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EX-23 - CONSENT OF CROWE HORWATH LLP - ConnectOne Bancorp, Inc.d440447dex23.htm
EX-10.10 - 2012 EQUITY COMPENSATION PLAN - ConnectOne Bancorp, Inc.d440447dex1010.htm
EX-10.1 - EMPLOYMENT AGREEMENT OF FRANK SORRENTINO III EFFECTIVE AS OF JANUARY 1, 2013 - ConnectOne Bancorp, Inc.d440447dex101.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

PRE – EFFECTIVE AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ConnectOne Bancorp, Inc.

(Exact Name of Registrant as specified in its Charter)

 

 

 

New Jersey   6022   26-1998619

(State of

Incorporation)

 

(Primary Standard

Classification Code)

 

(IRS Employer

ID No.)

301 Sylvan Ave

Englewood Cliffs, NJ 07632

(201) 816-8900

(Address and Telephone Number of Registrant’s Principal Executive Offices and Principal Place of Business)

 

 

Frank Sorrentino III, Chairman and Chief Executive Officer

ConnectOne Bancorp, Inc.

301 Sylvan Ave

Englewood Cliffs, NJ 07632

(201) 816-8900

(Name, Address and Telephone Number of Agent for Service)

 

 

Copies of communications to:

 

Robert A. Schwartz, Esq.   Philip R. Bevan
Windels Marx Lane & Mittendorf, LLP   Elias, Matz, Tiernan & Herrick L.L.P.
120 Albany Street Plaza, FL 6   734 15th Street, N.W., 11th Floor
New Brunswick, NJ 08901   Washington, D.C. 20005
732-448-2548   202-347-3000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practical after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common stock, no par value

  $57,500,000   $7,843(3)

 

 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee in accordance with Rule 457(o).
(2) Includes the offering price of shares to cover over-allotments, if any, pursuant to the options granted to the underwriters.
(3) Previously paid.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and no offer to buy these securities is being solicited in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED FEBRUARY     , 2013

LOGO

CONNECTONE BANCORP, INC.

1,600,000 shares of common stock

 

 

This prospectus describes the public offering and sale of 1,600,000 shares of common stock of ConnectOne Bancorp, Inc., a New Jersey corporation and bank holding company headquartered in the Borough of Englewood Cliffs, New Jersey. We currently estimate that the public offering price will be between $26.00 and $29.00 per share. The common stock is not traded on any national market or securities exchange or in the over-the-counter market. We expect the common stock to be approved for listing on the Nasdaq Global Market under the symbol “CNOB”.

 

 

INVESTING IN THE COMMON STOCK IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PLEASE SEE “RISK FACTORS” BEGINNING ON PAGE 14.

 

 

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements.

 

     Per Share      Total  

Public offering price of common stock

   $         $     

Underwriting discounts and commissions

   $         $     

Proceeds to us, before expenses

   $         $     

We have granted the underwriters a 30-day option to purchase up to 240,000 additional shares of             our common stock at the public offering price, less underwriting discounts and commissions, to cover over-allotments, if any.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE PROSPECTIVE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The securities are not savings accounts, deposits, or other obligations of any bank and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.

We have not authorized anyone to provide any information or to make any representations other than those contained in this Prospectus. We take no responsibility for, and can provide no assurance as the reliability of, any information that others may give you. This Prospectus is an offer to sell only the shares offered hereby and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this Prospectus is current only as of its date.

The underwriters expect to deliver the shares of our common stock against payment on             , 2013.

.

 

 

 

Stifel  
  Keefe, Bruyette & Woods    
  Sandler O’Neill + Partners, L.P.  

The date of this Prospectus is             , 2013


Table of Contents

 

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

ABOUT THIS PROSPECTUS

     1   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     1   

PROSPECTUS SUMMARY

     1   

THE OFFERING

     5   

SUMMARY OF SELECTED FINANCIAL DATA

     7   

RECENT DEVELOPMENTS

     10   

RISK FACTORS

     14   

USE OF PROCEEDS

     24   

DIVIDEND POLICY

     25   

DILUTION

     25   

CAPITALIZATION

     25   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     27   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     45   

BUSINESS

     46   

SUPERVISION AND REGULATION

     49   

MANAGEMENT

     57   

EXECUTIVE COMPENSATION

     61   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     64   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     66   

DESCRIPTION OF OUR CAPITAL STOCK

     66   

RESTRICTION ON ACQUISITION OF THE COMPANY

     67   

SHARES ELIGIBLE FOR FUTURE SALE

     68   

UNDERWRITING

     68   

LEGAL MATTERS

     71   

EXPERTS

     72   

WHERE YOU CAN FIND MORE INFORMATION

     72   

REGISTRATION REQUIREMENTS

     72   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     73   

 

i


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ABOUT THIS PROSPECTUS

You should rely only on the information contained in this Prospectus or in any free-writing prospectus we may authorize to be delivered or made available to you. We have not, and the underwriters have not, authorized any other person to provide you with additional, different, or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it. For further information, please see the section of this Prospectus entitled “Where You Can Find More Information.” We are not making an offer to sell the common stock in any jurisdiction where the offer or sale is not permitted.

You should not assume that the information appearing in this Prospectus is accurate as of any date other than the date on the front cover of this Prospectus, regardless of the time of delivery of this prospectus or any sale of the common stock. Our business, financial condition, results of operations and prospects may have changed since those dates.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements in this document discuss future expectations, contain projections or results of operations or financial conditions or state other “forward-looking” information. Those statements are subject to known and unknown risk, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. We based the forward-looking statements on various factors and using numerous assumptions. Important factors that may cause actual results to differ from those contemplated by forward-looking statements include those disclosed under “Risk Factors” as well as the following factors:

 

   

the success or failure of our efforts to implement our business strategy;

 

   

the effect of changing economic conditions and, in particular, changes in interest rates;

 

   

changes in government regulations, tax rates and similar matters;

 

   

our ability to attract and retain quality employees; and

 

   

risks which may be described in our future filings with the Securities and Exchange Commission (referred to as the SEC).

We do not undertake to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements.

PROSPECTUS SUMMARY

This summary highlights important features of this offering. Because this is a summary, it may not contain all of the information that you should consider before investing in our common stock. Therefore, you should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors,” as well as the consolidated financial statements included herein before making a decision to invest in our common stock. Unless the context otherwise requires, references in this prospectus to the “Company,” “we,” “us,” and “our” refer to ConnectOne Bancorp, Inc. and its wholly owned subsidiary, North Jersey Community Bank.

ConnectOne Bancorp, Inc.

We are a New Jersey corporation and a registered bank holding company pursuant to the Bank Holding Company Act of 1956, as amended, that was formed in 2008 to serve as the holding company for North Jersey Community Bank.

The Bank is a community-based, full-service commercial bank that was founded in 2005 with the belief that a high service institution can better identify and serve the banking needs of small to medium-sized businesses, professional entities and individuals than can a branch or subsidiary of a larger out-of-market institution. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey, and through its seven other banking offices. We offer a broad range of commercial and consumer banking services to our customers and expect people living, working and shopping in our primary trade area to be the source of most of our customer deposits and lending business.


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Our business has experienced significant growth. Since inception we have concentrated our asset generation efforts on commercial real estate, construction and business loans and focused our deposit generation on relationship-based core deposit accounts. Since December 31, 2006, total assets have grown from $179.8 million to $883.8 million at September 30, 2012 and total deposits have grown from $158.9 million to $724.3 million over the same timeframe. We achieved profitability in our eighth quarter of operations and for the nine month period ended September 30, 2012 reported a return on average assets of 1.01%.

In recent years, we have achieved many milestones, including:

 

   

Growing our total assets to approximately $883.8 million at September 30, 2012 from $514.8 million at December 31, 2009, representing a 21.8% compound annual growth rate;

 

   

Growing non-interest-bearing deposits to $148.7 million at September 30, 2012 from $66.3 million at December 31, 2009;

 

   

Increasing our net income by 28.0% to $6.1 million during the first nine months of 2012 from $4.8 million during the first nine months of 2011. Net income for the full year 2011 was $6.7 million, representing a 41.0% increase from net income of $4.7 million earned in 2010;

 

   

Acquiring the deposits and former branch location of Citizens Community Bank, which is now our Ridgewood office, in a FDIC-assisted transaction in 2009;

 

   

Being named one of the 50 Fastest growing Companies by NJBIZ (New Jersey’s only weekly business journal);

 

   

Expanding beyond our original northeastern New Jersey market place with the opening of our Holmdel branch in Monmouth County, New Jersey;

 

   

Winning a Forbes Enterprise Award honoring visionary small businesses; and

 

   

Being recognized as one of the top five performing community banks in 2010 and one of the top fifteen best performing community banks in 2011 with assets between $500 million and $5 billion in the United States by SNL Financial LC.

Our Competitive Strengths

We believe that the following strengths differentiate our company and create the foundation to capitalize on opportunities and to successfully grow our business:

 

   

Superior, Relationship-Based Customer Service. The Bank offers high-quality service by minimizing personnel turnover and by providing more direct, personal attention than the Bank believes is offered by competing financial institutions, the majority of which are branch offices of banks headquartered outside the Bank’s primary trade area. By emphasizing the need for a professional, responsive and knowledgeable staff, the Bank offers a superior level of service to our customers.

 

   

Commercial Lending Expertise. Our ability to drive quality, commercial loan growth in an otherwise sluggish economic environment is a result of being able to provide clients with access to a knowledgeable, experienced officer with a relationship orientation and the ability to respond to a broad range of business needs on a customized basis. As a result of senior management’s availability for consultation on a daily basis, the Bank believes it offers customers a quicker response time on loan applications and other banking transactions, as well as greater certainty that these transactions will actually close, than competitors, whose decisions may be made in distant headquarters. We believe that this response time and certainty to close results in a pricing advantage to us, in that we frequently may exceed competitors’ loan pricing yet still win customers.

 

   

Strong Net Interest Margin. Our ability to expeditiously make lending decisions and provide certainty of execution translates into incremental yield, which when coupled with the Bank’s stable funding base, consisting primarily of core deposits (deposits other than time deposits), results in an above average net interest margin. Our net interest margin for the nine months ended September 30, 2012 was 4.25%, an increase of 4 basis points compared to the net interest margin reported for the year ended December 31, 2011.

 

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Robust Operating Platform. We provide state-of-the-art banking technology, including remote deposit capture, internet banking and mobile banking, to provide our customers with the most choices and maximum flexibility. In addition, we have made investments in our infrastructure and technology in order to create a scalable platform to accommodate our future growth aspirations. We believe that our advanced technology combined with responsive and personal service provides the Bank’s customers with a superior banking experience.

 

   

Engaged and Experienced Management and Board of Directors. The Bank was founded in 2005 by a group of local business leaders on the premise that an essential component of a vibrant local economy is a strong community bank that focuses on serving the financial needs of its customers. We believe that the long-standing ties to the community of our Board of Directors, led by Mr. Frank Sorrentino III, Chairman and Chief Executive Officer, and their significant business experience provide us with the ability to effectively assess and address the needs of the local markets. The interests of our executive management team and directors are aligned with those of our stockholders through common stock ownership. At September 30, 2012, our directors and officers beneficially owned approximately 26.9% of our common stock.

Effective October 1, 2012 Mr. William S. Burns joined the Company as Chief Financial Officer. Mr. Burns was previously the Chief Financial Officer of Somerset Hills Bancorp, a bank holding company located in north/central New Jersey, and of The Trust Company of New Jersey. Mr. Burns has over thirty (30) years of experience in the financial services industry. Mr. Burns succeeded Frank Baier as Chief Financial Officer. Mr. Baier resigned to pursue other opportunities, but remains as a member of the Board of the Company.

Effective January 7, 2013, Mr. Aditya Kishore joined the Company as Chief Information/Operations Officer. Mr. Kishore was previously the Chief Operations Officer and Chief Technology Officer of Carver Federal Savings Bank, a New York City based thrift, for approximately two years, served as the Chief Operating and Chief Information Officer of Hanover Community Bank, based on Long Island, New York for eighteen months prior thereto, and was Chief of Banking Products at Fidelity National Information Services, a financial institution technology and service provider. As Chief Operations Officer, Mr. Kishore will assume certain responsibilities previously undertaken by Ms. Laura Criscione as Chief Operations Officer. Ms. Criscione will now serve as the Company’s Chief Compliance Officer.

 

   

Maintaining Solid Asset Quality. We have implemented a strong credit culture and have maintained solid asset quality. At September 30, 2012, our level of non-performing assets consisting of non-accrual loans and other real estate owned (“OREO”) as a percentage of total assets was 0.64%, and our year-to-date annualized net charge-offs were 0.04%. We believe that this experience is the result of our underwriting standards, experienced loan officers, diligent monitoring of the loan portfolio and our close ties to and knowledge of our customers.

 

   

Exceptional Market Area. We operate in what we believe to be one of the most attractive markets in New Jersey, and by extension, the United States, in large part due to appealing market demographics. These demographics include nation leading household income levels, densely populated market areas and the presence of a diverse group of large and small businesses. Based on 2011 median data, New Jersey ranked second in the nation for highest household income levels, fourth in per capita income and second in population density. Our market areas rank highly in the state in relation to these demographic statistics. Furthermore, 20 Fortune 500 companies are headquartered in New Jersey, primarily concentrated in the northeast quarter of the state, our core market area. From a small business perspective, New Jersey ranked ninth in the nation in the number of business establishments with less than 500 employees (over 198,000 businesses). Bergen County ranked first in the state with small business establishments with less than 500 employees at approximately 31,200.

Our Market Area

Our banking offices are located in Bergen, Hudson and Monmouth Counties in New Jersey, which include some of the most affluent markets in the United States. We also attract business and customers from a broader region, primarily defined as the northeastern quarter of the State of New Jersey, from Route 195 to the south and Route 287 to the west to the New York state border on the north.

Bergen County, where 93.5% of our total deposits as of September 30, 2012 are located, is home to significant employers including Benjamin Moore, the Hertz Corporation, Pathmark and Volkswagen Group of America. Furthermore, CNBC, LG USA and Unilever of North America are headquartered in the Borough of Englewood Cliffs (our Company headquarters location). Looking at the broader state economic environment, 20 Fortune 500 companies are headquartered in New Jersey, primarily concentrated in the northeast quarter of the state, our core market area. Among Russell 3000 companies, 102 are headquartered in New Jersey, and Bergen County is home to more of these companies (17) than any other county in the State.

