Bancorp of New Jersey, Inc. - FORM 10-Q

Attached files

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EX-32 - EX-32 - Bancorp of New Jersey, Inc.	bkj-20180331xex32.htm
EX-31.2 - EX-31.2 - Bancorp of New Jersey, Inc.	bkj-20180331ex3125b67ca.htm
EX-31.1 - EX-31.1 - Bancorp of New Jersey, Inc.	bkj-20180331ex3118c9659.htm

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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 March 31, 2018

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

For the transition period from to

Commission file number: 001-34089

BANCORP OF NEW JERSEY, INC.

(Exact name of registrant as specified in its charter)

New Jersey		20-8444387
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1365 Palisade Ave, Fort Lee, New Jersey		07024
(Address of principal executive offices)		(Zip Code)

(201) 944-8600

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☐
		(Do not check if a 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 ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 1, 2018 there were 6,948,278 outstanding shares of the issuer’s class of common stock, no par value.

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INDEX

		PAGE

Part I Financial Information

Item 1.	Financial Statements:

	Unaudited Consolidated Statements of Financial Condition — March 31, 2018 and December 31, 2017	3

	Unaudited Consolidated Statements of Income - Three Months Ended March 31, 2018 and 2017	4

	Unaudited Consolidated Statements of Comprehensive Income- Three months Ended March 31, 2018 and 2017	5

	Unaudited Consolidated Statements of Stockholders’ Equity – Three Months Ended March 31, 2018 and 2017	6

	Unaudited Consolidated Statements of Cash Flows – Three Months Ended March 31, 2018 and 2017	7

	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35

Item 4.	Controls and Procedures	35

Part II Other Information

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Mine Safety Disclosures	36

Item 5.	Other Information	36

Item 6.	Exhibits	36

Signatures		38

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BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except for per share data)


	March 31, 2018		December 31, 2017
Assets
Cash and due from banks	$	2,533	$	1,627
Interest bearing deposits		58,102		90,540
Federal funds sold		452		452
Total cash and cash equivalents		61,087		92,619
Interest bearing time deposits		1,000		1,000
Securities available for sale		52,179		53,234
Securities held to maturity (fair value $6,058 and $6,058 at March 31, 2018 and December 31, 2017, respectively)		6,058		6,058
Restricted investment in bank stock, at cost		1,305		1,380
Loans receivable		723,789		721,191
Deferred loan fees and costs, net		(786)		(798)
Allowance for loan losses		(8,111)		(8,317)
Net loans		714,892		712,076
Premises and equipment, net		13,578		13,725
Accrued interest receivable		2,810		2,695
Other real estate owned		415		415
Other assets		4,135		4,205
Total assets	$	857,459	$	887,407
Liabilities and Stockholders’ Equity
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits	$	136,938	$	133,661
Savings and interest bearing transaction accounts		271,293		307,583
Time deposits $250 and under		231,148		231,224
Time deposits over $250		119,617		115,825
Total deposits		758,996		788,293
Borrowed funds		11,713		13,385
Accrued expenses and other liabilities		2,165		2,420
Total liabilities		772,874		804,098
Stockholders’ equity:
Common stock, no par value, authorized 20,000,000 shares; issued and outstanding 6,948,278 at March 31, 2018 and 6,932,690 at December 31, 2017		70,342		70,182
Retained earnings		14,825		13,482
Accumulated other comprehensive loss		(582)		(355)
Total stockholders’ equity		84,585		83,309
Total liabilities and stockholders’ equity	$	857,459	$	887,407

See accompanying notes to unaudited consolidated financial statements

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BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except for per share data)


	For the Three Months Ended March 31,
	2018		2017
INTEREST INCOME
Loans, including fees	$	8,148	$	7,385
Securities		236		200
Federal funds sold and other		307		190
TOTAL INTEREST INCOME		8,691		7,775

INTEREST EXPENSE
Savings and interest bearing transaction accounts		417		438
Time deposits		1,514		1,208
Borrowed funds		49		87
TOTAL INTEREST EXPENSE		1,980		1,733

NET INTEREST INCOME		6,711		6,042
Provision for loan losses		325		—
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,386		6,042
NON-INTEREST INCOME
Fees and service charges		95		118
TOTAL NON-INTEREST INCOME		95		118

NON-INTEREST EXPENSE
Salaries and employee benefits		2,415		2,292
Occupancy and equipment expense		867		738
FDIC premiums and related expenses		158		233
Legal fees		138		83
Other real estate owned expenses		7		2
Professional fees		248		487
Data processing		333		304
Other expenses		537		362
TOTAL NON-INTEREST EXPENSE		4,703		4,501
Income before provision for income taxes		1,778		1,659
Income tax expense		435		597
Net income	$	1,343	$	1,062

PER SHARE OF COMMON STOCK
Basic	$	0.19	$	0.17
Diluted	$	0.19	$	0.17

See accompanying notes to unaudited consolidated financial statements

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BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)


	For the Three Months Ended March 31,
	2018		2017
Net income	$	1,343	$	1,062
Other comprehensive income:
Unrealized (losses) gains on securities available for sale, net of deferred income tax (benefit) expense of $(88) and $44, respectively		(227)		68
Comprehensive income	$	1,116	$	1,130

See accompanying notes to unaudited consolidated financial statements

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BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)


					Accumulated
					Other
	Common		Retained		Comprehensive
	Stock		Earnings		(Loss)		Total
Balance at January 1, 2017		61,524		15,813		(193)		77,144
Exercise of stock options		176		—		—		176
Stock based compensation		72		—		—		72
Net income		—		1,062		—		1,062
Other comprehensive income, net of taxes		—		—		68		68
Balance at March 31, 2017	$	61,772	$	16,875	$	(125)	$	78,522

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

See accompanying notes to unaudited consolidated financial statements

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BANCORP OF NEW JERSEY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	For the Three Months Ended March 31,
	2018		2017
Cash flows from operating activities:
Net income	$	1,343	$	1,062
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		325		—
Amortization of securities premiums		45		49
Deferred income taxes		74		(132)
Depreciation		207		182
Stock based compensation		153		72
(Amortization) accretion of net loan origination fees and costs		(12)		116
Gain on sale of other real estate owned		—		(18)
Changes in operating assets and liabilities:
Increase in accrued interest receivable		(115)		(166)
Decrease in other assets		83		167
(Decrease) increase in accrued interest payable and other liabilities		(254)		200
NET CASH PROVIDED BY OPERATING ACTIVITIES		1,849		1,532

Cash flows from investing activities:
Purchases of securities held to maturity		—		(4,090)
Proceeds from maturities of securities held to maturity		—		2,469
Proceeds from calls, maturities and other principal payments of securities available for sale		695		4,000
Proceeds from calls of restricted investment of bank stock		75		74
Proceeds from sale of other real estate owned		—		178
Net increase in loans		(3,129)		(24,447)
Purchases of premises and equipment		(60)		(364)
NET CASH USED IN INVESTING ACTIVITIES		(2,419)		(22,180)

Cash flows from financing activities:
Net (decrease) increase in deposits		(29,297)		37,302
Net decrease in borrowed funds		(1,672)		(1,646)
Proceeds from exercise of stock options		7		176
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(30,962)		35,832
(Decrease) increase in cash and cash equivalents		(31,532)		15,184
Cash and cash equivalents at beginning of year		92,619		76,976
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	61,087	$	92,160
Supplemental information:
Cash paid during the year for:
Interest	$	1,935	$	1,883
Income taxes	$	12	$	—

See accompanying notes to unaudited consolidated financial statements

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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 York Corp., BONJ-New Jersey Investment Company, BONJ-Delaware Investment Company and BONJ REIT Inc. All significant inter-company accounts and transactions have been eliminated in consolidation.

