UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172020
or
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file Number:        000-32891
1ST
1ST CONSTITUTION BANCORP
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-3665653
(State of Other Jurisdiction
of Incorporation or Organization)
 (I.R.S. Employer Identification No.)

2650 Route 130P.O. Box 634CranburyNew Jersey08512
(Address of Principal Executive Offices)(Zip Code)

2650 Route 130, P.O. Box 634, Cranbury, NJ08512
(Address of Principal Executive Offices)(Zip Code)
(609) 655-4500
(Issuer’sRegistrant’s Telephone Number, Including Area Code)(609)655-4500
 
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, no par valueFCCYNASDAQ Global Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý☒       No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý☒       No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filero☐ Accelerated filerý☒
Non-accelerated filero☐ Smaller reporting companyo☒
(Do not check if a smaller reporting company)

  Emerging growth companyo☐
If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided persuantpursuant to Section 13(a) of the Exchange Act.o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o☐  No  ý☒
As of November 1, 2017,August 3, 2020, there were 8,073,15510,215,550 shares of the registrant’s common stock, no par value, outstanding.



1ST CONSTITUTION BANCORP
FORM 10-Q
INDEX
  Page
   
PART I.FINANCIAL INFORMATION 
   
Item 1.Financial Statements
1
   
 Consolidated Balance Sheets (unaudited) at SeptemberJune 30, 20172020 and December 31, 20162019 (unaudited)
1
   
 Consolidated Statements of Income for the Three and NineSix Months Ended SeptemberJune 30, 20172020 and SeptemberJune 30, 20162019 (unaudited)
2
   
 Consolidated Statements of Comprehensive Income for the Three and NineSix Months Ended SeptemberJune 30, 20172020 and SeptemberJune 30, 20162019 (unaudited)
3
   
 Consolidated Statements of Changes in Shareholders' Equity for the NineThree and Six Months Ended SeptemberJune 30, 20172020 and SeptemberJune 30, 20162019 (unaudited)
4
   
 Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20172020 and SeptemberJune 30, 20162019 (unaudited)
5
   
 Notes to Consolidated Financial Statements (unaudited)
6
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
3436
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk
5363
   
Item 4.Controls and Procedures
5364
   
PART II.OTHER INFORMATION 
   
Item 1.Legal Proceedings
5465
   
Item 1A.Risk Factors
5465
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
5565
   
Item 3.Defaults Upon Senior Securities
5565
   


Item 4.Mine Safety Disclosures
5565
   
Item 5.Other Information
5565
   
Item 6.Exhibits
5666
   
SIGNATURES
5767



PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements.

1ST Constitution Bancorp
Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
  June 30, 2020 December 31, 2019
ASSETS    
Cash and due from banks $10,101
 $2,547
Interest-earning deposits 2,481
 12,295
Total cash and cash equivalents 12,582
 14,842
Investment securities  
  
Available for sale, at fair value 151,661
 155,782
Held to maturity (fair value of $97,567 and $78,223 at June 30, 2020
and December 31, 2019, respectively)		 94,440
 76,620
Total investment securities 246,101
 232,402
Loans held for sale 11,129
 5,927
Loans 1,355,436
 1,216,028
  Less: allowance for loan losses (12,126) (9,271)
    Net loans 1,343,310
 1,206,757
Premises and equipment, net 14,691
 15,262
Right-of-use assets 17,282
 17,957
Accrued interest receivable 5,740
 4,945
Bank-owned life insurance 36,943
 36,678
Other real estate owned 470
 571
Goodwill and intangible assets 36,563
 36,779
Other assets 16,139
 14,142
Total assets $1,740,950
 $1,586,262
LIABILITIES AND SHAREHOLDERS’ EQUITY  
  
LIABILITIES  
  
Deposits  
  
Non-interest bearing $397,238
 $287,555
Interest bearing 1,012,154
 989,807
Total deposits 1,409,392
 1,277,362
Short-term borrowings 107,250
 92,050
Redeemable subordinated debentures 18,557
 18,557
Accrued interest payable 1,296
 1,592
Lease liability 18,036
 18,617
Accrued expenses and other liabilities 8,935
 7,506
Total liabilities 1,563,466
 1,415,684
SHAREHOLDERS' EQUITY  
  
Preferred stock, no par value; 5,000,000 shares authorized; none issued —
 —
Common stock, no par value; 30,000,000 shares authorized; 10,258,374 and 10,224,974 shares issued and 10,219,048 and 10,191,676 shares outstanding as of June 30, 2020 and December 31, 2019, respectively 110,546
 109,964
Retained earnings 66,067
 60,791
Treasury stock, 39,326 and 33,298 shares at June 30, 2020 and December 31, 2019, respectively (503) (368)
Accumulated other comprehensive income 1,374
 191
Total shareholders' equity 177,484
 170,578
Total liabilities and shareholders' equity $1,740,950
 $1,586,262
  September 30, 2017 December 31, 2016
ASSETS    
Cash and Due From Banks $15,657
 $14,886
     Total cash and cash equivalents 15,657
 14,886
Investment Securities:  
  
     Available for sale, at fair value 110,276
 103,794
Held to maturity (fair value of $113,757 and $128,559
at September 30, 2017 and December 31, 2016, respectively)		 111,554
 126,810
            Total investment securities 221,830
 230,604
     
Loans Held for Sale 6,019
 14,829
Loans 771,982
 724,808
Less- Allowance for loan losses (7,802) (7,494)
             Net loans 764,180
 717,314
     
Premises and Equipment, Net 10,627
 10,673
Accrued Interest Receivable 3,141
 3,095
Bank-Owned Life Insurance 24,125
 22,184
Other Real Estate Owned 356
 166
Goodwill and Intangible Assets 12,591
 12,880
Other Assets 10,868
 11,582
Total assets $1,069,394
 $1,038,213
LIABILITIES AND SHAREHOLDERS’ EQUITY  
  
LIABILITIES  
  
Deposits  
  
Non-interest bearing $192,191
 $170,854
Interest bearing 677,622
 663,662
Total deposits 869,813
 834,516
     
Borrowings 63,025
 73,050
Redeemable Subordinated Debentures 18,557
 18,557
Accrued Interest Payable 715
 866
Accrued Expenses and Other Liabilities 5,674
 6,423
Total liabilities 957,784
 933,412
     
SHAREHOLDERS’ EQUITY  
  
Preferred stock, no par value; 5,000,000 shares authorized, none issued —
 —
Common Stock, no par value; 30,000,000 shares authorized; 8,102,858 and 8,027,087 shares issued and 8,069,560 and 7,993,789 shares outstanding as of September 30, 2017 and December 31, 2016, respectively 72,584
 71,695
Retained earnings 39,624
 34,074
Treasury Stock, 33,298 shares at September 30, 2017 and December 31, 2016, respectively (368) (368)
Accumulated other comprehensive loss (230) (600)
Total shareholders’ equity 111,610
 104,801
Total liabilities and shareholders’ equity $1,069,394
 $1,038,213
The accompanying notes are an integral part of these consolidated financial statements.


1ST Constitution Bancorp
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 20162020 2019 2020 2019
INTEREST INCOME              
Loans, including fees$9,416
 $9,054
 $26,161
 $25,088
$15,374
 $12,869
 $30,179
 $25,026
Securities:              
Taxable846
 827
 2,500
 2,459
852
 1,215
 1,908
 2,485
Tax-exempt527
 514
 1,628
 1,554
496
 422
 934
 863
Federal funds sold and short-term investments25
 13
 183
 79
4
 47
 93
 94
Total interest income10,814
 10,408
 30,472
 29,180
16,726
 14,553
 33,114
 28,468
       
INTEREST EXPENSE              
Deposits1,204
 1,051
 3,351
 2,989
2,724
 2,671
 5,962
 4,988
Borrowings113
 197
 349
 498
48
 257
 110
 430
Redeemable subordinated debentures134
 107
 380
 311
106
 192
 258
 390
Total interest expense1,451
 1,355
 4,080
 3,798
2,878
 3,120
 6,330
 5,808
       
Net interest income9,363
 9,053
 26,392
 25,382
13,848
 11,433
 26,784
 22,660
PROVISION/(CREDIT) FOR LOAN LOSSES150
 —
 450
 (300)
Net interest income after provision/(credit) for loan losses9,213
 9,053
 25,942
 25,682
       
PROVISION FOR LOAN LOSSES2,125
 400
 3,020
 700
Net interest income after provision for loan losses11,723
 11,033
 23,764
 21,960
NON-INTEREST INCOME              
Service charges on deposit accounts142
 185
 445
 558
132
 159
 345
 325
Gain on sales of loans, net1,329
 876
 3,936
 2,525
Income on Bank-owned life insurance131
 113
 391
 414
Gain on sales of securities24
 —
 128
 —
Gain on sales of loans2,121
 1,160
 3,591
 2,205
Income on bank-owned life insurance264
 149
 444
 288
Gain on sales and calls of securities10
 —
 18
 —
Other income490
 586
 1,385
 1,392
573
 702
 1,158
 1,218
Total non-interest income2,116
 1,760
 6,285
 4,889
3,100
 2,170
 5,556
 4,036
       
NON-INTEREST EXPENSES              
Salaries and employee benefits4,617
 4,102
 13,882
 11,887
6,001
 5,278
 12,170
 10,241
Occupancy expense865
 911
 2,604
 2,618
1,205
 991
 2,375
 2,012
Data processing expenses338
 314
 983
 941
470
 345
 916
 693
FDIC insurance expense95
 105
 255
 328
225
 60
 259
 160
Other real estate owned expenses11
 12
 26
 76
14
 34
 31
 82
Merger-related expenses—
 258
 64
 273
Other operating expenses1,691
 1,218
 5,204
 3,875
1,922
 1,600
 3,815
 3,199
Total non-interest expenses7,617
 6,662
 22,954
 19,725
9,837
 8,566
 19,630
 16,660
       
Income before income taxes3,712
 4,151
 9,273
 10,846
4,986
 4,637
 9,690
 9,336
INCOME TAXES1,227
 1,456
 2,920
 3,616
1,296
 1,267
 2,579
 2,569
Net income$2,485
 $2,695
 $6,353
 $7,230
$3,690
 $3,370
 $7,111
 $6,767
       
NET INCOME PER COMMON SHARE       
EARNINGS PER COMMON SHARE       
Basic$0.31
 $0.34
 $0.79
 $0.91
$0.36
 $0.39
 $0.70
 $0.78
       
Diluted$0.30
 $0.33
 $0.76
 $0.89
$0.36
 $0.39
 $0.69
 $0.78
       
WEIGHTED AVERAGE SHARES OUTSTANDING              
Basic8,063,119
 7,974,323
 8,040,955
 7,954,212
10,209,295
 8,634,251
 10,205,065
 8,629,197
Diluted8,328,252
 8,185,840
 8,309,363
 8,159,419
10,248,156
 8,696,943
 10,256,481
 8,692,063
The accompanying notes are an integral part of these consolidated financial statements.


1ST Constitution Bancorp
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
Three Months Ended September 30, Nine Months Ended September 30,2020 2019 2020 2019
2017 2016 2017 2016       
Net income$2,485
 $2,695
 $6,353
 $7,230
$3,690
 $3,370
 $7,111
 $6,767
Other comprehensive income:       
Unrealized holding gains/(losses) on securities available for sale18
 (211) 745
 1,046
Other comprehensive income (loss):       
Unrealized holding gains on securities available for sale1,716
 1,021
 1,529
 2,431
Tax effect(7) 77
 (275) (380)(418) (251) (372) (590)
Net of tax amount11
 (134) 470
 666
1,298
 770
 1,157
 1,841
              
Reclassification adjustment for gains on securities available for sale (1)
(12) —
 (92) —
(10) —
 (11) —
Tax effect (2)
5
 —
 37
 —
3
 —
 3
 —
Net of tax amount(7) —
 (55) —
(7) —
 (8) —
              
Pension liability—
 28
 —
 62
Reclassification adjustment for unrealized impairment loss on held to maturity security(3)
5
 3
 8
 4
Tax effect—
 (11) —
 (25)(2) (1) (3) (1)
Net of tax amount—
 17
 —
 37
3
 2
 5
 3
              
Reclassification adjustment for actuarial gains for unfunded pension liability       
Income (3)
(32) (48) (75) (120)
Pension liability85
 56
 141
 111
Tax effect (2)
13
 19
 30
 48
(25) (14) (42) (31)
Net of tax amount(19) (29) (45) (72)60
 42
 99
 80
       
Reclassification adjustment for actuarial gains for unfunded pension liability(4)
(56)
(44) (100)
(88)
Tax effect (2)
17
 13
 30
 26
Net of tax amount(39) (31) (70) (62)
       
Total other comprehensive income(15) (146) 370
 631
1,315
 783
 1,183
 1,862
       
Comprehensive income$2,470
 $2,549
 $6,723
 $7,861
$5,005
 $4,153
 $8,294
 $8,629

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


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



1ST Constitution Bancorp
Consolidated Statements of Changes in Shareholders’ Equity
For the NineThree and Six Months Ended SeptemberJune 30, 20172020 and 20162019
(Dollars in thousands)
(Unaudited)

  
Common
Stock
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
           
Balance, January 1, 2016 $70,845
 $25,589
 $(344) $(130) $95,960
           
Exercise of stock options (3,564 shares) 19
 —
 —
 —
 19
           
Share-based compensation 530
 —
 —
 —
 530
           
Treasury stock purchased (2,000 shares) —
 —
 (24) —
 (24)
           
Dividends on common stock ($0.05 per share) —
 (399) —
 —
 (399)
           
Net income for the nine months ended
September 30, 2016		 —
 7,230
 —
 —
 7,230
           
Other comprehensive income —
 —
 —
 631
 631
Balance, September 30, 2016 $71,394
 $32,420
 $(368) $501
 $103,947
           
Balance, January 1, 2017 $71,695
 $34,074
 $(368) $(600) $104,801
           
Exercise of stock options (18,790 shares) 150
 —
 —
 —
 150
           
Share-based compensation 739
 —
 —
 —
 739
           
Dividends on common stock ($0.10 per share) —
 (803) —
 —
 (803)
           
Net income for the nine months ended
September 30, 2017		 —
 6,353
 —
 —
 6,353
           
Other comprehensive income —
 —
 —
 370
 370
Balance, September 30, 2017 $72,584
 $39,624
 $(368) $(230) $111,610
 
Common
Stock
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
Balance, April 1, 2019$79,828
 $52,501
 $(368) $(754) $131,207
Net income—
 3,370
 —
 —
 3,370
Exercise of stock options and issuance of restricted shares (10,555 shares and 14,181 shares, respectively)66
 —
 —
 —
 66
Share-based compensation296
 —
 —
 —
 296
Cash dividends ($0.075 per share)—
 (647) —
 —
 (647)
Other comprehensive income—
 —
 —
 783
 783
Balance, June 30 2019$80,190
 $55,224
 $(368) $29
 $135,075
          
Balance, April 1, 2020$110,254
 $63,295
 $(503) $59
 $173,105
Net income—
 3,690
 —
 —
 3,690
Share-based compensation292
 —
 —
 —
 292
Cash dividends ($0.09 per share)—
 (918) —
 —
 (918)
Other comprehensive income—
 —
 —
 1,315
 1,315
Balance, June 30, 2020$110,546
 $66,067
 $(503) $1,374
 $177,484

 
Common
Stock
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
Balance, January 1, 2019$79,536
 $49,750
 $(368) $(1,833) $127,085
Net income—
 6,767
 —
 —
 6,767
Exercise of stock options and issuance of restricted shares (15,919 shares and 28,581 shares, respectively)89
 —
 —
 —
 89
Share-based compensation565
 —
 —
 —
 565
Cash dividends ($0.15 per share)—
 (1,293) —
 —
 (1,293)
Other comprehensive income—
 —
 —
 1,862
 1,862
Balance, June 30, 2019$80,190
 $55,224
 $(368) $29
 $135,075
          
Balance, January 1, 2020$109,964
 $60,791
 $(368) $191
 $170,578
Net income—
 7,111
 —
 —
 7,111
Share-based compensation582
 —
 —
 —
 582
Cash dividends ($0.18 per share)—
 (1,835) —
 —
 (1,835)
Treasury stock purchased (6,028 shares)—
 —
 (135) —
 (135)
Other comprehensive income—
 —
 —
 1,183
 1,183
Balance, June 30, 2020$110,546
 $66,067
 $(503) $1,374
 $177,484

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



1ST Constitution Bancorp
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

Nine Months Ended September 30,Six Months Ended June 30,
2017 20162020 2019
OPERATING ACTIVITIES:      
Net income$6,353
 $7,230
$7,111
 $6,767
Adjustments to reconcile net income to net cash provided by operating activities-   
Provision/(credit) for loan losses450
 (300)
Adjustments to reconcile net income to net cash (used in) provided by operating activities-   
Provision for loan losses3,020
 700
Depreciation and amortization1,037
 970
1,061
 681
Net amortization of premiums and discounts on securities678
 864
655
 248
Gains on sales of securities(128) —
SBA loan discount accretion(206) (188)
Gains on sales and calls of securities available for sale(11) —
Gains on sales and calls of securities held to maturity(7) —
Gains on sales of other real estate owned(14) (31)—
 (137)
Gains on sales of loans held for sale(3,936) (2,525)(3,591) (2,205)
Originations of loans held for sale(83,754) (55,090)(118,467) (56,668)
Proceeds from sales of loans held for sale96,500
 51,928
116,856
 58,030
Income on bank–owned life insurance(391) (414)
Increase in cash surrender value on bank–owned life insurance(369) (288)
Gain on cash surrender value on bank-owned life insurance(75) —
Share-based compensation expense739
 530
582
 565
Decrease in deferred tax asset384
 1,033
Noncash rent and equipment expense94
 112
Increase in accrued interest receivable(46) (2)(795) (235)
(Increase)/decrease in other assets(114) 829
Decrease in accrued interest payable(151) (52)
(Decrease)/increase in accrued expenses and other liabilities(824) 874
Increase in other assets(1,226) (1,215)
(Decrease) increase in accrued interest payable(296) 469
Increase (decrease) in accrued expenses and other liabilities1,470
 (1,765)
Net cash provided by operating activities16,399
 4,811
6,190
 5,904
INVESTING ACTIVITIES:      
Purchases of securities -   
Purchases of securities:   
Available for sale(29,729) (28,157)(18,417) (25,339)
Held to maturity(16,460) (16,591)(31,364) (5,942)
Proceeds from maturities and payments of securities -   
Proceeds from calls, maturities and payments of securities:   
Available for sale15,892
 17,034
23,624
 13,660
Held to maturity30,538
 18,432
13,347
 7,590
Proceeds from sales of securities available for sale7,602
 —
Proceeds from sales of securities held to maturity1,033
 —
Proceeds from bank-owned life insurance benefits paid—
 248
179
 —
Net redemption/(purchase) of restricted stock494
 (1,740)
Net purchase of restricted stock(1,706) (1,524)
Net increase in loans(47,771) (67,315)(139,367) (84,929)
Capital expenditures(575) (319)(107) (375)
Cost of improvement to other real estate owned(5) (60)
Proceeds from sales of other real estate owned284
 1,033
101
 1,192
Purchase of bank-owned life insurance(1,550) (300)
Net cash used in investing activities(40,247) (77,735)(153,710) (95,667)
FINANCING ACTIVITIES:      
Exercise of stock options150
 19
—
 89
Purchase of treasury stock—
 (24)
Purchase of treasury shares(135) —
Cash dividends paid to shareholders(803) —
(1,835) (1,293)
Net increase in deposits35,297
 40,305
132,030
 71,162
Net (decrease)/increase in short-term borrowings(25) 38,203
Repayment of Federal Home Loan Bank advances(10,000) —
Increase in short-term borrowings15,200
 33,075
Net cash provided by financing activities24,619
 78,503
145,260
 103,033
Increase in cash and cash equivalents771
 5,579
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD14,886
 11,368
CASH AND CASH EQUIVALENTS AT END OF PERIOD$15,657
 $16,947
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION   
Cash paid during the period for -   
Interest$4,231
 $3,850
Income taxes2,572
 3,656
Non-cash items: Transfer of loans to other real estate owned455
 142
(Decrease) increase in cash and cash equivalents(2,260) 13,270
Cash and cash equivalents at beginning of period14,842
 16,844
Cash and cash equivalents at end of period$12,582
 $30,114




Supplemental Disclosures of Cash Flow Information   
Cash paid during the period for -   
Interest$6,626

$5,339
Income taxes1,241

3,724
Noncash items:   
Right-of-use assets$—
 $15,441
Lease liability144
 16,021
    






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



1ST Constitution Bancorp
Notes Toto Consolidated Financial Statements
SeptemberJune 30, 20172020
(Unaudited)

(1)   Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements include 1ST Constitution Bancorp (the “Company”), its wholly-owned subsidiary, 1ST Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1ST Constitution Investment Company of New Jersey, Inc., and FCB Assets Holdings, Inc., 204 South Newman Street Corp., and 249 New York Avenue, LLC. 1st 1ST Constitution Capital Trust II, a subsidiary of the Company, is not included in the Company’s consolidated financial statements, as it is a variable interest entity and the Company is not the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation and certain prior period amounts have been reclassified to conform to current year presentation.consolidation. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K/A10-K for the year ended December 31, 2016,2019, filed with the SEC on March 20, 2017.16, 2020.

Goodwill
During the second quarter of 2020, management determined that a triggering event had occurred with respect to goodwill, which required a review of goodwill for impairment. Management completed its review of goodwill and concluded that it was more likely than not that the fair value of goodwill exceeded the carrying amount of goodwill at June 30, 2020. Accordingly, goodwill was not impaired at June 30, 2020.

In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) whichthat are necessary for a fair presentation of the operating results for the interim periods have been included. The results of operations for periods of less than a year are not necessarily indicative of results for the full year.
During the review of the three months ended June 30, 2017, management became aware that during previously reported periods, the amortization of deferred loan origination costs was being recorded in other operating expenses and not as an adjustment to yield as required by the Financial Standards Accounting Board ("FASB") Accounting Standards Codification ("ASC") 310-20. As such, management has adjusted interest income and other operating expenses by $435,000 and $1.2 million for the three and nine months ended September 30, 2016, respectively.
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of SeptemberJune 30, 20172020 for items that should potentially be recognized or disclosed in these consolidated financial statements.  The evaluation was conducted through the date these consolidated financial statements were issued.

COVID-19 Impact
The sudden emergence of the COVID-19 global pandemic in the first quarter of 2020, and the responses thereto (including business and school closures, restrictions on travel and social distancing protocols), has caused, and is continuing to cause, widespread uncertainty, social and economic disruption, highly volatile financial markets and unprecedented increases in unemployment levels in a short period of time. As a result, almost all businesses located in the Bank’s primary market areas of northern and central New Jersey, communities along the New Jersey shore, and the New York City metropolitan area, and their employees, have been adversely impacted.

The ultimate impact of the COVID-19 pandemic on the businesses and the people in the communities that the Bank serves, and on the Company’s operations and financial performance, will depend on future developments related to the duration, extent and severity of the pandemic and measures taken by governmental and private parties in response thereto. However, to the extent that the Bank’s customers are not able to fulfill their contractual obligations, the Company’s business operations, asset valuations, financial condition, cash flows and results of operations could be materially adversely impacted. Material adverse impacts may also include all or a combination of valuation impairments on our intangible assets, investments, loans, deferred tax assets, or other real estate owned ("OREO"). Similarly, the Company’s operations rely on third-party vendors to process, record and monitor transactions. If any of these vendors are unable to provide these services, our ability to serve customers could be disrupted. The pandemic could also negatively impact customers’ ability to conduct banking and other financial transactions. The Company’s operations could also be adversely impacted if key personnel or a significant number of employees were unable to work due to illness or restrictions.

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”)
Act in response to the coronavirus pandemic. This legislation aims at providing relief for individuals and businesses that have been
negatively impacted by the coronavirus pandemic.

The CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” accounting guidance in ASC 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of i) December 30,


2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019. The Bank adopted this provision as of March 31, 2020.


Adoption of New Accounting Standards

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

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 consolidated statements of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the consolidated statements 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 adoption of this guidance in 2020 did not have a material impact on the Company's consolidated financial statements.

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 ending after December 15, 2020. The adoption of this guidance in 2020 did not have a material impact on the Company's consolidated financial statements.

(2) Acquisition of Shore Community Bank
On November 6, 2017,8, 2019, the Company andcompleted its acquisition of 100 percent of the Bank entered into an Agreement and Planshares of Merger (the “Merger Agreement”) with New Jerseycommon stock of Shore Community Bank (“NJCB”("Shore"), providing for the merger of NJCBwhich merged with and into the Bank with the Bank as the surviving entity (the “Merger”“Shore Merger”). See NoteThe former shareholders of Shore received total consideration of $54.3 million, which was comprised of 1,509,275 shares of common stock of the Company with a market value of $29.2 million and cash of $25.1 million, of which $925,000 was cash paid in exchange for unexercised outstanding stock options.

The Shore Merger was accounted for under the acquisition method of accounting, and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at preliminary estimated fair values as of the Shore Merger date. The excess of the fair value of the consideration paid over the preliminary net fair value of Shore's assets and liabilities resulted in the recognition of goodwill of $23.2 million. Shore’s results of operations have been included in the Company’s Consolidated Financial Statements since November 8, 2019.

The assets acquired and 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 closing date of the Shore Merger.


The following table summarizes the fair value of the acquired assets and liabilities assumed:
(Dollars in thousands)Amount
Consideration paid: 
Company stock issued$29,175
Cash payment24,233
Cash payment for unexercised outstanding stock options925
Total consideration paid$54,333
  
  
Recognized amounts of identifiable assets acquired and liabilities assumed at fair value: 
Cash and cash equivalents$32,599
Investment securities available for sale26,440
Loans205,833
Premises and equipment, net4,433
Core deposit intangible asset1,467
Bank-owned life insurance7,250
Right-of-use assets3,226
Accrued interest receivable778
Other real estate owned605
Other assets2,518
Deposits(249,836)
Lease liability(3,226)
Other liabilities(948)
Total identifiable assets and liabilities, net$31,139
  
Goodwill recorded from Shore merger$23,194

Accounting Standards Codification (“ASC”) Topic 805-10 provides that if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report, in its financial statements, provisional amounts for the items for which the accounting is incomplete. During the measurement period, the acquirer shall 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. Thus, the acquirer shall adjust its financial statements as needed, including recognizing in its current-period earnings the full effect of a change in depreciation, amortization, or other income effects, if any, as a result of the change to provisional amounts calculated as if the accounting had been completed at the acquisition 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 Shore 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 $3.6 million and estimated prepayments. Projected cash flows were then discounted to present value, utilizing a risk-adjusted market rate for similar loans that management determined market participants would likely use.

At the Shore Merger date, the Company recorded $201.3 million of loans without evidence of credit quality deterioration and $4.6 million of loans with evidence of credit quality deterioration.



The following table summarizes the composition of the loans acquired and recorded at fair value:
 At November 8, 2019
(Dollars in thousands)Loans acquired with no credit quality deteriorationLoans acquired with credit quality deteriorationTotal
Commercial   
  Construction$9,733
 $—
 $9,733
 
  Commercial real estate135,482
 4,071
 139,553
 
  Commercial business12,027
 —
 12,027
 
Residential real estate36,849
 500
 37,349
 
Consumer7,171
 —
 7,171
 
  Total loans$201,262
 $4,571
 $205,833
 

The following is a summary of the loans acquired with evidence of deteriorated credit quality in the Shore Merger as of the date of the closing of the merger:
(Dollars in thousands)Acquired Credit Impaired Loans
Contractually required principal and interest at acquisition$7,584
Contractual cash flows not expected to be collected (non-accretable difference)2,355
  
Expected cash flows at acquisition5,229
Interest component of expected cash flows (accretable difference)658
  
Fair value of acquired loans$4,571


Bank-owned life insurance was recorded at the cash surrender value of the insurance policies, which approximates the redemption value of the policies.

