PART I

Item 1. Business.

~~1st~~1^ST Constitution Bancorp

~~1st~~1^ST Constitution Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. ~~1st~~1^ST Constitution Bancorp was organized under the laws of the State of New Jersey in February 1999 for the purpose of acquiring all of the issued and outstanding stock of ~~1st~~1^ST Constitution Bank (the ~~“Bank”~~"Bank") and thereby enabling the Bank to operate within a bank holding company structure. The Company became an active bank holding company on July 1, 1999. As of December 31, ~~2016,~~2018, the Company has ~~two~~three employees, ~~both~~all of whom are full-time. The Bank is a wholly-owned subsidiary of the Company. Other than its investment in the Bank, the Company currently conducts no other significant business activities.

The main office of the Company and the Bank is located at 2650 Route 130 Cranbury, New Jersey 08512, and the telephone number is (609) 655-4500.

~~1st~~1^ST Constitution Bank

The Bank is a commercial bank formed under the laws of the State of New Jersey and engages in the business of commercial and retail banking. As a community bank, the Bank offers a wide range of services (including demand, savings and time deposits and commercial and consumer/installment loans) to individuals, small businesses and not-for-profit organizations principally in the Fort Lee area of Bergen County and in Middlesex, Mercer, Somerset and Monmouth Counties of New Jersey. The Bank conducts its operations through its main office located in Cranbury, New Jersey, and operates ~~eighteen~~19 additional branch offices in Asbury Park, downtown Cranbury, Fair Haven, Fort Lee, Freehold, Hamilton Square, Hightstown, Hillsborough, Hopewell, Jamesburg, Lawrenceville, Little Silver, Neptune City, Perth Amboy, Plainsboro, ~~Skillman, West Windsor, Fort Lee,~~ Princeton, Rumson, ~~Fair Haven,~~ Shrewsbury, ~~Little Silver~~ and ~~Asbury Park,~~Skillman, New Jersey. The Bank also operates ~~four~~a residential mortgage loan production ~~offices~~office in ~~Forked River, Flemington,~~ Jersey City, ~~and Somerset,~~ New Jersey. The Bank’s deposits are insured up to applicable legal limits by the ~~Federal Deposit Insurance Corporation (“FDIC”).~~FDIC. As of December 31, ~~2016,~~2018, the Bank had ~~204~~194 employees, of which ~~194~~189 were full-time employees.

Management efforts focus on positioning the Bank to meet the financial needs of the communities in Middlesex, Mercer, Somerset and Monmouth Counties and the Fort Lee area of Bergen County and to provide financial services to individuals, families, institutions and small businesses. To achieve this goal, the Bank is focusing its efforts on:

•expansion of the Bank;

•personal service; and

•technological advances and e-commerce.

Expansion of the Bank

On April 11, 2018, the Company closed on the merger of New Jersey Community Bank ("NJCB"), a New Jersey-chartered bank, with and into the Bank, with the Bank being the surviving entity (the "NJCB Merger"). At the time of the merger, NJCB had approximately $95 million in assets, approximately $75 million in loans, and approximately $87 million in deposits. NJCB operated two branch offices in Monmouth County, New Jersey which became branches of the Bank as a result of the Merger.

Pursuant to the terms of the merger agreement, dated as of November 6, 2017, governing the Merger (the "Merger Agreement"), each outstanding share of NJCB common stock was exchanged for the right to receive $1.60 in cash and 0.1309 of a share of the Company's common stock. The Company issued 249,785 shares of its common stock, having an aggregate fair value of approximately $5.5 million, and paid cash of approximately $3.1 million, of which approximately $401,000 was placed into escrow under the terms of the Merger Agreement. Cash used as consideration was provided by the Bank from existing cash assets.

The Bank continually evaluates opportunities to expand its products and services to existing and new customers and expand into new markets through the acquisition of other banks and bank offices within and contiguous to its existing markets and/or by opening new branch offices.

Personal Service

The Bank provides a wide range of commercial and consumer banking services to individuals, families, institutions and small businesses in central and coastal New Jersey and the Fort Lee area of Bergen County. The Bank’s focus is to understand the needs

of the community and ~~the~~its customers and tailor products, services and advice to meet those needs. The Bank seeks to provide a high level of personalized banking services, emphasizing quick and flexible responses to customer demands.

Technological Advances and e-Commerce

The Bank recognizes that customers want to receive service via their most convenient delivery channel, be it the traditional branch office, by telephone, ATM, or the ~~internet.~~Internet. For this reason, the Bank continues to enhance its e-commerce capabilities. At www.1stconstitution.com, customers have easy access to online banking, including account access, and to the Bank’s bill payment system. Consumers and businesses may also access their accounts and make deposits through their mobile devices. Consumers can take advantage of Momentum Mortgage, our new digital mortgage platform, to apply online for loans and interact with senior management through the e-mail system. Business customers have access to cash management information and transaction capability through the Bank’s online Cash Manager product which permits business customers to make deposits, originate ACH payments, initiate wire transfers, retrieve account information and place “stop payment” orders. This overall expansion in electronic banking ~~offers~~provides the Bank’s customers with the means to access the Bank’s services easily and at their own convenience.

Competition

The Bank experiences substantial competition in attracting and retaining deposits and in making loans. In attracting deposits and borrowers, the Bank competes with commercial banks, savings banks, and savings and loan associations, as well as regional and national insurance companies and non-bank financial institutions, mutual funds, regulated small loan companies and local credit unions, regional and national sponsors of money market funds and corporate and government borrowers. Within the direct market area of the Bank, there are a significant number of offices of competing financial institutions. In New Jersey generally, and in the Bank’s local market specifically, the Bank’s most direct competitors are large commercial banks, including Bank of

America, PNC Bank, JP Morgan Chase, Wells Fargo and Santander Bank, as well as savings banks and savings and loan associations, including Provident Bank and Investors Bank.

The Bank is at a competitive disadvantage compared with these larger national and regional commercial and savings banks. By virtue of their larger capital, asset size and reserves, many of such institutions have substantially greater lending limits (ceilings on the amount of credit a bank may provide to a single customer that are linked to the institution’s capital) and other resources than the Bank. Many such institutions are empowered to offer a wider range of services, including trust services, than the Bank and, in some cases, have lower funding costs (the price a bank must pay for deposits and other borrowed monies used to make loans to customers) than the Bank. In addition to having established deposit bases and loan portfolios, these institutions, particularly large national and regional commercial and savings banks, have the financial ability to finance extensive advertising campaigns and to allocate considerable resources to locations and products perceived as profitable.

In addition, non-bank financial institutions offer services that compete for customers’ investable funds and deposits with the Bank. For example, brokerage firms and insurance companies offer such instruments as short-term money market funds, corporate and government securities funds, mutual funds and annuities. It is expected that competition in these areas will continue to increase. Some of these competitors are not subject to the same degree of regulation and supervision as the Company and the Bank and therefore may be able to offer customers more attractive products than the Bank.

However, management of the Bank believes that loans to small and mid-sized businesses and professionals, which represent the main commercial loan business of the Bank, are not always of primary importance to the larger banking institutions. The Bank competes for this segment of the market by providing responsive personalized services, making timely local decisions, and acquiring in depth knowledge of its customers and their businesses.

Lending Activities

The Bank’s lending activities include both commercial and consumer loans. Loan originations are derived from a number of sources, including real estate broker referrals, mortgage loan companies, direct solicitation by the Bank’s loan officers, existing depositors and borrowers, builders, attorneys, walk-in customers and, in some instances, other lenders. The Bank has established disciplined and systematic procedures for approving and monitoring loans that vary depending on the size and nature of the loans.

Commercial ~~Lending~~Business

The Bank offers a variety of commercial loan services, including term loans, lines of credit, and loans secured by equipment and receivables. A broad range of short-to-medium term commercial loans, both secured and unsecured, are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition and development of real estate and improvements), and the purchase of equipment and machinery. Commercial loans are granted based on the

borrower’s ability to generate cash flow to support its debt obligations and other cash related expenses. A borrower’s ability to repay commercial loans is substantially dependent on the success of the business itself and on the quality of its management. As a general practice, the Bank takes, as collateral, a security interest in any available real estate, equipment, inventory, receivables or other personal property of its borrowers, although the Bank occasionally makes commercial loans on an unsecured basis. Generally, the Bank requires personal guarantees of its commercial loans to offset the risks associated with such loans. The Bank also offers loans of which a portion, generally 75% to 85%, are guaranteed by the Small Business Administration ("SBA"), which is a United States government agency. The Bank generally sells the guaranteed portion of these loans into the secondary market.

Commercial Real Estate

Commercial real estate loans are made to businesses to expand their facilities and operations and to real estate operators to finance the acquisition of income producing properties. The Company's loan policy requires that borrowers have sufficient cash flow to meet the debt service requirements and the value of the property meets the loan-to-value criteria set in the loan policy. The Company monitors loan concentrations by borrower, by type of property and by location and other criteria. The Company's commercial real estate portfolio is largely secured by real estate collateral located in the State of New Jersey.

Commercial Construction Financing

Construction financing is provided to businesses to expand their facilities and operations and to real estate developers for the acquisition, development and construction of residential and commercial properties. First mortgage construction loans are made to developers and builders primarily for single family homes or smaller multi-family buildings (less than ten units) that are presold, or are to be sold or leased on a speculative basis.

The Bank lends to builders and developers with established relationships, successful operating histories and sound financial resources.

Residential ~~Consumer~~ Lending

A portion of the Bank’s lending activities consists of the origination of fixed and adjustable rate residential first mortgage loans secured by owner-occupied property located in the Bank’s primary market areas. Home mortgage lending is unique in that

a broad geographic territory may be serviced by originators working from strategically placed offices either within the Bank’s traditional banking facilities or from affordable office locations in commercial buildings. The Bank also offers construction loans, reverse mortgages, second mortgage home improvement loans and home equity lines of credit.

The Bank finances the construction of individual, owner-occupied single-family houses on the basis of written underwriting and construction loan management guidelines. These loans are made to qualified individual borrowers and are generally supported by a take-out commitment from a permanent lender. The construction phase of these loans has certain risks, including the viability of the contractor, the contractor’s ability to complete the project within the budget and changes in interest rates.

The Bank will generally sell its originated residential mortgage loans in the secondary market. The decision to sell is made prior to origination. The sale into the secondary market allows the Bank to mitigate its interest rate risks related to such lending operations. This brokerage arrangement allows the Bank to accommodate its clients’ demands while eliminating the interest rate risk for the ~~15-~~15 to ~~30 year~~30-year period generally associated with such loans.

For commercial and residential mortgage loans, the Bank, in most cases, requires borrowers to obtain and maintain title, fire, and extended casualty insurance, and, where required by applicable regulations, flood insurance. The Bank maintains its own errors and omissions insurance policy to protect against loss in the event of failure of a mortgagor to pay premiums on fire and other hazard insurance policies. Mortgage loans originated by the Bank customarily include a ~~“due~~"due on ~~sale”~~sale" clause, which gives the Bank the right to declare a loan immediately due and payable in certain circumstances, including, without limitation, upon the sale or other disposition by the borrower of the real property subject to a mortgage. In general, the Bank enforces "due on sale" clauses.

Non-Residential Consumer Lending

Non-residential consumer loans made by the Bank include loans for automobiles, recreation vehicles, and boats, as well as personal loans (secured and unsecured) and deposit account secured loans. Non-residential consumer loans are attractive to the Bank because they typically have a shorter term and carry higher interest rates than are charged on other types of loans. ~~Non-residential~~However, non-residential consumer loans ~~however, do~~ pose an additional risk of collectability when compared to traditional ~~types of~~ loans, such as residential mortgage loans.

Consumer loans are granted based on employment and financial information solicited from prospective borrowers, as well as credit records collected from various reporting agencies. The stability of the borrower, willingness to pay and credit history are the primary factors to be considered. The availability of collateral is also a factor considered in making such a loan. The Bank seeks collateral that can be assigned and has good marketability with a clearly adequate margin of value. The geographic area of the borrower is another consideration, with preference given to borrowers in the Bank’s primary market areas.

Supervision and Regulation

Banking is a complex, ~~highly regulated~~highly-regulated industry. The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct of monetary policy. In furtherance of those goals, Congress has created several largely autonomous regulatory agencies and enacted a myriad of legislation that governs banks, bank holding companies and the banking industry. This regulatory framework is intended primarily for the protection of depositors and not for the protection of the Company’s shareholders or creditors. Descriptions of, and references to, the statutes and regulations below are brief summaries thereof, and do not purport to be complete. The descriptions are qualified in their entirety by reference to the specific statutes and regulations discussed.

Regulation of the Bank Holding Company

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the ~~“BHCA”~~"BHCA"). As a bank holding company, the Company is subject to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the ~~“Federal~~"Federal Reserve ~~Board”~~Board") and is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may also make examinations of the Company and its subsidiaries. The Company is subject to capital standards similar to, but separate from, those applicable to the Bank.

Under the BHCA, bank holding companies that are not financial holding companies generally may not acquire the ownership or control of more than 5% of the voting shares, or substantially all of the assets, of any company, including a bank

or another bank holding company, without the Federal Reserve Board’s prior approval. The Company has not applied to become a financial holding company but did obtain such approval to acquire the shares of the Bank. A bank holding company that does not qualify as a financial holding company is generally limited in the types of activities in which it may engage to those that the Federal Reserve Board had recognized as permissible for bank holding companies prior to the date of enactment of the Gramm-Leach- Bliley Financial Services Modernization Act of 1999. For example, a holding company and its banking subsidiary are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or lease or sale of any property or the furnishing of services. At present, the Company does not engage in any significant activity other than owning the Bank.

In addition to federal bank holding company regulation, the Company is registered as a bank holding company with the New Jersey Department of Banking and Insurance (the ~~“NJ~~"NJ Banking ~~Department”~~Department"). The Company is required to file with the NJ Banking Department copies of the reports it files with the federal banking and securities regulators.

Regulation of the Bank Subsidiary

As a New Jersey-chartered commercial bank, the Bank is subject to supervision and examination by the NJ Banking Department. The Bank is also subject to regulation and examination by the FDIC, which is its principal federal bank regulator.

The Bank must comply with various requirements and restrictions under federal and state law, including the maintenance of reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, limitations on the types of investments that may be made and the services that may be offered, and restrictions on dividends as described in the below section titled ~~“Restrictions~~"Restrictions on Dividends and Redemption of Stock for the Company and the Bank.”" The Bank must also comply with the capital regulations promulgated by the FDIC as described in the section below titled ~~“Capital~~"Capital Adequacy of the Company and the Bank.”" Consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board which influence the money supply and credit availability in the national economy.

For additional information on laws and regulations affecting the Bank, please refer to the below section titled ~~“Banking~~"Banking Legislation and Regulations.”"

Capital Adequacy of the Company and the Bank

The Company is required to comply with minimum capital adequacy standards established by the Federal Reserve Board. There are two basic measures of capital adequacy for bank holding companies and the depository institutions that they own: a risk based measure and a leverage measure. All applicable capital standards must be satisfied for a bank holding company to be considered in compliance.

The Federal Deposit Insurance Corporation Improvement Act of 1991 ~~(“FDICIA”~~("FDICIA") ~~required~~requires each federal banking agency to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities. In addition, pursuant to FDICIA, each federal banking agency has promulgated regulations specifying the levels at which a bank would be considered ~~“well~~"well capitalized,~~” “adequately~~" "adequately capitalized,~~” “undercapitalized,” “significantly~~" "undercapitalized," "significantly undercapitalized,”" or ~~“critically undercapitalized,”~~"critically undercapitalized" and ~~to take~~requiring that certain mandatory and discretionary supervisory actions be taken based on the capital level of the institution.

In December 2010, the Group of Governors and Heads of Supervisors of the Basel Committee on Banking Supervision, the oversight body of the Basel Committee, published its “calibrated” capital standards for major banking institutions, referred to as Basel III. Subsequently, in July 2013, the Federal Reserve Board and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implemented and addressed the revised standards of Basel III and ~~address~~addressed relevant provisions of the Dodd-Frank ~~Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).~~Act. The Federal Reserve Board’s and the FDIC’s rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more (which was subsequently increased to $1 billion or more in May 2015), and top-tier savings and loan holding companies ~~(“banking organizations”~~(collectively referred to herein as, "banking organizations"). Among other things, the rules ~~establish~~established a new Common Equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and ~~increase~~increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets). Banking organizations are also required to have a total capital ratio of at least 8% and a Tier 1 leverage ratio of at least 4%. The rules also limit a banking organization’s ability to pay dividends, engage in share repurchases or pay discretionary bonuses if the banking organization does not hold a ~~“capital~~"capital conservation ~~buffer”~~buffer" consisting of 2.5% of Common Equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The rules became effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods for certain components). The Company and the Bank began phasing in the capital

conservation buffer requirement ~~began phasing in~~ on January 1, 2016 at 0.625% of Common Equity Tier 1 capital to risk-weighted assets and ~~will increase~~increased by that amount each year until fully implemented in January 2019 at 2.5% of Common Equity Tier 1 capital to risk-weighted assets. ~~As of~~The phase-in period ended on January 1, ~~2017, the Company~~ 2019,

and the ~~Bank were required to maintain a capital conservation buffer~~Capital Conservation Buffer is now at its fully phased-in level of ~~1.25%~~2.5%.

With respect to the Bank, the FDIC’s regulations implementing these provisions of FDICIA provide that an institution will be classified as ~~“well capitalized”~~"well capitalized" if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 8.0 percent, (iii) has a Common Equity Tier 1, or CET1, ratio of at least 6.5 percent, (iv) has a Tier 1 leverage ratio of at least 5.0 percent, and (v) meets certain other requirements. An institution will be classified as ~~“adequately capitalized”~~"adequately capitalized" if it (i) has a total risk-based capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 6.0 percent, (iii) has a CET1 ratio of at least 4.5 percent, (iv) has a Tier 1 leverage ratio of at least 4.0 percent, and (v) does not meet the definition of ~~“well~~"well capitalized.”" An institution will be classified as ~~“undercapitalized”~~"undercapitalized" if it (i) has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 6.0 percent, (iii) has a CET1 ratio of less than 4.5 percent or (iv) has a Tier 1 leverage ratio of less than 4.0 percent. An institution will be classified as ~~“significantly undercapitalized”~~"significantly undercapitalized" if it (i) has a total risk-based capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0 percent, (iii) has a CET1 ratio of less than 3.0 percent or (iv) has a Tier 1 leverage ratio of less than 3.0 percent. An institution will be classified as ~~“critically undercapitalized”~~"critically undercapitalized" if it has a Tier 1 leverage ratio that is equal to or less than 2.0 percent. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination rating. Similar categories apply to bank holding companies. ~~When~~Because the capital conservation buffer is now fully phased in, the capital ratios applicable to depository institutions will exceed the ratios to be considered well-capitalized under the prompt corrective action regulations.

Under these capital rules, the Bank’s CET1 risk-based capital, Tier 1 risk-based capital, total risk-based capital and leverage capital ratios were ~~12.13%~~12.40%, ~~12.13% ,12.96%~~12.40% ,13.18%, and ~~10.68%~~11.74%, respectively, at December 31, ~~2016.~~2018. The Bank is classified as a non-advanced approaches bank for regulatory purposes and has permanently opted out of including the amount of accumulated other comprehensive income in the computation of regulatory capital.

Restrictions on Dividends and Redemption of Stock for the Company and the Bank

The primary source of cash to pay dividends, if any, to the Company’s shareholders and to meet the Company’s obligations is dividends paid to the Company by the Bank. Dividend payments by the Bank to the Company are subject to the New Jersey Banking Act of 1948 (the ~~“Banking Act”~~"Banking Act") and the Federal Deposit Insurance Act (the ~~“FDIA”~~"FDIA"). Under the Banking Act, the Bank may not pay dividends unless, following the dividend payment, the capital stock of the Bank will be unimpaired and (i) the Bank will have a surplus of not less than 50% of its capital stock or, if not, (ii) the payment of such dividend will not reduce the surplus of the Bank. Under the FDIA, the Bank may not pay any dividends, if after paying the dividend, it would be undercapitalized under applicable capital requirements. In addition to these explicit limitations, the federal regulatory agencies are authorized to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice. The Bank is also limited in paying dividends if it does not maintain the necessary ~~“capital~~"capital conservation ~~buffer”~~buffer' as discussed below.

It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the immediately preceding year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash ~~dividend~~dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiary. A bank holding company may not pay dividends when it is insolvent.

The Federal Reserve Board has issued a supervisory letter to bank holding companies that contains guidance on when the board of directors of a bank holding company should eliminate or defer or severely limit dividends, including, for example, when net income available for shareholders for the past four quarters, net of dividends paid during that period, is not sufficient to fully fund the dividends. The letter also contains guidance on the redemption of stock by bank holding companies which urges bank holding companies to advise the Federal Reserve Board of any such redemption or repurchase of common stock for cash or other value ~~which~~that results in the net reduction of a bank holding company’s capital at the beginning of the quarter below the capital outstanding at the end of the quarter. The Company’s payment of cash dividends to date were within the guidelines set forth in the Federal Reserve Board’s supervisory letter.

Subsequent to the issuance of the supervisory letter, the Federal Reserve Board adopted regulations requiring bank holding companies to give prior written notice to the Federal Reserve Board before purchasing or redeeming its stock if the

gross consideration for the purchase or redemption, when aggregated with the net consideration (i.e., gross consideration paid for purchases and redemptions minus gross consideration received for all stock sold) paid for all purchases or redemptions of stock during the preceding 12 months, is equal to ~~10 percent~~10% or more of the bank holding company’s consolidated net worth. However, if a bank holding company (i) will be well-capitalized before and immediately after the purchase or redemption, (ii) is well-managed and (iii) is not the subject of any unresolved supervisory issues, then the bank holding company will not be required to give any prior written notice to the Federal Reserve Board. At this time, the Company fits within the above exception and is not required to give prior written notice to the Federal Reserve Board before purchasing or redeeming its stock.

The Federal Reserve Board’s capital adequacy rules also limit a banking organization’s ability to pay dividends or to engage in share repurchases if the banking organization does not hold a ~~“capital~~"capital conservation ~~buffer”~~buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement began phasing in on January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and will increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets. For further discussion of regulatory capital rules, please refer to the discussion under the above section titled ~~“Capital~~"Capital Adequacy of the Company and the Bank.~~” As of January 1, 2017, the Company and the Bank were required to maintain a capital conservation buffer of 1.25%.~~"

Prior to September 2016, the Company had never paid a cash dividend on its common stock. On September 15, 2016, the Board of Directors of the Company declared a cash dividend of $0.05 per common share, which was paid on October 21, 2016 to all shareholders of record as of the close of business on September 28, 2016.

On December 15, 2016, the Board of Directors of the Company declared a cash dividend of $0.05 per common share. The cash dividend was paid on January 25, 2017 to all shareholders of record as of the close of business on January 3, 2017.

The timing and the amount of the payment of future dividends, if any, on the Company's common shares will be at the discretion of the Company's Board of Directors and will be determined after consideration of various factors, including the level of earnings, cash requirements, regulatory capital and financial condition.

Priority on Liquidation

The Company is a legal entity separate and distinct from the Bank. The rights of the Company as the sole shareholder of the Bank, and therefore the rights of the Company’s creditors and shareholders, to participate in the distributions and earnings of the Bank when the Bank is not in receivership under Federal banking laws, are subject to various state and federal law restrictions as discussed above under the heading ~~“Restrictions~~"Restrictions on Dividends and Redemption of Stock for the Company and the Bank.”" In the event of a liquidation or other resolution of an insured depository institution such as the Bank, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of an obligation of the institution to its shareholders (the Company) or any shareholder or creditor of the Company. The claims on the Bank by creditors include obligations in respect of federal funds purchased and certain other borrowings, as well as deposit liabilities.

Financial Institution Legislation

Dodd-Frank Act

The Dodd-Frank Act has had a broad impact on the financial services industry, including significant regulatory and compliance requirements, including, among other things, (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act established a framework for systemic risk oversight within the financial system to be distributed among federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the FDIC.

Effective in July 2011, the Dodd-Frank Act eliminated federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. As of the date of this Form 10-K, the Bank does not pay interest on demand deposits. This significant change to existing law has not had an adverse impact on our net interest margin for the years ended December 31, ~~2016~~2018, 2017 and ~~2015.~~2016.

The Dodd-Frank Act also changed the base for FDIC deposit insurance assessments. Assessments are based on average

consolidated total assets less tangible equity capital of a financial institution, rather than on deposits. The Dodd-Frank Act also increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per account owner. However, if an Interest on Lawyer Trust Account ("IOLTA") qualifies for pass-through coverage as a fiduciary account, then each separate client for whom a law firm holds funds in such IOLTA may be insured up to $250,000 for his or her funds. The legislation also increased the required minimum reserve ratio for the Deposit Insurance Fund, from 1.15% to 1.35% of insured deposits, and directed the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets, including the Bank.

The Dodd-Frank Act requires publicly traded companies to give their ~~stockholders~~shareholders a non-binding vote on executive compensation (“("say on ~~pay”~~pay") and so-called ~~“golden parachute”~~"golden parachute" payments. It also provides that the listing standards of the national securities exchanges shall require listed companies to implement and disclose ~~“clawback”~~"clawback" policies mandating the recovery of incentive compensation paid to executive officers in connection with accounting restatements. Such listing standards have yet to be implemented. For further discussion of incentive compensation rules, please refer to the discussion under the below section titled ~~“Incentive~~"Incentive Compensation.”"

The Dodd-Frank Act created the Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit ~~“unfair,~~"unfair, deceptive or ~~abusive”~~abusive" acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets, which authority does not extend to the Bank at this time since we do not meet the asset threshold.

The Dodd-Frank Act also weakens the federal preemption rules that have been applicable ~~for~~to national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws. The Dodd-Frank Act requires minimum leverage (Tier 1) and risk based capital requirements for bank and savings and loan holding companies, which exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities; however, bank holding companies with assets of less than $15 billion as of December 31, 2009 are permitted to include trust preferred securities that were issued before May 19, 2010 as Tier 1 capital.

The Dodd-Frank Act and the rules and regulations promulgated under the Dodd-Frank Act have impacted the Bank, as well as all community banks, by increasing our operating and compliance costs. To the extent the Dodd-Frank Act remains in place, it is likely to further increase our operating and compliance costs as certain yet to be written implementing rules and regulations are enacted.

Volcker Rule

On December 10, 2013, the Federal Reserve, the Office of the Comptroller of the Currency, the FDIC, the Commodity Futures Trading Commission and the SEC issued final rules to implement the Volcker Rule contained in Section 619 of the ~~Dodd- Frank~~Dodd-Frank Act, which became effective on July 21, 2015, for investments in covered funds made after December 31, 2013. The

Volcker Rule prohibits an insured depository institution and its affiliates from: (i) engaging in ~~“proprietary trading”~~"proprietary trading" and (ii) investing in or sponsoring certain types of funds (defined as ~~“Covered Funds”~~"Covered Funds") subject to certain limited exceptions. The rule also effectively prohibits short-term trading strategies by any U.S. banking entity if those strategies involve instruments other than those specifically permitted for trading and prohibits the use of some hedging ~~strategies. The~~strategies.The Company identified no investments that met the definition of Covered Funds and that were required to be divested by July 21, 2015 under the foregoing rules.

Incentive Compensation

The Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities with at least $1 billion in total assets, such as the Company and the Bank, that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these agencies must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regulations in April 2011 and subsequently proposed revised regulations in May 2016, but the revised regulations have not been finalized. If the revised regulations are adopted in the form proposed, they will impose limitations on the manner in which the Company may structure compensation for its executives and employees.

In 2010, the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based ~~upon~~on the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. These three principles are incorporated into the proposed joint compensation regulations under the Dodd-Frank Act.

The Federal Reserve will review, as part of its regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not ~~“large,~~"large, complex banking organizations.”" These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

Gramm-Leach-Bliley Financial Services Modernization Act of 1999

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the ~~“Modernization Act”~~"Modernization Act") became effective in early 2000. The Modernization Act:

allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities, ~~than is permissible for a bank holding company,~~ including insurance underwriting and making merchant banking investments in commercial and financial companies; if a bank holding company elects to become a financial holding company, it files a certification, effective in 30 days, and thereafter may engage in certain financial activities without further approvals;

allows banks to establish subsidiaries to engage in certain activities ~~which~~that a financial holding company could engage in, ifprovided that the bank meets certain management, capital and Community Reinvestment Act standards; and

allows insurers and other financial services companies to acquire banks and removes various restrictions ~~that currently apply~~applicable to bank holding company ownership of securities firms and mutual fund advisory companies; and establishes the overall regulatory structure applicable to financial holding companies that also engage in insurance and securities operations.

~~The Modernization Act modified other laws, including laws related to financial privacy and community reinvestment.~~

The Modernization Act also amended the BHCA and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing an application under these acts. The Modernization Act modified other laws, including laws related to financial privacy and community reinvestment.

Additional proposals to change the laws and regulations governing the banking and financial services industry are frequently

introduced in Congress, in state legislatures and before the various bank regulatory agencies. The likelihood and timing of any such changes and the impact such changes might have on the Company cannot be determined at this time.

Public Company Legislation

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), which became law on July 30, 2002, added new legal requirements affecting corporate governance, accounting and corporate reporting for companies with publicly traded securities.

The Sarbanes-Oxley Act provides for, among other things:

a prohibition on personal loans made or arranged by the issuer to its directors and executive officers (except for loans made by a bank subject to Regulation O of the Federal Reserve Board);

independence requirements for audit committee members;

disclosure of whether at least one member of the audit committee is a ~~“financial expert”~~"financial expert" (as such term is defined by the ~~Securities and Exchange Commission (“SEC”)~~SEC and if not, why not;

independence requirements for outside auditors;

a prohibition byon a company’s registered public accounting firm from performing statutorily mandated audit services for the company if the company’s chief executive officer, chief financial officer, comptroller, chief accounting officer or any person serving in equivalent positions had been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date;

certification of financial statements and annual and quarterly reports by the principal executive officer and the principal financial officer;

the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement due to corporate misconduct;

disclosure of off-balance sheet transactions;

two-business day filing requirements for insiders filing Forms 4;

disclosure of a code of ethics for financial officers and filing a Form 8-K for a change or waiver of such code;

“"real ~~time”~~time" filing of periodic reports;

posting of certain SEC filings and other information on the company’s website;

the reporting of securities violations ~~“up~~"up the ~~ladder”~~ladder" by both in-house and outside attorneys;

restrictions on the use of non-GAAP financial measures;

the formation of a public accounting oversight board; and

various increased criminal penalties for violations of securities laws.

Additionally, Section 404 of the Sarbanes-Oxley Act requires that a public company subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the ~~“Exchange Act”~~"Exchange Act"), include in its annual report (i) a management’s report on internal control over financial reporting assessing the company’s internal controls, and (ii) if the company is an ~~“accelerated filer”~~"accelerated filer" or a ~~“large~~"large accelerated ~~filer”~~filer", an auditor’s attestation report, completed by the registered public accounting firm that prepares or issues an accountant’s report which is included in the company’s annual report, attesting to the effectiveness of management’s internal control assessment.

The Company met the ~~“accelerated filer”~~"accelerated filer" requirements as of the end of its fiscal year ended December 31, 2016 pursuant to Rule 12b-2 of the ~~Securities~~ Exchange ~~Act of 1934, as amended.~~Act. However, pursuant to Rule 12b-2 and SEC Release No. 33-8876, the Company (as a smaller reporting company transitioning to the larger reporting company system) iswas not required to satisfy the larger reporting company disclosure requirements until its first Quarterly Report on Form 10-Q for the fiscal year ~~ending~~ended December 31, 2017. ~~However, the~~The Company iswas further required to include an attestation report of the Company’s independent registered public accounting firm regarding the Company’s internal control over financial reporting in its Annual Report on Form 10-K for the year ended December 31, 2016. In 2018, the SEC increased the public float threshold to be considered a “smaller reporting company” to $250 million from $75 million with respect to the accelerated filer reporting and disclosure requirements. However, the SEC did not change the public float threshold to be considered an “accelerated filer,” which remains $75 million or more, but less than $700 million with respect to the attestation report of the Company's independent registered public accounting firm. The Company meets the criteria to be both a “smaller reporting company” and an “accelerated filer,” and is therefore required to continue to include the

attestation report of the Company’s independent registered public accounting firm regarding the Company’s internal control over financial reporting in its Annual Report on Form 10-K. Although the Company satisfies the definition of a “smaller reporting company,” the Company has determined to continue to provide disclosures as an “accelerated filer” that are not required for a "smaller reporting company" for the foreseeable future.

Each of the national stock exchanges, including the Nasdaq Global Market where the Company’s common stock is listed, have in place corporate governance rules, including rules requiring director independence, and the adoption of charters for the nominating, corporate governance, and audit committees. These rules are intended to, among other things, make the board of directors independent of management and allow shareholders to more easily and efficiently monitor the performance of companies and directors. These burdens increase the Company’s legal and accounting fees and the amount of time that the Board of Directors and management must devote to corporate governance issues.

Section 302(a) of the Sarbanes-Oxley Act requires the Company’s principal executive officer and principal financial officer to certify that the Company’s Quarterly and Annual Reports do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which they were made, not misleading. ~~The rules have several requirements, including having~~Among other things, these officers must certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting; they have made certain disclosures to the Company’s auditors and the audit committee of the Board of Directors about the Company’s internal control over financial reporting; and they have included information in the Company’s Quarterly and Annual Reports about their evaluation of disclosure controls and procedures and whether there have been significant changes in the Company’s internal controls over financial reporting.

Banking Legislation and Regulations

Anti-Money Laundering

As part of the USA PATRIOT Act, signed into law on October 26, 2001, Congress adopted the International Money

Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the ~~“Act”~~"FATA"). The ~~Act~~FATA authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions such as banks, bank holding companies, broker-dealers and insurance companies. Among its other provisions, the ~~Act~~FATA requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-United States persons or their representatives; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign shell bank that does not have a physical presence in any country. In addition, the ~~Act~~FATA expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.

The Department of Treasury has issued regulations implementing the due diligence requirements. These regulations require minimum standards to verify customer identity and maintain accurate records, encourage cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, prohibit the anonymous use of ~~“concentration~~"concentration accounts,”" and require all covered financial institutions to have in place an ~~anti- money~~anti-money laundering compliance program.

Community Reinvestment Act

Under the Community Reinvestment Act ~~(“CRA”~~(the "CRA"), as implemented by FDIC regulations, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with CRA. The CRA requires the FDIC to assess an institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the applicable institution. The CRA requires public disclosure of an institution’s CRA rating and requires that the FDIC provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. An institution’s CRA rating is considered in determining whether to grant charters, branches and other deposit facilities, relocations, mergers, consolidations and acquisitions. Performance less than satisfactory may be the basis for denying an application. At its last CRA examination, the Bank was rated ~~“satisfactory”~~"satisfactory" under the CRA.

FIRREA

Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ~~(“FIRREA”~~("FIRREA"), a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. These provisions have commonly been referred to as FIRREA’s ~~“cross guarantee”~~"cross guarantee" provisions. Further, under FIRREA, the failure to meet capital guidelines could subject a bank to a variety of enforcement remedies available to federal regulatory authorities.

FIRREA also imposes certain independent appraisal requirements upon a bank’s real estate lending activities and further imposes certain loan-to-value restrictions on a bank’s real estate lending activities. Banking regulators have promulgated regulations in these areas.

Insurance of Deposits

The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. This limit is $250,000 per account owner. FDICIA is applicable to depository institutions and deposit insurance. The FDIC established a risk-based assessment system for all insured depository institutions and established an insurance premium assessment system based upon: (i) the probability that the insurance fund will incur a loss with respect to the institution, (ii) the likely amount of the loss, and (iii) the revenue needs of the insurance fund. The resulting matrix sets the assessment premium for a particular institution in accordance with its capital level and overall rating by the primary regulator.

As a result of the Dodd-Frank Act, the FDIC modified its assessment rules so that an institution’s deposit insurance assessment base changed from total deposits to total assets less tangible equity. These assessment base rates range from 2.5 to 9 basis points for Risk Category I banks and up to 45 basis points for Risk Category IV banks. Risk Category II and III banks have assessment base rates ranging from 9 to 33 basis points, respectively. If the risk category of the Bank changes adversely, our FDIC insurance premiums could increase.