 

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From a small business perspective, New Jersey ranked ninth in the nation in the number of business establishments with less than 500 employees (over 198,000 businesses) according to United States Census Bureau 2010 Economic Development Data & Information (EDDI). Bergen County ranked first in the State in small business establishments with less than 500 employees at approximately 31,200.

Based on 2011 median data provided by ESRI (based primarily on US Census data as of 2011), New Jersey ranked second in the nation for the highest median household income level ($67,128). Bergen and Monmouth Counties ranked sixth and fifth in the state with household income levels of $79,903 and $80,475, respectively. Furthermore, on a per capita income basis, New Jersey ranked fourth in the nation, and Bergen and Monmouth Counties ranked fourth and fifth, respectively, in the state. New Jersey also ranked second in the nation in relation to population density, while Bergen County ranked fourth in the state.

Our Business Strategy

We seek to position ourselves as “a better place to be” for our customers, community, employees and shareholders. Our primary strategy is to be the banking provider of choice in our demographically attractive market area and serve as a community banking alternative that can offer clients a comprehensive suite of products and services but with superior, relationship-based customer service. We strive to maintain a strong corporate culture paired with a clear vision that provides customers with uncompromising service and customized solutions to every financial need. The banking landscape has changed dramatically in our region over the past decade as a result of the heightened level of consolidation in which the largest institutions are now headquartered outside of the state. We feel that the opportunity created by this dislocation will enable us to continue to exhibit favorable growth trends as we distinguish ourselves from the competition through service oriented banking characterized by the ability to respond quickly to customers’ needs.

We have adopted a strategy of rapid franchise growth by focusing on brand awareness and referral based revenue, by providing state-of-the-art technology combined with personalized customer service typical of a community-based bank, and by hiring seasoned banking professionals familiar with our operating area. This strategy has resulted in a strong track record of increasing profitability, reflecting exceptional growth in both loans and core deposits. We believe our approach to growth has been disciplined as we have maintained sound credit quality and have prudently managed our infrastructure.

Over the past several years the regulatory and business environment has remained negative for larger financial institutions, which have focused on deleveraging and cost cutting. The Bank has been, and expects to continue to be, successful in attracting customers and employees displaced from other institutions due to these trends. A large portion of our customers come to the Bank through referrals from existing customers, because the Bank can offer a quicker response on loan applications and other banking transactions, as well as the greater certainty that these transactions will actually close, compared to our competitors. We believe that this quicker response time and increased certainty to close results in a pricing advantage to us, in that we frequently may exceed competitors’ loan pricing and still win customers. Our increasing capital base has allowed us to make larger loans, and thereby service the credit needs of larger customers and enhance our relationships with existing customers as they grow their businesses.

Historically, we have concentrated on organic growth, through opening new branches and offering new technology and product delivery channels to acquire new customers. While we expect to take an opportunistic approach to acquisitions, considering opportunities to purchase whole institutions, branches or lines of business that complement our existing strategy, we expect the bulk of our growth to continue to be organic. Our goal is to open new offices in the counties contained in our broader trade area discussed above. However, we do not believe that we need to establish a physical location in each market that we serve. We believe that advances in technology have created new delivery channels which allow us to service customers and maintain business relationships without a physical presence, and that these customers can also be serviced through a regional office. We believe the key to customer acquisition and retention is establishing quality teams of lenders and business relationship officers who will frequently go to the customer, rather than having the customer come into the branch. Our expansion into Monmouth County, through the opening of our Holmdel, New Jersey office, is an example of this strategy. We opened the branch in July, 2011 and, as of September 30, 2012, we had $20.0 million in total deposits at the Holmdel branch.

 

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Effective in November, 2012, we changed our name to ConnectOne Bancorp, Inc. from North Jersey Community Bancorp, Inc. We also intend to change the name of the Bank to ConnectOne Bank, effective in the first half of 2013. We believe the name change better reflects our focus on servicing customers in a larger geographic area. When we started the Bank in 2005, we had one office located in Englewood Cliffs, New Jersey, in eastern Bergen County, and the name North Jersey Community Bank appropriately reflected the Bank’s target customer base. However, as we have grown, we came to believe the name was too restrictive, as we now serve customers throughout New Jersey and in New York City, and have an office, and may look to establish future offices, in central New Jersey. We therefore believe the new name better reflects our mission to connect with our customers, regardless of where they are located.

Since inception in 2005, we have remained focused on execution of our strategy which has produced prodigious growth and consistent profitability as evidenced by our performance over the first nine months of 2012, in which we grew assets by $154.1 million to $883.8 million and attained an annualized return on average assets of 1.01%. While we have grown significantly, we have also focused on expense management. Our efficiency ratio for the nine months ended September 30, 2012 and for the year ended December 31, 2011 was 49.7% and 52.9%, respectively. While we cannot guarantee that this ratio will continue to improve as we grow, expense containment will continue to be one of management’s top priorities.

Recent Preferred Stock Conversion

Over the past several years, we issued shares of convertible preferred stock in order to augment our capital base. In 2009, we issued 125,000 shares of our Series A Preferred Stock and 400,000 shares of our Series B Stock; in 2010, we issued 241,175 shares of our Series B Preferred Stock; in 2011, we issued 59,025 shares of our Series B Preferred Stock; and in 2012 we issued 7,500 shares of our Series C Preferred Stock. All of these shares were issued pursuant to exemptions from registration under Section 5 of the Securities Act. We received an aggregate of $24.0 million in proceeds from the sale of these preferred shares. In accordance with the terms of each class of preferred stock, all of our outstanding preferred stock converted, during 2012, into shares of our common stock. We issued an aggregate of 909,921 shares of our common stock upon conversion of our outstanding preferred stock, and as of September 30, 2012, there were no shares of our preferred stock outstanding. We converted our outstanding preferred stock to common stock because (i) our Board believed the Company would be better served by maintaining a more simplified capital structure and (ii) the Board believed regulatory agencies look more favorably on common equity as a component of capital.

Additional Information

Our principal executive offices are located at 301 Sylvan Avenue, Englewood Cliffs, New Jersey, 07632. Our telephone number is (201) 819-8600. Our Internet address is www.njcb.com. Information on or accessible through our website is not incorporated by reference and is not part of this prospectus.

THE OFFERING

 

Common stock offered

   1,600,000 shares

Common stock outstanding after the offering1 2

   4,752,951 shares

Market for the common stock

   We have applied to list our common stock on the Nasdaq Global Market under the trading symbol “CNOB.”

 

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Dividend policy

   We have never paid cash dividends to holders of our common stock. We intend to adopt a policy of retaining earnings, if any, to increase our net worth and capital ratios over the next few years. Any future determinations relating to our dividend policy will be made at the discretion of the Board of Directors. For additional information, see “Dividend Policy.”

Use of proceeds

   We intend to contribute substantially all of the proceeds of this offering to the Bank to provide regulatory capital to support future asset growth and continued expansion of the Bank’s business. For additional information, see “Use of Proceeds.”

Directed Share Program

  

We intend to reserve up to 100,000 shares of common stock being offered by this prospectus for sale at the initial offering price to our directors, officers, employees and other individuals associated with us and members of their families.

Risk factors

   An investment in the common stock involves certain risks. Prospective purchasers of the common stock should consider the information discussed under the heading “Risk Factors” on page 14.

 

1 

As of September 30, 2012.

2

Unless otherwise indicated, the share information in the table above and in this prospectus excludes up to 240,000 shares that may be purchased by the underwriters from us to cover over-allotments. Unless otherwise indicated, information contained in this prospectus regarding the number of outstanding shares of common stock does not include 305,000 shares of common stock issuable upon the exercise of outstanding stock options or an aggregate of 413,000 shares of common stock reserved for future issuance under our stock option plans.

Exemptions under the Jumpstart Our Business Startups Act of 2012

We are an emerging growth company, or “EGC”, as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. We will cease to be an EGC at the earliest of (A) the last day of the fiscal year in which we have total annual gross revenues of $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest $1,000,000); (B) the last day of the fiscal year in which the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement under the Securities Act of 1933 occurs; (C) the date on which we have, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or (D) the date on which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act or any successor thereto. Our gross revenues are currently less than 5% of the annual gross revenue threshold described above, thus we expect to maintain our current EGC status for the five-year period provided by the JOBS Act.

Because we are an EGC, we have an exemption from Section 404(b) of Sarbanes-Oxley Act of 2002 and Section 14A(a) and (b) of the Securities Exchange Act of 1934. Under Section 404(b), we are now exempt from the internal control assessment required by subsection (a), which requires that the registered public accounting firm that prepares or issues the audit report for the issuer attest to, and report on, the assessment made by the management of the issuer. We also will have reduced reporting requirements in our documents filed with the SEC, including reduced disclosure requiring executive compensation matters and will not be required to receive a separate shareholder vote regarding either executive compensation or for any golden parachutes for our executives so long as we continue to operate as an emerging growth company.

 

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Further, Section 102(b)(1) of the JOBS Act exempts EGCs from complying with new or revised accounting standards until private companies (that is, those that have not had a Securities Act of 1933, as amended, registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended) are required to comply with the new or revised financial accounting standards. We hereby elect to use the extended transition period for complying with new or revised accounting standards.

SUMMARY OF SELECTED FINANCIAL DATA

The following tables set forth selected consolidated historical financial data (i) as of and for the nine months ended September 30, 2012 and 2011 and (ii) as of and for the years ended December 31, 2011, 2010, and 2009. Selected consolidated financial data as of and for the years ended December 31, 2011, 2010 and 2009 have been derived from our audited financial statements. You should read the information as of and for the years ended December 31, 2011 and 2010 in conjunction with the audited financial statements and the related notes appearing in this prospectus beginning on Page F-1. Selected financial data as of and for the nine months ended September 30, 2012 and 2011 have not been audited but, in the opinion of our management, contain all adjustments (consisting of only normal or recurring adjustments) necessary to present fairly our financial position and results of operations for such periods in accordance with generally accepted accounting principles. Our results of operations for the nine months ended September 30, 2012 are not necessarily indicative of our results of operations that may be expected for the year ending December 31, 2012. The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

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     (unaudited)        
     At or for the Nine Months Ended     At or for the Year Ended  
     September 30,     December 31,  
     2012     2011     2011     2010     2009  
     (Dollars in thousands, except per share data)  

SELECTED BALANCE SHEET DATA

          

Total assets

   $ 883,846      $ 696,494      $ 729,741      $ 602,377      $ 514,835   

Total loans

     804,514        622,440        629,459        494,186        398,286   

Allowance for loan losses

     12,248        9,526        9,617        7,414        4,759   

Securities available for sale

     21,982        31,232        27,435        24,025        27,537   

Goodwill and other intangible assets

     260        260        260        260        293   

Deposits

     724,281        563,854        609,421        482,685        429,387   

Tangible common stockholders’ equity (1)

     69,969        38,348        40,093        33,715        29,090   

Total stockholders’ equity

     70,229        55,112        56,857        49,299        39,850   

Average total assets

     806,026        646,052        665,292        560,851        473,929   

Average common stockholders’ equity

     52,522        36,249        37,468        31,092        32,575   

SELECTED INCOME STATEMENT DATA

          

Interest income

   $ 29,962      $ 24,657      $ 33,676      $ 28,963      $ 23,851   

Interest expense

     4,725        4,537        6,207        6,051        8,091   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     25,237        20,120        27,469        22,912        15,760   

Provision for loan losses

     2,840        2,202        2,355        2,930        1,455   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     22,397        17,918        25,114        19,982        14,305   

Non-interest income

     815        733        1,113        900        415   

Non-interest expense

     12,941        10,641        15,057        12,941        10,969   

Income tax expense

     4,154        3,230        4,504        3,212        1,538   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     6,117        4,780        6,666        4,729        2,213   

Dividends on preferred shares

     354        446        600        479        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 5,763      $ 4,334      $ 6,066      $ 4,250      $ 2,213   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (unaudited)        
     At or for the Nine Months Ended     At or for the Year Ended  
     September 30,     December 31,  
     2012     2011     2011     2010     2009  
     (restated)                          

PER COMMON SHARE DATA:

          

Basic earnings per share

   $ 2.26      $ 1.93      $ 2.71      $ 1.91      $ 0.97   

Diluted earnings per share (restated, 9/30/12) (5)

     1.92        1.56        2.18        1.61        0.95   

Book value per common share

     22.27        17.21        17.99        15.16        13.20   

Tangible book value per common share

     22.19        17.10        17.87        15.04        13.07   

Basic weighted average common shares

     2,546,996        2,241,628        2,242,085        2,227,296        2,222,660   

Diluted weighted average common shares (restated, 9/30/12) (5)

     3,184,927        3,059,635        3,063,076        2,938,655        2,338,823   

SELECTED PERFORMANCE RATIOS

          

Return on average assets (2)

     1.01     0.99     1.00     0.84     0.47

Return on average common stockholders’ equity (2)

     14.66     15.93     16.19     13.67     6.79

Net interest margin (2)

     4.25     4.24     4.21     4.22     3.44

Efficiency ratio (1) (3)

     49.7     51.3     52.9     54.3     67.8

SELECTED ASSET QUALITY RATIOS

          

Nonaccrual loans to total loans

     0.70     1.04     1.02     0.82     0.55

Nonaccrual loans and loans past due 90 days and still accruing to total loans

     0.85     1.04     1.02     0.97     0.55

Non-performing assets (4) to total assets

     0.64     0.93     0.88     0.67     0.43

Allowance for loan losses to total loans

     1.52     1.53     1.53     1.50     1.19

Allowance for loan losses to non-accrual loans

     217.9     147.7     149.4     183.1     216.6

Net loan charge-offs to average loans (2)

     0.04     0.02     0.03     0.06     0.00

CAPITAL RATIOS (Consolidated)

          

Leverage ratio

     7.96     8.01     7.76     8.19     7.62

Risk-based Tier 1 capital ratio

     9.52     9.03     9.90     10.16     9.75

Risk-based total capital ratio

     10.77     10.28     11.15     11.41     10.94

Tangible common equity to tangible assets (1)

     7.92     5.51     5.50     5.60     5.65

 

(1) These measures are not measures recognized under generally accepted accounting principles (United States) (“GAAP”), and are therefore considered to be non-GAAP financial measures. See —“Non-GAAP Financial Measures” for a reconciliation of these measurers to their most comparable GAAP measures.
(2) Nine-month data has been annualized.
(3) Efficiency ratio is total non-interest expense divided by the sum of net interest income and total non-interest income (excluding securities gains/(losses)).
(4) Non-performing assets are deemed to be nonaccrual loans and OREO.
(5) Amount was restated for the nine months ended September 30, 2012. See Note 19 of Notes to Consolidated Financial Statements.

