans to become non-performing in
future periods.
As of December 31, 2007 and 2006, there were no loans identified as having
structural weaknesses on the "watch list." The total balance of loans on the
"watch list" at December 31, 2007 and 2006 totaled $6.0 million and $5.0
million, respectively.
Allowance for Loan Losses and Related Provision
The allowance for loan losses is a valuation account that reflects an evaluation
of the probable losses in the loan portfolio. The determination of the adequacy
of the allowance for loan losses is a critical accounting policy of Central
Jersey Bank, N.A., due to the inherently subjective nature of the evaluation.
Credit losses primarily arise from Central Jersey Bank, N.A.'s loan portfolio,
but also may be derived from other credit-related sources, including commitments
to extend credit. Additions are made to the allowance through periodic
provisions which are charged to expense. All losses of principal are charged to
the allowance when incurred or when a determination is made that a loss is
expected. Subsequent recoveries, if any, are credited to the allowance.
As part of our evaluation of the adequacy of our allowance for loan losses, each
quarter we prepare an analysis. This analysis categorizes the entire loan
portfolio by certain risk characteristics such as loan type (commercial,
commercial real estate, one- to four-family, consumer, etc.) and loan risk
rating.
Loan risk ratings for every loan are determined by credit officers who consider
various factors, including the borrower's current financial condition and
payment status, historical loan performance, underlying collateral, as well as
internal loan review and regulatory ratings. Any loans with known potential
losses are categorized and reserved for separately.
The loss factors applied to each loan risk rating are inherently subjective in
nature, and, in Central Jersey Bank, N.A.'s circumstances, even more so due to
the lack of any meaningful charge-off experience. Loss factors are assigned to
loan risk rating categories on the basis of our assessment of the potential risk
inherent in each loan type. Key factors we consider in determining loss factors
for each loan type include the current real estate market conditions,
39
changes in the trend of delinquencies and non-performing loans, the current
state of the local and national economy, loan portfolio growth and changes in
composition and concentrations within the portfolio. The loss factors are
evaluated by management on a quarterly basis and any adjustments are approved by
the Board of Directors of Central Jersey Bancorp. There have been no significant
changes in loss factors in 2007 as compared to 2006.
We establish the provision for loan losses after considering the allowance for
loan loss worksheet, the amount of the allowance for loan losses in relation to
the total loan balance, loan portfolio growth, loan delinquency trends and peer
group analysis. Central Jersey Bank, N.A.'s allowance for loan losses is
allocated on an individual loan basis. We have applied this process consistently
and have made minimal changes in the estimation methods and assumptions that we
have used.
Our primary lending emphasis is the origination of commercial real estate loans,
commercial and industrial loans, and to a lesser extent, home equity and second
mortgages. As a result of our strategic plans and lending emphasis, we have a
loan concentration in commercial loans at December 31, 2007 and 2006, the
majority of which are secured by real property located in New Jersey.
Based on the composition of our loan portfolio and the growth in our loan
portfolio over the past five years, we believe the primary risks inherent in our
portfolio are possible increases in interest rates, a possible decline in the
economy, generally, and a possible decline in real estate market values. Any one
or a combination of these events may adversely affect our loan portfolio
resulting in increased delinquencies and loan losses.
The provision for loan losses was $165,000 for the year ended December 31, 2007,
as compared to $500,000 for 2006. The decrease in loan charge-offs for the year
ended December 31, 2007 is due primarily to the charge-off of $409,000 in
unsecured loans during the year ended December 31, 2006. Subsequent to the
$409,000 charge-off, Central Jersey Bancorp recorded a recovery on those
unsecured loans totaling $90,000 on March 7, 2007.
Loan portfolio composition remained consistent in 2007, as compared to 2006,
with commercial loans comprising 85.6% of total loans outstanding at December
31, 2007, as compared to 86.5% at December 31, 2006. In addition, Central Jersey
Bank, N.A. had non-accrual or impaired loans totaling $214,000 at December 31,
2007, as compared to $91,000 at December 31, 2006. Gross loans outstanding
totaled $315.2 million at December 31, 2007, as compared to $315.3 million at
December 31, 2006, a decrease of $100,000, or 0.3%. The allowance for loan
losses was $3.41 million at December 31, 2007, as compared to $3.23 million at
December 31, 2006.
40
The following table summarizes Central Jersey Bank, N.A.'s allowance for loan
losses for the years ended December 31, 2007, 2006, 2005, 2004 and 2003.
(in thousands) 2007 2006 2005 2004 2003
------- ------- ------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 3,229 $ 3,175 $ 1,638 $ 1,378 $ 1,228
Provision charged to expense 165 500 426 260 150
Charge-offs (88) (455) (92) -- --
Allaire Community Bank combination -- -- 1,203 -- --
Recoveries 102 9 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 3,408 $ 3,229 $ 3,175 $ 1,638 $ 1,378
=========================================================================================================================
Ratio of allowance for loan losses to total loans 1.08% 1.02% 1.02% 1.16% 1.10%
Ratio of net recoveries (charge-offs) to average
loans outstanding 0.03% (0.14%) (0.03%) 0.00% 0.00%
The following table sets forth Central Jersey Bank, N.A.'s percent of allowance
for loan losses to total allowance and the percent of loans to total loans in
each of the categories listed at the dates indicated (dollars in thousands):
December 31, 2007 December 31, 2006 December 31, 2005
Percent Percent Percent
of Percent of Percent of Percent
allowance of loans allowance of loans allowance of loans
to total to total to total to total to total to total
Loan Type Amount allowance loans Amount allowance loans Amount allowance loans
--------- ------ --------- ----- ------ --------- ----- ------ --------- -----
Commercial $ 2,999 88.0% 85.6% $ 2,811 87.1% 86.5% $ 2,749 86.6% 85.5%
Consumer 409 12.0% 14.4% 418 12.9% 13.5% 426 13.4% 14.5%
------- ----- ----- ------- ----- ----- ------- ----- -----
Total $ 3,408 100.0% 100.0% $ 3,229 100.0% 100.0% $ 3,175 100.0% 100.0%
======= ===== ===== ======= ===== ===== ======= ===== =====
December 31, 2004 December 31, 2003
Percent Percent
of Percent of Percent
allowance of loans allowance of loans
to total to total to total to total
Loan Type Amount allowance loans Amount allowance loans
--------- ------ --------- ----- ------ --------- -----
Commercial $ 1,403 85.7% 84.0% $ 1,151 83.5% 83.8%
Consumer 235 14.3% 16.0% 227 16.5% 16.2%
------- ------- ------- ------- ------- -------
Total $ 1,638 100.0% 100.0% $ 1,378 100.0% 100.0%
======= ======= ======= ======= ======= =======
Deposits
One of Central Jersey Bank, N.A.'s primary strategies is the accumulation and
retention of core deposits. Core deposits are defined as all deposits except
certificates of deposits with balances in excess of $100,000.
Total deposits were $403.3 million at December 31, 2007, a decrease of $24.0
million, or 5.6%, from the year ended December 31, 2006 total of $427.3 million.
Core deposits as a percentage of total deposits were 84.8% at December 31, 2007,
as compared to 84.7% at December 31, 2006.
41
The following table represents categories of Central Jersey Bank, N.A.'s
deposits at December 31, 2007, 2006 and 2005.
December 31, December 31, December 31,
------------ ------------ ------------
(in thousands) 2007 2006 2005
---- ---- ----
Demand deposits, non-interest bearing $ 73,955 $ 83,482 $ 91,297
Savings, N.O.W. and money market accounts 187,354 202,650 173,993
Certificates of deposit of less than $100,000 80,587 75,842 67,813
Certificates of deposit of $100,000 or more 61,394 65,303 74,451
-------- -------- --------
Total deposits $403,290 $427,277 $407,554
======== ======== ========
The following table represents categories of Central Jersey Bank, N.A.'s average
deposit balances and weighted average interest rates for the years ended
December 31, 2007, 2006 and 2005 (in thousands):
December 31, December 31, December 31,
------------ ------------ ------------
2007 2006 2005
---- ---- ----
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ---- -------- ---- -------- ----
Demand deposits, non-interest bearing $ 79,828 --% $ 84,444 --% $ 88,435 --%
Savings, N.O.W. and money market accounts 190,610 2.89% 189,445 2.51% 184,488 1.47%
Certificates of deposit of less than $100,000 81,497 4.78% 72,960 4.11% 60,040 3.04%
Certificates of deposit of $100,000 or more 65,437 4.88% 68,489 4.42% 67,704 3.05%
-------- ---- -------- ---- -------- ----
Total deposits $417,372 3.02% $415,338 2.59% $400,667 1.65%
======== ==== ======== ==== ======== ====
At December 31, 2007, Central Jersey Bank, N.A. had $142.0 million in time
deposits maturing as follows (in thousands):
Over 1
3 months Over 3 to year to Over 3
or less 12 months 3 years years Total
----------------------------------------------------------------
Less than $100,000 $ 33,876 $ 44,464 $ 2,057 $ 190 $ 80,587
Equal to or more than $100,000 21,651 32,510 7,233 -- 61,394
----------------------------------------------------------------
Total $ 55,527 $ 76,974 $ 9,290 $ 190 $141,981
================================================================
Liquidity and Capital Resources
Liquidity defines the ability of Central Jersey Bank, N.A. to generate funds to
support asset growth, meet deposit withdrawals, maintain reserve requirements
and otherwise operate on an ongoing basis. An important component of a bank's
asset and liability management structure is the level of liquidity, which are
net liquid assets available to meet the needs of its customers and regulatory
requirements. The liquidity needs of Central Jersey Bank, N.A. have been
primarily met by cash on hand, loan and investment amortizations and borrowings.
Central Jersey Bank, N.A. invests funds not needed for operations (excess
liquidity) primarily in daily federal funds sold. During 2007, Central Jersey
Bank, N.A. continued to maintain a large secondary source of liquidity known as
Investment Securities available-for-sale. The market value of that portfolio was
$114.8 million and $95.7 million at December 31, 2007 and 2006, respectively.
42
It has been Central Jersey Bank, N.A.'s experience that its core deposit base
(which is defined as transaction accounts and term deposits of less than
$100,000) is primarily relationship-driven. Non-core deposits (which are defined
as term deposits of $100,000 or greater) are much more interest rate sensitive.
In any event, adequate sources of reasonably priced on-balance sheet funds, such
as overnight federal funds sold, due from banks and short-term investments
maturing in less than one year, must be continually accessible for contingency
purposes. This is accomplished primarily by the daily monitoring of certain
accounts for sufficient balances to meet future loan commitments, as well as
measuring Central Jersey Bank, N.A.'s liquidity position on a monthly basis.
Supplemental sources of liquidity include large certificates of deposit,
wholesale and retail repurchase agreements, and federal funds purchased from
correspondent banks. Correspondent banks, which are typically referred to as
"banker's banks," offer essential services such as cash letter processing,
investment services, loan participation support, wire transfer operations and
other traditional banking services. Brokered deposits, which are deposits
obtained, directly or indirectly, from or through the mediation or assistance of
a deposit broker, may be utilized as supplemental sources of liquidity in
accordance with Central Jersey Bank, N.A.'s balance sheet management policy.
Contingent liquidity sources may include off-balance sheet funds, such as
advances from both the Federal Home Loan Bank and the Federal Reserve Bank, and
federal funds purchase lines with "upstream" correspondents. An additional
source of liquidity is made available by curtailing loan activity and instead
using the available cash to fund short-term investments such as overnight
federal funds sold or other approved investments maturing in less than one year.
In addition, future expansion of Central Jersey Bank, N.A.'s retail banking
network is expected to create additional sources of liquidity from new deposit
customer relationships.
Central Jersey Bank, N.A. is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on Central Jersey Bank, N.A.'s financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, Central Jersey Bank, N.A. must meet specific capital guidelines that
involve quantitative measures of Central Jersey Bank, N.A.'s assets, liabilities
and certain off-balance-sheet items as calculated under regulatory accounting
practices. Central Jersey Bank, N.A.'s capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors. See "Item 1. Business-Government Regulation."
Quantitative measures established by regulation to ensure capital adequacy
require Central Jersey Bank, N.A. to maintain minimum amounts and ratios (set
forth in the following table) of Total Capital and Tier 1 Capital to risk
weighted assets and of Tier 1 Capital to average assets (leverage ratio). As of
December 31, 2007, Central Jersey Bank, N.A. met all capital adequacy
requirements to which it is subject.
As of December 31, 2007, the most recent notification from the OCC categorized
Central Jersey Bank, N.A. as "well capitalized" under the regulatory framework
for prompt corrective action. There are no conditions or events since that
notification that we believe have changed Central Jersey Bank, N.A.'s category.
The following is a summary of Central Jersey Bank, N.A.'s and Central Jersey
Bancorp's actual capital ratios as of December 31, 2007 and 2006, compared to
the minimum capital adequacy requirements and the requirements for
classification as a "well-capitalized" institution:
43
Tier I Tier I
Capital to Capital to Total Capital to
Average Assets Ratio Risk Weighted Risk Weighted
(Leverage Ratio) Asset Ratio Asset Ratio
2007 2006 2007 2006 2007 2006
-------------------------------------------------------------------------------
Central Jersey Bancorp 9.08% 8.38% 12.74% 11.71% 13.73% 12.62%
Central Jersey Bank, N.A. 9.34% 8.47% 12.94% 11.81% 13.93% 12.72%
(a) "Adequately capitalized"
institution (under federal
regulations) 4.00% 4.00% 4.00% 4.00% 8.00% 8.00%
(b) "Well capitalized" institution
(under federal regulations) 5.00% 5.00% 6.00% 6.00% 10.00% 10.00%
Guaranteed Preferred Beneficial Interest in Central Jersey Bancorp Subordinated
Debt
In March 2004, MCBK Capital Trust I, a special purpose business trust of Central
Jersey Bancorp, issued an aggregate of $5.0 million of trust preferred
securities to ALESCO Preferred Funding III, a pooled investment vehicle. Sandler
O'Neill & Partners, L.P. acted as placement agent in connection with the
offering of the trust preferred securities. The securities issued by MCBK
Capital Trust I are fully guaranteed by Central Jersey Bancorp with respect to
distributions and amounts payable upon liquidation, redemption or repayment.
These securities have a floating interest rate equal to the three-month LIBOR
plus 285 basis points, which resets quarterly. The securities mature on April 7,
2034 and may be called at par by Central Jersey Bancorp any time after April 7,
2009. These securities were placed in a private transaction exempt from
registration under the Securities Act.