Lending Limits

In January 2013, the NJ Banking Department issued an order requiring a New Jersey chartered bank’s calculation of lending limits to any person or entity to include credit exposure to such person or entity arising from a derivative transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction or securities borrowing transaction. Previously, such credit exposure was not included in a New Jersey chartered bank’s calculation of lending limits. New Jersey chartered banks must comply with the operative provisions of the order, which include compliance with all of the rules set forth in the Office of the Comptroller of the Currency’s rules on lending limits (codified at 12 C.F.R pts. 32, 159 and 160). This change in the calculation of lending limits did not have a significant impact on the Bank’s operations.

Available Information

The Internet website address of the Company is http://www.1stconstitution.com. The information on our website is not incorporated into this Annual Report. The Company’s Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge, on or through our Internet website, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. All filings we make with the SEC are also available free of charge via EDGAR through the SEC’s website at http://www.sec.gov.

We also make available, free of charge, through the investors page on our website, charters of the committees of our Board of Directors, as well as other information and materials, including information about how to contact our Board of Directors, its committees and their members.

Item 1A. Risk Factors.

The following are some important factors that could cause the Company’s actual results to differ materially from those referred to or implied in any forward-looking statement. These are in addition to the risks and uncertainties discussed elsewhere in this Form 10-K and the Company’s other filings with the SEC.

An economic downturn or the return of negative developments in the financial services industry could negatively impact our operations.

The ~~recent~~ U.S. economic downturn from 2008 to 2010 resulted in uncertainty in the financial markets in general. ~~While~~Although the U.S. economy has ~~gradually improved over~~experienced a recovery in the ~~past few~~ years ~~the recovery has been slow and~~since then, the possibility of a fall-back into recession ~~currently~~always exists. The Federal Reserve, in an attempt to help the overall economy, has kept interest rates historically low through its targeted federal funds rate even though it has increased the federal funds rate once in each of 2015 and 2016, ~~and anticipates raising the federal funds rate two or~~ three times in ~~2017.~~2017 and four times in 2018. If the Federal Reserve increases the federal funds rate ~~two or three times~~ in ~~2017,~~the future, overall interest rates ~~will likely~~may rise, which may negatively impact the housing markets and the U.S. ~~economic recovery.~~economy. An economic downturn or the return of negative developments in the financial services industry could negatively impact our operations by causing an increase in our provision for loan losses and a deterioration of our loan portfolio. Such a downturn may also adversely affect our ability to originate or sell loans. The occurrence of any of these events could have an adverse impact on our financial performance.

A downturn affecting the economy and/or the real estate market in our primary market area would adversely affect our loan portfolio and our growth potential.

Much of the Company’s lending is in northern and central New ~~Jersey.~~Jersey and the New York City metropolitan area. As a result of this geographic concentration, a significant broad-based deterioration in economic conditions in the New Jersey and New York City metropolitan area could have a material adverse impact on the quality of the Company’s loan portfolio, results of operations and future growth potential. A prolonged decline in economic conditions in our market area could restrict borrowers’ ability to pay outstanding principal and interest on loans when due, and consequently, adversely affect the cash flows and results of operations of the Company’s business.

The Company’s loan portfolio is ~~largely~~primarily secured by real estate collateral located in the State of New Jersey. Conditions in the real estate markets in which the collateral for the Company’s loans are located strongly influence the level of the Company’s non-performing loans and results of operations. A decline in the New Jersey real estate markets could adversely affect the Company’s loan portfolio. Decreases in local real estate values would adversely affect the value of property used as collateral for the Company’s loans. Adverse changes in the economy also may have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings.

The Company faces significant competition.

The Company faces significant competition from many other banks, savings institutions and other financial institutions ~~which~~that have branch offices or otherwise operate in the Company’s market area. Non-bank financial institutions, such as securities brokerage firms, insurance companies and money market funds, engage in activities which compete directly with traditional bank business, which has also led to greater competition. Many of these competitors have substantially greater financial resources than the Company, including larger capital bases that allow them to attract customers seeking larger loans than the Company is able to accommodate and the ability to aggressively advertise their products and to allocate considerable resources to locations and products perceived as profitable. There can be no assurance that the Company and the Bank will be able to successfully compete with these entities in the future.

The Company is subject to interest rate risk.

The Company’s earnings are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Company’s ability to originate loans and obtain deposits, (ii) the fair value of the Company’s financial assets and liabilities, and (iii) the average duration of the Company’s mortgage-backed securities portfolio. If the spread between the interest rates paid on deposits and other borrowings and the interest rates received on loans and other investments narrows, the Company’s net interest income, and therefore earnings, could be adversely affected. This also includes the risk that interest-earning assets may be more responsive to changes in interest rates than interest-bearing liabilities, or vice versa (repricing risk), the risk that the individual interest rates or rate indices underlying various interest-earning assets and ~~interest bearing~~interest-bearing liabilities may not change in the same degree over a given time period (basis risk), and the risk of changing interest rate relationships across the spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk).

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the Company’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations.

Historically low interest rates may adversely affect our net interest income and profitability.

During the last ~~nine~~ten years, it has been the policy of the Federal Reserve Board to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities and Treasury securities. As a result, yields have been at levels lower than were available prior to 2008 on securities we have purchased and loans we have originated. Consequently, the average yield on our interest-earning assets has decreased during the low interest rate environment. As a general matter, our interest-bearing assets re-price or mature more quickly than our interest-bearing liabilities. Our ability to lower our interest expense is limited at these interest rate levels, while the average yield on our interest-earning assets ~~may continue to~~could decrease. While the Federal Reserve Board raised the targeted federal funds rate and discount rate in ~~December~~ 2015, 2016, 2017 and ~~December 2016~~2018, and may further raise the targeted federal funds rate and discount rate in ~~2017,~~the future, we believe that interest rates may remain relatively low ~~for~~and could decline in the near ~~future.~~future from current levels. Accordingly, our net interest margin ~~may~~could decline, which may have an adverse effect on our profitability.

The Company is subject to risks associated with speculative construction lending.

The risks associated with speculative construction lending include the borrower’s inability to complete the construction process on time and within budget, the sale of the project within projected absorption periods, the economic risks associated with real estate collateral, and the potential of a rising interest rate environment. Such loans may include financing the development and/or construction of residential subdivisions. This activity may involve financing land purchases, infrastructure development (i.e., roads, utilities, etc.), as well as construction of residences or multi-family dwellings for subsequent sale or lease by the developer/builder. Because the sale and leasing of developed properties is integral to the success of developer business, loan ~~repayment~~repayments may be especially subject to the volatility of real estate market values. Management has established underwriting and monitoring criteria to minimize the inherent risks of speculative commercial real estate construction lending. Further, management concentrates lending efforts with developers demonstrating successful performance on marketable projects within the Bank’s lending areas.

Our mortgage warehouse lending business represents a significant portion of our overall lending activity and is subject to numerous risks.

Our primary lending emphasis is the origination of commercial business and commercial real estate loans and mortgage warehouse lines of credit. Based on the composition of our 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.

A significant portion of our loan portfolio consists of the mortgage warehouse lines of credit. Risks associated with these loans include, without limitation, (i) credit risks relating to the mortgage bankers that borrow from us, (ii) the risk of intentional misrepresentation or fraud by any of such mortgage bankers, (iii) changes in the market value of mortgage loans originated by the mortgage banker, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit, due

to changes in interest rates during the time in warehouse, or (iv) unsalable or impaired mortgage loans so originated, which could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the mortgage banker.

The impact of interest rates on our mortgage warehouse business can be significant. Changes in interest rates can impact the number of residential mortgages originated and initially funded under mortgage warehouse lines of credit and thus our mortgage warehouse related revenues. A decline in mortgage rates generally increases the demand for mortgage loans. Conversely, in a constant or increasing rate environment, we would expect fewer loans may be originated. Although we use models to assess the impact of interest rates on mortgage related revenues, the estimates of net income produced by these models are dependent on estimates and assumptions of future loan demand, prepayment speeds and other factors which may overstate or understate actual subsequent experience. Further, the concentration of our loan portfolio on loans originated through our mortgage warehouse business increases the risk associated with our loan portfolio because of the concentration of loans in a single line of business, namely one-to-four family residential mortgage lending, and in a particular segment of that business, namely mortgage warehouse lending.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loan and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Material additions to our allowance would materially decrease our net income.

In addition, bank regulators periodically review our loan portfolio and our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs or reclassify loans. Any increase in our allowance for loan losses or loan charge-offs or loan reclassifications as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.

If we do not successfully integrate banks that we may acquire in the future, the combined bank may be adversely affected.

If we make any acquisitions in the future, we will need to integrate ~~those~~the acquired entities into our existing business and systems. We may experience difficulties in accomplishing this integration or in effectively managing the combined bank after any future ~~acquisitions.~~acquisition. The integration of any acquired entity will also divert the attention of our management. We cannot assure you that we will be successful in integrating any future acquisitions into our own business.

The expected benefits from acquiring another entity may not be realized if the combined bank does not achieve certain cost savings and other benefits.

Our belief that cost savings and revenue enhancements are achievable in any future acquisition is a forward-looking statement that is inherently uncertain. The combined bank’s actual cost savings and revenue enhancements, if any, for any future acquisition cannot be quantified at this time. Any actual cost savings or revenue enhancements will depend on future expense levels and operating results, the timing of certain events and general industry, regulatory and business conditions. Many of these events will be beyond the control of the combined bank.

We depend on our executive officers and key personnel to implement our strategy and could be harmed by the loss of their services.

We believe that the implementation of our strategy will depend in large part on the skills of our executive management team and our ability to motivate and retain these and other key personnel. Accordingly, the loss of service of one or more of our executive officers or key personnel could reduce our ability to successfully implement our business strategy and materially and adversely affect us. Leadership changes will occur from time to time, and if significant resignations occur, we may not be able to recruit additional qualified personnel. We believe our executive management team possesses valuable knowledge about the banking industry and that their knowledge and relationships would be very difficult to replicate. Although our Chief Executive Officer and President has entered into an employment agreement with us, it is possible that he may not complete the term of his employment agreement or may choose not to renew it upon expiration.

Our customers also rely on us to deliver personalized financial services. Our success depends on the experience of our branch managers and lending officers and on their relationships with the customers and communities they serve. The loss of the service of these individuals could undermine the confidence of our customers in our ability to provide such personalized services.

We need to continue to attract and retain these individuals and to recruit other qualified individuals to ensure continued growth. In addition, competitors may recruit these individuals in light of the value of the individuals’ relationships with their customers and communities and we may not be able to retain such relationships absent the individuals. If we are unable to attract and retain our branch managers and lending officers, and recruit individuals with appropriate skills and knowledge to support our business, our business strategy, business, financial condition and results of operations may be adversely affected.

Our directors and executive officers own a significant percentage of our stock and will be able to exert significant control over matters subject to shareholder approval.

As of December 31, ~~2016,~~2018, our directors and executive officers, together with their affiliates and related persons, beneficially own, in the aggregate, approximately ~~13.8%~~14.3% of our outstanding shares of common stock. These shareholders, if acting together, may have the ability to determine the outcome of matters submitted to our shareholders for approval, including the election and removal of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, these persons, acting together, may have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership may harm the market price of our common stock by:

delaying, deferring, or preventing a change in control;

entrenching our management and/or the board of directors;

impeding a merger, consolidation, takeover, or other business combination involving us; or

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

Federal and state government regulation impacts the Company’s operations.

The operations of the Company and the Bank are heavily regulated and will be affected by present and future legislation and by the policies established from time to time by various federal and state regulatory authorities. In particular, the monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future. Among the instruments of monetary policy used by the Federal Reserve Board to implement its objectives are changes in the discount rate charged on bank ~~borrowings.~~borrowings and the targeted Federal Funds rate. It is not possible to predict what changes, if any, will be made to the monetary policies of the Federal Reserve Board or to existing federal and state legislation or the effect that such changes may have on the future business and earnings prospects of the Company.

The Company and the Bank are subject to examination, supervision and comprehensive regulation by various federal and state agencies. Compliance with the rules and regulations of these agencies may be costly and may limit growth and restrict certain activities, including payment of dividends, investments, loans and interest rate charges, interest rates paid on deposits, and locations of offices. The Bank is also subject to capitalization guidelines set forth in federal legislation and regulations.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the impact of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance could adversely affect the Company’s results of operations.

Legislative and regulatory reforms may materially adversely impact our financial condition, results of operations, liquidity, or stock price.

The Dodd-Frank Act restructures the regulation of depository institutions. The Dodd-Frank Act contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. Also included was the creation of the Consumer Financial Protection Bureau, a new federal agency administering consumer and fair lending laws, a function that was previously performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions has been reduced as well. We expect that many of the requirements called for in the Dodd-Frank Act will be implemented over time, and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

In addition, international banking industry regulators have largely agreed upon significant changes in the regulation of capital required to be held by banks and their holding companies to support their businesses. The international rules, known as Basel III, generally increased the capital required to be held and narrow the types of instruments which will qualify as providing appropriate capital and imposed a new liquidity measurement. The Basel III requirements are complex and will be phased in over many years.

The Basel III rules do not apply to U.S. banks or holding companies automatically. Among other things, the Dodd-Frank Act requires U.S. regulators to reform the system under which the safety and soundness of banks and other financial institutions, individually and systemically, are regulated. That reform effort included the regulation of capital and liquidity.

On July 2, 2013, the Federal Reserve approved a final rule (the “Final Rule”) to establish a new comprehensive regulatory capital framework for all U.S. banking organizations. On July 9, 2013, the FDIC approved an interim final rule (which became final in April 2014 with no substantive changes) that was substantially similar to the Final Rule. Effective January 1, 2015, these new requirements ~~establish~~established the following minimum capital ratios: (1) a common equity Tier 1 (“CET1”) capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio of 4.0%. In addition, there is a ~~new~~ requirement to maintain a capital conservation buffer, comprised of

CET1 capital, in an amount greater than 2.5% of risk-weighted assets over the minimum capital required by each of the minimum risk-based capital ratios in order to avoid limitations on the organization’s ability to pay dividends, repurchase shares or pay discretionary bonuses. The capital conservation buffer requirement began phasing in on January 1, 2016, and initially required a buffer amount greater than 0.625% during 2016 in order to avoid these limitations. Following 2016, the required amount of the capital conservation buffer ~~will continue~~continues to increase each year until January 1, 2019 when the buffer amount must be greater than 2.5% in order to avoid the above limitations.

These regulations define what qualifies as capital for purposes of meeting these various capital requirements, as well as the risk weight of certain assets for purposes of the risk-based capital ratios.

Under these regulations, in order to be considered well-capitalized for prompt corrective action purposes, the Bank will be required to maintain the following ratios: (1) a CET1 ratio of at least 6.5% of risk-weighted assets; (2) a Tier 1 capital ratio of at least 8.0% of risk weighted assets; (3) a total capital ratio of a least 10.0% of risk-weighted assets; and (4) a leverage ratio of at least 5.0%. The Bank’s CET1 risk-based capital, Tier 1 risk-based capital, total risk-based capital and leverage capital ratios were ~~12.13%~~12.40%, ~~12.13%~~12.40%, ~~12.96%~~13.18%, and ~~10.68%~~11.74%, respectively, at December 31, ~~2016.~~2018.

The application of these capital requirements could increase the Company’s required capital levels and the cost of capital, among other things. Any permanent significant increase in the Company’s cost of capital could have significant adverse impacts on the profitability of many of our products, the types of products we could offer profitably, our overall profitability, and our overall growth opportunities, among other things. Implementation of changes to asset risk weightings for ~~risk based~~risk-based capital calculations or items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could also result in management modifying the Company’s business strategy and limiting the Company’s ability to repurchase our common stock. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in us having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Although most financial institutions would be affected, these business impacts could be felt unevenly, depending upon the business and product mix of each institution. Other potential adverse effects could include higher dilution of common shareholders if we had to issue additional shares and a higher risk that we might fall below regulatory capital thresholds in an adverse economic cycle.

Any additional changes in the regulation and oversight of the Company, in the form of new laws, rules and regulations, could make compliance more difficult or expensive or otherwise materially adversely affect our business, financial condition or operations.

The price of our common stock may fluctuate.

The price of our common stock on the NASDAQ Global Market constantly changes and recently, given the uncertainty in the financial markets, has fluctuated widely. From the beginning of fiscal year ~~2015~~2017 through the end of fiscal year ~~2016,~~2018, our stock price fluctuated between a high of ~~$20.85~~$27.00 per share and a low of ~~$9.41~~$15.75 per share. We expect that the market closing price of our common stock will continue to fluctuate. Consequently, the current market price of our common stock may not be indicative of future market prices, and we may be unable to sustain or increase the value of an investment in our common stock.

Our common stock price can fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include:

quarterly fluctuations in our operating and financial results;

operating results that vary from the expectations of management, securities analysts and investors;

changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

events negatively impacting the financial services industry which result in a general decline in the market valuation of our common stock;

announcements of material developments affecting our operations or our dividend policy;

future sales of our equity securities;

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

changes in accounting standards, policies, guidance, interpretations or principles; and

general domestic economic and market conditions.

In addition, recently, the stock market generally has experienced extreme price and volume fluctuations. Industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of our operating results.

The Bank is subject to liquidity risk.

Liquidity risk is the potential that the Bank will be unable to meet its obligations as they become due, capitalize on growth opportunities as they arise, or pay regular dividends because of an inability to liquidate assets or obtain adequate funding in a timely basis, at a reasonable cost and within acceptable risk tolerances.

Liquidity is required to fund various obligations, including credit commitments to borrowers, mortgage and other loan originations, withdrawals by depositors, repayment of borrowings, dividends to shareholders, operating expenses and capital expenditures.

Liquidity is derived primarily from retail deposit growth and retention; principal and interest payments on loans; principal and interest ~~payments;~~payments on investment securities; sale, maturity and prepayment of investment securities; net cash provided from operations and access to other funding sources.

Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. If we become unable to obtain funds when needed, it could have a material adverse effect on our business and in turn, our consolidated financial condition and results of operations.

The Company is subject to liquidity risk.

Our recurring cash requirements, at the holding company level, primarily consist of interest expense on junior subordinated debentures issued to capital trusts. Holding company cash needs are routinely satisfied by dividends collected from the Bank.

While we expect that the holding company will continue to receive dividends from the Bank sufficient to satisfy holding company cash needs, in the event that the Bank has insufficient resources or is subject to legal or regulatory restrictions on the payment of dividends, the Bank may be unable to provide dividends or a sufficient level of dividends to the holding company; in that event, the holding company may have insufficient funds to satisfy its obligations as they become due.

Future growth, operating results or regulatory requirements may require us to raise additional capital but that capital may not be available.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. To the extent our future operating results erode capital or we elect to expand through loan growth or acquisition, we may be required to raise additional capital. Our ability to raise capital will depend on conditions in the capital markets, which are outside of our control, and on our financial performance. Accordingly, we cannot be assured of our ability to raise capital when needed or on favorable terms. If we cannot raise additional capital when needed, we will be subject to increased regulatory supervision and the imposition of restrictions on our growth and business. These actions could negatively impact our ability to operate or further

expand our operations and may result in increases in operating expenses and reductions in revenues that could have a material effect on our consolidated financial condition and results of operations.

Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.

Insured depository institution failures, as well as deterioration in banking and economic conditions, could significantly increase the loss provisions of the FDIC, resulting in a decline in the designated reserve ratio of the Deposit Insurance Fund to historical lows. Effective January 1, 2011, the FDIC increased the designated reserve ratio from 1.25% to 2.00%. In addition, the ~~Dodd-Frank~~Dodd-

Frank Act permanently increased the deposit insurance limit on FDIC deposit insurance coverage to $250,000 per insured depositor, retroactive to January 1, 2008, which may result in even larger losses to the Deposit Insurance Fund.

The FDIC may further increase or decrease the assessment rate schedule in order to manage the Deposit Insurance Fund to prescribed statutory target levels. An increase in the risk category for the Bank or in the assessment rates could have an adverse effect on the Bank's earnings. The FDIC may terminate deposit insurance for an institution if it determines ~~the~~that such institution ~~involved~~ has engaged in or is engaging in unsafe or unsound banking practices, is in an unsafe or unsound condition, or has violated applicable laws, regulations or orders.

Future offerings of debt or other securities may adversely affect the market price of our stock.

In the future, the Company may attempt to increase its capital resources or, if the Company’s or the Bank’s capital ratios fall below the required minimums, the Company or the Bank could be forced to raise additional capital by making additional offerings of debt or preferred equity securities, including medium-term notes, trust preferred securities, senior or subordinated notes and preferred stock. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock.

The Company may issue additional shares of common stock which may dilute the ownership and voting power of our shareholders and the book value of our common stock.

The Company is currently authorized to issue up to 30,000,000 shares of common stock, of which ~~8,027,342~~8,611,342 shares were outstanding on February 28, ~~2017.~~2019. We may decide to issue additional shares of common stock for any corporate purposes. Our Board of Directors has the authority, without action or vote of our shareholders, to issue all or part of the authorized but unissued shares of common stock in public offerings or up to 20% of our outstanding common stock in non-public offerings. Any issuance of shares of our common stock will dilute the percentage ownership interest of our common shareholders and may reduce the market price of our common stock or dilute the book value of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution.

The Company may lose lower-cost funding sources.

Checking, savings, and money market deposit account balances and other forms of customer deposits can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, the Company could lose a relatively low-cost source of funds, increasing its funding costs and reducing the Company’s net interest income and net income.

There may be changes in accounting policies or accounting standards.

The Company’s accounting policies are fundamental to understanding its financial results and condition. Some of these policies require the use of estimates and assumptions that may affect the value of the Company’s assets or liabilities and financial results. The Company identified its accounting policies regarding the allowance for loan losses, security impairment, goodwill and other intangible assets, and income taxes to be critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. Under each of these policies, it is possible that materially different amounts would be reported under different conditions, using different assumptions, or as new information becomes available.

From time to time the Financial Accounting Standards Board (“FASB”) and the SEC change the financial accounting and reporting standards that govern the form and content of the Company’s external financial statements. FASB recently adopted new accounting standards related to fair value accounting, measurement of credit losses on financial instruments and accounting for leases that could materially change the Company’s financial statements in the future. In addition, accounting standard setters and those who interpret the accounting standards (such as the FASB, SEC, banking regulators and the Company’s independent auditors) may change or even reverse their previous interpretations or positions on how these standards should be applied. Changes in financial accounting and reporting standards and changes in current interpretations may be beyond the Company’s control, can be hard to predict and could materially impact how the Company reports its financial results and condition. In certain cases, the Company could be required to apply a new or revised standard retroactively or apply an existing standard differently (also retroactively), which may result in the Company restating prior period financial statements in material amounts.

In addition, the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") updated the criteria in its Internal-Control Integrated Framework for assessing the effectiveness of internal controls over financial reporting. The Company adopted such updated criteria, which changed the manner in which the Company assesses its internal controls over financial

reporting, effective December 31, 2016. In the future, there may be further changes to the criteria used to assess the effectiveness of internal controls, which may result in the Company expending more resources to assess its internal controls.

Failure to maintain effective systems of internal controls over financial reporting could have a material adverse effect on our results of operations and financial condition disclosures.

We must have effective internal controls over financial reporting in order to provide reliable financial reports, to effectively prevent fraud, and to operate successfully as a public company. If we were unable to provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. As part of our ongoing monitoring of our internal controls over financial reporting, we may discover material weaknesses or significant deficiencies requiring remediation. A "material weakness" is a deficiency, or a combination of deficiencies, in internal controls over ~~finanical~~financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.

We continually work to improve our internal controls; however, we cannot be certain that these measures will ensure appropriate and adequate controls over our future financial processes and reporting. Any failure to maintain effective controls or to timely implement any necessary improvement of our internal controls could, among other things, result in losses from fraud or error, harm our reputation, or cause investors to lose confidence in our reported financial information, each of which could have a material adverse effect on our results of operations and financial condition and the market value of our common stock.

We may be required to increase our allowance for credit losses as a result of a recent change to an accounting standard.

In 2016, the FASB released a new standard for determining the amount of the allowance for credit losses. The new standard will be effective for the Company for reporting periods beginning January 1, 2020. The new credit loss model will be a significant change from the standard in place today, as it requires the allowance for credit losses to be calculated based on current expected credit losses (commonly referred to as the “CECL model”) rather than losses inherent in the portfolio as of a point in time. Because the new CECL model focuses on the life of the loan concept, more data will be required to support allowance estimates, including that loan portfolios will need to be broken down by origination year. As a result, audit and disclosure requirements will increase. The extent of the increase is under evaluation, but will depend upon the nature and characteristics of the Company’s loan portfolio at the adoption date, and the macroeconomic conditions and forecasts at that date. As a result, the potential financial impact is currently unknown.

The fair value of our investment securities can ~~flucutate~~fluctuate due to market conditions out of our control.

As of December 31, ~~2016,~~2018, approximately ~~89%~~77% of our investment securities portfolio was comprised of U.S. government agency and sponsored enterprises obligations, U.S. government agency and sponsored enterprises' mortgage backed securities and municipal securities. As of December 31, ~~2016,~~2018, the fair value of our investment portfolio was approximately ~~$232.4~~$212.4 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, ratings agency downgrades of the securities, defaults by the issuer or with respect to the underlying securities, changes in market interest rates and instability in the credit markets. Any of these mentioned factors, among others, could cause other-than-temporary impairments in future periods and result in a realized loss, which could have a material adverse effect on our business. The process for determining whether impairment is other-than-temporary usually requires complex, subjective judgements about the future financial performance of

the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.

Because of changing economic and market conditions affecting issuers and the performance of underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our financial condition and results of operations.

The Company encounters continuous technological change.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and may reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or ~~be successful in marketing~~to successfully market these products and services to its customers. Failure to ~~successfully~~ keep pace with technological change

affecting the financial services industry could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

The Company is subject to operational risk.

We rely on certain external vendors to provide products and services necessary to maintain our day-to-day operations. These third parties provide key components of our business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, Internet connections and network access. While we have selected these third-party vendors carefully, we do not control their actions. Any complications caused by these third parties, including those resulting from disruptions in communication or electrical services provided by a vendor, failure of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to provide services for any reason or poor performance of services, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business. Financial or operational difficulties of a third-party vendor could also hurt our operations if those difficulties interfere with the vendor’s ability to provide services. Furthermore, our vendors could also be sources of operational and information security risk, including from breakdowns or failures of their own systems or capacity constraints. Replacing these third-party vendors could also create significant delay and expense. Problems caused by external vendors could be disruptive to our operations, which could have a material adverse impact on our business, financial condition and results of operations.

Loss of, or failure to adequately safeguard, confidential or proprietary information may adversely affect the Company’s business, financial operations ~~net income~~ or reputation.

The Company regularly collects, processes, transmits and stores significant amounts of confidential information regarding its customers, employees and others. This information is necessary for the conduct of the Company’s business activities, including the ongoing maintenance of deposit, loan and other account relationships for ~~our~~the Bank's customers, and receiving instructions and affecting transactions for those customers and other users of the ~~Company’s~~Bank’s products and services. In addition to confidential information regarding its customers, employees and others, the Company compiles, processes, transmits and stores proprietary, non-public information concerning its own business, operations, plans and strategies. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on behalf of the Company.

Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. Although cybersecurity incidents in the financial services industry are on the rise, we have not experienced any losses relating to cyber-attacks or other information security breaches. However, there can be no assurance that we will not suffer such losses in the future. A failure in or breach of the Company’s operational or information security systems, or those of the Company’s third-party service providers, as a result of cyber-attacks or information security breaches or due to employee error, malfeasance or other disruptions could adversely affect ~~our~~its business, result in the disclosure or misuse of confidential or proprietary information, damage ~~our~~its reputation, increase ~~our~~its costs and/or cause losses. The Company may also be required to expend significant additional resources to modify its protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications or disclosure. As a result, cyber security and the continued development and enhancement of the controls and processes designed to protect the Company’s systems, computers, software, data and networks from attack, damage or unauthorized access are a very high priority for the Company.

If this confidential or proprietary information were to be mishandled, misused or lost, the Company could be exposed to significant regulatory consequences, reputational damage, civil litigation and financial loss. Mishandling, misuse or loss of this confidential or proprietary information could occur, for example, if the confidential or proprietary information were erroneously provided to parties who are not permitted to have the information, either by fault of the systems or employees of the Company, or

the systems or employees of third parties which have collected, compiled, processed, transmitted or stored the information on the Company’s behalf, where the information is intercepted or otherwise inappropriately taken by third parties or where there is a failure or breach of the network, communications or information systems which are used to collect, compile, process, transmit or store the information.

~~Although~~The Company continues to implement protections and adopt procedures to address the risks posed by the current information technology environment. For example, the Company ~~employs~~has and continues to introduce systems and software to prevent cyber incidents and continues to review and strengthen its defenses to cybersecurity threats through the use of various services, programs and outside vendors. The Company also continually reviews and revises its cybersecurity policy to ensure that it remains up to date. In the event that the Company experiences a ~~variety~~material cybersecurity incident or identifies a material cybersecurity threat, the Company will make all reasonable efforts to properly disclose it in a timely fashion. However, it is impossible for the Company to know when or if such incidents may arise or the business impact of ~~physical, procedural~~any such incident.

As a result of such risks, the Company has significantly increased the resources dedicated to this effort and ~~technological safeguards~~believes that further increases may be required in the future, in anticipation of increases in the sophistication and persistency of such attacks. The Company has and is likely to ~~protect~~continue to incur additional costs in preparing its infrastructure and maintaining it to resist any such attacks. In addition to personnel dedicated to overseeing the infrastructure and systems to defend against cybersecurity incidents, senior management is regularly briefed on issues, preparedness and any incidents requiring response. At its regularly scheduled meetings, the Audit Committee of the Board of Directors and the Board of Directors are periodically briefed and brought up to date on cybersecurity matters.

Notwithstanding the precaution we need to take to safeguard this confidential and proprietary information from mishandling, misuse or loss, these ~~safeguards~~precautions do not provide absolute assurance that mishandling, misuse or loss of the information will not occur, or that if mishandling, misuse or loss of the information did occur, those events would be promptly detected and addressed. ~~Additionally, as information~~Nor is there any guarantee that the Company's cybersecurity efforts will be successful in discovering or preventing a security ~~risks~~breach, and ~~cyber threats continue~~any failure or failures to ~~evolve,~~safeguard against such security breaches may have a material adverse impact on the Company’s business, financial results, or reputation

Possible replacement of the LIBOR benchmark interest rate may have an impact on our business, financial condition or results of operations.

On July 27, 2017, the Financial Conduct Authority (FCA), a regulator of financial services firms in the United Kingdom, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The FCA and submitting LIBOR banks have indicated they will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative reference rate. In the United States, efforts to identify a set of alternative U.S. dollar reference interest rates include proposals by the Alternative Reference Rates Committee of the Federal Reserve Board. Other financial services regulators and industry groups are evaluating the possible phase-out of LIBOR and the development of alternate reference rate indices or reference rates. Some of our assets and liabilities are indexed to LIBOR. We are evaluating the potential impact of the possible replacement of the LIBOR benchmark interest rate, but are not able to predict whether LIBOR will cease to be available after 2021, whether the alternative rates the Federal Reserve Board proposes to publish will become market benchmarks in place of LIBOR, or what the impact of such a transition will have on our business, financial condition, or results of operations. Reform of, or the replacement or phasing out of, LIBOR and proposed regulation of LIBOR and other “benchmarks” may materially adversely affect the amount of interest paid on any LIBOR-based loans, investment securities and borrowings of the Company ~~may be required to expend additional resources to continue to enhance its information security measures and/or to investigate~~ and ~~remediate any information security vulnerabilities.~~the Company’s business, financial condition and results of operations.

We may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.

We are required to comply with anti-money laundering, anti-terrorism and other laws and regulations in the United States. These laws and regulations require us, among other things, to adopt and enforce “know-your-customer” policies and procedures and to report suspicious and large transactions to applicable regulatory authorities. These laws and regulations have become increasingly complex and detailed, require improved systems, ~~and~~ sophisticated monitoring and compliance personnel and have become the subject of enhanced government supervision.

While we have adopted policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and related activities, those policies and procedures may not completely eliminate instances in which we may be used by customers to engage in money laundering and other illegal or improper activities. To the extent we fail to fully comply with applicable laws and regulations, the FDIC ~~along~~and/or with other banking agencies have the authority to impose fines and other penalties on us. In addition, our business and reputation could suffer if customers use our banking network for money laundering or illegal or improper purposes. At its regularly scheduled meetings, the Audit Committee of the Board of Directors and the Board of Directors are periodically briefed and brought up to date on money laundering and related matters.

There may be claims and litigation.

From time to time as part of the Company’s normal course of business, customers make claims and take legal actions against the Company based on actions or inactions of the Company. If such claims and legal actions are not resolved in a manner favorable to the Company, they may result in financial liability and/or adversely affect the market perception of the Company and its products and services. This may also impact customer demand for the Company’s products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on its financial condition and results of operations.

Severe weather, acts of terrorism and other external events could significantly impact our business.