 

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Non-GAAP Financial Measures

The information set forth above contains certain financial information determined by methods other than in accordance with GAAP. These non-GAAP financial measures are “efficiency ratio,” “tangible common equity,” “tangible common equity to tangible assets” and “tangible book value per common share.” Although we believe these non-GAAP financial measures provide a greater understanding of our business, these measures are not necessarily comparable to similar measures that may be presented by other companies.

“Efficiency ratio” is defined as non-interest expenses divided by our operating revenue, which is equal to net interest income plus non-interest income excluding gains and losses on sales of securities. In our judgment, the adjustments made to operating revenue allow investors and analysts to better assess our operating expenses in relation to our core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items that are unrelated to our core business.

“Tangible common equity” is defined as common stockholders’ equity reduced by goodwill. We believe that this measure is important to many investors in the marketplace who are interested in changes from period to period in common stockholders’ equity exclusive of changes in intangible assets. Goodwill, an intangible asset that is recorded in a purchase business combination, has the effect of increasing both common equity and assets while not increasing our tangible common equity or tangible assets.

“Tangible common equity to tangible assets” is defined as the ratio of common equity reduced by goodwill divided by total assets reduced by goodwill. We believe that this measure is important to many investors in the marketplace who are interested in relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. Goodwill, an intangible asset that is recorded in a purchase business combination, has the effect of increasing both common equity and assets while not increasing our tangible common equity or tangible assets.

“Tangible book value per common share” is defined as tangible common stockholders’ equity divided by total common shares outstanding. We believe that this measure is important to many investors in the marketplace who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets. Goodwill, an intangible asset that is recorded in a purchase business combination, has the effect of increasing book value while not increasing our tangible book value.

 

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The information provided below reconciles each non-GAAP measure to its most comparable GAAP measure.

 

     (unaudited)        
     For the Nine Months Ended     For the Year Ended  
     September 30,     December 31,  
     2012     2011     2011     2010     2009  
     (Dollars in thousands, except per share data)  

Efficiency Ratio

          

Non-interest expense (numerator)

   $ 12,941      $ 10,641      $ 15,057      $ 12,941      $ 10,969   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     25,237        20,120        27,469        22,912        15,760   

Non-interest income

     815        733        1,113        900        415   

Less: gains on sales of securities

     —          (96     (96     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating revenue (denominator)

   $ 26,052      $ 20,757      $ 28,486      $ 23,812      $ 16,175   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency Ratio

     49.7     51.3     52.9     54.3     67.8

Tangible Common Equity and Tangible Common Equity/Tangible Assets

          

Common equity

   $ 70,229      $ 38,608      $ 40,353      $ 33,975      $ 29,350   

Less: intangible assets

     (260     (260     (260     (260     (260
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity

   $ 69,969      $ 38,348      $ 40,093      $ 33,715      $ 29,090   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 883,846      $ 696,494      $ 729,741      $ 602,377      $ 514,835   

Less: Intangible assets

     (260     (260     (260     (260     (260
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible assets

   $ 883,586      $ 696,234      $ 729,481      $ 602,117      $ 514,575   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible Common Equity/Tangible Assets

     7.92     5.51     5.50     5.60     5.65

Tangible Book Value per Common Share

          

Book Value Per Common Share

   $ 22.27      $ 17.21      $ 17.99      $ 15.16      $ 13.20   

Less: Effects of intangible assets

     (0.08     (0.11     (0.12     (0.12     (0.13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible Book Value per Common Share

   $ 22.19      $ 17.10      $ 17.87      $ 15.04      $ 13.07   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

RECENT DEVELOPMENTS

Impact of Hurricane Sandy

On October 29 and 30, 2012, Hurricane Sandy struck the New York metropolitan area, affecting our Northern and Central New Jersey trade area. The storm disrupted the operations of many businesses and caused significant property damage in many parts of New Jersey, including in our trade area. While the Bank was closed on October 29, all offices were reopened by October 30. Under our disaster recovery plan, those locations that did not have electrical service were powered by generators. None of our locations suffered significant damage. We were able to receive and process customer payments. While we waived overdraft and certain other fees for customers in the immediate aftermath of the storm, the costs incurred by the Bank were not significant, and the storm did not have a significant impact on our operations.

After the storm, we began contacting those customers located in areas known to have been damaged by Sandy. We saw an increase in loan delinquencies at October 31, 2012, and attempted to contact these customers to determine if, and to what extent, they were affected by the storm. By November 30, 2012, our loans past due thirty days or more had returned to a level comparable to that at September 30, 2012. While a number of our borrowers reported property damage and some disruption to their business operations, we do not believe that the storm’s adverse impact, if any, on the repayment ability of our borrowers or on the underlying collateral securing our loans, had or will have a material adverse effect on our financial condition, results of operations or cash flows. We base this assessment on the small number of borrowers affected and the fact that our borrower payment delinquency level had returned to pre-storm levels by November 30, 2012.

 

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Recent Financial Performance

The following tables contain certain information concerning the financial position and results of operations of ConnectOne Bancorp, Inc. at November 30, 2012, September 30, 2012 and December 31, 2011 and for the two months and eleven months ended November 30, 2012 and 2011. You should read this information in conjunction with the audited financial statements included in this prospectus beginning on page F-1. The financial information data at November 30, 2012 and September 30, 2012 and for the two months and eleven months ended November 30, 2012 and 2011 have not been audited but, in the opinion of management, contains all adjustments (consisting of only normal or recurring adjustments) necessary to present fairly our financial position and results of operations for such periods in accordance with generally accepted accounting principles. Financial information at December 31, 2011 is derived from ConnectOne Bancorp, Inc. audited consolidated financial statements. Results for the two-month and eleven-month periods ended November 30, 2012 may not be indicative of operations of ConnectOne Bancorp, Inc. for the year ending December 31, 2012.

 

     At November 30,
2012
    At December 31,
2011
 
     (Unaudited)        
     (Dollars in thousands, except per share data)  

SELECTED BALANCE SHEET DATA

    

Total assets

   $ 919,897      $ 729,741   

Total loans

     816,027        629,459   

Allowance for loan losses

     12,946        9,617   

Securities available for sale

     19,875        27,435   

Goodwill and other intangible assets

     260        260   

Deposits

     760,609        609,421   

Tangible common equity (1)

     71,379        40,093   

Total stockholders' equity

     71,639        56,857   

Book value per common share

   $ 22.64      $ 17.99   

Tangible book value per common share (1)

     22.56        17.87   

SELECTED ASSET QUALITY RATIOS

    

Nonaccrual loans to total loans

     0.98     1.02

Nonaccrual loans and loans past due 90 days and still accruing to total loans

     1.06     1.02

Non-performing assets (2) to total assets

     0.93     0.88

Allowance for loan losses to total loans

     1.59     1.53

Allowance for loan losses to non-accrual loans

     161.7     149.4

CAPITAL RATIOS (Consolidated)

    

Leverage ratio

     7.89     7.76

Risk-based Tier 1 capital ratio

     9.64     9.90

Risk-based total capital ratio

     10.90     11.15

Tangible common equity to tangible assets (1)

     7.76     5.50

 

     For the Two Months Ended
November 30,
    For the Eleven Months
Ended November 30,
 
     2012     2011     2012     2011  
     (Unaudited)     (Unaudited)  
     (Dollars in thousands, except per share amounts)  

SELECTED INCOME STATEMENT DATA

        

Interest income

   $ 7,243      $ 5,997      $ 37,205      $ 30,654   

Interest expense

     1,054        1,111        5,779        5,648   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     6,189        4,886        31,426        25,006   

Provision for loan losses

     750        153        3,590        2,355   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     5,439        4,733        27,836        22,651   

Non-interest income

     186        258        1,001        991   

Non-interest expense

     3,068        2,923        16,009        13,564   

Income tax expense

     1,027        833        5,181        4,063   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,530        1,235        7,647        6,015   

Dividends on preferred shares

     —          102        354        548   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 1,530      $ 1,133      $ 7,293      $ 5,467   
  

 

 

   

 

 

   

 

 

   

 

 

 

PER COMMON SHARE DATA:

        

Basic earnings per share

   $ 0.48      $ 0.51      $ 2.74      $ 2.43   

Diluted earnings per share

     0.47        0.42        2.39        1.96   

Basic weighted average common shares

     3,166,127        2,241,628        2,664,923        2,241,628   

Diluted weighted average common shares

     3,260,523        2,990,397        3,197,435        3,059,877   

SELECTED PERFORMANCE RATIOS

        

Return on average assets (3)

     1.02     1.04     1.02     1.00

Return on average common stockholders' equity (3)

     12.79     18.51     14.51     16.31

Net interest margin (3)

     4.16     4.15     4.23     4.21

Efficiency ratio (1) (4)

     48.1     56.8     49.4     52.4

Net loan charge-offs to average loans (3)

     0.04     0.06     0.04     0.03

 

(1) These measures are not measures recognized under GAAP. and are therefore considered to be non-GAAP financial measures. See —"Non-GAAP Financial Measures" for a reconciliation of these measurers to their most comparable GAAP measures.
(2) Non-performing assets are deemed to be nonaccrual loans and OREO.
(3) Data has been annualized.
(4) Efficiency ratio is total non-interest expense divided by the sum of net interest income and total non-interest income (excluding securities gains/(losses)).

 

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Non-GAAP Financial Measures

The information set forth above contains certain financial information determined by methods other than in accordance with GAAP. These non-GAAP financial measures are “efficiency ratio,” “tangible common equity,” “tangible common equity to tangible assets” and “tangible book value per common share.” We have defined these terms, in the way that we use them, on page 9. Although we believe these non-GAAP financial measures provide a greater understanding of our business, these measures are not necessarily comparable to similar measures that may be presented by other companies. The following tables provide a reconciliation of these measures to the closest GAAP financial measures:

 

     At November 30,
2012
    At December 31,
2011
 
     (Unaudited)        
     (Dollars in thousands, except per share data)  

Tangible Common Equity and Tangible Common Equity/Tangible Assets

    

Common equity

   $ 71,639      $ 40,353   

Less: intangible assets

     (260     (260
  

 

 

   

 

 

 

Tangible common equity

   $ 71,379      $ 40,093   
  

 

 

   

 

 

 

Total assets

     919,897        729,741   

Less: Intangible assets

     (260     (260
  

 

 

   

 

 

 

Tangible assets

   $ 919,637      $ 729,481   
  

 

 

   

 

 

 

Tangible Common Equity/Tangible Assets

     7.76     5.50

Tangible Book Value per Common Share

    

Book Value Per

    

Common Share

   $ 22.64      $ 17.99   

Less: Effects of intangible assets

     (0.08     (0.12
  

 

 

   

 

 

 

Tangible Book Value per Common Share

   $ 22.56      $ 17.87   
  

 

 

   

 

 

 

 

     For the Two
Months Ended
November 30,
    For the Eleven
Months Ended
November 30,
 
     2012     2011     2012     2011  
     (Unaudited)     (Unaudited)  
     (Dollars in thousands, except per share amounts)  

Efficiency Ratio

        

Non-interest expense
(numerator)

   $ 3,068      $ 2,923      $ 16,009      $ 13,564   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     6,189        4,886        31,426        25,006   

Non-interest income

     186        258        1,001        991   

Less: gains on sales of securities

     —          —          —          (96
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating revenue
(denominator)

   $ 6,375      $ 5,144      $ 32,427      $ 25,901   
  

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency Ratio

     48.1     56.8     49.4     52.4

Operating Results Overview

Net income for the two months ended November 30, 2012 and 2011 was $1.5 million and $1.2 million, respectively, while net income for the eleven months ended November 30, 2012 and 2011 was $7.6 million and $6.0 million, respectively. Net income available to common stockholders and diluted earnings per common share were $1.5 million and $0.47, respectively, for the two months ended November 30, 2012, versus $1.1 million and $0.42, respectively, for 2011. Net income available to common stockholders and diluted earnings per common share were $7.3 million and $2.39, respectively, for the eleven months ended November 30, 2012, versus $5.5 million and $1.96, respectively, for 2011. During 2012, all three series of preferred stock were converted into common shares and, as of November 30, 2012, no shares of preferred stock were outstanding.

The increases in net income, net income available to common stockholders, and diluted earnings per share were primarily attributable to significant increases in net interest income due to the Company’s rapid growth in loans and deposits. Partially offsetting the revenue increases were higher employee, occupancy and other operating expenses, commensurate with the Company’s growing infrastructure. Credit costs have kept pace with both loan growth and the changing mix of the loan portfolio, while benefiting from overall sound credit quality.

Restatement

        In our subsequent review of financial information for the nine months ended September 30, 2012 included in our initial confidential draft registration statement on Form S-1 filed with the Securities and Exchange Commission, we identified an error in the diluted earnings per share calculation for that period. The error resulted from an incorrect mathematical calculation used in the “if converted” method of calculating diluted earnings per share, specifically with respect to the number of days outstanding for the convertible preferred stock issuances which were converted entirely in 2012. The error had no impact on equity, net income, or net income available to common stockholders. As a result, we restated our diluted earnings per share disclosure in this prospectus, as disclosed in Note 19 – Restatement to the consolidated financial statements included herein.

When such errors occur, we evaluate the impact on our internal controls over financial reporting. Because our controls did not timely identify the error in the financial statements included in our initial confidential draft registration statement with respect to the nine months ended September 30, 2012, we have concluded that a material weakness existed with respect to this matter at September 30, 2012, which ultimately necessitated the aforementioned restatement. In reviewing calculations of diluted earnings per share for periods subsequent to September 30, 2012, our controls discovered the error and our calculation was modified to properly reflect the correct number of days outstanding, including the restatement of September 30, 2012 and the other affected period, the eleven months ended November 30, 2012 included in this prospectus. There was no effect on other periods presented as the error occurred only in the periods during which preferred stock was converted to common stock. Furthermore, since all of the shares of convertible preferred stock have been converted, there will be no effect on future period presentations. Management has concluded that the material weakness has been fully remediated as of November 30, 2012.

