Company Quick10K Filing
Quick10K
Unity Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$21.26 11 $230
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 2019-07-18 Earnings, Exhibits
8-K 2019-07-16 Other Events, Exhibits
8-K 2019-04-25
8-K 2019-04-25 Other Events, Exhibits
8-K 2019-04-25
8-K 2019-03-31 Earnings, Exhibits
8-K 2019-01-29
8-K 2019-01-23 Earnings, Exhibits
8-K 2019-01-23 Earnings, Exhibits
8-K 2018-12-05
8-K 2018-11-29 Other Events, Exhibits
8-K 2018-10-25 Officers, Exhibits
8-K 2018-10-18 Earnings, Exhibits
8-K 2018-08-23 Other Events, Exhibits
8-K 2018-08-01
8-K 2018-07-19 Earnings, Exhibits
8-K 2018-04-26
8-K 2018-04-24 Earnings, Exhibits
8-K 2018-02-22 Other Events, Exhibits
8-K 2018-02-01
8-K 2018-01-24 Earnings, Exhibits
WDAY Workday 45,160
VFC VF 37,200
YUM Yum Brands 30,820
CTS CTS 939
ACIU AC Immune 351
ERA Era Group 208
SDT Sandridge Mississippian Trust I 27
WEP Wisconsin Electric Power 0
DBO Invesco DB Oil Fund 0
LSMG Lode-Star Mining 0
UNTY 2019-03-31
Part I Consolidated Financial Information
Item 1 Consolidated Financial Statements (Unaudited)
Note 1. Significant Accounting Policies
Note 2. Litigation
Note 3. Net Income per Share
Note 4. Income Taxes
Note 5. Other Comprehensive (Loss) Income
Note 6. Fair Value
Note 7. Securities
Note 8. Loans
Note 9. Allowance for Loan Losses and Reserve for Unfunded Loan Commitments
Note 10. New Accounting Pronouncements
Note 11. Derivative Financial Instruments and Hedging Activities
Note 12. Employee Benefit Plans
Note 13. Regulatory Capital
Note 14. Leases
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 - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Mine Safety Disclosures - N/A
Item 5 Other Information - None
Item 6 Exhibits
EX-31.1 q12019ex311.htm
EX-31.2 q12019ex312.htm
EX-32.1 q12019ex321.htm

Unity Bancorp Earnings 2019-03-31

UNTY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 unty-q1x2019x10q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)
(X) 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
 
(  ) 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 1-12431
 image0a10.jpg
Unity Bancorp, Inc.
(Exact name of registrant as specified in its charter)

New Jersey
22-3282551
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
64 Old Highway 22, Clinton, NJ
08809
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code (908) 730-7630
 
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, as amended, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:  
Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act):
Large accelerated filer ☐       Accelerated filer ☒       Nonaccelerated filer ☐       Smaller reporting company ☒ Emerging Growth Company ☐

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

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

The number of shares outstanding of each of the registrant’s classes of common equity stock, as of April 30, 2019 common stock, no par value: 10,837,759 shares outstanding.





Table of Contents

PART I
CONSOLIDATED FINANCIAL INFORMATION
Page #
 
 
 
ITEM 1
 
 
 
 
Consolidated Balance Sheets at March 31, 2019 and December 31, 2018
 
 
 
 
Consolidated Statements of Income for the three months ended March 31, 2019 and 2018
 
 
 
 
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018
 
 
 
 
Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2019 and 2018
 
 
 
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018
 
 
 
 
 
 
 
ITEM 2
 
 
 
ITEM 3
 
 
 
ITEM 4
 
 
 
PART II
 
 
 
ITEM 1
 
 
 
ITEM 1A
 
 
 
ITEM 2
 
 
 
ITEM 3
 
 
 
ITEM 4
 
 
 
ITEM 5
 
 
 
ITEM 6
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 31.1
 
 
 
 
 
Exhibit 31.2
 
 
 
 
 
Exhibit 32.1
 

2




PART I        CONSOLIDATED FINANCIAL INFORMATION
ITEM 1        Consolidated Financial Statements (Unaudited)
Unity Bancorp, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands)
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
 
Cash and due from banks
 
$
20,737

 
$
20,028

Federal funds sold and interest-bearing deposits
 
128,400

 
125,487

Cash and cash equivalents
 
149,137

 
145,515

Securities:
 
 
 
 
Debt securities available for sale (amortized cost of $46,770 in 2019 and $47,762 in 2018)
 
45,934

 
46,713

Securities held to maturity (fair value of $14,767 in 2019 and $14,802 in 2018)
 
14,780

 
14,875

Equity securities with readily determinable fair values (amortized cost of $2,398 in 2019 and $2,394 in 2018)
 
2,248

 
2,144

Total securities
 
62,962

 
63,732

Loans:
 
 
 
 
SBA loans held for sale
 
8,010

 
11,171

SBA loans held for investment
 
38,815

 
39,333

Commercial loans
 
702,235

 
694,102

Residential mortgage loans
 
438,431

 
436,056

Consumer loans
 
125,503

 
123,904

Total loans
 
1,312,994

 
1,304,566

Allowance for loan losses
 
(15,684
)
 
(15,488
)
Net loans
 
1,297,310

 
1,289,078

Premises and equipment, net
 
23,059

 
23,371

Bank owned life insurance ("BOLI")
 
24,861

 
24,710

Deferred tax assets
 
5,320

 
5,350

Federal Home Loan Bank ("FHLB") stock
 
10,120

 
10,795

Accrued interest receivable
 
6,926

 
6,399

Other real estate owned ("OREO")
 
