UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008.
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 0-49925
Central Jersey Bancorp
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-3757709
--------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1903 Highway 35, Oakhurst, New Jersey 07755
-------------------------------------------
(Address of principal executive offices, including zip code)
(732) 663-4000
----------------------------------------------------
(Registrant's telephone number, including area code)
627 Second Avenue, Long Branch, New Jersey 07740
-----------------------------------------------------
(Former name, former address and formal fiscal year,
if changed since last report)
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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the 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]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [_] No [X].
As of October 30, 2008, there were 9,003,153 shares of the registrant's common
stock, par value $.01 per share, outstanding.
Central Jersey Bancorp
INDEX TO FORM 10-Q
------------------
PAGE
----
PART I. FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited)
as of September 30, 2008 and December 31, 2007......................1
Consolidated Statements of Income (unaudited)
for the three and nine months ended September 30, 2008 and 2007.....2
Consolidated Statements of Changes in Shareholders' Equity
(unaudited) for the three and nine months ended
September 30, 2008 and 2007.........................................3
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2008 and 2007...............4
Notes to Unaudited Consolidated Financial Statements................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations...................20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........37
Item 4. Controls and Procedures............................................37
PART II. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings..................................................38
Item 1A. Risk Factors.......................................................38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........38
Item 3. Defaults Upon Senior Securities....................................39
Item 4. Submission of Matters to a Vote of Security Holders................39
Item 5. Other Information..................................................39
Item 6. Exhibits...........................................................39
Signatures....................................................................40
Index of Exhibits............................................................E-1
Forward-Looking Statements
Certain information included in this Quarterly Report on Form 10-Q 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.
i
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 Quarterly Report on Form
10-Q.
ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL JERSEY BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
(dollars in thousands, except share amounts)
September 30, December 31,
2008 2007
------------ ------------
ASSETS
- ------
Cash and due from banks $ 11,214 $ 11,198
Federal funds sold 1,164 3,679
------------ ------------
Cash and cash equivalents 12,378 14,877
Investment securities available-for-sale, at fair value 136,521 114,824
Investment securities held-to-maturity (fair value of $14,893 and
$17,379, respectively, at September 30, 2008 and December 31, 2007) 15,019 17,430
Federal Reserve Bank stock 1,960 1,960
Federal Home Loan Bank stock 2,549 550
Loans held-for-sale -- 658
Loans 347,043 315,173
Less: Allowance for loan losses 3,817 3,408
------------ ------------
Loans, net 343,226 311,765
Accrued interest receivable 2,105 2,218
Premises and equipment 5,931 4,626
Bank owned life insurance 3,654 3,565
Goodwill 26,957 26,957
Core deposit intangible 1,564 1,926
Other assets 3,039 2,150
------------ ------------
Total assets $ 554,903 $ 503,506
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Non-interest bearing $ 79,649 $ 73,955
Interest bearing 326,647 329,335
------------ ------------
406,296 403,290
Borrowings 72,504 24,564
Subordinated debentures 5,155 5,155
Accrued expenses and other liabilities 1,621 1,611
------------ ------------
Total liabilities 485,576 434,620
------------ ------------
Shareholders' equity:
Common stock, par value $0.01 per share. Authorized
100,000,000 shares and issued and outstanding
9,037,598 and 9,183,290 shares, respectively, at September 30, 2008 and
December 31, 2007 91 91
Additional paid-in capital 64,344 60,787
Accumulated other comprehensive income 360 848
Treasury stock - at cost, 174,903 and 0 shares, respectively, at September
30, 2008 and December 31, 2007 (1,328) --
Retained earnings 5,860 7,160
------------ ------------
Total shareholders' equity 69,327 68,886
------------ ------------
Total liabilities and shareholders' equity $ 554,903 $ 503,506
============ ============
See accompanying notes to unaudited consolidated financial statements.
1
CENTRAL JERSEY BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
-----------------------------------------
Interest and dividend income:
Interest and fees on loans $ 5,414 $ 5,731 $ 15,838 $ 17,320
Interest on securities available for sale 1,782 1,501 5,056 3,622
Interest on securities held to maturity 173 212 478 674
Interest on federal funds sold and due from banks 60 348 332 1,302
-----------------------------------------
Total interest and dividend income 7,429 7,792 21,704 22,918
Interest expense:
Interest expense on deposits 1,962 3,237 6,864 9,633
Interest expense on other borrowings 429 196 989 539
Interest expense on subordinated debentures 78 111 252 330
-----------------------------------------
Total interest expense 2,469 3,544 8,105 10,502
-----------------------------------------
Net interest income 4,960 4,248 13,599 12,416
-----------------------------------------
Provision for loan losses 252 -- 399 165
-----------------------------------------
Net interest income after provision for loan losses 4,708 4,248 13,200 12,251
-----------------------------------------
Other income (loss):
Service charges on deposit accounts 393 373 1,157 1,093
Gain on the sale of securities available-for-sale 340 -- 402 87
Gain on the sale of loans held-for-sale 81 14 348 47
Income on bank owned life insurance 30 30 89 88
Impairment on available-for-sale securities -- -- -- (1,957)
-----------------------------------------
Total other income (loss) 844 417 1,996 (642)
Operating expenses:
Salaries and employee benefits 1,975 1,785 5,841 5,280
Net occupancy expenses 478 429 1,385 1,201
Data processing fees 272 219 708 663
Outside service fees 200 225 626 641
Premises and equipment depreciation 159 167 485 541
Audit and accounting services 145 90 305 355
Core deposit intangible amortization 121 138 362 414
Abandonment of leasehold improvements -- 137 -- 137
Other operating expenses 641 513 1,978 1,566
-----------------------------------------
Total other expenses 3,991 3,703 11,690 10,798
-----------------------------------------
Income before provision for income taxes 1,561 962 3,506 811
Income taxes 536 331 1,189 707
-----------------------------------------
Net income $ 1,025 $ 631 $ 2,317 $ 104
=========================================
Basic earnings per share $ 0.11 $ 0.07 $ 0.25 $ 0.01
=========================================
Diluted earnings per share $ 0.11 $ 0.07 $ 0.24 $ 0.01
=========================================
See accompanying notes to unaudited consolidated financial statements.
2
CENTRAL JERSEY BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
(dollars in thousands, except share amounts)
Accumulated
Additional other
Common paid-in comprehensive Treasury Retained
stock capital (loss) income stock earnings Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2006 $ 91 $ 60,497 $ (1,409) -- $ 6,316 $ 65,495
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- -- 104 104
Unrealized loss on securities
available-for-sale, net of tax of ($100) -- -- (93) -- -- (93)
Reclassification adjustment for
gains included in net income,
net of tax of ($37) -- -- 50 -- -- 50
Impairment on securities
available-for-sale, net of tax of ($646) -- -- 1,311 -- -- $ 1,311
----------
Total comprehensive income -- -- -- -- -- 1,372
Exercise of stock options - 82,134 shares,
including tax benefit of $13 -- 289 -- -- -- 289
Cash paid for fractional shares -- (4) -- -- -- (4)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2007 $ 91 $ 60,782 $ (141) -- $ 6,420 $ 67,152
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007 $ 91 $ 60,787 $ 848 -- $ 7,160 $ 68,886
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- -- 2,317 2,317
Unrealized loss on securities
available-for-sale, net of tax of $306 -- -- (488) -- -- $ (488)
----------
Total comprehensive income -- -- -- -- -- 1,829
Exercise of stock options - 29,699 shares,
including tax benefit of $41 -- 171 -- -- -- 171
Purchase of 174,903 shares outstanding stock;
placed in treasury -- -- -- (1,328) -- (1,328)
5% stock dividend -- 3,390 -- -- (3,390) --
Cash paid for fractional shares -- (4) -- -- -- (4)
Cumulative effect adjustment
adoption of EITF 06-4 -- -- -- -- (227) (227)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2008 $ 91 $ 64,344 $ 360 $ (1,328) $ 5,860 $ 69,327
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
3
CENTRAL JERSEY BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Nine months ended
September 30,
2008 2007
----------------------
Cash flows from operating activities:
Net income $ 2,317 $ 104
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in cash surrender value of life insurance (89) (88)
Deferred taxes 136 286
Provision for loan losses 399 165
Depreciation and amortization 485 541
Net discount accretion on held-to-maturity securities (11) (8)
Net (discount accretion) premium amortization on available-for-sale securities (24) 43
Core deposit intangible amortization 362 414
Impairment on available-for-sale securities -- 1,957
Abandonment of leasehold improvements -- 137
Gain on sale of securities available-for-sale (402) (87)
Gain on the sale of loans held-for-sale (348) (47)
Originations of loans held-for-sale (2,795) (16,935)
Proceeds from the sale of loans held-for-sale 3,464 16,680
Decrease in accrued interest receivable 113 440
Increase in other assets (3,024) (311)
(Decrease) increase in accrued expenses and other liabilities (217) 218
--------- ---------
Net cash provided by operating activities 366 3,509
--------- ---------
Cash flows from investing activities:
Maturities of and paydowns on investment securities held-to-maturity 7,404 3,116
Maturities, sales of and paydowns on investment securities available-for-sale 54,137 93,747
Purchase of investment securities available-for-sale (75,896) (108,975)
Purchase of investment securities held-to-maturity (4,982) --
Decrease in due from broker -- 3,527
Net (increase) decrease in loans (31,523) 7,865
Purchases of premises and equipment, net (1,790) (89)
--------- ---------
Net cash used in investment activities (52,650) (809)
--------- ---------
Cash flows from financing activities:
Net proceeds from stock options exercised 171 289
Net increase (decrease) in non-interest bearing deposits 5,694 (6,835)
Net decrease in interest bearing deposits (2,688) (14,426)
Net increase in other borrowings 7,918 9,976
Proceeds from Federal Home Loan Bank advances 40,022 --
Purchase of outstanding stock; placed in treasury (1,328) --
Cash paid for fractional shares (4) (4)
--------- ---------
Net cash provided by (used in) financing activities 49,785 (11,000)
--------- ---------
Decrease in cash and cash equivalents (2,499) (8,300)
Cash and cash equivalents at beginning of period 14,877 37,796
--------- ---------
Cash and cash equivalents at end of period $ 12,378 $ 29,496
========= =========
Cash paid during the period for:
Interest $ 8,162 $ 9,620
========= =========
Income taxes $ 1,755 $ 1,270
========= =========
See accompanying notes to unaudited consolidated financial statements.