A significant portion of our primary markets are located near coastal waters which could generate naturally occurring severe weather, or in response to climate change, that could have a significant impact on our ability to conduct business. Additionally, surrounding areas, including New Jersey, may be central targets for potential acts of terrorism against the United States. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause additional expenses. Although the Company has established disaster recovery policies and procedures, the occurrence of any such event in the future could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

We currently operate 1920 bank branch offices in New Jersey, including the Bank’s main office in Cranbury, New Jersey. In addition, there is an Operations Center which is leased in Cranbury, New Jersey. The following table provides certain information with respect to our bank branch offices as of February 28, ~~2017:~~

2019:


Location	Location	Leased or Owned	Original Year Leased or Acquired	Year of Lease Expiration	Leased or Owned	Original Year Leased or Acquired	Year of Lease Expiration
Main Office
2650 Route 130 Cranbury, New Jersey	2650 Route 130 Cranbury, New Jersey	Leased	1989	2017	Leased	1989	2027

Village Office
74 North Main Street Cranbury, New Jersey	74 North Main Street Cranbury, New Jersey	Owned	2005	—	Owned	2005	—

Plainsboro Office
Plainsboro Village Center 11 Shalks Crossing Road Plainsboro, New Jersey	Plainsboro Village Center 11 Shalks Crossing Road Plainsboro, New Jersey	Leased	1998	2021	Leased	1998	2021

Hamilton Square Office
3659 Nottingham Way Hamilton, New Jersey	3659 Nottingham Way Hamilton, New Jersey	Leased	1999	2024	Leased	1999	2024

Princeton Office
The Windrows at Princeton Forrestal 2000 Windrow Drive Princeton, New Jersey	The Windrows at Princeton Forrestal 2000 Windrow Drive Princeton, New Jersey	Leased	2001	2017	Leased	2001	2019

Perth Amboy Office
145 Fayette Street Perth Amboy, New Jersey	145 Fayette Street Perth Amboy, New Jersey	Leased	2003	2019	Leased	2003	2026

Jamesburg Office
1 Harrison Street Jamesburg, New Jersey	1 Harrison Street Jamesburg, New Jersey	Owned	2002	—	Owned	2002	—


West Windsor Office *
44 Washington Road Princeton Jct, New Jersey		Leased	2004	2017

Fort Lee Office
180 Main Street Fort Lee, New Jersey	180 Main Street Fort Lee, New Jersey	Leased	2006	2019	Leased	2006	2024

Hightstown Office
140 Mercer Street Hightstown, New Jersey	140 Mercer Street Hightstown, New Jersey	Leased	2007	2024	Leased	2007	2024

Lawrenceville Property
150 Lawrenceville-Pennington Road Lawrenceville, New Jersey	150 Lawrenceville-Pennington Road Lawrenceville, New Jersey	Owned	2009	—	Owned	2009	—

South River Operations Center
1246 South River Road, Bldg. 2 Cranbury, New Jersey	1246 South River Road, Bldg. 2 Cranbury, New Jersey	Leased	2010	2020	Leased	2010	2020

Rocky Hill Office
995 Route 518 Skillman, New Jersey	995 Route 518 Skillman, New Jersey	Owned	2011	—	Owned	2011	—

Hopewell Office
86 East Broad Street Hopewell, New Jersey					Owned	2011	—
Hillsborough Office
32 New Amwell Road Hillsborough, New Jersey					Owned	2011	—
Rumson Office
20 Bingham Avenue Rumson, New Jersey					Leased	2014	2026



Exhibit No.		Description
2		Agreement and Plan of Merger, dated as of November 6, 2017, by and among the Company, the Bank and NJCB (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on November 7, 2017)
3(i)	~~(i)(A)~~	Certificate of Incorporation of the Company (conformed copy) (incorporated by reference to Exhibit 3(i)(A) to the Company’s Form 10-K (SEC File No. 000-32891) filed with the SEC on March 27, 2009)
3(ii)
3	~~(ii)(A)~~	By-laws of the Company, as amended~~(conformed~~ February 21, 2019 (conformed copy) ~~(incorporated by reference to Exhibit 3(ii)(A) to the Company’s Form 8-K filed with the SEC on March 23, 2016)~~
4.1
~~4.1~~		Specimen Share of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-KSB (SEC File No. 000-32891) filed with the SEC on March 22, 2002)
4.2
~~4.2~~		Warrant, dated November 23, 2011, to purchase shares of the Company’s common stock (incorporated by reference to Exhibit 4.5 to the Company’s Form 10-K (SEC File No. 000-32891) filed with the SEC on March 22, 2013)
4.3
~~4.3~~		Warrant, dated November 23, 2011, to purchase shares of the Company’s common stock (incorporated by reference to Exhibit 4.6 to the Company’s Form 10-K (SEC File No. 000-32891) filed with the SEC on March 22, 2013)

10.1	#	1st Constitution Bancorp Supplemental Executive Retirement Plan, dated as of October 1, 2002 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-QSB (SEC File No. 000-32891) filed with the SEC on November 13, 2002)

10.2	#	Amended and Restated 1st Constitution Bancorp Directors’ Insurance Plan, effective as of June 16, 2005 (incorporated by reference to Exhibit No. 10 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on March 24, 2006)

10.3



~~10.3~~	#	1st Constitution Bancorp Form of Executive Life Insurance Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Form 10-QSB (SEC File No. 000-32891) filed with the SEC on November 13, 2002)



10.4	#	Amendment No. 1 to 1st Constitution Bancorp Supplemental Executive Retirement Plan, effective January 1, 2004 (incorporated by reference to Exhibit 10.12 to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on August 11, 2004)

10.5	#	The 1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by reference to Exhibit A of the Company's proxy statement on Schedule 14A for its annual meeting of shareholders held on May 19, 2005 (SEC File No. 000-32891) filed with the SEC on April 15, 2005)

10.6	#	Form of Restricted Stock Agreement under the 1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.18 to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on August 8, 2005)

10.7	#	Form of Nonqualified Stock Option Agreement under the 1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.19 to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on August 8, 2005)

10.8	#	Form of Incentive Stock Option Agreement under the 1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.20 to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on August 8, 2005)
10.9
~~10.9~~		Amended and Restated Declaration of Trust of 1st Constitution Capital Trust II, dated as of June 15, 2006, among 1st Constitution Bancorp, as sponsor, the Delaware and institutional trustee named therein, and the administrators named therein (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on June 16, 2006)
10.10
~~10.10~~		Indenture, dated as of June 15, 2006, between 1st Constitution Bancorp, as issuer, and the trustee named therein, relating to the Floating Rate Junior Subordinated Debt Securities due 2036 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on June 16, 2006)
10.11
~~10.11~~		Guarantee Agreement, dated as of June 15, 2006, between 1st Constitution Bancorp and the guarantee trustee named therein (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on June 16, 2006)

10.12	#	Amendment No. 2 to 1st Constitution Bancorp Supplemental Executive Retirement Plan, effective as of December 31, 2004 (incorporated by reference to Exhibit 10.24 to the Company’s Form 10-K (SEC File No. 000-32891) filed with the SEC on April 15, 2008)

10.13	#	1st Constitution Bancorp 2005 Supplemental Executive Retirement Plan, effective as of January 1, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on December 28, 2006)

10.14	#	Amended and Restated Employment Agreement between the Company and Robert F. Mangano dated as of July 1, 2010 (incorporated by reference to Exhibit 10 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on July 14, 2010)

10.15	#	1st Constitution Bancorp 2013 Equity Incentive Plan (incorporated by reference to Appendix A of the Company's proxy statement on Schedule 14A for its annual meeting of shareholders held on May 23, 2013 (SEC File No. 000-32891) filed with the SEC on April 11, 2013)

10.16	#	Form of Restricted Stock Agreement under the 1st Constitution Bancorp 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.16 to the Company’s Form 10-K (SEC File No. 000-32891) filed with the SEC on March 22, 2016)

10.17	#	Form of Incentive Stock Option Agreement under the 1st Constitution Bancorp 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.17 to the Company’s Form 10-K (SEC File No. 000-32891) filed with the SEC on March 22, 2016)

10.18	#	Letter Agreement, dated January 31, 2014, between 1st Constitution Bank and Stephen J. Gilhooly (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on April 1, 2014)

10.19



~~10.19~~	#	Amendment to the Amended and Restated Employment Agreement, effective as of April 4, 2014, between 1st Constitution Bancorp and Robert F. Mangano (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (SEC File No. 000-3281) filed with the SEC on April 8, 2014)

10.20	#	1st Constitution Bancorp 2015 Directors Stock Plan (incorporated by reference to Appendix A to the Company's proxy statement on Schedule 14A for its annual meeting of shareholders held on May 21, 2015 (SEC File No. 000-32891) that was filed with the SEC on April 14, 2015)

10.21	#	Second Amendment, effective as of April 12, 2016, to the Amended and Restated Employment Agreement, dated as of July 1, 2010, by and between 1st Constitution Bancorp and Robert F. Mangano (the “Employment Agreement”), as amended by the Amendment to the Employment Agreement, effective as of April 4, 2014 (the “First Amendment”), by and between 1st Constitution Bancorp and Robert F. Mangano (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on April 12, 2016)



10.22	#	Amended and Restated Indemnification Agreement, dated as of April 24, 2013, by and between Rumson-Fair Haven Bank and Trust Company and James G. Aaron (which was assumed by 1st Constitution Bank following the merger of Rumson-Fair Haven Bank and Trust Company with and into 1st Constitution Bank) (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on August 10, 2016)
10.23	#	Third Amendment, effective as of April 7, 2017, to the Amended and Restated Employment Agreement, dated as of July 1, 2010, by and between the Company and Robert F. Mangano, as amended (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on April 12, 2017)
10.24	#	Form of Restricted Stock Agreement for Non-Employee Directors under the 1st Constitution Bancorp 2015 Directors Stock Plan (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on August 10, 2017)
10.25	#	Employment Agreement, dated as of January 1, 2015, by and among the Company, the Bank and John T. Andreacio (incorporated by reference to Exhibit 10.25 to the Company's Form 10-K (SEC File No. 000-32891) filed with the SEC on March 19, 2018)
10.26	#	Employment Agreement, dated as of May 7, 2018, by and between 1st Constitution Bancorp and 1st Constitution Bank, on one hand, and Naqi A. Naqvi, on the other hand (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K (SEC File No. 000-32891) filed with the SEC on May 11, 2018)
21	*	Subsidiaries of the Company

23.1	*	Consent of BDO USA, LLP as Independent Registered Public Accounting Firm

31.1	*	Certification of the principal executive officer of the Company, pursuant to ~~Securities~~ Exchange Act Rule 13a-14(a)

31.2	*	Certification of the principal financial officer of the Company, pursuant to ~~Securities~~ Exchange Act Rule 13a-14(a)

32	*	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of ~~The~~the Sarbanes-Oxley Act of 2002, signed by the principal executive officer and the principal financial officer of the Company

101.INS	*	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH	*	XBRL Taxonomy Extension Schema Document

101.CAL	*	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	*	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	*	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	*	XBRL Taxonomy Extension Presentation Linkbase Document

___________________________

* Filed herewith.

# Management contract or compensatory plan or arrangement.

(b) Exhibits.

Exhibits required by Section 601 of Regulation S-K (see (a) above).

See the notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Item 16. Form 10-K Summary.

Not applicable.

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

1^st Constitution Bancorp

Cranbury, New Jersey

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of 1^st Constitution Bancorp (the “Company”) as of December 31, ~~2016~~2018 and ~~2015 and~~2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years ~~then ended.~~ in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 14, 2019, expressed an unqualified opinion thereon.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on ~~these~~the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the ~~Public Company Accounting Oversight Board (United States).~~PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material ~~misstatement. An audit includes~~misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence ~~supporting~~regarding the amounts and disclosures in the consolidated financial ~~statements, assessing~~statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial ~~statement presentation.~~statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ BDO USA, LLP

We have served as the Company's auditor since 2013.

Woodbridge, New Jersey

March 15, 2019

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

1^st Constitution Bancorp

Cranbury, New Jersey

Opinion on Internal Control over Financial Reporting

We have audited 1^STConstitution Bancorp's (the “Company’s”) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the ~~consolidated financial statements referred to above present fairly,~~Company maintained, in all material respects, ~~the~~effective internal control over financial ~~position~~reporting as of 1^st ~~Constitution Bancorp at~~ December 31, ~~2016 and 2015, and~~2018, based on the ~~results of its operations and its cash flows for the years then ended~~, ~~in conformity with accounting principles generally accepted in the United States of America.~~COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the ~~Company’s internal control over financial reporting~~consolidated balance sheets of the Company as of December 31, ~~2016, based on criteria established~~2018 and 2017, the related consolidated statements of income, comprehensive income, changes in ~~Internal Control - Integrated Framework (2013)~~ ~~issued by the Committee of Sponsoring Organizations~~shareholders’ equity, and cash flows for each of the ~~Treadway Commission (COSO)~~three years in the period ended December 31, 2018, and the related notes and our report dated March ~~20, 2017~~14, 2019 expressed an ~~adverse~~unqualified opinion thereon.

~~/s/ BDO USA, LLP~~Basis for Opinion

~~Philadelphia, Pennsylvania~~

~~March 20, 2017~~

~~Report of Independent Registered Public Accounting Firm~~

~~Board of Directors and Shareholders~~

1^st ~~Constitution Bancorp~~

~~Cranbury, New Jersey~~

~~We have audited 1~~^st ~~Constitution Bancorp (the “Company”) internal control over financial reporting as of December 31, 2016, based on criteria established in~~ ~~Internal Control - Integrated Framework (2013)~~ ~~issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).~~ The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial ~~Reporting~~.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the ~~Public Company Accounting Oversight Board (United States).~~PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

~~In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria~~. ~~We do not express an opinion or any other form of assurance on management's statements referring to any corrective actions taken by the Company after the date of management's assessment.~~

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended and our report dated March 20, 2017 expressed an unqualified opinion thereon.

/s/ BDO USA, LLP

~~Philadelphia, Pennsylvania~~

Woodbridge, New Jersey

March ~~20, 2017~~15, 2019

~~1st~~1^ST CONSTITUTION BANCORP

CONSOLIDATED BALANCE SHEETS

December 31, ~~2016~~2018 and ~~2015~~2017

(Dollars in Thousands, except share data)

2016 2015
ASSETS
Cash and Due From Banks $ 14,886
$ 11,368
Federal Funds Sold/Short-Term Investments —
—
       Total cash and cash equivalents 14,886
11,368
Investment Securities
                 Available for sale, at fair value 103,794
91,422
            Held to maturity (fair value of $128,559 and $127,157
at December 31, 2016 and 2015, respectively) 126,810
123,261
  Total investment securities 230,604
214,683

Loans Held for Sale 14,829
5,997

Loans 724,808
682,121
       Less- Allowance for loan losses (7,494 ) (7,560 )
Net loans 717,314
674,561

Premises and Equipment, Net 10,673
11,109
Accrued Interest Receivable 3,095
2,853
Bank-Owned Life Insurance 22,184
21,583
Other Real Estate Owned 166
966
Goodwill and Intangible Assets 12,880
13,284
Other Assets 11,582
11,587
Total assets $ 1,038,213
$ 967,991

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES

Deposits

Non-interest bearing $ 170,854
$ 159,918
Interest bearing 663,662
626,839
Total deposits 834,516
786,757

Borrowings 73,050
58,896
Redeemable Subordinated Debt 18,557
18,557
Accrued Interest Payable 866
846
Accrued Expenses and Other Liabilities 6,423
6,975
Total liabilities 933,412
872,031

SHAREHOLDERS’ EQUITY
Preferred stock, no par value: 5,000,000 shares authorized, none issued —
—
Common stock, no par value; 30,000,000 shares authorized; 8,027,087 and 7,954,267 shares issued and 7,993,789 and 7,922,968 shares outstanding as of December 31, 2016 and 2015, respectively 71,695
70,845



	2018			2017
ASSETS
Cash and due from banks	$	4,983		$	5,037
Interest-earning deposits	11,861			13,717
Total cash and cash equivalents	16,844			18,754
Investment securities:
Available for sale, at fair value	132,222			105,458
Held to maturity (fair value of $80,204 and $111,865 at December 31, 2018 and December 31, 2017, respectively)	79,572			110,267
Total investment securities	211,794			215,725
Loans held for sale	3,020			4,254
Loans	883,164			789,906
Less: Allowance for loan losses	(8,402		)	(8,013		)
Net loans	874,762			781,893
Premises and equipment, net	11,653			10,705
Accrued interest receivable	3,860			3,478
Bank-owned life insurance	28,705			25,051
Other real estate owned	2,515			—
Goodwill and intangible assets	12,258			12,496
Other assets	12,422			6,918
Total assets	$	1,177,833		$	1,079,274
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits
Non-interest bearing	$	212,981		$	196,509
Interest bearing	737,691			725,497
Total deposits	950,672			922,006
Short-term borrowings	71,775			20,500
Redeemable subordinated debentures	18,557			18,557
Accrued interest payable	1,228			804
Accrued expenses and other liabilities	8,516			5,754
Total liabilities	1,050,748			967,621
SHAREHOLDERS’ EQUITY
Preferred stock, no par value; 5,000,000 shares authorized; none issued	—			—
Common stock, no par value; 30,000,000 shares authorized; 8,639,276 and 8,116,201 shares issued and 8,605,978 and 8,082,903 shares outstanding as of December 31, 2018 and December 31, 2017, respectively	79,536			72,935
Retained earnings	49,750			39,822
Treasury stock, 33,298 shares at December 31, 2018 and 2017	(368		)	(368		)
Accumulated other comprehensive loss	(1,833		)	(736		)
Total shareholders’ equity	127,085			111,653
Total liabilities and shareholders’ equity	$	1,177,833		$	1,079,274

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

1^ST CONSTITUTION BANCORP

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2018, 2017 and 2016

(Dollars in thousands, except per share data)

Retained earnings 34,074
25,589
Treasury Stock 33,298 shares and 31,298 shares at December 31, 2016 and 2015, respectively (368 ) (344 )
Accumulated other comprehensive loss (600 ) (130 )
Total shareholders’ equity 104,801
95,960
Total liabilities and shareholders’ equity $ 1,038,213
$ 967,991



	2018		2017		2016
INTEREST INCOME
Loans, including fees	$	45,202	$	35,967	$	33,701
Securities:
Taxable	4,024		3,326		3,268
Tax-exempt	1,989		2,140		2,078
Federal funds sold and short-term investments	258		230		88
Total interest income	51,473		41,663		39,135
INTEREST EXPENSE
Deposits	6,511		4,550		4,044
Borrowings	836		429		687
Redeemable subordinated debentures	694		519		427
Total interest expense	8,041		5,498		5,158
Net interest income	43,432		36,165		33,977
PROVISION (CREDIT) FOR LOAN LOSSES	900		600		(300		)
Net interest income after provision (credit) for loan losses	42,532		35,565		34,277
NON-INTEREST INCOME
Service charges on deposit accounts	638		596		715
Gain on sales of loans, net	4,475		5,149		3,785
Income on bank-owned life insurance	575		522		549
Gain on bargain purchase	230		—		—
Gain on sales of securities	12		129		—
Other income	1,988		1,844		1,873
Total other income	7,918		8,240		6,922
NON-INTEREST EXPENSES
Salaries and employee benefits	19,853		18,804		16,543
Occupancy expense	3,623		3,169		3,243
Data processing expenses	1,332		1,314		1,277
FDIC insurance expense	486		360		453
Other real estate owned expenses	158		42		74
Merger-related expenses	2,141		265		—
Other operating expenses	6,492		7,052		5,701
Total other expenses	34,085		31,006		27,291
Income before income taxes	16,365		12,799		13,908
INCOME TAXES	4,317		5,871		4,623
Net income	$	12,048	$	6,928	$	9,285
EARNINGS PER COMMON SHARE
Basic	$	1.45	$	0.86	$	1.17
Diluted	1.40		0.83		1.14
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	8,320,718		8,049,981		7,962,121
Diluted	8,593,509		8,312,784		8,177,439

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

~~1st~~1^ST CONSTITUTION BANCORP

~~CONSOLIDATED STATEMENTS OF INCOME~~

~~For the Years Ended December 31, 2016 and 2015~~

~~(Dollars in thousands, except per share data)~~

2016 2015
INTEREST INCOME
Loans, including fees $ 35,429
$ 35,597
Securities

Taxable 3,268
3,167
Tax-exempt 2,078
2,131
Federal funds sold/interest earning deposits 88
50
Total interest income 40,863
40,945
INTEREST EXPENSE

   Deposits 4,044
3,704
   Borrowings 687
577
   Redeemable subordinated debentures 427
355
Total interest expense 5,158
4,636
Net interest income 35,705
36,309

(CREDIT) PROVISION FOR LOAN LOSSES (300 ) 1,100
Net interest income after (credit) provision for loan losses 36,005
35,209
NON-INTEREST INCOME

Service charges on deposit accounts 715
818
Gain on sales of loans, net 3,785
4,039
Income on Bank-owned life insurance 549
558
Other income 1,837
1,049
Total other income 6,886
6,464
NON-INTEREST EXPENSES

Salaries and employee benefits 18,298
17,232
Occupancy expense 4,001
4,098
Data processing expenses 1,277
1,211
FDIC insurance expense 453
660
Other real estate owned expenses 81
734
Other operating expenses 4,873
5,012
Total other expenses 28,983
28,947
Income before income taxes 13,908
12,726
INCOME TAXES 4,623
4,062
Net income $ 9,285
$ 8,664
NET INCOME PER COMMON SHARE

Basic $ 1.17
$ 1.10
Diluted $ 1.14
$ 1.07
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 7,962,121
7,901,278
Diluted 8,177,439
8,075,752

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

~~1st CONSTITUTION BANCORP~~

Consolidated Statements of Comprehensive Income

For the years ended December 31, ~~2016~~2018, 2017 and ~~2015~~2016

(Dollars in thousands)


							Twelve Months Ended December 31,
	2016			2015			2018			2017			2016
Net income	$	9,285		$	8,664		$	12,048		$	6,928		$	9,285
Other comprehensive income (loss):
Unrealized losses on securities available for sale							(1,624		)	(14		)	(667		)
Tax effect (3)							388			40			243
Net of tax amount							(1,236		)	26			(424		)

Other comprehensive (loss) income:
Unrealized holding (losses) gains on securities available for sale	(667		)	(224		)
Tax effect	243			38
Reclassification adjustment for realized gains on securities available for sale (1)							(12		)	(93		)	—
Tax effect (3)							3			38			—
Net of tax amount	(424		)	(186		)	(9		)	(55		)	—

Pension liability	83			(53		)	269			62			83
Tax effect	(31		)	21			(77		)	(24		)	(31		)
Net of tax amount	52			(32		)	192			38			52

Reclassification adjustment for actuarial (gains) for unfunded pension liability
Income ⁽¹⁾	(160		)	(266		)
Tax effect ⁽²⁾	62			106
Reclassification adjustment for actuarial gains for unfunded pension liability (2)							(62		)	(60		)	(160		)
Tax effect (3)							18			24			62
Net of tax amount	(98		)	(160		)	(44		)	(36		)	(98		)
Total other comprehensive (loss) income	(470		)	(378		)

Total other comprehensive loss							(1,097		)	(27		)	(470		)

Comprehensive income	$	8,815		$	8,286		$	10,951		$	6,901		$	8,815


(1)	Included in gain on sale of securities on the consolidated statements of income


(2)	Included in salaries and employee benefits expense on the consolidated statements of income


~~(2)~~(3)	Included in income taxes on the consolidated statements of income

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

~~1st~~1^ST CONSTITUTION BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Years Ended December 31, ~~2016~~2018, 2017 and ~~2015~~2016

(Dollars in thousands)

Common
Stock

Retained
Earnings

Treasury
Stock

Accumulated
Other
Comprehensive
(Loss) Income

Total
Shareholders'
Equity
BALANCE, January 1, 2015 $ 61,448
$ 25,730
$ (316 ) $ 248
$ 87,110

Exercise of stock options and issuance of restricted
shares under employee benefit programs (33,800 shares issued from Treasury Stock) (39 ) —
331
—
292

Share-based compensation 631
—
—
—
631

5% Stock dividends declared February and December 2015 (737,448 shares) 8,805
(8,805 ) —
—
—

Treasury stock purchased, net (31,050 shares) —
—
(359 ) —
(359 )

Net Income for the year ended 12/31/2015 —
8,664
—
—
8,664

Other comprehensive loss —
—
—
(378 ) (378 )
BALANCE, December 31, 2015 $ 70,845
$ 25,589
$ (344 ) $ (130 ) $ 95,960

Exercise of stock options 96
—
—
—
96

Share-based compensation 754
—
—
—
754

Treasury stock purchased (2,000 shares) —
—
(24 ) —
(24 )

Dividends on common stock —
(800 ) —
—
(800 )

Net Income for the year ended December 31, 2016 —
9,285
—
—
9,285

Other comprehensive loss —
—
—
(470 ) (470 )
BALANCE, December 31, 2016 $ 71,695
$ 34,074
$ (368 ) $ (600 ) $ 104,801



	Common Stock		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Shareholders' Equity
Balance, January 1, 2016	$	70,845	$	25,589		$	(344	)	$	(130	)	$	95,960
Net income	—		9,285			—			—			9,285
Exercise of stock options and issuance of restricted shares (18,645 and 73,450 shares, respectively)	96		—			—			—			96
Share-based compensation	754		—			—			—			754
Treasury stock purchased (2,000 shares)	—		—			(24		)	—			(24		)
Cash dividends ($0.10 per share)	—		(800		)	—			—			(800		)
Other comprehensive loss	—		—			—			(470		)	(470		)
Balance, December 31, 2016	71,695		34,074			(368		)	(600		)	104,801

Net income	—		6,928			—			—			6,928
Exercise of stock options and issuance of restricted shares (31,640 and 60,613 shares, respectively)	247		—			—			—			247
Share-based compensation	993		—			—			—			993
Cash dividends ($0.16 per share)	—		(1,289		)	—			—			(1,289		)
Other comprehensive loss	—		—			—			(27		)	(27		)
Reclassifications of certain deferred tax effects	—		109			—			(109		)	—
Balance, December 31, 2017	72,935		39,822			(368		)	(736		)	111,653

Net income	—		12,048			—			—			12,048
Exercise of stock options and issuance of restricted shares (12,762 and 62,150 shares, respectively)	88		—			—			—			88
Share-based compensation	1,019		—			—			—			1,019
Exercise of stock warrants (198,378 shares)	—		—			—			—			—
Issuance of common stock (249,785 shares)	5,494		—			—			—			5,494
Cash dividends ($0.255 per share)	—		(2,120		)	—			—			(2,120		)
Other comprehensive loss	—		—			—			(1,097		)	(1,097		)
Balance, December 31, 2018	$	79,536	$	49,750		$	(368	)	$	(1,833	)	$	127,085

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

~~1st~~1^ST CONSTITUTION BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, ~~2016~~2018, 2017 and ~~2015~~2016

(Dollars in thousands)

2016 2015
OPERATING ACTIVITIES:

Net income $ 9,285
$ 8,664
Adjustments to reconcile net income to net cash provided by operating activities:

(Credit) provision for loan losses (300 ) 1,100
Provision for loss on other real estate owned —
382
Depreciation and amortization 1,415
1,476
Net amortization of premiums and discounts on securities 1,141
810
  (Gains) loss on sales of other real estate owned (31 ) 692
Gains on sales of loans held for sale (3,785 ) (4,039 )
Originations of loans held for sale (96,968 ) (134,073 )
Proceeds from sales of loans held for sale 91,708
140,486
Income on Bank-owned life insurance (549 ) (558 )
Share-based compensation expense 754
631
Deferred tax expense 354
159
  (Increase) decrease in accrued interest receivable (242 ) 243
Decrease in other assets 388
617
   Increase (decrease) in accrued interest payable
20

(61 )
Decrease in accrued expense and other liabilities (552 ) (363 )
Net cash provided by  operating activities 2,638
16,166
INVESTING ACTIVITIES:
Purchases of securities:
Available for sale (37,300 ) (34,109 )
Held to maturity (35,212 ) (15,599 )
Proceeds from maturities and repayments of securities:

Available for sale 23,354
18,783
Held to maturity 31,429
35,705
Proceeds from Bank-owned life insurance benefits paid 248
—
Net purchase of restricted stock (661 ) (1,516 )
Net increase in loans (42,779 ) (30,646 )
Purchase of Bank-owned life insurance (300 ) —
Capital expenditures (457 ) (706 )
Additional investment in other real estate owned (61 ) —
Proceeds from sales of other real estate owned 1,033
6,027
Net cash used in investing activities (60,706 ) (22,061 )
FINANCING ACTIVITIES:
Exercise of stock options and issuance of restricted shares 96
292
Purchase of treasury stock (24 ) (359 )
Cash dividends paid to shareholders (399 ) —
Net increase (decrease) in demand, savings and time deposits 47,759
(31,004 )
Repayment of long-term borrowing (10,000 ) —
Net increase in short-term borrowings 24,154
33,789
Net cash provided by financing activities 61,586
2,718
Increase (decrease) in cash and cash equivalents 3,518
(3,177 )

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

11,368
14,545
CASH AND CASH EQUIVALENTS AT END OF YEAR

$ 14,886
$ 11,368



	2018			2017			2016
OPERATING ACTIVITIES:
Net Income	$	12,048		$	6,928		$	9,285
Adjustments to reconcile net income to net cash provided by operating activities
Provision (credit) for loan losses	900			600			(300		)
Depreciation and amortization	1,389			1,380			1,415
Net amortization of premiums and discounts on securities	556			879			1,141
SBA loan discount accretion	(323		)	(247		)	(153		)
Gain on bargain purchase	(230		)	—			—
Gain on sales of securities available for sale	(12		)	(93		)	—
Gain on sales of securities held to maturity	—			(36		)	—
Gains on sales of other real estate owned	—			(5		)	(31		)
Gains on sales of loans held for sale	(4,475		)	(5,149		)	(3,785		)
Originations of loans held for sale	(111,109		)	(110,831		)	(96,968		)
Proceeds from sales of loans held for sale	116,818			126,555			91,708
Increase in cash surrender value on bank-owned life insurance	(589		)	(522		)	(549		)
Loss on cash surrender value on bank-owned life insurance	14			—			—
Share-based compensation expense	1,019			993			754
Deferred tax expense	305			620			354
Re-measurement of deferred tax assets and liabilities	(28		)	1,712			—
Increase in accrued interest receivable	(123		)	(383		)	(242		)
(Increase) decrease in other assets	(1,589		)	(181		)	388
Increase (decrease) in accrued interest payable	424			(62		)	20
Increase (decrease) in accrued expenses and other liabilities	2,333			(266		)	(552		)
Net cash provided by operating activities	17,328			21,892			2,485
INVESTING ACTIVITIES:
Purchases of securities :
Available for sale	(35,209		)	(35,680		)	(37,300		)
Held to maturity	(7,723		)	(34,592		)	(35,212		)
Proceeds from maturities and prepayments of securities:
Available for sale	17,664			25,770			23,354
Held to maturity	38,192			49,889			31,429
Proceeds from sales of securities:
Available for sale	—			7,602			—
Held to maturity	—			1,034			—
Proceeds from bank-owned life insurance benefits paid	893			—			248
Net (purchase) redemption of restricted stock	(2,510		)	2,408			(661		)
Net (increase) in loans	(19,762		)	(65,387		)	(42,626		)
Capital expenditures	(648		)	(846		)	(457		)
Forfeitable deposit on other real estate owned	175			—			—
Capital improvement to other real estate owned	—			(5		)	(61		)
Net cash paid for NJCB merger	(996		)
Proceeds from sales of other real estate owned	—			631			1,033
Purchase of bank-owned life insurance	—			(2,345		)	(300		)
Net cash used in investing activities	(9,924		)	(51,521		)	(60,553		)
FINANCING ACTIVITIES:
Exercise of stock options	88			247			96

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for -
Interest $ 5,138
$ 4,697
Income taxes 4,590
4,170
Non-cash investing activities
Real estate acquired in full satisfaction of loans in foreclosure 141
2,357



Purchase of treasury stock	—			—			(24		)
Cash dividends paid to shareholders	(2,120		)	(1,690		)	(399		)
Net (decrease) increase in deposits	(58,557		)	87,490			47,759
Increase (decrease) in overnight borrowings	51,275			(42,550		)	24,154
Repayment of long-term borrowing	—			(10,000		)	(10,000		)
Net cash (used in) provided by financing activities	(9,314		)	33,497			61,586
(Decrease) increase in cash and cash equivalents	(1,910		)	3,868			3,518
Cash and cash equivalents at beginning of year	18,754			14,886			11,368
Cash and cash equivalents at end of period	$	16,844		$	18,754		$	14,886
Supplemental disclosures of cash flow information:
Cash paid during the period for :
Interest	$	7,617		$	5,560		$	5,138
Income taxes	3,226			3,220			4,590
Noncash items:
Transfer of loans to other real estate owned	1,460			455			141
Acquisition of New Jersey Community Bank
Noncash assets acquired:
Investment securities available for sale	$	11,173
Loans	75,144
Premises and equipment, net	1,120
Bank-owned life insurance	3,972
Accrued interest receivable	259
Core deposit intangible asset	80
Other real estate owned	1,230
Other assets	1,601
	$	94,579
Liabilities assumed:
Deposits	$	87,223
Other liabilities	636
	$	87,859

Common stock issued for NJCB merger	$	5,494

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

~~1st~~1^ST CONSTITUTION BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, ~~2016~~2018 and ~~2015~~2017

1. Summary of Significant Accounting Policies

~~1st~~1^ST Constitution Bancorp (the “Company”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and was organized under the laws of the State of New Jersey. The Company is the parent to ~~1st~~1^ST Constitution Bank (the “Bank”), a New Jersey state-chartered commercial bank. The Bank provides community banking services to a broad range of customers, including corporations, individuals, partnerships and other community organizations in the central, coastal and northeastern New Jersey areas. The Bank conducts its operations through its main office located in Cranbury, New Jersey and operated, as of December 31, ~~2016, eighteen~~2018, 19 additional branch offices in ~~downtown~~Asbury Park, Cranbury, Fair Haven, Fort Lee, Freehold, Hamilton Square, Hightstown, Hillsborough, Hopewell, Jamesburg, Lawrenceville, Little Silver, Neptune City, Perth Amboy, Plainsboro, Skillman, ~~West Windsor,~~ Princeton, Rumson, ~~Fair Haven, Asbury Park,~~and Shrewsbury, ~~and Little Silver,~~ New Jersey. The Bank also operates ~~four~~two residential mortgage loan production offices in Forked River ~~Flemington,~~and Jersey City, ~~and Somerset,~~ New Jersey.

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, ~~2016~~2018 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.

Basis of Financial Statement Presentation:The ~~Company paid a 5% common stock dividend on April 7, 2015 and a 5% common stock dividend on February 1, 2016. As appropriate, common shares and per common share data presented in the~~ consolidated financial statements ~~and the accompanying notes below~~ have been ~~adjusted~~prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). In preparing the financial statements, management is required to ~~reflect~~make estimates and assumptions that affect the ~~common stock dividends.~~

~~On September 15, 2016, the Board~~reported amounts of ~~Directors declared a quarterly cash dividend~~assets and liabilities and disclosure of ~~$0.05 per common share that was paid on October 21, 2016 to all shareholders of record~~contingent assets and liabilities as of the ~~close of business on September 28, 2016. This action representedthe first cash dividend declared by 1~~^ST ~~Constitution Bancorp on its common shares.~~

~~On December 15, 2016, the Board of Directors declared a quarterly cash dividend of $0.05 per common share that was paid on January 25, 2017 to all shareholders of record as~~date of the ~~close~~balance sheet and revenues and expenses for that period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of ~~business on January 3, 2017.~~the allowance for loan losses, other-than-temporary security impairment, the fair value of other real estate owned, if any, and the valuation of deferred tax assets.

~~Basis~~Principles of ~~Presentation~~

Consolidation:The ~~accounting and reporting policies~~consolidated financial statements of the Company ~~conform to accounting principles generally accepted in~~are prepared on the ~~United States~~accrual basis and include the accounts of ~~America (“U.S. GAAP”) and to the accepted practices within the banking industry. The following is a description of the more significant of these policies and practices.~~

~~Principles of Consolidation~~

~~The accompanying consolidated financial statements include~~ the Company and its wholly-owned subsidiary, 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.~~LLC and 249 New York Avenue, LLC. 1st Constitution Capital Trust II, a subsidiary of the Company (“Trust II”), 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. While the following footnotes include the collective results of the Company and the Bank, the footnotes primarily reflect the Bank's and its subsidiaries' activities. 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.

~~Use of Estimates in the Preparation of Financial Statements~~

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other-than-temporary security impairment, the fair value of other real estate owned and the valuation of deferred tax assets.

Concentration of Credit ~~Risk~~

Risk: Financial instruments which potentially subject the Company and its subsidiaries to concentrations of credit risk primarily consist of investment securities and loans. At December 31, ~~2016, 49.5%~~2018, 48.9% of our investment securities portfolio consisted of U.S. Government and Agency issues and collateralized mortgage obligations collateralized by agency mortgage backed securities. In addition, ~~40.1%~~29.2% of the portfolio consisted of municipal bonds. The remaining ~~10.4%~~21.9% of our investment securities consisted ~~primarily~~ of corporate debt and asset-backed issues. The Bank’s lending activity is primarily concentrated in loans collateralized by real estate located primarily in the State of New Jersey. As a result, credit risk is broadly dependent on the real estate market and general economic conditions in that state.

Interest Rate ~~Risk~~

Risk: The Bank is principally engaged in the business of attracting deposits from the general public and using these deposits, together with other funds, to purchase investment securities and to make loans, the majority of which are secured by real estate. The potential for interest-rate risk exists as a result of the Company's generally shorter duration of interest-sensitive assets compared to the generally longer duration of interest-sensitive liabilities. In a changing interest rate environment, assets held by the Bank will re-price faster than liabilities of the Bank, thereby affecting net interest income. For this reason, management regularly monitors the maturity structure and rate adjustment features of the Bank’s assets and liabilities in order to measure its level of interest-rate risk and to plan for future volatility.

Investment ~~Securities~~

Securities: Investment securities which the Company has the intent and ability to hold until maturity are classified as held to maturity and are recorded at cost, adjusted for amortization of premiums and accretion of discounts. Investment securities that are held for indefinite periods of time, that management intends to use as part of its asset/liability management strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, increased capital requirements or other similar factors, are classified as available for sale and are carried at fair value. Unrealized gains and losses on available for sale securities are recorded as a separate component of shareholders’ equity. Realized gains and losses, which are computed using the specific identification method, are recognized in earnings on a trade date basis.

If the fair value of a security is less than its amortized cost, the security is deemed to be impaired. Management evaluates all securities with unrealized losses quarterly to determine if such impairments are temporary or other-than-temporary in accordance with the Accounting Standards Codification (“ASC”) of the Financial Accounting Standards Board (“FASB”). Temporary impairments on available for sale securities are recognized, on a tax-effected basis, through other comprehensive income (“OCI”) with offsetting adjustments to the carrying value of the security and the balance of related deferred taxes. Temporary impairments of held to maturity securities are not recorded in the consolidated financial statements; however, information concerning the amount and duration of impairments on held to maturity securities are disclosed.

Other-than-temporary impairments ("OTTI") on all equity securities and on debt securities that the Company has decided to sell, or will, more likely than not, be required to sell prior to the full recovery of fair value to a level equal to or exceeding amortized cost, are recognized in earnings. If neither of these conditions regarding the likelihood of sale for a debt security apply, the OTTI is bifurcated into credit-related and noncredit-related components. Credit-related impairment generally represents the amount by which the present value of the cash flows that are expected to be collected on a debt security fall below its amortized cost. The noncredit-related component represents the remaining portion of the impairment not otherwise designated as credit-related. The Company recognizes credit-related OTTI in earnings. Noncredit-related OTTI on debt securities are recognized in OCI.

Premiums and discounts on all securities are amortized/accreted to maturity by use of the level-yield method considering the impact of principal amortization and prepayments.