Net Interest Income

        For the two months ended November 30, 2012, net interest income was $6.2 million, an increase of $1.3 million, or 26.7%, compared to net interest income of $4.9 million for the same period in 2011. The increase in net interest income was largely attributable to growth in average interest-earning assets, principally loans, which increased by 26.4% to $893.3 million for 2012 from $706.9 million for the same period in 2011. The net interest margin remained relatively stable at 4.16% for the two months ended November 30, 2012 as compared to 4.15% in the prior year period, as reduced yields on our loan portfolio resulting from the continuing declining interest rate environment were offset by the lower weighted average cost of interest-bearing deposits combined with growth in non-interest-bearing demand deposits.

For the eleven months ended November 30, 2012, net interest income was $31.4 million, an increase of $6.4 million, or 25.6%, compared to net interest income of $25.0 million for the same period in 2011. The increase in net interest income was largely attributable to growth in average interest-earning assets, principally loans, which increased by 25.2% to $812.0 million for the eleven months dated November, 30, 2012 from $648.7 million for the same period in 2011. The net interest margin remained relatively stable at 4.23% for the eleven months ended November 30, 2012 as compared to 4.21% in the prior year period, as reduced yields on our loan portfolio resulting from the continuing declining interest rate environment were offset by the lower weighted average cost of interest-bearing deposits combined with growth in non-interest-bearing demand deposits.

 

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Provision for Loan Losses

The provision for loan losses was $0.8 million for the two months ended November 30, 2012 and $0.2 million for the comparable prior year period. For the eleven months ended November 30, 2012, the provision for loan losses was $3.6 million, while for the eleven months ended November 30, 2011 the provision for loan losses was $2.4 million. Although loan loss provisioning in all periods presented resulted, in part, from the growth in the loan portfolio, the increase in the two months ended and eleven months ended November 30, 2012 versus the prior year periods resulted largely from an increase in specific reserves.

Non-Interest Income

The Company’s non-interest income consists primarily of service charges on deposit accounts, gains on sale of residential mortgages, card (ATM, credit and debit cards) income and fees from a title insurance agency in which the Bank is a 49% owner. To date, the Bank has de-emphasized fee income, focusing instead on customer growth and retention.

Non-interest income amounted to $0.2 million for the two months ended November 30, 2012 versus $0.3 million for the two months ended November 30, 2011. Non-interest income was $1.0 million for both the eleven months ended November 30, 2012 and 2011.

Non-Interest Expense

For the two months ended November 30, 2012, non-interest expenses totaled $3.1 million, a $0.2 million, or 5.0%, increase from $2.9 million in the prior year period. This increase was primarily due to higher staff expenses ($0.1 million) and other expenses ($0.1 million) which include various items related to the Company’s growth and increased volume of business. For the eleven months ended November 30, 2012, noninterest expenses totaled $16.0 million, representing a $2.4 million, or 18.0%, increase over $13.6 million in the same period 2011. The year over year increase resulted from higher staff expenses ($1.4 million), related to an increase in the number of employees, and other expenses ($0.7 million), consistent with growth in the company’s infrastructure.

Income Taxes

We recorded income tax expense of $1.0 million for the two months ended November 30, 2012 compared to $0.8 million for the same period 2011. We recorded income tax expense of $5.2 million for the eleven months ended November 30, 2012 compared to $4.1 million for the same period 2011. The effective tax rate was 40% for all periods presented representing the combined federal and state statutory tax rates for a New Jersey corporation, and reflecting no tax-advantaged investments such as municipal securities or bank owned life insurance. Management has thus far taken a conservative approach to the Company’s tax position and is currently exploring various strategies to potentially lower our effective tax rates in the future.

Financial Condition

        Total assets as of November 30, 2012 were $919.9 million. This compares to total assets of $729.7 million as of December 31, 2011. Assets increased by 26.1% or $190.2 million from December 31, 2011 to November 30, 2012. This increase was primarily due to continued growth in our loan portfolio, specifically in commercial real estate loans ($156.2 million increase) and commercial loans ($24.2 million increase).

Liabilities totaled $848.3 million as of November 30, 2012. This compares to total liabilities of $672.9 million at December 31, 2011. Total liabilities increased by 26.1% or $175.4 million from December 31, 2011 to November 30, 2012. The increase was mainly due to an increase in deposits ($151.2 million) from $609.4 million at December 31, 2011 to $760.6 million at November 30, 2012. Our Federal Home Loan Bank borrowings also increased $24.0 million from $55.6 million at December 31, 2011 to $79.6 million at November 30, 2012. The increase in deposits was mainly seen in the following line items: non-interest demand ($48.4 million increase), certificates of deposit greater than $100,000 ($39.9 million increase), money market accounts ($33.5 million increase), and brokered certificates of deposit ($20.4 million increase), which was partially offset by a $10.6 million decline in savings account balances.

Total shareholders’ equity at November 30, 2012 was $71.6 million, an increase of $14.7 million from $56.9 million at December 31, 2011. The increase was largely due to net income ($7.3 million) as well as the proceeds from the issuance of preferred stock ($7.5 million).

Non-Performing Assets, TDRs, and Loans 90 Days Past Due and Accruing

The following table sets forth information concerning our non-performing assets, TDRs, and past-due accruing loans as of the dates indicated:

 

(dollars in thousands)

   As of
November 30,
2012
    As of
September 30,
2012
    As of
December 31,
2011
 

Nonaccrual loans:

      

Commercial

   $ 3,152      $ 3,135      $ 388   

Commercial real estate

     2,487        2,487        6,049   

Commercial construction

     —          —          —     

Residential real estate

     2,369        —          —     

Home equity

     —          —          —     

Consumer

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Total nonaccrual loans

     8,008 (1)      5,622        6,437   

Other real estate owned

     533        —          —     
  

 

 

   

 

 

   

 

 

 

Total non-performing assets (2)

   $ 8,541      $ 5,622      $ 6,437   
  

 

 

   

 

 

   

 

 

 

Loans past due 90 days and still accruing

   $ 638      $ 1,237      $ —     
  

 

 

   

 

 

   

 

 

 

Performing troubled debt restructured loans

   $ 1,909      $ 2,494      $ 4,831   
  

 

 

   

 

 

   

 

 

 

Nonaccrual loans to total loans

     0.98     0.70     1.02

Nonaccrual loans and loans past due 90 days and still accruing to total loans

     1.06     0.85     1.02

Non-performing assets to total assets

     0.93     0.64     0.88

 

1) The increase in nonaccrual loans is due to a single residential loan that became past due greater than 90 days during two-month period ending November 30, 2012. The loan is well secured and no specific impairment charges were required.
2) Non-performing assets are defined as nonaccrual loans plus OREO.

 

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RISK FACTORS

An investment in our common stock involves a substantial degree of risk and should be undertaken only by persons who can afford an investment involving such risks. An investment in our common stock is suitable only for persons who are interested in a long-term investment and can afford to lose their entire investment. Money invested in our common stock, unlike money deposited in a bank, will not be insured by the Federal Deposit Insurance Corporation (the “FDIC”) or any other entity or governmental authority and will not be interest earning. Persons interested in purchasing our common stock should carefully consider, among others, the following risks:

Risks Applicable to Our Business:

Nationwide economic weakness may adversely affect our business by reducing real estate values in our trade area and stressing the ability of our customers to repay their loans.

Our trade area, like the rest of the United States, is currently experiencing weak economic conditions. In addition, the financial services industry is a major employer in our trade area. The financial services industry has been adversely affected by current economic and regulatory factors. As a result, many companies have experienced reduced revenues and have laid off employees. These factors have stressed the ability of both commercial and consumer customers to repay their loans, and may result in higher levels of non-accrual loans. In addition, real estate values have declined in our trade area. Since the number of our loans secured by real estate represents a material segment of our overall loan portfolio, declines in the market value of real estate impact the value of the collateral securing our loans, and could lead to greater losses in the event of defaults on loans secured by real estate.

Our recent growth has substantially increased our expenses and impacted our results of operations.

As a strategy, we have focused on growth by aggressively pursuing business development opportunities, and we have grown rapidly since our incorporation. Our assets have grown from $179.8 million at December 31, 2006, to $883.8 million at September 30, 2012, representing a compound annual growth rate in excess of 30%. During that time, we have opened four new offices. Although we believe that our growth strategy will support our long term profitability and franchise value, the expense associated with our growth, including compensation expense for the employees needed to support this growth and leasehold and other expenses associated with our locations, has and may continue to negatively affect our results. In addition, in order for our most recently opened branches to contribute to our long term profitability, we will need to be successful in attracting and maintaining cost efficient deposits at these locations. In order to successfully manage our growth, we need to adopt and effectively implement policies, procedures and controls to maintain our credit quality and oversee our operations. We can give you no assurance that we will be successful in this strategy.

Our growth-oriented business strategy could be adversely affected if we are not able to attract and retain skilled employees.

We may not be able to successfully manage our business as a result of the strain on our management and operations that may result from growth. Our ability to manage growth will depend upon our ability to continue to attract, hire and retain skilled employees. Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational and other systems, to manage multiple, concurrent customer relationships and to hire, train and manage our employees.

We may need to raise additional capital to execute our growth oriented business strategy.

In order to continue our historic rate of growth, we will be required to maintain our regulatory capital ratios at levels higher than the minimum ratios set by our regulators. In light of current economic conditions, our regulators have been seeking higher capital bases for insured depository institutions experiencing strong growth. In addition, the implementation of certain new regulatory requirements, such as the Basel III accord and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), may establish higher tangible capital requirements for financial institutions. These developments may require us to raise additional capital in the future. We can offer you no assurances that we will be able to raise capital in the future, or that the terms of any such capital will be beneficial to our existing security holders. In the event we are unable to raise capital in the future, we may not be able to continue our growth strategy.

 

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We have a significant concentration in commercial real estate loans and commercial business loans.

Our loan portfolio is made up largely of commercial real estate loans and commercial business loans. These types of loans generally expose a lender to a higher degree of credit risk of non-payment and loss than do residential mortgage loans because of several factors, including dependence on the successful operation of a business or a project for repayment, the collateral securing these loans may not be sold as easily as residential real estate, and loan terms with a balloon payment rather than full amortization over the loan term. In addition, commercial real estate and commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to four-family residential mortgage loans. Underwriting and portfolio management activities cannot completely eliminate all risks related to these loans. Any significant failure to pay on time by our customers or a significant default by our customers would materially and adversely affect us.

At September 30, 2012, we had $526.0 million of commercial real estate loans, which represented 65.4% of our total loan portfolio. Our commercial real estate loans include loans secured by multi-family, owner occupied and non-owner occupied properties for commercial uses. In addition, we make both secured and unsecured commercial and industrial loans. At September 30, 2012, we had $131.5 million of commercial business loans, which represented 16.3% of our total loan portfolio. Unsecured loans generally involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’ businesses. Secured commercial and industrial loans are generally collateralized by accounts receivable, inventory, equipment or other assets owned by the borrower and typically include a personal guaranty of the business owner. Compared to real estate, that type of collateral is more difficult to monitor, its value is harder to ascertain, it may depreciate more rapidly and it may not be as readily saleable if repossessed.

The real estate markets in our market area have deteriorated in the last several years. However, various sources, including the Federal Reserve Open Market Committee, Reuters and Reis, Inc. now indicate that both the U.S. economy generally and the economy in our trade area are expanding at a moderate pace. Reuters, (globally) and Reis, Inc., locally, indicated that they feel the rental market will remain strong and improve throughout 2013 and for the two years beyond. Further, the FOMC indication that rates will remain stable throughout 2013 and perhaps even as far as 2015 will contribute to a stable market in this sector.

With regard to multi-family properties, according to the Reis report, the local vacancy rate of roughly 4% was half of the 8% reported in 2009, and fell to its locally lowest level in more than a decade. REIS reported earlier in 2012, that they expected the market to remain strong through the balance of 2012 and throughout 2013.

With regard to non-owner occupied commercial real estate, The Bergen Record, a newspaper covering our Northern New Jersey trade area, reported in October that the amount of empty retail space along highways in Northern and Central New Jersey reached the lowest level in 3 1/2 years in July, dropping to 7.7%, according to a survey performed by the retail brokerage firm known as the Goldstein Group. In that survey it was indicated that the vacancy rates would continue to decline in 2012 and 2013, although the survey acknowledged that a longer period of time would be required for this area to return to the 4% and 5% vacancy rates experienced in 2007 and 2008.

That survey also indicated that commercial (including office) space vacancy remained at approximately 17% largely as a result of continuing negative absorption as additional space continues to come on the market. Class B space vacancies also remains at approximately 16%, also largely as a result of negative absorption.

Loans secured by owner-occupied real estate and commercial and industrial loans are both reliant on the operating businesses to provide cash flow to meet debt service obligations, and as a result they are more susceptible to the general impact on the economic environment affecting those operating companies as well as the real estate. As discussed above, the general consensus is that both the national economy generally and the economy in our service area are improving slowly. PNC’s Northern New Jersey Outlook indicates that the economy in Northern New Jersey will grow slowly and that payroll growth will be softer than the national average in 2013 as the impact of the European economy and reduced European imports is felt more in the Northeast and as the federal income tax increases cut into disposable income and increase the drag on spending. The Outlook does predict increased growth in the second half of 2013.

Although the economy in our market area generally, and the real estate market in particular, is improving slowly, we can give you no assurance that it will continue to grow or that the rate of growth will accelerate to historical levels. Many factors, including continuing European economic difficulties could reduce or halt growth in our local economy and real estate market. Accordingly, it may be more difficult for commercial real estate borrowers to repay their loans in a timely manner in the current economic climate, as commercial real estate borrowers’ ability to repay their loans frequently depends on the successful development of their properties. The deterioration of one or a few of our commercial real estate loans could cause a material increase in our level of nonperforming loans, which would result in a loss of revenue from these loans and could result in an increase in the provision for loan losses and/or an increase in charge-offs, all of which could have a material adverse impact on our net income. We also may incur losses on commercial real estate loans due to declines in occupancy rates and rental rates, which may decrease property values and may decrease the likelihood that a borrower may find permanent financing alternatives. Given the continued weaknesses in the commercial real estate market in general, there may be loans where the value of our collateral has been negatively impacted. The weakening of the commercial real estate market may increase the likelihood of default of these loans, which could negatively impact our loan portfolio’s performance and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, we could incur material losses. Any of these events could increase our costs, require management time and attention, and materially and adversely affect us.

Federal banking agencies have issued guidance regarding high concentrations of commercial real estate loans within bank loan portfolios. The guidance requires financial institutions that exceed certain levels of commercial real estate lending compared with their total capital to maintain heightened risk management practices that address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. If there is any deterioration in our commercial real estate portfolio or if our regulators conclude that we have not implemented appropriate risk management practices, it could adversely affect our business, and could result in the requirement to maintain increased capital levels. Such capital may not be available at that time, and may result in our regulators requiring us to reduce our concentration in commercial real estate loans.

