Attached files
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EX-23.1 - EXHIBIT 23.1 - CENTRAL JERSEY BANCORP | ex23_1.htm |
EX-32.1 - EXHIBIT 32.1 - CENTRAL JERSEY BANCORP | ex32_1.htm |
EX-31.2 - EXHIBIT 31.2 - CENTRAL JERSEY BANCORP | ex31_2.htm |
EX-99.1 - EXHIBIT 99.1 - CENTRAL JERSEY BANCORP | ex99_1.htm |
EX-99.2 - EXHIBIT 99.2 - CENTRAL JERSEY BANCORP | ex99_2.htm |
EX-32.2 - EXHIBIT 32.2 - CENTRAL JERSEY BANCORP | ex32_2.htm |
EX-31.1 - EXHIBIT 31.1 - CENTRAL JERSEY BANCORP | ex31_1.htm |
EX-21.1 - EXHIBIT 21.1 - CENTRAL JERSEY BANCORP | ex21_1.htm |
EX-10.7 - EXHIBIT 10.7 - CENTRAL JERSEY BANCORP | ex10_7.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended December 31, 2009
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ______ to ______
Commission
file number 000-49925
CENTRAL
JERSEY BANCORP
|
(Exact
name of Registrant as specified in its
charter)
|
New Jersey
|
22-3757709
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
1903 Highway 35, Oakhurst, New
Jersey
|
07755
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s telephone number,
including area code:
(732) 663-4000
Securities
registered under Section 12(b) of the Act: None
Securities
registered under Section 12(g) of the Act:
Common
Stock, par value $0.01
|
(Title
of class)
|
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No
x
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No
x
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
o
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes x No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
x
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer
o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
x
As of
June 30, 2009, the aggregate fair value of the Registrant’s common stock held by
non-affiliates was approximately $38,099,491.
As of
February 28, 2010, 9,256,975 shares of the Registrant’s common stock were
outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
Part III
of this Annual Report on Form 10-K incorporates certain information by reference
from the Registrant’s Proxy Statement for the Annual Meeting of Shareholders
scheduled to be held on May 26, 2010. It is anticipated that the
Proxy Statement will be filed with the Securities and Exchange Commission by
April 27, 2010.
ii
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Certain
information included in this Annual Report on Form 10-K and other filings of the
Registrant under the Securities Act of 1933, as amended (the “Securities Act”),
and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as
well as information communicated orally or in writing between the dates of such
filings, contains or may contain “forward-looking statements” within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Such statements are subject to certain risks, trends and
uncertainties that could cause actual results to differ materially from expected
results. Among these risks, trends and uncertainties are the effect
of governmental regulation on Central Jersey Bank, National Association, a
nationally chartered commercial bank and wholly-owned subsidiary of the
Registrant, interest rate fluctuations, regional economic and other conditions,
the availability of working capital, the cost of personnel and technology and
the competitive markets in which Central Jersey Bank, N.A.
operates.
In some
cases, forward-looking statements can be identified by terminology such as
“may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential” or “continue” or the negative of such terms
or other comparable terminology. Although the Registrant believes
that the expectations reflected in the forward-looking statements contained
herein are reasonable, the Registrant cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither the
Registrant, nor any other person, assumes responsibility for the accuracy and
completeness of such statements. The Registrant is under no duty to
update any of the forward-looking statements contained herein after the date of
this Annual Report on Form 10-K.
iii
CENTRAL JERSEY BANCORP
INDEX TO FORM
10-K
PART I
|
PAGE
|
||
Item
1.
|
1
|
||
Item
1A.
|
15
|
||
Item
1B.
|
15
|
||
Item
2.
|
15
|
||
Item
3.
|
15
|
||
Item
4.
|
15
|
||
PART II
|
|||
Item
5.
|
16
|
||
Item
6.
|
17
|
||
Item
7.
|
18
|
||
Item
7A.
|
47
|
||
Item
8.
|
47
|
||
Item
9.
|
47
|
||
Item
9A.
|
47
|
||
Item
9B.
|
48
|
||
PART III
|
|||
Item
10.*
|
49
|
||
Item
11.*
|
49
|
||
Item
12.*
|
49
|
||
Item
13.*
|
49
|
||
Item
14.*
|
49
|
PART IV
|
|||
Item
15.
|
50
|
||
51
|
*
|
The
information required under this Item is to be contained in the
Registrant’s Proxy Statement for the Annual Meeting of Shareholders
scheduled to be held on May 26, 2010, and is incorporated herein by
reference. It is anticipated that the Proxy Statement will be
filed with the Securities and Exchange Commission by April 27,
2010.
|
PART I
Item
1.
|
Business
|
About
Our Company
Central
Jersey Bancorp is a bank holding company headquartered in Oakhurst, New
Jersey. The holding company was incorporated in New Jersey on March
7, 2000, and became an active bank holding company on August 31, 2000 through
the acquisition of Monmouth Community Bank, National Association. On
January 1, 2005, Central Jersey Bancorp completed its strategic business
combination transaction with Allaire Community Bank, a New Jersey
state-chartered bank, pursuant to which Allaire Community Bank became a
wholly-owned bank subsidiary of Central Jersey Bancorp. On the
effective date of the combination, the name of the holding company was changed
from Monmouth Community Bancorp to Central Jersey Bancorp.
On May
26, 2009, Central Jersey Bancorp and OceanFirst Financial Corp., the parent
company of OceanFirst Bank, entered into an Agreement and Plan of Merger (the
“Merger Agreement”) pursuant to which Central Jersey Bancorp had intended to
merge with and into OceanFirst Financial Corp. Concurrent with the
merger, it was expected that Central Jersey Bank, N.A. would merge with and into
OceanFirst Bank. The merger of Central Jersey Bancorp and OceanFirst
Financial Corp. was intended to qualify as a tax free reorganization for federal
income tax purposes, with shares of Central Jersey Bancorp exchanged for
OceanFirst Financial Corp. shares on a tax free basis. The Merger
Agreement was terminated by mutual consent on December 17, 2009 when it became
apparent that the requisite regulatory approvals would not be received in time
for the merger to be completed by December 31, 2009, as contemplated in the
Merger Agreement.
Central
Jersey Bancorp maintains an Internet website at www.cjbna.com. Through
our website, shareholders may access free of charge our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports, filed or furnished pursuant to Section 13(a)
or 15(d) of the Exchange Act. These reports are available as soon as
reasonably practicable after Central Jersey Bancorp electronically files the
reports with the Securities and Exchange Commission (the “SEC”). We
also post on our website our Corporate Governance Guidelines, Code of
Conduct/Ethics Policy, Chief Executive and Chief Financial Officer Code of
Ethics, Nominating and Corporate Governance Committee Charter, Audit Committee
Charter, Compensation Committee Charter and Luxury Expenditure and Limitation
Policy. These reports are also available in print by contacting Mr.
James S. Vaccaro, Chairman, President and Chief Executive Officer, Central
Jersey Bancorp, 1903 Highway 35, Oakhurst, New Jersey 07755.
About
Our Business
In August
of 2005, Central Jersey Bancorp combined its two bank subsidiaries, Monmouth
Community Bank, N.A. and Allaire Community Bank, into a single banking entity,
named Central Jersey Bank, National Association. Central Jersey Bank,
N.A. offers a full range of retail and commercial banking services primarily to
customers located in Monmouth County and Ocean County, New Jersey. These
services include checking accounts, savings accounts, money market accounts,
certificates of deposit, installment loans, real estate mortgage loans,
commercial loans, wire transfers, money orders, traveler’s checks, safe deposit
boxes, night depositories, federal payroll tax deposits, bond coupon redemption,
bank by mail, direct deposit, automated teller services and telephone and
internet banking. Central Jersey Bank, N.A. has debit card, merchant
card and international services available to its customers through correspondent
institutions. Central Jersey Bank, N.A. currently has thirteen
full-service branch facilities located in Belmar, Bradley Beach, Long Branch
(2), Manasquan, Point Pleasant, Spring Lake Heights, Little Silver, Neptune
City, Ocean Grove, Oakhurst and Wall Township (2), New Jersey.
Central
Jersey Bank, N.A. is a national association chartered by the Office of the
Comptroller of the Currency (“OCC”). The deposits of the bank
subsidiary are insured by the Federal Deposit Insurance Corporation
(“FDIC”). Central Jersey Bank, N.A. provides a broad range of
financial products and services to individual consumers, small businesses and
professionals in its market area. When a customer’s loan
requirements exceed Central Jersey Bank,
N.A.’s lending limit, it may seek to arrange such loan on a participation basis
with other financial institutions. In addition, Central Jersey Bank,
N.A. participates in loans originated by other financial
institutions.
Business
Strategy
Central
Jersey Bancorp’s strategy is to provide a competitive range of community banking
services to its market area, in a professional environment, at fair and
reasonable interest rates and fees, at convenient operating hours, with a
commitment to prompt, quality and highly personalized service, which is both
efficient and responsive to local banking needs. Service to customers
and a commitment to the community are the basic and distinguishing features
offered by Central Jersey Bank, N.A., Central Jersey Bancorp’s bank
subsidiary.
Market
Area
Central
Jersey Bank, N.A. currently operates thirteen full-service branch facilities
located in Belmar, Bradley Beach, Long Branch (2), Manasquan, Point Pleasant,
Spring Lake Heights, Little Silver, Ocean Grove, Neptune City, Oakhurst and Wall
Township (2), New Jersey. Except for the Point Pleasant branch,
located in Ocean County, New Jersey, each branch is within Monmouth County, New
Jersey, one of the largest counties, by population, in the State of New
Jersey. The individual branch locations provide a great deal of
exposure and are well-situated to conveniently serve businesses, professionals
and individuals throughout Central Jersey Bancorp’s market area.
Commercial
activity within Central Jersey Bancorp’s market area includes small and medium
sized businesses, corporate offices, professional offices, major retail centers,
resort and recreational businesses along the nearby oceanfront, as well as
numerous industrial establishments specializing in light manufacturing, baking
products, rubber and plastic products, surgical and medical devices, electronics
and telecommunications. In addition, the market area contains a
variety of major employers, including Monmouth Medical Center, Jersey Shore
University Medical Center and Monmouth University.
Services
Offered
Central
Jersey Bancorp’s bank subsidiary, Central Jersey Bank, N.A., is community
oriented and offers services and products designed to meet the banking needs of
local individuals, businesses and professionals. Business people and
professionals are offered a broad spectrum of deposit and loan products designed
to satisfy their occupational and personal financial needs. In
addition, Central Jersey Bank, N.A. provides a broad array of consumer banking
services to the general public residing or working in its market
area.
Deposits. In order to
attract and retain stable deposit relationships with the commercial
establishments and other businesses within its market area, Central Jersey Bank,
N.A. offers competitive small business cash management
services. Central Jersey Bank, N.A. believes that the expertise and
experience of its management coupled with the introduction of new technologies
enables the bank subsidiary to maximize the growth of business related
deposits. The primary deposit services of Central Jersey Bank, N.A.
offered to non-business customers are comprised of demand deposits, savings
deposits (including money markets), time deposits and individual retirement
accounts.
Loans. Central Jersey
Bank N.A.’s loan portfolio consists primarily of variable-rate and short-term
fixed rate loans, with a significant concentration in commercial purpose
transactions. Central Jersey Bank, N.A. believes that the familiarity
of its management and the members of its Board of Directors appointed to its
Loan Committee with prospective local borrowers enables Central Jersey Bank,
N.A. to better evaluate the character, integrity and creditworthiness of
prospective borrowers.
Residential
Mortgage Loans. In order to
effectively penetrate the mortgage market, Central Jersey Bank, N.A., through an
unaffiliated third party vendor, offers a range of residential mortgage products
at competitive rates. Central Jersey Bank, N.A. closes its originated
residential mortgages in its name and then sells its residential mortgage
production to government agencies and private investors in order to manage
interest rate risk and liquidity. Central Jersey Bank, N.A. believes
that its policy of closing loans in a time frame that meets the needs of its
borrowers is important to its business.
Commercial
Mortgage/Construction Loans. Central Jersey
Bank, N.A. originates various types of loans secured with real estate, including
construction loans. Central Jersey Bank, N.A.’s loan officers work
closely with real estate developers, individual builders and attorneys to offer
construction loans and services to the residential real estate market as well as
to owner-occupied commercial properties and investment
properties. Construction lending constitutes a minor portion of the
loan portfolio. In some cases, Central Jersey Bank, N.A. may
originate loans larger than its lending or policy limits and will participate
these loans with other financial institutions.
Consumer
Lending. Central Jersey
Bank, N.A. offers a full menu of consumer loan products that include home equity
loans and lines of credit, secured and unsecured personal loans, overdraft lines
of credit and auto loans. Central Jersey Bank, N.A. also offers a service to
consumers that allows a consumer to apply for consumer loans via the Internet
and receive a preapproval on their loan request in approximately sixty
seconds. The ability to complete an application on-line allows
Central Jersey Bank, N.A. to compete with the national lenders on a local
level.
Small
Business Loans. Central Jersey
Bank, N.A. generally targets businesses with annual revenues of less than
$25,000,000. Often, these businesses are ignored by the larger
lending institutions and have experienced the negative effects of the bank
consolidations. Central Jersey Bank, N.A. offers responsiveness,
flexibility and local decision-making for loan applications of small business
owners, thereby eliminating the delays generally associated with non-local
management. Central Jersey Bank, N.A. participates in the U.S. Small
Business Administration (“SBA”) programs through its SBA loan department, which
was established in the fall of 2007, and in programs offered through the New
Jersey Economic Development Authority. As an independent community
bank, Central Jersey Bank, N.A. serves the business banking needs of
professionals in the legal, medical, accounting, insurance, and real estate
industries. Lines of credit, term loans and time loans are tailored to meet the
borrowing needs of Central Jersey Bank, N.A.’s customers in the professional
community.
In 2009,
the SBA awarded Central Jersey Bank, N.A. with Preferred Lender Program Status
(“PLP”), a designation that streamlines access to SBA-guaranteed loans for the
institution’s small business customers. The SBA approves PLP status
for lending institutions that are experienced with SBA-guaranteed loans and have
demonstrated the ability to process, close, service and liquidate them, as well
as the ability to develop and analyze complete loan packages. When
the SBA designates a bank as a PLP status lender, it delegates the final credit
decision and most servicing and liquidation authority and responsibility to
those carefully selected banks.
Other Services. To further
attract and retain customer relationships, Central Jersey Bank, N.A. provides an
expanded array of financial services, including the following: the
issuance of money orders, cashier checks and gift checks, wire transfers, U.S.
Savings Bonds sales and redemptions, debit and ATM cards, federal payroll tax
deposits, payroll services, safe deposit boxes, traveler’s checks, night
depositories,
bond
coupon redemptions, bank-by-mail, direct deposit, business sweep accounts,
automated teller machines, online deposit account and loan account applications
and telephone and internet banking. Central Jersey Bank, N.A. offers
a variety of personal and business credit cards. These credit cards
are underwritten and managed by a third party unaffiliated banking
organization. Central Jersey Bank, N.A. also maintains coin counting
machines, for the convenience of its customers, in most of its branch
offices.
Competition
Central
Jersey Bank, N.A. actively competes for deposits and loans with existing New
Jersey and out-of-state financial institutions. Central Jersey Bank,
N.A.’s competition includes large financial service companies and other
entities, in addition to traditional banking institutions such as savings banks,
commercial banks, internet banks and credit unions. Such competition
includes community banks, with banking philosophies similar to those of Central
Jersey Bank, N.A., which are located within or near the market area served by
Central Jersey Bank, N.A.
Many of
Central Jersey Bank, N.A.’s larger competitors have a greater ability to finance
wide ranging advertising campaigns through their greater capital
resources. Marketing efforts to attract prospective customers depend
heavily upon referrals from Central Jersey Bank, N.A.’s Board of Directors,
advisory boards, management and shareholders, selective advertising in local
media and direct mail solicitations. Central Jersey Bank, N.A.
competes for business principally on the basis of high quality, personal service
to customers, customer access to bank decision makers and competitive interest
rates and fees.
In recent
years, intense market demands, technological and regulatory changes and economic
pressures have eroded once clearly defined financial service industry
classifications. Existing banks have been forced to diversify their
services, increase rates paid on deposits, provide competitive pricing on loans
and become more cost effective, as a result of competition with one another and
with new types of financial service companies, including non-banking
competitors. Corresponding changes in the regulatory framework have
resulted in increasing homogeneity in the financial services offered by
financial institutions. Some of the results of these market dynamics
in the financial services industry have been a number of new bank and non-bank
competitors, increased merger activity, and increased customer awareness of
product and service differences among competitors. These factors may
be expected to affect the business prospects of Central Jersey Bank,
N.A.
Employees
James S.
Vaccaro (Chairman, President and Chief Executive Officer), Robert S. Vuono
(Senior Executive Vice President, Chief Operating Officer and Secretary), and
Anthony Giordano, III (Senior Executive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary) currently are the executive officers of the
holding company, Central Jersey Bancorp, and its banking subsidiary, Central
Jersey Bank, N.A. Mr. Vaccaro, Mr. Vuono and Mr. Giordano have each entered into
a change of control agreement with Central Jersey Bancorp. Including
the aforementioned executive officers, Central Jersey Bancorp had a total of 133
full time equivalent employees as of December 31, 2009.
Holding
Company Operations
Central
Jersey Bancorp serves as the holding company for Central Jersey Bank,
N.A. The holding company has minimal assets and liabilities other
than its investment in Central Jersey Bank, N.A. and its participation in MCBK
Capital Trust I, a special purpose business trust established in March 2004 for
the purpose of issuing $5.0 million of preferred capital
securities. See “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operation – Guaranteed Preferred Beneficial
Interest in the Central Jersey Bancorp Subordinated Debt.” All
banking products and services are, and will be, provided by Central Jersey
Bancorp’s bank subsidiary, Central Jersey Bank, N.A. For state tax
purposes,
CJB
Investment Company (formerly MCB Investment Company), a New Jersey corporation,
was formed on March 9, 2004 to hold and invest in investment securities in
support of Central Jersey Bank, N.A. In addition, during 2009 Central
Jersey Bancorp formed Central Delaware Investment Co., a Delaware corporation
and a subsidiary of CJB Investment Company. Both CJB Investment
Company and Central Delaware Investment Co., are special purpose entities, whose
activities are limited to holding investment securities, collecting earnings,
principal repayments and recognizing other gains/losses
thereon.
Government
Regulation
Central
Jersey Bancorp and its subsidiaries, including Central Jersey Bank, N.A.,
operate within a system of banking laws and regulations intended to protect bank
customers and depositors. These laws and regulations govern the
permissible operations and management, activities, reserves, loans and
investments of Central Jersey Bancorp and its subsidiaries. In
addition, Central Jersey Bancorp is subject to federal and state securities laws
and general federal laws and regulations. Central Jersey Bancorp and
its non-bank subsidiary also are subject to the corporate laws and regulations
of their respective states of incorporation. The following
descriptions summarize the key banking and other laws and regulations to which
Central Jersey Bancorp and Central Jersey Bank, N.A. are
subject. These descriptions are not intended to be complete and are
qualified in their entirety by reference to the full text of the statutes and
regulations discussed. Future changes in these laws and regulations,
or in the interpretation and application thereof by their administering
agencies, cannot be predicted, but could have a material effect on the business
and results of operations of Central Jersey Bancorp and its
subsidiaries.
Central
Jersey Bancorp is a bank holding company under the Federal Bank Holding Company
Act of 1956, as amended by the 1999 financial modernization legislation known as
the Gramm-Leach-Bliley Act, and is subject to the supervision of the Board of
Governors of the Federal Reserve System. In general, the Bank Holding
Company Act limits the business of bank holding companies to banking, managing
or controlling banks, and performing certain servicing activities for
subsidiaries and, as a result of the Gramm-Leach-Bliley Act amendments to the
Bank Holding Company Act, permits bank holding companies that are also
designated as “financial holding companies” to engage in any activity, or
acquire and retain the shares of any company engaged in any activity, that is
either (1) financial in nature or incidental to such financial activity (as
determined by the Federal Reserve Board in consultation with the OCC), or (2)
complementary to a financial activity and does not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally (as determined by the Federal Reserve Board). In order for
a bank holding company to engage in the broader range of activities that are
permitted by the Bank Holding Company Act for bank holding companies that are
also financial holding companies, upon satisfaction of certain regulatory
criteria, the bank holding company must file a declaration with the Federal
Reserve Board that it elects to be a financial holding
company. Central Jersey Bancorp does not intend to seek a financial
holding company designation at this time, and does not believe that the current
decision not to seek a financial holding company designation will adversely
affect its ability to compete in its chosen markets. Central Jersey
Bancorp does not believe that seeking such a designation at this time would
position it to compete more effectively in the offering of its current products
and services.
Central
Jersey Bank, N.A., the banking subsidiary of Central Jersey Bancorp, is a
national association, and is subject to the regulation, supervision and
examination of the OCC. In addition, as a national bank, Central
Jersey Bank, N.A. was required to become a member bank of the Federal Reserve
Bank of New York, and is subject to examination and regulation by the Board of
Governors of the Federal Reserve System. The Federal Reserve Board
regulates aspects of activities conducted by Central Jersey Bancorp and its
subsidiaries, as discussed above.
Dividend
Restrictions
Central
Jersey Bancorp and its subsidiaries are separate legal entities whose finances
are in some ways interconnected. Central Jersey Bancorp’s principal
source of funds to fulfill its guarantee of trust preferred securities issued by
MCBK Capital Trust I or to pay cash dividends on its common stock, if such
dividends were to be declared, is from cash dividends paid to it by Central
Jersey Bank, N.A. Certain federal statutes and regulations limit the
payment of dividends to Central Jersey Bancorp by its bank subsidiary without
regulatory approval.
As a
national bank, Central Jersey Bank, N.A. must obtain prior approval from the OCC
to pay a cash dividend if the total of all cash dividends declared by Central
Jersey Bank, N.A. in any calendar year would exceed Central Jersey Bank, N.A.’s
net income for that year, combined with its retained net income for the
preceding two calendar years, less any transfers required by the OCC or to a
fund for retirement of preferred stock. Additionally, Central Jersey
Bank, N.A. may not declare dividends in excess of net profits on hand, after
deducting the amount by which the principal amount of all loans on which
interest is past due for a period of six months or more exceeds the reserve for
credit losses.
The
payment of dividends is limited further by applicable minimum capital
requirements. The Federal Reserve Board and the OCC have issued
additional guidelines and policy statements, applicable to Central Jersey
Bancorp and Central Jersey Bank, N.A., requiring bank holding companies and
national banks to continually evaluate the level of cash dividends in relation
to their respective operating income, capital needs, asset quality and overall
financial condition, and limiting dividends to payments out of current operating
earnings.
As an
insured depository institution, Central Jersey Bank, N.A. is subject to the
Federal Deposit Insurance Act which provides that no dividends may be paid by an
insured depository institution if it is in arrears in the payment of any
insurance assessment due to the FDIC. In addition, under the Federal
Deposit Insurance Act, an insured depository institution may not pay any
dividend if the institution is undercapitalized or if the payment of the
dividend would cause the institution to become undercapitalized, as further
discussed below. A payment of dividends that would have the effect of
depleting a depository institution’s capital base to an inadequate level could
constitute an unsafe and unsound practice subject to a cease and desist
order.
Prior to
2008, Central Jersey Bank, N.A. had never declared any cash
dividends. However, on January 15, 2008, Central Jersey Bancorp, the
parent company of Central Jersey Bank, N.A., announced that its Board of
Directors authorized a common stock repurchase program. Central
Jersey Bank, N.A. declared and paid cash dividends totaling $2.042 million to
Central Jersey Bancorp in order to effectuate the common stock repurchase
program. As of December 23, 2008, the Company suspended its stock
repurchase program due to its participation in the Capital Purchase Program (the
“Capital Purchase Program”) established as part of the U.S. Department of the
Treasury’s Troubled Asset Relief Program (“TARP”). In addition,
during 2009 Central Jersey Bancorp declared and paid $505,000 in dividends due
on the 11,300 shares of Fixed Rate Cumulative Perpetual Senior Preferred Stock,
Series A, having a liquidation preference of $1,000 per share (the “Series A
Preferred Shares”), issued by Central Jersey Bancorp to the U.S. Department of
the Treasury as part of the Capital Purchase Program. Central Jersey
Bank, N.A. declared and paid $320,000 in cash dividends to Central Jersey
Bancorp in order to provide funding for the aforementioned dividend
payment.
Transactions
with Affiliates
Banking
laws and regulations impose certain restrictions on the ability of bank holding
companies and their non-bank subsidiaries to borrow from and engage in other
transactions with their subsidiary or affiliated banks. Generally,
these restrictions require that any extensions of credit must be secured
by
designated
amounts of specified collateral and are limited to (1) 10% of the bank’s capital
stock and surplus per non-bank affiliated borrower, and (2) 20% of the bank’s
capital stock and surplus aggregated as to all non-bank affiliated
borrowers. In addition, certain transactions with affiliates must be
on terms and conditions, including credit standards, at least as favorable to
the institution as those prevailing for arms-length
transactions. Central Jersey Bank, N.A. also must comply with
regulations which restrict loans made to directors, executive officers and
principal shareholders of Central Jersey Bancorp and its
subsidiaries.
Liability
of Commonly Controlled Institutions and “Source of Strength”
Doctrine
The
Federal Deposit Insurance Act contains a “cross-guarantee” provision that could
result in any insured depository institution owned by Central Jersey Bancorp
being assessed for losses incurred by the FDIC in connection with assistance
provided to, or the failure of, any other insured depository institution owned
by Central Jersey Bancorp. Also, under the Bank Holding Company Act
and Federal Reserve Board policy, bank holding companies are expected to
represent a source of financial and managerial strength to their bank
subsidiaries, and to commit resources to support bank subsidiaries in
circumstances where banks may not be in a self sufficient financial
position. Capital loans by a bank holding company to a bank
subsidiary are subordinate in right of repayment to deposits and other bank
indebtedness. If a bank holding company declares bankruptcy, any
commitment made to a federal bank regulatory agency by the bank holding company
to sustain the capital of its subsidiary banks will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
In
addition, under the National Bank Act, as amended, if the capital stock of a
subsidiary national bank is impaired, by losses or otherwise, the OCC is
authorized to require payment of the deficiency by assessment upon the bank’s
parent company, and to sell the stock of the bank if such assessment is not
satisfied within three months to the extent necessary to eliminate the
deficiency.
FDIC
Deposit Insurance Coverage
The FDIC
is an independent agency of the United States government that protects against
the loss of insured deposits if an FDIC-insured bank or savings association
fails. FDIC deposit insurance is backed by the full faith and credit
of the United States government. FDIC insurance covers funds in
deposit accounts, including checking and savings accounts, money market deposit
accounts and certificates of deposit (CDs). FDIC insurance does not,
however, cover other financial products and services that insured banks may
offer, such as stocks, bonds, mutual fund shares, life insurance policies,
annuities or municipal securities. There is no need for depositors to
apply for FDIC insurance or even to request it. Coverage is
automatic. The FDIC provides separate coverage for deposits held in
different account ownership categories. The standard insurance amount
currently is $250,000 per depositor. The $250,000 limit is permanent
for certain retirement accounts (includes IRAs) and is temporary for all other
deposit accounts through December 31, 2013. On January 1, 2014, the
standard coverage limit will return to $100,000 for all deposit categories
except IRAs and Certain Retirement Accounts, which will continue to be insured
up to $250,000 per owner.
The
coverage limits shown in the chart below refer to the total of all deposits that
an account holder has in the same ownership categories at each FDIC-insured
bank. The chart shows only the most common ownership categories that
apply to individual and family deposits, and assumes that all FDIC requirements
are met.
Single
Accounts (owned by one person)
|
$250,000
per owner
|
|
Joint
Accounts (two or more persons)
|
$250,000
per co-owner
|
|
IRAs
and certain other retirement accounts
|
$250,000
per owner
|
|
Trust
Accounts
|
$250,000
per owner per beneficiary subject to specific limitations and
requirements
|
|
Corporation,
Partnership and Unincorporated Association Accounts
|
$250,000
per corporation, partnership or unincorporated
association
|
|
Employee
Benefit Plan Accounts
|
$250,000
for the non-contingent, ascertainable interest of each
participant
|
|
Government
Accounts
|
$250,000
per official custodian
|
|
Non-interest
Bearing Transaction Accounts
|
Unlimited
coverage – only at participating FDIC-insured banks and savings
associations
|
Central
Jersey Bank, N.A. accept deposits, and those deposit have the benefit of FDIC
insurance up to the applicable limits. The FDIC’s Deposit Insurance
Fund (the “DIF”) is funded by assessments on insured depository institutions,
which depend on the risk category of an institution and the amount of insured
deposits that it holds. The FDIC may increase or decrease the
assessment rate schedule on a semi-annual basis.
As part
of its efforts to rebuild the DIF, the FDIC adopted a rule imposing a special
assessment of five basis points on each FDIC-insured depository institution’s
assets, minus its Tier 1 Capital, as of June 30, 2009, subject to a cap of 10
basis points of average assessable domestic deposits for the second quarter of
2009. This special assessment totaled approximately $257,000 for
Central Jersey Bank, N.A. Additionally, as part of its efforts to
rebuild the DIF, the FDIC also required insured depository institutions,
including Central Jersey Bank, N.A., to prepay their estimated assessments for
the fourth quarter of 2009 and all of 2010, 2011 and 2012. On
December 30, 2009, Central Jersey Bank, N.A. prepaid an aggregate of $2,684,189
for its estimated quarterly risk-based assessments for these
periods.
Temporary
Liquidity Guarantee Program
On
November 21, 2008, the Board of Directors of the FDIC adopted a final rule
relating to the Temporary Liquidity Guarantee Program (“TLG
Program”). The TLG Program was announced by the FDIC on
October 14, 2008, preceded by the determination of systemic risk by the
Secretary of the U.S. Department of the Treasury (after consultation with the
President), as an initiative to counter the system-wide crisis in the nation’s
financial sector. Under the TLG Program, the FDIC will
(1) guarantee, through the earlier of maturity or June 30, 2012,
certain newly issued senior unsecured debt issued by participating institutions
on or after October 14, 2008, and before June 30, 2009, and
(2) provide full FDIC deposit insurance coverage for non-interest bearing
transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts
paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts
held at participating FDIC- insured institutions through June 30, 2010. Coverage
under the TLG Program was available for the first 30 days without
charge. The fee assessment for coverage of senior unsecured
debt
ranges
from 50 basis points to 100 basis points per annum, depending on the
initial maturity of the debt. The fee assessment for deposit
insurance coverage is 10 basis points per quarter on amounts in covered
accounts exceeding $250,000. On December 23, 2008, Central
Jersey Bancorp elected to participate in both guarantee programs.
TARP
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 the Treasury announced TARP, pursuant to which qualified U.S.
financial institutions could voluntarily build capital to increase the flow of
financing to U.S. businesses and consumers and to support the U.S.
economy.
On
December 23, 2008, Central Jersey Bancorp, pursuant to the Capital Purchase
Program established as part of TARP, sold the following securities to the U.S.
Department of the Treasury (1) the Series A Preferred Shares, and
(ii) a warrant to purchase up to 268,621 of Central Jersey Bancorp’s common
stock at an exercise price of $6.31 per share (the “Warrant”). Both
the Series A Preferred Shares and the Warrant qualify as components of Central
Jersey Bancorp’s regulatory Tier 1 Capital. The additional Tier 1
Capital further fortifies Central Jersey Bancorp’s already strong capital
position and provides strategic flexibility.
The
Series A Preferred Shares pay cumulative dividends at a rate of 5% per annum, or
approximately $550,000 annually, and will reset to a rate of 9% at the end of
the fifth year. The Warrant has a term of 10 years and is
exercisable, in whole or part, at any time during the term. The
exercise price for the Warrant was the market price of Central Jersey Bancorp’s
common stock at the time of issuance calculated on a 20-trading day trailing
average. The fair value of the Warrant was estimated on December 23,
2008 using the Black-Scholes option pricing model with the following
weighted-average assumptions used: stock price $6.31, dividend yield of 0%;
expected volatility of 46.50%; risk free interest rate of 1.45%; and expected
life of five years.