Federal law requires a member institution of the FHLB system to hold restricted stock of its district FHLB according to a predetermined formula. The Bank’s investment in the restricted stock of the FHLB of New York is carried at cost and is included in other assets. The investment in FHLB stock was ~~$3,962~~$3.9 million and ~~$3,302~~$1.5 million at December 31, ~~2016~~2018 and December 31, ~~2015,~~2017, respectively.

Management evaluates the FHLB restricted stock for impairment in accordance with U.S. GAAP. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital

stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. Management believes no impairment charge is necessary related to the FHLB stock as of December 31, ~~2016.~~2018.

Bank-Owned Life ~~Insurance~~

Insurance: The Company invests in bank-owned life insurance (“BOLI”). BOLI involves the purchasing of life insurance by the Company on a select group of its executives, directors, officers and employees. The Company is the owner and beneficiary of the policies. This pool of insurance, due to the advantages of the Bank, is profitable to the Company. This profitability offsets a portion of current and future benefit costs and is intended to provide a funding source for the payment of future benefits. The Bank’s deposits fund BOLI and the earnings from BOLI are recognized as non-interest income.

Loans and Loans Held For ~~Sale~~

Sale: Loans that management intends to hold to maturity are stated at the principal amount outstanding, net of unearned income. Unearned income is recognized over the lives of the respective loans, principally using the effective interest method. Interest income is generally not accrued on loans, including impaired loans, where interest or principal is 90 days or more past due, unless the loans are adequately secured and in the process of collection, or on loans where management has determined that the borrowers may be unable to meet contractual principal and/or interest obligations. When it is probable that, based upon current information, the Bank will not collect all amounts due under the contractual terms of the loan, the loan is reported as impaired. Smaller balance homogeneous type loans, such as residential loans and loans to individuals, which are collectively evaluated, are generally excluded from consideration for impairment. Loan impairment is measured based upon the present value of the expected future cash flows discounted at the loan’s effective interest rate or the underlying fair value of collateral for collateral dependent loans. When a loan, including an impaired loan, is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Non-accrual loans are generally not returned to

accruing status until principal and interest payments have been brought current and full collectibility is reasonably assured. Cash receipts on non-accrual and impaired loans are applied to principal, unless the loan is deemed fully collectible.

Loans held for sale are carried at the lower of aggregated cost or fair value. The fair value of loans held for sale are determined, when possible, using quoted secondary market prices. If no such quoted market prices exist, fair values are determined using quoted prices for similar loans, adjusted for the specific attributes of the loans. Realized gains and losses on loans held for sale are recognized at settlement date and are determined based on the cost, including deferred net loan origination fees and the costs of the specific loans sold. Residential mortgage loans are sold with servicing released.

The Bank accounts for its transfers and servicing of financial assets in accordance with ASC Topic 860, “Transfers and Servicing” ("ASC Topic 860"). The Bank originates residential mortgages under a definitive plan to sell those loans with servicing generally released. Residential mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. The Bank also originates commercial loans, of which a portion are guaranteed by the Small Business Administration ("SBA"). The guaranteed portion of the loans is generally sold into the secondary market. Gains and losses on sales are also accounted for in accordance with ASC Topic 860.

The Bank enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding “rate lock commitments.” Rate lock commitments on residential mortgage loans that are intended to be sold are considered to be derivatives. Time elapsing between the issuance of a loan commitment and closing and sale of the loan generally ranges from 30 to 120 days. The Bank protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Bank commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Bank is generally not exposed to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates.

The fair value of rate lock commitments and best efforts commitments is not readily ascertainable with precision because rate lock commitments and best efforts commitments are not actively traded in stand-alone markets. The Bank determines the fair value of rate lock commitments based upon the forward sales price that is obtained in the best efforts commitment at the time the borrower locks in the interest rate on the loan while taking into consideration the probability that the rate lock commitments will close. Due to high correlation between rate lock commitments and best efforts commitments, no gain or loss occurs on the rate lock commitments. The estimated fair value of rate lock commitments was ~~$123,000~~$79,000 and $135,000 at December 31, ~~2016. The estimated fair value of rate lock commitments at December 31, 2015 was not deemed to be significant~~2018 and ~~therefore, not recorded on the balance sheet.~~2017, respectively.

ASC Topic 460, ~~“Guarantees,”~~"Guarantees," requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support contracts entered into by customers. Most guarantees extend for one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank defines the fair value of these letters of credit as the fees paid by the customer or similar fees collected on similar instruments. The Bank amortizes the fees collected over the life of the instrument. The Bank generally obtains collateral, such as real estate or liens on customer assets, for these types of commitments. The Bank’s potential liability would be reduced by any proceeds obtained in liquidation of the collateral. The Bank had standby letters of credit for customers aggregating ~~$2.0 million~~$766 thousand and ~~$2.1~~$1.2 million at December 31, ~~2016~~2018 and ~~2015,~~2017, respectively. These letters of credit are primarily related to real estate lending and the approximate value of underlying collateral upon liquidation is expected to be sufficient to cover this maximum potential exposure at December 31, ~~2016.~~2018. The amount of the liability related to guarantees under issued standby letters of credit was not material as of December 31, ~~2016~~2018 and ~~2015.~~2017.

Allowance for Loan ~~Losses~~

Losses: The allowance for loan losses is maintained at a level sufficient to absorb estimated credit losses in the loan portfolio as of the date of the financial statements. The allowance for loan losses is a valuation reserve available for losses incurred or inherent in the loan portfolio and other extensions of credit. The determination of the adequacy of the allowance for loan losses is a critical accounting policy of the Bank.

All, or part, of the principal balance of commercial and commercial real estate loans and construction loans are charged off against the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Consumer loans are generally charged off no later than 120 days past due on a contractual basis, or earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

Loans are placed in a nonaccrual status when the ultimate collectability of principal or interest in whole, or in part, is in doubt. Past-due loans contractually past-due 90 days or more for either principal or interest are also placed in nonaccrual status unless they are both well secured and in the process of collection. Impaired loans are evaluated individually.

Purchased Credit-Impaired (“PCI”) loans are loans acquired at a discount that is due, in part, to credit quality. PCI loans are accounted for in accordance with ASC Subtopic 310-30, "Receivables, Loans and Debt Securities Acquired with Deteriorated Credit Quality" and are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses). The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of the PCI loans or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of the loans. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or a valuation allowance. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loans and result in an increase in yield on a prospective basis.

The following is our charge-off policy for our loan segments:

Commercial, Commercial Real Estate and Construction

Loans are generally fully or partially charged down to the fair value of collateral securing the asset when:

Management judges the loan to be uncollectible;

Repayment is deemed to be protracted beyond reasonable time frames;

The loan has been classified as a loss by either internal loan review process or external examiners;

The customer has filed bankruptcy and the loss becomes evident owing to a lack of assets; or

The loan is significantly past due unless both well secured and in the process of collection.

Consumer

~~Consumer~~

Consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible.

Premises and ~~Equipment~~

Equipment: Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily on the straight-line method over the estimated useful lives of the related assets for financial reporting purposes and using the mandated methods by asset type for income tax purposes. Building, furniture and fixtures, equipment and leasehold improvements are depreciated or amortized over the estimated useful lives of the assets or lease terms, as applicable. Estimated useful lives of buildings are forty years, furniture and fixtures and equipment are three to fifteen years and leasehold improvements are generally three to ten years. Expenditures for maintenance and repairs are charged to expense as incurred.

The Bank accounts for impairment of long-lived assets in accordance with ASC Topic 360, “Property, Plant, and Equipment,” which requires recognition and measurement for the impairment of long-lived assets to be held and used or to be disposed of by sale. The Bank had no impaired long-lived assets at December 31, ~~2016~~2018 and ~~2015.~~2017.

~~Derivative Contracts~~

Derivative contracts, as required by ASC Topic 815, “Derivatives and Hedging,” are carried at fair value as either assets or liabilities on the balance sheet with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders’ equity, net of related income tax effects for contracts that are classified as cash flow hedges. Gains and losses on derivative contracts are recognized upon realization, utilizing the specific identification method.

Income ~~Taxes~~

Taxes: There are two components of income tax expense or benefit: current and deferred. Current income tax expense or benefit approximates cash to be paid or refunded for taxes for the applicable period. Deferred tax assets and liabilities are recognized due to differences between the basis of assets and liabilities as measured by tax laws and their basis as reported in the financial statements. Deferred tax assets are subject to management’s judgment based upon available evidence that future realizations are likely. If management determines that the Company may not be able to realize some or all of the net deferred tax asset in the future, a charge to income tax expense may be required to increase the valuation reserve of the net deferred tax asset. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax expense or benefit is recognized for the change in deferred tax assets and liabilities.

The Company accounts for uncertainty in income taxes recognized in its consolidated financial statements in accordance with ASC Topic 740, ~~“Income~~"Income Taxes,”" which prescribes a recognition threshold and measurement attribute for the financial statement

recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has not identified any significant income tax uncertainties through the evaluation of its income tax positions for the years ended December 31, ~~2016~~2018 and ~~2015~~2017 and has not recognized any liabilities for tax uncertainties as of December 31, ~~2016~~2018 and ~~2015.~~2017. Our policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense; such amounts were not significant during the years ended December 31, ~~2016~~2018 and ~~2015.~~2017. The tax years subject to examination by the taxing authorities are, for federal and state purposes, the years ended December 31, 2018, 2017, 2016 ~~2015, 2014~~ and ~~2013.~~2015.

On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The Tax Act contained several key tax provisions including the reduction in the maximum corporate federal tax rate to 21% from 35% effective January 1, 2018. As a result, the Company was required to re-measure, through income tax expense, its deferred tax assets and liabilities using the enacted rate at which it expects them to be recovered or settled. In December 2017, the U.S. Securities and Exchange Commission ("SEC") also issued Staff Accounting Bulletin No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"), which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Because the Tax Act was passed late in December 2017 and ongoing analysis and interpretation of the other key tax provisions was expected over the next 12 months, the Company considered the deferred tax re-measurements and other items to be provisional in nature. In 2018, the Company completed its analysis within the measurement period in accordance with SAB 118. See Note 13 - Income Taxes - for additional information.

Other Real Estate Owned ("OREO")

: OREO obtained through loan foreclosures or the receipt of deeds-in-lieu of foreclosure is recorded at the fair value of the related property, as determined by current appraisals less estimated costs to sell at the initial transfer from the loan portfolio. Write-downs on these properties, which occur after the initial transfer from the loan portfolio, are recorded as operating expenses. Costs of holding such properties are charged to expense in the current period. Gains, to the extent realized, and losses on the disposition of these properties are reflected in current operations.

Goodwill and Other Intangible ~~Assets~~

Assets: Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable net assets acquired in accordance with the acquisition method of accounting. Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or more often if events or circumstances indicated that there may be impairment, in accordance with ASC Topic 350, “Intangibles – Goodwill and Other.” Goodwill is tested for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. Core deposit intangibles are a measure of the value of checking and savings deposits acquired in business combinations accounted for under the purchase method. Core deposit intangibles are amortized over their estimated lives (ranging from five to ten years) and identifiable intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. Any impairment loss related to goodwill and other intangible assets is reflected as other non-interest expense in the statement of income in the period in which the impairment was determined. No assurance can be given that future impairment tests will not result in a charge to earnings. See Note 8 – Goodwill and Intangible Assets - for additional information.

Share-Based ~~Compensation~~

Compensation: The Company recognizes compensation expense for stock awards and options in accordance with ASC Topic 718, “Compensation – Stock Compensation.” The expense of stock-based compensation is generally measured at fair value at the grant date with compensation expense recognized over the service period, which is usually the vesting period. The Company utilizes the Black-Scholes option-pricing model to estimate the fair value of each stock option on the date of grant. The Black-Scholes model takes into consideration the exercise price and expected life of the options, the current price of the underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Company’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested. See Note 15 – Share-Based Compensation - for additional information.

Benefit ~~Plans~~

Plans: The Company provides certain retirement savings benefits to employees under a 401(k) plan. The Company’s contributions to the 401(k) plan are expensed as incurred.

The Company also provides retirement benefits to certain employees under supplemental executive retirement plans. The plans are unfunded and the Company accrues actuarially determined benefit costs over the estimated service period of the employees in the plans. In accordance with ASC Topic 715, “Compensation – Retirement Benefits,” the Company recognizes the unfunded status of these postretirement plans as a liability in its consolidated balance sheets and recognizes changes in that unfunded status in the year in which the changes occur through other comprehensive income.

Cash and Cash ~~Equivalents~~

Equivalents: Cash and cash equivalents includes cash on hand, interest and non-interest bearing amounts due from banks, federal funds sold and short-term investments. Generally, federal funds are sold and short-term investments are made for a one or two-day period.

~~Reclassifications~~

Certain reclassifications have been made to the prior period amounts to conform with the current period presentation. Such reclassification had no impact on net income or total shareholders’ equity.

Advertising ~~Costs~~

Costs: It is the Company’s policy to expense advertising costs in the period in which they are incurred.

Earnings Per Common ~~Share~~

Share: Basic ~~net income~~earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during each period.

Diluted ~~net income~~earnings 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.

~~The following tables illustrate the reconciliation~~Awards of ~~the numerators~~restricted shares are included in outstanding shares when granted. Unvested restricted shares are entitled to non-forfeitable dividends and ~~denominators~~participate in undistributed earnings with common shares. Awards of ~~the~~this nature are considered participating securities and basic and diluted earnings per ~~common~~ share ~~(EPS) calculations.~~ 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.

(Dollars in thousands except per share data) Year Ended December 31, 2016
Net Income
Weighted
average
shares

Per share
Amount
Basic earnings per common share:
Net income $ 9,285
7,962,121
$ 1.17

Effect of dilutive securities:
Stock options and warrants 215,318

Diluted EPS:
Net income plus assumed conversion $ 9,285
8,177,439
$ 1.14

Year Ended December 31, 2015
Net Income
Weighted
average
shares

Per share
Amount
Basic earnings per common share:
Net income $ 8,664
7,901,278
$ 1.10

Effect of dilutive securities:

Stock options and warrants
174,474

Diluted EPS:

Net income plus assumed conversion $ 8,664
8,075,752
$ 1.07

For the years ended December 31, 2018, 2017 and 2016, 19,350, 8,900 and ~~2015,~~ 11,088 ~~and 25,182~~ 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 years ended December 31, 2018, 2017 and 2016:



(In thousands, except per share data)	2018		2017		2016
Net income	$	12,048	$	6,928	$	9,285

Basic weighted average shares outstanding	8,320,718		8,049,981		7,962,121
Plus: common stock equivalents	272,791		262,803		215,318
Diluted weighted average shares outstanding	8,593,509		8,312,784		8,177,439
Earnings per share:
Basic	$	1.45	$	0.86	$	1.17
Diluted	1.40		0.83		1.14

Comprehensive ~~Income~~

Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, other-than-temporary non-credit related security impairments, ~~unrealized gains and losses on cash flow hedges~~ and changes in the funded status of benefit plans.

Variable Interest ~~Entities~~

Entities: Management has determined that Trust II qualifies as a variable interest entity under ASC Topic 810, “Consolidation.” Trust II issued mandatorily redeemable preferred stock to investors, loaned the proceeds to the Company and holds, as its sole asset, subordinated debentures issued by the Company. As a qualified variable interest entity, Trust II’s balance sheet and statement of operations have never been consolidated with those of the ~~Company.~~Company because the Company is not the beneficiary.

In March 2005, the Federal Reserve Board ("FRB") adopted a final rule that would continue to allow the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits. Under the final rule, after a five-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit could

be included in Tier 2 capital, subject to restrictions. Based on the final rule, the Company has included all of its $18.0 million in trust preferred securities in Tier 1 capital at December 31, ~~2016~~2018 and ~~2015.~~2017.

Segment ~~Information~~

Information: U.S. GAAP establishes standards for public business enterprises to report information about operating segments in their annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also established standards for related disclosure about products and services, geographic areas and major customers. Operating segments are components of an enterprise, which are evaluated regularly by the chief operating decision-maker in deciding how to allocate and assess resources and performance. The Company’s chief operating decision-maker is the President and Chief Executive Officer. The Company has applied the aggregation criteria for its operating segments to create one reportable segment, “Community Banking.”

The Company’s Community Banking segment consists of construction, commercial, retail and mortgage banking operations. The Community Banking segment is managed as a single strategic unit, which generates revenue from a variety of products and services provided by the Company. Construction, commercial, retail and mortgage lending is dependent upon the ability of the Company to fund itself with retail deposits and other borrowings and to manage interest rate, liquidity and credit risk as a single unit.

Reclassifications: Certain reclassifications have been made to the prior period amounts to conform with the current period presentation. Such reclassification had no impact on net income or total shareholders’ equity.

Recent Accounting Pronouncements

ASU 2018-15 - Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license.

The amendments in this Update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this Update.

The amendments in this ASU also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The term of the hosting arrangement includes the non-cancellable period of the arrangement plus periods covered by (1) an option to extend the arrangement if the customer is reasonably certain to exercise that option, (2) an option to terminate the arrangement if the customer is reasonably certain not to exercise the termination option, and (3) an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor. The entity also is required to apply the existing impairment guidance in Subtopic 350-40 to the capitalized implementation costs as if the costs were long-lived assets.

The amendments in this ASU also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the consolidated balance sheets in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.

The Company is currently evaluating the potential impact, if any, of adopting this ASU on its financial statements. The provisions of this ASU are effective for fiscal years beginning after December 15, 2019.

ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)

In August 2018, the FASB issued ASU 2018-14 - “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20),” which consists of amendments to the disclosure framework project to improve the effectiveness of disclosures in the notes to the financial statements. The amendments in this Update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

The following disclosure requirements are removed from Subtopic 715-20:


1.	The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year;


2.	The amount and timing of plan assets expected to be returned to the employer;


3.	The disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law;


4.	Related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan;


5.	For nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. However, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets; and


6.	For public entities, the effects of a one-percentage point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.

The following disclosure requirements are added to Subtopic 715-20:


1.	The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates; and


2.	An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

The amendments in this ASU also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed:


1.	The projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs in excess of plan assets; and


2.	The accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs in excess of plan assets.

The amendments in this ASU remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. Although narrow in scope, the amendments are considered an important part of the FASB’s efforts to improve the effectiveness of disclosures in the notes to financial statements by applying concepts in the Concepts Statement.

For the Company, the provisions of this ASU are effective for fiscal years beginning after December 15, 2020. The Company does not expect the adoption of this guidance to have a material impact on the disclosures in the Company’s consolidated financial statements.

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 and 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


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 were added to Topic 820; however, the disclosures are not required for nonpublic entities:


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

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 in 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 89.

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

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.

ASU Update 2017-07 - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which requires that an employer disaggregate the service cost component from the other components of net benefit costs as follows: (1) service cost must be presented in the same line item(s) as other employee compensation costs. These costs are generally included within income from continuing operations but in some cases, may be eligible for capitalization if certain criteria are met; and (2) all other components of net benefit cost must be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. These generally include interest cost, actual return on plan assets, amortization of prior service cost included in accumulated other comprehensive income and gains or losses from changes in the value of the projected benefit obligation or plan assets.

For the Company, the provisions of this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those years. The adoption of this guidance in 2018 did not have a material impact on the Company’s consolidated financial statements.

ASU Update 2017-04 - Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04 "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The primary goal of this ASU is to simplify the goodwill impairment test and provide cost savings for all entities by removing the requirement to determine the fair value of individual assets and liabilities in order to calculate a reporting unit's "implied" goodwill under current U.S. GAAP.

~~The amendments have staggered~~For the Company, the provisions of this ASU are effective dates: (1) a public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments for its annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, (2) a public business entity that is not an SEC filier should adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020 and (3) all other entities, including non-for-profit entities, should adopt the amendments for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021.2019. The amendments should be adopted prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

The ~~Company does not expect the~~ adoption of this guidance toin 2018 did not have a material impact on ~~its~~the Company's consolidated financial statements.

ASU Update 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business

In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business," which clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this ASU provide a more robust framework to use in determining when a set of assets and activities is a business. The current definition of a business is interpreted broadly and can be difficult to apply. Stakeholders indicated that analyzing transactions is inefficient and costly and the definition does not permit the use of reasonable judgment.

Under current implementation guidance, there are three elements of a business: inputs, processes and outputs. While an integrated set of assets and activities (collectively referred to as a "set") that is a business usually has outputs, outputs are not required to be present. Additionally, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes.

The ASU introduces a "screen" to assist entities in determining when a set should not be considered a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business. If the screen is not met, the ASU requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Further, the

ASU removes the evaluation of whether a market participant could replace missing elements (as required under current U.S. GAAP).

For ~~public business entities,~~the Company, the ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. ~~For all other entities, the amendments apply to annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019.~~ The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition.

The ~~Company does not expect the~~ adoption of this guidance toin 2018 did not have a material impact on ~~its~~the Company's consolidated financial statements.

~~ASU Update 2016-20 - Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.~~

In December 2016, the FASB issued ASU 2016-20 "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers," amending the new revenue recognition standard that it jointly issued with the International Accounting Standards Board ("IASB") in 2014. The amendments do not change the core principles of the standard, but clarify certain narrow aspects of the standard including its scope, contract cost accounting, disclosures, illustrative examples and other matters. The ASU becomes effective concurrently with ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)."

~~The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.~~

~~ASU Update 2016-18 - Restricted Cash.~~

In November 2016, the FASB issued ASU 2016-18 "Restricted Cash," which updates Topic 230-Statement of Cash Flows, to require that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. Consequently, transfers between cash and restricted cash will not be presented as a separate line item in the operating, investing or financing sections of the cash flow statement. The ASU includes examples of the revised presentation guidance and additional presentation and disclosure requirements apply.

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. 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 that interim period.

~~The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.~~

~~ASU Update 2016-17 - Interests Held Through Related Parties That Are Under Common Control~~.

In October 2016, the FASB issued ASU 2016-17 "Interests Held Through Related Parties That Are Under Common Control," which amends the variable interest entity ("VIE") guidance within Topic 810. It does not change the two required characteristics for a single decision maker to be the primary beneficiary ("power" and "economics"), but it revised one aspect of the related analysis. The amendments change how a single decision maker of a VIE treats indirect variable interest held through related parties that are under common control when determining whether it is the primary beneficiary of that VIE. The ASU requires consideration of such indirect interests on a proportionate basis instead of being the equivalent of direct interests in their entity, thereby making consolidation less likely.

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted; however, if an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of that fiscal year.

~~The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.~~

ASU Update 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.

In August 2016, the FASB issued ASU 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which clarifies whether the following items should be categorized as operating, investing or financing in the statement of cash flows: (1) debt prepayment and extinguishment costs, (2) settlement of zero-coupon debt, (3) settlement of contingent consideration, (4) insurance proceeds, (5) settlement of corporate-owned life insurance (COLI) and bank-owned life

insurance ~~policies~~ (BOLI) policies, (6) distributions from equity method investees, (7) beneficial interests in securitization transactions and (8) receipts and payments with aspects of more than one class of cash flows.

For ~~public business entities,~~ the ~~amendments~~Company, the provisions of this ASU are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. 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 that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company ~~currently~~ classifies cash flows related to BOLI in accordance with the guidance, and ~~does not expect~~ the adoption of this guidance toin 2018 did not have a material impact on its consolidated financial statements.

ASU Update 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial ~~Instruments.~~Instruments

In June 2016, the FASB issued ASU 2016-13 "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which requires credit losses on most financial assets to be measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model).

Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.

The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination ("PCD assets") should be determined in a similar manner to other financial assets measured on an amortized cost basis. Upon initial recognition, the allowance for credit losses is added to the purchase price ("gross up approach") to determine the initial amortized cost basis. The subsequent accounting for PCD assets will use the CECL model described above.

The ASU made certain targeted amendments to the existing impairment model for available-for-sale (AFS) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.

For ~~public business entities that are SEC filers,~~ the ~~amendments~~Company, the provisions of this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for all entities as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years.

The Company ~~is currently evaluating~~has completed the initial analysis of its financial assets and will be building and validating the CECL models in 2019 to evaluate the impact of the pending adoption of the new standard on its consolidated financial statements.

ASU Update ~~2016-09 Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.~~

In March 2016, the FASB issued ASU 2016-09 "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" to simplify the accounting for stock compensation. The ASU focuses on income tax accounting, award classification, estimating forfeitures and cash flow presentation. The ASU also provides certain accounting policy alternatives to nonpublic entities. The ASU simplifies several aspects of the stock compensation guidance in Topic 718 and other related guidance. The following six amendments apply to all entities: (1) accounting for income taxes upon vesting or exercise of share-based payments and related EPS effects, (2) classification of excess tax benefits on the statement of cash flows, (3) accounting for forfeitures, (4) liability classification exception for statutory tax withholding requirements, (5) cash flow presentation of employee taxes paid when an employer withholds shares for tax-withholding purposes and (6) elimination of the indefinite deferral in Topic 718.

For public business entities, the amendments are effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period for which the financial statements have not been issued or made available to be issued. 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 that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company adopted the guidance for the year ended December 31, 2016. The effect of the adoption of this guidance was not material.

2016-02 - Leases

~~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 asset 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. ~~A modified retrospective~~The Company adopted Topic 842 in the first quarter of 2019 utilizing the optional transition ~~approach is required~~method as provided by ASU 2018-11. Under the optional transition method, only the most recent period presented will reflect 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 these leases.

The election of these practical expedients allows the Company to continue to account for ~~lessees~~these leases that commenced before January 1, 2019 in accordance with previous GAAP. All of the Company’s leases that commenced before January 1, 2019 were operating leases and 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 will be recognized for each operating lease at each reporting date based on the present value of the remaining minimum lease payments.

The Company has 16 leases for real property, which includes 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 include one or more options to extend the lease term. Two of the leases for branch offices are a lease for the land under the building and the Company owns the leasehold improvements. The Company also has 13 leases for office equipment, which are 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 so that it would have the 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 because of 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 results in the recognition of a significant lease liability and ROU asset.

Upon adoption on January 1, 2019, the Company recognized a lease liability of approximately $16.2 million and a ROU asset of $15.7 million. If the increase in assets due to the recognized ROU asset had been included in assets at December 31, 2018, the Company’s regulatory capital ratios for CET 1 risk-based capital, Tier 1 risk-based capital, total risk-based capital, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financingleverage capital ratios would have been 10.57%, 12.22%, 12.98%, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. In 2017, the Company plans to complete an evaluation of all of its leases to determine the potential impact on the Company's consolidated financial statements as a result of this new standard.11.73%, respectively.

ASU Update 2016-01 - Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial ~~Liabilities.~~Liabilities

In January 2016, the FASB issued ASU 2016-01 "Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The guidance in the ASU, among other things, requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income, the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category

and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. ~~The~~

For the Company, the guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The ~~Company does not expect the~~ adoption of this guidance ~~to have a material impact on its consolidated financial statements.~~

~~ASU Update 2015-16 Business Combination (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.~~

In September 2015, the FASB issued ASU 2015-16 "Business Combination (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments," to require adjustments to provisional amounts that are identified during the measurement period to be recognized in the reporting period in which the adjustment amounts are determined. This includes any effect on earnings of changes in depreciation, amortization or other income as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update would require an entity to disclose (either on the face of the income statement or in the notes) the nature and amount of measurement-period adjustments recognized in the current period, including, separately, the amounts in current-period income statement line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015 and for all other entities for fiscal years beginning after December 31, 2016 and for interim periods within fiscal years beginning after December 15, 2017. Adoption of this guidance in 20162018 did not have a material impact on the Company’s consolidated financial statements.

ASU ~~2014-9 Revenue~~2014-09 -Revenue from Contracts with Customers (Topic 606)

In May 2014, the FASB issued ASU ~~2014-9,~~2014-09, deferred by ASU 2015-14, “Revenue from Contracts with Customers (Topic 606).” The amendments in this update establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry specific guidance such as the real estate, construction and software industries. The revenue standard's core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five

basic steps: (1) identify the contract with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ~~This~~

In December 2016, the FASB issued ASU 2016-20 "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers," amending the new revenue recognition standard that it jointly issued with the International Accounting Standards Board ("IASB") in 2014. The amendments do not change the core principles of the standard, but clarify certain narrow aspects of the standard, including its scope, contract cost accounting, disclosures, illustrative examples and other matters. The ASU becomes effective concurrently with ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)."

The Company's revenue is comprised of primarily interest income on interest-earning assets less interest expense on interest-bearing liabilities and non-interest income. The scope of this guidance excludes net interest income as well as other revenues associated with financial assets and liabilities (such as gains on the sale of loans, loan fees and loan servicing fees), including loans, leases and securities. Accordingly, a significant portion of the Company's revenues will not be affected.

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” and all subsequent amendments to the ASU (collectively, “Topic 606”), which ~~does not apply~~(i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to ~~financial instruments, is effective~~recognize a gain or loss from the transfer of nonfinancial assets, such as other real estate owned (“OREO”). The majority of the Company’s revenues come from interest income, other services to customers and other sources, including loans, leases and securities that are outside the scope of Topic 606. The Company’s services that fall within the scope of Topic 606 are presented within non-interest income and are recognized as revenue as the Company satisfies its obligations to customers. Services within the scope of Topic 606 include service charges on deposits, interchange income, other services and the sale of OREO. Refer to Note 24 - Revenue from Contracts with Customers - for ~~interim and annual~~further discussion on the Company’s accounting policies for revenue sources within the scope of Topic 606.

The Company adopted Topic 606 using the modified retrospective method for reporting periods beginning after ~~December 15, 2017. Early adoption is permitted only~~January 1, 2018. The Company did not have any contracts that were not completed as of ~~annual reporting periods beginning~~January 1, 2018. The adoption of Topic 606 did not result in a change to the accounting for any of the in-scope revenue streams; therefore, no cumulative effect adjustment was recorded.

(2) Acquisition of New Jersey Community Bank

On April 11, 2018, the Company completed its acquisition of 100 percent of the shares of common stock of New Jersey Community Bank ("NJCB"), which merged 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 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 ~~December 15, 2016, including interim periods within that year.~~closing the merger as a result of a certain litigation matter.

The ~~Company does not expect~~merger was accounted for under the ~~adoption~~acquisition method of ~~ASU 2014-9 to have a material impact on its consolidated financial statements.~~

~~ASU 2014-12 Accounting for Share-Based-Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period (a consensus~~accounting, and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at preliminary estimated fair values as of the ~~FAS Emerging Issues Task Force).~~

~~In June 2014, the FASB issued ASU 2014-12, "Accounting for Share-Based-Payments When the Terms~~NJCB merger date. NJCB’s results of ~~an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period," which requires that a performance target~~operations have been included in ~~a share-based payment award that affects vesting~~the Company’s Consolidated Statements of Income since April 11, 2018.

The assets acquired and ~~that could be achieved~~liabilities assumed in the merger were recorded at their estimated 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 fair values are preliminary estimates and subject to adjustment for up to one year after the ~~requisite service~~closing date of the merger.

The following table summarizes the estimated 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 ~~be treated~~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 obtained 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 security’s terms and conditions, among other things.

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 ~~performance condition. This update~~risk-adjusted market rate for similar loans that management determined market participants would likely use.

At the NJCB merger 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		1,301
Residential real estate		7,572		—		7,572
Consumer		6,409		—		6,409
Total loans	$	74,263	$	881	$	75,144

The following is ~~effective~~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	609
(non-accretable difference)

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 ~~interim~~each period:



(Dollars in thousands)	Amount
Year
2018	$	15
2019	13
2020	12
2021	10
2022		8
Thereafter		22
	$	80

The fair values of deposit liabilities with no stated maturities, such as checking, money market and ~~annual periods beginning after~~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 NJCB merger were expensed as incurred. For the year ended December ~~15, 2015.~~ 31, 2018 and 2017, the Company incurred $2.1 million and $265,000, respectively, of expenses for termination of contracts, legal and financial advisory fees, severance and other integration related expenses, which have been separately stated as merger-related expenses in the Company’s Consolidated Statements of Income.

Supplemental Pro Forma Financial Information

The ~~amendments can be applied prospectively~~following table presents financial information regarding the former NJCB operations included in the Company’s Consolidated Statements of Income from the date of the NJCB merger (April 11, 2018) through December 31, 2018 under the column “Actual from Acquisition Date to ~~all awards granted or modified after~~December 31, 2018.” In addition, the ~~effective date or retrospectively~~table presents unaudited condensed pro forma financial information assuming that the NJCB merger had been completed as of January 1, 2018 and January 1, 2017, respectively. In the table, merger-related expenses of $2.1 million and $365,000 were excluded from the pro forma non-interest expenses for the year ended December 31, 2018 and December 31, 2017, respectively. Income taxes were also adjusted to ~~all awards with performance targets~~exclude income tax benefits of $568,000 and $77,000 related to the merger expenses for the year ended December 31, 2018 and December 31, 2017, respectively.

The table has been prepared for comparative purposes only and is not necessarily indicative of the actual results that ~~are outstanding~~would have been attained had the NJCB merger occurred as of the beginning of the ~~earliest annual period~~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 ~~all new or modified awards thereafter. Adoption of this guidance in 2016 did not have a material impact on~~certain merger expenses and the ~~Company’s consolidated financial statements.~~related income tax effects.



(Dollars in thousands)		Actual from Acquisition Date to 12/31/2018		Pro Forma for the Twelve Months Ended 12/31/2018		Pro Forma for the Twelve Months Ended 12/31/2017

Net interest income	$	2,504	$	44,280	$	39,231
Non-interest income	92		7,864		8,509
Non-interest expenses	1,223		33,032		35,206
Income taxes	413		4,886		5,871
Net income	960		13,327		6,063

2.3. Investment Securities

~~Amortized~~A summary of amortized cost and fair value of investment securities available for sale as of December 31, 2018 and 2017 follows:



	2018
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
U.S. Treasury securities and obligations of U.S. Government
sponsored corporations (“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
	$	134,429	$	203	$	(2,410	)	$	132,222



	2017
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
U. S. Treasury securities and obligations of U.S. Government sponsored corporations (“GSE”)	$	1,997	$	—	$	(30	)	$	1,967
Residential collateralized mortgage obligations - GSE	27,688		18		(381		)	27,325
Residential mortgage backed securities - GSE	14,231		129		(72		)	14,288
Obligations of state and political subdivisions	19,575		227		(82		)	19,720
Trust preferred debt securities – single issuer	2,481		—		(132		)	2,349
Corporate debt securities	27,917		14		(248		)	27,683
Other debt securities	12,140		12		(26		)	12,126
	$	106,029	$	400	$	(971	)	$	105,458

A summary of amortized cost, carrying value ~~gross unrealized gains~~ and ~~losses, and the~~ fair value ~~by security type are~~of investment securities held to maturity as of December 31, 2018 and 2017 follows:

(Dollars in thousands) Gross Gross
Amortized Unrealized Unrealized Fair
2016 Cost Gains Losses Value
Available for sale-
U.S. Treasury securities and obligations of U.S. Government
sponsored corporations (“GSE”) and agencies $ 3,514
$ —
$ (35 ) $ 3,479
Residential collateralized mortgage obligations- GSE 22,647
58
(145 ) 22,560
Residential mortgage backed securities – GSE 31,207
388
(119 ) 31,476
Obligations of state and political subdivisions 21,604
152
(356 ) 21,400
Trust preferred debt securities – single issuer 2,478
—
(206 ) 2,272
Corporate debt securities 21,963
10
(205 ) 21,768
Other debt securities 845
—
(6 ) 839
$ 104,258
$ 608
$ (1,072 ) $ 103,794

Amortized
Cost

Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Loss

Carrying
Value

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value
Held to maturity-
U. S. Treasury securities and obligations
of U.S. Government sponsored
corporations (“GSE”) and agencies
$ 3,727
$ —
$ 3,727
$ —
$ (116 ) $ 3,611
Residential collateralized mortgage obligations – GSE

11,882
—
11,882
247
(130 ) 11,999
Residential mortgage backed securities - GSE

40,565
—
40,565
540
(113 ) 40,992
Obligations of state and political subdivisions 70,017
—
70,017
1,274
(255 ) 71,036
Trust preferred debt securities - pooled 657
(501 ) 156
303
—
459
Other debt securities 463
—
463
—
(1 ) 462
$ 127,311
$ (501 ) $ 126,810
$ 2,364
$ (615 ) $ 128,559

(Dollars in thousands) Gross Gross
Amortized Unrealized Unrealized Fair
2015 Cost Gains Losses Value
Available for sale-
U. S. Treasury securities and obligations of U.S. Government
sponsored corporations (“GSE”) and agencies
$ 5,523
$ —
$ (42 ) $ 5,481
Residential collateralized mortgage obligations - GSE 8,255
68
(36 ) 8,287
Residential mortgage backed securities – GSE 32,279
541
(185 ) 32,635
Obligations of state and political subdivisions 21,125
365
(54 ) 21,436
Trust preferred debt securities – single issuer 2,474
—
(338 ) 2,136
Corporate debt securities 20,510
65
(153 ) 20,422
Other debt securities 1,053
—
(28 ) 1,025
$ 91,219
$ 1,039
$ (836 ) $ 91,422



	2018
(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
	$	80,073	$	(501	)	$	79,572	$	1,317	$	(685	)	$	80,204

Amortized
Cost

Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Loss

Carrying
Value

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value
Held to maturity-
Residential collateralized mortgage obligations – GSE

$ 13,630
$ —
$ 13,630
$ 404
$ —
$ 14,034
Residential mortgage backed securities - GSE

47,718
—
47,718
928
(46 ) 48,600
Obligations of state and political subdivisions

61,135
—
61,135
2,294
(14 ) 63,415
Trust preferred debt securities - pooled

657
(501 ) 156
341
—
497
Other debt securities 622
—
622
—
(11 ) 611
$ 123,762
$ (501 ) $ 123,261
$ 3,967
$ (71 ) $ 127,157



	2017
(In thousands)	Amortized Cost		Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss			Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U. S. Treasury securities and obligations of U.S. Government sponsored corporations (“GSE”)	$	3,234	$	—		$	3,234	$	—	$	(84	)	$	3,150
Residential collateralized mortgage obligations - GSE	8,701		—			8,701		94		(123		)	8,672
Residential mortgage backed securities - GSE	34,072		—			34,072		231		(127		)	34,176
Obligations of state and political subdivisions	63,797		—			63,797		1,224		(35		)	64,986
Trust preferred debt securities - pooled	657		(501		)	156		418		—			574
Other debt securities	307		—			307		—		—			307
	$	110,768	$	(501	)	$	110,267	$	1,967	$	(369	)	$	111,865

At December 31, ~~2016~~2018 and December 31, ~~2015, $121.7~~2017, $80.4 million and ~~$69.8~~$98.4 million of investment securities, respectively, were pledged to secure public funds, collateralize borrowings from the FHLB and ~~municipal deposits under~~for other purposes required or permitted by law.