The Company recorded a core deposit intangible asset related to a value ascribed to demand, interest checking, money market and savings account, referred to as core deposits, acquired as part of the acquisition. The value assigned to the acquired core deposits represents the future economic benefit of the potential cost savings from acquiring the core deposits, net of operating expenses and including ancillary fee income, compared to the cost of obtaining alternative funds from available market sources. Management used estimates including the expected attrition rates of depository accounts, future interest rate levels, and the cost of servicing various depository products. The core deposit intangible asset totaled $1.5 million and is being amortized over its estimated useful life of approximately 10 - Subsequent Event -years, using an accelerated method.


The following table presents the projected amortization of the core deposit intangible asset for further information.each period beginning July 1, 2020:
(Dollars in thousands)Amount
Year 
2020$129
2021236
2022209
2023182
2024156
Thereafter378
Total$1,290


The fair values of deposit liabilities with no stated maturities, such as checking, money market and savings accounts, were assumed to equal the carrying value amounts since these deposits are payable on demand. The fair values of certificates of deposit represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.



Direct costs related to the Shore Merger were expensed as incurred. For the year ended December 31, 2019, the Company incurred $1.7 million 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 Financial Information

The following table presents financial information regarding the former Shore operations included in the Company’s Consolidated Statements of Income for the six months ended June 30, 2020 under the column "Shore Six Months Ended June 30, 2020." In addition, the table presents unaudited condensed pro forma financial information for the three and six months ended June 30, 2019 assuming that the Shore Merger had been completed as of January 1, 2019.

The table has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the Shore Merger occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma financial information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the integration and consolidation of Shore’s operations.
(Dollars in thousands)Shore Six Months Ended June 30, 2020 Actual for the Six Months Ended June 30, 2020 Pro Forma for the Three Months Ended June 30, 2019 Pro Forma for the Six Months Ended June 30, 2019
Net interest income$4,678
 $26,784
 $14,010
 $27,776
Non-interest income199
 5,556
 2,331
 4,375
Non-interest expenses1,928
 19,630
 10,385
 20,009
Income taxes725
 2,579
 1,615
 3,247
Net income1,849
 7,111
 3,942
 8,166



(2) Net Income


(3) Earnings Per Common Share

Basic net incomeearnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during each period. Diluted net incomeearnings 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 reconciliationAwards of the numeratorsrestricted shares are included in outstanding shares when granted. Unvested restricted shares are entitled to non-forfeitable dividends and denominatorsparticipate in undistributed earnings with common shares. Awards of thethis 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) Three Months Ended September 30, 2017
  
Net 
Income
 
Weighted-average
shares
 
Per share
amount
Basic earnings per common share:
 Net income
 $2,485
 8,063,119
 $0.31
Effect of dilutive securities:      
Stock options and warrants   265,133
  
Diluted EPS:      
Net income plus assumed conversion $2,485
 8,328,252
 $0.30
(Dollars in thousands, except per share data) Three Months Ended September 30, 2016
  
Net 
Income
 
Weighted-average
shares
 
Per share
amount
Basic earnings per common share:
 Net income
 $2,695
 7,974,323
 $0.34
Effect of dilutive securities:      
Stock options and warrants   211,517
  
Diluted EPS:      
Net income plus assumed conversion $2,695
 8,185,840
 $0.33

For the three months ended SeptemberJune 30, 20172020 and 2016, 9,5002019, 54,930 and 11,13029,530 options, respectively, were anti-dilutive and were not included in the computation of diluted earnings per common share.
(Dollars in thousands, except per share data) Nine Months Ended September 30, 2017
  
Net 
Income
 
Weighted-average
shares
 
Per share
amount
Basic earnings per common share:
Net income
 $6,353
 8,040,955
 $0.79
Effect of dilutive securities:      
Stock options and warrants   268,408
  
Diluted EPS:      
Net income plus assumed conversion $6,353
 8,309,363
 $0.76

(Dollars in thousands, except per share data) Nine Months Ended September 30, 2016
  
Net 
Income
 
Weighted-average
shares
 
Per share
amount
Basic earnings per common share:
Net income
 $7,230
 7,954,212
 $0.91
Effect of dilutive securities:      
Stock options and warrants   205,207
  
Diluted EPS:      
Net income plus assumed conversion $7,230
 8,159,419
 $0.89


For the ninesix months ended SeptemberJune 30, 20172020 and 2016, 9,5002019, 41,430 and 20,06029,530 options, respectively, were anti-dilutive and were not included in the computation of diluted earnings per common share.

The following table illustrates the calculation of both basic and diluted earnings per share for the three and six months ended June 30, 2020 and 2019:
 Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands, except per share data)2020 2019 2020 2019
        
Net income$3,690
 $3,370
 $7,111
 $6,767
        
Basic weighted average shares outstanding10,209,295
 8,634,251
 10,205,065
 8,629,197
Plus: common stock equivalents38,861
 62,692
 51,416
 62,866
Diluted weighted average shares outstanding10,248,156
 8,696,943
 10,256,481
 8,692,063
Earnings per share:       
Basic$0.36
 $0.39
 0.70
 0.78
Diluted$0.36
 $0.39
 0.69
 0.78





(3)(4) Investment Securities
AmortizedA summary of amortized cost carrying value, gross unrealized gains and losses, and the fair value by security type are asof investment securities available for sale follows:
September 30, 2017 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
(Dollars in thousands)        
Available for sale        
U.S. Treasury securities and obligations of U.S. Government sponsored corporations (“GSE”) and agencies $1,997
 $—
 $(10) $1,987
Residential collateralized mortgage obligations- GSE 26,651
 45
 (117) 26,579
Residential mortgage backed securities – GSE 21,294
 201
 (35) 21,460
Obligations of state and political subdivisions 20,104
 260
 (34) 20,330
Trust preferred debt securities – single issuer 2,481
 —
 (124) 2,357
Corporate debt securities 24,940
 153
 (128) 24,965
Other debt securities 12,620
 1
 (23) 12,598
  $110,087
 $660
 $(471) $110,276

September 30, 2017 
Amortized
Cost
 
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Loss
 
Carrying
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
(Dollars in thousands)            
Held to maturity            
U.S. Treasury securities and obligations of U.S. Government
sponsored corporations (“GSE”) and agencies		 $3,446
 $—
 $3,446
 $—
 $(60) $3,386
Residential collateralized mortgage obligations – GSE 9,387
 —
 9,387
 160
 (103) 9,444
Residential mortgage backed securities – GSE 35,932
 —
 35,932
 426
 (40) 36,318
Obligations of state and political subdivisions 62,290
 —
 62,290
 1,446
 (37) 63,699
Trust preferred debt securities-pooled 657
 (501) 156
 411
 —
 567
Other debt securities 343
 —
 343
 —
 —
 343
  $112,055
 $(501) $111,554
 $2,443
 $(240) $113,757
 June 30, 2020
(Dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)$3,769
 $—
 $(16) $3,753
Residential collateralized mortgage obligations - GSE41,888
 641
 (158) 42,371
Residential mortgage backed securities - GSE17,498
 678
 (8) 18,168
Obligations of state and political subdivisions30,591
 1,032
 —
 31,623
Trust preferred debt securities - single issuer1,493
 —
 (166) 1,327
Corporate debt securities29,047
 542
 (260) 29,329
Other debt securities25,443
 171
 (524) 25,090
Total$149,729
 $3,064
 $(1,132) $151,661



December 31, 2016 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
December 31, 2019
(Dollars in thousands)         
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
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
U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)$774
 $—
 $(10) $764
Residential collateralized mortgage obligations - GSE53,223
 194
 (242) 53,175
Residential mortgage backed securities - GSE 31,207
 388
 (119) 31,476
18,100
 292
 (5) 18,387
Obligations of state and political subdivisions 21,604
 152
 (356) 21,400
33,177
 342
 —
 33,519
Trust preferred debt securities-single issuer 2,478
 —
 (206) 2,272
Trust preferred debt securities - single issuer1,492
 —
 (50) 1,442
Corporate debt securities 21,963
 10
 (205) 21,768
23,224
 139
 (84) 23,279
Other debt securities 845
 —
 (6) 839
25,378
 80
 (242) 25,216
 $104,258
 $608
 $(1,072) $103,794
Total$155,368
 $1,047
 $(633) $155,782


December 31, 2016 
Amortized
Cost
 
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Loss
 
Carrying
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
(Dollars in thousands)             
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

A summary of amortized cost, carrying value and fair value of investment securities held to maturity follows:
 June 30, 2020
(Dollars in thousands)
Amortized
Cost
 
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Loss
 
Carrying
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Residential collateralized mortgage obligations - GSE$7,406
 $—
 $7,406
 $361
 $—
 $7,767
Residential mortgage backed securities - GSE31,921
 —
 31,921
 1,406
 —
 33,327
Obligations of state and political subdivisions52,840
 —
 52,840
 969
 (12) 53,797
Trust preferred debt securities - pooled655
 (484) 171
 334
 —
 505
Other debt securities2,102
 —
 2,102
 69
 —
 2,171
Total$94,924
 $(484) $94,440
 $3,139
 $(12) $97,567

Restricted stock is included in other assets at September
 December 31, 2019
(Dollars in thousands) 
Amortized
Cost
 
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Loss
 
Carrying
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Residential collateralized mortgage obligations - GSE$5,117
 $—
 $5,117
 $76
 $(35) $5,158
Residential mortgage backed securities - GSE36,528
 —
 36,528
 481
 (54) 36,955
Obligations of state and political subdivisions32,533
 —
 32,533
 690
 (25) 33,198
Trust preferred debt securities - pooled657
 (492) 165
 479
 —
 644
Other debt securities2,277
 —
 2,277
 —
 (9) 2,268
Total$77,112
 $(492) $76,620
 $1,726
 $(123) $78,223




At June 30, 20172020 and December 31, 2016 and totaled $3.52019, $99.1 million and $4.0$92.2 million respectively. Restricted stock consisted of $3.4 million ofinvestment securities, respectively, were pledged to secure public funds and collateralized borrowings from the Federal Home Loan Bank of New York (“FHLB”) and for other purposes required or permitted by law.

Restricted stock was included in other assets at June 30, 2020 and December 31, 2019 and totaled $6.0 million and $4.3 million, respectively. Restricted stock consisted of $5.9 million of FHLB stock and $65,000$160,000 of Atlantic Community Bankers Bank stock at SeptemberJune 30, 20172020 and $3.9$4.2 million of Federal Home Loan Bank of New York stockFHLB and $65,000$160,000 of Atlantic Community Bankers Bank stock at December 31, 2016.
During the third quarter of 2017, the Company sold five mortgage backed securities with a book value of $766,000 for a gain of $24,000. Three of the securities, with a book value of $415,000 and a gain of $12,000, were sold from the held to maturity portfolio and all securities had a principal balance of less than 15% of the original principal balance outstanding at the time of purchase. ASC 320-10-25-14 provides that sales of debt securities that are categorized as held to maturity and are sold after 85% of the principal outstanding at acquisition had been collected shall be equivalent to holding the security to maturity. Accordingly, the sales of the mortgage-backed securities that were classified as held to maturity were treated as held to maturity.
During the nine months ended September 30, 2017, the Company sold securities with a book value of $8.5 million for a net gain of $128,000. 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 the nine months ended September 30, 2017. All 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.

2019.

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 SeptemberJune 30, 2017.2020.  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.
 September 30, 2017June 30, 2020
(Dollars in thousands) Amortized Cost 

Fair Value
 YieldAmortized Cost 

Fair Value
 Yield
Available for sale           
Due in one year or less $4,259
 $4,252
 3.01%$9,553
 $9,543
 2.43%
Due after one year through five years 20,820
 20,897
 2.29%34,085
 35,038
 2.38%
Due after five years through ten years 30,969
 31,120
 2.67%35,376
 35,585
 1.84%
Due after ten years 54,039
 54,007
 2.65%70,715
 71,495
 2.32%
Total $110,087
 $110,276
 2.60%$149,729
 $151,661
 2.23%
          
 Carrying Value 

Fair Value
 YieldCarrying Value 

Fair Value
 Yield
Held to maturity  
  
   
  
  
Due in one year or less $25,413
 $25,449
 1.69%$17,407
 $17,477
 2.26%
Due after one year through five years 17,683
 18,449
 4.65%10,302
 10,585
 3.72%
Due after five years through ten years 18,861
 19,390
 3.55%18,178
 18,950
 2.94%
Due after ten years 49,597
 50,469
 3.18%48,553
 50,555
 2.78%
Total $111,554
 $113,757
 3.14%$94,440
 $97,567
 2.81%

Gross unrealized losses on available for sale and held to maturity securities and the fair value of the related securities aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position at SeptemberJune 30, 20172020 and December 31, 20162019 were as follows:
September 30, 2017   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
 2 $5,373
 $(70) $—
 $—
 $5,373
 $(70)
Residential collateralized
mortgage obligations –GSE
 8 18,625
 (191) 1,509
 (29) 20,134
 (220)
Residential mortgage backed
securities-GSE
 15 14,487
 (75) —
 —
 14,487
 (75)
Obligations of state and
political subdivisions
 29 9,020
 (54) 2,376
 (17) 11,396
 (71)
Trust preferred debt securities-
single issuer
 4 —
 —
 2,357
 (124) 2,357
 (124)
Corporate debt securities 4 3,803
 (35) 4,906
 (93) 8,709
 (128)
Other debt securities 4 9,144
 (22) 23
 (1) 9,167
 (23)
Total temporarily impaired
securities
 66 $60,452
 $(447) $11,171
 $(264) $71,623
 $(711)

 June 30, 2020
   Less than 12 months 12 months or longer Total
(Dollars in thousands)
Number
of
Securities
 Fair Value 
Unrealized
Losses
 Fair Value 
Unrealized
Losses
 Fair Value 
Unrealized
Losses
U.S. Treasury securities and obligations of U.S. Government sponsored
entities (GSE) and agencies
2 $3,753
 $(16) $—
 $—
 $3,753
 $(16)
Residential collateralized
mortgage obligations - GSE
6 4,197
 (31) 11,620
 (127) 15,817
 (158)
Residential mortgage backed
securities - GSE
5 519
 (8) —
 —
 519
 (8)
Obligations of state and
political subdivisions
4 2,475
 (12) —
 —
 2,475
 (12)
Trust preferred debt securities -
single issuer
2 —
 —
 1,327
 (166) 1,327
 (166)
Corporate debt securities5 8,841
 (182) 4,922
 (78) 13,763
 (260)
Other debt securities10 3,693
 (113) 11,703
 (411) 15,396
 (524)
Total temporarily impaired
securities
34 $23,478
 $(362) $29,572
 $(782) $53,050
 $(1,144)


December 31, 2016 Less than 12 months 12 months or longer Total
December 31, 2019
 Less than 12 months 12 months or longer Total
(Dollars in thousands) 
Number
of
Securities
 Fair Value 
Unrealized
Losses
 Fair Value 
Unrealized
Losses
 Fair Value 
Unrealized
Losses
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)
U.S. Treasury securities and obligations of U.S. Government sponsored
entities (GSE) and agencies
1 $764
 $(10) $—
 $—
 $764
 $(10)
Residential collateralized
mortgage obligations - GSE
39 18,328
 (138) 13,300
 (139) 31,628
 (277)
Residential mortgage backed
securities - GSE
 29 26,581
 (216) 3,542
 (16) 30,123
 (232)13 5,505
 (59) —
 —
 5,505
 (59)
Obligations of state and
political subdivisions
 74 25,545
 (611) —
 —
 25,545
 (611)4 2,311
 (25) 527
 —
 2,838
 (25)
Trust preferred debt securities- single issuer 4 —
 —
 2,272
 (206) 2,272
 (206)
Trust preferred debt securities - single issuer2 —
 —
 1,442
 (50) 1,442
 (50)
Corporate debt securities 6 12,700
 (204) 1,999
 (1) 14,699
 (205)4 2,994
 (5) 7,954
 (79) 10,948
 (84)
Other debt securities 3 —
 —
 1,276
 (7) 1,276
 (7)12 13,692
 (151) 5,598
 (100) 19,290
 (251)
Total temporarily impaired
securities
 126 $89,158
 $(1,457) $9,089
 $(230) $98,247
 $(1,687)75 $43,594
 $(388) $28,821
 $(368) $72,415
 $(756)

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

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

Obligations of state and political subdivisions: The unrealized losses on investments in these securities were caused by increases in market interest rates.  It is expected that the securities would not be settled at a price less than the amortized cost of the investment.  None of the issuers have defaulted on interest payments. These investments are not considered to be other than temporarily impaired because the decline in fair value is attributable to changes in interest rates and not credit quality.  The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity.  Therefore, these investments are not considered other-than-temporarily impaired.
Corporate debt securities:   The unrealized losses on investments in corporate debt securities were caused by increases in market interest rates.  None of the corporate issuers have defaulted on interest payments.   The decline in fair value is attributable to changes in interest rates and not a decline in 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 four2 corporate trust preferred securities issued by two1 large financial institutionsinstitution that mature in 2027. The contractual terms of the trust preferred securities do not allow the issuer to settle the securities at a price less than the face value of the trust preferred securities, which is greater than the amortized cost of the trust preferred securities. One of the issuers continues to maintainThe issuer maintains 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 and credit spreads and the lack of an active trading market for these securities. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.

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



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 market participants for the issuer’s credit risk.  All of the issuers maintain an investment grade rating and 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 debt securities issued by 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.
Due to recovery of the cash flows underlying the security, the Company began to accrete the $501,000 of impairment charge in the other comprehensive income component in 2019. Total accretion of $8,000 was recognized in the first six months of 2020 as an increase in the carrying amount of the security. On a quarterly basis, management evaluates thethis security to determine if any additional other-than-temporary impairment is required. As of SeptemberJune 30, 2017, the security was in an unrealized gain position.2020, management concluded that no additional other-than-temporary impairment had occurred.



(4)(5)   Allowance for Loan Losses and Credit Quality
The Company’s primary lending emphasis is the origination of commercial business and commercial real estate loans, and mortgage warehouse lines of credit.credit and commercial business loans. Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy and a decline in New Jersey 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 SeptemberJune 30, 2017:2020:
(Dollars in thousands) 30-59 Days 
60-89
Days
 
Greater
than 90
Days
 
Total Past
Due
 Current 
Total
Loans
Receivable
 
Recorded
Investment
> 90 Days
Accruing
 
Non-accrual
Loans
Commercial                
Construction $96
 $—
 $—
 $96
 $127,508
 $127,604
 $—
 $—
Commercial Business 568
 148
 379
 1,095
 92,936
 94,031
 —
 3,476
Commercial Real Estate 315
 —
 2,583
 2,898
 288,484
 291,382
 —
 2,583
Mortgage Warehouse Lines —
 —
 —
 —
 193,535
 193,535
 —
 —
Residential Real Estate 616
 —
 74
 690
 41,268
 41,958
 —
 74
Consumer                
Loans to Individuals —
 70
 116
 186
 22,425
 22,611
 —
 378
Other —
 —
 —
 —
 186
 186
 —
 —
Total loans $1,595
 $218
 $3,152
 $4,965
 $766,342
 771,307
 —
 $6,511
Deferred loan fees and costs, net           675
    
Total loans, net           $771,982
    
(Dollars in thousands)30-59 Days 
60-89
Days
 
Greater
than 90
Days
 
Total Past
Due
 Current 
Total
Loans
Receivable
 
Recorded
Investment
> 90 Days
Accruing
 
Non-accrual
Loans
Commercial real estate$—
 $453
 $5,117
 $5,570
 $586,706
 $592,276
 $—
 $3,886
Mortgage warehouse lines—
 —
 —
 —
 297,093
 297,093
 —
 —
Construction—
 —
 7,500
 7,500
 127,682
 135,182
 —
 7,500
Commercial business28
 —
 629
 657
 215,592
 216,249
 —
 784
Residential real estate77
 1,123
 668
 1,868
 85,994
 87,862
 —
 836
Loans to individuals97
 217
 153
 467
 27,853
 28,320
 —
 513
Other loans—
 2
 —
 2
 126
 128
 —
 —
Total loans$202
 $1,795
 $14,067
 $16,064
 $1,341,046
 1,357,110
 $—
 $13,519
Deferred loan (fees) costs, net          (1,674)    
Total loans          $1,355,436
    


The following table provides an aging of the loan portfolio by loan class at December 31, 2016:2019:
(Dollars in thousands) 30-59 Days 
60-89
Days
 
Greater than
90 Days
 
Total Past
Due
 Current 
Total
Loans
Receivable
 
Recorded
Investment
> 90 Days
Accruing
 
Non-accrual
Loans
Commercial                
Construction $—
 $—
 $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 564
 —
 392
 956
 43,835
 44,791
 —
 544
Consumer                
Loans to Individuals —
 29
 361
 390
 23,346
 23,736
 24
 337
Other —
 —
 —
 —
 207
 207
 —
 —
Total loans $1,418
 $1,086
 $4,436
 $6,940
 $716,131
 723,071
 $24
 $5,174
Deferred loan fees and costs, net           1,737
    
Total loans, net           $724,808
    
(Dollars in thousands)30-59 Days 
60-89
Days
 
Greater than
90 Days
 
Total Past
Due
 Current 
Total
Loans
Receivable
 
Recorded
Investment
> 90 Days
Accruing
 
Non-accrual
Loans
Commercial real estate$238
 $1,927
 $3,882
 $6,047
 $561,608
 $567,655
 $—
 $2,596
Mortgage warehouse lines—
 —
 —
 —
 236,672
 236,672
 —
 —
Construction—
 —
 —
 —
 148,939
 148,939
 —
 —
Commercial business381
 —
 330
 711
 138,560
 139,271
 —
 501
Residential real estate2,459
 271
 677
 3,407
 86,852
 90,259
 —
 708
Loans to individuals296
 —
 311
 607
 31,997
 32,604
 —
 692
Other loans—
 —
 —
 —
 137
 137
 —
 —
Total loans$3,374
 $2,198
 $5,200
 $10,772
 $1,204,765
 1,215,537
 $—
 $4,497
Deferred loan costs, net          491
    
Total loans          $1,216,028
    

As provided by ASCAccounting Standards Codification (“ASC”) 310-30, the excess of cash flows expected at acquisition over the initial investment in the loan is recognized as interest income over the life of the loan. At SeptemberJune 30, 2017,2020 and December 31, 2019, there were no acquired$5.2 million and $5.4 million of purchased credit impaired loans, with evidence of deteriorated credit quality that were non-performing while at December 31, 2016, there were $439,000 in acquired loans with evidence of deteriorated credit qualityrespectively, that were not classified as non-performing loans.loans due to the accretion of income.
The Company’s internal credit risk grades are based on the definitions currently utilized by the banking regulatory agencies.  The grades assigned and their definitions are as follows, and loans graded excellent, above average, good and watch list are treated as “pass” for grading purposes:follows:

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


2.  Above Average - Loans to companies whose balance sheets show excellent liquidity and long-term debt is on well-spread schedules of repayment easily covered by cash flow.  Such companies have been consistently profitable and have diversification in their product lines or sources of revenue.  The continuation of profitable operations for the foreseeable future is likely.  Management is comprised of a mix of ages, experience and backgrounds and management succession is in place. Sources of raw materials and, for service companies, the sources of revenue are abundant.  Future needs have been planned for. Character and management ability of individuals or company principals are excellent.  Loans to individuals are supported by their high net worthsworth 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 1graded excellent and 2 above. Loans to individuals are supported by good net worth but whose supporting assets are illiquid.above average.

3w. Watch - Included in this category are loans evidencing problems identified by BankCompany management that require closer supervision.  Such problems havesupervision, but do not developed to the point which requiresrequire a "special mention"“special mention” rating. This category also covers situations where the BankCompany 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. Loans that received modification to provide a deferral of interest and or principal for up to 90 days that complied with the CARES Act criteria were rated watch by management.

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

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



6.  Doubtful - A loan classified as "doubtful"“doubtful” has all the weaknesses inherent in oneof 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"“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 rathervalue. Rather, this classification indicates that it is not practical or desirable to defer writing off this loan even though partial recovery may be affectedoccur in the future.

Loans graded as “excellent,” “above average,” “good” and “watch” are treated as “pass” for grading purposes. The following table provides a breakdown of the loan portfolio by credit quality indicator at SeptemberJune 30, 2017:2020:

(Dollars in thousands)                   
Commercial Credit Exposure - By
Internally Assigned Grade
 Construction 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse Lines
 
Residential
Real Estate
Construction 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse Lines
 
Residential
Real Estate
Grade:          
Pass $127,277
 $86,668
 $271,440
 $193,535
 $40,994
$125,875
 $211,978
 $553,192
 $297,093
 $84,997
Special Mention 327
 3,574
 13,888
 —
 673
—
 2,819
 14,533
 —
 888
Substandard —
 780
 6,054
 —
 291
9,307
 1,216
 24,551
 —
 1,977
Doubtful —
 3,009
 —
 —
 —
—
 236
 —
 —
 —
Total $127,604
 $94,031
 $291,382
 $193,535
 $41,958
$135,182
 $216,249
 $592,276
 $297,093
 $87,862

Consumer Credit Exposure -
By Payment Activity
 
Loans To
Individuals
 Other
Loans To
Individuals
 Other loans
    
Performing $22,233
 $186
$27,807
 $128
Non-performing 378
 —
513
 —
Total $22,611
 $186
$28,320
 $128




The following table provides a breakdown of the loan portfolio by credit quality indicator at December 31, 2016:2019:
(Dollars in thousands)                   
Commercial Credit Exposure - By
Internally Assigned Grade
 Construction 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse
Lines
 
Residential
Real Estate
Construction 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse
Lines
 
Residential
Real Estate
Grade:          
Pass $95,548
 $91,908
 $223,435
 $216,259
 $43,950
$147,132
 $135,804
 $538,104
 $235,808
 $87,512
Special Mention 301
 7,102
 14,334
 —
 244
—
 1,990
 9,994
 864
 922
Substandard 186
 611
 4,624
 —
 597
1,807
 1,477
 19,557
 —
 1,825
Doubtful —
 29
 —
 —
 —
—
 —
 —
 —
 —
Total $96,035
 $99,650
 $242,393
 $216,259
 $44,791
$148,939
 $139,271
 $567,655
 $236,672
 $90,259

Consumer Credit Exposure - By
Payment Activity
 
Loans To
Individuals
 Other
Loans To
Individuals
 Other loans
Performing $23,375
 $207
$31,912
 $137
Non-performing 361
 —
692
 —
Total $23,736
 $207
$32,604
 $137

At June 30, 2020, there were $75.1 million of Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans which are 100% guaranteed by the SBA and, accordingly, 0 reserve was provided for such loans.
Impaired Loans
Loans are considered to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan agreement, including scheduled interest payments. When a loan is placed on non-accrual status, it is also considered to be impaired. Loans are placed on non-accrual status when: (1) the full collection of interest or


principal becomes uncertain or (2) theythe loans are contractually past due 90 days or more as to interest or principal payments unless the loans are both well secured and in the process of collection.


