Company Quick10K Filing
Quick10K
1st Constitution Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$18.93 9 $163
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-03 Shareholder Vote
8-K 2019-04-19 Earnings, Other Events, Exhibits
8-K 2019-02-08 Suspend Trading, Exhibits
8-K 2019-01-31 Earnings, Other Events, Exhibits
8-K 2018-11-05 Regulation FD, Exhibits
8-K 2018-10-19 Earnings, Other Events, Exhibits
8-K 2018-07-20 Earnings, Other Events, Exhibits
8-K 2018-05-24 Shareholder Vote
8-K 2018-05-07 Officers, Exhibits
8-K 2018-04-20 Earnings, Other Events, Exhibits
8-K 2018-04-11 M&A, Other Events, Exhibits
8-K 2018-03-22 Other Events, Exhibits
8-K 2018-02-26 Other Events, Exhibits
8-K 2018-02-14 Other Events, Exhibits
8-K 2018-02-02 Earnings, Other Events, Exhibits
CMD Cantel Medical 2,910
ATRI Atrion 1,630
SNHY Sun Hydraulics 1,440
FORR Forrester Research 913
MGI MoneyGram 120
WVFC WVS Financial 33
OPTT Ocean Power Technologies 7
C765 Global Macro Trust 0
SMLR Semler Scientific 0
OIBR OI 0
FCCY 2019-03-31
Item 4. Mine Safety Disclosures 55 Item 5. Other Information 55 Item 6. Exhibits 56 Signatures 57
Part I. Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits.
EX-31.1 exhibit311ceocertification.htm
EX-31.2 exhibit312cfocertification.htm
EX-32 exhibit32ceoandcfocertifca.htm

1st Constitution Bancorp Earnings 2019-03-31

FCCY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 fccy-20190331x10q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file Number:        000-32891
1ST CONSTITUTION BANCORP
(Exact Name of Registrant as Specified in Its Charter)
New Jersey
 
22-3665653
(State of Other Jurisdiction
of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
2650 Route 130, P.O. Box 634, Cranbury, NJ
 
08512
(Address of Principal Executive Offices)
 
(Zip Code)
(609) 655-4500
(Issuer’s Telephone Number, Including Area Code)
 
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, no par value
FCCY
NASDAQ Stock Market LLC
(NASDAQ Global Select Market)

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 ý       No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý       No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
o
 
Accelerated filer
ý
Non-accelerated filer
o
 
Smaller reporting company
ý
 
 
 
Emerging growth company
o
If an emerging growth company, indicated 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.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  ý
As of May 2, 2019, there were 8,627,708 shares of the registrant’s common stock, no par value, outstanding.




1ST CONSTITUTION BANCORP
FORM 10-Q
INDEX
 
 
Page
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
Consolidated Balance Sheets at March 31, 2019 and December 31, 2018 (unaudited)
 
 
 
 
Consolidated Statements of Income for the Three Months Ended March 31, 2019 and March 31, 2018 (unaudited)
 
 
 
 
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and March 31, 2018 (unaudited)
 
 
 
 
Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended March 31, 2019 and March 31, 2018 (unaudited)
 
 
 
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and March 31, 2018 (unaudited)
 
 
 
 
Notes to Consolidated Financial Statements (unaudited)
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 




Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits
 
 
 
SIGNATURES




PART I. FINANCIAL INFORMATION
Item 1.        Financial Statements.

1ST Constitution Bancorp
Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
 
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
 
Cash and due from banks
 
$
5,308

 
$
4,983

Interest-earning deposits
 
9,853

 
11,861

Total cash and cash equivalents
 
15,161

 
16,844

Investment securities
 
 

 
 

Available for sale, at fair value
 
147,237

 
132,222

Held to maturity (fair value of $78,929 and $80,204 at March 31, 2019
and December 31, 2018, respectively)
 
77,826

 
79,572

Total investment securities
 
225,063

 
211,794

Loans held for sale
 
1,169

 
3,020

Loans
 
874,333

 
883,164

Less: allowance for loan losses
 
(8,704
)
 
(8,402
)
Net loans
 
865,629

 
874,762

Premises and equipment, net
 
11,620

 
11,653

Right-of-use assets
 
15,391

 

Accrued interest receivable
 
3,779

 
3,860

Bank-owned life insurance
 
28,844

 
28,705

Other real estate owned
 
2,515

 
2,515

Goodwill and intangible assets
 
12,226

 
12,258

Other assets
 
10,080

 
12,422

Total assets
 
$
1,191,477

 
$
1,177,833

LIABILITIES AND SHAREHOLDERS EQUITY
 
 

 
 

LIABILITIES
 
 

 
 

Deposits
 
 

 
 

Non-interest bearing
 
$
213,387

 
$
212,981

Interest bearing
 
781,818

 
737,691

Total deposits
 
995,205

 
950,672

Short-term borrowings
 
22,050

 
71,775

Redeemable subordinated debentures
 
18,557

 
18,557

Accrued interest payable
 
1,589

 
1,228

Lease liability
 
15,912

 

Accrued expenses and other liabilities
 
6,957

 
8,516

Total liabilities
 
1,060,270

 
1,050,748

SHAREHOLDERS' EQUITY
 
 

 
 

Preferred stock, no par value; 5,000,000 shares authorized; none issued
 

 

Common stock, no par value; 30,000,000 shares authorized; 8,659,040 and 8,639,276 shares issued and 8,625,742 and 8,605,978 shares outstanding as of March 31, 2019 and December 31, 2018, respectively
 
79,828

 
79,536

Retained earnings
 
52,501

 
49,750

Treasury stock, 33,298 shares at March 31, 2019 and December 31, 2018
 
(368
)
 
(368
)
Accumulated other comprehensive loss
 
(754
)
 
(1,833
)
Total shareholders’ equity
 
131,207

 
127,085

Total liabilities and shareholders’ equity
 
$
1,191,477

 
$
1,177,833

The accompanying notes are an integral part of these consolidated financial statements.