Central
Jersey Bancorp is subject to certain requirements regarding executive
compensation and corporate governance during the period in which any obligation
arising from financial assistance provided under the Capital Purchase Program
remains outstanding. These requirements are set forth in the
Emergency Economic Stabilization Act of 2008 (the “EESA”) and the regulations
promulgated thereunder by the U.S. Department of the Treasury, and include the
following: (1) Central Jersey Bancorp’s Compensation Committee is required to
review incentive compensation arrangements with senior risk officers at least
annually to ensure that no such arrangement encourages senior executive officers
to take unnecessary and excessive risks that threaten the value of Central
Jersey Bancorp, and the Compensation Committee must provide certifications to
that effect to the OCC; (2) Central Jersey Bancorp is required to recover any
bonus or incentive compensation paid to a senior executive officer that is based
on statements of earnings that are subsequently proven to be materially
inaccurate; and (3) Central Jersey Bancorp is prohibited from making any “golden
parachute payments” as defined in the EESA and the regulations promulgated
thereunder.
On
February 17, 2009, President Obama signed the American Recovery and Reinvestment
Act of 2009 (the “ARRA”) into law, which amended the executive compensation and
corporate governance provisions of the EESA. On June 15, 2009, the
U.S. Department of the Treasury issued new regulations under the
AARA. The amendments and the regulations promulgated thereunder
elaborate on the requirements and obligations under the EESA and provide that
Capital Purchase Program participants: (1) may not provide incentives for senior
executive officers to take unnecessary and excessive risks that threaten the
value of the financial institution; (2) must recover any bonus or incentive
compensation paid to senior executive officers based on statements of earning
that are subsequently proven to be materially inaccurate; (3) may not make any
“golden parachute payments” to senior executive officers; (4) may not pay any
bonus, retention award or
incentive
compensation to certain of the most highly compensated employees, except
pursuant to employment contracts executed on or before February 11, 2009 and
except for long-term restricted stock that meets certain requirements; (5) may
not adopt any compensation plan that would encourage manipulation of reported
earnings to enhance the compensation paid to any employee; (6) must establish a
compensation committee of independent directors to review employee compensation
plans; and (7) must provide certain certifications regarding executive
compensation and compliance with the requirements of the EESA. The
ARRA also provides that, subject to consultation with the appropriate federal
banking agency, the Secretary of the U.S. Department of the Treasury will permit
a participant in the Capital Purchase Program to repay any assistance previously
provided under the Capital Purchase Program. The participant will not
have to replace the assistance with Tier I Capital, as originally provided in
the Capital Purchase Program.
Capital
Adequacy
The
Federal Reserve Board and the OCC have substantially similar risk-based capital
and leverage ratio guidelines for banking organizations. These
guidelines are intended to ensure that banking organizations have adequate
capital given the risk levels of their assets and off-balance sheet financial
instruments. Under the risk-based capital and leverage ratio
guidelines, assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items. These risk-based capital requirements
identify concentration of credit risk, and facilitate management of those
risks.
To derive
total risk-weighted assets, bank assets are given risk-weights of 0%, 20%, 50%
and 100%. In addition, certain off-balance sheet items are converted
to asset equivalent amounts to which an appropriate risk-weight will
apply. Most loans are assigned to the 100% risk category, except for
performing first mortgage loans fully secured by residential property, which
carry a 50% risk-weighting. Most investment securities (including,
primarily, general obligation claims of states or other political subdivisions
of the United States) are assigned to the 20% category, except for municipal or
state revenue bonds, which have a 50% risk-weight, and direct obligations of the
U.S. Department of the Treasury or obligations backed by the full faith and
credit of the United States government, which have a 0%
risk-weight. In converting off-balance sheet items, direct credit
substitutes, including general guarantees and standby letters of credit backing
financial obligations, are given a 100%
risk-weighting. Transaction-related contingencies such as bid bonds,
standby letters of credit backing nonfinancial obligations, and undrawn
commitments (including commercial credit lines with an initial maturity or more
than one year) have a 50% risk-weighting. Short-term commercial
letters of credit have a 20% risk-weighting, and certain short-term
unconditionally cancelable commitments have a 0% risk-weighting.
Under the
capital guidelines, a banking organization’s total capital is divided into
tiers. “Tier I Capital” consists of common shareholders’ equity,
qualifying preferred stock, and minority interests in the equity accounts of
consolidated subsidiaries, less certain goodwill items and other intangible
assets. No more than 25% of qualifying Tier I Capital may consist of
trust preferred securities. “Tier II Capital” consists of hybrid
capital instruments, perpetual debt, mandatory convertible debt securities, a
limited amount of subordinated debt, and preferred stock that does not qualify
as Tier I Capital, plus a limited amount of loan and lease loss allowances and a
limited amount of unrealized holding gains on equity
securities. “Tier III Capital” consists of qualifying unsecured
subordinated debt. “Total Capital” is the sum of Tier I, Tier II and
Tier III Capital. The sum of Tier II and Tier III Capital may not
exceed the amount of Tier I Capital.
Under the
Federal Reserve Board’s risk-based capital guidelines for bank holding
companies, the required minimum ratio of Total Capital (the sum of Tier I, Tier
II and Tier III Capital) to risk-weighted assets (including certain off-balance
sheet activities, such as standby letters of credit) is 8%. The
required minimum ratio of Tier I Capital to risk-weighted assets is
4%. At December 31, 2009, Central Jersey
Bancorp’s
ratios of Total Capital and Tier 1 Capital to risk-weighted assets were 12.50%
and 13.76%, respectively.
The
Federal Reserve Board also requires bank holding companies to comply with
minimum leverage ratio guidelines. The leverage ratio is the ratio of
a bank holding company’s Tier I Capital (excluding intangibles) to its total
assets (excluding loan loss reserve, goodwill, and certain other
intangibles). Bank holding companies normally must maintain a minimum
leverage ratio of 4%, unless the bank holding company has the highest
supervisory rating or has implemented the Federal Reserve Board’s risk-adjusted
measure for market risk, in which case its minimum leverage ratio must be
3%. Banking organizations undergoing significant growth or
undertaking acquisitions must maintain even higher capital
positions. At December 31, 2009, Central Jersey Bancorp’s leverage
ratio was 9.68%. Central Jersey Bank, N.A. is subject to similar
risk-based and leverage capital guidelines, as adopted by the OCC.
Banking
regulators currently are developing proposed revisions to their existing capital
adequacy regulations and standards, based on policy guidelines issued by the
Basel Committee on Banking Supervision, an international committee of central
banks and bank regulators from major industrialized
countries. Central Jersey Bank, N.A. is analyzing the potential
impact of these proposed revisions on its risk-based capital.
Prompt
Corrective Action
The
Federal Deposit Insurance Act requires federal banking regulators to take prompt
corrective action with respect to depository institutions that do not meet
minimum capital requirements. Failure to meet minimum requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have an adverse material effect on Central
Jersey Bancorp’s financial condition. Under the Prompt Corrective
Action Regulations, Central Jersey Bank, N.A. must meet specific capital
guidelines that involve quantitative measures of its assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices.
The
Prompt Corrective Action Regulations define specific capital categories based on
an institution’s capital ratios. The capital categories, in declining
order, are “well capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized,” and “critically
undercapitalized.” The Federal Deposit Insurance Act imposes
progressively more restrictive constraints on operations, management and capital
distributions, depending on the capital category by which the institution is
classified. Institutions categorized as “undercapitalized” or worse
may be subject to requirements to file a capital plan with their primary federal
regulator, prohibitions on the payment of dividends and management fees,
restrictions on asset growth and executive compensation, and increased
supervisory monitoring, among other things. Other restrictions may be
imposed on the institution by the regulatory agencies, including requirements to
raise additional capital, sell assets or sell the entire
institution. Once an institution becomes “critically
undercapitalized,” it generally must be placed in receivership or
conservatorship within 90 days.
The
Prompt Corrective Action Regulations provide that an institution is “well
capitalized” if the institution has a total risk-based capital ratio of 10.0% or
greater, a Tier I risk-based capital ratio of 6.0% or greater, and a leverage
ratio of 5.0% or greater. The institution also may not be subject to
an order, written agreement, and capital directive or prompt corrective action
directive to meet and maintain a specific level for any capital
measure. An institution is “adequately capitalized” if it has a total
risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital ratio
of 4.0% or greater, and a leverage ratio of 4.0% or greater (or a leverage ratio
of 3.0% or greater if the institution is rated
composite
1 in its most recent report of examination, subject to appropriate federal
banking agency guidelines), and the institution does not meet the definition of
a well-capitalized institution. An institution is deemed
“undercapitalized” if it has a total risk-based capital ratio that is less than
8.0%, a Tier I risk-based capital ratio of less than 4.0%, or a leverage ratio
of less than 4.0% (or a leverage ratio of less than 3.0% if the institution is
rated composite 1 in its most recent report of examination, subject to
appropriate federal banking agency guidelines), and the institution does not
meet the definition of a significantly undercapitalized or critically
undercapitalized institution. An institution is “significantly
undercapitalized” if the institution has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio of less than 3.0%, or a
leverage ratio less than 3.0% and the institution does not meet the definition
of a critically undercapitalized institution, and is “critically
undercapitalized” if the institution has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
The
appropriate federal banking agency may, under certain circumstances, reclassify
a well capitalized insured depository institution as adequately
capitalized. The appropriate agency is also permitted to require an
adequately capitalized or undercapitalized institution to comply with the
supervisory provisions as if the institution were in the next lower category
(but not to treat a significantly undercapitalized institution as critically
undercapitalized) based on supervisory information other than an institution’s
capital levels.
At
December 31, 2009, Central Jersey Bank, N.A. was “well capitalized” based on the
ratios and guidelines noted above. However, the capital categories of
the bank are determined solely for the purpose of applying the Prompt Corrective
Action Regulations and may not constitute an accurate representation of its
overall financial condition or prospects. Additional information on
capital amounts and ratios of Central Jersey Bancorp and Central Jersey Bank,
N.A. is found in Note 17 to our consolidated financial statements included
herein.
Unsafe
and Unsound Practices
Notwithstanding
its Prompt Corrective Action category dictated by risk-based capital ratios, the
Federal Deposit Insurance Act permits the appropriate bank regulatory agency to
reclassify an institution if it determines, after notice and a hearing, that the
condition of the institution is unsafe or unsound, or if it deems the
institution to be engaging in an unsafe or unsound practice. Under
the Financial Institutions Supervisory Act, the OCC has the authority to
prohibit national banks from engaging in any activity in the conduct of their
business which the OCC believes constitutes an unsafe or unsound
practice. The Federal Reserve Board has similar authority with regard
to bank holding companies and their non-bank subsidiaries.
The
USA PATRIOT Act
On
October 26, 2001, certain comprehensive anti-terrorism legislation known as the
USA PATRIOT Act of 2001 was enacted. Title III of the USA PATRIOT Act
substantially broadened the scope of the U.S. anti-money-laundering laws and
regulations by imposing significant compliance and due diligence obligations,
creating additional crimes and penalties and expanding the extra-territorial
jurisdiction of the United States. The U.S. Department of the
Treasury has issued a number of implementing regulations which apply various
requirements of the USA PATRIOT Act to financial institutions such as Central
Jersey Bank, N.A. Those regulations impose obligations on financial
institutions to maintain appropriate policies, procedures and controls to
detect, prevent and report money laundering and terrorist
financing.
Failure
of a financial institution to comply with the USA PATRIOT Act’s requirements
could have serious legal consequences for an institution and adversely affect
its reputation. Central Jersey Bancorp has adopted appropriate
policies, procedures and controls to address compliance with the requirements of
the USA PATRIOT Act under the existing regulations and will continue to revise
and update its policies, procedures and controls to reflect changes required by
the USA PATRIOT Act and by the U.S. Department of the Treasury
regulations.
Community
Reinvestment Act
The
Federal Community Reinvestment Act requires banks to respond to the full range
of credit and banking needs within their communities, including the needs of low
and moderate-income individuals and areas. A bank’s failure to
address the credit and banking needs of all socio-economic levels within its
markets may result in restrictions on growth and expansion opportunities for the
bank, including restrictions on new branch openings, relocation, formation of
subsidiaries, mergers and acquisitions. In the latest CRA examination
report with respect to Central Jersey Bank, N.A., dated August 10, 2009, Central
Jersey Bank, N.A. received a rating of satisfactory.
Consumer
Privacy
The
privacy provisions of the Gramm-Leach-Bliley Act generally prohibit financial
institutions, including Central Jersey Bancorp and Central Jersey Bank, N.A.,
from disclosing or sharing nonpublic personal financial information to third
parties for marketing or other purposes not related to transactions, unless
customers have an opportunity to “opt out” of authorizing such disclosure, and
have not elected to do so. It has never been the policy of Central
Jersey Bancorp to release such information except as may be required by
law. The Fair Credit Reporting Act also restricts information sharing
among affiliates for marketing and other purposes.
Loans
to One Borrower
Federal
banking laws limit the amount a bank may lend to a single borrower to 15% of the
bank’s capital and surplus, plus an additional 10% of capital and surplus if the
amount over the 15% general limit is fully secured by adequate amounts of
readily marketable capital. However, no loan to one borrower may
exceed 25% of a bank’s statutory capital, notwithstanding collateral pledged to
secure it. Well-qualified national banks also may be eligible for
certain preferred lending limits within specified loan categories.
Depositor
Preference Statute
Under
federal law, depositors, certain claims for administrative expenses and employee
compensation against an insured depository institution are afforded a priority
over other general unsecured claims against the institution, in the event of a
“liquidation or other resolution” of the institution by a receiver.
Sarbanes-Oxley
Act of 2002
On July
30, 2002, the President of the United States signed into law the Sarbanes-Oxley
Act of 2002. The stated goals of Sarbanes-Oxley Act of 2002 are to
increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. The Sarbanes-Oxley Act
of 2002 generally applies to all companies, both domestic and foreign, that file
or are required to file periodic reports with the SEC under the Exchange
Act.
The
Sarbanes-Oxley Act of 2002 includes very specific disclosure requirements and
corporate governance rules, requires the SEC and self regulatory organizations
to adopt extensive additional disclosure, corporate governance and other related
rules and mandates further studies of certain issues by the SEC and the
Comptroller General. The Sarbanes-Oxley Act of 2002 represents
significant federal involvement in matters traditionally left to state
regulatory systems, such as the regulation of the accounting profession, and to
state corporate law, such as the relationship between a board of directors and
management and between a board of directors and its committees.
The
Sarbanes-Oxley Act of 2002 addresses, among other matters:
|
·
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audit
committees for all reporting
companies;
|
|
·
|
certification
of financial statements by the chief executive officer and the chief
financial officer;
|
|
·
|
the
forfeiture of bonuses or other incentive-based compensation and profits
from the sale of an issuer’s securities by directors and senior officers
under certain circumstances;
|
|
·
|
a
prohibition on insider trading during pension plan black out
periods;
|
|
·
|
disclosure
of off-balance sheet transactions;
|
|
·
|
expedited
filing requirements for certain periodic and current
reports;
|
|
·
|
disclosure
of a code of ethics;
|
|
·
|
“real
time” filing of periodic reports;
|
|
·
|
the
formation of a public accounting oversight
board;
|
|
·
|
auditor
independence; and
|
|
·
|
various
increased criminal penalties for violations of securities
laws.
|
Overall
Impact of New Legislation and Regulations
Financial
regulatory reform continues to be a top priority for President Obama’s
Administration. The U.S. House of Representatives (the “House”)
passed the “Wall Street Reform and Consumer Protection Act” on December 11,
2009. The U.S. Senate has not yet enacted legislation in this
area. The Senate Banking Committee draft bill, “Restoring American
Financial Stability Act of 2009” is still in draft form and currently under
discussion. Both legislative products focus on measures to improve
financial stability, provide for more effective bank supervision, enhance the
regulation of consumer financial products and services through the establishment
of a Consumer Financial Protection Agency and allow for better coordination
between regulatory agencies. The House’s bill would establish a
Systemic Dissolution Fund to help wind down financial institutions when
necessary. The fund would be pre-funded by FDIC assessments on large
financial companies with assets exceeding $50 billion, to pay for the resolution
of a bank holding company, a systemically important financial company, an
insurance company or any other financial company. The Senate Banking
Committee’s draft proposal has a similar resolution mechanism and sets the
threshold at $10 billion or more.
In
addition to the foregoing, various legislative initiatives are from time to time
introduced in Congress. It cannot be predicted whether or to what
extent the business and condition of Central Jersey Bancorp and its subsidiaries
will be affected by new legislation or regulations, and legislation or
regulations as yet to be proposed or enacted. Further, the U.S.
Department of the Treasury has the authority to unilaterally change the scope
and requirements of the Capital Purchase Program, which could have an adverse
impact on the operations of Central Jersey Bancorp and its
subsidiaries.
Impact
of Monetary Policies
The
earnings of Central Jersey Bank, N.A. will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and its agencies. The monetary policies of the Federal Reserve Board
have had, and will likely continue to have, an important impact on the operating
results of banks through the Federal Reserve Board’s power to implement national
monetary policy in order, among other things, to curb inflation or combat a
recession. The Federal Reserve Board has a major effect upon the
levels of bank loans, investments and deposits through its open
market
operations
in United States government securities and through its regulation of, among
other things, the discount rate on borrowing of member banks and the reserve
requirements against member bank deposits. It is not possible to
predict the nature and impact of future changes in monetary and fiscal
policies.
Item 1A.
|
Risk
Factors
|
Not
applicable.
Item 1B.
|
Unresolved Staff
Comments
|
None.
Item 2.
|
Properties
|
Bank
Buildings
The
corporate headquarters of Central Jersey Bank, N.A. is a leased facility located
in Oakhurst, New Jersey at 1903 Highway 35, which includes a full service
branch.
Central
Jersey Bank, N.A. also leases office space or owns the buildings at the
following branch locations:
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·
|
627
Second Avenue, Long Branch, New
Jersey.
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·
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700
Allaire Road, Spring Lake Heights, New
Jersey.
|
|
·
|
700
Branch Avenue, Little Silver, New
Jersey.
|
|
·
|
61
Main Avenue, Ocean Grove, New
Jersey.
|
|
·
|
444
Ocean Boulevard, Long Branch, New
Jersey.
|
|
·
|
2200
Highway 35, Sea Girt, New Jersey.
|
|
·
|
155
Main Street, Manasquan, New Jersey.
|
|
·
|
Shark
River Plaza, 300 West Sylvania Avenue, Route 33, Neptune City, New
Jersey.
|
|
·
|
2201
Bridge Avenue, Point Pleasant, New
Jersey.
|
|
·
|
501
Main Street, Bradley Beach, New
Jersey.
|
|
·
|
611
Main Street, Belmar, New Jersey.
|
|
·
|
Shop
Rite Plaza, 2445 Highway 34, Manasquan, New
Jersey.
|
Item 3.
|
Legal
Proceedings
|
There are
no material legal, governmental, administrative or other proceedings pending
against Central Jersey Bancorp or Central Jersey Bank, N.A.
Item 4.
|
(Removed and
Reserved)
|
PART II
Item
5.
|
Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities
|
Effective
February 1, 2007, the common stock of Central Jersey Bancorp commenced trading
on the NASDAQ Global Market under the ticker symbol “CJBK.” Prior
thereto, the common stock of Central Jersey Bancorp traded on the NASDAQ Capital
Market.
The
following table sets forth, for the periods indicated, the high and low last
sale information for Central Jersey Bancorp’s common stock, as reported on the
NASDAQ Global Market for the period commencing January 1, 2008 through December
31, 2009. Please note that the information set forth below reflects
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions, and has been adjusted to reflect a 5% stock
dividend paid on July 1, 2008.
Year
Ended December 31, 2009
|
High
|
Low
|
||||||
First
Quarter
|
$ | 7.50 | $ | 4.62 | ||||
Second
Quarter
|
6.70 | 4.90 | ||||||
Third
Quarter
|
6.65 | 5.05 | ||||||
Fourth
Quarter
|
6.11 | 2.80 | ||||||
Year
Ended December 31, 2008
|
High
|
Low
|
||||||
First
Quarter
|
$ | 8.38 | $ | 7.35 | ||||
Second
Quarter
|
8.74 | 7.66 | ||||||
Third
Quarter
|
8.00 | 6.62 | ||||||
Fourth
Quarter
|
7.44 | 5.40 |
As of
March 8, 2010, the following were market makers for Central Jersey Bancorp’s
common stock: UBS Securities LLC; Citadel Derivatives Group LLC; Susquehanna
Capital Group; Sandler O’ Neill & Partners, L.P.; Knight Equity Markets,
L.P.; Keefe, Bruyette & Woods, Inc.; Sterne, Agee & Leach, Inc.; NASDAQ
Execution Services LLC; Stifel Nicolaus & Co.; Hudson Securities, Inc.;
Susquehanna Financial Group; Automated Trading Desk Financial Services, LLC;
Bloomberg Tradebook LLC; E*Trade Capital Markets Lic; Goldman, Sachs & Co.;
Merrill Lynch, Pierce, Fenner & Smith Incorporated; Stockcross Financial
Services, Inc. and Domestic Securities, Inc.
As of
February 28, 2009, the approximate number of registered holders of Central
Jersey Bancorp’s common stock was 619.
During
2009 Central Jersey Bancorp declared and paid $505,000 in dividends due on the
Series A Preferred Shares, issued by Central Jersey Bancorp to the U.S.
Department of the Treasury as part of the Capital Purchase
Program. Central Jersey Bank, N.A. declared and paid $320,000 in cash
dividends to Central Jersey Bancorp in order to provide funding for the
aforementioned dividend payment.
Central
Jersey Bancorp has not paid any cash dividends on its common stock and does not
presently intend to declare or pay cash dividends on its common
stock. Our dividend policy is subject to certain regulatory
considerations and the discretion of our Board of Directors and depends upon a
number of factors, including operating results, financial condition and general
business conditions. Holders of common stock are entitled to receive
dividends as, if and when declared by our Board of Directors out
of
funds
legally available therefore, subject to the restrictions set forth under the
Federal Bank Holding Company Act. Subject to the provisions of the
Capital Purchase Program described below, we may pay cash dividends without
regulatory approval if net income available to common shareholders fully funds
the proposed dividends, and the expected rate of earnings retention is
consistent with capital needs, asset quality and overall financial
condition.
For so
long as any Series A Preferred Shares are outstanding, Central Jersey Bancorp is
not permitted to declare or pay cash dividends on its common stock unless all
dividends on the Series A Preferred Shares have been paid
in-full. Further, unless the Series A Preferred Shares are redeemed
or fully transferred to third parties, Central Jersey Bancorp is prohibited from
increasing its common stock dividends without prior approval of the U.S.
Department of the Treasury until December 23, 2011, which is the third
anniversary of the investment by the U.S. Department of the Treasury in Central
Jersey Bancorp.
Stock
Repurchase Plan
On
January 7, 2008, Central Jersey Bancorp announced a common stock repurchase
program. Central Jersey Bancorp’s Board of Directors authorized
Central Jersey Bancorp to repurchase up to 5.7%, or 525,000 shares, of the
9,183,290 shares of its common stock outstanding at the time the repurchase
program was announced. Repurchases were to 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 24 months ending
December 31, 2009, or such shorter or longer period of time as Central Jersey
Bancorp may determine. The acquired shares are being held in treasury
to be used for general corporate purposes. Central Jersey Bancorp’s
repurchase activities were transacted in accordance with SEC safe harbor rules
and guidance for issuer repurchases. During the year ended December
31, 2008, Central Jersey Bancorp repurchased 246,448 shares of its common stock
at an average price of $7.29 per share. Central Jersey Bank, N.A.
declared and paid $2.042 million in cash dividends to Central Jersey Bancorp in
order to effectuate the common stock repurchase program. Effective
December 23, 2008, Central Jersey Bancorp suspended its stock repurchase program
due to its participation in the Capital Purchase Program.
Item 6.
|
Selected Financial
Data
|
Not
applicable.
Item 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
The
following discussion and analysis is intended to provide information about
Central Jersey Bancorp’s financial condition and results of operations for the
years ended December 31, 2009 and 2008. The following information
should be read in conjunction with Central Jersey Bancorp’s audited consolidated
financial statements for the years ended December 31, 2009 and 2008 including
the related notes thereto, which begin on page F-1 of this report.
General
Central
Jersey Bancorp (formerly Monmouth Community Bancorp) is a bank holding company
headquartered in Oakhurst, New Jersey. The holding company was
incorporated in New Jersey on March 7, 2000, and became an active bank holding
company on August 31, 2000 through the acquisition of Central Jersey Bank, N.A.
(formerly Monmouth Community Bank, N.A.). On January 1, 2005, Central
Jersey Bancorp completed its strategic business combination transaction with
Allaire Community Bank, a New Jersey state-chartered bank, pursuant to which
Allaire Community Bank became a wholly-owned bank subsidiary of Central Jersey
Bancorp. On the effective date of the combination, the name of the
holding company was changed from Monmouth Community Bancorp to Central Jersey
Bancorp. In addition, as a part of the combination, each outstanding
share of common stock of Allaire Community Bank was exchanged for one share of
Central Jersey Bancorp common stock.
Critical
Accounting Policies
Note 1
“Summary of Significant Accounting Policies” to our consolidated financial
statements for the years ended December 31, 2009 and 2008, contained elsewhere
in this report, includes a summary of our significant accounting
policies. We believe our policy, with respect to the methodology for
our determination of the allowance for loan losses (“ALL”), involves a high
degree of complexity and requires management to make difficult and subjective
judgments which often requires assumptions or estimates about uncertain
matters. Changes in these judgments, assumptions or estimates could
cause reported results to differ materially. This critical policy and
its application are periodically reviewed by Central Jersey Bancorp’s Audit
Committee and Board of Directors.
Additional
critical accounting policies relate to judgments about other asset impairments,
including goodwill, investment securities, servicing rights and deferred tax
assets. Goodwill is recognized for the excess of the purchase price
over the estimated fair value of acquired net assets in a business
combination. In accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Goodwill and Other
Intangibles,” goodwill is not amortized but is subject to impairment
testing at least annually, which the Central Jersey Bancorp performs as of
December 31st of
each year. On an interim basis, Central Jersey Bancorp evaluates whether
circumstances are present that would indicate potential impairment of its
goodwill. These circumstances include prolonged trading value of Central Jersey
Bancorp’s common stock relative to its book value, adverse changes in the
business or legal climate, actions by regulators, or loss of key personnel. When
it is determined that these or other circumstances are present, Central Jersey
Bancorp tests the carrying value of goodwill for impairment at an interim
date.
The
goodwill impairment test is a two step test in which Central Jersey Bancorp
first identifies its reporting units and compares the estimated fair value of
each reporting unit to the carrying amount, inclusive of the goodwill assigned
it. If the carrying amount of a reporting unit exceeds the estimated fair value,
an indicator of goodwill impairment exists and a second step test is performed
to determine if any goodwill impairment exists. In the second step, Central
Jersey Bancorp calculates the implied value of goodwill by emulating a business
combination for each reporting unit. This step subtracts the
estimated
fair
value of net assets in the reporting unit from the step one estimated fair value
to determine the implied value of goodwill. If the implied value of goodwill
exceeds the carrying value of goodwill allocated to the reporting unit, goodwill
is not impaired, but if the implied value of goodwill is less than the carrying
value of the goodwill allocated to the reporting unit, a goodwill impairment
charge is recognized for the difference in the consolidated statement of
operations with a corresponding reduction to goodwill on the consolidated
statement of financial condition. Central Jersey Bancorp’s only reporting unit
is “community banking” for purposes of the goodwill impairment
test.
In
performing its evaluation of goodwill impairment, Central Jersey Bancorp makes
significant judgments, particularly with respect to estimating the fair value of
its reporting unit and if the second step test is required, estimating the fair
value of net assets. Central Jersey Bancorp utilizes a third-party specialist
who assists with valuation techniques to evaluate its reporting unit and
estimates a fair value as though it were an acquirer. The estimate utilizes
historical data, cash flows, and market and industry data specific to the
reporting unit. Industry and market data is used to develop material assumptions
such as transaction multiples, required rates of return, control premiums,
transaction costs and synergies of a transaction, and
capitalization.
Other
intangible assets are specifically identified intangible assets created from a
business combination. Core deposit intangibles represent the value of checking,
savings and other acquired, low cost deposits. Core deposit intangibles are
amortized over the lesser of the estimated lives of deposit accounts or ten
years on an accelerated basis. Decreases in deposit lives may result
in increased amortization and/or an impairment charge.
For
purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks with original maturities of three months or less
and overnight federal funds sold. Federal funds sold are generally
sold for one-day periods.
FASB ASC
Topic 320, “Investments-Debt
and Equity Securities,” requires that securities be categorized as “held
to maturity,” “trading securities” or “available-for-sale,” based on
management’s intent as to the ultimate disposition of each
security. FASB ASC Topic 320 allows debt securities to be classified
as “held to maturity” and reported in consolidated financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold these securities to maturity. When an entity does not intend
to sell the security, and it is more likely than not, the entity will not have
to sell the security before recovery of its cost basis, it will recognize the
credit component of an other-than-temporary impairment of a debt security in
earnings and the remaining portion in other comprehensive
income. Such securities are stated at cost, adjusted for amortization
of premiums and accretion of discounts over the estimated remaining lives of the
investment securities utilizing the level-yield method. Central Jersey Bank,
N.A. does not currently use or maintain a trading account. Securities
not classified as “held to maturity” are classified as
“available-for-sale.” These securities are reported at fair value,
and unrealized gains and losses on the securities are excluded from earnings and
reported, net of deferred taxes, as a separate component of
equity. 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. 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. When an entity does not intend to sell the
security, and it is more likely than not, the entity will not have to sell the
security before recovery of its cost basis, it will recognize the
credit
component
of an other-than-temporary impairment of a debt security in earnings and the
remaining portion in other comprehensive income. For held-to-maturity
debt securities, the amount of an other-than-temporary impairment recorded in
other comprehensive income for the noncredit portion of a previous
other-than-temporary impairment should be amortized prospectively over the
remaining life of the security on the basis of the timing of future estimated
cash flows of the security. After evaluation, as of December
31, 2009, Central Jersey Bank, N.A. noted no other-than-temporary impairment
issues.
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, at the loan’s observable market price, or the fair
value of the underlying collateral, if the loan is collateral
dependent. Conforming residential mortgage loans, home equity and
second mortgages and loans to individuals, are excluded from the definition of
impaired loans as they are characterized as smaller balance, homogeneous loans
and are collectively evaluated.
The
accrual of income on loans, including impaired loans, is generally discontinued
when a loan becomes more than 90 days delinquent as to principal or interest or
when other circumstances indicate that collection is questionable, unless the
loan is well secured and in the process of collection. Income on
non-accrual loans, including impaired loans, is recognized only in the period in
which it is collected, and only if management determines that the loan principal
is fully collectible. Loans are returned to an accrual status when a
loan is brought current as to principal and interest and reasons 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 90 days past due unless they are well
secured and in the process of collection or, regardless of the past due status
of the loan, when management determines that the complete recovery of principal
and interest is in doubt. Commercial loans are generally written down
after an analysis is completed which indicates that collectibility of the full
principal balance is in doubt. Consumer loans are generally written
down 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 written down 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 fair value.
The ALL
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 ALL
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 ALL. 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 ALL
may be necessary due to economic, operating, regulatory and other conditions
beyond Central Jersey Bank, N.A.’s control. Management believes that
the ALL is adequate as of December 31, 2009.
Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value less cost to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of
carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in net expenses
from other non-interest expenses.
Income
taxes are accounted for under the asset and liability method. Current
income taxes are provided for based upon amounts estimated to be currently
payable, for both federal and state income taxes. Deferred federal
and state tax assets and liabilities are recognized for the expected future tax
consequences of existing differences between financial statement and tax basis
of existing assets and liabilities. Deferred tax assets are
recognized for future deductible temporary differences and tax loss carry
forwards if their realization is “more-likely-than-not.” The effect
of a change in the tax rate on deferred taxes is recognized in the period of the
enactment date.
Comprehensive
(loss) income is segregated into net (loss) income and other comprehensive
(loss) income. Other comprehensive (loss) income includes items
previously recorded directly to equity, such as unrealized gains and losses on
securities available-for-sale. Comprehensive (loss) income is
presented in the Consolidated 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.
Central
Jersey Bank, N.A. originates SBA loans and typically sells the U.S. Government
guaranteed portion 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. Central Jersey Bank, N.A. accounts for its
transfers and servicing of financial assets in accordance with FASB ASC Topic
860, “Transfers and
Servicing.” Central Jersey Bank, N.A. records servicing rights
based on the fair values at the date of sale.