4
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Note 1. Basis of Presentation
- ------------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Central Jersey Bancorp and its wholly-owned subsidiary, Central
Jersey Bank, N.A., which are sometimes collectively referred to herein as the
"Company."
The interim unaudited consolidated financial statements reflect all normal and
recurring adjustments that are, in the opinion of management, considered
necessary for a fair presentation of the financial condition and results of
operations for the periods presented. The results of operations for the three
and nine months ended September 30, 2008 are not necessarily indicative of the
results of operations that may be expected for all of 2008.
Certain information and note disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting
principles ("GAAP") have been condensed or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC").
Earnings per share, average shares outstanding, stock options, stock
appreciation rights and related amounts set forth herein for all periods
presented have been adjusted to reflect the 5% stock dividends, paid on July 1,
2008 and July 2, 2007.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
Central Jersey Bancorp's Annual Report on Form 10-K for the year ended December
31, 2007.
Certain prior period amounts have been reclassified to correspond with the
current period presentation.
On January 1, 2008, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 157, Fair Value Measurements. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in GAAP and expands
disclosures about fair value measurements (see Note 8 - Fair Value
Measurements).
On January 1, 2008, the Company changed its accounting policy and recognized a
cumulative-effect adjustment to retained earnings totaling $227,000. This
adjustment, related to accounting for certain endorsements split-dollar
insurance arrangements, was made in accordance with Emerging Issues Task Force
("EITF") Issue No. 06-4, Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (see
Note 9 - Post Retirement Benefits).
5
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Note 2. Earnings Per Share
- ---------------------------
The following tables reconcile shares outstanding for basic and diluted earnings
per share for the three and nine months ended September 30, 2008 and 2007:
Three months ended September 30, 2008
Income Average shares Per share
(dollars in thousands, except for per share data) (numerator) (denominator) amount
------------------------------------------
Basic EPS
Income available to common shareholders $ 1,025 9,075 $ 0.11
Effect of dilutive securities:
Stock options -- 430 --
------------------------------------------
Diluted EPS
Income available to common shareholders, plus
assumed exercise of options $ 1,025 9,505 $ 0.11
==========================================
Nine months ended September 30, 2008
Income Average shares Per share
(dollars in thousands, except for per share data) (numerator) (denominator) amount
------------------------------------------
Basic EPS
Income available to common shareholders $ 2,317 9,119 $ 0.25
Effect of dilutive securities:
Stock options -- 426 --
------------------------------------------
Diluted EPS
Income available to common shareholders, plus
assumed exercise of options $ 2,317 9,545 $ 0.24
==========================================
6
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Three months ended September 30, 2007
Income Average shares Per share
(dollars in thousands, except for per share data) (numerator) (denominator) amount
------------------------------------------
Basic EPS
Income available to common shareholders $ 631 9,182 $ 0.07
Effect of dilutive securities:
Stock options -- 431 --
------------------------------------------
Diluted EPS
Income available to common shareholders, plus
assumed exercise of options $ 631 9,613 $ 0.07
==========================================
Nine months ended September 30, 2007
Income Average shares Per share
(dollars in thousands, except for per share data) (numerator) (denominator) amount
------------------------------------------
Basic EPS
Income available to common shareholders $ 104 9,134 $ 0.01
Effect of dilutive securities:
Stock options -- 453 --
------------------------------------------
Diluted EPS
Income available to common shareholders, plus
assumed exercise of options $ 104 9,587 $ 0.01
==========================================
For the three months ended September 30, 2008, dilutive securities relating to
the Company's employee and director stock option plans totaled 429,821, which,
when added to the average basic shares outstanding of 9,074,977, resulted in
average diluted shares outstanding of 9,504,798. For the nine months ended
September 30, 2008, dilutive securities relating to the Company's employee and
director stock option plans totaled 425,888, which, when added to the average
basic shares outstanding of 9,118,884, resulted in average diluted shares
outstanding of 9,554,772. For the three months ended September 30, 2007,
dilutive securities relating to the Company's employee and director stock option
plans totaled 430,957, which, when added to the average basic shares outstanding
of 9,181,602 resulted in average diluted shares outstanding of 9,612,559. For
the nine months ended September 30, 2007, dilutive securities relating to the
Company's employee and director stock option plans totaled 452,758, which, when
added to the average basic shares outstanding of 9,134,348, resulted in average
diluted shares outstanding of 9,587,106.
7
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Stock Appreciation Rights
On January 31, 2006, the Company granted under its 2005 Equity Incentive Plan,
173,646 Stock Appreciation Rights ("SARS") (98,389 were granted to employees and
75,257 were granted to directors), each with an exercise price of $9.40. 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
September 30, 2008 using the Black-Scholes option pricing model with the
following weighted-average assumptions used: stock price $7.50; dividend yield
of 0%; expected volatility of 46.50%; risk free interest rate of 2.98%; and
expected lives of seven years. These SARS had a fair value of approximately
$3.42 per share at September 30, 2008. The Company recorded no share based
payment expense for the three months ended September 30, 2008 and a $68,700
(pre-tax) share based payment expense for the nine months ended September 30,
2008, related to the granting of SARS. As of September 30, 2008, total unvested
compensation expense associated with the outstanding SARS was approximately
$156,000 (pre-tax), which will vest over 16 months.
A summary of the status of the Company's SARS as of and for the nine months
ended September 30, 2008 is presented below:
As of and for the nine months
ended
September 30, 2008
---------------------------------------------------------------
Weighted
average
exercise
SARS price
---------------------------------------------------------------
Outstanding at beginning of year 167,857 $ 9.40
Granted -- --
Forfeited (31,258) $ 9.40
Exercised -- --
===============================================================
Outstanding at period end 136,599 $ 9.40
===============================================================
SARS exercisable at period end 68,299 $ 9.40
Weighted average fair value of
SARS granted $ 3.42
Unvested SARS at period end 68,300
Weighted average fair value of
unvested SARS $ 233,586
===============================================================
8
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Stock Option Plan
In 2000, the Company established its Employee and Director Stock Option Plan
(the "Plan"). The Plan currently provides for the granting of stock options to
purchase in aggregate up to 1,410,349 shares of the Company's common stock,
subject to adjustment for certain dilutive events such as stock distributions.
During the nine months ended September 30, 2008, no options were granted. As a
result of the January 1, 2005 combination with Allaire Community Bank, all
outstanding options granted under the Plan became fully vested. In addition,
options granted under the Allaire Community Bank Employee and Director Stock
Option Plans (the "Allaire Plans") to purchase 841,814 shares of Allaire
Community Bank common stock were converted into options to purchase 841,814
shares of Central Jersey Bancorp common stock, all of which are fully vested.
The Company does not anticipate granting any additional stock options under the
Plan or Allaire Plans.
A summary of the status of the Company's stock options as of and for the nine
months ended September 30, 2008 is presented below:
As of and for the nine months
ended September 30, 2008
---------------------------------------------------------------
Weighted
average
exercise
Shares price
---------------------------------------------------------------
Outstanding at beginning of year 1,410,349 $ 4.77
Granted -- --
Forfeited (16,962) $ 9.88
Exercised (29,699) $ 4.41
================================================================
Outstanding at period end 1,363,688 $ 4.72
================================================================
Options exercisable at period end 1,363,688 $ 4.72
Weighted average fair value of
options granted n/a
================================================================
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
9
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
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
nine months ended September 30, 2008 or years ended December 31, 2007 and 2006,
as no stock options were granted during 2008, 2007 or 2006 and all stock options
were fully vested prior to January 1, 2006.