The following tables summarize the distribution of the allowance for loan losses and loans receivable by loan class and impairment method at SeptemberJune 30, 20172020 and December 31, 2016: 
September 30, 2017
(Dollars in thousands) Construction
 
Commercial
Business
 
Commercial
Real Estate

 
Mortgage
Warehouse Lines
 
Residential
Real Estate

 
Loans to
Individuals
 Other
 Unallocated
 Total
Allowance for loan losses:                  
Individually evaluated for impairment $—
 $245
 $79
 $—
 $—
 $—
 $—
 $—
 $324
Loans acquired with deteriorated credit quality —
 —
 —
 —
 —
 —
 —
 —
 —
Collectively evaluated for impairment 1,594
 1,170
 2,664
 871
 388
 118
 —
 673
 7,478
Ending Balance $1,594
 $1,415
 $2,743
 $871
 $388
 $118
 $—
 $673
 $7,802
                   
Loans receivable:                  
Individually evaluated for impairment $231
 $3,521
 $5,846
 $—
 $74
 $378
 $—
 $—
 $10,050
Loans acquired with deteriorated credit quality —
 258
 596
 —
 —
 —
 —
 —
 854
Collectively evaluated for impairment 127,373
 90,252
 284,940
 193,535
 41,884
 22,233
 186
 —
 760,403
Ending Balance $127,604
 $94,031
 $291,382
 $193,535
 $41,958
 $22,611
 $186
 $—
 $771,307
2019:

December 31, 2016
 June 30, 2020
(Dollars in thousands)Construction
 
Commercial
Business
 
Commercial
Real Estate

 
Mortgage
Warehouse Lines
 
Residential
Real Estate

 
Loans to
Individuals
 Other loans
 Unallocated
 Total
Allowance for loan losses:                 
Individually evaluated for impairment$—
 $89
 $28
 $—
 $—
 $—
 $—
 $—
 $117
Loans acquired with deteriorated credit quality—
 —
 8
 —
 —
 —
 —
 —
 8
Collectively evaluated for impairment1,661
 1,691
 6,583
 1,337
 506
 182
 


 41
 12,001
Ending Balance$1,661
 $1,780
 $6,619
 $1,337
 $506
 $182
 $—
 $41
 $12,126
                  
Loans receivable:                 
Individually evaluated for impairment$9,307
 $1,530
 $7,436
 $—
 $836
 $513
 $—
 $—
 $19,622
Loans acquired with deteriorated credit quality—
 321
 5,163
 —
 519
 —
 —
 —
 6,003
Collectively evaluated for impairment125,875
 214,398
 579,677
 297,093
 86,507
 27,807
 128
 —
 1,331,485
Ending Balance$135,182
 $216,249
 $592,276
 $297,093
 $87,862
 $28,320
 $128
 $—
 1,357,110
Deferred loan (fees) costs, net                (1,674)
                 $1,355,436
December 31, 2019
(Dollars in thousands) Construction 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse Lines
 
Residential
Real Estate
 
Loans to
Individuals
 Other Unallocated TotalConstruction 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse Lines
 
Residential
Real Estate
 
Loans to
Individuals
 Other loans Unallocated Total
Allowance for loan losses:                                   
Individually evaluated for impairment $7
 $101
 $114
 $—
 $38
 $—
 $—
 $—
 $260
$8
 $7
 $50
 $—
 $—
 $—
 $—
 $—
 $65
Loans acquired with deteriorated credit quality —
 —
 —
 —
 —
 —
 —
 —
 —
—
 3
 1
 —
 —
 —
 —
 —
 4
Collectively evaluated for impairment 1,197
 1,631
 2,460
 973
 329
 112
 —
 532
 7,234
1,381
 1,399
 4,473
 1,083
 412
 185
 —
 269
 9,202
Ending Balance $1,204
 $1,732
 $2,574
 $973
 $367
 $112
 $—
 $532
 $7,494
$1,389
 $1,409
 $4,524
 $1,083
 $412
 $185
 $—
 $269
 $9,271
                                   
Loans receivable:                                   
Individually evaluated for impairment $391
 $947
 $3,817
 $—
 $544
 $337
 $—
 $—
 $6,036
$1,807
 $1,251
 $6,171
 $—
 $708
 $692
 $—
 $—
 $10,629
Loans acquired with deteriorated credit quality —
 191
 930
 —
 —
 —
 —
 —
 1,121
—
 334
 5,419
 —
 504
 —
 —
 —
 6,257
Collectively evaluated for impairment 95,644
 98,512
 237,646
 216,259
 44,247
 23,399
 207
 —
 715,914
147,132
 137,686
 556,065
 236,672
 89,047
 31,912
 137
 —
 1,198,651
Ending Balance $96,035
 $99,650
 $242,393
 $216,259
 $44,791
 $23,736
 $207
 $—
 $723,071
$148,939
 $139,271
 $567,655
 $236,672
 $90,259
 $32,604
 $137
 $—
 1,215,537
Deferred loan (fees) costs, net                491
                $1,216,028



The activity in the allowance for loan loss by loan class for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 was as follows:

(Dollars in thousands) Construction 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse Lines
 
Residential
Real Estate
 Loans to Individuals Other Unallocated Total
Balance - July 1, 2017 $1,455
 $1,437
 $2,991
 $902
 $385
 $120
 $—
 $417
 $7,707
Provision charged/(credited) to operations 139
 39
 (252) (31) 3
 (4) —
 256
 150
Loans charged off —
 (61) —
 —
 —
 —
 —
 —
 (61)
Recoveries of loans charged off —
 —
 4
 —
 —
 2
 —
 —
 6
Balance - September 30, 2017 $1,594
 $1,415
 $2,743
 $871
 $388
 $118
 $—
 $673
 $7,802
                   
Balance - July 1, 2016 $975
 $1,230
 $3,150
 $1,190
 $294
 $119
 $—
 $524
 $7,482
Provision charged/(credited) to operations 190
 486
 (448) (46) 5
 (9) —
 (178) —
Loans charged off —
 —
 —
 —
 —
 —
 —
 —
 —
Recoveries of loans charged off —
 3
 —
 —
 —
 1
 —
 —
 4
Balance - September 30, 2016 $1,165
 $1,719
 $2,702
 $1,144
 $299
 $111
 $—
 $346
 $7,486
 (Dollars in thousands) Construction 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse Lines
 
Residential
Real Estate
 Loans to Individuals Other Unallocated Total
Balance - January 1, 2017 $1,204
 $1,732
 $2,574
 $973
 $367
 $112
 $—
 $532
 $7,494
Provision charged/(credited) to operations 390
 (259) 156
 (102) 122
 2
 —
 141
 450
Loans charged off —
 (61) —
 —
 (101) —
 —
 —
 (162)
Recoveries of loans charged off —
 3
 13
 —
 —
 4
 —
 —
 20
Balance - September 30, 2017 $1,594
 $1,415
 $2,743
 $871
 $388
 $118
 $—
 $673
 $7,802
                   
Balance - January 1, 2016 $1,025
 $2,005
 $3,049
 $866
 $288
 $109
 $—
 $218
 7,560
Provision charged/(credited) to operations 140
 (190) (665) 278
 11
 (2) —
 128
 (300)
Loans charged off —
 (101) (60) —
 —
 —
 —
 —
 (161)
Recoveries of loans charged off —
 5
 378
 —
 —
 4
 —
 —
 387
Balance - September 30, 2016 $1,165
 $1,719
 $2,702
 $1,144
 $299
 $111
 $—
 $346
 $7,486

Balance - (Dollars in thousands) Construction 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse Lines
 
Residential
Real Estate
 Loans to Individuals Other Loans Unallocated Total
Balance - April 1, 2020 $1,706
 $1,771
 $4,800
 $1,027
 $430
 $188
 $—
 $79
 $10,001
Provision charged/(credited) to operations (45) 9
 1,819
 310
 76
 (6) —
 (38) 2,125
Loans charged off —
 —
 —
 —
 —
 —
 —
 —
 —
Recoveries of loans charged off —
 —
 —
 —
 —
 —
 —
 —
 —
Balance - June 30, 2020 $1,661
 $1,780
 $6,619
 $1,337
 $506
 $182
 $—
 $41
 $12,126
                   
Balance - April 1, 2019 $1,794
 $1,615

$3,640
 $582
 $426
 $155
 $—
 $492
 $8,704
Provision charged/(credited) to operations (35) 276

189
 351
 55
 (13) 43
 (466) 400
Loans charged off —
 (345)
(75) —
 —
 —
 (43) —
 (463)
Recoveries of loans charged off —
 —

—
 —
 —
 —
 —
 —
 —
Balance - June 30, 2019 $1,759
 $1,546

$3,754
 $933
 $481
 $142
 $—
 $26
 $8,641
                   
(Dollars in thousands) Construction 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse Lines
 
Residential
Real Estate
 Loans to Individuals Other Loans Unallocated Total
Balance - January 1, 2020 $1,389
 $1,409
 $4,524
 $1,083
 $412
 $185
 $—
 $269
 $9,271
Provision charged/(credited) to operations 272
 536
 2,095
 254
 94
 (3) —
 (228) 3,020
Loans charged off —
 (165) —
 —
 —
 —
 —
 —
 (165)
Recoveries of loans charged off —
 —
 —
 —
 —
 —
 —
 —
 —
Balance - June 30, 2020 $1,661
 $1,780
 $6,619
 $1,337
 $506
 $182
 $—
 $41
 $12,126
                   
January 1, 2019 $1,732
 $1,829
 $3,439
 $731
 $431
 $148
 $—
 $92
 $8,402
Provision charged/(credited) to operations 27
 62
 390
 202
 50
 (8) 43
 (66) 700
Loans charged off —
 (345) (75) —
 —
 —
 (43) —
 (463)
Recoveries of loans charged off —
 —
 —
 —
 —
 2
 —
 —
 2
Balance - June 30, 2019 $1,759
 $1,546
 $3,754
 $933
 $481
 $142
 $—
 $26
 $8,641
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.


Impaired Loans Receivables (By Class) –September 30, 2017
      Three Months Ended June 30, 2020 Six Months Ended June 30, 2020
(Dollars in thousands)       Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 Average
Recorded
Investment		 Interest
Income
Recognized
 
Recorded
Investment

 
Unpaid
Principal
Balance

 
Related
Allowance

 
Average
Recorded
Investment

 
Interest
Income
Recognized

 Average
Recorded
Investment
 Interest
Income
Recognized
With no allowance:                           
Commercial:                           
Construction $231
 $231
 $—
 $231
 $3
 $201
 $9
$9,307
 $9,307
 $—
 $9,304
 $23
 $6,203
 $48
Commercial Business 675
 675
 —
 693
 25
 725
 123
1,637
 3,057
 —
 1,621
 17
 1,358
 35
Commercial Real Estate 3,465
 3,465
 —
 2,880
 18
 2,808
 128
8,856
 11,233
 —
 8,884
 91
 8,338
 182
Mortgage Warehouse Lines —
 —
 —
 —
 —
 —
 —
—
 —
 —
 —
 —
 —
 ���
Subtotal 4,371
 4,371
 —
 3,804
 46
 3,734
 260
19,800
 23,597
 —
 19,809
 131
 15,899
 265
Residential Real Estate 74
 74
 —
 76
 —
 166
 —
1,355
 1,620
 —
 1,360
 9
 1,282
 18
Consumer:            
  
           
  
Loans to Individuals 378
 378
 —
 366
 —
 332
 —
513
 635
 —
 517
 —
 599
 —
Other —
 —
 —
 —
 —
 —
 —
Other loans—
 —
 —
 —
 —
 —
 —
Subtotal 378
 378
 —
 366
 —
 332
 —
513
 635
 —
 517
 —
 599
 —
With no allowance: $4,823
 $4,823
 $—
 $4,246
 $46
 $4,232
 $260
$21,668
 $25,852
 $—
 $21,686
 $140
 $17,780
 $283
            
  
           
  
With an allowance:                           
Commercial:                           
Construction $—
 $—
 $—
 $—
 $—
 $114
 $—
$—
 $—
 $—
 $—
 $—
 $—
 $—
Commercial Business 3,104
 3,104
 245
 3,045
 44
 2,745
 171
214
 214
 89
 140
 —
 398
 —
Commercial Real Estate 2,977
 2,977
 79
 3,092
 44
 2,764
 129
3,743
 3,743
 36
 3,675
 51
 4,113
 104
Mortgage Warehouse Lines —
 —
 —
 —
 —
 —
 —
—
 —
 —
 —
 —
 —
 —
Subtotal 6,081
 6,081
 324
 6,137
 88
 5,623
 300
3,957
 3,957
 125
 3,815
 51
 4,511
 104
Residential Real Estate —
 —
 —
 —
 —
 100
 —
—
 —
 —
 —
 —
 —
 —
Consumer:                           
Loans to Individuals —
 —
 —
 —
 —
 —
 —
—
 —
 —
 —
 —
 —
 —
Other —
 —
 —
 —
 —
 —
 —
Other loans—
 —
 —
 —
 —
 —
 —
Subtotal —
 —
 —
 —
 —
 —
 —
—
 —
 —
 —
 —
 —
 —
With an allowance: $6,081
 $6,081
 $324
 $6,137
 $88
 $5,723
 $300
$3,957
 $3,957
 $125
 $3,815
 $51
 $4,511
 $104
Total:            
  
           
  
Construction 231
 231
 —
 231
 3
 315
 9
9,307
 9,307
 —
 9,304
 23
 6,203
 48
Commercial Business 3,779
 3,779
 245
 3,738
 69
 3,470
 294
1,851
 3,271
 89
 1,761
 17
 1,756
 35
Commercial Real Estate 6,442
 6,442
 79
 5,972
 62
 5,572
 257
12,599
 14,976
 36
 12,559
 142
 12,451
 286
Mortgage Warehouse Lines —
 —
 —
 —
 —
 —
 —
—
 —
 —
 —
 —
 —
 —
Residential Real Estate 74
 74
 —
 76
 —
 266
 —
1,355
 1,620
 —
 1,360
 9
 1,282
 18
Consumer 378
 378
 —
 366
 —
 332
 —
513
 635
 —
 517
 —
 599
 —
Total $10,904
 $10,904
 $324
 $10,383
 $134
 $9,955
 $560
$25,625
 $29,809
 $125
 $25,501
 $191
 $22,291
 $387


Impaired Loans Receivables (By Class) – December 31, 2016
(Dollars in thousands      
 
Recorded
Investment

 
Unpaid
Principal Balance

 
Related
Allowance

December 31, 2019 
(Dollars in thousands)
Recorded
Investment
 
Unpaid
Principal Balance
 
Related
Allowance
 
With no allowance:            
Commercial:            
Construction $186
 $186
 $—
$—
 $—
 $—
 
Commercial Business 883
 1,054
 —
680
 1,971
 —
 
Commercial Real Estate 1,380
 1,380
 —
7,141
 8,204
 —
 
Mortgage Warehouse Lines —
 —
 —
—
 —
 —
 
Subtotal 2,449
 2,620
 —
7,821
 10,175
 —
 
Residential Real Estate 244
 244
 —
1,212
 1,465
 —
 
Consumer:            
Loans to Individuals 337
 337
 —
692
 802
 —
 
Other —
 —
 —
Other loans—
 —
 —
 
Subtotal 337
 337
 —
692
 802
 —
 
With no allowance $3,030
 $3,201
 $—
$9,725
 $12,442
 $—
 
With an allowance:            
Commercial:            
Construction $205
 $205
 $7
$1,807
 $1,807
 $8
 
Commercial Business 255
 255
 101
905
 993
 10
 
Commercial Real Estate 3,367
 3,367
 114
4,449
 5,757
 51
 
Mortgage Warehouse Lines —
 —
 —
—
 —
 —
 
Subtotal 3,827
 3,827
 222
7,161
 8,557
 69
 
Residential Real Estate 300
 316
 38
—
 —
 —
 
Consumer:            
Loans to Individuals —
 —
 —
—
 —
 —
 
Other —
 —
 —
Other loans—
 —
 —
 
Subtotal —
 —
 —
—
 —
 —
 
With an allowance $4,127
 $4,143
 $260
$7,161
 $8,557
 $69
 
            
Total:            
Construction 391
 391
 7
$1,807
 $1,807
 $8
 
Commercial Business 1,138
 1,309
 101
1,585
 2,964
 10
 
Commercial Real Estate 4,747
 4,747
 114
11,590
 13,961
 51
 
Mortgage Warehouse Lines —
 —
 —
—
 —
 —
 
Residential Real Estate 544
 560
 38
1,212
 1,465
 —
 
Consumer 337
 337
 —
692
 802
 —
 
Total $7,157
 $7,344
 $260
$16,886
 $20,999
 $69
 





Impaired Loans Receivables (By Class)
Impaired Loans Receivables (By Class) – September 30, 2016        
 Three Months Ended September 30, 2016 Nine Months Ended September 30, 2016Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
(Dollars in thousands) 
Average
Recorded
Investment
 Interest Income Recognized Average
Recorded
Investment		 Interest Income Recognized
Average
Recorded
Investment
 Interest Income Recognized Average
Recorded
Investment		 Interest Income Recognized
With no allowance:               
Commercial:               
Construction $342
 $2
 $284
 $5
$34
 $1
 $69
 $2
Commercial Business 742
 3
 537
 11
954
 26
 953
 52
Commercial Real Estate 1,640
 23
 1,577
 70
1,432
 17
 1,590
 33
Mortgage Warehouse Lines —
 —
 —
 —
—
 —
 


 —
Subtotal 2,724
 28
 2,398
 86
2,420
 44
 2,612
 87
Residential Real Estate 259
 —
 885
 (2)1,333
 —
 1,243
 —
               
Consumer:      
  
     
  
Loans to Individuals 263
 —
 263
 —
683
 —
 617
 —
Other —
 —
 —
 —
Other loans—
 —
 


 —
Subtotal 263
 —
 263
 —
683
 —
 617
 —
With no allowance: $3,246
 $28
 $3,546
 $84
With no allowance$4,436
 $44
 $4,472
 $87
With an allowance:      
  
     
  
Commercial:               
Construction $—
 $—
 $—
 $—
$—
 $—
 $—
 


Commercial Business 345
 —
 233
 13
301
 1
 1,233
 3
Commercial Real Estate 3,372
 11
 3,681
 34
4,700
 59
 4,526
 117
Mortgage Warehouse Lines —
 —
 —
 —
—
 —
 —
 


Subtotal 3,717
 11
 3,914
 47
5,001
 60
 5,759
 120
Residential Real Estate 301
 —
 167
 —
—
 —
 —
 —
Consumer:      
  
     
  
Loans to Individuals —
 —
 —
 —
—
 —
 —
 —
Other —
 —
 —
 —
Other loans—
 —
 —
 —
Subtotal —
 —
 —
 —
—
 —
 —
 —
With an allowance: $4,018
 $11
 $4,081
 $47
With an allowance$5,001
 $60
 $5,759
 $120
Total:      
  
     
  
Construction 342
 2
 284
 5
$34
 $1
 69
 2
Commercial Business 1,087
 3
 770
 24
1,255
 27
 2,186
 55
Commercial Real Estate 5,012
 34
 5,258
 104
6,132
 76
 6,116
 150
Mortgage Warehouse Lines —
 —
 —
 —
—
 —
 —
 —
Residential Real Estate 560
 —
 1,052
 (2)1,333
 —
 1,243
 —
Consumer 263
 —
 263
 —
683
 —
 617
 —
Total $7,264
 $39
 $7,627
 $131
$9,437
 $104
 $10,231
 $207



Purchased Credit-Impaired Loans
Purchased credit-impaired loans (“PCI”) are loans acquired at a discount that are due in part to the deteriorated credit quality. On November 8, 2019, as part of the Shore Merger, the Company acquired purchased credit-impaired loans with loan balances totaling $6.3 million and fair values totaling $4.6 million. The following table presents additional information regarding purchased credit-impaired loans at SeptemberJune 30, 20172020 and December 31, 2016:2019:
(Dollars in thousands) September 30, 2017
 December 31, 2016
June 30, 2020 December 31, 2019
Outstanding balance $1,016
 $1,470
$7,479
 $8,038
Carrying amount $854
 $1,121
$6,003
 $6,257

Changes in accretable discount for purchased credit-impaired loans for the three and ninesix months ended SeptemberJune 30, 20172020 and SeptemberJune 30, 20162019 were as follows:
 Three months ended September 30, Nine months ended September 30,Three months ended June 30, Six months ended June 30,
(Dollars in thousands) 2017 2016 2017 20162020 2019 2020 2019
Balance at beginning of period $171
 $44
 $30
 $73
$522
 $129
 $657
 $164
Transfer from non-accretable discount —
 —
 161
 —
Acquisition of impaired loans—
 —
 —
 —
Accretion of discount (23) (7) (43) (36)(96) (35) (231) (70)
Balance at end of period $148
 $37
 $148
 $37
$426
 $94
 $426
 $94

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 the process of foreclosure (dollars in thousands):
September 30, 2017 December 31, 2016
Number
of  loans
 
Recorded
Investment
 
Number of 
loans
 
Recorded
Investment
— $—
 4 $822
June 30, 2020 December 31, 2019
Number of loans Recorded Investment Number of loans Recorded Investment
2 $475
 2 $382

At September 30, 2017, there was one residential property with a fair value of $190,000 held in other real estate owned. At December 31, 2016, there were no residential properties held in other real estate owned.
Troubled Debt Restructurings
In the normal course of business, the Bank 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 repayment stream with the borrower’s cash flow. A modified loan would be considered a troubled debt restructuring (“TDR”) if the Bank grants a concession to a borrower and has determined that the borrower is troubled (i.e., experiencing financial difficulties).
If the Bank restructures a loan to a troubled borrower, the loan terms (i.e., interest rate, payment, amortization period and maturity date) may be modified in various ways to enable the borrower to cover the modified debt service payments based on current financial statements and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms may only be offered for only that time period. Where possible, the Bank would attemptattempts to obtain additional collateral and/or secondary repayment sources at the time of the restructuring in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. The Bank 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,TDR, applicable guidance requires that a creditor must separately conclude that the restructuring constitutes a concession and the borrower is experiencing financial difficulties.
There were no0 loans modified as a TDR during the threesix months ended SeptemberJune 30, 20172020 and there was one commercial real estate loan with a pre- and post-modification recorded investment of $2.3 million that was modified as a TDR during the nine months ended SeptemberJune 30, 2017. The concession to the borrower was a change in monthly payments to interest only for a period of time.2019. There were no loans modified as a TDR during the three months ended September 30, 2016 and one loan with a recorded investment of $456,000 that was modified as a TDR during the nine months ended September 30, 2016. This loan subsequently defaulted within twelve months of restructuring. There were no troubled debt restructurings0 TDRs that subsequently defaulted within twelve12 months of restructuring during the three and ninesix months ended SeptemberJune 30, 2017.2020.

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. As of June 30, 2020, $147.5 million of loans to borrowers had been modified to defer the payment of interest and or principal for up to 90 days and were comprised of $139.1 million of commercial loans and $8.4 million of consumer loans. These modified loans were not considered to be TDRs.


Deferrals for $49.2 million of these modified loans expired in July 2020, at which time a full monthly loan payment was due. As of July 31, 2020, customers had made the required monthly loan payments on $45.6 million of these loans, payments were due on $2.6 million of these loans and one loan relationship totaling $1.0 million received a second modification to extend the deferral for another 90 days.

As of July 31, 2020, loan deferrals totaled $99.4 million and were comprised of $94.3 million of commercial loans and $5.1 million of consumer loans.

(6)   Revenue from Contracts with Customers

(5)All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The following table presents the Company’s sources of non-interest income for the three and six months ended June 30, 2020 and 2019. Items outside the scope of ASC 606 are noted as such.
 Three months endedSix months ended
(Dollars in thousands)June 30, 2020 June 30, 2019June 30, 2020 June 30, 2019
Service charges on deposit accounts:      
  Overdraft fees$30
 $83
$125
 $172
  Other102
 76
220
 153
Interchange income152
 118
301
 221
Other income - in scope112
 112
215
 206
Gain on sale of OREO—
 137
—
 137
Income on bank-owned life insurance (1)
264
 149
444
 288
Net gains on sales of loans (1)
2,121
 1,160
3,591
 2,205
Loan servicing fees (1)
157
 180
323
 359
Gains on sales and calls of securities (1)
10
 —
18
 —
Other income (1)
152
 155
319
 295
 $3,100
 $2,170
$5,556
 $4,036
(1) Not within the scope of ASC 606
(7) Share-Based Compensation
The Company’s share-based incentive plans (“Stock Plans”) authorize the issuance of an aggregate of 485,873945,873 shares of the Company’s common stock (as adjusted for stock dividends) pursuant tothrough awards that may be granted in the form of stock options to purchase common stock (“Options”)(each an “Option” and collectively, “Options”), awards of restricted shares of common stock (“Stock Awards”).  , restricted stock units (“RSUs”), stock appreciation rights or such other awards as the Compensation Committee of the Board of Directors (the “Compensation Committee”) may determine.
As of SeptemberJune 30, 2017,2020, there were 127,292398,591 shares of common stock available for future grants under the Stock Plans.
The following table summarizes stock optionOptions activity during the ninesix months ended SeptemberJune 30, 2017:2020:
(Dollars in thousands, except share amounts) Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value
Outstanding at January 1, 2017 165,819
 $7.35
    
Granted 9,900
 18.65
    
Exercised (16,556) 8.05
    
Forfeited (1,630) 16.07
    
Expired —
 —
    
Outstanding at September 30, 2017 157,533
 $7.93
 4.4 $1,611
Exercisable at September 30, 2017 139,669
 $7.14
 4.0 $1,538
(Dollars in thousands, except share amounts)Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value
Outstanding at January 1, 2020122,151
 $9.85
 3.9 1,500
Granted27,000
 17.53
 9.6  
Outstanding at June 30, 2020149,151
 $11.24
 4.5 $490
        
Exercisable at June 30, 2020115,751
 $9.29
 3.2 $490



The fair value of each optionOption and the significant weighted average assumptions used to calculate the fair value of the optionsOptions granted forduring the ninesix months ended SeptemberJune 30, 20172020 were as follows:
 Grant Date
 January 6, 2020March 19, 2020
Fair value of options granted$5.27
$2.10
Risk-free rate of return1.72%1.00%
Expected option life in years7
7
Expected volatility24.53%24.63%
Expected dividends1.35%2.86%
Fair value of options granted$6.05
Risk-free rate of return2.45%
Expected option life in years7
Expected volatility31.25%
Expected dividends (1)
1.19%
(1) The Company declared its first cash dividend on September 15, 2016.
Share-based compensation expense related to optionsOptions was $16,000$45,000 and $11,000$35,000 for the threesix months ended SeptemberJune 30, 20172020 and 2016, respectively. Share-based compensation expense related to options was $44,000 and $33,000 for the nine months ended September 30, 2017 and 2016,2019, respectively. As of SeptemberJune 30, 2017,2020, there was approximately $87,000$122,000 of unrecognized compensation cost related to non-vested stock options.unvested Options.
The following table summarizes the activity in non-vested restricted sharesStock Awards for the ninesix months ended SeptemberJune 30, 2017:2020:
(Dollars in thousands, except share amounts) Number of Shares Average Grant-Date Fair ValueNumber of Shares Average Grant-Date Fair Value
Non-vested at January 1, 2017 143,259
 $9.02
Outstanding at January 1, 2020134,359
 $13.84
Granted 61,900
 17.96
33,400
 16.53
Vested (48,037) 10.60
(37,651) 17.38
Forfeited (1,539) 12.49
Non-vested at September 30, 2017 155,583
 $12.06
Non-vested at June 30, 2020130,108
 $13.51

Share-based compensation expense related to stock grantsStock Awards was $239,000$537,000 and $157,000$530,000 for the threesix months ended SeptemberJune 30, 20172020 and 2016, respectively. Share-based compensation expense related to stock grants was $695,000 and $497,000 for the nine months ended September 30, 2017 and 2016,2019, respectively. As of SeptemberJune 30, 2017,2020, there was approximately $1.8 million of unrecognized compensation cost related to non-vestedunvested Stock Awards.
The following table summarizes the activity in RSUs for the six months ended June 30, 2020:
(Dollars in thousands, except share amounts)Number of Shares Average Grant-Date Fair Value
Outstanding at January 1, 202010,300
 $19.38
Granted18,950
 21.92
Vested(3,433) 19.38
Non-vested at June 30, 202025,817
 $21.24

Share-based compensation expense related to RSUs was $112,000 and $33,000 for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, there was approximately $303,000 of unrecognized compensation cost related to unvested Stock Awards.
RSUs vest pro-rata over 3 years subject to achievement of certain established performance metrics. The ultimate number of RSUs earned, if any, will depend on the performance measured over each annual period during the applicable 3-year performance period. If performance measures are achieved, the RSUs will vest on the date of certification of performance achievement by the Compensation Committee following each annual performance period. On March 19, 2020, the Compensation Committee certified that the applicable performance metrics were achieved at 138% of target for 2019. Awards of RSUs are settled in cash unless the recipient timely elects for the RSUs to be settled in shares of common stock. The RSUs are recorded as a liability by the Company and the liability is adjusted as the market value of the Company's stock grants.price changes..