 

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The nature of our commercial loan portfolio may expose us to increased lending risks.

Given the significant growth in our loan portfolio, many of our commercial real estate loans are unseasoned, meaning that they were originated relatively recently. As of November 30, 2012, we had $531.9 million in commercial real estate loans outstanding. Approximately seventy-five percent (75%) of the loans, or $401.5 million, had been originated in the past three years. Our limited experience with these loans does not provide us with a significant payment history pattern with which to judge future collectability. As a result, it may be difficult to predict the future performance of our loan portfolio. These loans may have delinquency or charge-off levels above our expectations, which could negatively affect our performance.

The small to medium-sized businesses that the Bank lends to may have fewer resources to weather a downturn in the economy, which may impair a borrower’s ability to repay a loan to the Bank that could materially harm our operating results.

The Bank targets its business development and marketing strategy primarily to serve the banking and financial services needs of small to medium-sized businesses. These small to medium-sized businesses frequently have smaller market share than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience significant volatility in operating results. Any one or more of these factors may impair the borrower’s ability to repay a loan. In addition, the success of a small to medium-sized business often depends on the management talents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay a loan. Economic downturns and other events that negatively impact our market areas could cause the Bank to incur substantial credit losses that could negatively affect our results of operations and financial condition.

Regulatory changes allowing the payment of interest on commercial accounts may negatively impact our core deposit strategy and our net interest income.

Our current core deposit strategy includes continuing to increase our noninterest-bearing commercial accounts in order to lower our cost of funds. Recent changes effected by the Dodd-Frank Act, however, permit the payment of interest on such accounts, which was previously prohibited. If our competitors begin paying interest on commercial accounts, this may increase competition from other financial institutions for these deposits and negatively affect our ability to continue to increase commercial deposit accounts, may require us to consider paying interest on such accounts, or may otherwise require us to revise our core deposit strategy, any of which could increase our interest expense and therefore our cost of funds and, as a result, decrease our net interest income which would adversely impact our results of operations.

The loss of our Chairman and Chief Executive Officer could hurt our operations.

We rely heavily on our Chairman and Chief Executive Officer, Frank Sorrentino III. Mr. Sorrentino has served as Chief Executive Officer of the Bank for five years. It was Mr. Sorrentino who originally conceived of the business idea of organizing North Jersey Community Bank, and he spearheaded the efforts to organize the Bank in 2005. The loss of Mr. Sorrentino could have a material adverse effect on us, as he is central to virtually all aspects of our business operations and management. In addition, as a small community bank, we have fewer management-level personnel who are in position to succeed and assume the responsibilities of Mr. Sorrentino. For further information, see “Management.”

Our lending limit may restrict our growth.

We are limited in the amount we can loan to a single borrower by the amount of our capital. Generally, under current law, we may lend up to 15% of our unimpaired capital and surplus to any one borrower. Based upon our current capital levels, the amount we may lend is significantly less than that of many of our competitors and may discourage potential borrowers who have credit needs in excess of our lending limit from doing business with us. We accommodate larger loans by selling participations in those loans to other financial institutions, but his strategy may not always be available.

 

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We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.

We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected.

Historically low interest rates may adversely affect our net interest income and profitability.

During the last four years it has been the policy of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a result, yields on securities we have purchased, and to a lesser extent, market rates on the loans we have originated, have been at levels lower than were available prior to 2008. Consequently, the average yield on our interest-earning assets has decreased during the recent low interest rate environment. As a general matter, our interest-bearing liabilities re-price or mature more quickly than our interest-earning assets, which has contributed to increases in net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) in the short term. However, our ability to lower our interest expense is limited at these interest rate levels, while the average yield on our interest-earning assets may continue to decrease. The Federal Reserve has indicated its intention to maintain low interest rates in the near future. Accordingly, our net interest income may decrease, which may have an adverse affect on our profitability. For information with respect to changes in interest rates, see “Risk Factors—Changes in interest rates may adversely affect our earnings and financial condition.”

Anti-takeover provisions in our corporate documents and in New Jersey corporate law may make it difficult and expensive to remove current management.

Anti-takeover provisions in our corporate documents and in New Jersey law may render the removal of our existing board of directors and management more difficult. Consequently, it may be difficult and expensive for our stockholders to remove current management, even if current management is not performing adequately. See “Description of our Capital Stock” for a description of anti-takeover provisions in our corporate documents and under New Jersey law.

Competition from other financial institutions in originating loans and attracting deposits may adversely affect our profitability.

We face substantial competition in originating loans. This competition comes principally from other banks, savings institutions, mortgage banking companies, credit unions and other lenders. Many of our competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce our net income by decreasing the number and size of loans that we originate and the interest rates we may charge on these loans.

In attracting deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect our ability to generate the funds necessary for lending operations which may increase our cost of funds.

 

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We also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, insurance companies and governmental organizations which may offer more favorable terms. Some of our non-bank competitors are not subject to the same extensive regulations that govern our operations. As a result, such non-bank competitors may have advantages over us in providing certain products and services. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our earnings and financial condition.

Hurricanes or other adverse weather events could negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.

Hurricanes and other weather events can disrupt our operations, result in damage to our properties and negatively affect the local economies in which we operate. In addition, these weather events may result in a decline in value or destruction of properties securing our loans and an increase in delinquencies, foreclosures and loan losses.

Risks Related to Investing in Our Common Stock:

No public market currently exists for our common stock.

Prior to this offering, there has not been a public trading market for our common stock. An active trading market may not develop or be sustained after this offering. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. The initial public offering price for our common stock sold in this offering will be determined by negotiations between us and the underwriters. This price may not be indicative of the price at which our common stock will trade after this offering. The market price of our common stock may decline below the initial offering price, and you may not be able to sell your common stock at or above the price you paid in this offering, or at all.

Investors in this offering will experience immediate and substantial dilution in the tangible book value of their investment.

We expect the public offering price of our common stock in this offering to be higher than the tangible book value per share of our common stock immediately after this offering. Therefore, if you invest in our common stock in this offering, you will incur an immediate dilution of $[        ] in tangible book value per share from the price you paid. The exercise of outstanding options would result in further dilution in tangible book value per share from the price you paid since the weighted average exercise price of outstanding stock options is $[        ] per share. For a further description of the dilution you will experience immediately after this offering, see “Dilution.”

We have broad discretion to use the proceeds of this offering.

We have broad discretion in applying the net proceeds received from this offering. We have not allocated specific amounts of the net proceeds to specific purposes and will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. See the “Use of Proceeds” section.

 

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We are an emerging growth company, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors. In addition, our election not to opt out of the JOBS Act extended accounting transition period may make our financial statements less easily comparable to the financial statements of other companies.

We are an EGC, as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.

In addition, Section 102(b)(1) of the JOBS Act exempts EGCs from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an EGC, will adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

We do not expect to pay cash dividends on shares of our common stock after completion of this offering.

We have not paid cash dividends on our common stock since the formation of the Bank in 2005, and expect that we will continue to retain earnings to augment our capital base and finance future growth. Therefore, investors should not purchase shares of common stock in this offering with a view for a current return on their investment in the form of cash dividends.

The market price of our common stock may be volatile, which could cause the value of an investment in our common stock to decline.

The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:

 

   

general market conditions;

 

   

domestic and international economic factors unrelated to our performance;

 

   

actual or anticipated fluctuations in our quarterly operating results;

 

   

downgrades in securities analysts’ estimates of our financial performance or lack of research and reports by industry analysts;

 

   

changes in market valuations or earnings of similar companies;

 

   

any future sales of our common stock or other securities; and

 

   

additions or departures of key personnel.

The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies.

The restatement of our September 30, 2012 earnings per share may indicate a weakness in our internal controls over financial reporting.

In our subsequent review of financial information for the nine months ended September 30, 2012 included in our initial confidential draft registration statement on Form S-1 filed with the Securities and Exchange Commission, we identified an error in the diluted earnings per share calculation for that period. The error resulted from an incorrect mathematical calculation used in the “if converted” method of calculating diluted earnings per share, specifically with respect to the number of days outstanding for the convertible preferred stock issuances which were converted entirely in 2012. The error had no impact on equity, net income, or net income available to common stockholders. As a result, we restated our diluted earnings per share disclosure in this prospectus, as disclosed in Note 19 – Restatement to the consolidated financial statements included herein.

When such errors occur, we evaluate the impact on our internal controls over financial reporting. Because our controls did not timely identify the error in the financial statements included in our initial confidential draft registration statement with respect to the nine months ended September 30, 2012, we have concluded that a material weakness existed with respect to this matter at September 30, 2012, which ultimately necessitated the aforementioned restatement. In reviewing calculations of diluted earnings per share for periods subsequent to September 30, 2012, our controls discovered the error and our calculation was modified to properly reflect the correct number of days outstanding, including the restatement of September 30, 2012 and the other affected period, the eleven months ended November 30, 2012 included in this prospectus. There was no effect on other periods presented as the error occurred only in the periods during which preferred stock was converted to common stock. Furthermore, since all of the shares of convertible preferred stock have been converted, there will be no effect on future period presentations. Management has concluded that the material weakness has been fully remediated as of November 30, 2012. However, we can give you no assurances that we may not discover additional material weaknesses in our internal controls over financial reporting in the future, or that these weaknesses may not have a material adverse effect on our results of operations or financial condition. Furthermore, such failure could also adversely affect the results of the periodic management evaluations regarding the effectiveness of our internal controls over financial reporting.

 

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Risks Applicable to the Banking Industry Generally:

The financial services industry is undergoing a period of great volatility and disruption.

Beginning in mid 2007, there has been significant turmoil and volatility in global financial markets. Nationally, economic factors including inflation, recession, a rise in unemployment, a weakened US dollar, dislocation and volatility in the credit markets, and rising consumer costs persist. Recent market uncertainty regarding the financial sector has increased. In addition to the impact on the economy generally, changes in interest rates, in the shape of the yield curve, or in valuations in the debt or equity markets or disruptions in the liquidity or other functioning of financial markets, all of which have been seen recently, could directly impact us in one or more of the following ways:

 

   

Net interest income, the difference between interest earned on our interest earning assets and interest paid on interest bearing liabilities, represents a significant portion of our earnings. Both increases and decreases in the interest rate environment may reduce our profits. We expect that we will continue to realize income from the spread between the interest we earn on loans, securities and other interest-earning assets, and the interest we pay on deposits, borrowings and other interest-bearing liabilities. The net interest spread is affected by the differences between the maturity and repricing characteristics of our interest-earning assets and interest-bearing liabilities. Our interest-earning assets may not reprice as slowly or rapidly as our interest-bearing liabilities.

 

   

The market value of our securities portfolio may decline and result in other than temporary impairment charges. The value of securities in our portfolio is affected by factors that impact the U.S. securities market in general as well as specific financial sector factors and entities. Recent uncertainty in the market regarding the financial sector has negatively impacted the value of securities within our portfolio. Further declines in these sectors may result in future other than temporary impairment charges.

 

   

Asset quality may deteriorate as borrowers become unable to repay their loans.

Our allowance for loan losses may not be adequate to cover actual losses.

Like all financial institutions, we maintain an allowance for loan losses to provide for loan defaults and nonperformance. The process for determining the amount of the allowance is critical to our financial results and conditions. It requires difficult, subjective and complex judgments about the future, including the impact of national and regional economic conditions on the ability of our borrowers to repay their loans. If our judgment proves to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio. Further, state and federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses and may require an increase in our allowance for loan losses.

At September 30, 2012, our allowance for loan losses as a percentage of total loans was 1.52% and as a percentage of total non-accrual loans was 217.9%. Although we believe that our allowance for loan losses is adequate to cover known and probable incurred losses included in the portfolio, we cannot assure you that we will not further increase the allowance for loan losses or that our regulators will not require us to increase this allowance. Either of these occurrences could adversely affect our earnings.

Changes in interest rates may adversely affect our earnings and financial condition.

Our net income depends primarily upon our net interest income. Net interest income is the difference between interest income earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and borrowed funds. The level of net interest income is primarily a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by such external factors as the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the Federal Reserve Board of Governors (the “FOMC”), and market interest rates.

 

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A sustained increase in market interest rates could adversely affect our earnings if our cost of funds increases more rapidly than our yield on our earning assets, and compresses our net interest margin. In addition, the economic value of portfolio equity would decline if interest rates increase. For example, we estimate that as of September 30, 2012, a 200 basis point increase in interest rates would have resulted in our economic value of portfolio equity declining by approximately $14.3 million or 13.76%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensitivity Analysis.”

Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. We expect that we will periodically experience gaps in the interest rate sensitivities of our assets and liabilities. That means either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets, an increase in market rates of interest could reduce our net interest income. Likewise, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could reduce our net interest income. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, deflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets.

We also attempt to manage risk from changes in market interest rates, in part, by controlling the mix of interest rate sensitive assets and interest rate sensitive liabilities. However, interest rate risk management techniques are not exact. A rapid increase or decrease in interest rates could adversely affect our results of operations and financial performance.

The banking business is subject to significant government regulations.

We are subject to extensive governmental supervision, regulation and control. These laws and regulations are subject to change, and may require substantial modifications to our operations or may cause us to incur substantial additional compliance costs. In addition, future legislation and government policy could adversely affect the commercial banking industry and our operations. Such governing laws can be anticipated to continue to be the subject of future modification. Our management cannot predict what effect any such future modifications will have on our operations. In addition, the primary focus of Federal and state banking regulation is the protection of depositors and not the shareholders of the regulated institutions.

For example, the Dodd-Frank Act may result in substantial new compliance costs. The Dodd-Frank Act was signed into law on July 21, 2010. Generally, the Dodd-Frank Act is effective the day after it was signed into law, but different effective dates apply to specific sections of the law, many of which will not become effective until various Federal regulatory agencies have promulgated rules implementing the statutory provisions. Uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which could have a material adverse impact either on the financial services industry as a whole, or on our business, results of operations and financial condition.

The following aspects of the financial reform and consumer protection act are related to the operations of the Bank:

 

   

A new independent consumer financial protection bureau was established within the Federal Reserve, empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. However, smaller financial institutions, like the Bank, are subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.

 

   

Tier 1 capital treatment for “hybrid” capital items like trust preferred securities is eliminated subject to various grandfathering and transition rules.