273

 
56

Goodwill
 
1,516

 
1,516

Prepaid expenses and other assets
 
8,562

 
8,635

Total assets
 
$
1,590,046

 
$
1,579,157

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing demand
 
$
259,114

 
$
270,152

Interest-bearing demand
 
166,409

 
185,792

Savings
 
399,006

 
394,727

Time, under $100,000
 
205,491

 
184,022

Time, $100,000 to $250,000
 
117,355

 
116,147

Time, $250,000 and over
 
79,211

 
56,847

Total deposits
 
1,226,586

 
1,207,687

Borrowed funds
 
195,000

 
210,000

Subordinated debentures
 
10,310

 
10,310

Accrued interest payable
 
419

 
406

Accrued expenses and other liabilities
 
14,014

 
12,266

Total liabilities
 
1,446,329

 
1,440,669

Commitments and contingencies
 


 


Shareholders' equity:
 
 
 
 
Common stock
 
88,779

 
88,484

Retained earnings
 
55,145

 
50,161

Accumulated other comprehensive income
 
(207
)
 
(157
)
Total shareholders' equity
 
143,717

 
138,488

Total liabilities and shareholders' equity
 
$
1,590,046

 
$
1,579,157

 
 
 
 
 
Issued and outstanding common shares
 
10,822

 
10,780


The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

3




Unity Bancorp, Inc.
Consolidated Statements of Income
(Unaudited)
 
 
For the three months ended March 31,
(In thousands, except per share amounts)
 
2019
 
2018
INTEREST INCOME
 
 
 
 
Federal funds sold, interest-bearing deposits and repos
 
$
221

 
$
205

FHLB stock
 
116

 
134

Securities:
 
 
 
 
Taxable
 
475

 
492

Tax-exempt
 
29

 
31

Total securities
 
504

 
523

Loans:
 
 
 
 
SBA loans
 
995

 
1,183

Commercial loans
 
9,069

 
7,726

Residential mortgage loans
 
5,560

 
4,340

Consumer loans
 
2,035

 
1,529

Total loans
 
17,659

 
14,778

Total interest income
 
18,500

 
15,640

INTEREST EXPENSE
 
 
 
 
Interest-bearing demand deposits
 
409

 
224

Savings deposits
 
1,119

 
776

Time deposits
 
2,008

 
1,000

Borrowed funds and subordinated debentures
 
749

 
768

Total interest expense
 
4,284

 
2,768

Net interest income
 
14,216

 
12,872

Provision for loan losses
 
500

 
500

Net interest income after provision for loan losses
 
13,716

 
12,372

NONINTEREST INCOME
 
 
 
 
Branch fee income
 
368

 
330

Service and loan fee income
 
442

 
564

Gain on sale of SBA loans held for sale, net
 
316

 
547

Gain on sale of mortgage loans, net
 
350

 
424

BOLI income
 
151

 
171

Net security gains (losses)
 
100

 
(15
)
Other income
 
293

 
265

Total noninterest income
 
2,020

 
2,286

NONINTEREST EXPENSE
 
 
 
 
Compensation and benefits
 
4,845

 
4,834

Occupancy
 
694

 
690

Processing and communications
 
716

 
689

Furniture and equipment
 
657

 
536

Professional services
 
288

 
251

Loan collection and OREO expenses
 
66

 
6

Other loan expenses
 
46

 
33

Deposit insurance
 
167

 
186

Advertising
 
348

 
319

Director fees
 
163

 
162

Other expenses
 
486

 
488

Total noninterest expense
 
8,476

 
8,194

Income before provision for income taxes
 
7,260

 
6,464

Provision for income taxes
 
1,520

 
1,235

Net income
 
$
5,740

 
$
5,229


 
 
 
 
Net income per common share - Basic
 
$
0.53

 
$
0.49

Net income per common share - Diluted
 
$
0.52

 
$
0.48


 
 
 
 
Weighted average common shares outstanding - Basic
 
10,801

 
10,678

Weighted average common shares outstanding - Diluted
 
10,955

 
10,853


The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.




4




Unity Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
For the three months ended
 
 
March 31, 2019
 
March 31, 2018
(In thousands)
 
Before tax amount
 
Income tax expense (benefit)
 
Net of tax amount
 
Before tax amount
 
Income tax expense (benefit)
 
Net of tax amount
Net income
 
$
7,260

 
$
1,520

 
$
5,740

 
$
6,464

 
$
1,235

 
$
5,229

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on securities arising during the period
 
313

 
73

 
240

 
(807
)
 
(226
)
 
(581
)
Less: reclassification adjustment for gains on securities included in net income
 
100

 
21

 
79

 

 

 

Total unrealized gains (losses) on debt securities available for sale
 
213

 
52

 
161

 
(807
)
 
(226
)
 
(581
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustments related to defined benefit plan:
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of prior service cost
 
21

 
(70
)
 
91

 
21

 
155

 
(134
)
Total adjustments related to defined benefit plan
 
21

 
(70
)
 
91

 
21

 
155

 
(134
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized (losses) gains from cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding (losses) gains on cash flow hedges arising during the period
 
(408
)
 
(106
)
 
(302
)
 
583

 
34

 
549

Total unrealized (losses) gains on cash flow hedges
 
(408
)
 
(106
)
 
(302
)
 
583

 
34

 
549

Total other comprehensive loss
 
(174
)
 
(124
)
 
(50
)
 
(203
)
 
(37
)
 
(166
)
Total comprehensive income
 
$
7,086

 
$
1,396

 
$
5,690

 
$
6,261

 
$
1,198

 
$
5,063


The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

5




Consolidated Statements of Changes in Shareholders’ Equity
For the three months ended March 31, 2019 and 2018
(Unaudited)
 
 
Common stock
 
 
 
Accumulated other
 
Total
(In thousands)
 
Shares
 
Amount
 
Retained earnings
 
comprehensive loss
 
shareholders' equity
Balance, December 31, 2018
 
10,780

 
$
88,484

 
$
50,161

 
$
(157
)
 
$
138,488

Net income
 

 

 
5,740

 

 
5,740

Other comprehensive loss, net of tax
 

 

 

 
(50
)
 
(50
)
Dividends on common stock ($0.07 per share)
 

 
26

 
(756
)
 

 
(730
)
Common stock issued and related tax effects (1)
 
42

 
269

 

 

 
269

Balance, March 31, 2019
 
10,822

 
$
88,779

 
$
55,145

 
$
(207
)
 
$
143,717


 
 
Common stock
 
 
 
Accumulated other
 
Total
(In thousands)
 
Shares
 
Amount
 
Retained earnings
 
comprehensive income (loss)
 
shareholders' equity
Balance, December 31, 2017
 
10,615

 
$
86,782

 
$
31,117

 
$
206

 
$
118,105

Net income
 

 

 
5,229

 

 
5,229

Other comprehensive loss, net of tax
 

 

 

 
(166
)
 
(166
)
Dividends on common stock ($0.06 per share)
 

 
25

 
(643
)
 

 
(618
)
Common stock issued and related tax effects (1)
 
94

 
554

 

 

 
554

Retained earnings impact due to adoption of ASU 2016-01 (2)
 

 

 
(56
)
 
56

 

Tax rate adjustment to AOCI (3)
 

 

 
66

 
(66
)
 

Balance, March 31, 2018
 
10,709

 
$
87,361

 
$
35,713

 
$
30

 
$
123,104


(1) Includes the issuance of common stock under employee benefit plans, which includes nonqualified stock options and restricted stock expense related entries, employee option exercises and the tax benefit of options exercised.
(2) As a result of ASU 2016-01, "Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities", the Company reclassed $56 thousand of losses on available for sale equity securities sitting in accumulated other comprehensive income to retained earnings.
(3) As a result of ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income", the Company reclassed $66 thousand from accumulated other comprehensive income to retained earnings.

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
໿


6




Unity Bancorp, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
 
For the three months ended March 31,
(In thousands)
 
2019
 
2018
OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
5,740

 
$
5,229

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
500

 
500

Net amortization of purchase premiums and discounts on securities
 
37

 
53

Depreciation and amortization
 
121

 
379

Deferred income tax expense
 
82

 
36

Stock compensation expense
 
283

 
265

Gain on sale of mortgage loans held for sale, net
 
(258
)
 
(356
)
Gain on sale of SBA loans held for sale, net
 
(316
)
 
(547
)
Origination of mortgage loans held for sale
 
(19,431
)
 
(20,132
)
Origination of SBA loans held for sale
 
(2,412
)
 
(3,507
)
Proceeds from sale of mortgage loans held for sale, net
 
19,689

 
20,488

Proceeds from sale of SBA loans held for sale, net
 
6,511

 
6,322

BOLI income
 
(151
)
 
(171
)
Net change in other assets and liabilities
 
819

 
(952
)
Net cash provided by operating activities
 
11,214

 
7,607

INVESTING ACTIVITIES
 
 
 
 
Purchases of FHLB stock, at cost
 
(20,295
)
 
(13,838
)
Maturities and principal payments on securities held to maturity
 
89

 
132

Maturities and principal payments on debt securities available for sale
 
959

 
1,272

Proceeds from redemption of FHLB stock
 
20,970

 
17,393

Proceeds from sale of OREO
 

 
426

Net increase in loans
 
(12,541
)
 
(26,674
)
Purchases of premises and equipment
 
(109
)
 
(309
)
Net cash used in investing activities
 
(10,927
)
 
(21,598
)
FINANCING ACTIVITIES
 
 
 
 
Net increase in deposits
 
18,899

 
74,377

Proceeds from new borrowings
 
175,000

 
121,000

Repayments of borrowings
 
(190,000
)
 
(215,000
)
Proceeds from exercise of stock options
 
166

 
290

Dividends on common stock
 
(730
)
 
(643
)
Net cash provided by (used in) financing activities
 
3,335

 
(19,976
)
Increase (Decrease) in cash and cash equivalents
 
3,622

 
(33,967
)
Cash and cash equivalents, beginning of period
 
145,515

 
150,254

Cash and cash equivalents, end of period
 
$
149,137

 
$
116,287


7




Unity Bancorp, Inc.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
 
 
For the three months ended March 31,
(In thousands)
 
2019
 
2018
SUPPLEMENTAL DISCLOSURES
 
 
 
 
Cash:
 
 
 
 
Interest paid
 
$
4,271

 
$
2,794

Income taxes paid
 
$
52

 
$
1,461

Noncash investing activities:
 
 
 
 
Establishment of lease liability and right-of-use asset
 
$
2,765

 
$

Capitalization of servicing rights
 
$
211

 
$
241

Transfer of loans to OREO
 
$
328

 
$
106

 
 
 
 
 
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.


8




Unity Bancorp, Inc.
Notes to the Consolidated Financial Statements (Unaudited)
March 31, 2019
 
NOTE 1.  Significant Accounting Policies

The accompanying Consolidated Financial Statements include the accounts of Unity Bancorp, Inc. (the "Parent Company") and its wholly-owned subsidiary, Unity Bank (the "Bank" or when consolidated with the Parent Company, the "Company"), and reflect all adjustments and disclosures which are generally routine and recurring in nature, and in the opinion of management, necessary for a fair presentation of interim results.  The Bank has multiple subsidiaries used to hold part of its investment and loan portfolios and OREO properties.  All significant intercompany balances and transactions have been eliminated in consolidation.  Certain reclassifications have been made to prior period amounts to conform to the current year presentation, with no impact on current earnings or shareholders’ equity.  The financial information has been prepared in accordance with U.S. generally accepted accounting principles and has not been audited.  In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses during the reporting periods.  Actual results could differ from those estimates.  Amounts requiring the use of significant estimates include the allowance for loan losses, valuation of deferred tax and servicing assets, the carrying value of loans held for sale and other real estate owned, the valuation of securities and the determination of other-than-temporary impairment for securities and fair value disclosures.  Management believes that the allowance for loan losses is adequate.  While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions.  The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q were available to be issued.

The interim unaudited Consolidated Financial Statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the Securities and Exchange Commission (“SEC”) and consist of normal recurring adjustments necessary for the fair presentation of interim results.  The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results which may be expected for the entire year.  As used in this Form 10-Q, “we” and “us” and “our” refer to Unity Bancorp, Inc., and its consolidated subsidiary, Unity Bank, depending on the context.  Certain information and financial disclosures required by U.S. generally accepted accounting principles have been condensed or omitted from interim reporting pursuant to SEC rules.  Interim financial statements should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Other-Than-Temporary Impairment

The Company has a process in place to identify securities that could potentially incur credit impairment that is other-than-temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.  Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation.  This evaluation considers relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other-than-temporary.  Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (4) for fixed maturity securities, the intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, our ability and intent to hold the security for a forecasted period of time that allows for the recovery in value.

Management assesses its intent to sell or whether it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses.  For debt securities that are considered other-than-temporarily impaired with no intent to sell and no requirement to sell prior to recovery of its amortized cost basis, the amount of the impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors.  The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows.  The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income.  For debt securities where management has the intent to sell, the amount of the impairment is reflected in earnings as realized losses.


9




The present value of expected future cash flows is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security.  The methodology and assumptions for establishing the best estimate cash flows vary depending on the type of security.  The asset-backed securities cash flow estimates are based on bond specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds and structural support, including subordination and guarantees.  The corporate bond cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using bond specific facts and circumstances including timing, security interests and loss severity.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Loans

Loans Held for Sale 

Loans held for sale represent the guaranteed portion of Small Business Administration (“SBA”) loans and are reflected at the lower of aggregate cost or market value.  The Company originates loans to customers under an SBA program that historically has provided for SBA guarantees of up to 90 percent of each loan.  The Company generally sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the nonguaranteed portion in its portfolio.  The net amount of loan origination fees on loans sold is included in the carrying value and in the gain or loss on the sale.  When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets are recognized in income.  All criteria for sale accounting must be met in order for the loan sales to occur; see details under the “Transfers of Financial Assets” heading above.

Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold.  Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues.  Impairment is evaluated based on stratifying the underlying financial assets by date of origination and term.  Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.  Any impairment, if temporary, would be reported as a valuation allowance.

Serviced loans sold to others are not included in the accompanying Consolidated Balance Sheets.  Income and fees collected for loan servicing are credited to noninterest income when earned, net of amortization on the related servicing assets.

Loans Held to Maturity 

Loans held to maturity are stated at the unpaid principal balance, net of unearned discounts and deferred loan origination fees and costs.  In accordance with the level yield method, loan origination fees, net of direct loan origination costs, are deferred and recognized over the estimated life of the related loans as an adjustment to the loan yield.  Interest is credited to operations primarily based upon the principal balance outstanding.

Loans are reported as past due when either interest or principal is unpaid in the following circumstances: fixed payment loans when the borrower is in arrears for two or more monthly payments; open end credit for two or more billing cycles; and single payment notes if interest or principal remains unpaid for 30 days or more.

Nonperforming loans consist of loans that are not accruing interest as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt (nonaccrual loans).  When a loan is classified as nonaccrual, interest accruals are discontinued and all past due interest previously recognized as income is reversed and charged against current period earnings.  Generally, until the loan becomes current, any 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 merit recognition of a portion of such payments as interest income.  Loans may be returned to an accrual status when the ability to collect is reasonably assured and when the loan is brought current as to principal and interest.


10




Loans are charged off when collection is sufficiently questionable and when the Company can no longer justify maintaining the loan as an asset on the balance sheet.  Loans qualify for charge-off when, after thorough analysis, all possible sources of repayment are insufficient.  These include: 1) potential future cash flows, 2) value of collateral, and/or 3) strength of co-makers and guarantors.  All unsecured loans are charged off upon the establishment of the loan’s nonaccrual status.  Additionally, all loans classified as a loss or that portion of the loan classified as a loss is charged off.  All loan charge-offs are approved by the Board of Directors.

Troubled debt restructurings ("TDRs") occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider.  These concessions typically include reductions in interest rate, extending the maturity of a loan, or a combination of both. Interest income on accruing TDRs is credited to operations primarily based upon the principal amount outstanding, as stated in the paragraphs above.

The Company evaluates its loans for impairment.  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 according to the contractual terms of the loan agreement.  The Company has defined impaired loans to be all TDRs and nonperforming loans individually evaluated for impairment.  Impairment is evaluated in total for smaller-balance loans of a similar nature (consumer and residential mortgage loans), and on an individual basis for all other loans.  Impairment of a loan is measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or as a practical expedient, based on a loan’s observable market price or the fair value of collateral, net of estimated costs to sell, if the loan is collateral-dependent.  If the value of the impaired loan is less than the recorded investment in the loan, the Company establishes a valuation allowance, or adjusts existing valuation allowances, with a corresponding charge to the provision for loan losses.

For additional information on loans, see Note 8 to the Consolidated Financial Statements and the section titled "Loan Portfolio" under Item 2.  Management's Discussion and Analysis.

Allowance for Loan Losses and Reserve for Unfunded Loan Commitments

The allowance for loan losses is maintained at a level management considers adequate to provide for probable loan losses as of the balance sheet date.  The allowance is increased by provisions charged to expense and is reduced by net charge-offs.

The level of the allowance is based on management’s evaluation of probable losses in the loan portfolio, after consideration of prevailing economic conditions in the Company’s market area, the volume and composition of the loan portfolio, and historical loan loss experience.  The allowance for loan losses consists of specific reserves for individually impaired credits and TDRs, reserves for nonimpaired loans based on historical loss factors and reserves based on general economic factors and other qualitative risk factors such as changes in delinquency trends, industry concentrations or local/national economic trends.  This risk assessment process is performed at least quarterly, and, as adjustments become necessary, they are realized in the periods in which they become known.

Although management attempts to maintain the allowance at a level deemed adequate to provide for probable losses, future additions to the allowance may be necessary based upon certain factors including changes in market conditions and underlying collateral values.  In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for loan losses.  These agencies may require the Company to make additional provisions based on their judgments about information available to them at the time of their examination.

The Company maintains an allowance for unfunded loan commitments that is maintained at a level that management believes is adequate to absorb estimated probable losses.  Adjustments to the allowance are made through other expenses and applied to the allowance which is maintained in other liabilities.

For additional information on the allowance for loan losses and unfunded loan commitments, see Note 9 to the Consolidated Financial Statements and the sections titled "Asset Quality" and "Allowance for Loan Losses and Reserve for Unfunded Loan Commitments" under Item 2. Management's Discussion and Analysis.


11




Income Taxes

The Company accounts for income taxes according to the asset and liability method.  Under this method, 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 basis.  Deferred tax assets and liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Valuation reserves are established against certain deferred tax assets when it is more likely than not that the deferred tax assets will not be realized.  Increases or decreases in the valuation reserve are charged or credited to the income tax provision.When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions.  Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.  The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits would be recognized in income tax expense on the income statement.

NOTE 2.  Litigation

The Company may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of its business.  In the best judgment of management, based upon consultation with counsel, the consolidated financial position and results of operations of the Company will not be affected materially by the final outcome of any pending legal proceedings or other contingent liabilities and commitments.

NOTE 3.  Net Income per Share

Basic net income per common share is calculated as net income divided by the weighted average common shares outstanding during the reporting period. 

Diluted net income per common share is computed similarly to that of basic net income per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally stock options, were issued during the reporting period utilizing the Treasury stock method.

The following is a reconciliation of the calculation of basic and diluted income per share: 
 
 
For the three months ended March 31,
(In thousands, except per share amounts)
 
2019
 
2018
Net income
 
$
5,740

 
$
5,229

Weighted average common shares outstanding - Basic
 
10,801

 
10,678

Plus: Potential dilutive common stock equivalents
 
154

 
175

Weighted average common shares outstanding - Diluted
 
10,955

 
10,853

Net income per common share - Basic
 
$
0.53

 
$
0.49

Net income per common share - Diluted
 
0.52

 
0.48

Stock options and common stock excluded from the income per share calculation as their effect would have been anti-dilutive
 
209

 
84



12




NOTE 4.  Income Taxes

The Company follows FASB ASC Topic 740, “Income Taxes,” which prescribes a threshold for the financial statement recognition of income taxes and provides criteria for the measurement of tax positions taken or expected to be taken in a tax return.  ASC 740 also includes guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition of income taxes.  

On July 1, 2018, New Jersey's Assembly Bill 4202 was signed into law. The new bill, effective January 1, 2018, imposes a temporary surtax on corporations earning New Jersey allocated taxable income in excess of $1 million at a rate of 2.5 percent for tax years beginning on or after January 1, 2018, through December 31, 2019, and at 1.5 percent for tax years beginning on or after January 1, 2020, through December 31, 2021. In addition, effective for periods on or after January 1, 2019, New Jersey requires mandatory unitary combined reporting for its Corporation Business Tax.

For the quarter ended March 31, 2019, the Company reported income tax expense of $1.5 million for an effective tax rate of 20.9 percent, compared to an income tax expense of $1.2 million and an effective tax rate of 19.1 percent for the prior year’s quarter. The Company did not recognize or accrue any interest or penalties related to income taxes during the three months ended March 31, 2019 or 2018.  The Company did not have an accrual for uncertain tax positions as of March 31, 2019 or December 31, 2018, as deductions taken and benefits accrued are based on widely understood administrative practices and procedures and are based on clear and unambiguous tax law.  Tax returns for all years 2014 and thereafter are subject to future examination by tax authorities.

NOTE 5.  Other Comprehensive (Loss) Income

The following tables show the changes in other comprehensive income (loss) for the three months ended March 31, 2019 and 2018, net of tax:

 
 
For the three months ended March 31, 2019
(In thousands)
 
Net unrealized (losses) gains on securities
 
Adjustments related to defined benefit plan
 
Net unrealized gains (losses) from cash flow hedges
 
Accumulated other comprehensive loss
Balance, beginning of period (1)
 
$
(721
)
 
$
(431
)
 
$
1,030

 
$
(122
)
Other comprehensive income (loss) before reclassifications
 
240

 

 
(302
)
 
(62
)
Less amounts reclassified from accumulated other comprehensive income (loss)
 
79

 
(91
)
 

 
(12
)
Period change
 
161

 
91

 
(302
)
 
(50
)
Balance, end of period (1)
 
$
(560
)
 
$
(340
)
 
$
728

 
$
(172
)

 
 
For the three months ended March 31, 2018
(In thousands)
 
Net unrealized losses on securities
 
Adjustments related to defined benefit plan
 
Net unrealized gains from cash flow hedges
 
Accumulated other comprehensive income (loss)
Balance, beginning of period
 
$
(335
)
 
$
(341
)
 
$
882

 
$
206

Other comprehensive (loss) income before reclassifications
 
(581
)
 

 
549

 
(32
)
Less amounts reclassified from accumulated other comprehensive (loss) income
 

 
134

 

 
134

Period change
 
(581
)
 
(134
)
 
549

 
(166
)
Balance, end of period (1)
 
$
(916
)
 
$
(475
)
 
$
1,431

 
$
40



13




(1) AOCI does not reflect the net reclassification of $35 thousand to Retained Earnings as a result of ASU 2016-01, "Financial
Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" & ASU
2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income".

NOTE 6.  Fair Value

Fair Value Measurement

The Company follows FASB ASC Topic 820, “Fair Value Measurement and Disclosures,” which requires additional disclosures about the Company’s assets and liabilities that are measured at fair value.  Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  In determining fair value, the Company uses various methods including market, income and cost approaches.  Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market corroborated, or generally unobservable inputs.  The Company utilizes techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  Financial assets and liabilities carried at fair value will be classified and disclosed as follows:

Level 1 Inputs

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Generally, this includes debt and equity securities and derivative contracts that are traded in an active exchange market (i.e. New York Stock Exchange), as well as certain U.S. Treasury, U.S. Government and sponsored entity agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2 Inputs

Quoted prices for similar assets or liabilities in active markets.
Quoted prices for identical or similar assets or liabilities in inactive markets.
Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (i.e., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”
Generally, this includes U.S. Government and sponsored entity mortgage-backed securities, corporate debt securities and derivative contracts.

Level 3 Inputs

Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.
These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Fair Value on a Recurring Basis

The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis:

Debt Securities Available for Sale

The fair value of available for sale ("AFS") debt securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1).  If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).


14




As of March 31, 2019, the fair value of the Company's AFS debt securities portfolio was $45.9 million.  Approximately 56 percent of the portfolio was made up of residential mortgage-backed securities, which had a fair value of $25.9 million at March 31, 2019.  Approximately $25.4 million of the residential mortgage-backed securities are guaranteed by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC").  The underlying loans for these securities are residential mortgages that are geographically dispersed throughout the United States. 

All of the Company’s AFS debt securities were classified as Level 2 assets at March 31, 2019.  The valuation of AFS debt securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar assets or liabilities in active markets and all other relevant information.  It includes model pricing, defined as valuing securities based upon their relationship with other benchmark securities. 

Equity Securities with Readily Determinable Fair Values

The fair value of equity securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1).  If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

As of March 31, 2019, the fair value of the Company's equity securities portfolio was $2.2 million.

All of the Company’s equity securities were classified as Level 2 assets at March 31, 2019.  The valuation of equity securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar assets or liabilities in active markets and all other relevant information.

There were no changes in the inputs or methodologies used to determine fair value during the period ended March 31, 2019, as compared to the periods ended December 31, 2018 and March 31, 2018.  


15




The tables below present the balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:
 
 
Fair Value Measurements at March 31, 2019 Using
(In thousands)
 
Assets/Liabilities Measured at Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Measured on a recurring basis:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
U.S. Government sponsored entities
 
$
5,678

 
$

 
$
5,678

 
$

State and political subdivisions
 
4,502

 

 
4,502

 

Residential mortgage-backed securities
 
25,851

 

 
25,851

 

Corporate and other securities
 
9,903

 

 
9,903

 

Total debt securities available for sale
 
$
45,934

 
$

 
$
45,934

 
$

 
 
 
 
 
 
 
 
 
Equity securities with readily determinable fair values
 
2,248

 

 
2,248

 

Total equity securities
 
$
2,248

 
$

 
$
2,248

 
$

 
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
1,025

 

 
1,025

 

Total swap agreements
 
$
1,025

 
$

 
$
1,025

 
$

 
 
 
 
 
 
 
 
 
 
 
Fair value Measurements at December 31, 2018 Using
(In thousands)
 
Assets/Liabilities Measured at Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Measured on a recurring basis:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
U.S. Government sponsored entities
 
$
5,642

 
$

 
$
5,642

 
$

State and political subdivisions
 
4,498

 

 
4,498

 

Residential mortgage-backed securities
 
26,613

 

 
26,613

 

Corporate and other securities
 
9,960

 

 
9,960

 

Total debt securities available for sale
 
$
46,713

 
$

 
$
46,713

 
$

 
 
 
 
 
 
 
 
 
Equity securities with readily determinable fair values
 
2,144

 

 
2,144

 

Total equity securities
 
$
2,144

 
$

 
$
2,144

 
$

 
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
1,433

 

 
1,433

 

Total swap agreements
 
$
1,433

 
$

 
$
1,433

 
$




16




Fair Value on a Nonrecurring Basis

The following tables present the assets and liabilities subject to fair value adjustments (impairment) on a non-recurring basis carried on the balance sheet by caption and by level within the hierarchy (as described above):

 
 
Fair Value Measurements at March 31, 2019 Using
(In thousands)
 
Assets/Liabilities Measured at Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Net (Credit) Provision During Period
Measured on a non-recurring basis:
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
OREO
 
$
273

 
$

 
$

 
$
273

 
$
(110
)
Impaired collateral-dependent loans
 
2,300

 

 

 
2,300

 
(437
)
 
 
 
 
 
 
 
 
 
 
 
  
 
Fair Value Measurements at December 31, 2018 Using
(In thousands)
 
Assets/Liabilities Measured at Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Net (Credit) Provision During Period
Financial assets:
 
 
 
 
 
 
 
 
 
 
OREO
 
$
56

 
$

 
$

 
$
56

 
$
(196
)
Impaired collateral-dependent loans
 
2,625

 

 

 
2,625

 
(335
)

Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  The following is a description of the valuation methodologies used for instruments measured at fair value on a nonrecurring basis:

Appraisal Policy

All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal Practice ("USPAP").  Appraisals are certified to the Company and performed by appraisers on the Company’s approved list of appraisers.  Evaluations are completed by a person independent of Company management.  The content of the appraisal depends on the complexity of the property.  Appraisals are completed on a “retail value” and an “as is value.”

OREO

The fair value of OREO is determined using third party appraisals, which may be discounted based on management’s review and changes in market conditions (Level 3 Inputs).  

Impaired Collateral-Dependent Loans

The fair value of impaired collateral-dependent loans is derived in accordance with FASB ASC Topic 310, “Receivables.”  Fair value is determined based on the loan’s observable market price or the fair value of the collateral.  Partially charged-off loans are measured for impairment based upon a third party appraisal for collateral-dependent loans.  When an updated appraisal is received for a nonperforming loan, the value on the appraisal is discounted in the manner discussed above.  If there is a deficiency in the value after the Company applies these discounts, management applies a specific reserve and the loan remains in nonaccrual status.  The receipt of an updated appraisal would not qualify as a reason to put a loan back into accruing status.  The Company removes loans from nonaccrual status generally when the borrower makes nine months of contractual payments and demonstrates the ability to service the debt going forward.  Charge-offs are determined based upon the loss that management believes the Company will incur after evaluating collateral for impairment based upon the valuation methods described above and the ability of the borrower to pay any deficiency.

17





The valuation allowance for impaired loans is included in the allowance for loan losses in the consolidated balance sheets.  At March 31, 2019, the valuation allowance for impaired loans was $230 thousand, a decrease of $437 thousand from $667 thousand at December 31, 2018.

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments,” requires the disclosure of the estimated fair value of certain financial instruments, including those financial instruments for which the Company did not elect the fair value option.  These estimated fair values as of March 31, 2019 and December 31, 2018 have been determined using available market information and appropriate valuation methodologies.  Considerable judgment is required to interpret market data to develop estimates of fair value.  The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange.  The use of alternative market assumptions and estimation methodologies could have had a material effect on these estimates of fair value.  The methodology for estimating the fair value of financial assets and liabilities that are measured on a recurring or nonrecurring basis are discussed above.  The following methods and assumptions were used to estimate the fair value of other financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents

For these short-term instruments, the carrying value is a reasonable estimate of fair value.

Securities

The fair value of securities is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

SBA Loans Held for Sale

The fair value of SBA loans held for sale is estimated by using a market approach that includes significant other observable inputs.

Loans

The fair value of loans is estimated by discounting the future cash flows using current market rates that reflect the interest rate risk inherent in the loan, except for previously discussed impaired loans.

FHLB Stock

Federal Home Loan Bank stock is carried at cost.  Carrying value approximates fair value based on the redemption provisions of the issues.

Servicing Assets

Servicing assets do not trade in an active, open market with readily observable prices.  The Company estimates the fair value of servicing assets using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including market discount rates and prepayment speeds.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Deposit Liabilities

The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date (i.e. carrying value).  The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using current market rates.


18




Borrowed Funds and Subordinated Debentures

The fair value of borrowings is estimated by discounting the projected future cash flows using current market rates.

Standby Letters of Credit

At March 31, 2019, the Bank had standby letters of credit outstanding of $5.0 million, compared to $5.7 million at December 31, 2018.  The fair value of these commitments is nominal.

The table below presents the carrying amount and estimated fair values of the Company’s financial instruments presented as of March 31, 2019 and December 31, 2018:
 
 
 
 
March 31, 2019
 
December 31, 2018
(In thousands)
 
Fair value level
 
Carrying amount
 
Estimated fair value
 
Carrying amount
 
Estimated fair value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
Level 1
 
$
149,137

 
$
149,137

 
$
145,515

 
$
145,515

Securities (1)
 
Level 2
 
62,962

 
62,948

 
63,732

 
63,600

SBA loans held for sale
 
Level 2
 
8,010

 
8,870

 
11,171

 
12,177

Loans, net of allowance for loan losses (2)
 
Level 2
 
1,289,300

 
1,285,495

 
1,277,907

 
1,268,909

FHLB stock
 
Level 2
 
10,120

 
10,120

 
10,795

 
10,795

Servicing assets
 
Level 3
 
2,135

 
2,135

 
2,375

 
2,375

Accrued interest receivable
 
Level 2
 
6,926

 
6,926

 
6,399

 
6,399

OREO
 
Level 3
 
273

 
273

 
56

 
56

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
Level 2
 
1,226,586

 
1,225,195

 
1,207,687

 
1,204,731

Borrowed funds and subordinated debentures
 
Level 2
 
205,310

 
204,284

 
220,310

 
218,879

Accrued interest payable
 
Level 2
 
419

 
419

 
406

 
406


(1)
Includes held to maturity (“HTM”) corporate securities that are considered Level 3.  These securities had book values of $3.5 million and $3.6 million at March 31, 2019 and December 31, 2018, respectively, and market values of $3.4 million at March 31, 2019 and December 31, 2018. Includes one corporate bond with a book value and market value of $1.0 million at March 31, 2019 and December 31, 2018.
(2)
Includes collateral-dependent impaired loans that are considered Level 3 and reported separately in the tables under the “Fair Value on a Nonrecurring Basis” heading.  Collateral-dependent impaired loans, net of specific reserves totaled $2.3 million and $2.6 million at March 31, 2019 and December 31, 2018, respectively.

Limitations

Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-statement of condition financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the effect of fair value estimates have not been considered in the above estimates.



19




NOTE 7. Securities

This table provides the major components of debt securities available for sale ("AFS") and held to maturity ("HTM") at amortized cost and estimated fair value at March 31, 2019 and December 31, 2018:
 
 
March 31, 2019
 
December 31, 2018
(In thousands)
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored entities
 
$
5,756

 
$

 
$
(78
)
 
$
5,678

 
$
5,758

 
$

 
$
(116
)
 
$
5,642

State and political subdivisions
 
4,547

 
20

 
(65
)
 
4,502

 
4,614

 
4

 
(120
)
 
4,498

Residential mortgage-backed securities
 
26,237

 
81

 
(467
)
 
25,851

 
27,159

 
74

 
(620
)
 
26,613

Corporate and other securities
 
10,230

 
30

 
(357
)
 
9,903

 
10,231

 
123

 
(394
)
 
9,960

Total debt securities available for sale
 
$
46,770

 
$
131

 
$
(967
)
 
$
45,934

 
$
47,762

 
$
201

 
$
(1,250
)
 
$
46,713

Held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored entities
 
$
2,527

 
$

 
$
(82
)
 
$
2,445

 
$
2,527

 
$

 
$
(94
)
 
$
2,433

State and political subdivisions
 
951

 
115

 

 
1,066

 
951

 
110

 

 
1,061

Residential mortgage-backed securities
 
3,249

 
21

 
(34
)
 
3,236

 
3,312

 
17

 
(52
)
 
3,277

Commercial mortgage-backed securities
 
3,540

 

 
(107
)
 
3,433

 
3,570

 

 
(138
)
 
3,432

Corporate and other securities
 
4,513

 
75

 
(1
)
 
4,587

 
4,515

 
84

 

 
4,599

Total securities held to maturity
 
$
14,780

 
$
211

 
$
(224
)
 
$
14,767

 
$
14,875

 
$
211

 
$
(284
)
 
$
14,802

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity securities
 
$
2,398

 
$
35

 
$
(185
)
 
$
2,248

 
$
2,394

 
$

 
$
(250
)
 
$
2,144



20




This table provides the remaining contractual maturities and yields of securities within the investment portfolios.  The carrying value of securities at March 31, 2019 is distributed by contractual maturity.  Mortgage-backed securities and other securities, which may have principal prepayment provisions, are distributed based on contractual maturity.  Expected maturities will differ materially from contractual maturities as a result of early prepayments and calls.
 
 
Within one year
 
After one through five years
 
After five through ten years
 
After ten years
 
Total carrying value
(In thousands, except percentages)
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
Available for sale at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored entities  
 
$

 
%
 
$
3,693

 
1.61
%
 
$
1,985

 
2.17
%
 
$

 
%
 
$
5,678

 
1.81
%
State and political subdivisions    
 
2,340

 
2.91
 

 

 
874

 
2.50

 
1,288

 
2.74

 
4,502

 
2.78

Residential mortgage-backed securities    
 
68

 
2.94
 
8,750

 
2.69

 
14,851

 
2.95

 
2,182

 
2.79

 
25,851

 
2.85

Corporate and other securities
 

 
 
6,234

 
4.34

 
3,669

 
4.00

 

 

 
9,903

 
4.21

Total debt securities available for sale
 
$
2,408

 
2.91
%
 
$
18,677

 
3.03
%
 
$
21,379

 
3.04
%
 
$
3,470

 
2.77
%
 
$
45,934

 
3.01
%
Held to maturity at cost:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored entities  
 
$

 
%
 
$
1,002

 
2.03
%
 
$
1,525

 
1.94
%
 
$

 
%
 
$
2,527

 
1.98
%
State and political subdivisions    
 

 

 
494

 
5.06

 

 

 
457

 
5.84

 
951

 
5.43

Residential mortgage-backed securities    
 

 

 
460

 
3.32

 
924

 
3.15

 
1,865

 
3.82

 
3,249

 
3.56

Commercial mortgage-backed securities    
 

 

 

 

 
3,540

 
2.76

 

 

 
3,540

 
2.76

Corporate and other securities
 

 

 
4,513

 
5.73

 

 

 

 

 
4,513

 
5.73

Total securities held to maturity
 
$

 
%
 
$
6,469

 
4.93
%
 
$
5,989

 
2.61
%
 
$
2,322

 
4.22
%
 
$
14,780

 
3.88
%
Equity Securities at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity securities
 
$

 
%
 
$

 
%
 
$

 
%
 
$
2,248

 
2.17
%
 
$
2,248

 
2.17
%

The fair value of securities with unrealized losses by length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2019 and December 31, 2018 are as follows:
 
 
March 31, 2019
 
 
 
 
Less than 12 months
 
12 months and greater
 
Total
(In thousands, except number in a loss position)
 
Total number in a loss position
 
Estimated fair value
 
Unrealized loss
 
Estimated fair value
 
Unrealized loss
 
Estimated fair value
 
Unrealized loss
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored entities
 
5

 
$