The entire proceeds to MCBK Capital Trust I from the sale of the trust preferred
securities were used by MCBK Capital Trust I in order to purchase $5.1 million
of subordinated debentures from Central Jersey Bancorp. The subordinated
debentures bear a variable interest rate equal to LIBOR plus 285 basis points.
Although the subordinated debentures are treated as debt of Central Jersey
Bancorp, they currently qualify as Tier I Capital investments, subject to the
25% limitation under risk-based capital guidelines of the Federal Reserve. The
portion of the trust preferred securities that exceeds this limitation qualifies
as Tier II Capital of Central Jersey Bancorp. At December 31, 2007, $5.0 million
of the trust preferred securities qualified for treatment as Tier I Capital.
Central Jersey Bancorp is using the proceeds it received from the subordinated
debentures to support the general balance sheet growth of Central Jersey Bancorp
and to maintain Central Jersey Bank, N.A.'s required regulatory capital ratios.
On March 1, 2005, the Federal Reserve adopted a final rule that allows the
continued inclusion of outstanding and prospective issuances of trust preferred
securities in the Tier I Capital of bank holding companies, subject to stricter
quantitative limits and qualitative standards. The new quantitative limits
become effective after a five-year transition period ending March 31, 2009.
Under the final rules, trust preferred securities and other restricted core
capital elements are limited to 25% of all core capital elements. Amounts of
restricted core capital elements in excess of these limits may be included in
Tier II Capital. At December 31, 2007, the only restricted core capital element
owned by Central Jersey Bancorp is trust preferred securities. Central Jersey
Bancorp believes that its trust preferred issues qualify as Tier I Capital.
However, in the event that the trust preferred issues do not qualify as Tier I
Capital, Central Jersey Bank, N.A. would remain well capitalized.
44
Recent Accounting Pronouncements
In March 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No.
156, Accounting for Servicing of Financial Assets. Prior thereto, SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, established, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. SFAS No. 156
amends SFAS No. 140 to require that all separately recognized servicing assets
and servicing liabilities be initially measured at fair value, if practicable.
SFAS No. 156 permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
Under SFAS No. 156, an entity can elect subsequent fair value measurement to
account for its separately recognized servicing assets and servicing
liabilities. By electing that option, an entity may simplify its accounting
because SFAS No. 156 permits income statement recognition of the potential
offsetting changes in fair value of those servicing assets and servicing
liabilities and derivative instruments in the same accounting period. SFAS No.
156 was effective in the first fiscal year beginning after September 15, 2006
with earlier adoption permitted. Central Jersey Bancorp's adoption of SFAS No.
156 on January 1, 2007 did not have a material impact on its consolidated
financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"). FIN 48 establishes a recognition
threshold and measurement for income tax positions recognized in an enterprise's
financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes. FIN 48 also prescribes a two-step evaluation process for tax positions.
The first step is recognition and the second is measurement. For recognition, an
enterprise judgmentally determines whether it is more-likely-than-not that a tax
position will be sustained upon examination, including resolution of related
appeals or litigation processes, based on the technical merits of the position.
If the tax position meets the more-likely-than-not recognition threshold it is
measured and recognized in the financial statements as the largest amount of tax
benefit that is greater than 50% likely of being realized. If a tax position
does not meet the more-likely-than-not recognition threshold, the benefit of
that position is not recognized in the financial statements.
Tax positions that meet the more-likely-than-not recognition threshold at the
effective date of FIN 48 may be recognized, or continue to be recognized, upon
adoption of this Interpretation. The cumulative effect of applying the
provisions of FIN 48 shall be reported as an adjustment to the opening balance
of retained earnings for that fiscal year. FIN 48 was effective for fiscal years
beginning after December 15, 2006. Central Jersey Bancorp's adoption of FIN 48
on January 1, 2007 did not have a material impact on its consolidated financial
statements. As of January 1, 2007, there were no amounts recorded for
unrecognized tax benefits or for the payment of interest or penalties.
Furthermore, no amounts were accrued for the year ended December 31, 2007. The
tax years that remain subject to examination are 2006, 2005 and 2004 for federal
and state tax purposes and 2003 for state tax purposes only. Accruals of
interest and penalties related to unrecognized tax benefits, when applicable,
are recognized in income tax expense.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
in U.S. generally accepted accounting principles ("GAAP"), and enhances
disclosures about fair value measurements. This Statement applies when other
accounting pronouncements require fair value measurements; it does not require
new fair value measurements. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those years. Earlier application is encouraged, provided
the entity has not yet issued financial statements, including financial
statements for any interim period for that fiscal year. Central
45
Jersey Bancorp's adoption of SFAS No. 157 did not have a material impact on its
consolidated financial statements.
In September 2006, the Emerging Issues Task Force ("EITF") of the FASB discussed
public comments received on two issues: (1) EITF Issue No. 06-4, Accounting for
Deferred Compensation and Post-Retirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements, and (2) EITF Issue 06-5, Accounting
for Purchases of Life Insurance - Determining the Amount that could be Realized
in Accordance with FASB Technical Bulletin 85-4 (Accounting for Purchases of
Life Insurance). On September 7, the EITF agreed to clarify certain points based
on public comments. The EITF reached a consensus that an employer should
recognize a liability for future benefits under SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, or APB Opinion No.
12, Omnibus Opinion - 1967, for an endorsement split-dollar life insurance
arrangement subject to the EITF Issue No. 06-4. This liability is to be based on
the substantive agreement with the employee. The consensus is effective for
fiscal years beginning after December 15, 2007. Early adoption is permitted as
of the beginning of an entity's fiscal year. Entities should recognize the
effects of applying the consensus on this issue as a change in accounting
principle through a cumulative-effect adjustment to retained earnings or to
other components of equity or net assets in the statement of financial position
as of the beginning of the year of adoption. Retrospective application to all
prior periods is permitted. Central Jersey Bancorp's adoption of EITF 06-4 did
not have a material impact on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. Under this Statement, Central Jersey
Bancorp may elect to report financial instruments and certain other items at
fair value on a contract-by-contract basis with changes in value reported in
earnings. This election is irrevocable. SFAS No. 159 provides an opportunity to
mitigate volatility in reported earnings that is caused by measuring hedged
assets and liabilities that were previously required to use a different
accounting method than the related hedging contracts when the complex provisions
of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
are not met.
SFAS No. 159 is effective for years beginning after November 15, 2007. Central
Jersey Bancorp adopted SFAS No. 159 effective January 1, 2008, however, decided
not to elect the fair value option permitted by SFAS No. 159.
Impact of Inflation
The consolidated financial statements and related financial data presented in
this report have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. The primary impact of inflation on the operation of
Central Jersey Bancorp and Central Jersey Bank, N.A. is reflected in increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
the effects of general levels of inflation are primarily reflected in the
interest rate paid in liabilities and earned on interest earning assets.
Interest rates do not necessarily move in the same magnitude as the prices of
goods and services. We believe that continuation of our efforts to manage the
rates, liquidity and interest sensitivity of our assets and liabilities is
necessary to generate an acceptable return on assets.
46
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
Qualitative Analysis
Interest rate risk is the exposure of a bank's current and future earnings and
capital arising from the adverse movements in interest rates. Central Jersey
Bank, N.A.'s most significant risk exposure is interest rate risk. The
guidelines of Central Jersey Bank, N.A.'s interest rate risk policy seek to
limit the exposure to changes in interest rates that affect the underlying
economic value of assets and liabilities, earnings and capital.
The ALCO/Investment Committee of Central Jersey Bank, N.A. meets on a quarterly
basis to review the impact of interest rate changes on net interest income, net
interest margin and economic value of equity. Members of the ALCO/Investment
Committee include Central Jersey Bancorp's President and Chief Executive
Officer, Chief Operating Officer, Chief Financial Officer and Chief Lending
Officer. The ALCO/Investment Committee reviews a variety of strategies that
project changes in asset or liability mix and the impact of those changes on
projected net interest income.
Central Jersey Bank, N.A.'s strategy for liabilities has been to maintain a
stable core-funding base by focusing on core deposit account acquisition and
increasing products and services per household. Time deposit accounts as a
percentage of total deposits were 35.2% at December 31, 2007, as compared to
33.0% at December 31, 2006. Time deposits are generally short term in nature. As
of December 31, 2007, 93.3% of all time deposits had maturities of one year or
less, as compared to 85.7% at December 31, 2006. Central Jersey Bank, N.A.'s
ability to retain maturing time deposit accounts is the result of a strategy to
remain competitive priced within the marketplace. Central Jersey Bank, N.A.'s
pricing strategy may vary depending upon funding needs and Central Jersey Bank,
N.A.'s ability to fund operations through alternative sources, primarily by
accessing short term lines of credit with the Federal Home Loan Bank during
periods of pricing dislocation.
Quantitative Analysis
Central Jersey Bank, N.A. measures sensitivity to changes in interest rates
through the use of balance sheet and income simulation models. The analyses
capture changes in net interest income using flat rates as a base case and
rising and declining interest rate forecasts. Central Jersey Bank, N.A. measures
changes in net interest income for the forecast period, generally twelve to
twenty-four months, within set limits for acceptable change.
The following table sets forth the results of the projected net interest income
simulation model for the twelve month period commencing December 31, 2007 and
ending December 31, 2008:
Net Interest Income
-------------------
Change in Interest Rates
In Basis Points (Rate Shock) Amounts ($) Change ($) Change (%)
- --------------------------------------------------------------------------------
+200 $ 16,880 $ (99) (0.58%)
+100 16,945 (34) (0.20%)
Base Case 16,979 -- --
- -100 16,900 (79) (0.47%)
- -200 $ 16,492 $ (487) (2.87%)
47
The preceding table indicates that for the year ending December 31, 2008, in the
event of an immediate 200 basis point parallel increase in interest rates,
Central Jersey Bank, N.A. would experience a (0.58%), or $99,000, decrease in
net interest income for that period. In the event of a 200 basis point decrease
in interest rates, Central Jersey Bank, N.A. would experience a (2.87%), or
$487,000, decrease in net interest income for the year ending December 31, 2008.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The consolidated financial statements and supplementary data of Central Jersey
Bancorp called for by this item are submitted under a separate section of this
report. Reference is made to the Index of Consolidated Financial Statements
contained on page F-1 herein.
Item 9. Changes in and Disagreements With Accountants on Accounting and
--------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures
-----------------------
As required by Rule 13a-15 under the Exchange Act, as of the end of the period
covered by this Annual Report on Form 10-K, Central Jersey Bancorp carried out
an evaluation of the effectiveness of the design and operation of Central Jersey
Bancorp's disclosure controls and procedures. This evaluation was carried out
under the supervision and with the participation of Central Jersey Bancorp's
management, including Central Jersey Bancorp's Chairman, President and Chief
Executive Officer and Central Jersey Bancorp's Executive Vice President and
Chief Financial Officer, who concluded that Central Jersey Bancorp's disclosure
controls and procedures are effective. There has been no significant change in
Central Jersey Bancorp's internal controls during the last fiscal quarter that
has materially affected, or is reasonably likely to materially affect, Central
Jersey Bancorp's internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Central Jersey
Bancorp's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in Central Jersey Bancorp's
reports filed under the Exchange Act is accumulated and communicated to
management, including Central Jersey Bancorp's Chairman, President and Chief
Executive Officer and Executive Vice President and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting
-----------------------------------------------------------------------
The management of Central Jersey Bancorp is responsible for establishing and
maintaining adequate internal control over financial reporting. Central Jersey
Bancorp's internal control system is a process designed to provide reasonable
assurance to the company's management and Board of Directors regarding the
preparation and fair presentation of published financial statements.
Central Jersey Bancorp's internal control over financial reporting includes
policies and procedures that pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect transactions and dispositions
of assets; provide reasonable assurances that
48
transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and expenditures are being
made only in accordance with authorizations of management and the directors of
Central Jersey Bancorp; and provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of Central
Jersey Bancorp's assets that could have a material effect on our consolidated
financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management assessed the effectiveness of Central Jersey Bancorp's internal
control over financial reporting as of December 31, 2007. In making this
assessment, we used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework (COSO). Based on the assessment management believes that, as of
December 31, 2007, Central Jersey Bancorp's internal control over financial
reporting is effective based on those criteria.
Attestation Report of the Independent Registered Public Accounting Firm
-----------------------------------------------------------------------
Central Jersey Bancorp's independent registered public accounting firm that
audited the consolidated financial statements has issued an audit report on the
effectiveness of Central Jersey Bancorp's internal control over financial
reporting as of December 31, 2007. This report appears on page F-3.
Item 9B. Other Information
-----------------
None
49
PART III
Item 10. Directors, Executive Officers and Corporate Governance
------------------------------------------------------
The information required under this Item with respect to Central Jersey
Bancorp's directors and executive officers will be contained in Central Jersey
Bancorp's Proxy Statement for the Annual Meeting of Shareholders scheduled to be
held on May 28, 2008, under the captions "Election of Directors," "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Executive Officers," and is
incorporated herein by reference.
Item 11. Executive Compensation
----------------------
The information required under this Item with respect to executive compensation
will be contained in Central Jersey Bancorp's Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on May 28, 2008, under the captions
"Executive Compensation" and "Director Compensation," and is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
--------------------------------------------------------------------
Related Stockholder Matters
---------------------------
The information required by this Item will be contained in Central Jersey
Bancorp's Proxy Statement for the Annual Meeting of Shareholders scheduled to be
held on May 28, 2008, under the captions "Securities Authorized for Issuance
under Equity Compensation Plans" and "Security Ownership of Certain Beneficial
Owners and Management," and is incorporated herein by reference.
Item 13. Certain Relationships, Related Transactions and Director
--------------------------------------------------------------------
Independence
------------
The information required by this item will be contained in Central Jersey
Bancorp's Proxy Statement for the Annual Meeting of Shareholders scheduled to be
held on May 28, 2008, under the caption "Certain Relationships and Related Party
Transactions" and "Director Independence" and is incorporated herein by
reference.
Item 14. Principal Accountant Fees and Services
--------------------------------------
The information required by this item will be contained in Central Jersey
Bancorp's Proxy Statement for the Annual Meeting of Shareholders scheduled to be
held on May 28, 2008, under the captions "Audit Fees," "Audit Related Fees,"
"Tax Fees," "All Other Fees," and "Policy on Pre-Approval of Audit and
Permissible Non-Audit Services," and is incorporated herein by reference.
50
PART IV
Item 15. Exhibits and Financial Statement Schedules
------------------------------------------
(a) Exhibits
--------
Reference is made to the Index of Exhibits beginning on page
E-1 herein.