1



1ST Constitution Bancorp
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
 
Three Months Ended March 31,
 
 
2019
 
2018
 
INTEREST INCOME
 
 
 
 
     Loans, including fees
$
12,157

 
$
9,536

 
     Securities:
 
 
 
 
           Taxable
1,270

 
866

 
           Tax-exempt
441

 
515

 
     Federal funds sold and short-term investments
47

 
138

 
               Total interest income
13,915

 
11,055

 
INTEREST EXPENSE
 
 
 
 
     Deposits
2,317

 
1,219

 
     Borrowings
173

 
7

 
     Redeemable subordinated debentures
198

 
150

 
Total interest expense
2,688

 
1,376

 
Net interest income
11,227

 
9,679

 
PROVISION FOR LOAN LOSSES
300

 
225

 
Net interest income after provision for loan losses
10,927

 
9,454

 
NON-INTEREST INCOME
 
 
 
 
Service charges on deposit accounts
166

 
150

 
Gain on sales of loans
1,045

 
1,149

 
Income on Bank-owned life insurance
139

 
114

 
Gain on sales of securities

 
6

 
Other income
516

 
466

 
Total non-interest income
1,866

 
1,885

 
NON-INTEREST EXPENSES
 
 
 
 
Salaries and employee benefits
4,963

 
4,738

 
Occupancy expense
1,021

 
812

 
Data processing expenses
348

 
309

 
FDIC insurance expense
100

 
130

 
Other real estate owned expenses
48

 
2

 
Merger-related expenses

 
164

 
Other operating expenses
1,614

 
1,490

 
 Total non-interest expenses
8,094

 
7,645

 
                  Income before income taxes
4,699

 
3,694

 
INCOME TAXES
1,302

 
841

 
Net income
$
3,397

 
$
2,853

 
 
 
 
 
 
EARNINGS PER COMMON SHARE
 
 
 
 
Basic
$
0.39

 
$
0.35

 
Diluted
$
0.39

 
$
0.34

 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
Basic
8,624,088

 
8,111,490

 
Diluted
8,694,004

 
8,386,751

 
The accompanying notes are an integral part of these consolidated financial statements.

2



1ST Constitution Bancorp
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
 
 
 
 
Net income
$
3,397

 
$
2,853

 
Other comprehensive income (loss):
 
 
 
 
Unrealized holding gains (losses) on securities available for sale
1,408

 
(1,351
)
 
            Tax effect
(337
)
 
322

 
Net of tax amount
1,071

 
(1,029
)
 
 
 
 
 
 
Reclassification adjustment for gains on securities available for sale (1)

 
(6
)
 
            Tax effect (2)

 
2

 
 Net of tax amount

 
(4
)
 
 
 
 
 
 
Reclassification adjustment for unrealized impairment loss on held to maturity security(3)
1

 

 
Tax effect

 

 
Net of tax amount
1

 

 
 
 
 
 
 
Pension liability
55

 

 
Tax effect
(17
)
 

 
Net of tax amount
38

 

 
 
 
 
 
 
 Reclassification adjustment for actuarial gains for unfunded pension liability
 
 
 
 
Income (4)
(44
)
 
(15
)
 
Tax effect (2)
13

 
4

 
Net of tax amount
(31
)
 
(11
)
 
 
 
 
 
 
Total other comprehensive income (loss)
1,079

 
(1,044
)
 
 
 
 
 
 
Comprehensive income
$
4,476

 
$
1,809

 
(1) Included in gain on sales of securities on the consolidated statements of income
(2) Included in income taxes on the consolidated statements of income
(3) Included in investment securities held to maturity on the consolidated balance sheets
(4) Included in salaries and employee benefits expense on the consolidated statements of income


        
The accompanying notes are an integral part of these consolidated financial statements.


3



1ST Constitution Bancorp
Consolidated Statements of Changes in Shareholders’ Equity
For the Three Months Ended March 31, 2019 and 2018
(Dollars in thousands)
(Unaudited)
 
Common
Stock
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
Balance, January 1, 2018
$
72,935

 
$
39,822

 
$
(368
)
 
$
(736
)
 
$
111,653

Net income

 
2,853

 

 

 
2,853

Exercise of stock options and issuance of restricted shares (2,989 shares and 26,400 shares, respectively)
20

 

 

 

 
20

Share-based compensation
237

 

 

 

 
237

Cash dividends ($0.06 per share)

 
(485
)
 

 

 
(485
)
Other comprehensive loss

 

 

 
(1,044
)
 
(1,044
)
Balance, March 31, 2018
$
73,192

 
$
42,190

 
$
(368
)
 
$
(1,780
)
 
$
113,234

 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2019
$
79,536

 
$
49,750

 
$
(368
)
 
$
(1,833
)
 
$
127,085

Net income

 
3,397

 

 

 
3,397

Exercise of stock options and issuance of restricted shares (5,364 shares and 14,400 shares, respectively)
23

 

 

 

 
23

Share-based compensation
269

 

 

 

 
269

Cash dividends ($0.075 per share)

 
(646
)
 

 

 
(646
)
Other comprehensive income

 

 

 
1,079

 
1,079

Balance, March 31, 2019
$
79,828

 
$
52,501

 
$
(368
)
 
$
(754
)
 
$
131,207

The accompanying notes are an integral part of these consolidated financial statements.