During 2018, the ~~State~~Company received proceeds from the calls of ~~New Jersey Governmental Unit Deposit Protection Act ("GUDPA").~~securities with a book value of $1.4 million and resulted in a gain of $12,000 for the year ended December 31, 2018.

During 2017, the Company sold securities with a book value of $8.5 million for a net gain of $129,000. Included in the sales were $1.0 million of securities that were in the held to maturity portfolio and that resulted in a gain of $36,000 for year ended December 31, 2017. All held to maturity securities sold were mortgage backed securities with a remaining book value of less than 15% of the original principal balance at the time of purchase and, as allowed in ASC 320-10-25-14, were treated as held to maturity. There were no securities gains or losses in 2016.

The following is a summary of the proceeds from the sales of investment securities and the associated gross gains, gross losses, and net tax expense for the years ended December 31, 2018, 2017, and 2016.



	2018				2017					2016
(In thousands)	Available for Sale		Held to Maturity		Available for Sale			Held to Maturity		Available for Sale		Held to Maturity
Proceeds	$	—	$	—	$	7,602		$	1,034	$	—	$	—
Gross gains	—		—		120			36		—		—
Gross losses	—		—		(27		)	—		—		—
Net tax expense	—		—		38			12		—		—

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 December 31, ~~2016.~~2018. 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.

(Dollars in thousands) December 31, 2016

Amortized
Cost

Fair Value
Yield
Available for sale
Due in one year or less $ 2,616
$ 2,619
3.06 %
Due after one year through five years 15,544
15,470
1.28 %
Due after five years through ten years 44,489
44,695
2.68 %
Due after ten years 41,609
41,010
2.75 %
Total $ 104,258
$ 103,794
2.51 %

Carrying Value

Fair Value
Yield
Held to maturity

Due in one year or less $ 29,807
$ 29,816
1.44 %
Due after one year through five years 16,833
17,373
4.43 %
Due after five years through ten years 23,597
24,280
3.51 %
Due after ten years 56,573
57,090
3.28 %
Total $ 126,810
$ 128,559
3.04 %



(Dollars in thousands)	Amortized Cost		Fair Value		Yield
Available for sale
Due in one year or less	$	8,388	$	8,354	2.07	%
Due after one year through five years	35,001		34,018		3.17
Due after five years through ten years	22,272		21,992		3.03
Due after ten years	68,768		67,858		2.94
Total	$	134,429	$	132,222	2.96	%

	Carrying Value		Fair Value		Yield
Held to maturity
Due in one year or less	$	9,433	$	9,449	3.48	%
Due after one year through five years	18,616		18,912		3.66
Due after five years through ten years	22,475		22,562		3.14
Due after ten years	29,048		29,281		3.22
Total	$	79,572	$	80,204	3.33	%

~~Gross~~

The following table presents gross unrealized losses on ~~available for sale and held to maturity~~the Company's investment securities and the fair value of the related securities ~~aggregated by security category~~ and length of time that the individual securities have been in a continuous unrealized loss position at December 31, ~~2016~~2018 and ~~2015 are as follows:~~2017.



	2018
		Less than 12 months					12 months or longer					Total
(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 corporations (“GSE”)	2	$	994	$	(1	)	$	1,958	$	(40	)	$	2,952	$	(41	)
Residential collateralized mortgage obligations - GSE	34	20,756		(138		)	22,106		(682		)	42,862		(819		)
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		(162		)	—		—			1,329		(162		)
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	$	(1,321	)	$	78,091	$	(1,775	)	$	152,203	$	(3,095	)


2016		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 corporations (“GSE”) and agencies	3	$	7,090	$	(151	)	—		—			$	7,090	$	(151	)
Residential collateralized mortgage obligations - GSE	7	17,242		(275		)	—		—			17,242		(275		)
																	2017
																		Less than 12 months					12 months or longer					Total
(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 corporations (GSE)																	2	$	1,967	$	(30	)	$	3,150	$	(84	)	$	5,117	$	(114	)
Residential collateralized mortgage obligations-GSE																	11	19,237		(205		)	8,788		(299		)	28,025		(504		)
Residential mortgage backed securities - GSE	29	26,581		(216		)	3,542		(16		)	30,123		(232		)	35	21,770		(141		)	3,074		(58		)	24,844		(199		)
Obligations of state and political subdivisions	74	25,545		(611		)	—		—			25,545		(611		)	42	11,594		(82		)	2,717		(35		)	14,311		(117		)
Trust preferred debt securities -single issuer	4	—		—			2,272		(206		)	2,272		(206		)
Trust preferred debt securities– single issuer																	4	—		—			2,349		(132		)	2,349		(132		)
Corporate debt securities	6	12,700		(204		)	1,999		(1		)	14,699		(205		)	7	11,967		(98		)	7,662		(150		)	19,629		(248		)
Other debt securities	3	—		—			1,276		(7		)	1,276		(7		)	4	8,840		(25		)	21		(1		)	8,861		(26		)
Total temporarily impaired securities	126	$	89,158	$	(1,457	)	$	9,089	$	(230	)	$	98,247	$	(1,687	)	105	$	75,375	$	(581	)	$	27,761	$	(759	)	$	103,136	$	(1,340	)

2015 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 corporations (GSE) and agencies 3
$ 5,481
$ (42 ) —
—
$ 5,481
$ (42 )
Residential collateralized mortgage obligations-GSE 2
5,894
(36 ) —
—
5,894
(36 )
Residential mortgage backed securities - GSE 19
20,911
(175 ) 3,980
(56 ) 24,891
(231 )
Obligations of state and political subdivisions 32
2,760
(19 ) 6,465
(49 ) 9,225
(68 )
Trust preferred debt securities– single issuer 4
—
—
2,136
(338 ) 2,136
(338 )
Corporate debt securities 4
9,214
(153 ) —
—
9,214
(153 )
Other debt securities 3
586
(11 ) 1,025
(28 ) 1,611
(39 )
Total temporarily impaired securities 67
$ 44,846
$ (436 ) $ 13,606
$ (471 ) $ 58,452
$ (907 )

U.S. Treasury securities and obligations of U.S. Government sponsored corporations and agencies: The unrealized losses on investments in these securities were caused by increases in market interest rates. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. 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.

Residential collateralized mortgage obligations and residential mortgage backed securities: The unrealized losses on investments in residential collateralized mortgage obligations and residential mortgage backed securities were caused by increases in market interest rates. The contractual cash flows of these securities are guaranteed by the issuer, 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 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 ~~four~~two corporate trust preferred securities issued by ~~two~~one large financial institutions that both 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. ~~One of the issuers~~The issuer continues to maintain an investment grade credit rating and ~~neither~~ has not defaulted on interest payments. The decline in fair value is attributable to the widening of interest rate spreads and the lack of an active trading market for these securities and, to a lesser degree, market concerns about the issuers’ 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.

Corporate debt securities. The unrealized losses on investments in corporate debt securities were caused by an increase in market interest ~~rates.~~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 and not credit quality.~~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.

Other debt securities. The unrealized losses on investments in other 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 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 financial institution holding companies. During 2009, the Company recognized an other-than-temporary impairment charge 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 to be 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 this security to determine if any additional other-than-temporary impairment is required. As of December 31, ~~2016,~~2018, management concluded that no additional other-than-temporary impairment had occurred.

The Company regularly reviews the composition of the investment securities portfolio, taking into account market risks, the current and expected interest rate environment, liquidity needs and its overall interest rate risk profile and strategic goals.

3.4. Loans and Loans Held for Sale

~~Loans are~~The following table presents loans outstanding, by class of loan, as ~~follows:~~

of December 31,

December 31,
(Dollars in thousands) 2016 2015
Commercial business $ 99,650
$ 99,277
Commercial real estate 242,393
207,250
Mortgage warehouse lines 216,259
216,572
Construction loans 96,035
93,745
Residential real estate loans 44,791
40,744
Loans to individuals 23,736
23,074
All other loans 207
233
Gross Loans 723,071
680,895
Deferred loan fees and costs, net 1,737
1,226
$ 724,808
$ 682,121




(In thousands)	2018		2017
Commercial real estate	$	388,431	$	308,924
Mortgage warehouse lines	154,183		189,412
Construction	149,387		136,412
Commercial business	120,590		92,906
Residential real estate	47,263		40,494
Loans to individuals	22,962		21,025
Other loans	181		183
Gross Loans	882,997		789,356
Deferred loan costs, net	167		550
Total	$	883,164	$	789,906

The ~~Bank’s~~Company's lending focus and business is concentrated primarily in New Jersey, particularly northern and central New ~~Jersey.~~Jersey and the New York City metropolitan area. A significant portion of the total loan portfolio is secured by real estate or other collateral located in these areas.

The ~~Bank had residential mortgage~~Company is a participant in the Small Business Administration ("SBA") Preferred Lender Program and originates loans ~~held for sale of $14.8 million at December 31, 2016 and $6.0 million at December 31, 2015.~~under the program that are later sold. The ~~Bank~~Company also sells residential mortgage loans in the secondary market on a non-recourse basis, generally with the related loan servicing rights released to purchasers. Loans held for sale at December 31, ~~2016~~2018 and ~~2015 were~~2017 included $2.1 million and $2.3 million, respectively, in residential mortgage loans that the ~~Bank~~Company intends to sell under best efforts forward sales commitments providing for delivery to purchasers generally within a two month period. The estimated fair value of the derivatives of ~~interest rate~~interest-rate lock commitments was ~~$123,000~~$79,000 at December 31, ~~2016~~2018 and ~~was not deemed to be significant~~$135,000 at December 31, ~~2015.~~2017.

The following table presents loans held for sale, by type of loan, as of December 31, 2018 and 2017.



(In thousands)	2018		2017
Residential real estate	$	2,145	$	2,269
SBA	875		1,985
	$	3,020	$	4,254

Loans sold to others and serviced by the Company are not included in the accompanying Consolidated Balance Sheets. The total amount of such loans serviced, but owned by outside investors, amounted to approximately $71.7 million and $42.3 million at

December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017, the carrying value, of servicing assets was $991,000 and $726,000, respectively. The fair value of SBA servicing assets was determined using a discount rate of 11.50% on the servicing asset and 13.50% on the excess servicing and constant prepayment speeds averaging 11.70%.

The table below summarizes the changes in the related servicing assets for the years ended December 31, 2018 and 2017.



(In thousands)	2018			2017
Balance, beginning of year	$	726		$	605
Servicing assets capitalized	517			302
Amortization expense	(252		)	(181		)
Balance, end of year	$	991		$	726

In addition, the Company had discounts of $1.1 million and $863,000 related to the retained portion of the unsold SBA loans at December 31, 2018 and 2017, respectively.

4.5. Allowance for Loan Losses and Credit Quality Disclosures

The Company’s primary lending emphasis is the origination of commercial business and commercial real estate loans and mortgage warehouse lines of credit. Based on the composition of the loan portfolio, the primary inherent risks are deteriorating credit quality, a decline in the economy and a decline in New Jersey and New York City metropolitan area 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.

The following table provides an aging of the loan portfolio by loan class at December 31, ~~2016:~~2018 and 2017:

(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
Construction Loans $ —
$ —
$ 186
$ 186
$ 95,849
$ 96,035
$ —
$ 186
Commercial Business 113
115
790
1,018
98,632
99,650
—
920
Commercial Real Estate 741
942
2,707
4,390
238,003
242,393
—
3,187
Mortgage Warehouse Lines —
—
—
—
216,259
216,259
—
—
Residential Real Estate Loans 564
—
392
956
43,835
44,791
—
544
Loans to Individuals —
29
361
390
23,346
23,736
24
337
Other —
—
—
—
207
207
—
—
Deferred Loan Fees and Costs, Net —
—
—
—
1,737
1,737
—
—
Total $ 1,418
$ 1,086
$ 4,436
$ 6,940
$ 717,868
$ 724,808
$ 24
$ 5,174



	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		Nonaccrual 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		—		—
	$	884	$	736	$	3,086	$	4,706	$	878,291	882,997		$	55	$	6,525
Deferred loan costs, net											167
Total											$	883,164



	2017
(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		Nonaccrual Loans
Commercial real estate	$	540	$	—	$	2,465	$	3,005	$	305,919	$	308,924	$	—	$	2,465
Mortgage warehouse lines	—		—		—		—		189,412		189,412		—		—
Construction	—		—		—		—		136,412		136,412		—		—
Commercial business	180		545		619		1,344		91,562		92,906		—		4,212
Residential real estate	911		256		69		1,236		39,258		40,494		—		69
Loans to individuals	119		—		116		235		20,790		21,025		—		368
Other	—		—		—		—		183		183		—		—
	$	1,750	$	801	$	3,269	$	5,820	$	783,536	789,356		$	—	$	7,114
Deferred loan costs, net											550
Total											$	789,906

~~The following table provides an aging of the loan portfolio by loan class at December 31, 2015:~~

(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
Construction Loans $ —
$ —
$ —
$ —
$ 93,745
$ 93,745
$ —
$ —
Commercial Business 530
5
186
721
98,556
99,277
—
304
Commercial Real Estate 789
—
3,996
4,785
202,465
207,250
—
4,321
Mortgage Warehouse Lines —
—
—
—
216,572
216,572
—
—
Residential Real Estate Loans —
166
1,132
1,298
39,446
40,744
—
1,132
Consumer

Loans to Individuals 400
—
263
663
22,411
23,074
—
263
Other —
—
—
—
233
233
—
—
Deferred Loan Fees and Costs, Net —
—
—
—
1,226
1,226
—
—
Total $ 1,719
$ 171
$ 5,577
$ 7,467
$ 674,654
$ 682,121
$ —
$ 6,020

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. ~~Accordingly, loans acquired with evidence of deteriorated credit quality in the amount of $439,000 and $489,000 at~~At December 31, ~~2016~~2018 and ~~2015,~~2017, there were $865,000 and $439,000 of PCI loans, respectively, that were not classified as non-performing loans due to the accretion of income based on ~~expected cash flows.~~their original contract terms.

Additional income before taxes amounting to ~~$522,000~~$155,000, $514,000 and ~~$471,000~~$522,000 would have been recognized in ~~2016~~2018, 2017 and ~~2015,~~2016, respectively, if interest on all loans had been recorded based upon their original contract terms.

Management reviews the adequacy of the allowance for loan losses on at least a quarterly basis to ensure that the provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is adequate based on management’s assessment of probable estimated losses. The Company’s methodology for assessing the adequacy of the allowance for loan losses consists of several key elements and is consistent with U.S. GAAP and interagency supervisory guidance. The allowance

for loan losses methodology consists of two major components. The first component is an estimation of losses associated with individually identified impaired loans, which follows ASC Topic 310. The second major component estimates losses under ASC Topic 450, which provides guidance for estimating losses on groups of loans with similar risk characteristics. The ~~Bank’s~~Company’s methodology results in an allowance for loan losses which includes a specific reserve for impaired loans, an allocated reserve and an unallocated portion.

When analyzing groups of loans under ASC Topic 450, the ~~Bank~~Company follows the Interagency Policy Statement on the Allowance for Loan and Lease Losses. The methodology considers the ~~Bank’s~~Company’s historical loss experience adjusted for changes in trends, conditions, and other relevant factors that affect repayment of the loans as of the evaluation date. These adjustment factors, known as qualitative factors, include:

Delinquencies and ~~non-accruals~~non-accruals;

Portfolio ~~quality~~quality;

Concentration of ~~credit~~credit;

Trends in volume and type of ~~loans~~loans;

Quality of ~~collateral~~collateral;

Policy and ~~procedures~~procedures;

Experience, ability and depth of ~~management~~management;

Economic trends – national and ~~local~~local; and

External factors – competition, legal and ~~regulatory~~regulatory.

The methodology includes the segregation of the loan portfolio into loan ~~types~~classes with a further segregation into risk rating categories, such as special mention, substandard, doubtful, and loss. This allows for an allocation of the allowance for loan losses by loan type; however, the allowance is available to absorb any loan loss without restriction. Larger balance, non-homogeneous loans representing significant individual credit exposures are evaluated individually through the internal loan review process. It is this process that produces the watch list for loans that have indications of credit weakness. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated. Based on these reviews, an estimate of probable losses for the individual larger-balance loans are determined, whenever possible, and used to establish specific loan loss reserves. In general, for non-homogeneous loans not individually assessed and for homogeneous groups, such as residential mortgages and consumer

credits, the loans are collectively evaluated based on delinquency status, loan type, and historical losses. These loan groups are then internally risk rated.

The watch list includes loans that are assigned a rating of special mention, substandard, doubtful and loss. Loans assigned a rating of special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as doubtful have all the weaknesses inherent in loans classified as substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans rated as doubtful in whole, or in part, are placed in non-accrual status. Loans classified as a loss are considered uncollectible and are charged off against the allowance for loan losses.

The specific allowance for impaired loans is established for specific loans that have been identified by management as being impaired. These loans are considered to be impaired primarily because the loans have not performed according to payment terms and there is reason to believe that repayment of the loan principal in whole, or in part, is unlikely. The specific portion of the allowance is the total amount of potential unconfirmed losses for these individual impaired loans. To assist in determining the fair value of loan collateral, the ~~Bank~~Company often utilizes independent third party qualified appraisal firms which, in turn, employ their own criteria and assumptions that may include occupancy rates, rental rates and property expenses, among others.

The second category of reserves consists of the allocated portion of the allowance. The allocated portion of the allowance is determined by taking pools of loans outstanding that have similar characteristics and applying historical loss experience for each pool. This estimate represents the potential unconfirmed losses within the portfolio. Individual loan pools are created for commercial business loans and commercial real estate loans, construction loans, warehouse lines of credit and various types of loans to individuals. The historical loss estimation for each loan pool is then adjusted ~~to account~~ for ~~current conditions, current~~qualitative factors such as economic trends, concentrations of credit, trends in the volume of loans, portfolio quality, delinquencies and non-accrual trends. These factors are evaluated for each class of the loan portfolio ~~performance,~~and may have positive or negative effects on the allocated allowance for the loan ~~policy or management changes or any other~~portfolio segment. The aggregate amount resulting from the application of these qualitative ~~factor which may cause future losses to deviate from historical levels.~~factors determines the overall risk for the portfolio and results in an allocated allowance for each of the loan segments.

The Company also maintains an unallocated allowance. The unallocated allowance is used to cover any factors or conditions which may cause a potential loan loss but are not specifically identifiable. It is prudent to maintain an unallocated portion of the allowance because no matter how detailed an analysis of potential loan losses is performed, these estimates, by definition, lack precision. Management must make estimates using assumptions and information that is often subjective and changing rapidly.

The following discusses the risk characteristics of each of our loan ~~portfolio segments,~~portfolios.

Commercial Business

The Company offers a variety of commercial ~~mortgage warehouse~~loan services, including term loans, lines of credit and ~~consumer.~~loans secured by equipment and receivables. A broad range of short-to-medium term commercial loans, both secured and unsecured, are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition and development of real estate and improvements) and the purchase of equipment and machinery. Commercial business loans are granted based on the borrower's ability to generate cash flow to support its debt obligations and other cash related expenses. A borrower's ability to repay commercial business loans is substantially dependent on the success of the business itself and on the quality of its management. As a general practice, the Company takes as collateral a security interest in any available real estate, equipment, inventory, receivables or other personal property of its borrowers, although the Company occasionally makes commercial business loans on an unsecured basis. Generally, the Company requires personal guarantees of its commercial business loans to offset the risks associated with such loans.

Much of the Company's lending is in northern and central New Jersey and New York City metropolitan area. As a result of this geographic concentration, a significant broad-based deterioration in economic conditions in New Jersey and the New York City metropolitan area could have a material adverse impact on the Company's loan portfolio. A prolonged decline in economic conditions in our market area could restrict borrowers' ability to pay outstanding principal and interest on loans when due. The value of assets pledged as collateral may decline and the proceeds from the sale or liquidation of these assets may not be sufficient to repay the loan.

Commercial Real Estate

the debt service requirements and the value of the property meets the loan-to-value criteria set in the loan policy. The Company monitors loan concentrations by borrower, by type of property and by location and other criteria.

The ~~Company’s primary lending emphasis is the origination of commercial, construction and~~Company's commercial real estate ~~loans. Based on~~portfolio is largely secured by real estate collateral located in the ~~composition~~State of New Jersey and the New York City metropolitan area. Conditions in the real estate markets in which the collateral for the Company's loans are located strongly influence the level of the ~~loan portfolio, the inherent primary risks are deteriorating credit quality, a~~Company's non-performing loans. A decline in the ~~economy~~New Jersey and ~~a decline in~~the New ~~Jersey~~York City metropolitan area real estate market ~~values. Any one, or a combination, of these events may~~could adversely affect the Company's loan ~~portfolio~~portfolio. Decreases in local real estate values would adversely affect the value of property used as collateral for the Company's loans. Adverse changes in the economy also may have a negative effect on the ability of our borrowers to make timely repayments of their loans.

Construction Financing

Construction financing is provided to businesses to expand their facilities and operations and to real estate developers for the acquisition, development and construction of residential and commercial properties. First mortgage construction loans are made to developers and builders primarily for single family homes and multi-family buildings that are presold or are to be sold or leased on a speculative basis.

The Company lends to builders and developers with established relationships, successful operating histories and sound financial resources. Management has established underwriting and monitoring criteria to minimize the inherent risks of real estate construction lending. The risks associated with speculative construction lending include the borrower's inability to complete the construction process on time and within budget, the sale or rental of the project within projected absorption periods and the economic risks associated with real estate collateral. Such loans may ~~result in increased delinquencies,~~include financing the development and/or construction of residential subdivisions. This activity may involve financing land purchases and infrastructure development (i.e., roads, utilities, etc.) as well as construction of residences or multi-family dwellings for subsequent sale by the developer/builder. Because the sale or rental of developed properties is integral to the success of developer business, loan ~~losses and increased future provision levels.~~repayment may be especially subject to the volatility of real estate market values.

Mortgage Warehouse Lines of Credit

The Company’s Mortgage Warehouse ~~Unit~~Funding Group provides revolving lines of credit that are available to licensed mortgage banking companies. The warehouse line of credit is used by the mortgage banker to originate one-to-four family residential mortgage loans that are pre-sold into the secondary mortgage market, which includes state and national banks, national mortgage banking firms, insurance companies and government-sponsored enterprises, including the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and others. On average, an advance under the warehouse line of credit remains outstanding for a period of less than 30 days, with repayment coming directly from the sale of the loan into the secondary mortgage market. Interest and a transaction fee are collected by the ~~Bank~~Company at the time of repayment.

As a separate segment of the total portfolio, the warehouse loan portfolio is individually analyzed as a whole for allowance for loan losses purposes. Warehouse lines of credit are subject to the same inherent risks as other commercial lending, but the overall degree of risk differs. While the Company’s loss experience with this type of lending has been non-existent since the product was introduced in 2008, there are other risks unique to this lending that still must be considered in assessing the adequacy of the allowance for loan losses. These unique risks may include, but are not limited to, (i) credit risks relating to the mortgage bankers that borrow from us, (ii) the risk of intentional misrepresentation or fraud by any of such mortgage bankers, (iii) changes in the market value of mortgage loans originated by the mortgage banker, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit, due to changes in interest rates during the time in warehouse or (iv) unsalable or impaired mortgage loans so originated, which could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the mortgage banker.

These factors, along with the other qualitative factors such as economic trends, concentrations of credit, trends in the volume of loans, portfolio quality, delinquencies and non-accruals, are also considered and may have positive or negative effects on the allocated allowance. The aggregate amount resulting from the application of these qualitative factors determines the overall risk for the portfolio and results in an allocated allowance for warehouse lines of credit.

Consumer

The Company’s consumer loan portfolio segment is comprised of residential real estate loans, ~~home equity~~ loans to individuals and other ~~loans to individuals.~~loans. Individual loan pools are created for the various types of loans to individuals. The principal risk is the borrower becomes unemployed or has a significant reduction in income.

In general, for homogeneous groups such as residential mortgages and consumer credits, the loans are collectively evaluated based on delinquency status, loan type and historical losses. These loan groups are then internally risk rated.

The Company considers the following credit quality indicators in assessing the risk in the loan portfolio:

Consumer credit ~~scores~~scores;

Internal credit risk ~~grades~~grades;

Loan-to-value ~~ratios~~ratios;

~~Collateral~~Collateral; and

Collection ~~experience~~

experience.

Internal Risk Rating of Loans

The ~~Bank’s~~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 ~~Bank~~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 high net worths 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, competition is strong. The prospects for growth are good. Loans in this category do not meet the collateral requirements of loans in categories 1 and 2 above. Loans to individuals are supported by good net worth but whose supporting assets are illiquid.

3w. Watch - Included in this category are loans evidencing problems identified by ~~Bank~~Company management that require closer supervision. Such problems have not developed to the point which requires a "special mention" rating. This category also covers situations where the ~~Bank~~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 in the ~~Bank's~~Company's credit position at some future date. Special mention loans are not adversely classified and do not expose the ~~Bank~~Company to sufficient risk to warrant adverse classification.

5. Substandard - A "substandard" loan is inadequately protected by the current sound 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 ~~Bank~~Company will sustain some loss if the deficiencies are not corrected.

6. Doubtful - A loan classified as "doubtful" has all the weaknesses inherent in 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, but rather it is not practical or ~~desireable~~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 December 31, ~~2016:~~2018 and 2017:



Commercial Credit Exposure by Internally Assigned Grade	2018
(In thousands)	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	2018
(In thousands)	Loans to Individuals		Other
Performing	$	22,564	$	181
Nonperforming	398		—
Total	$	22,962	$	181

(Dollars in thousands)
Commercial Credit Exposure- By
Internally Assigned Grade
Construction

Commercial
Business

Commercial
Real Estate

Mortgage
Warehouse
Lines

Residential
Real Estate

Grade:
Pass $ 95,548
$ 91,908
$ 223,435
$ 216,259
$ 43,950
Special Mention 301
7,102
14,334
—
244
Substandard 186
611
4,624
—
597
Doubtful —
29
—
—
—
Loss —
—
—
—
—
Total $ 96,035
$ 99,650
$ 242,393
$ 216,259
$ 44,791



Commercial Credit Exposure by Internally Assigned Grade	2017
(In thousands)	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate
Pass	$	136,180	$	84,746	$	289,203	$	189,412	$	39,539
Special Mention	232		3,454		13,267		—		666
Substandard	—		1,252		6,454		—		289
Doubtful	—		3,454		—		—		—
Total	$	136,412	$	92,906	$	308,924	$	189,412	$	40,494


(Dollars in thousands)
Consumer Credit Exposure -By Payment Activity	Loans to Individuals		Other

Consumer Credit Exposure by Payment Activity					2017
(In thousands)					Loans to Individuals		Other
Performing	$	23,375	$	207	$	20,657	$	183
Nonperforming	361		—		368		—
Total	$	23,736	$	207	$	21,025	$	183

~~The following table provides a breakdown of the loan portfolio by credit quality indicator at December 31, 2015:~~

(Dollars in thousands)
Commercial Credit Exposure- By
Internally Assigned Grade
Construction

Commercial
Business

Commercial
Real Estate

Mortgage
Warehouse
Lines

Residential
Real Estate

Grade:
Pass $ 93,558
$ 90,856
$ 191,754
$ 216,572
$ 39,878
Special Mention 187
7,768
9,311
—
260
Substandard —
653
6,185
—
606
Doubtful —
—
—
—
—
Loss —
—
—
—
—
Total $ 93,745

$ 99,277

$ 207,250

$ 216,572

$ 40,744

(Dollars in thousands)
Consumer Credit Exposure - By Payment Activity Loans to Individuals
Other

Performing $ 22,811
$ 233
Nonperforming 263
—
Total $ 23,074
$ 233

Impaired Loans Disclosures

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 contract, 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) they 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 atas of and for the years ended December 31, ~~2016~~2018, 2017 and ~~2015,~~2016, respectively.

Allowance for Loan Losses as of and for the year ended December 31, 2016
(Dollars in thousands)
Construction Commercial Business Commercial Real Estate Mortgage Warehouse Lines Residential Real Estate Loans to Individuals Other Unallocated Deferred Fees Total
Allowance for loan losses:
Beginning balance $ 1,025
$ 2,005
$ 3,049
$ 866
$ 288
$ 109
$ —
$ 218
$ —
$ 7,560
(Credit) provision charged to operations 179
(177 ) (800 ) 107
79
(3 ) 1
314
—
(300 )
Loans charged off —
(97 ) (60 ) —
—
—
(1 ) —
—
(158 )
Recoveries of loans charged off —
1
385
—
—
6

—
—
392
Ending balance $ 1,204
$ 1,732
$ 2,574
$ 973
$ 367
$ 112
$ —
$ 532
$ —
$ 7,494

Individually evaluated for impairment $ 7
$ 101
$ 114
$ —
$ 38
$ —
$ —
$ —
$ —
$ 260
Loans acquired with deteriorated credit quality —
—
—
—
—
—
—
—
—
—
Collectively evaluated for impairment 1,197
1,631
2,460
973
329
112
—
532
—
7,234
Ending Balance $ 1,204
$ 1,732
$ 2,574
$ 973
$ 367
$ 112
$ —
$ 532
$ —
$ 7,494

Loans receivable:

Loans acquired with deteriorated credit quality $ —
$ 191
$ 930
$ —
$ —
$ —
$ —
$ —
$ —
$ 1,121
Individually evaluated for impairment 391
947
3,817
—
544
337
—
—
—
6,036
Collectively evaluated for impairment 95,644
98,512
237,646
216,259
44,247
23,399
207
—
1,737
717,651
Ending Balance $ 96,035
$ 99,650
$ 242,393
$ 216,259
$ 44,791
$ 23,736
$ 207
$ —
$ 1,737
$ 724,808



	2018
(Dollars in thousands)	Construction		Commercial Business			Commercial Real Estate			Mortgage Warehouse Lines			Residential Real Estate		Loans to Individuals			Other			Unallocated			Deferred Fees		Total
Allowance for loan losses:
Beginning balance	$	1,703	$	1,720		$	2,949		$	852		$	392	$	114		$	—		$	283				$	8,013
Provision (credit) charged to operations	29		158			920			(121		)	39		49			17			(191		)			900
Loans charged off	—		(62		)	(491		)	—			—		(16		)	(17		)	—					(586		)
Recoveries of loans charged off	—		13			61			—			—		1			—			—					75
Ending balance	$	1,732	$	1,829		$	3,439		$	731		$	431	$	148		$	—		$	92				$	8,402

Individually evaluated for impairment	$	—	$	380		$	71		$	—		$	—	$	—		$	—		$	—				$	451
Loans acquired with deteriorated credit quality	—		—			2			—			—		—			—			—			—		2
Collectively evaluated for impairment	1,732		1,449			3,366			731			431		148			—			92					7,949
Ending balance	$	1,732	$	1,829		$	3,439		$	731		$	431	$	148		$	—		$	92				$	8,402
Loans receivables:
Individually evaluated for impairment	$	103	$	3,775		$	5,093		$	—		$	1,156	$	398		$	—		$	—		$	—	$	10,525
Loans acquired with deteriorated credit quality	—		319			1,419			—			—		—			—			—			—		1,738
Collectively evaluated for impairment	149,284		116,496			381,919			154,183			46,107		22,564			181			—			167		870,901
Total	$	149,387	$	120,590		$	388,431		$	154,183		$	47,263	$	22,962		$	181		$	—		$	167	$	883,164

Allowance for Loan Losses as of and for the year ended December 31, 2015
(Dollars in thousands)
Construction Commercial Business Commercial Real Estate Mortgage Warehouse Lines Residential Real Estate Loans to Individuals Other Unallocated Deferred Fees Total
Allowance for loan losses:
Beginning balance $ 1,215
$ 1,761
$ 2,393
$ 896
$ 197
$ 129
$ 2
$ 332
$ —
$ 6,925
(Credit) provision charged to operations (190 ) 347
1,010
(30 ) 91
(13 ) (1 ) (114 ) —
1,100
Loans charged off —
(116 ) (361 ) —
—
(13 ) (1 ) —
—
(491 )
Recoveries of loans charged off —
13
7
—
—
6

—
—
26
Ending balance $ 1,025
$ 2,005
$ 3,049
$ 866
$ 288
$ 109
$ —
$ 218
$ —
$ 7,560

Individually evaluated for impairment $ —
$ 68
$ 125
$ —
$ 69
$ —
$ —
$ —
$ —
$ 262
Loans acquired with deteriorated credit quality —
—
64
—
—
—
—
—
—
64
Collectively evaluated for impairment 1,025
1,937
2,860
866
219
109
—
218
—
7,234
Ending Balance $ 1,025
$ 2,005
$ 3,049
$ 866
$ 288
$ 109
$ —
$ 218
$ —
$ 7,560

Loans receivable:

Loans acquired with deteriorated credit quality $ —
$ 241
$ 1,359
$ —
$ —
$ —
$ —
$ —
$ —
$ 1,600
Individually evaluated for impairment 494
458
4,833
—
1,132
263
—
—
—
7,180
Collectively evaluated for impairment 93,251
98,578
201,058
216,572
39,612
22,811
233
—
1,226
673,341
Ending Balance $ 93,745
$ 99,277
$ 207,250
$ 216,572
$ 40,744
$ 23,074
$ 233
$ —
$ 1,226
$ 682,121



	2017
(In thousands)	Construction		Commercial Business			Commercial Real Estate		Mortgage Warehouse Lines			Residential Real Estate			Loans to Individuals			Other			Unallocated			Deferred Fees		Total
Allowance for loan losses:
Beginning balance	$	1,204	$	1,732		$	2,574	$	973		$	367		$	112		$	—		$	532				$	7,494
(Credit) provision charged to operations	499		2			358		(121		)	126			(2		)	(13		)	(249		)			600
Loans charged off	—		(61		)	—		—			(101		)	—			—			—					(162		)
Recoveries of loans charged off	—		47			17		—			—			4			13			—					81
Ending balance	$	1,703	$	1,720		$	2,949	$	852		$	392		$	114		$	—		$	283				$	8,013

Individually evaluated for impairment	$	—	$	592		$	92	$	—		$	—		$	—		$	—		$	—				$	684
Collectively evaluated for impairment	1,703		1,128			2,857		852			392			114			—			283					7,329
Ending balance	$	1,703	$	1,720		$	2,949	$	852		$	392		$	114		$	—		$	283				$	8,013
Loans receivable:
Individually evaluated for impairment	$	232	$	4,459		$	5,713	$	—		$	69		$	368		$	—		$	—		$	—	$	10,841
Loans acquired with deteriorated credit quality	—		274			590		—			—			—			—			—			—		864
Collectively evaluated for impairment	136,180		88,173			302,621		189,412			40,425			20,657			183			—			550		778,201
Total	$	136,412	$	92,906		$	308,924	$	189,412		$	40,494		$	21,025		$	183		$	—		$	550	$	789,906



	2016
(In thousands)	Construction		Commercial Business			Commercial Real Estate			Mortgage Warehouse Lines		Residential Real Estate		Loans to Individuals			Other			Unallocated		Deferred Fees		Total
Allowance for loan losses:
Beginning balance	$	1,025	$	2,005		$	3,049		$	866	$	288	$	109		$	—		$	218			$	7,560
(Credit) provision charged to operations	179		(177		)	(800		)	107		79		(3		)	1			314				(300		)
Loans charged off	—		(97		)	(60		)	—		—		—			(1		)	—				(158		)
Recoveries of loans charged off	—		1			385			—		—		6			—			—				392
Ending balance	$	1,204	$	1,732		$	2,574		$	973	$	367	$	112		$	—		$	532			$	7,494

Individually evaluated for impairment	$	7	$	101		$	114		$	—	$	38	$	—		$	—		$	—			$	260
Collectively evaluated for impairment	1,197		1,631			2,460			973		329		112			—			532				7,234
Ending balance	$	1,204	$	1,732		$	2,574		$	973	$	367	$	112		$	—		$	532			$	7,494
Loans receivable:
Individually evaluated for impairment	$	391	$	947		$	3,817		$	—	$	544	$	337		$	—		$	—	$	—	$	6,036
Loans acquired with deteriorated credit quality	—		191			930			—		—		—			—			—		—		1,121
Collectively evaluated for impairment	95,644		98,721			237,437			216,259		44,247		23,399			207			—		1,737		717,651
Total	$	96,035	$	99,859		$	242,184		$	216,259	$	44,791	$	23,736		$	207		$	—	$	1,737	$	724,808

When a loan is identified as impaired, the measurement of impairment is based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole remaining source of repayment for the loan is the liquidation of the collateral. In such cases, the current fair value of the collateral less selling costs is used. If the value of the impaired loan is less than the recorded investment in the loan, the impairment is recognized through an allowance estimate or a charge to the allowance.