The
determination of whether deferred tax assets will be realizable is predicated on
estimates of future taxable income. Such estimates are subject to
management’s judgment. A valuation reserve is established when
management is unable to conclude that it is more likely than not that it will
realize deferred tax assets based on the nature and timing of these
items.
Overview
In the
second quarter of 2009, Central Jersey Bancorp recorded a $27.0 million goodwill
impairment charge, resulting in a net loss and a net loss available to common
shareholders of $25.8 million and $26.5 million, respectively, for the year
ended December 31, 2009, as compared to net income and net income available
to
shareholders
of $2.9 million for 2008. Basic and diluted loss per common share for
the year ended December 31, 2009 were both ($2.91), as compared to basic and
diluted earnings per common share of $0.32 and $0.30, respectively, for
2008. The net income available to common shareholders figure for the
year ended December 31, 2009, takes into account $565,000 in preferred stock
dividends payable to the U.S. Department of the Treasury as part of the Capital
Purchase Program and $178,000 in related preferred stock discount
accretion. Had Central Jersey Bancorp not realized the $27.0 million
goodwill impairment charge for the year ended December 31, 2009, net income and
net income available to common shareholders would have been $1.2 million and
$446,000, respectively.
The $27.0
million in goodwill was recorded on January 1, 2005 in conjunction with the
combination with Allaire Community Bank. The goodwill impairment
charge was a non-cash adjustment to Central Jersey Bancorp’s consolidated
financial statements which did not affect cash flows, liquidity, or tangible
capital. As goodwill is excluded from regulatory capital, the
impairment charge did not impact regulatory capital ratios of Central Jersey
Bancorp or Central Jersey Bank, N.A., both of which remain “well-capitalized”
under regulatory requirements. The goodwill impairment charge was
recorded in accordance with FASB ASC Topic 350, which requires an interim
goodwill impairment analysis under certain events, including “a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed of.”
Central
Jersey Bancorp recorded an income tax benefit of $888,000 on a loss before taxes
of $26.7 million for the year ended December 31, 2009. For the year
ended December 31, 2008, Central Jersey Bancorp recorded income tax expense of
$1.3 million on income before taxes of $4.2 million, resulting in an effective
tax rate of 30.7%. The income tax benefit was due to the utilization
of capital tax loss carry-forwards which resulted from the 2007 balance sheet
restructuring initiative. As a result of the restructuring, a
deferred tax valuation allowance was established against deferred tax assets
generated from the capital tax loss carry-forwards. Since $772,000 of
the $2.9 million in gains from the sale of available-for-sale investment
securities, recorded during the year ended December 31, 2009, were realized in
CJB Investment Company, a wholly-owned subsidiary of Central Jersey Bank, N.A.,
these gains are considered capital gains and are permitted to be offset against
the remaining capital tax loss carry-forwards. The federal income tax
benefit is primarily the result of the reversal of the deferred tax valuation
allowance which totaled approximately $262,000 and a significant increase in the
amount of federal tax free interest income derived from municipal bond and note
obligations.
The net
interest margin on a tax equivalent basis was 3.29% for the year ended December
31, 2009, as compared to 3.73% for the year ended December 31,
2008. The retail and commercial banking markets remain very
competitive for deposit and loan pricing. The yield on
interest-earning assets was 4.70% for the year ended December 31, 2009, as
compared to 5.84% for the year ended December 31, 2008. The average
cost of deposits and interest-bearing liabilities was 1.82% for the year ended
December 31, 2009, as compared to 2.70% for the year ended December 31,
2008. The decrease in both average yield on interest-earning assets
and the cost of deposits and interest-earning liabilities for year ended
December 31, 2009 was primarily due to the significant reduction in the general
level of short term rates and the 500 basis point reduction in the Prime Rate of
interest which occurred between September 2007 and December 2008.
Per
common share earnings have been adjusted in all periods to reflect the
two-for-one stock split, in the form of a stock dividend, paid to common
shareholders of record on June 15, 2005, and for the 5% stock dividends paid on
July 1, 2006, July 2, 2007 and July 1, 2008.
Total
assets of $577.7 million, at December 31, 2009, were comprised primarily of
$369.5 million in net loans, $104.2 million in investment securities and $78.3
million in cash and cash equivalents, as compared to total assets of $599.4
million at December 31, 2008, which primarily consisted of $356.3 million in net
loans, $185.4 million in investment securities, and $9.8 million in cash and
cash equivalents. Total assets at
December
31, 2009 were funded primarily through deposits totaling $467.9 million, a $49.1
million, or 11.7%, increase from deposits totaling $418.8 million at December
31, 2008.
Central
Jersey Bancorp reported an $869,000, or 12.7%, increase in total delinquencies
at December 31, 2009 from the total reported at December 31,
2008. Delinquencies totaled $7.7 million at December 31, 2009, as
compared to $6.8 million at December 31, 2008. Non-accrual loans
increased by $5.4 million from $2.5 million at December 31, 2008 to $7.9 million
at December 31, 2009. Other real estate owned (“OREO”) plus
non-performing loans, which consist of non-accrual loans and loans
delinquent 90+ days and still accruing, increased by $6.3 million
from $3.4 million at December 31, 2008 to $9.7 million at December 31,
2009.
The table
below provides selected performance ratios for the years ended December 31, 2009
and December 31, 2008:
Performance
Ratios:
|
2009
|
2008
|
||||||
Return
on average assets
|
(4.35 | %) | 0.54 | % | ||||
Return
on average tangible assets
|
(4.45 | %) | 0.57 | % | ||||
Return
on average equity
|
(44.42 | %) | 4.20 | % | ||||
Return
on average tangible equity
|
(56.58 | %) | 7.13 | % | ||||
Shareholders’
equity to total assets
|
9.61 | % | 13.76 | % |
The table
below provides selected performance ratios for the years ended December 31, 2009
and December 31, 2008, excluding the impact of the previously-disclosed $27.0
million goodwill impairment charge.
Performance
Ratios:
|
2009
|
2008
|
||||||
Return
on average assets
|
0.19 | % | 0.54 | % | ||||
Return
on average tangible assets
|
0.20 | % | 0.57 | % | ||||
Return
on average equity
|
1.65 | % | 4.20 | % | ||||
Return
on average tangible equity
|
2.71 | % | 7.13 | % | ||||
Shareholders’
equity to total assets
|
13.64 | % | 13.76 | % |
Results
of Operations
General
Central
Jersey Bancorp’s principal source of revenue is derived from Central Jersey
Bank, N.A.’s net interest income, which is the difference between interest
income on earning assets and interest expense on deposits and other
borrowings. Interest-earning assets consist principally of loans,
securities and federal funds sold, while the sources used to fund such assets
consist primarily of deposits and other borrowings. Central Jersey
Bancorp’s net income (loss) is also affected by Central Jersey Bank, N.A.’s
provision for loan losses, non-interest income and non-interest
expenses. Non-interest income consists primarily of service charges
and fees and the gain on sale of securities
available-for-sale. Non-interest expenses consist primarily of
salaries and employee benefits, occupancy costs and other operating related
expenses.
For
the years ended December 31, 2009 and 2008
Net
Interest Income
Net
interest income for Central Jersey Bank, N.A. totaled $18.2 million for the year
ended December 31, 2009, as compared to $18.4 million for the year ended
December 31, 2008. Net interest income for the year ended December
31, 2009 was comprised primarily of $20.7 million in interest and fees on loans,
$5.4 million in interest on securities, and $318,000 in interest income on
federal funds sold and due from banks, less interest expense on deposits of $7.0
million, interest expense on borrowed funds of $942,000, and interest expense on
subordinated debentures of $190,000, whereas net interest income for the year
ended December 31, 2008 was comprised primarily of $21.1 million in interest and
fees on loans, $7.6 million in interest on securities, and $386,000 in interest
income on federal funds sold and due from banks, less interest expense on
deposits of $9.0 million, interest expense on borrowed funds of $1.3 million,
and interest expense on subordinated debentures of $355,000.
Average
interest-earning assets totaled $563.5 million for the year ended December 31,
2009, a $70.4 million, or 14.3%, increase over average interest-earning assets
of $493.1 million for the year ended December 31,
2008. Interest-earning assets for such periods were funded primarily
by deposit inflows and the proceeds from borrowed funds. Deposits for
the year ended December 31, 2009 averaged $442.2 million, of which $365.4
million, or 82.6%, were interest-bearing. This represents a 10.1%
increase over average total deposits of $401.7 million for the year ended
December 31, 2008, of which $326.5 million, or 81.3%, were
interest-bearing. Subordinated debentures and other borrowings for
the year ended December 31, 2009, averaged $5.2 million and $73.4 million,
respectively, as compared to $5.2 million and $63.1 million, respectively, for
the year ended December 31, 2008. The increase in other borrowings
was due to growth in the bank subsidiary’s sweep account product for business
customers. As of December 31, 2009, borrowings included $26.4 million
bank sweep funds, $15.0 million in Federal Home Loan Bank of New York (“FHLBNY”)
callable advances and $6.2 million in FHLBNY fixed rate advances.
Net
interest margin on a tax equivalent basis was 3.29% for the year ended December
31, 2009, as compared to 3.73% for the year ended December 31,
2008. The retail and commercial banking markets remain very
competitive for deposit and loan pricing. The yield on
interest-earning assets was 4.70% for the year ended December 31, 2009, as
compared to 5.84% for the year ended December 31, 2008. The average
cost of deposits and interest-bearing liabilities was 1.82% for the year ended
December 31, 2009, as compared to 2.70% for the year ended December 31,
2008. The decrease in both average yield on interest-earning assets
and the cost of deposits and interest-earning liabilities for year ended
December 31, 2008 was primarily due to the significant reduction in the general
level of short term rates and the 500 basis point reduction in the Prime Rate of
interest which occurred between September 2007 and December
2008.
The
following table presents a summary of the principal components of average
interest-earning assets and average interest-bearing liabilities with the
related interest income and interest expense for the years ended December 31,
2009 and 2008:
(dollars
in thousands)
|
Year
ended December 31, 2009
|
Year
ended December 31, 2008
|
||||||||||||||||||||||
Average Balance
|
Interest
|
Average Yield/Cost
|
Average Balance
|
Interest
|
Average Yield/Cost
|
|||||||||||||||||||
Interest
earning assets:
|
||||||||||||||||||||||||
Federal
funds sold
|
$ | 21,488 | $ | 32 | 0.15 | % | $ | 6,612 | $ | 180 | 2.72 | % | ||||||||||||
Loans
receivable, gross
|
373,041 | 20,709 | 5.49 | % | 333,427 | 21,084 | 6.32 | % | ||||||||||||||||
Deposits
with banks
|
4,912 | 286 | 5.82 | % | 4,566 | 206 | 4.51 | % | ||||||||||||||||
Taxable
investments
|
106,664 | 4,288 | 4.02 | % | 146,567 | 7,558 | 5.16 | % | ||||||||||||||||
Tax-exempt
investments1
|
57,371 | 1,426 | 2.49 | % | 1,892 | 78 | 4.12 | % | ||||||||||||||||
Total
interest earning assets
|
563,476 | 26,741 | 4.70 | % | 493,064 | 29,106 | 5.84 | % | ||||||||||||||||
Cash
and due from banks
|
14,867 | 9,094 | ||||||||||||||||||||||
Allowance
for loan losses
|
(7,456 | ) | (3,698 | ) | ||||||||||||||||||||
Other
assets
|
21,229 | 42,672 | ||||||||||||||||||||||
Total
assets
|
$ | 592,116 | $ | 541,132 | ||||||||||||||||||||
Interest
bearing liabilities:
|
||||||||||||||||||||||||
Interest
bearing demand
|
$ | 67,368 | $ | 669 | 0.99 | % | $ | 45,980 | $ | 1,576 | 1.92 | % | ||||||||||||
Money
market
|
78,520 | 1,488 | 1.90 | % | 28,526 | 772 | 2.71 | % | ||||||||||||||||
Savings
|
56,236 | 331 | 0.59 | % | 67,868 | 928 | 1.37 | % | ||||||||||||||||
Time
|
163,259 | 4,559 | 2.79 | % | 148,173 | 5,708 | 3.85 | % | ||||||||||||||||
Total
interest bearing deposits
|
365,383 | 7,047 | 1.93 | % | 326,524 | 8,984 | 2.75 | % | ||||||||||||||||
Other
borrowings
|
73,437 | 942 | 1.28 | % | 63,141 | 1,325 | 2.10 | % | ||||||||||||||||
Subordinated
debentures
|
5,155 | 190 | 3.69 | % | 5,155 | 355 | 6.89 | % | ||||||||||||||||
Total
interest-bearing liabilities
|
443,975 | 8,179 | 1.82 | % | 394,820 | 10,664 | 2.70 | % | ||||||||||||||||
Non-interest
bearing demand
|
76,811 | 75,149 | ||||||||||||||||||||||
Other
liabilities
|
1,935 | 1,865 | ||||||||||||||||||||||
Shareholders’
equity
|
69,395 | 69,298 | ||||||||||||||||||||||
Total
liabilities and shareholders’ equity
|
$ | 592,116 | $ | 541,132 | ||||||||||||||||||||
Net
interest income/Net interest rate spread2
|
$ | 18,562 | 3.10 | % | $ | 18,442 | 3.53 | % | ||||||||||||||||
Tax
equivalent adjustment
|
(362 | ) | (20 | ) | ||||||||||||||||||||
Net
interest income, as reported
|
$ | 18,200 | $ | 18,422 | ||||||||||||||||||||
Net
interest margin3
|
3.23 | % | 3.73 | % | ||||||||||||||||||||
Tax
equivalent adjustment
|
0.06 | % | 0.00 | % | ||||||||||||||||||||
Net
interest margin on a fully tax equivalent basis3
|
3.29 | % | 3.73 | % |
1
|
Interest
income is presented on a tax equivalent basis using a 34% federal tax
rate.
|
2
|
Net
interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing
liabilities.
|
3
|
Net
interest margin represents net interest income divided by average
interest-earning assets.
|
Rate/Volume
Analysis
The
following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected Central Jersey Bank, N.A.’s interest income and
interest expense during the periods indicated. Information is
provided in each category with respect to: (1) changes attributable to changes
in volume (changes in volume multiplied by prior rate); (2) changes attributable
to changes in rate (changes in rate multiplied by prior volume); and (3) the net
change. The changes attributable to the combined impact of volume and
rate have been allocated proportionately to the changes due to volume and the
changes due to rate (in thousands).
Year
ended December 31, 2009
Compared
to
Year
ended December 31, 2008
|
||||||||||||
Increase
(Decrease)
Due
to Change in:
|
Total
Increase
|
|||||||||||
Volume
|
Rate
|
(Decrease)
|
||||||||||
(in
thousands)
Interest
Income:
|
||||||||||||
Loans
receivable, gross
|
$ | 2,354 | $ | (2,729 | ) | $ | (375 | ) | ||||
Securities
|
734 | (2,998 | ) | (2,264 | ) | |||||||
Deposits
with banks
|
17 | 63 | 80 | |||||||||
Federal
funds sold
|
135 | (283 | ) | (148 | ) | |||||||
Total
interest-earning assets
|
3,240 | (5,947 | ) | (2,707 | ) | |||||||
Interest
Expense:
|
||||||||||||
Interest-bearing
demand
|
(138 | ) | (459 | ) | (597 | ) | ||||||
Savings
deposits
|
538 | (1,687 | ) | (1,149 | ) | |||||||
Money
market deposits
|
1,006 | (290 | ) | 716 | ||||||||
Time
deposits
|
(244 | ) | (663 | ) | (907 | ) | ||||||
Total
interest-bearing deposits
|
1,162 | (3,099 | ) | (1,937 | ) | |||||||
Other
borrowings
|
191 | (574 | ) | (383 | ) | |||||||
Subordinated
debentures
|
-- | (165 | ) | (165 | ) | |||||||
Total
interest-bearing liabilities
|
1,353 | (3,838 | ) | (2,485 | ) | |||||||
Net
interest income
|
$ | 1,887 | $ | (2,109 | ) | $ | (222 | ) |
Provision
for Loan Losses
For the
year ended December 31, 2009, the provision for loan losses was $6.2 million, as
compared to $1.3 million for the year ended December 31, 2008. The
recorded provision for loan losses, for the year ended December 31, 2009,
included $21.2 million in loans which were downgraded in risk rating and/or
placed on non-accrual status during 2009, a $3.6 million increase in the
specific reserve of certain impaired loans and loan net charge-offs totaling
$1.2 million. The significant increase in the provision for loan
losses is due to the credit deterioration of certain commercial and commercial
real estate loans as a result of general economic conditions. At
December 31, 2009, two loans were transferred to other real estate owned,
impacting the provision for loan losses by $245,000, and recorded as other real
estate owned at their fair market value less cost to sell of $1.1
million. Total gross loans outstanding at December 31, 2009 were
$379.1 million, an increase of $18.1 million, or 5.01%, over the December 31,
2008 total of $361.0 million.
Non-Interest
Income
Non-interest
income, which consists of service charges on deposit accounts, gains on the sale
of investment securities available-for-sale, income from bank owned life
insurance and gains on the sale of loans held-for-sale, was $5.1 million for the
year ended December 31, 2009, as compared to $2.7 million for
2008. Gains on
the sale
of investment securities available-for-sale totaled $2.9 million for the year
ended December 31, 2009, as compared to $739,000 for 2008. Gains on
the sale of loans held-for-sale totaled $536,000 and $351,000, for the years
ended December 31, 2009 and 2008, respectively, and were primarily attributable
to fees realized from the sale and servicing of SBA loans which totaled $461,000
for the year ended December 31, 2009, as compared to $334,000 for the year ended
December 31, 2008. 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. Gains on sale
of residential mortgage loans totaled $75,000 and $17,000, for the years ended
December 31, 2009 and 2008, respectively. Service charges on deposit
accounts remained consistent at $1.5 million for the year ended December 31,
2009, which was a nominal decrease of $19,000 from December 31,
2008. Income on bank owned life insurance increased $12,000, to
$132,000 for the year ended December 31, 2009, as compared to $120,000 for the
year ended December 31, 2008.
Non-Interest
Expense
Excluding
the $27.0 million non-cash goodwill impairment charge recorded for the year
ended December 31, 2009, non-interest expense for the year ended December 31,
2009 was $16.7 million, as compared to $15.6 million for the prior
year. The $1.1 million increase for 2009 included an $869,000
increase in FDIC deposit insurance expense and $634,000 in non-recurring
expenses related to the terminated Merger Agreement. Non-interest
expense generally includes costs associated with employee salaries and benefits,
occupancy expenses, data processing fees, core deposit intangible amortization,
and other non-interest expenses. Central Jersey Bank, N.A. incurred
$413,000 in core deposit intangible amortization expense related to the
combination with Allaire Community Bank for the year ended December 31, 2009, as
compared to $482,000 in 2008.
The $27.0
million in goodwill was recorded as an intangible asset on January 1, 2005 in
conjunction with the combination of Monmouth Community Bancorp (the predecessor
to Central Jersey Bancorp) and Allaire Community Bank. The goodwill
impairment charge is a non-cash adjustment to Central Jersey Bancorp’s
consolidated financial statements, which has no affect on cash flows, liquidity,
or tangible capital. As goodwill is excluded from regulatory capital,
the impairment charge had no impact on regulatory capital ratios of Central
Jersey Bancorp or Central Jersey Bank, N.A., both of which remain
“well-capitalized” under regulatory requirements. The goodwill
impairment charge was recorded in accordance with FASB ASC Topic 350, which
requires an interim goodwill impairment analysis under certain
events.
On
February 27, 2009 the Board of Directors of the FDIC voted to amend the
restoration plan for the Deposit Insurance Fund. The Board also took
action to ensure the continued strength of the insurance fund by imposing a
special assessment on insured institutions of 5 basis points, implementing
changes to the risk-based assessment system, and setting rates beginning the
second quarter of 2009. The special assessment payment was made
September 30, 2009; however, in accordance with the rule, the full amount of
$279,000 was accrued in the second quarter of 2009, when the June 30, 2009
deposits were measurable.
Full-time
equivalent employees totaled 133 at December 31, 2009, as compared to 140 at
December 31, 2008. The decrease in full-time equivalent employees is
due primarily due to the reduction in staff in anticipation of the merger with
OceanFirst Financial Corp. Subsequent to the termination of the
merger, the organization has reorganized and been reconstituted in a manner that
we believe will, prospectively, result in improved operating
efficiencies.
The table
below presents non-interest expense, excluding the $27.0 million non-cash
goodwill impairment charge, by major category, for the years ended December 31,
2009 and 2008, respectively (in thousands):
Non-interest Expense:
|
2009
|
2008
|
||||||
Salaries
and employee benefits
|
$ | 7,562 | $ | 7,759 | ||||
Net
occupancy expenses
|
2,125 | 2,059 | ||||||
Professional
fees
|
1,437 | 896 | ||||||
FDIC
insurance premiums
|
1,147 | 278 | ||||||
Data
processing
|
972 | 1,011 | ||||||
Outside
service fees
|
828 | 782 | ||||||
Furniture,
fixtures and equipment
|
796 | 694 | ||||||
Core
deposit intangible amortization
|
413 | 482 | ||||||
Stationery,
supplies and printing
|
205 | 239 | ||||||
Advertising
|
204 | 268 | ||||||
Insurance
|
161 | 184 | ||||||
Telephone
|
108 | 133 | ||||||
Other
operating expenses
|
784 | 852 | ||||||
Total
|
$ | 16,742 | $ | 15,637 |
Income
Tax Expense
Central
Jersey Bancorp recorded an income tax benefit of $888,000 on a loss before taxes
of $26.7 million for the year ended December 31, 2009. For the year
ended December 31, 2008, Central Jersey Bancorp recorded income tax expense of
$1.3 million on income before taxes of $4.2 million, resulting in an effective
tax rate of 30.7%. The income tax benefit was due to the utilization
of capital tax loss carry-forwards which resulted from the 2007 balance sheet
restructuring initiative. As a result of the restructuring, a
deferred tax valuation allowance was established against deferred tax assets
generated from the capital tax loss carry-forwards. Since $772,000 of
the $2.9 million in gains from the sale of available-for-sale investment
securities, recorded during the year ended December 31, 2009, were realized in
CJB Investment Company, a wholly-owned subsidiary of Central Jersey Bank, N.A.,
these gains are considered capital gains and are permitted to be offset against
the remaining capital tax loss carry-forwards. The federal income tax
benefit is primarily the result of the reversal of the deferred tax valuation
allowance which totaled approximately $262,000 and a significant increase in the
amount of federal tax free interest income derived from municipal bond and note
obligations.
Financial
Condition
Cash
and Cash Equivalents
Cash and
cash equivalents consist of cash on hand, amounts due from banks with original
maturities of three months or less, and federal funds sold. Cash and
cash equivalents were $78.3 million at December 31, 2009, an increase of $68.5
million, from the December 31, 2008 total of $9.8 million. The
increase is due primarily to the timing of cash flows related to Central Jersey
Bank, N.A.’s business activities and the sale of investment securities.
Goodwill
and Other Intangible Assets
Goodwill
and other intangible assets on the consolidated statement of financial condition
decreased $27.4 million, from $28.4 million at December 31, 2008 to $1.0 million
at December 31, 2009. The decrease was primarily due to $27.0 million of
goodwill impairment identified in the “community banking” reporting unit,
accompanied by scheduled amortization of core deposit
intangibles.
Central
Jersey Bancorp’s only reporting unit is “community banking” for purposes of the
goodwill impairment test. Central Jersey Bancorp performed an interim
impairment test of goodwill during the second quarter of 2009 due to the
presence of indicators of potential impairment which included adverse changes in
economic conditions reflected in the prolonged trading value of common stock
relative to its book value and the tentative merger between Central Jersey
Bancorp and OceanFirst Financial Corp.
In
performing its evaluation of goodwill impairment, management makes significant
judgments, particularly with respect to estimating the fair value of its
reporting unit and, if the second step goodwill impairment test is required,
estimating the fair value of net assets. In addition, management will utilize
third party specialists to assist during the testing process and in developing
assumptions. The techniques Central Jersey Bancorp employed included
discounted cash flow analysis and the use of two separate marked-based
approaches. Step one and step two tests incorporated recent declines
in merger and acquisition values, changes to control premiums, synergies
available to a potential acquirer (net of transaction expenses), views on
regulatory matters, and increased expectations for returns given perceived risk
in financial services and banking industry. In addition, the analysis
incorporated certain financial results, which have been negatively impacted by
credit quality. The current economic climate was assumed to improve
gradually over time, and existing legislative and regulatory requirements were
assumed to continue for the duration of the analysis.
Prior to
the impairment test, the carrying value of goodwill assigned to the “community
banking” reporting unit was $27.0 million. Upon testing, the
“community banking” reporting unit failed the step one test, resulting in a
potential indicator of impairment and a required step two test. The
step two test for the “community banking” reporting unit resulted in $27.0
million of impairment, for which the carrying value of its goodwill was reduced
as of December 31, 2009. Net income in 2009 was reduced by $27.0
million as a result of the impairment. The goodwill impairment charge
did not impact income taxes, since all of its goodwill is not
deductible. As goodwill is excluded from regulatory capital, the
impairment charge had no impact on the regulatory capital ratios of Central
Jersey Bancorp or Central Jersey Bank, N.A., both of which remain
“well-capitalized” under regulatory requirements.
Other
intangible assets are specifically identified intangible assets created from a
business combination. Core deposit intangibles represent the value of checking,
savings and other acquired, low cost deposits. Core deposit intangibles are
amortized over the lesser of the estimated lives of deposit accounts or ten
years on an accelerated basis. Decreases in deposit lives may result
in increased amortization and/or an impairment charge.
For the
years ended December 31, 2009 and 2008, Central Jersey Bancorp had $1.0 million
and $1.4 million, respectively, of core deposit intangible related to the
combination with Allaire Community Bank. At December 31, 2009,
Central Jersey Bank N.A. performed an annual analysis to test the core deposit
premium and noted no impairment.
Investment
Securities Portfolio
Investment
securities totaled $104.2 million at December 31, 2009, a decrease of $81.2
million, or 43.8%, from the December 31, 2008 total of $185.4
million. The decrease was primarily due to the sale of $119.4 million
of mortgage backed securities, $37.1 million of municipal bond and note
obligations and $10.0 million of government-sponsored agency
securities. For the year ended December 31, 2009, principal pay downs
of securities totaled $30.4 million, purchases of mortgage-backed securities
totaled $43.2 million, purchases of municipal bond and note obligations totaled
$94.6 million, purchases of government-sponsored agency securities totaled $21.8
million, $37.3 million of government-sponsored agency securities were matured
and/or called, $4.7 million of municipal bonds were matured and/or called
and
net
premium/discount amortization totaled $500,000. In addition, at
December 31, 2009, the net change of the unrealized gain on available-for-sale
securities decreased by $1.5 million from December 31, 2008.
The
following table summarizes the maturity and weighted average yields in each of
Central Jersey Bank, N.A.’s investment securities portfolios at December 31,
2009:
Maturities
and weighted average yields:
(dollars
in thousands)
|
Within
1 Year
|
Over
1 to 5
Years
|
Over
5 to 10
Years
|
Over 10
Years
|
Total
|
|||||||||||||||
Securities
held-to-maturity:
|
||||||||||||||||||||
Mortgage-backed
securities
|
||||||||||||||||||||
Amortized
cost
|
$ | 753 | $ | 773 | $ | 2,040 | $ | 3,651 | $ | 7,217 | ||||||||||
Weighted
average yield
|
4.00 | % | 4.56 | % | 4.60 | % | 5.42 | % | 4.95 | % | ||||||||||
Obligations
of U.S. Government agencies
|
||||||||||||||||||||
Amortized
cost
|
-- | -- | -- | -- | -- | |||||||||||||||
Weighted
average yield
|
-- | -- | -- | -- | -- | |||||||||||||||
Total
securities held-to-maturity
|
||||||||||||||||||||
Amortized
cost
|
$ | 753 | $ | 773 | $ | 2,040 | $ | 3,651 | $ | 7,217 | ||||||||||
Weighted
average yield
|
4.00 | % | 4.56 | % | 4.60 | % | 5.42 | % | 4.95 | % | ||||||||||
Securities
available-for-sale:
|
||||||||||||||||||||
Mortgage-backed
securities
|
||||||||||||||||||||
Fair
value
|
$ | 312 | $ | 2 | $ | 17,993 | $ | 16,545 | $ | 34,852 | ||||||||||
Weighted
average yield
|
5.00 | % | 5.00 | % | 4.84 | % | 5.46 | % | 5.14 | % | ||||||||||
Obligations
of U.S. Government agencies
|
||||||||||||||||||||
Fair
value
|
-- | 10,906 | -- | -- | $ | 10,906 | ||||||||||||||
Weighted
average yield
|
-- | 1.58 | % | -- | -- | 1.58 | % | |||||||||||||
Municipal
Obligations
|
||||||||||||||||||||
Fair
value
|
36,175 | 4,924 | 3,357 | 3,825 | 48,281 | |||||||||||||||
Weighted
average yield
|
2.40 | % | 4.89 | % | 3.93 | % | 3.71 | % | 2.86 | % | ||||||||||
Other
debt securities
|
||||||||||||||||||||
Fair
value
|
2,691 | 217 | -- | -- | 2,908 | |||||||||||||||
Weighted
average yield
|
2.39 | % | 2.75 | % | -- | -- | 2.42 | % | ||||||||||||
Total
securities available-for-sale
|
||||||||||||||||||||
Fair
value
|
$ | 39,178 | $ | 16,049 | $ | 21,350 | $ | 20,370 | $ | 96,947 | ||||||||||
Weighted
average yield
|
2.42 | % | 2.61 | % | 4.70 | % | 5.13 | % | 3.52 | % |
Investment
Policy
The Board
of Directors has adopted an investment policy to govern the investment function
of Central Jersey Bank, N.A., which includes the purchase of investment
securities for the held-to-maturity and available-for-sale portfolios and the
sale of investment securities from the available-for-sale
portfolio.
The basic
objectives of the investment function are:
|
·
|
to
keep Central Jersey Bank, N.A.’s funds fully employed at the maximum
after-tax return;
|
|
·
|
to
minimize exposure to credit risk;
and
|
|
·
|
to
provide liquidity required by current
circumstances.
|
As used
in our investment policy and in other policies of Central Jersey Bank, N.A., the
term “liquidity” refers to the expected cash flow from performing assets and
secondary to borrowings secured by performing assets. These two
sources of liquidity are expected to fund the operations of Central Jersey Bank,
N.A. For this reason, unless otherwise indicated, the term
“liquidity” in Central Jersey Bank, N.A.’s policies does not refer to proceeds
from the sale of assets, except for the sale of assets
available-for-sale.
Investment
management therefore emphasizes:
|
·
|
preservation
of principal;
|
|
·
|
strong
cash-flow characteristics;
|
|
·
|
ready
availability of credit information;
|
|
·
|
appropriateness
of size both as to Central Jersey Bank, N.A. and as to an obligor’s
outstanding debt;
|
|
·
|
eligibility
as collateral for public-agency deposits and customer repurchase-agreement
accounts; and
|
|
·
|
broad
marketability, as an indicator of
quality.
|
The
purpose of bonds in the held-to-maturity portfolio is to provide earnings
consistent with the safety factors of quality, maturity and risk
diversification. This purpose is reflected in the accounting
principle that carrying a debt security at amortized cost is appropriate only if
the ALCO/Investment Committee of Central Jersey Bank, N.A. has the intent and
ability to hold that security to maturity. Management should be
indifferent to price fluctuations unrelated to the continuing ability of an
investment security to contribute to recurring income. For purposes
of our investment policy, an investment security shall be deemed to have matured
if it is sold: (1) within three months of maturity or a call date if
exercise of the call is probable; or (2) after collection of at least 85% of the
principal outstanding at acquisition.
Debt
securities that are not positively expected to be held-to-maturity, but rather
for indefinite periods of time, and equity securities, shall be booked to the
available-for-sale portfolio, which shall be monitored daily and reported at
fair value with unrealized holding gains and losses excluded from earnings and
reported as a tax-effected net amount in a separate component of shareholders’
equity. However, in calculating and reporting regulatory capital,
only net unrealized losses on marketable equity securities is deducted from Tier
1 or core capital.
FASB ASC
Topic 320 allows debt securities to be classified as “held to maturity” and
reported in consolidated financial statements at amortized cost only if the
reporting entity has the positive intent and ability to hold these securities to
maturity. When an entity does not intend to sell the debt security,
and it is more likely than not that the entity will not have to sell the debt
security before recovery of its cost basis, it will recognize the credit
component of an other-than-temporary impairment of a debt security in earnings
and the remaining portion in other comprehensive income.