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

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

The financial information in this quarterly report has been prepared in accordance with 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. Certain 2017 information has been reclassified for consistency with the 2018 presentation.

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, 2017, 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 March 31, 2018, 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.

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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 26, 2017.

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 plan allows the Company to grant options to directors and employees of the Company to purchase up to 251,983 shares of the Company’s common stock. At March 31, 2018, stock options to purchase 219,609 shares, net of forfeitures, have been issued to directors and employees of the Company under the 2006 Plan, of which options to purchase 49,615 shares were outstanding. There are no options available for grants under the 2006 Plan as the plan has expired.

During 2016, the Company granted 67,158 Non-Qualified Stock Options (“NQO”) to employees of the Company. The fair value of the NQOs granted was $2.63 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 each on February 1, 2017, February 1, 2018 and February 1, 2019.

Under the 2006 Plan, there were 33,100 unvested options at March 31, 2018 and 38,997 unvested at March 31, 2017. At March 31, 2018 there was $36 thousand of unrecognized compensation expense related to unvested options. For the three months ended March 31, 2018, $10 thousand was recorded as expense for options that have been issued through the 2006 Plan. For the three months ended March 31, 2017, $20 thousand was recorded as expense for options that have been issued through the 2006 Plan.

During the three months ended March 31, 2018 options to purchase 588 shares of common stock at a price of $10.64 per share were exercised for a total price of $7 thousand. During the three months ended March 31, 2017 options to purchase 15,750 and 210 shares of common stock at prices of $10.95 and $10.64 per share respectively, were exercised for a total price of $176 thousand.

A summary of stock option activity under the 2006 Plan during the three months ended March 31, 2017 and 2018 are presented below:


						Weighted
		Weighted				Average
		Average		Aggregate		Remaining
	Number of	Exercise Price		Intrinsic Value		Contractual
	Shares	per Share		(1)		Term
Outstanding at December 31, 2016	90,783	$	10.74
Forfeited	(788)		10.64
Exercised	(15,960)		10.95

Outstanding at March 31, 2017	74,035	$	10.71	$	280,950	7.46

Exercisable at March 31, 2017	38,997	$	10.78	$	130,635	5.41

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						Weighted
		Weighted				Average
		Average		Aggregate		Remaining
	Number of	Exercise Price		Intrinsic Value		Contractual
	Shares	per Share		(1)		Term
Outstanding at December 31, 2017	51,253	$	10.64
Forfeited	(1,050)		10.64
Exercised	(588)		10.64

Outstanding at March 31, 2018	49,615	$	10.64	$	298,186	8.31

Exercisable at March 31, 2018	33,100	$	10.64	$	198,931	8.31

(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 March 31, 2018 and 2017, respectively. This amount changes based on the changes in the market value in the Company’s stock.

2007 Director Plan

During 2007, the Bank’s stockholders approved the 2007 Non-Qualified Stock Option Plan for Directors (the “2007 Director Plan”). At the time of the holding company reorganization, the 2007 Director Plan was assumed by the Company. This plan provides for 504,000 options to purchase shares of the Company’s common stock to be issued to non-employee directors of the Company. At March 31, 2018, stock options to purchase 404,600 shares, net of forfeitures, have been issued to non-employee directors of the Company under the 2007 Director Plan. No options to purchase shares were outstanding at March 31, 2018. There are no options available for grants under the 2007 Director Plan as the plan has expired.

Under the 2007 Director Plan, there were no unvested options and no unrecognized compensation expense at March 31, 2018 and 2017. In connection with the 2007 Director Plan, no share based compensation expense was recognized for the three months ended March 31, 2018 and 2017.

A summary of stock option activity under the 2007 Director Plan during the three months ended March 31, 2017 and 2018 are presented below:


						Weighted
		Weighted				Average
		Average		Aggregate		Remaining
	Number of	Exercise Price		Intrinsic Value		Contractual Life
	Shares	per Share		(1)		(Years)
Outstanding at December 31, 2016	325,500	$	10.95
Outstanding at March 31, 2017	325,500	$	10.95	$	1,163,272	0.56

Exercisable at March 31, 2017	325,500	$	10.95	$	1,163,272	0.56


						Weighted
		Weighted				Average
		Average		Aggregate		Remaining
	Number of	Exercise Price		Intrinsic Value		Contractual Life
	Shares	per Share		(1)		(Years)
Outstanding at December 31, 2017	—	$	—
Outstanding at March 31, 2018	—	$	—	$	—	—

Exercisable at March 31, 2018	—	$	—	$	—	—

(1)

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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 262,500 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 March 31, 2018, there were 171,943 shares, net of forfeitures, issued to employees and directors of the Company under the 2011 Plan.


	2017
		Weighted
		Average
	Number	Grant Date
	of Shares	Fair Value
Outstanding at December 31, 2016	29,400	$	12.38
Granted	31,500		14.28
Forfeited	(4,200)		12.38
Vested	(13,650)		12.38
Outstanding at March 31, 2017	43,050	$	13.77


	2018
		Weighted
		Average
	Number	Grant Date
	of Shares	Fair Value
Outstanding at December 31, 2017	32,550	$	13.61
Granted	15,000		17.54
Vested	(14,550)		13.44
Outstanding at March 31, 2018	33,000	$	15.47

Approximately $462 thousand remains to be expensed over the next twenty three months related to the unvested restricted stock. For the three months ended March 31, 2018 and 2017, $125 thousand and $45 thousand, respectively, were recorded as compensation expense for restricted stock that had been issued through the 2011 Plan.

During 2016, the Company granted 31,500 NQOs to an executive of the Company. The fair value of the 31,500 NQOs granted was $2.78 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 14,700 NQOs to employees of the Company. The fair value of the NQOs granted was $6.95 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 each on February 1, 2018, February 1, 2019 and February 1, 2020.

Under the 2011 Plan, there were 20,300 unvested options at March 31, 2018 and 21,000 unvested options at March 31, 2017. At March 31, 2018 there was $64 thousand of unrecognized compensation expense related to unvested options. For the three months ended March 31, 2018, $18 thousand was recorded as expense for options that have been issued through the 2011 Plan. For the three months ended March 31, 2017, $7 thousand was recorded as expense for options that have been issued through the 2011 Plan.

