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, 2019

 

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 every Interactive Data File required to be submitted 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 such files).  Yes  ☒  No ☐

 

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

 

 

 

 

 

Large accelerated filer 

Accelerated filer ☒

Non-accelerated filer 

Smaller reporting company ☒

 

 

 

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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

 

Securities registered pursuant to section 12(b) of the Act:

 

 

 

Title of each class

Trading symbol

Name of each exchange on which registered

Common stock

BKJ

NYSE MKT, LLC

 

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 1, 2019, there were 7,320,404 outstanding shares of the issuer’s class of common stock, no par value.

 

 

INDEX

 

PAGE

 

 

Part I           Financial Information 

 

 

 

 

Item 1. 

Financial Statements:

3

 

 

 

 

Unaudited Consolidated Statements of Financial Condition — September 30, 2019 and December 31, 2018

3

 

 

 

 

Unaudited Consolidated Statements of Income - Three Months Ended September 30, 2019 and 2018

4

 

 

 

 

Unaudited Consolidated Statements of Income – Nine Months Ended September 30, 2019 and 2018

5

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income- Three and Nine months Ended September 30, 2019 and 2018

6

 

 

 

 

Unaudited Consolidated Statements of Stockholders’ Equity – Nine Months Ended September 30, 2019 and 2018

7

 

 

 

 

Unaudited Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2019 and 2018

8

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

9

 

 

 

Item 2. 

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

30

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

40

 

 

 

Item 4. 

Controls and Procedures

40

 

 

 

Part II         Other Information 

 

 

 

 

Item 1. 

Legal Proceedings

41

 

 

 

Item 1A. 

Risk Factors

41

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

41

 

 

 

Item 3. 

Defaults Upon Senior Securities

41

 

 

 

Item 4. 

Mine Safety Disclosures

41

 

 

 

Item 5. 

Other Information

41

 

 

 

Item 6. 

Exhibits

41

 

 

 

Signatures 

 

43

 

ITEM 1. Financial Statements

 

BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except for per share data)

 

 

 

 

 

 

 

 

 

 

    

September 30, 2019

    

December 31, 2018

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

2,601

 

$

3,541

 

Interest bearing deposits

 

 

101,885

 

 

59,024

 

Federal funds sold

 

 

4,035

 

 

1,977

 

Total cash and cash equivalents

 

 

108,521

 

 

64,542

 

Interest bearing time deposits

 

 

500

 

 

500

 

Securities available for sale

 

 

26,914

 

 

32,293

 

Securities held to maturity (fair value $264 and $5,852 at September 30, 2019 and December 31, 2018, respectively)

 

 

264

 

 

5,852

 

Restricted investment in bank stock, at cost

 

 

3,088

 

 

3,239

 

Loans receivable

 

 

798,074

 

 

765,919

 

Deferred loan fees and costs, net

 

 

(830)

 

 

(937)

 

Allowance for loan losses

 

 

(8,696)

 

 

(8,393)

 

Net loans

 

 

788,548

 

 

756,589

 

Premises and equipment, net

 

 

12,996

 

 

13,440

 

Accrued interest receivable

 

 

2,849

 

 

2,841

 

Other real estate owned

 

 

1,363

 

 

511

 

Right of use asset

 

 

12,865

 

 

 —

 

Other assets

 

 

3,776

 

 

3,929

 

Total assets

 

$

961,684

 

$

883,736

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

128,152

 

$

118,489

 

Savings and interest bearing transaction accounts

 

 

272,516

 

 

298,108

 

Time deposits $250 and under

 

 

268,199

 

 

213,855

 

Time deposits over $250

 

 

131,040

 

 

106,250

 

Total deposits

 

 

799,907

 

 

736,702

 

Borrowed funds

 

 

49,847

 

 

51,658

 

Lease liability

 

 

13,333

 

 

 —

 

Accrued expenses and other liabilities

 

 

5,490

 

 

6,269

 

Total liabilities

 

 

868,577

 

 

794,629

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, no par value, authorized 20,000,000 shares; issued and outstanding 7,293,697 at September 30, 2019 and 7,295,466 at December 31, 2018

 

 

76,913

 

 

76,713

 

Retained earnings

 

 

16,236

 

 

12,814

 

Accumulated other comprehensive loss

 

 

(42)

 

 

(420)

 

Total stockholders’ equity

 

 

93,107

 

 

89,107

 

Total liabilities and stockholders’ equity

 

$

961,684

 

$

883,736

 

 

See accompanying notes to unaudited consolidated financial statements

3

BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except for per share data)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 

 

 

    

2019

    

2018

 

INTEREST INCOME

 

 

 

 

 

 

 

Loans, including fees

 

$

9,535

 

$

8,779

 

Securities

 

 

168

 

 

229

 

Federal funds sold and other

 

 

616

 

 

319

 

TOTAL INTEREST INCOME

 

 

10,319

 

 

9,327

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

Savings and interest bearing transaction accounts

 

 

938

 

 

546

 

Time deposits

 

 

2,387

 

 

1,663

 

Borrowed funds

 

 

382

 

 

184

 

TOTAL INTEREST EXPENSE

 

 

3,707

 

 

2,393

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES

 

 

6,612

 

 

6,934

 

Provision for loan losses

 

 

250

 

 

280

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

 

6,362

 

 

6,654

 

NON-INTEREST INCOME

 

 

 

 

 

 

 

Fees and service charges

 

 

134

 

 

115

 

TOTAL NON-INTEREST INCOME

 

 

134

 

 

115

 

 

 

 

 

 

 

 

 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

2,676

 

 

2,369

 

Occupancy and equipment expense

 

 

889

 

 

827

 

FDIC premiums and related expenses

 

 

(95)

 

 

130

 

Legal fees

 

 

686

 

 

120

 

Other real estate owned expenses

 

 

49

 

 

 1

 

Professional fees

 

 

455

 

 

237

 

Data processing

 

 

403

 

 

149

 

Other expenses

 

 

476

 

 

585

 

TOTAL NON-INTEREST EXPENSE

 

 

5,539

 

 

4,418

 

Income before provision for income taxes

 

 

957

 

 

2,351

 

Income tax expense

 

 

440

 

 

589

 

Net income

 

$

517

 

$

1,762

 

 

 

 

 

 

 

 

 

PER SHARE OF COMMON STOCK

 

 

 

 

 

 

 

Basic

 

$

0.07

 

$

0.24

 

Diluted

 

$

0.07

 

$

0.24

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

 

 

 

 

 

 

 

 

 

 

 

4

BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except for per share data)

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 

 

 

    

2019

    

2018

 

INTEREST INCOME

 

 

 

 

 

 

 

Loans, including fees

 

$

27,380

 

$

25,106

 

Securities

 

 

554

 

 

698

 

Federal funds sold and other

 

 

1,448

 

 

887

 

TOTAL INTEREST INCOME

 

 

29,382

 

 

26,691

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

Savings and interest bearing transaction accounts

 

 

2,736

 

 

1,427

 

Time deposits

 

 

6,161

 

 

4,786

 

Borrowed funds

 

 

1,082

 

 

356

 

TOTAL INTEREST EXPENSE

 

 

9,979

 

 

6,569

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES

 

 

19,403

 

 

20,122

 

Provision for loan losses

 

 

390

 

 

930

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

 

19,013

 

 

19,192

 

NON-INTEREST INCOME

 

 

 

 

 

 

 

Fees and service charges

 

 

391

 

 

320

 

TOTAL NON-INTEREST INCOME

 

 

391

 

 

320

 

 

 

 

 

 

 

 

 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

7,546

 

 

7,156

 

Occupancy and equipment expense

 

 

2,707

 

 

2,522

 

FDIC premiums and related expenses

 

 

138

 

 

436

 

Legal fees

 

 

1,036

 

 

477

 

Other real estate owned expenses

 

 

74

 

 

10

 

Professional fees

 

 

892

 

 

730

 

Data processing

 

 

971

 

 

687

 

Other expenses

 

 

1,418

 

 

1,814

 

TOTAL NON-INTEREST EXPENSE

 

 

14,782

 

 

13,832

 

Income before provision for income taxes

 

 

4,622

 

 

5,680

 

Income tax expense

 

 

1,200

 

 

1,385

 

Net income

 

$

3,422

 

$

4,295

 

 

 

 

 

 

 

 

 

PER SHARE OF COMMON STOCK

 

 

 

 

 

 

 

Basic

 

$

0.47

 

$

0.61

 

Diluted

 

$

0.47

 

$

0.61

 

 

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, 

 

 

    

2019

    

2018

 

Net income

 

$

517

 

$

1,762

 

Other comprehensive income:

 

 

 

 

 

 

 

Unrealized gains on securities available for sale, net of deferred income tax expense of $3

 

 

 6

 

 

 —

 

Comprehensive income

 

$

523

 

$

1,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 

 

 

    

2019

    

2018

 

Net income

 

$

3,422

 

$

4,295

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale, net of deferred income tax expense (benefit) of $144 and $(86), respectively

 

 

378

 

 

(222)

 

Comprehensive income

 

$

3,800

 

$

4,073

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

6

BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

For the Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Common

 

Retained

 

Comprehensive

 

 

 

 

 

 

Stock

 

Earnings

 

(Loss)

 

Total

 

Balance at January 1, 2018

 

 

70,182

 

 

13,482

 

 

(355)

 

 

83,309

 

Exercise of stock options

 

 

 7

 

 

 —

 

 

 —

 

 

 7

 

Stock based compensation

 

 

153

 

 

 —

 

 

 —

 

 

153

 

Net income

 

 

 —

 

 

1,343

 

 

 —

 

 

1,343

 

Other comprehensive loss, net of taxes

 

 

 —

 

 

 —

 

 

(227)

 

 

(227)

 

Balance at March 31, 2018

 

 

70,342

 

 

14,825

 

 

(582)

 

 

84,585

 

Stock based compensation

 

 

83

 

 

 —

 

 

 —

 

 

83

 

5% Stock dividend (347,214 shares)

 

 

6,149

 

 

(6,149)

 

 

 —

 

 

 —

 

Net income

 

 

 —

 

 

1,190

 

 

 —

 

 

1,190

 

Other comprehensive loss, net of taxes

 

 

 —

 

 

 —

 

 

 5

 

 

 5

 

Balance at June 30, 2018

 

 

76,574

 

 

9,866

 

 

(577)

 

 

85,863

 

Stock based compensation

 

 

84

 

 

 —

 

 

 —

 

 

84

 

Dividends in lieu of fractional shares of stock dividend

 

 

(4)

 

 

 —

 

 

 —

 

 

(4)

 

Net income

 

 

 —

 

 

1,762

 

 

 —

 

 

1,762

 

Balance at September 30, 2018

 

$

76,654

 

$

11,628

 

$

(577)

 

$

87,705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2019

 

 

76,713

 