4



1ST Constitution Bancorp
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
OPERATING ACTIVITIES:
 
 
 
Net income
$
3,397

 
$
2,853

Adjustments to reconcile net income to net cash provided by operating activities-
 
 
 
Provision for loan losses
300

 
225

Depreciation and amortization
340

 
332

Net amortization of premiums and discounts on securities
110

 
152

SBA discount accretion
(92
)
 
(73
)
Gains on sales and calls of securities available for sale

 
(6
)
Gains on sales of loans held for sale
(1,045
)
 
(1,149
)
Originations of loans held for sale
(22,467
)
 
(25,471
)
Proceeds from sales of loans held for sale
25,363

 
28,955

Increase in cash surrender value on bank–owned life insurance
(139
)
 
(128
)
Loss on cash surrender value on bank-owned life insurance

 
14

Share-based compensation expense
269

 
237

Increase in deferred tax asset

 
(36
)
Noncash rent and equipment expense
53

 

Decrease in accrued interest receivable
81

 
276

Increase in other assets
(304
)
 
(991
)
Increase (decrease) in accrued interest payable
361

 
(29
)
(Decrease) increase in accrued expenses and other liabilities
(1,084
)
 
1,164

                Net cash provided by operating activities
5,143

 
6,325

INVESTING ACTIVITIES:
 
 
 
Purchases of securities:
 
 
 
Available for sale
(20,950
)
 
(12,057
)
Held to maturity
(2,739
)
 
(1,200
)
Proceeds from maturities and payments of securities:
 
 
 
Available for sale
7,280

 
3,584

Held to maturity
4,436

 
8,645

Proceeds from bank-owned life insurance benefits paid

 
893

Net redemption (purchase) of restricted stock
2,238

 
(195
)
Net decrease in loans
8,924

 
13,377

Capital expenditures
(200
)
 
(71
)
Net cash (used in) provided by investing activities
(1,011
)
 
12,976

FINANCING ACTIVITIES:
 
 
 
Exercise of stock options
23

 
20

Cash dividends paid to shareholders
(646
)
 
(485
)
Net increase (decrease) in deposits
44,533

 
(30,920
)
(Decrease) increase in short-term borrowings
(49,725
)
 
9,325

Net cash used in financing activities
(5,815
)
 
(22,060
)
Decrease in cash and cash equivalents
(1,683
)
 
(2,759
)
Cash and cash equivalents at beginning of period
16,844

 
18,754

Cash and cash equivalents at end of period
$
15,161

 
$
15,995

Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period for -
 
 
 
Interest
$
2,327

 
$
1,405

Income taxes
2,192

 
62

Non-cash activities:
 
 
 
Right-of-use assets
15,674

 

Lease liability
16,142

 


The accompanying notes are an integral part of these consolidated financial statements.

5



1ST Constitution Bancorp
Notes to Consolidated Financial Statements
March 31, 2019
(Unaudited)

(1)   Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements include 1ST Constitution Bancorp (the “Company”), its wholly-owned subsidiary, 1ST Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1ST Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., 204 South Newman Street Corp. and 249 New York Avenue, LLC. 1ST Constitution Capital Trust II, a subsidiary of the Company, is not included in the Company’s consolidated financial statements, as it is a variable interest entity and the Company is not the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation and certain prior period amounts have been reclassified to conform to current year presentation. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 15, 2019.

In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the operating results for the interim periods have been included. The results of operations for periods of less than a year are not necessarily indicative of results for the full year.

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2019 for items that should potentially be recognized or disclosed in these financial statements.  The evaluation was conducted through the date these financial statements were issued.

Adoption of New Accounting Standards         
ASU 2019-01 - Leases: Codification Improvements (Topic 842)
In March 2019, the FASB issued ASU No. 2019-01, “Leases (Topic 842): Codification Improvements.” ASU 2019-01 aligns the new leases guidance with existing guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers, and clarifies an exemption for lessors and lessees from a certain interim disclosure requirement associated with adopting the FASB’s new lease accounting standard. Although this guidance is effective for years beginning after December 15, 2019, however. the Company adopted this guidance along with the adoption of ASU 2018-11, “Leases- Targeted Improvements,” and ASU 2016-02, “Leases.” The adoption of this guidance did have a material impact on the Company's financial statements. See the discussions regarding the adoptions of ASU 2018-11 and ASU 2016-02 below.

ASU 2018-13 - Fair Value Measurement (Topic 820)
In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement,” which modifies the disclosure requirements on fair value measurements. The following disclosure requirements that are applicable to public entities were removed from Topic 820:

1.
The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy;
2.
The policy for timing of transfers between levels; and
3.
The valuation process for Level 3 fair value measurements.

The following disclosure requirements were modified in Topic 820:

1.
In lieu of a roll-forward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy, in addition to purchases and issues of Level 3 assets and liabilities;
2.
For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse, only if the investee has communicated the timing to the entity or announced the timing publicly; and

6



3.
The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

The following disclosure requirements applicable to public companies were added to Topic 820:

1.
The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and
2.
The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

In addition, the amendments eliminate “at a minimum” from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements.

For the Company, the provisions of this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those years. The adoption of this guidance effective January 1, 2019 did not have a material impact on the Company’s consolidated financial statements.

ASU 2018-11 - Leases - Targeted Improvements (Topic 842)
In July 2018, the FASB issued ASU 2018-11, “Leases-Targeted Improvements,” which provides an additional (and optional) transition method for a cumulative effect adjustment. The additional transition method allows entities to initially apply the new lease standard at the adoption date (January 1, 2019 for calendar-year-end public business entities) and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This additional transition method changes only when an entity is required to initially apply the transition requirements of the new leases standard; it does not change how those requirements apply. An entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with current U.S. GAAP (Topic 840, Leases).

For the Company, the provisions of this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those years. The Company adopted this guidance effective January 1, 2019 along with the adoption of ASU 2016-02-, “Leases.” The adoption of this guidance did have a material impact on the Company's financial statements. See the discussion regarding the adoption of ASU 2016-02 on page 8.


ASU 2018-07 - Compensation - Stock Compensation (Topic 718)

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation,” which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees.

The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendment also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer, or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, “Revenue from Contracts with Customers.”

For the Company, the provisions of this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period.

The adoption of this guidance in 2019 did not have a material impact on the Company’s consolidated financial statements.