No options were exercised under the 2011 Plan during the three months ended March 31, 2018 and 2017.

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A summary of stock option activity under the 2011 Plan during the three months ended March 31, 2017 and 2018 are

presented below:


						Weighted
		Weighted				Average
		Average		Aggregate		Remaining
	Number of	Exercise Price		Intrinsic Value		Contractual
	Shares	per Share		(1)		Term
Outstanding at December 31, 2016	31,500	$	10.70
Outstanding at March 31, 2017	31,500	$	10.70	$	121,450	9.06

Exercisable at March 31, 2017	10,500	$	10.70	$	40,150	9.06

						Weighted
		Weighted				Average
		Average		Aggregate		Remaining
	Number of	Exercise Price		Intrinsic Value		Contractual
	Shares	per Share		(1)		Term
Outstanding at December 31, 2017	46,200	$	12.72
Outstanding at March 31, 2018	46,200	$	12.72	$	181,545	8.47

Exercisable at March 31, 2018	25,900	$	11.90	$	122,990	8.30

(1)

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 $61 thousand and $60 thousand during the three months ended March 31, 2018 and 2017, 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 and warrants to purchase the Company’s common stock.

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


	For the three months ended
	March 31,
(In thousands except per share data)	2018		2017
Net income available to common stockholders	$	1,343	$	1,062
Weighted average number of common shares outstanding - basic		6,942		6,330
Basic earnings per share	$	0.19	$	0.17

Net income available to common stockholders	$	1,343	$	1,062
Weighted average number of common shares outstanding		6,942		6,330
Effect of dilutive options		19		50
Weighted average number of common shares outstanding- diluted		6,961		6,380
Diluted earnings per share	$	0.19	$	0.17

Non-qualified options to purchase 81,115 shares of common stock at a weighted average price of $10.66 were included in the computation of diluted earnings per share for the three months ended March 31, 2018. Non-qualified options to purchase 14,700 shares of common stock at a price of $17.05 were not included because they were antidilutive.

Incentive stock options to purchase 15,000 shares of common stock at a price of $11.50 and non-qualified options to purchase 338,370 shares of common stock at a weighted average price of $11.47 were included in the computation of diluted earnings per share for the three months ended March 31, 2017.

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

A summary of securities held to maturity and securities available for sale at March 31, 2018 and December 31, 2017 is as follows (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2018	Cost		Gains		Losses		Value
Securities Held to Maturity:
Obligations of states and political subdivisions	$	6,058	$	—	$	—	$	6,058
Total securities held to maturity		6,058		—		—		6,058

Securities Available for Sale:
U.S. Treasury securities		6,258		—		(170)		6,088
Government sponsored enterprise obligations
Agency backed		33,448		—		(305)		33,143
Mortgage backed		13,278		—		(330)		12,948
Total securities available for sale		52,984		—		(805)		52,179

	$	59,042	$	—	$	(805)	$	58,237

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			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2017	Cost		Gains		Losses		Value
Securities Held to Maturity:
Obligations of states and political subdivisions	$	6,058	$	—	$	—	$	6,058
Total securities held to maturity		6,058		—		—		6,058

Securities Available for Sale:
U.S. Treasury securities		6,286		—		(124)		6,162
Government sponsored enterprise obligations
Agency backed		33,453		—		(218)		33,235
Mortgage backed		13,986		—		(149)		13,837
Total securities available for sale		53,725		—		(491)		53,234

	$	59,783	$	—	$	(491)	$	59,292

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
March 31, 2018	Value		Losses		Value		Losses		Value		Losses
Securities Available for Sale:
U.S. Treasury securities		—		—		6,088		(170)		6,088		(170)
Government sponsored enterprise obligations		22,726		(466)		23,365		(169)		46,091		(635)
Total securities available for sale		22,726		(466)		29,453		(339)		52,179		(805)

Total securities	$	22,726	$	(466)	$	29,453	$	(339)	$	52,179	$	(805)


	Less than 12 Months				More than 12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2017	Value		Losses		Value		Losses		Value		Losses
Securities Available for Sale:
U.S. Treasury securities		—		—		6,162		(124)		6,162		(124)
Government sponsored enterprise obligations		23,691		(201)		23,381		(166)		47,072		(367)
Total securities available for sale		23,691		(201)		29,543		(290)		53,234		(491)

Total securities	$	23,691	$	(201)	$	29,543	$	(290)	$	53,234	$	(491)

The amortized cost and fair value of securities held to maturity and securities available for sale at March 31, 2018 by contractual maturity are shown below. Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay their obligations. (in thousands):


	Securities Held to Maturity				Securities Available for Sale
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
One year or less	$	6,058	$	6,058	$	18,034	$	17,932
After one to five years		—		—		21,672		21,299
Greater than five years		—		—		13,278		12,948
Total	$	6,058	$	6,058	$	52,984	$	52,179

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

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likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary-impairment decline exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

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

At March 31, 2018, the Company’s available for sale securities portfolio consisted of fourteen securities, of which nine were in an unrealized loss position for more than twelve months, and five were in a loss position for less than twelve months. No OTTI charges were recorded for the three months ended March 31, 2018. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities. Unrealized losses primarily relate to interest rate fluctuations and not credit concerns.

Securities with an amortized cost of $20.2 million and a fair value of $20 million, were pledged to secure public funds on deposit at March 31, 2018. Securities with an amortized cost of $11.1 milion and a fair value of $10.9 million were pledged to secure borrowings with the Federal Home Loan Bank of New York (“FHLBNY”) as of March 31, 2018. Securities with an amortized cost of $20.2 million and a fair value of $20 million, were pledged to secure public funds on deposit at December 31, 2017. In addition, securities with an amortized cost of $11.1 million and a fair value of $11 million were pledged to secure borrowings with FHLBNY as of December 31, 2017.

During the three months ended March 31, 2018 and 2017, the Company did not sell securities from its available for sale or held to maturity portfolios.

Note 5. Loans.