 

   

The prohibition on payment of interest on demand deposits was repealed, effective July 21, 2011.

 

   

Deposit insurance is permanently increased to $250,000 and unlimited deposit insurance for noninterest-bearing transaction accounts extended through the end of 2012.

 

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The deposit insurance assessment base calculation now equals the depository institution’s total assets minus the sum of its average tangible equity during the assessment period.

 

   

The minimum reserve ratio of the Deposit Insurance Fund increased to 1.35 percent of estimated annual insured deposits or assessment base; however, the FDIC is directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.

The following aspects of the financial reform and consumer protection act are related to the operations of the Company:

 

   

The Federal Deposit Insurance Act was amended to direct federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries.

 

   

The Securities and Exchange Commission is authorized to adopt rules requiring public companies to make their proxy materials available to shareholders for nomination of their own candidates for election to the board of directors.

 

   

Public companies are now required to provide their shareholders with a non-binding vote: (i) at least once every three years on the compensation paid to executive officers, and (ii) at least once every six years on whether they should have a “say on pay” vote every one, two or three years.

 

   

A separate, non-binding shareholder vote is now required regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments.

 

   

Securities exchanges are now required to prohibit brokers from using their own discretion to vote shares not beneficially owned by them for certain “significant” matters, which include votes on the election of directors, executive compensation matters, and any other matter determined to be significant.

 

   

Stock exchanges are prohibited from listing the securities of any issuer that does not have a policy providing for (i) disclosure of its policy on incentive compensation payable on the basis of financial information reportable under the securities laws, and (ii) the recovery from current or former executive officers, following an accounting restatement triggered by material noncompliance with securities law reporting requirements, of any incentive compensation paid erroneously during the three-year period preceding the date on which the restatement was required that exceeds the amount that would have been paid on the basis of the restated financial information.

 

   

Disclosure in annual proxy materials will be required concerning the relationship between the executive compensation paid and the financial performance of the issuer.

 

   

Item 402 of Regulation S-K will be amended to require companies to disclose the ratio of the Chief Executive Officer’s annual total compensation to the median annual total compensation of all other employees.

 

   

Smaller reporting companies are exempt from complying with the internal control auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, adopted Basel III in September 2010, which constitutes a strengthened set of capital requirements for banking organizations in the United States and around the world. Basel III is currently the subject of notices of proposed rulemakings released in June of 2012 by the respective U.S. federal banking agencies. The comment period for these notices of proposed rulemakings ended on October 22, 2012. Basel III is intended to be implemented beginning January 1, 2013 and to be fully-phased in on a global basis on January 1, 2019. Basel III would require capital to be held in the form of tangible common equity, generally increase the required capital ratios, phase out certain kinds of intangibles treated as capital and certain types of instruments and change the risk weightings of assets used to determine required capital ratios. However, on November 9, 2012, the U.S. federal banking agencies announced that they do not expect that any of the proposed rules would become effective on January 1, 2013. They did not indicate the likely new effective date.

 

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These provisions, as well as any other aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, may impact the profitability of our business activities and may change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations in order to comply, and could therefore also materially and adversely affect our business, financial condition and results of operations.

Our management is actively reviewing the provisions of the Dodd-Frank Act and Basel III, many of which are to be phased-in over the next several months and years, and assessing the probable impact on our operations. However, the ultimate effect of these changes on the financial services industry in general, and us in particular, is uncertain at this time.

See “Supervision and Regulation.”

Our securities are not FDIC insured.

Our securities are not savings or deposit accounts or other obligations of any bank and are not insured by the FDIC, the Deposit Insurance Fund or any other governmental agency and are subject to investment risk, including the possible loss of principal.

The laws that regulate our operations are designed for the protection of depositors and the public, not our shareholders.

The federal and state laws and regulations applicable to our operations give regulatory authorities extensive discretion in connection with their supervisory and enforcement responsibilities, and generally have been promulgated to protect depositors and the Deposit Insurance Fund and not for the purpose of protecting shareholders. These laws and regulations can materially affect our future business. Laws and regulations now affecting us may be changed at any time, and the interpretation of such laws and regulations by bank regulatory authorities is also subject to change.

We can give no assurance that future changes in laws and regulations or changes in their interpretation will not adversely affect our business. Legislative and regulatory changes may increase our cost of doing business or otherwise adversely affect us and create competitive advantages for non-bank competitors.

The potential impact of changes in monetary policy and interest rates may negatively affect our operations.

Our operating results may be significantly affected (favorably or unfavorably) by market rates of interest that, in turn, are affected by prevailing economic conditions, by the fiscal and monetary policies of the United States government and by the policies of various regulatory agencies. Our earnings will depend significantly upon our interest rate spread (i.e., the difference between income earned on our loans and investments and the interest paid on our deposits and borrowings). Like many financial institutions, we may be subject to the risk of fluctuations in interest rates, which, if significant, may have a material adverse effect on our operations.

 

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We cannot predict how changes in technology will impact our business; increased use of technology may expose us to service interruptions or breaches in security.

The financial services market, including banking services, is increasingly affected by advances in technology, including developments in:

 

   

Telecommunications;

 

   

Data processing;

 

   

Automation;

 

   

Internet-based banking, including personal computers, mobile phones and tablets;

 

   

Telephone banking;

 

   

Debit cards and so-called “smart cards”; and

 

   

Remote deposit capture.

Our ability to compete successfully in the future will depend, to a certain extent, on whether we can anticipate and respond to technological changes. We offer electronic banking services for our consumer and business customers via our website, www.njcb.com, including internet banking and electronic bill payment, as well as mobile banking by phone. We also offer check cards, ATM cards, credit cards, and automatic and ACH transfers. The successful operation and further development of these and other new technologies will likely require additional capital investments in the future. In addition, increased use of electronic banking creates opportunities for interruptions in service or security breaches which could expose us to claims by customers or other third parties. We cannot assure you that we will have sufficient resources or access to the necessary proprietary technology to remain competitive in the future, or that we will be able to maintain a secure electronic environment.

If and when the Bank becomes subject to increased internal control reporting under FDIC regulations, if it cannot favorably assess the effectiveness of its internal controls over financial reporting or if its independent registered public accounting firm is unable to provide an unqualified attestation report on the Bank’s internal controls, we may be subject to additional regulatory scrutiny.

If and when the Bank’s total assets exceed $1.0 billion, it will be subject to further reporting requirements under the rules of the FDIC as of for the fiscal year in which it exceeds such threshold. Pursuant to these rules, management will be required to prepare a report that contains an assessment by management of the Bank’s effectiveness of internal control structure and procedures for financial reporting as of the end of such fiscal year. The Bank will also be required to obtain an independent public accountant’s attestation report concerning its internal control structure over financial reporting that includes the call report and/or the FR Y-9C report. The rules that must be met for management to assess the Bank’s internal controls over financial reporting are complex, and require significant documentation, testing and possible remediation. The effort to comply with regulatory requirements relating to internal controls will likely cause us to incur increased expenses and will cause a diversion of management’s time and other internal resources. We also may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of the Bank’s internal controls over financial reporting. In addition, in connection with the attestation process, the Bank may encounter problems or delays in completing the implementation of any requested improvements or receiving a favorable attestation from its independent registered public accounting firm. If the Bank cannot favorably assess the effectiveness of its internal controls over financial reporting, or if its independent registered public accounting firm is unable to provide an unqualified attestation report on the Bank’s internal controls, investor confidence and the price of our common stock could be adversely affected and we may be subject to additional regulatory scrutiny.

USE OF PROCEEDS

Assuming an initial public offering price as set forth on the cover page of this prospectus, we estimate that the net proceeds to us from the sale of our common stock in this offering will be $            (or $            if the underwriters exercise in full their option to purchase additional shares of common stock from us), after deducting estimated underwriting discounts and offering expenses.

 

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We intend to contribute substantially all of the net proceeds of the offering to the Bank for use as follows: (i) to support growth in the Bank’s loan and investment portfolios; (ii) to acquire other banks or financial institutions, to the extent such opportunities arise; and (iii) for general corporate purposes while maintaining our capital ratios at acceptable levels. In addition, a larger capital base will increase our legal lending limit and permit us to make larger loans, and to better penetrate our market areas.

Proceeds held by us will be invested in short term investments until needed for the uses described above. At the current time, we neither have any agreements nor are we engaged in any negotiations to make any acquisitions, but are constantly evaluating opportunities to do so.

DIVIDEND POLICY

We intend to follow a policy of retaining earnings, if any, to increase our net worth and capital ratios over the next few years. We have not historically declared or paid dividends on our common stock and any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including our earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to our common stock, and other factors deemed relevant by our board of directors.

DILUTION

If you invest in our common stock, your ownership interest will be diluted by the amount by which the initial offering price per share paid by the purchasers of common stock in this offering exceeds the tangible book value per share of our common stock immediately following this offering. As of September 30, 2012, our tangible book value was approximately $70.0 million or $22.19 per share based on 3,152,951 shares of common stock issued and outstanding. Tangible book value per share represents common stockholders’ equity less intangible assets and goodwill, divided by the number of shares of common stock outstanding.

Our pro forma tangible book value, as of September 30, 2012 would have been approximately $            , or $            per share based on             shares of common stock issued and outstanding, after giving effect to the sale by us of 1,600,000 shares of common stock in this offering at an initial public offering price as set forth on the cover page to this prospectus, after deducting the estimated underwriting discounts and offering expenses.

This represents an immediate increase in the tangible book value of $            per share to existing stockholders and an immediate dilution in the tangible book value of $            per share to the new investors who purchase our common stock in this offering.

The following table illustrates the immediate per share dilution to new investors as of September 30, 2012:

 

Offering price per share

      $                

Tangible common book value per share before offering

   $ 22.19      

Increase in tangible book value per share attributable to this Offering

     
  

 

 

    

Pro forma tangible book value per share after this offering

      $                
     

 

 

 

Dilution per share to new investors

      $                
     

 

 

 

The following table compares the average price paid per share by all existing shareholders of the Company with the price to be paid by investors purchasing our common stock in this offering:

 

     Existing
Stockholders
     New
Investors
 

Shares purchased

     3,152,951      

Total consideration

   $ 51,205,000       $            

Average price per share

   $ 16.24       $     

CAPITALIZATION

The following table sets forth our consolidated capitalization as of September 30, 2012, on an actual basis and on a pro forma basis as adjusted to give effect to this offering, at an offering price as set forth on the cover page to this prospectus, after deducting the estimated underwriting discounts and offering expenses per share and no exercise of the underwriter’s over-allotment option. You should read this information together with our consolidated financial statements and related notes, which are included elsewhere in this prospectus.

 

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     September 30, 2012  
     Actual          Pro forma  
     (Dollars in thousands, except
per share data)
 

Long-term debt:

         

Long-term borrowings

   $ 79,829           $ 79,829   
  

 

 

        

 

 

 

Stockholders’ equity:

         
 

Preferred stock, no par value, 1,000,000 shares authorized

   $ —            

Common stock, no par value, per share, 10,000,000 shares authorized, 3,152,951 shares outstanding and             shares outstanding, as adjusted

     51,205          

Retained earnings

     18,357             18,357   

Accumulated other comprehensive income

     667             607   
  

 

 

        

 

 

 

Total stockholders’ equity:

   $ 70,229          
  

 

 

        

Total capitalization

   $ 150,058          
  

 

 

        

Book value per common share

   $ 22.27          

Tangible book value per common share

   $ 22.19          

The Company and the Bank both meet the regulatory capital requirements applicable to them under federal banking regulations. The following table sets forth our capital ratios as of September 30, 2012, and as adjusted to give effect, after deducting estimated offering expenses and underwriting discounts, to the sale of the common stock offered by this prospectus, as well as the minimum required regulatory capital.

 

     AMOUNT    RATIO       
     Actual:      Adjusted:    Actual:     Adjusted (1):    Minimum
Requirement
 

The Company:

             

Leverage Capital

   $ 69,252            7.96        4.00

Risk-Based Tier 1 Capital

     69,252            9.52        4.00

Risk-Based Total Capital

     78,385            10.77        8.00

The Bank (2):

             

Leverage Capital

   $ 69,182            7.95        4.00

Risk-Based Tier 1 Capital

     69,182            9.51        4.00

Risk-Based Total Capital

     78,315            10.77        8.00

 

(1) Assumes net proceeds of the offering are invested in assets with a 20% risk weighting.
(2) Assumes substantially all of the net proceeds are contributed to the Bank.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Critical Accounting Policies and Estimates

“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to our audited consolidated financial statements included in this prospectus contains a summary of our significant accounting policies. Management believes our policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and our Board of Directors.

The allowance for loan losses is based upon management’s evaluation of the adequacy of the allowance, including an assessment of known and probable incurred losses included in the portfolio, including giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of our loans are secured by real estate in the State of New Jersey. Accordingly, the collectability of a substantial portion of the carrying value of our loan portfolio is susceptible to changes in local market conditions and may be adversely affected by declines in real estate values, or if the Central or Northern areas of New Jersey experience an adverse economic shock. Future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond our control.

As indicated in Note 19 to the Notes to Consolidated Financial Statements, the Company has restated its diluted earnings per share disclosure for the nine months ended September 30, 2012. The discussion in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” gives effect to the restatement. See also “Recent Developments—Operating Results Overview” and “Risk Factors—Risks Related to Investing in Our Common Stock.”

Overview and Strategy

We serve as a holding company for the Bank, which is our primary asset and only operating subsidiary. We follow a business plan that emphasizes the delivery of customized banking services in our market area to customers who desire a high level of personalized service and responsiveness. The Bank conducts a traditional banking business, making commercial loans, consumer loans and residential and commercial real estate loans. In addition, the Bank offers various non-deposit products through non-proprietary relationships with third party vendors. The Bank relies upon deposits as the primary funding source for its assets. The Bank offers traditional deposit products.

Many of our customer relationships start with referrals from existing customers. We then seek to cross sell our products to customers to grow the customer relationship. For example, we will frequently offer an interest rate concession on credit products for customers that maintain a non-interest bearing deposit account at the Bank. This strategy has lowered our funding costs and helped slow the growth of our interest expense even as we have substantially increased our total deposits. It has also helped fuel our significant loan growth. We believe that the Bank’s significant growth and increasing profitability demonstrate the need for and success of our brand of banking.