ASU Update 2017-08 - Premium Amortization on Purchased Callable Debt Securities

In March 2017, the FASB issued ASU 2017-08, “Premium Amortization on Purchased Callable Debt Securities,” which shortens the amortization period for premiums on purchased callable debt securities to the earliest call date (i.e., yield-to-earliest call

7



amortization) rather than amortizing over the full contractual term. The ASU does not change the accounting for securities held at a discount.

The amendments apply to callable debt securities with explicit, non-contingent call features that are callable at fixed prices and on preset dates. If a security may be prepaid based upon prepayments of the underlying loans and not because the issuer exercised a date specific call option, it is excluded from the scope of the new standard. However, for instruments with contingent call features, once the contingency is resolved and the security is callable at a fixed price and preset date, the security is within the scope of the amendments. Further, the amendments apply to all premiums on callable debt securities, regardless of how they were generated.

The amendments require companies to reset the effective yield using the payment terms of the debt security if the call option is not exercised on the earliest call date. If the security has additional future call dates, any excess of the amortized cost basis over the amount repayable by the issuer at the next call date should be amortized to the next call date.

For the Company, the provisions of this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those years. The adoption of this guidance in 2019 did not have a material impact on the Company's consolidated financial statements.

ASU Update 2016-02 - Leases

In February 2016, the FASB issued ASU 2016-02 “Leases. From the lessee's perspective, the new standard establishes a right- of-use (“ROU”) model that requires a lessee to record a ROU assets and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessee. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results.

The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted Topic 842 effective January 1, 2019 utilizing the optional transition method as provided by ASU 2018-11. Under the optional transition method, only the most recent period presented reflected the adoption with a cumulative-effect adjustment to the opening balance of retained earnings and the comparative prior periods will be presented under the previous guidance of Topic 840.

The new guidance includes a number of optional transition-related practical expedients. The Company elected to apply the practical expedients that relate to: the identification and classification of leases that commenced before January 1, 2019 and the initial direct costs of those leases.

The election of these practical expedients allows the Company to continue to account for those leases that commenced before January 1, 2019 in accordance with previous U.S. GAAP. All of the Company’s leases that commenced before January 1, 2019 were operating leases. The lease expense will continue to be recognized based on the terms of the leases, except that a right-of-use asset and a lease liability was recognized for each operating lease at January 1, 2019 based on the present value of the remaining minimum lease payments.

At January 1, 2019, the Company had 16 leases for real property, which included leases for 13 of its branch offices and leases for three offices that are used for general office space. All of the real property leases included one or more options to extend the lease term. Two of the leases for branch offices constituted a lease for the land under the building and the Company owned the leasehold improvements to these two leases. The Company also had 13 leases for office equipment, which were primarily copier/printers.

For purposes of adopting Topic 842, the Company assumed in general that it would exercise the next lease extension for each real estate lease in order to have use of the property for at least a 5 to 10 year future period. With respect to one lease for land, the Company assumed that it would exercise all extensions covering a 25 year period due to the significance of the leasehold improvements. None of the equipment leases include extensions and generally have three to five year terms.

Due to the significance of the leases for real estate and the assumption regarding the exercise of the extensions for one land lease, the adoption of Topic 842 resulted in the recognition of a significant lease liability and ROU assets.

The Company adopted ASU Topic 842 effective January 1, 2019 and recognized a lease liability of $16.2 million and ROU assets of $15.7 million. The adoption of this guidance in 2019 did have a material impact on the Company's financial condition.


8




(2) Acquisition of New Jersey Community Bank
On April 11, 2018, the Company completed the merger of New Jersey Community Bank (“NJCB”) with and into the Bank. The shareholders of NJCB received total consideration of $8.6 million, which was comprised of 249,785 shares of common stock of the Company with a market value of $5.5 million and cash consideration of $3.1 million, of which $401,000 was placed in escrow to cover costs and expenses, including settlement costs, if any, that the Company may incur after closing the merger as a result of a certain litigation matter.
The merger was accounted for under the acquisition method of accounting, and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at preliminary estimated fair values as of the acquisition date. NJCB’s results of operations have been included in the Company’s Consolidated Statements of Income since April 11, 2018.
The assets acquired and liabilities assumed in the merger were recorded at their fair values based on management’s best estimates, using information available at the date of the merger, including the use of third-party valuation specialists.
The following table summarizes the fair value of the acquired assets and liabilities assumed:
(Dollars in thousands)
Amount
Consideration paid:
 
Company stock issued
$
5,494

Cash payment
2,668

Cash held in escrow
401

Total consideration paid
$
8,563

 
 
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed at fair value:
 
Cash and cash equivalents
$
2,073

Investment securities available for sale
11,173

Loans
75,144

Premises and equipment, net
1,120

Core deposit intangible asset
80

Bank-owned life insurance
3,972

Accrued interest receivable
259

Other real estate owned
1,230

Other assets
1,601

Deposits
(87,223
)
Other liabilities
(636
)
Total identifiable assets and liabilities, net
$
8,793

 
 
Gain from bargain purchase
$
230

Accounting Standards Codification (“ASC”) Topic 805-10 provides that if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report, in its financial statements, provisional amounts for the items for which the accounting is incomplete. During the measurement period, the acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. The measurement period may not exceed one year from the acquisition date.
Investments were recorded at fair value, utilizing quoted market prices on nationally recognized exchanges (Level 1) or by using Level 2 inputs.  For Level 2 securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the securities' terms and conditions, among other things.