The components of the loan portfolio, which are categorized by collateral code, at March 31, 2018 and December 31, 2017 are summarized as follows (in thousands):


	March 31, 2018		December 31, 2017
Commercial real estate	$	582,890	$	573,941
Residential mortgages		64,685		66,497
Commercial and industrial		26,250		27,237
Home equity		49,729		53,199
Consumer		235		317
	$	723,789	$	721,191

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

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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
March 31, 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		—		—		(25)		(510)		—		—		(535)
Recoveries		—		—		2		—		2		—		4
Provision		88		(40)		56		734		(20)		(493)		325
Ending balance	$	5,955	$	332	$	608	$	627	$	32	$	557	$	8,111
Ending balance: individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance: collectively evaluated for impairment	$	5,955	$	332	$	608	$	627	$	32	$	557	$	8,111

Loan receivables:
Ending balance	$	582,890	$	64,685	$	26,250	$	49,729	$	235	$	—	$	723,789
Ending balance: individually evaluated for impairment	$	11,186	$	8,893	$	2,957	$	2,153	$	—	$	—	$	25,189
Ending balance: collectively evaluated for impairment	$	571,704	$	55,792	$	23,293	$	47,576	$	235	$	—	$	698,600


	Commercial		Residential		Commercial
March 31, 2017	Real Estate		Mortgages		& Industrial		Home Equity		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	5,925	$	554	$	809	$	425	$	6	$	568	$	8,287
Charge-offs		—		(47)		—		—		—		—		(47)
Recoveries		—		1		—		—		—		—		1
Provision		(68)		(40)		(107)		10		(1)		206		—
Ending balance	$	5,857	$	468	$	702	$	435	$	5	$	774	$	8,241

December 31, 2017
Allowance for loan losses:
Ending balance	$	5,867	$	372	$	575	$	403	$	50	$	1,050	$	8,317
Ending balance: individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance: collectively evaluated for impairment	$	5,867	$	372	$	575	$	403	$	50	$	1,050	$	8,317

Loan receivables:
Ending balance	$	573,941	$	66,497	$	27,237	$	53,199	$	317	$	—	$	721,191
Ending balance: individually evaluated for impairment	$	11,554	$	8,966	$	2,957	$	3,214	$	—	$	—	$	26,691
Ending balance: collectively evaluated for impairment	$	562,387	$	57,531	$	24,280	$	49,985	$	317	$	—	$	694,500

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

For the three months ended:


	Commercial		Residential		Commercial
March 31, 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		—		—		(25)		(510)		—		—		(535)
Recoveries		—		—		2		—		2		—		4
Provisions		88		(40)		56		734		(20)		(493)		325
Ending balance	$	5,955	$	332	$	608	$	627	$	32	$	557	$	8,111


	Commercial		Residential			Commercial
March 31, 2017	Real Estate		Mortgages		& Industrial		Home Equity		Consumer		Unallocated		Total
Allowance for loan losses
Beginning Balance	$	5,925	$	554	$	809	$	425	$	6	$	568	$	8,287
Charge-offs		—		(47)		—		—		—		—		(47)
Recoveries		—		1		—		—		—		—		1
Provisions		(68)		(40)		(107)		10		(1)		206		—
Ending balance	$	5,857	$	468	$	702	$	435	$	5	$	774	$	8,241

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 March 31, 2018 and December 31, 2017, (in thousands):


	30-59 Days		60-89 Days		90+ Days		Total Past				Total Loans		Nonaccrual
March 31, 2018	Past Due		Past Due		Past Due		Due		Current		Receivables		Loans
Commercial real estate	$	5,255	$	—	$	1,325	$	6,580	$	576,310	$	582,890	$	2,987
Residential mortgages		2,372		1,397		1,938		5,707		58,978		64,685		8,893
Commercial and industrial		32		—		2,957		2,989		23,261		26,250		2,957
Home equity		1,193		490		2,002		3,685		46,044		49,729		1,969
Consumer		14		—		—		14		221		235		—
	$	8,866	$	1,887	$	8,222	$	18,975	$	704,814	$	723,789	$	16,806


	30-59 Days		60-89 Days		90+ Days		Total Past				Total Loans		Nonaccrual
December 31, 2017	Past Due		Past Due		Past Due		Due		Current		Receivables		Loans
Commercial real estate	$	209	$	—	$	3,343	$	3,552	$	570,389	$	573,941	$	3,344
Residential mortgages		4,527		974		2,026		7,527		58,970		66,497		9,052
Commercial and industrial		—		25		2,957		2,982		24,255		27,237		2,957
Home equity		3,265		1,230		1,022		5,517		47,682		53,199		3,073
Consumer		—		—		—		—		317		317		—
	$	8,001	$	2,229	$	9,348	$	19,578	$	701,613	$	721,191	$	18,426

At March 31, 2018, the Company had one loan that was delinquent ninety days or greater and accruing interest. At December 31, 2017, the Company had no loans greater than ninety days delinquent and accruing interest.

If nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the three month period ended March 31, 2018 and 2017, the gross interest income would have been $104 thousand and $181 thousand, respectively. There was no interest income recognized on these loans during the three month ended March 31, 2018 and 2017.

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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 March 31, 2018 and December 31, 2017 (in thousands):


	Commercial		Residential		Commercial
March 31, 2018	Real Estate		Mortgages		& Industrial		Home Equity		Consumer		Total
Pass	$	571,704	$	54,669	$	23,032	$	47,576	$	235	$	697,216
Special Mention		—		1,123		261		—		—		1,384
Substandard		11,186		8,893		2,957		2,153		—		25,189
Doubtful		—		—		—		—		—		—
	$	582,890	$	64,685	$	26,250	$	49,729	$	235	$	723,789


	Commercial		Residential		Commercial
December 31, 2017	Real Estate		Mortgages		& Industrial		Home Equity		Consumer		Total
Pass	$	562,387	$	56,407	$	24,051	$	49,985	$	317	$	693,147
Special Mention		—		1,124		229		—		—		1,353
Substandard		11,554		8,966		2,957		3,214		—		26,691
Doubtful		—		—		—		—		—		—
	$	573,941	$	66,497	$	27,237	$	53,199	$	317	$	721,191

A loan is considered impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. The following table provides information about the Company’s impaired loans at March 31, 2018 and December 31, 2017 (in thousands):


			Unpaid
	Recorded		Principal		Related
March 31, 2018	Investment		Balance		Allowance
Commercial real estate	$	11,186	$	11,186	$	—
Residential mortgages		8,893		10,503		—
Commercial and industrial		2,957		3,057		—
Home equity		2,153		2,515		—
Total impaired loans	$	25,189	$	27,261	$	—


			Unpaid
	Recorded		Principal		Related
December 31, 2017	Investment		Balance		Allowance
Commercial real estate	$	11,554	$	11,578	$	—
Residential mortgages		8,966		10,287		—
Commercial and industrial		2,957		3,057		—
Home equity		3,214		3,509		—
Total impaired loans	$	26,691	$	28,431	$	—

The following tables provide information about the Company’s impaired loans for the three months ended March 31, 2018 and 2017 (in thousands):


	Three Months Ended				Three Months Ended
	March 31, 2018				March 31, 2017
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Received		Investment		Received
Commercial real estate	$	11,370	$	—	$	10,177	$	—
Residential mortgages		8,972		—		9,674		—
Commercial and industrial		2,957		—		3,257		—
Home equity		2,641		—		4,534		—
Total impaired loans	$	25,940	$	—	$	27,642	$	—

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

The following table summarizes information in regards to TDRs by loan portfolio class as of March 31, 2018 and December 31, 2017 (in thousands):


	Accrual		Number of	Nonaccrual		Number of
March 31, 2018	Status		Loans	Status		Loans	Total
Residential mortgages	$	1,312	4	$	7,294	10	$	8,606
Home equity		—	—		1,572	5		1,572
	$	1,312	4	$	8,866	15	$	10,178


	Accrual		Number of	Nonaccrual		Number of
December 31, 2017	Status		Loans	Status		Loans	Total
Commercial real estate	$	—	—	$	338	1	$	338
Residential mortgages		637	3		7,446	10		8,083
Home equity		—	—		2,959	8		2,959
	$	637	3	$	10,743	19	$	11,380

For the three months ended March 31, 2018 and 2017 there was one new TDR that occurred.