Our results of operations depend primarily on our net interest income, which is the difference between the interest earned on our interest-earning assets and the interest paid on funds borrowed to support those assets, primarily deposits. Net interest margin is the difference between the weighted average rate received on interest-earning assets and the weighted average rate paid to fund those interest-earning assets, which is also affected by the average level of interest-earning assets as compared with that of interest-bearing liabilities. Net income is also affected by the amount of non-interest income and non-interest expenses.

 

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Operating Results Overview

Net income for the nine months ended September 30, 2012 and 2011 was $6.1 million and $4.8 million, respectively, while net income for the years ended December 31, 2011 and 2010 was $6.7 million and $4.7 million, respectively. Net income available to common shareholders and diluted earnings per common share, which were impacted by three series of convertible preferred stock issued at various times between 2009 and 2012, was $5.8 million and $1.92 (Restated) respectively, for the nine months ended September 30, 2012 compared with $4.3 million and $1.56, respectively, for the prior year period. Net income available to common shareholders and diluted earnings per common share were $6.1 million and $2.18, respectively, for 2011, versus $4.3 million and $1.61, respectively, for 2010. During 2012, all three series of preferred stock were converted into common shares and, as of September 30, 2012, no shares of preferred stock were outstanding.

The increases in net income, net income available to common shareholders, and diluted earnings per share were primarily attributable to significant increases in net interest income and other operating income due to the Company’s rapid growth in loans and deposits, and in its customer base. Partially offsetting the revenue increases were higher employee, occupancy and other operating expenses, commensurate with the Company’s growing infrastructure. Credit costs have kept pace with both loan growth and a changing mix in the loan portfolio, while benefitting from overall sound credit quality.

Net Interest Income

For the nine months ended September 30, 2012, net interest income was $25.2 million, an increase of $5.1 million, or 25.4%, compared to net interest income of $20.1 million for the same period in 2011. The increase in net interest income was largely attributable to growth in average interest-earning assets, principally loans, which increased by 29.4% to $718.3 million for 2012 from $555.3 million for the same period in 2011. The net interest margin remained relatively stable at 4.25% in 2012 as compared to 4.24% for the prior year period, as reduced yields on our loan portfolio resulting from the continuing declining interest rate environment were offset by the lower weighted average cost of interest-bearing deposits combined with growth in non-interest-bearing demand deposits.

For the year ended December 31, 2011, net interest income was $27.5 million, an increase of $4.6 million, or 19.9%, compared to net interest income of $22.9 million for the year ended December 31, 2010. The increase in net interest income was largely attributable to growth in average interest-earning assets, principally average loans, which increased by 28.6% to $573.6 million for 2011 from $446.0 million for 2010. The net interest margin remained relatively stable at 4.21% in 2011 as compared to 4.22% for 2010, as reduced yields on our loan portfolio resulting from the declining interest rate environment were offset by the lower weighted average cost of interest-bearing deposits and the growth in noninterest-bearing demand deposits.

Average Balance Sheets

The following table sets forth certain information relating to our average assets and liabilities for the nine months ended September 30, 2012 and 2011 and the years ended December 31, 2011, 2010 and 2009 and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Securities available for sale are reflected in the following table at amortized cost. The average balance of loans includes non-accrual loans, and associated yields include loan fees, which are considered an adjustment to yields.

 

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     For The Nine Months Ended  
     September 30, 2012     September 30, 2011  
     (dollars in thousands)  
     Average
Balance
    Interest      Average
Rate (5)
    Average
Balance
    Interest      Average
Rate (5)
 

Interest-earning assets:

              

Investment securities (1)

   $ 32,589      $ 833         3.41   $ 46,258      $ 1,183         3.41

Loans receivable (2) (3)

     718,270        29,076         5.41     555,300        23,431         5.62

Federal funds sold and interest- bearing deposits with banks

     42,869        53         0.17     31,312        43         0.18
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     793,728        29,962         5.04     632,870        24,657         5.19

Allowance for loan losses

     (10,721          (8,332     

Non-interest earning assets

     23,019             21,514        
  

 

 

        

 

 

      

Total assets

   $ 806,026           $ 646,052        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Savings, NOW, Money Market, Interest Checking

   $ 307,671        1,101         0.48   $ 263,490        1,823         0.92

Time deposits

     218,112        2,478         1.52     151,062        1,750         1.54
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     525,783        3,579         0.91     414,552        3,573         1.15

Borrowings

     76,728        1,001         1.74     69,771        815         1.56

Capital lease obligation

     3,233        145         5.99     3,301        149         6.01
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     605,744        4,725         1.04     487,624        4,537         1.24

Non-interest-bearing deposits

     130,617             103,242        

Other liabilities

     4,139             2,818        

Stockholders’ equity

     65,526             52,368        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 806,026           $ 646,052        
  

 

 

        

 

 

      

Net interest income/interest rate spread

     $ 25,237         4.00     $ 20,120         3.95
    

 

 

        

 

 

    

Net interest margin (4)

          4.25          4.24

 

(1) Average balances are calculated on amortized cost.
(2) Includes loan fee income.
(3) Loans receivable include non-accrual loans.
(4) Represents net interest income divided by average total interest-earning assets.
(5) Rates are annualized.

 

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    For the Year Ended  
    December 31, 2011     December 31, 2010     December 31, 2009  
    (dollars in thousands)  
    Average
Balance
    Interest     Average
Rate
    Average
Balance
    Interest     Average
Rate
    Average
Balance
    Interest     Average
Rate
 

Interest earning assets:

                 

Investment securities (1)

  $ 43,980      $ 1,505        3.42   $ 48,154      $ 1,805        3.75   $ 45,538      $ 1,962        4.31

Loans receivable (2) (3)

    573,648        32,113        5.60     446,048        27,054        6.07     347,796        21,785        6.26

Federal funds sold and interest- bearing deposits with banks

    35,339        58        0.16     49,110        104        0.21     65,308        104        0.16
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    652,967        33,676        5.16     543,312        28,963        5.33     458,642        23,851        5.20

Allowance for loan losses

    (8,651         (5,855         (3,807    

Non-interest earning assets

    20,976            23,394            19,094       
 

 

 

       

 

 

       

 

 

     

Total assets

  $ 665,292          $ 560,851          $ 473,929       
 

 

 

       

 

 

       

 

 

     

Interest-bearing liabilities:

                 

Savings, NOW, Money Market, Interest Checking

  $ 270,374        2,356        0.87   $ 242,918        2,621        1.08   $ 195,016        3,474        1.78

Time deposits

    160,580        2,532        1.58     134,355        2,273        1.69     140,679        3,627        2.58
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing deposits

    430,954        4,888        1.13     377,273        4,894        1.30     335,695        7,101        2.12

Borrowings

    68,217        1,121        1.64     57,720        956        1.66     42,238        786        1.86

Capital lease obligation

    3,293        198        6.01     3,346        201        6.01     3,404        203        5.96
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    502,464        6,207        1.24     438,339        6,051        1.38     381,337        8,090        2.12

Non-interest-bearing deposits

    106,174            77,722            55,899       

Other liabilities

    2,970            2,214            3,114       

Stockholders’ equity

    53,684            42,576            33,579       
 

 

 

       

 

 

       

 

 

     

Total liabilities and stockholders’ equity

  $ 665,292          $ 560,851          $ 473,929       
 

 

 

       

 

 

       

 

 

     

Net interest income/interest rate spread

    $ 27,469        3.92     $ 22,912        3.95     $ 15,761        3.08
   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Net interest margin (4)

        4.21         4.22         3.44
     

 

 

       

 

 

       

 

 

 

 

(1) Average balances are calculated on amortized cost
(2) Includes loan fee income
(3) Loans receivable include non-accrual loans
(4) Represents net interest income divided by average total interest-earning assets

 

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Table of Contents

Rate/Volume Analysis

The following table presents, by category, the major factors that contributed to the changes in net interest income. Changes due to both volume and rate have been allocated in proportion to the relationship of the dollar amount change in each.

 

     For the Nine Months Ended September 30,  
     2012 versus 2011  
     Increase (Decrease)  
     Due to Change in Average  
     Volume     Rate     Net  

Interest Income:

      

Investment securities

   $ (353   $ 3      $ (350

Loan receivable

     6,485        (840     5,645   

Federal funds sold and interest-bearing deposits with banks

     14        (4     10   
  

 

 

   

 

 

   

 

 

 

Total interest income

   $ 6,146      $ (841   $ 5,305   
  

 

 

   

 

 

   

 

 

 

Interest Expense:

      

Savings, NOW, Money Market, Interest Checking

   $ 386      $ (1,108   $ (722

Time deposits

     756        (28     728   

Borrowings

     84        102        186   

Capital lease obligation

     (3     (1     (4
  

 

 

   

 

 

   

 

 

 

Total interest expense

     1,223        (1,035     188   
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 4,922      $ 195      $ 5,117   
  

 

 

   

 

 

   

 

 

 

 

     For the Year Ended December 31,     For the Year Ended December 31,  
     2011 versus 2010     2010 versus 2009  
     Increase (Decrease)     Increase (Decrease)  
     Due to Change in Average     Due to Change in Average  
     Volume     Rate     Net     Volume     Rate     Net  

Interest Income:

            

Investment securities

   $ (150   $ (150   $ (300   $ 124      $ (281   $ (157

Loan receivable

     6,923        (1,864     5,059        5,935        (666     5,269   

Federal funds sold and interest- bearing deposits with banks

     (26     (20     (46     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

   $ 6,748      $ (2,035   $ 4,713      $ 6,059      $ (947   $ 5,112   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense:

            

Savings, NOW, Money Market, Interest Checking

   $ 377      $ (642   $ (265   $ 1,409      $ (2,262   $ (853

Time deposits

     397        (138     259        (157     (1,197     (1,354

Borrowings

     172        (7     165        243        (73     170   

Capital lease obligation

     (3     —          (3     (4     2        (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     944        (788     156        1,492        (3,531     (2,039
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 5,804      $ (1,247   $ 4,557      $ 4,567      $ 2,584      $ 7,151   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Provision for Loan Losses

The provision for loan losses was $2.8 million for the nine months ended September 30, 2012 and $2.2 million for the comparable prior year period due largely, in both periods, to growth in the Bank’s loan portfolio. For the year ended December 31, 2011, the provision for loan losses was $2.4 million, while for the year ended December 31, 2010 the provision for loan losses was $2.9 million. A substantial portion of the loan loss provisioning was due to loan growth in both full year periods. In addition, the 2010 loan loss provision was increased further due to rising economic uncertainty during that period, including persistently high levels of unemployment and low consumer spending, which increased risks inherent in the portfolio. This led to an increase in the allowance for loan losses to total loans ratio from 1.19% at December 31, 2009 to 1.50% at December 31, 2010. The allowance for loan losses ratio was 1.53% at September 30, 2011 and December 31, 2011 and 1.52% at September 30, 2012.

Non-Interest Income

The Company’s non-interest income consists primarily of service charges on deposit accounts, gains on sale of residential mortgages, card (ATM, credit and debit cards) income and fees from a title insurance agency in which the Bank is a 49% owner. To date, the Bank has de-emphasized fee income, focusing instead on customer growth and retention.

Non-interest income amounted to $0.8 million for the first nine months of 2012 versus $0.7 million for the first nine months of 2011. The increase was due to increased gains on sales of residential mortgages ($0.1 million) and increased card (ATM, credit and debit) income ($0.1 million) partially offset by lower securities gains ($0.1 million). Noninterest income for 2011 totaled $1.1 million versus $0.9 million in 2010. The increase for the year over year comparison was due to higher fees on deposits ($0.1 million) and securities gains ($0.1 million).

Non-Interest Expense

Noninterest expenses, in absolute terms, have increased significantly over the past few years as we have expanded our geographic reach and invested in our infrastructure to support our strong asset growth. For the nine months ended September 30, 2012, noninterest expenses totaled $12.9 million, a $2.3 million, or 21.6%, increase from $10.6 million in the prior year period. This increase was primarily due to higher staff expenses ($1.3 million), occupancy, equipment and data processing ($0.4 million) and other expenses ($0.4 million) which include various items related to the Company’s growth and increased volume of business. For the full year 2011, noninterest expenses totaled $15.1 million, representing a $2.2 million, or 16.4%, increase over $12.9 million in 2010. The year over year increase resulted from higher staff expenses ($1.0 million), occupancy, equipment and data processing ($0.5 million) and professional fees ($0.4 million).

Management continues to focus efforts on supporting growth primarily by adding to staff, investing in technology, and by enhancing risk controls. At the same time, management seeks to contain costs whenever prudent. Our success in this regard is evident in the favorable trend in our efficiency ratio, a widely-followed metric in the banking industry which measures operating expenses as a percentage of net revenue. (The ratio is computed by dividing total noninterest expense by the sum of net interest income and noninterest income less securities gains). The Company’s efficiency ratio has improved in recent years, from 67.8% in 2009 to 54.3% in 2010, to 52.9% in 2011 and to 49.7% for the first nine months of 2012.

 

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Table of Contents

Income Taxes

We recorded income tax expense of $4.2 million for the first nine months of 2012, $3.2 million for the first nine months of 2011, $4.5 million for the year ended December 31, 2011 and $3.2 million for the year ended December 31, 2010. The effective tax rate was 40% for all periods presented representing the combined federal and state statutory tax rates for a New Jersey corporation, and reflecting no tax-advantaged investments such as municipal securities or bank owned life insurance. Management has thus far taken a conservative approach to the Company’s tax position and is currently exploring various strategies to potentially lower our effective tax rates in the future.

Financial Condition

General

At September 30, 2012, our total assets were $883.8 million, net loans were $792.0 million and total deposits were $724.3 million, compared to total assets of $729.7 million, net loans of $619.8 million and total deposits of $609.4 million at December 31, 2011 and total assets of $602.4 million, net loans of $486.4 million and total deposits of $482.7 million at December 31, 2010.

Loan Portfolio

The Bank’s lending activities are generally oriented to small-to-medium sized businesses, high net worth individuals, professional practices and consumer and retail customers living and working in the Bank’s market area of Hudson, Bergen and Monmouth Counties, New Jersey. The Bank has not made loans to borrowers outside of the United States. The Bank believes that its strategy of high-quality customer service, competitive rate structures and selective marketing have enabled it to gain market entry.