9



Loans acquired in the NJCB merger were recorded at fair value and subsequently accounted for in accordance with ASC Topic 310. The fair values of loans acquired were estimated, utilizing cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses of approximately $1.6 million and estimated prepayments. Projected cash flows were then discounted to present value, utilizing a risk-adjusted market rate for similar loans that management determined market participants would likely use.
At the acquisition date, the Company recorded $74.3 million of loans without evidence of credit quality deterioration and $881,000 of loans with evidence of credit quality deterioration.
The following table summarizes the composition of the loans acquired and recorded at fair value:
 
 
 
At April 11, 2018
 
 
(Dollars in thousands)
Loans acquired with no credit quality deterioration
 
Loans acquired with credit quality deterioration
 
Total
Commercial
 
 
 
 
 
  Construction
$
798

 
$

 
$
798

  Commercial real estate
58,191

 
873

 
59,064

  Commercial business
1,293

 
8

 
1,302

Residential real estate
7,572

 
 
 
7,572

Consumer
6,409

 
 
 
6,409

  Total loans
$
74,263

 
$
881

 
$
75,144

The following is a summary of the loans acquired with evidence of deteriorated credit quality in the NJCB acquisition as of the date of the closing of the merger:
(Dollars in thousands)
Acquired Credit Impaired Loans
 
 
Contractually required principal and interest at acquisition
$
1,658

Contractual cash flows not expected to be collected (non-accretable difference)
609

Expected cash flows at acquisition
1,049

Interest component of expected cash flows (accretable difference)
168

 
 
Fair value of acquired loans
$
881

Bank-owned life insurance was recorded at the cash surrender value of the insurance policies, which approximates the redemption value of the policies.
The core deposit intangible asset totaled $80,000 and is being amortized over its estimated useful life of approximately 10 years, using an accelerated method. No goodwill was recognized in the transaction.
The following table presents the projected amortization of the core deposit intangible asset for each period:

10



(Dollars in thousands)
Amount
Year
 
2019
$
13

2020
12

2021
10

2022
8

2023
7

Thereafter
15

 
$
65

The fair values of deposit liabilities with no stated maturities, such as checking, money market and savings accounts, were assumed to equal the carrying value amounts since these deposits are payable on demand. The fair values of certificates of deposit represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.
Direct costs related to the acquisition were expensed as incurred. The Company incurred $164,000 in merger-related expenses for the three months ended March 31, 2018.
Supplemental Pro Forma Financial Information
The following table presents financial information regarding the former NJCB operations included in the Company’s Consolidated Statements of Income for the three months ended March 31, 2019 under the column “NJCB Three Months Ended March 31, 2019.” In addition, the table presents unaudited condensed pro forma financial information assuming that the NJCB acquisition had been completed as of January 1, 2018.
The table has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma financial information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the integration and consolidation of NJCB’s operations. The pro forma financial information reflects adjustments related to certain merger expenses and the related income tax effects.
(Dollars in thousands)
NJCB
Three Months Ended 3/31/2019
 
Actual for the Three Months Ended 3/31/2019
 
Pro Forma for the Three Months Ended 3/31/2018
 
 
 
 
 
 
Net interest income
$
563

 
$
11,227

 
$
10,400

Non-interest income
21

 
1,866

 
1,941

Non-interest expenses
337

 
8,094

 
8,698

Income taxes
113

 
1,302

 
842

Net income
264

 
3,397

 
2,576


11



(3) Net Income Per Common Share

Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during each period. Diluted net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding, as adjusted for the assumed exercise of dilutive common stock warrants and common stock options using the treasury stock method.

Awards of restricted shares are included in outstanding shares when granted. Unvested restricted shares are entitled to non-forfeitable dividends and participate in undistributed earnings with common shares. Awards of this nature are considered participating securities and basic and diluted earnings per share are computed under the two-class method.

Dilutive securities in the tables below exclude common stock options and warrants with exercise prices that exceed the average market price of the Company’s common stock during the periods presented. Inclusion of these common stock options and warrants would be anti-dilutive to the diluted earnings per common share calculation. For the three months ended March 31, 2019 and 2018, 30,630 options and no options, respectively, were anti-dilutive and were not included in the computation of diluted earnings per common share.

The following table illustrates the calculation of both basic and diluted earnings per share for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
(Dollars in thousands, except per share data)
2019
 
2018
 
 
 
 
 
 
Net income
$
3,397

 
$
2,853

 
 
 
 
 
 
Basic weighted average shares outstanding
8,624,088

 
8,111,490

 
Plus: common stock equivalents
69,916

 
275,261

 
Diluted weighted average shares outstanding
8,694,004

 
8,386,751

 
Earnings per share:
 
 
 
 
Basic
$
0.39

 
$
0.35

 
Diluted
$
0.39

 
$
0.34

 



(4) Investment Securities
A summary of amortized cost and approximate fair value of investment securities available for sale follows:
 
March 31, 2019
(Dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)
$
2,996

 
$

 
$
(14
)
 
$
2,982

Residential collateralized mortgage obligations - GSE
53,325

 
110

 
(514
)
 
52,921

Residential mortgage backed securities - GSE
16,314

 
105

 
(48
)
 
16,371

Obligations of state and political subdivisions
22,284

 
233

 
(23
)
 
22,494

Trust preferred debt securities - single issuer
1,490

 

 
(109
)
 
1,381

Corporate debt securities
28,297

 

 
(435
)
 
27,862

Other debt securities
23,330

 
13

 
(117
)
 
23,226

Total
$
148,036

 
$
461

 
$
(1,260
)
 
$
147,237


12



 
December 31, 2018
(Dollars in thousands) 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)
$
2,993

 
$

 
$
(41
)
 
$
2,952

Residential collateralized mortgage obligations - GSE
48,789

 
70

 
(676
)
 
48,183

Residential mortgage backed securities - GSE
13,945

 
37

 
(100
)
 
13,882

Obligations of state and political subdivisions
23,506

 
85

 
(249
)
 
23,342

Trust preferred debt securities - single issuer
1,490

 

 
(161
)
 
1,329

Corporate debt securities
28,323

 

 
(1,037
)
 
27,286

Other debt securities
15,383

 
11

 
(146
)
 
15,248

Total
$
134,429

 
$
203

 
$
(2,410
)
 