 

12,814

 

 

(420)

 

 

89,107

 

Stock based compensation

 

 

67

 

 

 —

 

 

 —

 

 

67

 

Net income

 

 

 —

 

 

1,561

 

 

 —

 

 

1,561

 

Other comprehensive income, net of taxes

 

 

 —

 

 

 —

 

 

206

 

 

206

 

Balance at March 31, 2019

 

 

76,780

 

 

14,375

 

 

(214)

 

 

90,941

 

Stock based compensation

 

 

65

 

 

 —

 

 

 —

 

 

65

 

Net income

 

 

 —

 

 

1,344

 

 

 —

 

 

1,344

 

Exercise of stock options

 

 

 3

 

 

 —

 

 

 —

 

 

 3

 

Other comprehensive income, net of taxes

 

 

 —

 

 

 —

 

 

166

 

 

166

 

Balance at June 30, 2019

 

 

76,848

 

 

15,719

 

 

(48)

 

 

92,519

 

Stock based compensation

 

 

65

 

 

 —

 

 

 —

 

 

65

 

Net income

 

 

 —

 

 

517

 

 

 —

 

 

517

 

Other comprehensive income, net of taxes

 

 

 —

 

 

 —

 

 

 6

 

 

 6

 

Balance at September 30, 2019

 

$

76,913

 

$

16,236

 

$

(42)

 

$

93,107

 

 

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, 

 

 

    

2019

    

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

3,422

 

$

4,295

 

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

 

 

 

 

 

 

 

Provision for loan losses

 

 

390

 

 

930

 

Amortization of securities premiums

 

 

92

 

 

135

 

Deferred income taxes

 

 

54

 

 

239

 

Depreciation

 

 

666

 

 

640

 

Stock based compensation

 

 

197

 

 

320

 

Accretion of net loan origination fees and costs

 

 

(107)

 

 

60

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

(Increase) decrease in accrued interest receivable

 

 

(8)

 

 

(199)

 

Decrease (increase) in other assets

 

 

421

 

 

(8)

 

(Decrease) increase in accrued interest payable and other liabilities

 

 

(780)

 

 

226

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

4,347

 

 

6,638

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of securities held to maturity

 

 

(264)

 

 

(5,852)

 

Proceeds from maturities of securities held to maturity

 

 

5,852

 

 

6,058

 

Proceeds from calls, maturities and other principal payments of securities available for sale

 

 

5,812

 

 

12,065

 

Purchases of collateral of OREO property

 

 

(852)

 

 

 —

 

Purchase of restricted investment in bank stock

 

 

(516)

 

 

(1,036)

 

Proceeds from calls of restricted investment of bank stock

 

 

667

 

 

226

 

Proceeds from sale of other real estate owned

 

 

 —

 

 

415

 

Proceeds from maturities of certificates of deposit

 

 

 —

 

 

250

 

Net increase in loans

 

 

(32,242)

 

 

(24,515)

 

Purchases of premises and equipment

 

 

(222)

 

 

(404)

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(21,765)

 

 

(12,793)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net increase (decrease) in deposits

 

 

63,205

 

 

(15,353)

 

Net (decrease) increase in borrowed funds

 

 

(1,811)

 

 

14,964

 

Dividends paid

 

 

 —

 

 

(4)

 

Proceeds from exercise of stock options

 

 

 3

 

 

 7

 

NET CASH PROVIDED (USED IN) BY FINANCING ACTIVITIES

 

 

61,397

 

 

(386)

 

Increase (decrease) in cash and cash equivalents

 

 

43,979

 

 

(6,541)

 

Cash and cash equivalents at beginning of year

 

 

64,542

 

 

92,619

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

108,521

 

$

86,078

 

Supplemental information:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

9,931

 

$

6,415

 

Income taxes

 

$

1,317

 

$

664

 

Non-cash Investing and Financing Activities:

 

 

 

 

 

 

 

Recognition of right of use asset

 

$

13,464

 

$

 —

 

Recognition of lease liability

 

$

13,791

 

$

 —

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing transactions:

 

 

 

 

 

 

 

Loans transferred to other real estate owned

 

$

 —

 

$

511

 

 

 

 

 

 

 

 

 

 

See accompanying 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 unaudited 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 Jersey Investment Company, BONJ-Delaware Investment Company and BONJ REIT Inc.  All significant inter-company accounts and transactions have been eliminated in consolidation. BONJ-New York Corp. was dissolved in the third quarter of 2019.

 

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 accounting principles generally accepted in the United States of America (“US GAAP”); these consolidated financial statements have not been audited. Certain information and footnote disclosures required under US GAAP have been condensed or omitted, as permitted by rules and regulations of the Securities and Exchange Commission.

 

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the related notes for the year ended December 31, 2018, which are included in the Company’s annual report on Form 10-K as filed with the Securities and Exchange Commission. In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred between September 30, 2019 and the date these consolidated financial statements were issued.

 

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, mobile 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.

 

Pending Merger with ConnectOne Bancorp, Inc.

 

On August 15, 2019, the Company and ConnectOne Bancorp, Inc. (“ConnectOne”) announced that they had entered into an Agreement and Plan of Merger  (“Merger Agreement”), pursuant to which the Company will merge with and into ConnectOne (“Merger”). The Merger Agreement was approved by the Boards of Directors of each of the Company and

9

ConnectOne. Following the Merger, the Bank will merge with and into ConnectOne’s wholly-owned bank subsidiary, ConnectOne Bank, with ConnectOne Bank as the surviving bank.

 

Under the terms of the Merger Agreement, the Company’s shareholders will have the right to receive for each share of the Company’s common stock, no par value, at their election, either (i) $16.25 in cash or (ii) 0.78 shares of ConnectOne’s common stock, without par value. The Company’s shareholders will have the right to elect all stock consideration, all cash consideration or a combination thereof, subject to required proration such that, in the aggregate, 80% of the Company’s shares are exchanged for stock consideration and 20% are exchanged for cash consideration.

 

The Merger is subject to the satisfaction of customary closing conditions, including outstanding regulatory approvals and approval by the Company’s and ConnectOne’s shareholders. The Company’s special meeting of shareholders to vote on the proposed Merger, among other matters, is scheduled for December 9, 2019. It is anticipated that the transaction will close during the first quarter of 2020.

 

For more information on the pending Merger, please refer to the Company’s Current Report on Form 8-K filed with the SEC on August 16, 2019. The foregoing summary of the Merger Agreement is not complete and is qualifed in its entirety by reference to the complete text of the Merger Agreement, which was included as Exhibit 2.1 to the Form 8-K filed with the SEC on August 16, 2019 and is incorporated by reference herein. 

 

 

Note 2.  Benefit Plans and Stock-Based Compensation

 

Stock option and restricted share information, and the related activity, for the periods presented have been adjusted for a 5% stock dividend declared on June 28, 2018.

 

2006 Stock Option Plan

 

During 2006, the Bank’s stockholders approved the 2006 Stock Option Plan (the “2006 Plan”).  At the time of the holding company reorganization, the 2006 Plan was assumed by the Company.  The 2006 Plan allows the Company to grant Incentive Stock Options (“ISO”) and Non-Qualified Stock Options (“NQO”) to directors and employees of the Company to purchase up to 264,582 shares of the Company’s common stock. At September 30, 2019, stock options to purchase 228,781 shares, net of forfeitures, have been issued to directors and employees of the Company under the 2006 Plan, of which options to purchase 49,960 shares were outstanding. There are no options available for grants under the 2006 Plan as the plan has expired.

 

During 2016, the Company granted 70,523 NQOs to employees of the Company. The fair value of the NQOs granted was $2.50 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 NQOs granted vest on February 1, 2017, February 1, 2018 and February 1, 2019.

 

There were no unvested options at September 30, 2019 and 17,318 unvested options at September 30, 2018. At September 30, 2019 there was no unrecognized compensation expense related to unvested options. For the three and nine months ended September 30, 2019, zero and $3 thousand, respectively, were recorded as expense for options that have been issued through the 2006 Plan. For the three and nine months ended September 30, 2018, $11 thousand and $32 thousand, respectively, were recorded as expense for options that have been issued through the 2006 Plan.

 

During the nine months ended September 30, 2019 options to purchase 331 shares of common stock at a price of $10.13 were exercised for a total price of $3 thousand. During the nine months ended September 30, 2018 options to purchase 617 shares of common stock at a price of $10.13 were exercised for a total price of $7 thousand.

 

 

 

 

 

 

10

A summary of stock option activity under the 2006 Plan during the nine months ended September 30, 2018 and 2019 are presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

    

Weighted

 

 

 

 

Weighted

 

 

 

 

Average

 

 

 

 

Average

 

Aggregate

 

Remaining

 

 

Number of

 

Exercise Price

 

Intrinsic Value

 

Contractual

 

 

Shares

 

per Share

 

(1)  

 

Term (Years)

Outstanding at January 1, 2018

 

53,819

 

$

10.13

 

 

 

 

 

Forfeited

 

(1,918)

 

 

10.13

 

 

 

 

 

Exercised

 

(617)

 

 

10.13

 

 

 

 

 

Outstanding at September 30, 2018

 

51,284

 

$

10.13

 

$

357,280

 

7.81

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2018

 

33,966

 

$

10.13

 

$

236,631

 

7.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

    

Weighted

 

 

 

 

 

Weighted

 

 

 

 

Average

 

 

 

 

 

Average

 

Aggregate

 

Remaining

 

 

 

Number of

 

Exercise Price

 

Intrinsic Value

 

Contractual

 

 

 

Shares

 

per Share

 

(1)  

 

Term (Years)

 

Outstanding at January 1, 2019

 

51,174

 

$

10.13

 

 

 

 

 

 

Forfeited

 

(883)

 

 

10.13

 

 

 

 

 

 

Exercised

 

(331)

 

 

10.13

 

 

 

 

 

 

Outstanding at September 30, 2019

 

49,960

 

$

10.13

 

$

337,565

 

6.81

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2019

 

49,960

 

$

10.13

 

$

337,565

 

6.81

 

 

(1)

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 September 30, 2019 and 2018, respectively. This amount changes based on the changes in the market value in the Company’s stock.

 

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 275,625 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 options.  At September 30, 2019, there were 172,452 shares, net of forfeitures, issued to employees and directors of  the Company under the 2011 Plan. There are 103,173 shares available for grants under the 2011 Plan as of September 30, 2019.