				Post-
		Pre-Modification		Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
2018	Loans	Investments		Investments
Residential mortgages	1	$	679	$	679
	1	$	679	$	679

				Post-
		Pre-Modification		Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
2017	Loans	Investments		Investments
Residential mortgages	1	$	2,984	$	2,984
	1	$	2,984	$	2,984

During the three months ended March 31, 2018, 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 three months ended March 31, 2018, the Company had no foreclosed residential real estate properties. In addition, as of March 31, 2018, the Company had loans with a carrying value of $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 March 31, 2018, the Company had $3.4 million of letters of credit outstanding. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be

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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 March 31, 2018 for guarantees under standby letters of credit issued is not material.

Note 7. Borrowed Funds

Borrowings may consist of long-term and short-term debt fixed rate advances from the FHLBNY as well as short term borrowings through lines of credit with other financial institutions. Information concerning borrowings at March 31, 2018 and December 31, 2017, is as follows (in thousands):


	2018
					Original
March 31, 2018	Amount		Rate		Term (years)	Maturity
Fixed Rate Amortizing Note		1,370	1.50	%	5	June 2019
Fixed Rate Amortizing Note		2,183	1.51	%	5	July 2019
Fixed Rate Amortizing Note		2,156	1.51	%	5	August 2019
Fixed Rate Amortizing Note		2,588	2.02	%	7	August 2021
Fixed Rate Amortizing Note		3,416	1.48	%	5	October 2019
	$	11,713	1.61	%


	2017
					Original
December 31, 2017	Amount		Rate		Term (years)	Maturity
Fixed Rate Amortizing Note		1,624	1.50	%	5	June 2019
Fixed Rate Amortizing Note		2,563	1.51	%	5	July 2019
Fixed Rate Amortizing Note		2,511	1.51	%	5	August 2019
Fixed Rate Amortizing Note		2,766	2.02	%	7	August 2021
Fixed Rate Amortizing Note		3,921	1.48	%	5	October 2019
	$	13,385	1.61	%

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 March 31, 2018 and December 31, 2017.

At March 31, 2018 and December 31, 2017, loans with a carrying value of approximately $145.0 million and $149.3 million and securities with a fair value of $10.9 million and $11.0 million, respectively, were pledged to secure advances and municipal letters of credit from FHLBNY.

The Company has a $5.0 million line of credit with the Atlantic Community Bankers Bank. 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 Atlantic Community Bankers Bank for the purchase of federal funds in the event that temporary liquidity needs arise. There were no outstanding borrowings on any of the lines of credit at March 31, 2018 and December 31, 2017. Additionally, the Bank is a member of the FHLBNY. The FHLBNY relationship provides additional borrowing capacity.

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

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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 March 31, 2018, the applicable minimum ratios, the applicable minimum required based on the phase-in provisions and the minimum required to be considered well capitalized:


							To Be Well
			Minimum Required		Minimum Capital		Capitalized Under
			For Capital		With Phase-in		Prompt Corrective
	March 31, 2018		Adequacy Purposes		Buffer Schedule		Action Regulations

Risk-Based Capital:
Common Equity Tier 1 Capital	10.97	%	4.50	%	6.375	%	6.50	%
Tier 1 Capital Ratio	10.97	%	6.00	%	7.875	%	8.00	%
Total Capital Ratio	12.05	%	8.00	%	9.875	%	10.00	%
Leverage Ratio	9.68	%	4.00	%	N/A		5.00	%

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

Note 9. Fair Value Measurements

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

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

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

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

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

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

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2018 and December 31, 2017, respectively, are as follows (in thousands):


			(Level 1)		(Level 2)		(Level 3)
			Quoted Prices in
			Active Markets		Significant Other
	March 31,		for Identical		Observable		Significant
Description	2018		Assets		Inputs		Unobservable Inputs
Securities available for sale:
U.S. Treasury securities	$	6,088	$	—	$	6,088	$	—
Government sponsored enterprise obligations:
Agency backed		33,143		—		33,143		—
Mortgage backed		12,948		—		12,948		—
Total securities available for sale	$	52,179	$	—	$	52,179	$	—

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			(Level 1)		(Level 2)		(Level 3)
			Quoted Prices in
			Active Markets		Significant Other
	December 31,		for Identical		Observable		Significant
Description	2017		Assets		Inputs		Unobservable Inputs
Securities available for sale:
U.S. Treasury securities	$	6,162	$	—	$	6,162	$	—
Government sponsored enterprise obligations:
Agency backed		33,235		—		33,235		—
Mortgage backed		13,837		—		13,837		—
Total securities available for sale	$	53,234	$	—	$	53,234	$	—

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2018 and December 31, 2017, respectively, follows (in thousands):


			(Level 1)		(Level 2)		(Level 3)
			Quoted Prices in
	March 31,		Active Markets for		Significant Other		Significant
Description	2018		Identical Assets		Observable Inputs		Unobservable Inputs
Other real estate owned	$	415	$	—	$	—	$	415


			(Level 1)		(Level 2)		(Level 3)
			Quoted Prices in
	December 31,		Active Markets for		Significant Other		Significant
Description	2017		Identical Assets		Observable Inputs		Unobservable Inputs
Other real estate owned	$	415	$	—	$	—	$	415

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


	Fair Value		Valuation	Unobservable	Range
March 31, 2018	Estimate		Techniques	Input	(Weighted Average)
Other real estate owned	$	415	Appraisal of Collateral (1)	Appraisal Adjustments (2)	21.8
				Liquidation Expenses (2)	6.8

	Fair Value		Valuation	Unobservable	Range
December 31, 2017	Estimate		Techniques	Input	(Weighted Average)
Other real estate owned	$	415	Appraisal of Collateral (1)	Appraisal Adjustments (2)	21.8
				Liquidation Expenses (2)	6.8

(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

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not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.