(6)(8) Benefit Plans
The Bank has a 401(k) plan whichthat covers substantially all employees with six months or more of service. The Bank'sBank’s 401(k) plan permits all eligible employees to make contributions to the plan up to the IRS salary deferral limit. The Bank’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.  The Company recognizes the over-funded or under-funded status of a defined benefit post-retirement plan as an asset or liability on its balance sheet and recognizes changes in that funded status in the year in which the changes occur through comprehensive income. At June 30, 2020 and December 31, 2019, the Company’s President and Chief Executive Officer was the only eligible participant in the supplemental executive retirement plans.

In connection with the benefit plans, the Bank has life insurance policies on the lives of its executives,executive officers, directors and certain employees. The Bank is the owner and beneficiary of these policies. The cash surrender values of these policies totaled approximately $24.1$36.9 million and $22.2$36.7 million at SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively.

The components of net periodic expense for the Company’s supplemental executive retirement plans for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 were as follows:
Three Months Ended
June 30,		 Six Months Ended
June 30,
(Dollars in thousands) Three Months Ended
September 30,		 Nine Months Ended
September 30,		2020 2019 2020 2019
 2017
 2016
 2017
 2016
Service cost $67
 $58
 $178
 $162
$45
 $47
 $92
 $94
Interest cost 39
 49
 117
 134
41
 41
 82
 82
Actuarial gain recognized (32) (48) (75) (120)(56) (44) (100) (88)
Total $74
 $59
 $220
 $176
$30
 $44
 $74
 $88



(7)(9) Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)

Other comprehensive income (loss) is the total of (1) net income (loss), and (2) all other changes in equity from non-shareholder sources, which are referred to as other comprehensive income (loss).  The components of accumulated other comprehensive loss,income (loss), and the related tax effects, are as follows:
(Dollars in thousands) 
Before-Tax
Amount
 
Income Tax
Effect
 
Net-of-Tax
Amount
September 30, 2017      
Unrealized net holding gains on available-for-sale securities $189
 $(108) $81
Unrealized impairment loss on held to maturity security (501) 170
 (331)
Unfunded pension liability - plan actuarial gains 34
 (14) 20
Accumulated other comprehensive loss $(278) $48
 $(230)
 June 30, 2020
(Dollars in thousands)
Before-Tax
Amount
 
Income Tax
Effect
 
Net-of-Tax
Amount
Net unrealized holding gains on investment securities available for sale$1,932
 $(480) $1,452
Unrealized impairment loss on held to maturity security(484) 115
 (369)
Gains on unfunded pension liability405
 (114) 291
Accumulated other comprehensive income$1,853
 $(479) $1,374
December 31, 2016      
Unrealized net holding losses on available-for-sale securities $(464) $130
 $(334)
Unrealized impairment loss on held to maturity security (501) 170
 (331)
Unfunded pension liability - plan actuarial gains $109
 $(44) $65
Accumulated other comprehensive loss $(856) $256
 $(600)
 December 31, 2019
(Dollars in thousands)
Before-Tax
Amount
 
Income Tax
Effect
 
Net-of-Tax
Amount
Net unrealized holding gains on investment securities available for sale$414
 $(111) $303
Unrealized impairment loss on held to maturity security(492) 118
 (374)
Gains on unfunded pension liability364
 (102) 262
Accumulated other comprehensive income$286
 $(95) $191




Changes in the components of accumulated other comprehensive income (loss) are as follows and are presented net of tax:tax for the three and six months ended June 30, 2020 and June 30, 2019:

(Dollars 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)
Three Months Ended September 30, 2017:        
Balance, beginning of period $77
 $(331) $39
 $(215)
Other comprehensive income before reclassifications 11
 —
 —
 11
Amounts reclassified from accumulated other comprehensive income —
 —
 (19) (19)
Reclassification adjustment for gain realized in income (7) —
 —
 (7)
Other comprehensive income/(loss) 4
 —
 (19) (15)
Balance, end of period $81
 $(331) $20
 $(230)
         
Three Months Ended September 30, 2016:        
Balance, beginning of period $890
 $(331) $88
 $647
Other comprehensive income/(loss) before reclassifications (134) —
 17
 (117)
Amounts reclassified from accumulated other comprehensive income —
 —
 (29) (29)
Other comprehensive loss (134) —
 (12) (146)
Balance, end of period $756
 $(331) $76
 $501
(Dollars 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)
Nine Months Ended September 30, 2017:        
Balance, beginning of period $(334) $(331) $65
 $(600)
Other comprehensive income before reclassifications 470
 —
 —
 470
Amounts reclassified from accumulated other comprehensive income —
 —
 (45) (45)
Reclassification adjustment for gain realized in income (55) —
 —
 (55)
Other comprehensive income/(loss) 415
 —
 (45) 370
Balance, end of period $81
 $(331) $20
 $(230)
         
Nine Months Ended September 30, 2016:        
Balance, beginning of period $90
 $(331) $111
 $(130)
Other comprehensive income before reclassifications 666
 —
 37
 703
Amounts reclassified from accumulated other comprehensive income —
 —
 (72) (72)
Other comprehensive gain/(loss) 666
 —
 (35) 631
Balance, end of period $756
 $(331) $76
 $501
(Dollars 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 - April 1, 2020 $161
 $(372) $270
 $59
Other comprehensive income (loss) before reclassifications 1,298
 —
 60
 1,358
Amounts reclassified from accumulated other comprehensive income —
 3
 (39) (36)
Reclassification adjustment for gains realized in income (7) —
 —
 (7)
Other comprehensive income 1,291
 3
 21
 1,315
Balance - June 30, 2020 $1,452
 $(369) $291
 $1,374
         
Balance - April 1, 2019 $(608) $(381) $235
 $(754)
Other comprehensive income (loss) before reclassifications 770
 —
 42
 812
Amounts reclassified from accumulated other comprehensive income —
 2
 (31) (29)
Reclassification adjustment for gains realized in income —
 —
 —
 —
Other comprehensive income 770
 2
 11
 783
Balance - June 30, 2019 $162
 $(379) $246
 $29
         
January 1, 2020 $303
 $(374) $262
 $191
Other comprehensive income (loss) before reclassifications 1,157
 —
 99
 1,256
Amounts reclassified from accumulated other comprehensive income —
 5
 (70) (65)
Reclassification adjustment for gains realized in income (8) —
 —
 (8)
Other comprehensive income 1,149
 5
 29
 1,183
Balance - June 30, 2020 $1,452
 $(369) $291
 $1,374
         
January 1, 2019 $(1,679) $(382) $228
 $(1,833)
Other comprehensive income (loss) before reclassifications 1,841
 —
 80
 1,921
Amounts reclassified from accumulated other comprehensive income —
 3
 (62) (59)
Reclassification adjustment for gains realized in income —
 —
 —
 —
Other comprehensive income 1,841
 3
 18
 1,862
Balance - June 30, 2019 $162
 $(379) $246
 $29





(8)(10) Recent Accounting Pronouncements
ASU Update 2017-122016-13 - Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued Accounting Standards Update ("ASU") 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities," which is intended to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. While the Company continues to assess all potential impacts of the standard, it does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial statements.
ASU Update 2017-09 - Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09 "Scope of Modification Accounting," which clarifies Topic 718 Compensation-Stock Compensation, such that an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before modification. The standard indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before modification; and (3) the classification of the modification award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification.
The amendments are effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted, including adoption in an interim period.
The Company does not expect the adoption of this guidance to have a material impact on its 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.
The amendments are effective for public business entities 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 Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
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.

The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted as of the beginning of an annual period.

The Company does not expect the adoption of this guidance to have a material impact on its 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 effective dates: a public business entity that is an SEC filer should adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 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 to have a material impact on its 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 ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. 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 to have a material impact on its 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. 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 an 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. 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 has adopted this guidance and it did not 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 (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 are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal 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 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 to 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 FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) No. 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 amendmentsCompany, the provisions of this ASU are effective for fiscal years beginning after December 15, 2019,2022, 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 evaluatinghas completed the initial analysis of its financial assets and will continue to build and validate the CECL models in 2020 to evaluate the impact of the pending adoption of the new standard on its consolidated financial statements.

In April 2019, the FASB issued ASU Update 2016-02: Leases.2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this ASU make minor improvements to the Codification by eliminating certain inconsistencies and clarifying the current guidance.

In February 2016,June 2019, the FASB issued ASU 2016-02 "Leases2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief." From
This ASU provides optional targeted transition relief that allows reporting entities to irrevocably elect the lessee's perspective,fair value option on financial instruments that 1) were previously recorded at amortized cost and 2) are within the new standard establishes a right- of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability onscope of Topic 326 if the balance sheetinstruments are eligible 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.

fair value option under Topic 825. The new standardguidance is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019.

In November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). ASU 2019-10 provides that the FASB’s recently developed philosophy regarding the implementation of effective dates applies to ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), among other ASUs. For the Company, the provisions of this ASU are effective for fiscal years beginning after December 15, 2022, 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. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after,See the beginningdiscussions regarding the adoption 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 financing 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.ASU 2016-13 above.

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

In January 2016,Also in November 2019, the FASB issued ASU 2016-01 "Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." TheNo. 2019-11, “Financial Instruments - Credit Losses: Codification Improvements (Topic 326)” to clarify its new credit impairment guidance in theASC 326, based on implementation issues raised by stakeholders. ASU among other things, requires equity investments, with certain exceptions,2019-11 clarifies that expected recoveries are to be measured at fair value with changesincluded in fair value recognized in net income; simplifies the impairment assessmentallowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of equity investments without readily determinable fair values by requiring a qualitative assessmentthe prepayment assumptions applicable immediately prior to identify impairment; eliminates the requirement for public business entitiesrestructuring event; and extends the practical expedient to discloseexclude accrued interest receivable from all additional relevant disclosures involving the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost onbasis. For the balance sheet; requires public business entities to useCompany, the exit price notion when measuring the fair valueprovisions 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 guidance in this ASU isare effective for fiscal years beginning after December 15, 2017,2022, including interim periods within those fiscal years. The Company does not expectEarly adoption is permitted for all entities as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years. See the discussions regarding the adoption of this guidance to have a material impact on its consolidated financial statements.ASU 2016-13 above.

ASU 2014-9 Revenue from Contracts with Customers2020-02 - Financial Instruments - Credit Losses (Topic 606)326) and Leases (Topic 842)

In May 2014,January 2020, the FASB issued ASU 2014-9, deferredNo. 2020-02, “Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” This ASU adds and amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This 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 asis effective upon issuance. See the real estate, construction and software industries. The revenue standard's core principle is built ondiscussion regarding the contract between a vendor and a customer for the provisionadoption of ASU 2016-13 above.



goods and services. It attemptsASU 2020-03 - Codification Improvements to depictFinancial Instruments

In March 2020, the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the considerationFASB issued ASU No. 2020-3, “Codification Improvements 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.Financial Instruments.” This ASU isclarifies various financial instruments topics, including the CECL standard issued in 2016. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective for interim and annual reporting periods beginning after December 15, 2017.upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted onlybefore an entity’s adoption of ASU 2016-13. Other amendments are effective upon issuance of this ASU. See the discussion regarding the adoption of ASU 2016-13 above.

ASU 2020-04 - Reference Rate Reform (Topic 848)

In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848)" provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued, subject to meeting certain criteria. Under the new guidance, an entity can elect by accounting topic or industry subtopic to account for the modification of a contract affected by reference rate reform as a continuation of the existing contract, if certain conditions are met. In addition, the new guidance allows an entity to elect on a hedge-by-hedge basis to continue to apply hedge accounting for hedging relationships in which the critical terms change due to reference rate reform, if certain conditions are met. A one-time election to sell and/or transfer held-to-maturity debt securities that reference a rate affected by reference rate reform is also allowed. ASU No. 2020-04 became effective for all entities as of annual reporting periods beginning afterMarch 12, 2020 and will apply to all LIBOR reference rate modifications through December 15, 2016, including interim periods within that year.

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. The Company is currently evaluating the impact that the guidance will have on its revenue derived from sales of other real estate owned, debit card interchange fees, customer service charges for wires, money orders, safe deposit box rentals and other services provided to customers.31, 2022.

(9)(11) 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 of future values.  While management believes 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.  Securities classified as available for sale are reported at fair value utilizing quoted market prices on nationally recognized exchanges (Level 1) or by usingLevel 1 and Level 2 inputs.  For Level 2 securities, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the 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.  Impaired loans are those which the Company has measured and recognized impairment, generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third partythird-party appraisals of the collateral or discounted cash flows based on the expected proceeds.  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:
June 30, 2020
(Dollars in thousands) 
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 
Total Fair
Value
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 
Total Fair
Value
September 30, 2017:        
Securities available for sale:               
U.S. Treasury securities and obligations of U.S. Government
sponsored corporations (“GSE”) and agencies
 $—
 $1,987
 $—
 $1,987
Residential collateralized mortgage obligations- GSE —
 26,579
 —
 26,579
Residential mortgage backed securities – GSE —
 21,460
 —
 21,460
U.S. Treasury securities and obligations of U.S. Government
sponsored entities (“GSE”) and agencies
$—
 $3,753
 $—
 $3,753
Residential collateralized mortgage obligations - GSE—
 42,371
 —
 42,371
Residential mortgage backed securities - GSE—
 18,168
 —
 18,168
Obligations of state and political subdivisions —
 20,330
 —
 20,330
—
 31,623
 —
 31,623
Trust preferred debt securities – single issuer —
 2,357
 —
 2,357
Trust preferred debt securities - single issuer—
 1,327
 —
 1,327
Corporate debt securities 19,055
 5,910
 —
 24,965
17,756
 11,573
 —
 29,329
Other debt securities —
 12,598
 —
 12,598
—
 25,090
 —
 25,090
Interest rate lock derivative —
 65
 —
 65
—
 354
 —
 354
Total $19,055
 $91,286
 $—
 $110,341
$17,756
 $134,259
 $—
 $152,015
December 31, 2019
(Dollars in thousands) 
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 
Total Fair
Value
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
U.S. Treasury securities and obligations of U.S. Government
sponsored entities (“GSE”) and agencies
$—
 $764
 $—
 $764
Residential collateralized mortgage obligations - GSE—
 53,175
 —
 53,175
Residential mortgage backed securities - GSE—
 18,387
 —
 18,387
Obligations of state and political subdivisions —
 21,400
 —
 21,400
—
 33,519
 —
 33,519
Trust preferred debt securities – single issuer —
 2,272
 —
 2,272
Trust preferred debt securities - single issuer—
 1,442
 —
 1,442
Corporate debt securities 12,826
 8,942
 —
 21,768
11,151
 12,128
 —
 23,279
Other debt securities —
 839
 —
 839
—
 25,216
 —
 25,216
Interest rate lock derivative —
 123
 —
 123
—
 159
 —
 159
Total $12,826
 $91,091
 $—
 $103,917
$11,151
 $144,790
 $—
 $155,941


Certain assets and 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).  Assets and liabilities subject to fair value adjustments (impairment) on a nonrecurring basis for the nine months ended Septemberat June 30, 20172020 and the twelve months ended December 31, 20162019 were as follows:

(Dollars in thousands) 
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 
Total Fair
Value
September 30, 2017:        
Impaired loans $—
 $—
 $7,261
 $7,261
Other real estate owned —
 —
 190
 190
December 31, 2016:        
Impaired loans $—
 $—
 $4,130
 $4,130

(Dollars in thousands)
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 
Total Fair
Value
June 30, 2020       
Impaired loans$—
 $—
 $3,833
 $3,833
Other real estate owned—
 —
 93
 93
December 31, 2019       
Impaired loans$—
 $—
 $7,092
 $7,092
Other real estate owned—
 —
 93
 93



Impaired loans measured at fair value and included in the above table at SeptemberJune 30, 20172020 consisted of sixteen7 loans having an aggregate recorded investment of $7.6$4.0 million and specific loan loss allowancesallowance of $324,000.$125,000. Impaired loans measured at fair value and included in the above table at December 31, 20162019 consisted of nine12 loans having an aggregate balance of $4.4$7.2 million with a specific loan loss allowance of $255,000.$69,000.
The following table presents additional qualitative information about assets measured at fair value on a nonrecurring basis, where there was evidence of impairment, and for which the Company has utilized Level 3 inputs to determine fair value:
(Dollars in thousands) 
Fair Value
Estimate
 
Valuation
Techniques
 
Unobservable
Input
 
Range
(Weighted Average)
Fair Value
Estimate
 
Valuation
Techniques
 Unobservable Input 
Range
(Weighted Average)
September 30, 2017   
June 30, 2020  
Impaired loans $7,261
 Appraisal of
collateral (1)		 Appraisal adjustments (2) 1% - 16% (7.5%)$3,833
 
Appraisal of collateral (1)
 
Appraisal adjustments (2)
  0.5% - 26.6%
(11.5%)
Other real estate owned $190
 Appraisal of
collateral (1)		 Appraisal adjustments (2) —%$93
 
Appraisal of
collateral (1)
 
Appraisal adjustments (2)
  47.0%
(47.0%)
December 31, 2016   
December 31, 2019  
Impaired loans $4,130
 Appraisal of collateral (1) Appraisal adjustments (2) 3%-100% (29.1%)$7,092
 
Appraisal of collateral (1)
 
Appraisal adjustments (2)
  0.1% - 40.4%
(12.6%)
Other real estate owned$93
 
Appraisal of
collateral (1)
 
Appraisal adjustments (2)
  47.0%
(47.0%)
(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs whichthat are not identifiable.
(2)
Includes qualitative adjustments by management and estimated liquidation expenses.
The following is a summary of fair value versus carrying value of all of the Company’s financial instruments. For the Company and the Bank, as with 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 were used for the purpose of this note. 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. The carrying amounts reported in the balance sheet for cash and cash equivalents, accrued interest receivable and accrued interest payable approximate fair value.
Securities Held to Maturity. The fair values of securities held to maturity are determined in the same manner as for securities available for sale.
Loans Held For Sale. The fair values 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.
Gross Loans Receivable. The fair values of loans, excluding impaired loans subject to specific loss reserves, are estimated using discounted cash flow analyses that use market rates as of 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.
SBA servicing asset. Servicing assets do not trade in an active market with readily observable prices. The Company estimates the fair value of an 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 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.
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.


Deposit Liabilities. 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 for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates of deposit to a schedule of aggregated expected monthly maturities on time deposits.
Borrowings and Subordinated Debt. The carrying amounts of short-term borrowings approximate their fair values. The fair values of long-term FHLB advances 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. For subordinated debt, which reprices quarterly, the fair value is based on inputs that are observable either directly or indirectly for similar debt obligations.
The estimated fair values and carrying amounts of financial assets and liabilities as of SeptemberJune 30, 20172020 and December 31, 20162019 were as follows:


September 30, 2017
June 30, 2020
 Carrying Level 1 Level 2 Level 3 FairCarrying Level 1 Level 2 Level 3 Fair
(Dollars in thousands) Value Inputs Inputs Inputs ValueValue Inputs Inputs Inputs Value
Cash and cash equivalents $15,657
 $15,657
 $—
 $—
 $15,657
$12,582
 $12,582
 $—
 $—
 $12,582
Securities available for sale 110,276
 19,055
 91,221
 —
 110,276
151,661
 17,756
 133,905
 —
 151,661
Securities held to maturity 111,554
 —
 113,757
 —
 113,757
94,440
 —
 97,567
 —
 97,567
Loans held for sale 6,019
 —
 6,262
 —
 6,262
11,129
 —
 11,424
 —
 11,424
Loans, net 764,180
 —
 —
 764,426
 764,426
Net loans1,343,310
 —
 —
 1,385,404
 1,385,404
SBA servicing asset 745
 —
 822
 —
 822
819
 —
 1,245
 —
 1,245
Interest rate lock derivative 65
 —
 65
 —
 65
354
 —
 354
 —
 354
Accrued interest receivable 3,141
 —
 3,141
 —
 3,141
5,740
 —
 5,740
 —
 5,740
FHLB stock 3,403
 —
 3,403
 —
 3,403
5,882
 —
 5,882
 —
 5,882
Deposits (869,813) —
 (869,202) —
 (869,202)(1,409,392) —
 (1,412,108) —
 (1,412,108)
Borrowings (63,025) —
 (63,025) —
 (63,025)
Short-term borrowings(107,250) —
 (107,250) —
 (107,250)
Redeemable subordinated debentures (18,557) —
 (12,166) —
 (12,166)(18,557) —
 (10,808) —
 (10,808)
Accrued interest payable (715) —
 (715) —
 (715)(1,296) —
 (1,296) —
 (1,296)

December 31, 2016
December 31, 2019
 Carrying Level 1 Level 2 Level 3 FairCarrying Level 1 Level 2 Level 3 Fair
(Dollars in thousands) Value Inputs Inputs Inputs ValueValue Inputs Inputs Inputs Value
Cash and cash equivalents $14,886
 $14,668
 $—
 $—
 $14,668
$14,842
 $14,842
 $—
 $—
 $14,842
Securities available for sale  103,794
 12,826
 90,968
 —
 103,794
155,782
 11,151
 144,631
 —
 155,782
Securities held to maturity  126,810
 —
 128,559
 —
 128,559
76,620
 —
 78,223
 —
 78,223
Loans held for sale  14,829
 —
 15,103
 —
 15,103
5,927
 —
 6,093
 —
 6,093
Loans, net 717,314
 —
 —
 721,285
 721,285
Net loans1,206,757
 —
 —
 1,243,088
 1,243,088
SBA servicing asset 605
 —
 822
 —
 822
930
 —
 1,245
 —
 1,245
Interest rate lock derivative 123
 —
 123
 —
 123
159
 —
 159
 —
 159
Accrued interest receivable 3,095
 —
 3,095
 —
 3,095
4,945
 —
 4,945
 —
 4,945
FHLB stock 3,962
 —
 3,962
 —
 3,962
4,176
 —
 4,176
 —
 4,176
Deposits  (834,516) —
 (834,050) —
 (834,050)(1,277,362) —
 (1,278,166) —
 (1,278,166)
Borrowings  (73,050) —
 (73,222) —
 (73,222)
Short-term borrowings (92,050) —
 (92,050) —
 (92,050)
Redeemable subordinated debentures (18,557) —
 (11,922) —
 (11,922)(18,557) —
 (12,837) —
 (12,837)
Accrued interest payable (866) —
 (866) —
 (866)(1,592) —
 (1,592) —
 (1,592)

Loan commitments and standby letters of credit as of SeptemberJune 30, 20172020 and December 31, 20162019 were based on fees charged for similar agreements; accordingly, the estimated fair value of loan commitments and standby letters of credit was nominal.


(12) Leases

At June 30, 2020, the Company had 35 operating leases under which the Company is a lessee. Of the 35 leases, 23 leases were for real property, including leases for 19 of the Company’s branch offices and 4 leases for general office space including the Company’s headquarters. All of the real property leases include one or more options to extend the lease term. NaN of the branch office leases are for the land on which the branch offices are located and the Company owns the leasehold improvements.

In addition, the Company had 10 leases for office equipment, which are primarily copiers and printers, and 2 automobile leases. None of these leases include extensions and generally have three to five year terms.

The Company does not have any finance leases.



During the three and six months ended June 30, 2020 and 2019, the Company recognized rent and equipment expense associated with leases as follows:
(In thousands)Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2019 2018
 Operating lease cost:       
 Fixed rent expense and equipment expense$670
 $492
 $1,337
 $976
Variable rent expense—
 —
 —
 —
Short-term lease expense11
 2
 23
 4
Sublease income—
 —
 —
 —
Net lease cost$681
 $494
 $1,360
 $980

(In thousands)Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2019 2018
Lease cost - occupancy expense$626
 $430
 $1,240
 $857
Lease cost - other expense55
 64
 120
 123
Net lease cost$681
 $494
 $1,360
 $980


During the six months ended June 30, 2020 and 2019, the following cash and non-cash activities were associated with the leases:
 Six Months Ended June 30,
(In thousands)2020 2019
 Cash paid for amounts included in the measurement of lease liabilities:   
 Operating cash flows from operating leases$1,266
 $868
    
 Non-cash investing and financing activities:   
 Additions to ROU assets obtained from:   
 Net lease cost—
 —
 New operating lease liabilities144
 412

The future payments due under operating leases at June 30, 2020 and 2019 were as follows:
 At June 30
(In thousands)2020 2019
Due in less than one year$2,058
 $1,832
Due in one year but less than two years2,030
 1,816
Due in two years but less than three years2,021
 1,788
Due in three years but less than four years1,929
 1,784
Due in four years but less than five years1,766
 1,687
Thereafter14,243
 12,865
Total future payments$24,047
 $21,772
Less: Implied interest(6,011) (5,751)
Total lease liability$18,036
 $16,021
(10)Subsequent Event

On November 6, 2017,

As of June 30, 2020, future payments due under operating leases were based on ASC Topic 842 and included, in general, at least one lease renewal option on all real estate leases except on one land lease where all renewal options were included. As of June 30, 2020, the Company and the Bank entered into an Agreement and Plan of Merger (the “Merger Agreement”) with New Jersey Community Bank (“NJCB”), providingweighted-average remaining lease term for the merger of NJCB with and into the Bank,all operating leases is 14.9 years. The weighted average discount rate associated with the Bank as the surviving entity (the “Merger”). The Merger is a stock and cash transaction valued at approximately $4.00 per share, or approximately $7.6 million in total consideration. The transaction has been unanimously approved by the boards of directors of both institutions, and is anticipated to be completed at the end of the first quarter of 2018. The Merger is subject to approval by the shareholders of NJCB, as well as regulatory approvals, and other customary closing conditions.