 

 

 

 

 

 

 

 

 

 

 

11

The following is a summary of the restricted stock awards activity under the 2011 Plan during the nine months ended September 30, 2018 and 2019:

 

 

 

 

 

 

 

 

2018

 

 

 

 

Weighted

 

 

 

 

Average

 

 

Number

 

Grant Date

 

    

of Shares

    

Fair Value

Outstanding at January 1, 2018

 

34,175

 

$

12.96

Granted

 

15,750

 

 

16.70

Vested

 

(15,275)

 

 

12.80

Outstanding at September 30, 2018

 

34,650

 

$

14.73

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number

 

Grant Date

 

 

    

of Shares

    

Fair Value

 

Outstanding at January 1, 2019

 

21,525

 

$

15.11

 

Vested

 

(5,250)

 

 

16.70

 

Outstanding at September 30, 2019

 

16,275

 

$

14.60

 

 

Approximately $73 thousand remains to be expensed over the next five months related to the unvested restricted stock as of September 30, 2019. For the three and nine months ended September 30, 2019, $60 thousand and $178 thousand, respectively, were recorded as compensation expense for restricted stock that had been issued through the 2011 Plan. For the three and nine months ended September 30, 2018, $64 thousand and $253 thousand, respectively, were recorded as compensation expense for restricted stock that had been issued through the 2011 Plan.

 

During 2016, the Company granted 33,075 NQOs to an executive of the Company.  The fair value of the NQOs granted was $2.65 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 2.137%, risk free interest rate of 1.87%, expected volatility of 27.0% and expected lives of 10 years. One third of the NQOs granted vested immediately, with the remaining NQOs vesting over a two year period.

 

In July 2017, the Company granted 15,435 NQOs to employees of the Company.  The fair value of the NQOs granted was $6.62 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 0.00%, risk free interest rate of 2.31%, expected volatility of 26.81% and expected lives of 10 years.   One third of the NQOs granted vest on February 1, 2018, February 1, 2019 and February 1, 2020.

 

There were 3,150 unvested options at September 30, 2019 and 9,870 unvested options at September 30, 2018. At September 30, 2019 there was $7 thousand of unrecognized compensation expense related to unvested options. For the three and nine months ended September 30, 2019, $5 thousand and $16 thousand, respectively, were recorded as expense for options that have been issued through the 2011 Plan. For the three and nine months ended September 30, 2018, $8 thousand and $36 thousand, respectively, were recorded as expense for options that have been issued through the 2011 Plan.

 

No options were exercised under the 2011 Plan during the three and nine months ended September 30, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

12

A summary of stock option activity under the 2011 Plan during the nine months ended September 30, 2018 and 2019 are presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

    

Weighted

 

 

 

 

 

Weighted

 

 

 

 

Average

 

 

 

 

 

Average

 

Aggregate

 

Remaining

 

 

 

Number of

 

Exercise Price

 

Intrinsic Value

 

Contractual

 

 

 

Shares

 

per Share

 

(1)  

 

Term (Years)

 

Outstanding at January 1, 2018

 

48,510

 

$

12.11

 

 

 

 

 

 

Forfeited

 

(630)

 

 

16.24

 

 

 

 

 

 

Outstanding at September 30, 2018

 

47,880

 

$

12.06

 

$

241,292

 

7.95

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2018

 

38,010

 

$

10.98

 

$

232,785

 

7.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Weighted

 

 

 

 

 

Weighted

 

 

 

 

Average

 

 

 

 

 

Average

 

Aggregate

 

Remaining

 

 

 

Number of

 

Exercise Price

 

Intrinsic Value

 

Contractual

 

 

 

Shares

 

per Share

 

(1)  

 

Term (Years)

 

Outstanding at January 1, 2019

 

43,680

 

$

11.66

 

 

 

 

 

 

Forfeited

 

(1,155)

 

 

16.24

 

 

 

 

 

 

Outstanding at September 30, 2019

 

42,525

 

$

11.53

 

$

227,746

 

6.84

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2019

 

39,375

 

$

11.16

 

$

225,693

 

6.76

 

 

(1)

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 September 30, 2019 and 2018, respectively. This amount changes based on the changes in the market value in the Company’s common stock. 

 

Defined Contribution Plan

 

The Company currently offers a Safe Harbor 401(k) Plan (“Plan”) covering eligible employees, wherein employees can invest eligible pretax and after tax earnings up to the Plan and legal limits.  The Company makes safe harbor matching contributions equal to 100% of the employees’ earnings deferrals that do not exceed 4% of the employees’ compensation. The Company recorded matching contributions of approximately $67 thousand and $63 thousand during the three months ended September 30, 2019 and 2018, respectively, and approximately $194 thousand and $179 thousand during the nine months ended September 30, 2019 and 2018, 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 outstanding during that period. Outstanding “common share equivalents” include options to purchase the Company’s common stock.

 

13

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)

    

2019

    

2018

 

Net income available to common stockholders

 

$

517

 

$

1,762

 

Weighted average number of common shares outstanding - basic

 

 

7,294

 

 

7,239

 

Basic earnings per share

 

$

0.07

 

$

0.24

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

517

 

$

1,762

 

Weighted average number of common shares outstanding - basic

 

 

7,294

 

 

7,239

 

Effect of dilutive options

 

 

16

 

 

21

 

Weighted average number of common shares outstanding- diluted

 

 

7,310

 

 

7,260

 

Diluted earnings per share

 

$

0.07

 

$

0.24

 

 

NQOs to purchase 92,485 shares of common stock at a weighted average price of $10.77 were included in the computation of diluted earnings per share for the three months ended September 30, 2019.

 

NQOs to purchase 99,164 shares of common stock at a weighted average price of $11.06 were included in the computation of diluted earnings per share for the three months ended September 30, 2018.

 

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)

    

2019

    

2018

 

Net income available to common stockholders

 

$

3,422

 

$

4,295

 

Weighted average number of common shares outstanding - basic

 

 

7,293

 

 

7,044

 

Basic earnings per share

 

$

0.47

 

$

0.61

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

3,422

 

$

4,295

 

Weighted average number of common shares outstanding - basic

 

 

7,293

 

 

7,044

 

Effect of dilutive options

 

 

13

 

 

20

 

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

 

 

7,306

 

 

7,064

 

Diluted earnings per share

 

$

0.47

 

$

0.61

 

 

NQOs to purchase 92,485 shares of common stock at a weighted average price of $10.77 were included in the computation of diluted earnings per share for the nine months ended September 30, 2019.

NQOs to purchase 99,164 shares of common stock at a weighted average price of $11.06 were included in the computation of diluted earnings per share for the nine months ended September 30, 2018.

 

 

 

 

14

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, 2019 and December 31, 2018 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

September 30, 2019

 

Cost

 

Gains

 

Losses

 

Value

 

Securities Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

$

264

 

$

 —

 

$

 —

 

$

264

 

Total securities held to maturity

 

 

264

 

 

 —

 

 

 —

 

 

264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

6,084

 

 

 —

 

 

(35)

 

 

6,049

 

Government sponsored enterprise obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

    Agency backed

 

 

11,466

 

 

 5

 

 

(3)

 

 

11,468

 

    Mortgage backed

 

 

9,421

 

 

 —

 

 

(24)

 

 

9,397

 

Total securities available for sale

 

 

26,971

 

 

 5

 

 

(62)

 

 

26,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

27,235

 

$

 5

 

$

(62)

 

$

27,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

December 31, 2018

 

Cost

 

Gains

 

Losses

 

Value

 

Securities Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

$

5,852

 

$

 

$

 

$

5,852

 

Total securities held to maturity

 

 

5,852

 

 

 —

 

 

 —

 

 

5,852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

6,171

 

 

 

 

(143)

 

 

6,028

 

Government sponsored enterprise obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

    Agency backed

 

 

15,440

 

 

 —

 

 

(168)

 

 

15,272

 

    Mortgage backed

 

 

11,264

 

 

 —

 

 

(271)

 

 

10,993

 

Total securities available for sale

 

 

32,875

 

 

 —

 

 

(582)

 

 

32,293

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

38,727

 

$

 —

 

$

(582)

 

$

38,145

 

 

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, 2019

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

 —

 

 

 —

 

 

6,049

 

 

(35)

 

 

6,049

 

 

(35)

 

Government sponsored enterprise obligations

 

 

 —

 

 

 —

 

 

15,892

 

 

(27)

 

 

15,892

 

 

(27)

 

Total securities available for sale

 

 

 —

 

 

 —

 

 

21,941

 

 

(62)

 

 

21,941

 

 

(62)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities

 

$

 —

 

$

 —

 

$

21,941

 

$

(62)

 

$

21,941

 

$

(62)

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

More than 12 Months

 

Total

 

 

   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

December 31, 2018

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

 —

 

 

 —

 

 

6,028

 

 

(143)

 

 

6,028

 

 

(143)

 

Government sponsored enterprise obligations

 

 

 —

 

 

 —

 

 

26,265

 

 

(439)

 

 

26,265

 

 

(439)

 

Total securities available for sale

 

 

 —

 

 

 —

 

 

32,293

 

 

(582)

 

 

32,293

 

 

(582)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities

 

$

 —

 

$

 —

 

$

32,293

 

$

(582)

 

$

32,293

 

$

(582)

 

 

The amortized cost and fair value of securities held to maturity and securities available for sale at September 30, 2019 by contractual maturity are shown below (in thousands). Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay their obligations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

Securities Available for Sale

 

 

    

Amortized

    

Fair

    

Amortized

    

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

One year or less

 

$

264

 

$

264

 

$

12,582

 

$

12,543

 

After one to five years

 

 

 —

 

 

 —

 

 

4,968

 

 

4,974

 

Greater than five years

 

 

 —

 

 

 —

 

 

9,421

 

 

9,397

 

Total

 

$

264

 

$

264

 

$

26,971

 

$

26,914

 

 

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. 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 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, OTTI would be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at statement of financial condition 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, 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 OTTI recognized in earnings would become the new amortized cost basis of the investment.

 

At September 30, 2019, the Company’s securities available for sale portfolio consisted of eight securities, seven of which were in an unrealized loss position for more than twelve months and one in was in an unrealized gain position. However, all seven securities in a loss position experienced an increase in fair value at September 30, 2019 as compared to December 31, 2018. No OTTI charges were recorded for the three or nine months ended September 30, 2019. 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 available for sale with an amortized cost  and a fair value of $8.0 million were pledged to secure borrowings with the Federal Home Loan Bank of New York (“FHLBNY”) as of September 30, 2019. Securities with an amortized cost of $8.1 million and a fair value of $8.0 million were pledged to secure borrowings with the FHLBNY as of December 31, 2018.  

 

During the three and nine months ended September 30, 2019 and 2018, the Company did not sell securities from its available for sale or held to maturity portfolios.     