Note 3. Loans Receivable, Net and Loans Held-for-Sale
- ------------------------------------------------------
Loans receivable, net and loans held-for-sale at September 30, 2008 and December
31, 2007, consisted of the following (in thousands):
September 30, December 31,
Loan Type 2008 2007
- --------- ------------ ------------
Real estate loans - commercial $ 259,685 $ 240,256
Home equity and second mortgages 46,933 37,832
Commercial and industrial loans 35,225 29,371
1-4 family real estate loans 2,692 3,822
Consumer loans 2,211 3,654
------------ ------------
Total loans $ 346,746 $ 314,935
Deferred origination costs, net 297 238
Allowance for loan losses (3,817) (3,408)
------------ ------------
Loans receivable, net $ 343,226 $ 311,765
============ ============
Loans held-for-sale $ -- $ 658
============ ============
Non-Performing Loans
Loans are considered to be non-performing if they (a) are on a non-accrual
basis, (b) are past due ninety days or more and still accruing interest, or (c)
have been renegotiated to provide a reduction or deferral of interest because of
a weakening in the financial position of the borrowers. A loan, which is past
due ninety days or more and still accruing interest, remains on accrual status
only when it is both adequately secured as to principal and is in the process of
collection. The Company had non-accrual loans totaling $924,000 at September 30,
2008, as compared to $214,000 at December 31, 2007. Non-performing loans at
September 30, 2008 included two commercial loans; one loan with a balance of
$86,000, which was placed on non-accrual status as of June 30, 2006 with a risk
rating of "substandard," and one loan with a balance of $838,000, which was
placed on non-accrual status as of May 2008 with a risk rating of "substandard."
It should be noted that the second loan had a balance of $1.8 million when it
was placed on non-accrual status but a principal payment of $1.0 million was
received in September 2008, which has reduced the loan balance to $838,000.
These loans were considered impaired and were evaluated in
10
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan.
After evaluation, a specific reserve of approximately $15,000 was required for
one of the impaired loans.
The allowance for loan losses, which began the year at $3.41 million, or 1.08%
of total loans, increased to $3.82 million at September 30, 2008, or 1.10% of
total loans. There were no loan charge-offs during the three and nine months
ended September 30, 2008, as compared to $4,000 for both periods in 2007. Loan
loss recoveries totaled $4,000 and $10,000, respectively, during the three and
nine months ended September 30, 2008, as compared to $3,000 and $99,000,
respectively, for the same periods in 2007.
Note 4. Deposits
- -----------------
The major types of deposits at September 30, 2008 and December 31, 2007 were as
follows (in thousands):
September 30, December 31,
Deposit Type 2008 2007
- ------------ ------------ ------------
Demand deposits, non-interest bearing $ 79,649 $ 73,955
Savings, N.O.W. and money market accounts 173,982 187,354
Certificates of deposit of less than $100 78,973 80,587
Certificates of deposit of $100 or more 73,692 61,394
------------ ------------
Total $ 406,296 $ 403,290
============ ============
Note 5. Borrowings
- -------------------
Borrowed funds at September 30, 2008 and December 31, 2007 are summarized as
follows (in thousands):
September 30, December 31,
2008 2007
-----------------------------
Borrowings $ 72,504 $ 24,564
----------------------------------------------------------
Total $ 72,504 $ 24,564
==========================================================
Borrowings were $72.5 million at September 30, 2008, as compared to $24.6
million at December 31, 2007. 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. As of September 30, 2008,
borrowings included $32.5 million in bank sweep funds, $18.8 million in Federal
Home Loan Bank overnight advances, $20.0 million in Federal Home Loan Bank
callable advances and $1.2 million in Federal Home Loan Bank fixed rate
advances. These borrowings were used to fund interest-earning assets. Central
Jersey Bank, N.A. uses investment securities to pledge as collateral for
repurchase agreements. At September
11
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
30, 2008 and December 31, 2007, Central Jersey Bank, N.A. had unused lines of
credit with the FHLB of $79.8 million and $8.9 million, respectively.
At September 30, 2008, Central Jersey Bank, N.A. had outstanding Federal Home
Loan Bank callable advances as follows (in thousands):
Date Amount Rate Term Call Feature
------------------------------------------------------------------
1/24/2008 $ 10,000 2.710% 10 n/c 2 One Time
2/01/2008 5,000 2.380% 5 n/c 1 One Time
2/01/2008 5,000 2.903% 7 n/c 3 One Time
-------------------
$ 20,000 2.676%
===================
At September 30, 2008, Central Jersey Bank, N.A. had the following outstanding
Federal Home Loan Bank fixed rate advance (in thousands):
Date Amount Rate Term Maturity
----------------------------------------------------------------
5/28/2008 $ 1,223 4.940% 13 years 5/28/2021
Note 6. 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.
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 September 30, 2008, $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 help ensure that Central Jersey Bank, N.A. maintains the
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
12
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
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 September 30, 2008, 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.
Note 7. Income Taxes
- ---------------------
The Company recorded an income tax expense of $536,000 on income before taxes of
$1.6 million for the three months ended September 30, 2008, resulting in an
effective tax rate of 34.34%, as compared to an income tax expense of $331,000
on income before taxes of $962,000 for the three months ended September 30,
2007, resulting in an effective tax rate of 34.41%.
The Company recorded an income tax expense of $1.2 million on income before
taxes of $3.5 million for the nine months ended September 30, 2008, resulting in
an effective tax rate of 33.91%, as compared to an income tax expense of
$707,000 on income before taxes of $811,000 for the nine months ended September
30, 2007, resulting in an effective tax rate of 87.18%. The lower than
anticipated income tax rate for the nine months ended September 30, 2008 was due
to the tax treatment applied to gains on the sale of investment securities by
CJB Investment Company, a wholly-owned subsidiary of Central Jersey Bank, N.A.
Since the gains were realized in CJB Investment Company, the gains are
considered capital gains and are permitted to be offset against the remaining
capital loss carry-forwards resulting from the 2007 balance sheet restructuring
initiative.
The Company's effective tax rate of 87.18% for the nine months ended September
30, 2007, resulted from the fact that the majority of the investment securities
for which the $1.96 million other-than-temporary impairment was recorded were
held by CJB Investment Company. A full valuation allowance was recorded for 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 did not, at the time,
have the ability to generate capital gains and utilize the capital losses and
thus a full valuation allowance was required for the investment company
available-for-sale securities which were identified as other-than-temporarily
impaired.
Note 8. Fair Value Measurements
- --------------------------------
Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157,
Fair Value Measurements, for financial assets and financial liabilities. In
accordance with the Financial Accounting Standards Board (the "FASB") Staff
Position No. 157-2, Effective Date of FASB Statement No. 157, the Company will
delay application of SFAS No. 157 for non-financial assets and non-financial
liabilities until January 1, 2009. SFAS No. 157 defines fair value, establishes
a framework for measuring fair value in GAAP and expands disclosures about fair
value
13
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
measurements. The adoption of SFAS No. 157 for financial assets and financial
liabilities did not have a significant impact on the Company's consolidated
financial condition or results of operations. The adoption of SFAS No. 157 for
non-financial assets and non-financial liabilities is not expected to have a
significant impact on the Company's consolidated financial condition or results
of operations.
Beginning January 1, 2008, financial assets and financial liabilities recorded
at fair value in the consolidated statement of financial condition are
categorized based upon the level of judgment associated with the inputs used to
measure their fair value. SFAS No. 157 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities and the lowest priority to
unobservable inputs. A financial instrument's level within the fair value
hierarchy is based on the lowest level of input that is significant to the fair
value measurement. The three levels of the fair value hierarchy under SFAS No.
157 are described below:
Basis of Fair Value Measurement
- -------------------------------
Level I Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets or
liabilities;
Level II Quoted prices in markets that are not active, or inputs that are
observable either directly or indirectly, for substantially the
full term of the asset or liability;
Level III Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable (i.e.,
supported by little or no market activity).
A description of the valuation methodologies used for instruments measured at
fair value, as well as the general classification of such instruments pursuant
to the valuation hierarchy, is set forth below. These valuation methodologies
were applied to all of the Company's financial assets and financial liabilities
carried at fair value, effective January 1, 2008.
In general, fair value is based upon quoted market prices, where available. If
such quoted market prices are not available, fair value is based upon internally
developed models that primarily use, as inputs, observable market-based
parameters. Valuation adjustments may be made to ensure that financial
instruments are recorded at fair value. These adjustments may include amounts to
reflect counterparty credit quality, the Company's creditworthiness, among other
things, as well as unobservable parameters. Any such valuation adjustments are
applied consistently over time.
Investment securities available-for-sale - Investment securities classified as
available-for-sale are reported at fair value utilizing Level II inputs. For
these investment securities, the Company obtains fair value measurements from an
independent pricing service. The fair value measurements consider observable
data that may include dealer quotes, market spreads, cash flows, the U.S.
Treasury yield curve, live trading levels, trade execution data, market
consensus
14
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
prepayment speeds, credit information and the investment security's terms and
conditions, among other things.
Loans held-for-sale - The fair value of loans held-for-sale is determined, when
possible, using quoted secondary-market prices. If no such quoted price exists,
the fair value of a loan is determined using quoted prices for a similar asset
or assets, adjusted for the specific attributes of that loan.
Impaired loans - Certain impaired loans are reported at the fair value of the
underlying collateral if repayment is expected solely from the collateral.
Collateral values are estimated using Level III inputs based on customized net
present value discounting criteria.
Servicing rights - The fair value of mortgage servicing rights is based on a
valuation model that calculates the present value of estimated net servicing
income. The valuation model incorporates assumptions that market participants
would use in estimating future net servicing income. The Company is able to
compare the valuation model inputs and results to widely available published
industry data for reasonableness.
The following table summarizes financial assets measured fair value on a
recurring basis as of September 30, 2008, segregated by the level of valuation
inputs within the fair value hierarchy utilized to measure fair value (in
thousands):
Total
Level I Level II Level III fair value
-------------------------------------------------
Investment securities
available-for-sale $ -- $ 136,521 $ -- $ 136,521
Impaired loans -- -- 974 974
Servicing rights -- -- 134 134
-------------------------------------------------
Total assets $ -- $ 136,521 $ 1,108 $ 137,629
Certain financial assets and financial liabilities are measured at fair value on
a nonrecurring basis; that is, the instruments are not measured at fair value on
an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment). Financial
assets and financial liabilities measured at fair value on a non-recurring basis
were not significant at September 30, 2008.
Certain non-financial assets and non-financial liabilities measured at fair
value on a recurring basis include reporting units measured at fair value in the
first step of a goodwill impairment test. Certain non-financial assets measured
at fair value on a non-recurring basis include non-financial assets and
non-financial liabilities measured at fair value in the second step of a
goodwill impairment test, as well as intangible assets and other non-financial,
long-lived assets measured at fair value for impairment assessment. As stated
above, SFAS 157 will be applicable to these fair value measurements beginning
January 1, 2009.
15
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Note 9. Post Retirement Benefits
- ---------------------------------
In September 2006, the 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. 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.
During the nine months ended September 30, 2008, Central Jersey Bancorp
recognized and recorded a deferred compensation liability of $227,000 for future
benefits related to an endorsement split-dollar life insurance arrangement
subject to EITF Issue No. 06-4.
Note 10. Recent Accounting Pronouncements
- ------------------------------------------
In November 2007, the SEC issued Staff Accounting Bulletin ("SAB") No. 109,
Written Loan Commitments Recorded at Fair Value through Earnings. This SAB
expresses the views of the Staff regarding written loan commitments that are
accounted for at fair value through earnings under GAAP. To make the Staff's
views consistent with current authoritative accounting guidance, the SAB revises
and rescinds portions of SAB No. 105, Application of Accounting Principles to
Loan Commitments. Specifically, the SAB revises the SEC Staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the Staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The Staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
implementation of this SAB did not have a material impact on the Company's
consolidated financial condition or results of operations.
In December 2007, FASB Statement No. 141(R), Business Combinations, was issued.
This Statement establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The Statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. The guidance will become
effective as of the
16
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
beginning of a company's fiscal year beginning after December 15, 2008. This new
pronouncement will impact the Company's accounting for business combinations
completed beginning January 1, 2009.
In December 2007, FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51, was issued. This
Statement establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective as of the beginning of a company's fiscal year
beginning after December 15, 2008. The Company is currently evaluating the
potential impact this new pronouncement will have on its consolidated financial
condition and results of operations.
In February 2008, the FASB issued a FASB Staff Position ("FSP") FAS 140-3,
Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions. This FSP addresses the issue of whether or not these transactions
should be viewed as two separate transactions or as one "linked" transaction.
The FSP includes a "rebuttable presumption" that presumes linkage of the two
transactions unless the presumption can be overcome by meeting certain criteria.
The FSP will be effective for fiscal years beginning after November 15, 2008 and
will apply only to original transfers made after that date; early adoption will
not be allowed. The Company is currently evaluating the potential impact this
new pronouncement will have on its consolidated financial condition and results
of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133,
(Statement 161). SFAS No. 161 requires entities that utilize derivative
instruments to provide qualitative disclosures about their objectives and
strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within derivatives. SFAS No.
161 also requires entities to disclose additional information about the amounts
and location of derivatives located within the financial statements, how the
provisions of SFAS No. 133 has been applied, and the impact that hedges have on
an entity's financial position, financial performance, and cash flows. SFAS No.
161 is effective for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The Company is currently evaluating
the potential impact this new pronouncement will have on its consolidated
financial condition and results of operations.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. The hierarchy of authoritative accounting
guidance is not expected to change current practice but is expected to
facilitate the FASB's plan to designate as authoritative its forthcoming
codification of accounting standards. This Statement is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board's
("PCAOB") related amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles, to remove the GAAP
hierarchy from its auditing standards. The hierarchical guidance provided by
SFAS No. 162 is not expected to have a significant impact on the Company's
consolidated financial condition or results of operations.
17
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB 14-1 requires issuers of convertible debt that may be
settled wholly or partly in cash to account for the debt and equity components
separately. The FSP is effective for financial statements issued for fiscal
years beginning after December 15, 2008 and interim periods within those years,
and must be applied retrospectively to all periods presented. Early adoption is
prohibited. The Company is currently evaluating the potential impact this new
pronouncement will have on its consolidated financial condition and results of
operations.
In June 2008, the EITF of the FASB discussed public comments received on EITF
Issue No. 08-3, Accounting by Lessees for Nonrefundable Maintenance Deposits.
The Task Force reached a consensus that lessees should account for nonrefundable
maintenance deposits as deposit assets if it is probable that maintenance
activities will occur and the deposit is therefore realizable. Amounts on
deposit that are not probable of being used to fund future maintenance
activities should be charged to expense. The consensus is effective for fiscal
years beginning after December 15, 2008, and should be initially applied by
recording a cumulative-effect adjustment to opening retained earnings in the
period of adoption. Early application is not permitted. The Company is currently
evaluating the potential impact this new pronouncement will have on its
consolidated financial condition and results of operations.
In September 2008, the FASB issued FSP 133-1 and FIN 45-4, Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161 (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN 45-4 amends
and enhances disclosure requirements for sellers of credit derivatives and
financial guarantees. It also clarifies that the disclosure requirements of SFAS
No. 161 are effective for quarterly periods beginning after November 15, 2008,
and fiscal years that include those periods. FSP 133-1 and FIN 45-4 is effective
for reporting periods (annual or interim) ending after November 15, 2008. The
implementation of this standard will not have a material impact on the Company's
consolidated financial condition or results of operations.
In September 2008, the FASB ratified EITF Issue No. 08-5, Issuer's Accounting
for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement
(EITF 08-5). EITF 08-5 provides guidance for measuring liabilities issued with
an attached third-party credit enhancement (such as a guarantee). It clarifies
that the issuer of a liability with a third-party credit enhancement should not
include the effect of the credit enhancement in the fair value measurement of
the liability. EITF 08-5 is effective for the first reporting period beginning
after December 15, 2008. The implementation of this standard will not have a
material impact on the Company's consolidated financial condition or results of
operations.
In October 2008, the FASB issued FSP SFAS No. 157-3, Determining the Fair Value
of a Financial Asset When The Market for That Asset Is Not Active (FSP 157-3),
to clarify the application of the provisions of SFAS 157 in an inactive market
and how an entity would determine fair value in an inactive market. FSP 157-3 is
effective immediately and applies to our September 30, 2008 financial
statements. The application of the provisions of FSP 157-3 did
18
Central Jersey Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
not materially affect the Company's consolidated financial condition or results
of operations as of and for the three and nine months ended September 30, 2008.
19
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
General
The following discussion and analysis is intended to provide information about
the Company's financial condition as of September 30, 2008 and results of
operations for the three and nine months ended September 30, 2008 and 2007. The
following information should be read in conjunction with the Company's unaudited
consolidated financial statements for the three and nine months ended September
30, 2008 and 2007, including the related notes thereto, contained elsewhere in
this document.
Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as disclosures found elsewhere in this quarterly report on
Form 10-Q, are based upon the Company's unaudited consolidated financial
statements, which have been prepared in accordance with GAAP. The preparation of
these unaudited consolidated financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. Note 1 to Central Jersey Bancorp's audited consolidated
financial statements for the year ended December 31, 2007, included with Central
Jersey Bancorp's annual report on Form 10-K for the year ended December 31,
2007, contains a summary of the Company's significant accounting policies.
Management believes the Company's policy with respect to the methodology for the
determination of the allowance for loan losses and the impairment of investment
securities requires management to make difficult and subjective judgments that
often require assumptions or estimates about uncertain matters. Changes in these
judgments, assumptions or estimates could materially impact results of
operations. This critical policy and its application are periodically reviewed
with Central Jersey Bancorp's Audit Committee and its Board of Directors.
Additional critical accounting policies relate to judgments about other asset
impairments, including goodwill, investment securities, servicing rights and
deferred tax assets. Central Jersey Bancorp performs an annual analysis to test
the aggregate balance of goodwill for impairment in accordance with SFAS No.
142, Goodwill and Other Intangible Assets. For purposes of the goodwill
impairment evaluation, Central Jersey Bancorp is identified as the reporting
unit. The fair value of goodwill is determined using standard valuation
methodologies similar to those used to determine the fair value of goodwill in a
business combination, 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.
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 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,
20
adjusted for amortization of premiums and accretion of discounts over the
estimated remaining lives of the investment securities utilizing the level-yield
method. Investment 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. Investment securities available-for-sale include
investment 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. Investment securities
available-for-sale are carried at estimated fair value. Unrealized holding gains
and losses on such investment securities available-for-sale are excluded from
earnings and reported as a separate component of shareholders' equity. Gains and
losses on sales of investment 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 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. After evaluation, as of September
30, 2008, Central Jersey Bank, N.A. noted no other-than-temporary impairment
issues. The overall investment security portfolio is in an unrealized gain
position and does not reflect any significant individual investment security
losses.
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 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
21
and interest and reasons for doubtful collection no longer exist.
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 ninety 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
one hundred twenty 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 the Interagency Policy Statement on
the Allowance for Loan and Lease Losses issued jointly by the federal banking
agencies on December 13, 2006 (OCC Bulletin 2006-47) and 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 as of September 30, 2008.
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.
22
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 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.
Intangible assets consist of goodwill, core deposit premiums and servicing
rights. 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.
The Company originates SBA loans and typically sells up to 75% of the
outstanding loan balance to investors, with servicing retained. Servicing rights
fees, which are usually based on a percentage of the outstanding principal
balance of the loan, are recorded for servicing functions. The Company accounts
for its transfers and servicing of financial assets in accordance with SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The Company records servicing rights based on
the fair values at the date of sale.
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 premiums 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.
On January 7, 2008, the Company announced a common stock repurchase program. As
authorized by Central Jersey Bancorp's Board of Directors, Central Jersey
Bancorp may repurchase up to 5.7%, or 525,000 shares, of the 9,183,290 shares of
common stock outstanding at the time the repurchase program was announced.
Repurchases may be made from time to time, in the open market, in unsolicited
negotiated transactions or in such other manner deemed appropriate by
management, at prices not exceeding prevailing market prices, subject to
availability of the shares, over twenty-four months ending December 31, 2009, or
such shorter or longer period of time as Central Jersey Bancorp may determine.
The acquired shares are to be
23
held in treasury to be used for general corporate purposes. The Company's
repurchase activities take into account SEC safe harbor rules and guidance for
issuer repurchases. During the nine months ended September 30, 2008, the Company
repurchased 174,903 shares of its common stock at an average price of $7.56 per
share.
Overview
Central Jersey Bancorp reported net income of $1.03 million for the three months
ended September 30, 2008, a $394,000, or 62.4%, increase over the $631,000 of
net income reported for the same period in 2007. Basic and diluted earnings per
share for the three months ended September 30, 2008 were $0.11, as compared to
basic and diluted earnings per share of $0.07 for the same period in 2007. The
reported net income of $1.03 million was the most ever recorded by Central
Jersey Bancorp for a quarter. The significant increase in net income is
primarily attributable to a number of key factors including: (a) net interest
margin expansion, which is the result of the 2007 balance sheet restructuring
initiative, lower funding costs and incremental growth in interest-earning
assets; (b) the realization of gains in the available-for-sale investment
securities portfolio; and (c) cost savings initiatives implemented in the latter
part of 2007.
For the nine months ended September 30, 2008, Central Jersey Bancorp reported
net income of $2.3 million, as compared to net income of $104,000 for the same
period in 2007. Basic and diluted earnings per share for the nine months ended
September 30, 2008 were $0.25 and $0.24, respectively, as compared to basic and
diluted earnings per share of $0.01 for the same period in 2007. The modest net
income reported for the nine months ended September 30, 2007 was due to the
balance sheet restructuring initiative announced on April 30, 2007, which
resulted in a one-time pre-tax charge of approximately $1.96 million and was
reflected in Central Jersey Bancorp's first quarter 2007 unaudited consolidated
financial statements.
Total assets of $554.9 million at September 30, 2008 were comprised primarily of
$343.2 million in net loans, $151.5 million in investment securities and $12.4
million in cash and cash equivalents, as compared to total assets of $503.5
million at December 31, 2007, which primarily consisted of $311.8 million in net
loans, $132.3 million in investment securities, $658,000 in residential loans
held-for-sale and $14.9 million in cash and cash equivalents. Total assets at
September 30, 2008 were funded primarily through deposits totaling $406.3
million and other borrowings totaling $72.5 million, as compared to $403.3
million and $24.6 million, respectively, at December 31, 2007.
At September 30, 2008 non-accrual loans totaled $924,000, as compared to
$214,000 at December 31, 2007. The increase in non-performing loans was due
primarily to one commercial loan totaling $838,000 which was placed on
non-accrual status in May 2008. It should be noted that this loan had a balance
of $1.8 million when it was placed on non-accrual status but a principal payment
of $1.0 million was received in September 2008, which has reduced the loan
balance to $838,000. There were no loan charge-offs during the three and nine
months ended September 30, 2008, as compared to $4,000 for both periods in 2007.
Recoveries, which are payments received on loans previously charged-off, totaled
$4,000 and $10,000, respectively, during the three and nine months ended
September 30, 2008, as compared to $3,000 and $99,000, respectively, for the
same periods in 2007.
24
Results of Operations
General
Central Jersey Bancorp's principal source of revenue is derived from its bank
subsidiary's net interest income, which is the difference between interest
income on earning assets and interest expense on deposits and borrowed funds.
Interest-earning assets consist principally of loans, investment 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 its bank
subsidiary's provision for loan losses, other-than-temporary impairment of
investment securities, other income and other expenses. Other income consists
primarily of service charges and fees. Other expenses consist primarily of
salaries and employee benefits, occupancy costs and other operating related
expenses.
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 Three Months Ended September 30, 2008 and 2007
Net Interest Income
Net interest income was $5.0 million for the three months ended September 30,
2008, as compared to $4.3 million for the same period in 2007. Net interest
income for the three months ended September 30, 2008 was comprised of $5.4
million of interest and fees on loans, $2.0 million of interest on securities,
and $60,000 of interest on federal funds sold and due from banks, less interest
expense on deposits of $2.0 million, interest expense on other borrowed funds of
$429,000 and interest expense on subordinated debentures of $78,000. The net
interest margin for the three months ended September 30, 2008 was 3.99%, as
compared to 3.62% for the same period in 2007.
Interest and dividend income was $7.4 million for the three months ended
September 30, 2008, as compared to $7.8 million for the same period in 2007.
This represents a decrease of $363,000, or 4.7%. The average yield on
interest-earning assets decreased to 5.92% for the three months ended September
30, 2008, from 6.59% for the same period in 2007. The decrease in interest and
dividend income and the average yield on interest-earning assets was primarily
due to the over 300 basis point reduction in the general level of short term
interest rates and the 325 basis point reduction in the Prime Rate of interest
which occurred between September 2007 and April 2008.
25
Average interest-earning assets, which were 91.3% of average total assets,
totaled $494.4 million for the three months ended September 30, 2008, and were
comprised of $337.5 million in loans, $151.5 million in investment securities,
$688,000 in federal funds sold and $4.7 million in other interest bearing
deposits.
Interest expense was $2.5 million for the three months ended September 30, 2008,
as compared to $3.5 million for the same period in 2007. This represents a
decrease of $1.0 million, or 30.3%. The decrease was due primarily to average
cost of deposits and interest bearing liabilities which decreased to an average
cost of 2.08% for the three months ended September 30, 2008 from an average cost
of 3.15% for the same period in 2007, as a result of the previously-mentioned
lower interest rate environment. Average interest-bearing deposits totaled
$313.6 million for the three months ended September 30, 2008, as compared to
$335.0 million for the same period in 2007, a decrease of $21.4 million, or
6.4%, and were comprised of $93.6 million in interest-bearing checking and money
market deposits, $69.7 million in savings deposits and $150.3 million in time
deposits. Interest expense associated with borrowings and subordinated
debentures totaled $429,000 and $78,000, respectively, for the three months
ended September 30, 2008, as compared to $196,000 and $111,000, respectively,
for the same period in 2007. Borrowings for the three months ended September 30,
2008 averaged $74.4 million, as compared to $23.7 million for the same period in
2007. The increase was due to growth in the bank subsidiary's sweep account
product for business customers and $40.0 million in Federal Home Loan Bank
advances. The Federal Home Loan Bank advances were used to fund loan growth and
the purchase of mortgage-backed securities during the period.
Provision for Loan Losses
For the three months ended September 30, 2008, the provision for loan losses was
$252,000, as compared to no provision for the same period in 2007. The provision
for loan losses recorded for each period is representative of the loan growth
that occurred during the period and the risk profile of the loan portfolio.
Included in the provision for loan losses for the three months ended September
30, 2008 was a $15,000 specific reserve for an impaired loan. This loan was
evaluated in accordance with SFAS No. 114. There were no loan charge-offs during
the three months ended September 30, 2008, as compared to $4,000 for the same
period in 2007. Recoveries totaled $4,000 during the three months ended
September 30, 2008, as compared to $3,000 for the same period in 2007.
Non-Interest Income
Non-interest income, which consists of service charges on deposit accounts,
gains on the sale of investment securities available-for-sale, gains on the sale
of loans held-for-sale, income from bank owned life insurance and the impairment
on available-for-sale investment securities, was $844,000 for the three months
ended September 30, 2008, as compared to $417,000 for the same period in 2007.
Gains on the sale of investment securities available-for-sale totaled $340,000
for the three months ended September 30, 2008, as compared to no gains for the
same period in 2007. The significant increase in gains on the sale of investment
securities available-for-sale is the result of prudent balance sheet management.
Gains on the sale of loans held-for-sale were $81,000 for the three months ended
September 30, 2008, as compared to $14,000 for the three months ended September
30, 2007. The increase in gains on the sale of loans held-for-sale was due to
fees realized from the sale and servicing of SBA loans. The servicing rights
fees recorded in conjunction with SBA loans sold were $28,000 for the three
months ended September 30, 2008, as
26
compared to no servicing rights fees for the three months ended September 30,
2007. The origination of SBA loans, which are generally sold with servicing
retained, commenced in the fourth quarter of 2007, with the initial SBA loan
sales occurring during the first quarter of 2008.
Non-Interest Expense
Non-interest expense was $4.0 million for the three months ended September 30,
2008, as compared to $3.7 million for the same period in 2007. Non-interest
expense generally includes costs associated with employee salaries and benefits,
occupancy expenses, data processing fees, core deposit intangible amortization,
and other operating expenses.
The table below presents non-interest expense, by major category, for the three
months ended September 30, 2008 and 2007 (in thousands):
Three months ended
September 30,
Non-Interest Expense 2008 2007
-------------------- -------- --------
Salaries and employee benefits $ 1,975 $ 1,785
Net occupancy expenses 478 429
Data processing fees 272 219
Outside service fees 200 225
Premises and equipment depreciation 159 167
Audit and tax fees 145 90
Core deposit intangible amortization 121 138
Printing, stationery and supplies 71 56
Legal expenses 55 58
Advertising and marketing expenses 52 41
Abandonment of leasehold improvements -- 137
Other operating expenses 463 358
-------- --------
Total $ 3,991 $ 3,703
======== ========
Income Tax Expense
The Company recorded an income tax expense of $536,000 on income before taxes of
$1.6 million for the three months ended September 30, 2008, resulting in an
effective tax rate of 34.34%, as compared to an income tax expense of $331,000
on income before taxes of $962,000 for the three months ended September 30,
2007, resulting in an effective tax rate of 34.41%. The lower than anticipated
income tax rate for the three months ended September 30, 2008 was due to the tax
treatment applied to gains on the sale of investment securities. Since the gains
were realized in CJB Investment Company, the gains are considered capital gains
and permitted to be offset against the remaining capital loss carry-forwards
resulting from the 2007 balance sheet restructuring initiative.
For the Nine Months Ended September 30, 2008 and 2007
Net Interest Income
Net interest income was $13.6 million for the nine months ended September 30,
2008, as compared
27
to $12.4 million for the same period in 2007. Net interest income for the nine
months ended September 30, 2008 was comprised of $15.8 million of interest and
fees on loans, $5.5 million of interest on securities, and $332,000 of interest
on federal funds sold and due from banks, less interest expense on deposits of
$6.9 million, interest expense on other borrowed funds of $989,000 and interest
expense on subordinated debentures of $252,000. The net interest margin for the
nine months ended September 30, 2008 was 3.78%, as compared to 3.54% for the
same period in 2007.
Interest and dividend income was $21.7 million for the nine months ended
September 30, 2008, as compared to $22.9 million for the same period in 2007.
This represents a decrease of $1.2 million, or 5.2%. The average yield on
interest-earning assets decreased to 5.96% for the nine months ended September
30, 2008, from 6.48% for the same period in 2007. The decrease in interest and
dividend income and the average yield on interest-earning assets was primarily
due to the over 300 basis point reduction in the general level of short term
interest rates and the 325 basis point reduction in the Prime Rate of interest
which occurred between September 2007 and April 2008. Average interest-earning
assets, which were 90.9% of average total assets, totaled $481.1 million for the
nine months ended September 30, 2008, and were comprised of $326.8 million in
loans, $141.4 million in investment securities, $8.6 million in federal funds
sold and $4.3 million in other interest bearing deposits.
Interest expense was $8.1 million for the nine months ended September 30, 2008,
as compared to $10.5 million for the same period in 2007. This represents a
decrease of $2.4 million, or 22.9%. The decrease was due primarily to average
cost of deposits and interest bearing liabilities which decreased to an average
cost of 2.36% for the nine months ended September 30, 2008 from an average cost
of 3.14% for the same period in 2007, as a result of the previously-mentioned
lower interest rate environment. Average interest-bearing deposits totaled
$322.2 million for the nine months ended September 30, 2008, as compared to
$339.9 million for the same period in 2007, a decrease of $17.7 million, or
5.2%, and were comprised of $106.3 million in interest-bearing checking and
money market deposits, $69.4 million in savings deposits and $146.5 million in
time deposits. Interest expense associated with borrowings and subordinated
debentures totaled $989,000 and $252,000, respectively, for the nine months
ended September 30, 2008, as compared to $539,000 and $330,000, respectively,
for the same period in 2007. Borrowings for the nine months ended September 30,
2008 averaged $55.9 million, as compared to $20.8 million for the same period in
2007. The increase was due to growth in the bank subsidiary's sweep account
product for business customers and $40.0 million in Federal Home Loan Bank
advances. The Federal Home Loan Bank advances were used to fund loan growth and
the purchase of mortgage-backed securities during the period.
Provision for Loan Losses
For the nine months ended September 30, 2008, the provision for loan losses was
$399,000 as compared to $165,000 for the same period in 2007. The provision for
loan losses recorded for the nine months ended September 30, 2008 was
representative of the loan growth that occurred during the period and the
changes in the risk profile of the loan portfolio for such period. Included in
the provision for loan losses for the nine months ended September 30, 2008 was a
$15,000 specific reserve for an impaired loan. This loan was evaluated in
accordance with SFAS No. 114. There were no loan charge-offs during the nine
months ended September 30, 2008 as compared to $4,000 for the same period in
2007. Recoveries totaled $10,000 during the nine months ended September 30,
2008, as compared to $99,000 for the same period in 2007.
28
Non-Interest Income (Loss)
Non-interest income (loss), which consists of service charges on deposit
accounts, gains on the sale of investment securities available-for-sale, gains
on the sale of loans held-for-sale, income from bank owned life insurance and
the impairment on available-for-sale investment securities was $2.0 million for
the nine months ended September 30, 2008, as compared to ($642,000) for the same
period in 2007. Gains on the sale of investment securities available-for-sale
totaled $402,000 for the nine months ended September 30, 2008, as compared to
$87,000 for the same period in 2007. The significant increase in gains on the
sale of investment securities available-for-sale is the result of prudent
balance sheet management. Gains on the sale of loans held-for-sale were $348,000
for the nine months ended September 30, 2008, as compared to $47,000 for the
nine months ended September 30, 2007. The significant increase in gains on the
sale of loans held-for-sale was due to fees realized from the sale and servicing
of SBA loans. The gain on sale of SBA loans was $337,000 for the nine months
ended September 30, 2008, as compared to no gain for the nine months ended
September 30, 2007. The servicing rights fees recorded in conjunction with SBA
loans sold were $135,000 for the nine months ended September 30, 2008, as
compared to no servicing rights fees for the nine months ended September 30,
2007. The origination of SBA loans, which are generally sold with servicing
retained, commenced in the fourth quarter of 2007, with the initial SBA loan
sales occurring during the first quarter of 2008. The loss recorded in
non-interest income for the nine months ended September 30, 2007 was directly
related to the one-time balance sheet restructuring charge of $1.96 million,
pre-tax.
Non-Interest Expense
Non-interest expense was $11.7 million for the nine months ended September 30,
2008, as compared to $10.8 million for the same period in 2007. Non-interest
expense generally includes costs associated with employee salaries and benefits,
occupancy expenses, data processing fees, core deposit intangible amortization,
and other operating expenses.
The table below presents non-interest expense, by major category, for the nine
months ended September 30, 2008 and 2007 (in thousands):
Nine months ended
September 30,
Non-Interest Expense 2008 2007
-------------------- -------- --------
Salaries and employee benefits $ 5,841 $ 5,280
Net occupancy expenses 1,385 1,201
Data processing fees 708 663
Outside service fees 626 641
Premises and equipment depreciation 485 541
Core deposit intangible amortization 362 414
Audit and tax fees 305 355
Advertising and marketing expenses 191 115
Printing, stationery and supplies 174 172
Legal expenses 165 240
Abandonment of leasehold improvements -- 137
Other operating expenses 1,448 1,039
-------- --------
Total $ 11,690 $ 10,798
======== ========
29
Income Tax Expense
The Company recorded an income tax expense of $1.2 million on income before
taxes of $3.5 million for the nine months ended September 30, 2008, resulting in
an effective tax rate of 33.91%, as compared to an income tax expense of
$707,000 on income before taxes of $811,000 for the nine months ended September
30, 2007, resulting in an effective tax rate of 87.18%. The lower than
anticipated income tax rate for the nine months ended September 30, 2008 was due
to the tax treatment applied to gains on the sale of investment securities by
CJB Investment Company. Since the gains were realized in CJB Investment Company,
the gains are considered capital gains and permitted to be offset against the
remaining capital loss carry-forwards resulting from the 2007 balance sheet
restructuring initiative.
The Company's effective tax rate of 87.18% for the nine months ended September
30, 2007, resulted from the fact that the majority of the investment securities
for which the $1.96 million other-than-temporary impairment was recorded were
held by CJB Investment Company. A full valuation allowance was recorded for 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 did not, at the time,
have the ability to generate capital gains and utilize the capital losses and
thus a full valuation allowance was required for the investment company
available-for-sale securities which were identified as other-than-temporarily
impaired.
Financial Condition
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of cash on hand, due from banks and
federal funds sold. At September 30, 2008, cash and cash equivalents were $12.4
million, a decrease of $2.5 million, or 16.8%, from the December 31, 2007 total
of $14.9 million. This decrease was due primarily to the timing of cash flows
related to the Company's business activities.
Investment Portfolio
Investment securities totaled $151.5 million at September 30, 2008, an increase
of $19.2 million, or 14.5%, over the December 31, 2007 total of $132.3 million.
The increase was attributable to the purchase of $80.2 million of
mortgage-backed securities, and $707,000 of bond anticipation notes during the
period. For the nine months ended September 30, 2008, principal pay downs of
mortgage-backed securities have totaled $21.4 million, $6.4 million of
government-sponsored agency securities, $1.0 million of mortgage-backed
securities and $3.0 million in bond anticipation notes matured, and $29.1
million in mortgage-backed securities were sold. In addition, at September 30,
2008, the net change of the unrealized gain on available-for-sale securities
decreased by $794,000 from December 31, 2007. 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
investment securities until a market price recovery or maturity, these
investment securities are not considered other-than-temporarily impaired.
30
Loan Portfolio
Loans, net of the allowance for loan losses, closed the nine months ended
September 30, 2008 at $343.2 million, an increase of $31.4 million, or 10.1%,
over the $311.8 million balance at December 31, 2007. The increase in loans was
due primarily to the origination of commercial real estate loans, consumer home
equity loans and lines of credit during the period.
Loan portfolio composition remained consistent at September 30, 2008, as
compared to December 31, 2007, with commercial loans comprising 85.1% of total
loans outstanding at September 30, 2008, as compared to 85.6% at December 31,
2007. In addition, Central Jersey Bancorp had non-accrual loans totaling
$924,000 at September 30, 2008, as compared to $214,000 at December 31, 2007.
The increase in non-performing loans was due primarily to one commercial loan
totaling $838,000 which was placed on non-accrual status in May 2008. It should
be noted that this loan had a balance of $1.8 million when it was placed on
non-accrual status but a principal payment of $1.0 million was received in
September 2008, which has reduced the loan balance to $838,000. The allowance
for loan losses increased to $3.82 million, or 1.10% of total gross loans, at
September 30, 2008, as compared to $3.41 million, or 1.08% of total gross loans,
at December 31, 2007.
There were no loans held-for-sale at September 30, 2008, as compared to $658,000
at December 31, 2007. The decrease in loans held-for-sale is due primarily to
the timing of loan closings and sales.
Allowance for Loan Losses and Related Provision
The allowance for loan losses, which began the year at $3.41 million, or 1.08%
of total loans, increased to $3.82 million at September 30, 2008, or 1.10% of
total loans. Non-performing loans totaled $924,000 at September 30, 2008, as
compared to $214,000 at December 31, 2007. The increase in non-performing loans
was due primarily to one commercial loan totaling $838,000 which was placed on
non-accrual status in May 2008. It should be noted that this loan had a balance
of $1.8 million when it was placed on non-accrual status but a principal payment
of $1.0 million was received in September 2008, which has reduced the loan
balance to $838,000. There were no loan charge-offs during the three and nine
months ended September 30, 2008 as compared to $4,000 for the same periods in
2007.
For the three and nine months ended September 30, 2008, the provision for loan
losses was $252,000 and $399,000, respectively, as compared to no provision for
the three months ended September 30, 2007 and $165,000 for the nine months ended
September 30, 2007. The provision for loan losses recorded for each period is
representative of the loan growth that occurred during the period and the risk
profile of the loan portfolio.
Non-performing Loans
A loans 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 because of a
weakening in the financial position of the borrowers. A loan, which is past due
ninety days or more and still accruing interest, remains on accrual status only
when it is both adequately secured as to principal and is in the process of
collection. Central Jersey
31
Bancorp had non-accrual loans totaling $924,000 at September 30, 2008, as
compared to $214,000 at December 31, 2007. Non-performing loans at September 30,
2008 included two commercial loans: one loan with a balance of $86,000, was
placed on non-accrual status as of June 30, 2006 with a risk rating of
"substandard;" and one commercial loan with a balance of $838,000, was placed on
non-accrual status as of May 2008 with a risk rating of "substandard." It should
be noted that the latter loan had a balance of $1.8 million when it was placed
on non-accrual status but a principal payment of $1.0 million was received in
September 2008. These loans are considered impaired and are evaluated in
accordance with SFAS No. 114.
Impaired Loans
When necessary, Central Jersey Bancorp performs individual loan reviews in
accordance with SFAS No. 114 to determine whether any individually reviewed
loans are impaired and, if impaired, measures a SFAS No. 114 allowance
allocation in accordance with the standard. A loan is recognized as impaired
when it is probable that principal and/or interest are not collectible in
accordance with the loan's contractual terms. The Company considers loans on
non-accrual status or risk rated 8 or higher as impaired and automatically
subject to SFAS No. 114 review. In addition, any other loan that management
considers possibly impaired due to deteriorating conditions or for any other
reasons, is, at management's discretion, subject to SFAS No. 114 review.
At September 30, 2008, Central Jersey Bancorp had impaired loans totaling
$974,000, as compared to no impaired loans at December 31, 2007. Impaired loans
included one loan, in particular, with a balance of $838,000 at September 30,
2008, which required a $15,000 specific reserve. This specific reserve was
included in the Company's overall allowance for loan losses balance at September
30, 2008.
Potential Problem Loans
In addition to non-performing loans, Central Jersey Bancorp 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 weakness" which
potentially could cause such loans to become non-performing in future periods.
As of September 30, 2008, loans on the watch list totaled $17.8 million, as
compared to $6.0 million at December 31, 2007. This increase was representative
of the changes in the risk profile of the loan portfolio. Loans which were risk
rated "special mention" increased by $11.2 million, to $16.6 million, at
September 30, 2008 from $5.4 million at December 31, 2007. Loans which were risk
rated "substandard" increased by $600,000, to $1.2 million, at September 30,
2008 from $581,000 at December 31, 2007. Loans which were risk rated "doubtful"
increased to $50,000 at September 30, 2008 from no loans risk rated "doubtful"
at December 31, 2007. A majority of the risk rating downgrades occurred in the
commercial mortgage loan portfolio.
Commitments and Conditional Obligations
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
32
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 September 30, 2008 and December 31, 2007 is as follows
(in thousands):
September 30, December 31,
2008 2007
--------------------------------------------------------------------------
Standby letters of credit $ 1,326 $ 1,446
Outstanding loan and credit line commitments $ 67,377 $ 78,464
--------------------------------------------------------------------------
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 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. Central Jersey Bank, N.A.'s liability for
performance standby letters of credit was immaterial at September 30, 2008 and
December 31, 2007.
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 fifteen 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.
Deposits
One of Central Jersey Bancorp's primary strategies is the accumulation and
retention of core deposits. Core deposits are defined as all deposits with the
exception of certificates of deposits in excess of $100,000. Deposits, at
September 30, 2008, totaled $406.3 million, an increase of $3.0 million, or
0.74%, from the December 31, 2007 total of $403.3 million. The modest increase
in deposit balances was reflective of the competitive deposit pricing
environment and general economic slowdown. Core deposits as a percentage of
total deposits were 81.9% and 84.8%, respectively, at September 30, 2008 and
December 31, 2007.
33
Borrowings
Borrowings were $72.5 million at September 30, 2008, as compared to $24.6
million at December 31, 2007, representing an increase of $47.9 million, or
194.7%. 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. As of September 30, 2008, borrowings included $32.5
million bank sweep funds, $18.8 million in Federal Home Loan Bank overnight
advances, $20.0 million in Federal Home Loan Bank callable advances and $1.2
million in Federal Home Loan Bank fixed rate advances. The increase was due to
growth in the bank subsidiary's sweep account product for business customers and
$40.0 million in Federal Home Loan Bank advances. The Federal Home Loan Bank
advances were used to fund loan growth and the purchase of mortgage-backed
securities during the period.
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 the nine months ended
September 30, 2008, Central Jersey Bank, N.A. continued to maintain a large
secondary source of liquidity known as investment securities available-for-sale.
The fair value of that portfolio was $136.5 million at September 30, 2008 and
$114.8 million at December 31, 2007.
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 lines of credit with
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 FHLB 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
34
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. Available liquidity and borrowing
capacity is reviewed by management on a monthly basis. As of September 30, 2008,
the Company's liquidity surplus was $90.7 million.
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.
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
September 30, 2008, Central Jersey Bancorp and Central Jersey Bank, N.A. met all
capital adequacy requirements to which they were subject.