Under the terms of the Merger Agreement, NJCB shareholders will receive $1.60 in cash and 0.1333 shares of Company common stock, subject to adjustment as set forth in the Merger Agreement, for each share of NJCB common stock that they own. The Company expects to issue approximately 254,392 new shares of common stock in the Merger. This deal value equates to approximately 82% of NJCB’s tangible book valueoperating leases as of SeptemberJune 30, 2017 and is anticipated to be accretive to the Company's earnings per share and tangible book value in 2018.
NJCB is headquartered in Freehold, New Jersey, and serves its customers and communities through two full-service locations in Freehold and Neptune City, New Jersey. NJCB has assets of approximately $104 million, loans of $83 million and deposits of $94 million as of September 30, 2017. Following consummation of the Merger, the Company will have approximately $1.2 billion in assets with 20 branch banking offices located in Bergen, Middlesex, Monmouth, Mercer and Somerset Counties, New Jersey.

A description and copy of the Merger Agreement is available in the Company’s Current Report on Form 8-K filed on November 7, 2017.


2020 was 3.35%.



Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis of the operating results
When used in this Quarterly Report on Form 10-Q for the three and ninesix months ended SeptemberJune 30, 20172020 (this “Form 10-Q”), the words “the Company,” “we,” “our,” and financial condition at September 30, 2017 is intended“us” refer to help readers analyze the accompanying financial statements, notes and other supplemental information contained in this document. Results of operations for the three and nine month periods ended September 30, 2017 are not necessarily indicative of results to be attained for any other periods.
This discussion and analysis should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report and Part II, Item 7 of the Company’s Form 10-K/A (Management’s Discussion and Analysis of Financial Condition and Results of Operation) for the year ended December 31, 2016, as filed with the SEC on March 20, 2017.
General
Throughout the following sections, the “Company” refers to 1ST1ST Constitution Bancorp and, as the context requires, its wholly-owned subsidiary, 1ST1ST Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1ST1ST Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., LLC, 204 South Newman Street Corp. and 249 New York Avenue, LLC.  1ST1ST Constitution Capital Trust II (“Trust II”), a subsidiary of the Company, is not included in the Company’s consolidated financial statements as it is a variable interest entity and the Company is not the primary beneficiary. Trust II, a subsidiary of the Company, was created in May 2006 to issue trust preferred securities to assist the Company in raising additional capital.
The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was organized under the laws
This discussion and analysis of the State of New Jersey in February 1999operating results for the purposethree and six months ended June 30, 2020 and financial condition at June 30, 2020 is intended to help readers analyze the accompanying financial statements, notes and other supplemental information contained in this Form 10-Q. Results of acquiring alloperations for the three- and six-month periods ended June 30, 2020 are not necessarily indicative of results to be attained for any other periods.

This discussion and analysis should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this Form 10-Q and Part II, Item 7 of the issuedCompany’s Form 10-K (Management’s Discussion and outstanding stockAnalysis of Financial Condition and Results of Operation) for the year ended December 31, 2019, as filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2020 (the “2019 Form 10-K”), as well as the risk factors set forth under Part I, Item 1A of the Bank, a full service commercial bank that began operations in August 1989, thereby enabling2019 Form 10-K, as modified and supplemented by the Bank to operate within a bank holding company structure. The Company became an active bank holding company on July 1, 1999. Other than its ownership interest in the Bank, the Company currently conducts no other significant business activities.
The Bank operates 18 branches and manages an investment portfolio through its subsidiary, 1ST Constitution Investment Company of New Jersey, Inc.   FCB Assets Holdings, Inc., a subsidiaryrisk factors under Part II, Item 1A of the Bank, is used by the Bank to manage and dispose of repossessed real estate.
On November 6, 2017, the Company and the Bank entered into an Agreement and Plan of Merger (the "Merger Agreement") with New Jersey Community Bank ("NJCB"), providing for the merger of NJCB with and into the Bank, with the Bank as the surviving entity (the "Merger"). See Note 10 - Subsequent Event - for further information.

When used in this Quarterly Report onCompany’s Form 10-Q for the three and nine month period ended September 30, 2017 (this "Form 10-Q"),March 31, 2020, as filed with the words "the Company," "we," "our," and "us" refer to 1st Constitution Bancorp and its wholly-owned subsidiaries, unless we indicate otherwise.SEC on May 11, 2020.


Forward-Looking Statements

This reportForm 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements.  When used in this and in future filings by the Company with the SEC, and in the Company’s press releaseswritten and in oral statements made with the approval of an authorized executive officer of the Company, the words or phrases “will,” “will likely result,” “could,” “anticipates,” “believes,” “continues,” “expects,” “plans,” “will continue,” “is anticipated,” “estimated,” “project” or “outlook” or similar expressions (including confirmations by an authorized executive officer of the Company of any such expressions made by a third party with respect to the Company) are intended to identify forward-looking statements. The Company cautions readers not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made.  Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.
Factors
These forward-looking statements are based upon our opinions and estimates as of the date they are made and are not guarantees of future performance. Although we believe that the expectations reflected in these forward-looking statements are reasonable, such forward-looking statements are subject to known and unknown risks and uncertainties that may be beyond our control, which could cause actual results, performance and achievements to differ materially from results, performance and achievements projected, expected, expressed or implied by the forward-looking statements.

Examples of factors or events that could cause actual results to differ materially from historical results or those resultsanticipated, expressed or implied include, but are not limited to, those listed under “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”without limitation, changes in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2016 filed with the SEC on March 20, 2017, such as the overall economy and the interest rate environment;changes; inflation, market and monetary fluctuations; the ability of our customers to repay their obligations; the accuracy of our financial statement estimates and assumptions, including the adequacy of the estimate made in connection with determining the adequacy of the allowance for loan losses; competition;increased competition and its effect on the availability and pricing of deposits and loans; significant changes in accounting, tax or regulatory practices and requirements; certain interest rate risks; risks associated with investmentschanges in mortgage-backed securities; risks associated with speculative construction lending;deposit flows, loan demand or real estate values; the enactment of legislation or regulatory changes; changes in monetary and risks associated with safeguarding information technology systems. Other risks and uncertainties that could cause actual results to differ from those described above include, but are not limitedfiscal policies of the U.S. government; changes to the following: (1)method that LIBOR rates are determined and to the occurrencepotential phasing out of LIBOR after 2021; changes in loan delinquency rates or in our levels of non-performing assets; our ability to declare and pay dividends; changes in the economic climate in the market areas in which we operate; the frequency and magnitude of foreclosure of our loans; changes in consumer spending and saving habits; the effects of the health and soundness of other financial institutions, including the need of the FDIC to increase the Deposit Insurance Fund assessments; technological changes; the effects of climate change and harsh weather conditions, including hurricanes and man-made disasters; the economic impact of any event, changefuture terrorist threats and attacks, acts of war or other circumstances that could give rise tothreats thereof and the terminationresponse of the Merger Agreement; (2)United States to any such threats and attacks; our ability to integrate acquisitions and achieve cost savings; other risks described from time to time in our filings with the risk that NJCB’s shareholders may not adoptSEC; and our ability to manage the Merger Agreement; (3)risks involved in the risk thatforegoing. Further, the necessary regulatory approvals may not be obtained orforegoing factors may be obtainedexacerbated by the ultimate impact of the COVID-19 pandemic, which is unknown at this time.


subject to conditions that are not anticipated; (4) delays in closing
In addition, statements about the Merger or other risks that anyCOVID-19 pandemic and the potential effects and impacts of the closing conditions to the Merger may not be satisfied in a timely manner; (5) the inability to realize expected cost savings and synergies from the Merger in the amounts or in the timeframe anticipated; (6) the diversion of management’s time from ongoing business operations due to issues relating to the Merger; (7) costs or difficulties relating to integration matters might be greater than expected; (8) material adverse changes in the Company’s or NJCB’s operations or earnings; (9) potential litigation in connection with the Merger; (10) an increase or decrease in the common stock price of the Company during the 10 day pricing period prior to the closing of the Merger, which could cause an adjustment to the exchange ratio or give NJCB the right to terminate the Merger Agreement under certain circumstances; (11) the inability to retain NJCB’s customers and employees; and (12) the potential change in Federal tax law that could have a negative impactCOVID-19 pandemic on the Company’s tax benefitsbusiness, financial condition, liquidity and results of operations may constitute forward-looking statements and are subject to the risk that actual results may differ, possibly materially, from what is reflected in such forward-looking statements due to factors and future developments that are uncertain, unpredictable and, in many cases, beyond our control, including the Merger.scope, duration and extent of the pandemic, actions taken by governmental authorities in response to the pandemic and the direct and indirect impact of the pandemic on our employees, customers, business and third-parties with which we conduct business.

Although management has taken certain steps to mitigate any negative effect of the aforementioned items,factors and the COVID-19 pandemic, significant unfavorable changes could severely impact the assumptions used and could have an adverse effect on profitability. The Company undertakes noAny forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to publicly reviseupdate any forward-looking statementsstatement to reflect anticipated or unanticipatedthe impact of subsequent events or circumstances, occurring after the date of such statements, except as required by law.


OVERVIEW

The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company 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 the Bank, a full-service commercial bank that began operations in August 1989, thereby enabling the Bank to operate within a bank holding company structure. The Company became an active bank holding company on July 1, 1999. Other than its ownership interest in the Bank, the Company currently conducts no other significant business activities.

The Bank operates 26 branches and manages its investment portfolio through its subsidiary, 1ST Constitution Investment Company of New Jersey, Inc. FCB Assets Holdings, Inc., a subsidiary of the Bank, is used by the Bank to manage and dispose of repossessed real estate.

On November 8, 2019, the Company and the Bank completed the merger of Shore Community Bank (“Shore”) with and into the Bank (the "Shore Merger"). Shore’s results of operations have been included in the Company’s Consolidated Financial Statements since November 8, 2019. Therefore, comparisons of the Company’s Consolidated Financial Statements from before and after the Shore Merger are impacted by the inclusion of former Shore operations after November 7, 2020. See Note 2 - Acquisition of Shore Community Bank - for further information.

COVID-19 Impact and Response

The sudden emergence of the COVID-19 global pandemic in the first quarter of 2020 has created widespread uncertainty, social and economic disruption, highly volatile financial markets and unprecedented increases in unemployment levels in a short period of time. Mandated business and school closures, restrictions on travel and social distancing have resulted in almost all businesses and employees being adversely impacted. The businesses located in the Bank’s primary market areas of northern and central New Jersey, communities along the New Jersey shore, and the New York City metropolitan area, and their employees, have been adversely impacted. As a result of the recent emergence of the pandemic and the uncertainty, it is not possible to determine the overall impact of the pandemic on the Company’s business. To the extent that customers are not able to fulfill their contractual obligations to the Company, the Company’s business operations, asset valuations, financial condition, cash flows and results of operations could be materially adversely impacted. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, investments, loans, deferred tax assets, or other real estate owned ("OREO").

The ultimate impact of the COVID-19 pandemic on the Company’s operations and financial performance will depend on future developments related to the duration, extent and severity of the pandemic and the length of time that mandated business and school closures, restrictions on travel and social distancing remain in place. The Company’s operations rely on third-party vendors to process, record and monitor transactions. If any of these vendors are unable to provide these services, our ability to serve customers could be disrupted. The pandemic could negatively impact customers’ ability to conduct banking and other financial transactions. The Company’s operations could be adversely impacted if key personnel or a significant number of employees were unable to work due to illness or restrictions.

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”)
Act in response to the coronavirus pandemic. This legislation aims at providing relief for individuals and businesses that have been
negatively impacted by the coronavirus pandemic.

The CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” accounting guidance


in ASC 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019. The Bank adopted this provision as of March 31, 2020.

In the Company's Form 10-Q for the quarter ended March 31, 2020, the Company reported the initial steps that it took in response to the sudden emergence of the COVID-19 global pandemic. During the second quarter of 2020, the Company continued to work with its customers who were severely impacted by the economic disruption. Management significantly increased the provision for loan losses in response to the deterioration in the economic environment and higher potential incurred losses in the loan portfolio. Management may further increase the provision and allowance for loan losses in response to changes in economic conditions and the performance of the loan portfolio in future periods.

To protect our employees and customers we have:
Effective March 24, 2020 adjusted branch hours and temporarily closed our branch lobbies to customers,
except on an appointment only basis and deployed 50% of the staff to work remotely.
Continued to service our customers through drive-up facilities, ATMs and our robust technology capabilities
that allow customers to execute transactions and apply for residential mortgage loans through our website
www.momentummortgage.com utilizing their mobile devices and computers.
Provided our employees with masks, gloves and hand sanitizer.
Installed protective shields and partitions in branch offices and social distancing markings.
Effective June 22, 2020 re-opened our lobby facilities and require that customers entering our locations to have
face coverings.

To support our loan and deposit customers and the communities we serve:
We are working tirelessly to provide access to additional credit and forbearance on loan interest and or principal payments for up to 90 days where management has determined that it is warranted. As of June 30, 2020, $147.5 million of loans ($139.1 million of commercial loans and $8.4 million of consumer loans) were modified to provide deferral of interest and or principal by borrowers for up to 90 days.
In connection with the review of the adequacy of the allowance for loan losses at June 30, 2020, management reviewed over 81% of the $139.1 million of commercial business and commercial real estate loans that had been modified to defer interest and or principal for up to 90 days and also reviewed over 97% of the hotel loans and 87% of the restaurant-food service loans.
As a long-standing Small Business Administration (“SBA”) preferred lender, we are actively participating in the SBA’s Paycheck Protection Program (“PPP”) established under the CARES Act. As of June 30, 2020, we have funded 459 SBA PPP loans totaling $75.1 million.
We registered to utilize the Main Street New Loan Facility (“Facility”) established by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the CARES Act to provide financing to our customers and communities. This Facility is intended to facilitate lending by banks to small and medium sized businesses, which we believe may be beneficial to certain of our customers.
We are participating in the Federal Reserve's Paycheck Protection Program Liquidity Facility (“PPPLF”) and may pledge the SBA PPP loans to collateralize a like amount of borrowings from the Federal Reserve at a favorable interest rate of 0.35% up to a 2 year term.


Modification of Loans and Deferral of Payments
During the six months ended June 30, 2020, $139.1 million of commercial loans and $8.4 million of consumer loans had been modified to provide deferral of interest and or principal by borrowers for up to 90 days. Deferrals for $49.2 million of these modified loans expired during July 2020, at which time a full monthly loan payment was due. As of July 31, 2020, customers had made the required monthly loan payments on $45.6 million of these loans, payments were due on $2.6 million of these loans and one loan relationship totaling $1.0 million received a second modification to extend the deferral for another 90 days.
As of July 31, 2020, loan deferrals totaled $99.4 million and were comprised of $94.3 million of commercial loans and $5.1 million of consumer loans.



RESULTS OF OPERATIONS

Three and NineSix Months Ended SeptemberJune 30, 20172020 Compared to Three and NineSix Months Ended SeptemberJune 30, 20162019

Summary

The Company reported net income of $2.5$3.7 million and diluted earnings per share of $0.36 for the three months ended June 30, 2020 compared to net income of $3.4 million and diluted earnings per share of $0.39 for the three months ended June 30, 2019. For the six months ended June 30, 2020, net income was $7.1 million and diluted earnings per share were $0.69 compared to net income of $6.8 million, or $0.30$0.78 per diluted share, for the threesix months ended SeptemberJune 30, 20172019. The decrease in diluted earnings per share is due primarily to an increase in the average number of shares outstanding in 2020 compared to $2.7 million, or $0.33 per diluted share, for2019 as a result of the three months ended September 30, 2016. Forissuance of 1,509,275 shares of common stock as consideration in the nine months ended September 30, 2017, the Company reported net income of $6.4 million, or $0.76 per diluted share, compared to net income of $7.2 million, or $0.89 per diluted share, for the nine months ended September 30, 2016.Shore Merger.

Return on average total assets and return on average shareholders' equity were 0.94%0.89% and 8.94%8.50%, respectively, for the three months ended SeptemberJune 30, 20172020 compared to return on average total assets and return on average shareholders' equity of 1.10% and 10.22%, respectively, for the three months ended June 30, 2019. Return on average total assets and return on average shareholders' equity were 0.89% and 8.26%, respectively, for the six months ended June 30, 2020 compared to return on average assets and return on average shareholders' equity of 1.03%1.14% and 10.45%10.49%, respectively, for the threesix months ended SeptemberJune 30, 2016. 2019. Book value per share was $17.37 at June 30, 2020 compared to $16.74 at December 31, 2019.

Management anticipates that the Company’s results of operations and net income will continue to be impacted for the foreseeable future due to the economic disruption related to the COVID-19 pandemic.
The provision for loan losses and allowance for loan losses may increase as borrowers continue to be negatively affected by the contraction of economic activity and the dramatic increase in unemployment.
Due to the asset sensitive nature of the Company’s balance sheet, the Federal Reserve’s reduction in the targeted fed funds rate to zero to 0.25% and the concomitant decline in the prime rate to 3.25% in March 2020 caused a reduction in the average yield of loans tied to the prime rate and the net interest margin declined in the second quarter of 2020. The net interest margin was also impacted by the funding of the PPP loans with a 1.0% interest rate, which will be partially offset by the recognition of the loan fees earned on these loans. The timing and impact to the net interest margin will be contingent on how quickly and the extent to which the PPP loans become grants that are repaid by the SBA over the next two years. The net interest margin and the net interest income may decline in future periods if the Company cannot reduce the cost of interest-bearing liabilities at the same time and to the same extent as the decline in the average yield of assets.
It is expected that residential real estate sales, and therefore the origination and sale of residential mortgages may decline as a result of the restrictions implemented to contain the spread of COVID-19, such as business closures and social distancing measures. This decline in turn, would result in lower gain on sales of loans and a decrease in non-interest income.
A significant increase in non-performing loans could result in increased non-interest expense due to higher expenses for loan collection and recovery costs.

During the second quarter of 2020, management determined that a triggering event had occurred with respect to goodwill, which required a review of goodwill for impairment. Management completed its review of goodwill and concluded that it was more likely than not that the fair value of goodwill exceeded the carrying amount of goodwill at June 30, 2020. Accordingly, goodwill was not impaired at June 30, 2020.

The effects of the COVID-19 pandemic could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a new goodwill impairment test and could result in an impairment charge being necessary in the future. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. It is expected that any such charge would have no impact on tangible capital or regulatory capital.

Second Quarter 2020 Highlights

Return on average total assets and return on average shareholders' equity were 0.83%0.89% and 7.87%8.50%, respectively, for the nine months ended September 30, 2017 compared to return on average assets and return on average equity of 0.97% and 9.68%, respectively, for the nine months ended September 30, 2016. Book value and tangible book value per share were $13.83 and $12.27, respectively, at September 30, 2017 compared to $13.11 and $11.50, respectively, at December 31, 2016.
THIRD QUARTER 2017 HIGHLIGHTS

Commercial business, commercial real estate and construction loans totaled $513.0 million at September 30, 2017 and increased $88.2 million, or 20.8%, compared to $424.8 million at September 30, 2016 and increased $74.9 million, or 17.1%, compared to $438.1 million at December 31, 2016. Total loans were $772.0 million at September 30, 2017.respectively.
Net interest income was $9.4$13.8 million and the net interest margin was 3.85%3.64% on a tax equivalent basis.
Non-interest income increased $356,000 to $2.1 million, which was driven primarily by a higher volume of sales of residential mortgages and SBA guaranteed loans.
The Bank recorded aA provision for loan losses of $150,000$2.1 million was recorded for the second quarter of 2020 and net charge-offsthere were $55,000.no charge-offs.
Total loans were $1.4 billion at June 30, 2020 and increased $138.0 million from March 31, 2020. Mortgage warehouse loans increased $72.3 million and commercial real estate loans increased $15.4 million from March 31, 2020.
During the second quarter of 2020, the Bank funded $75.1 million in SBA PPP loans under the CARES Act.


Total deposits were $1.4 billion at June 30, 2020 and increased $111.4 million with non-interest demand deposits increasing $98.1 million from March 31, 2020.
Non-performing assets were $6.9$14.0 million, or 0.64%0.80% of total assets at June 30, 2020, relatively unchanged from March 31, 2020, and included $356,000$470,000 of OREO at Septemberother real estate owned ("OREO").

The following table reflects the reconciliation of non-GAAP measures for the three and six months ended June 30, 2017.2020 and 2019.

 Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands, except per share data)2020 2019 2020 2019
Adjusted net income       
Net income$3,690
 $3,370
 $7,111
 $6,767
Adjustments:       
Merger-related expenses—
 258
 64
 273
Income tax effect of adjustments—
 (77) (19) (82)
Adjusted net income$3,690
 $3,551
 $7,156
 $6,958
        
Adjusted earnings per diluted share       
Adjusted net income$3,690
 $3,551
 $7,156
 $6,958
Diluted shares outstanding10,248,156
 8,696,943
 10,256,481
 8,692,063
Adjusted net income per diluted share$0.36
 $0.41
 $0.70
 $0.80
        
Adjusted return on average total assets       
Adjusted net income$3,690
 $3,551
 $7,156
 $6,958
Average assets1,668,600
 1,227,743
 1,609,991
 1,198,211
Adjusted return on average total assets0.89% 1.16% 0.89% 1.17%
        
Adjusted return on average shareholders' equity       
Adjusted net income$3,690
 $3,551
 $7,156
 $6,958
Average equity174,603
 132,222
 173,217
 130,099
Adjusted return on average shareholders' equity8.50% 10.77% 8.31% 10.79%
        
Book value and tangible book value per common share       
Shareholders' equity    $177,484
 $135,075
Less: goodwill and intangible assets    36,563
 12,196
Tangible shareholders' equity    140,921
 122,879
Shares outstanding    10,219,048
 8,648,993
Book value per common share    $17.37
 $15.62
Tangible book value per common share    $13.79
 $14.21
        
1  The Company used the non-GAAP financial measures, Adjusted net income, Adjusted net income per diluted share, Adjusted return on average total assets, Adjusted return on average shareholders' equity and tangible book value per common share, because the Company believes that it is helpful to readers in understanding the Company's financial performance and the effect on its financial statements of the merger-related expenses related to the Shore Merger in 2019. These non-GAAP measures improve the comparability of the current period results with the results of the prior periods. The Company cautions that the non-GAAP financial measures should be considered in addition to, but not as a substitute for, the Company's GAAP financial results.
 



Earnings Analysis
The Bank’sCompany’s results of operations depend primarily on net interest income, which is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve and the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Other factors that may affect the Bank’sCompany’s operating results are general and local economic and competitive conditions, government policies and actions of regulatory authorities.
Net Interest Income
Net interest income, the Company’s largest and most significant component of operating income, is the difference between interest and fees earned on loans and other earning assets and interest paid on deposits and borrowed funds. This component represented 81.6%81.7% of the Company’s net revenues (defined as net interest income plus non-interest income) for the three months ended SeptemberJune 30, 20172020 compared to 83.7%84.0% of net revenues for the three months ended SeptemberJune 30, 2016. Net interest income as a percentage of total revenues was 80.8% and 83.8%, respectively, for the nine months ended September 30, 2017 and 2016.2019. Net interest income also depends upon the relative amount of average interest-earning assets, average interest-bearing liabilities and the interest rate earned or paid on them, respectively.





The following tables settable sets forth the Company’s consolidated average balances of assets and liabilities and shareholders’ equity, as well as interest income and interest expense on related items, and the Company’s average yield or rate for the three and nine months ended SeptemberJune 30, 20172020 and 2016.2019. The average rates are derived by dividing interest income and interest expense by the average balance of assets and liabilities, respectively.
(Dollars in thousands)Three months ended September 30, 2017 Three months ended September 30, 2016
Average
Balance		 Interest Average
Yield		 Average
Balance		 Interest Average
Yield		Three months ended June 30, 2020 Three months ended June 30, 2019
Assets:           
(Dollars in thousands except yield/cost information)Average
Balance		 Interest Average
Yield		 Average
Balance		 Interest Average
Yield
Assets           
Interest-earning assets:           
Federal funds sold/short-term investments$12,383
 $25
 0.80% $12,434
 $13
 0.40%$16,807
 $4
 0.10% $7,650
 $47
 2.46%
Investment securities:                      
Taxable142,353
 846
 2.38% 148,715
 827
 2.22%168,415
 852
 2.02% 166,287
 1,215
 2.92%
Tax-exempt (4)
89,034
 781
 3.51% 79,917
 760
 3.81%
Tax-exempt (1)
82,709
 627
 3.03% 57,425
 534
 3.72%
Total investment securities231,387
 1,627
 2.81% 228,632
 1,587
 2.78%251,124
 1,479
 2.36% 223,712
 1,749
 3.13%
Loan portfolio: (1)
   
  
  
  
  
Loans: (2)
   
  
  
  
  
Commercial real estate579,640
 7,791
 5.32% 403,980
 5,187
 5.08%
Mortgage warehouse lines223,696
 2,284
 4.08% 151,929
 2,214
 5.76%
Construction123,822
 1,895
 6.07% 89,682
 1,248
 5.54%140,593
 1,992
 5.70% 158,097
 2,768
 7.02%
Commercial business145,209
 1,567
 4.34% 122,005
 1,833
 6.03%
SBA PPP loans54,285
 348
 2.58% —
 —
 —%
Residential real estate42,436
 445
 4.19% 45,919
 514
 4.48%87,878
 952
 4.29% 47,280
 523
 4.42%
Loans to individuals22,379
 228
 4.04% 23,286
 257
 4.40%28,809
 316
 4.34% 21,964
 292
 5.26%
Commercial real estate286,130
 3,573
 4.95% 234,218
 3,271
 5.56%
Commercial business71,338
 956
 5.32% 79,834
 909
 4.53%
SBA loans22,238
 370
 6.60% 21,662
 319
 5.86%
Mortgage warehouse lines174,610
 1,901
 4.32% 245,654
 2,505
 4.06%
Loans held for sale3,715
 37
 3.95% 3,802
 16
 1.67%14,472
 114
 3.15% 4,104
 42
 4.09%
All other loans1,526
 11
 2.86% 2,683
 15
 2.22%890
 10
 4.44% 895
 10
 4.42%
Total loans748,194
 9,416
 4.99% 746,740
 9,054
 4.83%1,275,472
 15,374
 4.85% 910,254
 12,869
 5.67%
Total interest-earning assets991,964
 $11,068
 4.43% 987,806
 $10,654
 4.30%1,543,403

$16,857
 4.39% 1,141,616
 $14,665
 5.15%
Non-interest-earning assets:           
Allowance for loan losses(7,770)     (7,552)    (10,232)     (8,755)    
Cash and due from bank5,371
     5,019
    
Cash and due from banks11,712
     10,968
    
Other assets59,328
     59,886
    123,717
     83,914
    
Total non-interest-earning assets125,197
     86,127
    
Total assets$1,048,893
     $1,045,159
    $1,668,600
     $1,227,743
    
Liabilities and shareholders’ equity:           
Liabilities and shareholders’ equity           
Interest-bearing liabilities:           
Money market and NOW accounts $324,940
 $358
 0.44% $296,554
 $281
 0.38%$425,347
 $611
 0.58% $340,048
 $683
 0.81%
Savings accounts208,548
 338
 0.64% 209,703
 316
 0.60%271,772
 547
 0.81% 191,586
 464
 0.97%
Certificates of deposit158,737
 508
 1.27% 173,652
 454
 1.04%353,160
 1,566
 1.78% 266,662
 1,524
 2.29%
Other borrowed funds27,533
 113
 1.63% 64,463
 197
 1.22%
Federal Reserve Bank PPPLF borrowings3,970
 3
 0.30% —
 —
 —%
Short-term borrowings35,679
 45
 0.51% 39,187
 257
 2.63%
Redeemable subordinated debentures18,557
 134
 2.89% 18,557
 107
 2.31%18,557
 106
 2.26% 18,557
 192
 4.14%
Total interest-bearing liabilities738,315
 $1,451
 0.78% 762,929
 $1,355
 0.71%1,108,485
 $2,878
 1.04% 856,040
 $3,120
 1.46%
Net interest spread (2)
    3.65%     3.59%
Non-interest-bearing liabilities:           
Demand deposits193,937
     171,631
    356,322
     215,530
    
Other liabilities6,395
     7,962
    29,190
     23,951
    
Total liabilities938,647
     942,522
    
Total non-interest-bearing liabilities385,512
     239,481
    
Shareholders’ equity110,246
     102,637
    174,603
     132,222
    
Total liabilities and shareholders’ equity$1,048,893
     $1,045,159
    $1,668,600
     $1,227,743
    
Net interest income and net interest margin (3)
  $9,617
 3.85%   $9,299
 3.75%
Net interest spread (3)
    3.35%     3.69%
Net interest income and margin (4)
  $13,979
 3.64%   $11,545
 4.06%
(1)
(1) Tax equivalent basis, using federal tax rate of 21% in 2020 and 2019.
(2) Loan origination fees 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 the average balance of loans held for sale.
(3) The net interest spread is the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities.
(4) The net interest margin is equal to net interest income divided by average interest-earning assets.
Loan origination fees 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 the average balance of loans held for sale. Please refer to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation under the heading “Non-Performing Assets” for a discussion of the Bank’s policy with regard to non-accrual loans.
(2)
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)
The net interest margin is equal to net interest income divided by average interest-earning assets.
(4)
Tax-equivalent basis. The tax equivalent adjustment was $254 and $246 for the three months ended September 30, 2017 and September 30, 2016, respectively.