16

 

Note 5.  Loans

 

The components of the loan portfolio, which are categorized by collateral code, at September 30, 2019 and December 31, 2018 are summarized as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30, 2019

    

December 31, 2018

 

Commercial real estate

 

$

676,154

 

$

640,627

 

Residential mortgages

 

 

54,420

 

 

58,281

 

Commercial and industrial

 

 

23,975

 

 

24,852

 

Home equity

 

 

43,359

 

 

41,833

 

Consumer

 

 

166

 

 

326

 

 

 

$

798,074

 

$

765,919

 

 

Our market area is concentrated in Bergen County, New Jersey, with commercial real estate and commercial and industrial loans made to borrowers located primarily in New Jersey, New York and a defined radius of our headquarters. Our 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

    

Commercial

    

 

    

 

    

 

    

 

 

September 30, 2019

 

Real Estate

 

Mortgages

 

& Industrial

 

Home Equity

 

Consumer

 

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

6,556

 

$

306

 

$

238

 

$

753

 

$

22

 

$

655

 

$

8,530

 

Charge-offs

 

 

(50)

 

 

 —

 

 

(137)

 

 

(243)

 

 

(52)

 

 

 —

 

 

(482)

 

Recoveries

 

 

 —

 

 

392

 

 

 3

 

 

 —

 

 

 3

 

 

 —

 

 

398

 

Provision (credit)

 

 

245

 

 

(409)

 

 

112

 

 

186

 

 

29

 

 

87

 

 

250

 

Ending balance

 

$

6,751

 

$

289

 

$

216

 

$

696

 

$

 2

 

$

742

 

$

8,696

 

Ending balance: individually evaluated for impairment

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Ending balance: collectively evaluated for impairment

 

$

6,751

 

$

289

 

$

216

 

$

696

 

$

 2

 

$

742

 

$

8,696

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

676,154

 

$

54,420

 

$

23,975

 

$

43,359

 

$

166

 

$

 —

 

$

798,074

 

Ending balance: individually evaluated for impairment

 

$

7,166

 

$

7,998

 

$

1,802

 

$

352

 

$

 —

 

$

 —

 

$

17,318

 

Ending balance: collectively evaluated for impairment

 

$

668,988

 

$

46,422

 

$

22,173

 

$

43,007

 

$

166

 

$

 —

 

$

780,756

 

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial

    

Residential

    

Commercial

    

    

    

    

    

    

    

    

 

September 30, 2018

 

Real Estate

 

Mortgages

 

& Industrial

 

Home Equity

 

Consumer

 

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

6,270

 

$

310

 

$

598

 

$

557

 

$

28

 

$

425

 

$

8,188

 

Charge-offs

 

 

(47)

 

 

(87)

 

 

 —

 

 

(219)

 

 

 —

 

 

 —

 

 

(353)

 

Recoveries

 

 

 —

 

 

32

 

 

 —

 

 

 —

 

 

 2

 

 

 

 

34

 

Provision (credit)

 

 

119

 

 

64

 

 

(5)

 

 

330

 

 

(4)

 

 

(224)

 

 

280

 

Ending balance

 

$

6,342

 

$

319

 

$

593

 

$

668

 

$

26

 

$

201

 

$

8,149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

6,508

 

$

342

 

$

231

 

$

733

 

$

20

 

$

559

 

$

8,393

 

Ending balance: individually evaluated for impairment

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Ending balance: collectively evaluated for impairment

 

$

6,508

 

$

342

 

$

231

 

$

733

 

$

20

 

$

559

 

$

8,393

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

640,627

 

$

58,281

 

$

24,852

 

$

41,833

 

$

326

 

$

 —

 

$

765,919

 

Ending balance: individually evaluated for impairment

 

$

8,190

 

$

5,129

 

$

1,802

 

$

816

 

$

 —

 

$

 —

 

$

15,937

 

Ending balance: collectively evaluated for impairment

 

$

632,437

 

$

53,152

 

$

23,050

 

$

41,017

 

$

326

 

$

 —

 

$

749,982

 

 

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

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

    

Real Estate

    

Mortgages

    

& Industrial

    

Home Equity

    

Consumer

    

Unallocated

    

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

6,508

 

$

342

 

$

231

 

$

733

 

$

20

 

$

559

 

$

8,393

 

Charge-offs

 

 

(50)

 

 

 —

 

 

(137)

 

 

(243)

 

 

(68)

 

 

 

 

(498)

 

Recoveries

 

 

 

 

392

 

 

10

 

 

 

 

 9

 

 

 

 

411

 

Provision (credit)

 

 

293

 

 

(445)

 

 

112

 

 

206

 

 

41

 

 

183

 

 

390

 

Ending balance

 

$

6,751

 

$

289

 

$

216

 

$

696

 

$

 2

 

$

742

 

$

8,696

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Residential

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

    

Real Estate

    

Mortgages

    

& Industrial

    

Home Equity

    

Consumer

    

Unallocated

    

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

5,867

 

$

372

 

$

575

 

$

403

 

$

50

 

$

1,050

 

$

8,317

 

Charge-offs

 

 

(47)

 

 

(87)

 

 

(49)

 

 

(957)

 

 

 —

 

 

 

 

(1,140)

 

Recoveries

 

 

 —

 

 

32

 

 

 4

 

 

 

 

 6

 

 

 

 

42

 

Provision (credit)

 

 

522

 

 

 2

 

 

63

 

 

1,222

 

 

(30)

 

 

(849)

 

 

930

 

Ending balance

 

$

6,342

 

$

319

 

$

593

 

$

668

 

$

26

 

$

201

 

$

8,149

 

 

18

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, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

30-59 Days

    

60-89 Days

    

90+ Days

    

Total Past

    

    

    

Total Loans

    

Nonaccrual

 

September 30, 2019

 

Past Due

 

Past Due

 

Past Due

 

Due

 

Current

 

Receivables

 

Loans

 

Commercial real estate

 

$

2,050

 

$

191

 

$

653

 

$

2,894

 

$

673,260

 

$

676,154

 

$

653

 

Residential mortgages

 

 

403

 

 

221

 

 

4,774

 

 

5,398

 

 

49,022

 

 

54,420

 

 

7,998

 

Commercial and industrial

 

 

 —

 

 

 —

 

 

1,802

 

 

1,802

 

 

22,173

 

 

23,975

 

 

1,802

 

Home equity

 

 

1,481

 

 

77

 

 

189

 

 

1,747

 

 

41,612

 

 

43,359

 

 

327

 

Consumer

 

 

14

 

 

 —

 

 

 —

 

 

14

 

 

152

 

 

166

 

 

 —

 

 

 

$

3,948

 

$

489

 

$

7,418

 

$

11,855

 

$

786,219

 

$

798,074

 

$

10,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

30-59 Days

    

60-89 Days

    

90+ Days

    

Total Past

    

    

    

Total Loans

    

Nonaccrual

 

December 31, 2018

 

Past Due

 

Past Due

 

Past Due

 

Due

 

Current

 

Receivables

 

Loans

 

Commercial real estate

 

$

2,502

 

$

183

 

$

1,678

 

$

4,363

 

$

636,264

 

$

640,627

 

$

1,678

 

Residential mortgages

 

 

3,113

 

 

 —

 

 

2,172

 

 

5,285

 

 

52,996

 

 

58,281

 

 

5,129

 

Commercial and industrial

 

 

175

 

 

 —

 

 

1,802

 

 

1,977

 

 

22,875

 

 

24,852

 

 

1,802

 

Home equity

 

 

298

 

 

 —

 

 

568

 

 

866

 

 

40,967

 

 

41,833

 

 

778

 

Consumer

 

 

19

 

 

 —

 

 

 —

 

 

19

 

 

307

 

 

326

 

 

 —

 

 

 

$

6,107

 

$

183

 

$

6,220

 

$

12,510

 

$

753,409

 

$

765,919

 

$

9,387

 

 

At September 30, 2019, the Company had no accruing loans that were delinquent for more than ninety days. At December 31, 2018, the Company had one accruing loan with a carrying value of $830 thousand that was delinquent for more than ninety days.

 

If nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the three month periods ended September 30, 2019 and 2018, the gross interest income would have been $114 thousand and $127 thousand, respectively. If nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the nine month periods ended September 30, 2019 and 2018, the gross interest income would have been $304 thousand and $244 thousand, respectively. There was no interest income recognized on these loans during the three and nine months ended September 30, 2019 and 2018.

 

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, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial

    

Residential

    

Commercial

    

 

 

    

 

 

    

 

 

 

September 30, 2019

 

Real Estate

 

Mortgages

 

& Industrial

 

Home Equity

 

Consumer

 

Total

 

Pass

 

$

667,726

 

$

45,339

 

$

22,075

 

$

43,007

 

$

166

 

$

778,313

 

Special Mention

 

 

1,262

 

 

1,083

 

 

98

 

 

 —

 

 

 —

 

 

2,443

 

Substandard

 

 

7,166

 

 

7,998

 

 

1,802

 

 

352

 

 

 —

 

 

17,318

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

676,154

 

$

54,420

 

$

23,975

 

$

43,359

 

$

166

 

$

798,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial

    

Residential

    

Commercial

    

 

 

    

 

 

    

 

 

 

December 31, 2018

 

Real Estate

 

Mortgages

 

& Industrial

 

Home Equity

 

Consumer

 

Total

 

Pass

 

$

632,437

 

$

52,064

 

$

22,821

 

$

41,017

 

$

326

 

$

748,665

 

Special Mention

 

 

 —

 

 

1,088

 

 

229

 

 

 —

 

 

 —

 

 

1,317

 

Substandard

 

 

8,190

 

 

5,129

 

 

1,802

 

 

816

 

 

 —

 

 

15,937

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

640,627

 

$

58,281

 

$

24,852

 

$

41,833

 

$

326

 

$

765,919

 

 

 

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

19

tables provide information about the Company’s impaired loans at September 30, 2019 and December 31, 2018 (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Unpaid

    

 

 

 

 

Recorded

 

Principal

 

Related

 

September 30, 2019

 

Investment

 

Balance

 

Allowance

 

Commercial real estate

 

$

7,166

 

$

7,169

 

$

 —

 

Residential mortgages

 

 

7,998

 

 

9,654

 

 

 —

 

Commercial and industrial

 

 

1,802

 

 

1,812

 

 

 —

 

Home equity

 

 

352

 

 

637

 

 

 —

 

Total impaired loans

 

$

17,318

 

$

19,272

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Unpaid

    

 

 

 

 

Recorded

 

Principal

 

Related

 

December 31, 2018

 

Investment

 

Balance

 

Allowance

 

Commercial real estate

 

$

8,190

 

$

8,191

 

$

 —

 

Residential mortgages

 

 

5,129

 

 

6,684

 

 

 —

 

Commercial and industrial

 

 

1,802

 

 

1,812

 

 

 —

 

Home equity

 

 

816

 

 

1,282

 

 

 —

 

Total impaired loans

 

$

15,937

 

$

17,969

 

$

 —

 

 

The following tables provide information about the Company’s impaired loans for the three and nine months ended September 30, 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

September 30, 2019

 

September 30, 2018

 

 

    

Average

    

Interest

    

Average

    

Interest

 

 

 

Recorded

 