Loan
Portfolio
Central
Jersey Bank, N.A.’s primary policy goal is to establish a sound credit portfolio
that contributes, in combination with other earning assets, to a satisfactory
return on assets, return on shareholders’ equity and capital to asset
ratio.
Central
Jersey Bank, N.A. conducts both commercial and retail lending
activities. The loan approval process at Central Jersey Bank, N.A. is
driven by the aggregate indebtedness of the borrower and related
entities. Executive officers with lending authority and loan officers
have various individual and collective loan approval authorities up to
$500,000. All credit accommodations exceeding $500,000 are referred
to Central Jersey Bank, N.A.’s Loan Committee for review and
approval. The Loan Committee is comprised of internal and outside
directors and the senior commercial loan officer. A loan officer with
a loan application for more than $500,000 (or from a borrowing relationship with
aggregate debt in excess of $500,000) presents a complete analysis of the
proposed credit accommodation to the members of the Loan Committee for their
consideration.
The
analysis includes, among other things, the following:
|
·
|
a
description of the borrower;
|
|
·
|
the
loan purpose and use of proceeds;
|
|
·
|
the
requested loan amount;
|
|
·
|
the
recommended term;
|
|
·
|
the
recommended interest rate;
|
|
·
|
primary,
secondary and tertiary sources of
repayment;
|
|
·
|
proposed
risk rating;
|
|
·
|
full
collateral description;
|
|
·
|
fees
(if any);
|
|
·
|
full
borrower financial analysis, including comparative balance sheets, income
statements and statements of cash flows;
and
|
|
·
|
inherent
strengths and weaknesses of the requested credit
accommodation.
|
A similar
analysis is prepared for those loan requests aggregating in excess of $100,000
but less than the $500,000 threshold.
Central
Jersey Bank, N.A. utilizes a comprehensive approach to loan
underwriting. The primary quantitative determinants in the
underwriting process include overall creditworthiness of the borrower, cash flow
from operations in relation to debt service requirements and the ability to
secure the credit accommodation with collateral of adequate value.
For
commercial loans, the collateral is somewhat dependent on the loan
type. Commercial lines of credit, term loans and time notes are
typically secured by a general lien on business assets and qualified (typically
less than 90 days) accounts receivable (based upon an acceptable advance
rate). Commercial mortgage loans are secured by the underlying
property with an acceptable equity margin. Personal guarantees from
the principals of a business are generally required. In general,
Central Jersey Bank, N.A. requires that income available to service debt
repayment requirements be equal to at least 125% of those
requirements.
Commercial
loans are often subject to cyclical economic risks of the underlying
business(es) of the borrower. Such risks are generally reduced during
the loan approval process. For example, Central Jersey Bank, N.A.
requires that a loan amount be less than the value of the collateral securing
the loan and that the standard cash flow analysis of the commercial borrower
shows an ample margin for debt service even with significant business
contraction. Commercial mortgage underwriting also requires that
available funds for debt service exceed debt service requirements.
Retail or
consumer loan credit accommodations include home equity loans, home equity lines
of credit, direct automobile loans and secured and unsecured personal
loans. Underwriting criteria for home equity products include a loan
to value not to exceed 80% and a debt service to income ratio not to exceed
45%. Such criteria provide Central Jersey Bank, N.A. with
underwriting comfort without placing the institution in a position of
competitive disadvantage.
There are
a number of risks associated with the granting of consumer
loans. While income and equity or collateral values are primary
determinants of the loan approval process for consumer loans, Central Jersey
Bank, N.A. also gives much consideration to employment and debt payment history
of the borrower(s). As with the commercial underwriting process,
consumer loans require both an income cushion and a collateral
cushion. Such criteria provide for a margin should a borrower’s
income diminish or the collateral securing the loan depreciate in
value.
The
granting of a loan, by definition, contains inherent risks. Central
Jersey Bank, N.A. attempts to mitigate risks through sound credit
underwriting. Each loan that Central Jersey Bank, N.A. approves
undergoes credit scrutiny that results in a quantification of risk and then the
assignment of a risk rating. Individual risk ratings carry with them
a required reserve that is used to fund Central Jersey Bank, N.A.’s
ALL. The inherent risk associated with each loan is a function of
loan type, collateral, cash flow, credit rating, general economic conditions and
interest rates.
Central
Jersey Bank, N.A. is limited by regulation as to the total amount which may be
committed and loaned to a borrower and its related entities. Central
Jersey Bank, N.A.’s legal lending limit is equal to 15% of its capital funds,
including capital stock, surplus, retained earnings and the
ALL. Central Jersey Bank, N.A. may lend an additional 10% of its
capital funds to a borrower and its related entities if the additional loan or
extension of credit is fully secured by readily marketable collateral having a
fair value at least equal to the amount borrowed. The additional
limitation is separate from, and in addition to, the general limitation of
15%.
The
following table summarizes net loans outstanding by loan category and amount at
December 31, 2009, 2008, 2007, 2006 and 2005.
(in thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Commercial
and industrial loans
|
$ | 46,160 | $ | 37,119 | $ | 29,384 | $ | 35,476 | $ | 32,708 | ||||||||||
Real
estate loans – commercial
|
263,170 | 267,705 | 240,370 | 237,234 | 232,570 | |||||||||||||||
1-4
family real estate loans
|
2,876 | 2,646 | 3,822 | 4,182 | 4,858 | |||||||||||||||
Home
equity and second mortgages
|
65,116 | 51,688 | 37,832 | 35,573 | 38,153 | |||||||||||||||
Consumer loans
|
1,765 | 1,840 | 3,765 | 2,857 | 2,054 | |||||||||||||||
Total
loans
|
$ | 379,087 | $ | 360,998 | $ | 315,173 | $ | 315,322 | $ | 310,343 | ||||||||||
Less allowance for loan
losses
|
9,613 | 4,741 | 3,408 | 3,229 | 3,175 | |||||||||||||||
Net loans
|
$ | 369,474 | $ | 356,257 | $ | 311,765 | $ | 312,093 | $ | 307,168 | ||||||||||
Loans held-for-sale
|
$ | -- | $ | 400 | $ | 658 | $ | 242 | $ | 3,127 |
Loans,
net of the ALL, totaled $369.5 million at December 31, 2009, an increase of
$13.2 million, or 3.71%, from the $356.3 million balance at December 31,
2008. The increase in loan balances was due primarily to the
origination of commercial loans, consumer home equity loans and lines of credit
during the period off set by principal pay downs.
For the
year ended December 31, 2009, commercial and industrial loans and commercial
real estate loans increased by $4.5 million to $309.3 million, which represents
a 1.5% increase over the balance of $304.8 million at December 31,
2008.
During
2009, home equity and second mortgages increased by $13.4 million to $65.1
million at December 31, 2009, which represents a 26.0% increase over the balance
of $51.7 million at December 31, 2008.
The
following table summarizes the maturities of loans by category and whether such
loans are at a fixed or floating rate at December 31, 2009.
December 31, 2009
|
||||||||||||||||||||||||
Maturity
and repricing data for loans:
(in
thousands)
|
Within
1 Year
|
Over 1 to 3
Years
|
Over 3 to 5
Years
|
Over 5 to 15
Years
|
Over 15 Years
|
Total
|
||||||||||||||||||
Loans
secured by 1-4 family residential properties
|
||||||||||||||||||||||||
Fixed
rate
|
$ | 4,066 | $ | 3,082 | $ | 7,232 | $ | 15,628 | $ | 9,751 | $ | 39,759 | ||||||||||||
Adjustable
rate
|
9,491 | 751 | 1,393 | -- | -- | 11,635 | ||||||||||||||||||
All
other loans secured by real estate
|
||||||||||||||||||||||||
Fixed
rate
|
50,220 | 27,248 | 48,413 | 50,087 | 28,548 | 204,516 | ||||||||||||||||||
Adjustable
rate
|
73,648 | 15,447 | 28,236 | 5,846 | -- | 123,177 | ||||||||||||||||||
Total
|
$ | 137,425 | $ | 46,528 | $ | 85,274 | $ | 71,561 | $ | 38,299 | $ | 379,087 |
Criticized/classified
assets as of December 31, 2009 and 2008 are summarized as follows (in
thousands):
2009
|
2008
|
|||||||
Special
Mention
|
$ | 11,770 | $ | 21,343 | ||||
Substandard
|
23,306 | 2,812 | ||||||
Doubtful
|
5,052 | 50 | ||||||
Loss
|
109 | 94 | ||||||
Total
criticized/classified assets
|
$ | 40,237 | $ | 24,299 |
The total
balance of criticized/classified loans at December 31, 2009 and 2008 totaled
$40.2 million and $24.3 million, respectively. The $15.9 million increase was
representative of the changes in the risk profile of the loan
portfolio. Loans which were risk rated “special mention” decreased by
$9.6 million, to $11.8 million, at December 31, 2009, from $21.3 million at
December 31, 2008. Loans which were risk rated “substandard”
increased by $20.5 million, to $23.3 million, at December 31, 2009, from $2.8
million at December 31, 2008. Loans which were risk rated “doubtful”
increased by $5.0 million, to $5.1 million at December 31, 2009, from $50,000 at
December 31, 2008. A majority of the risk rating downgrades occurred
in the commercial mortgage loan portfolio.
Troubled
asset and delinquency trends at December 31, 2009 and 2008 are summarized as
follows (dollars in thousands):
2009
|
2008
|
|||||||
30-89
Day
|
$ | 6,912 | $ | 5,963 | ||||
90
Days + and still accruing
|
775 | 855 | ||||||
Total
Delinquencies
|
$ | 7,687 | $ | 6,818 | ||||
Non-Accrual
Loans
|
$ | 7,868 | $ | 2,545 | ||||
Non-Performing
Loans (90+; Non-Accrual)
|
$ | 8,643 | $ | 3,400 | ||||
OREO
|
1,055 | - | ||||||
Total
Non-Performing Loans and OREO
|
$ | 9,698 | $ | 3,400 | ||||
Total
Delinquencies, Non-Accrual and OREO
|
$ | 16,610 | $ | 9,363 | ||||
ALL
|
$ | 9,613 | $ | 4,741 | ||||
Total
Loans
|
$ | 379,087 | $ | 360,998 | ||||
Total
Assets
|
$ | 577,658 | $ | 599,385 | ||||
Total
Delinquencies / Total Loans
|
2.03 | % | 1.89 | % | ||||
Total
Non-Accrual Loans / Total Loans
|
2.08 | % | 0.70 | % | ||||
ALL
/ Total Loans
|
2.54 | % | 1.31 | % | ||||
ALL
/ Non-Performing Loans
|
111.2 | % | 139.4 | % | ||||
ALL
/ Non-Performing Loans and OREO
|
99.1 | % | 139.4 | % | ||||
Non-Performing
Loans / Total Loans
|
2.3 | % | 0.9 | % | ||||
Non-Performing
Loans and OREO / Total Assets
|
1.7 | % | 0.6 | % |
Non-Performing
Loans
A loan is
considered to be non-performing if it (1) is on a non-accrual basis, (2) is past
due 90 days or more and still accruing interest, or (3) has been renegotiated to
provide a reduction or deferral of interest or principal because of a weakening
in the financial position of the borrower. A loan, which is past due
90 days or more and still accruing interest, remains on accrual status only
where it is both adequately secured as to principal and is in the process of
collection. Central Jersey Bank, N.A. had non-performing loans
totaling $8.6 million and $3.4 at December 31, 2009 and 2008,
respectively. Additionally, Central Jersey Bank, NA had $1.1 million
in OREO properties as of December 31, 2009. If the non-accrual loans
had performed in accordance with their original terms, interest income would
have increased by $524,353 and $55,130, for the years ended December 31,
2009 and 2008, respectively. At December 31, 2009, there are no
commitments to lend additional funds to borrowers whose loans are on
non-accrual.
Impaired
Loans
When
necessary, Central Jersey Bank, N.A. performs individual loan reviews in
accordance with FASB ASC Topic 310, to determine whether any individually
reviewed loans are impaired and, if impaired, measures a valuation allowance
allocation in accordance with FASB ASC Topic 310. 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. Central Jersey Bank, NA considers loans on non-accrual status
or risk rated “8” or higher as impaired and automatically subject to a FASB ASC
Topic 310 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 a FASB ASC
Topic 310 review.
At
December 31, 2009, Central Jersey Bancorp had impaired loans totaling $23.2
million, as compared to $2.7 million at December 31, 2008. The
increase in impaired loans was due primarily to multiple commercial loans
totaling $21.2 million which were downgraded in risk rating and/or placed on
non-accrual status during 2009. These loans were considered impaired
and were evaluated in accordance with FASB ASC Topic 310. After
evaluation, specific reserves were required for fifteen of the impaired
loans. At December 31, 2009, Central Jersey Bancorp recorded $4.1
million of specific reserves for impaired loans, as compared to $474,000 in
specific reserves for impaired loans at December 31, 2008.
Central
Jersey Bancorp’s policy for interest income recognition on non-accrual loans is
to recognize income on currently performing restructured loans under the accrual
method. Central Jersey Bancorp recognizes income on non-accrual loans
under the accrual basis when the principal payments on the loans become current
and the collateral on the loan is sufficient to cover the outstanding obligation
to Central Jersey Bancorp. If these factors do not exist, Central
Jersey Bancorp does not recognize income. There was no income
recognized on non-accrual loans during 2009. Total cash collected on
non-accrual loans during 2009 was $263,000, as compared to $1.1 million
collected during 2008, all of which was credited to the principal balances
outstanding.
Allowance
for Loan Losses and Related Provision
ALL is a
valuation account that reflects an evaluation of the probable losses in the loan
portfolio. The determination of the adequacy of the ALL is a critical
accounting policy of Central Jersey Bank, N.A., due to the inherently subjective
nature of the evaluation. Credit losses primarily arise from Central
Jersey Bank, N.A.’s loan portfolio, but also may be derived from other
credit-related sources, including commitments to extend
credit. Additions are made to the allowance through periodic
provisions which are charged to expense. All losses of principal are
charged to the allowance when incurred or when a determination is made that a
loss is expected. Subsequent recoveries, if any, are credited to the
allowance.
In order
to comprehensively address periodic provisioning and the resultant ALL, Central
Jersey Bancorp utilizes a multidisciplinary approach to the ALL
determination. That approach considers each of the following
factors:
|
·
|
Historical Realized
Losses in the credit
portfolio.
|
|
·
|
Delinquency
Trends currently experienced in the credit
portfolio.
|
|
·
|
Internal Risk Rating
System (“IRR”) that assigns a risk factor, and specific reserve, to
every outstanding credit exposure.
|
|
·
|
External Independent
Assessment of ALL adequacy and the entire credit management
function periodically performed by loan review and regulatory
authorities.
|
|
·
|
Current and
Anticipated Environmental Conditions that could affect borrowers’
ability to continually meet their contractual repayment
obligations.
|
Individually
evaluated loans that are not determined to be impaired but have specific
characteristics that indicate it is probable that there would be an incurred
loss in a group of loans with those characteristics
and all
other loans are evaluated by Central Jersey Bank, N.A. in accordance with FASB
ASC Topic 450 “Contingencies.”
The loss
factors utilized in calculating a reasonable estimate are inherently subjective
and require material estimates that may by susceptible to significant
change. Central Jersey Bank, N.A. formally evaluates loss factors
utilized in evaluating its unimpaired loans on no less than a quarterly basis,
and more frequently, if in management’s judgment, circumstances indicate the
revaluation of such loss reserves is prudent. After the loss factors
have been applied to each loan in the portfolio, further segmentation is
required to adequately differentiate the risk in the
portfolio. Therefore, the loan portfolio is segmented by both loan
type and credit risk rating to capture common risk characteristics for each
pool.
The
reserve allocation for loan pools are based on Central Jersey Bank, N.A.’s
historical loss experience of the particular group, adjusted for changes in
trends, conditions, and other relevant qualitative factors that affect repayment
of the loans as of the evaluation date. Qualitative and/or
environmental factors are used to adjust historical loss rates which require
significant judgment by management. In the event that Central Jersey
Bank, N.A. must make adjustments to historical loss rates, management will
explain how the adjustments reflect current information, events, circumstances,
and conditions in the loss measurement.
Certain
loans classified under FASB ASC Topic 450 may, at management’s discretion, be
evaluated under FASB ASC Topic 310 for impairment. If loans being
evaluated are deemed not to be impaired they will remain in their original FASB
ASC Topic 450 pool.
When
necessary, Central Jersey Bank, N.A. performs individual loan reviews in
accordance with FASB ASC Topic 310, to determine whether any individually
reviewed loans are impaired and, if impaired, measures a valuation allowance
allocation in accordance with FASB ASC Topic 310.
As a
matter of policy, Central Jersey Bank, N.A. values collateral dependent impaired
loans based upon the estimated fair value of the underlying
collateral. Estimates of fair value, for collateral dependent loans,
are based upon third party independent appraisals, as adjusted for relevant
factors, including, among other things, cost to sell the collateral (including
broker fees, legal, carrying costs, etc.), changes in the collateral’s
condition, and changes in market conditions subsequent to the appraisal date of
the collateral. Any portion of the recorded investment in a
collateral-dependent loan in excess of the fair value of the collateral that is
identified as uncollectible, and is therefore deemed a confirmed loss, will be
charged off against the ALL.
Before
concluding that an impaired FASB ASC Topic 310 loan needs no associated loss
allowance, Central Jersey Bank, N.A. needs to determine, document and support
that its measurement process was appropriate and that it considered all
available and relevant information.
For
example, for a collateral-dependent loan, the following factors should be
considered in the measurement of impairment under the fair value of collateral
method:
|
·
|
volatility
of the fair value of the
collateral,
|
|
·
|
timing
and reliability of the appraisal or other
valuation,
|
|
·
|
timing
of the institution’s or third party’s inspection of the
collateral,
|
|
·
|
confidence
in the institution’s lien on the
collateral,
|
|
·
|
historical
losses on similar loans, and
|
|
·
|
other
factors as appropriate for the loan
type.
|
Some
impaired loans may have risk characteristics in common with other impaired
loans. In this case, management may aggregate those loans and use
historical statistics such as average recovery period and
average
amount recovered, along with composite effective interest rate as a means of
measuring impairment of those loans.
Our
primary lending emphasis is the origination of commercial real estate loans,
commercial and industrial loans, and to a lesser extent, home equity and second
mortgages. As a result of our strategic plans and lending emphasis,
we have a loan concentration in commercial loans at December 31, 2009 and 2008,
the majority of which are secured by real property located in New
Jersey.
Based on
the composition of our loan portfolio and the growth in our loan portfolio over
the past five years, we believe the primary risks inherent in our portfolio are
possible increases in interest rates, a possible decline in the economy,
generally, and a continued decline in real estate fair values. Any
one or a combination of these events may adversely affect our loan portfolio
resulting in increased delinquencies and loan losses.
For the
year ended December 31, 2009, the provision for loan losses was $6.2 million, as
compared to $1.3 million for the year ended December 31, 2008. The
significant increase in the provision for loan losses is due to required
incremental reserves resulting from the credit deterioration of certain
commercial loans and, to a lesser extent, loan growth that occurred during the
periods presented. Total gross loans outstanding at December 31, 2009
were $379.1 million, an increase of $18.1 million, or 5.0%, over the December
31, 2008 total of $361.0 million.
Loan
portfolio composition changed slightly in 2009, as compared to 2008, with gross
commercial loans totaling $309.1 million, or 81.5%, of total gross loans
outstanding at December 31, 2009, as compared to $304.7 million, or 84.4%, at
December 31, 2008. Gross loans outstanding totaled $379.1 million at
December 31, 2009, as compared to $361.0 million at December 31, 2008, an
increase of $18.1 million, or 5.01%.
The
following table summarizes Central Jersey Bank, N.A.’s ALL for the years ended
December 31, 2009, 2008, 2007, 2006, and 2005.
(dollars in thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Balance,
beginning of year
|
$ | 4,741 | $ | 3,408 | $ | 3,229 | $ | 3,175 | $ | 1,638 | ||||||||||
Provision
charged to expense
|
6,214 | 1,319 | 165 | 500 | 426 | |||||||||||||||
Charge-offs
|
(1,494 | ) | -- | (88 | ) | (455 | ) | (92 | ) | |||||||||||
Allaire
Community Bank combination
|
-- | -- | -- | -- | 1,203 | |||||||||||||||
Recoveries
|
152 | 14 | 102 | 9 | -- | |||||||||||||||
Balance, end of year
|
$ | 9,613 | $ | 4,741 | $ | 3,408 | $ | 3,229 | $ | 3,175 | ||||||||||
Ratio
of allowance for loan losses to total loans
|
2.54 | % | 1.31 | % | 1.08 | % | 1.02 | % | 1.02 | % | ||||||||||
Ratio
of net recoveries (charge-offs) to average loans
outstanding
|
(0.36 | %) | 0.004 | % | 0.004 | % | (0.14 | %) | (0.03 | %) |
The
following table sets forth Central Jersey Bank, N.A.’s percent of ALL to total
allowance and the percent of loans to total loans in each of the categories
listed at the dates indicated (dollars in thousands):
December
31, 2009
|
December
31, 2008
|
December
31, 2007
|
||||||||||||||||||||||||||||||||||
Loan type
|
Amount
|
Percent of allowance to total
allowance
|
Percent of loans to total
loans
|
Amount
|
Percent of allowance to total
allowance
|
Percent of loans to total
loans
|
Amount
|
Percent of allowance to total
allowance
|
Percent of loans to total
loans
|
|||||||||||||||||||||||||||
Commercial
|
$ | 8,932 | 92.9 | % | 74.5 | % | $ | 4,293 | 90.6 | % | 84.4 | % | $ | 2,999 | 88.0 | % | 85.6 | % | ||||||||||||||||||
Consumer
|
681 | 7.1 | % | 25.5 | % | 448 | 9.4 | % | 15.6 | % | 409 | 12.0 | % | 14.4 | % | |||||||||||||||||||||
Total
|
$ | 9,613 | 100.0 | % | 100.0 | % | $ | 4,741 | 100.0 | % | 100.0 | % | $ | 3,408 | 100.0 | % | 100.0 | % |
December
31, 2006
|
December
31, 2005
|
|||||||||||||||||||||||
Loan type
|
Amount
|
Percent of allowance to total allowance
|
Percent of loans to total
loans
|
Amount
|
Percent of allowance to total
allowance
|
Percent of loans to total
loans
|
||||||||||||||||||
Commercial
|
$ | 2,811 | 87.1 | % | 86.5 | % | $ | 2,749 | 86.6 | % | 85.5 | % | ||||||||||||
Consumer
|
418 | 12.9 | % | 13.5 | % | 426 | 13.4 | % | 14.5 | % | ||||||||||||||
Total
|
$ | 3,229 | 100.0 | % | 100.0 | % | $ | 3,175 | 100.0 | % | 100.0 | % |
Other
Real Estate Owned
Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value less cost to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of
carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in net expenses
from other non-interest expenses.
At
December 31, 2009, two loans were transfer to other real estate owned, impacting
the provision for loan losses by $245,000, and recorded as other real estate
owned at their fair market value less cost to sell of $1.1 million.
Restricted
Stock
Restricted
stock, which represents required investments in the common stock of
correspondent banks, is carried at cost and as of December 31, 2009 and 2008,
consisted of the common stock of the FHLBNY, the Federal Reserve Bank of New
York (“FRB”) and Atlantic Central Bankers Bank (“ACBB”).
Management
evaluates the restricted stock for impairment in accordance with the AICPA
Accounting Standards Executive Committee (“AcSEC”) Statement of Position (“SOP”)
01-6, “Accounting by Certain
Entities (Including Entities With Trade Receivables) That Lend to or Finance the
Activities of Others.” Management’s determination of whether
these investments are impaired is based on their assessment of the ultimate
recoverability of the investments’ cost rather than by recognizing temporary
declines in value. The determination of
whether a decline affects the ultimate recoverability of the investments’ cost
is influenced by criteria such as (1) the significance of the decline in net
assets of the FHLBNY, as compared to the capital stock amount for the FHLBNY and
the length of time this situation has persisted, (2) commitments by the FHLBNY
to make payments required by law or regulation and the level of
such
payments
in relation to the operating performance of the FHLBNY, and (3) the impact of
legislative and regulatory changes on institutions and, accordingly, on the
customer base of the FHLBNY.
Management
believes no impairment charge is necessary related to the restricted stock as of
December 31, 2009.
Deposits
One of
Central Jersey Bank, N.A.’s primary strategies is the accumulation and retention
of core deposits. Core deposits are defined as all deposits except
certificates of deposits with balances in excess of $100,000.
Total
deposits were $467.9 million at December 31, 2009, an increase of $49.1 million,
or 11.7%, over the year ended December 31, 2008 total of $418.8
million. Core deposits as a percentage of total deposits were 82.8%
at December 31, 2009, as compared to 82.5% at December 31, 2008. The
increase in deposit balances was reflective of continued core deposit growth
that occurred throughout Central Jersey Bank, N.A.’s retail
franchise.
The
following table represents categories of Central Jersey Bank, N.A.’s deposits at
December 31, 2009 and 2008.
(in
thousands)
|
December 31,
2009
|
December 31,
2008
|
||||||
Demand
deposits, non-interest bearing
|
$ | 80,500 | $ | 75,947 | ||||
Savings,
N.O.W. and money market accounts
|
226,729 | 190,475 | ||||||
Certificates
of deposit of less than $100,000
|
72,089 | 78,949 | ||||||
Certificates
of deposit of $100,000 or more
|
88,560 | 73,444 | ||||||
Total
deposits
|
$ | 467,878 | $ | 418,815 |
The
following table represents categories of Central Jersey Bank, N.A.’s average
deposit balances and weighted average interest rates for the years ended
December 31, 2009 and 2008 (dollars in thousands):
December 31,
2009
|
December 31,
2008
|
|||||||||||||||
Average
Balance
|
Weighted
Average
Rate
|
Average
Balance
|
Weighted
Average
Rate
|
|||||||||||||
Demand
deposits, non-interest bearing
|
$ | 76,811 | 0.00 | % | $ | 75,149 | 0.00 | % | ||||||||
Savings,
N.O.W. and money market accounts
|
202,124 | 1.23 | % | 178,351 | 1.84 | % | ||||||||||
Certificates
of deposit of less than $100,000
|
75,755 | 2.62 | % | 79,867 | 3.80 | % | ||||||||||
Certificates
of deposit of $100,000 or more
|
87, 504 | 2.84 | % | 68,306 | 3.95 | % | ||||||||||
Total
deposits
|
$ | 442,194 | 1.93 | % | $ | 401,673 | 2.24 | % |
At
December 31, 2009, Central Jersey Bank, N.A. had $160.6 million in time deposits
maturing as follows (in thousands):
3 months or less
|
Over 3 to 12 months
|
Over 1 year to 3 years
|
Over 3 years
|
Total
|
||||||||||||||||
Less
than $100,000
|
$ | 17,097 | $ | 41,158 | $ | 13,598 | $ | 236 | $ | 72,089 | ||||||||||
Equal
to or more than $100,000
|
11,260 | 52,819 | 23,994 | 487 | 88,560 | |||||||||||||||
Total
|
$ | 28,357 | $ | 93,977 | $ | 37,592 | $ | 723 | $ | 160,649 |
Borrowings
Borrowings
were $47.6 million at December 31, 2009, as compared to $71.7 million at
December 31, 2008, a decrease of $24.1 million, or 33.6%. 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 December 31, 2009, borrowings included $26.4
million bank sweep funds, $15.0 million in FHLBNY callable advances and $6.2
million in FHLBNY fixed rate advances. The decrease was primarily due
to a decrease in overnight borrowings as a result of cash generated from deposit
growth and the sale of investment securities available-for-sale.
Commitments
and Conditional Obligations
In the
ordinary course of business to meet the financial needs of Central Jersey Bank,
N.A.’s customers, Central Jersey Bank, N.A. is party to financial instruments
with off-balance sheet risk. These financial instruments include
unused lines of credit and involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the consolidated financial
statements. The contract or notional amounts of these instruments
express the extent of involvement Central Jersey Bank, N.A. has in each category
of financial instruments.
Central
Jersey Bank, N.A.’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. Central Jersey Bank, N.A.
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The contract or notional
amount of financial instruments which represent credit risk at December 31, 2009
and December 31, 2008 is as follows (in thousands):
2009
|
2008
|
|||||||
Standby
letters of credit
|
$ | 2,140 | $ | 2,206 | ||||
Outstanding
loan and credit line commitments
|
$ | 67,122 | $ | 65,079 |
Standby
letters of credit are conditional commitments issued by Central Jersey Bank,
N.A. 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 FASB ASC
Topic 952. 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 December 31, 2009 and December 31,
2008.
Outstanding
loan commitments represent the unused portion of loan commitments available to
individuals and companies as long as there is no violation of any condition
established in the contract. Outstanding loan commitments generally
have a fixed expiration date of one year or less, except for home equity loan
commitments which generally have an expiration date of up to 15
years. Central Jersey Bank, N.A. evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if any, upon extension of credit is based upon management’s credit
evaluation of the customer. Various types of collateral may be held,
including property and marketable securities. The credit risk
involved in these financial instruments is essentially the same as that involved
in extending loan facilities to customers.
At
December 31, 2009, the Central Jersey Bancorp was obligated under non-cancelable
lease agreements for 10 branch office leases and two leases for office and
storage space. The leases provide for increased rentals based upon
increases in real estate taxes and the cost of living index. Minimum
rental payments under the terms of these leases are as follows (in
thousands):
2010
|
$ | 1,045,747 | ||
2011
|
947,349 | |||
2012
|
891,661 | |||
2013
|
535,269 | |||
2014
and thereafter
|
663,119 | |||
Total
|
$ | 4,083,145 |
Total
rent expense was $1.1 million in both 2009 and 2008.
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 2009, 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 $96.9
million and $170.7 million at December 31, 2009 and 2008,
respectively.
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, amounts due from
banks and short-term investments maturing in less than one year, must be
continually accessible for contingency purposes. This is accomplished
primarily by the daily monitoring of certain accounts for sufficient balances to
meet future loan commitments, as well as measuring Central Jersey Bank, N.A.’s
liquidity position on a monthly basis.
Supplemental
sources of liquidity include large certificates of deposit, wholesale and retail
repurchase agreements, and federal funds purchased from correspondent
banks. Correspondent banks, which are typically referred to as
“banker’s banks,” offer essential services such as cash letter processing,
investment services, loan participation support, wire transfer operations and
other traditional banking services. Brokered deposits, which are
deposits obtained, directly or indirectly, from or through the
mediation
or assistance of a deposit broker, may be utilized as supplemental sources of
liquidity in accordance with Central Jersey Bank, N.A.’s balance sheet
management policy. Contingent liquidity sources may include
off-balance sheet funds, such as advances from both the FHLBNY and the Federal
Reserve Bank, and federal funds purchase lines with “upstream”
correspondents. An additional source of liquidity is made available
by curtailing loan activity and instead using the available cash to fund
short-term investments such as overnight federal funds sold or other approved
investments maturing in less than one year. In addition, future
expansion of Central Jersey Bank, N.A.’s retail banking network is expected to
create additional sources of liquidity from new deposit customer
relationships.
Central
Jersey Bank, N.A. is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on Central Jersey Bank, N.A.’s financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Central Jersey Bank, N.A. must meet
specific capital guidelines that involve quantitative measures of Central Jersey
Bank, N.A.’s assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Central Jersey
Bank, N.A.’s capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
See “Item 1. Business-Government Regulation.”
Quantitative
measures established by regulation to ensure capital adequacy require Central
Jersey Bank, N.A. to maintain minimum amounts and ratios (set forth in the
following table) of Total Capital and Tier 1 Capital to risk weighted assets and
of Tier 1 Capital to average assets (leverage ratio). As of December
31, 2009, Central Jersey Bank, N.A. met all capital adequacy requirements to
which it is subject.
As of
December 31, 2009, the most recent notification from the OCC categorized Central
Jersey Bank, N.A. as “well capitalized” under the regulatory framework for
prompt corrective action. There are no conditions or events since
that notification that we believe have changed Central Jersey Bank, N.A.’s
category.