(b) Financial Statement Schedules:
------------------------------
Reference is made to the Index of Consolidated Financial
Statements on page F-1 herein. No schedules are included with
the consolidated financial statements because the required
information is inapplicable or is presented in the
consolidated financial statements or notes thereto.
51
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CENTRAL JERSEY BANCORP
Date: March 14, 2008 By: /s/ James S. Vaccaro
---------------------------------------
James S. Vaccaro
Chairman, President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints James S. Vaccaro and Robert S. Vuono and each of them,
his or her true and lawful attorneys-in-fact and agents for him or her and in
his or her name, place an stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as they might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents may lawfully do or cause
to be done by virtue hereof.
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this report to be signed by the following persons in the capacities and
on the dates stated.
Signatures Title Date
---------- ----- ----
/s/ James S. Vaccaro Chairman, President and Chief Executive March 14, 2008
- ----------------------------- Officer (Principal Executive Officer) and
James S. Vaccaro Director
/s/ Robert S. Vuono Senior Executive Vice President, Chief March 14, 2008
- ----------------------------- Operating Officer, Secretary and Director
Robert S. Vuono
/s/ Anthony Giordano, III Executive Vice President, Chief Financial March 14, 2008
- ----------------------------- Officer, Treasurer and Assistant Secretary
Anthony Giordano, III (Principal Financial and Accounting Officer)
52
Signatures Title Date
---------- ----- ----
/s/ James G. Aaron Director March 14, 2008
- -------------------------------
James G. Aaron
/s/ Mark R. Aikins Director March 14, 2008
- -------------------------------
Mark R. Aikins
/s/ Nicholas A. Alexander Director March 14, 2008
- -------------------------------
Nicholas A. Alexander
/s/ John A. Brockriede Director March 14, 2008
- -------------------------------
John A. Brockriede
Director March 14, 2008
/s/ George S. Callas
- -------------------------------
George S. Callas
/s/ James P. Dugan Director March 14, 2008
- -------------------------------
James P. Dugan
/s/ M. Claire French Director March 14, 2008
- -------------------------------
M. Claire French
/s/ William H. Jewett Director March 14, 2008
- -------------------------------
William H. Jewett
/s/ Paul A. Larson, Jr. Director March 14, 2008
- -------------------------------
Paul A. Larson, Jr.
/s/ John F. McCann Director March 14, 2008
- -------------------------------
John F. McCann
/s/ Carmen M. Penta Director March 14, 2008
- -------------------------------
Carmen M. Penta
/s/ Mark G. Solow Director March 14, 2008
- -------------------------------
Mark G. Solow
53
CENTRAL JERSEY BANCORP
AND SUBSIDIARY
Consolidated Financial Statements
Contents
December 31, 2007
Reports of Independent Registered Public Accounting Firm .................................................F-2
Consolidated Statements of Financial Condition at December 31, 2007 and 2006..............................F-4
Consolidated Statements of Income for the years ended December 31, 2007, 2006
and 2005.............................................................................................F-5
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2007, 2006 and 2005...............................................................F-6
Consolidated Statement of Cash Flows for the years ended
December 31, 2007, 2006 and 2005.....................................................................F-7
Notes to Consolidated Financial Statements................................................................F-8
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Central Jersey Bancorp:
We have audited the accompanying consolidated statements of financial condition
of Central Jersey Bancorp and subsidiary as of December 31, 2007 and 2006, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
2007. These consolidated financial statements are the responsibility of Central
Jersey Bancorp's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Central Jersey
Bancorp and subsidiary as of December 31, 2007 and 2006, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles.
We also have audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Central Jersey Bancorp's internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated March 14, 2008 expressed an unqualified opinion on the effectiveness of
the Company's internal control over financial reporting.
/s/ KPMG LLP
Short Hills, New Jersey
March 14, 2008
F-2
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
On Internal Control Over Financial Reporting
--------------------------------------------
The Board of Directors and Shareholders
Central Jersey Bancorp:
We have audited Central Jersey Bancorp and subsidiary's (the Company)- internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Management of the
Company is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting included on page 48, Item 9A, Control Procedures -
Management's Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the effectiveness of the Company's
internal control over financial reporting 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion Central Jersey Bancorp and subsidiary maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statements of
financial position of Central Jersey Bancorp and subsidiary as of December 31,
2007 and 2006, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2007, and our report dated March 14, 2008 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Short Hills, New Jersey
March 14, 2008
F-3
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2007 AND 2006
(dollars in thousands, except per share amounts)
ASSETS 2007 2006
- ------ ----------- -----------
Cash and due from banks $ 11,198 $ 16,162
Federal funds sold 3,679 21,634
----------- -----------
Cash and cash equivalents 14,877 37,796
Investment securities available-for-sale, at market value 114,824 95,735
Investment securities held-to-maturity (market value of $17,379 and
$20,454 at December 31, 2007 and 2006, respectively) 17,430 20,820
Federal Reserve Bank Stock 1,960 1,952
Federal Home Loan Bank Stock 550 542
Loans held-for-sale 658 242
Loans 315,173 315,322
Less: Allowance for loan losses 3,408 3,229
----------- -----------
Loans, net 311,765 312,093
Accrued interest receivable 2,218 2,613
Premises and equipment 4,626 5,357
Bank owned life insurance 3,565 3,447
Goodwill 26,957 26,957
Core deposit intangible 1,926 2,478
Due from broker -- 3,527
Other assets 2,150 2,740
----------- -----------
Total assets $ 503,506 $ 516,299
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Non-interest bearing $ 73,955 $ 83,482
Interest bearing 329,335 343,795
----------- -----------
403,290 427,277
Borrowings 24,564 17,099
Subordinated debentures 5,155 5,155
Accrued expenses and other liabilities 1,611 1,273
----------- -----------
Total liabilities 434,620 450,804
----------- -----------
Shareholders' equity:
Common stock, par value $0.01 per share. Authorized
100,000,000 shares and issued and outstanding
8,745,990 and 8,667,281 shares at December 31, 2007 and
2006, respectively 87 87
Additional paid-in capital 60,791 60,501
Accumulated other comprehensive income (loss), net of tax expense
(benefit) 848 (1,409)
Retained earnings 7,160 6,316
----------- -----------
Total shareholders' equity 68,886 65,495
----------- -----------
Total liabilities and shareholders' equity $ 503,506 $ 516,299
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(dollars in thousands, except per share amounts)
2007 2006 2005
----------- ----------- -----------
Interest and dividend income:
Interest and fees on loans $ 22,975 $ 23,159 $ 18,726
Interest on securities available-for-sale 5,100 4,465 4,891
Interest on federal funds sold and due from banks 1,530 804 239
Interest on securities held-to-maturity 883 991 1,091
----------- ----------- -----------
Total interest and dividend income 30,488 29,419 24,947
Interest expense:
Interest expense on deposits 12,597 10,760 6,615
Interest expense on other borrowings 746 1,267 547
Interest expense on subordinated debentures 439 429 340
----------- ----------- -----------
Total interest expense 13,782 12,456 7,502
----------- ----------- -----------
Net interest income 16,706 16,963 17,445
Provision for loan losses 165 500 426
----------- ----------- -----------
Net interest income after provision for loan losses 16,541 16,463 17,019
----------- ----------- -----------
Other income:
Impairment on available-for-sale securities (1,957) -- --
Service charges on deposit accounts 1,479 1,412 1,401
Income on bank owned life insurance 118 109 112
Gain on sale of available-for-sale securities 87 -- --
Gain on the sale of loans held-for-sale 56 213 105
Other service charges, commissions and fees -- 6 6
----------- ----------- -----------
Total other (loss) income (217) 1,740 1,624
----------- ----------- -----------
Operating expenses:
Salaries and employee benefits 7,146 7,345 7,287
Net occupancy expenses 1,821 1,687 1,718
Professional fees 938 759 687
Data processing fees 884 809 937
Outside service fees 856 866 1,017
Furniture, fixtures and equipment 626 690 599
Core deposit intangible amortization 552 619 688
Stationery, supplies and printing 251 269 288
Insurance 194 200 192
Telephone 161 153 134
Abandonment of leasehold improvements 137 -- --
Advertising 134 150 220
Other operating expenses 670 762 783
----------- ----------- -----------
Total other expenses 14,370 14,309 14,550
----------- ----------- -----------
Income before provision for income taxes 1,954 3,894 4,093
Income taxes 1,110 1,428 1,461
----------- ----------- -----------
Net income $ 844 $ 2,466 $ 2,632
=========== =========== ===========
Basic earnings per share $ 0.10 $ 0.28 $ 0.31
=========== =========== ===========
Diluted earnings per share $ 0.09 $ 0.27 $ 0.28
=========== =========== ===========
Average basic shares outstanding 8,710,865 8,655,137 8,549,322
=========== =========== ===========
Average diluted shares outstanding 9,132,772 9,156,428 9,354,568
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(dollars in thousands)
Accumulated
Additional other
Common paid-in comprehensive Retained
stock capital (loss) income earnings Total
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 $ 40 $ 15,216 $ (619) $ 1,218 $ 15,855
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- 2,632 2,632
Unrealized loss on securities
available-for-sale, net of tax of ($881) -- -- (1,534) -- (1,534)
--------
Total comprehensive income 1,098
Allaire Community Bank combination 40 44,375 -- -- 44,415
Exercise of stock options - 54,329
shares (including tax benefit $148) 2 408 -- -- 410
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 $ 82 $ 59,999 $ (2,153) $ 3,850 $ 61,778
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- 2,466 2,466
Unrealized gain on securities
available-for-sale, net of tax of $437 -- -- 744 -- 744
--------
Total comprehensive income 3,210
Exercise of stock options - 113,150
shares (including tax benefit $250) 5 719 -- -- 724
Common stock retired - 22,599 (217) -- -- (217)
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2006 $ 87 $ 60,501 $ (1,409) $ 6,316 $ 65,495
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- 844 844
Unrealized gain on securities
available-for-sale, net of tax of $686 -- -- 896 -- 896
Reclassification adjustment for gains
included in net income net of tax ($37) -- -- 50 -- 50
Impairment on securities
available-for-sale, net of tax of ($646) -- -- 1,311 -- 1,311
--------
Total comprehensive income 3,101
Exercise of stock options - 79,223
shares (including tax benefit $15) -- 294 -- -- 294
Cash paid for fractional shares -- (4) -- -- (4)
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007 $ 87 $ 60,791 $ 848 $ 7,160 $ 68,886
===================================================================================================================
See accompanying notes to consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(dollars in thousands)
2007 2006 2005
-----------------------------------------
Cash flows from operating activities:
Net income $ 844 $ 2,466 $ 2,632
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Increase in cash surrender value of life insurance (118) (109) (112)
Deferred taxes (815) (478) (189)
Tax benefit of stock option exercises (15) (250) (148)
Provision for loan losses 165 500 426
Net discount accretion (premium amortization) on held-to-maturity securities (11) (8) 7
Net premium amortization on available-for-sale securities 35 163 246
Depreciation and amortization 705 842 736
Decrease (increase) in accrued interest receivable 395 23 (242)
Core deposit intangible amortization 552 619 688
Impairment on available-for-sale securities 1,957 -- --
Abandonment of leasehold improvements 137 -- --
Gain on sale of securities available-for-sale (87) -- --
Gain on the sale of loans held-for-sale (56) (213) (105)
Origination of loans held-for-sale (19,825) (25,390) (11,591)
Proceeds from sale of loans held-for-sale 19,465 28,488 8,569
Decrease (increase) in other assets 1,374 2,071 (4,658)
Increase (decrease) in accrued expenses and other liabilities 353 (612) (119)
-----------------------------------------
Net cash provided by (used in) operating activities 5,055 8,112 (3,860)
-----------------------------------------
Cash flows from investing activities:
Purchase of investment securities available-for-sale (115,585) (474) --
Maturities of and paydowns on investment securities held-to-maturity 3,401 1,755 2,995
Proceeds from sales, maturities of and paydowns on investment securities
available-for-sale 96,848 16,932 16,707
Decrease (increase) in due from broker 3,527 (3,527) --
Net decrease (increase) in loans 163 (5,425) (48,052)
Cash/cash equivalents acquired in Allaire Community Bank combination -- -- 6,886
Purchases of premises and equipment, net (111) (193) (710)
-----------------------------------------
Net cash (used in) provided by investing activities (11,757) 9,068 (22,174)
-----------------------------------------
Cash flows from financing activities:
Proceeds from stock options exercised, net 309 757 558
Net (decrease) increase in non-interest bearing deposits (9,527) (7,815) 22,163
Net (decrease) increase in interest bearing deposits (14,460) 27,538 (17,341)
Net increase (decrease) in other borrowings 7,465 (21,092) 23,288
Cash paid for fractional shares (4) -- --
-----------------------------------------
Net cash (used in) provided by financing activities (16,217) (612) 28,668
-----------------------------------------
(Decrease) increase in cash and cash equivalents (22,919) 16,568 2,634
Cash and cash equivalents at beginning of period 37,796 21,228 18,594
-----------------------------------------
Cash and cash equivalents at end of period $ 14,877 $ 37,796 $ 21,228
=========================================
Cash paid during the period for:
Interest $ 13,766 $ 12,413 $ 7,597
Taxes $ 1,612 $ 1,508 $ 1,860
Non cash investing activities:
Fair value of assets acquired in Allaire Community Bank combination $ -- $ -- $ 201,820
Goodwill and core deposit intangible resulting from Allaire Community
Bank combination $ -- $ -- $ 31,014
Liabilities assumed in Allaire Community Bank combination $ -- $ -- $ 186,528
Common stock issued in Allaire Community Bank combination $ -- $ -- $ 39,803
See accompanying notes to consolidated financial statements.
F-7
Central Jersey Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
(1) Summary of Significant Accounting Policies
Business
Effective August 31, 2000, Central Jersey Bancorp, a newly formed corporation,
acquired all of the shares of Central Jersey Bank, N.A. Each share of $5 par
value common stock of Central Jersey Bank, N.A. was exchanged for one share of
$0.01 par value common stock of Central Jersey Bancorp. The reorganization was
accounted for as if it were a pooling of interests. Central Jersey Bancorp and
Central Jersey Bank, N.A. are collectively referred to herein as the "Company."