The following table sets forth the Company’s consolidated average balances of assets and liabilities and shareholders’ equity, as well as interest income and interest expense on related items, and the Company’s average yield or rate for the six months ended June 30, 2020 and 2019. The average rates are derived by dividing interest income and interest expense by the average balance of assets and liabilities, respectively.
(Dollars in thousands)Nine months ended September 30, 2017 Nine months ended September 30, 2016
 
Average
Balance
 Interest 
Average
Yield
 
Average
Balance
 Interest 
Average
Yield
Assets:           
Federal funds sold/short-term investments$30,199
 $183
 0.81% $24,508
 $79
 0.43%
Investment securities:           
Taxable141,662
 2,500
 2.35% 144,534
 2,459
 2.27%
Tax-exempt (4)
92,341
 2,409
 3.48% 80,203
 2,299
 3.82%
Total investment securities234,003
 4,909
 2.80% 224,737
 4,758
 2.82%
Loan portfolio: (1)
   
    
  
  
Construction111,436
 4,817
 5.78% 92,795
 3,673
 5.29%
Residential real estate42,136
 1,335
 4.22% 42,375
 1,338
 4.21%
Loans to individuals22,428
 701
 4.18% 23,454
 715
 4.07%
Commercial real estate267,247
 10,088
 5.05% 227,481
 9,304
 5.46%
Commercial business73,461
 2,919
 5.31% 70,760
 2,827
 5.34%
SBA loans22,420
 1,087
 6.48% 21,507
 919
 5.71%
Mortgage warehouse lines155,755
 5,014
 4.30% 201,322
 6,187
 4.11%
Loans held for sale4,408
 165
 5.00% 4,378
 83
 2.53%
All other loans1,828
 35
 2.56% 2,282
 42
 2.47%
Total loans701,119
 26,161
 4.99% 686,354
 25,088
 4.88%
Total interest-earning assets965,321
 $31,253
 4.33% 935,599
 $29,925
 4.27%
Allowance for loan losses(7,646)     (7,534)    
Cash and due from bank5,234
     5,086
    
Other assets58,736
     59,652
    
Total assets$1,021,645
     $992,803
    
Liabilities and shareholders’ equity:           
   Money market and NOW accounts $329,089
 $1,032
 0.42% $295,776
 $821
 0.37%
Savings accounts210,056
 992
 0.63% 206,355
 888
 0.57%
Certificates of deposit147,109
 1,327
 1.21% 153,544
 1,280
 1.11%
Other borrowed funds20,494
 349
 2.28% 46,257
 498
 1.44%
Redeemable subordinated debentures18,557
 380
 2.73% 18,557
 311
 2.23%
Total interest-bearing liabilities725,305
 $4,080
 0.75% 720,489
 $3,798
 0.70%
Net interest spread (2)
    3.58%     3.57%
Demand deposits181,892
     164,963
    
Other liabilities6,577
     7,612
    
Total liabilities913,774
     893,064
    
Shareholders’ equity107,871
     99,739
    
Total liabilities and shareholders’ equity$1,021,645
     $992,803
    
Net interest income and net interest margin (3)
  $27,173
 3.76%   $26,127
 3.73%
 Six months ended June 30, 2020 Six months ended June 30, 2019
(Dollars in thousands except yield/cost information)Average
Balance		 Interest Average
Yield		 Average
Balance		 Interest Average
Yield
Assets           
Interest-earning assets:           
Federal funds sold/short-term investments$20,682
 $93
 0.90% $7,490
 $94
 2.53%
Investment securities:

 

        
Taxable168,393
 1,908
 2.27% 163,454
 2,485
 3.04%
Tax-exempt (1)
73,954
 1,182
 3.20% 58,621
 1,093
 3.73%
Total investment securities242,347
 3,090
 2.55% 222,075
 3,578
 3.22%
Loans: (2)
   
  
  
  
  
Commercial real estate577,140
 15,146
 5.19% 397,154
 10,199
 5.11%
Mortgage warehouse lines199,485
 4,319
 4.33% 137,741
 4,038
 5.86%
Construction144,044
 4,171
 5.82% 156,987
 5,430
 6.98%
Commercial business144,001
 3,370
 4.71% 122,456
 3,655
 6.02%
SBA PPP loans27,143
 348
 2.58% —
 —
 —%
Residential real estate89,119
 1,948
 4.32% 47,277
 1,058
 4.45%
Loans to individuals29,653
 708
 4.72% 22,353
 567
 5.05%
Loans held for sale9,229
 149
 3.23% 2,741
 58
 4.23%
All other loans1,346
 20
 2.94% 936
 21
 4.46%
Total loans1,221,160
 30,179
 4.97% 887,645
 25,026
 5.69%
Total interest-earning assets1,484,189
 $33,362
 4.52% 1,117,210
 $28,698
 5.18%
Non-interest-earning assets:           
Allowance for loan losses(9,843)     (8,645)    
Cash and due from banks12,547
     11,060
    
Other assets123,098
     78,586
    
Total non-interest-earning assets125,802
     81,001
    
Total assets$1,609,991
     $1,198,211
    
Liabilities and shareholders’ equity           
Interest-bearing liabilities:           
Money market and NOW accounts $413,592
 $1,371
 0.67% $337,516
 $1,257
 0.75%
Savings accounts268,413
 1,151
 0.86% 190,387
 889
 0.94%
Certificates of deposit356,521
 3,440
 1.94% 257,251
 2,842
 2.23%
Federal Reserve Bank PPPLF borrowings1,984
 3
 0.30% —
 —
 —%
Short-term borrowings27,298
 107
 0.79% 32,729
 430
 2.65%
Redeemable subordinated debentures18,557
 258
 2.75% 18,557
 391
 4.21%
Total interest-bearing liabilities1,086,365
 $6,330
 1.17% 836,440
 $5,809
 1.40%
Non-interest-bearing liabilities:           
Demand deposits319,920
     211,575
    
Other liabilities30,489
     20,097
    
Total non-interest-bearing liabilities350,409
     231,672
    
Shareholders’ equity173,217
     130,099
    
Total liabilities and shareholders’ equity$1,609,991
     $1,198,211
    
Net interest spread (3)
    3.35%     3.78%
Net interest income and margin (4)
  $27,032
 3.66%   $22,889
 4.13%
(1) Tax equivalent basis, using federal tax rate of 21% in 2020 and 2019.
(1)
(2) Loan origination fees 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 the average balance of loans held for sale.
(3) The net interest spread is the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities.
(4) The net interest margin is equal to net interest income divided by average interest-earning assets.
Loan origination fees 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 the average balance of loans held for sale. Please refer to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation under the heading “Non-Performing Assets” for a discussion of the Bank’s policy with regard to non-accrual loans.
(2)
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)
The net interest margin is equal to net interest income divided by average interest-earning assets.
(4)
Tax-equivalent basis. The tax equivalent adjustment was $781 and $745 for the six months ended September 30, 2017 and September 30, 2016, respectively.




Three months ended SeptemberJune 30, 20172020 compared to three months ended SeptemberJune 30, 20162019

Net interest income was $9.4$13.8 million for the quarterthree months ended SeptemberJune 30, 20172020 and increased $310,000,$2.4 million, or 3.4%21.1%, compared to net interest income of $9.1 million for the third quarter of 2016. The higher net interest income reflected increases in income from investment securities and loans, which were partially offset by an increase in interest paid on deposits.
Average interest-earning assets were $992.0 million and $987.8 million for the third quarters of 2017 and 2016, respectively. The increase in average interest-earning assets of $4.2 million from the third quarter of 2016 to the same quarter of 2017 was due primarily to increases in average loans and average investment securities balances.
Total interest income was $10.8$11.4 million for the three months ended SeptemberJune 30, 2017 compared to $10.42019. Total interest income was $16.7 million for the three months ended SeptemberJune 30, 2016, an2020 compared to $14.6 million for the three months ended June 30, 2019. The increase in total interest income was primarily due to a net increase of $406,000 due primarily to$365.2 million in average loans, reflecting growth in all segments of the increaseloan portfolio except construction loans, and includes $54.3 million in average new SBA PPP loans. The growth in average loans included approximately $201.9 million of loans from the yield on loans, which was partially offset by declines in the average balances of mortgage warehouse and commercial business loans.
For the third quarters of 2017 and 2016, theShore Merger. Average interest-earning assets were $1.5 billion with a tax-equivalent yield onof 4.39% for the second quarter of 2020 compared to average interest-earning assets was 4.43% and 4.30%of $1.1 billion, with a tax-equivalent yield of 5.15%, respectively.for the second quarter of 2019. The higher yield on average interest-earning assets for the thirdsecond quarter of 2017 when compared2020 declined 76 basis points to the third quarter of 2016 was4.39%, primarily due to the higher yield earned on the loan portfolio. The 75 basis point increasesharp decline in the Federal Reserve targeted federal funds rate and the corresponding increase in the Bank's prime rate since December of 2016 have had a positive effect on the yields for construction, commercial business, SBA, home equity and warehouse loans with variablemarket interest rate termsrates beginning in the third quarter of 2017.
Average interest-bearing liabilities decreased $24.6 million, or 3.23%, to $738.3 million for2019 and continuing through the three months ended September 30, 2017 from $762.9 million forsecond quarter of 2020. The Federal Reserve reduced the same three months of 2016 due primarily to declines in other borrowedtargeted federal funds savings accounts and certificates of deposit, which were partially offset by increases in money market and NOW accounts. FHLB borrowings of $10.0 million maturedrate 50 basis points in the third quarter and total average borrowings declined by $36.9 million fromof 2019, 25 basis points in the thirdfourth quarter of 20162019 and, in response to the thirdCOVID-19 pandemic, further reduced the targeted federal funds rate by 150 basis points in March 2020. The prime rate was 5.50% in the second quarter of 2017.2019. As a result of the reductions in the targeted federal funds rate in 2019 and 2020, the prime rate declined to 4.75% in October 2019 and declined further to 3.25% in March 2020. The increase in average non-interest bearing demand depositsBank had approximately $487.0 million of $22.3loans with an interest rate tied to the prime rate and approximately $49.3 million provided additional funding that partially offset the decrease in FHLB borrowings. Average certificates of deposit declined by $14.9 million,loans with an interest rate tied to either 1 or 8.6%, to $158.7 million3-month LIBOR at June 30, 2020. The results for the thirdsecond quarter of 2017 from $173.7 million during2020 reflected the third quarterimpact of 2016 , while average savings accounts declined $1.2 million to $208.5 million during the third quarter of 2017 from the same prior yearlower prime rate on loan interest income for a full quarter. Money market and NOW accounts averaged $324.9 million and $296.6 million for the third quarters of 2017 and 2016, respectively, which represented an increase of $28.4 million, or 9.57%.

Interest expense on average interest-bearing liabilities was $1.5$2.9 million, with an interest cost of 0.78%1.04%, for the thirdsecond quarter of 20172020, compared to $1.4$3.5 million, with an interest cost of 0.71%1.30%, for the thirdfirst quarter of 2016. The2020 and $3.1million, with an interest cost of 1.46%, for the second quarter of 2019. Despite an increase of $96,000$252.4 million in interest expense onaverage interest-bearing liabilities for the thirdsecond quarter of 20172020 compared to the samesecond quarter of 2016 primarily reflected higher2019, interest costsexpense declined $242,000 for the comparable period largely due to a decline in interest rates paid on deposits, borrowings and borrowings duethe redeemable subordinated debentures as a direct result of the falling interest rate environment. The average cost of interest-bearing deposits was 1.04% for the second quarter of 2020, 1.27% for the first quarter of 2020 and 1.35% for the second quarter of 2019. The lower interest cost of interest-bearing deposits for the second quarter of 2020 compared to higher short-termthe second quarter of 2019 primarily reflects a sharp decline in market interest rates beginning in the fourth quarter of 2019 and continuing through the first six months of 2020. The interest rates paid on deposits generally do not adjust quickly to sharp changes in market interest rates and decline over time in a falling interest rate environment. The growth in average interest-bearing liabilities included average interest-bearing deposits of $172.6 million acquired in the Shore Merger. Of the total increase in average interest-bearing liabilities, certificates of deposit increased $86.5 million, which generally have a higher interest cost than other types of interest-bearing deposits. At June 30, 2020, there were partially offset by$266 million of certificates of deposit with an average interest cost of 1.60% that mature within the decline in balances of other borrowings.next 12 months. Management will continue to adjust the interest rates paid on deposits to reflect the then current interest rate environment and competitive factors.

The net interest margin on a tax-equivalent basis increaseddecreased 42 basis points to 3.85%3.64% for the three months ended September 30, 2017second quarter of 2020 compared to 3.75%4.06% for the three months ended September 30, 2016,second quarter of 2019 due primarily due to the higher76 basis point decline in the yield onof average interest-earning assets.assets, partially offset by the 42 basis points decline in the interest cost of average interest-bearing liabilities. Due to the sharp decline in the prime rate in the third and fourth quarters of 2019 followed by the further decline in the prime rate in March of 2020, the yield of loans declined 82 basis points to 4.85% and the interest cost of interest-bearing liabilities was not reduced as quickly and to the same extent as the decline in the yield of loans.

NineSix months ended SeptemberJune 30, 20172020 compared to the ninesix months ended SeptemberJune 30, 20162019
For the ninesix months ended SeptemberJune 30, 2017, the Company's2020, net interest income increased by $1.0$4.1 million, or 3.98%18.2%, to $26.4$26.8 million compared to $25.4$22.7 million for the ninecomparable period in 2019. Total interest income was $33.1 million for the six months ended SeptemberJune 30, 2016.2020 compared to $28.5 million for the six months ended June 30, 2019. This increase was due primarily to the $333.5 million increase in average interest-earning assetsloans, reflecting growth in all segments of the loan portfolio except construction loans and anincludes $27.1 million in average SBA PPP loans. The increase in the average yield on loans.
loans included approximately $204.4 million of loans acquired from Shore Merger. Average interest-earning assets increased $29.7$367.0 million to $965.3 million$1.48 billion for the ninesix months ended SeptemberJune 30, 20172020 compared to $935.6 million$1.12 billion for the same period of 2016.in 2019. This increase was due primarily to the $333.5 million increase in average loans, a $20.3 million increase in average total investment securities and a $13.2 million increase in average federal funds sold/short-term investments. The increase, when comparing 2017 withtax-equivalent yield on average interest earnings assets was 4.52% for the six months ended June 30, 2020 compared to 5.18% for the same period in the prior year. The decline of 66 basis points in tax-equivalent yield year over year was due primarily to increasesthe steady decline in average loans, average short-term investmentsmarket interest rates since late 2019 and average investment securities balances. Average loans were $701.1 millioninto the first half of 2020. The Federal Reserve reduced the targeted federal funds rate in the third and $686.4 million forfourth quarters of 2019 and a further sharp decline in March 2020 in response to the nine months ended September 30, 2017 and 2016, respectively, an increase of $14.8 million, or 2.2%, year over year. Construction and commercial real estate loans recorded average increases of $18.6 million and $39.8 million, respectively, when comparing the nine months ended September 30, 2017 and 2016, while mortgage warehouse lines decreased by $45.6 million when comparing the same time periods. The Company experienced higher demand for construction and commercial real estate loans in 2017. Average mortgage warehouse loans declined asCOVID-19 pandemic. As a result of lower volume of refinancing activity of residential mortgagesthe reductions in 2017 due to higher residential mortgage rates in 2017 than 2016. Averagethe targeted federal funds increased $5.7 million and average investment securities increased $9.3 million when comparingrate, the nine months ended September 30, 2017prime rate declined to the same nine months of 2016 due3.25% in March 2020 compared to the investment of excess cash.5.50% in June 2019.


For the nine months ended September 30, 2017 and 2016, total interest income was $30.5 million and $29.2 million, respectively, reflecting an increase of $1.3 million, or 4.43%, due primarily to the increases in construction loan, commercial real estate loan and investment average balances and the increase in yields on loans,which were partially offset by the decline in the average balance of mortgage warehouse loans.
The tax-equivalent yield on interest-earning assets was 4.33% for the nine months ended September 30, 2017 and 4.27% for the same nine-month period in 2016 and was primarily due to the higher yield earned on the loan portfolio. As noted above, the 75 basis point increase in the Federal Reserve targeted federal funds rate and the corresponding increase in the Bank's prime rate since December of 2016 have had a positive effect on the yields of most loan categories in 2017.
Average interest-bearing liabilities increased $4.8 million, or 0.67%, to $725.3 million for the nine months ended September 30, 2017 from $720.5 million for the same period of 2016 and was primarily due to the decline in other borrowed funds and certificates of deposit, which were partially offset by increases in money market, NOW and savings accounts. FHLB borrowings of $10.0 million matured in the third quarter of 2017 and total average borrowings declined by $25.8 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Year over year, average certificates of deposit declined by $6.4 million, or 4.19%, to $147.1 million during the nine months ended September 30, 2017 from $153.5 million during the nine months ended September 30, 2016. Average savings accounts increased $3.7 million, or 1.79%, to $210.1 million during the nine months ended September 30, 2017 from the same prior year period. For the nine months ended September 30, 2017 and 2016, money market and NOW accounts averaged $329.1 million and $295.8 million, respectively, which represented an increase of $33.3 million, or 11.26%.
Interest expense on average interest-bearing liabilities was $4.1$6.3 million, with an interest cost of 0.75%1.17%, for the ninesix months ended SeptemberJune 30, 20172020 compared to $3.8$5.8 million, with an interest cost of 0.70%1.40%, for the same nine months of 2016.period in the prior year. The interest cost declined 23 basis points at June 30, 2020 compared to June 30, 2019 largely due to lower market interest rates. The increase of $282,000 in interest expense onaverage interest-bearing liabilities when comparingincluded average interest-bearing deposits of $174.6 million acquired in the nine-month periodsShore Merger. Of the total increase in average interest-bearing liabilities of 2017 and 2016, primarily reflected$249.9 million, certificates of deposit, which generally have a higher deposit and borrowings interest costs duecost than non-maturity deposits, increased $99.3 million. Management will continue to higher short-term marketmonitor the interest rates which were partially offset by the decline in balances of other borrowingspaid on deposits and certificate of deposits.adjust them based on then current market conditions.

The net interest margin on a tax-equivalent basis increased to 3.76%was 3.66% for the ninesix months ended SeptemberJune 30, 20172020 compared to 3.73%4.13% for the ninesix months ended SeptemberJune 30, 2016, primarily due to2019. The 47 basis points decline in the highernet interest margin year over year was a result of a decline of 66 basis points in the yield on interest-earning assets.of average interest-bearing assets, which was partially offset by a decline of 23 basis points in interest cost of the average interest-bearing liabilities.

Provision for Loan Losses

Management considers a complete review of the following specific factors in determining the provisions for loan losses: historical losses by loan category, the level of non-accrual loans and problem loans as identified through internal review and classification, collateral values and the growth, size and risk elements of the loan portfolio. In addition to these factors, management takes into consideration current economic conditions and local real estate market conditions.
In general, overAs a result of the last three years,economic and social disruption caused by the Bank experienced an improvement in loan credit quality and achieved a steady resolution of non-performing loans and assets related to the severe recession, which was reflectedCOVID-19 pandemic, in the current levelsecond quarter of non-performing loans at September 30, 2017. Net charge-offs of2020 management reviewed construction, commercial business and commercial real estate loans in 2017, 2016that had been modified to defer interest and 2015 have declined significantly, which has resulted in a reductionor principal for up to 90 days with special emphasis on hotel and restaurant-food service industries as most likely to be adversely impacted by the economic disruption caused by the pandemic. Prior to March 2020, when the impacts of the historical loss factors for these segments ofCOVID-19 pandemic began to be realized, the general economic environment in New Jersey and the New York City metropolitan area had been positive with stable and expanding economic activity, and the Company had generally experienced stable loan portfolio that were applied by management to estimatecredit quality over the allowance for loan losses at September 30, 2017.past five years.

Three months ended SeptemberJune 30, 20172020 compared to three months ended SeptemberJune 30, 20162019
During the third quarter of 2017, the Bank
The Company recorded a provision for loan losses of $150,000, charge-offs$2.1 million for the second quarter of $61,000 and recoveries of loans previously charged-off of $6,0002020 compared to no recordeda provision for loan losses no charge-offs and recoveries of loans previously charged-off of $4,000 recorded during$400,000 for the thirdsecond quarter of 2016. A2019. The significant increase in the provision for loan losses was recorded in the thirdsecond quarter of 2017 due primarily2020 included an additional provision of approximately $1.2 million that reflected an increase in the qualitative factors attributed to the modification and deferral of principal and or interest up to 90 days on $147.5 million of loans at June 30, 2020. As a result of the deferral of payments requested by and granted to these borrowers, management concluded that, although these loans generally were credit rated “Watch,” the deferral of payments indicated a somewhat weaker financial strength than “Pass” credit rated loans warranting an additional reserve for estimated incurred losses. During the second quarter of 2020, total loans downgraded to credit ratings of “Special Mention”, “Substandard” and “Doubtful” were $8.9 million, $5.2 million and $151,000, respectively. As a result of these downgrades, an additional provision for loan losses of approximately $850,000 was recorded. The higher provision also reflects, to a lesser extent, the growth and the change in the mix of loans in the loan portfolio. TheAt June 30, 2020 total loans were $1.4 billion and the allowance for loan losses was $7.8$12.1 million, or 1.01%0.89% of total loans, compared to total loans of $967.8 million and an allowance for loan losses of $8.6 million, or 0.89% of total loans, at June 30, 2019. Included in loans at June 30, 2020 were $200.0 million of loans that were acquired in the Shore Merger. Acquisition accounting for the Shore Merger in 2019 and the New Jersey Community Bank (“NJCB”) merger in 2018 resulted in the former Shore and NJCB loans being recorded at Septembertheir fair value and no allowance for loan losses as of the effective time of the respective mergers. The unaccreted general credit fair value discounts related to the former Shore and NJCB loans were approximately $1.9 million and $0.6 million at June 30, 2017 compared to $7.52020, respectively. In addition, at June 30, 2020 there were $75.1 million or 1.00% of SBA PPP loans at September 30, 2016which are 100% guaranteed by the SBA and, $7.5 million, or 1.03% of loans, at December 31, 2016.accordingly, no reserve was provided.

NineSix months ended SeptemberJune 30, 20172020 compared to ninesix months ended SeptemberJune 30, 20162019
The Company recorded a provision for loan losses of $450,000$3.0 million for the ninesix months ended SeptemberJune 30, 2017 compared to2020, representing an increase of $2.3 million from a credit (negative) provision for loan losses of $700,000 for the six months ended June 30, 2019. The significant increase in the amount of $300,000provision for loan losses for the ninefirst six months of 2020 was to reserve for the estimated increase in incurred loan losses due primarily to the economic and social disruption caused by the COVID-19 pandemic. The principal components of the increase were: a provision of $388,000, which reflected an increase in the qualitative factors for national and local economic conditions due to the weakening economic operating environment; a provision of $1.2 million for an increase in the qualitative factors attributed to the modification of loans and deferral of principal and or interest on $147.5 million of loans; and an $850,000 provision related to the downgrade of the credit ratings on certain loans. The higher provision also reflects, to a lesser extent, the growth and change in mix of the loan portfolio. Net charge-offs were $165,000 for the six months ended SeptemberJune 30, 2016. For2020 compared to $481,000 for the ninesix months ended SeptemberJune 30, 2017, the Company recorded charge-offs of $162,000 and recoveries of previously charged-off loans of $20,000, while charge-offs of $161,000 and recoveries of previously charged-off loans of $387,000 were recorded during the nine months ended September 30, 2016.2019.




Non-Interest Income

Three months ended SeptemberJune 30, 20172020 compared to three months ended SeptemberJune 30, 20162019

Non-interest income was $3.1 million for the second quarter of 2020, representing an increase of $930,000, or 42.9%, compared to $2.2 million for the second quarter of 2019. The significant increase in non-interest income was driven primarily by a $961,000 increase in gain on the sales of loans.

For the second quarter of 2020, residential mortgage banking operations originated approximately $76.0 million of residential mortgages, sold $76.6 million of residential mortgages and recorded $2.1 million of gain on sales of loans compared to $26.2 million of residential mortgages originated, $28.3 million of residential mortgage loans sold and $878,000 of gain on sales of loans recorded for the second quarter of 2019. The residential mortgage loan pipeline was $48.6 million at June 30, 2020 and was comprised 60% of refinance and 40% of purchase loan applications and commitments for mortgages. Management believes that the increase in residential mortgage loans sold was due primarily to increased residential mortgage lending activity as a result of lower mortgage interest rates in the 2020 period compared to the 2019 period.

Due to the disruption and uncertainty caused by the COVID-19 pandemic, no SBA loans were originated or sold and no gain on sales of loans was recorded for the second quarter of 2020 compared to $4.7 million of SBA loans sold and gain on sales of loans of $282,000 recorded for the second quarter of 2019. However, SBA lending activity continued during the second quarter of 2020 and at June 30, 2020 the SBA pipeline of applications and commitments was $7.7 million.

Service charges on deposit accounts for the three months ended June 30, 2020 decreased $27,000 compared to the three months ended June 30, 2019 primarily due to lower overdraft fees. Income on Bank-owned life insurance (“BOLI”) for the three months ended June 30, 2020 increased $115,000 compared to the three months ended June 30, 2019 due primarily to the increase in BOLI acquired in the Shore Merger. Other income decreased $129,000 for the second quarter of 2020 compared to the second quarter of 2019 primarily due to a gain from the sale of OREO of $137,000 in the second quarter of 2019.

In future periods, sales of residential mortgages may decline due to a lower level of refinancing activity and or a lower level of residential home purchases due to the economic and social disruption caused by the COVID-19 pandemic. A decline in sales of residential mortgages could result in lower gain on sales of loans and a decline of non-interest income. The origination and sale of SBA loans may continue to be depressed due to lower demand for financing by customers.

Six months ended June 30, 2020 compared to six months ended June 30, 2019
Total non-interest income was $2.1for the six months ended June 30, 2020 increased $1.5 million, and $1.8or 37.7%, to $5.5 million compared to total non-interest income of $4.0 million for the third quarters of 2017 and 2016, respectively, an increase of $356,000, or 20.2%, when the 2017 quarter is compared to the 2016 quarter and wassix months ended June 30, 2019 due primarily to increases in gain ofon the sales of loans and income from Bank-owned life insurance ("BOLI"), which were partially offset by a decrease in service charge income and other income.loans.
For the third quarters of 2017 and 2016, gains of sales of loans was $1.3 million and $876,000, respectively, an increase of $453,000. The BankCompany originates and sells commercial loans guaranteed by the SBA and residential mortgage loans in the secondary market. SBA guaranteed commercialFor the six months ended June 30, 2020, $115.8 million of residential mortgages were originated and $110.6 million of residential mortgages were sold, which generated gain on sales of loans of $3.3 million, as compared to $54.1 million of residential mortgages originated and $47.9 million of residential mortgage sold, which generated gain on sales of loans of $1.6 million, for the six months ended June 30, 2019. The increase in residential mortgage loans sold was due primarily to increased residential mortgage lending activity anddue to a lower interest rate environment for the first six months of 2020 compared to the same period in 2019.
For the six months ended June 30, 2020, SBA loan sales vary from periodwere $2.7 million and gain on sales of loans of $226,000 was recorded compared to period. In the third quarter of 2017, $5.8$7.9 million of SBA loans were sold and gains of $520,000 were recorded compared to $3.5 milliongain on sales of loans sold and gains of $347,000$612,000 recorded infor the third quarter of 2016. At Septembersix months ended June 30, 2017, the pipeline of approved and committed SBA loans was $5.7 million with another $10.2 million in process.
Residential mortgages totaling $28.9 million were sold and $809,000 of gains were recorded in the third quarter of 2017 compared to $12.2 million of loans sold and $529,000 of gains recorded in the third quarter of 2016. Residential mortgage lending activity was higher in the third quarter of 2017 as compared to the third quarter of 2016 due primarily to the residential mortgage lending team that joined the Bank in August 2016.2019.
Service charges on deposit accounts decreased $43,000, or 23.24%,increased modestly to $142,000$345,000 for the third quarter of 2017six months ended June 30, 2020 from $185,000 in the same quarter of 2016, primarily due to lower customer fees for insufficient funds.
Non-interest income also includes income from BOLI, which amounted to $131,000$325,000 for the threesix months ended SeptemberJune 30, 2017 compared to $113,000 for the three months ended September 30, 2016.2019.
For the third quarter of 2017,six months ended June 30, 2020, income on BOLI increased $155,000 to $444,000, due primarily to the Company recorded other income of $490,000, representing a decrease of $96,000 from $586,000increase in BOLI acquired in the Shore Merger compared to $289,000 for the third quarter of 2016, which included a recovery of $77,000 on an acquired loan during such period.

Ninesix months ended SeptemberJune 30, 20172019. Other income decreased $59,000 to $1.1 million compared to nine months ended September 30, 2016
Total non-interest income for the nine months ended September 30, 2017 was $6.3 million and increased $1.4 million, or 28.6%, compared to total non-interest income of $4.9$1.2 million for the ninesix months ended SeptemberJune 30, 2016, primarily2019 in part due to increases in gainsa gain on the sale of loans and securities, which were partially offset by decreases in service charge income and income from BOLI.
Gains on salesOREO of loans originated for sale increased by $1.4 million to $3.9 million for the nine months ended September 30, 2017 compared to $2.5 million for the same nine-month period in 2016. The Bank sells both loans guaranteed by the SBA and residential mortgage loans$137,000 recorded in the secondary market. For the nine months ended September 30, 2017, SBA loan sales were $11.8 million and generated gains on salessecond quarter of loans of approximately $1.1 million compared to SBA loan sales of $13.3 million that generated gains on sales of $1.3 million for the nine months ended September 30, 2016.
For the nine months ended September 30, 2017, the Bank's residential mortgage banking operation sold $92.3 million of residential mortgage loans, which generated gains from the sales of loans of $2.9 million, as compared to sales of $50.7 million of residential mortgage loans, which generated gains of $1.3 million, during the nine months ended September 30, 2016. As noted above, the increase in residential lending activity and gains on the sale of loans was due to the the addition of residential mortgage lending personnel in August 2016, resulting in a significant increase in the volume of loans originated and sold for the first nine months of 2017 compared to the same period of 2016.
The decrease in service charge revenues of $113,000 to $445,000 for the nine months ended September 30, 2017 compared to $558,000 for the nine months ended September 30, 2016 was primarily due to lower monthly service charges and lower overdraft fees collected on deposit accounts.
For the nine months ended September 30, 2017 and 2016, income from BOLI was $391,000 and $414,000, respectively. Other income for the nine months ended September 30, 2017 and 2016 was approximately $1.4 million.2019.


Non-Interest Expenses
For the third quarter of 2017,three months ended June 30, 2020, non-interest expenses were $7.6$9.8 million compared to $6.7$8.6 million for the same quarter of 2016,three months ended June 30, 2019, representing an increase of $955,000,$1.3 million, or 14.3%, primarily14.8%. The primary reason for the increase was $950,000 of expenses due to increasesthe inclusion of the former Shore operations in salaries and employee benefits, regulatory, professional and other fees and other expenses, which were partially offset by decreases in FDIC insurance expense and occupancy expense.the second quarter of 2020.

The following table presents the major components of non-interest expenses for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016:2019:

 Three months ended September 30, Nine months ended September 30,
(Dollars in thousands)2017 2016 2017 2016
Salaries and employee benefits$4,617
 $4,102
 $13,882
 $11,887
Occupancy expense865
 911
 2,604
 2,618
Data processing expenses338
 314
 983
 941
FDIC insurance expense95
 105
 255
 328
Other real estate owned expenses11
 12
 26
 76
Equipment expense151
 98
 436
 346
Marketing42
 59
 182
 163
Regulatory, professional and other fees625
 413
 1,762
 1,230
Directors’ fees26
 20
 73
 67
Amortization of intangible assets96
 101
 289
 303
Other expenses751
 527
 2,462
 1,766
Total$7,617
 $6,662
 $22,954
 $19,725
`
 Three months ended June 30, Six months ended June 30,
(Dollars in thousands)2020 2019 2020 2019
Salaries and employee benefits$6,001
 $5,278
 $12,170
 $10,241
Occupancy expense1,205
 991
 2,375
 2,012
Data processing expenses470
 345
 916
 693
Equipment expense412
 295
 823
 619
Marketing34
 111
 78
 191
Telephone129
 97
 254
 193
Regulatory, professional and consulting fees497
 376
 961
 833
Insurance127
 97
 246
 187
Supplies111
 57
 208
 123
FDIC insurance expense225
 60
 259
 160
Other real estate owned expenses14
 34
 31
 82
Merger-related expense—
 258
 64
 273
Amortization of intangible assets91
 31
 213
 63
Other expenses521
 536
 1,032
 990
Total$9,837
 $8,566
 $19,630
 $16,660

Three months ended SeptemberJune 30, 20172020 compared to three months ended SeptemberJune 30, 20162019

Salaries and employee benefits, which represent the largest portion of non-interest expenses, increased by $515,000,$723,000, or 12.6%13.7%, to $4.6$6.0 million for the three months ended SeptemberJune 30, 20172020 compared to $4.1$5.3 million for the three months ended SeptemberJune 30, 2016. The increase in2019, due primarily to salaries and benefits for former Shore employees ($442,000) who joined the Company, higher commissions expense of $421,000 related to the origination of residential mortgage loans primarily for sale, merit increases and increases in employee benefits wasbenefit expenses, which amounts were partially offset by higher deferred loan origination expenses of approximately $338,000 related to the origination of SBA PPP loans.

Occupancy expense increased $214,000, or 21.6%, to $1.2 million for the three months ended June 30, 2020, due primarily to the addition of the five former Shore branch offices and the opening of a new branch office in Long Branch in June 2019 compared to $1.0 million for the three months ended June 30, 2019.

Data processing expenses increased $125,000, or 36.2%, to $470,000 for the second quarter of 2020 compared to $345,000 for the second quarter of 2019 due primarily to the addition of the former Shore operations ($110,000) and increases in loans, deposits and other customer services.

Equipment expense increased $117,000, or 39.7%, to $412,000 in the second quarter of 2020 compared to $295,000 for the second quarter of 2019 due primarily to the addition of equipment and maintenance agreements related to the inclusion of Shore operations.

Regulatory, professional and consulting fees increased $121,000, or 32.2%, to $497,000 in the second quarter of 2020 compared to $376,000 for the second quarter of 2019 due primarily to an increase in legal services.

Supplies increased $54,000, or 94.7%, to $111,000 for the second quarter of $199,0002020 compared to $57,000 for the second quarter of 2019 due primarily to the addition of five former Shore branch offices, the opening of a new branch in commissions paid to residential loan officersLong Branch and, in part, due to the higher volumepurchase of residential mortgages originated and sold in the third quarter of 2017 compared to the third quarter of 2016. Deferred loan origination costs, which are netted against salaries and employee benefits, were $292,000 and $430,000 for the third quarters of 2017 and 2016, respectively, declining $138,000 between periods. Merit increases, increases in employer payroll taxes and increases in employee benefits expense comprised the balance of the increase.COVID-19-related protective supplies.
Occupancy expense decreased by $46,000, or 5.0%, to $865,000 for the third quarter of 2017 compared to $911,000 for the same quarter in 2016, primarily due to the closing of a branch office at the end of the first quarter of 2017.
The cost of data processing services increased $24,000 to $338,000 for the third quarter of 2017 as compared to $314,000 for the third quarter of 2016 due to increases in customers' accounts and higher transaction activity.
The Company recorded
FDIC insurance expense of $95,000 and $105,000increased $165,000, or 275.0%, to $225,000 for the third quarterssecond quarter of 20172020 from $60,000 for the second quarter of 2019, due primarily to the growth of assets, the Shore Merger and 2016, respectively, a decrease of $10,000 primarily due to a lower assessment rate that reflected the improvement in asset quality and the improved financial performance of the Bankan increase in the last two yearsFDIC assessment rate.

For the second quarter of 2020, there were no merger-related expenses compared to $258,000 for the second quarter of 2019 related to legal and a lower assessment ratefinancial advisory fees incurred for smaller banks.the pending Shore Merger.
Regulatory, professional and other fees
Amortization of intangible assets increased $212,000,$60,000, or 51.3%193.5%, to $625,000$91,000 for the three months ended SeptemberJune 30, 2017 from $413,0002020 compared to $31,000 for the same periodthree months ended June 30, 2019 due primarily to the $67,000 amortization of 2016 primarilythe core deposit intangible related to the Shore Merger.

Non-interest expenses may increase, if there is a significant increase in non-performing loans, due to higher professional and consulting fees. For the third quarter of 2017 as compared to the third quarter of 2016, increases of $84,000 in consulting expense, primarily for marketing and loan collection costs, and $115,000 in legal expense, primarilyexpenses for loan collection and related litigation costs,recovery costs. In addition, FDIC insurance expense may increase if the Bank’s financial condition is adversely impacted by a higher level of non-performing loans and assets.

Six months ended June 30, 2020 compared to six months ended June 30, 2019
Non-interest expenses were incurred. The levels$19.6 million for the six months ended June 30, 2020 compared to $16.7 million for the six months ended June 30, 2019, representing an increase of regulatory, professional and consulting fees have also increased over the last several years$3.0 million, or 17.8%, due primarily to compliance$1.9 million of expenses incurred in connection with increased regulatory requirements, management of enterprise riskthe former Shore operations and information security and additional internal and external audit fees, including attestation requirements regarding internal controls over financial reporting as a resultgeneral increases year-over-year due to the growth of the Company becoming an "Accelerated Filer" for SEC reporting purposes for the year ended December 31, 2016 and subsequent periods.
The Company recorded other expenses of $751,000 for the third quarter of 2017 as compared to $527,000 for the third quarter of 2016, an increase of $224,000 due to increases in various expense categories.
Company.





Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
Salaries and employee benefits, which represent the largest portion of non-interest expenses, were $13.9increased $1.9 million, and $11.9or 18.8%, to $12.2 million for the ninesix months ended SeptemberJune 30, 20172020 compared to $10.2 million for the six months ended June 30, 2019, due primarily to salaries and 2016, respectively, an increasebenefits for former Shore employees ($928,000) who joined the Company, higher commissions expense of $2.0 million, or 16.8%. The increase in salary and employee benefits expense includes $741,000 of commissions paid$749,000 related to residential loan officers as a result of the higher volumeorigination of residential mortgage loans originated in the first nine months of 2017. The increase also includes $639,000 of salaries resulting from the employment of additional residential mortgage personnel andprimarily for sale, merit increases as well as a $220,000 increaseand increases in benefitsemployee benefit expenses.

Occupancy expense and an increase of $215,000 in share-based compensation expense. In addition, deferred loan origination costs were $174,000 lowerincreased $363,000or 18.0% to $2.4 million for the ninesix months ended SeptemberJune 30, 20172020 compared $2.0 million for the six months ended June 30, 2019, due primarily to the addition of the five former Shore branch offices and the opening of a new branch in Long Branch in June 2019.

Data processing expenses increased $223,000, or 32.2%, to $916,000 for the six months ended June 30, 2020 compared to the same period in 2016.
The cost of data processing services increased to $983,000$693,000 for the ninesix months ended SeptemberJune 30, 2017 from $941,0002019, due primarily to the addition of the Shore operations ($195,000) and increases in loans, deposits and other customer services.

Equipment expense increased $204,000, or 33.0%, to $823,000 for the ninesix months ended SeptemberJune 30, 2016 due2020 compared to increases in customers' accounts and transaction activity. The Company recorded FDIC insurance expense of $255,000 and $328,000$619,000 for the ninesix months ended SeptemberJune 30, 20172019, due primarily to additional equipment and 2016, respectively, a declinemaintenance agreements related to the inclusion of $73,000, or 22.3%, when comparing the year over year periods, primarily as a result of a lower assessment rate, which reflected the lower level of net charge-offs, the lower level of non-performing assets and the improved financial performance of the Bank in the last two years.Shore operations.
Other real estate owned expenses decreased by $50,000 to $26,000 for the nine months ended September 30, 2017 when compared to $76,000 for the same nine months of 2016 due to different types and amounts of expenses that were associated with the OREO assets. At September 30, 2017, there was one multi-family residential property and one commercial real estate property with an aggregate carrying value of $356,000 compared to one commercial property with a carrying value of $166,000 as OREO at September 30, 2016.
Regulatory, professional and otherconsulting fees increased by $532,000,$128,000, or 43.3%15.4%, to $1.8 million$961,000 for the ninesix months ended SeptemberJune 30, 20172020 compared to $1.2 million$833,000 for the ninesix months ended SeptemberJune 30, 20162019, due primarily to increasesan increase in consulting and legal expenses,services.

Supplies increased $85,000, or 69.1%, to $208,000 for the six months ended June 30, 2020 compared to $123,000 for the six months ended June 30, 2019, due primarily for marketing, loan collection and litigation costs, and internal and external professional audit fees, including attestation requirements regarding internal controls over financial reporting as a resultto growth of the Company, becoming an "Accelerated Filer" for SEC purposesthe inclusion of the former Shore operations and the purchase of COVID-19-related protective supplies.

FDIC insurance expense increased $99,000, or 61.9%, to $259,000 for the yearsix months ended December 31, 2016June 30, 2020 compared to $160,000 for the six months ended June 30, 2019, due primarily to the growth of assets, the acquisition of Shore and subsequent periods.
The Company recorded an increase in otherthe FDIC assessment rate.

Merger-related expenses of $696,000declined to $2.5 million$64,000 for the ninesix months ended SeptemberJune 30, 2017 as2020 compared to $1.8 million$273,000 for the same nine-month period in 2016. During 2017, Management updated its deferred loan origination cost analysis and methodology, which resulted in the identification of approximately $500,000 of deferred loan origination costs at December 31, 2016 that were charged to expense in the first quarter of 2017. The balance of the increase wassix months ended June 30, 2019, due to smaller increaseshigher legal and financial advisory fees incurred in various expense categories.connection with the Shore Merger in 2019.

Amortization of intangible assets increased $150,000, or 238.1%, to $213,000 for the six months ended June 30, 2020 compared to $63,000 for the six months ended June 30, 2019, due primarily to the amortization of a core deposit intangible related to the Shore Merger.







Income Taxes

Three months ended SeptemberJune 30, 20172020 compared to three months ended SeptemberJune 30, 20162019
Pre-tax income
Income tax expense was $3.7$1.3 million for the three months ended September 30, 2017 compared to $4.2 million for the three months ended September 30, 2016.
The Company recorded income tax expense of $1.2 million for the thirdsecond quarter of 2017 as compared to $1.5 million for the same quarter of 2016. Income tax expense decreased primarily due to the decrease in pre-tax income. The effective income tax rate was 33.1% for the three months ended September 30, 2017 compared to 35.1% for the three months ended September 30, 2016. The effective tax rate decreased due to the higher percentage of tax-exempt interest income and income on bank-owned life insurance as compared to pre-tax income in the third quarter of 2017 compared to such percentage in the third quarter of 2016.
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
Pre-tax income was $9.3 million for the nine months ended September 30, 2017 compared to pre-tax income of $10.8 million for the nine months ended September 30, 2016.
The Company recorded income tax expense of $2.9 million and $3.6 million for the nine months ended September 30, 2017 and 2016, respectively,2020, which resulted in an effective tax rate of 31.5% and 33.3%26.0%, respectively. compared to income tax expense of $1.3 million, which resulted in an effective tax rate of 27.3% for the second quarter of 2019. The reduction in the effective tax rate for 2020 was due primarily to the 1.00% lower New Jersey state statutory rate in 2020 than in 2019.

Six months ended June 30, 2020 compared to six months ended June 30, 2019

Income tax expense decreased primarily due towas $2.6 million for the decreasesix months ended June 30, 2020, which resulted in pre-tax income. Thean effective tax rate decreasedof 26.6%, compared to income tax expense of $2.6 million, which resulted in an effective tax rate of 27.5% for the six months ended June 30, 2019. The reduction in the effective tax rate for 2020 was due primarily to the higher percentage1.00% lower New Jersey state statutory tax rate in 2020 than in 2019 and the effect of tax-exempt interest income and income on bank-owned life insurance as compared to pre-tax income for the nine months ended September 30, 2017 compared to such percentagenon-deductible merger expenses in the nine months ended September 30, 2016.





2019 period.

Financial ConditionFINANCIAL CONDITION

SeptemberJune 30, 2017 Compared with2020 compared to December 31, 20162019

Total consolidated assets were $1.74 billion at SeptemberJune 30, 2017 were $1.07 billion,2020, representing an increase of $31.2$154.7 million or 3.0%, from total consolidated assets of $1.04$1.59 billion at December 31, 2016.2019. This increase was due primarily to a $139.4 million increase in total loans, a $13.7 million increase in total investment securities and a $5.2 million increase in loans held for sale. The increase in assets was funded primarily attributable to anby a $132.0 million increase of $47.2 million in total loans, which was partially offset by decreases of $8.8deposits and a $15.2 million increase in investment securities and $8.8 million in loans held for sale.short-term borrowings.

Cash and Cash Equivalents

Cash and cash equivalents totaled $12.6 million at SeptemberJune 30, 2017 totaled $15.7 million2020 compared to $14.9$14.8 million at December 31, 2016,2019, representing a decrease of $2.3 million. The decrease in cash and cash equivalents reflects a short-term decrease in interest-earning deposits, partially offset by an increase in cash and due from banks, due to the timing of $771,000. To the extent that the Bank does not utilize funds for loan originations or securities purchases, the cash inflows are invested in overnight deposits at the Federal Reserve Bank of New York.flows.

Loans Held for Sale

Loans held for sale were $11.1 million at SeptemberJune 30, 2017 were $6.0 million2020 compared to $14.8$5.9 million at December 31, 2016.2019. The amount of loans held for sale varies from period to period due to changes in the amount and timing of sales of residential mortgages.mortgage loans and SBA guaranteed commercial loans.

Investment Securities

Investment securities represented approximately 20.7%14.1% of total assets at SeptemberJune 30, 20172020 and approximately 22.2%14.7% of total assets at December 31, 2016.2019. Total investment securities decreased $8.8increased $13.7 million or 3.8%, to $221.8$246.1 million at SeptemberJune 30, 20172020 from $230.6$232.4 million at December 31, 2016.2019. Purchases of investment securities totaled $46.2$49.8 million during the ninesix months ended SeptemberJune 30, 2017,2020, and proceeds from sales, calls, maturities and payments totaled $55.1$37.0 million during this same period.

Securities available for sale are investments that may be sold in response to changing market and interest rate conditions or for other business purposes. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create economically attractive returns.  At SeptemberJune 30, 2017,2020, securities available for sale totaled $110.3were $151.7 million, an increaserepresenting a decrease of $6.5$4.1 million or 6.2%, compared tofrom securities available for sale totaling $103.8of $155.8 million at December 31, 2016.2019.

At SeptemberJune 30, 2017,2020, the securities available for sale portfolio had net unrealized gains of $189,000$1.9 million compared to net unrealized lossesgains of $464,000$414,000 at December 31, 2016.2019.  These net unrealized gains and losses were reflected, net of tax, in shareholders’ equity as a component of accumulated other comprehensive income.

Securities held to maturity, which are carried at amortized historical cost, are investments for which there is the positive intent and ability to hold to maturity.  At SeptemberJune 30, 2017,2020, securities held to maturity were $111.6$94.4 million, a decreaserepresenting an increase of $15.3$17.8 million from $126.8$76.6 million at December 31, 2016.2019.  The fair value of the held to maturity portfolio was $97.6 million at SeptemberJune 30, 2017 was $113.8 million.2020.



Loans

The loan portfolio, which represents the Bank'sCompany’s largest asset, is a significant source of both interest and fee income. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk. The Bank’sCompany’s primary lending focus continues to be the financing of mortgage warehouse lines, construction loans, commercial business loans, owner-occupied commercial mortgage loans and commercial real estate loans on income-producing assets.


The following table represents the components of the loan portfolio at SeptemberJune 30, 20172020 and December 31, 2016:2019:
 September 30, 2017 December 31, 2016June 30, 2020 December 31, 2019
(Dollars in thousands) Amount % Amount %Amount % Amount %
Construction loans $127,604
 17% $96,035
 13%
Residential real estate loans 41,958
 5% 44,791
 6%
Commercial business 94,031
 12% 99,650
 14%
Commercial real estate 291,382
 38% 242,393
 34%$592,276
 44% $567,655
 47%
Mortgage warehouse lines 193,535
 25% 216,259
 30%297,093
 22
 236,672
 20
Construction loans135,182
 10
 148,939
 12
Commercial business216,249
 16
 139,271
 11
Residential real estate87,862
 6
 90,259
 7
Loans to individuals 22,611
 3% 23,736
 3%28,320
 2
 32,604
 3
Other loans 186
 —% 207
 —%128
 —
 137
 —
Gross loans 771,307
 

 723,071
 

Deferred loan costs, net 675
   1,737
  
Total loans $771,982
 100% $724,808
 100%1,357,110
 100% 1,215,537
 100%
Deferred loan (fees) costs, net(1,674)   491
  
Total loans, including deferred loans (fees) costs, net$1,355,436
   $1,216,028
  
Total loans increased by $47.2$139.4 million, or 6.5%11.5%, to $772.0$1.4 billion at June 30, 2020 compared to $1.2 billion at December 31, 2019. Commercial business loans increased $77.0 million, which included $75.1 million in SBA PPP loans, mortgage warehouse loans increased $60.4 million and commercial real estate loans increased $24.6 million. Partially offsetting these increases, construction loans decreased $13.8 million, loans to individuals decreased $4.3 million and residential mortgage loans decreased $2.4 million.

Commercial real estate loans totaled $592.3 million at SeptemberJune 30, 20172020, representing an increase of $24.6 million compared to $724.8$567.7 million at December 31, 2016 due primarily to increases in commercial2019. Commercial real estate and construction loans. Commercial business, commercialloans consist primarily of loans to businesses that are collateralized by real estate and construction loans were $513.0 million at September 30, 2017 and increased $88.2 million, or 20.8%, compared to $424.8 million at September 30, 2016 and increased $74.9 million, or 17.1%, compared to $438.1 million at December 31, 2016.
Mortgage warehouse lines' outstanding balances decreased $22.7 million to $193.5 million at September 30, 2017 compared to $216.3 million at December 31, 2016, reflecting lower levels of residential mortgage originations by the Bank’s mortgage banking customers that were primarily due to a lower level of residential mortgage loan refinancing activity as a result of higher mortgage interest ratesassets employed in the first three quartersoperation of 2017 comparedthe business and loans to real estate investors to finance the first three quartersacquisition and/or improvement of 2016.owned income-producing commercial properties.
The Bank’s mortgage warehouse 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 finance the origination of one-to-four family residential mortgage loans that are pre-sold to 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 the Government National Mortgage Association. 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.  InterestThe Bank collects interest and a transaction fee are collected by the Bank at the time of repayment. The Bank funded $893.6Mortgage warehouse loans totaled $297.1 million of residential mortgages through customers' warehouse lines of credit in the third quarter of 2017at June 30, 2020 compared to $1.1 billion in$236.7 million at December 31, 2019. In the third quarterfirst six months of 2016. For the nine months ended September 30, 2017, the Bank funded $2.62020, $2.0 billion of residential mortgagesmortgage loans were financed through customers'the mortgage warehouse lines of creditfunding group compared to $2.9$1.5 billion for the nine months ended September 30, 2016.
Commercial business loans decreased $5.6 million, or 5.6%, to $94.0 million during the first ninesix months of 2017. Commercial business loans consist2019. The higher level of funding activity was due primarily of loans to small and middle market businesses and are typically working capital loans usedthe lower interest rate environment in 2020 than in 2019, which resulted in an increase in refinance activity in 2020 compared to finance inventory, receivables or equipment needs. These loans are generally secured by business assets of the commercial borrower.2019.
Commercial real estate loans increased $49.0 million, or 20.2%, to $291.4 million during the first nine months of 2017. Commercial real estate loans consist  primarily of loans to businesses collateralized by real estate employed in the business and loans to finance income-producing properties.
Construction loans increased $31.6totaled $135.2 million at June 30, 2020 compared to $127.6$148.9 million during the first nine months of 2017.at December 31, 2019. 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 properties and income-producing properties. First mortgage construction loans are made to developers and builders for single family homes or multi-family buildings that are presoldpre-sold or are to be sold or leased on a speculative basis. The Bank lends to developers and builders with established relationships, successful operating histories and sound financial resources.
The In many cases the Bank also financesprovides the constructionmortgage loan to the customer upon completion of individual, owner-occupied single family homes.the project.

Commercial business loans totaled $216.2 million at June 30, 2020 compared to $139.3 million at December 31, 2019. As a SBA preferred lender, the Bank is participating in the SBA PPP, which was established under the CARES Act and has funded $75.1 million in SBA PPP loans as of June 30, 2020. Commercial business loans consist primarily of loans to small and middle market businesses and are typically working capital loans used to finance inventory, receivables or equipment needs. These loans are madegenerally secured by business assets of the commercial borrower.



Residential real estate loans totaled $87.9 million at June 30, 2020 compared to qualified individual borrowers and$90.3 million at December 31, 2019. Loans to individuals, which are generally supported by a take-out commitment from a permanent lender.comprised primarily of home equity loans, totaled $28.3 million at June 30, 2020 compared to $32.6 million at December 31, 2019.