$
132,222



A summary of amortized cost, carrying value and approximate fair value of investment securities held to maturity follows:
 
March 31, 2019
(Dollars in thousands)
Amortized
Cost
 
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Loss
 
Carrying
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Residential collateralized mortgage obligations - GSE
$
6,375

 
$

 
$
6,375

 
$
48

 
$
(101
)
 
$
6,322

Residential mortgage backed securities - GSE
32,842

 

 
32,842

 
176

 
(153
)
 
32,865

Obligations of state and political subdivisions
35,607

 

 
35,607

 
724

 
(31
)
 
36,300

Trust preferred debt securities - pooled
657

 
(500
)
 
157

 
517

 

 
674

Other debt securities
2,845

 

 
2,845

 

 
(77
)
 
2,768

Total
$
78,326

 
$
(500
)
 
$
77,826

 
$
1,465

 
$
(362
)
 
$
78,929


 
December 31, 2018
(Dollars in thousands) 
Amortized
Cost
 
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Loss
 
Carrying
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Residential collateralized mortgage obligations - GSE
$
6,701

 
$

 
$
6,701

 
$
30

 
$
(143
)
 
$
6,588

Residential mortgage backed securities - GSE
31,343

 

 
31,343

 
84

 
(346
)
 
31,081

Obligations of state and political subdivisions
38,494

 

 
38,494

 
634

 
(118
)
 
39,010

Trust preferred debt securities - pooled
657

 
(501
)
 
156

 
569

 

 
725

Other debt securities
2,878

 

 
2,878

 

 
(78
)
 
2,800

Total
$
80,073

 
$
(501
)
 
$
79,572

 
$
1,317

 
$
(685
)
 
$
80,204



13



At March 31, 2019 and December 31, 2018, $75.7 million and $80.4 million of investment securities, respectively, were pledged to secure public funds and collateralized borrowings from the Federal Home Loan Bank of New York (“FHLB”) and for other purposes required or permitted by law.

Restricted stock was included in other assets at March 31, 2019 and December 31, 2018 and totaled $1.8 million and $4.1 million, respectively. Restricted stock consisted of $1.7 million of FHLB stock and $135,000 of Atlantic Community Bankers Bank stock at March 31, 2019 and $3.9 million of FHLB and $135,000 of Atlantic Community Bankers Bank stock at December 31, 2018.

The following table sets forth certain information regarding the amortized cost, carrying value, fair value, weighted average yields and contractual maturities of the Company’s investment portfolio as of March 31, 2019.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
March 31, 2019
(Dollars in thousands)
Amortized Cost
 

Fair Value
 
Yield
Available for sale
 
 
 
 
 
Due in one year or less
$
8,862

 
$
8,880

 
2.54
%
Due after one year through five years
35,943

 
35,580

 
2.91
%
Due after five years through ten years
24,970

 
24,939

 
3.11
%
Due after ten years
78,261

 
77,838

 
3.01
%
Total
$
148,036

 
$
147,237

 
2.97
%
 
 
 
 
 
 
 
Carrying Value
 

Fair Value
 
Yield
Held to maturity
 

 
 

 
 

Due in one year or less
$
8,962

 
$
9,001

 
3.27
%
Due after one year through five years
16,670

 
16,988

 
3.69
%
Due after five years through ten years
21,574

 
21,835

 
3.14
%
Due after ten years
30,620

 
31,105

 
3.31
%
Total
$
77,826

 
$
78,929

 
3.34
%

14



Gross unrealized losses on available for sale and held to maturity securities and the fair value of the related securities aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2019 and December 31, 2018 were as follows:
 
March 31, 2019
 
 
 
Less than 12 months
 
12 months or longer
 
Total
(Dollars in thousands)
Number
of
Securities
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
U.S. Treasury securities and
obligations of U.S.     
Government sponsored
entities (GSE) and   
agencies
2
 
$
997

 
$
(1
)
 
$
1,985

 
$
(13
)
 
$
2,982

 
$
(14
)
Residential collateralized
mortgage obligations - GSE
20
 
7,425

 
(88
)
 
29,670

 
(527
)
 
37,095

 
(615
)
Residential mortgage backed
securities - GSE
49
 
5,850

 
(8
)
 
21,554

 
(193
)
 
27,404

 
(201
)
Obligations of state and
political subdivisions
19
 
514

 
(4
)
 
7,658

 
(50
)
 
8,172

 
(54
)
Trust preferred debt securities -
single issuer
2
 

 

 
1,382

 
(109
)
 
1,382

 
(109
)
Corporate debt securities
10
 
6,360

 
(187
)
 
21,501

 
(248
)
 
27,861

 
(435
)
Other debt securities
10
 
14,013

 
(90
)
 
6,291

 
(104
)
 
20,304

 
(194
)
Total temporarily impaired
securities
112
 
$
35,159

 
$
(378
)
 
$
90,041

 
$
(1,244
)
 
$
125,200

 
$
(1,622
)
 
December 31, 2018
 
 
 
Less than 12 months
 
12 months or longer
 
Total
(Dollars in thousands)
Number
of
Securities
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
U.S. Treasury securities and
obligations of U.S.      
Government sponsored
entities (GSE) and   
agencies
2
 
$
994

 
$
(1
)
 
$
1,958

 
$
(40
)
 
$
2,952

 
$
(41
)
Residential collateralized
mortgage obligations - GSE
34
 
20,756

 
(138
)
 
22,106

 
(682
)
 
42,862

 
(820
)
Residential mortgage backed
securities - GSE
68
 
18,393

 
(141
)
 
19,402

 
(305
)
 
37,795

 
(446
)
Obligations of state and
political subdivisions
67
 
12,785

 
(154
)
 
11,638

 
(213
)
 
24,423

 
(367
)
Trust preferred debt securities - single issuer
2
 
1,329

 
(161
)
 

 

 
1,329

 
(161
)
Corporate debt securities
10
 
8,912

 
(632
)
 
18,374

 
(405
)
 
27,286

 
(1,037
)
Other debt securities
9
 
10,943

 
(93
)
 
4,613

 
(130
)
 
15,556

 
(223
)
Total temporarily impaired
securities
192
 
$
74,112

 
$
(1,320
)
 
$
78,091

 
$
(1,775
)
 
$
152,203

 
$
(3,095
)
U.S. Treasury securities and obligations of U.S. Government sponsored entities and agencies: The unrealized losses on investments in these securities were caused by increases in market interest rates. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity.  Therefore, these investments are not considered other-than-temporarily impaired.