On January 1, 2005, Central Jersey Bancorp completed its strategic business
combination transaction with Allaire Community Bank, a New Jersey
state-chartered bank, pursuant to which Allaire Community Bank became a
wholly-owned bank subsidiary of Central Jersey Bancorp. On the effective date of
the combination, the name of the holding company was changed from Monmouth
Community Bancorp to Central Jersey Bancorp. In August 2005, Central Jersey
Bancorp combined its two bank subsidiaries, Monmouth Community Bank, N.A. and
Allaire Community Bank, into a single banking entity, named Central Jersey Bank,
N.A. Central Jersey Bancorp currently owns one operating subsidiary, Central
Jersey Bank, N.A.
The Company provides a full range of banking services to customers located
primarily in Monmouth and Ocean Counties, New Jersey. Central Jersey Bancorp and
Central Jersey Bank, N.A. are subject, as applicable, to federal statutes
applicable to banks and bank holding companies. In 2001, Central Jersey Bank,
N.A. converted from a state chartered institution to a nationally chartered
institution regulated by the Office of Comptroller of the Currency (the "OCC").
Central Jersey Bank, N.A.'s deposits are insured by the Federal Deposit
Insurance Corporation (the "FDIC"). Central Jersey Bancorp is subject to
regulation, supervision and examination by the Federal Reserve Bank of New York.
Central Jersey Bancorp paid a 5% stock dividend on July 1, 2007. As of December
31, 2007, there were 8,745,990 issued and outstanding shares of Central Jersey
Bancorp common stock. Central Jersey Bancorp paid a 5% stock dividend on July 1,
2006. As of December 31, 2006, there were 8,667,281 issued and outstanding
shares of Central Jersey Bancorp common stock. Central Jersey Bancorp effected a
two-for-one stock split, in the form of a stock dividend, for shareholders of
record on June 15, 2005. All prior period amounts have been retroactively
restated to reflect the aforementioned stock splits and stock distributions.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
Central Jersey Bancorp and its wholly-owned bank subsidiary, Central Jersey
Bank, N.A. All significant inter-company accounts and transactions have been
eliminated in consolidation. The consolidated financial statements of the
Company have been prepared in conformity with U.S. generally accepted accounting
principles ("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 dates of the consolidated statements of
financial condition and results of operations for the periods indicated. Actual
results could differ significantly from those estimates.
F-8
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses as
well as the other-than-temporary impairment of investment securities.
While management uses available information to recognize estimated losses on
loans, such estimates may be adjusted to account for changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to increase such allowance based,
in their judgment, on the information available to them at the time of their
examination.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and overnight federal funds sold. Federal funds
sold are generally sold for one-day periods.
Investment Securities
Investment securities held-to-maturity are comprised of debt securities that the
Company has the positive intent and ability to hold to maturity. Such securities
are stated at cost, adjusted for amortization of premiums and accretion of
discounts over the estimated remaining lives of the securities as an adjustment
to the yield using the level-yield method. Securities to be held for indefinite
periods of time and not intended to be held-to-maturity, including all equity
securities, are classified as available-for-sale. Securities available-for-sale
include securities that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates, resultant prepayment risk and other factors related to interest rate and
resultant prepayment risk changes. Securities available-for-sale are carried at
fair value. Unrealized holding gains and losses on such securities
available-for-sale are excluded from earnings and reported as a separate
component of shareholders' equity. Gains and losses on sales of securities are
based on the specific identification method and are accounted for on a trade
date basis.
On a quarterly basis, the Company evaluates investment securities for
other-than-temporary impairment. For individual investment securities classified
as either available-for-sale or held-to-maturity, a determination is made as to
whether a decline in fair value below the amortized cost basis is other than
temporary. If the decline in fair value is judged to be other than temporary,
the cost basis of the individual investment security shall be written down to
fair value as a new cost basis and the amount of the write-down shall be
recognized in earnings. Subsequent increases in the fair value of
available-for-sale securities shall be included as a separate component of
equity; subsequent decreases in fair value, if not an other-than-temporary
impairment, also shall be included as a separate component of shareholders'
equity.
Loans Held-for-Sale
Loans held-for-sale are carried at the lower of aggregate cost or fair value.
F-9
Loans
Loans are stated at unpaid principal balances, adjusted for unearned income and
deferred loan fees and costs.
Interest on loans is credited to operations based upon the principal amount
outstanding.
Loan origination and commitment fees and certain direct loan origination costs
are deferred, and the net amount is amortized over the estimated life of the
loan as an adjustment to the loan's yield using the level-yield method.
An impaired loan is defined as a loan for which, based on current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Impaired
loans are measured based on the present value of expected future cash flows, or,
as a practical expedient, at the loan's observable market price, or the fair
value of the underlying collateral, if the loan is collateral dependent. The
accrual of income on loans, including impaired loans, is generally discontinued
when a loan becomes more than ninety days delinquent as to principal or interest
or when other circumstances indicate that collection is questionable, unless the
loan is well secured and in the process of collection. Income on non-accrual
loans, including impaired loans, is recognized only in the period in which it is
collected, and only if management determines that the loan principal is fully
collectible. Loans are returned to an accrual status when a loan is brought
current as to principal and interest and reasons indicating doubtful collection
no longer exists. Residential mortgages and consumer loans are deemed smaller
balance homogenous loans which are evaluated collectively for impairment as one
and are therefore, excluded from the population of impaired loans.
A loan is considered past due when a payment has not been received in accordance
with the contractual terms. Generally, commercial loans are placed on
non-accrual status when they are 90 days past due unless they are well secured
and in the process of collection or, regardless of the past due status of the
loan, when management determines that the complete recovery of principal and
interest is in doubt. Commercial loans are generally charged off after an
analysis is completed which indicates that collectibility of the full principal
balance is in doubt. Consumer loans are generally charged off after they become
120 days past due. Commercial mortgage loans are not generally placed on a
non-accrual status unless the value of the real estate has deteriorated to the
point that a potential loss of principal or interest exists. Subsequent payments
are credited to income only if collection of principal is not in doubt. If
principal and interest payments are brought contractually current and future
collectibility is reasonably assured, loans are returned to accrual status.
Commercial mortgage loans are generally charged off when the value of the
underlying collateral does not cover the outstanding principal balance. Loan
origination and commitment fees less certain costs are deferred and the net
amount amortized as an adjustment to the related loan's yield. Loans held for
sale are recorded at the lower of aggregate cost or market value.
The allowance for loan losses is based upon management's evaluation of the
adequacy of the allowance, including an assessment of: (a) known and inherent
risks in the loan portfolio, (b) the size and composition of the loan portfolio,
(c) actual loan loss experience, (d) the level of delinquencies, (e) the
individual loans for which full collectibility may not be assured, (f) the
existence and estimated net realizable value of any underlying collateral and
guarantees securing the loans, and (g) the current economic and market
conditions. Although management uses the best information available, the level
of the allowance for loan losses remains an estimate that is subject to
significant judgment and short-term change. Various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowance for loan losses.
F-10
Such agencies may require the Company to make additional provisions for loan
losses based upon information available to them at the time of their
examination. Furthermore, the majority of the Company's loans are secured by
real estate in the State of New Jersey. Accordingly, the collectibility of a
substantial portion of the carrying value of the Company's loan portfolio is
susceptible to changes in local market conditions and may be adversely affected
should real estate values decline or the Central New Jersey area experience an
adverse economic climate. Future adjustments to the allowance for loan losses
may be necessary due to economic, operating, regulatory and other conditions
beyond the Company's control. Management believes that the allowance for loan
losses is adequate.
The provision for loan losses charged to operating expense is determined by
management and is based upon a periodic review of the loan portfolio, past
experience, the economy, and other factors that may affect a borrower's ability
to repay a loan. The provision is based on management's estimates and actual
losses may vary from these estimates. Estimates are reviewed and adjustments, as
they become necessary, are reported in the periods in which they become known.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is charged to operations on a straight-line basis
over the estimated useful lives of the assets or, in the case of leasehold
improvements, the lease period, if shorter. Depreciable lives range from three
to ten years for furniture, fixtures and equipment and five to fifteen years for
leasehold improvements. Gains or losses on dispositions are reflected in current
operations. Maintenance and repairs are charged to expense as incurred.
Bank-Owned Life Insurance
Bank-owned life insurance is recorded at its realizable value. The change in the
net asset value is included as a component of non-interest income.
401(k) Plan
The Company has a 401(k) plan covering substantially all of its employees. The
Company may contribute an amount equal to 100% of the first 3% of the employee
deferral and then 50% of the next 2% of the employee deferral. The Company's
matching contribution, if any, is determined by the Board of Directors in its
sole discretion.
Income Taxes
Income taxes are accounted for under the asset and liability method. Current
income taxes are provided for based upon amounts estimated to be currently
payable, for both federal and state income taxes. Deferred federal and state tax
assets and liabilities are recognized for the expected future tax consequences
of existing differences between financial statement and tax bases of existing
assets and liabilities. Deferred tax assets are recognized for future deductible
temporary differences and tax loss carryforwards if their realization is "more
likely than not." The effect of a change in the tax rate on deferred taxes is
recognized in the period of the enactment date.
Comprehensive Income
Comprehensive income is segregated into net income and other comprehensive
income. Other comprehensive income includes items previously recorded directly
to equity, such as unrealized
F-11
gains and losses on securities available-for-sale, net of tax. Comprehensive
income is presented in the Statements of Changes in Shareholders' Equity.
Segment Reporting
The Company's operations are solely in the financial services industry and
include providing to its customers traditional banking and other financial
services. The Company operates primarily in the geographical region of Central
New Jersey. Management makes operating decisions and assesses performance based
on an ongoing review of the Company's consolidated financial results. Therefore,
the Company has a single operating segment for financial reporting purposes.
Net Income Per Share
Basic and diluted net income per share for the year ended December 31, 2007 was
calculated by dividing the net income of $844,000 by the weighted average number
of shares outstanding of 8,710,865 (as to the basic net income per share
determination) and 9,132,772 (as to the diluted net income per share
determination). Basic and diluted net income per share for the year ended
December 31, 2006 was calculated by dividing the net income of $2.5 million by
the weighted average number of shares outstanding of 8,655,137 (as to the basic
net income per share determination) and 9,156,428 (as to the diluted net income
per share determination). Basic and diluted net income per share for year ended
December 31, 2005 was calculated by dividing the net income of $2.6 million by
the weighted average number of shares outstanding of 8,549,322 (as to the basic
net income per share determination) and 9,354,568 (as to the diluted net income
per share determination). Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
(such as stock options) were exercised or resulted in the issuance of common
stock. These potentially dilutive shares would then be included in the weighted
average number of shares outstanding for the period using the treasury stock
method. Shares issued and shares reacquired during the period are weighted for
the portion of the period that they were outstanding.
The following table reconciles shares outstanding for basic and diluted earnings
per share for the years ended December 31, 2007, 2006 and 2005:
Year ended
December 31,
2007 2006 2005
---------------------------------------
Average basic shares outstanding 8,710,865 8,655,137 8,549,322
Add effect of dilutive securities:
Stock options 421,907 500,991 805,246
---------------------------------------
Average diluted shares outstanding 9,132,772 9,156,428 9,354,568
=======================================
Options to purchase 111,132 shares of common stock and 157,937 shares of common
stock at a weighted average price of $10.39 per share and $9.00 per share,
respectively, were outstanding and were not included in the computation of
diluted earnings per share for the year ended December 31, 2007, because the
option exercise price was greater than the average market price for the period.
Options to purchase 111,132 shares of common stock and 161,629 shares of common
stock at a weighted average price of $10.39 per share and $9.00 per share,
respectively, were outstanding and were not included in the computation of
diluted earnings per share for the year ended December 31, 2006, because the
option exercise price was greater than the average market price for the period.
F-12
Intangible Assets
Intangible assets of the Company consist of goodwill and core deposit premiums.
Goodwill represents the excess of the purchase price over the estimated fair
value of identifiable net assets acquired through purchase acquisitions. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Other Intangible Assets, goodwill with an indefinite useful life is
not amortized, but is evaluated for impairment on an annual basis.
Core deposit premiums represent the intangible value of depositor relationships
assumed in purchase acquisitions and are amortized on an accelerated basis over
a period of ten years. The amortization of the core deposit premium is recorded
as a component of operating expenses.
Impairment
Long-lived assets including goodwill and certain identifiable intangibles are
periodically evaluated for impairment in value. Long-lived assets and deferred
costs are typically measured whenever events or circumstances indicate that the
carrying amount may not be recoverable. No such events have occurred during the
periods reported. Certain identifiable intangibles and goodwill are evaluated
for impairment at least annually utilizing the "market approach" as prescribed
by SFAS No. 142, Goodwill and Other Intangible Assets. Asset impairment is
recorded when required.
Stock Based Compensation
Effective January 1, 2006, the Company began recording compensation expense
associated with stock options in accordance with SFAS No. 123(R), Share-Based
Payment. Prior to January 1, 2006, the Company accounted for stock-based
compensation related to stock options under the recognition and measurement
principles of Accounting Principle Board Opinion No. 25; therefore, the Company
measured compensation expense for its stock option plans using the intrinsic
value method, that is, the excess, if any, of the fair market value of the
Company's stock at the grant date over the amount required to be paid to acquire
the stock, and provided the disclosures required by SFAS No. 123(R) and SFAS No.
148, Accounting for Stock-Based Compensation. The Company has adopted the
modified prospective transition method provided by SFAS No. 123(R), and as a
result, has not retroactively adjusted results from prior periods.
As a result of the adoption of SFAS No. 123(R), the Company has incurred no
compensation expense related to the Company's stock compensation plans for the
years ended December 31, 2007 and 2006, as no stock options were granted during
2007 or 2006 and all stock options were fully vested prior to January 1, 2006.
F-13
For stock options granted prior to the adoption of SFAS No. 123(R), the
following table illustrates the pro forma effect on net income and earnings per
share as if the Company had accounted for all employee stock options granted
prior to January 1, 2006 under the fair value based accounting method of SFAS
No. 123(R) (in thousands except per share data):
2005
- -----------------------------------------------------------------
Net Income:
As reported $ 2,632
Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net of
related tax effects 882
---------
Pro forma $ 1,750
Net income per share - basic:
As reported $ 0.31
Pro forma $ 0.20
Net income per share - diluted:
As reported $ 0.28
Pro forma $ 0.19
There were no new employee or director stock option grants during 2007 and 2006.
Effective January 1, 2005, Central Jersey Bancorp, formerly known as Monmouth
Community Bancorp ("MCB"), and Allaire Community Bank consummated a combination
in the form of a merger which resulted in the accelerated vesting of MCB
options. The Company accounted for the accelerated vesting of MCB stock options
in accordance with FIN 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25.