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

Fair value estimates and assumptions are set forth below for the Company’s financial instruments at March 31, 2018 and December 31, 2017 (in thousands):


					(Level 1)		(Level 2)		(Level 3)
					Quoted Prices in				Significant
	March 31, 2018				Active Markets for		Significant Other		Unobservable
	Carrying amount		Estimated Fair Value		Identical Assets		Observable Inputs		Inputs
Financial assets:
Cash and cash equivalents	$	61,087	$	61,087	$	61,087	$	—	$	—
Interest bearing time deposits		1,000		1,000		—		1,000		—
Securities available for sale		52,179		52,179		—		52,179		—
Securities held to maturity		6,058		6,058		—		6,058		—
Restricted investment in bank stock		1,305		1,305		—		1,305		—
Loans receivable, net		714,892		690,808		—		—		690,808
Accrued interest receivable		2,810		2,810		—		2,810		—
Financial liabilities:
Deposits		758,996		764,261		—		764,261		—
Borrowed funds		11,713		11,611		—		11,611		—
Accrued interest payable		696		696		—		696		—


					(Level 1)		(Level 2)		(Level 3)
					Quoted Prices in				Significant
	December 31, 2017				Active Markets for		Significant Other		Unobservable
	Carrying amount		Estimated Fair Value		Identical Assets		Observable Inputs		Inputs
Financial assets:
Cash and cash equivalents	$	92,619	$	92,619	$	92,619	$	—	$	—
Interest bearing time deposits		1,000		1,000		—		1,000		—
Securities available for sale		53,234		53,234		—		53,234		—
Securities held to maturity		6,058		6,058		—		6,058		—
Restricted investment in bank stock		1,380		1,380		—		1,380		—
Loans receivable, net		712,076		703,901		—		—		703,901
Accrued interest receivable		2,695		2,695		—		2,695		—
Financial liabilities:
Deposits		788,293		793,879		—		793,879		—
Borrowed funds		13,385		13,307		—		13,307		—
Accrued interest payable		651		651		—		651		—

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

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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

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.

Impaired loans

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

Accrued Interest Receivable and Payable

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

Other Real Estate Owned

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.

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Limitation

The preceding fair value estimates were made at March 31, 2018 and December 31, 2017 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 March 31, 2018 and December 31, 2017, 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 month ended March 31, 2018 and 2017.

Note 11. Recent Accounting Pronouncements

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

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

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The amendments in this ASU establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company applied the five-step method outlined in the ASU to all revenue streams scoped-in by the ASU and elected the modified retrospective implementation method. Substantially all of the Corporation’s interest income and certain noninterest income were not impacted by the adoption of this ASU because the revenue from those contracts with customers is covered by other guidance in U.S. GAAP. The Company’s largest source of noninterest revenue which is subject to the guidance is service charges on deposit accounts. The Company adopted ASU 2014-09 on January 1, 2018. The adoption of ASU 2014-09 did not change the timing and pattern of the Company’s revenue recognition related to scoped-in noninterest income. The adoption did not have a material impact on the Company’s consolidated financial statements.

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

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

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

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. The adoption of this standard will require the Company to recognize the rights and obligations arising from operating leases as assets and liabilities. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. The Company is presently evaluating the potential impact of the adoption of this accounting pronouncement to its consolidated financial statements.

ASU 2016-13, Financial Instruments – Credit Losses

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

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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, 2017 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, 2017, as filed with the Securities and Exchange Commission.

Statements Regarding Forward Looking Information

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

You should note that many factors, some of which are discussed elsewhere in this document could affect the future financial results of Bancorp of New Jersey, Inc. and its subsidiaries and could cause those results to differ materially from those expressed in the forward-looking statements contained in this document. These factors include, but are not limited to, the items set forth under Item 1A – Risk Factors in our Annual Report on Form 10-K filed 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; and

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

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

Critical Accounting Policies, Judgments and Estimates

Our consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this report. Certain of these policies require numerous estimates and

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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.

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 residential real estate and home equity consumer loans, as well as other more complex loans, is triggered by identified evaluation factors, including delinquency status, size of loan, type of collateral and the financial condition of the borrower. 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 allowance for loan losses at an adequate level. For example, our evaluation of the allowance includes consideration of current economic conditions, and a change in economic conditions could reduce the ability of borrowers to make timely repayments of their loans. This could result in increased delinquencies and increased non-performing loans, and thus a need to make additional provisions for loan losses. Any provision reduces our net income. While the allowance is increased by the provision for loan losses, it is decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. A change in economic conditions could adversely affect the value of properties collateralizing real estate loans, resulting in increased charges against the allowance and reduced recoveries, and require additional provisions for loan losses. Furthermore, growth or a change in the composition of our loan portfolio could require additional provisions for loan losses.

Deferred Income Taxes

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

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Results of Operations

Three Months Ended 31, 2018 compared to Three Months Ended March 31, 2017

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

Net Income

Net income for the first quarter of 2018 was $1.34 million compared to net income of $1.06 million for the first quarter of 2017. The increase in net income for the three month period ended March 31, 2018 compared to the same period in 2017 was primarily due to an increase in net interest income due to loan growth and a decrease in the tax expense related to a lower federal corporate tax rate in 2018 provided by the Tax Cuts and Jobs Act (the “Tax Act”) signed in to law on December 22, 2017, partially offset by an increase in non-interest expenses and a $325 thousand provision for loan losses recognized by the Company in the first quarter of 2018, while no provision was recognized for the same period in 2017.

Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. For the three month period ended March 31, 2018, net interest income increased by $669 thousand or 11.07% versus the same period last year. Interest income increased by $916 thousand or 11.78% for the three months ended March 31, 2018 as compared to the corresponding period last year. This increase in interest income was primarily due to loan growth and higher interest received on cash and investment balances due to rising interest rates. Average yield on total loans for the three months ended March 31, 2018 was 4.56% compared to 4.47% for the three months ended March 31, 2017. Average total loans were $725 million compared to $669 million at March 31, 2017. Total interest expense increased by $247 thousand in the first quarter of 2018 to $2.0 million compared to $1.7 million in the prior year. The increase in interest expense was due to higher interest rates as market rates continue to increase in our market area, and we continue to face significant competition for deposits. Interest on borrowed funds decreased by $38 thousand due to declining balances of borrowed funds. During the first quarter of 2018 average certificates of deposit increased to $349.2 million from $311.7 million in the comparable quarter of 2017. Yield on certificates of deposit increased to 1.76% in the current quarter from 1.58% in the corresponding quarter. Average other interest bearing deposits increased to $302.1 million in the current quarter from $298.4 million in the first quarter of 2017. Average borrowed funds decreased to $12.3 million in the current quarter from $24.0 million in the same quarter last year.