Income

 

Recorded

 

Income

 

 

 

Investment

 

Received

 

Investment

 

Received

 

Commercial real estate

 

$

8,643

 

$

 

$

10,095

 

$

 

Residential mortgages

 

 

8,181

 

 

 

 

6,675

 

 

 —

 

Commercial and industrial

 

 

1,802

 

 

 

 

1,936

 

 

 

Home equity

 

 

708

 

 

 

 

1,390

 

 

 —

 

Total impaired loans

 

$

19,334

 

$

 —

 

$

20,096

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30, 2019

 

September 30, 2018

 

 

    

Average

    

Interest

    

Average

    

Interest

 

 

 

Recorded

 

Income

 

Recorded

 

Income

 

 

 

Investment

 

Received

 

Investment

 

Received

 

Commercial real estate

 

$

8,784

 

$

 

$

10,732

 

$

 

Residential mortgages

 

 

8,395

 

 

 

 

7,823

 

 

 —

 

Commercial and industrial

 

 

1,802

 

 

 

 

2,447

 

 

 

Home equity

 

 

868

 

 

 

 

2,016

 

 

 —

 

Total impaired loans

 

$

19,849

 

$

 —

 

$

23,018

 

$

 —

 

 

 

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 at September 30, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Accrual

    

Number of

    

Nonaccrual

    

Number of

    

 

 

September 30, 2019

 

Status

 

Loans

 

Status

 

Loans

 

Total

 

Residential mortgages

 

$

2,457

 

 6

 

$

3,342

 

 7

 

$

5,799

 

Home equity

 

 

200

 

 1

 

 

96

 

 2

 

 

296

 

 

 

$

2,657

 

 7

 

$

3,438

 

 9

 

$

6,095

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Accrual

    

Number of

    

Nonaccrual

    

Number of

    

 

 

December 31, 2018

 

Status

 

Loans

 

Status

 

Loans

 

Total

 

Residential mortgages

 

$

2,274

 

 5

 

$

3,832

 

 8

 

$

6,106

 

Home equity

 

 

 —

 

 —

 

 

671

 

 4

 

 

671

 

 

 

$

2,274

 

 5

 

$

4,503

 

12

 

$

6,777

 

 

 

For the nine months ended September 30, 2019 there were two new TDRs that occurred. For the nine months ended September 30, 2018 there were two new TDRs that occurred.

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Post-

 

 

 

 

 

Pre-Modification

 

Modification

 

 

 

 

 

Outstanding

 

Outstanding

 

 

 

Number of

 

Recorded

 

Recorded

 

2019

 

Loans

 

Investments

 

Investments

 

Residential mortgages

 

 1

 

$

200

 

$

200

 

Home equity

 

 1

 

 

196

 

 

196

 

 

 

 2

 

$

396

 

$

396

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Post-

 

 

 

 

 

Pre-Modification

 

Modification

 

 

 

 

 

Outstanding

 

Outstanding

 

 

 

Number of

 

Recorded

 

Recorded

 

2018

 

Loans

 

Investments

 

Investments

 

Residential mortgages

 

 2

 

$

989

 

$

989

 

 

 

 2

 

$

989

 

$

989

 

 

During the three and nine months ended September 30, 2019, the Company had no loans meeting the definition of a TDR that were placed on default status.

 

The Company may obtain physical possession of real estate collateralizing loans via foreclosure or an in-substance repossession into other real estate owned. During the nine months ended September 30, 2019, the Company had no foreclosed residential real estate property. During the nine months ended September 30, 2018, the Company had one foreclosed residential real estate property. In addition, as of September 30, 2019, the Company had fifteen loans with a carrying value of $7.3 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, 2019, the Company had $576 thousand 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, 2019 for guarantees under standby letters of credit issued is not material.

 

21

Note 7. Borrowed Funds

 

Borrowings may consist of fixed rate advances from the FHLBNY as well as short term borrowings through lines of credit with other financial institutions.  Information concerning borrowings at September 30, 2019 and December 31, 2018 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

Original

 

 

 

September 30, 2019

    

Amount

    

Rate

    

Term (years)

    

Maturity

 

Fixed Rate Note

 

$

10,000

 

2.90

%  

3

 

April  2021

 

Fixed Rate Note

 

 

10,000

 

2.95

%  

2

 

June  2020

 

Fixed Rate Note

 

 

5,000

 

2.97

%  

1

 

December  2019

 

Fixed Rate Note

 

 

10,000

 

3.02

%  

2

 

December  2020

 

Fixed Rate Amortizing Note

 

 

1,501

 

2.02

%  

7

 

August  2021

 

Fixed Rate Amortizing Note

 

 

346

 

1.48

%  

5

 

October  2019

 

Fixed Rate Note

 

 

10,000

 

2.49

%  

3

 

March  2022

 

Total FHLBNY Advances

 

$

46,847

 

2.82

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Line of Credit Advance

 

 

3,000

 

5.50

%  

 

 

 

 

Total Atlantic Community Bankers Bank Advance

 

$

3,000

 

5.50

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total borrowings

 

$

49,847

 

2.98

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

    

 

 

    

 

    

Original

    

 

 

December 31, 2018

 

Amount

 

Rate

 

Term (years)

 

Maturity

 

Fixed Rate Note

 

$

10,000

 

2.75

%  

0.5

 

April  2019

 

Fixed Rate Note

 

 

10,000

 

2.90

%  

 3

 

April  2021

 

Fixed Rate Note

 

 

10,000

 

2.95

%  

 2

 

June  2020

 

Fixed Rate Note

 

 

5,000

 

2.97

%  

 1

 

December  2019

 

Fixed Rate Note

 

 

10,000

 

3.02

%  

 2

 

December  2020

 

Fixed Rate Amortizing Note

 

 

603

 

1.50

%  

 5

 

June  2019

 

Fixed Rate Amortizing Note

 

 

1,033

 

1.51

%  

 5

 

July  2019

 

Fixed Rate Amortizing Note

 

 

1,084

 

1.51

%  

 5

 

August  2019

 

Fixed Rate Amortizing Note

 

 

2,049

 

2.02

%  

 7

 

August  2021

 

Fixed Rate Amortizing Note

 

 

1,889

 

1.48

%  

 5

 

October  2019

 

 

 

$

51,658

 

2.75

%  

 

 

 

 

 

In addition to the advances listed above, the Bank had municipal letters of credit issued by FHLBNY in the amount of $40 million at both September 30, 2019 and December 31, 2018.

 

At September 30, 2019 and December 31, 2018, loans with a carrying value of approximately $231.1 million and $199.3 million and securities with a fair value of $8.0 million in both periods were pledged to secure advances and municipal letters of credit from the FHLBNY.

   

The Company has a $5.0 million line of credit with the Atlantic Community Bankers Bank (“ACBB”). In addition, 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 ACBB for the purchase of federal funds in the event that temporary liquidity needs arise. The Company had a $3 million outstanding borrowing on the line of credit with ACBB at September 30, 2019. There were no outstanding borrowings on any of the Bank’s lines of credit at September 30, 2019 and December 31, 2018.

 

22

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 standards in the rule.

 

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, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

To Be Well

 

 

 

 

 

Minimum Required

 

 

 

Capitalized Under

 

 

 

 

 

For Capital

 

Minimum Capital

 

Prompt Corrective

 

 

 

September 30, 2019

 

Adequacy Purposes

 

With Buffer

 

Action Regulations

 

 

 

 

 

 

 

 

 

 

 

Risk-Based Capital:

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 Capital

 

11.29

%  

4.50

%  

7.00

%  

6.50

%

Tier 1 Capital Ratio

 

11.29

%  

6.00

%  

8.50

%  

8.00

%

Total Capital Ratio

 

12.34

%  

8.00

%  

10.50

%  

10.00

%

Leverage Ratio

 

10.01

%  

4.00

%  

N/A

 

5.00

%

 

Under a policy of the Federal Reserve applicable to holding companies with less than $3 billion in assets, the Company is not subject to capital requirements on a consolidated basis. 

 

Note 9. Fair Value Measurements

 

US 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.

 

23

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, 2019 and December 31, 2018, 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

 

2019

 

Assets

 

Inputs

 

Unobservable Inputs

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

6,049

 

$

 —

 

$

6,049

 

$

 —

 

Government sponsored enterprise obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

    Agency backed

 

 

11,468

 

 

 —

 

 

11,468

 

 

 —

 

    Mortgage backed

 

 

9,397

 

 

 —

 

 

9,397

 

 

 —

 

Total securities available for sale

 

$

26,914

 

$

 —

 

$

26,914

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

Significant Other

 

 

 

 

 

 

December 31, 

 

for Identical

 

Observable

 

Significant

 

Description

 

2018

 

Assets

 

Inputs

 

Unobservable Inputs

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

6,028

 

$

 

$

6,028

 

$

 —

 

Government sponsored enterprise obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

    Agency backed

 

 

15,272

 

 

 —

 

 

15,272

 

 

 —

 

    Mortgage backed

 

 

10,993

 

 

 

 

10,993

 

 

 

Total securities available for sale

 

$

32,293

 

$

 —

 

$

32,293

 

$

 —

 

 

There were no transfers between Levels 1, 2 or 3 for the three and nine month periods ended September 30, 2019 and 2018. 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, 2019 and December 31, 2018 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

September 30, 

 

Active Markets for

 

Significant Other

 

Significant

 

Description

 

2019

 

Identical Assets

 

Observable Inputs

 

Unobservable Inputs

 

Other real estate owned

 

$

1,363

 

$

 —

 

$

 —

 

$

1,363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

December 31, 

 

Active Markets for

 

Significant Other

 

Significant

 

Description

 

2018

 

Identical Assets

 

Observable Inputs

 

Unobservable Inputs

 

Other real estate owned

 

$

511

 

$

 —

 

$

 —

 

$

511

 

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 

    

Weighted Average

 

September 30, 2019

 

Estimate

 

Techniques

 

Input

 

Discount

 

Other real estate owned

 

$

1,363

 

Appraisal of Collateral (1)

 

Appraisal Adjustments (2)

 

8.5%

 

 

 

 

 

 

 

 

Liquidation Expenses (2)

 

2.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Fair Value      

    

Valuation

    

Unobservable 

    

Weighted Average

 

December 31, 2018

 

Estimate

 

Techniques

 

Input

 

Discount

 

Other real estate owned

 

$

511

 

Appraisal of Collateral (1)

 

Appraisal Adjustments (2)

 

8.5%

 

 

 

 

 

 

 

 

Liquidation Expenses (2)

 

15.1%

 

24

(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, establishing a new cost basis.  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 ends and have not been re-evaluated or updated for purposes of these consolidated 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.