Stock Appreciation Rights
On January 31, 2006, the Company granted under its 2005 Equity Incentive Plan,
165,375 Stock Appreciation Rights ("SARS") (93,712 were granted to employees and
71,663 were granted to directors), each with an exercise price of $9.87. These
SARS can only be settled in cash. The SARS vest over a four year period and
expire February 1, 2016.
The fair value of SARS granted was estimated on December 31, 2007 using the
Black-Scholes option pricing model with the following weighted-average
assumptions used: stock price $7.95, dividend yield of 0%; expected volatility
of 41.17%; risk free interest rate of 3.45%; and expected lives of seven years.
These SARS had a fair value of approximately $3.35 per share at December 31,
2007. The Company recorded, as a component of salaries and employee benefits
expense, share based payment expense of approximately $80,000, net of tax,
related to the granting of SARS during the year ended December 31, 2007. As of
December 31, 2007, total unvested compensation expense was approximately
$279,000 (pre-tax) and will vest over 25 months.
The fair value of SARS granted was estimated on December 31, 2006 using the
Black-Scholes option pricing model with the following weighted-average
assumptions used: stock price $7.90, dividend yield of 0%; expected volatility
of 41.17%; risk free interest rate of 4.70%; and expected lives of seven years.
These SARS had a fair value of approximately $3.51 per share at December 31,
2006. The Company recorded, as a component of salaries and employee benefits
expense,
F-14
share based payment expense of approximately $80,000, net of tax, related to the
granting of SARS during the year ended December 31, 2006. As of December 31,
2006, total unvested compensation expense was approximately $433,000 (pre-tax)
and will vest over 37 months.
A summary of the status of the Company's SARS as of December 31, 2007 and 2006,
is presented below:
December 31, 2007 December 31, 2006
- ------------------------------------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
SARS price SARS price
- ------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 159,862 $ 9.87 -- --
Granted -- -- 165,375 $ 9.87
Forfeited -- -- (5,513) $ 9.87
Exercised -- -- -- --
======================================================================================================
Outstanding at period end 159,862 $ 9.87 159,862 $ 9.87
======================================================================================================
SARS exercisable at period end -- -- -- --
Weighted average fair value of
SARs granted $ 3.35 $ 3.51
======================================================================================================
Reclassifications
Certain reclassifications have been made to the prior period amounts to conform
to the current period presentation.
(2) Strategic Business Combination
On January 1, 2005, Central Jersey Bancorp completed its strategic business
combination transaction with Allaire Community Bank, a New Jersey
state-chartered bank, pursuant to which Allaire Community Bank became a
wholly-owned bank subsidiary of Central Jersey Bancorp. On the effective date of
the combination, the name of the holding company was changed from Monmouth
Community Bancorp to Central Jersey Bancorp. In addition, as part of the
combination, each outstanding share of common stock of Allaire Community Bank
was exchanged for one share of Central Jersey Bancorp common stock.
The combination was accounted for as a purchase and the excess cost over the
fair value of net assets acquired ("goodwill") in the transaction was $26.9
million. Under the provisions of SFAS No. 142, goodwill is not being amortized
in connection with this transaction and the goodwill will not be deductible for
income tax purposes. The Company also recorded a core deposit intangible of $3.8
million in connection with the combination, which is being amortized on an
accelerated basis over 10 years. The amortization of premiums and discounts
resulting from the fair value adjustments of assets and liabilities may have a
material impact on the Company's results of operations in future periods.
F-15
The following table presents data with respect to the fair values of assets and
liabilities acquired in the combination with Allaire Community Bank (in
thousands):
January 1, 2005
---------------
Assets:
Cash and due from banks $ 6,886
Securities 65,960
Loans, net 119,753
Fixed assets 3,536
Other assets 2,458
Bank owned life insurance 3,227
Core deposit intangible 3,785
Goodwill 27,229
-----------
Total assets $ 232,834
===========
Liabilities:
Deposits $ 169,879
Borrowings 14,903
Other liabilities 1,752
-----------
Total liabilities 186,534
-----------
Net assets acquired $ 46,300
===========
The net deferred tax asset resulting from adjustments of net assets acquired,
including the creation of the core deposit intangible, amounted to $72,000.
The computation of the purchase price, the allocation of the purchase price to
net assets of Allaire Community Bank based on their respective values as of
January 1, 2005 and the resulting amount of goodwill are presented below
(dollars in thousands, except per share amounts):
Common shares outstanding of Allaire Community Bank 1,996,140
Percentage exchanged for Central Jersey Bancorp common stock 100%
-----------
Allaire common shares exchanged for Central Jersey Bancorp common stock 1,996,140
Exchange ratio 1.00
-----------
Central Jersey Bancorp common stock issued 1,996,140
Market price per share of Central Jersey Bancorp common stock $ 19.94
-----------
Total purchase price of Allaire Community Bank 39,803
Total common stockholders' equity of Allaire Community Bank 16,031
-----------
Excess of purchase price over carrying value of assets acquired $ 23,772
Purchase accounting adjustments related to assets and liabilities acquired:
Transaction costs 1,677
Tax effect of transaction costs (at 34%) (578)
Securities held-to-maturity 219
Securities available-for-sale 291
Loans (388)
Lease termination cost 766
Buildings (350)
Time deposits (16)
Collateralized borrowings 3
Stock options 4,700
Tax effect of fair value adjustments (at 34%) (866)
Core deposit intangible (3,785)
Tax effect of core deposit intangible (at 34%) 1,512
-----------
Goodwill $ 26,957
===========
F-16
(3) Cash and Due from Banks
As of December 31, 2007, the Company was not required to maintain any reserve
balances.
(4) Investment Securities
The amortized cost, gross unrealized gains and losses, and market value of
investment securities held-to-maturity and securities available-for-sale at
December 31, 2007 and 2006 are as follows (in thousands):
- -----------------------------------------------------------------------------------------------------------------------
2007
- -----------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
- -----------------------------------------------------------------------------------------------------------------------
Investment securities held-to-maturity:
Obligations of U.S. Government
sponsored agencies $ 10,690 $ 13 $ 38 $ 10,665
Mortgage-backed securities of U.S. Government
sponsored agencies 6,740 27 53 6,714
- -----------------------------------------------------------------------------------------------------------------------
Total $ 17,430 $ 40 $ 91 $ 17,379
=======================================================================================================================
Investment securities available-for-sale:
Mortgage-backed securities of U.S. Government
sponsored agencies 109,452 1,400 38 110,814
Other debt securities 4,010 -- -- 4,010
- -----------------------------------------------------------------------------------------------------------------------
Total $ 113,462 $ 1,400 $ 38 $ 114,824
=======================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------
2006
- -----------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
- -----------------------------------------------------------------------------------------------------------------------
Investment securities held-to-maturity:
Obligations of U.S. Government
sponsored agencies $ 12,673 $ -- $ 192 $ 12,481
Mortgage-backed securities of U.S. Government
sponsored agencies 8,147 15 189 7,973
- -----------------------------------------------------------------------------------------------------------------------
Total $ 20,820 $ 15 $ 381 $ 20,454
=======================================================================================================================
Investment securities available-for-sale:
Obligations of U.S. Government
sponsored agencies $ 73,782 $ 23 $ 1,414 $ 72,391
Mortgage-backed securities of U.S. Government
sponsored agencies 23,642 -- 876 22,766
Other debt securities 578 2 -- 580
- -----------------------------------------------------------------------------------------------------------------------
Total $ 98,002 $ 25 $ 2,290 $ 95,737
=======================================================================================================================
F-17
The amortized cost and market value of investment securities held-to-maturity
and investment securities available-for-sale at December 31, 2007 by contractual
maturity are shown below (in thousands). Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Market
cost value
--------------------------------------------------------------------------------------------------
Investment securities held-to-maturity:
Due in one year or less $ 1,998 $ 1,986
Due after one year through fifth year 6,026 5,993
Due after fifth year through tenth year 3,962 3,944
Due after tenth year 5,444 5,456
--------------------------------------------------------------------------------------------------
Total $ 17,430 $ 17,379
==================================================================================================
Investment securities available-for-sale:
Due in one year or less $ 6,011 $ 6,001
Due after one year through fifth year 2,653 2,625
Due after fifth year through tenth year 21,583 21,982
Due after tenth year 83,215 84,216
--------------------------------------------------------------------------------------------------
Total $ 113,462 $ 114,824
==================================================================================================
Proceeds from the sale of investment securities available-for-sale during 2007
were $88.6 million, resulting in gross gains and gross losses of $87,000 and
$1.96 million, respectively. There were no sales of investment securities in
2006 or 2005.
During 2007, the Company recorded an other-than-temporary impairment charge of
$1.96 million, pre-tax, related to a reduction in the market value of investment
securities available-for-sale. Prior to the charge, the impairment was
considered temporary and was recorded as an unrealized loss on investment
securities available-for-sale and reflected as a reduction of equity, net of
tax, through accumulated other comprehensive income.
At December 31, 2007 and 2006, there were $86.9 million and $107.3 million,
respectively, of investment securities pledged as collateral for short term
borrowings, to secure public funds or for any other purposes required by law.
Gross unrealized losses on both investment securities held-to-maturity and
investment securities available-for-sale and their fair values, aggregated by
security category and length of time that individual securities have been in a
continuous unrealized loss position, at December 31, 2007 and 2006, were as
follows (in thousands):
- -----------------------------------------------------------------------------------------------------------------------
Less than 12 months 12 months or more Total
--------------------------------------------------------------------------------
2007 Unrealized Market Unrealized Market Unrealized Market
Investment securities losses value losses value losses value
- -----------------------------------------------------------------------------------------------------------------------
U.S. Government sponsored agencies $ 25 $ 6,516 $ 13 $ 2,235 $ 38 $ 8,751
Mortgage-backed securities 1 190 90 10,034 91 10,224
- -----------------------------------------------------------------------------------------------------------------------
Total $ 26 $ 6,706 $ 103 $ 12,269 $ 129 $ 18,975
=======================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------
Less than 12 months 12 months or more Total
--------------------------------------------------------------------------------
2006 Unrealized Market Unrealized Market Unrealized Market
Investment securities losses value losses value losses value
- -----------------------------------------------------------------------------------------------------------------------
U.S. Government sponsored agencies $ 2 $ 485 $ 1,604 $ 82,470 $ 1,606 $ 82,955
Mortgage-backed securities -- -- 1,065 29,538 1,065 29,538
- -----------------------------------------------------------------------------------------------------------------------
Total $ 2 $ 485 $ 2,669 $112,008 $ 2,671 $112,493
=======================================================================================================================
F-18
U.S. Government sponsored agencies - The unrealized losses in U.S. Government
sponsored agencies were caused by general interest rate increases. Since the
decrease in market value is attributable to changes in interest rates and not
credit quality, and because the Company has the ability and intent to hold these
securities until a market price recovery or maturity, these securities are not
considered other-than-temporarily impaired.
Mortgage-backed securities - The unrealized losses on mortgage-backed securities
were caused by general interest rate increases. Fannie Mae and Freddie Mac
guarantee the contractual cash flows of these investment securities. Since the
decrease in market value is attributable to changes in interest rates and not
credit quality, and because the Company has the ability and intent to hold these
securities until a market price recovery or maturity, these investment
securities are not considered other-than-temporarily impaired.
(5) Loans
Loans at December 31, 2007 and 2006 are summarized as follows (in thousands):
2007 2006
- --------------------------------------------------------------------------------
Commercial and industrial loans $ 29,371 $ 35,476
Real estate loans - commercial 240,256 237,015
1-4 family real estate loans 3,822 4,182
Home equity and second mortgages 37,832 35,573
Consumer loans 3,654 2,857
- --------------------------------------------------------------------------------
Subtotal 314,935 315,103
Net deferred fees 238 219
Less allowance for loan losses 3,408 3,229
- --------------------------------------------------------------------------------
Net loans $311,765 $312,093
================================================================================
Loans held-for-sale $ 658 $ 242
================================================================================
A substantial portion of the Company's loans are secured by real estate and made
to borrowers located in New Jersey, primarily in Monmouth and Ocean Counties.
Accordingly, as with most financial institutions in the Company's market area,
the ultimate collectibility of a substantial portion of the Company's loan
portfolio is susceptible to changes in market conditions in the market area.
Activity in the allowance for loan losses for the years ended December 31, 2007,
2006 and 2005 is summarized as follows (in thousands):
2007 2006 2005
- ---------------------------------------------------------------------------------------------
Balance, beginning of year $ 3,229 $ 3,175 $ 1,638
Allaire Community Bank combination -- -- 1,203
Provision charged to expense 165 500 426
Charge-offs (88) (455) (92)
Recoveries 102 9 --
- ---------------------------------------------------------------------------------------------
Balance, end of year $ 3,408 $ 3,229 $ 3,175
=============================================================================================
Ratio of allowance for loan losses to total loans 1.08% 1.02% 1.02%
=============================================================================================
At December 31, 2007, 2006 and 2005, the Company had non-accrual loans totaling
$214,000, $91,000 and $79,000, respectively, and no impaired loans. There were
no loans ninety days or greater past due and still accruing interest at December
31, 2007, 2006 or 2005. If the non-
F-19
accrual loans had performed in accordance with their original terms, interest
income would have increased by $4,359, $477 and $6,365, for the years ended
December 31, 2007, 2006 and 2005, respectively. At December 31, 2007, there were
no commitments to lend additional funds to borrowers whose loans are
non-accrual.
In the ordinary course of business to meet the financial needs of the Company's
customers, the Company is party to financial instruments with off-balance sheet
risk. These financial instruments include unused lines of credit and involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the consolidated financial statements. The contract or notional amounts of these
instruments express the extent of involvement the Company has in each category
of financial instruments.
The Company's exposure to credit loss from nonperformance by the other party to
the above-mentioned financial instruments is represented by the contractual
amount of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The contract or notional amount of financial instruments which
represent credit risk at December 31, 2007 and 2006 is as follows (in
thousands):
2007 2006
--------------------------------------------------------------------------
Standby letters of credit $ 1,361 $ 1,478
Outstanding loan and credit line commitments $ 77,689 $ 62,705
--------------------------------------------------------------------------
Standby letters of credit are conditional commitments issued by the Company
which guarantee performance by a customer to a third party. The credit risk and
underwriting procedures involved in issuing letters of credit are essentially
the same as that involved in extending loan facilities to customers. All of
Central Jersey Bank, N.A.'s outstanding standby letters of credit are
performance standby letters within the scope of the Financial Accounting
Standards Board ("FASB") Interpretation No. 45. These are irrevocable
undertakings by Central Jersey Bank, N.A., as guarantor, to make payments in the
event a specified third party fails to perform under a non-financial contractual
obligation. Most of Central Jersey Bank, N.A.'s performance standby letters of
credit arise in connection with lending relationships and have terms of one year
or less. The maximum potential future payments Central Jersey Bank, N.A. could
be required to make equals the face amount of the letters of credit shown above.