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


		For the Three Months Ended March 31,
	2018						2017
	Average				Average		Average				Average
	Balance		Interest		Yield/Cost		Balance		Interest		Yield/Cost
Interest-Earning Assets:
Loans	$	724,641		8,148	4.56	%	$	669,447		7,385	4.47	%
Securities (1)		60,134		252	1.70			70,737		215	1.23
Federal Funds Sold		1,763		7	1.61			1,210		7	2.35
Interest-earning cash accounts		79,261		300	1.54			96,885		183	0.77
Total interest-earning Assets		865,799		8,707	4.08	%		838,279		7,790	3.77	%
Non-interest earning Assets		21,632						21,662
Allowance for Loan Losses		(8,192)						(8,283)
Total Assets	$	879,239					$	851,658
Interest-Bearing Liabilities:
Demand Deposits	$	31,145	$	14	0.18	%	$	28,963	$	15	0.21	%
Savings Deposits		103,826		235	0.92			116,602		268	0.93
Money Market Deposits		167,104		168	0.41			152,877		155	0.41
Time Deposits		349,248		1,514	1.76			310,706		1,208	1.58
Borrowed Funds		12,333		49	1.61			24,003		87	1.47
Total Interest Bearing Liabilities		663,656		1,980	1.21	%		633,151		1,733	1.11	%
Non-Interest Bearing Liabilities:
Demand Deposits		129,088						137,534
Other Liabilities		2,568						3,091
Total Non-Interest Bearing Liabilities		131,656						140,625
Stockholders’ Equity		83,927						77,882
Total Liabilities and Stockholders' Equity	$	879,239					$	851,658
Net Interest Income
(Tax Equivalent Basis)			$	6,727					$	6,057
Tax Equivalent Basis adjustment				(16)						(15)
Net Interest Income			$	6,711					$	6,042
Net Interest Rate Spread					2.87	%					2.66	%
Net Interest Margin					3.15	%					2.93	%
Ratio of Interest-Earning Assets to
Interest-Bearing Liabilities		1.30						1.32

(1)

Yield is calculated on a tax effective basis.

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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 recognized a provision for loan losses of $325 thousand for the three months ended March 31, 2018 compared to no provision in the three months ended March 30, 2017. The allowance for loan losses to total loans was 1.12% as of the end of the first quarter of 2018.

Non-interest Income

Our non-interest income is comprised primarily of service fees received from deposit accounts and gains (losses) on the sales of securities. For the three months ended March 31, 2018, non-interest income decreased by $23 thousand compared to the three months ended March 31, 2017.

Non-interest Expense

Non-interest expense was $4.7 million during the first quarter of 2018, up from $4.5 million in the first quarter of 2017, an increase of $202 thousand or 4.5%. The increase was primarily in salaries and employee benefits, data processing, occupancy and equipment expense, and legal fees of $123 thousand, $29 thousand, $129 thousand and $55 thousand, respectively. The increases were partially offset by decreases in professional fees and FDIC premiums and related expenses of $239 thousand and $75 thousand, respectively. The increase in salaries and employee benefits costs is associated with health insurance premium increases, annual increases and executive stock awards expenses. The increase in occupancy and equipment expense is related to the relocation of the corporate offices located in Englewood Cliffs. The decrease in professional fees is mainly attributable to non-recurring consulting fees related to enhancing the Company’s risk management structure in the prior year.

Income Tax Expense

The income tax provision decreased $162 thousand to $435 thousand for the three months ended March 31, 2018 from $597 thousand for the quarter ended March 31, 2017. The decrease in income tax provision expense was due to the Tax Act which reduced the corporate tax rate to 21% from 34% starting on January 1, 2018. The effective tax rate for the three months ended March 31, 2018 was 24.45% compared to 35.99% for the corresponding period in 2017.

FINANCIAL CONDITION

Total consolidated assets decreased by $29.9 million, or 3.37%, from $887.4 million at December 31, 2017 to $857.5 million at March 31, 2018. Loans receivable, or “total loans,” increased from $721.2 million at December 31, 2017 to $723.8 million at March 31, 2018, an increase of $2.6 million, or 0.36%. Total cash and cash equivalents decreased from $92.6 million at December 31, 2017 to $61.1 million at March 31, 2018, a decrease of $31.5 million. The change in cash is mainly due to a decrease in deposit account balances. Total deposits declined by $29.3 million to $759.0 million at March 31, 2018, from $788.3 million at December 31, 2017 mainly due to outflows of government and municipal deposits attributable to the cyclical nature of real estate tax collections and payments, which may have been compounded this quarter due to the timing of the Tax Act and its impact on payments of local municipal taxes. Borrowed funds decreased to $11.7 million at March 31, 2018 from $13.4 million at December 31, 2017.

Loans

Our loan portfolio is the primary component of our assets, which 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, reached $714.9 million at March 31, 2018, an increase from $712.1 million at December 31 2017. Historically, we offered residential mortgage loans. Due to regulatory and compliance burdens associated with these loans, we no longer offer residential mortgage loans. As a result, we expect our portfolio of residential mortgage loans to continue to decrease in future periods, offset by commercial loan growth. Our market area is concentrated in Bergen County, New Jersey, with commercial loans made to borrowers located primarily in New Jersey and New York. We have a concentration of commercial loans collateralized by real estate. We believe that we will continue to have opportunities for commercial loan growth due in part, to our experienced staff and relationship

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focused strategy. We believe that our strategy of customer service, competitive rate structures, and selective marketing have enabled us to effectively compete as a relationship driven community bank.

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

Loan Quality

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

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, their liquidity, materials establishing the value 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.

As of March 31, 2018 the Bank had non-accrual loans of $16.8 million, compared to non-accrual loans totaling $18.4 million at year end 2017. The reduction in non-accrual loans was mainly due to a sale of three non-performing loans in the first quarter of 2018. If the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the three months ended March 31, 2018, the gross interest income that would have been recorded in such periods would have been approximately $104 thousand.

Within its nonaccrual loans at March 31, 2018, the Bank had seven residential mortgage loans and eight 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 March 31, 2018, nonaccrual TDR loans had an outstanding balance of $8.9 million and had no specific reserves associated with them. At March 31, 2018, the Bank had accruing loans which met the definition of a TDR totaling $1.3 million.

Investment Securities

At March 31, 2018, total securities were $58.2 million, of which $52.1 million were classified as Available for Sale and $6.1 million we classified as Held to Maturity. The company has no securities classified as trading.

Deposits

Deposits remain our primary source of funds. Total deposits decreased to $759.0 million at March 31, 2018 from $788.3 million at December 31, 2017, a decrease of $29.3 million, or 3.72%. Certificates of deposit increased by $3.7 million. Savings and interest bearing demand deposits decreased by $36.3 million for the first three months of 2018. Noninterest bearing demand deposit accounts increased by $3.2 million during the first three months of 2018. 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. The decline in deposits is substantially due to outflows of government and municipal deposits attributable to the cyclical nature of real estate tax collections and payments, which may have been compounded this quarter due to the timing of the Tax Act and its impact on payments

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of local municipal taxes. 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. These advances are secured under terms of a blanket collateral agreement by a pledge of qualifying securities and mortgage loans. At March 31, 2018 and December 31, 2017, the Bank had outstanding borrowings of $11.7 million and $13.4 million, respectively, with the FHLBNY.

Liquidity

Our liquidity is a measure of our ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by prevailing interest rates, economic conditions, and competition. In addition, if warranted, we would be able to access funds through established lines of credit and borrowings.