Commercial loans are loans made for business purposes and are primarily secured by collateral such as cash balances with the Bank, marketable securities held by or under the control of the Bank, business assets including accounts receivable, taxi medallions, inventory and equipment and liens on commercial and residential real estate. Commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties. Commercial real estate loans include loans secured by first liens on completed commercial properties, including multi-family properties, to purchase or refinance such properties. Residential mortgages include loans secured by first liens on residential real estate, and are generally made to existing customers of the Bank to purchase or refinance primary and secondary residences. Home equity loans and lines of credit include loans secured by first or second liens on residential real estate for primary or secondary residences. Consumer loans are made to individuals who qualify for auto loans, cash reserve, credit cards and installment loans.

During 2011 and the first nine months of 2012, loan portfolio growth was positively impacted in several ways including (i) an increase in demand for small business lines of credit and business term loans as economic conditions have stabilized and begun to improve, (ii) industry consolidation and lending restrictions involving larger competitors allowing the Bank to gain market share, (iii) an increase in refinancing strategies employed by borrowers during the current low rate environment, and (iv) the Bank’s success in attracting highly experienced commercial loan officers with substantial local market knowledge.

Our loans at September 30, 2012 totaled $804.5 million, an increase of $175.0 million, or 27.8%, over loans at December 31, 2011 of $629.5 million. The biggest component of our loan portfolio at September 30, 2012 and December 31, 2011 was commercial real estate loans. Our commercial real estate loans at September 30, 2012 were $526.0 million, an increase of $150.3 million, or 39.9%, over gross commercial real estate loans at December 31, 2011 of $375.7 million. Our commercial loans were $131.5 million at September 30, 2012, an increase of $23.4 million, or 21.7%, over commercial loans at December 31, 2011 of $108.1 million. Our commercial construction loans at September 30, 2012 were $31.2 million, an increase of $2.7 million, or 9.3%, over commercial construction loans at December 31, 2011 of $28.5 million. Our residential real estate loans were $82.5 million at September 30, 2012, a decrease of $6.2 million, or 6.9%, over residential real estate loans at December 31, 2011 of $88.7 million.

 

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Table of Contents

Our home equity loans were $31.9 million at September 30, 2012, an increase of $4.3 million, or 15.7%, over home equity loans of $27.6 million at December 31, 2011. Our consumer loans at September 30, 2012 were $1.4 million, an increase of $0.5 million, or 58.4%, over consumer loans of $0.9 million at December 31, 2011. The growth in our loan portfolio reflects the success of our business strategy, in particular emphasizing high-quality customer service strategy, which has led to continued customer referrals.

The following table sets forth the classification of our loans held for investment by major category as of September 30, 2012, and at December 31, 2011, 2010, 2009, 2008 and 2007, respectively:

 

    As of
September 30,
    As of
December 31,
 

(dollars in thousands)

  2012     2011     2010     2009     2008     2007  
    Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  

Commercial

  $ 131,471        16.34   $ 108,066        17.17   $ 106,544        21.56   $ 78,217        19.64   $ 58,686        19.32   $ 36,618        17.46

Commercial real estate

    526,021        65.38     375,719        59.69     259,694        52.55     230,324        57.83     155,272        51.13     109,917        52.42

Commercial construction

    31,193        3.88     28,543        4.53     37,065        7.50     24,111        6.05     36,473        12.01     22,678        10.81

Residential real estate

    82,516        10.26     88,666        14.09     64,648        13.08     39,764        9.98     31,033        10.22     20,577        9.81

Home equity

    31,903        3.97     27,575        4.38     25,056        5.07     25,000        6.28     21,617        7.12     19,409        9.26

Consumer

    1,410        0.18     890        0.14     1,179        0.24     870        0.22     617        0.20     498        0.24
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans

  $ 804,514        100.00   $ 629,459        100.00   $ 494,186        100.00   $ 398,286        100.00   $ 303,698        100.00   $ 209,697        100.00
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth fixed and adjustable rate loans in the loan portfolio as of September 30, 2012, and December 31, 2011 in terms of contractual maturity (in thousands):

 

     As of September 30, 2012      As of December 31, 2011  
     Due Under      Due 1-5      Due More than      Due Under      Due 1-5      Due More than  

(dollars in thousands)

   One Year      Years      Five Years      One Year      Years      Five Years  

By Loan Portfolio Class:

                 

Commercial

   $ 63,683       $ 55,805       $ 11,983       $ 49,561       $ 46,068       $ 12,437   

Commercial real estate

     11,243         57,191         457,587         13,718         35,632         326,369   

Commercial construction

     28,007         3,186         —           21,006         7,537         —     

Residential real estate

     1,438         7,300         73,778         3,318         6,713         78,635   

Home equity

     —           3,511         28,392         —           3,558         24,017   

Consumer

     26         747         637         38         644         208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 104,397       $ 127,740       $ 572,377       $ 87,641       $ 100,152       $ 441,666   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

By Interest Rate Type:

                 

Fixed

   $ 96,631       $ 108,868       $ 533,420       $ 36,297       $ 87,021       $ 406,350   

Adjustable

     7,766         18,872         38,957         51,344         13,131         35,316   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 104,397       $ 127,740       $ 572,377       $ 87,641       $ 100,152       $ 441,666   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Asset Quality

General. One of our key objectives is to maintain a high level of asset quality. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower. Initial contacts typically are made 15 days after the date the payment is due, and late notices are sent approximately 15 days after the date the payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. All loans which are delinquent 30 days or more are reported to the board of directors of the Bank on a monthly basis.

On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases (“non-accrual” loans). Except for loans that are well secured and in the process of collection, it is our policy to discontinue accruing additional interest and reverse any interest accrued on any loan which is 90 days or more past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to his/her ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt.

Real estate which is acquired as a result of foreclosure is classified as OREO until sold. OREO is recorded at the lower of cost or fair value less estimated selling costs. Costs associated with acquiring and improving a foreclosed property is usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of OREO are charged to operations, as incurred.

We account for our impaired loans in accordance with GAAP. An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Loans collectively evaluated for impairment include smaller balance residential real estate loans and consumer loans. These loans are evaluated as a group because they have similar characteristics and performance experience. Larger commercial and construction loans are individually evaluated for impairment. Our total impaired loans amounted to $8.1 million at September 30, 2012, compared to $13.0 million and $4.3 million at December 31, 2011 and 2010, respectively.

In limited situations we will modify or restructure a borrower’s existing loan terms and conditions. A restructured loan is considered a troubled debt restructuring (“TDR”) when, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession to the borrower in modifying or renewing a loan that the institution would not otherwise consider. We had five TDRs totaling $2.5 million, which, as of September 30, 2012, were currently performing under their restructured terms. Subsequent to September 30, 2012 one of these credits, with a balance of $0.5 million was taken into OREO, with a related charge off of $53,000.

 

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Table of Contents

Asset Classification. Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “special mention.”

When an insured institution classifies one or more assets, or portions thereof, as “substandard” or “doubtful,” it is required that a general valuation allowance for loan losses be established for loan losses in an amount deemed prudent by management. General valuation allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as “loss,” it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.

A bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies, have adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Our management believes that, based on information currently available, our allowance for loan losses is maintained at a level which covers all known and probable incurred losses in the portfolio at each reporting date. However, actual losses are dependent upon future events and, as such; further additions to the level of allowances for loan losses may become necessary.

The table below sets forth information on our classified assets and assets designated special mention at the dates indicated.

 

     As of      As of  
     September 30,      December 31,  

(dollars in thousands)

   2012      2011      2010  

Classified assets:

        

Substandard

   $ 17,138       $ 20,323       $ 7,127   

Doubtful

     —           —           —     

Loss

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total classified assets

     17,138         20,323         7,127   
  

 

 

    

 

 

    

 

 

 

Special mention assets

     26,602         11,810         25,790   
  

 

 

    

 

 

    

 

 

 

Total classified and special mention assets

   $ 43,740       $ 32,133       $ 32,917   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Delinquent Loans. The following tables show the delinquencies in our loan portfolio as of the dates indicated.

 

     At September 30, 2012 Loans Delinquent For:     At September 30, 2012  
     30-89 Days     90 Days or more     Total Delinquent Loans  

(dollars in thousands)

   Number      Amount      % of Total
Delinquent
Loans 30-

89 Days
    Number      Amount      % of Total
Delinquent
Loans 90

Days or
more
    Number      Amount      % of Total
Delinquent
Loans 90

Days or
more
 

Commercial

     —         $ —           0.0     2       $ 274         6.9     2       $ 274         4.3

Commercial real estate

     —           —           0.0     3         3,067         76.8     3         3,067         48.2

Commercial construction

     1         2,372         100.0     —           —           0.0     1         2,372         37.3

Residential real estate

     —           —           0.0     1         638         16.0     1         638         10.0

Home equity

     —           —           0.0     —           —           0.0     —           —           0.0

Consumer

     —           —           0.0     1         13         0.3     1         13         0.2
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     1       $ 2,372         100.0     7       $ 3,992         100.0     8       $ 6,364         100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     At December 31, 2011 Loans Delinquent For:     At December 31, 2011  
     30-89 Days     90 Days or more     Total Delinquent Loans  

(dollars in thousands)

   Number      Amount      % of Total
Delinquent
Loans 30-
89 Days
    Number      Amount      % of Total
Delinquent
Loans 90
Days or
more
    Number      Amount      % of Total
Delinquent
Loans 90
Days or
more
 

Commercial

     —         $ —           0.0     3       $ 388         6.0     3       $ 388         5.7

Commercial real estate

     —           —           0.0     4         6,049         94.0     4         6,049         88.7

Commercial construction

     1         289         75.7     —           —           0.0     1         289         4.2

Residential real estate

     1         83         21.7     —           —           0.0     1         83         1.2

Home equity

     1         10         2.6     —           —           0.0     1         10         0.1

Consumer

     —           —           0.0     —           —           0.0     —           —           0.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     3       $ 382         100.0     7       $ 6,437         100.0     10       $ 6,819         100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Non-Performing Assets, TDRs, and Loans 90 Days Past Due and Accruing. The following table sets forth information concerning our non-performing assets, TDRs, and past-due accruing loans as of the dates indicated:

 

     As of     As of  
     September 30,     December 31,  

(dollars in thousands)

   2012     2011     2010     2009     2008     2007  

Nonaccrual loans:

            

Commercial

   $ 3,135      $ 388      $ —        $ —        $ —        $ —     

Commercial real estate

     2,487        6,049        2,538        —          —          —     

Commercial construction

     —          —          —          —          —          —     

Residential real estate

     —          —          1,511        2,197        —          —     

Home equity

     —          —          —          —          —          —     

Consumer

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonaccrual loans

     5,622        6,437        4,049        2,197        —          —     

Other real estate owned

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets (1)

   $ 5,622      $ 6,437      $ 4,049      $ 2,197      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans past due 90 days and still accruing

   $ 1,237      $ —        $ 723      $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Performing troubled debt restructured loans

   $ 2,494      $ 4,831      $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nonaccrual loans to total loans

     0.70     1.02     0.82     0.55     0.00     0.00

Nonaccrual loans and loans past due 90 days and still accruing to total loans

     0.85     1.02     0.97     0.55     0.00     0.00

Non-performing assets to total assets (1)

     0.64     0.88     0.67     0.43     0.00     0.00

 

(1) Non-performing assets are defined as nonaccrual loans plus OREO.

 

38


Table of Contents

Allowance for Loan Losses

The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. We maintain an allowance for loan losses at a level considered adequate to provide for all known and probable incurred losses in the portfolio. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the reserve and any subsequent recovery is credited. Our officers analyze risks within the loan portfolio on a continuous basis, and through an external independent loan review function, and by our Audit Committee. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly, and, as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to our allowance for loan losses.

At September 30, 2012, the allowance for loan losses was $12.2 million, an increase of $2.7 million from year-end 2011. Net charge-offs totaled $209,000 during the first nine months of 2012 and $90,000 for the first nine months of 2011. The allowance for loan losses as a percentage of loans receivable was 1.52% at September 30, 2012 and 1.53 % at December 31, 2011.

The following is a summary of the reconciliation of the allowance for loan losses for the periods indicated:

 

     For the                                
     Nine Months Ended                 For the              
     September 30,     Year Ended December 31,  

(dollars in thousands)

   2012     2011     2010     2009     2008     2007  

Balance at beginning of period

   $ 9,617      $ 7,414      $ 4,759      $ 3,316      $ 2,003      $ 1,320   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision charged to operating expenses

     2,840        2,355        2,930        1,455        1,288        714   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries of loans previously charged-off:

            

Commercial

     —          —          18        1        30        —     

Consumer

     31        —          —          —          —          —     

Residential Real Estate

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     31        —          18        1        30        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans charged-off:

            

Commercial

     (240     —          (293     (13     (5     (31

Consumer

     —          (62     —          —          —          —     

Residential Real Estate

     —          (90     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (240     (152     (293     (13     (5     (31
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (209     (152     (275     (13     (5     (31
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 12,248      $ 9,617      $ 7,414      $ 4,759      $ 3,316      $ 2,003   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs to average loans outstanding (annualized)

     0.04     0.03     0.06     0.00     0.00     0.02
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses to period-end loans

     1.52     1.53     1.50     1.19     1.09     0.96
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

39


Table of Contents

The following table sets forth, for each of our major lending areas, the amount and percentage of our allowance for loan losses attributable to such category, and the percentage of total loans represented by such category, as of the dates indicated:

Allocation of the Allowance for Loan Losses by Category

 

     As of September 30, 2012     As of December 31, 2011     As of December 31, 2010  

(dollars in thousands)

   Amount      % of
ALL
    % of
Total Loans
    Amount      % of
ALL
    % of
Total Loans
    Amount      % of
ALL
    % of
Total Loans
 

Commercial

   $ 1,586         12.9     16.3   $ 653         6.8     17.2   $ 634         8.6     21.6

Commercial real estate

     6,920         56.5     65.4     5,658         58.8     59.7     2,902         39.1     52.5

Commercial construction

     518         4.2     3.9     430         4.5     4.5     808         10.9     7.5

Residential real estate

     2,686         21.9     10.3     2,534         26.3     14.1     2,773         37.4     13.1

Home equity

     521         4.3     4.0     339         3.5     4.4     292         3.9     5.1

Consumer

     17         0.1     0.2     3         0.0     0.1     5         0.1     0.2
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 12,248         100.0     100.0   $ 9,617         100.0     100.0   $ 7,414         100.0     100.0
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     As of December 31, 2009     As of December 31, 2008     As of December 31, 2007  

(dollars in thousands)

   Amount      % of
ALL
    % of
Total Loans
    Amount      % of
ALL
    % of
Total Loans
    Amount      % of
ALL