15



Residential collateralized mortgage obligations and residential mortgage backed securities: The unrealized losses on investments in residential collateralized mortgage obligations and mortgage backed securities were caused by increases in market interest rates. The contractual cash flows of these securities are guaranteed by the issuers, which are primarily government or government sponsored agencies. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. The decline in fair value is attributable to changes in interest rates and not credit quality. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity.  Therefore, these investments are not considered other-than-temporarily impaired.

Obligations of state and political subdivisions: The unrealized losses on investments in these securities were caused by increases in market interest rates.  It is expected that the securities would not be settled at a price less than the amortized cost of the investment.  None of the issuers have defaulted on interest payments. These investments are not considered to be other than temporarily impaired because the decline in fair value is attributable to changes in interest rates and not credit quality.  The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity.  Therefore, these investments are not considered other-than-temporarily impaired.

Trust preferred debt securities – single issuer: The investments in these securities with unrealized losses are comprised of two corporate trust preferred securities issued by one large financial institution that mature in 2027. The contractual terms of the trust preferred securities do not allow the issuer to settle the securities at a price less than the face value of the trust preferred securities, which is greater than the amortized cost of the trust preferred securities. The issuer maintains an investment grade credit rating and has not defaulted on interest payments. The decline in fair value is attributable to the widening of interest rate and credit spreads and the lack of an active trading market for these securities. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.

Corporate debt securities.  The unrealized losses on investments in corporate debt securities were caused by an increase in market interest rates, which includes the yield required by the market participant for the issuer’ s credit risk.  None of the corporate issuers have defaulted on interest payments.  The decline in fair value is attributable to changes in market interest rates. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.

Trust preferred debt securities – pooled:  This trust preferred debt security was issued by a two-issuer pool (Preferred Term Securities XXV, Ltd. co-issued by Keefe, Bruyette and Woods, Inc. and First Tennessee (“PRETSL XXV”)) consisting primarily of debt securities issued by financial institution holding companies. During 2009, the Company recognized an other-than-temporary impairment of $865,000, of which $364,000 was determined to be a credit loss and charged to operations, and $501,000 was recognized in the other comprehensive income (loss) component of shareholders’ equity.

The primary factor used to determine the credit portion of the impairment loss recognized in the income statement for this security was the discounted present value of projected cash flow where that present value of cash flow was less than the amortized cost basis of the security.  The present value of cash flow was developed using a model that considered performing collateral ratios, the level of subordination to senior tranches of the security and credit ratings of and projected credit defaults in the underlying collateral.

On a quarterly basis, management evaluates the security to determine if any additional other-than-temporary impairment is required. As of March 31, 2019, the security was in an unrealized gain position and the security was receiving the interest and principal allocable to it. In the first quarter of 2019, a portion of the $501,000 other-than-temporary impairment was recognized as an increase in the carrying amount of the bond. The remaining balance will be recognized over the remaining term of the bond.

(5)   Allowance for Loan Losses and Credit Quality
The Company’s primary lending emphasis is the origination of commercial real estate loans, mortgage warehouse lines of credit and commercial business. Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy and a decline in New Jersey real estate market values. Any one, or a combination, of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.

16



The following table provides an aging of the loan portfolio by loan class at March 31, 2019:
(Dollars in thousands)
30-59 Days
 
60-89
Days
 
Greater
than 90
Days
 
Total Past
Due
 
Current
 
Total
Loans
Receivable
 
Recorded
Investment
> 90 Days
Accruing
 
Non-accrual
Loans
Commercial real estate
$
1,677

 
$

 
$
1,315

 
$
2,992

 
$
393,697

 
$
396,689

 
$

 
$
1,030

Mortgage warehouse lines

 

 

 

 
128,174

 
128,174

 

 

Construction

 

 

 

 
155,581

 
155,581

 

 

Commercial business
374

 

 
443

 
817

 
121,900

 
122,717

 

 
635

Residential real estate
961

 

 
1,151

 
2,112

 
45,114

 
47,226

 

 
1,151

Loans to individuals

 

 
444

 
444

 
23,179

 
23,623

 

 
629

Other

 

 

 

 
162

 
162

 

 

Total loans
$
3,012

 
$

 
$
3,353

 
$
6,365

 
$
867,807

 
874,172

 
$

 
$
3,445

Deferred loan costs, net
 
 
 
 
 
 
 
 
 
 
161

 
 
 
 
Total loans
 
 
 
 
 
 
 
 
 
 
$
874,333

 
 
 
 

The following table provides an aging of the loan portfolio by loan class at December 31, 2018:
(Dollars in thousands)
30-59 Days
 
60-89
Days
 
Greater than
90 Days
 
Total Past
Due
 
Current
 
Total
Loans
Receivable
 
Recorded
Investment
> 90 Days
Accruing
 
Non-accrual
Loans
Commercial real estate
$

 
$
499

 
$
1,201

 
$
1,700

 
$
386,731

 
$
388,431

 
$

 
$
1,439

Mortgage warehouse lines

 

 

 

 
154,183

 
154,183

 

 

Construction

 

 

 

 
149,387

 
149,387

 

 

Commercial business
280

 

 
466

 
746

 
119,844

 
120,590

 

 
3,532

Residential real estate
588

 