The following is a summary of Central Jersey Bank, N.A.'s and Central Jersey
Bancorp's actual capital ratios as of September 30, 2008 and December 31, 2007,
compared to the minimum capital adequacy requirements and the requirements for
classification as a "well-capitalized" institution:
Tier I Tier I
Capital to Capital to Total Capital to
Average Assets Ratio Risk Weighted Risk Weighted
(Leverage Ratio) Asset Ratio Asset Ratio
September 30, December 31, September 30, December 31, September 30, December 31,
Actual Ratios 2008 2007 2008 2007 2008 2007
- ------------- ------------- ------------ ------------- ------------ ------------- ------------
Central Jersey Bancorp 8.73% 9.08% 11.81% 12.74% 12.83% 13.73%
Central Jersey Bank, N.A. 8.87% 9.34% 11.98% 12.94% 12.99% 13.93%
Required Regulatory Ratios
- --------------------------
"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%
35
Capital Purchase Program
On October 14, 2008, the U.S. government announced a series of initiatives to
strengthen market stability, improve the strength of financial institutions and
enhance market liquidity. In connection therewith, the U.S. Department of
Treasury (the "Department of Treasury") announced its voluntary Capital Purchase
Program (the "Program") in order to encourage U.S. financial institutions to
build capital to increase the flow of financing to U.S. businesses and consumers
and to support the U.S. economy. It is the intention of Central Jersey Bancorp
to apply to participate in the Program.
Under the terms of the Program, the Department of Treasury will purchase up to
$250 billion of senior preferred shares of stock on standardized terms (the
"Senior Preferred Stock") from qualifying financial institutions. Central Jersey
Bancorp, as a qualifying financial institution, may issue an amount of Senior
Preferred Stock equal to not less than one percent, or approximately $3.7
million, of its risk-weighted assets, and not more than the lesser of (1) $25
billion and (2) three percent, or approximately $11.0 million, of its
risk-weighted assets. It is anticipated that, if Central Jersey Bancorp is
approved to participate in the Program, Central Jersey Bancorp will sell to the
Department of Treasury approximately $11.0 million of Senior Preferred Stock.
The per share purchase price of the Senior Preferred Stock has not been
determined. The $11.0 million of Senior Preferred Stock would represent
approximately twenty-one percent of Central Jersey Bancorp's tangible equity at
September 30, 2008, after giving effect to the issuance of the Senior Preferred
Stock. The Senior Preferred Stock will pay cumulative dividends at a rate of
five percent per annum, or approximately $550,000 annually, and will reset to a
rate of nine percent at the end of the fifth year. The Senior Preferred Stock
may not be redeemed for a period of three years from the date of the investment,
except under limited circumstances. After the third anniversary of the date of
the investment, the Senior Preferred Stock may be redeemed, in whole or in part,
at any time and from time to time, at the option of Central Jersey Bancorp.
In addition, as part of the Program, the Department of Treasury will also
receive warrants to purchase shares of Central Jersey Bancorp's Common Stock
with an aggregate market price equal to approximately $1,650,000, or fifteen
percent of the Senior Preferred Stock. The warrants shall have a term of ten
years and shall be immediately exercisable, in whole or part. The exercise price
for the warrants will be the market price of Central Jersey Bancorp's Common
Stock at the time of issuance calculated on a 20-trading day trailing average.
Central Jersey Bancorp's participation in the Program is completely voluntary.
Central Jersey Bancorp is well-capitalized, profitable and has ample liquidity.
The Board of Directors has carefully reviewed the Program and has determined
that, additional Tier I capital, in the current and anticipated economic
operating environment, is beneficial to Central Jersey Bancorp and its banking
subsidiary, Central Jersey Bank, N.A. The cost of capital under the Program is
attractively priced and provides distinct cost advantages as compared to other
capital alternatives. It is the belief of the Board of Directors that
participation in the Program by Central Jersey Bancorp provides flexibility for
future balance sheet growth and franchise expansion opportunities.
In order to participate in the Program, Central Jersey Bancorp not only needs
the approval of the applicable federal regulatory authorities, but also needs
the approval of its shareholders to amend its Certificate of Incorporation to
authorize for issuance 10,000,000 shares of preferred stock.
36
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, as of the end of the period
covered by this quarterly report, the Company carried out an evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures. This evaluation was carried out under the supervision and with the
participation of the Company's management, including its President and Chief
Executive Officer and Executive Vice President and Chief Financial Officer, who
concluded that the Company's disclosure controls and procedures are effective.
The Company's Internal Auditors also participated in this evaluation. There has
been no change in the Company's internal controls during the last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company'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 the Company's
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the Company's reports filed under the Exchange Act is accumulated
and communicated to management, including its President and Chief Executive
Officer and Executive Vice President and Chief Financial Officer, to allow
timely decisions regarding required disclosure.
37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a party to routine
legal proceedings within the normal course of business. Such routine legal
proceedings in the aggregate are believed by management to be immaterial to the
Company's financial condition or results of operations.
Item 1A. Risk Factors
------------
Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
Information regarding Central Jersey Bancorp's common stock repurchases
for the three months ended September 30, 2008, is as follows:
Issuer Purchases of Equity Securities
Total Number of
Shares Purchased Maximum Number
Total Number Average Price as Part of Publicly of Shares that May
of Shares Paid Announced Yet Be Purchased
Period Purchased(1) Per Share(2) Program Under the Program
========================================================================================================================
========================================================================================================================
July 1, 2008 through
July 31, 2008 23,300 $ 7.94 125,953 399,047
========================================================================================================================
August 1, 2008
through August 31,
2008 22,050 $ 7.90 148,003 376,997
========================================================================================================================
September 1, 2008
through September
30,2008 26,900 $ 7.58 174,903 350,097
========================================================================================================================
Total 72,250 174,903
========================================================================================================================
(1) On January 7, 2008, Central Jersey Bancorp announced its intention to
repurchase up to 5.7%, or 525,000 shares, of the 9,183,290 shares of common
stock then outstanding. Repurchases may be made from time to time, in the open
market, in unsolicited negotiated transactions or in such other manner deemed
appropriate by management, at prices not exceeding prevailing market prices,
subject to availability of the shares, over twenty-four months ending December
31, 2009, or such shorter or longer period of time as Central Jersey Bancorp may
determine.
(2) Excludes the broker commission of $0.04 per share, or $2,890, that was paid
by the Company with respect to the shares purchased through the common stock
repurchase plan for the three months ended September 30, 2008.
- ---------------------------
38
Item 3. Defaults Upon Senior Securities
-------------------------------
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable.
Item 5. Other Information
-----------------
Not Applicable.
Item 6. Exhibits
--------
See Index of Exhibits commencing on page E-1.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Central Jersey Bancorp
--------------------------------------------
Registrant
Date: November 7, 2008 /s/ James S. Vaccaro
--------------------------------------------
James S. Vaccaro
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 7, 2008 /s/ Anthony Giordano, III
--------------------------------------------
Anthony Giordano, III
Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
(Principal Financial and Accounting Officer)
40
INDEX OF EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
2.1 Plan of Acquisition of all of the outstanding stock of
Monmouth Community Bank by 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
(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
E-1
(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 1, 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).
10.1.1 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).
10.1.2 The Allaire Community Bank 1999 Director Stock Option Plan
(Incorporated by reference to Exhibit 4.4 to the Registrant's
Registration Statement on Form S-8 (Registration No.
333-122468), effective February 2, 2005).
10.1.3 The Allaire Community Bank 2000 Director Stock Option Plan
(Incorporated by reference to Exhibit 4.5 to the Registrant's
Registration Statement on Form S-8 (Registration No.
333-122468), effective February 2, 2005).
10.1.4 The Allaire Community Bank 2001 Director Stock Option Plan
(Incorporated by reference to Exhibit 4.6 to the Registrant's
Registration Statement on Form S-8 (Registration No.
333-122468), effective February 2, 2005).
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).
E-2
10.4 Guarantee Agreement by Registrant and Wilmington Trust
Company, dated March 25, 2004 (Incorporated by reference to
Exhibit 10.12 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, by
and between the Registrant and Robert S. Vuono (Incorporated
by reference to Exhibit 10.13 to the Registrant's Current
Report on Form 8-K dated August 1, 2006).
10.5.1 Amendment No. 1 to Change of Control Agreement, dated as of
February 21, 2007, between the Registrant and Robert S. Vuono
(Incorporated by reference to Exhibit 10.5.1 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2006).
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, by
and between the Registrant and James S. Vaccaro (Incorporated
by reference to Exhibit 10.11 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, 2006).
10.9 Change of Control Agreement, dated as of August 1, 2006, by
and between the Registrant and Anthony Giordano, III
(Incorporated by reference to Exhibit 10.12 to the
Registrant's Current Report on Form 8-K dated August 1, 2006).
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, 2006).
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, 2006).
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, 2006).
E-3
10.12 Central Jersey Bancorp 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).
10.13 Lease Agreement by and between FPN Prime, L.L.C., as Landlord,
and Central Jersey Bank, N.A., as Tenant, dated October 4,
2007, for executive office space located at 1903 Highway 35,
Oakhurst, New Jersey (Incorporated by reference to Exhibit
10.13 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2008).
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.
E-4