Central Jersey Bank, N.A.'s liability for performance standby letters of credit
was immaterial at December 31, 2007 and 2006.
Outstanding loan commitments represent the unused portion of loan commitments
available to individuals and companies as long as there is no violation of any
condition established in the contract. Outstanding loan commitments generally
have a fixed expiration date of one year or less, except for home equity loan
commitments which generally have an expiration date of up to 15 years. The
Company evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if any, upon extension of credit is based upon
management's credit evaluation of the customer. Various types of collateral may
be held, including property and marketable securities. The credit risk involved
in these financial instruments is essentially the same as that involved in
extending loan facilities to customers.
At December 31, 2007 and 2006, loans to officers, directors and related parties
amounted to approximately $4.1 million and $4.5 million, respectively. During
the years ended December 31, 2007 and 2006, $757,000 and $93,000, respectively,
in new loans to officers, directors and related parties were originated and
repayments totaled approximately $1.2 million and $289,000, respectively.
F-20
(6) Premises and Equipment
Premises and equipment at December 31, 2007 and 2006 are summarized as follows
(in thousands):
2007 2006
--------------------------------------------------------------------------
Land $ 1,074 $ 1,074
Buildings and improvements 1,367 1,374
Leasehold improvements 2,985 3,615
Equipment 3,985 3,899
Auto 50 50
--------------------------------------------------------------------------
9,461 10,012
Accumulated depreciation and amortization (4,835) (4,655)
--------------------------------------------------------------------------
$ 4,626 $ 5,357
==========================================================================
Depreciation and amortization expense amounted to $705,000, $842,000 and
$736,000 in 2007, 2006 and 2005, respectively. As a result of the closing of two
branch offices during the third quarter of 2007, the Company recorded during the
year ended December 31, 2007 one-time charges for abandonment of leasehold
improvements totaling $137,000, pre-tax, and lease payment accruals totaling
$53,000, pre-tax (included in net occupancy expense), in accordance with SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
(7) Intangible Assets
Intangible assets at December 31, 2007 and 2006 are summarized as follows (in
thousands):
2007 2006
--------------------------------------------------------------------------
Goodwill $ 26,957 $ 26,957
Core deposit intangible 1,926 2,478
--------------------------------------------------------------------------
Total $ 28,883 $ 29,435
==========================================================================
Amortization expense of intangible assets for the years ended December 31, 2007,
2006 and 2005 is as follows (in thousands):
2007 2006 2005
- --------------------------------------------------------------------------------
Core deposit intangible amortization $ 552 $ 619 $ 688
================================================================================
Scheduled amortization of core deposit intangibles for each of the next five
years is as follows (in thousands):
------------------------------------------------------
2008 $ 482
2009 413
2010 344
2011 275
2012 206
F-21
(8) Deposits
Interest-bearing deposits at December 31, 2007 and 2006 consist of the following
(in thousands):
2007 2006
-----------------------------------------------------------------------
Savings, N.O.W. and money market accounts $187,354 $202,650
Certificates of deposit less than $100,000 80,587 75,842
Certificates of deposit of $100,000 or more 61,394 65,303
-----------------------------------------------------------------------
Total $329,335 $343,795
=======================================================================
At December 31, 2007, certificates of deposit mature as follows: 2008 - $132.5
million; 2009 - $8.9 million; 2010 - $344,000; 2011 - $176,000; and 2012 -
$14,000.
Interest expense on deposits for the years ended December 31, 2007, 2006 and
2005 is summarized as follows (in thousands):
2007 2006 2005
- --------------------------------------------------------------------------------
Savings, N.O.W. and money market accounts $5,513 $4,762 $2,719
Certificates of deposit 7,084 5,998 3,896
- --------------------------------------------------------------------------------
(9) Borrowings
Borrowed funds at December 31, 2007 and 2006 are summarized as follows (in
thousands):
2007 2006
--------------------------------------------------------------------------
Other borrowings $24,564 $17,099
--------------------------------------------------------------------------
Total $24,564 $17,099
==========================================================================
Borrowings were $24.6 million at December 31, 2007, as compared to $17.1 million
at December 31, 2006. These borrowings, which are short term in nature, were
used to fund interest-earning assets during the years ended December 31, 2007
and 2006. Borrowings typically include wholesale borrowing arrangements as well
as arrangements with deposit customers of Central Jersey Bank, N.A. to sweep
funds into short-term borrowings. Central Jersey Bank, N.A. uses investment
securities to pledge as collateral for the repurchase agreements. At December
31, 2007 and 2006, Central Jersey Bank, N.A. had unused lines of credit with the
FHLB of $8.9 million and $51.6 million, respectively.
(10) Subordinated Debentures
In March 2004, MCBK Capital Trust I, a special purpose business trust of Central
Jersey Bancorp, issued an aggregate of $5.0 million of trust preferred
securities to ALESCO Preferred Funding III, a pooled investment vehicle. Sandler
O'Neill & Partners, L.P. acted as placement agent in connection with the
offering of the trust preferred securities. The securities issued by MCBK
Capital Trust I are fully guaranteed by Central Jersey Bancorp with respect to
distributions and amounts payable upon liquidation, redemption or repayment.
These securities have a floating interest rate equal to the three-month LIBOR
plus 285 basis points, which resets quarterly. The securities mature on April 7,
2034 and may be called at par by Central Jersey Bancorp any time after April 7,
2009. These securities were placed in a private transaction exempt from
registration under the Securities Act of 1933, as amended.
F-22
The entire proceeds to MCBK Capital Trust I from the sale of the trust preferred
securities were used by MCBK Capital Trust I in order to purchase $5.1 million
of subordinated debentures from Central Jersey Bancorp. The subordinated
debentures bear a variable interest rate equal to LIBOR plus 285 basis points.
Although the subordinated debentures are treated as debt of Central Jersey
Bancorp, they currently qualify as Tier I Capital investments, subject to the
25% limitation under risk-based capital guidelines of the Federal Reserve. The
portion of the trust preferred securities that exceeds this limitation qualifies
as Tier II Capital of Central Jersey Bancorp. At December 31, 2007, $5.0 million
of the trust preferred securities qualified for treatment as Tier I Capital.
Central Jersey Bancorp is using the proceeds it received from the subordinated
debentures to support the general balance sheet growth of Central Jersey Bancorp
and to maintain Central Jersey Bank, N.A.'s required regulatory capital ratios.
On March 1, 2005, the Federal Reserve adopted a final rule that allows the
continued inclusion of outstanding and prospective issuances of trust preferred
securities in the Tier I Capital of bank holding companies, subject to stricter
quantitative limits and qualitative standards. The new quantitative limits
become effective after a five-year transition period ending March 31, 2009.
Under the final rules, trust preferred securities and other restricted core
capital elements are limited to 25% of all core capital elements. Amounts of
restricted core capital elements in excess of these limits may be included in
Tier II Capital. At December 31, 2007, the only restricted core capital element
owned by Central Jersey Bancorp is trust preferred securities. Central Jersey
Bancorp believes that its trust preferred issues qualify as Tier I Capital.
However, in the event that the trust preferred issues do not qualify as Tier I
Capital, Central Jersey Bank, N.A. would remain well capitalized.
(11) Other-Than-Temporary Impairment
During 2007, Central Jersey Bancorp executed a balance sheet restructuring
strategy involving approximately $88.6 million of investment securities held in
the available-for-sale investment portfolio. The restructuring resulted in a
one-time pre-tax impairment charge of approximately $1.96 million, which was
reflected in Central Jersey Bancorp's consolidated financial statements for the
three months ended March 31, 2007. Available-for-sale investment securities,
consisting primarily of lower yielding fixed rate callable agency investment
securities were sold during the second quarter of 2007 and replaced with higher
yielding investment securities with a comparable to modestly shorter aggregate
weighted average life. The market value loss that these investment securities
carried at March 31, 2007, was recorded as an other-than-temporary impairment
since Central Jersey Bancorp did not have the intent to hold these securities to
recovery. The investment securities the Company identified as impaired were
primarily fixed rate government sponsored agency bonds that either had a below
market interest rate coupon or a longer than desired maturity term. Central
Jersey Bancorp realized a gain on the sale of available-for-sale securities of
$87,000, pre-tax, in conjunction with the balance sheet restructuring during the
year ended December 31, 2007.
The Company's effective tax rate of 56.8% for the year ended December 31, 2007,
resulted from the fact that the majority of the investment securities for which
the previously-mentioned $1.96 million other-than-temporary impairment was
recorded were held by CJB Investment Company, a wholly-owned subsidiary of
Central Jersey Bank, N.A. A full valuation allowance was recorded for the
deferred tax assets associated with the impairment of the investment securities
sold by CJB Investment Company. The impairment of the investment securities at
the investment company level was considered a capital loss for tax purposes
while the impairment of the investment securities held by Central Jersey Bank,
N.A. was considered an ordinary loss for tax purposes. CJB Investment Company
does not, at this time, have the ability to generate
F-23
capital gains and utilize the capital losses and thus a full valuation allowance
was required for the deferred tax assets associated with the investment
company's available-for-sale securities which were identified as
other-than-temporarily impaired.
(12) Income Taxes
Components of income tax expense for the years ended December 31, 2007, 2006 and
2005 are as follows (in thousands):
2007 2006 2005
- --------------------------------------------------------------------------------------------
Current income tax expense:
Federal $ 1,640 $ 1,640 $ 1,451
State 285 266 199
- --------------------------------------------------------------------------------------------
1,925 1,906 1,650
- --------------------------------------------------------------------------------------------
Deferred income tax expense (benefit)
Federal (614) (386) (145)
State (201) (92) (44)
- --------------------------------------------------------------------------------------------
(815) (478) (189)
- --------------------------------------------------------------------------------------------
$ 1,110 $ 1,428 $ 1,461
============================================================================================
A reconciliation between the reported income taxes and income taxes which would
be computed by applying the normal federal income tax rate of 34% to income
before taxes follows (in thousands):
2007 2006 2005
- --------------------------------------------------------------------------------------------
Federal income tax $ 664 $ 1,324 $ 1,392
State income tax effect, net of federal tax effect 56 114 102
Bank-owned life insurance (40) (37) (38)
Valuation reserve 417 -- --
Meals and entertainment 6 5 4
Other 7 22 1
- --------------------------------------------------------------------------------------------
Provision charged to expense $ 1,110 $ 1,428 $ 1,461
============================================================================================
F-24
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2007 and
2006 are as follows (in thousands):
2007 2006
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 1,344 $ 1,273
Impaired investment securities 702 --
New Jersey NOL carry forwards 52 36
Allowance for uncollected interest 120 38
Unrealized loss - securities available-for-sale -- 855
Net purchase accounting adjustments 240 169
Depreciation 371 82
AMA 4 4
Stock options / SARS 102 51
Other 3 3
- --------------------------------------------------------------------------------
Gross deferred tax asset 2,938 2,511
Less: valuation reserve (515) (36)
- --------------------------------------------------------------------------------
Deferred tax assets, net 2,423 2,475
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred loan costs 95 95
Discount accretion -- 11
Unrealized gain - securities available-for-sale 514 --
- --------------------------------------------------------------------------------
Gross deferred tax liabilities 609 106
- --------------------------------------------------------------------------------
Net deferred tax assets $ 1,814 $ 2,369
================================================================================
Based upon current facts concerning taxes paid in the carryback period and
projections of future taxable income, management has determined that it is more
likely than not that the deferred tax assets will be realized, except for
certain New Jersey net operating losses by Central Jersey Bancorp and the
impairment of investment securities, for which management has reserved against
these deferred tax assets. However, there can be no assurances about the level
of future earnings.
As of January 1, 2007, there were no amounts recorded for unrecognized tax
benefits or for the payment of interest or penalties. Furthermore, no amounts
were accrued for the year ended December 31, 2007. The tax years that remain
subject to examination are 2006, 2005 and 2004 for federal and state tax
purposes and 2003 for state tax purposes only. Accruals of interest and
penalties related to unrecognized tax benefits, when applicable, are recognized
in income tax expense.
(13) Branch Office Closings
Effective September 14, 2007, Central Jersey Bancorp closed two of its branch
offices - Highway 35, Neptune City and Highway 33, Neptune Township. The
customer relationships from both of these branch offices were transferred to the
West Sylvania, Neptune City branch office. As a result of the closing of these
two branch offices, the Company recorded during the year ended December 31, 2007
one-time charges for abandonment of leasehold improvements totaling $137,000,
pre-tax, and lease payment accruals totaling $53,000, pre-tax (included in net
occupancy expense), in accordance with SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. In addition, for the year ended
December 31, 2007, the Company recorded $35,000, pre-tax (included in salaries
and employee benefits expense), in one-time employee termination expenses
related to the branch office consolidations in accordance with SFAS No. 146.
F-25
(14) Commitments and Contingencies
At December 31, 2007, the Company was obligated under non-cancelable lease
agreements for 12 premises. The leases provide for increased rentals based upon
increases in real estate taxes and the cost of living index. Minimum rental
payments under the terms of these leases are as follows (in thousands):
2008 $1,128
2009 1,014
2010 819
2011 699
2012 and thereafter 2,782
------------------------------------
Total $6,442
====================================
Total rent expense was $846,000, $769,000 and $785,000 in 2007, 2006 and 2005,
respectively.
Litigation
Central Jersey Bank, N.A. may, in the ordinary course of business, become a
party to litigation involving collection matters, contract claims and other
legal proceedings relating to the conduct of its business. Central Jersey Bank,
N.A. may also have various commitments and contingent liabilities which are not
reflected in the accompanying consolidated balance sheets.
Related Party Transactions
The Company leases administrative office space at 6 West End Court, Long Branch,
New Jersey. Certain members of the Board of Directors of Central Jersey Bancorp
hold an ownership interest in the leased property. The negotiations with respect
to the leased space were conducted at arms-length and the lease amount to be
paid by Central Jersey Bank, N.A. was determined by an independent appraiser to
be at fair market value. Total lease payments for 2007, 2006 and 2005 were
$61,000, $55,000 and $55,000, respectively.
(15) Regulatory Matters
Subject to applicable law, the Board of Directors of Central Jersey Bank, N.A.
may provide for the payment of cash dividends. Prior approval of the OCC is
required to the extent that the total of all cash dividends to be declared by
Central Jersey Bank, N.A. in any calendar year exceeds net profits, as defined,
for that year combined with its retained net profits from the preceding two
calendar years less any transfers to capital surplus.