The following tables summarize information regarding impaired loans receivable by loan class as of and for the years ended December 31, 2018, 2017 and 2016, respectively.

Impaired Loans Receivables (By Class) - December 31, 2016

Recorded
Investment

Unpaid Principal
Balance

Related
Allowance

Year to Date 2016 Average
Recorded
Investment

Year to Date
2016 Interest
Income
Recognized
(Dollars in thousands)
With no related allowance:
Construction $ 186
$ 186
$ —
$ 260
$ —
Commercial Business 883
1,054
—
623
14
Commercial Real Estate 1,380
1,380
—
1,528
74
Mortgage Warehouse Lines —
—
—
—
—
Subtotal 2,449
2,620
—
2,411
88

Residential Real Estate 244
244
—
725
—

Consumer

Loans to Individuals 337
337
—
281
—
Other —
—
—
—
—
Subtotal 337
337
—
281
—
Subtotal with no related allowance 3,030

3,201

—

3,417

88
With an allowance:

Commercial

Construction 205
205
7
51
9
Commercial Business 255
255
101
238
—
Commercial Real Estate 3,367
3,367
114
3,603
19
Mortgage Warehouse Lines —
—
—
—
—
Subtotal 3,827

3,827

222

3,892

28

Residential Real Estate 301
316
38
200
—
Consumer

Loans to Individuals —
—
—
—
—
Other —
—
—
—
—
Subtotal —

—

—

—

—
Subtotal with an allowance 4,128

4,143

260

4,092

28

Total:

Construction
391
391
7
311
9
Commercial Business 1,138
1,309
101
861
14
Commercial Real Estate 4,747
4,747
114
5,131
93
Mortgage Warehouse Lines —
—
—
—
—
Residential Real Estate 544
560
38
925
—
Consumer 337
337
—
281
—
Total $ 7,157

$ 7,344

$ 260

$ 7,509

$ 116



	2018
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Year to Date 2018 Average Recorded Investment		Year to Date 2018 Interest Income Recognized
With no related allowance:
Commercial:
Construction	$	103	$	103	$	—	$	115	$	7
Commercial business	992		1,332		—		1,112		112
Commercial real estate	2,304		2,629		—		2,757		48
Mortgage warehouse lines	—		—		—		—		—
	3,399		4,064		—		3,984		167
Consumer:
Residential real estate	1,156		1,241		—		846		—
Loans to individuals	398		478		—		410		—
Other	—		—		—		—		—
	1,554		1,719		—		1,256		—
With no related allowance	4,953		5,783		—		5,240		167
With an allowance:
Commercial:
Construction	—		—		—		—		—
Commercial business	3,102		3,217		380		3,326		44
Commercial real estate	4,208		4,208		73		4,336		252
Mortgage warehouse lines	—		—		—		—		—
	7,310		7,425		453		7,662		296
Consumer:
Residential real estate	—		—		—		—		—
Loans to individuals	—		—		—		—		—
Other	—		—		—		—		—
	—		—		—		—		—
With an allowance	7,310		7,425		453		7,662		296

Total:
Construction	103		103		—		115		7
Commercial business	4,094		4,549		380		4,438		156
Commercial real estate	6,512		6,837		73		7,093		300
Mortgage warehouse lines	—		—		—		—		—
Residential real estate	1,156		1,241		—		846		—
Loans to individuals	398		478		—		410		—
Other	—		—		—		—		—
	$	12,263	$	13,208	$	453	$	12,902	$	463

Impaired Loans Receivables (By Class) - December 31, 2015

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Year to Date 2015 Average
Recorded
Investment

Year to Date
2015 Interest
Income
Recognized
(Dollars in thousands)
With no related allowance:
Commercial
Construction $ 494
$ 494
$ —
$ 477
$ 27
Commercial Business 488
847
—
492
23
Commercial Real Estate 2,417
2,683
—
2,998
94
Mortgage Warehouse Lines —
—
—
—
—
Subtotal 3,399

4,024

—

3,967

144

Residential Real Estate 831
831
—
981
—

Consumer

Loans to Individuals 263
280
—
88
—
Other —
—
—
—
—
Subtotal 263
280
—
88
—
Subtotal with no related allowance 4,493

5,135

—

5,036

144

With an allowance:

Commercial

Construction —
—
—
—
—
Commercial Business 211
237
68
307
5
Commercial Real Estate 3,775
3,788
189
4,200

154

Mortgage Warehouse Lines —
—
—
—
—

Subtotal 3,986

4,025

257

4,507

159

Residential Real Estate 301
316
69
100
—
Consumer

Loans to Individuals —
—
—
175
—
Other —
—
—
—
—
Subtotal —

—

—

175

—
Subtotal with an allowance 4,287
4,341
326
4,782
159

Total:

Construction
494
494
—
477
27
Commercial Business 699
1,084
68
799
28
Commercial Real Estate 6,192
6,471
189
7,198
248
Mortgage Warehouse Lines —
—
—
—
—
Residential Real Estate 1,132
1,147
69
1,081
—
Consumer 263
280
—
263
—
Total $ 8,780

$ 9,476

$ 326

$ 9,818

$ 303



	December 31, 2017
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Year to Date 2017 Average Recorded Investment		Year to Date 2017 Interest Income Recognized
With no related allowance:
Commercial:
Construction	$	232	$	232	$	—	$	209	$	12
Commercial business	1,271		1,419		—		828		153
Commercial real estate	1,348		1,372		—		2,772		128
Mortgage warehouse lines	—		—		—		—		—
	2,851		3,023		—		3,809		293
Consumer:
Residential real estate	69		123		—		142		—
Loans to individuals	368		438		—		342		—
Other	—		—		—		—		—
	437		561		—		484		—
With no related allowance	3,288		3,584		—		4,293		293
With an allowance:
Commercial:
Construction	—		—		—		86		—
Commercial business	3,462		3,464		592		2,864		84
Commercial real estate	4,955		5,748		92		3,005		188
Mortgage warehouse lines	—		—		—		—		—
	8,417		9,212		684		5,955		272
Consumer:
Residential real estate	—		—		—		75		—
Loans to individuals	—		—		—		—		—
Other	—		—		—		—		—
	—		—		—		75		—
With an allowance	8,417		9,212		684		6,030		272

Total:
Construction	232		232		—		295		12
Commercial business	4,733		4,883		592		3,692		237
Commercial real estate	6,303		7,120		92		5,777		316
Mortgage warehouse lines	—		—		—		—		—
Residential real estate	69		123		—		217		—
Loans to individuals	368		438		—		342		—
Other	—		—		—		—		—
	$	11,705	$	12,796	$	684	$	10,323	$	565



(Dollars in thousands)	Year to Date 2016 Average Recorded Investment		Year to Date 2016 Interest Income Recognized
With no related allowance:
Commercial:
Construction	$	260	$	—
Commercial business	623		14
Commercial real estate	1,528		74
Mortgage warehouse lines	—		—
	2,411		88
Consumer:
Residential real estate	725		—
Loans to individuals	281		—
Other	—		—
	281		—
With no related allowance	3,417		88
With an allowance:
Commercial:
Construction	51		9
Commercial business	238		—
Commercial real estate	3,603		19
Mortgage warehouse lines	—		—
	3,892		28
Consumer:
Residential real estate	200		—
Loans to individuals	—		—
Other	—		—
	200		—
With an allowance	4,292		28

Total:
Construction	311		9
Commercial business	861		14
Commercial real estate	5,131		93
Mortgage warehouse lines	—		—
Residential real estate	925		—
Loans to individuals	281		—
Other	—		—
	$	7,509	$	116

Purchased Credit-Impaired Loans

Purchased Credit-Impaired ~~loans (“PCI”~~Loans ("PCI") are loans acquired at a discount that is due in part to credit quality. ~~Acquired~~On April 11, 2018, as part of the NJCB merger, the Company acquired purchased credit-impaired loans with loan balances totaling ~~$2.6~~$1.1 million ~~were deemed to be PCI at February 7, 2014~~ and ~~were initially recorded at~~ fair ~~value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses).~~values totaling $881,000.

The following table presents additional information regarding PCI loans ~~for the years ended~~at December 31, ~~2016~~2018 and ~~2015:~~2017:

(Dollars in thousands)
Purchased Loans with Evidence of
Credit Deterioration
12/31/2016 12/31/2015
Outstanding balance $ 1,470
$ 1,964
Carrying amount $ 1,121
$ 1,600



(In thousands)	2018		2017
Outstanding balance	$	2,007	$	998
Carrying amount	1,738		864

In ~~2015, an allowance for~~2018, 2017 and 2016, no loan ~~losses in the amount of $64,000~~loss provision was recorded for ~~one~~ PCI ~~loan.~~loans.

The following table presents changes in accretable discount for PCI loans for the years ended December 31, ~~2016~~2018, 2017 and ~~2015:~~

2016:

(Dollars in thousands) December 31, 2016 December 31, 2015
Balance at beginning of year $ 73
$ 135
Acquisition of impaired loans —
—
Accretion of discount (43 ) (62 )
Balance at end of year $ 30
$ 73

Non-accretable difference at end of year $ 215
$ 215



(In thousands)	2018			2017			2016
Balance at beginning of year	$	126		$	30		$	73
Acquisition of impaired loans	168			—			—
Transfer from non-accretable to accretable	—			161			—
Accretion of discount	(130		)	(65		)	(43		)
Balance at end of year	$	164		$	126		30

Non-accretable difference at end of year	$	122		$	26		$	215

The following table presents the years for the scheduled remaining accretable discount that will accrete to income based on the Company’s most recent estimates of cash flows for PCI loans:

(Dollars in thousands) Periods ending December 31,
2017 $ 22
2018 8
Thereafter —
Total $ 30



(In thousands)	Years ending December 31,
	2019	$	110
	2020	54
	Thereafter	—
	Total	$	164

Consumer Mortgage Loans Secured by Residential Real Estate in Process of Foreclosure

The following table summarizes the recorded investment in consumer mortgage loans secured by residential real estate in process of foreclosure:

(Dollars in thousands) December 31,
2016 2015
Number of loans Recorded Investment Number of loans Recorded Investment
3 $ 524
5 $ 1,008



	December 31,
(Dollars in thousands)	2018			2017
	Number of loans	Recorded Investment		Number of loans	Recorded Investment
	4	$	821	1	$	77

In the normal course of business, the ~~Bank~~Company may consider modifying loan terms for various reasons. These reasons may include as a retention strategy to compete in the current interest rate environment or to re-amortize or extend a loan term to better match the loan’s payment stream with the borrower’s cash flow. A modified loan would be considered a troubled debt restructuring (“TDR”) if the ~~Bank~~Company grants a concession to a borrower and has determined that the borrower is troubled (i.e., experiencing financial difficulties).

If the ~~Bank~~Company restructures a loan to a troubled borrower, the loan terms (i.e., interest rate, payment, amortization period, maturity date) may be modified in various ways to enable the borrower to cover the modified debt service payments based on current financial information and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms may only be offered

for that time period. Where possible, the ~~Bank~~Company would attempt to obtain additional collateral and/or secondary repayment sources

at the time of the restructure in order to put the ~~Bank~~Company in the best possible position if the borrower is not able to meet the modified terms. The ~~Bank~~Company will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default.

In evaluating whether a restructuring constitutes a troubled debt restructuring, applicable guidance requires that a creditor must separately conclude that the restructuring constitutes a concession and the borrower is experiencing financial difficulties. The following table is a breakdown of troubled debt restructurings, all of which are classified as impaired, which occurred during the years ended December 31, ~~2016~~2018 and ~~2015.~~

~~During 2016~~2017:

(Dollars in thousands)
Number of
Contracts

Pre-Modification
Outstanding
Recorded
Investment

Post-Modification
Outstanding
Recorded
Investment
Troubled Debt Restructurings:
Commercial Real Estate 1
$ 458
$ 458

~~During 2015~~



	2018
(Dollars in thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial Business	1	$	135	$	132
Commercial Real Estate	2	$	1,001	$	991



	2017
(Dollars in thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial Real Estate	1	$	2,337	$	2,322

~~There was one troubled debt restructuring in the amount of $458,000 that subsequently defaulted within twelve months of restructuring during the year ended December 31, 2016.~~

There were no troubled debt restructurings that subsequently defaulted within ~~twelve~~12 months of restructuring during the ~~year~~years ended December 31, ~~2015.~~2018 and 2017.

If the Bank determines that a borrower has suffered deterioration in its financial condition, a restructuring of the loan terms may occur. Such loan restructurings may include, but are not limited to, reductions in principal or interest, reductions in interest rates and extensions of the maturity date. When modifications are implemented, such loans meet the definition of a troubled debt restructuring. All of the modifications employed by the Bank during 2016 and 2015 have resulted in lower principal amortization payments. The lower payments are determined by an analysis of the borrower’s cash flow ability to meet the modified terms while anticipating an improved financial condition to enable a resumption of the original payment terms.

5.6. Related Parties

Activity related to loans to directors, executive officers and their affiliated interests during ~~2016~~the years ended December 31, 2018 2017 and ~~2015~~2016 is as follows:

(Dollars in thousands) December 31,
2016 2015
Balance, beginning of year $ 870
$ 1,376
Loans granted 751
16
Repayments of loans (264 ) (522 )
Balance, end of year $ 1,357
$ 870



(In thousands)	2018			2017			2016
Balance, beginning of year	$	2,719		$	1,357		$	870
Loans granted	3,365			1,603			751
Repayments of loans	(279		)	(241		)	(264		)
Balance, end of year	$	5,805		$	2,719		$	1,357

All such loans were made under customary terms and conditions and were current as to principal and interest payments as of December 31, ~~2016~~2018, 2017 and ~~2015.~~2016.

Related party deposits were ~~$14.9~~$12.0 million, $10.7 million and ~~$9.0~~$14.9 million at December 31, ~~2016~~2018, 2017 and ~~2015,~~2016, respectively.

Rent of approximately $126,000 and $122,000 was paid in 2018 and 2017, respectively, to an entity affiliated with a director of the Company for the lease of one of the Company’s offices. In 2016, the rent paid was less than $120,000.

The Company has had and intends to have business transactions in the ordinary course of business with directors, officers and affiliated interests on comparable terms as those prevailing from time to time for other non-affiliated customers of the Company. For these transactions, related expenses are not significant to the operations of the Company.

7. Premises and Equipment

Premises and equipment consist of the ~~following:~~following at December 31,

December 31,
(Dollars in thousands)
Estimated
Useful Lives
2016 2015
Land $ 1,798
$ 1,798
Building 40 years 8,083
8,083
Leasehold improvements 3 - 10 years 5,864
5,762
Furniture, fixtures and equipment 3 – 15 years 4,897
4,542
20,642
20,185
Less: Accumulated depreciation (9,969 ) (9,076 )
$ 10,673
$ 11,109



(Dollars in thousands)	Estimated Useful Lives	2018		2017
Land		$	1,798	$	1,798
Building	40 years	8,340		8,083
Leasehold improvements	3 - 10 years	7,577		6,241
Furniture, fixtures and equipment	3 - 15 years	5,520		5,032
Projects in progress		24		337
		23,259		21,491
Less: Accumulated depreciation		11,606		10,786
Total		$	11,653	$	10,705

Depreciation expense was ~~$893,000~~$820,000, $814,000 and ~~$1.0~~$893,000 million for the years ended December 31, ~~2016~~2018, 2017 and ~~2015,~~2016, respectively.

7.8. Other Real Estate Owned (“OREO”)

~~Activity related to~~The following table presents the activity in other real estate owned for the years ended December 31, ~~2016~~



(In thousands)	2018			2017			2016
Balance, beginning of year	$	—		$	166		$	966
Other real estate owned properties added	1,460			455			141
Other real estate owned property acquired in NJCB merger	1,230			—			—
Sales during the year	—			(626		)	(1,002		)
Increase in carrying amount of other real estate owned	—			5			61
Forfeitable deposit on other real estate owned	(175		)	—			—
Balance, end of year	$	2,515		$	—		$	166

The Company recorded gains on sales of other real estate owned of $0, $5,000 and ~~2015 is as follows:~~

(Dollars in thousands) 2016
2015
Balance, beginning of year $ 966
$ 5,710
Transfers into real estate owned 141
2,357
Transfers to other assets —
—
Sale of real estate owned (1,033 ) (6,027 )
Gain (loss) on sale of real estate owned 31
(692 )
Increase (decrease) in carrying amount of real estate owned 61
(382 )
Balance, end of year $ 166
$ 966

At$31,000 for the years ended December 31, 2018, 2017 and 2016, ~~OREO was comprised of one commercial property. At December 31, 2015, OREO was comprised of one residential property.~~

respectively.

9. Goodwill and Intangible Assets

~~Goodwill~~The table below presents goodwill and intangible assets ~~are summarized as follows:~~

at December 31,

December 31,
(Dollars in thousands) 2016 2015
Goodwill $ 11,854
$ 11,854
Core deposits intangible 1,026
1,430
Total $ 12,880
$ 13,284



(In thousands)	2018		2017
Goodwill	$	11,854	$	11,854
Core deposits intangible, net	404		642
Total	$	12,258	$	12,496

Amortization expense of intangible assets was ~~$404,000~~$318,000, $384,000 and ~~$428,000~~$404,000 for the years ended December 31, ~~2016~~2018, 2017 and ~~2015,~~2016, respectively.

Scheduled amortization of the core deposits intangible is as follows:

(Dollars in thousands)
2017 $ 384
2018 305
2019 110
2020 88
2021 67
Thereafter 72
$ 1,026



(In thousands)	Year	Amount
	2019	$	123
	2020	100
	2021	78
	2022	54
	2023	31
	After five years	18
		$	404

9.10. Deposits

~~Deposits~~The following table presents the details of total deposits at December 31, ~~2016 and 2015 are summarized as follows:~~

(Dollars in thousands) 2016 2015
Non-interest bearing $ 170,854
$ 159,918
Interest bearing 310,103
284,547
Savings 205,294
196,324
Certificates of deposit 148,265
145,968
$ 834,516
$ 786,757



			% of Total				% of Total
(Dollars in thousands)	2018		Deposits		2017		Deposits
Non-interest bearing	$	212,981	22.40	%	$	196,509	21.31	%
Interest bearing	323,503		34.03		372,133		40.36
Savings	189,612		19.95		215,197		23.34
Certificates of deposit	224,576		23.62		138,167		14.99
	$	950,672	100.00	%	$	922,006	100.00	%

At December 31, ~~2016,~~2018, certificates of deposit have contractual maturities as follows:

(Dollars in thousands)
Year Amount
2017 $ 86,079
2018 35,752
2019 8,050
2020 6,161
2021 12,223
$ 148,265



(In thousands)	Year	Amount
	2019	$	116,043
	2020	76,986
	2021	18,743
	2022	9,147
	2023	3,657
		$	224,576

Certificates of deposit greater than $250,000 were ~~$23.9~~$38.0 million and ~~$24.3~~$23.6 million at December 31, ~~2016~~2018 and December 31, ~~2015,~~2017, respectively.

~~10.~~11. Borrowings

~~The balance~~At December 31, 2018 the Company had overnight borrowings totaling $71.8 million with an average interest rate of 2.60%. Overnight borrowings ~~was $73.1 million~~ at December 31, ~~2016, consisting~~2017 totaled $20.5 million with a weighted average interest rate of one long-term FHLB advance totaling $10.0 million and overnight funds purchased of $63.1 million. The balance of borrowings was $58.9 million at December 31, 2015, consisting of three long-term FHLB advances totaling $20.3 million and overnight funds purchased of $38.6 million.1.53%. These borrowings are primarily used to fund asset growth not supported by deposit generation.

Two long-term FHLB fixed rate convertible advances were assumed by the Bank as a result of an acquisition in 2014. These two advances totaled $10.0 million with an average rate of 4.50%. As a result of acquisition accounting, the two advances were fair valued and a premium of $1.0 million was assigned. The premium was amortized over the remaining term of the advances. The two advances had a combined carrying amount of $10.3 million atAt December 31, ~~2015 and both advances matured and were repaid on December 14, 2016.~~

~~The Bank also has a fixed rate convertible advance~~2018, unused short-term or overnight borrowing potential totaled $131.1 million from the FHLB ~~in the amount of $10.0~~and borrowing commitments totaled $46.0 million ~~that bears interest at the rate of 4.08%. This advance may be called by the FHLB quarterly at the option of the FHLB if rates rise and the rate earned~~from correspondent banks.

by the FHLB is no longer a “market” rate. This advance is fully secured by marketable securities. The FHLB advance matures on July 31, 2017. Due to the call provision, the expected maturity could differ from the contractual maturity.

~~11.~~

12. Redeemable Subordinated Debentures

On May 30, 2006, the Company established ~~1st~~1^ST Constitution Capital Trust II (“Trust II”), a Delaware business trust and wholly-owned subsidiary of the Company, for the sole purpose of issuing $18.0 million of trust preferred securities (the “Capital Securities”). Trust II utilized the $18.0 million in proceeds, along with $557,000 invested in Trust II by the Company, to purchase $18,557,000 of floating rate junior subordinated debentures issued by the Company and due to mature on June 15, 2036. The subordinated debentures carry a floating interest rate based on the three-month LIBOR plus 165 basis points ~~(2.61344%~~(4.4500% at December 31, ~~2016)~~2018). The Capital Securities were issued in connection with a pooled offering involving approximately 50 other financial institution holding companies. All of the Capital Securities were sold to a single pooling vehicle. The floating rate junior subordinated debentures are the only asset of Trust II and have terms that mirrored the Capital Securities. These debentures are redeemable in whole or in part prior to ~~maturity after June 15, 2011.~~maturity. Trust II is obligated to distribute all proceeds of a redemption of these debentures, whether voluntary or upon maturity, to holders of the Capital Securities. The Company’s obligation with respect to the Capital Securities and the debentures, when taken together, provided a full and unconditional guarantee on a subordinated basis by the Company of the obligations of Trust II to pay amounts when due on the Capital Securities. Interest payments on the floating rate junior subordinated debentures flow through Trust II to the pooling vehicle.

~~12.~~13. Income Taxes

The components of income tax expense ~~(benefit)~~ are summarized as ~~follows:~~

follows for the years ended December 31, 2018, 2017 and 2016:

(Dollars in thousands) 2016 2015
Federal:
Current $ 3,360
$ 3,199
Deferred 269
8
3,629
3,207
State:
Current 909
704
Deferred 85
151
994
855
$ 4,623
$ 4,062



(In thousands)	2018			2017		2016
Federal:
Current	$	2,479		$	2,791	$	3,360
Deferred	209			496		269
Remeasurement of deferred tax assets and liabilities	(28		)	1,712		—
	2,660			4,999		3,629
State:
Current	1,561			748		909
Deferred	96			124		85
	1,657			872		994
	$	4,317		$	5,871	$	4,623

A comparison of income tax expense at the Federal statutory rate of 21% in ~~2016~~2018, and ~~2015~~34% in 2017 and 2016 to the Company’s provision for income taxes is as follows:

(Dollars in thousands) 2016 2015
Federal income tax $ 4,729
$ 4,327
Add (deduct) effect of:

State income taxes net of federal income tax effect 656
564
Tax-exempt interest income (706 ) (724 )
Bank-owned life insurance (187 ) (203 )
Other items, net 131
98
Provision for income taxes $ 4,623
$ 4,062



(In thousands)	2018			2017			2016
Federal income tax	$	3,437		$	4,352		$	4,729
Add (deduct) effect of:
State income taxes net of federal income tax effect	1,309			575			656
Tax-exempt interest income	(416		)	(728		)	(706		)
Bank-owned life insurance	(110		)	(177		)	(187		)
Executive compensation	96			139			—
Remeasurement of federal deferred tax assets and liabilities	(28		)	1,712			—
Other items, net	29			(2		)	131
Provision for income taxes	$	4,317		$	5,871		$	4,623

The tax effects of existing temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as ~~follows:~~

follows at December 31, 2018 and 2017:

December 31,
(Dollars in thousands) 2016 2015
Deferred tax assets (liabilities):
Allowance for loan losses $ 2,993
$ 3,020
Unrealized loss (gain) on securities available for sale 130
(113 )
Supplemental executive retirement plan liability 1,886
2,060
Other than temporary impairment loss 170
170
Depreciation 802
482
Non-accrual interest 313
231
Pension liability (44 ) (75 )
Other 262
324
Acquisition accounting adjustments (52 ) 441
Net deferred tax assets, included in other assets $ 6,460
$ 6,540



(In thousands)	2018		2017
Deferred tax assets:
Allowance for loan losses	$	2,362	$	2,253
Unrealized loss on securities available for sale	528		137
Supplemental executive retirement plan liability	1,294		1,213
Other than temporary impairment loss	119		119
Depreciation	612		622
Non-accrual interest	200		330
Acquisition accounting adjustments	647		—
Federal net operating loss carryover, net	871		—
Other	72		147
Total gross deferred tax assets	$	6,705	$	4,821
Deferred tax liabilities:
Deferred costs	564		540
Pension liability	90		31
Acquisition accounting adjustments	—		44
Total gross deferred tax liabilities	$	654	$	615

Net deferred tax assets	$	6,051	$	4,206

Based upon the current facts, management has determined that it is more likely than not that there will be sufficient taxable income in future years to realize the deferred tax assets. However, there can be no assurances about the level of future earnings.

The Company is subject to U.S. Federal income tax as well as income tax of the State of New Jersey and other states. The tax years of 2015, 2016, 2017 and 2018 remain open to federal examination. The tax years of 2014, 2015, 2016, 2017 and 2018 remain open for state examination. The Company is currently under examination by the State of New York for the years 2015, 2016 and 2017.

At December 31, 2018, the Company has $6.0 million of federal net operating loss carryforwards which begin to expire in 2034, unless previously used. These net operating loss carryforwards arose from the NJCB merger. The Company's use of the net operating loss carryforward is limited by statute to a maximum of $197,000 per year.

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. ASC 740 (Income Taxes) requires the recognition of the effect of changes in tax laws or rates in the period in which the legislation is enacted. The changes in the deferred tax assets and liabilities remeasured at the new 21% federal tax rate are reflected in income tax expense for fiscal year 2017.

The Company performed a preliminary analysis in 2017 and expensed an estimated $1.7 million related to the effect of the lower corporate tax rates on the deferred tax assets and liabilities. This was a non-cash charge to income. Upon completion of the 2017 federal tax returns, the provisional remeasurement of federal deferred tax liability was reduced by $28,000. The measurement period under Staff Accounting Bulletin 118 issued by the SEC is closed as of December 22, 2018 and the accounting for the Tax Act is final.

~~13.~~14. Comprehensive Income and Accumulated Other Comprehensive ~~Income~~Loss

Comprehensive income is the total of ~~(1)~~ net income and ~~(2)~~ all other changes in equity from non-shareholder sources, which are referred to as other comprehensive income. The components of accumulated other comprehensive ~~income (loss)~~loss that are included in shareholders' equity and the related tax effects are as ~~follows:~~follows at December 31, 2018 and 2017:

Year ended December 31, 2016:
(Dollars in thousands)
Before-Tax
Amount

Income Tax
Effect

Net-of-Tax
Amount
Unrealized holding (losses) gains on available for sale securities:
    Unrealized holding gains on available for sale  securities $ (464 ) $ 130
$ (334 )
    Reclassification adjustment for (gains) losses realized in income —
—
—
    Other comprehensive (loss) on securities available for sale (464 ) 130
(334 )
Unrealized impairment (loss) on held to maturity security:

    Unrealized impairment (loss) on held to maturity security (501 ) 170
(331 )
Unfunded pension liability:

Changes from plan actuarial gains and losses included in other comprehensive
income
269
(108 ) 161
    Reclassification adjustment for (gains) realized in income (160 ) 64
(96 )
    Other comprehensive gain from plan actuarial gains 109
(44 ) 65
Accumulated other comprehensive income (loss) $ (856 ) $ 256
$ (600 )

Year ended December 31, 2015:

(Dollars in thousands)
Before-Tax
Amount

Income Tax
Effect

Net-of-Tax
Amount
Unrealized holding (losses) gains on available for sale securities:

    Unrealized holding gains on available for sale  securities $ 203
$ (113 ) $ 90
    Reclassification adjustment for loss realized in income —
—
—
    Other comprehensive gain on securities available for sale 203
(113 ) 90
Unrealized impairment (loss)  on held to maturity security:

    Unrealized impairment (loss) on held to maturity security (501 ) 170
(331 )
Unfunded pension liability:

Changes from plan actuarial gains and losses included in other comprehensive
income
452
(181 ) 271
Reclassification adjustment for (gains) realized in income (266 ) 106
(160 )
Other comprehensive gain from plan actuarial gains 186
(75 ) 111
Accumulated other comprehensive income (loss) $ (112 ) $ (18 ) $ (130 )



	2018
(In thousands)	Before-Tax Amount			Income Tax Effect			Net-of-Tax Amount
Net unrealized holding loss on securities available for sale	$	(2,207	)	$	528		$	(1,679	)
Unrealized impairment loss on held to maturity security	(501		)	119			(382		)
Gains on unfunded pension liability	318			(90		)	228
Total other comprehensive loss	$	(2,390	)	$	557		$	(1,833	)

	2017
	Before-Tax Amount			Income Tax Effect			Net-of-Tax Amount
Net unrealized holding loss on securities available for sale	$	(571	)	$	137		$	(434	)
Unrealized impairment loss on held to maturity security	(501		)	119			(382		)
Gains on unfunded pension liability	111			(31		)	80
Total other comprehensive loss	$	(961	)	$	225		$	(736	)

Changes in the components of accumulated other comprehensive ~~income (loss)~~loss are as follows and are presented net of tax:

(Dollars in thousands)
Unrealized
Holding (Losses)
Gains on
Available for Sale
Securities

Unrealized
Impairment Loss
On Held to
Maturity
Security

Unfunded
Pension
Liability

Accumulated
Other
Comprehensive
Income (Loss)
Balance, January 1, 2015 $ 276
$ (331 ) $ 303
$ 248
Other comprehensive income (loss) before reclassifications (186 ) —
(32 ) (218 )
Amounts reclassified from accumulated other comprehensive income (loss) —
—
(160 ) (160 )
Other comprehensive income (loss) (186 ) —
(192 ) (378 )
Balance, December 31, 2015 90
(331 ) 111
(130 )
Other comprehensive income (loss) before reclassifications (424 ) —
52
(372 )
Amounts reclassified from accumulated other comprehensive income (loss) —
—
(98 ) (98 )
Other comprehensive income (loss) (424 ) —
(46 ) (470 )
Balance, December 31, 2016 $ (334 ) $ (331 ) $ 65
$ (600 )



(In thousands)	Unrealized Holding Gains (Losses) on Available for Sale Securities			Unrealized Impairment Loss on Held to Maturity Security			Unfunded Pension Liability			Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2015	$	90		$	(331	)	$	111		$	(130	)
Other comprehensive income (loss) before reclassifications	(424		)	—			52			(372		)
Amounts reclassified from accumulated other comprehensive income	—			—			(98		)	(98		)
Other comprehensive income (loss)	(424		)	—			(46		)	(470		)
Balance, December 31, 2016	(334		)	(331		)	65			(600		)
Other comprehensive income (loss) before reclassifications	26			—			38			64
Amounts reclassified from accumulated other comprehensive income	(55		)	—			(36		)	(91		)
Reclassification of certain deferred tax effects	(71		)	(51		)	13			(109		)
Other comprehensive loss	(100		)	(51		)	15			(136		)
Balance, December 31, 2017	(434		)	(382		)	80			(736		)
Other comprehensive income (loss) before reclassifications	(1,236		)	—			192			(1,044		)
Amounts reclassified from accumulated other comprehensive income	—			—			(44		)	(44		)
Reclassification adjustment for gains realized in income	(9		)	—			—			(9		)
Other comprehensive loss	(1,245		)	—			148			(1,097		)
Balance, December 31, 2018	$	(1,679	)	$	(382	)	$	228		$	(1,833	)

~~14.~~15. Benefit Plans

Retirement Savings ~~Plan~~

Plan: The Bank has a 401(k) ~~plan~~Plan (the "Plan") which covers substantially all employees with six months or more of service. The plan permits all eligible employees to make ~~basic~~ contributions to the ~~plan~~Plan up to the IRS salary deferral limit. Under the ~~plan,~~Plan, the Bank provided a matching contribution of 50% ~~in 2016 and 2015,~~, up to 6% of base compensation. Employer contributions to the ~~plan~~Plan amounted to $343,000, $353,000 and $272,000 in ~~2016~~2018, 2017 and ~~$274,000~~2016.

Bank-Owned Life Insurance: In connection with the benefit plans, the Bank has life insurance policies on the lives of its executives, directors, officers and employees. The Bank is the owner and beneficiary of the policies. The cash surrender values of the policies totaled approximately $28.7 million and $25.1 million as of December 31, 2018 and 2017, respectively. Included in ~~2015.~~the total at December 31, 2018, is $4.0 million of bank-owned life insurance policies acquired in the NJCB merger.

Supplemental Executive Retirement Plan

The Company also provides retirement benefits to certain employees under supplemental executive retirement ~~plans.~~plans (the "Supplemental Plans"). The ~~plans~~Supplemental Plans are unfunded and the Company accrues actuarially determined benefit costs over the estimated service period of the employees participating in the ~~plans.~~Supplemental Plans. The present value of the benefits accrued under ~~these plans~~the Supplemental Plans as of December 31, ~~2016~~2018 and ~~2015~~2017 is approximately ~~$4.7~~$4.3 million and ~~$5.2~~$4.2 million, respectively, and is included in other liabilities and accumulated other comprehensive ~~income~~loss in the accompanying consolidated balance sheets. Compensation expense related to the ~~supplemental executive retirement plans~~Supplemental Plans of ~~$235,000~~$287,000, $293,000 and ~~$184,000~~$235,000 is included in the accompanying consolidated statements of income for the years ended December 31, ~~2016~~2018, 2017 and ~~2015,~~2016, respectively.

~~Bank-Owned Life Insurance~~

In connection with the benefit plans, the Bank has life insurance policies on the lives of its executives, directors, officers and employees. The Bank is the owner and beneficiary of the policies. The cash surrender values of the policies totaled approximately $22.2 million and $21.6 million as of December 31, 2016 and 2015, respectively.

The following table sets forth the changes in benefit obligations of the Company’s ~~supplemental executive retirement plans.~~ Supplemental Plans for the years ended December 31, 2018 and 2017.

(Dollars in thousands) 2016 2015
Change in Benefit Obligation
Beginning January 1 $ 4,971
$ 4,511
Service cost 216
267
Interest cost 179
183
Actuarial (gain) loss (83 ) 53
Benefits paid (670 ) (43 )
Ending December 31 $ 4,613
$ 4,971

Amount Recognized in Consolidated Balance Sheets
Liability for pension $ 4,722
$ 5,157
Net actuarial gain included in accumulated other comprehensive income (109 ) (186 )
Prior service cost included in accumulated other comprehensive income —
—
Net recognized pension liability $ 4,613
$ 4,971

Information for pension plans with an accumulated
benefit obligation in excess of plan assets

Projected benefit obligation $ 4,613
$ 4,971
Accumulated benefit obligation 4,463
4,699



(In thousands)	2018			2017
Change in Benefit Obligation
Beginning January 1	$	4,205		$	4,613
Service cost	192			197
Interest cost	157			156
Actuarial gain	(269		)	(62		)
Benefits paid	—			(699		)
Ending December 31	$	4,285		$	4,205

Amount Recognized in Consolidated Balance Sheets
Liability for pension	$	4,603		$	4,316
Net actuarial gain included in accumulated other comprehensive loss	(318		)	(111		)
Net recognized pension liability	$	4,285		$	4,205

Information for pension plans with an accumulated benefit obligation in excess of plan assets
Projected benefit obligation	$	4,285		$	4,205
Accumulated benefit obligation	4,120			4,043

The following table sets forth the components of net periodic benefit cost for the years ended December 31, 2018, 2017 and 2016.

Components of Net Periodic Benefit Cost 2016 2015
Service cost $ 216
$ 267
Interest cost 179
183
Amortization of prior service cost —
—
Recognized net actuarial gain (160 ) (266 )
Net periodic benefit expense $ 235
$ 184



(In thousands)	2018			2017			2016
Service cost	$	192		$	197		$	216
Interest cost	157			156			179
Recognized net actuarial gain	(62		)	(60		)	(160		)
Net periodic benefit cost	$	287		$	293		$	235

The net periodic benefit cost is projected to be ~~$184,000~~$175,000 and actuarial gains of ~~$109,000~~$177,000 are expected to be removed from accumulated other comprehensive ~~income~~loss and recognized as a component of net periodic benefit expense for the year ending December 31, ~~2017.~~2019.

Weighted-Average Assumptions, December 31 2016 2015
Discount Rate 4.0 % 4.0 %
Salary Scale 4.0 % 4.0 %

Projected Annual Benefit Payments*
(Dollars in thousands) 2017 $ 4,906
2018 $ —
2019 $ —
2020 $ —
2021 $ —
2022-2026 $ —

For each of the years ended December 31, 2018, 2017 and 2016, the weighted-average discount rate was 4% and the assumed salary increase was 4% for each of the same years.

* Represents management’sManagement's expectation as of December 31, ~~2016 as to when such~~2018 for the projected annual benefit payments ~~will be made.~~is represented in the table below.



(In thousands)
2019	$	4,587
2020	—
2021	—
2022	—
2023	—
Thereafter	—
	$	4,587

~~15.~~16.Share-Based Compensation

The Company’s stock-based incentive plans (the “Stock Plans”) authorize the issuance of an aggregate of 485,873 shares of the Company’s common stock (as adjusted for stock dividends) pursuant to awards that may be granted in the form of stock options to purchase common stock (“Options”) and awards of shares of common stock (“Stock Awards”). The purpose of the Stock Plans is to attract and retain personnel for positions of substantial responsibility and to provide additional incentive to certain officers, directors, employees and other persons to promote the success of the Company. Under the Stock Plans, options have a term of ten years after the date of grant, subject to earlier termination in certain circumstances. Options are granted with an exercise price at the then fair market value of the Company’s common stock. The grant date fair value is calculated using the Black-Scholes option valuation model. As of December 31, ~~2016,~~2018, there were ~~196,175~~55,136 shares of common stock available for future grants under the Stock ~~Plans, of which 156,465 shares are available for future grant under the 2013 Equity Incentive Plan and 39,710 shares are available for future grant under the 2015 Directors Stock Plan.~~Plans.

~~Stock-based~~Share-based compensation expense related to stock options was ~~$44,000~~$57,000, $65,000 and ~~$41,000~~$44,000 for the years ended December 31, 2018, 2017 and 2016, ~~and 2015,~~ respectively.

As of December 31, 2018, there was approximately $71,000 of unrecognized compensation cost related to non-vested stock option-based compensation arrangements granted under the Stock Plans that is expected to be recognized over the next four years.

Transactions under the Company’s stock option plans during the ~~years~~year ended December 31, ~~2016 and 2015~~2018 are summarized as follows:

Stock Options

Number of
Shares

Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Term (years)

Aggregate
Intrinsic
Value
Outstanding at January 1, 2015 246,880
$ 7.80

Granted 13,892
10.10

Exercised (43,639 ) 6.68

Forfeited (27,788 ) 10.55

Expired (11,751 ) 11.89

Outstanding at December 31, 2015 177,594
7.41
5.2 $ 861,000
Granted 11,655
11.98

Exercised (18,645 ) 9.79

Forfeited (4,648 ) 11.60

Expired (155 ) 11.85

Outstanding at December 31, 2016 165,801
$ 7.35
5.2 $ 1,881,841

Exercisable at December 31, 2016 146,067
$ 7.27
5.0 $ 1,669,569



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (In thousands)
Balance, January 1, 2018	142,005		$	7.86	4.4	$	1,486
Granted	10,450		18.30
Exercised	(12,944	)	7.18
Forfeited	—		—
Expired	—		—
Balance, December 31, 2018	139,511		$	8.70	4.0	$	1,566

Exercisable at December 31, 2018	120,495		$	7.48	3.4	$	1,501

~~There were 18,645 options exercised in 2016 and 43,639 options exercised in 2015.~~ The ~~total~~aggregate intrinsic value ~~(market~~in the table above represents the total pre-tax intrinsic value (the difference between market value of the Company's common stock on ~~date~~the last trading day of 2018 and the exercise ~~less grant~~ price) ~~of options exercised during~~. The Company's closing stock price on December 31, 2018 was $19.93. During the year ended December 31, ~~2016~~2018, the aggregate intrinsic value of stock options exercised was ~~$125,000 compared to $176,000 during~~$170,000 and the ~~year ended December 31, 2015.~~Company received cash totaling $88,000 for options exercised.

The following table summarizes stock options outstanding and exercisable at December 31, ~~2016:~~

2018:

Outstanding Options Exercisable Options
Exercise Price Range Number
Average
Life in
Years

Average
Exercise
Price
Number
Average
Life in
Years

Average
Exercise
Price
$5.54 to $5.63 55,106
4.8 $ 5.60
48,339
4.8 $ 5.59
$6.16 to $7.46 69,990
4.8 $ 6.95
66,774
4.7 $ 6.94
$9.30 to $11.98 40,705
6.3 $ 10.40
30,954
6.0 $ 10.60
165,801
5.2 $ 7.35
146,067
5.0 $ 7.27



	Outstanding Options				Exercisable Options
Exercise Price Range	Number	Average Life in Years	Average Exercise Price		Number	Average Life in Years	Average Exercise Price
$5.54 to $5.63	50,975	2.8	$	5.60	50,975	2.8	$	5.60
$6.16 to $7.46	45,001	2.3	6.95		45,001	2.3	6.95
$9.30 to $11.98	24,185	6.1	10.70		18,869	5.9	10.49
$18.30 to 18.65	19,350	8.6	18.46		5,650	8.4	18.52
	139,511	4.0	$	8.70	120,495	3.4	$	7.48

The fair value of each option and the significant weighted average assumptions used to calculate the fair value of the options granted during the years ended December 31, ~~2016~~2018, 2017 and ~~2015~~2016 are as follows:

2016 2015
Fair value of options granted $ 4.65
$ 4.05
Risk-free rate of return 2.25 % 1.37 %
Expected option life in years 7
7
Expected volatility 30.66 % 32.37 %
Expected dividends ⁽¹⁾
— % —



	2018			2017			2016
Fair value of options granted	$	5.93		$	6.05		$	4.65
Risk-free rate of return	2.46		%	2.45		%	2.25		%
Expected option life in years	7			7			7
Expected volatility	31.35		%	31.25		%	30.66		%
Expected dividends	1.18		%	1.19		%	—		%

~~(1) Subsequent to the granting of stock options in 2016, the Company paid its first cash dividend on October 21, 2016.~~

As of December 31, 2016, there was approximately $75,300 of unrecognized compensation cost related to non-vested stock option-based compensation arrangements granted under the Company’s stock incentive plans. That cost is expected to be recognized over the next four years.

The following table summarizes the activity in nonvested restricted shares for the ~~years~~year ended December 31, ~~2016 and 2015:~~2018:

Non-vested Shares

Number of
Shares

Average
Grant-Date
Fair Value
January 1, 2015 148,634
$ 7.16
Granted 70,515
10.66
Vested (60,930 ) 8.99
Forfeited (14,340 ) 8.61
Non-vested at December 31, 2015 143,879
8.32
Granted 76,450
12.31
Vested (74,070 ) 10.91
Forfeited (3,000 ) 12.69
Non-vested at December 31, 2016 143,259
$ 9.02



	Number of Shares		Weighted Average Grant-Date Fair Value
Balance, January 1, 2018	150,745		$	11.87
Granted	62,150		20.19
Vested	(65,362	)	16.76
Forfeited	—		—
Balance, December 31, 2018	147,533		$	13.21

The value of restricted shares is based upon the ~~closing price~~market value of the common stock on the date of grant. The shares generally vest over a four year service period with compensation expense recognized on a straight-line basis.

~~Stock based~~Share-based compensation expense related to stock grants was ~~$710,000~~$962,000, $928,000 and ~~$590,000~~$710,000 for the years ended December 31, ~~2016~~2018, 2017 and ~~2015,~~2016, respectively.

As of December 31, ~~2016,~~2018, there was approximately ~~$1.4~~$1.8 million of unrecognized compensation cost related to non-vested stock grants that will be recognized over the next ~~three~~four years.

~~16.~~

17. Commitments and Contingencies

As of December 31, ~~2016,~~2018, future minimum rental payments under non-cancelable operating leases were as follows:



(In thousands)
2019	$	1,525
2020	1,392
2021	1,245
2022	1,008
2023	798
Thereafter	2,285
	$	8,253

(Dollars in thousands) 2017 $ 1,331
2018 1,099
2019 957
2020 750
2021 658
Thereafter 2,449
$ 7,244

Rent expense aggregated $1.8 million for the year ended December 31, 2018 and $1.5 million ~~and~~ for each of the years ended December 31, ~~2016~~2017 and ~~2015.~~2016.

Commitments With Off-Balance Sheet ~~Risk~~

Risk: The consolidated balance sheet does not reflect various commitments relating to financial instruments which are used in the normal course of business. Management does not anticipate that the settlement of those financial instruments will have a material adverse effect on the Company’s financial condition. These instruments include commitments to extend credit and letters of credit. These financial instruments carry various degrees of credit risk, which is defined as the possibility that a loss may occur from the failure of another party to perform according to the terms of the contract. As these off-balance sheet financial instruments have essentially the same credit risk involved in extending loans, the ~~Bank~~Company generally uses the same credit and collateral policies in making these commitments and conditional obligations as it does for on-balance sheet investments. Additionally, as some commitments and conditional obligations are expected to expire without being drawn or returned, the contractual amounts do not necessarily represent future cash requirements.

Commitments to extend credit are legally binding loan commitments with set expiration dates. They are intended to be disbursed, subject to certain conditions, upon request of the borrower. The ~~Bank~~Company receives a fee for providing a commitment. The ~~Bank~~Company was committed to advance ~~$372.7~~$23.1 million and ~~$290.9~~$57.5 million ~~to its borrowers~~for loans that have not closed and $403.0 million and $387.6 million for lines of credit on closed loans as of December 31, ~~2016~~2018 and ~~December 31, 2015,~~2017, respectively.

The ~~Bank~~Company issues financial standby letters of credit that are within the scope of ASC Topic 460, “Guarantees.” These are irrevocable undertakings by the ~~Bank~~Company to guarantee payment of a specified financial obligation. Most of the ~~Bank’s~~Company’s financial standby letters of credit arise in connection with lending relationships and have terms of one year or less. The maximum potential future payments that the ~~Bank~~Company could be required to make under these standby letters of credit amounted to ~~$2.0~~$766,000 at December 31, 2018 and $1.2 million at December 31, ~~2016 and $2.1 million at December 31, 2015.~~2017. The current amount of the liability as of December 31, ~~2016~~2018 and ~~2015~~2017 for guarantors under standby letters of credit is not material.

The ~~Bank~~Company also enters into best efforts forward sales commitments to sell residential mortgage loans that it has closed (loans held for sale) or that it expects to close (commitments to originate loans held for sale). These commitments are used to reduce the ~~Bank’s~~Company’s market price risk during the period from the commitment date to the sale date. The notional amount of the ~~Bank’s~~Company’s forward sales commitments was approximately ~~$8.3~~$4.3 million at December 31, ~~2016~~2018 and ~~$16.9~~$7.9 million at December 31, ~~2015.~~2017. The fair value of the loan origination commitments was ~~$123,000~~$79,000 at December 31, ~~2016~~2018 and ~~was not significant~~$135,000 at December 31, ~~2015.~~2017.

~~Litigation~~

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. The Company may also have various commitments and contingent liabilities which are not reflected in the accompanying consolidated balance sheet. Management is not aware of any present legal proceedings or contingent liabilities and commitments that would have a material impact on the Company’s financial condition or results of operations.

~~17.~~18. Other Operating Expenses

The components of other operating expenses for the years ended December 31, ~~2016~~2018, 2017 and ~~2015~~2016 are as follows:

(Dollars in thousands) 2016 2015
Marketing $ 240
$ 282
Equipment 555
839
Telephone 377
449
Regulatory, professional and other consulting fees 1,706
1,681
Insurance 303
324
Amortization of intangible assets 404
428
Other expenses 1,288
1,009
$ 4,873
$ 5,012



(Dollars in thousands)	2018		2017		2016
Regulatory, professional and other consulting fees	$	1,713	$	2,263	$	1,706
Equipment	1,175		1,008		917
Telephone	391		389		377
Amortization of intangible assets	318		384		404
Insurance	375		373		303
Supplies	294		259		219
Marketing	280		225		240
Other expenses	1,946		2,151		1,535
	$	6,492	$	7,052	$	5,701

~~18.~~19. Regulatory Capital Requirements

The Company and the Bank are subject to various regulatory capital requirements administered by the Federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the ~~Bank’s~~Company’s and the ~~Company’s~~Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Common Equity Tier 1, Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (Leverage ratio, as defined). As of December 31, ~~2016,~~2018, the Company and the Bank met all capital adequacy requirements to which they are subject.

To be categorized as adequately capitalized, the Company and the Bank must maintain minimum Common Equity Tier 1, Total ~~risk-based,~~capital to risk-weighted assets, Tier ~~I risk-based~~1 capital to risk-weighted assets and Tier I leverage capital ratios as set forth in the below table. As of December 31, ~~2016,~~2018, the Bank's capital ratios ~~exceed~~exceeded the regulatory standards for well-capitalized institutions. Certain bank regulatory limitations exist on the availability of the Bank’s assets for the payment of dividends by the Bank without prior approval of bank regulatory authorities.

In July 2013, the Federal Reserve Board and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implemented and addressed the revised standards of Basel III and addressed relevant provisions of the Dodd-Frank Act. The Federal Reserve Board’s final rules and the FDIC’s interim final rules (which became final in April 2014 with no substantive changes) apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more (which was subsequently increased to $1 billion or more in May 2015) and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rules established a Common Equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets). Banking organizations are also required to have a total capital ratio of at least 8% and a Tier 1 leverage ratio of at least 4%.

The rules also limited a banking organization’s ability to pay dividends, engage in share repurchases or pay discretionary bonuses if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of Common Equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The rules became effective for the Company and the Bank on January 1, 2015. The capital conservation buffer requirement began phasing in on January 1, 2016 at 0.625% of Common Equity Tier 1 capital to risk-weighted assets and ~~will increase~~increases by that amount each year until fully implemented in January 2019 at 2.5% of ~~common equity~~Common Equity Tier 1 capital to risk-weighted assets. As of ~~January 1, 2017,~~December 31, 2018, the Company and the Bank were required to maintain a capital conservation buffer of ~~1.25%~~1.875%.

~~Actual~~The Bank's actual capital amounts and ratios ~~for~~are presented in the ~~Company~~following table:



									To Be Well Capitalized Under Prompt
					For Capital				Corrective
	Actual				Adequacy Purposes				Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2018
Common equity Tier 1	$	133,548	12.40	%	$	48,471	4.50	%	$	70,013	6.50	%
Total capital to risk-weighted assets	141,950		13.18	%	86,170		8.00	%	107,712		10.00	%
Tier 1 capital to risk-weighted assets	133,548		12.40	%	64,627		6.00	%	86,170		8.00	%
Tier 1 leverage capital	133,548		11.74	%	45,516		4.00	%	56,894		5.00	%

As of December 31, 2017
Common equity Tier 1	$	115,031	11.74	%	$	44,106	4.50	%	$	63,709	6.50	%
Total capital to risk-weighted assets	123,044		12.55	%	78,411		8.00	%	98,014		10.00	%
Tier 1 capital to risk-weighted assets	115,031		11.74	%	58,808		6.00	%	78,411		8.00	%
Tier 1 leverage capital	115,031		10.96	%	41,987		4.00	%	52,484		5.00	%

The Company's actual capital amounts and ratios are presented in the ~~Bank as of December 31, 2016 and 2015 are as follows:~~

following table:

To Be Well Capitalized
Under Prompt
For Capital Corrective
(Dollars in thousands) Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2016
Company

Common equity Tier 1 (CET1) $ 93,101
10.40 % $ 40,302
>4.5% N/A
N/A
Total Capital to Risk Weighted Assets 118,595
13.24 % 71,648
>8% N/A
N/A
Tier 1 Capital to Risk Weighted Assets 111,101
12.41 % 53,736
>6% N/A
N/A
Tier 1 Leverage Capital 111,101
10.93 % 40,658
>4% N/A
N/A
Bank
Common equity Tier 1 (CET1) $ 108,606
12.13 % $ 40,302
>4.5% $ 58,214
≥6.5%
Total Capital to Risk Weighted Assets 116,100
12.96 % 71,648
>8% 89,560
≥10%
Tier 1 Capital to Risk Weighted Assets 108,606
12.13 % 53,736
>6% 71,648
≥8%
Tier 1 Leverage Capital 108,606
10.68 % 40,658
>4% 50,823
>5%
As of December 31, 2015

Company

Common equity Tier 1 (CET1) $ 83,994
10.03 % $ 37,628
>4.5% N/A
N/A
Total Capital to Risk Weighted Assets 109,554
13.08 % 66,894
>8% N/A
N/A
Tier 1 Capital to Risk Weighted Assets 101,994
12.18 % 50,170
>6% N/A
N/A
Tier 1 Leverage Capital 101,994
10.80 % 37,765
>4% N/A
N/A
Bank

Common equity Tier 1 (CET1) $ 99,631
11.90 % $ 37,628
>4.5% $ 54,431
≥6.5%
Total Capital to Risk Weighted Assets 107,191
12.80 % 66,894
>8% 83,739
≥10%
Tier 1 Capital to Risk Weighted Assets 99,631
11.90 % 50,170
>6% 66,991
≥8%
Tier 1 Leverage Capital 99,631
10.55 % 37,765
>4% 47,211
>5%



									To Be Well Capitalized Under Prompt
					For Capital				Corrective
	Actual				Adequacy Purposes				Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount	Ratio
As of December 31, 2018
Common equity Tier 1	$	115,537	10.72	%	$	48,496	4.50	%	N/A	N/A
Total capital to risk-weighted assets	141,939		13.17	%	86,214		8.00	%	N/A	N/A
Tier 1 capital to risk-weighted assets	133,537		12.39	%	64,661		6.00	%	N/A	N/A
Tier 1 leverage capital	133,537		11.73	%	45,538		4.00	%	N/A	N/A

As of December 31, 2017
Common equity Tier 1	$	99,839	10.19	%	$	44,106	4.50	%	N/A	N/A
Total capital to risk-weighted assets	125,852		12.84	%	78,411		8.00	%	N/A	N/A
Tier 1 capital to risk-weighted assets	117,839		12.02	%	58,808		6.00	%	N/A	N/A
Tier 1 leverage capital	117,839		11.23	%	41,987		4.00	%	N/A	N/A

Dividend payments by the Bank to the Company are subject to the New Jersey Banking Act of 1948, as amended (the “Banking Act”) and the Federal Deposit Insurance Act, as amended (the “FDIA”). Under the Banking Act, the Bank may not pay dividends unless, following the dividend payment, the capital stock of the Bank will be unimpaired and (i) the Bank will have a surplus of not less than 50% of its capital stock or, if not, (ii) the payment of such dividend will not reduce the surplus of the Bank. Under the FDIA, the Bank may not pay any dividends if after paying the dividend, it would be undercapitalized under applicable capital requirements. In addition to these explicit limitations, the federal regulatory agencies are authorized to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice. The Bank is also limited in paying dividends if it does not maintain the necessary “capital conservation buffer” as discussed below.

It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the immediately preceding year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividend that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiary. A bank holding company may not pay dividends when it is insolvent. The Company's payment of cash dividends to date were within the guidelines set forth in the Federal Reserve Board's policy.

In the event the Company defers payments on the junior subordinated debentures used to fund payments to be made pursuant to the terms of the Capital Securities, the Company would be unable to pay cash dividends on its common stock until the deferred payments are made.

~~19.~~20. Shareholders’ Equity

The Company issued a warrant on December 23, 2008 to the United States Department of the Treasury (the “Treasury”) under the Troubled Asset Relief Program (“TARP”) Capital Purchase Program (the “CPP”). This warrant was sold by the Treasury on November 23, 2011 and exchanged for two new warrants which permit the holders thereof to acquire, on an adjusted basis resulting from declarations of stock and cash dividends to holders of common stock since the issuance of the two warrants, ~~283,572~~289,719 shares of common stock of the Company at a price of ~~$6.349~~$6.214 per share. The warrants had an expiration date of December 23, 2018.

Certain terms and conditions of the ~~warrant~~warrants issued to the Treasury were modified or deleted in the two new warrants, including, without limitation, the deletion of the anti-dilution provision upon certain issuances of the ~~Company’s~~Company's common stock at or below a specified price relative to the initial exercise price. However, the two warrants still provide for the adjustment of the exercise price and the number of shares of the ~~Company’s~~Company's common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of the ~~Company’s~~Company's common stock. ~~The~~

On December 19, 2018, both of the outstanding warrants were exercised and pursuant to the terms and conditions of the two warrants, ~~remain outstanding, are immediately exercisable and continue to have an expiration date~~the Company issued a net of ~~December 23, 2018, which~~198,378 shares. No cash was received from the ~~expiration date~~exercise of the ~~warrant originally issued to the Treasury.~~warrants.

The Board of Governors of the Federal Reserve System has issued a supervisory letter to bank holding companies that contains guidance on when the board of directors of a bank holding company should eliminate or defer or severely limit dividends, including, for example, when net income available for shareholders for the past four quarters, net of dividends paid during that period, is not sufficient to fully fund the dividends. The letter also contains guidance on the redemption of stock by bank holding companies which urges bank holding companies to advise the Federal Reserve of any such redemption or repurchase of common stock for cash or other value which results in the net reduction of a bank holding company’s capital at the beginning of the quarter below the capital outstanding at the end of the quarter. The Company's payment of cash dividends to date were within the guidelines set forth in the Federal Reserve Board's supervisory letter.

On August 3, 2005, the Board of Directors of the Company authorized a common stock repurchase program that allowed for the repurchase of a limited number of the Company’s shares at management’s discretion on the open market. The Company undertook this repurchase program in order to increase shareholder value. During the year ended December 31, 2015, the Company repurchased 31,050 shares for an aggregate price of approximately $359,000.

On January 21, 2016, the Board of Directors of the Company authorized a new common stock repurchase program. Under the new common stock repurchase program, the Company may purchase in open market or privately negotiated transactions up to five (5%) percent of its common shares outstanding on the date of the approval of the stock repurchase program, which limitation will be adjusted for any future stock dividends. This new repurchase program replaced the repurchase program authorized on August 3, 2005. ~~During~~The Company repurchased no shares during the years ended December 31, 2018 and 2017, while during the year ended December 31, 2016, the Company repurchased 2,000 shares for an aggregate price of approximately $24,000.

~~20.~~21. Fair Value Disclosures

U.S. GAAP has established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:


Level 1.

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


Level 2.

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


Level 3.

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and counterparty creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective value or reflective of future values. While management believes that the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available for ~~Sale~~. Sale: Securities classified as available for sale are reported at fair value utilizing Level 1 and Level 2 inputs. For Level 2 securities, 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 prepayment speeds, credit information and the security’s terms and conditions, among other things.

Interest Rate Lock Derivatives. Interest rate lock commitments do not trade in active markets with readily observable prices. The fair value of an interest rate lock commitment is estimated based upon the forward sales price that is obtained in the best efforts commitment at the time the borrower locks in the interest rate on the loan and the probability that the locked rate commitment will close.

Impaired ~~loans.~~ loans: Loans included in the following table are those which the Company has measured and recognized impairment based generally on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third party appraisals of the properties or discounted expected cash ~~flows based on the expected proceeds.~~flows. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less specific valuation allowances.

Other Real Estate Owned. Foreclosed properties are adjusted to fair value less estimated selling costs at the time of foreclosure in preparation for transfer from portfolio loans to other real estate owned (“OREO”), thereby establishing a new accounting basis. The Company subsequently adjusts the fair value of the OREO, utilizing Level 3 inputs on a non-recurring basis to reflect partial write-downs based on the observable market price, current appraised value of the asset or other estimates of fair value.

The fair value of other real estate owned is determined using appraisals, which may be discounted based on management’s review and changes in market conditions.

The following table summarizes financial assets ~~and financial liabilities~~ measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:



	December 31, 2018
(In thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Securities available for sale:
U.S. Treasury Securities and obligations of U.S. Government sponsored corporations ("GSE")	$	—	$	2,952	$	—	$	2,952
Residential collateralized mortgage obligations - GSE	—		48,183		—		48,183
Residential mortgage backed securities-GSE	—		13,882		—		13,882
Obligations of state and political subdivisions	—		23,342		—		23,342
Trust preferred debt securities - single issuer	—		1,329		—		1,329
Corporate debt securities	16,388		10,898		—		27,286
Other debt securities	—		15,248		—		15,248
Total	$	16,388	$	115,834	$	—	$	132,222

(Dollars in thousands)
Level 1
Inputs

Level 2
Inputs

Level 3
Inputs

Total Fair
Value
December 31, 2016:
Securities available for sale:
     U.S. Treasury Securities and obligations of U.S. Government
        sponsored corporations ("GSE") and agencies

$ —
$ 3,479
$ —
$ 3,479
     Residential collateralized mortgage obligations - GSE

—
22,560
—
22,560
     Residential mortgage backed securities-GSE

—
31,476
—
31,476
    Obligations of state and political subdivisions

—
21,400
—
21,400
Trust preferred debt securities - single issuer —
2,272
—
2,272
Corporate debt securities 12,826
8,942
—
21,768
Other debt securities —
839
—
839
Total $ 12,826
$ 90,968
$ —
$ 103,794

December 31, 2015:

Securities available for sale:

     U.S. Treasury Securities and obligations of U.S Government
         sponsored corporations (“GSE”) and agencies

$ —
$ 5,481
$ —
$ 5,481
     Residential collateralized mortgage obligations - GSE

—
8,287
—
8,287
     Residential mortgage backed securities – GSE

—
32,635
—
32,635
     Obligations of state and political subdivisions

—
21,436
—
21,436
Trust preferred debt securities - single issuer —
2,136
—
2,136
Corporate debt securities 14,043
6,379
—
20,422
Other debt securities —
971
54
1,025
Total $ 14,043
$ 77,325
$ 54
$ 91,422



	December 31, 2017
(In thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Securities available for sale:
U.S. Treasury Securities and obligations of U.S Government sponsored corporations (“GSE”)	$	—	$	1,967	$	—	$	1,967
Residential collateralized mortgage obligations - GSE	—		27,325		—		27,325
Residential mortgage backed securities – GSE	—		14,288		—		14,288
Obligations of state and political subdivisions	—		19,720		—		19,720
Trust preferred debt securities - single issuer	—		2,349		—		2,349
Corporate debt securities	16,080		11,603		—		27,683
Other debt securities	—		12,126		—		12,126
Total	$	16,080	$	89,378	$	—	$	105,458

Certain financial assets ~~and financial liabilities~~ are measured at fair value on a nonrecurring basis; that is, the instruments 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).

Financial assets ~~and financial liabilities~~ measured at fair value on a non-recurring basis at December 31, ~~2016~~2018 and ~~2015~~2017 are as follows:

(Dollars in thousands)
Level 1
Inputs

Level 2
Inputs

Level 3
Inputs

Total Fair
Value
December 31, 2016
Impaired loans —
—
$ 4,130
$ 4,130

December 31, 2015

Impaired loans —
—
$ 3,960
$ 3,960
Other real estate owned —
—
966
966



(In thousands)	Level 1 Inputs	Level 2 Inputs	Level 3 Inputs		Total Fair Value
December 31, 2018
Impaired loans	—	—	$	6,857	$	6,857
Other real estate owned	—	—	1,460		1,460

December 31, 2017
Impaired loans	—	—	$	8,313	$	8,313

Impaired loans, measured at fair value and included in the above table, consisted of 98 loans having an aggregate balance of ~~$4.4~~$7.3 million and specific loan loss allowances of ~~$0.3 million~~$453,000 at December 31, ~~2016~~2018 and 914 loans having an aggregate balance of ~~$4.3~~$9.0 million and specific loan loss allowances of ~~$0.3 million~~$684,000 at December 31, ~~2015.~~2017.

The following table presents additional qualitative information about assets measured at fair value on a non-recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

(Dollars in thousands)

Quantitative Information about Level 3 Fair Value Measurements

Fair Value

Estimate

Valuation

Techniques

Unobservable

Input

Range (Weighted

Average)

Fair Value

Estimate

Valuation

Techniques

Unobservable

Input

Range (Weighted

Average)

December 31, 2016

Impaired loans

4,130

Appraisal of collateral (1)

Appraisal adjustments (2)

3%-100% (29.1%)

December 31, 2015

December 31, 2018

Impaired loans

3,960

Appraisal of collateral (1)

Appraisal adjustments (2)

11%-44% (29.6%)

6,857

Appraisal of collateral (1)

Appraisal adjustments (2)

5%-23% (10.6%)

Other real estate owned

966

Appraisal of collateral (1)

Appraisal adjustments (2)

0.11%

1,460

Appraisal of collateral (1)

Appraisal adjustments (2)

47%-80% (63.5%)

December 31, 2017

Impaired loans

8,313

Appraisal of collateral (1)

Appraisal adjustments (2)

0.5%-100% (28.2%)


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


(2)	Includes qualitative adjustments by management and estimated liquidation expenses.

~~The fair value of other real estate owned was determined using appraisals, which may be adjusted based on management’s review and changes in market conditions.~~

The following is a summary of the fair value and the carrying value of all of the Company’s financial instruments. For the Company and the Bank, as for most financial institutions, the bulk of assets and liabilities are considered financial instruments. Many of the financial instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimations and present value calculations are used. Changes in assumptions could significantly affect these estimates.

~~Estimated fair values have been determined by using the best available data and an estimation methodology suitable for each category of financial instruments as follows:~~

~~Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable (Carried at Cost).~~ ~~The carrying amounts reported on the balance sheet for cash and cash equivalents, accrued interest receivable and accrued interest payable approximate fair value.~~

~~Securities Held to Maturity (Carried at Amortized Cost).~~ ~~The fair values of securities held to maturity are determined in the same manner as for securities available for sale.~~

~~Loans Held For Sale (Carried at Lower of Aggregated Cost or Fair Value).~~ The fair values of loans held for sale are determined, when possible, using prices based on the best efforts commitment by the purchaser of the loan or quoted secondary market prices. If no such quoted market prices exist, fair values are determined using quoted prices for similar loans, adjusted for the specific attributes of the loans.

~~SBA servicing asset~~. Servicing assets do not trade in an active market with readily observable prices. The Company estimates the fair value of the SBA servicing asset using a discounted cash flow model, which incorporates assumptions based on observable discount rates and prepayment speeds.

~~Interest rate lock derivatives~~. Interest rate lock commitments do not trade in active markets with readily observable prices. The fair value of the interest rate lock commitments is estimated based upon the forward sales price that is obtained in the best efforts commitment at the time the borrower locks in the interest rate on the loan and the probability that the locked rate commitment will close.

~~Federal Home Loan Bank Stock. FHLB stock is carried at cost. The carrying value approximates fair value based upon the redemption price provision of the FHLB stock.~~

~~Gross Loans Receivable (Carried at Cost).~~ The fair values of loans, excluding impaired loans subject to specific loss reserves, are estimated using discounted cash flow analyses and market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates,

projected repayments and prepayments of principal. Generally, for variable rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values.

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

~~Borrowings and Subordinated Debentures (Carried at Cost).~~ The carrying amounts of short-term borrowings approximate their fair values. The fair values of long-term FHLB advances and subordinated debentures are estimated using discounted cash flow analysis, based on quoted or estimated interest rates for new borrowings with similar credit risk characteristics, terms and remaining maturity.

~~The estimated~~ fair values and the ~~recorded book balances,~~carrying value of financial instruments at December 31, ~~2016~~2018 and ~~2015~~2017 were as follows:


December 31, 2016
(Dollars in thousands)	Carrying Value			Level 1 Inputs		Level 2 Inputs		Level 3 Inputs	Fair Value
												2018
(In thousands)												Carrying Value			Level 1 Inputs		Level 2 Inputs			Level 3 Inputs		Fair Value
Cash and cash equivalents	$	14,886		$	14,886	—		—	$	14,886		$	16,844		$	16,844	$	—		$	—	$	16,844
Securities available for sale	103,794			12,826		90,968		—	103,794			132,222			16,388		115,834			—		132,222
Securities held to maturity	126,810			—		128,559		—	128,559			79,572			—		80,204			—		80,204
Loans held for sale	14,829			—		15,103		—	15,103			3,020			—		3,141			—		3,141
Loans, net	717,314			—		—		716,492	716,492
Net loans												874,762			—		—			874,742		874,742
SBA servicing asset	605			—		822		—	822			991			—		1,490			—		1,490
Interest rate lock derivative	123			—		123		—	123			79			—		79			—		79
Accrued interest receivable	3,095			—		3,095		—	3,095			3,860			—		3,860			—		3,860
FHLB Stock	3,962			—		3,962		—	3,962			3,929			—		3,929			—		3,929
Deposits	(834,516		)	—		(834,050	)	—	(834,050		)	(950,672		)	—		(949,813		)	—		(949,813		)
Borrowings	(73,050		)	—		(73,222	)	—	(73,222		)
Short-term borrowings												(71,775		)	—		(71,775		)	—		(71,775		)
Redeemable subordinated debentures	(18,557		)	—		(11,922	)	—	(11,922		)	(18,557		)	—		(12,774		)	—		(12,774		)
Accrued interest payable	(866		)	—		(866	)	—	(866		)	(1,228		)	—		(1,228		)	—		(1,228		)

December 31, 2015
(Dollars in thousands)
Carrying
Value

Level 1
Inputs

Level 2
Inputs

Level 3
Inputs

Fair
Value
Cash and cash equivalents $ 11,368
$ 11,368
—
—
$ 11,368
Securities available for sale 91,422
14,043
77,325
54
91,422
Securities held to maturity 123,261
—
127,157
—
127,157
Loans held for sale 5,997
—
6,115
—
6,115
Loans, net 674,561
—
—
674,722
674,722
Accrued interest receivable 2,853
—
2,853
—
2,853
FHLB Stock 3,302
—
3,302
—
3,302
Deposits (786,757 ) —
(786,594 ) —
(786,594 )
Borrowings (58,896 ) —
(59,347 ) —
(59,347 )
Redeemable subordinated debentures (18,557 ) —
(11,641 ) —
(11,641 )
Accrued interest payable (846 ) —
(846 ) —
(846 )



	2017
(In thousands)	Carrying Value			Level 1 Inputs		Level 2 Inputs			Level 3 Inputs		Fair Value
Cash and cash equivalents	$	18,754		$	18,754	$	—		$	—	$	18,754
Securities available for sale	105,458			16,080		89,378			—		105,458
Securities held to maturity	110,267			—		111,865			—		111,865
Loans held for sale	4,254			—		4,539			—		4,539
Net loans	781,893			—		—			784,064		784,064
SBA servicing asset	726			—		1,016			—		1,016
Interest rate lock derivative	135			—		135			—		135
Accrued interest receivable	3,478			—		3,478			—		3,478
FHLB Stock	1,490			—		1,490			—		1,490
Deposits	(922,006		)	—		(920,732		)	—		(920,732		)
Short-term borrowings	(20,500		)	—		(20,500		)	—		(20,500		)
Redeemable subordinated debentures	(18,557		)	—		(12,326		)	—		(12,326		)
Accrued interest payable	(804		)	—		(804		)	—		(804		)

Loan commitments and standby letters of credit as of December 31, ~~2016~~2018 and ~~2015~~2017 were based on fees charged for similar agreements; accordingly, the estimated fair ~~value~~values of loan commitments and standby letters of credit were nominal. ~~The fair value of interest rate lock commitments and SBA servicing rights were insignificant at December 31, 2015.~~

~~21.~~22. Parent-only Financial Information

The condensed financial statements of 1^stSTConstitution Bancorp (parent company only) are presented below:

1^stST CONSTITUTION BANCORP

Condensed Statements of Financial Condition

(Dollars in Thousands)

December 31, 2016 December 31, 2015
Assets:

Cash $ 490
$ 77
Investment securities 557
557
Investment in subsidiary 120,306
111,597
Other assets 2,451
2,325
Total Assets $ 123,804
$ 114,556

Liabilities And Shareholders’ Equity
Other liabilities $ 446
$ 39
Subordinated debentures 18,557
18,557
Shareholders’ equity 104,801
95,960
Total Liabilities and Shareholders’ Equity $ 123,804
$ 114,556



	December 31,
	2018		2017
Assets:
Cash	$	425	$	317
Investment securities	557		557
Investment in subsidiary	145,096		126,846
Other assets	—		2,519
Total Assets	$	146,078	$	130,239
Liabilities And Shareholders’ Equity
Other liabilities	$	436	$	29
Subordinated debentures	18,557		18,557
Shareholders’ equity	127,085		111,653
Total Liabilities and Shareholders’ Equity	$	146,078	$	130,239

~~1st~~

1^ST CONSTITUTION BANCORP

Consolidated Statements of Income and Comprehensive Income

(Dollars in Thousands)

Year ended December 31,
2016 2015
Income:
Interest income $ 13
$ 11
Dividend income from subsidiary 1,240
366
Total Income 1,253
377

Expense:
Interest expense 440
366
Total Expense 440
366

Income before income taxes and equity in undistributed income of subsidiaries 813
11
Federal income tax benefit (146 ) (122 )
Income before equity in undistributed income of subsidiaries 959
133
Equity in undistributed income of subsidiaries 8,326
8,531
Net Income 9,285
8,664
Equity in other comprehensive loss of subsidiaries (470 ) (378 )
Comprehensive Income $ 8,815
$ 8,286



	Year ended December 31,
	2018			2017			2016
Income:
Interest income	$	—		$	16		$	13
Dividend income from subsidiary	2,830			1,826			1,240
Total Income	2,830			1,842			1,253
Expense:
Interest expense	694			535			440
Total Expense	694			535			440
Income before income taxes and equity in undistributed income of subsidiaries	2,136			1,307			813
Income tax benefit	(146		)	(177		)	(146		)
Income before equity in undistributed income of subsidiaries	2,282			1,484			959
Equity in undistributed income of subsidiaries	9,766			5,444			8,326
Net Income	12,048			6,928			9,285
Equity in other comprehensive loss of subsidiaries	(1,097		)	(27		)	(470		)
Comprehensive Income	$	10,951		$	6,901		$	8,815

~~1st~~1^ST CONSTITUTION BANCORP

Condensed Statements of Cash Flows

(Dollars in Thousands)


	Year ended December 31,						Year Ended December 31,
	2016			2015			2018			2017			2016
Operating Activities:
Net Income	$	9,285		$	8,664		$	12,048		$	6,928		$	9,285
Adjustments:
Increase in other assets	(126		)	(92		)
Decrease in other liabilities	408			—
Decrease (increase) in other assets							2,520			(68		)	(126		)
Increase (decrease) in other liabilities							407			(16		)	408
Equity in undistributed income of subsidiaries	(8,326		)	(8,531		)	(9,766		)	(5,444		)	(8,326		)
Net cash provided by operating activities	1,241			41			5,209			1,400			1,241

Cash Flows From Investing Activities:
Investment in subsidiary	(501		)	37			—			(130		)	(501		)
Net cash (used in) provided by investing activities	(501		)	37
Cash paid for NJCB merger							(3,069		)	—
Net cash used in investing activities							(3,069		)	(130		)	(501		)

Cash Flows From Financing Activities:
Cash dividend paid	(399		)	—			(2,120		)	(1,690		)	(399		)
Issuance of common stock, net	96			292
Exercise of stock options							88			247			96
Purchase of treasury stock, net	(24		)	(359		)	—			—			(24		)
Net cash used in financing activities	(327		)	(67		)	(2,032		)	(1,443		)	(327		)

Net increase in cash	413			11
Net increase (decrease) in cash							108			(173		)	413
Cash at beginning of year	77			66			317			490			77
Cash at end of year	$	490		$	77		$	425		$	317		$	490



New Jersey		22-3665653
(State or Other Jurisdiction of Incorporation or Organization)		IRS Employer Identification Number)



Large accelerated filer	o	Accelerated filer	x
Non-accelerated filer	o	Smaller reporting company	xý
(Do not check if a smaller reporting company)
		Emerging growth company	o



	FORM 10-K

	TABLE OF CONTENTS

	PART I

Item 1.	Business	12
Item 1A.	Risk Factors	1312
Item 1B.	Unresolved Staff Comments	2223
Item 2.	Properties	22
~~Item 3.~~	~~Legal Proceedings~~	24
Item 4. 3.	~~Mine Safety Disclosures~~Legal Proceedings	2425
Item 4.	Mine Safety Disclosures	25

	PART II

Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	2425
Item 6.	Selected Financial Data	2628
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2629
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	5163
Item 8.	Financial Statements and Supplementary Data	5164
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	5164
Item 9A.	Controls and Procedures	5164
Item 9B.	Other Information	5366

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance	5366
Item 11.	Executive Compensation	5366
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	5366
Item 13.	Certain Relationships and Related Transactions, and Director Independence	5366
Item 14.	Principal Accounting Fees and Services	5366

	PART IV

Item 15.	Exhibits, Financial Statement Schedules	5467
Item 16.	Form 10-K Summary	69

SIGNATURES		~~117~~130



	2016		⁽¹⁾		2015		⁽¹⁾
	High		Low		High		Low
First Quarter	$	13.30	$	11.27	$	10.98	$	9.41
Second Quarter	12.85		11.71		11.86		10.07
Third Quarter	13.78		11.78		11.40		10.29
Fourth Quarter	20.85		13.25		12.37		10.81



			Period Ending
Index	12/31/2013	12/31/2014	12/31/2015	12/31/2016	12/31/2017	12/31/2018
1st Constitution Bancorp	100.00	99.00	122.85	188.64	186.26	205.36
SNL US Bank & Thrift	100.00	111.63	113.89	143.78	169.07	140.05
SNL US Bank $500M-$1B	100.00	109.71	123.83	167.20	203.98	196.88
SNL US Bank $1B-$5B	100.00	104.56	117.04	168.38	179.51	157.27



	2650 Route 130, P.O. Box 634, Cranbury, NJ 08512
	(Address of Principal Executive Offices, including Zip Code)



	(609) 655-4500
	(Registrant’s telephone number, including area code)



	Title of each class Common stock, no par value	Name of each exchange on which registered NASDAQ Stock Market LLC (NASDAQ Global Select Market)



Period		Total Number of Shares Purchased		Average Price Paid Per Share			Total Number of Shares Purchased As Part of Publicly Announced Program		Maximum Number of Shares That May Yet be Purchased Under the Program
Beginning	Ending
October 1, ~~2016~~2018	October 31, ~~2016~~2018	—		$	—		—		394,141
November 1, ~~2016~~2018	November 30, ~~2016~~2018	—		—			—		394,141
December 1, ~~2016~~2018	December 31, ~~2016~~2018	—		—			—		394,141
	Total		—		$	—		—		394,141



	Number of Securities to be Issued Upon Exercise of Outstanding Options	Weighted-Average Exercise Price of Outstanding Options		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a))
Plan Category	(a)	(b)		(c)
Equity Compensation Plans Approved by Security Holders	139,511	$	8.70	55,136
Equity Compensation Plans Not Approved by Security Holders	—	—		—
Total	139,511	$	8.70	55,136



	As of and for the years ended December 31,
(In thousands, except per share data)	2018			2017			2016			2015			2014
Summary earnings:
Interest income	$	51,473		$	41,663		$	39,135		$	39,323		$	35,888
Interest expense	8,041			5,498			5,158			4,636			4,658
Net interest income	43,432			36,165			33,977			34,687			31,230
Provision (credit) for loan losses	900			600			(300		)	1,100			5,750
Net interest income after provision (credit) for loan losses	42,532			35,565			34,277			33,587			25,480
Non-interest income	7,918			8,240			6,922			6,586			6,814
Non-interest expense	34,085			31,006			27,291			27,447			26,865
Income before income tax expense	16,365			12,799			13,908			12,726			5,429
Income tax expense	4,317			5,871			4,623			4,062			1,073
Net income	$	12,048		$	6,928		9,285			$	8,664		$	4,356
Per share data:
Earnings per share - basic	$	1.45		$	0.86		$	1.17		$	1.1		$	0.56
Earnings per share - diluted	1.40			0.83			1.14			1.07			0.55
Cash dividends declared	0.255			0.16			0.10			—			—
Book value end-of-period (1)	14.77			13.81			13.11			12.72			12.21

Basic weighted average shares outstanding	8,320,718			8,049,981			7,962,121			7,901,278			7,366,955
Common stock equivalents (dilutive)	272,791			262,803			215,318			174,474			368,348
Fully diluted weighted average shares outstanding	8,593,509			8,312,784			8,177,439			8,075,752			7,735,303
Balance sheet data (at period end):
Total assets	$	1,177,833		$	1,079,274		$	1,038,213		$	967,991		$	956,779
Securities, available for sale	132,222			105,458			103,794			91,422			80,161
Investment securities	79,572			110,267			126,810			123,261			143,638
Total loans	883,164			789,906			724,808			682,121			654,297
Allowance for loan losses	(8,402		)	(8,013		)	(7,494		)	(7,560		)	(6,925		)
Total deposits	950,672			922,006			834,516			786,757			817,761
Shareholders' equity	127,085			111,653			104,801			95,960			87,110
Common cash dividends	2,120			1,289			800			—			—
Selected performance ratios:
Return on average total assets	1.06		%	0.67		%	0.93		%	0.89		%	0.46		%
Return on average shareholders' equity	10.11		%	6.36		%	9.21		%	9.49		%	5.34		%
Dividend payout ratio (2)	17.60		%	18.61		%	8.62		%	n/a			n/a
Net interest margin	4.09		%	3.81		%	3.70		%	3.90		%	3.84		%
Non-interest income to average assets	0.70		%	0.80		%	0.69		%	0.67		%	0.61		%
Non-interest expenses to average assets	3.00		%	3.01		%	2.72		%	2.81		%	2.89		%

Nonperforming loans to total loans	0.75		%	0.90		%	0.72		%	0.88		%	0.74		%
Nonperforming assets to total assets	0.77		%	0.66		%	0.52		%	0.72		%	1.11		%
Allowance for loan losses to nonperforming loans	127.69		%	112.64		%	144.17		%	125.59		%	143.08		%
Allowance for loan losses to total loans	0.95		%	1.01		%	1.03		%	1.11		%	1.06		%
Net recoveries (charge-offs) to average loans	(0.06		)%	(0.01		)%	0.03		%	(0.07		)%	(1.04		)%



							Change in
(Dollars in thousands)	2018			2017			$			%
Net interest income	$	43,432		$	36,165		$	7,267		20.1	%
Provision for loan losses	900			600			300			50.0	%
Non-interest income	7,918			8,240			(322		)	(3.9	)%
Non-interest expense	34,085			31,006			3,079			9.9	%
Net income before income taxes	16,365			12,799			3,566			27.9	%
Income taxes	4,317			5,871			(1,554		)	(26.5	)%
Net income	12,048			6,928			5,120			73.9	%
Adjustments:
Revaluation of deferred tax assets	(28		)	1,712			(1,740		)	N.M.
Merger-related expenses	2,141			265			1,876			707.9	%
Gain on bargain purchase	(230		)	—			(230		)	N.M.
Income tax effect of adjustments	(568		)	(77		)	(491		)	637.7	%
Total adjustments	1,315			1,900			(585		)	(30.8	)%
Adjusted net income	$	13,363		$	8,828		$	4,535		51.4	%

Earnings per common share:
Basic, as reported	$	1.45		$	0.86		$	0.59		68.6	%
Adjustments	0.16			0.24			(0.08		)	(33.3	)%
Basic, as adjusted	$	1.61		$	1.10		$	0.51		46.4	%

Diluted, as reported	$	1.40		0.83			$	0.57		68.7	%
Adjustments	0.16			0.23			(0.07		)	(30.4	)%
Diluted, as adjusted	$	1.56		$	1.06		$	0.50		47.2	%

Return on average total assets:
As reported	1.06		%	0.67		%

Adjusted net income	$	13,363		$	8,828
Average assets	1,137,768			1,031,796
As adjusted	1.17		%	0.86		%
Return on average shareholders' equity:
As reported	10.11		%	6.36		%

Adjusted net income	$	13,363		$	8,828
Average shareholders' equity	119,212			108,925
As adjusted	11.21		%	8.10		%



	Years ended December 31,
(Dollars in thousands)	2018			2017			2016
Net interest income	$	43,432		$	36,165		$	33,977
Interest rate spread	3.81		%	3.58		%	3.50		%
Net interest margin	4.09			3.81			3.70



(yields on a tax-equivalent basis)	2016							2015							2014
(Dollars in thousands)	Average Balance			Interest		Average Yield		Average Balance			Interest		Average Yield		Average Balance			Interest		Average Yield
Assets:
Interest-Earning Deposits	$	21,041		$	88	0.42	%	$	23,131		$	50	0.22	%	$	60,933		$	150	0.25	%
Investment Securities:
Taxable	143,461			3,268		2.28	%	127,859			3,167		2.48	%	168,992			4,022		2.38	%
Tax-exempt (4)	81,570			3,075		3.77	%	81,612			3,153		3.86	%	87,455			3,419		3.91	%
Total	225,031			6,343		2.82	%	209,471			6,320		3.02	%	256,447			7,441		2.90	%
Loan Portfolio (1):
Construction	93,478			5,408		5.79	%	95,627			5,961		6.23	%	77,159			5,233		6.78	%
Residential Real Estate	42,694			1,858		4.28	%	43,048			1,804		4.13	%	45,572			1,855		4.07	%
Home Equity	23,250			1,025		4.41	%	22,217			1,028		4.63	%	22,070			1,201		5.44	%
Commercial Business and Commercial Real Estate	302,172			16,786		5.55	%	290,301			16,510		5.69	%	271,888			15,893		5.85	%
SBA Loans	21,508			1,352		6.28	%	19,409			1,100		5.67	%	13,971			771		5.52	%
Mortgage Warehouse Lines	205,711			8,769		4.26	%	203,074			8,894		4.38	%	124,127			5,589		4.50	%
Loans Held for Sale	7,256			176		2.38	%	8,954			246		2.71	%	7,017			291		4.15	%
All Other Loans	2,367			55		2.34	%	1,855			54		2.90	%	1,575			46		2.92	%
Total	698,436			35,429		5.07	%	684,485			35,597		5.20	%	563,379			30,879		5.48	%
Total Interest-Earning Assets	944,508			41,860		4.43	%	917,087			41,967		4.58	%	880,759			38,470		4.37	%

Allowance for Loan Losses	(7,538		)					(7,484		)					(7,487		)
Cash and Due From Banks	5,120							6,272							14,620
Other Assets	59,679							62,149							57,689
Total Assets	$	1,001,769						$	978,024						$	945,581



Liabilities and Shareholders' Equity:
Interest-Bearing Liabilities:
Money Market and NOW Accounts	$	301,086	$	1,128	0.37	%	$	300,813	$	1,013	0.34	%	$	286,235	$	954	0.33	%
Savings Accounts	206,069		1,208		0.59	%	196,844		950		0.48	%	199,078		904		0.45	%
Certificates of Deposit under $100,000	62,858		617		0.98	%	87,306		875		1.00	%	70,574		910		1.29	%
Certificates of Deposit of $100,000 and Over	89,220		1,091		1.22	%	71,449		866		1.21	%	98,891		1,031		1.04	%
Other Borrowed Funds	48,448		687		1.42	%	38,472		577		1.50	%	23,724		515		2.18	%
Trust Preferred Securities	18,557		427		2.30	%	18,557		355		1.91	%	18,557		344		1.90	%
Total Interest-Bearing Liabilities	726,238		5,158		0.71	%	713,441		4,636		0.65	%	697,059		4,658		0.67	%

Net Interest Spread (2)					3.72	%					3.93	%					3.70	%

Demand Deposits	166,519						164,419						159,935
Other Liabilities	8,205						8,857						7,065
Total Liabilities	900,962						886,717						864,059
Shareholders' Equity	100,807						91,307						81,522
Total Liabilities and Shareholders' Equity	$	1,001,769					$	978,024					$	945,581
Net Interest Margin(3)			$	36,702	3.89	%			$	37,331	4.07	%			$	33,812	3.84	%



	December 31, 2018
	Average					Average
(In thousands except yield/cost information)	Balance			Interest		Yield/Cost
Assets
Interest-earning assets:
Federal funds sold/short term investments	$	20,157		$	258	1.28	%
Investment securities:
Taxable	146,631			4,024		2.74
Tax-exempt (1)	74,477			2,518		3.38
Total investment securities	221,108			6,542		2.96
Loans: (2)
Commercial real estate	356,581			18,318		5.07
Mortgage warehouse lines	153,868			8,403		5.46
Construction	137,976			9,090		6.59
Commercial business	111,150			6,059		5.45
Residential real estate	46,301			2,085		4.44
Loans to individuals	23,155			1,083		4.61
Loans held for sale	2,738			123		4.49
All other loans	1,197			41		3.38
Total loans	832,966			45,202		5.38
Total interest-earning assets	1,074,231			52,002		4.81	%
Non-interest-earning assets:
Allowance for loan losses	(8,314		)
Cash and due from bank	5,595
Other assets	66,256
Total non-interesting-earning assets	63,537
Total assets	$	1,137,768
Liabilities and Shareholders' Equity
Interest-bearing Liabilities:
Money market and NOW accounts	$	356,906		$	1,978	0.55	%
Savings accounts	203,940			1,467		0.72
Certificates of deposit	189,521			3,066		1.62
Other borrowed funds	36,612			836		2.28
Redeemable subordinated debentures	18,557			694		3.74
Total interest-bearing liabilities	805,536			8,041		1.00	%
Non-interest-bearing liabilities:
Demand deposits	204,002
Other liabilities	9,018
Total non-interest-bearing liabilities	213,020
Shareholders' equity	119,212
Total liabilities and shareholders' equity	$	1,137,768
Net interest spread (3)						3.81	%
Net interest income and margin (4)				$	43,961	4.09	%


(1)	Tax-equivalent basis, using 21% federal tax rate in 2018.


~~(2)~~(3)	The net interest rate spread is the difference between the average yield on interest earning assets and the average rate paid on interest bearing liabilities.


~~(3)~~(4)	The net interest margin is equal to net interest income divided by average interest earning assets.


(1)	Tax-equivalent basis, using 34% federal tax rate in 2017.


(2)	Loan origination fees and costs are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include non-accrual loans with no related interest income and average balance of loans held for sale.


(4)	~~Tax-equivalent basis.~~ The ~~tax-equivalent adjustments were $997,000 for the year ended December 31, 2016 and $1.0 million and $1.1 million for the years ended December 31, 2015 and 2014, respectively.~~net interest margin is equal to net interest income divided by average interest earning assets.



	Year ended 2018 compared with 2017									Year ended 2017 compared with 2016
	Due to Change in:									Due to Change in:
(Dollars in thousands)	Volume			Rate			Total			Volume			Rate			Total
Assets
Federal funds sold/short term investments	$	(62	)	$	90		$	28		$	27		$	115		$	142
Investment securities:
Taxable	148			550			698			(69		)	127			58
Tax-exempt	(552		)	(97		)	(649		)	325			(233		)	92
Total investment securities	(404		)	453			49			256			(106		)	150
Loans:
Commercial real estate	4,105			362			4,467			2,973			(1,557		)	1,416
Mortgage warehouse lines	(293		)	1,759			1,466			(1,816		)	328			(1,488		)
Construction	1,273			1,037			2,310			1,148			736			1,884
Commercial business	842			(257		)	585			(316		)	837			521
Residential real estate	187			121			308			(34		)	(17		)	(51		)
Loans to individuals	40			140			180			(43		)	13			(30		)
Loans held for sale	(70		)	(9		)	(79		)	(74		)	100			26
Other	(12		)	10			(2		)	(16		)	4			(12		)
Total loans	6,072			3,163			9,235			1,822			444			2,266
Total interest income	$	5,606		$	3,706		$	9,312		$	2,105		$	453		$	2,558
Liabilities
Money market and NOW accounts	88			450			538			132			180			312
Savings accounts	(43		)	178			135			27			97			124
Certificates of deposit	537			751			1,288			(73		)	143			70
Other borrowed funds	314			93			407			(387		)	129			(258		)
Redeemable subordinated debentures	—			175			175			—			92			92
Total interest expense	896			1,647			2,543			(301		)	641			340
Net interest income	$	4,710		$	2,059		$	6,769		$	2,406		$	(188	)	$	2,218



Rate/Volume Table	Amount of Increase (Decrease)
(Dollars in thousands)	2016 versus 2015									2015 versus 2014
	Due to Change in:									Due to Change in:
(Tax-equivalent basis)	Volume			Rate			Total			Volume			Rate			Total
Interest Income:
Loans:
Construction	$	(134	)	$	(419	)	$	(553	)	$	1,253		$	(525	)	$	728
Residential Real Estate	(15		)	69			54			(103		)	52			(51		)
Home Equity	47			(50		)	(3		)	8			(181		)	(173		)
Commercial Business and Commercial Real Estate	676			(400		)	276			1,076			(588		)	488
Mortgage Warehouse Lines	115			(240		)	(125		)	3,555			(250		)	3,305
SBA Loans	119			133			252			9			(6		)	3
Loans Held for Sale and All Other Loans	(32		)	(37		)	(69		)	367			51			418
Total Loans	$	776		$	(944	)	$	(168	)	$	6,165		$	(1,447	)	$	4,718
Investment Securities :
Taxable	$	386		$	(285	)	$	101		$	(979	)	$	124		$	(855	)
Tax-exempt	(2		)	(76		)	(78		)	(228		)	(38		)	(266		)
Total Investment Securities	$	384		$	(361	)	$	23		$	(1,207	)	$	86		$	(1,121	)
Federal Funds Sold / Short-Term Investments	(5		)	43			38			(95		)	(5		)	(100		)
Total Interest Income	$	1,155		$	(1,262	)	$	(107	)	$	4,863		$	(1,366	)	$	3,497
Interest Expense :
Money Market and NOW Accounts	$	1		$	114		$	115		$	49		$	10		$	59
Savings Accounts	45			213			258			(10		)	56			46
Certificates of Deposit under $100,000	(244		)	(14		)	(258		)	216			(251		)	(35		)
Certificates of Deposit of $100,000 and Over	215			10			225			(286		)	121			(165		)
Other Borrowed Funds	150			(40		)	110			321			(259		)	62
Trust Preferred Securities	—			72			72			—			11			11
Total Interest Expense	$	167		$	355		$	522		$	290		$	(312	)	$	(22	)
Net Interest Income	$	988		$	(1,617	)	$	(629	)	$	4,573		$	(1,054	)	$	3,519



(Dollars in thousands)	Maturity Range
Type	Within One Year		After One But Within Five Years		After Five Years		Total
	(in thousands)
Commercial business	$	61,514	$	27,867	$	10,269	$	99,650
Commercial real estate	31,670		167,819		42,904		242,393
Mortgage warehouse lines	216,259		—		—		216,259
Construction	84,703		8,617		2,715		96,035
Residential real estate	5,468		17,272		22,051		44,791
Loans to individuals and other loans	20,858		920		2,165		23,943
Total	$	420,472	$	222,495	$	80,104	$	723,071

Fixed rate loans	$	11,550	$	57,862	$	63,995	$	133,407
Floating rate loans	408,922		164,633		16,109		589,664
Total	$	420,472	$	222,495	$	80,104	$	723,071


Non-Performing Assets and Loans
																	December 31,
(Dollars in thousands)							December 31,										2018			2017			2016			2015			2014
	2016			2015				2014			2013			2012
Non-Performing loans:
Loans 90 days or more past due and still accruing	$	24		$	—			$	317		$	—		$	85		$	55		$	—		$	24		$	—		$	317
Non-accrual loans	5,174			6,020				4,523			6,322			5,878			6,525			7,114			5,174			6,020			4,523
Total non-performing loans	5,198			6,020				4,840			6,322			5,963			6,580			7,114			5,198			6,020			4,840
Other real estate owned	166			966				5,710			2,136			8,333			2,515			—			166			966			5,710
Other repossessed assets	—			—				66			—			—			—			—			—			—			66
Total non-performing assets	5,364			6,986				10,616			8,458			14,296			9,095			7,114			5,364			6,986			10,616
Performing troubled debt restructurings	864			1,535				3,925			3,859			2,012			4,003			3,728			864			1,535			3,925
Performing troubled debt restructurings and total non-performing assets	$	6,228		$	8,521			$	14,541		$	12,317		$	16,308		$	13,098		$	10,842		$	6,228		$	8,521		$	14,541

Non-performing loans to total loans	0.72		%	0.88		%		0.74		%	1.69		%	1.14		%	0.75		%	0.90		%	0.72		%	0.88		%	0.74		%
Non-performing loans to total loans excluding warehouse lines	1.02		%	1.29		%		1.02		%	2.47		%	2.51		%	0.90			1.18			1.02			1.29			1.02
Non-performing assets to total assets	0.52		%	0.72		%		1.11		%	1.14		%	1.70		%	0.77			0.66			0.52			0.72			1.11
Non-performing assets to total assets excluding mortgage warehouse lines	0.65		%	0.93		%		1.37		%	1.35		%	2.57		%	0.89			0.80			0.65			0.93			1.37
Total non-performing assets and performing troubled debt restructurings to total assets	0.60		%	0.88		%		1.52		%	1.66		%	2.04		%	1.11			1.00			0.60			0.88			1.52


	Maturity
	3 Months or Less		Over 3 to 6 Months		Over 6 to 12 Months		Over 12 Months		Total
	3 Months or Less		Over 3 to 6 Months		Over 6 to 12 Months		Over 12 Months		Total
(Dollars in thousands)

(In thousands)											3 Months or Less		Over 3 to 6 Months		Over 6 to 12 Months		Over 12 Months		Total
Certificates of deposit of $100,000 or more	$	17,726	$	15,375	$	21,136	$	38,611	$	92,848	$	28,445	$	17,672	$	38,496	$	79,601	$	164,214
Certificates of deposit less than $100,000	10,418		9,162		12,262		23,575		55,417		10,400		6,675		14,355		28,932		60,362
Total certificates of deposit	$	28,144	$	24,537	$	33,398	$	62,186	$	148,265
Total											$	38,845	$	24,347	$	52,851	$	108,533	$	224,576


Average Deposit Balances
													2018				2017				2016
(Dollars in thousands)	2016				2015				2014				Average Balance		Percentage of Total		Average Balance		Percentage of Total		Average Balance		Percentage of Total
	Average Balance		Percentage of Total		Average Balance		Percentage of Total		Average Balance		Percentage of Total
Non-interest bearing demand	$	166,519	20	%	$	164,419	20	%	$	159,935	20	%	$	204,002	21	%	$	183,802	21	%	$	166,380	20	%
Interest bearing demand	301,086		36	%	300,813		37	%	286,235		35	%	356,906		38	%	336,445		38	%	301,086		36	%
Savings	206,069		25	%	196,844		24	%	199,078		24	%	203,940		21	%	210,798		24	%	206,208		25	%
Certificates of deposit of $100,000 or more	89,220		11	%	71,449		9	%	98,891		12	%
Other certificates of deposit less than $100,000	62,858		8	%	87,306		10	%	70,574		9	%
Certificates of deposit													189,521		20	%	145,539		17	%	152,078		19	%
Total	$	825,752	100	%	$	820,831	100	%	$	814,713	100	%	$	954,369	100	%	$	876,584	100	%	$	825,752	100	%



(In thousands)	Less than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Commercial and standby letters of credit	$	766	$	—	$	—	$	—	$	766
Commitments to fund loans	22,870		185		28		—		23,083
Commitments to extend credit	338,873		39,477		2,082		22,563		402,995
Commitments to sell residential loans	4,328		—		—		—		4,328
Total	$	366,837	$	39,662	$	2,110	$	22,563	$	431,172



(Dollars in thousands)	One Year or Less		One to Three Years		Three to Five Years		Over Five Years		Total
Off Balance Sheet:
Standby letters of credit	$	1,994	$	—	$	—	$	—	$	1,994
Commitments to extend credit	372,683		—		—		—		372,683
Commitments to sell residential loans	8,319		—		—		—		8,319
Total off balance sheet:	$	382,996	$	—	$	—	$	—	$	382,996
Contractual Obligations:
Operating Leases	$	1,331	$	2,056	$	1,408	$	2,449	$	7,244
Borrowed funds and subordinated debentures	73,050		—		—		18,557		91,607
Certificates of deposit	86,079		49,963		12,223		—		148,265
Retirement benefit obligation projected	4,906		—		—		—		4,906
Total contractual obligations:	165,366		52,019		13,631		21,006		252,022
Total	$	548,362	$	52,019	$	13,631	$	21,006	$	635,018



	Payments Due by Period
(In thousands)	Less than One Year		One to Three Years		Three to Five Years		More than Five Years		Total
Operating leases	$	1,525	$	2,637	$	1,806	$	2,285	$	8,253
Borrowed funds and subordinated debentures	71,775		—		—		18,557		90,332
Certificates of deposit	116,043		95,729		12,804		—		224,576
Retirement benefit obligation projected	4,587		—		—		—		4,587
Total contractual obligations:	$	193,930	$	98,366	$	14,610	$	20,842	$	327,748



Interest Rate Sensitivity Analysis at December 31, 2016
(Dollars in thousands)													Total			One Year
	Interest Sensitivity Period												Within			to			Over			Non-interest
	30 Day			90 Day			180 Day			365 Day			One Year			Five Years			Five Years			Sensitive			Total
Assets :
Cash and due from banks	$	9,781		$	—		$	—		$	—		$	9,781		$	—		$	—		$	5,105		$	14,886
Federal funds sold	—			—			—			—			—			—			—			—			—
Investment securities	9,323			24,180			6,861			33,176			73,540			90,690			47,551			18,823			230,604
Loans held for sale	14,829			—			—			—			14,829			—			—			—			14,829
Loans, net of allowance for loan losses	391,445			18,294			25,657			41,148			476,544			209,931			20,401			10,438			717,314
Other assets	—			—			—			—			—			—			—			60,580			60,580
	$	425,378		$	42,474		$	32,518		$	74,324		$	574,694		$	300,621		$	67,952		$	94,946		$	1,038,213
Sources of Funds :
Demand deposits - non-interest bearing	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	170,854		$	170,854
Demand deposits - interest bearing	135,613			—			—			—			135,613			144,489			30,001			—			310,103
Savings deposits	114,977			—			—			31			115,008			49,271			41,015			—			205,294
Certificates of deposits	6,975			21,146			24,537			33,398			86,056			62,209			—			—			148,265
Borrowings	63,050			—			—			10,000			73,050			—			—			—			73,050
Redeemable subordinated debentures	—			18,000			—			—			18,000			—			—			557			18,557
Non-interest-bearing sources	—			—			—			—			—			—			—			112,090			112,090
	$	320,615		$	39,146		$	24,537		$	43,429		$	427,727		$	255,969		$	71,016		$	283,501		$	1,038,213

Asset (Liability) Sensitivity Gap :
Period Gap	$	104,763		$	3,328		$	7,981		$	30,895		$	146,967		$	44,652		$	(3,064	)	$	(188,555	)	—
Cumulative Gap	$	104,763		$	108,091		$	116,072		$	146,967		$	293,934		$	338,586		$	335,522		—			—
Cumulative Gap to Total Assets	10.1		%	10.4		%	11.2		%	14.2		%	28.3		%	32.6		%	32.3		%	—			—



	Interest Sensitivity Period												Total Within			One Year to			Over			Non-interest
(In thousands)	30 Day			90 Day			180 Day			365 Day			One Year			Five Years			Five Years			Sensitive			Total
Assets :
Cash and due from banks	$	12,743		$	—		$	763		$	—		$	13,506		$	—		$	—		$	3,338		$	16,844
Federal funds sold	—			—			—			—			—			—			—			—			—
Investment securities	37,869			19,513			6,380			22,409			86,171			82,888			33,262			9,473			211,794
Loans held for sale	3,020			—			—			—			3,020			—			—			—			3,020
Loans, net of allowance for loan losses	397,257			25,888			39,513			71,867			534,525			315,684			22,629			10,326			883,164
Other assets	—			—			—			—			—			—			—			63,269			63,269
	$	450,889		$	45,401		$	46,656		$	94,276		$	637,222		$	398,572		$	55,891		$	86,406		$	1,178,091
Liabilities and Equity:
Demand deposits - non-interest bearing	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	212,981		$	212,981
Demand deposits - interest bearing	151,564			—			—			—			151,564			139,084			32,855			—			323,503
Savings deposits	104,772			—			—			31			104,803			46,912			37,897			—			189,612
Certificates of deposits	11,243			27,638			23,486			53,676			116,043			108,533			—			—			224,576
Borrowings	71,775			—			—			—			71,775			—			—			—			71,775
Redeemable subordinated debentures	—			18,000			—			—			18,000			—			—			557			18,557
Non-interest-bearing sources	—			—			—			—			—			—			—			137,087			137,087
	$	339,354		$	45,638		$	23,486		$	53,707		$	462,185		$	294,529		$	70,752		$	350,625		$	1,178,091

Asset (Liability) Sensitivity Gap :
Period Gap	$	111,535		$	(237	)	$	23,170		$	40,569		$	175,037		$	104,043		$	(14,861	)	$	(264,219	)	—
Cumulative Gap	$	111,535		$	111,298		$	134,468		$	175,037		$	175,037		$	279,080		$	264,219		—			—
Cumulative Gap to Total Assets	9.5		%	9.4		%	11.4		%	14.9		%	14.9		%	23.7		%	22.4		%	—			—


										Next 12 Months
	Economic Value of Equity ⁽²⁾									Net Interest Income											Next 12 Months
Change in Interest Rates	Dollar		Dollar			Percentage		Dollar		Dollar		Percentage		Economic Value of Equity ⁽²⁾							Net Interest Income
Basis Point (bp) ⁽¹⁾														Dollar		Dollar			Percentage		Dollar		Dollar			Percentage
	Amount		Change			Change		Amount		Change		Change
	(Dollars in Thousands)
(Dollars in thousands)														Amount		Change			Change		Amount		Change			Change
+300 bp	$	137,643	$	(962	)	(0.69	)%	$	40,448	$	2,872	7.64	%	$	167,824	$	(4,005	)	(2.33	)%	$	50,668	$	4,215		9.10	%
+200 bp	138,006		(599		)	(0.43	)%	39,327		1,751		4.66	%	169,632		(2,197		)	(1.28	)%	49,274		2,821			6.10	%
0 bp	138,605		—			—		37,576		—		—		171,829		—			—		46,453		—			—

-200 bp														168,019		(3,810		)	(2.22	)%	41,289		(5,164		)	(11.12	)%


⁽¹⁾	Assumes an instantaneous and parallel shift in interest rates at all maturities.