The
following is a summary of Central Jersey Bancorp and Central Jersey Bank, N.A.’s
actual capital ratios as of December 31, 2009 and 2008, compared to the minimum
capital adequacy requirements and the requirements for classification as a
“well-capitalized” institution:
Tier
I
Capital
to
Average
Assets Ratio
(Leverage
Ratio)
|
Tier
I
Capital
to
Risk
Weighted
Asset
Ratio
|
Total
Capital to
Risk
Weighted
Asset
Ratio
|
||||||||||||||||||||||
Actual Ratios
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||||
Central
Jersey Bancorp
|
9.68 | % | 10.20 | % | 12.50 | % | 13.91 | % | 13.76 | % | 15.09 | % | ||||||||||||
Central
Jersey Bank, N.A.
|
7.89 | % | 10.33 | % | 10.19 | % | 14.05 | % | 14.00 | % | 15.24 | % | ||||||||||||
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 | % |
Guaranteed
Preferred Beneficial Interest in Central Jersey Bancorp Subordinated
Debt
In March
2004, MCBK Capital Trust I, a special purpose business trust of Central Jersey
Bancorp, issued an aggregate of $5.0 million of trust preferred securities to
ALESCO Preferred Funding III, a pooled investment vehicle. Sandler
O’Neill & Partners, L.P. acted as placement agent in connection with the
offering of the trust preferred securities. The securities issued by
MCBK Capital Trust I are fully guaranteed by Central Jersey Bancorp with respect
to distributions and amounts payable upon liquidation, redemption or
repayment. These securities have a floating interest rate equal to
the three-month LIBOR plus 285 basis points, which resets
quarterly. The securities mature on April 7, 2034 and may be called
at par by Central Jersey Bancorp any time after April 7, 2009. These
securities were placed in a private transaction exempt from registration under
the Securities Act.
The
entire proceeds to MCBK Capital Trust I from the sale of the trust preferred
securities were used by MCBK Capital Trust I in order to purchase $5.1 million
of subordinated debentures from Central Jersey Bancorp. The
subordinated debentures bear a variable interest rate equal to LIBOR plus 285
basis points. Although the subordinated debentures are treated as
debt of Central Jersey Bancorp, they currently qualify as Tier I Capital
investments, subject to the 25% limitation under risk-based capital guidelines
of the Federal Reserve. The portion of the trust preferred securities
that exceeds this limitation qualifies as Tier II Capital of Central Jersey
Bancorp. At December 31, 2009, $5.0 million of the trust preferred
securities qualified for treatment as Tier I Capital. Central Jersey
Bancorp is using the proceeds it received from the subordinated debentures to
support the general balance sheet growth of Central Jersey Bancorp and to
maintain Central Jersey Bank, N.A.’s required regulatory capital
ratios.
On March
1, 2005, the Federal Reserve adopted a final rule that allows the continued
inclusion of outstanding and prospective issuances of trust preferred securities
in the Tier I Capital of bank holding companies, subject to stricter
quantitative limits and qualitative standards. The new quantitative
limits become effective after a five-year transition period ending March 31,
2009. Under the final rules, trust preferred securities and other
restricted core capital elements are limited to 25% of all core capital
elements. Amounts of restricted core capital elements in excess of
these limits may be included in Tier II Capital. At December 31,
2009, 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.
Recent
Accounting Pronouncements
FASB
ASC Topic 860
In
October 2009, the FASB issued ASU Topic 860, “Transfers and Servicing – Accounting
for Transfers of Financial Assets.” This Update amends the
Codification for the issuance of FASB Statement No. 166, “Accounting for Transfers of
Financial Assets-an amendment of FASB Statement No. 140.” The
amendments in this update improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require
enhanced disclosures about the risks that a transferor continues to be exposed
to because of its continuing involvement in transferred financial
assets. Comparability and consistency in accounting for transferred
financial assets will also be improved through clarifications of the
requirements for isolation and limitations on portions of financial assets that
are eligible for sale accounting. This update is effective at the
start of a reporting entity’s first fiscal year beginning after November 15,
2009. Early application is not permitted. Central Jersey
Bancorp does not
expect
the adoption of this pronouncement to have a material impact on its consolidated
financial position, results of operations or cash flows.
FASB
ASC Topic 810
In
October 2009, the FASB issued ASU Topic 810, “Consolidations – Improvements to
Financial Reporting by Enterprises Involved with Variable Interest
Entities.” This update amends the Codification for the
issuance of FASB Statement No. 167, “Amendments to FASB Interpretation
No. 46(R).” The amendments in this update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will
be more effective for identifying which reporting entity has a controlling
financial interest in a variable interest entity. The amendments in
this update also require additional disclosures about a reporting entity’s
involvement in variable interest entities, which will enhance the information
provided to users of financial statements. This update is effective
at the start of a reporting entity’s first fiscal year beginning after November
15, 2009. Early application is not permitted. Central
Jersey Bancorp does not expect the adoption of this pronouncement to have a
material impact on its consolidated financial position, results of operations or
cash flows.
FASB
ASC Topic 105
In
June 2009, the FASB issued guidance now codified as FASB ASC Topic 105,
“Generally Accepted Accounting
Principle,” as the single source of authoritative nongovernmental U.S.
GAAP. FASB ASC Topic 105 does not change current U.S. generally accepted
accounting principles (“U.S. GAAP”), but is intended to simplify user access to
all authoritative U.S. GAAP by providing all authoritative literature related to
a particular topic in one place. All existing accounting standard documents will
be superseded and all other accounting literature not included in the ASC will
be considered non-authoritative. These provisions of FASB ASC Topic 105 are
effective for interim and annual periods ending after September 15, 2009
and, accordingly, are effective for Central Jersey Bancorp for the current
fiscal reporting period. The adoption of this pronouncement did not have an
impact on Central Jersey Bancorp’s consolidated financial condition, results of
operations or cash flows, but impacted our financial reporting process by
eliminating all references to pre-codification standards. On the effective date
of this Statement, ACS superseded all then-existing non-SEC accounting and
reporting standards, and all other non-grandfathered non-SEC accounting
literature not included in the ACS became non-authoritative.
FASB
ASC Topic 855
In
May 2009, the FASB issued guidance now codified as FASB ASC Topic 855,
“Subsequent Events,”
which establishes general standards of accounting for, and disclosures of,
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. This pronouncement is effective for
interim or fiscal periods ending after June 15, 2009. Accordingly, Central
Jersey Bancorp adopted these provisions of FASB ASC Topic 855. The adoption of
this pronouncement did not have a material impact on Central Jersey Bancorp’s
consolidated financial position, results of operations or cash flows. However,
the provisions of FASB ASC Topic 855 resulted in additional disclosures with
respect to subsequent events. See Note 1, Basis of Presentation, for
this additional disclosure.
FASB
ASC Topic 825
In
April 2009, the FASB issued guidance now codified as FASB ASC Topic 825,
“Financial Instruments,”
which amends previous Topic 825 guidance to require disclosures about
fair value of financial instruments in interim as well as annual financial
statements. This pronouncement is effective for periods ending after
June 15, 2009. Accordingly, Central Jersey Bancorp adopted these provisions
of FASB ASC Topic 825 on March 29, 2009. The adoption of this
pronouncement did not have a material impact on Central Jersey Bancorp’s
consolidated financial position, results of operations or cash
flows. However, these provisions of FASB ASC Topic 825 resulted in
additional disclosures with respect to the fair value of Central Jersey
Bancorp’s financial instruments. See Note 14, Fair Value Measurements, for
these additional disclosures.
FASB
ASC Topic 320
In
April 2009, the FASB issued guidance now codified as FASB ASC Topic 320,
“Investments — Debt and Equity
Securities” and Topic 325 “Investments — Other,” which
is designed to create greater clarity and consistency in accounting for and
presenting impairment losses on securities. The pronouncement is
effective for periods ending after June 15, 2009. Accordingly,
Central Jersey Bancorp adopted this pronouncement on March 29,
2009. The adoption of this guidance did not have a material impact on
our consolidated financial position, results of operations or cash
flows. However, the provisions of FASB ASC Topic 320 resulted in
additional disclosures with respect to the fair value of Central Jersey
Bancorp’s investments with unrealized losses that are not deemed
other-than-temporarily impaired. See Note 14, Fair Value Measurements, for
these additional disclosures.
FASB
ASC Topic 820
In
April 2009, the FASB issued guidance now codified as FASB ASC Topic 820,
“Fair Value Measurements and
Disclosures.” This guidance defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This guidance establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset. The
pronouncement is effective for periods ending after June 15,
2009. Accordingly, Central Jersey Bancorp adopted this pronouncement
on March 29, 2009. The adoption of this guidance did not have a
material impact on our consolidated financial position, results of operations or
cash flows. However, the provisions of FASB ASC Topic 320 resulted in
additional disclosures with respect to the fair value of Central Jersey
Bancorp’s investments with unrealized losses that are not deemed
other-than-temporarily impaired. See Note 14, Fair Value Measurements, for
these additional disclosures.
Impact
of Inflation
The
consolidated financial statements and related financial data presented in this
report have been prepared in accordance with U.S. GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. The primary impact of inflation on the
operation of Central Jersey Bancorp and Central Jersey Bank, N.A. is reflected
in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, the effects of general levels of
inflation are primarily reflected in the interest rate paid in liabilities and
earned on interest earning assets. Interest rates do not necessarily
move in the same magnitude as the prices of goods and services. We
believe that continuation of our efforts to manage the rates, liquidity and
interest sensitivity of our assets and liabilities is necessary to generate an
acceptable return on assets.
Item 7A.
|
Quantitative and
Qualitative Disclosures about Market
Risk
|
Not
applicable.
Item 8.
|
Financial Statements
and Supplementary Data
|
The
consolidated financial statements and supplementary data of Central Jersey
Bancorp called for by this item are submitted under a separate section of this
report. Reference is made to the Index of Consolidated Financial
Statements contained on page F-1 herein.
Item 9.
|
Changes in and
Disagreements With Accountants on Accounting and Financial
Disclosure
|
None.
Item 9A.
|
Controls and
Procedures
|
As
required by Rule 13a-15 under the Exchange Act, as of the end of the period
covered by this Annual Report on Form 10-K, Central Jersey Bancorp carried out
an evaluation of the effectiveness of the design and operation of Central Jersey
Bancorp’s disclosure controls and procedures. This evaluation was
carried out under the supervision and with the participation of Central Jersey
Bancorp’s management, including Central Jersey Bancorp’s Chairman, President and
Chief Executive Officer and Central Jersey Bancorp’s Senior Executive Vice
President and Chief Financial Officer, who concluded that Central Jersey
Bancorp’s disclosure controls and procedures are effective. There has
been no significant change in Central Jersey Bancorp’s internal controls during
the last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, Central Jersey Bancorp’s internal control over financial
reporting.
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in Central Jersey Bancorp’s
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the 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 Central Jersey Bancorp’s reports filed under the Exchange Act
is accumulated and communicated to management, including Central Jersey
Bancorp’s Chairman, President and Chief Executive Officer and Senior Executive
Vice President and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Management’s Annual Report
on Internal Control Over Financial Reporting
The
management of Central Jersey Bancorp is responsible for establishing and
maintaining adequate internal control over financial
reporting. Central Jersey Bancorp’s internal control system is a
process designed to provide reasonable assurance to the company’s management and
Board of Directors regarding the preparation and fair presentation of published
financial statements.
Central
Jersey Bancorp’s internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of assets;
provide reasonable assurances that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. GAAP, and
that receipts and expenditures are being made only in accordance with
authorizations of management and the directors of Central Jersey Bancorp; and
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of Central Jersey Bancorp’s assets
that could have a material effect on our consolidated financial
statements.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
assessed the effectiveness of Central Jersey Bancorp’s internal control over
financial reporting as of December 31, 2009. In making this
assessment, we used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework (COSO). Based on the assessment management believes that,
as of December 31, 2009, Central Jersey Bancorp’s internal control over
financial reporting is effective based on those criteria.
Item 9B.
|
Other
Information
|
On March
24, 2010, Central Jersey Bancorp entered into a Second Amended and Restated
Change of Control Agreement with Anthony Giordano, III, Senior Executive Vice
President, Chief Financial Officer, Treasurer and Assistant Secretary of Central
Jersey Bancorp. Mr. Giordano’s existing change of control agreement
was amended and restated to (i) provide that the benefits payable to him
thereunder would be equal to his monthly compensation (including monthly salary,
the cash equivalent of the monthly benefits provided to him, and annual bonus
compensation prorated over 12 months) multiplied by 30 (“Severance”) and not by
24 as set forth in his prior agreement and (ii) provide that Mr. Giordano will
be entitled to receive Severance from either Central Jersey Bancorp or a
Successor Entity (as defined in the agreement), as the case may be, if Mr.
Giordano is either (a) not retained by a Successor Entity for a period of at
least 36 months (an increase from 24 months) following the occurrence of a
Change of Control Event (as defined in the agreement) or (b) terminated by a
Successor Entity within 36 months (an increase from 30 months) following the
occurrence of a Change of Control Event after accepting employment with such
Successor Entity as of the effective date of the Change of Control
Event. The terms of Mr. Giordano’s Second Amended and Restated Change
of Control Agreement are consistent with the terms of the change of control
agreements between Central Jersey Bancorp and its other named executive
officers. Mr. Giordano’s Second Amended and Restated Change of
Control Agreement is furnished herewith as Exhibit 10.7.
PART III
Item
10.
|
Directors, Executive
Officers and Corporate
Governance
|
The
information required under this Item with respect to Central Jersey Bancorp’s
directors and executive officers will be contained in Central Jersey Bancorp’s
Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on
May 26, 2010, under the captions “Election of Directors,” “Section 16(a)
Beneficial Ownership Reporting Compliance” and “Executive Officers,” and is
incorporated herein by reference.
Item 11.
|
Executive
Compensation
|
The
information required under this Item with respect to executive compensation will
be contained in Central Jersey Bancorp’s Proxy Statement for the Annual Meeting
of Shareholders scheduled to be held on May 26, 2010, under the captions
“Executive Compensation” and “Director Compensation,” and is incorporated herein
by reference.
Security Ownership of
Certain Beneficial Owners and Management and Related Shareholder
Matters
|
The
information required by this Item will be contained in Central Jersey Bancorp’s
Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on
May 26, 2010, under the captions “Securities Authorized for Issuance under
Equity Compensation Plans” and “Security Ownership of Certain Beneficial Owners
and Management,” and is incorporated herein by reference.
Item 13.
|
Certain Relationships,
Related Transactions and Director
Independence
|
The
information required by this item will be contained in Central Jersey Bancorp’s
Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on
May 26, 2010, under the caption “Certain Relationships and Related Party
Transactions” and “Director Independence” and is incorporated herein by
reference.
Item 14.
|
Principal Accountant
Fees and Services
|
The
information required by this item will be contained in Central Jersey Bancorp’s
Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on
May 26, 2010, under the captions “Audit Fees,” “Audit Related Fees,” “Tax Fees,”
“All Other Fees,” and “Policy on Pre-Approval of Audit and Permissible Non-Audit
Services,” and is incorporated herein by reference.
PART IV
Item
15.
|
Exhibits and Financial
Statement Schedules
|
|
(a)
|
Exhibits
|
Reference
is made to the Index of Exhibits beginning on page E-1 herein.
|
(b)
|
Financial Statement
Schedules:
|
Reference
is made to the Index of Consolidated Financial Statements on page F-1
herein. No schedules are included with the consolidated financial
statements because the required information is inapplicable or is presented in
the consolidated financial statements or notes thereto.
In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CENTRAL JERSEY BANCORP | |||
Date: March
30, 2010
|
By:
|
/s/ James S. Vaccaro
|
|
James
S. Vaccaro
|
|||
Chairman,
President and Chief Executive
Officer
|
KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints James S. Vaccaro and Robert S. Vuono and each of them,
his or her true and lawful attorneys-in-fact and agents for him or her and in
his or her name, place an stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as they might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents may lawfully do or cause
to be done by virtue hereof.
In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this report to be signed by the following persons in the capacities and
on the dates stated.
Signatures
|
Title
|
Date
|
||
/s/
James S. Vaccaro
|
Chairman,
President and Chief
|
March
30, 2010
|
||
James
S. Vaccaro
|
Executive
Officer (Principal Executive Officer) and Director
|
|||
/s/
Robert S. Vuono
|
Senior
Executive Vice President,
|
March
30, 2010
|
||
Robert
S. Vuono
|
Chief
Operating Officer, Secretary and Director
|
|||
/s/
Anthony Giordano, III
|
Senior
Executive Vice President,
|
March
30, 2010
|
||
Anthony
Giordano, III
|
Chief
Financial Officer, Treasurer and Assistant Secretary (Principal Financial
and Accounting Officer)
|
Signatures
|
Title
|
Date
|
||
/s/
James G. Aaron
|
Director
|
March
30, 2010
|
||
James
G. Aaron
|
||||
/s/
Mark R. Aikins
|
Director
|
March
30, 2010
|
||
Mark
R. Aikins
|
||||
/s/
John A. Brockriede
|
Director
|
March
30, 2010
|
||
John
A. Brockriede
|
||||
/s/
George S. Callas
|
Director
|
March
30, 2010
|
||
George
S. Callas
|
||||
/s/
Paul A. Larson, Jr.
|
Director
|
March
30, 2010
|
||
Paul
A. Larson, Jr.
|
||||
Director
|
March
30, 2010
|
|||
John
F. McCann
|
||||
/s/
Carmen M. Penta
|
Director
|
March
30, 2010
|
||
Carmen
M. Penta
|
||||
/s/
Mark G. Solow
|
Director
|
March
30, 2010
|
||
Mark
G. Solow
|
CENTRAL
JERSEY BANCORP
AND
SUBSIDIARY
Consolidated
Financial Statements
Contents
December
31, 2009
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Statements of Financial Condition at December 31, 2009 and
2008
|
F-3
|
Consolidated
Statements of Operations for the years ended December 31, 2009 and
2008
|
F-4
|
Consolidated
Statements of Changes in Shareholders’ Equity for the years ended December
31, 2009 and 2008
|
F-5
|
Consolidated
Statement of Cash Flows for the years ended December 31, 2009 and
2008
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and
Shareholders
of Central Jersey Bancorp
We have
audited the accompanying consolidated statement of financial condition of
Central Jersey Bancorp and subsidiary (the “Company”) as of December 31,
2009 and 2008, and the related consolidated statements of operations, changes in
shareholders’ equity, comprehensive income, and cash flows for the years then
ended. The Company’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Central Jersey Bancorp and
subsidiary as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended December 31, 2009
in conformity with accounting principles generally accepted in the United States
of America.
/s/
ParenteBeard LLC
ParenteBeard
LLC
Malvern,
Pennsylvania
March 30,
2010
CENTRAL
JERSEY BANCORP
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(dollars
in thousands, except per share amounts)
December 31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Cash
and due from banks
|
$ | 9,789 | $ | 9,306 | ||||
Federal
funds sold
|
68,526 | 461 | ||||||
Cash
and cash equivalents
|
78,315 | 9,767 | ||||||
Investment
securities available-for-sale, at fair value
|
96,947 | 170,683 | ||||||
Investment
securities held-to-maturity (fair value of $7,462 and $15,124,
respectively, at December 31, 2009 and December 31, 2008)
|
7,217 | 14,679 | ||||||
Federal
Reserve Bank stock
|
1,848 | 1,960 | ||||||
Federal
Home Loan Bank stock
|
1,820 | 2,940 | ||||||
Loans
held-for-sale
|
-- | 400 | ||||||
Loans
|
379,087 | 360,998 | ||||||
Less:
Allowance for loan losses
|
9,613 | 4,741 | ||||||
Loans,
net
|
369,474 | 356,257 | ||||||
Accrued
interest receivable
|
2,285 | 2,251 | ||||||
Other
real estate owned
|
1,055 | -- | ||||||
Premises
and equipment
|
5,946 | 6,303 | ||||||
Bank
owned life insurance
|
3,817 | 3,685 | ||||||
Goodwill
|
-- | 26,957 | ||||||
Core
deposit intangible
|
1,031 | 1,444 | ||||||
FDIC
prepaid insurance
|
2,684 | -- | ||||||
Other
assets
|
5,219 | 2,059 | ||||||
Total
assets
|
$ | 577,658 | $ | 599,385 | ||||
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||
Deposits:
|
||||||||
Non-interest
bearing
|
$ | 80,500 | $ | 75,947 | ||||
Interest
bearing
|
387,378 | 342,868 | ||||||
467,878 | 418,815 | |||||||
Borrowings
|
47,575 | 71,741 | ||||||
Subordinated
debentures
|
5,155 | 5,155 | ||||||
Accrued
expenses and other liabilities
|
1,531 | 1,546 | ||||||
Investment
securities purchased not settled
|
-- | 19,676 | ||||||
Total
liabilities
|
522,139 | 516,933 | ||||||
Shareholders’
equity:
|
||||||||
Common
stock, par value $0.01 per share. Authorized 100,000,000
shares, 9,256,975 and 9,000,531 shares outstanding, and 9,503,423 and
9,246,979 shares issued, respectively, at December 31, 2009 and December
31, 2008
|
92 | 90 | ||||||
Preferred
stock, liquidation value $1,000 per share. Authorized
10,000,000 shares and issued and outstanding 11,300 shares at December 31,
2009 and December 31, 2008
|
11,300 | 11,300 | ||||||
Additional
paid-in capital
|
64,981 | 64,502 | ||||||
Accumulated
other comprehensive income, net of tax expense
|
1,022 | 1,925 | ||||||
Treasury
stock – 246,448 shares at December 31, 2009 and December 31,
2008
|
(1,806 | ) | (1,806 | ) | ||||
(Accumulated
deficit)/retained earnings
|
(20,070 | ) | 6,441 | |||||
Total
shareholders’ equity
|
55,519 | 82,452 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 577,658 | $ | 599,385 | ||||
See
accompanying notes to consolidated financial statements.
CENTRAL
JERSEY BANCORP
CONSOLIDATED
STATEMENTS OF OPERATIONS
(dollars
in thousands, except per share amounts)
December 31,
|
||||||||
2009
|
2008
|
|||||||
Interest
and dividend income:
|
||||||||
Interest
and fees on loans
|
$ | 20,709 | $ | 21,084 | ||||
Interest
on securities available-for-sale:
|
||||||||
Taxable
interest income
|
3,334 | 6,894 | ||||||
Non-taxable
interest income
|
1,426 | 58 | ||||||
Interest
on securities held-to-maturity
|
592 | 664 | ||||||
Interest
on federal funds sold and due from banks
|
318 | 386 | ||||||
Total
interest and dividend income
|
26,379 | 29,086 | ||||||
Interest
expense:
|
||||||||
Interest
expense on deposits
|
7,047 | 8,984 | ||||||
Interest
expense on borrowings
|
942 | 1,325 | ||||||
Interest
expense on subordinated debentures
|
190 | 355 | ||||||
Total
interest expense
|
8,179 | 10,664 | ||||||
Net
interest income
|
18,200 | 18,422 | ||||||
Provision
for loan losses
|
6,214 | 1,319 | ||||||
Net
interest income after provision for loan losses
|
11,986 | 17,103 | ||||||
Non-interest
income:
|
||||||||
Gain
on sale of available-for-sale securities
|
2,885 | 739 | ||||||
Service
charges on deposit accounts
|
1,504 | 1,522 | ||||||
Gain
on sale of loans held-for-sale
|
536 | 351 | ||||||
Income
on bank owned life insurance
|
132 | 120 | ||||||
Total
non-interest income
|
5,057 | 2,732 | ||||||
Non-interest
expense:
|
||||||||
Salaries
and employee benefits
|
7,562 | 7,759 | ||||||
Net
occupancy expenses
|
2,125 | 2,059 | ||||||
Professional
fees
|
1,437 | 896 | ||||||
FDIC
insurance premiums
|
1,147 | 278 | ||||||
Data
processing fees
|
972 | 1,011 | ||||||
Outside
service fees
|
828 | 782 | ||||||
Furniture,
fixtures and equipment
|
796 | 694 | ||||||
Core
deposit intangible amortization
|
413 | 482 | ||||||
Stationery,
supplies and printing
|
205 | 239 | ||||||
Advertising
|
204 | 268 | ||||||
Insurance
|
161 | 184 | ||||||
Telephone
|
108 | 133 | ||||||
Goodwill
impairment
|
26,957 | -- | ||||||
Other
operating expenses
|
784 | 852 | ||||||
Total
non-interest expenses
|
43,699 | 15,637 | ||||||
(Loss)
income before provision for income taxes
|
(26,656 | ) | 4,198 | |||||
Income
tax (benefit) expense
|
(888 | ) | 1,288 | |||||
Net
(loss) income
|
$ | (25,768 | ) | $ | 2,910 | |||
Preferred
stock dividend
|
565 | 12 | ||||||
Preferred
stock discount amortization
|
178 | -- | ||||||
Net
(loss) income available to common shareholders
|
$ | (26,511 | ) | $ | 2,898 | |||
Basic
(loss) earnings per common share
|
$ | (2.91 | ) | $ | 0.32 | |||
Diluted
(loss) earnings per common share
|
$ | (2.91 | ) | $ | 0.30 | |||
Average
basic shares outstanding
|
9,117,428 | 9,092,180 | ||||||
Average
diluted shares outstanding
|
9,117,428 | 9,523,891 |
See
accompanying notes to consolidated financial statements.
CENTRAL
JERSEY BANCORP
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(dollars
in thousands, except share amounts)
Accumulated
|
Retained
|
|||||||||||||||||||||||||||
Additional
|
other
|
earnings/
|
||||||||||||||||||||||||||
Common
|
Preferred
|
paid-in
|
comprehensive
|
Treasury
|
(accumulated
|
|||||||||||||||||||||||
stock
|
stock
|
capital
|
income
(loss)
|
stock
|
deficit)
|
Total
|
||||||||||||||||||||||
Balance
at December 31, 2007
|
$ | 91 | $ | -- | $ | 60,787 | $ | 848 | $ | -- | $ | 7,160 | $ | 68,886 | ||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||
Net
income
|
-- | -- | -- | -- | -- | 2,910 | 2,910 | |||||||||||||||||||||
Unrealized
gain on securities available-for-sale, net of reclassification adjustment
of $739 and tax effect of $648
|
-- | -- | -- | 1,077 | -- | -- | 1,077 | |||||||||||||||||||||
Total
comprehensive income
|
$ | 3,987 | ||||||||||||||||||||||||||
Exercise
of stock options – 64,177 shares, including tax benefit
$94
|
1 | -- | 329 | -- | -- | -- | 330 | |||||||||||||||||||||
Purchase
of 246,448 shares outstanding stock; placed in treasury
|
(2 | ) | -- | -- | -- | (1,806 | ) | -- | (1,808 | ) | ||||||||||||||||||
5%
stock dividend – 437,400 shares
|
-- | -- | 3,390 | -- | -- | (3,390 | ) | -- | ||||||||||||||||||||
Preferred
stock
|
-- | 11,300 | -- | -- | -- | -- | 11,300 | |||||||||||||||||||||
Cash
dividends accrued on preferred stock
|
(12 | ) | (12 | ) | ||||||||||||||||||||||||
Cumulative
effect adjustment adoption of EITF 06-4
|
-- | -- | -- | -- | -- | (227 | ) | (227 | ) | |||||||||||||||||||
Cash
paid for fractional shares
|
-- | -- | (4 | ) | -- | -- | -- | (4 | ) | |||||||||||||||||||
Balance
at December 31, 2008
|
$ | 90 | $ | 11,300 | $ | 64,502 | $ | 1,925 | $ | (1,806 | ) | $ | 6,441 | $ | 82,452 | |||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||
Net
loss
|
-- | -- | -- | -- | -- | (25,768 | ) | (25,768 | ) | |||||||||||||||||||
Unrealized
loss on securities available-for-sale, net of
reclassification adjustment of $2,885 and tax effect of
($561)
|
-- | -- | -- | (903 | ) | -- | -- | (903 | ) | |||||||||||||||||||
Total
comprehensive loss
|
$ | (26,671 | ) | |||||||||||||||||||||||||
Exercise
of stock options – 256,444 shares, including tax benefit
$170
|
2 | -- | 479 | -- | -- | -- | 481 | |||||||||||||||||||||
Discount
– preferred stock
|
-- | -- | -- | -- | -- | (178 | ) | (178 | ) | |||||||||||||||||||
Cash
dividends accrued on preferred stock
|
(565 | ) | (565 | ) | ||||||||||||||||||||||||
Balance
at December 31, 2009
|
$ | 92 | $ | 11,300 | $ | 64,981 | $ | 1,022 | $ | (1,806 | ) | $ | (20,070 | ) | $ | 55,519 |
See
accompanying notes to consolidated financial statements.
CENTRAL
JERSEY BANCORP
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(dollars
in thousands)
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
(loss) income
|
$ | (25,768 | ) | $ | 2,898 | |||
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
||||||||
Goodwill
impairment charge
|
26,957 | -- | ||||||
Earnings
on cash surrender value of life insurance
|
(132 | ) | (120 | ) | ||||
Deferred
tax benefit
|
(1,987 | ) | (210 | ) | ||||
Provision
for loan losses
|
6,214 | 1,319 | ||||||
Depreciation
and amortization
|
529 | 676 | ||||||
Net
premium amortization (discount accretion) on held-to-maturity
securities
|
166 | (15 | ) | |||||
Net
premium amortization (discount accretion) on available-for-sale
securities
|
334 | (11 | ) | |||||
Core
deposit intangible amortization
|
413 | 482 | ||||||
Gain
on sale of securities available-for-sale
|
(2,885 | ) | (739 | ) | ||||
Gain
on the sale of loans held-for-sale
|
(536 | ) | (351 | ) | ||||
Originations
of loans held-for-sale
|
(13,336 | ) | (4,233 | ) | ||||
Proceeds
from the sale of loans held-for-sale
|
14,272 | 4,508 | ||||||
Increase
in accrued interest receivable
|
(34 | ) | (33 | ) | ||||
Increase in
other assets
|
(2,803 | ) | (2,089 | ) | ||||
Decrease
in accrued expenses and other liabilities
|
(75 | ) | (293 | ) | ||||
Net
cash provided by operating activities
|
1,329 | 1,789 | ||||||
Cash
flows from investing activities:
|
||||||||
Maturities
and paydowns on investment securities held-to-maturity
|
7,296 | 7,748 | ||||||
Maturities
and paydowns on investment securities available-for-sale
|
72,966 | 24,437 | ||||||
Proceeds
from sale of investment securities available-for-sale
|
166,451 | 53,147 | ||||||
Purchase
of investment securities available-for-sale
|
(183,709 | ) | (131,616 | ) | ||||
Purchase
of investment securities held-to-maturity
|
-- | (4,982 | ) | |||||
Investment
securities purchased not settled
|
-- | 19,676 | ||||||
Net
increase in loans
|
(20,486 | ) | (45,477 | ) | ||||
Purchases
of premises and equipment
|
(172 | ) | (2,353 | ) | ||||
Net
cash provided by (used in) investment activities
|
42,346 | (79,420 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from stock options exercised
|
481 | 330 | ||||||
Net
increase in non-interest bearing deposits
|
4,553 | 1,992 | ||||||
Net
increase in interest bearing deposits
|
44,510 | 13,533 | ||||||
Net
increase (decrease) in other borrowings
|
3,405 | (1,528 | ) | |||||
Net
(decrease) increase in Federal Home Loan Bank advances
|
(27,499 | ) | 48,740 | |||||
Repayment
of Federal Home Loan Bank advances
|
(72 | ) | (34 | ) | ||||
Cash
dividend paid on preferred stock
|
(505 | ) | -- | |||||
Purchase
of outstanding stock; placed in treasury
|
-- | (1,808 | ) | |||||
Cash
paid for fractional shares
|
-- | (4 | ) | |||||
Issuance
of preferred stock and warrants
|
-- | 11,300 | ||||||
Net
cash provided by financing activities
|
24,873 | 72,521 | ||||||
Increase
(decrease) in cash and cash equivalents
|
68,548 | (5,110 | ) | |||||
Cash
and cash equivalents at beginning of period
|
9,767 | 14,877 | ||||||
Cash
and cash equivalents at end of period
|
$ | 78,315 | $ | 9,767 | ||||
Supplementary
cash flow information:
|
||||||||
Interest
paid
|
$ | 8,194 | $ | 10,754 | ||||
Income
taxes paid
|
$ | 1,724 | $ | 2,199 | ||||
Loans
receivable transferred to other real estate owned
|
$ | 1,055 | $ | -- |
See
accompanying notes to consolidated financial statements.