 
1,156

 
1,744

 
45,519

 
47,263

 

 
1,156

Loans to individuals
16

 
237

 
263

 
516

 
22,446

 
22,962

 
55

 
398

Other

 

 

 

 
181

 
181

 

 

Total loans
$
884

 
$
736

 
$
3,086

 
$
4,706

 
$
878,291

 
882,997

 
$
55

 
$
6,525

Deferred loan costs, net
 
 
 
 
 
 
 
 
 
 
167

 
 
 
 
Total loans
 
 
 
 
 
 
 
 
 
 
$
883,164

 
 
 
 
As provided by ASC 310-30, the excess of cash flows expected at acquisition over the initial investment in the loan is recognized as interest income over the life of the loan. At March 31, 2019 and December 31, 2018, there were $861,000 and $865,000 of purchased credit impaired loans, respectively, that were not classified as a non-performing loan due to the accretion of income based on their original contract terms.
The Company’s internal credit risk grades are based on the definitions currently utilized by the banking regulatory agencies.  The grades assigned and their definitions are as follows, and loans graded excellent, above average, good and watch list are treated as “pass” for grading purposes:

1.  Excellent - Loans that are based upon cash collateral held at the Company and adequately margined. Loans that are based upon “blue chip” stocks listed on the major stock exchanges and adequately margined.

2.  Above Average - Loans to companies whose balance sheets show excellent liquidity and long-term debt is on well-spread schedules of repayment easily covered by cash flow.  Such companies have been consistently profitable and have diversification in their product lines or sources of revenue.  The continuation of profitable operations for the foreseeable future is likely.  Management is comprised of a mix of ages, experience and backgrounds and management succession is in place. Sources of raw materials and, for service companies, the sources of revenue are abundant.  Future needs have been planned for. Character and management ability of individuals or company principals are excellent.  Loans to individuals are supported by their high net worth and liquid assets.

3.  Good - Loans to companies whose balance sheets show good liquidity and cash flow adequate to meet maturities of long-term debt with a comfortable margin. Such companies have established profitable records over a number of years, and there has been growth in net worth.  Operating ratios are in line with those of the industry, and expenses are in proper relationship to the volume of business done and the profits achieved. Management is well-balanced and competent in their responsibilities. Economic environment is favorable; however,

17



competition is strong. The prospects for growth are good. Loans in this category do not meet the collateral requirements of loans graded excellent and above average.

3w.  Watch - Included in this category are loans evidencing problems identified by Company management that require closer supervision, but do not require a “special mention” rating. This category also covers situations where the Company does not have adequate current information upon which credit quality can be determined.  The account officer has the obligation to correct these deficiencies within 30 days from the time of notification.

4.  Special Mention - A “special mention” loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

5.  Substandard - A “substandard” loan is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

6.  Doubtful - A loan classified as “doubtful” has all the weaknesses inherent of a loan classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

7.  Loss - A loan classified as “loss” is considered uncollectible and of such little value that its continuance on the books is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value. Rather, this classification indicates that it is not practical or desirable to defer writing off this loan even though partial recovery may occur in the future.

The following table provides a breakdown of the loan portfolio by credit quality indicator at March 31, 2019:
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
Commercial Credit Exposure - By Internally Assigned Grade
Construction
 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse Lines
 
Residential
Real Estate
Pass
$
152,606

 
$
111,630

 
$
372,756

 
$
127,830

 
$
45,490

Special Mention
2,975

 
9,931

 
14,671

 
344

 
98

Substandard

 
918

 
9,262

 

 
1,638

Doubtful

 
238

 

 

 

Total
$
155,581

 
$
122,717

 
$
396,689

 
$
128,174

 
$
47,226

Consumer Credit Exposure - By Payment Activity
Loans To
Individuals
 
Other
Performing
$
22,825

 
$
162

Non-performing
798

 

Total
$
23,623

 
$
162



18



The following table provides a breakdown of the loan portfolio by credit quality indicator at December 31, 2018:
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
Commercial Credit Exposure - By Internally Assigned Grade
Construction
 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse
Lines
 
Residential
Real Estate
Pass
$
146,460

 
$
104,162

 
$
366,424

 
$
152,378

 
$
45,825

Special Mention
2,927

 
12,703

 
13,317

 
1,805

 
103

Substandard

 
3,487

 
8,690

 

 
1,335

Doubtful

 
238

 

 

 

Total
$
149,387

 
$
120,590

 
$
388,431

 
$
154,183

 
$
47,263

Consumer Credit Exposure - By Payment Activity
Loans To
Individuals
 
Other
Performing
$
22,564

 
$
181

Non-performing
398

 

Total
$
22,962

 
$
181


Impaired Loans
Loans are considered to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan agreement, including scheduled interest payments. When a loan is placed on non-accrual status, it is also considered to be impaired. Loans are placed on non-accrual status when: (1) the full collection of interest or principal becomes uncertain or (2) the loans are contractually past due 90 days or more as to interest or principal payments unless the loans are both well secured and in the process of collection.

The following tables summarize the distribution of the allowance for loan losses and loans receivable by loan class and impairment method at March 31, 2019 and December 31, 2018:

 
March 31, 2019
(Dollars in thousands)
Construction

 
Commercial
Business
 
Commercial
Real Estate

 
Mortgage
Warehouse Lines
 
Residential
Real Estate

 
Loans to
Individuals
 
Other

 
Unallocated

 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$
238

 
$
110

 
$

 
$

 
$

 
$

 
$

 
$
348

Loans acquired with deteriorated credit quality

 

 
1

 

 

 

 

 

 
1

Collectively evaluated for impairment
1,794

 
1,377

 
3,529

 
582

 
426

 
155

 

 
492

 
8,355

Ending Balance
$
1,794

 
$
1,615

 
$
3,640

 
$
582

 
$
426

 
$
155

 
$

 
$
492

 
$
8,704

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable: