UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-Q

 

(Mark one)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                            to                           

 

Commission file number:  001-34089

 

BANCORP OF NEW JERSEY, INC.

(Exact name of registrant as specified in its charter)

 

New Jersey

 

20-8444387

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

 

1365 Palisade Ave, Fort Lee, New Jersey

 

07024

(Address of principal executive offices)

 

(Zip Code)

 

(201) 944-8600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒  No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See 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 ☐

Smaller reporting company ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):  Yes  ☐  No  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of November 7, 2016 there were 6,316,291 outstanding shares of the issuer’s class of common stock, no par value.

 

 

 


 

INDEX

 

 

PAGE

 

 

Part I           Financial Information

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Unaudited Consolidated Statements of Financial Condition — September 30, 2016 and December 31, 2015

 

 

 

 

Unaudited Consolidated Statements of Income - Three Months Ended September 30, 2016 and 2015

 

 

 

 

Unaudited Consolidated Statements of Income — Nine Months Ended September 30, 2016 and 2015

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income- Three and Nine Months Ended September 30, 2016 and 2015

 

 

 

 

Unaudited Consolidated Statements of Stockholders’ Equity – Nine Months Ended September 30, 2016  and 2015

 

 

 

 

Unaudited Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2016 and 2015

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28 

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

35 

 

 

 

Item 4.  

Controls and Procedures

35 

 

 

 

Part II         Other Information  

 

 

 

 

Item 1.  

Legal Proceedings

36 

 

 

 

Item 1A.  

Risk Factors

36 

 

 

 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

36 

 

 

 

Item 3.  

Defaults Upon Senior Securities

36 

 

 

 

Item 4.  

Mine Safety Disclosures

36 

 

 

 

Item 5.  

Other Information

36 

 

 

 

Item 6.  

Exhibits

36 

 

 

 

Signatures  

 

37 

 

2


 

 

BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

    

September 30, 2016

    

December 31, 2015

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

2,287

 

$

2,238

 

Interest bearing deposits

 

 

89,690

 

 

71,497

 

Federal funds sold

 

 

452

 

 

454

 

Total cash and cash equivalents

 

 

92,429

 

 

74,189

 

Interest bearing time deposits

 

 

1,000

 

 

1,000

 

Securities available for sale

 

 

61,778

 

 

64,750

 

Securities held to maturity (fair value $5,096 and $5,829 at September 30, 2016 and December 31, 2015, respectively)

 

 

5,096

 

 

5,829

 

Restricted investment in bank stock, at cost

 

 

2,281

 

 

2,020

 

Loans receivable

 

 

660,206

 

 

645,062

 

Deferred loan fees and costs, net

 

 

(499)

 

 

(381)

 

Allowance for loan losses

 

 

(8,320)

 

 

(8,020)

 

Net loans

 

 

651,387

 

 

636,661

 

Premises and equipment, net

 

 

12,949

 

 

10,500

 

Accrued interest receivable

 

 

2,376

 

 

2,305

 

Other real estate owned

 

 

614

 

 

512

 

Other assets

 

 

5,162

 

 

5,154

 

Total assets

 

$

835,072

 

$

802,920

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

148,319

 

$

117,919

 

Savings and interest bearing transaction accounts

 

 

269,826

 

 

232,456

 

Time deposits under $250K

 

 

161,579

 

 

192,560

 

Time deposits $250K and over

 

 

145,515

 

 

157,804

 

Total deposits

 

 

725,239

 

 

700,739

 

Borrowed funds

 

 

31,648

 

 

26,529

 

Accrued expenses and other liabilities

 

 

2,078

 

 

2,499

 

Total liabilities

 

 

758,965

 

 

729,767

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, no par value, authorized 20,000,000 shares; issued and outstanding 6,299,791 at September 30, 2016 and 6,240,241 at December 31, 2015

 

 

61,293

 

 

60,509

 

Retained earnings

 

 

14,814

 

 

12,940

 

Accumulated other comprehensive loss

 

 

 —

 

 

(296)

 

Total stockholders’ equity

 

 

76,107

 

 

73,153

 

Total liabilities and stockholders’ equity

 

$

835,072

 

$

802,920

 

 

See accompanying notes to unaudited consolidated financial statements

3


 

BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 

 

 

    

2016

    

2015

 

INTEREST INCOME

 

 

 

 

 

 

 

Loans, including fees

 

$

7,620

 

$

7,545

 

Securities

 

 

166

 

 

229

 

Federal funds sold and other

 

 

110

 

 

51

 

TOTAL INTEREST INCOME

 

 

7,896

 

 

7,825

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

Savings and interest bearing transaction accounts

 

 

385

 

 

321

 

Time deposits

 

 

1,238

 

 

1,629

 

Borrowed funds

 

 

112

 

 

113

 

TOTAL INTEREST EXPENSE

 

 

1,735

 

 

2,063

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

 

6,161

 

 

5,762

 

Provision for (recovery of) loan losses

 

 

1,120

 

 

(124)

 

NET INTEREST INCOME AFTER (RECOVERY OF)  PROVISION FOR LOAN LOSSES

 

 

5,041

 

 

5,886

 

NON-INTEREST INCOME

 

 

 

 

 

 

 

Fees and service charges

 

 

202

 

 

98

 

TOTAL NON-INTEREST INCOME

 

 

202

 

 

98

 

 

 

 

 

 

 

 

 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

2,075

 

 

1,866

 

Occupancy and equipment expense

 

 

648

 

 

662

 

FDIC premiums and related expenses

 

 

278

 

 

243

 

Legal fees

 

 

88

 

 

69

 

Other real estate owned expenses

 

 

9

 

 

6

 

Professional fees

 

 

382

 

 

223

 

Data processing

 

 

312

 

 

256

 

Other expenses

 

 

449

 

 

563

 

TOTAL NON-INTEREST EXPENSE

 

 

4,241

 

 

3,888

 

Income before provision for income taxes

 

 

1,002

 

 

2,096

 

Income tax expense

 

 

322

 

 

738

 

Net income

 

$

680

 

$

1,358

 

 

 

 

 

 

 

 

 

PER SHARE OF COMMON STOCK

 

 

 

 

 

 

 

Basic

 

$

0.11

 

$

0.22

 

Diluted

 

$

0.11

 

$

0.22

 

 

See accompanying notes to unaudited consolidated financial statements.

4


 

BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 

 

 

    

2016

    

2015

 

INTEREST INCOME

 

 

 

 

 

 

 

Loans, including fees

 

$

22,839

 

$

22,956

 

Securities

 

 

581

 

 

677

 

Federal funds sold and other

 

 

311

 

 

116

 

TOTAL INTEREST INCOME

 

 

23,731

 

 

23,749

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

Savings and interest bearing transaction accounts

 

 

1,109

 

 

924

 

Time deposits

 

 

3,859

 

 

4,770

 

Borrowed funds

 

 

328

 

 

358

 

TOTAL INTEREST EXPENSE

 

 

5,296

 

 

6,052

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

 

18,435

 

 

17,697

 

Provision for loan losses

 

 

1,570

 

 

659

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

 

16,865

 

 

17,038

 

NON-INTEREST INCOME

 

 

 

 

 

 

 

Fees and service charges

 

 

392

 

 

239

 

Losses on sales of securities

 

 

 

 

(15)

 

TOTAL NON-INTEREST INCOME

 

 

392

 

 

224

 

 

 

 

 

 

 

 

 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,268

 

 

5,588

 

Occupancy and equipment expense

 

 

1,996

 

 

2,143

 

FDIC premiums and related expenses

 

 

817

 

 

522

 

Legal fees

 

 

222

 

 

249

 

Other real estate owned expenses

 

 

81

 

 

183

 

Professional fees

 

 

822

 

 

626

 

Data processing

 

 

884

 

 

732

 

Other expenses

 

 

1,562

 

 

1,447

 

TOTAL NON-INTEREST EXPENSE

 

 

12,652

 

 

11,490

 

Income before provision for income taxes

 

 

4,605

 

 

5,772

 

Income tax expense

 

 

1,602

 

 

1,998

 

Net income

 

$

3,003

 

$

3,774

 

 

 

 

 

 

 

 

 

PER SHARE OF COMMON STOCK

 

 

 

 

 

 

 

Basic

 

$

0.48

 

$

0.62

 

Diluted

 

$

0.48

 

$

0.62

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5


 

BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

    

For the Three Months Ended September 30, 

 

 

    

2016

    

2015

 

Net income

 

$

680

 

$

1,358

 

Other comprehensive income:

 

 

 

 

 

 

 

Net unrealized holding gains on securities available for sale arising during the period, net of income tax expense of $5 and $188, respectively

 

 

7

 

 

306

 

Comprehensive income

 

$

687

 

$

1,664

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 

 

 

    

2016

    

2015

 

Net income

 

$

3,003

 

$

3,774

 

Other comprehensive income

 

 

 

 

 

 

 

Unrealized holding gains on securities available for sale, net of deferred income tax expense of $186 and $326, respectively

 

 

296

 

 

572

 

Less: Reclassification adjustment for loss on sale of securities, net of income tax benefit of $0 and $6, respectively

 

 

 —

 

 

(9)

 

Comprehensive income

 

$

3,299

 

$

4,355

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

6


 

BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Accumulated

    

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Common

 

Retained

 

Comprehensive

 

 

 

 

 

 

Stock

 

Earnings

 

(Loss)

 

Total

 

Balance at January 1, 2015

 

 

50,998

 

 

9,635

 

 

(739)

 

 

59,894

 

Exercise of stock options

 

 

20

 

 

 —

 

 

 —

 

 

20

 

Stock based compensation

 

 

159

 

 

 —

 

 

 —

 

 

159

 

Dividends on common stock ($0.18 per share)

 

 

 —

 

 

(1,123)

 

 

 —

 

 

(1,123)

 

Net income

 

 

 —

 

 

3,774

 

 

 —

 

 

3,774

 

Sale of common stock through a private placement (868,057 shares issued)

 

 

9,280

 

 

 —

 

 

 —

 

 

9,280

 

Total other comprehensive income

 

 

 —

 

 

 —

 

 

581

 

 

581

 

Balance at September 30, 2015

 

$

60,457

 

$

12,286

 

$

(158)

 

$

72,585

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2016

 

 

60,509

 

 

12,940

 

 

(296)

 

 

73,153

 

Exercise of stock options

 

 

580

 

 

 —

 

 

 —

 

 

580

 

Stock based compensation

 

 

204

 

 

 —

 

 

 —

 

 

204

 

Dividends on common stock ($0.18 per share)

 

 

 —

 

 

(1,129)

 

 

 —

 

 

(1,129)

 

Net income

 

 

 —

 

 

3,003

 

 

 —

 

 

3,003

 

Total other comprehensive income

 

 

 —

 

 

 —

 

 

296

 

 

296

 

Balance at September 30, 2016

 

$

61,293

 

$

14,814

 

$

 —

 

$

76,107

 

 

See accompanying notes to unaudited consolidated financial statements

7


 

BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

 

 

 

 

 

 

 

    

For the Nine Months Ended September 30, 

 

 

    

2016

    

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

3,003

 

$

3,774

 

Adjustments to reconcile net income to net cash provided by Operating activities:

 

 

 

 

 

 

 

Provision for loan losses

 

 

1,570

 

 

659

 

(Accretion) amortization of securities premiums

 

 

(52)

 

 

82

 

Deferred tax benefit

 

 

(458)

 

 

(1,085)

 

Depreciation and amortization

 

 

478

 

 

458

 

Stock based compensation

 

 

204

 

 

159

 

Accretion (amortization) of net loan origination fees and costs

 

 

118

 

 

(40)

 

Loss on sale of securities

 

 

 —

 

 

15

 

Loss on sale of other real estate owned

 

 

 —

 

 

6

 

Write down of other real estate owned

 

 

56

 

 

180

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

(Increase) decrease in accrued interest receivable

 

 

(71)

 

 

101

 

(Decrease) increase in other assets

 

 

265

 

 

315

 

Increase in accrued interest payable and other liabilities

 

 

(421)

 

 

593

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

4,692

 

 

5,217

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of securities available for sale

 

 

(37,000)

 

 

(11,998)

 

Purchases of securities held to maturity

 

 

(5,096)

 

 

(4,718)

 

Proceeds from maturities of securities held to maturity

 

 

5,829

 

 

11,923

 

Proceeds from called or matured securities available for sale

 

 

40,505

 

 

 

Proceeds from sales of securities available for sale

 

 

 —

 

 

6,985

 

Purchase of restricted investment in bank stock

 

 

(706)

 

 

(171)

 

Proceeds from calls of restricted investment of bank stock

 

 

445

 

 

241

 

Proceeds from sale of other real estate owned

 

 

 

 

162

 

Net (increase) decrease in loans

 

 

(16,572)

 

 

8,697

 

Purchases of premises and equipment

 

 

(2,927)

 

 

(447)

 

NET CASH PROVIDED BY (USED IN) PROVIDED BY INVESTING ACTIVITIES

 

 

(15,522)

 

 

10,674

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net increase in deposits

 

 

24,500

 

 

58,017

 

Net increase (decrease) in borrowed funds

 

 

5,119

 

 

(4,806)

 

Dividends paid

 

 

(1,129)

 

 

(1,123)

 

Proceeds from the sale of common stock through the private placement

 

 

 —

 

 

9,280

 

Proceeds from exercise of options

 

 

580

 

 

20

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

29,070

 

 

61,388

 

Increase in cash and cash equivalents

 

 

18,240

 

 

77,279

 

Cash and cash equivalents at beginning of year

 

 

74,189

 

 

22,060

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

92,429

 

$

99,339

 

Supplemental information:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

5,406

 

$

6,062

 

Taxes

 

$

2,259

 

$

2,424

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing transactions:

 

 

 

 

 

 

 

Loans transferred to other real estate owned

 

$

158

 

$

 —

 

See accompany notes to unaudited consolidated financial statements

 

 

 

 

 

 

 

 

8


 

 

BANCORP OF NEW JERSEY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.  Significant Accounting Policies

 

Basis of Financial Statement Presentation

 

The accompanying consolidated financial statements include the accounts of Bancorp of New Jersey, Inc. (together with its consolidated subsidiaries, the “Company”), and its direct wholly-owned subsidiary, Bank of New Jersey (the “Bank”) and the Bank’s wholly-owned subsidiaries, BONJ-New York Corp., BONJ-New Jersey Investment Company, BONJ-Delaware Investment Company and BONJ REIT Inc.  All significant inter-company accounts and transactions have been eliminated in consolidation.

 

The Company was incorporated under the laws of the State of New Jersey to serve as a holding company for the Bank and to acquire all the capital stock of the Bank (referred to herein as the “holding company reorganization”).

 

The Company’s class of common stock has no par value and the Bank’s class of common stock has a par value of $10 per share.

 

The financial information in this quarterly report has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”); these financial statements have not been audited. Certain information and footnote disclosures required under GAAP have been condensed or omitted, as permitted by rules and regulations of the Securities and Exchange Commission.

 

Organization

 

The Company is a New Jersey corporation and bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).  The Bank is a community bank which provides a full range of banking services to individuals and corporate customers primarily in New Jersey.  Both the Company and the Bank are subject to competition from other financial institutions.  The Bank is regulated by state and federal agencies and is subject to periodic examinations by those regulatory authorities.  The Bank conducts a traditional commercial banking business, accepting deposits from the general public, including individuals, businesses, non-profit organizations, and governmental units.  The Bank makes commercial loans, consumer loans and commercial real estate loans.  In addition, the Bank provides other customer services and makes investments in securities, as permitted by law.  The Bank has sought to offer an alternative, community-oriented style of banking in an area, that is presently dominated by larger, statewide and national institutions.  The Bank continues to focus on establishing and retaining customer relationships by offering a broad range of traditional financial services and products, competitively-priced and delivered in a responsive manner to small businesses, professionals and individuals in its market area.  As a community bank, the Bank endeavors to provide superior customer service that is highly personalized, efficient and responsive to local needs.  To better serve its customers and expand its market reach, the Bank provides for the delivery of certain of its financial products and services to its local customers and to a broader market through the use of mail, telephone and internet banking.  The Bank seeks to deliver these products and services with the care and professionalism expected of a community bank and with a special dedication to personalized customer service.

 

9


 

Note 2.  Benefit Plans and Stock-Based Compensation

 

2006 Stock Option Plan

 

During 2006, the Bank’s stockholders approved the 2006 Stock Option Plan.  At the time of the holding company reorganization, the 2006 Stock Option Plan was assumed by the Company.  The plan allows the Company to grant options to directors and employees of the Company to purchase up to 239,984 shares of the Company’s common stock.  At September 30, 2016, stock options to purchase 228,200 shares, net of forfeitures, have been issued to employees of the Bank under the 2006 Stock Option Plan, of which options to purchase 114,200 shares were outstanding.

 

During the three and nine months ended September 30, 2016, the Company granted 63,960 Non-Qualified Stock Options (NQO) to employees of the Company.  The fair value of the 63,960 NQOs granted was $2.76 per NQO on the date of grant. The fair value of the NQOs was determined using the Black-Scholes option pricing model. The following assumptions were used in determining the fair value of the NQOs granted: expected dividend yield of 2.149%, risk free interest rate of 1.57%, expected volatility of 26.54% and expected lives of 10 years.   One third of the NQO granted, or 21,320 NQOs vest each on February 1, 2017, February 1, 2018 and February 1, 2019.

 

 

Under the 2006 Stock Option Plan, there were 62,700 unvested options at September 30, 2016 and $154 thousand unrecognized compensation expense. For the three and nine months ended September 30, 2016 and 2015, $19 thousand was recorded as expense for NQOs that has been issued through the 2006 Plan.

 

During the nine months ended September 30, 2016 options to purchase 63,800 shares of common stock at a price of $9.09 per share were exercised for a total price of $579,942 and 45,660 options were forfeited.

 

2007 Director Plan

 

During 2007, the Bank’s stockholders approved the 2007 Non-Qualified Stock Option Plan for Directors (the “2007 Director Plan”).  At the time of the holding company reorganization, the 2007 Director Plan was assumed by the Company. This plan provides for 480,000 options to purchase shares of the Company’s common stock to be issued to non-employee directors of the Company.  At September 30, 2016, non-qualified options to purchase 460,000 shares of the Company’s stock have been issued to non-employee directors of the Company under the 2007 Director Plan and approximately 331,334 were outstanding at September 30, 2016.  No options were granted, exercised or forfeited through the 2007 Director Plan during the first nine months of 2016.

 

Under the 2007 Director Plan, there were no unvested options at September 30, 2016 and no unrecognized compensation expense.

 

In connection with the 2007 Director Plan, no share based compensation expense was recognized for the three months and nine months ended September 30, 2016 and 2015, respectively.

 

The aggregate intrinsic value of a stock option represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had they exercised their options on that date.  This amount changes based on the changes in the market value in the Company’s stock.The aggregate intrinsic value of options outstanding as of September 30, 2016 and 2015 under the 2006 Stock Option Plan and the 2007 Director Plan was approximately $38 thousand and $200 thousand, respectively.

 

2011 Equity Incentive Plan

 

During 2011, the shareholders of the Company approved the Bancorp of New Jersey, Inc. 2011 Equity Incentive Plan (the “2011 Plan”).  This plan authorizes the issuance of up to 250,000 shares of the Company’s common stock, subject to adjustment in certain circumstances described in the 2011 Plan, pursuant to awards of incentive stock options or non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units or performance awards. Employees, directors, consultants, and other service providers of the Company and its affiliates (primarily the Bank) are eligible to receive awards under the 2011 Plan, provided, that only employees are eligible to receive incentive stock

10


 

options.  At September 30, 2016, there were 109,468 shares, net of forfeitures, issued to employees of  the Company under the 2011 Plan.

 

During the three and nine months ended September 30, 2016, no shares of common stock were issued and 250 and 4,250 shares of common stock were forfeited under the 2011 Plan.  For the three months ended September 30, 2016 and 2015, $70 thousand and $53 thousand, respectively, was recorded as expense for restricted stock that has been issued through the 2011 Plan in prior years. For the nine months ended September 30, 2016 and 2015, $204 and $159, respectively, was recorded as expense for restricted stock that has been issued through the 2011 Plan in prior years.  At September 30, 2016, there were a total of approximately 32,000 shares of unvested restricted stock and approximately $356 thousand of compensation expense which will be recorded over the next two years.

 

During the nine months ended September 30, 2016, the Company granted 30,000 Non-Qualified Stock Options (NQO) to an executive of the Company.  The fair value of the 30,000 NQOs granted was $2.92 per NQO on the date of grant. The fair value of the NQOs was determinded using the Black-Scholes option pricing model. The following assumptions were used in determining the fair value of the NQOs granted: expected dividend yield of 2.137%, risk free interest rate of 1.87%, expected volatility of 27.0% and expected lives of 10 years.   One third of the NQO granted, or 10,000 NQOs vested immedialty, with the remaining 20,000 NQOs vesting over a two year period. No NQOs were exercised or forfeited during the first nine months of 2016 under the 2011 Plan.

 

Under the 2011 Plan, there were 20,000 unvested options at September 30, 2016 and $46 thousand in unrecognized compensation expense. For the three and nine months ended September 30, 2016 and 2015, $7 thousand and $41, respectively, was recorded as expense for NQOs that have been issued through the 2011 Plan.

 

The aggregate intrinsic value of  a stock option represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had they exercised their options on that date.  This amount changes based on the changes in the market value in the Company’s stock. The aggregate intrinsic value of NQOs outstanding as of September 30, 2016 and 2015 under the 2011 Plan was approximately $0 and $0, respectively. 

 

Note 3.  Earnings Per Share.

 

Basic earnings per share is calculated by dividing the net income for a period by the weighted average number of common shares outstanding during that period.

 

Diluted earnings per share is calculated by dividing the net income for a period by the weighted average number of outstanding common shares and dilutive common share equivalents during that period. Outstanding “common share equivalents” include options and warrants to purchase the Company’s common stock.

 

The following table shows earnings per share for the three month periods presented:

 

 

 

 

 

 

 

 

 

 

    

For the three months ended

 

 

 

September 30, 

 

(In thousands except per share data)

    

2016

    

2015

 

Net income applicable to common stock

 

$

680

 

$

1,358

 

Weighted average number of common shares outstanding - basic

 

 

6,298

 

 

6,240

 

Basic earnings per share

 

$

0.11

 

$

0.22

 

 

 

 

 

 

 

 

 

Net income applicable to common stock

 

$

680

 

$

1,358

 

Weighted average number of common shares outstanding

 

 

6,298

 

 

6,240

 

Effect of dilutive options

 

 

3

 

 

16

 

Weighted average number of common shares outstanding- diluted

 

 

6,301

 

 

6,256

 

Diluted earnings per share

 

$

0.11

 

$

0.22

 

 

Incentive stock options to purchase 16,500 shares of common stock at a weighted average price of $9.09; and no unvested shares of restricted common stock were included in the computation of diluted earnings per share for the three months ended September 30, 2016.  Incentive stock options to purchase 35,000 shares of common stock at a weighted average price of $11.50,  non-qualified options to purchase 331,334 shares of common stock at a weighted average price

11


 

of $11.50 and non-qualified options to purchase 92,700 shares of common stock at a weighted average price of $11.19 were not included in the computation of diluted earnings per share for the three months ended September 30, 2016, because they were anti-dilutive.

 

Incentive stock options to purchase 84,700 shares of common stock at a weighted average price of $9.09; and 48,500 unvested shares of restricted common stock were included in the computation of diluted earnings per share for the three months ended September 30, 2015.  Incentive stock options to purchase 75,000 shares of common stock at a weighted average price of $11.50 and non-qualified options to purchase 331,334 shares of common stock at a weighted average price of $11.50 were not included in the computation of diluted earnings per share for the three months ended September 30, 2015, because they were anti-dilutive.

 

The following table shows earnings per share for the nine month periods presented:

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

 

 

 

September 30, 

 

(In thousands except per share data)

    

2016

    

2015

 

Net income applicable to common stock

 

$

3,003

 

$

3,774

 

Weighted average number of common shares outstanding - basic

 

 

6,261

 

 

6,049

 

Basic earnings per share

 

$

0.48

 

$

0.62

 

 

 

 

 

 

 

 

 

Net income applicable to common stock

 

$

3,003

 

$

3,774

 

Weighted average number of common shares outstanding

 

 

6,261

 

 

6,049

 

Effect of dilutive options

 

 

3

 

 

16

 

Weighted average number of common shares and common share equivalents- diluted

 

 

6,264

 

 

6,065

 

Diluted earnings per share

 

$

0.48

 

$

0.62

 

 

Incentive stock options to purchase 16,500 shares of common stock at a weighted average price of $9.09; and no unvested shares of restricted common stock were included in the computation of diluted earnings per share for the nine months ended September 30, 2016. Incentive stock options to purchase 35,000 shares of common stock at a weighted average price of $11.50, non-qualified options to purchase 331,334 shares of common stock at a weighted average price of $11.50 and non-qualified options to purchase 92,700 shares of common stock at a weighted average price of $11.19 were not included in the computation of diluted earnings per share for the nine months ended September 30, 2016, because they were anti-dilutive.

 

Incentive stock options to purchase 84,700 shares of common stock at a weighted average price of $9.09; and 48,500 unvested shares of restricted common stock were included in the computation of diluted earnings per share for the nine months ended September 30, 2015.  Incentive stock options to purchase 75,000 shares of common stock at a weighted average price of $11.50 and non-qualified options to purchase 331,334 shares of common stock at a weighted average price of $11.50 were not included in the computation of diluted earnings per share for the nine months ended September 30, 2015, because they were anti-dilutive.

 

12


 

Note 4.  Securities Available for Sale and Held to Maturity Securities

 

A summary of securities held to maturity and securities available for sale at September 30, 2016 and December 31, 2015 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

September 30, 2016

 

Cost

 

Gains

 

Losses

 

Value

 

Securities Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

$

5,096

 

$

 —

 

$

 —

 

$

5,096

 

Total securities held to maturity

 

 

5,096

 

 

 —

 

 

 —

 

 

5,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury obligations

 

 

6,428

 

 

13

 

 

 —

 

 

6,441

 

Government sponsored enterprise obligations

 

 

55,350

 

 

15

 

 

(28)

 

 

55,337

 

Total securities available for sale

 

 

61,778

 

 

28

 

 

(28)

 

 

61,778

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

66,874

 

$

28

 

$

(28)

 

$

66,874

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

December 31, 2015

 

Cost

 

Gains

 

Losses

 

Value

 

Securities Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

$

5,829

 

$

 

$

 

$

5,829

 

Total securities held to maturity

 

 

5,829

 

 

 —

 

 

 —

 

 

5,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury obligations

 

 

6,512

 

 

 

 

(159)

 

 

6,353

 

Government sponsored enterprise obligations

 

 

58,720

 

 

 

 

(323)

 

 

58,397

 

Total securities available for sale

 

 

65,232

 

 

 —

 

 

(482)

 

 

64,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

71,061

 

$

 —

 

$

(482)

 

$

70,579

 

 

The unrealized losses, categorized by the length of time of continuous loss position, and the fair value of related securities available for sale are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

More than 12 Months

 

Total

 

 

   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

September 30, 2016

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government Sponsored Enterprise obligations

 

 

24,104

 

 

(28)

 

 

 —

 

 

 —

 

 

24,104

 

 

(28)

 

Total securities available for sale

 

 

24,104

 

 

(28)

 

 

 —

 

 

 —

 

 

24,104

 

 

(28)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

More than 12 Months

 

Total

 

 

   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

December 31, 2015

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury obligation

 

 

 —

 

 

 —

 

 

6,353

 

 

(159)

 

 

6,353

 

 

(159)

 

Government Sponsored Enterprise obligations

 

 

15,707

 

 

(12)

 

 

42,690

 

 

(311)

 

 

58,397

 

 

(323)

 

Total securities available for sale

 

 

15,707

 

 

(12)

 

 

49,043

 

 

(470)

 

 

64,750

 

 

(482)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities

 

$

15,707

 

$

(12)

 

$

49,043

 

$

(470)

 

$

64,750

 

$

(482)

 

 

13


 

The amortized cost and fair value of securities held to maturity and securities available for sale at September 30, 2016 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

Securities Available for Sale

 

 

    

Amortized

    

Fair

    

Amortized

    

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

One year or less

 

$

5,096

 

$

5,096

 

$

26,728

 

$

26,732

 

After one to five years

 

 

 —

 

 

 —

 

 

35,050

 

 

35,046

 

Total

 

$

5,096

 

$

5,096

 

$

61,778

 

$

61,778

 

 

Management evaluates securities for other-than-temporary-impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  In determining OTTI management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost; (2) the financial condition and near term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery.  The assessment of whether an other-than-temporary-impairment decline exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time.  An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

 

When OTTI for debt securities occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis, the OTTI would be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.  If the Company does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, the OTTI would be separated into the amount representing the credit loss and the amount related to all other factors.  The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings.  The amount of the total OTTI related to other factors would be recognized in other comprehensive income, net of applicable tax benefit.  The previous amortized cost basis less the OTTI recognized in earnings would become the new amortized cost basis of the investment.

 

At September 30, 2016, the Company’s available for sale securities portfolio consisted of sixteen securities, of which none were in an unrealized loss position for more than twelve months and five were in a loss position for less than twelve months. No OTTI charges were recorded for the three or nine months ended September 30, 2016. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities. Unrealized losses primarily relate to interest rate fluctuations and not credit concerns.

 

Securities with an amortized cost of $50.3 million and a fair value of $50.3 million, were pledged to secure public funds on deposit at September 30, 2016. Securities with an amortized cost of $31.3 million and a fair value of $31.0 million, were pledged to secure public funds on deposit at December 31, 2015.  

 

During the three and nine months ended September 30, 2016, the Company did not sell securities from its available for sale or held to maturity portfolios.  During the three months ended September 30, 2015, the Company sold no securities from its available for sale portfolio.  For the nine months ended September 30, 2015, the Company sold three securities from its available for sale portfolio and recognized a loss of approximately $15 thousand.  For the three and nine months ended September 30, 2015, the Company did not sell any securities from its held to maturity portfolio. 

 

14


 

Note 5.  Loans.

 

The components of the loan portfolio at September 30, 2016 and December 31, 2015 are summarized as follows (in thousands):

 

 

    

September 30, 2016

    

December 31, 2015

 

Commercial real estate

 

$

482,926

 

$

460,396

 

Residential mortgages (1)

 

 

85,759

 

 

48,698

 

Commercial (1)

 

 

31,958

 

 

69,855

 

Home equity

 

 

57,903

 

 

63,308

 

Consumer

 

 

1,660

 

 

2,805

 

 

 

$

660,206

 

$

645,062

 

 

(1)

Reflects the results of a presentation reclassification of the Company’s loan portfolio, primarily effecting commercial loans and residential morgtgages made effective as of September 30, 2016.

 

The Company grants loans primarily to those New Jersey residents and businesses within its local trading area.  Its borrowers’ abilities to repay their obligations are dependent upon various factors, including the borrowers’ income and net worth, cash flows generated by the underlying collateral, value of the underlying collateral and priority of the Company’s lien on the property.  Such factors are dependent upon various economic conditions and individual circumstances beyond the Company’s control; the Company is therefore subject to risk of loss.  The Company believes its lending policies and procedures adequately manage the potential exposure to such risks and an allowance for loan losses is provided for management’s best estimate of probable loan losses.

 

The activity in the allowance for loan losses and recorded investment in loan receivables as of and for the periods indicated are as follows (in thousands):

 

For the three months ended and as of:

 

 

    

Commercial

    

Residential

    

 

    

 

    

 

    

 

    

 

 

September 30, 2016

 

Real Estate

 

Mortgages

 

Commercial

 

Home Equity

 

Consumer

 

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

5,866

 

$

294

 

$

1,100

 

$

524

 

$

17

 

$

425

 

$

8,226

 

Charge-offs

 

 

 —

 

 

 —

 

 

(1,026)

 

 

 —

 

 

(1)

 

 

 —

 

 

(1,027)

 

Recoveries

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1

 

 

 —

 

 

1

 

Provision

 

 

143

 

 

396

 

 

1,049

 

 

(51)

 

 

8

 

 

(425)

 

 

1,120

 

Ending balance

 

$

6,009

 

$

690

 

$

1,123

 

$

473

 

$

25

 

$

 —

 

$

8,320

 

Ending balance: individually evaluated for impairment

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Ending balance: collectively evaluated for impairment

 

$

6,009

 

$

690

 

$

1,123

 

$

473

 

$

25

 

$

 —

 

$

8,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

482,926

 

$

85,759

 

$

31,958

 

$

57,903

 

$

1,660

 

$

 —

 

$

660,206

 

Ending balance: individually evaluated for impairment

 

$

1,119

 

$

4,069

 

$

 —

 

$

4,514

 

$

 —

 

$

 —

 

$

9,702

 

Ending balance: collectively evaluated for impairment

 

$

481,807

 

$

81,690

 

$

31,958

 

$

53,389

 

$

1,660

 

$

 —

 

$

650,504

 

 

15


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial

    

Residential

    

    

    

    

    

    

    

    

    

    

 

September 30, 2015

 

Real Estate

 

Mortgages

 

Commercial

 

Home Equity

 

Consumer

 

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

5,691

 

$

640

 

$

980

 

$

543

 

$

24

 

$

 —

 

$

7,878

 

Charge-offs

 

 

 —

 

 

 

 

 

(36)

 

 

 

 

 

 

 

 

 

 

 

(36)

 

Recoveries

 

 

 —

 

 

 

 

1

 

 

 —

 

 

 

 

 

 

1

 

Provision

 

 

(246)

 

 

(16)

 

 

(10)

 

 

95

 

 

(7)

 

 

60

 

 

(124)

 

Ending balance

 

$

5,445

 

$

624

 

$

935

 

$

638

 

$

17

 

$

60

 

$

7,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

5,566

 

$

572

 

$

1,066

 

$

573

 

$

39

 

$

204

 

$

8,020

 

Ending balance: individually evaluated for impairment

 

$

 —

 

$

267

 

$

 —

 

$

80

 

$

 —

 

$

 —

 

$

347

 

Ending balance: collectively evaluated for impairment

 

$

5,566

 

$

305

 

$

1,066

 

$

493

 

$

39

 

$

204

 

$

7,673

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

460,396

 

$

48,698

 

$

69,855

 

$

63,308

 

$

2,805

 

$

 —

 

$

645,062

 

Ending balance: individually evaluated for impairment

 

$

842

 

$

4,524

 

$

 —

 

$

2,626

 

$

 —

 

$

 —

 

$

7,992

 

Ending balance: collectively evaluated for impairment

 

$

459,554

 

$

44,174

 

$

69,855

 

$

60,682

 

$

2,805

 

$

 —

 

$

637,070

 

 

The following tables present the activity in the allowance for loan losses for the periods indicated (in thousands):

 

For the nine months ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

    

Real Estate

    

Mortgages

    

Commercial

    

Home Equity

    

Consumer

    

Unallocated

    

Total

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

5,566

 

$

572

 

$

1,066

 

$

573

 

$

39

 

$

204

 

$

8,020

 

Charge-offs

 

 

 

 

(90)

 

 

(1,026)

 

 

(155)

 

 

(1)

 

 

 

 

(1,272)

 

Recoveries

 

 

 

 

 —

 

 

1

 

 

 

 

1

 

 

 

 

2

 

Provisions

 

 

443

 

 

208

 

 

1,082

 

 

55

 

 

(14)

 

 

(204)

 

 

1,570

 

Transfer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

6,009

 

$

690

 

$

1,123

 

$

473

 

$

25

 

$

 —

 

$

8,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

    

Real Estate

    

Mortgages

    

Commercial

    

Home Equity

    

Consumer

    

Unallocated

    

Total

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

4,950

 

$

348

 

$

1,128

 

$

500

 

$

24

 

$

242

 

$

7,192

 

Charge-offs

 

 

(60)

 

 

 

 

(265)

 

 

 

 

 —

 

 

 

 

(325)

 

Recoveries

 

 

191

 

 

 

 

2

 

 

 

 

 

 

 

 

193

 

Provisions

 

 

364

 

 

276

 

 

70

 

 

138

 

 

(7)

 

 

(182)

 

 

659

 

Ending balance

 

$

5,445

 

$

624

 

$

935

 

$

638

 

$

17

 

$

60

 

$

7,719

 

 

16


 

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2016 and December 31, 2015, (in thousands):

 

 

    

30-59 Days

    

60-89 Days

    

Greater than

    

Total Past

    

    

    

Total Loans

    

Nonaccrual

 

September 30, 2016

 

Past Due

 

Past Due

 

90 Days

 

Due

 

Current

 

Receivables

 

Loans

 

Commercial real estate

 

$

1,797

 

$

 —

 

$

1,119

 

$

2,916

 

$

480,010

 

$

482,926

 

$

1,119

 

Residential mortgages

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

85,759

 

 

85,759

 

 

3,545

 

Commercial

 

 

850

 

 

 —

 

 

 —

 

 

850

 

 

31,108

 

 

31,958

 

 

 —

 

Home equity

 

 

305

 

 

 —

 

 

126

 

 

431

 

 

57,472

 

 

57,903

 

 

4,411

 

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,660

 

 

1,660

 

 

 —

 

 

 

$

2,952

 

$

 —

 

$

1,245

 

$

4,197

 

$

656,009

 

$

660,206

 

$

9,075

 

 

 

    

30-59 Days

    

60-89 Days

    

Greater than

    

Total Past

    

    

    

Total Loans

    

Nonaccrual

 

December 31, 2015

 

Past Due

 

Past Due

 

90 Days

 

Due

 

Current

 

Receivables

 

Loans

 

Commercial real estate

 

$

402

 

$

 —

 

$

842

 

$

1,244

 

$

459,152

 

$

460,396

 

$

842

 

Residential mortgages

 

 

428

 

 

 —

 

 

3,992

 

 

4,420

 

 

44,278

 

 

48,698

 

 

3,992

 

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

69,855

 

 

69,855

 

 

 —

 

Home equity

 

 

 —

 

 

475

 

 

2,522

 

 

2,997

 

 

60,311

 

 

63,308

 

 

2,522

 

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,805

 

 

2,805

 

 

 —

 

 

 

$

830

 

$

475

 

$

7,356

 

$

8,661

 

$

636,401

 

$

645,062

 

$

7,356

 

 

The Company had no loans greater than ninety days delinquent and accruing interest at September 30, 2016 and December 31, 2015.

 

If nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the three and nine month periods ended September 30, 2016, the gross interest income would have been $62 thousand and $148 thousand, respectively. If nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the three and nine month periods ended September 30, 2015, the gross interest income would have been $57 thousand and $255 thousand, respectively.  Actual interest income recognized on these loans during the three and nine months ended September 30, 2016 was $0. Actual interest income recognized on these loans during the three and nine months ended September 30, 2015 was $0 and $17 thousand.

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of September 30, 2016 and December 31, 2015 (in thousands):

 

 

    

Commercial

    

Residential

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2016

 

Real Estate

 

Mortgages

 

Commercial

 

Home Equity

 

Consumer

 

Total

 

Pass

 

$

474,766

 

$

77,927

 

$

28,701

 

$

56,905

 

$

1,660

 

$

639,959

 

Special Mention

 

 

600

 

 

5,729

 

 

 —

 

 

 —

 

 

 —

 

 

6,329

 

Substandard

 

 

7,560

 

 

2,103

 

 

3,257

 

 

998

 

 

 —

 

 

13,918

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

482,926

 

$

85,759

 

$

31,958

 

$

57,903

 

$

1,660

 

$

660,206

 

 

 

    

Commercial

    

Residential

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

 

Real Estate

 

Mortgages

 

Commercial

 

Home Equity

 

Consumer

 

Total

 

Pass

 

$

450,193

 

$

48,698

 

$

62,367

 

$

57,910

 

$

2,805

 

$

621,973

 

Special Mention

 

 

7,644

 

 

 —

 

 

3,919

 

 

4,400

 

 

 —

 

 

15,963

 

Substandard

 

 

2,559

 

 

 —

 

 

3,569

 

 

998

 

 

 —

 

 

7,126

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

460,396

 

$

48,698

 

$

69,855

 

$

63,308

 

$

2,805

 

$

645,062

 

 

17


 

A loan is considered impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  The following table provides information about the Company’s impaired loans at September 30, 2016 and December 31, 2015 (in thousands): 

 

 

    

 

    

Unpaid

    

 

 

 

 

Recorded

 

Principal

 

Related

 

September 30, 2016

 

Investment

 

Balance

 

Allowance

 

Impaired loans with no specific reserves:

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

1,119

 

$

1,143

 

 

 —

 

Residential mortgages

 

 

4,069

 

 

4,806

 

 

 —

 

Commercial

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

 

4,514

 

 

4,824

 

 

 —

 

Total impaired loans with no specific reserves

 

$

9,702

 

$

10,773

 

 

 —

 

Total impaired loans

 

$

9,702

 

$

10,773

 

$

 —

 

 

 

    

 

    

Unpaid

    

 

 

 

 

Recorded

 

Principal

 

Related

 

December 31, 2015

 

Investment

 

Balance

 

Allowance

 

Impaired loans with specific reserves:

 

 

 

 

 

 

 

 

 

 

Residential mortgages

 

$

3,568

 

$

4,055

 

$

267

 

Home equity

 

 

278

 

 

175

 

 

80

 

Total impaired loans with specific reserves

 

$

3,846

 

$

4,230

 

$

347

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with no specific reserves:

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

842

 

$

867

 

$

 —

 

Residential mortgages

 

 

956

 

 

1,045

 

 

 —

 

Home equity

 

 

2,348

 

 

2,723

 

 

 —

 

Total impaired loans with no specific reserves

 

$

4,146

 

$

4,635

 

$

 —

 

Total impaired loans

 

$

7,992

 

$

8,865

 

$

347

 

 

The following tables provide information about the Company’s impaired loans for the three month and nine month periods ended September 30, 2016 and 2015  (in thousands):

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

September 30, 2016

 

September 30, 2015

 

 

    

Average

    

Interest

    

Average

    

Interest

 

 

 

Recorded

 

Income

 

Recorded

 

Income

 

 

 

Investment

 

Received

 

Investment

 

Received

 

Impaired loans with specific reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgages

 

$

 

$

 

$

248

 

$

 

Home equity

 

 

 

 

 

 

175

 

 

 

Total impaired loans with specific reserves

 

$

 —

 

$

 —

 

$

423

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with no specific reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

972

 

$

 

$

373

 

$

 

Residential mortgages

 

 

4,104

 

 

 

 

4,344

 

 

 —

 

Commercial

 

 

 

 

 

 

7

 

 

 

Home equity

 

 

3,846

 

 

 

 

2,474

 

 

 —

 

Total impaired loans with no specific reserves

 

 

8,922

 

 

 —

 

 

7,198

 

 

 —

 

Total impaired loans

 

$

8,922

 

$

 —

 

$

7,621

 

$

 —

 

 

 

18


 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30, 2016

 

September 30, 2015

 

 

    

Average

    

Interest

    

Average

    

Interest

 

 

 

Recorded

 

Income

 

Recorded

 

Income

 

 

 

Investment

 

Received

 

Investment

 

Received

 

Impaired loans with specific reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgages

 

$

 

$

 

$

248

 

$

 

Home equity

 

 

 

 

 

 

87

 

 

3

 

Total impaired loans with specific reserves

 

$

 —

 

$

 —

 

$

335

 

$

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with no specific reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

904

 

$

 

$

1,070

 

$

 

Residential mortgages

 

 

4,278

 

 

 

 

4,196

 

 

12

 

Commercial

 

 

 

 

 

 

4

 

 

 

Home equity

 

 

3,194

 

 

 

 

2,489

 

 

2

 

Total impaired loans with no specific reserves

 

 

8,376

 

 

 —

 

 

7,759

 

 

14

 

Total impaired loans

 

$

8,376

 

$

 —

 

$

8,094

 

$

17

 

 

Troubled debt restructured loans (“TDRs”) are loans where the contractual terms of the loan have been modified for a borrower experiencing financial difficulties.  These modifications could include a reduction in the interest rate of the loan, payment extensions, forgiveness of principal or a combination of these concessions.

 

The following table summarizes information in regards to TDRs by loan portfolio class as of September 30, 2016 and December 31, 2015 (in thousands):

 

 

    

Accrual

    

Number of

    

Nonaccrual

    

Number of

    

 

 

September 30, 2016

 

Status

 

Loans

 

Status

 

Loans

 

Total

 

Residential mortgages

 

$

524

 

2

 

$

3,545

 

5

 

$

4,069

 

Commercial real estate

 

 

 —

 

 —

 

 

342

 

1

 

 

342

 

Home equity

 

 

103

 

2

 

 

3,733

 

8

 

 

3,836

 

 

 

$

627

 

4

 

$

7,620

 

14

 

$

8,247

 

 

 

    

Accrual

    

Number of

    

Nonaccrual

    

Number of

    

 

 

December 31, 2015

 

Status

 

Loans

 

Status

 

Loans

 

Total

 

Residential mortgages

 

$

532

 

2

 

$

3,468

 

4

 

$

4,000

 

Commercial real estate

 

 

 —

 

 —

 

 

367

 

1

 

 

367

 

Home equity

 

 

104

 

2

 

 

859

 

1

 

 

963

 

 

 

$

636

 

4

 

$

4,694

 

6

 

$

5,330

 

 

 

For the three and nine months ended September 30, 2016 there were four new TDR’s that occurred. For the three and nine months ended September, 30 2015, there were no new TDRs that occurred. 

 

 

    

    

    

    

 

    

Post-

 

 

 

 

 

Pre-Modification

 

Modification

 

 

 

 

 

Outstanding

 

Outstanding

 

 

 

Number of

 

Recorded

 

Recorded

 

2016

 

Loans

 

Investments

 

Investments

 

Residential mortgages

 

1

 

$

52

 

$

52

 

Home equity

 

3

 

 

1,380

 

 

1,380

 

 

 

4

 

$

1,432

 

$

1,432

 

 

During the three and nine months ended September 30, 2016 two loans that were modified on troubled debt restructurings defaulted. During the three and nine months ended September 30, 2015, there were no defaults of loans modified on troubled debt restructurings.

 

We may obtain physical possession of real estate collateralizing loans via foreclosure or an in-substance repossession into other real estate owned. During the three months ended September 30, 2016, we have no foreclosed residential real estate properties.

 

19


 

As of September 30, 2016, we had loans with a carrying value of $2.1 million collateralized by real estate property for which formal foreclosure proceedings were in process.

 

Note 6. Guarantees

 

The Company does not issue any guarantees that would require liability recognition or disclosure, other than the Company’s standby letters of credit.  Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  Generally, all letters of credit, when issued have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The Company generally holds collateral and/or personal guarantees supporting these commitments.  As of September 30, 2016, the Company had $3.6 million of letters of credit outstanding.  Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees.  Management believes that the current amount of the liability as of September 30, 2016 for guarantees under standby letters of credit issued is not material.

 

Note 7. Borrowed Funds

 

Borrowings may consist of long-term and short-term debt fixed rate advances from the Federal Home Loan Bank of New York (“ FHLBNY”) as well as short term borrowings through lines of credit with other financial institutions.  Information concerning borrowings at September 30, 2016 and December 31, 2015, is as follows (in thousands):

 

 

 

 

 

 

 

 

Original

 

 

 

September 30, 2016

    

Amount

    

Rate

    

Term (years)

    

Maturity

 

Fixed Rate ST Note

 

$

5,000

 

0.76

%  

0.75

 

October  2016

 

Fixed Rate Medium Note

 

 

5,000

 

0.98

%  

1

 

April  2017

 

Fixed Rate Amortizing Note

 

 

2,879

 

1.50

%  

5

 

June  2019

 

Fixed Rate Amortizing Note

 

 

4,443

 

1.51

%  

5

 

July  2019

 

Fixed Rate Amortizing Note

 

 

4,263

 

1.51

%  

5

 

August  2019

 

Fixed Rate Amortizing Note

 

 

3,643

 

2.02

%  

7

 

August  2021

 

Fixed Rate Amortizing Note

 

 

6,420

 

1.48

%  

5

 

October  2019

 

 

 

$

31,648

 

1.36

%  

 

 

 

 

 

 

 

    

 

 

    

 

    

Original

    

 

 

December 31, 2015

 

Amount

 

Rate

 

Term (years)

 

Maturity

 

Fixed Rate Amortizing Note

 

$

3,621

 

1.50

%  

5

 

June  2019

 

Fixed Rate Amortizing Note

 

 

5,555

 

1.51

%  

5

 

July  2019

 

Fixed Rate Amortizing Note

 

 

5,299

 

1.51

%  

5

 

August  2019

 

Fixed Rate Amortizing Note

 

 

4,158

 

2.02

%  

7

 

August  2021

 

Fixed Rate Amortizing Note

 

 

7,896

 

1.48

%  

5

 

October  2019

 

 

 

$

26,529

 

1.58

%  

 

 

 

 

 

The Bank has a $16 million overnight line of credit facility available with Zions First National Bank, a $12.0 million overnight line of credit available with First Tennessee Bank and a $10.0 million overnight line of credit with Atlantic Community Bankers Bank for the purchase of federal funds in the event that temporary liquidity needs arise.  Additionally, the Bank is a member of the FHLBNY.  The FHLBNY relationship provides additional borrowing capacity.  There were no outstanding borrowings on any of the lines of credit at September 30, 2016 and December 31, 2015.

 

Note 8. Capital Resources

 

A significant measure of the strength of a financial institution is its capital base.

 

The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1 or core capital as a percentage of average assets, to measure the soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations.

 

Under the final capital rules that became effective on January 1, 2015, there is a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital

20


 

standards in the rule. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and is being phased in over a four-year period, increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019.

 

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to Risk Weighted Assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

 

The following table summarizes the Bank’s risk-based capital and leverage ratios at September 30, 2016, the applicable minimum ratios, the applicable minimum required based on the phase-in provisions and the minimum required to be considered well capitalized:

 

 

    

 

    

 

    

 

    

 

To Be Well

 

 

 

 

 

Minimum Required

 

Minimum Capital

 

 

Capitalized Under

 

 

 

 

 

For Capital

 

With Phase-in

 

 

Prompt Corrective

 

 

 

September 30, 2016

 

Adequacy Purposes

 

Buffer Schedule

 

 

Action Regulations

 

 

 

 

 

 

 

 

 

 

 

 

Risk-Based Capital:

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 Capital

 

11.02

%  

4.50

%  

5.125

%  

 

6.50

%

Tier 1 Capital Ratio

 

11.02

%  

6.00

%  

6.625

%  

 

8.00

%

Total Capital Ratio

 

12.27

%  

8.00

%  

8.625

%  

 

10.00

%

Leverage Ratio

 

9.20

%  

4.00

%  

N/A

 

 

5.00

%

 

Under a policy of the Federal Reserve applicable to holding companies with less than $1 billion in assets, the Company is not subject to capital requirements on a consolidated basis.  

 

Note 9. Fair Value Measurements

 

U. S. GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

 

The three levels of the fair value hierarchy are described below:

 

·

Level 1 Inputs - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

·

Level 2 Inputs - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

 

·

Level 3 Inputs - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (that is, supported with little or no market activity).

 

The level of an asset or liability within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement of that asset or liability.

 

21


 

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2016 and December 31, 2015, respectively, are as follows (in thousands):

 

 

    

 

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

Significant Other

 

 

 

 

 

 

September 30, 

 

for Identical

 

Observable

 

Significant

 

Description

 

2016

 

Assets

 

Inputs

 

Unobservable Inputs

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury obligations

 

$

6,441

 

$

 —

 

$

6,441

 

$

 —

 

Government sponsored enterprise obligations

 

 

55,337

 

 

 —

 

 

55,337

 

 

 —

 

Total securities available for sale

 

$

61,778

 

$

 —

 

$

61,778

 

$

 —

 

 

 

    

 

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

Significant Other

 

 

 

 

 

 

December 31, 

 

for Identical

 

Observable

 

Significant

 

Description

 

2015

 

Assets

 

Inputs

 

Unobservable Inputs

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury obligations

 

$

6,353

 

$

 

$

6,353

 

$

 —

 

Government sponsored enterprise obligations

 

 

58,397

 

 

 

 

58,397

 

 

 

Total securities available for sale

 

$

64,750

 

$

 —

 

$

64,750

 

$

 —

 

 

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2016 and December 31, 2015, respectively, follows (in thousands):

 

 

    

 

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

September 30, 

 

        Active Markets for        

 

        Significant Other        

 

Significant

 

Description

 

2016

 

Identical Assets

 

Observable Inputs

 

   Unobservable Inputs   

 

Impaired loans

 

$

1,342

 

$

 —

 

$

 —

 

$

1,342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned

 

$

614

 

$

 —

 

$

 —

 

$

614

 

 

 

    

                              

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

December 31, 

 

        Active Markets for        

 

        Significant Other        

 

Significant

 

Description

 

2015

 

Identical Assets

 

Observable Inputs

 

   Unobservable Inputs   

 

Impaired loans

 

$

3,499

 

$

 

$

 

$

3,499

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned

 

$

512

 

$

 —

 

$

 —

 

$

512

 

 

22


 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value (in thousands):

 

 

    

      Fair Value      

    

Valuation

    

Unobservable 

    

Range

 

September 30, 2016

 

Estimate

 

Techniques

 

Input

 

(Weighted Average)

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned

 

$

614

 

Appraisal of Collateral (1)

 

Appriasal Adjustments (2)

 

11.5% - 48.40% (21.8)%

 

 

 

 

 

 

 

 

Liquidation Expenses (2)

 

7% - 10.3% (7.9)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Fair Value      

    

Valuation

    

Unobservable 

    

Range

 

December 31, 2015

 

Estimate

 

Techniques

 

Input

 

(Weighted Average)

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

3,499

 

Appraisal of Collateral (1)

 

Appriasal Adjustments (2)

 

1.1% - 45.0% (-7.5)%

 

 

 

 

 

 

 

 

Liquidation Expenses (2)

 

5.2% -48.1% (-8.2)%

 

Other real estate owned

 

$

512

 

Appraisal of Collateral (1)

 

Appriasal Adjustments (2)

 

6.9%

 

 

 

 

 

 

 

 

Liquidation Expenses (2)

 

6.3%

 


(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

 

(2)

Appraisals may be adjusted for qualitative factors such as economic conditions and estimated liquidation expenses.  The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

Other real estate owned assets are adjusted to fair value less estimated selling costs upon transfer of the loans to other real estate owned.  The fair value of other real estate owned is based upon independent third party appraisal values of the collateral or management’s estimation of the value of the collateral.  These assets are included as Level 3 fair values.

 

Management uses its best judgment in estimating the fair value of the Company’s financial instruments, however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in sales transactions on the dates indicated.  The estimated fair value amounts have been measured as of their respective period end and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.

 

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

 

23


 

Fair value estimates and assumptions are set forth below for the Company’s financial instruments at September 30, 2016 and December 31, 2015 (in thousands):

 

 

    

 

 

    

 

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

Significant

 

 

 

September 30, 2016

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

Carrying amount

 

Estimated Fair Value

 

Identical Assets

 

Observable Inputs

 

Inputs

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

92,429

 

$

92,429

 

$

92,429

 

$

 

$

 

Interest bearing time deposits

 

 

1,000

 

 

1,000

 

 

 

 

1,000

 

 

 

Securities available for sale

 

 

61,778

 

 

61,778

 

 

 

 

61,778

 

 

 

Securities held to maturity

 

 

5,096

 

 

5,096

 

 

 

 

5,096

 

 

 

Restricted investment in bank stock

 

 

2,281

 

 

2,281

 

 

 

 

2,281

 

 

 

Net loans

 

 

651,387

 

 

666,833

 

 

 

 

 

 

666,833

 

Accrued interest receivable

 

 

2,376

 

 

2,376

 

 

 

 

2,376

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

725,239

 

 

728,623

 

 

418,145

 

 

310,478

 

 

 

Borrowed funds

 

 

31,648

 

 

31,761

 

 

 

 

31,761

 

 

 

Accrued interest payable

 

 

606

 

 

606

 

 

 

 

606

 

 

 

 

 

 

 

 

 

 

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

    

 

 

    

    

 

    

Quoted Prices in

    

 

 

    

Significant

 

 

 

December 31, 2015

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

Carrying amount

 

Estimated Fair Value

 

Identical Assets

 

Observable Inputs

 

Inputs

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

74,189

 

$

74,189

 

$

74,189

 

$

 

$

 

Interest bearing time deposits

 

 

1,000

 

 

1,000

 

 

 

 

1,000

 

 

 

Securities available for sale

 

 

64,750

 

 

64,750

 

 

 

 

64,750

 

 

 

Securities held to maturity

 

 

5,829

 

 

5,829

 

 

 

 

5,829

 

 

 

Restricted investment in bank stock

 

 

2,020

 

 

2,020

 

 

 

 

2,020

 

 

 

Net loans

 

 

636,661

 

 

639,525

 

 

 

 

 

 

639,525

 

Accrued interest receivable

 

 

2,305

 

 

2,305

 

 

 

 

2,305

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

700,739

 

 

702,593

 

 

350,375

 

 

352,218

 

 

 

Borrowed funds

 

 

26,529

 

 

26,517

 

 

 

 

26,517

 

 

 

Accrued interest payable

 

 

716

 

 

716

 

 

 

 

716

 

 

 

 

Cash and Cash Equivalents and Interest Bearing Time Deposits

 

The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values.

 

Securities

 

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.  For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquiditiy and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3).  In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level 3 investments.  Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.

 

24


 

Restricted Investment in Bank Stock

 

The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.

 

Loans Receivable

 

The fair value of loans are estimated using discounted cash flow analyses, using market rates at the date of statement of financial condition that reflect the credit and the interest rate-risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.  Generally, for variable rate loans that re-price frequently and with no significant change in credit risk, fair values approximate carrying values.

 

Impaired loans

 

Impaired loans are those for which the Company has measured impairment generally based on the fair value of the loan’s collateral or discounted cash flows based upon the expected proceeds.  Fair value is generally based upon independent third-party appraisals of the properties.  These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. 

 

Accrued Interest Receivable and Payable

 

The carrying amount of accrued interest receivable and accrued interest payable approximates fair value.

 

Other Real Estate Owned

 

Other real estate owned assets are adjusted to fair value less estimated selling costs upon transfer of the loans to other real estate owned.  The fair value of other real estate owned is based upon independent third party appraisal values of the collateral or management’s estimation of the value of the collateral.  These assets are included as Level 3 fair values.

 

Deposits

 

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).  Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities of time deposits.

 

Borrowed Funds

 

The fair value of borrowed funds is estimated using quoted market prices, if available, or by discounting future cash flows using current interest rates for similar financial instruments.

 

Limitation

 

The preceding fair value estimates were made at September 30, 2016 and December 31, 2015 based on pertinent market data and relevant information on the financial instrument.  These estimates do not include any premium or discount that could result from an offer to sell at one time the Company’s entire holdings of a particular financial instrument or category thereof.  Since no market exists for a substantial portion of the Company’s financial instruments, fair value estimates were necessarily based on judgments regarding future expected loss experience, current economic conditions, risk assessment of various financial instruments, and other factors.  Given the innately subjective nature of these estimates, the uncertainties surrounding them and the matter of significant judgment that must be applied, these fair value estimates cannot be calculated with precision.  Modifications in such assumptions could meaningfully alter these estimates.

 

Since these fair value approximations were made solely for on and off balance sheet financial instruments at September 30, 2016 and December 31, 2015, no attempt was made to estimate the value of anticipated future business. 

25


 

Furthermore, certain tax implications related to the realization of the unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into the estimates.

 

Note 10. Accumulated Other Comprehensive Income

 

There were no reclassifications out of accumulated other comprehensive income for the three and nine months ended September 30, 2016.

 

There were no reclassifications out of accumulated other comprehensive income for the three months inded September 30, 2015. Reclassifications out of accumulated other comprehensive income for the nine months ended September 30, 2015 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

    

Amount Reclassified from

    

    

 

 

 

Accumulated Other

 

 

 

Details About Accumulated Other

 

Comprehensive Income

 

Affected Line Item in the Statements 

 

Comprehensive Income (Loss) Components

 

(Loss)

 

of Income (Loss)

 

Nine months ended September 30, 2015

 

 

 

 

 

 

Available for Sale Securities

 

 

 

 

 

 

Realized gains on sale of securities

 

$

(15)

 

Gains (losses) on sale of securities

 

 

 

 

6

 

Income tax expense

 

Total reclassifications

 

$

(9)

 

Net of tax

 

 

 

Note 11. Recent Accounting Pronouncements

 

This note provides a summary description of recent accounting standards that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on consolidated financial statements issued in the near future.

 

ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The amendments in this ASU establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries.  The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services.  It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled.  To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.  Public entities will apply the new standard for annual periods beginning after December 15, 2017, including interim periods therein.  Three basic transition methods are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach.  Under the third alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application (e.g. January 1, 2018) and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings.  That is, prior years would not be restated and additional disclosures would be required to enable users of the financial statements to understand the impact of adopting the new standard in the current year compared to prior years that are presented under legacy U.S. GAAP.  Early adoption is prohibited under U.S. GAAP. The implementation of ASU 2014-09 should not have a material impact on the Company’s financial position or results of operations.

 

ASU 2016-1, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.

 

In January 2016 the FASB issued ASU 2016-1, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01  requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at

26


 

amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-01 will be effective for us on January 1, 2018 and is not expected to have a material impact on the Company’s financial position or results of operations.

 

ASU 2016-02, Leases.

 

In February 2016 the FASB issued ASU 2016-02, Leases. ASU 2016-02 amends existing lease accounting guidance to include the requirement to recognize most lease arrangements on the statement of financial condition. The adoption of this standard will require the Company to recognize the rights and obligations arising from operating leases as assets and liabilities. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, early adoption is permitted. The Company is presently evaluating the potential impact of the adoption of this accounting pronouncement to its financial position or results of operations.

 

ASU 2016-13, Financial Instruments – Credit Losses

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. For public business entities that are U.S. Securities and Exchange Commission filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements and results of operations.

 

27


 

ITEM 2

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

You should read this discussion and analysis in conjunction with the unaudited interim consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, and with our audited consolidated financial statements for the year ended December 31, 2015 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission.

 

Statements Regarding Forward Looking Information

 

This document contains forward-looking statements, in addition to historical information.  Forward looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” and variations of such words and similar expressions, or future or conditional verbs such as “would,” “should,” “could,” “may,” or similar expressions.  The U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, provide a safe harbor in regard to the inclusion of forward-looking statements in this document and documents incorporated by reference.

 

You should note that many factors, some of which are discussed elsewhere in this document could affect the future financial results of Bancorp of New Jersey, Inc. and its subsidiaries and could cause those results to differ materially from those expressed in the forward-looking statements contained in this document.  These factors include, but are not limited, to the following:

 

·

Economic conditions affecting the financial industry;

·

Changes in interest rates and shape of the yield curve;

·

Credit risk associated with our lending activities;

·

Risks relating to our market area, significant real estate collateral and the real estate market;

·

Legislative and regulatory changes and our ability to comply with the significant laws and regulations impacting the banking and financial services industry;

·

Operating, legal and regulatory compliance risk;

·

Regulatory capital requirements and our ability to raise and maintain capital;

·

Our ability to prevent, detect and respond to any cyberattacks in order to protect our information assets and supporting infrastructure including information of our customers;

·

Our ability to attract and retain well-qualified management;

·

Fiscal and monetary policy;

·

Economic, political and competitive forces affecting our business;

·

Risks associated with potential business combinations; and

·

That management’s analysis of these risks and factors could be incorrect, and/or that the strategies developed to address them could be unsuccessful.

 

Bancorp of New Jersey, Inc., referred to as “we” or the “Company,” cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which change over time, and we assume no duty to update forward-looking statements, except as may be required by applicable law or regulation, and except as required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation, to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. We caution readers not to place undue reliance on any forward-looking statements.  These statements speak only as of the date made, and we advise readers that various factors, including those described above, could affect our financial performance and could cause actual results or circumstances for future periods to differ materially from those anticipated or projected.

 

Critical Accounting Policies, Judgments and Estimates

 

Our financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this report.  Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect our reported results

28


 

and financial position for the period or future periods.  Financial assets and liabilities required to be recorded at, or adjusted to reflect, fair value require the use of estimates, assumptions, and judgments.  Assets carried at fair value inherently result in more financial statement volatility.  Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available.  When such information is not available, management estimates valuation adjustments.  Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our financial condition and results of operations.

 

Allowance for Loan Losses

 

The allowance for loan losses (“ALLL”) represents our best estimate of losses known and inherent in our loan portfolio that are both probable and reasonable to estimate. In determining the amount of the ALLL, we consider the losses inherent in our loan portfolio and changes in the nature and volume of our loan activities, along with general economic and real estate market conditions. We utilize a segmented approach which identifies: (1) impaired loans for which specific reserves are established; (2) classified loans for which the general valuation allowance for the respective loan type is deemed to be inadequate; and (3) performing loans for which a general valuation allowance is established. We maintain a loan review system which provides for a systematic review of the loan portfolios and the identification of impaired loans. The review of residential real estate and home equity consumer loans, as well as other more complex loans, is triggered by identified evaluation factors, including delinquency status, size of loan, type of collateral and the financial condition of the borrower. Specific reserves are established for impaired loans based on a review of such information and/or appraisals of the underlying collateral. General reserves are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management’s judgment.

 

Although specific and general reserves are established in accordance with management’s best estimates, actual losses are dependent upon future events, and as such, further provisions for loan losses may be necessary in order to maintain the allowance for loan losses at an adequate level.  For example, our evaluation of the allowance includes consideration of current economic conditions, and a change in economic conditions could reduce the ability of borrowers to make timely repayments of their loans. This could result in increased delinquencies and increased non-performing loans, and thus a need to make additional provisions for loan losses. Any provision reduces our net income. While the allowance is increased by the provision for loan losses, it is decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. A change in economic conditions could adversely affect the value of properties collateralizing real estate loans, resulting in increased charges against the allowance and reduced recoveries, and require additional provisions for loan losses. Furthermore, growth or a change in the composition of our loan portfolio could require additional provisions for loan losses.

 

Deferred Income Taxes

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the period in which the deferred tax asset or liability is expected to be settled or realized.  The effect on deferred taxes of a change in tax rates is recognized in income in the period in which the change occurs.  Deferred tax assets are reduced, through a valuation allowance, if necessary, by the amount of such benefits that are not expected to be realized based on current available evidence.

 

29


 

Results of Operations

 

Three Months Ended September 30, 2016 and 2015 and Nine Months Ended September 30, 2016 and 2015

 

Our results of operations depend primarily on net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities.  Interest-earning assets consist principally of loans and investment securities, while interest-bearing liabilities consist primarily of deposits.  Net income is also affected by the provision for loan losses and the level of non-interest income, as well as by non-interest expenses, including salaries and employee benefits, occupancy and equipment expense, and other expenses, and income tax expense.

 

Net Income

 

Net income for the third quarter of 2016 was $680 thousand compared to $1.4 million for third quarter of 2015, a decrease of $678 thousand, or 49.9%.  This decrease was primarily due to increases in non-interest expense of $354  thousand or 9.1% and an increase in the provision for loan loss of $1.2 million partially offset by an increase in net interest income of $399 thousand.

 

Net income for the nine months ended September 30, 2016 was approximately $3.0 million compared to net income of approximately $3.8 million for the nine months ended September 30, 2015, a decrease of $771 thousand, or 20.4%.  The decrease was due to an increases of $911 thousand and $1.2 million in provision for loan loss and non-interest expense, respectively. These increases were partially offset by an increase in net interest income of $738 thousand and an increase in other operating income of $168 thousand.

 

Net Interest Income

 

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities.  Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.  For the three month period ended September 30, 2016, net interest income increased by $399 thousand or 7.0%. Interest income on loans increased slightly by $75 thousand for the three months ended September 30, 2016 as compared to the corresponding period last year. This increase in interest income was due to a $59.5 million increase in average commercial loans and $9.7 million decreases in the average balance of consumer and residential mortgage loans respectively. Yield on total loans decreased to 4.61% during the three months ended September 30, 2016 from 4.69% in the three months ended September 30, 2015. Total interest expense declined by $329 thousand in the third quarter of 2016 to $1.7 milliom compared to $2.1 million in the prior year period. The decline reflects a decrease in interest expense on certificate of deposits of $391 thousand for the three months ended September 30, 2016, compared to the three months ended September 30, 2015,  partially offset by an increase of $64 thousand in savings and money market deposits, and was due in most part to maturing of higher yielding certificates of deposits being replaced by lower yielding savings, money market and demand deposits. During the third quarter of 2016 average time deposits declined to $307 million from $384.5 million in the comparable quarter of 2015 In addition, the average balance of borrowings increased from $28.7 million for the quarter ended September 30, 2015, up to $33.9 million for the same quarter this year, an increase of $5.2 million. Average non-interest bearing deposits increased to $139.7 million in the current quarter from $104.7 million in the third quarter of 2015.

 

During the nine months ended September 30, 2016, net interest income reached $18.4 million compared to $17.7 million for the nine months ended September 30, 2015, an increase of $738 thousand, or 4.17%.  Total interest expense decreased by $756 thousand to $5.3 million for the nine months ended September 30, 2016 from $6.1 million for the nine months ended September 30, 2015.  The Company’s average rate paid on interest bearing liabilities decreased to 1.15% for the three months ended September 30, 2016, from 1.27% for the nine months ended September 30, 2015. During the first nine months of 2016, average time deposits declined to $320.9 million from $328.5 million in the comparable period of 2015. In addition, average non-interest bearing deposits increased to $128.7 million in the first nine months of 2016 from $95.6 million in the comparable period of 2015.

 

30


 

The following tables set forth average balance sheets, averages yields and costs, and certain other information for the periods indicated. All averages are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carring a zero yield.

 

 

 

 

For the three months ended September 30,

 

 

 

2016

 

2015

 

 

    

Average

    

 

 

    

Average

    

Average

    

 

 

    

Average

    

 

 

Balance

 

Interest

 

Yield/Cost

 

Balance

 

Interest

 

Yield/Cost

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

657,839

 

 

7,620

 

4.61

$

638,343

 

 

7,544

 

4.69

Securities (1)

 

 

66,667

 

 

175

 

1.04

 

 

72,386

 

 

239

 

1.31

 

Federal Funds Sold

 

 

1,035

 

 

4

 

1.92

 

 

1,334

 

 

1

 

0.30

 

Interest-earning cash accounts

 

 

88,277

 

 

106

 

0.48

 

 

94,255

 

 

50

 

0.21

 

Total interest-earning Assets

 

 

813,818

 

 

7,905

 

3.86

 

806,318

 

 

7,834

 

3.85

Non-interest earning Assets

 

 

22,087

 

 

 

 

 

 

 

18,377

 

 

 

 

 

 

Allowance for Loan Losses

 

 

(8,447)

 

 

 

 

 

 

 

(7,920)

 

 

 

 

 

 

Total Assets

 

$

827,458

 

 

 

 

 

 

$

816,775

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand Deposits

 

$

37,671

 

$

20

 

0.21

$

33,033

 

$

19

 

0.23

Savings Deposits

 

 

98,972

 

 

230

 

0.92

 

 

79,710

 

 

180

 

0.90

 

Money Market Deposits

 

 

131,467

 

 

135

 

0.41

 

 

111,111

 

 

122

 

0.44

 

Time Deposits

 

 

307,034

 

 

1,238

 

1.60

 

 

384,500

 

 

1,628

 

1.68

 

Borrowed Funds

 

 

33,894

 

 

112

 

1.31

 

 

28,686

 

 

113

 

1.56

 

Total Interest Bearing Liabilities

 

 

609,038

 

 

1,735

 

1.13

 

637,040

 

 

2,062

 

1.28

Non-Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand Deposits

 

 

139,690

 

 

 

 

 

 

 

104,653

 

 

 

 

 

 

Other Liabilities

 

 

2,723

 

 

 

 

 

 

 

3,176

 

 

 

 

 

 

Total Non-Interest Bearing Liabilities

 

 

142,413

 

 

 

 

 

 

 

107,829

 

 

 

 

 

 

Stockholders’ Equity

 

 

76,007

 

 

 

 

 

 

 

71,906

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

 

$

827,458

 

 

 

 

 

 

$

816,775

 

 

 

 

 

 

Net Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Tax Equivalent Basis)

 

 

 

 

$

6,170

 

 

 

 

 

 

$

5,772

 

 

 

Tax Equivalent Basis adjustment

 

 

 

 

 

(9)

 

 

 

 

 

 

 

(10)

 

 

 

Net Interest Income

 

 

 

 

$

6,161

 

 

 

 

 

 

$

5,762

 

 

 

Net Interest Rate Spread

 

 

 

 

 

 

 

2.73

 

 

 

 

 

 

2.57

Net Interest Margin

 

 

 

 

 

 

 

3.02

 

 

 

 

 

 

2.84

Ratio of Interest-Earning Assets to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities

 

 

1.34

 

 

 

 

 

 

 

1.27

 

 

 

 

 

 

 

(1)

Yield is calculated on a tax effective basis.

 

31


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30,

 

 

2016

 

2015

 

 

    

Average

    

 

 

    

Average

    

Average

    

 

 

    

Average

    

 

 

Balance

 

Interest

 

Yield/Cost

 

Balance

 

Interest

 

Yield/Cost

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

652,409

 

 

22,838

 

4.68

$

647,581

 

 

22,956

 

4.74

Securities (1)

 

 

67,002

 

 

608

 

1.21

 

 

70,658

 

 

706

 

1.34

 

Federal Funds Sold

 

 

1,109

 

 

13

 

1.57

 

 

1,361

 

 

5

 

0.49

 

Interest-earning cash accounts

 

 

86,082

 

 

299

 

0.46

 

 

70,221

 

 

112

 

0.21

 

Total interest-earning Assets

 

 

806,602

 

 

23,758

 

3.93

 

789,821

 

 

23,779

 

4.03

Non-interest earning Assets

 

 

20,961

 

 

 

 

 

 

 

18,567

 

 

 

 

 

 

Allowance for Loan Losses

 

 

(8,227)

 

 

 

 

 

 

 

(7,550)

 

 

 

 

 

 

Total Assets

 

$

819,336

 

 

 

 

 

 

$

800,838

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand Deposits

 

$

35,921

 

$

58

 

0.22

$

30,034

 

$

52

 

0.23

Savings Deposits

 

 

94,771

 

 

650

 

0.92

 

 

74,759

 

 

495

 

0.89

 

Money Market Deposits

 

 

129,963

 

 

401

 

0.41

 

 

117,160

 

 

377

 

0.43

 

Time Deposits

 

 

320,890

 

 

3,859

 

1.61

 

 

382,465

 

 

4,770

 

1.67

 

Borrowed Funds

 

 

31,305

 

 

328

 

1.40

 

 

30,347

 

 

358

 

1.58

 

Total Interest Bearing Liabilities

 

 

612,850

 

 

5,296

 

1.15

 

634,765

 

 

6,052

 

1.27

Non-Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand Deposits

 

 

128,732

 

 

 

 

 

 

 

95,618

 

 

 

 

 

 

Other Liabilities

 

 

2,785

 

 

 

 

 

 

 

2,550

 

 

 

 

 

 

Total Non-Interest Bearing Liabilities

 

 

131,517

 

 

 

 

 

 

 

98,168

 

 

 

 

 

 

Stockholders’ Equity

 

 

74,969

 

 

 

 

 

 

 

67,905

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

 

$

819,336

 

 

 

 

 

 

$

800,838

 

 

 

 

 

 

Net Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Tax Equivalent Basis)

 

 

 

 

$

18,462

 

 

 

 

 

 

$

17,727

 

 

 

Tax Equivalent Basis adjustment

 

 

 

 

 

(27)

 

 

 

 

 

 

 

(29)

 

 

 

Net Interest Income

 

 

 

 

$

18,435

 

 

 

 

 

 

$

17,698

 

 

 

Net Interest Rate Spread

 

 

 

 

 

 

 

2.78

 

 

 

 

 

 

2.75

Net Interest Margin

 

 

 

 

 

 

 

3.06

 

 

 

 

 

 

3.00

Ratio of Interest-Earning Assets to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities

 

 

1.32

 

 

 

 

 

 

 

1.24

 

 

 

 

 

 

 

(1)

Yield is calculated on a tax effective basis.

 

 

Provision for Loan Losses

 

The provision for loan losses represents our determination of the amount necessary to bring our allowance for loan losses to the level that we consider adequate to absorb probable losses inherent in our loan portfolio. See “Allowance for Loan Losses” for additional information about our allowance for loan losses and our methodology for determining the amount of the allowance.  The provision for loan losses was $1.1 million and $1.6 million for the three months and nine month periods ended September 30, 2016, respectively, compared to a recovery of $124 thousand and provision of $659 thousand for the three month and nine month periods ended September 30, 2015. The majority of the increase in the provision for the three months ended September 30, 2016 is related to a single credit placed on non-accrual status in the third quarter of 2016.