 

Fair value estimates and assumptions are set forth below for the Company’s financial instruments at September 30, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

Significant

 

 

 

September 30, 2019

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

Carrying amount

 

Estimated Fair Value

 

Identical Assets

 

Observable Inputs

 

Inputs

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

108,521

 

$

108,521

 

$

108,521

 

$

 

$

 

Interest bearing time deposits

 

 

500

 

 

500

 

 

 

 

500

 

 

 

Securities available for sale

 

 

26,914

 

 

26,914

 

 

 

 

29,914

 

 

 

Securities held to maturity

 

 

264

 

 

264

 

 

 

 

264

 

 

 

Restricted investment in bank stock

 

 

3,088

 

 

3,088

 

 

 

 

3,088

 

 

 

Loans receivable, net

 

 

788,548

 

 

780,328

 

 

 

 

 

 

780,328

 

Accrued interest receivable

 

 

3,776

 

 

3,776

 

 

 

 

3,776

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

799,907

 

 

805,185

 

 

 —

 

 

805,185

 

 

 

Borrowed funds

 

 

49,847

 

 

50,372

 

 

 

 

50,372

 

 

 

Accrued interest payable

 

 

742

 

 

742

 

 

 

 

742

 

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

    

 

 

    

    

 

    

Quoted Prices in

    

 

 

    

Significant

 

 

 

December 31, 2018

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

Carrying amount

 

Estimated Fair Value

 

Identical Assets

 

Observable Inputs

 

Inputs

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

64,542

 

$

64,542

 

$

64,542

 

$

 

$

 

Interest bearing time deposits

 

 

500

 

 

500

 

 

 

 

500

 

 

 

Securities available for sale

 

 

32,293

 

 

32,293

 

 

 

 

32,293

 

 

 

Securities held to maturity

 

 

5,852

 

 

5,852

 

 

 

 

5,852

 

 

 

Restricted investment in bank stock

 

 

3,239

 

 

3,239

 

 

 

 

3,239

 

 

 

Loans receivable, net

 

 

756,589

 

 

728,086

 

 

 

 

 

 

728,086

 

Accrued interest receivable

 

 

2,841

 

 

2,841

 

 

 

 

2,841

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

736,702

 

 

739,940

 

 

 —

 

 

739,940

 

 

 

Borrowed funds

 

 

51,658

 

 

51,681

 

 

 

 

51,681

 

 

 

Accrued interest payable

 

 

803

 

 

803

 

 

 

 

803

 

 

 

 

 

Cash and Cash Equivalents and Interest Bearing Time Deposits

 

The carrying amounts reported in the statement of financial condition 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, if applicable.

 

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, Net

 

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 interest rate-risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates and 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.

 

Accrued Interest Receivable and Payable

 

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

 

26

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, establishing a new cost basis.  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, 2019 and December 31, 2018 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, 2019 and December 31, 2018, no attempt was made to estimate the value of anticipated future business.  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, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

27

Notes 11. Leases

 

The Company determines if a lease is present at the inception of an agreement. Operating leases are capitalized at the commencement and are discounted using the Company’s FHLBNY borrowing rate for a similar term borrowing unless the lease defines an implicit rate within the contract. For operating leases existing prior to January 1, 2019, the rate for the remainng lease term as of January 1, 2019 was used.

 

Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease right-of-use assets and operating lease liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. No significant judgments or assumptions are involved in developing the estimated operating lease liabilities as the Company’s operating lease liabilities largely represent future rental expenses associated with operating leases and the borrowing rates are based on publicly available interest rates.

 

The Company has operating leases for branches and land which have original lease terms of one to twenty years, some of which include options to extend the lease. These options to extend are assessed on a lease-by-lease basis and adjustments are made to the right-of-use asset and lease liability if the Company is reasonably certain that an option will be exercised and will be expensed on a straight-line basis.

 

Operating lease costs for the first nine months of 2019 were $1.1 million with operating cash flows from operating leases of $981 thousand.

 

The Company has a land lease related to the location of its corporate office building. The lease includes an original term and multiple extension options. The remaining term of this lease is 35 years at September 30, 2019. The Company used a discount rate of 3.98% in the calculation of the right of use asset and lease liability related to this land lease. 

 

Excluding the land lease above, the weighted-average remaining lease term of the Company’s leases is 6.55 years, and the weighted-average discount rate is 3.21% at September 30, 2019.

 

An analysis of lease payment obligations for each of the next five years and thereafter in addition to a reconciliation to the Company’s lease liability are as follows (in thousands):

 

 

 

 

 

 

Three Months Ending December 31, 2019

 

$

329

 

2020

 

 

1,312

 

2021

 

 

1,204

 

2022

 

 

1,134

 

2023

 

 

1,154

 

Thereafter

 

 

16,623

 

Total lease payments

 

 

21,756

 

Less: interest

 

 

8,423

 

Present value of lease payments

 

$

13,333

 

 

 

 

 

 

 

 

 

Included in the table above is a related party branch office lease with a Director of the Company. This lease expires on July 31, 2021. As of September 30, 2019, the remaining payment obligation under this lease agreement is $330 thousand.

 

 

 

Note 12. 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 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 balance sheet. Leases are classified as either

28

finance or operating, with the classification affecting the pattern of expense recognition in the consolidated statement of income. The reporting of lease related expenses in the consolidated statements of income and cash flows are generally consistent with the current guidance. The new guidance became effective for the Company on January 1, 2019. The standard was applied using the optional transition method in accordance with the July 2018 issued ASU No. 2018-11 allowing the Company to choose the optional transition method, instead of the modified retrospective transition method. The adoption of this standard required the Company to recognize the rights and obligations arising from operating leases as a right of use asset and a lease liability in the amounts of $13.5 million and $13.8 million, respectively, on the consolidated statements of financial condition. Refer to Note 11 Leases, of this quarterly report form 10-Q, where we discuss the adoption of ASU 2016-02.

 

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. The amendments in ASU 2016-13 would have been effective for the Company beginning in the first quarter of 2020. In October 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, resulting in a required implementation date for the Company on January 1, 2023. The Company is currently evaluating the potential impact the adoption of ASU 2016-13 will have on its consolidated financial statements and results of operations.

 

ASU 2018-13, Fair Value Measurement (Topic 820)

 

In August 2018, the FASB issued ASU 2018-13, Fair Value measurement. ASU 2018-13 removes requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that disclosure regarding measurement uncertainty is intended to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 adds certain disclosure requirements, including disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for the Company beginning in the first quarter 2020. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively, while all other amendments should be applied retrospectively for all periods presented. The Company does not expect adoption of this ASU to have a material impact on its consolidated financial position or results of operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

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, 2018 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, 2018, as filed with the Securities and Exchange Commission.

 

Statements Regarding Forward Looking Information

 

This Quarterly Report on Form 10-Q 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 “will”, “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 Quarterly Report on Form 10-Q and documents incorporated by reference.

 

You should note that many factors, some of which are discussed elsewhere in this Quarterly Report on Form 10-Q could affect the future financial results of the Company and its subsidiaries and could cause those results to differ materially from those expressed in the forward-looking statements contained in this Quarterly Report on Form 10-Q. These factors include, but are not limited to, the items set forth under Item 1A – Risk Factors in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, as updated by our subsequent filings with the Securities and Exchange Commission, as well as 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;

·

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

·

The ability to complete the Merger as set forth in more detail in the Company’s definitive proxy statement filed with the Securities and Exchange Commission (“SEC”) on October 22, 2019 (the “October Proxy”), including the section entitled “Risk Factors”.

 

The Company, sometimes referred to as “we” or “our”, 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 and 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, except as required by law or applicable regulations. 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 or herein, could affect our financial performance and could cause actual results or circumstances for future periods to differ materially from those anticipated or projected.

30

Critical Accounting Policies, Judgments and Estimates

 

Our consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 “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 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 consolidated results of operations.

 

Pending Merger with ConnectOne Bancorp, Inc.

 

On August 15, 2019, the Company and ConnectOne announced that they had entered into the Merger Agreement pursuant to which the Company will merge with and into ConnectOne. The Merger Agreement was approved by the Boards of Directors of each of the Company and ConnectOne. Following the Merger, the Bank will merge with and into ConnectOne’s wholly-owned bank subsidiary, ConnectOne Bank, with ConnectOne Bank as the surviving bank.

 

Under the terms of the Merger Agreement, the Company’s shareholders will have the right to receive for each share of the Company’s common stock, no par value, at their election, either (i) $16.25 in cash or (ii) 0.78 shares of ConnectOne’s common stock, without par value. The Company’s shareholders will have the right to elect all stock consideration, all cash consideration or a combination thereof, subject to required proration such that, in the aggregate, 80% of the Company’s shares are exchanged for stock consideration and 20% are exchanged for cash consideration.

 

The Merger is subject to the satisfaction of customary closing conditions, including outstanding regulatory approvals and approval by the Company’s and ConnectOne’s shareholders. It is anticipated that the transaction will close during the first quarter of 2020. For more information on the pending Merger, please refer to the Company’s Current Report on Form 8-K filed with the SEC on August 16, 2019 as well as the October Proxy. The foregoing summary of the Merger Agreement is not complete and is qualified in its entirety by reference to the complete text of the Merger Agreement, which was included as Exhibit 2.1 to the Form 8-K filed with the SEC on August 16, 2019 and is incorporated by reference herein.

 

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) classified loans for which the general valuation allowance for the respective loan type is deemed to be inadequate; and (2) 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 portfolio and the identification of impaired loans. The review of loans is triggered by identified evaluation factors, including delinquency status, size of loan, type of collateral and the financial condition of the borrower. Charge-offs 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 charge-offs 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 ALLL 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

31

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.

32

Results of Operations

 

Three and Nine Months Ended September 30, 2019 compared to Three and Nine Months Ended September 30, 2018

 

Our results of operations depend primarily on net interest income, which is the difference between interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities.  Interest-earning assets consist principally of loans, cash and cash equivalents and investment securities, while interest-bearing liabilities consist primarily of deposits and borrowed funds. Net income is also affected by the amount of non-interest income and non-interest expense, the provision for loan losses, and income tax expense.

 

Net Income

 

Net income for the third quarter of 2019 was $517 thousand compared to net income of $1.76 million for the third quarter of 2018, a decrease of $1.25 million or 70.9%.  Net income for the nine months ended September 30, 2019 was $3.42 million compared to net income of $4.30 million for the same period in 2018, a decrease of $873 thousand or 20.4%. This decrease in net income for the three and nine month periods is primarily due to merger related expenses, lower net interest income and an increase in the effective tax rate.

 

Net Interest Income

 

Net interest income represents the difference between income on interest-earning assets and expense paid 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.

 

Net interest income decreased by $322 thousand or 4.6% and $719 thousand or 3.6% for the three and nine months ended September 30, 2019, respectively, versus the same periods last year. The lower net interest income is a result of the increase in total interest expense outpacing the increase in total interest income in 2019. Net interest margin was 2.88% at the end of the third quarter compared to 2.92% at the end of the second quarter of 2019.

 

Total interest income increased by $992 thousand or 10.6% and $2.7 million or 10.1% for the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods in 2018, and was driven primarily in loan growth.

 

Total interest expense increased by $1.3 million or 54.9% in the third quarter of 2019 to $3.7 million compared to $2.4 million in the third quarter of 2018. For the nine months ended September 30, 2019, total interest expense increased by $3.4 million or 51.9% versus the same period in 2018. The increase in total interest expense for the three and nine month periods was due to higher deposit balances and rates paid on deposits and borrowed funds.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33

The following tables set forth average balance sheets, average 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 carrying a zero yield.

(in thousands, except for yield data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 

 

 

 

2019

 

2018

 

 

    

Average

    

 

 

    

Average

    

Average

    

 

 

    

Average

    

 

 

Balance

 

Interest

 

Yield/Cost

 

Balance

 

Interest

 

Yield/Cost

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

791,758

 

 

9,535

 

4.78

$

741,738

 

 

8,779

 

4.70

Securities (1)

 

 

30,622

 

 

168

 

2.17

 

 

53,917

 

 

248

 

1.82

 

Federal Funds Sold

 

 

3,635

 

 

19

 

2.07

 

 

2,090

 

 

 7

 

1.33

 

Interest-earning cash accounts

 

 

107,302

 

 

597

 

2.21

 

 

65,742

 

 

312

 

1.88

 

Total interest-earning Assets

 

 

933,317

 

 

10,319

 

4.39

 

863,487

 

 

9,346

 

4.29

Non-interest earning Assets

 

 

35,866

 

 

 

 

 

 

 

23,019

 

 

 

 

 

 

Allowance for Loan Losses

 

 

(8,765)

 

 

 

 

 

 

 

(8,150)

 

 

 

 

 

 

Total Assets

 

$

960,418

 

 

 

 

 

 

$

878,356

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand Deposits

 

$

81,476

 

$

74

 

0.36

$

35,095

 

$

16

 

0.18

Savings Deposits

 

 

38,792

 

 

107

 

1.09

 

 

92,732

 

 

302

 

1.29

 

Money Market Deposits

 

 

149,656

 

 

757

 

2.01

 

 

139,421

 

 

228

 

0.65

 

Time Deposits

 

 

394,775

 

 

2,387

 

2.40

 

 

350,459

 

 

1,663

 

1.88

 

Borrowed Funds

 

 

50,199

 

 

381

 

3.01

 

 

29,003

 

 

184

 

2.52

 

Total Interest Bearing Liabilities

 

 

714,898

 

 

3,706

 

2.06

 

646,710

 

 

2,393

 

1.47

Non-Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand Deposits

 

 

133,390

 

 

 

 

 

 

 

141,334

 

 

 

 

 

 

Other Liabilities

 

 

18,952

 

 

 

 

 

 

 

3,383

 

 

 

 

 

 

Total Non-Interest Bearing Liabilities

 

 

152,342

 

 

 

 

 

 

 

144,717

 

 

 

 

 

 

Stockholders’ Equity

 

 

93,178

 

 

 

 

 

 

 

86,929

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

 

$

960,418

 

 

 

 

 

 

$

878,356

 

 

 

 

 

 

Net Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Tax Equivalent Basis)

 

 

 

 

$

6,613

 

 

 

 

 

 

$

6,953

 

 

 

Tax Equivalent Basis adjustment

 

 

 

 

 

(1)

 

 

 

 

 

 

 

(19)

 

 

 

Net Interest Income

 

 

 

 

$

6,612

 

 

 

 

 

 

$

6,934

 

 

 

Net Interest Rate Spread

 

 

 

 

 

 

 

2.33

 

 

 

 

 

 

2.82

Net Interest Margin

 

 

 

 

 

 

 

2.81

 

 

 

 

 

 

3.19

Ratio of Interest-Earning Assets to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities

 

 

1.31

 

 

 

 

 

 

 

1.34

 

 

 

 

 

 

 

(1)

Yield is calculated on a tax effective basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 

 

 

2019

 

2018

 

 

    

Average

    

 

 

    

Average

    

Average

    

 

 

    

Average

    

 

 

Balance

 

Interest

 

Yield/Cost

 

Balance

 

Interest

 

Yield/Cost

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

777,565

 

 

27,380

 

4.71

$

733,323

 

 

25,106

 

4.58

Securities (1)

 

 

35,214

 

 

576

 

2.19

 

 

57,848

 

 

752

 

1.74

 

Federal Funds Sold

 

 

2,943

 

 

40

 

1.82

 

 

1,982

 

 

21

 

1.42

 

Interest-earning cash accounts

 

 

85,484

 

 

1,408

 

2.20

 

 

70,871

 

 

866

 

1.63

 

Total interest-earning Assets

 

 

901,206

 

 

29,404

 

4.36

 

864,024

 

 

26,745

 

4.14

Non-interest earning Assets

 

 

31,184

 

 

 

 

 

 

 

21,932

 

 

 

 

 

 

Allowance for Loan Losses

 

 

(8,513)

 

 

 

 

 

 

 

(8,146)

 

 

 

 

 

 

Total Assets

 

$

923,877

 

 

 

 

 

 

$

877,810

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand Deposits

 

$

80,590

 

$

128

 

0.21

$

33,514

 

$

47

 

0.19

Savings Deposits

 

 

45,900

 

 

396

 

1.15

 

 

97,934

 

 

827

 

1.13

 

Money Market Deposits

 

 

150,165

 

 

2,212

 

1.97

 

 

149,264

 

 

553

 

0.50

 

Time Deposits

 

 

356,646

 

 

6,161

 

2.31

 

 

350,981

 

 

4,786

 

1.82

 

Borrowed Funds

 

 

50,767

 

 

1,082

 

2.85

 

 

21,061

 

 

356

 

2.26

 

Total Interest Bearing Liabilities

 

 

684,068

 

 

9,979

 

1.95

 

652,754

 

 

6,569

 

1.35

Non-Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand Deposits

 

 

133,287

 

 

 

 

 

 

 

136,812

 

 

 

 

 

 

Other Liabilities

 

 

15,292

 

 

 

 

 

 

 

2,825

 

 

 

 

 

 

Total Non-Interest Bearing Liabilities

 

 

148,579

 

 

 

 

 

 

 

139,637

 

 

 

 

 

 

Stockholders’ Equity

 

 

91,230

 

 

 

 

 

 

 

85,419

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

 

$

923,877

 

 

 

 

 

 

$

877,810

 

 

 

 

 

 

Net Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Tax Equivalent Basis)

 

 

 

 

$

19,425

 

 

 

 

 

 

$

20,176

 

 

 

Tax Equivalent Basis adjustment

 

 

 

 

 

(22)

 

 

 

 

 

 

 

(54)

 

 

 

Net Interest Income

 

 

 

 

$

19,403

 

 

 

 

 

 

$

20,122

 

 

 

Net Interest Rate Spread

 

 

 

 

 

 

 

2.41

 

 

 

 

 

 

2.79

Net Interest Margin

 

 

 

 

 

 

 

2.88

 

 

 

 

 

 

3.12

Ratio of Interest-Earning Assets to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities

 

 

1.32

 

 

 

 

 

 

 

1.32

 

 

 

 

 

 

 

(1)

Yield is calculated on a tax effective basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35

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 Company recorded a provision for loan losses of $250 thousand and $390 thousand for both the three and nine months ended September 30, 2019, respectively, compared to a provision for loan losses of $280 thousand and $930 thousand for the three and nine months ended September 30, 2018, respectively. The allowance for loan losses to total loans was 1.09% as of September 30, 2019.

 

Non-interest Income

 

Our non-interest income is comprised primarily of service fees received from deposit accounts. For the three and nine months ended September 30, 2019, non-interest income increased by $19 thousand and $71 thousand, respectively, compared to the corresponding periods of 2018.

 

Non-interest Expense

 

Non-interest expense was $5.5 million and $4.4 million during the third quarter of 2019 and 2018, respectively, as compared to non-interest expense of $14.8 million and $13.8 million for the nine months ended September 30, 2019 and 2018, respectively. Included in non-interest expense for the three and nine months ended September 30, 2019 are legal and professional fees of approximately $700 thousand in merger related expenses.

 

Income Tax Expense

 

The income tax accrual for the three months ended September 30, 2019 was $440 thousand compared to $589 thousand for the same period in 2018. The decrease in income tax expense was the result of lower income before provision of income taxes. The effective tax rate for the three months ended September 30, 2019 and 2018 was 46.2% and 25.1%, respectively.  The increase in the effective tax rate reflected a year-to-date catch up in the accrual for income taxes in anticipation of the issuance of regulations implementing New Jersey’s adoption of tax legislation requiring a combined filing of affiliated companies. In addition, certain merger related costs are not tax deductible.

 

The income tax accrual for the nine months ended September 30, 2019 was $1.2 million compared to $1.4 million for the same period in 2018 which was a result of lower income before provision of income taxes. The effective tax rate for the nine months ended September 30, 2019 was 26.0%, as the Company anticipates the issuance of regulations implementing the tax legislation discussed above and the non-deductibility of certain merger related expenses.

 

 

FINANCIAL CONDITION

 

Total assets increased by $77.9 million, or 8.8%, from $883.7 million at December 31, 2018 to $961.7 million at September 30, 2019, reflecting an increase in cash and cash equivalents, loans receivable and other assets related to the booking of a right to use asset due to the adoption of Accounting Standards Update 2016-02, Leases as of January 1, 2019.  Loans receivable, or “total loans,” increased from $765.9 million at December 31, 2018 to $798.1 million at September 30, 2019, an increase of $32.2 million. Total cash and cash equivalents increased from $64.5 million at December 31, 2018 to $108.5 million at September 30, 2019, an increase of $44.0 million. The change in cash is mainly due to an increase in deposit account balances and the maturity of certain securities. Total deposits increased by $63.2 million to $799.9 million at September 30, 2019, from $736.7 million at December 31, 2018. Borrowed funds decreased to $49.9 million as of September 30, 2019 from $51.7 million at December 31, 2018.

 

Loans

 

Our loan portfolio is the primary component of our assets, and consists of commercial real estate, commercial & industrial, residential mortgages, consumer and home equity loans. Net loans, which exclude net deferred fees and costs and the allowance for loan losses, increased to $788.5 million at September 30, 2019, an increase from $756.6 million at December 31, 2018. Our market area is concentrated in Bergen County, New Jersey, with commercial loans made to borrowers located primarily in New Jersey, New York and a defined radius of our headquarters. We have a

36

concentration of commercial real estate. We believe that we will continue to have opportunities for loan growth due, in part, to our experienced staff and relationship focused strategy. Our loan growth in the third quarter of 2019 was primarily in commercial real estate loans.