As of March 31, 2018, the Company had a $5 million line of credit with the Atlantic Community Bankers Bank. In addition, the Bank had a $16 million overnight line of credit with Zions First National Bank, a $12 million overnight line of credit with First Tennessee Bank and a $10 million overnight line of credit with Atlantic Community Bankers Bank for the purchase of federal funds in the event that temporary liquidity needs arise. There were no amounts outstanding under any of the facilities at March 31, 2018. We are an approved member of the FHLBNY. The FHLBNY relationship could provide additional sources of liquidity, if required. At March 31, 2018, the Bank had $11.7 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 $60.0 million as of March 31, 2018.

Our total deposits equaled $759.0 million and $788.3 million, respectively, at March 31, 2018 and December 31, 2017. Cash and cash equivalents decreased from $92.6 million on December 31, 2017 to $61.1 million at March 31, 2018.

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

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

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.

One of the monitoring tools used by ALCO is an analysis of the extent to which assets and liabilities are interest rate sensitive and measures our interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or re-price within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Accordingly,

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during a period of rising rates, a negative gap may result in the yield on assets increasing at a slower rate than the increase in the cost of interest-bearing liabilities, resulting in a decrease in net interest income. Conversely, during a period of falling interest rates, an institution with a negative gap would experience a re-pricing of its assets at a slower rate than its interest-bearing liabilities which, consequently, may result in its net interest income growing.

The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at the periods indicated which we anticipate, based upon certain assumptions, will re-price or mature in each of the future time periods presented. Except as noted, the amount of assets and liabilities which re-price or mature during a particular period were determined in accordance with the earlier of the term to re-pricing or the contractual terms of the asset or liability. Our loan maturity assumptions are based upon actual maturities within the loan portfolio. At March 31, 2018, we were within the target gap range established by ALCO for all terms.

Cumulative Rate Sensitive Balance Sheet

March 31, 2018

(in thousands)


	0-3			0-6			0-1			0-5			All
	Months			Months			Year			Years			Others		TOTAL
Securities	$	6,058		$	16,021		$	23,990		$	45,289		$	12,948	$	58,237

Loans		87,549			100,992			151,180			461,051			262,738		723,789

Federal Funds sold and Interest-Bearing Deposits in Banks		59,554			59,554			59,554			59,554			—		59,554
Other Assets		—			—			—			—			15,879		15,879

TOTAL ASSETS	$	153,161		$	176,567		$	234,724		$	565,894		$	291,565	$	857,459

Transaction / Demand Accounts	$	32,982		$	32,982		$	32,982		$	32,982		$	—	$	32,982
Money Market		140,473			140,473			140,473			140,473			—		140,473
Savings Deposits		97,838			97,838			97,838			97,838			—		97,838
Time Deposits		31,083			49,047			144,650			350,765			—		350,765

Borrowed Funds		—			—			—			11,713			—		11,713
Other Liabilities		—			—			—			—			139,103		139,103
Equity		—			—			—			—			84,585		84,585

TOTAL LIABILITIES AND EQUITY	$	302,376		$	320,340		$	415,943		$	633,771		$	223,688	$	857,459

Dollar Gap	$	(149,215)		$	(143,773)		$	(181,219)		$	(67,877)
Gap / Total Assets		(17.40)	%		(16.77)	%		(21.13)	%		(7.92)	%
Target Gap Range		+/- 35.00	%		+/- 30.00	%		+/- 25.00	%		+/- 25.00	%
RSA / RSL		50.65	%		55.12	%		56.43	%		89.29	%

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.

We continually evaluate interest rate risk management opportunities. During the first quarter of 2018, we believed that available hedging instruments were not cost-effective, and therefore, focused our efforts on our yield-cost spread through retail growth opportunities.

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The following table discloses our financial instruments that are sensitive to change in interest rates, categorized by expected maturity at March 31, 2018. Market risk sensitive instruments are generally defined as on- and off- balance sheet financial instruments.

Expected Maturity/Principal Repayment

March 31, 2018

(Dollars in thousands)


	Avg. Int.												There-
	Rate		2018		2019		2020		2021		2022		After		Total		Fair Value
Interest Rate Sensitive Assets:
Loans	4.56	%	$	133,407	$	67,136	$	43,037	$	70,716	$	109,273	$	300,220	$	723,789	$	690,808
Securities	1.70	%		23,990		10,360		10,939		—		—		12,948		58,237		58,237

Fed Funds Sold	1.61	%		452		—		—		—		—		—		452		452

Interest-earning cash and time deposits	1.54	%		59,102		—		—		—		—		—		59,102		59,102

Interest Rate Sensitive Liabilities:

Interest bearing demand deposits and money market accounts	0.37	%		173,455		—		—		—		—		—		173,455		173,435

Savings deposits	0.92	%		97,838		—		—		—		—		—		97,838		97,838

Time deposits	1.76	%		103,213		84,178		39,126		44,071		75,904		4,273		350,765		356,030

Borrowed Funds	1.61	%	$	—	$	9,125	$	—	$	2,588	$	—	$	—	$	11,713	$	11,611

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 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 this 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.

As of March 31, 2018, the Company’s management including the Chief Executive Officer and President (our Principal Executive and Operating Officer) and Senior Vice President and Chief Financial Officer (our Principal Financial and Accounting Officer), evaluated the Company’s disclosure controls and procedures related to the recording, processing, summarization, and reporting of information in the Company’s periodic reports that the Company files with the Securities and Exchange Commission.

Based on their evaluation as of March 31, 2018, the Company’s Chief Executive Officer and President and the Company’s Senior Vice President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

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Changes in internal controls over financial reporting.

There was no change in our internal control over financial reporting identified during the quarter ended March 31, 2018 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 periodically parties to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to the Bank’s business. Management does not believe that there are any pending or threatened proceedings against the Company or the Bank which, if determined adversely, would have a material effect on the business, financial position or results of operations of the Company or the Bank, nor are there any such proceedings known to be contemplated by governmental authorities.

Item 1A. Risk Factors

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 of the date of this Quarterly Report on Form 10-Q, there have been no changes in our risk factors.

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 37.

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EXHIBIT INDEX

Exhibit No.				Description


31.1				Rule 13a-14(a) Certification of Principal Executive Officer
31.2				Rule 13a-14(a) Certification of Principal Financial Officer
32				Section 1350 Certifications
101				Interactive Data Files
101.INS				XBRL Instance Document
101.SCH				XBRL Taxonomy Extension Schema Document
101.CAL				XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF				XBRL Taxonomy Extension Definition Linkbase Document
101.LAB				XBRL Taxonomy Extension Labels Linkbase Document
101.PRE				XBRL Taxonomy Extension Presentation Linkbase Document

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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: May 10, 2018	By:	/s/ Nancy E. Graves
		Nancy E. Graves
		Chief Executive Officer and President
		(Principal Executive and Operating Officer)


	By:	/s/ Matthew Levinson
		Matthew Levinson
		Senior Vice President and
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

Bancorp of New Jersey, Inc. - FORM 10-Q - May 10, 2018

Attached files

Bancorp of New Jersey, Inc. Reports