Central
Jersey Bancorp and Subsidiary
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE
1 - Summary of Significant Accounting Policies
Business
Central
Jersey Bancorp is a bank holding company headquartered in Oakhurst, New
Jersey. The holding company was incorporated in New Jersey on March
7, 2000, and became an active bank holding company on August 31, 2000 through
the acquisition of Monmouth Community Bank, National Association. On
January 1, 2005, Central Jersey Bancorp completed its strategic business
combination transaction with Allaire Community Bank, a New Jersey
state-chartered bank, pursuant to which Allaire Community Bank became a
wholly-owned bank subsidiary of Central Jersey Bancorp. On the
effective date of the combination, the name of the holding company was changed
from Monmouth Community Bancorp to Central Jersey Bancorp. In August
of 2005, Central Jersey Bancorp combined its two bank subsidiaries, Monmouth
Community Bank, N.A. and Allaire Community Bank, into a single banking entity,
named Central Jersey Bank, N. A. Central Jersey Bancorp and Central
Jersey Bank, N.A. are collectively referred to herein as the
“Company.”
Central
Jersey Bank, N.A. offers a full range of retail and commercial banking services
primarily to customers located in Monmouth County and Ocean County, New
Jersey. These services include checking accounts, savings accounts,
money market accounts, certificates of deposit, installment loans, real estate
mortgage loans, commercial loans, wire transfers, money orders, traveler’s
checks, safe deposit boxes, night depositories, federal payroll tax deposits,
bond coupon redemption, bank by mail, direct deposit, automated teller services
and telephone and internet banking. Central Jersey Bank, N.A. has
debit card, merchant card and international services available to its customers
through correspondent institutions. Central Jersey Bank, N.A.
currently has thirteen full-service branch facilities located in Belmar, Bradley
Beach, Long Branch (2), Manasquan, Point Pleasant, Spring Lake Heights, Little
Silver, Neptune City, Ocean Grove, Oakhurst and Wall Township (2), New
Jersey.
On May
26, 2009, Central Jersey Bancorp and OceanFirst Financial Corp., the parent
company of OceanFirst Bank, entered into a Agreement and Plan of Merger (the
“Merger Agreement”) pursuant to which Central Jersey Bancorp had intended to
merge with and into OceanFirst Financial Corp. Concurrent with the
merger, it was expected that Central Jersey Bank, N.A. would merge with and into
OceanFirst Bank. The merger of Central Jersey Bancorp and OceanFirst
Financial Corp. was intended to qualify as a tax free reorganization for federal
income tax purposes, with shares of Central Jersey Bancorp exchanged for
OceanFirst Financial Corp. shares on a tax free basis. The Merger
Agreement was terminated by mutual consent on December 17, 2009 when it became
apparent that the requisite regulatory approvals would not be received in time
for the merger to be completed by December 31, 2009, as contemplated in the
Merger Agreement.
Central
Jersey Bank, N.A. is a national association chartered by the Office of the
Comptroller of the Currency (“OCC”). The deposits of the bank
subsidiary are insured by the Federal Deposit Insurance Corporation
(“FDIC”). Central Jersey Bank, N.A. provides a broad range of
financial products and services to individual consumers, small businesses and
professionals in its market area. When a customer’s loan
requirements exceed Central Jersey Bank,
N.A.’s lending limit, it may seek to arrange such loan on a participation basis
with other financial institutions. In addition, Central Jersey Bank,
N.A. participates in loans originated by other financial
institutions.
Central
Jersey Bancorp paid a 5% stock dividend on July 1, 2008. As of
December 31, 2009, there were 9,256,975 outstanding shares of Central Jersey
Bancorp common stock. As of December 31, 2008, there were 9,000,531
outstanding shares of Central Jersey Bancorp common stock. All prior
period amounts have been retroactively restated to reflect the aforementioned
stock dividend.
Basis
of Financial Statement Presentation
The
accompanying consolidated financial statements include the accounts of Central
Jersey Bancorp and its wholly-owned bank subsidiary, Central Jersey Bank,
N.A. All significant inter-company accounts and transactions have
been eliminated in consolidation. The consolidated financial
statements of the Company have been prepared in conformity with U.S. generally
accepted accounting principles (“U.S. GAAP”).
Use
of Estimates
In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated statements of financial
condition and results of operations for the periods indicated. Actual
results could differ significantly from those estimates.
Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses (“ALL”) as
well as the other-than-temporary impairment of investment
securities.
While
management uses available information to recognize estimated losses on loans,
such estimates may be adjusted to account for changes in economic
conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company’s
ALL. Such agencies may require the Company to increase such allowance
based, in their judgment, on the information available to them at the time of
their examination.
New
Account Standards
Effective
April 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”)
guidance now codified as FASB Accounting Standards Codification (“ASC”) Topic
855, “Subsequent Events.”
This guidance establishes general standards for accounting
and for disclosure of events that occur after the balance sheet date but before
financial statements are issued. The subsequent event guidance sets
forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition in the financial statements, identifies the circumstances
under which an entity should recognize events or transactions occurring after
the balance sheet date in the financial statements, and the disclosures that
should be made about events or transactions that occur after the balance sheet
date. The Company has evaluated events and transactions occurring
subsequent to the balance sheet date of December 31, 2009, for items that should
potentially be recognized or disclosed in the accompanying audited consolidated
financial statements.
In
June 2009, the FASB issued guidance now codified as FASB ASC Topic 105,
“Generally Accepted Accounting
Principles,” as the single source of authoritative nongovernmental U.S.
GAAP. FASB ASC Topic 105 does not change current U.S. GAAP, but is
intended to simplify user access to all authoritative U.S. GAAP by providing all
authoritative literature related to a particular topic in one place. All
existing accounting standard documents will be superseded and all other
accounting literature not included in the FASB Codification will be considered
non-authoritative. These provisions of FASB ASC Topic 105 are
effective for interim and annual periods ending after September 15, 2009
and, accordingly, are effective for the Company for the current reporting
period. The adoption of this pronouncement did not have an impact on
the Company’s financial condition or results of operations, but impacted our
financial reporting process by eliminating all references to pre-codification
standards. On the effective date of this Statement, the Codification
superseded all then-existing non-SEC accounting and reporting standards, and all
other non-grandfathered non-SEC accounting literature not included in the
Codification became non-authoritative.
Cash
and Cash Equivalents
For
purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks with original maturities of three months or less
and overnight federal funds sold. Federal funds sold are generally
sold for one-day periods. The Company maintains cash deposits in other
depository institutions that occasionally exceed the amount of deposit insurance
available.
Investment
Securities
Management
determines the appropriate classification of debt securities at the time of
purchase and re-evaluates such designation as of each balance sheet
date.
Investments
in debt securities that the Company has the positive intent and ability to hold
to maturity are classified as held to maturity securities and reported at
amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized holding gains and
losses included in earnings. Debt and equity securities not
classified as trading securities, nor as held to maturity securities are
classified as available for sale securities and reported at fair value, with
unrealized holding gains or losses, net of deferred income taxes, reported in
the accumulated other comprehensive income component of shareholders’
equity. The Company held no trading securities at December 31,
2009 and 2008. Discounts and premiums are accreted/amortized to
income by use of the level-yield method. Gain or loss on sales of
securities available for sale is based on the specific identification
method.
FASB
recently issued accounting guidance related to the recognition and presentation
of other-than-temporary impairment, which the Company adopted effective
June 30, 2009 (“Pending Content” of FASB ASC Topic
320-1). This recent accounting guidance amends the recognition
guidance for other-than-temporary impairments of debt securities and expands the
financial statement disclosures for other-than-temporary impairment losses on
debt and equity securities. The recent guidance replaced the “intent
and ability” indication in current guidance by specifying that (a) if a company
does not have the intent to sell a debt security prior to recovery and, (b) it
is more likely than not that it will not have to sell the debt security prior to
recovery, the security would not be considered other-than-temporarily impaired
unless there is a credit loss.
When an
entity does not intend to sell the security, and it is more likely than not, the
entity will not have to sell the security before recovery of its cost basis, it
will recognize the credit component of an other-than-temporary impairment of a
debt security in earnings and the remaining portion in other comprehensive
income. For held-to-maturity debt securities, the amount of an
other-than-temporary impairment recorded in other comprehensive income for the
noncredit portion of a previous other-than-temporary impairment should be
amortized prospectively over the remaining life of the security on the basis of
the timing of future estimated cash flows of the security.
Prior to
the adoption of the recent accounting guidance on June 30, 2009, management
considered, in determining whether other-than-temporary impairment exists (1)
the length of time and the extent to which the fair value has been less than
amortized cost, (2) the financial condition and near-term prospects of the
issuer, and (3) the intent and ability of the Company to retain the investment
in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value.
Restricted
Stock
Restricted
stock, which represents required investments in the common stock of
correspondent banks, is carried at cost and as of December 31, 2009 and 2008,
consisted of the common stock of the Federal Home Loan Bank of New York
(“FHLBNY”), the Federal Reserve Bank of New York and Atlantic Central Bankers
Bank.
Management evaluates the
restricted stock for impairment in accordance with the AICPA Accounting
Standards Executive Committee (“AcSEC”) Statement of Position (“SOP”) 01-6,
“Accounting
by Certain Entities (Including Entities With Trade Receivables) That Lend to or
Finance the Activities of Others.” Management’s
determination of whether these investments are impaired is based on their
assessment of the ultimate recoverability of the investments’ cost rather than
by recognizing temporary declines in value. The determination
of whether a decline affects the ultimate recoverability of the investments’
cost is influenced by criteria such as (1) the significance of the decline in
net assets of the FHLBNY as compared to the capital stock amount for the FHLBNY
and the length of time this situation has persisted, (2) commitments by the
FHLBNY to make payments required by law or regulation and the level of such
payments in relation to the operating performance of the FHLBNY, and (3) the
impact of legislative and regulatory changes on institutions and, accordingly,
on the customer base of the FHLBNY.
Management
believes no impairment charge is necessary related to the restricted stock as of
December 31, 2009.
Loans
Held-for-Sale
Loans
originated and intended for sale in the secondary market are carried at the
lower of cost or fair value (“LOCOM”) or fair value under the fair value option
accounting guidance for financial instruments. For loans carried at LOCOM, gains
and losses on loan sales (sales proceeds minus carrying value) are recorded in
noninterest income, and direct loan origination costs and fees are deferred at
origination of the loan and are recognized in noninterest income upon sale of
the loan.
Loans
and Allowance for Loan Losses
Loans are
stated at unpaid principal balances, adjusted for unearned income and deferred
loan fees and costs. Interest on loans is credited to operations
based upon the principal amount outstanding. Loan origination and
commitment fees and certain direct loan origination costs are deferred, and the
net amount is amortized over the estimated life of the loan as an adjustment to
the loan’s yield using the level-yield method.
An
impaired loan is defined as a loan for which, based on current information and
events, it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan
agreement. Impaired loans are measured based on the present value of
expected future cash flows, at the loan’s observable market price, or the fair
value of the underlying collateral, if the loan is collateral
dependent. The accrual of income on loans, including impaired loans,
is generally discontinued when a loan becomes more than 90 days delinquent as to
principal or interest or when other circumstances indicate that collection is
questionable, unless the loan is well secured and in the process of
collection. Income on non-accrual loans, including impaired loans, is
recognized only in the period in which it is collected, and only if management
determines that the loan principal is fully collectible. Loans are
returned to an accrual status when a loan is brought current as to principal and
interest and reasons indicating doubtful collection no longer
exists.
A loan is
considered past due when a payment has not been received in accordance with the
contractual terms. Generally, commercial loans are placed on
non-accrual status when they are 90 days past due unless they are well
secured and in the process of collection or, regardless of the past due status
of the loan, when management determines that the complete recovery of principal
and interest is in doubt. Commercial loans are generally written down
after an analysis is completed which indicates that collectibility of the full
principal balance is in doubt. Consumer loans are generally charged
off after they become 120 days past due. Commercial mortgage
loans are not generally placed on a non-accrual status unless the value of the
real estate has deteriorated to the point that a potential loss of principal or
interest exists. Subsequent payments are credited to income only if
collection of principal is not in doubt. If principal and interest
payments are brought contractually current and future collectibility is
reasonably assured, loans are returned to accrual status. Commercial
mortgage loans are generally written down 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 cost or fair value.
The ALL
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 ALL
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 ALL.
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 ALL may be necessary due to economic, operating, regulatory and other
conditions beyond Central Jersey Bank, N.A.’s control. Management
believes that the ALL is adequate as of December 31, 2009.
The
provision for loan losses charged to non-interest expense is determined by
management and is based upon a periodic review of the loan portfolio, past
experience, the economy, and other factors that may affect a borrower’s ability
to repay a loan. The provision is based on management’s estimates and
actual losses may vary from these estimates. Estimates are reviewed
and adjustments, as they become necessary, are reported in the periods in which
they become known.
Other
Real Estate Owned
Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value less cost to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of
carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in net expenses
from other real estate owned.
Servicing
Mortgage
servicing assets are recognized separately when rights are acquired through
purchase or through sale of financial assets. Under the servicing
assets and liabilities accounting guidance in FASB ASC Topic 860-50, servicing
rights resulting from the sale or securitization of loans originated by the
Company are initially measured at fair value at the date of transfer. The
Company subsequently measures each class of servicing asset using either the
fair value or the amortization method. The Company has elected to initially and
subsequently measure the mortgage servicing rights for U.S. Small Business
Administration (“SBA”) loans using the amortization
method. Under the amortization method, servicing rights are amortized
in proportion to and over the period of estimated net servicing income. The
amortized assets are assessed for impairment or increased obligation based on
fair value at each reporting date. The Company originates SBA
loans and typically sells the U.S. Government guaranteed portion 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. These servicing rights are recorded as other assets in the
Consolidated Statements of Financial Condition. As of December 31,
2009, the Company recorded $289,000 in servicing rights.
Fair
value is based on market prices for comparable mortgage servicing contracts,
when available, or alternatively, is based on a valuation model that calculates
the present value of estimated future net servicing income. The valuation model
incorporates assumptions that market participants would use in estimating future
net servicing income, such as the cost to service, the discount rate, the
custodial earnings rate, an inflation rate, ancillary income, prepayment speeds
and default rates and losses. These variables change from quarter to quarter as
market conditions and projected interest rates change, and may have an adverse
impact on the value of the mortgage servicing right and result in a reduction to
noninterest income.
Each
class of separately recognized servicing assets subsequently measured using the
amortization method are evaluated and measured for impairment. Impairment is
determined by stratifying rights into tranches based on predominant
characteristics, such as interest rate, loan type and investor type. Impairment
is recognized through a valuation allowance for an individual tranche, to the
extent that fair value is less than the carrying amount of the servicing assets
for that tranche. The valuation allowance is adjusted to reflect changes in the
measurement of impairment after the initial measurement of
impairment. Changes in valuation allowances are reported with
gain/(loss) on sale of loans held-for-sale on the income
statement. Fair value in excess of the carrying amount of servicing
assets for that stratum is not recognized.
Servicing
fee income is recorded for fees earned for servicing loans. The fees are based
on a contractual percentage of the outstanding principal; or a fixed amount per
loan and are recorded as income when earned. The amortization of mortgage
servicing rights is netted against loan servicing fee income.
Premises
and Equipment
Premises
and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is charged to operations
on a straight-line basis over the estimated useful lives of the assets or, in
the case of leasehold improvements, the lease period, if
shorter. Depreciable lives range from three to ten years for
furniture, fixtures and equipment and five to 15 years for leasehold
improvements. Gains or losses on dispositions are reflected in
current operations. Maintenance and repairs are charged to expense as
incurred.
Bank-Owned
Life Insurance
The
Company is the beneficiary of insurance policies on the lives of certain
officers, employees, and directors of the Company. Bank-owned life
insurance is accounted for using the cash surrender value method and is recorded
at its net realizable value. The change in the net asset value is
included as a component of non-interest income.
Advertising
Costs
Advertising
costs are expensed as incurred.
401(k)
Plan
The
Company has a 401(k) plan covering substantially all of its
employees. The Company may contribute an amount equal to 100% of the
first 3% of the employee deferral and then 50% of the next 2% of the employee
deferral. The Company’s matching contribution, if any, is determined
by the Board of Directors in its sole discretion.
Income
Taxes
The
Company accounts for income taxes in accordance with income tax accounting
guidance FASB ASC Topic 740 “Income Taxes.” The
Company adopted the recent accounting guidance related to accounting for
uncertainty in income taxes, which sets out a consistent framework to determine
the appropriate level of tax reserves to maintain for uncertain tax
positions.
The
income tax accounting guidance results in two components of income tax expense:
current and deferred. Current income tax expense reflects taxes to be paid or
refunded for the current period by applying the provisions of the enacted tax
law to the taxable income or excess of deductions over revenues. The Company
determines deferred income taxes using the liability (or balance sheet) method.
Under this method, the net deferred tax asset or liability is based on the tax
effects of the differences between the book and tax bases of assets and
liabilities, and enacted changes in tax rates and laws are recognized in the
period in which they occur.
Deferred
income tax expense results from changes in deferred tax assets and liabilities
between periods. Deferred tax assets are recognized if it is more likely than
not, based on the technical merits, that the tax position will be realized or
sustained upon examination. The term more likely than not means a likelihood of
more than 50%; the terms examined and upon examination also include resolution
of the related appeals or litigation processes, if any. A tax position that
meets the more-likely-than-not recognition threshold is initially and
subsequently measured as the largest amount of tax benefit that has a greater
than 50% likelihood of being realized upon settlement with a taxing authority
that has full knowledge of all relevant information. The determination of
whether or not a tax position has met the more-likely-than-not recognition
threshold considers the facts, circumstances, and
information available at the reporting date and is subject to management’s
judgment. Deferred tax assets are reduced by a valuation allowance if, based on
the weight of evidence available, it is more likely than not that some portion
or all of a deferred tax asset will not be realized.
The
Company recognizes interest and penalties on income taxes as a component of
income tax expense.
Comprehensive
(Loss) Income
Comprehensive
(loss) income is segregated into net (loss) income and other comprehensive
(loss) income. Other comprehensive (loss) income includes items
previously recorded directly to equity, such as unrealized gains and
losses
on
securities available-for-sale, net of tax. Comprehensive (loss)
income is presented in the Statements of Changes in Shareholders’
Equity.
Fair
Value of Financial Instruments
Fair
values of financial instruments are estimated using relevant market information
and other assumptions, as more fully disclosed in Note 14. Fair value estimates
involve uncertainties and matters of significant judgment. Changes in
assumptions or in market conditions could significantly affect the
estimates.
Segment
Reporting
The
Company’s operations are solely in the financial services industry and include
providing to its customers traditional banking and other financial
services. The Company operates primarily in the geographical region
of central New Jersey. Management makes operating decisions and
assesses performance based on an ongoing review of the Company’s consolidated
financial results. Therefore, the Company has a single operating
segment for financial reporting purposes.
Treasury
Stock
Common
stock shares repurchased are recorded as treasury stock at cost.
Net
(Loss) Income Per Common Share
Basic net
loss per common share for the year ended December 31, 2009 was calculated by
dividing the net loss available to common shareholders (which is equal to net
loss less dividends on preferred stock) of $26.5 million by the weighted average
number of shares outstanding of 9,117,428 (as to the basic net income per common
share determination). For the year ended December 31,
2009, the effect of dilutive securities related to the Company's employee and
director stock option plans totaled 146,730, which, when added to the average
basic common
shares outstanding totaling 9,117,428, would
have resulted in average diluted common shares outstanding
totaling 9,264,158. However, in accordance with FASB ASC
Topic 260, “Earnings per
Share,” due to the Company reporting a net loss for the year ended
December 31, 2009, including potential common shares in the denominator of a
diluted per-share computation would result in an antidilutive per-share
amount. Basic and diluted net income per common share for the year
ended December 31, 2008 was calculated by dividing the net income available to
common shareholders of $2.9 million by the weighted average number of common
shares outstanding of 9,092,180 (as to the basic net income per share
determination) and 9,523,891 (as to the diluted net income per share
determination). Diluted earnings per common share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock (such as stock options) were exercised or resulted in the issuance
of common stock. These potentially dilutive shares would then be
included in the weighted average number of common shares outstanding for the
period using the treasury stock method. Shares issued and shares
reacquired during the period are weighted for the portion of the period that
they were outstanding.
Earnings
per common share, average common 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 dividend, paid on July 1,
2008.
The
following tables reconcile shares outstanding for basic and diluted earnings per
common share for the years ended December 31, 2009 and 2008:
December
31, 2009
|
||||||||||||
(dollars
in thousands, except for per share data)
|
Income (numerator)
|
Average shares
(denominator)
|
Per share amount
|
|||||||||
Basic
EPS
|
||||||||||||
Net
loss available to common shareholders
|
$ | (26,511 | ) | 9,117 | $ | (2.91 | ) | |||||
Effect
of dilutive securities:
|
||||||||||||
Stock
options and warrants
|
-- | -- | -- | |||||||||
Diluted
EPS
|
||||||||||||
Net
loss available to common shareholders, plus assumed exercise of options
and warrants
|
$ | (26,511 | ) | 9,117 | $ | (2.91 | ) |
December
31, 2008
|
||||||||||||
(dollars
in thousands, except for per share data)
|
Income (numerator)
|
Average shares
(denominator)
|
Per share amount
|
|||||||||
Basic
EPS
|
||||||||||||
Net
income available to common shareholders
|
$ | 2,898 | 9,092 | $ | 0.32 | |||||||
Effect
of dilutive securities:
|
||||||||||||
Stock
options and warrants
|
-- | 432 | -- | |||||||||
Diluted
EPS
|
||||||||||||
Net
income available to common shareholders, plus assumed exercise of options
and warrants
|
$ | 2,898 | 9,524 | $ | 0.30 | |||||||
Options
to purchase 100,020, 137,755, 5,480, 52,512 and 44,484 shares of common stock at
weighted average prices of $9.90, $8.57, $7.56, $5.32 and $5.04 per share,
respectively, were outstanding and were not included in the computation of
diluted earnings per common share for the year ended December 31, 2009, because
these were anti-dilutive stock options.
Goodwill
and Other Intangible Assets
Goodwill
is recognized for the excess of the purchase price over the estimated fair value
of acquired net assets in a business combination. In accordance with
FASB ASC Topic 350, “Goodwill
and Other Intangibles,” goodwill is not amortized but is subject to
impairment testing at least annually, which the Central Jersey Bancorp performs
as of December 31st of each year. On an interim basis, Central Jersey Bancorp
evaluates whether circumstances are present that would indicate potential
impairment of its goodwill. These circumstances include prolonged trading value
of Central Jersey Bancorp’s common stock relative to its book value, adverse
changes in the business or legal climate, actions by regulators, or loss of key
personnel. When it is determined that these or other circumstances are present,
Central Jersey Bancorp tests the carrying value of goodwill for impairment at an
interim date.
The
goodwill impairment test is a two step test in which Central Jersey Bancorp
first identifies its reporting units and compares the estimated fair value of
each reporting unit to the carrying amount, inclusive of the goodwill assigned
it. If the carrying amount of a reporting unit exceeds the estimated fair value,
an indicator of goodwill impairment exists and a second step test is performed
to determine if any goodwill impairment exists. In the second step, Central
Jersey Bancorp calculates the implied value of goodwill by emulating a business
combination for each reporting unit. This step subtracts the estimated fair
value of net assets in the reporting unit from the step one estimated fair value
to determine the implied value of goodwill. If the implied value of goodwill
exceeds the carrying value of goodwill
allocated
to the reporting unit, goodwill is not impaired, but if the implied value of
goodwill is less than the carrying value of the goodwill allocated to the
reporting unit, a goodwill impairment charge is recognized for the difference in
the consolidated statement of operations with a corresponding reduction to
goodwill on the consolidated statement of financial condition. Central Jersey
Bancorp’s only reporting unit is “community banking” for purposes of the
goodwill impairment test.
In
performing its evaluation of goodwill impairment, Central Jersey Bancorp makes
significant judgments, particularly with respect to estimating the fair value of
its reporting unit and if the second step test is required, estimating the fair
value of net assets. Central Jersey Bancorp utilizes a third-party specialist
who assists with valuation techniques to evaluate its reporting unit and
estimates a fair value as though it were an acquirer. The estimate utilizes
historical data, cash flows, and market and industry data specific to the
reporting unit. Industry and market data is used to develop material assumptions
such as transaction multiples, required rates of return, control premiums,
transaction costs and synergies of a transaction, and
capitalization.
A
goodwill impairment charge of $27.0 million was realized during the year ended
December 31, 2009. The $27.0 million in goodwill was recorded on
January 1, 2005 in conjunction with the combination with Allaire Community
Bank. The goodwill
impairment charge was a non-cash adjustment to Central Jersey Bancorp’s
financial statements which has no affect on cash flows, liquidity, or tangible
capital. As goodwill is excluded from regulatory capital, the
impairment charge had no impact on the regulatory capital ratios of Central
Jersey Bancorp or Central Jersey Bank, N.A., both of which remain
“well-capitalized” under regulatory requirements. The goodwill
impairment charge was recorded in accordance with FASB ASC Topic 350, which
requires an interim goodwill impairment analysis under certain events, including
“a more-likely-than-not expectation that a reporting unit or a significant
portion of a reporting unit will be sold or otherwise disposed of.”
Other
intangible assets are specifically identified intangible assets created from a
business combination. Core deposit intangibles represent the value of checking,
savings and other acquired, low cost deposits. Core deposit intangibles are
amortized over the lesser of the estimated lives of deposit accounts or ten
years on an accelerated basis. Decreases in deposit lives may result
in increased amortization and/or an impairment charge.
For the
years ended December 31, 2009 and 2008, Central Jersey Bancorp had $1.0 million
and $1.4 million, respectively, of core deposit intangible related to the
combination with Allaire Community Bank. At December 31, 2009,
Central Jersey Bank N.A. performed an annual analysis to test the core deposit
premium and noted no impairment.
Stock
Based Compensation
Stock
compensation accounting guidance, FASB ASC Topic 718, “Compensation—Stock
Compensation,” requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. That
cost will be measured based on the grant date fair value of the equity or
liability instruments issued. The stock compensation accounting guidance covers
a wide range of sharebased compensation arrangements including stock options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans.
The stock
compensation accounting guidance requires that compensation cost for all stock
awards be calculated and recognized over the employees’ service period,
generally defined as the vesting period. For awards with graded-vesting,
compensation cost is recognized on a straight-line basis over the requisite
service period for the entire award. A Black-Sholes model is used to estimate
the fair value of stock options, while the market price of the Company’s common
stock at the date of grant is used for restricted stock awards.
There
were no new employee or director stock option grants during 2009 and
2008.
Stock
Appreciation Rights
On
January 31, 2006, the Company granted under its 2005 Equity Incentive Plan,
173,644 Stock Appreciation Rights (“SARS”) (98,398 were granted to employees and
75,246 were granted to directors), each with an exercise price of
$9.87. These SARS can only be settled in cash. The SARS
vest over a four year period and expire February 1, 2016.
The fair
value of SARS granted was estimated on December 31, 2009 using the Black-Scholes
option pricing model with the following weighted-average assumptions used: stock
price $2.99, dividend yield of 0%; expected volatility of 81.17%; risk free
interest rate of 2.69%; and expected life of seven years. These SARS
had a fair value of approximately $1.70 per share at December 31,
2009. The Company recorded, as a component of salaries and employee
benefits expense, $64,000, net of tax, share based payment expense for the year
ended December 31, 2009, related to the granting of the SARS. As of
December 31, 2009, total unvested compensation expense was approximately $4,000
(pre-tax) and will vest over 1 month.
The fair
value of SARS granted was estimated on December 31, 2008 using the Black-Scholes
option pricing model with the following weighted-average assumptions used: stock
price $6.35, dividend yield of 0%; expected volatility of 56.03%; risk free
interest rate of 1.55%; and expected life of seven years. These SARS
had a fair value of approximately $3.02 per share at December 31,
2008. The Company recorded, as a component of salaries and employee
benefits expense, share based payment expense of approximately $69,000, net of
tax, related to the granting of SARS during the year ended December 31,
2008. As of December 31, 2008, total unvested compensation expense
was approximately $107,000 (pre-tax) and will vest over 13 months.
A summary
of the status of the Company’s SARS as of December 31, 2009 and 2008, is
presented below:
December 31, 2009
|
December 31, 2008
|
|||||||||||||||
SARS
|
Weighted
average
exercise
price
|
SARS
|
Weighted
average
exercise
price
|
|||||||||||||
Outstanding
at beginning of year
|
130,811 | $ | 9.40 | 167,857 | $ | 9.40 | ||||||||||
Granted
|
-- | -- | -- | -- | ||||||||||||
Forfeited
|
(17,363 | ) | -- | (37,046 | ) | -- | ||||||||||
Exercised
|
-- | -- | -- | -- | ||||||||||||
Outstanding at period end
|
113,448 | $ | 9.40 | 130,811 | $ | 9.40 | ||||||||||
SARS
exercisable at period end
|
85,086 | $ | 9.40 | 65,405 | $ | 9.40 | ||||||||||
Weighted
average fair value of SARS granted
|
$ | 1.70 | $ | 3.02 |
Transfers
of Financial Assets
Transfers
of financial assets are accounted for as sales, when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company—put presumptively beyond
the reach of the transferor and its creditors, even in bankruptcy or other
receivership, (2) the
transferee
obtains the right (free of conditions that constrain it from taking advantage of
that right) to pledge or exchange the transferred assets, and (3) the Company
does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity or the ability to
unilaterally cause the holder to return specific assets.
Reclassifications
Certain
reclassifications have been made to the prior period amounts to conform to the
current period presentation. These reclassifications had no effect on
results of operations.
NOTE
2 – Restrictions on Cash and Amounts Due From Banks
Central
Jersey Bank, N.A. is required to maintain average balances on hand or with the
Federal Reserve Bank of New York. At December 31, 2009 and 2008, these reserve
balances amounted to $276,000 and $411,000, respectively.
NOTE
3 - 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 the Treasury announced the Troubled Asset Relief Program (“TARP”),
pursuant to which qualified U.S. financial institutions could voluntarily build
capital to increase the flow of financing to U.S. businesses and consumers and
to support the U.S. economy.
On
December 23, 2008, Central Jersey Bancorp, pursuant to the Capital Purchase
Program established as part of TARP, sold the following securities to the U.S.
Department of the Treasury (1) 11,300 shares of Central Jersey Bancorp’s
Fixed Rate Cumulative Perpetual Senior Preferred Stock, Series A, having a
liquidation preference of $1,000 per share (the “Series A Preferred Shares”),
and (ii) a warrant to purchase up to 268,621 of Central Jersey Bancorp’s
common stock at an exercise price of $6.31 per share (the
“Warrant”). Both the Series A Preferred Shares and the Warrant
qualify as components of Central Jersey Bancorp’s regulatory Tier 1
Capital. The additional Tier 1 Capital further fortifies Central
Jersey Bancorp’s already strong capital position and provides strategic
flexibility.
The
Series A Preferred Shares pay cumulative dividends at a rate of 5% per annum, or
approximately $565,000 annually, and will reset to a rate of 9% at the end of
the fifth year. The Warrant has a term of 10 years and is
exercisable, in whole or part, at any time during the term. The
exercise price for the Warrant was the market price of Central Jersey Bancorp’s
common stock at the time of issuance calculated on a 20-trading day trailing
average. The fair value of the Warrant was estimated on December 23,
2008 using the Black-Scholes option pricing model with the following
weighted-average assumptions used: stock price $6.31, dividend yield of 0%;
expected volatility of 46.50%; risk free interest rate of 1.45%; and expected
life of five years.