Central Jersey Bank, N.A. and Central Jersey Bancorp are subject to various
regulatory capital requirements administered by federal banking agencies.
Failure to meet minimum requirements can initiate certain mandatory and possibly
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,
Central Jersey Bank, N.A. and Central Jersey Bancorp must meet specific capital
guidelines that involve quantitative measures of Central Jersey Bank, N.A.'s and
Central Jersey Bancorp's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
F-26
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." An
institution categorized as "undercapitalized" or worse is subject to certain
restrictions, including the requirement to file a capital plan with its primary
federal regulator, prohibitions on the payment of dividends and management fees,
restrictions on asset growth and executive compensation and increased
supervisory monitoring, among other things. Other restrictions may be imposed on
the institution by the applicable regulatory agencies, including requirements to
raise additional capital, sell assets or sell the entire institution. Once an
institution becomes "critically undercapitalized," it must generally be placed
in receivership or conservatorship within ninety days. An institution is deemed
to be "critically undercapitalized" if it has a tangible equity ratio, as
defined, of 2% or less.
To be considered "well capitalized," an institution must generally have a
leverage ratio (Tier 1 capital to total assets) of at least 5%, a Tier 1
risk-based capital ratio of at least 6%, and a total risk-based capital ratio of
at least 10%. Management believes that, as of December 31, 2007 and 2006,
Central Jersey Bank, N.A. and Central Jersey Bancorp meet all capital adequacy
requirements of their regulators. Further, the most recent regulatory
notification categorized Central Jersey Bank, N.A. and Central Jersey Bancorp as
well-capitalized under the prompt corrective action regulations.
The following is a summary of Central Jersey Bank, N.A.'s and Central Jersey
Bancorp's actual capital amounts and ratios as of December 31, 2007 and 2006,
compared to the minimum capital adequacy requirements and the requirements for
classification as a "well-capitalized" institution (dollars in thousands):
Tier I Tier I
Capital to Capital to Total Capital to
Average Assets Ratio Risk Weighted Risk Weighted
(Leverage Ratio) Asset Ratio Asset Ratio
2007 2006 2007 2006 2007 2006
-----------------------------------------------------------------------------------------
Central Jersey Bank, N.A. 9.34% 8.47% 12.94% 11.81% 13.93% 12.72%
"Adequately capitalized" institution
(under federal regulations) 4.00% 4.00% 4.00% 4.00% 8.00% 8.00%
"Well capitalized" institution (under
federal regulations) 5.00% 5.00% 6.00% 6.00% 10.00% 10.00%
Tier I Tier I
Capital to Capital to Total Capital to
Average Assets Ratio Risk Weighted Risk Weighted
(Leverage Ratio) Asset Ratio Asset Ratio
2007 2006 2007 2006 2007 2006
-----------------------------------------------------------------------------------------
Central Jersey Bank, N.A. $ 44,696 $ 41,547 $ 44,696 $ 41,547 $ 48,104 $ 44,776
"Adequately capitalized" institution
(under federal regulations) 19,143 19,625 13,817 14,077 27,634 28,154
"Well capitalized" institution (under
federal regulations) 23,929 24,531 20,726 21,116 34,543 35,194
F-27
Tier I Tier I
Capital to Capital to Total Capital to
Average Assets Ratio Risk Weighted Risk Weighted
(Leverage Ratio) Asset Ratio Asset Ratio
2007 2006 2007 2006 2007 2006
-----------------------------------------------------------------------------------------
Central Jersey Bancorp 9.08% 8.38% 12.74% 11.71% 13.73% 12.62%
"Adequately capitalized" institution
(under federal regulations) 4.00% 4.00% 4.00% 4.00% 8.00% 8.00%
"Well capitalized" institution (under
federal regulations) 5.00% 5.00% 6.00% 6.00% 10.00% 10.00%
Tier I Tier I
Capital to Capital to Total Capital to
Average Assets Ratio Risk Weighted Risk Weighted
(Leverage Ratio) Asset Ratio Asset Ratio
2007 2006 2007 2006 2007 2006
-----------------------------------------------------------------------------------------
Central Jersey Bancorp $ 43,835 $ 41,110 $ 43,835 $ 41,110 $ 47,243 $ 44,339
"Adequately capitalized" institution
(under federal regulations) 19,305 19,616 13,766 14,048 27,531 28,097
"Well capitalized" institution (under
federal regulations) 24,131 24,520 20,649 21,073 34,414 35,121
(16) Benefit Plans
Stock Option Plan
In 2000, the Company established an Employee and Director Stock Option Plan (the
"Plan"). As of December 31, 2007, stock options to purchase in aggregate up to
1,343,186 shares of the Company's common stock were outstanding. During 2007,
2006 and 2005, no options were granted. Effective January 1, 2005, as a result
of the combination with Allaire Community Bank, all outstanding options granted
under the Plan became fully vested. The Company does not anticipate granting any
further stock options under the Plan.
F-28
In addition, as a result of the combination with Allaire Community Bank, options
to purchase 801,728 shares of Allaire Community Bank common stock were converted
into options to purchase 801,728 shares of Central Jersey Bancorp common stock,
all of which are fully vested. A summary of the status of the Company's stock
options as of and for the years ended December 31, 2007, 2006 and 2005 is
presented below:
2007 2006 2005
- --------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
- --------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,429,803 $ 4.94 1,584,142 $ 5.00 857,270 $ 6.21
- --------------------------------------------------------------------------------------------------------------------------
Allaire Community Bank
combination -- -- -- -- 801,728 3.58
Granted -- -- -- -- -- --
Forfeited (7,394) 6.54 (41,189) 8.87 (908) 6.62
Exercised (79,223) 3.52 (113,150) 4.35 (73,948) 3.56
==========================================================================================================================
Outstanding at end of year 1,343,186 5.01 1,429,803 4.94 1,584,142 5.00
==========================================================================================================================
Options exercisable at year end 1,343,186 5.01 1,429,803 4.94 1,584,142 5.00
Weighted average fair value of
options granted during the year $ -- $ -- $ --
==========================================================================================================================
No additional compensation expense is projected for future years on stock
options outstanding at December 31, 2007.
The following table summarizes information about stock options outstanding at
December 31, 2007:
Options Outstanding and Exercisable
December 31, 2007
- ---------------------------------------------------------------------------------------------------
Weighted
average Range of
Number remaining exercise
outstanding Exercisable contractual life prices
- ---------------------------------------------------------------------------------------------------
163,407 163,407 29 Months $2.86 - 2.86
356,668 356,668 35 Months $3.11 - 3.81
375,947 375,947 42 Months $4.01 - 4.11
113,487 113,487 62 Months $5.22 - 5.22
333,677 333,677 78 Months $7.93 - 10.39
The aggregate intrinsic value for stock options outstanding and stock options
exercisable at December 31, 2007 is $3.9 million for both, based upon a market
price of $7.95 per share and a weighted average exercise price of $5.01 per
share. The aggregate intrinsic value of stock options exercised during 2007,
2006 and 2005 was $355,000, $701,000 and $566,000, respectively. There were no
stock options granted during 2007, 2006 or 2005.
F-29
401(k) Plan
The Company has a 401(k) plan covering substantially all of its employees. The
Company may contribute an amount equal to 100% of the first 3% of the employee
deferral and then 50% of the next 2% of the employee deferral. The Company's
matching contribution, if any, is determined by the Board of Directors in its
sole discretion. The Company's aggregate contributions to the 401(k) Plan for
2007, 2006 and 2005 were $147,000, $163,000 and $152,000, respectively.
(17) Fair Value of Financial Instruments
The following fair value estimates, methods and assumptions were used to measure
the fair value of each class of financial instruments for which it is practical
to estimate such value:
Cash and Cash Equivalents
As cash and cash equivalents are short-term in nature, the carrying amount was
considered to be a reasonable estimate of fair value.
Investment Securities
To determine fair value, investment securities were valued based upon an
independent pricing service, if available. If a quoted market price was not
available, fair values were estimated using quoted market prices for similar
securities.
Loans and Loans Held-for-Sale
Fair values were estimated for portfolios of performing loans with similar
characteristics. The fair value of other performing loan types was estimated by
discounting total future cash flows using market discount rates that reflect the
credit and interest rate risk inherent in the loan.
Commitments to Extend Credit
The majority of Central Jersey Bank, N.A.'s commitments to extend credit carry
current market rates if converted to loans. Therefore, the estimated fair value
is approximated by the recorded deferred fee amounts. Such amounts are
immaterial to the consolidated financial statements of the Company and,
therefore, are not separately disclosed.
Deposit Liabilities
The fair value of demand, savings, N.O.W. and money market deposits is the
amount payable on demand at December 31, 2007 and 2006. The fair value of
certificates of deposit was based on the discounted value of contractual cash
flows. The discount rate was estimated utilizing the rates currently offered for
deposits of similar remaining maturities.
Subordinated Debentures
The fair value of the subordinated debentures is assumed to approximate book
value since the securities are variable rate.
Borrowings
The fair value of borrowings is assumed to approximate book value since the
borrowings are variable rate.
F-30
Limitations
Fair value estimates were made at December 31, 2007 and 2006, based upon
pertinent market data and relevant information on each financial instrument.
These estimates do not include any premium or discount that could result from an
offer to sell the Company's entire holdings of a particular financial instrument
or category thereof at one time. Since no market exists for a substantial
portion of the Company's financial instruments, fair value estimates were
necessarily based on judgments with respect to future loss experience, current
economic conditions, risk assessments of various financial instruments involving
a myriad of individual borrowers, and other factors. Given the subjective nature
of these estimates, the uncertainties surrounding them and other matters of
significant judgment that must be applied, these fair value estimations cannot
be calculated with precision. Modifications in such assumptions could
meaningfully alter these estimates. Since these fair value approximations were
made solely for the balance sheet financial instruments at December 31, 2007 and
2006, no attempt was made to estimate the value of anticipated future business
or the value of non-financial statement assets or liabilities. 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.
The estimated fair values of the Company's financial instruments at December 31,
2007 and 2006 are as follows (in thousands):
2007 2006
---- ----
Book Fair Book Fair
value value value value
----- ----- ----- -----
Financial Assets:
Cash and cash equivalents $ 14,877 $ 14,877 $ 37,796 $ 37,796
Investment securities available-for-sale 114,824 114,824 95,735 95,735
Investment securities held-to-maturity 17,430 17,379 20,820 20,454
Loans, net 311,765 312,292 312,093 322,596
Loans held-for-sale 658 658 242 242
Due from broker -- -- 3,527 3,527
Financial Liabilities:
Deposits 403,290 403,519 427,277 447,756
Other borrowings 24,564 24,564 17,099 17,099
Subordinated debentures $ 5,155 $ 5,153 $ 5,155 $ 5,155
========================================================================================================
F-31
(18) Condensed Financial Statements of Central Jersey Bancorp (Central Jersey
Bancorp only)
The following information with respect to Central Jersey Bancorp (parent company
only) should be read in conjunction with the notes to the consolidated financial
statements (in thousands):
Balance Sheets 2007 2006
------------------------------------------------------------------------------
Assets:
Investment in subsidiary $ 73,535 $ 72,252
------------------------------------------------------------------------------
Total assets 73,535 72,252
------------------------------------------------------------------------------
Liabilities:
Other liabilities 342 193
Subordinated debentures 5,155 5,155
------------------------------------------------------------------------------
Total liabilities 5,497 5,348
------------------------------------------------------------------------------
Shareholders' Equity:
Common stock 87 87
Additional paid-in capital 60,791 60,501
Retained earnings 7,160 6,316
------------------------------------------------------------------------------
Total shareholders' equity $ 68,038 $ 66,904
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 73,535 $ 72,252
==============================================================================
Statements of Income 2007 2006 2005
--------------------------------------------------------------------------------------------
Equity in undistributed earnings of the bank $ 1,283 $ 2,895 $ 2,972
subsidiary
Interest expense on subordinated debt (439) (429) (340)
--------------------------------------------------------------------------------------------
Net income $ 844 $ 2,466 $ 2,632
============================================================================================
F-32
Statements of Cash Flows 2007 2006 2005
----------------------------------------------------------------------------------------------------------------
Cash Flow From Operating Activities
----------------------------------------------------------------------------------------------------------------
Net income $ 844 $ 2,466 $ 2,632
Less equity in undistributed earnings of the bank
subsidiary (1,283) (2,895) (2,972)
Increase (decrease) in other liabilities 149 (78) 78
----------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (290) (507) (262)
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Cash Flow From Financing Activities
----------------------------------------------------------------------------------------------------------------
Proceeds from issuance of common stock, net 290 507 262
Fractional shares paid in cash -- -- --
Proceeds from issuance of subordinated debt -- -- --
----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 290 507 262
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period -- -- --
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of period $ -- $ -- $ --
================================================================================================================
Non cash investing activities:
Fair value of assets acquired in Allaire Community Bank combination $ -- $ -- $ 201,820
Goodwill and core deposit intangible resulting from Allaire Community
Bank combination $ -- $ -- $ 31,014
Liabilities assumed in Allaire Community Bank combination $ -- $ -- $ 186,528
Common stock issued in Allaire Community Bank combination $ -- $ -- $ 39,803
(19) Recent Accounting Pronouncements
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets. Prior thereto, SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, established,
among other things, the accounting for all separately recognized servicing
assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140 to require
that all separately recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable. SFAS No. 156 permits, but does
not require, the subsequent measurement of separately recognized servicing
assets and servicing liabilities at fair value. Under SFAS No. 156, an entity
can elect subsequent fair value measurement to account for its separately
recognized servicing assets and servicing liabilities. By electing that option,
an entity may simplify its accounting because SFAS No. 156 permits income
statement recognition of the potential offsetting changes in fair value of those
servicing assets and servicing liabilities and derivative instruments in the
same accounting period. SFAS No. 156 was effective in the first fiscal year
beginning after September 15, 2006 with earlier adoption permitted. Central
Jersey Bancorp's adoption of SFAS No. 156 on January 1, 2007 did not have a
material impact on its consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"). FIN 48 establishes a recognition
threshold and measurement for income tax positions recognized in an enterprise's
financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes. FIN 48 also prescribes a two-step evaluation process for tax positions.
The first step is recognition and the second is measurement. For recognition, an
enterprise judgmentally determines whether it is more-likely-than-not that a tax
position will be sustained upon examination, including resolution of related
appeals or litigation processes, based on the technical merits of the position.