 

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.

 

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) generally 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 the 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.

 

At September 30, 2019, the Bank had non-accrual loans of $10.8 million, compared to non-accrual loans totaling $9.4 million at year end 2018. If the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the three and nine months ended September 30, 2019, the gross interest income that would have been recorded would have been approximately $114 thousand and $304 thousand, respectively.

 

Within its nonaccrual loans at September 30, 2019, the Bank had seven residential mortgage loans and two home equity loans that met the definition of a troubled debt restructuring (“TDR”) loan. 

 

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, 2019, nonaccrual TDR loans had an outstanding balance of $3.4 million and had no specific reserves associated with them. At September 30, 2019, accruing TDR had an outstanding balance of $2.7 million. The modifications to these loans did not involve principal forgiveness.

 

Investment Securities

 

At September 30, 2019, total securities were $27.2 million, of which $26.9 million were classified as Available for Sale and $264 thousand were classified as Held to Maturity. The Company has no securities classified as trading at September 30, 2019.

 

Deposits

 

Deposits remain our primary source of funds.  Total deposits increased by $63.2 million to $799.7 million at September 30, 2019, from $736.7 million at December 31, 2018. Along with new deposits to the Bank, the Company has been experiencing customers transferring funds from non-interest bearing and lower interest-bearing accounts to higher interest-bearing accounts. Certificates of deposit increased by $79.1 million. Savings and interest-bearing demand deposits decreased by $25.6 million for the first nine months of 2019. Non-interest bearing demand deposit accounts increased by $9.7 million during the first nine months of 2019. The Bank has sought to increase its core deposits, while reducing its reliance on potentially volatile municipal deposits and their effects of seasonal fluctuations related to real estate tax inflows and payments. Core deposits for the first nine months of 2019 increased by $79.8 million, with a

37

decrease of $16.6 million due to outflows of municipal deposits. 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 FHLBNY and ACBB. FHLBNY advances are secured under terms of a blanket collateral agreement by a pledge of qualifying securities and mortgage loans. At September 30, 2019 and December 31, 2018, the Company had outstanding borrowings of $49.8 million and $51.7 million, respectively.

 

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 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 are able to access funds through established lines of credit and borrowings.

 

As of September 30, 2019, the Company had a $5.0 million line of credit with the Atlantic Community Bankers Bank (“ACBB”), of which $3.0 million was advanced as of September 30, 2019. The proceeds of this advance were down-streamed to the Bank as Tier 1 capital. In addition, the Bank had a $16 million overnight line of credit with Zions First National Bank, a $12.0 million overnight line of credit with First Tennessee Bank and a $10 million overnight line of credit with ACBB for the purchase of federal funds in the event that temporary liquidity needs arise.  There were no amounts outstanding under any of the Bank’s facilities at September 30, 2019.  We are an approved member of the FHLBNY.  The FHLBNY relationship could provide additional sources of liquidity, if required.  At September 30, 2019, the Bank had $46.8 million of borrowed funds and a $40 million letter of credit from the FHLBNY. The amount of credit available from the FHLBNY is dependent upon the amount of qualifying collateral we pledge. Based on the qualifying collateral the Bank has pledged to FHLBNY, in the form of loans and securities, the Bank has a remaining borrowing potential of approximately $84.5 million as of September 30, 2019.

 

Our total deposits equaled $799.9 million and $736.7 million, respectively, at September 30, 2019 and December 31, 2018. Cash and cash equivalents increased from $64.6 million on December 31, 2018 to $108.5 million at September 30, 2019. 

 

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 the section above captioned Investment Securities)

 

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

 

Interest Rate Sensitivity Analysis

 

We manage our assets and liabilities with the objectives of evaluating the interest-rate risk included in certain balance sheet accounts; determining the level of risk appropriate given our business focus, operating environment, capital and liquidity requirements; establishing prudent asset concentration guidelines; and managing risk consistent with guidelines approved by our Board of Directors.  We seek to reduce the vulnerability of our operations to changes in interest rates and to manage the ratio of interest-rate sensitive assets to interest-rate sensitive liabilities within specified maturities or re-pricing dates.  Our actions in this regard are taken under the guidance of the asset/liability committee of our Board of Directors, or “ALCO.”  ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.

 

We currently utilize net interest income simulation and economic value of equity (“EVE”) models, conducted quarterly, to measure the potential impact to the Bank of future changes in interest rates. The results of the models were within

38

guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board of Directors by the Bank’s management, would be required by ALCO.

 

The net interest income (“NII”) simulation model attempts to measure the change in net interest income over the next one-year period, and over the next two-year period on a cumulative basis, assuming certain changes in the general level of interest rates.

 

Based on the most recent quarterly model conducted, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 5.6%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.0%.

 

Based on the most recent quarterly model conducted, we estimated that over the next two years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.3%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 4.7%.

 

An EVE analysis is also used to dynamically model the present value of asset and liability cash flows. The EVE is likely to be different as interest rates change. In the most recent quarterly model conducted, our EVE would decline by 11.2% with an instantaneous rate shock of up 200 basis points and increase by 4.1% with an instantaneous rate shock of down 100 basis points.

 

The following table illustrates the most recent results for EVE and NII models conducted with dollars in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Estimated Change in

 

 

 

    

 

    

Estimated Change in

Interest Rates

Estimated

 

EVE

 

Interest Rates

 

Estimated

 

NII (12 month)

(basis points)

EVE

 

 

Amount

%

 

(basis points)

 

NII

 

 

Amount

%

+

400

$

91,530

 

$

(31,287)

(25.5)

 

+

400

 

$

26,569

 

$

2,279

9.4

+

300

 

100,534

 

 

(22,283)

(18.1)

 

+

300

 

 

26,115

 

 

1,825

7.5

+

200

 

109,072

 

 

(13,745)

(11.2)

 

+

200

 

 

25,647

 

 

1,357

5.6

+

100

 

116,479

 

 

(6,338)

(5.2)

 

+

100

 

 

25,076

 

 

786

3.2

 

 —

 

122,817

 

 

 —

 —

 

 

 —

 

 

24,290

 

 

 —

 —

-

100

 

127,791

 

 

4,974

(4.1)

 

-

100

 

 

23,067

 

 

(1,223)

5.0

-

200

 

127,900

 

 

5,083

(4.1)

 

-

200

 

 

21,619

 

 

(2,671)

11.0

 

 

Market Risk

 

Market risk is the risk of loss from adverse changes in market prices and rates.  Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities.  Thus, we actively monitor and manage our interest rate risk exposure.

 

Our profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely impact our earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis.  We monitor the impact of changing interest rates on our net interest income using several tools.  One measure of our exposure to differential changes in interest rates between assets and liabilities is shown in the table above.

 

Our primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on our net interest income and capital, while structuring our asset-liability structure to obtain the maximum yield-cost spread on that structure.  We rely primarily on our asset-liability structure to control interest rate risk.

 

 

 

 

 

 

 

 

39

The following table discloses our financial instruments that are sensitive to change in interest rates, categorized by expected maturity at September 30, 2019.  Market risk sensitive instruments are generally defined as on- and off- balance sheet financial instruments.

 

Expected Maturity/Principal Repayment

September 30, 2019

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Avg. Int.

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

There-

    

 

 

    

 

 

 

 

 

Rate

 

2019

 

2020

 

2021

 

2022

 

2023

 

After

 

Total

 

Fair Value

 

Interest Rate Sensitive Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

4.71

$

130,989

 

$

55,675

 

$

59,256

 

$

112,703

 

$

145,821

 

$

293,630

 

$

798,074

 

$

788,194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities

 

2.19

 

6,494

 

 

11,287

 

 

 —

 

 

 —

 

 

 —

 

 

9,397

 

 

27,178

 

 

27,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fed Funds Sold

 

1.82

 

4,035

 

 

 

 

 

 

 

 

 

 

 

 

4,035

 

 

4,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning cash and time deposits

 

2.20

 

102,385

 

 

 

 

 

 

 

 

 

 

 

 

102,385

 

 

102,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Sensitive Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing transaction accounts

 

1.36

 

237,136

 

 

 

 

 

 

 

 

 

 

 

 

237,136

 

 

237,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

1.15

 

35,379

 

 

 

 

 

 

 

 

 

 

 

 

35,379

 

 

35,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

2.31

 

55,637

 

 

210,082

 

 

42,285

 

 

68,175

 

 

15,239

 

 

7,821

 

 

399,239

 

 

404,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowed Funds

 

2.85

$

8,346

 

$

20,000

 

$

11,501

 

$

10,000

 

$

 —

 

$

 —

 

$

49,847

 

$

50,372

 

 

 

Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest rates.  The maturity of certain types of assets and liabilities may fluctuate in advance of changes in market rates, while the maturity of other types of assets and liabilities may lag behind changes in market rates.  In the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from the maturities assumed in calculating the above table.

 

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

 

Interest rate risk management is our primary market risk. See “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operation – Interest Rate Sensitivity Analysis” herein for a discussion of our management of our interest rate risk.

 

ITEM 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

At September 30, 2019, the Company’s management, including the Chief Executive Officer and President (our Principal Executive and Operating Officer) and Executive 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, 2019, the Company’s Chief Executive Officer and President and the Company’s Executive 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.

 

40

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, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II  OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

The Company and the Bank are subject to routine litigation during the normal course of business. Accordingly, the Company and the Bank may periodically be parties to or otherwise involved in legal proceedings, 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 proceedings pending, or threatened against the Company, or the Bank, or contemplated by government authorities, which, if determined adversely, would have a material effect on the business, financial position or results of operations of the Company.

 

Item 1A.  Risk Factors

 

An investment in our common stock involves risks. Stockholders should carefully consider the risks described under Item 1A – Risk Factors in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, as supplemented by our subsequent Quarterly Reports on Form 10-Q. Stockholders should also carefully consider the risks with respect to the pending Merger that are contained in the “Risk Factors” section of the October Proxy.  

 

 

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 42.

41

EXHIBIT INDEX

 

Exhibit No.

    

 

    

Description

 

 

 

 

 

2.1

 

 

 

Agreement and Plan of Merger, dated as of August 15, 2019, by and between Bancorp of New Jersey, Inc. and ConnectOne Bancorp, Inc. (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed on August 16, 2019)

10.1

 

 

 

Form of Voting Agreement executed by all directors of Bancorp of New Jersey, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of ConnectOne Bancorp, Inc., filed August 16, 2019)

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

 

 

 

42

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 12, 2019

By:

/s/ Nancy E. Graves

 

 

Nancy E. Graves

 

 

Chief Executive Officer and President

 

 

(Principal Executive and Operating Officer)

 

 

 

 

 

 

 

By:

/s/ Matthew Levinson

 

 

Matthew Levinson

 

 

Executive Vice President and

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

43

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