 

Non-interest Income

 

Our non-interest income is comprised primarily of service fees received from deposit accounts and gains (losses) on the sales of securities.  For the three months and nine months ended September 30, 2016, non-interest income increased by $104 thousand and $168 thousand, respectively, as compared to the three months and nine months ended September 30, 2015.

 

Non-interest Expense

 

Non-interest expense was $4.2 million during the third quarter of 2016 compared to $3.9 million in the third quarter of 2015, an increase of approximately $353 thousand.  This increase was primarily due to increases in salaries and employee benefits of $209 thousand, professional fees of $159 thousand and data processing of $56 thousand. For the nine months ended September 30, 2016, non-interest expense was $12.7 million compared to $11.5 million for the nine months ended September 30, 2015, an increase of $1.2 million, or 10.1%.  The nine month increases were primarily due

32


 

to salaries and employee benefits which included severance, FDIC premiums, professional fees, data processing and other expenses of $680 thousand, $295 thousand, $196 thousand, $152 thousand and $115 thousand, respectively. These  increases were related to the Company’s efforts to enhance its risk management structure, including consultant costs, legal expense, retaining experienced staff and the cost of loan system upgrades.

 

Income Tax Expense

 

The income tax provision decreased $416 thousand to $322 thousand for the three months ended September 30, 2016 from $738 thousand for the quarter ended September 30, 2015.  For the nine months ended September 30, 2016, income tax expense was $1.6 million, a decrease of $396 thousand from the nine months ended September 30, 2015.  The effective tax rate for the three and nine month periods ended September 30, 2016, were 32.1% and 34.8%, respectively, compared to 35.2% and 34.6%, respectively, for the corresponding periods in 2015.

 

FINANCIAL CONDITION

 

Total consolidated assets increased by $32.2 million, or approximately 4.09%, from $802.9 million at December 31, 2015 to $835.1 million at September 30, 2016.  Loans receivable, or “total loans,” increased from $645.1 million at December 31, 2015 to $660.2 million at September 30, 2016, an increase of approximately $15.1 million, or 2.4%.  Total cash and cash equivalents increased from $74.1 million at December 31, 2015 to $92.4 million at September 30, 2016, an increase of $18.2 million.  Total deposits grew by $24.5 million to $725.2 million at September 30, 2016, from $700.7 million at December 31, 2015 . Borrowed funds grew to $31.7 million at September 30, 2016 from $26.5 million at December 31, 2015.

 

Loans

 

Our loan portfolio is the primary component of our assets.  Total loans, which exclude net deferred fees and costs and the allowance for loan losses, increased by 2.3% to reach $651.4 million at September 30, 2016 from $636.7 million at December 31 2015. Historically, we offered residential mortgage loans. However in light of the increasing regulatory and compliance burdens associated with these loans, they have become a less significant part of our business strategy. As a result, we expect our portfolio of residential mortgage loans to continue to decrease in future periods, exclusive of the results of the presentation reclassification of the Company’s loan portfolio, primarily effecting commercial loans and residential mortgages made effective as of September 30, 2016, as described in Note 5 to the Unaudited Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10Q. Our market area is concentrated in Bergen County, New Jersey, with commercial loans made to borrowers located primarily in New Jersey and New York. We believe that we will continue to have opportunities for commercial loan growth due in part, to our experienced staff and relationship focused strategy, and this commercial loan growth should help mitigate the run-off in the residential portfolio.

 

Our loan portfolio consists of commercial loans, commercial and residential real estate loans, consumer loans and home equity loans.  Commercial loans are made for the purpose of providing working capital primarily for construction, financing the purchase of an income producing property, purchase of equipment or inventory, as well as for other business purposes.  Real estate loans consist of loans secured by commercial or residential real property and loans for the construction of commercial or residential investment property.   We have a concentration of commercial loans collateralized by real estate.

 

We have not made any sub-prime loans.    We believe that our strategy of customer service, competitive rate structures, and selective marketing have enabled us to effectively compete as a relationship driven community bank.

 

For more information on the loan portfolio, see Note 5 in Notes to the Unaudited Consolidated Financial Statements in Part I, Item 1of this Quarterly Report on Form 10-Q.

 

Loan Quality

 

As mentioned above, our principal assets are our loans.  Inherent in the lending function is the risk of the borrower’s inability to repay a loan under its existing terms.  Risk elements include past due and restructured loans, potential problem loans and loan concentrations.

 

33


 

Impaired loans are identified by evaluating factors, including delinquency status, size of loan, type of collateral and the financial condition of the borrower. Non-performing assets include loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more, troubled debt restructured loans and foreclosed assets.  When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest, including interest applicable to prior years, is reversed and charged against current income.  Payments received from the borrower are applied to outstanding principal until such time as management determines that the financial condition of the borrower and other factors warrant returning the loan to accruing status.

 

We attempt to manage overall credit risk through loan diversification and our loan underwriting and approval procedures.  Due diligence begins at the time we begin to discuss the origination of a loan with a borrower.  Documentation, including a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source and timing of the repayment of the loan, and other factors are analyzed before a loan is submitted for approval.  Loans made are also subject to periodic audit and review.

 

As of September 30, 2016 the Bank had twenty non-accrual loans totaling approximately $9.1 million, compared to non-accrual loans totaling $7.4 million at year end 2015. The increase in non-accrual loans reflects the impact of a credit with an outstanding balance of $1.4 million being placed on non-accrual during the third quarter. If the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the three and nine month periods ended September 30, 2016, the gross interest income that would have been recorded in such periods would have been approximately $62 thousand and $148 thousand, respectively.

 

Within its nonaccrual loans at September 30, 2016, the Bank had five residential mortgage loans, eight home equity loans and one commercial real estate loan that met the definition of a troubled debt restructuring (“TDR”) loan.  During the third quarter of 2016, there were four new TDR loans totaling $1.4 million of which one was a residential mortgage and three were home equity loans.

 

TDRs are loans where the contractual terms have been modified for borrowers experiencing financial difficulties.  These modifications could include a reduction in the interest rate of the loan, payment extensions, forgiveness of principal, or a combination of these concessions.    At September 30, 2016, nonaccrual TDR loans had an outstanding balance of $7.6 million and had no specific reserves connected with them.  Of the TDR loans, two residential mortgage loans and two home equity loans totaling $524 thousand and $103 thousand, respectively, are performing in accordance with their modified terms.  At September 30, 2016, the Bank had a total of four accruing loans which met the definition of a TDR.

 

Investment Securities

 

Securities held as available for sale (“AFS”) were $61.8 million at September 30, 2016 compared to $64.8 million at December 31, 2015.

 

Deposits

 

Deposits remain our primary source of funds.  Total deposits increased to $725.2 million at September 30, 2016 from $700.7 million at December 31, 2015, an increase of $24.5 million, or 3.5%.  Time deposits decreased by $43.3 million while savings and other interest bearing and noninterest bearing accounts increased by $37.4 and $30.4 million, respectively, during the first nine months of 2016. The Company has no foreign deposits, nor are there any material customer concentrations of deposits.

 

Borrowed Funds

 

Borrowings consist of long-term and short-term advances from the Federal Home Loan Bank of New York (“FHLBNY”).  These advances are secured under terms of a blanket collateral agreement by a pledge of qualifying securities and mortgage loans.  At September 30, 2016 and December 31, 2015, the Bank had outstanding borrowings of $31.6 million and $26.5 million, respectively, with the FHLBNY.

 

Liquidity

 

Our liquidity is a measure of our ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner.  Our principal sources of funds are deposits, scheduled amortization and prepayments of loan

34


 

principal, maturities of investment securities, and funds provided by operations.  While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by prevailing interest rates, economic conditions, and competition.  In addition, if warranted, we would be able to access funds through established lines of credit and borrowings.

 

As of September 30, 2016, we had a $16 million overnight line of credit with Zions First National Bank, a $12 million overnight line of credit with First Tennessee Bank and a $10 million overnight line of credit with Atlantic Central Bankers Bank for the purchase of federal funds in the event that temporary liquidity needs arise.  There were no amounts outstanding under any of the facilities at September 30, 2016.  We are an approved member of the FHLBNY.  The FHLBNY relationship could provide additional sources of liquidity, if required.  At September 30, 2016, we have $ 31.6 million of borrowed funds from the FHLBNY.

 

Our total deposits equaled $725.2 million and $700.7 million, respectively, at September 30, 2016 and December 31, 2015. Cash and cash equivalents increased from $74.2 million on December 31, 2015 to $92.4 million on September 30, 2016. 

 

Through the investment portfolio, we have generally sought to obtain a safe, yet slightly higher yield than would have been available to us as a net seller of overnight federal funds, while maintaining liquidity.  Through our investment portfolio, we also attempt to manage our maturity gap, by seeking maturities of investments which coincide with maturities of deposits.  The investment portfolio also includes securities available for sale to provide liquidity for anticipated loan demand and other liquidity needs. (See Investment Securities)

 

We believe that our current sources of funds provide adequate liquidity for our current cash flow needs.

 

 

 

ITEM 3. Quantitative and Qualitative Disclosures about Market/Interest Risk

 

As a smaller reporting company, the Company is not required to provide the information otherwise required by this Item.

 

ITEM 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures.

 

As of September 30, 2016, the Company’s management including the Chief Executive Officer and President (our Principal Executive and Operating Officer) and Senior Vice President and Chief Financial Officer (our Principal Financial and Accounting Officer), evaluated the Company’s disclosure controls and procedures related to the recording, processing, summarization, and reporting of information in the Company’s periodic reports that the Company files with the Securities and Exchange Commission.

 

Based on their evaluation as of September 30, 2016, the Company’s Chief Executive Officer and President and the Company’s Senior Vice President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

 

Changes in internal controls over financial reporting.

 

There was no change in our internal control over financial reporting identified during the quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

35


 

PART II  OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

The Company and the Bank are periodically parties to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to the Bank’s business. Management does not believe that there are any pending or threatened proceedings against the Company or the Bank which, if determined adversely, would have a material effect on the business, financial position or results of operations of the Company or the Bank, nor are there any such proceedings known to be contemplated by governmental authorities.

 

Item 1A.  Risk Factors

 

As a smaller reporting company, the Company is not required to provide the information otherwise required by this Item.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds .

 

None

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not Applicable

 

Item 5.  Other Information

 

None.

 

Item 6.  Exhibits

 

The exhibits filed or incorporated by reference as part of this report are listed in the Exhibit Index, which appears at page 38.

36


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Bancorp of New Jersey, Inc.

 

 

 

 

 

 

Date:  November 14, 2016

By:

/s/ Nancy E. Graves

 

 

Nancy E. Graves

 

 

Chief Executive Officer and President

 

 

(Principal Executive and Operating Officer)

 

 

 

 

 

 

 

By:

/s/ Matthew Levinson

 

 

Matthew Levinson

 

 

Senior Vice President and

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

 

37


 

EXHIBIT INDEX

 

Exhibit No.

    

 

    

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1

 

 

 

Rule 13a-14(a) Certification of Principal Executive Officer

31.2

 

 

 

Rule 13a-14(a) Certification of Principal Financial Officer

32

 

 

 

Section 1350 Certifications

101

 

 

 

Interactive Data Files

101.INS

 

 

 

XBRL Instance Document

101.SCH

 

 

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

 

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

 

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

 

 

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

 

 

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

38


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