If the tax position meets the more-likely-than-not recognition threshold it is
measured and recognized in the financial statements as the largest
F-33
amount of tax benefit that is greater than 50% likely of being realized. If a
tax position does not meet the more-likely-than-not recognition threshold, the
benefit of that position is not recognized in the financial statements.
Tax positions that meet the more-likely-than-not recognition threshold at the
effective date of FIN 48 may be recognized, or continue to be recognized, upon
adoption of this Interpretation. The cumulative effect of applying the
provisions of FIN 48 shall be reported as an adjustment to the opening balance
of retained earnings for that fiscal year. FIN 48 was effective for fiscal years
beginning after December 15, 2006. Central Jersey Bancorp's adoption of FIN 48
on January 1, 2007 did not have a material impact on its consolidated financial
statements. As of January 1, 2007, there were no amounts recorded for
unrecognized tax benefits or for the payment of interest or penalties.
Furthermore, no amounts were accrued for the year ended December 31, 2007. The
tax years that remain subject to examination are 2006, 2005 and 2004 for federal
and state tax purposes and 2003 for state tax purposes only. Accruals of
interest and penalties related to unrecognized tax benefits, when applicable,
are recognized in income tax expense.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
in GAAP, and enhances disclosures about fair value measurements. This Statement
applies when other accounting pronouncements require fair value measurements; it
does not require new fair value measurements. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those years. Earlier application is encouraged,
provided the entity has not yet issued financial statements, including financial
statements for any interim period for that fiscal year. Central Jersey Bancorp's
adoption of SFAS No. 157 did not have a material impact on its consolidated
financial statements.
In September 2006, the Emerging Issues Task Force ("EITF") of the FASB discussed
public comments received on two issues: (1) EITF Issue No. 06-4, Accounting for
Deferred Compensation and Post-Retirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements, and (2) EITF Issue 06-5, Accounting
for Purchases of Life Insurance -- Determining the Amount that could be Realized
in Accordance with FASB Technical Bulletin 85-4 (Accounting for Purchases of
Life Insurance). On September 7, the EITF agreed to clarify certain points based
on public comments. The EITF reached a consensus that an employer should
recognize a liability for future benefits under SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, or APB Opinion No.
12, Omnibus Opinion - 1967, for an endorsement split-dollar life insurance
arrangement subject to the EITF Issue No. 06-4. This liability is to be based on
the substantive agreement with the employee. The consensus is effective for
fiscal years beginning after December 15, 2007. Early adoption is permitted as
of the beginning of an entity's fiscal year. Entities should recognize the
effects of applying the consensus on this issue as a change in accounting
principle through a cumulative-effect adjustment to retained earnings or to
other components of equity or net assets in the statement of financial position
as of the beginning of the year of adoption. Retrospective application to all
prior periods is permitted. Central Jersey Bancorp's adoption of EITF 06-4 did
not have a material impact on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. Under this Statement, Central Jersey
Bancorp may elect to report financial instruments and certain other items at
fair value on a contract-by-contract basis with changes in value reported in
earnings. This election is irrevocable. SFAS No. 159 provides an opportunity to
mitigate volatility in reported earnings that is caused by measuring hedged
assets and liabilities that were previously required to use a different
accounting method than the related
F-34
hedging contracts when the complex provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, are not met.
SFAS No. 159 is effective for years beginning after November 15, 2007. Central
Jersey Bancorp adopted SFAS No. 159 effective January 1, 2008, however, decided
not to elect the fair value option permitted by SFAS No. 159.
(20) Selected Quarterly Financial Data (Unaudited)
The following tables are a summary of certain quarterly financial data for the
years ended December 31, 2007 and 2006, respectively.
2007 Quarter Ended
-----------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
(dollars in thousands, except per share data)
Interest income $ 7,398 $ 7,729 $ 7,792 $ 7,569
Interest expense 3,371 3,587 3,544 3,280
------------- ------------- ------------- -------------
Net interest income 4,027 4,142 4,248 4,289
Provision for loan losses 125 40 -- --
------------- ------------- ------------- -------------
Net interest income after
provision for loan losses 3,902 4,102 4,248 4,289
Non-interest (loss) income (1,568) 509 417 425
Non-interest expense 3,651 3,445 3,703 3,571
------------- ------------- ------------- -------------
(Loss) income before income taxes (1,317) 1,166 962 1,143
Income tax (benefit)/expense (55) 431 331 403
------------- ------------- ------------- -------------
Net (loss) income $ (1,262) $ 735 $ 631 $ 740
============= ============= ============= =============
(Loss) earnings per share:
Basic $ (0.14) $ 0.09 $ 0.07 $ 0.08
============= ============= ============= =============
Diluted $ (0.14) $ 0.08 $ 0.07 $ 0.08
============= ============= ============= =============
Weighted average shares
outstanding:
Basic 8,668,330 8,685,424 8,744,383 8,745,323
============= ============= ============= =============
Diluted 8,668,330 9,155,322 9,154,818 9,139,034
============= ============= ============= =============
F-35
2006 Quarter Ended
------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
(dollars in thousands, except per share data)
Interest income $ 7,064 $ 7,321 $ 7,444 $ 7,590
Interest expense 2,799 2,979 3,225 3,453
------------ ------------ ------------ ------------
Net interest income 4,265 4,342 4,219 4,137
Provision for loan losses 51 97 318 34
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 4,214 4,245 3,901 4,103
Non-interest income 480 423 422 415
Non-interest expense 3,541 3,594 3,647 3,527
------------ ------------ ------------ ------------
Income before income taxes 1,153 1,074 676 991
Income taxes 428 399 239 362
------------ ------------ ------------ ------------
Net income $ 725 $ 675 $ 437 $ 629
============ ============ ============ ============
Earnings per share:
Basic $ 0.08 $ 0.08 $ 0.05 $ 0.07
============ ============ ============ ============
Diluted $ 0.08 $ 0.07 $ 0.05 $ 0.07
============ ============ ============ ============
Weighted average shares
outstanding:
Basic 8,610,316 8,675,672 8,675,672 8,667,281
============ ============ ============ ============
Diluted 9,252,069 9,175,796 9,156,902 9,130,682
============ ============ ============ ============
F-36
INDEX OF EXHIBITS
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.1 Plan of Acquisition of all of the outstanding stock of Monmouth
Community Bank by Central Jersey Bancorp (formerly Monmouth
Community Bancorp) (the "Registrant"), entered into as of March
16, 2000 by Monmouth Community Bank and the Registrant
(Incorporated by reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form SB-2 (Registration No.
333-87352), effective July 23, 2002).
2.2 Agreement and Plan of Acquisition, dated as of June 30, 2004, by
and between the Registrant and Allaire Community Bank
("Allaire"): Upon the request of the Securities and Exchange
Commission, the Registrant agrees to furnish a copy of Exhibit A
- Voting Agreement of Allaire Stockholders and Voting Agreement
of the Registrant's Shareholders; Exhibit B - Allaire Affiliate
Agreement, Exhibit C - Opinion of Giordano, Halleran & Ciesla,
P.C., as counsel to the Registrant, and Exhibit D - Opinion of
Frieri Conroy & Lombardo, LLC, as counsel to Allaire, and the
following Schedules: Schedule 1.10(a) - Composition of the
Registrant's Board of Directors; Schedule 1.10(b) - Composition
of Allaire and Monmouth Community Bank Boards of Directors;
Schedule 1.10(c) - Executive Officers of the Registrant, Allaire
and Monmouth Community Bank; Schedule 3.02(a) - Stock Options
(Allaire); Schedule 3.02(b) - Subsidiaries (Allaire); Schedule
3.08 - Absence of Changes or Events (Allaire); Schedule 3.09 -
Loan Portfolio (Allaire); Schedule 3.10 - Legal Proceedings
(Allaire); Schedule 3.11 - Tax Information (Allaire); Schedule
3.12(a) - Employee Benefit Plans (Allaire); Schedule 3.12(b) -
Defined Benefit Plans (Allaire); Schedule 3.12(h) - Payments or
Obligations (Allaire); Schedule 3.12(m) - Grantor or "Rabbi"
Trusts (Allaire); Schedule 3.12(n) - Retirement Benefits
(Allaire); Schedule 3.13(c) - Buildings and Structures
(Allaire); Schedule 3.14(a) - Real Estate (Allaire); Schedule
3.14(b) - Leases (Allaire); Schedule 3.16(a) - Material
Contracts (Allaire); Schedule 3.16(c) - Certain Other Contracts
(Allaire); Schedule 3.16(d) - Effect on Contracts and Consents
(Allaire); Schedule 3.18 - Registration Obligations (Allaire);
Schedule 3.20 - Insurance (Allaire); Schedule 3.21(b) - Benefit
or Compensation Plans (Allaire); Schedule 3.21(d) - Labor
Relations (Allaire); Schedule 3.22 - Compliance with Applicable
Laws (Allaire); Schedule 3.23 - Transactions with Management
(Allaire); Schedule 3.25 - Deposits (Allaire); Schedule 4.02(a)
- Stock Options (Registrant); Schedule 4.02(b) - Subsidiaries
(Registrant); Schedule 4.08 - Absence of Changes or Events
(Registrant); Schedule 4.09 - Loan Portfolio (Registrant);
Schedule 4.10 - Legal Proceedings (Registrant); Schedule 4.11 -
Tax Information (Registrant); Schedule 4.12(a) - Employee
Benefit Plans (Registrant); Schedule 4.12(b) - Defined Benefit
Plans (Registrant); Schedule 4.12(g) - Payments or Obligations
(Registrant); Schedule 4.12(l) - Grantor or "Rabbi" Trusts
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(Registrant); Schedule 4.12(m) - Retirement Benefits
(Registrant); Schedule 4.13(c) - Buildings and Structures;
(Registrant) Schedule 4.14(a) and 4.14(b) - Real Estate and
Leases (Registrant); Schedule 4.16(a) - Material Contracts
(Registrant); Schedule 4.16(c) - Certain Other Contracts
(Registrant); Schedule 4.16(d) - Effect on Contracts and
Consents (Registrant); Schedule 4.18 - Registration Obligations
(Registrant); Schedule 4.20 - Insurance (Registrant); Schedule
4.21(b) - Benefit or Compensation Plans (Registrant); Schedule
4.21(d) - Labor Relations (Registrant); Schedule 4.22 -
Compliance with Applicable Laws (Registrant); Schedule 4.23 -
Transactions with Management (Registrant); Schedule 4.25 -
Deposits (Registrant); Schedule 6.18(a) - Notice of Deadlines
(Allaire); and Schedule 6.18(b) - Notice of Deadlines
(Registrant) (Incorporated by reference to Exhibit 2.2 to the
Registrant's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 2004).
3.1 Certificate of Incorporation of the Registrant, as amended and
restated on January 4, 2005 (Incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form 10-KSB for
the year ended December 31, 2004).
3.2 By-laws of the Registrant, as amended and restated on January 1,
2005 (Incorporated by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 2004).
4. Specimen certificate representing the Registrant's common stock,
par value $0.01 per share (Incorporated by reference to Exhibit
4 to Amendment No. 1 to the Registrant's Registration Statement
on Form SB-2 (Registration No. 333-87352), effective July 23,
2002).
10.1 Registrant's Stock Option Plan (Incorporated by reference to
Exhibit 10.1 to the Registrant's Registration Statement on Form
SB-2 (Registration No. 333-87352), effective July 23, 2002).
10.2 Indenture between Registrant and Wilmington Trust Company, dated
March 25, 2004 (Incorporated by reference to Exhibit 10.10 to
the Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 2003).
10.3 Amended and Restated Declaration of Trust of MCBK Capital Trust
I, dated March 25, 2004 (Incorporated by reference to Exhibit
10.11 to the Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 2003).
10.4 Guarantee Agreement by Registrant and Wilmington Trust Company,
dated March 25, 2004 (Incorporated by reference to Exhibit 12 to
the Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 2003).
10.5* Change of Control Agreement, dated as of August 1, 2006, between
the Registrant and Robert S. Vuono (Incorporated by reference to
Exhibit 10.12 to the Registrant's Current Report on Form 8-K,
dated August 1, 2006).
E-2
10.5.1* Amendment No. 1 to Change of Control Agreement, dated as of
February 21, 2007, between the Registrant and Robert S. Vuono.
10.6* Change of Control Agreement, dated as of January 1, 2005,
between the Registrant and Robert K. Wallace (Incorporated by
reference to Exhibit 10.8 to the Registrant's Annual Report on
Form 10-KSB for the year ended December 31, 2004).
10.7* Severance Agreement, dated as of January 1, 2005, between the
Registrant and Carl F. Chirico (Incorporated by reference to
Exhibit 10.9 to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 2004).
10.8* Change of Control Agreement, dated as of August 1, 2006, between
the Registrant and James S. Vaccaro (Incorporated by reference
to Exhibit 10.10 to the Registrant's Current Report on Form 8-K,
dated August 1, 2006).
10.8.1* Amendment No. 1 to Change of Control Agreement, dated as of
February 21, 2007, between the Registrant and James S. Vaccaro.
(Incorporated by reference to Exhibit 10.8.1 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
2007).
10.9* Change of Control Agreement, dated as of August 1, 2006, between
the Registrant and Anthony Giordano, III (Incorporated by
reference to Exhibit 10.11 to the Registrant's Current Report on
Form 8-K, dated August 1, 2006). (Incorporated by reference to
Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2007).
10.9.1* Amendment No. 1 to Change of Control Agreement, dated as of
February 21, 2007, between the Registrant and Anthony Giordano,
III. (Incorporated by reference to Exhibit 10.9.1 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2007).
10.10* Change of Control Agreement, dated as of February 21, 2007,
between the Registrant and Thomas J. Garrity. (Incorporated by
reference to Exhibit 10.10 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2007).
10.11* Change of Control Agreement, dated as of February 21, 2007,
between the Registrant and Lisa A. Borghese. (Incorporated by
reference to Exhibit 10.11 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2007).
10.12 Registrant's 2005 Equity Incentive Plan (Incorporated by
reference to exhibit 10.10 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2005).
E-3
14.1 Chief Executive and Senior Financial Officer Code of Ethics
(Incorporated by reference to Exhibit 14.1 to the Registrant's
Annual Report on Form 10-KSB for the year ended December 31,
2003).
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, as to the Registrant's consolidated
financial statements for the years ended December 31, 2006, 2005
and 2004.
31.1 Section 302 Certification of Chief Executive Officer.
31.2 Section 302 Certification of Chief Financial Officer.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350.
- -------------------
*Constitutes a management contract.
E-4