NOTE
4 - Investment Securities
The
amortized cost, gross unrealized gains and losses, and fair value of investment
securities held-to-maturity and investment securities available-for-sale at
December 31, 2009 and 2008 are as follows (in thousands):
2009
|
||||||||||||||||
Gross
|
Gross
|
|||||||||||||||
Amortized
|
unrealized
|
unrealized
|
Fair
|
|||||||||||||
cost
|
gains
|
losses
|
value
|
|||||||||||||
Investment
securities held-to-maturity:
|
||||||||||||||||
Mortgage-backed securities of U.S. Government
sponsored agencies
|
$ | 7,217 | $ | 245 | $ | -- | $ | 7,462 | ||||||||
Total
|
$ | 7,217 | $ | 245 | $ | -- | $ | 7,462 | ||||||||
Investment
securities available-for-sale:
|
||||||||||||||||
Obligations
of U.S. Government sponsored agencies
|
$ | 14,996 | $ | 140 | $ | 8 | $ | 15,128 | ||||||||
Municipal
Obligations
|
48,222 | 130 | 71 | 48,281 | ||||||||||||
Mortgage-backed
securities of U.S. Government sponsored agencies
|
29,198 | 1,432 | -- | 30,630 | ||||||||||||
Other debt securities
|
2,908 | -- | -- | 2,908 | ||||||||||||
Total
|
$ | 95,324 | $ | 1,702 | $ | 79 | $ | 96,947 |
2008
|
||||||||||||||||
Gross
|
Gross
|
|||||||||||||||
Amortized
|
unrealized
|
unrealized
|
Fair
|
|||||||||||||
cost
|
gains
|
losses
|
value
|
|||||||||||||
Investment
securities held-to-maturity:
|
||||||||||||||||
Obligations
of U.S. Government sponsored agencies
|
$ | 4,335 | $ | 168 | $ | -- | $ | 4,503 | ||||||||
Mortgage-backed securities of U.S. Government
sponsored agencies
|
10,344 | 277 | -- | 10,621 | ||||||||||||
Total
|
$ | 14,679 | $ | 445 | $ | -- | $ | 15,124 | ||||||||
Investment
securities available-for-sale:
|
||||||||||||||||
Obligations
of U.S. Government sponsored agencies
|
$ | 32,000 | $ | 33 | $ | -- | $ | 32,033 | ||||||||
Mortgage-backed
securities of U.S. Government sponsored agencies
|
130,868 | 3,059 | 5 | 133,922 | ||||||||||||
Other debt securities
|
4,728 | -- | - - | 4,728 | ||||||||||||
Total
|
$ | 167,596 | $ | 3,092 | $ | 5 | $ | 170,683 |
The
available for sale securities are reported at fair value with unrealized gains
or losses included in equity, net of taxes. Accordingly, the carrying
value of such securities reflects their fair value at the balance sheet date.
Fair value is based upon either quoted market prices, or in certain cases where
there is limited activity in the market for a particular instrument, assumptions
are made to determine their fair values. See Note 14, Fair Value Measurements, for
these additional disclosures.
The
amortized cost and fair value of investment securities held-to-maturity and
investment securities available-for-sale at December 31, 2009 by contractual
maturity are shown below (in thousands). Expected maturities will
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized
|
Fair
|
|||||||
cost
|
value
|
|||||||
Investment
securities held-to-maturity:
|
||||||||
Due
in one year or less
|
$ | 753 | $ | 754 | ||||
Due
after one year through fifth year
|
773 | 802 | ||||||
Due
after fifth year through tenth year
|
2,040 | 2,128 | ||||||
Due
after tenth year
|
3,651 | 3,778 | ||||||
Total
|
$ | 7,217 | $ | 7,462 | ||||
Investment
securities available-for-sale:
|
||||||||
Due
in one year or less
|
$ | 39,128 | $ | 39,177 | ||||
Due
after one year through fifth year
|
15,984 | 16,050 | ||||||
Due
after fifth year through tenth year
|
20,609 | 21,350 | ||||||
Due
after tenth year
|
19,603 | 20,370 | ||||||
Total
|
$ | 95,324 | $ | 96,947 |
FASB
recently issued accounting guidance related to the recognition and presentation
of other-than-temporary impairment, which the Company adopted effective
June 30, 2009 (“Pending Content” of FASB ASC Topic
320-10). This recent accounting guidance amends the recognition
guidance for other-than-temporary impairments of debt securities and expands the
financial statement disclosures for other-than-temporary impairment losses on
debt and equity securities. The recent guidance replaced the “intent
and ability” indication in current guidance by specifying that (a) if a company
does not have the intent to sell a debt security prior to recovery and, (b) it
is more likely than not that it will not have to sell the debt security prior to
recovery, the security would not be considered other-than-temporarily impaired
unless there is a credit loss.
When an
entity does not intend to sell the security, and it is more likely than not, the
entity will not have to sell the security before recovery of its cost basis, it
will recognize the credit component of an other-than-temporary impairment of a
debt security in earnings and the remaining portion in other comprehensive
income. For held-to-maturity debt securities, the amount of an
other-than-temporary impairment recorded in other comprehensive income for the
noncredit portion of a previous other-than-temporary impairment should be
amortized prospectively over the remaining life of the security on the basis of
the timing of future estimated cash flows of the security.
Prior to
the adoption of the recent accounting guidance on June 30, 2009, management
considered, in determining whether other-than-temporary impairment exists (1)
the length of time and the extent to which the fair value has been less than
amortized cost, (2) the financial condition and near-term prospects of the
issuer, and (3) the intent and ability of the Company to retain the investment
in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value.
Proceeds
from the sale of investment securities available-for-sale during 2009 was $73.0
million, resulting in gross gains of $2.9 million, as compared to $53.1 million
and $739,000, respectively, in 2008.
At
December 31, 2009 and 2008, there were $76.5 million and $126.9 million,
respectively, of investment securities pledged as collateral for short term
borrowings, to secure public funds or for any other purposes required by
law.
Gross
unrealized losses on both investment securities held-to-maturity and investment
securities available-for-sale and their fair values, aggregated by security
category and length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2009 and 2008, were as follows (in
thousands):
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||||||||
2009
Investment
securities
|
Unrealized
losses
|
Fair
value
|
Unrealized
losses
|
Fair
value
|
Unrealized
losses
|
Fair
value
|
||||||||||||||||||
Mortgage-backed
securities
|
$ | 71 | $ | 7,652 | $ | -- | $ | -- | $ | 71 | $ | 7,652 | ||||||||||||
Obligations
of US Government sponsored agencies
|
8 | 4,992 | -- | -- | 8 | 4,992 | ||||||||||||||||||
Total
|
$ | 79 | $ | 12,644 | $ | -- | $ | -- | $ | 79 | $ | 12,644 |
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||||||||
2008
Investment
securities
|
Unrealized
losses
|
Fair
value
|
Unrealized
losses
|
Fair
value
|
Unrealized
losses
|
Fair
value
|
||||||||||||||||||
Mortgage-backed
securities
|
$ | 5 | $ | 1,934 | $ | -- | $ | -- | $ | 5 | $ | 1,934 | ||||||||||||
Total
|
$ | 5 | $ | 1,934 | $ | -- | $ | -- | $ | 5 | $ | 1,934 | ||||||||||||
Mortgage-backed securities –
The unrealized losses on the Company's investment mortgage-backed securities
were caused by interest rate increases. At December 31, 2009,
there were twelve securities in the less than 12 months category and no
securities in the 12 months or more category. The Company purchased
those investments at a discount relative to their face amount, and the
contractual cash flows of those investments are guaranteed by an agency of the
U.S. Government. Accordingly, it is expected that the securities would not be
settled at a price less than the amortized cost bases of the Company’s
investments. Because the decline in market value is attributable to changes in
interest rates and not credit quality, and because the Company does not intend
to sell the investments and it is not more likely than not that the Company will
be required to sell the investments before recovery of their amortized cost
bases, which may be maturity, the Company does not consider those investments to
be other-than-temporarily impaired at December 31, 2009.
U.S. Government and federal agency
obligations. The unrealized losses on the one investment in U.S.
Government obligations and direct obligations of U.S. government agencies were
caused by interest rate increases. The contractual term of that investment does
not permit the issuer to settle the security at a price less than the amortized
cost base of the investment. Because the Company does not intend to sell the
investment and it is not more likely than not that the Company will be required
to sell the investment before recovery of their amortized cost bases, which may
be maturity, the Company does not consider that investment to be
other-than-temporarily impaired at December 31, 2009.
NOTE
5 - Loans
Loans at
December 31, 2009 and 2008 are summarized as follows (in
thousands):
2009
|
2008
|
|||||||
Real
estate loans – commercial
|
$ | 248,403 | $ | 246,617 | ||||
Home
equity and second mortgages
|
65,116 | 51,688 | ||||||
Commercial
and industrial loans
|
46,160 | 37,111 | ||||||
Construction
loans
|
14,565 | 20,956 | ||||||
1-4
family real estate loans
|
2,876 | 2,646 | ||||||
Consumer
loans
|
1,475 | 1,647 | ||||||
Subtotal
|
378,595 | 360,665 | ||||||
Net
deferred costs
|
492 | 333 | ||||||
Less:
allowance for loan losses
|
9,613 | 4,741 | ||||||
Net
loans
|
$ | 369,474 | $ | 356,257 |
A
substantial portion of the Company’s loans are secured by real estate and made
to borrowers located in New Jersey, primarily in Monmouth and Ocean
Counties. Accordingly, as with most financial institutions in the
Company’s market area, the ultimate collectibility of a substantial portion of
the Company’s loan portfolio is susceptible to changes in market conditions in
the market area.
Activity
in the ALL for the years ended December 31, 2009 and 2008 is summarized as
follows (dollars in thousands):
2009
|
2008
|
|||||||
Balance,
beginning of year
|
$ | 4,741 | $ | 3,408 | ||||
Provision
charged to expense
|
6,214 | 1,319 | ||||||
Charge-offs
|
(1,494 | ) | -- | |||||
Recoveries
|
152 | 14 | ||||||
Balance, end of year
|
$ | 9,613 | $ | 4,741 | ||||
Ratio of ALL to total loans
|
2.54 | % | 1.31 | % |
Impaired
Loans
When
necessary, Central Jersey Bancorp performs individual loan reviews in accordance
with FASB ASC Topic 310 to determine whether any individually reviewed loans are
impaired and, if impaired, measures a valuation allowance allocation in
accordance with FASB ASC Topic 310. 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 a FASB ASC Topic 310 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
a FASB ASC Topic 310 review.
At
December 31, 2009, Central Jersey Bancorp had impaired loans totaling $23.2
million, as compared to $2.7 million at December 31, 2008. The
increase in impaired loans was due primarily to multiple commercial loans
totaling $21.2 million which were downgraded in risk rating and/or placed on
non-accrual status during 2009. These loans were considered impaired
and were evaluated in accordance with FASB ASC Topic 310. After
evaluation, specific reserves were required for fifteen of the impaired
loans. At December 31, 2009, Central Jersey Bancorp recorded $4.1
million of specific reserves for impaired loans, as compared to $474,000 in
specific reserves for impaired loans at December 31, 2008.
Central
Jersey Bancorp’s policy for interest income recognition on non-accrual loans is
to recognize income on currently performing restructured loans under the accrual
method. Central Jersey Bancorp recognizes income on non-accrual loans
under the accrual basis when the principal payments on the loans become current
and the collateral on the loan is sufficient to cover the outstanding obligation
to Central Jersey Bancorp. If these factors do not exist, Central
Jersey Bancorp does not recognize income. There was no income
recognized on non-accrual loans during 2009. Total cash collected on
non-accrual loans during 2009 was $263,000, as compared to $1.1 million
collected during 2008, all of which was credited to the principal balances
outstanding.
Impaired loans for the
years ended December 31, 2009 and 2008 are summarized as follows (dollars in
thousands):
2009
|
2008
|
|||||||
Balance
of impaired loans with no allowance allocation
|
$ | 4,035 | $ | 683 | ||||
Balance
of impaired loans with an allocated allowance
|
19,140 | 2,007 | ||||||
Total
recorded investment in impaired loans
|
$ | 23,175 | $ | 2,690 | ||||
Amount
of the allowance allocated to impaired loans
|
$ | 4,085 | $ | 474 | ||||
Average
balance of impaired loans
|
$ | 14,689 | $ | 1,286 |
At
December 31, 2009 and 2008, loans to officers, directors and related parties
amounted to approximately $2.4 million and $4.3 million,
respectively. During the year ended December 31, 2009 and 2008,
$498,000 and $113,000, respectively, in new loans to officers, directors and
related parties were originated and repayments totaled approximately $2.4
million and $181,000, respectively.
NOTE
6 – Other Real Estate Owned
Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value less cost to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of
carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in net expenses
from other non-interest expenses.
The
following table represents the balance of other real estate owned at December
31, 2009 and 2008 (in thousands):
2009
|
2008
|
|||||||
Other
real estate owned
|
$ | 1,055 | $ | -- |
At
December 31, 2009, two loans were transfered to other real estate owned,
impacting the provision for loan losses by $245,000, and recorded as other real
estate owned at their initial fair market value less cost to sell of $1.1
million.
NOTE
7 - Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk
In the
ordinary course of business to meet the financial needs of the Company’s
customers, the Company is party to financial instruments with off-balance sheet
risk. These financial instruments include unused lines of credit and
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the consolidated financial statements. The contract or
notional amounts of these instruments express the extent of involvement the
Company has in each category of financial instruments.
The
Company’s exposure to credit loss from nonperformance by the other party to the
above-mentioned financial instruments is represented by the contractual amount
of those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments. The contract or notional amount of financial instruments
which represent credit risk at December 31, 2009 and 2008 is as follows (in
thousands):
2009
|
2008
|
|||||||
Standby
letters of credit
|
$ | 2,140 | $ | 2,206 | ||||
Outstanding
loan and credit line commitments
|
$ | 67,122 | $ | 65,079 |
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
FASB ASC Topic 952. These are irrevocable undertakings by Central
Jersey Bank, N.A., as guarantor, to make payments in the event a specified third
party fails to perform under a non-financial contractual
obligation. Most of Central Jersey Bank, N.A.’s performance standby
letters of credit arise in connection with lending relationships and have terms
of one year or less. The maximum potential future payments Central
Jersey Bank, N.A. could be required to make equals the face amount of the
letters of credit shown above. Central Jersey Bank, N.A.’s liability
for performance standby letters of credit was immaterial at December 31, 2009
and 2008.
Outstanding
loan commitments represent the unused portion of loan commitments available to
individuals and companies as long as there is no violation of any condition
established in the contract. Outstanding loan commitments generally
have a fixed expiration date of one year or less, except for home equity loan
commitments which generally have an expiration date of up to 15
years. The Company evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained, if any, upon
extension of credit is based upon management’s credit evaluation of the
customer. Various types of collateral may be held, including property
and marketable securities. The credit risk involved in these
financial instruments is essentially the same as that involved in extending loan
facilities to customers.
NOTE
8 - Premises and Equipment
Premises
and equipment at December 31, 2009 and 2008 are summarized as follows (in
thousands):
2009
|
2008
|
|||||||
Equipment
|
$ | 5,390 | $ | 5,247 | ||||
Leasehold
improvements
|
3,647 | 3,611 | ||||||
Land
|
1,503 | 1,503 | ||||||
Buildings
and improvements
|
1,358 | 1,365 | ||||||
Auto
|
65 | 65 | ||||||
11,963 | 11,791 | |||||||
Accumulated depreciation and
amortization
|
(6,017 | ) | (5,488 | ) | ||||
$ | 5,946 | $ | 6,303 |
Depreciation
and amortization expense amounted to $723,000 and $676,000 in 2009 and 2008,
respectively.
NOTE
9 – Goodwill and Other Intangible Assets
Goodwill
and other intangible assets at December 31, 2009 and 2008 are summarized as
follows (in thousands):
2009
|
2008
|
|||||||
Goodwill
|
$ | 26,957 | $ | 26,957 | ||||
Less:
goodwill impairment
|
(26,957 | ) | -- | |||||
Goodwill,
net
|
-- | 26,957 | ||||||
Core
deposit intangible
|
3,785 | 3,785 | ||||||
Less:
accumulated amortization
|
(2,754 | ) | (2,341 | ) | ||||
Core
deposit intangible, net
|
1,031 | 1,444 | ||||||
Total
|
$ | 1,031 | $ | 28,401 |
Goodwill
and other intangible assets on the consolidated statement of financial condition
decreased $27.4 million, from $28.4 million at December 31, 2008 to $1.0 million
at December 31, 2009. The decrease was primarily due to $27.0 million of
goodwill impairment identified in the “community banking” reporting unit,
accompanied by scheduled amortization of core deposit
intangibles.
The
Company performed an interim impairment test during the second quarter ending
June 30th of
its goodwill due to the presence of indicators of potential impairment.
Specifically, the circumstances present included adverse changes in the business
climate which was reflected in the prolonged trading value of the Company’s
common stock relative to its book value, and the tentative merger between
Central Jersey Bancorp and OceanFirst Financial Corp.
The
Company’s only reporting unit is “community banking” for purposes of the
goodwill impairment test. As of June 30, 2009, the carrying value of goodwill
assigned to the “community banking” reporting unit was $27.0 million. Upon
testing, the “community banking” reporting unit failed the step one test,
resulting in a potential indicator of impairment.
The step
two test for the “community banking” reporting unit resulted in $27.0 million of
impairment, for which the carrying value of goodwill was reduced to zero as of
December 31, 2009 and a corresponding decrease to net income was recorded for
2009. There was no impact on income taxes for the period, as a result of the
goodwill impairment charge.
Amortization
expense of intangible assets for the years ended December 31, 2009 and 2008
is as follows (in thousands):
2009
|
2008
|
|||||||
Core
deposit intangible amortization
|
$ | 413 | $ | 482 |
Scheduled
amortization of core deposit intangibles is as follows (in
thousands):
2010
|
344
|
2011
|
275
|
2012
|
206
|
2013
|
138
|
2014
|
69
|
NOTE
10 - Deposits
Total
deposits at December 31, 2009 and 2008 consist of the following (in
thousands):
2009
|
2008
|
|||||||
Savings,
N.O.W. and money market accounts
|
$ | 226,729 | $ | 190,475 | ||||
Certificates
of deposit less than $100,000
|
72,089 | 78,949 | ||||||
Certificates
of deposit of $100,000 or more
|
88,560 | 73,444 | ||||||
Subtotal
of interest bearing deposits
|
$ | 387,378 | $ | 342,868 | ||||
Demand
deposits
|
80,500 | 75,947 | ||||||
Total
deposits
|
$ | 467,878 | $ | 418,815 |
At
December 31, 2009, certificates of deposit mature as follows: 2010 - $122.3
million; 2011 - $28.1 million; 2012 - $9.5 million; 2013 - $697,000; and 2014 -
$26,000.
Interest
expense on deposits for the years ended December 31, 2009 and 2008 is
summarized as follows (in thousands):
2009
|
2008
|
|||||||
Savings,
N.O.W. and money market accounts
|
$ | 2,488 | $ | 3,276 | ||||
Certificates
of deposit
|
4,559 | 5,708 | ||||||
Total
interest expense on deposits
|
$ | 7,047 | $ | 8,984 |
NOTE
11 - Borrowings
Borrowed
funds at December 31, 2009 and 2008 are summarized as follows (in
thousands):
2009
|
2008
|
|||||||
Borrowings
|
$ | 47,575 | $ | 71,741 |
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. At December 31, 2009, borrowings included $26.4 million
in bank sweep funds, $15.0 million in FHLBNY callable advances and
$6.2 million in FHLBNY fixed rate advances. At December 31, 2008,
borrowings included $23.0 million in bank sweep funds, $27.5 million in FHLBNY
overnight advances, $20.0 million in FHLBNY callable advances and $1.2 million
in FHLBNY fixed rate advances. At December 31, 2009 and December 31,
2008, Central Jersey Bank, N.A. had unused lines of credit with the FHLBNY of
$26.2 million and $33.8 million, respectively.
At
December 31, 2009, Central Jersey Bank, N.A. had outstanding FHLBNY callable
advances as follows (in thousands):
Date
|
Amount
|
Rate
|
Term
|
Call Feature
|
||||||
1/24/2008
|
$ | 10,000 | 2.710 | % |
10
year non-call 2 years
|
One
Time
|
||||
2/01/2008
|
5,000 | 2.903 | % |
7
year non-call 3
years
|
One
Time
|
|||||
$ | 15,000 | 2.774 | % |
At
December 31, 2009, Central Jersey Bank, N.A. had the following outstanding
FHLBNY fixed rate advances (in thousands):
Date
|
Amount
|
Rate
|
Term
|
Maturity
|
||||||
2/01/2008
|
$ | 5,000 | 2.380 | % |
5
years
|
2/01/2013
|
||||
5/28/2008
|
1,152 | 4.940 | % |
13
years
|
5/28/2021
|
|||||
$ | 6,152 | 2.871 | % |
NOTE
12 - Subordinated Debentures
In March
2004, MCBK Capital Trust I, a special purpose business trust of Central Jersey
Bancorp, issued an aggregate of $5.0 million of trust preferred securities to
ALESCO Preferred Funding III, a pooled investment vehicle. Sandler
O’Neill & Partners, L.P. acted as placement agent in connection with the
offering of the trust preferred securities. The securities issued by
MCBK Capital Trust I are fully guaranteed by Central Jersey Bancorp with respect
to distributions and amounts payable upon liquidation, redemption or
repayment. These securities have a floating interest rate equal to
the three-month LIBOR plus 285 basis points, which resets
quarterly. The securities mature on April 7, 2034 and may be called
at par by Central Jersey Bancorp any time after April 7, 2009. These
securities were placed in a private transaction exempt from registration under
the Securities Act of 1933, as amended.
The
entire proceeds to MCBK Capital Trust I from the sale of the trust preferred
securities were used by MCBK Capital Trust I in order to purchase $5.1 million
of subordinated debentures from Central Jersey Bancorp. The
subordinated debentures bear a variable interest rate equal to LIBOR plus 285
basis points. Although the subordinated debentures are treated as
debt of Central Jersey Bancorp, they currently qualify as Tier I Capital
investments, subject to the 25% limitation under risk-based capital guidelines
of the Federal Reserve. The portion of the trust preferred securities
that exceeds this limitation qualifies as Tier II Capital of Central Jersey
Bancorp. At December 31, 2009, $5.0 million of the trust preferred
securities qualified for treatment as Tier I Capital. Central Jersey
Bancorp is using the proceeds it received from the subordinated debentures to
support the general balance sheet growth of Central Jersey Bancorp and to
maintain Central Jersey Bank, N.A.’s required regulatory capital
ratios.
On March
1, 2005, the Federal Reserve adopted a final rule that allows the continued
inclusion of outstanding and prospective issuances of trust preferred securities
in the Tier I Capital of bank holding companies, subject to stricter
quantitative limits and qualitative standards. Under the final rules,
trust preferred securities and other restricted core capital elements are
limited to 25% of all core capital elements. Amounts of restricted
core capital elements in excess of these limits may be included in Tier II
Capital. At December 31, 2009, 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
13 - Income Taxes
Components
of income tax expense (benefit) for the years ended December 31, 2009 and 2008
are as follows (in thousands):
2009
|
2008
|
|||||||
Current
income tax expense:
|
||||||||
Federal
|
$ | 919 | $ | 1,228 | ||||
State
|
180 | 270 | ||||||
1,099 | 1,498 | |||||||
Deferred
income tax benefit:
|
||||||||
Federal
|
(1,456 | ) | (47 | ) | ||||
State
|
(531 | ) | (163 | ) | ||||
(1,987 | ) | (210 | ) | |||||
$ | (888 | ) | $ | 1,288 |
A
reconciliation between the reported income taxes and income taxes which would be
computed by applying the normal federal income tax rate of 34% to income before
taxes follows (in thousands):
2009
|
2008
|
|||||||
Federal
income tax
|
$ | (9,065 | ) | $ | 1,424 | |||
State
income tax effect, net of federal tax effect
|
(232 | ) | 71 | |||||
Bank-owned
life insurance
|
(46 | ) | (41 | ) | ||||
Tax-exempt
interest
|
(451 | ) | -- | |||||
Non
deductible expenses
|
5 | -- | ||||||
Goodwill
impairment
|
9,165 | -- | ||||||
Valuation
reserve
|
(253 | ) | (158 | ) | ||||
Other
|
(11 | ) | (8 | ) | ||||
Provision
charged to expense
|
$ | (888 | ) | $ | 1,288 |
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008
are as follows (in thousands):
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Allowance
for loan losses
|
$ | 3,840 | $ | 1,887 | ||||
Impaired
investment securities
|
-- | 282 | ||||||
Discount
accretion
|
70 | -- | ||||||
New
Jersey NOL carry forwards
|
43 | 43 | ||||||
Allowance
for uncollected interest
|
374 | 160 | ||||||
Net
purchase accounting adjustments
|
104 | 360 | ||||||
Depreciation
|
35 | 127 | ||||||
Alternative
minimum assessment
|
4 | 4 | ||||||
Stock
options / SARS
|
156 | 130 | ||||||
Other
|
96 | 41 | ||||||
Gross
deferred tax asset
|
4,722 | 3,034 | ||||||
Less: valuation reserve
|
(43 | ) | (324 | ) | ||||
Deferred tax assets, net
|
4,679 | 2,710 | ||||||
Deferred
tax liabilities:
|
||||||||
Deferred
loan costs
|
(153 | ) | (153 | ) | ||||
Impaired
investment securities
|
(1 | ) | -- | |||||
Discount
accretion
|
-- | (19 | ) | |||||
Unrealized gain - securities
available-for-sale
|
(602 | ) | (1,162 | ) | ||||
Gross deferred tax
liabilities
|
(756 | ) | (1,334 | ) | ||||
Net deferred tax assets
|
$ | 3,923 | $ | 1,376 |
Based
upon current facts concerning taxes paid in the carryback period and projections
of future taxable income, management has determined that it is more likely than
not that the deferred tax assets will be realized, except for certain New Jersey
state income tax net operating losses by Central Jersey Bancorp, for which
management has reserved against these deferred tax assets. However, there
can be no assurances about the level of future earnings. As of December
31, 2009, Central Jersey Bancorp had approximately $1.8 million of New Jersey
net operating loss carryforwards that will expire between 2009 and
2029.
As of
January 1, 2009, there were no amounts recorded for unrecognized tax benefits or
for the payment of interest or penalties. Furthermore, no amounts were
accrued for the year ended December 31, 2009. The tax years that remain
subject to examination at the federal level are 2009, 2008, 2007 and 2006.
Accruals of interest and penalties related to unrecognized tax benefits, when
applicable, are recognized in income tax expense.
NOTE 14 -
Fair Value Measurements
The
Company adopted the provisions of FASB ASC Topic 820, “Fair Value Measurements and
Disclosures,” for financial assets and financial
liabilities. FASB ASC Topic 820 defines fair value, establishes a
framework for measuring fair value in GAAP and expands disclosures about fair
value measurements. The adoption of FASB ASC Topic 820 for financial
assets and financial liabilities and non-financial assets and non-financial
liabilities did not have a significant impact on the Company’s consolidated
financial position, results of operations or cash flows.
Beginning
January 1, 2008, financial assets and financial liabilities recorded at fair
value in the Consolidated Statements of Financial Condition are categorized
based upon the level of judgment associated with the inputs used to measure
their fair value. Under the guidance, fair value measurements are not
adjusted for transaction costs. FASB ASC Topic 820 establishes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets 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 FASB ASC Topic 820 are described
below.
Management
uses its best judgment in estimating the fair value of the Company’s financial
instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amount the
Company could have realized in a sales transaction on the dates
indicated. The estimated fair value amounts have been measured as of
their respective period ends and have not been re-evaluated or updated for
purposes of these financial statements subsequent to those respective
dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each period-end.
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; and
|
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, as
noted above.
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. Department of the Treasury yield curve,
live trading levels, trade execution data, market consensus prepayment speeds,
credit information and the investment security’s terms and conditions, among
other things.
Impaired loans - Loans that
the Bank has measured impairment generally based on fair value of the loan’s
collateral. Fair value is generally determined based upon independent
third-party appraisals of the properties, or discounted cash
flows
based upon the expected proceeds. These assets are included as Level
III fair values, based upon the lowest level of input that is significant to the
fair value measurements.
Other Real Estate Owned –
Real estate owned is adjusted to fair value less estimated selling costs
upon transfer of the loans to real estate owned. Subsequently, real
estate owned assets are carried at the lower of carrying value or fair
value. Fair value is based upon independent market prices, appraised
values of collateral or management’s estimation of the value of the
collateral. These assets are included as Level III fair
values.
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 at fair value on a
recurring basis at December 31, 2009, segregated by the level of valuation
inputs within the fair value hierarchy utilized to measure fair value (in
thousands):
At December 31,
2009
|
||||||||||||||||
Level I
|
Level II
|
Level
III
|
Total
fair
value
|
|||||||||||||
Investment
securities available-for-sale:
|
||||||||||||||||
Obligations
of U.S. Government sponsored agencies
|
$ | -- | $ | 15,128 | $ | -- | $ | 15,128 | ||||||||
Municipal
obligations
|
-- | 48,281 | -- | 48,821 | ||||||||||||
Mortgage-backed
securities of U.S. Government sponsored agencies
|
-- | 38,092 | -- | 38,092 | ||||||||||||
Other
securities
|
-- | 2,908 | -- | 2,908 | ||||||||||||
Total
assets measured fair value on a recurring basis
|
$ | -- | $ | 104,409 | $ | -- | $ | 104,409 |
At December 31,
2008
|
||||||||||||||||
Level I
|
Level II
|
Level
III
|
Total
fair
value
|
|||||||||||||
Investment
securities available-for-sale:
|
||||||||||||||||
Obligations
of U.S. Government sponsored agencies
|
$ | -- | $ | 32,033 | $ | -- | $ | 32,033 | ||||||||
Municipal
obligations
|
-- | 4,728 | -- | 4,728 | ||||||||||||
Mortgage-backed
securities of U.S. Government sponsored agencies
|
-- | 129,411 | -- | 129,411 | ||||||||||||
Other
securities
|
-- | 4,511 | -- | 4,511 | ||||||||||||
Total
assets measured fair value on a recurring basis
|
$ | -- | $ | 170,683 | $ | -- | $ | 170,683 |
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).
The following tables
summarize financial assets measured at fair value on a nonrecurring basis at
December 31, 2009 and December 31, 2008, segregated by the level of valuation
inputs within the fair value hierarchy utilized to measure fair value (in
thousands):
At December 31,
2009
|
||||||||||||||||
Level I
|
Level II
|
Level
III
|
Total
fair
value
|
|||||||||||||
Impaired
loans
|
$ | -- | $ | -- | $ | 15,055 | $ | 15,055 | ||||||||
Other
real estate owned
|
1,055 | 1,055 | ||||||||||||||
Servicing
rights
|
-- | -- | 289 | 289 | ||||||||||||
Total
assets measured fair value on a nonrecurring basis
|
$ | -- | $ | -- | $ | 16,399 | $ | 16,399 |
At December 31,
2008
|
||||||||||||||||
Level I
|
Level II
|
Level
III
|
Total
fair
value
|
|||||||||||||
Impaired
loans
|
$ | -- | $ | -- | $ | 1,533 | $ | 1,533 | ||||||||
Servicing
rights
|
-- | -- | 133 | 133 | ||||||||||||
Total
assets measured fair value on a nonrecurring basis
|
$ | -- | $ | -- | $ | 1,666 | $ | 1,666 |
The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value
calculation is only provided for a limited portion of the Company’s assets and
liabilities. Due to a wide range of valuation techniques and the
degree of subjectivity used in making the estimates, comparisons between the
Company’s disclosures and those of other companies may not be
meaningful. The following methods and assumptions were used to
estimate the fair values of the Company’s financial instruments at
December 31, 2009 and December 31, 2008:
Cash
and Cash Equivalents (Carried at Cost)
The
carrying amounts reported in the Consolidated Statements of Financial Condition
for cash and short-term instruments approximate those assets’ fair
values.
Investment
Securities
The fair
value of investment securities available-for-sale (carried at fair value) and
held-to-maturity (carried at amortized cost) are determined by obtaining quoted
market prices on nationally recognized securities exchanges (Level I), or matrix
pricing (Level II), which is a mathematical technique used widely in the
industry to value debt securities without relying exclusively on quoted market
prices for the specific investment securities but rather by relying on the
investment securities’ relationship to other benchmark quoted prices. For
certain investment securities which are not traded in active markets or are
subject to transfer restrictions, valuations are adjusted to reflect illiquidity
and/or nontransferability, and such adjustments are generally based on available
market evidence (Level III). In the absence of such evidence,
management’s best estimate is used. Management’s best estimate
consists of both internal and external support on certain Level III
investments. Internal cash flow models using a present value formula
that includes assumptions market participants would use along with indicative
exit pricing obtained from broker/dealers (where available) were used to support
fair values of certain Level III investments.
Loans
Receivable (Carried at Cost)
The fair
values of loans are estimated using discounted cash flow analyses, using market
rates at the dates of the Consolidated Statements of Financial Condition that
reflect the credit and interest rate-risk inherent in the loans. Projected
future cash flows are calculated based upon contractual maturity or call dates,
projected repayments and prepayments of principal. Generally, for
variable rate loans that reprice frequently and with no significant change in
credit risk, fair values are based on carrying values.
Loans Held for Sale (Carried at Lower
of Cost or Fair Value)
The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.
The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.
Servicing
Rights (Carried at Lower of Cost or Fair Value)
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
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.
Restricted
Investment in Bank Stock (Carried at Cost)
The
carrying amount of restricted investment in bank stock approximates fair value,
and considers the limited marketability of such securities.
Accrued
Interest Receivable and Payable (Carried at Cost)
The
carrying amount of accrued interest receivable and accrued interest payable
approximates the fair value of such interest receivable and interest
payable.
Deposit
Liabilities (Carried at Cost)
The fair
values disclosed for demand deposits (e.g., interest and noninterest checking,
passbook savings and money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered in the market on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Borrowings
(Carried at Cost)
Fair
values of FHLBNY advances are estimated using a discounted cash flow analysis,
based on quoted prices for new FHLBNY advances with similar credit risk
characteristics, terms and remaining maturity. These prices obtained
from this active market represent a fair value that is deemed to represent the
transfer price if the liability were assumed by a third party.
Subordinated
Debt (Carried at Cost)
The fair
value of subordinated debentures is estimated by discounting the estimated
future cash flows, using market discount rates of financial instruments with
similar characteristics, terms and remaining maturity.
Off-Balance
Sheet Financial Instruments (Disclosed at Notional Amounts)
Fair
values for the Company’s off-balance sheet financial instruments (lending
commitments and letters of credit) are based on fees currently charged in the
market to enter into similar agreements, taking into account, the remaining
terms of the agreements and the counterparties’ credit standing.
Limitations
Fair
value estimates were made at December 31, 2009 and December 31, 2008, based
upon pertinent market data and relevant information on each financial
instrument. These estimates do not include any premium or discount
that could result from an offer to sell the Company’s entire holdings of a
particular financial instrument or category thereof at one time. Since no market
exists for a substantial portion of the Company’s financial instruments, fair
value estimates were necessarily based on judgments with respect to future loss
experience, current economic conditions, risk assessments of various financial
instruments involving a myriad of individual borrowers, and other
factors. Given the subjective nature of these estimates, the
uncertainties surrounding them and other matters of significant judgment that
must be applied, these fair value estimations cannot be calculated with
precision. Modifications in such assumptions could meaningfully alter
these estimates. Since these fair value approximations were made
solely for the financial instruments included in the Consolidated Statements of
Financial Condition at December 31, 2009 and December 31, 2008, no attempt
was made to estimate the value of anticipated future business or the value of
non-financial statement assets or liabilities. Furthermore, certain
tax implications related to the realization of the unrealized gains and losses
could have a substantial impact on these fair value estimates and have not been
incorporated into the estimates.
The
estimated fair values of the Company’s financial instruments were as follows at
December 31, 2009 and 2008 (dollars in thousands):
2009
|
2008
|
|||||||||||||||
Carrying
amount |
Fair
value
|
Carrying
amount |
Fair
value
|
|||||||||||||
Financial
Assets:
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 78,315 | $ | 78,315 | $ | 9,767 | $ | 9,767 | ||||||||
Investment
securities available-for-sale
|
96,947 | 96,947 | 170,683 | 170,683 | ||||||||||||
Investment
securities held-to-maturity
|
7,217 | 7,462 | 14,679 | 15,124 | ||||||||||||
Loans,
net
|
369,474 | 377,183 | 356,257 | 364,684 | ||||||||||||
Loans
held-for-sale
|
-- | -- | 400 | 400 | ||||||||||||
Servicing
rights
|
289 | 289 | 133 | 133 | ||||||||||||
Restricted
stock
|
3,750 | 3,750 | 4,982 | 4,982 | ||||||||||||
Accrued
interest receivable
|
2,285 | 2,285 | 2,251 | 2,251 | ||||||||||||
Financial
Liabilities:
|
||||||||||||||||
Deposits
|
467,878 | 452,193 | 418,815 | 408,391 | ||||||||||||
Borrowings
|
47,575 | 48,655 | 71,741 | 72,679 | ||||||||||||
Accrued
interest payable
|
231 | 231 | 217 | 217 | ||||||||||||
Subordinated
debentures
|
5,155 | 1,804 | 5,155 | 5,167 | ||||||||||||
Off-balance
sheet financial instruments
|
$ | -- | $ | -- | $ | -- | $ | -- | ||||||||
NOTE
15 - Post Retirement Benefits
A
consensus was reached that an employer should recognize a liability for future
benefits under FASB ASC Topic 715, “Compensation Retirement
Benefits,” for an endorsement split-dollar life insurance
arrangement. 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
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 FASB ASC Topic 715.
NOTE
16 - Commitments and Contingencies
At
December 31, 2009, the Company was obligated under non-cancelable lease
agreements for 10 branch office leases and two leases for office and storage
space. The leases provide for increased rentals based upon increases
in real estate taxes and the cost of living index. Minimum rental
payments under the terms of these leases are as follows (in
thousands):
2010
|
$ | 1,045,747 | ||
2011
|
947,349 | |||
2012
|
891,661 | |||
2013
|
535,269 | |||
2014
and thereafter
|
663,119 | |||
Total
|
$ | 4,083,145 |
Total
rent expense was $1.1 million in both 2009 and 2008.
Litigation
Central
Jersey Bank, N.A. may, in the ordinary course of business, become a party to
litigation involving collection matters, contract claims and other legal
proceedings relating to the conduct of its business. Central Jersey
Bank, N.A. may also have various commitments and contingent liabilities which
are not reflected in the accompanying Consolidated Statements of Financial
Condition.
Related
Party Transactions
The
Company leased administrative office space at 6 West End Court, Long Branch, New
Jersey, through August 31, 2008. Certain members of the Board of
Directors of Central Jersey Bancorp hold an ownership interest in the leased
property. The negotiations with respect to the leased space were
conducted at arms-length and the lease amount paid by Central Jersey Bank, N.A.
was determined by an independent appraiser to be at fair market
value. The lease was terminated in 2008 and total lease payments for
2008 were $43,000.
NOTE
17 - Regulatory Capital Requirements
Subject
to applicable law and the Capital Purchase Program, the Board of Directors of
Central Jersey Bank, N.A. may provide for the payment of cash
dividends. Prior approval of the OCC is required to the extent that
the total of all cash dividends to be declared by Central Jersey Bank, N.A. in
any calendar year exceeds net profits, as defined, for that year combined with
its retained net profits from the preceding two calendar years less any
transfers to capital surplus.
For so
long as any Series A Preferred Shares are outstanding, Central Jersey Bancorp is
not permitted to declare or pay cash dividends on its common stock unless all
dividends on the Series A Preferred Shares have been paid
in-full. Further, unless the Series A Preferred Shares are redeemed
or fully transferred to third parties, Central Jersey Bancorp
is
prohibited from increasing its common stock dividends without prior approval of
the U.S. Department of the Treasury until December 23, 2011, which is the third
anniversary of the investment by the U.S. Department of the Treasury in Central
Jersey Bancorp.
Central
Jersey Bank, N.A. and Central Jersey Bancorp are subject to various regulatory
capital requirements administered by federal banking
agencies. Failure to meet minimum requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company’s financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Central Jersey Bank, N.A. and Central
Jersey Bancorp must meet specific capital guidelines that involve quantitative
measures of Central Jersey Bank, N.A.’s and Central Jersey Bancorp’s assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
The
prompt corrective action regulations define specific capital categories based on
an institution’s capital ratios. The capital categories, in declining
order, are “well capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized” and “critically
undercapitalized.” An institution categorized as “undercapitalized”
or worse is subject to certain restrictions, including the requirement to file a
capital plan with its primary federal regulator, prohibitions on the payment of
dividends and management fees, restrictions on asset growth and executive
compensation and increased supervisory monitoring, among other
things. Other restrictions may be imposed on the institution by the
applicable regulatory agencies, including requirements to raise additional
capital, sell assets or sell the entire institution. Once an
institution becomes “critically undercapitalized,” it must generally be placed
in receivership or conservatorship within ninety days. An institution
is deemed to be “critically undercapitalized” if it has a tangible equity ratio,
as defined, of 2% or less.
To be
considered “well capitalized,” an institution must generally have a leverage
ratio (Tier 1 Capital to total assets) of at least 5%, a Tier 1 risk-based
capital ratio of at least 6%, and a total risk-based capital ratio of at least
10%. Management believes that, as of December 31, 2009 and 2008,
Central Jersey Bank, N.A. and Central Jersey Bancorp meet all capital adequacy
requirements of their regulators. Further, the most recent regulatory
notification categorized Central Jersey Bank, N.A. and Central Jersey Bancorp as
well-capitalized under the prompt corrective action regulations.
The
following is a summary of Central Jersey Bank, N.A.’s and Central Jersey
Bancorp’s actual capital amounts and ratios as of December 31, 2009 and 2008,
compared to the minimum capital adequacy requirements and the requirements for
classification as a “well-capitalized” institution (dollars in
thousands):
Tier
I
Capital
to
Average
Assets Ratio
(Leverage
Ratio)
|
Tier
I
Capital
to
Risk
Weighted
Asset
Ratio
|
Total
Capital to
Risk
Weighted
Asset
Ratio
|
||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||
Actual Ratios
|
||||||||||||||||||||||||
Central
Jersey Bank, N.A.
|
7.89 | % | 10.33 | % | 10.19 | % | 14.05 | % | 14.00 | % | 15.24 | % | ||||||||||||
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 | % |
Tier
I
Capital
to
Average
Assets Ratio
(Leverage
Ratio)
|
Tier
I
Capital
to
Risk
Weighted
Asset
Ratio
|
Total
Capital to
Risk
Weighted
Asset
Ratio
|
||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||
Actual Amounts
|
||||||||||||||||||||||||
Central
Jersey Bank, N.A.
|
$ | 45,801 | $ | 56,542 | $ | 45,801 | $ | 56,542 | $ | 62,948 | $ | 61,299 | ||||||||||||
Required Regulatory Amounts
|
||||||||||||||||||||||||
“Adequately
capitalized” institution (under federal regulations)
|
$ | 23,217 | $ | 21,901 | $ | 17,984 | $ | 16,092 | $ | 35,967 | $ | 32,184 | ||||||||||||
“Well
capitalized” institution (under federal regulations)
|
$ | 29,021 | $ | 27,376 | $ | 26,975 | $ | 24,138 | $ | 44,958 | $ | 40,231 |
Tier
I
Capital
to
Average
Assets Ratio
(Leverage
Ratio)
|
Tier
I
Capital
to
Risk
Weighted
Asset
Ratio
|
Total
Capital to
Risk
Weighted
Asset
Ratio
|
||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||
Actual Ratios
|
||||||||||||||||||||||||
Central
Jersey Bancorp
|
9.68 | % | 10.20 | % | 12.50 | % | 13.91 | % | 13.76 | % | 15.09 | % | ||||||||||||
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 | % |
Tier
I
Capital
to
Average
Assets Ratio
(Leverage
Ratio)
|
Tier
I
Capital
to
Risk
Weighted
Asset
Ratio
|
Total
Capital to
Risk
Weighted
Asset
Ratio
|
||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||
Actual Amounts
|
||||||||||||||||||||||||
Central
Jersey Bancorp
|
$ | 56,180 | $ | 55,740 | $ | 56,180 | $ | 55,740 | $ | 61,850 | $ | 60,497 | ||||||||||||
Required Regulatory Amounts
|
||||||||||||||||||||||||
“Adequately
capitalized” institution (under federal regulations)
|
$ | 23,217 | $ | 21,864 | $ | 17,984 | $ | 16,033 | $ | 35,967 | $ | 32,067 | ||||||||||||
“Well
capitalized” institution (under federal regulations)
|
$ | 29,021 | $ | 27,330 | $ | 26,975 | $ | 24,050 | $ | 44,959 | $ | 40,084 |
NOTE
18 - Benefit Plans
Stock
Option Plans
As of
December 31, 2009, stock options to purchase in aggregate up to 1,023,442 shares
of the Company’s common stock were outstanding under the plans maintained by the
Company. During 2009 and 2008, no stock options were
granted. Effective January 1, 2005, as a result of the combination
with Allaire Community Bank, all outstanding stock options became
fully vested.
A summary
of the status of the Company’s stock options as of and for the years ended
December 31, 2009 and 2008 is presented below:
2009
|
2008
|
|||||||||||||||
Shares
|
Weighted
average
exercise
price
|
Shares
|
Weighted
average exercise price |
|||||||||||||
Outstanding
at beginning of year
|
1,289,948 | $ | 4.71 | 1,410,349 | $ | 4.77 | ||||||||||
Granted
|
-- | -- | -- | -- | ||||||||||||
Forfeited
|
(10,062 | ) | 7.39 | (56,224 | ) | 7.56 | ||||||||||
Exercised
|
(256,444 | ) | 3.21 | (64,177 | ) | 3.67 | ||||||||||
Outstanding at end of year
|
1,023,442 | 5.29 | 1,289,948 | 4.71 | ||||||||||||
Options
exercisable at year end
|
1,023,442 | 5.29 | 1,289,948 | 4.71 | ||||||||||||
Weighted average fair value of options granted
during the year
|
$ | -- | $ | -- |
No
additional compensation expense is projected for future years on stock options
outstanding at December 31, 2009.
The
following table summarizes information about stock options outstanding at
December 31, 2009:
Options
Outstanding and Exercisable
|
|||||||||||
December
31, 2009
|
|||||||||||
Number
outstanding
|
Exercisable
|
Weighted
average
remaining
contractual
life
|
Range
of exercise
prices
|
||||||||
122,856 | 122,856 |
5
Months
|
$ | 2.72 – 2.72 | |||||||
514,390 | 514,390 |
20
Months
|
$ | 3.06 – 3.92 | |||||||
90,429 | 90,429 |
36
Months
|
$ | 4.97 – 4.97 | |||||||
295,767 | 295,767 |
52
Months
|
$ | 7.56 – 9.90 |
The
aggregate intrinsic value for stock options outstanding and stock options
exercisable at December 31, 2009 is $33,000 for both, based upon a market price
of $2.99 per share and a weighted average exercise price of $2.72 per
share. The aggregate intrinsic value of stock options exercised
during 2009 and 2008 was $640,000 and $233,000, respectively. There were
no stock options granted during 2009 or 2008.
401(k)
Plan
The
Company has a 401(k) plan covering substantially all of its
employees. The Company may contribute an amount equal to 100% of the
first 3% of the employee deferral and then 50% of the next 2% of the employee
deferral. The Company’s matching contribution, if any, is determined
by the Board of Directors in its sole discretion. The Company’s
aggregate contributions to the 401(k) Plan for 2009 and 2008 were $172,000 and
$158,000, respectively.
NOTE
19 - Condensed Financial Statements of Central Jersey Bancorp (Parent Company
only)
The
following information with respect to Central Jersey Bancorp (parent company
only) should be read in conjunction with the notes to the consolidated financial
statements (in thousands):
Statements
of Financial Condition
|
2009
|
2008
|
||||||
Assets:
|
||||||||
Cash
|
$ | 91 | $ | 238 | ||||
Investment
in subsidiary
|
60,944 | 86,044 | ||||||
Total
assets
|
$ | 61,035 | $ | 86,282 | ||||
Liabilities:
|
||||||||
Other
liabilities
|
361 | 373 | ||||||
Subordinated
debentures
|
5,155 | 5,155 | ||||||
Total
liabilities
|
$ | 5,516 | $ | 5,528 | ||||
Shareholders’
Equity:
|
||||||||
Common
stock
|
92 | 90 | ||||||
Preferred
stock
|
11,300 | 11,300 | ||||||
Accumulated
other comprehensive income
|
1,022 | |||||||
Additional
paid-in capital
|
64,981 | 64,502 | ||||||
Treasury
stock
|
(1,806 | ) | (1,806 | ) | ||||
(Accumulated
deficit)/retained earnings
|
(20,070 | ) | 6,668 | |||||
Total
shareholders’ equity
|
$ | 55,519 | $ | 80,754 | ||||
Total
liabilities and shareholders’ equity
|
$ | 61,035 | $ | 86,282 |
Statements
of Income
|
2009
|
2008
|
||||||
Equity
in undistributed (losses) earnings of the bank subsidiary
|
$ | (26,318 | ) | $ | 3,253 | |||
Interest
expense on subordinated debt
|
(193 | ) | (355 | ) | ||||
Net
(loss) income available to common shareholders
|
$ | (26,511 | ) | $ | 2,898 |
Statements
of Cash Flows
|
2009
|
2008
|
||||||
Cash
Flow From Operating Activities:
|
||||||||
Net
(loss) income available to common shareholders
|
$ | (26,511 | ) | $ | 2,898 | |||
Less:
equity in undistributed (losses) earnings of the bank
subsidiary
|
26,318 | (3,253 | ) | |||||
(Decrease)
increase in other liabilities
|
(12 | ) | 31 | |||||
Net
cash used in operating activities
|
(205 | ) | (324 | ) | ||||
Cash
Flow From Investing Activities:
|
||||||||
Proceeds
from issuance of preferred stock downstreamed to
subsidiary
|
-- | (11,300 | ) | |||||
Net
cash used in investment activities
|
-- | (11,300 | ) | |||||
Cash
Flow From Financing Activities
|
||||||||
Proceeds
from exercise of stock options, net
|
481 | 330 | ||||||
Fractional
shares paid in cash
|
-- | (4 | ) | |||||
Proceeds
from issuance of subordinated debt
|
-- | -- | ||||||
Proceeds
from issuance of preferred stock
|
-- | 11,300 | ||||||
Cash
dividend from subsidiary
|
320 | 2,042 | ||||||
Cash
dividend paid on preferred stock
|
(505 | ) | -- | |||||
Purchase
of outstanding stock; placed in treasury
|
-- | (1,806 | ) | |||||
Net
cash provided by financing activities
|
296 | 11,892 | ||||||
Cash
and cash equivalents at beginning of period
|
238 | -- | ||||||
Cash
and cash equivalents at the end of period
|
$ | 91 | $ | 238 |
NOTE
20 - Recent Accounting Pronouncements
FASB
ASC Topic 860
In
October 2009, the FASB issued ASC Topic 860, “Transfers and Servicing – Accounting
for Transfers of Financial Assets.” This update amends the ASC
for the issuance of FASB Statement No. 166, “Accounting for Transfers of
Financial Assets-an amendment of FASB Statement No. 140.” The
amendments in this update improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require
enhanced disclosures about the risks that a transferor continues to be exposed
to because of its continuing involvement in transferred financial
assets. Comparability and consistency in accounting for transferred
financial assets will also be improved through clarifications of the
requirements for isolation and limitations on portions of financial assets that
are eligible for sale accounting. This update is effective at the
start of a reporting entity’s first fiscal year beginning after November 15,
2009. Early application is not permitted. The Company does
not expect the adoption of this pronouncement to have a material impact on the
Company’s consolidated financial position, results of operations or cash
flows.
In
October 2009, the FASB issued ASU Topic 810, “Consolidations – Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities.”
This update amends the Codification for the issuance of FASB
Statement No. 167, “Amendments
to FASB Interpretation No. 46(R).” The amendments in this
update replace the quantitative-based risks and rewards calculation for
determining which reporting entity, if any, has a controlling financial interest
in a variable interest entity with an approach focused on identifying which
reporting entity has the power to direct the activities of a variable interest
entity that most significantly impact the entity’s economic performance and (1)
the obligation to absorb losses of the entity or (2) the right to receive
benefits from the entity. An approach that is expected to be
primarily qualitative will be more effective for identifying which reporting
entity has a controlling financial interest in a variable interest
entity. The amendments in this update also require additional
disclosures about a reporting entity’s involvement in variable interest
entities, which will enhance the information provided to users of financial
statements. This update is effective at the start of a reporting
entity’s first fiscal year beginning after November 15, 2009. Early
application is not permitted. The Company does not expect the
adoption of this pronouncement to have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.
FASB
ASC Topic 825
In
April 2009, the FASB issued guidance now codified as FASB ASC Topic 825,
“Financial Instruments,”
which amends previous Topic 825 guidance to require disclosures about
fair value of financial instruments in interim as well as annual financial
statements. This pronouncement is effective for periods ending after
June 15, 2009. Accordingly, the Company adopted these provisions
of FASB ASC Topic 825 on March 29, 2009. The adoption of this pronouncement
did not have a material impact on the Company’s consolidated financial position,
results of operations or cash flows. However, these provisions of FASB ASC Topic
825 resulted in additional disclosures with respect to the fair value of the
Company’s financial instruments. See Note 14, Fair Value Measurements, for
these additional disclosures.
FASB
ASC Topic 320
In
April 2009, the FASB issued guidance now codified as FASB ASC Topic 320,
“Investments — Debt and Equity
Securities” and Topic 325 “Investments — Other,” which
is designed to create greater clarity and consistency in accounting for and
presenting impairment losses on securities. The pronouncement is
effective for periods ending after June 15, 2009. Accordingly,
the Company adopted this pronouncement on March 29, 2009. The
adoption of this guidance did not have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows. However, the provisions of FASB ASC Topic 320 resulted in
additional disclosures with respect to the fair value of the Company’s
investments with unrealized losses that are not deemed other-than-temporarily
impaired. See Note 14, Fair Value Measurements, for
these additional disclosures.
FASB
ASC Topic 820
In
April 2009, the FASB issued guidance now codified as FASB ASC Topic 820,
“Fair Value Measurements and
Disclosures.” This guidance defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This guidance establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset. The
pronouncement is effective for periods ending after June 15,
2009. Accordingly, the Company adopted this pronouncement on
March 29, 2009. The adoption of this guidance did not have a
material impact on the Company’s consolidated financial position, results of
operations or cash flows. However, the provisions of FASB ASC Topic 320 resulted
in additional disclosures with respect to the fair value of the Company’s
investments with unrealized losses that are not deemed other-than-temporarily
impaired. See Note 14, Fair Value Measurements, for
these additional disclosures.
NOTE
21 - Selected Quarterly Financial Data (Unaudited)
The
following tables are a summary of certain quarterly financial data for the years
ended December 31, 2009 and 2008, respectively.
2009 Quarter Ended
|
||||||||||||||||
March 31
|
June 30
|
September 30
|
December 31
|
|||||||||||||
(dollars
in thousands, except per share data)
|
||||||||||||||||
Interest
income
|
$ | 7,009 | $ | 6,533 | $ | 6,651 | $ | 6,186 | ||||||||
Interest
expense
|
2,286 | 2,207 | 1,935 | 1,751 | ||||||||||||
Net
interest income
|
4,723 | 4,326 | 4,716 | 4,435 | ||||||||||||
Provision
for loan losses
|
3,135 | 316 | 1,058 | 1,705 | ||||||||||||
Net
interest income after provision for loan losses
|
1,588 | 4,010 | 3,658 | 2,730 | ||||||||||||
Non-interest
income
|
2,166 | 894 | 1,466 | 531 | ||||||||||||
Non-interest
expense
|
4,045 | 30,950 | 4,068 | 4,636 | ||||||||||||
(Loss)
income before income taxes
|
(291 | ) | (26,046 | ) | 1,056 | (1,375 | ) | |||||||||
Income
tax (benefit) expense
|
(601 | ) | 258 | 136 | (681 | ) | ||||||||||
Net
income (loss)
|
$ | 310 | $ | (26,304 | ) | $ | 920 | $ | (694 | ) | ||||||
Preferred
stock dividend
|
141 | 142 | 141 | 141 | ||||||||||||
Preferred
stock discount amortization
|
44 | 44 | 45 | 45 | ||||||||||||
Net
income (loss) available to common shareholders
|
$ | 125 | $ | (26,490 | ) | $ | 734 | $ | (880 | ) | ||||||
Earnings
(loss) per common share:
|
||||||||||||||||
Basic
|
$ | 0.01 | $ | (2.92 | ) | $ | 0.08 | $ | (0.10 | ) | ||||||
Diluted
|
$ | 0.01 | $ | (2.92 | ) | $ | 0.08 | $ | (0.10 | ) | ||||||
Weighted
average shares outstanding:
|
||||||||||||||||
Basic
|
9,027,282 | 9,108,068 | 9,192,514 | 9,220,655 | ||||||||||||
Diluted
|
9,000,531 | 9,108,068 | 9,000,531 | 9,220,655 |
2008 Quarter Ended
|
||||||||||||||||
March 31
|
June 30
|
September 30
|
December 31
|
|||||||||||||
(dollars
in thousands, except per share data)
|
||||||||||||||||
Interest
income
|
$ | 7,252 | $ | 7,023 | $ | 7,428 | $ | 7,383 | ||||||||
Interest
expense
|
3,092 | 2,544 | 2,469 | 2,559 | ||||||||||||
Net
interest income
|
4,160 | 4,479 | 4,959 | 4,824 | ||||||||||||
Provision
for loan losses
|
65 | 81 | 253 | 920 | ||||||||||||
Net
interest income after provision for loan losses
|
4,095 | 4,398 | 4,706 | 3,904 | ||||||||||||
Non-interest
income
|
613 | 539 | 845 | 735 | ||||||||||||
Non-interest
expense
|
3,823 | 3,876 | 3,990 | 3,948 | ||||||||||||
Income
before income taxes
|
885 | 1,061 | 1,561 | 691 | ||||||||||||
Income
tax expense
|
304 | 350 | 536 | 98 | ||||||||||||
Net
income
|
$ | 581 | $ | 711 | $ | 1,025 | $ | 593 | ||||||||
Preferred
stock dividend
|
-- | -- | -- | 12 | ||||||||||||
Net
income available to common shareholders
|
$ | 581 | $ | 711 | $ | 1,025 | $ | 581 | ||||||||
Earnings
per share:
|
||||||||||||||||
Basic
|
$ | 0.06 | $ | 0.08 | $ | 0.11 | $ | 0.06 | ||||||||
Diluted
|
$ | 0.06 | $ | 0.07 | $ | 0.11 | $ | 0.06 | ||||||||
Weighted
average shares outstanding:
|
||||||||||||||||
Basic
|
9,165,344 | 9,116,813 | 9,074,977 | 9,012,650 | ||||||||||||
Diluted
|
9,569,088 | 9,549,876 | 9,504,798 | 9,351,516 |
INDEX
OF EXHIBITS
Exhibit
No.
|
Description of
Exhibit
|
|
2.1
|
Plan
of Acquisition of all of the outstanding stock of Monmouth Community Bank
by Central Jersey Bancorp (formerly Monmouth Community Bancorp) (the
“Registrant”), entered into as of March 16, 2000 by Monmouth Community
Bank and the Registrant (Incorporated by reference to Exhibit 2.1 to the
Registrant’s Registration Statement on Form SB-2 (Registration No.
333-87352), effective July 23, 2002).
|
|
2.2
|
Agreement
and Plan of Acquisition, dated as of June 30, 2004, by and between the
Registrant and Allaire Community Bank (“Allaire”): Upon the
request of the Securities and Exchange Commission (the “SEC”), 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
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4.13(c) –
Buildings and Structures; (Registrant) Schedule 4.14(a) and
4.14(b) – Real Estate and Leases (Registrant); Schedule
4.16(a) – Material Contracts (Registrant); Schedule
4.16(c) – Certain Other Contracts (Registrant); Schedule
4.16(d) – Effect on Contracts and Consents (Registrant); Schedule 4.18 –
Registration Obligations (Registrant); Schedule 4.20 –
Insurance (Registrant); Schedule
4.21(b) – Benefit or Compensation Plans (Registrant); Schedule
4.21(d) – Labor Relations (Registrant); Schedule 4.22 –
Compliance with Applicable Laws (Registrant); Schedule 4.23 –
Transactions with Management (Registrant); Schedule 4.25 –
Deposits (Registrant); Schedule
6.18(a) – Notice of Deadlines (Allaire); and Schedule
6.18(b) – Notice of Deadlines (Registrant) (Incorporated by
reference to Exhibit 2.2 to the Registrant’s Quarterly Report on Form
10-QSB for the quarter ended June 30, 2004 filed with the SEC on August
16, 2004).
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||
2.3.1
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Agreement
and Plan of Merger, dated as of May 26, 2009, between OceanFirst Financial
Corp. and the Registrant (Incorporated by reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K, dated May 26, 2009 and filed with
the SEC on May 27, 2009).
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2.3.2
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Termination
Agreement, dated December 17, 2009, between OceanFirst Financial Corp. and
the Registrant (Incorporated by reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K, dated December 18, 2009 and filed
with the SEC on that same date).
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3.1
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Amended
and Restated Certificate of Incorporation of the Registrant (Incorporated
by reference to Exhibit 3.1 to the Registrant’s Current Report on Form
8-K, dated December 23, 2008 and filed with the SEC on December 31,
2008).
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3.2
|
Certificate
of Amendment to the Amended and Restated Certificate of Incorporation of
the Registrant (Incorporated by reference to Exhibit 3.2 to the
Registrant’s Current Report on Form 8-K, dated December 23, 2008 and filed
with the SEC on December 31, 2008).
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3.3
|
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, filed with the
SEC on March 31, 2005).
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4.1
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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).
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4.2
|
Warrant
to Purchase Common Stock, dated December 23, 2008 (Incorporated by
reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K,
dated December 23, 2008 and filed with the SEC on December 31,
2008).
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10.1
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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).
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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, filed with the
SEC on March 30, 2004).
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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, filed
with the SEC on March 30, 2004).
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10.4
|
Guarantee
Agreement by Registrant and Wilmington Trust Company, dated March 25, 2004
(Incorporated by reference to Exhibit 12 to the Registrant’s Annual Report
on Form 10-KSB for the year ended December 31, 2003, filed with the SEC on
March 30, 2004).
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10.5*
|
Amended
and Restated Change of Control Agreement, dated December 23, 2008, by and
between James S. Vaccaro and Central Jersey Bancorp (Incorporated by
reference to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K,
dated December 23, 2008 and filed with the SEC on December 31,
2008).
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10.6*
|
Amended
and Restated Change of Control Agreement, dated December 23, 2008, by and
between Robert S. Vuono and Central Jersey Bancorp (Incorporated by
reference to Exhibit 10.9 to the Registrant’s Current Report on Form 8-K,
dated December 23, 2008 and filed with the SEC on December 31,
2008).
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|
Second
Amended and Restated Change of Control Agreement, dated March 29, 2010, by
and between Anthony Giordano III and Central Jersey
Bancorp.
|
||
10.8*
|
Senior
Executive Officer Agreement, dated December 19, 2008, by and between James
S. Vaccaro and Central Jersey Bancorp (Incorporated by reference to
Exhibit 10.5 to the Registrant’s Current Report on Form 8-K, dated
December 23, 2008 and filed with the SEC on December 31,
2008).
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10.9*
|
Senior
Executive Officer Agreement, dated December 19, 2008, by and between
Robert S. Vuono and Central Jersey Bancorp (Incorporated by reference to
Exhibit 10.6 to the Registrant’s Current Report on Form 8-K, dated
December 23, 2008 and filed with the SEC on December 31,
2008).
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10.10*
|
Senior
Executive Officer Agreement, dated December 19, 2008, by and between
Anthony Giordano III and Central Jersey Bancorp (Incorporated by reference
to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K, dated
December 23, 2008 and filed with the SEC on December 31,
2008).
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10.11
|
Registrant’s
2005 Equity Incentive Plan (Incorporated by reference to exhibit 10.10 to
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2005 and filed with the SEC on May 16, 2005).
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|
10.12
|
Letter
Agreement, dated December 23, 2008, including the Securities Purchase
Agreement – Standard Terms attached thereto, by and between the U.S.
Department of the Treasury and the Registrant (Incorporated by reference
to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated
December 23, 2008 and filed with the SEC on December 31,
2009).
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|
14.1
|
Chief
Executive and Senior Financial Officer Code of Ethics (Incorporated by
reference to Exhibit 14.1 to the Registrant’s Annual Report on Form 10-KSB
for the year ended December 31, 2003 and filed with the SEC on March 30,
2004).
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|
Subsidiaries
of the Registrant.
|
||
Consent
of Independent Registered Public Accounting Firm.
|
||
Section
302 Certification of Chief Executive Officer.
|
||
Section
302 Certification of Chief Financial Officer.
|
||
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350.
|
||
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section
1350.
|
||
Certification
of Principal Executive Officer Pursuant to Section 111(b)(4) of the
Emergency Economic Stabilization Act of 2008 and 31 CFR
30.15.
|
||
Certification
of Principal Financial Officer Pursuant to Section 111(b)(4) of the
Emergency Economic Stabilization Act of 2008 and 31 CFR
30.15.
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-------------------------------------------------
*Constitutes
a management contract.
E-4