The ability of the Company to enter into larger loan relationships and management’s philosophy of relationship banking are key factors in the Company’s strategy for loan growth.  The ultimate collectability of the loan portfolio and recovery of the carrying amount of real estate are subject to changes in the economic environment and real estate market in the Company’s market region.region, which is primarily New Jersey and the New York City metropolitan area.

If the economic disruption caused by the COVID-19 pandemic continues for an extended period of time, the Company may experience a decline in the origination of new loans and total loans could decline.


Non-Performing Assets

Non-Performing Assets
Non-performing assets consist of non-performing loans and other real estate owned. Non-performing loans are composed of (1) loans on a non-accrual basis and (2) loans which are contractually past due 90 days or more as to interest and principal payments but which have not been classified as non-accrual. Included in non-accrual loans are loans, whosethe terms of which have been restructured to provide a reduction or deferral of interest and/or principal because of deterioration in the financial position of the borrower and which have not performed in accordance with the restructured terms. Loan payments that are deferred due to COVID-19 continue to accrue interest and are not presented as past due in the table below.

The Bank’s policy with regard to non-accrual loans is that, generally, loans are placed on a non-accrual status when they are 90 days past due, unless these loans are well secured and in process of collection or, regardless of the past due status of the loan, when management determines that the complete recovery of principal or interest is in doubt.  Consumer loans are generally charged off after they become 120 days past due. Subsequent payments on loans in non-accrual status are credited to income only if collection of principal is not in doubt.

At SeptemberJune 30, 2017,2020, non-performing loans increased by $1.3$9.0 million to $6.5$13.5 million from $5.2$4.5 million at December 31, 20162019, and the ratio of non-performing loans to total loans increased to 0.84%1.00% at SeptemberJune 30, 20172020 compared to 0.72%0.37% at December 31, 2016.2019. During the third quartersix months ended June 30, 2020, $773,000 of 2017, $365,000 in non-performing loans were resolved, $165,000 of loans were charged-off and $9.8 million of loans were placed on non-accrual. During the first six months of 2020, a $7.5 million participation in a construction loan, $1.7 million in commercial real estate loans, a $84,000 commercial business loan, $320,000 of loans to individuals and a commercial$162,000 residential loan with a balance of $775,000 and two residential second mortgages with combined balances of $78,000 were classified as non-accrual. The increase in non-performing loans was due primarily to a $4.0 million shared national credit syndicated loan that was placed on non-accrual in the first quarter of 2017. In the second quarter, the borrower was recapitalized through an equity contribution by new investors, the loan balance was reduced by $906,000 and all interest was paid current. non-accrual.

The major segments of non-accrual loans consist of commercial business, commercial real estate and residential real estate loans, which are in the process of collection. The table below sets forth non-performing assets and risk elements in the Bank’s portfolio for the periods indicated.

September 30, December 31,
(Dollars in thousands)2017 2016June 30, 2020 December 31, 2019
Non-performing loans:      
Loans 90 days or more past due and still accruing$—
 $24
$—
 $—
Non-accrual loans6,511
 5,174
13,519
 4,497
Total non-performing loans6,511
 5,198
13,519
 4,497
Other real estate owned356
 166
470
 571
Other repossessed assets—
 —
Total non-performing assets6,867
 5,364
13,989
 5,068
Performing troubled debt restructurings3,538
 864
6,102
 6,132
Performing troubled debt restructurings and total non-performing assets$10,405
 $6,228
$20,091
 $11,200
      
Non-performing loans to total loans0.84% 0.72%1.00% 0.37%
Non-performing loans to total loans excluding mortgage warehouse lines1.13% 1.02%1.28% 0.46%
Non-performing assets to total assets0.64% 0.52%0.80% 0.32%
Non-performing assets to total assets excluding mortgage warehouse lines0.78% 0.65%0.97% 0.38%
Total non-performing assets and performing troubled debt restructurings to total assets0.97% 0.60%1.15% 0.71%
Non-performing loans to total loans increased to 0.84% at September 30, 2017 from 0.72% at December 31, 2016 principally due to the increase in non-accrual loans.

Non-performing assets increased by $1.5$8.9 million to $6.9$14.0 million at SeptemberJune 30, 20172020 from $5.4$5.1 million at December 31, 2016.  Other real estate owned2019. OREO totaled $356,000$470,000 at SeptemberJune 30, 20172020 compared to $166,000$571,000 at December 31, 2016.2019. One residential lot acquired in the Shore Merger with a carrying value of $101,000 was sold in the first quarter of 2020. OREO at SeptemberJune 30, 20172020 was comprised of one multi-family property5 residential lots acquired in the Shore Merger with a carrying value of $377,000 and one commercial property.land with a carrying value of $93,000 that was foreclosed in the second quarter of 2018.

At SeptemberJune 30, 2017,2020, the Bank had eight13 loans totaling $5.3$6.4 million whichthat were troubled debt restructurings. TwoThree of these loans totaling $1.8 million$318,000 are included in the above table as non-accrual loans and the remaining sixten loans totaling $3.5$6.1 million are consideredwere performing. At December 31, 2016,2019, the Bank had nine13 loans totaling $4.5$6.4 million that were troubled debt restructurings. FiveThree of these loans totaling $3.6 million$345,000 are included in the above table as non-accrual loans and the remaining fournine loans totaling $864,000 are considered$6.1 million were performing.
As provided by ASC 310-30,
In accordance with U.S. GAAP, the excess of cash flows expected at acquisition over the initial investment in the purchase of a credit impaired loan is recognized as interest income over the life of the loan. ThereAt June 30, 2020, there were no12 loans acquired with evidence of deteriorated credit quality totaling $5.2 million that were not classified as non-performing at September 30, 2017 compared to $439,000 atloans. At December 31, 2016, which2019, there were 13 loans acquired with evidence of deteriorated credit quality totaling $5.4 million that were not classified as non-performing loans.


Non-performing assets represented 0.64% of total assets at September 30, 2017 compared to 0.52% of total assets at December 31, 2016.
Management takes a proactive approach in addressing delinquent loans. The Company’s President and Chief Executive Officer meets weekly with all loan officers to review the status of credits past-duepast due 10 days or more. An action plan is discussed for delinquent loans to determine the steps necessary to induce the borrower to cure the delinquency and restore the loan to a current status. In addition, delinquency notices are system-generated when loans are five days past-duepast due and again at 15 days past-due.past due.

In most cases, the Company’s collateral is real estate. If the collateral is foreclosed upon, the real estate is carried at fair market value less the estimated selling costs. The amount, if any, by which the recorded amount of the loan exceeds the fair market value of the collateral, less estimated selling costs, is a loss that is charged to the allowance for loan losses at the time of foreclosure or repossession. Resolution of a past-due loan through foreclosure can be delayed if the borrower files a bankruptcy petition because a collection action cannot be continued unless the Company first obtains relief from the automatic stay provided by the United States Bankruptcy Reform Act of 1978, as amended.

Summary of Other Real Estate Owned Activity    
(Dollars in thousands) Three months ended September 30, 2017   Nine months ended September 30, 2017
Balance - June 30, 2017 $356
 Balance - January 1, 2017 $166
  Transfers into real estate owned —
   Transfer into real estate owned 455
Sale of real estate owned —
   Sale of real estate owned (284)
Gain on sale of real estate owned —
 Gain on sale of real estate owned 14
Increase in carrying amount on real estate owned —
 Increase in carrying amount on real estate owned 5
Balance - September 30, 2017 $356
 Balance - September 30, 2017 $356
During the three months ended September 30, 2017, there was no activity in other real estate owned. During the nine months ended September 30, 2017, one multi-family residential property with a fair value of $190,000 and one commercial real estate property with a fair value of $265,000 were transferred to other real estate owned and one residential property with a carrying value of $270,000 was sold.

Allowance for Loan Losses and Related Provision

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 Company.

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

Due to the economic disruption and uncertainty caused by the pandemic, the allowance for loan losses may increase in future periods as borrowers are affected by the expected severe contraction of economic activity and the dramatic increase in unemployment. This may result in increases in loan delinquencies, downgrades of loan credit ratings and charge-offs in future periods. The allowance for loan losses may increase significantly to reflect the decline in the performance of the loan portfolio and the higher level of incurred losses.

All, or part, of the principal balance of commercial business 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, 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.


Management reviews the adequacy of the allowance 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 is an estimation of losses under ASC Topic 450, which provides guidance for estimating losses on groups of loans with similar risk characteristics. The Company’s methodology results in an allowance for loan losses that includes a specific reserve for impaired loans, an allocated reserve and an unallocated portion.

When analyzing groups of loans, under ASC Topic 450, the BankCompany follows the Interagency Policy Statement on the Allowance for Loan and Lease Losses.  The methodology considers the 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-accrualsnon-accruals;
Portfolio qualityquality;
Concentration of creditcredit;
Trends in volume of loansloans;
Quality of collateralcollateral;
Policy and proceduresprocedures;
Experience, ability and depth of managementmanagement;
Economic trends –- national and locallocal; and
External factors –- competition, legal and regulatoryregulatory.

The methodology includes the segregation of the loan portfolio into loan types 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 thisThis process that produces the watch list.  The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated. Based on these reviews,this evaluation, an estimate of probable losses for the individual larger-balance loans is determined, whenever possible, and used to establish specific loan loss reserves.  In general, for non-homogeneous loans not individually assessed and for homogeneous groups of loans, 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 classified as 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 Company often utilizes independent third partythird-party qualified appraisal firms, which 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 outstanding loans 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, commercial real estate loans, construction loans, warehouse lines of credit and various types of loans to individuals.  The historical estimation for each loan pool is then adjusted to account for current conditions, current loan portfolio performance, loan policy or management changes or any other qualitative factor that management believes may cause future losses to deviate from historical levels.


The Company also maintains an unallocated allowance.  The unallocated allowance is used to cover any factors or conditions that 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-commercial, mortgage warehouseportfolios.



Commercial Business

The Company offers a variety of commercial 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 the 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

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.

In response to the COVID-19 pandemic, management identified hotel and restaurant-food service as industries that were most likely to be adversely impacted in the near-term by the economic disruption caused by the pandemic. The following table, which presents information as of June 30, 2020, summarizes the amount of loan modifications and forbearance granted, the amount of SBA PPP loans funded and the amount of loans for which the SBA will be paying the interest and principal over a six-month period within each such industry.
(Dollars in thousands) Balance% of Total Loans COVID-19 Deferrals SBA Paying P&IPPP Loans
Hotel$67,688
5.0%$32,094
$1,662
$662
Restaurant-food service47,709
3.5%6,180
4,265
10,403

The Company’s primary lending emphasis is the origination of commercial business andCompany's commercial real estate loans. Based onportfolio is largely secured by real estate collateral located in New Jersey and the compositionNew 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, aCompany's non-performing loans. A decline in the economy and a decline in New Jersey and New York City metropolitan area 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.

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 include financing the development and/or construction of residential subdivisions. This activity may involve financing land purchases and infrastructure development (such as 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 repayment may be especially subject to the volatility of 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.

Mortgage Warehouse Lines of Credit

The Company’s Mortgage Warehouse UnitFunding 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 to 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, the Government National Mortgage Association 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 at the time of repayment.

As a separate segmentclass of the total loan portfolio, the warehouse loan portfolio is individually analyzed as a whole for allowance for loan losslosses 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 the Bank,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 segmentportfolio is comprised of residential real estate loans, home equity loans and other loans to individuals. 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 scoresscores;
•Internal credit risk gradesgrades;
•Loan-to-value ratiosratios;
Collateral•Collateral; and
•Collection experienceexperience.





The following table presents, for the periods indicated, an analysis of the allowance for loan losses and other related data:

 Nine Months Ended September 30, 
Year Ended
December 31,
 Nine Months Ended September 30,
(Dollars in thousands) 2017 2016 2016Six Months Ended June 30, 2020 Year Ended December 31, 2019 Six Months Ended June 30, 2019
Balance, beginning of period $7,494
 $7,560
 $7,560
$9,271
 $8,402
 $8,402
Provision (credit) charged to operating expenses 450
 (300) (300)
Loans charged off :      
Provision charged to operating expenses3,020
 1,350
 700
Loans charged off:     
Residential real estate loans (101) —
 —
—
 —
 —
Commercial business and commercial real estate (61) (157) (161)(165) (463) (420)
Loans to individuals—
 (7) —
All other loans —
 (1) —
—
 (43) (43)
 (162) (158) (161)
Recoveries      
Total loans charged off(165) (513) (463)
Recoveries:     
Commercial business and commercial real estate 16
 386
 383
—
 26
 —
Loans to individuals 4
 6
 4
—
 6
 2
 20
 392
 387
Net (charge offs) recoveries (142) 234
 226
All other loans—
 —
 —
Total recoveries—
 32
 2
Net charge offs(165) (481) (461)
Balance, end of period $7,802
 $7,494
 $7,486
$12,126
 $9,271
 $8,641
Loans :      
Loans:     
At period end $771,982
 $724,808
 $749,436
$1,355,436
 $1,216,028
 $967,820
Average during the period 696,711
 691,180
 681,976
1,221,160
 964,920
 887,645
Net (charge offs) recoveries to average loans outstanding (0.02)% 0.03% 0.03%
Net (charge offs) recoveries to average loans outstanding, excluding mortgage warehouse loans (0.02)% 0.05% 0.05%
Allowance for loan losses to :      
Net charge offs to average loans outstanding(0.01)% (0.05)% (0.05)%
Net charge offs to average loans outstanding, excluding mortgage warehouse loans(0.02)% (0.06)% (0.06)%
Allowance for loan losses to:     
Total loans at period end 1.01 % 1.03% 1.00%0.89 % 0.76 % 0.89 %
Total loans at period end excluding mortgage warehouse
loans		 1.20 % 1.28% 1.28%1.15 % 0.84 % 1.01 %
Non-performing loans 119.83 % 144.17% 142.90%89.70 % 206.16 % 216.84 %
The following table represents the allocation of the allowance for loan losses (“ALL”) among the various categories of loans and certain other information as of SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively.  The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segmentportfolio of loans.

 September 30, 2017 December 31, 2016June 30, 2020 December 31, 2019
(Dollars in thousands) Amount 

As a %
of Loan Class
 
Loans % of
Loans
 Amount 

As a %
of Loan Class
 
Loans % of
Loans
Amount 

As a %
of Loan Class
 
Loans as a % of
Total Loans
 Amount 

As a %
of Loan Class
 
Loans as a % of
Total Loans
Commercial real estate loans $2,743
 0.94% 38% $2,574
 1.06% 34%$6,619
 1.12% 44% $4,524
 0.80% 47%
Commercial business 1,415
 1.50% 12% 1,732
 1.74% 14%
Commercial Business1,780
 0.82% 16% 1,409
 1.01% 11%
Construction loans 1,594
 1.25% 17% 1,204
 1.25% 13%1,661
 1.23% 10% 1,389
 0.93% 12%
Residential real estate loans 388
 9.30% 5% 367
 0.82% 6%506
 0.58% 6% 412
 0.46% 7%
Loans to individuals 118
 0.53% 3% 112
 0.47% 3%182
 0.64% 2% 185
 0.57% 3%
Subtotal 6,258
 1.14% 75% 5,989
 1.18% 70%10,748
 1.01% 78% 7,919
 0.81% 80%
Mortgage warehouse lines 871
 0.45% 25% 973
 0.45% 30%1,337
 0.45% 22% 1,083
 0.46% 20%
Unallocated reserves 673
 —
 —
 532
 —
 —
41
 —
 —
 269
 —
 —
Total $7,802
 1.01% 100% $7,494
 1.03% 100%$12,126
 0.89% 100% $9,271
 0.76% 100%


DuringFor the third quarterfirst six months of 2017,2020, the Bank recorded a provision for loan losses of $150,000, charge-offs of $61,000 and recoveries of loans previously charged-off of $6,000 compared to no recorded provision for loan losses, no charge-offs and recoveries of loans previously charged-off of $4,000 recorded during the third quarter of 2016. A provision for loan losses was recorded in the third quarter of 2017 due primarily to the growth and the change in the mix of loans in the loan portfolio.
The Company recorded a provision for loan losses of $450,000 for the nine months ended September 30, 2017$3.0 million, and net charge-offs of $165,000 compared to a credit (negative) provision for loan losses of $700,000, and net charge-offs of $481,000 recorded for the first six months of 2019. The


higher provision for loan losses recorded for the first six months of 2020 was due primarily to (i) a reserve for the estimated increase in incurred loan losses resulting from the economic and social disruption caused by the COVID-19 pandemic; (ii) the increase in the amountqualitative factors attributed to the modification of $300,000loans, including the deferral of principal and or interest payments and downgrades of the credit ratings on certain loans and, (iii) to a lesser extent, the growth and change in the mix of the loan portfolio.

As part of the review of the adequacy of the allowance for loan losses at June 30, 2020, management reviewed over 81% of the nine$139.1 million of commercial business and commercial real estate loans that had been modified to defer interest and or principal for up to 90 days. Loans excluded from the review were either recently modified in June, had a balance less than $250,000 or payments were being made by the SBA for six months ended Septemberunder the CARES Act.

As a result of this review, management concluded that although loans with modifications and deferrals of loan payments were credit rated “Watch,” the deferral of payments indicated a somewhat weaker financial strength than “Pass” credit rated loans. Therefore, an additional reserve for potential incurred losses of $1.2 million was warranted.

Management previously identified the hotel and restaurant-food service industries as most likely to be adversely impacted in the near-term by the economic disruption caused by the COVID-19 pandemic. At June 30, 2016. For2020 loans to hotel and restaurant-food service industries were $67.7 million and $47.7 million, respectively. Management reviewed over 97% of the ninehotel loans and over 87% of the restaurant-food service loans in the second quarter of 2020. Loans excluded from this review had a balance of less than $250,000 or payments were being made by the SBA for six months ended Septemberunder the CARES Act.

Management also evaluated the potential that incurred losses had increased with respect to the concentrations in hotel and restaurant-food service loans. In reviewing the loans in the hotel concentration, management noted that the weighted average loan to value of the hotel loans was 55% and all loans were current, except for one loan with a balance of $1.3 million that was on non-accrual.

With the respect to the restaurant-food service concentration, management observed that the weighted average loan to value of these restaurant-food service loans was 63% and all loans with balances greater than $400,000 in this concentration were current, except for one loan with a balance of $1.8 million that was on non-accrual.

On the basis of this review and the evaluation of the loans in the hotel and restaurant-food service concentrations, management concluded that, at June 30, 2017,2020, an increase in loan defaults would require a substantial decrease in the Company recorded charge-offsvalue of $162,000the collateral supporting these loans for there to be a significant increase in incurred losses in the hotel and recoveries of previously charged-off loans of $20,000, while charge-offs of $161,000 and recoveries of previously charged-off loans of $387,000 were recorded during the nine months ended September 30, 2016.restaurant-food service concentrations.

At SeptemberJune 30, 2017,2020, the allowance for loan losses was $7.8$12.1 million, or 1.01%0.89% of loans, compared to $7.5$9.3 million, or 1.00% of loans, at September 30, 2016 and $7.5 million, or 1.03%0.76% of loans, at December 31, 2016.2019 and $8.6 million, or 0.89% of loans, at June 30, 2019. The allowance for loan losses was 120%89.7% of non-performing loans at SeptemberJune 30, 20172020 compared to 144%206.2% of non-performing loans at December 31, 20162018 and 143%216.8% of non-performing loans at SeptemberJune 30, 2016. 2019.

Management believes that the quality of the loan portfolio remains sound, considering the economic climate in the State of New Jersey and that the allowance for loan losses is adequate in relation to credit risk exposure levels and the estimated incurred and inherent losses in the loan portfolio.portfolio at June 30, 2020. However, it is expected that the economic disruption occurring due to the COVID-19 pandemic will continue to impact businesses, borrowers, employees and consumers in the second half of 2020, which may continue with increasing severity in future periods. Management may further increase the provision for loan losses and the allowance for loan losses in response to changes in economic conditions and the performance of the loan portfolio in future periods.

Deposits

Deposits, which include demand deposits (interest bearing and non-interest bearing), savings deposits and time deposits, are a fundamental and cost-effective source of funding. The flow of deposits is influenced significantly by general economic conditions, changes in market interest rates and competition. The BankCompany offers a variety of products designed to attract and retain customers, with the Bank’sCompany’s primary focus on the building and expanding of long-term relationships.



The following table summarizes deposits at SeptemberJune 30, 20172020 and December 31, 2016.2019:
(Dollars in thousands) September 30, 2017 December 31, 2016 June 30, 2020 December 31, 2019
Demand        
Non-interest bearing $192,191
 $170,854
 $397,238
 $287,555
Interest bearing 327,559
 310,103
 402,662
 393,392
Savings 209,471
 205,294
 279,879
 259,033
Time 140,592
 148,265
Certificates of deposit 329,613
 337,382
Total $869,813
 $834,516
 $1,409,392
 $1,277,362
At SeptemberJune 30, 2017,2020, total deposits were $869.8 million,$1.41 billion, representing an increase of $35.3$132.0 million, or 4.2%10.3%, from $834.5 million$1.28 billion at December 31, 2016.  Overall, the2019.

The increase in deposits was due primarily to ana $109.7 million increase of $21.3 million in non-interest bearingnon-interest-bearing demand deposits, ana $9.3 million increase of $17.5 million in interest-bearing demand deposits and a $4.2$20.8 million increase in savings deposits, which were partially offset by a $7.8 million decrease in certificates of $7.7deposit when compared to the levels at December 31, 2019. Management estimated that approximately $30.0 million of the increase in non-interest-bearing demand deposits represented proceeds from SBA PPP loans that had not been expended by the borrowers at June 30, 2020.

The COVID-19 pandemic may impact the Bank’s ability to increase and or retain customers’ deposits. If the pandemic continues for an extended period of time, businesses may experience a loss of revenue and consumers may experience a reduction of income, which may cause them to withdraw their funds to pay expenses or reduce their ability to increase their deposits.


Borrowings

Borrowings are mainly comprised of Federal Home Loan Bank of New York (“FHLB”) borrowings and overnight funds purchased.  These borrowings are primarily used to fund asset growth not supported by deposit generation.  At SeptemberJune 30, 2017,2020, the Company had $63.0$107.3 million of overnightshort-term borrowings from the FHLB compared to $73.1$92.1 million of total borrowings at December 31, 2016, which consisted of $63.1 million of overnightshort-term borrowings from the FHLB at December 31, 2019. In April 2020 the Bank began participating in the Federal Reserve's PPPLF, which is a liquidity and $10.0 millionborrowing program to allow participating banks to borrow 100% of long-term FHLB borrowings, which matured in July 2017 and was repaid.the SBA PPP loans funded through the SBA at an interest rate of 0.35% for up to two years.

Liquidity
At SeptemberJune 30, 2017,2020, the amount of liquid assets and the Bank'sBank’s access to off-balance sheet liquidity remained at a level management deemed adequate to ensure that contractual liabilities, depositors’ withdrawal requirements and other operational and customer credit needs could be satisfied.
Liquidity management refers to the Company’s ability to support asset growth while satisfying the borrowing needs and deposit withdrawal requirements of customers.  In addition to maintaining liquid assets, factors such as capital position, profitability, asset quality and availability of funding affect a bank’s ability to meet its liquidity needs.  On the asset side, liquid funds are maintained in the form of cash and cash equivalents, federal funds sold, investment securities held to maturity maturing within one year, securities available for sale and loans held for sale.  Additional asset-based liquidity is derived from scheduled loan repayments as well as investment repayments of principal and interest. Investment securities and loans may also be pledged to the FHLB to collateralize additional borrowings.  On the liability side, the primary source of liquidity is the ability to generate core


deposits.  Long-term and short-term borrowings are used as supplemental funding sources when growth in the core deposit base does not keep pace with that of interest-earning assets.
The Bank has established a borrowing relationship with the FHLB that further supports and enhances liquidity. The FHLB provides member banks with a fully secured line of credit of up to 50 percent50% of a bank’s quarter-end total assets.  Under the terms of this facility, the Bank’s total credit exposure to the FHLB cannot exceed 50 percent50% of its total assets, or $535.0$870.5 million, at SeptemberJune 30, 2017.2020.  In addition, the aggregate outstanding principal amount of the Bank’s advances, letters of credit, the dollar amount of the FHLB’s minimum collateral requirement for off-balance sheet financial contracts and advance commitments cannot exceed 30 percent30% of the Bank’s total assets, unless the Bank obtains approval from the FHLB’s Board of Directors or its Executive Committee.  These limits are further restricted by a member’s ability to provide eligible collateral to support its obligations to the FHLB as well as the ability to meet the FHLB’s stock requirement. At SeptemberJune 30, 2017,2020 and December 31, 2019, the Bank pledged collateralapproximately $467.0 million and $308.5 million of loans, respectively, to support the FHLB to support additional borrowing capacity. At June 30, 2020 and December 31, 2019, the Bank had available borrowing


capacity of $109.0 million.$187.4 million and $131.2 million, respectively, at the FHLB. The Bank also maintains unsecured federal funds lines of $46.0 million with two correspondent banks.banks, all of which were unused and available at June 30, 2020.
The Bank has access to the Federal Reserve Bank of New York Discount Window facility. At this time the Bank has not pledged investment securities or loans, which would be required, to support borrowings through the Discount Window facility. The Bank has $75.1 million of SBA PPP loans that may be pledged to the Federal Reserve's PPPLF or to the FHLB for borrowing.
The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities.  At SeptemberJune 30, 2017,2020, the balance of cash and cash equivalents was $15.7$12.6 million.
Net cash provided by operating activities totaled $16.4$6.2 million for the ninesix months ended SeptemberJune 30, 20172020 compared to net cash provided by operating activities of $4.8$5.9 million for the ninesix months ended SeptemberJune 30, 2016.2019.  A source of funds is net income from operations adjusted for activity related to loans originated for sale and sold, the provision for loan losses, depreciation and amortization expenses and net amortization of premiums and discounts on securities. NetThe increase in cash provided by operating activities for the ninesix months ended SeptemberJune 30, 2017 was higher than2020 compared to net cash provided by operating activities for the ninesix months ended SeptemberJune 30, 20162019 was due primarily to higherthe increase in net proceeds fromincome in 2020 less the origination andnet funding (cash used) of loans held for sale of approximately $1.6 million in the first six months of 2020 compared to net sales (cash provided) of loans held for sale of approximately $15.9 million.$1.4 million in the first six months of 2019.

Net cash used in investing activities totaled $40.2$153.7 million for the ninesix months ended SeptemberJune 30, 20172020 compared to $77.7$95.7 million for the ninesix months ended SeptemberJune 30, 2016. The primary use of cash in investing activities for the first nine months of 2017 was a net increase in loans of $47.8 million compared to a net increase in loans of $67.3 million for the first nine months of 2016.2019. The loans and securities portfolios are also a source of liquidity, providing cash flows from maturities and periodic payments of principal. ForThe primary use of cash by investing activities for the ninesix months ended SeptemberJune 30, 2017 and September 30, 2016,2020 was the purchase of $49.8 million of investment securities compared to $31.3 million in the first six months of 2019. Partially offsetting these purchases was $37.0 million of payments, calls and maturities of investment securities totaled $46.4in the first six months of 2020 compared to $21.3 million of payments, calls and $35.5 million, respectively. Cash was used to purchase investment securitiesmaturities in the first six months of $46.2 million for2019. During the ninesix months ended SeptemberJune 30, 20172020, net loans increased $139.4 million compared to purchasesan increase in net loans of $44.7$84.9 million of investment securities forduring the ninesix months ended SeptemberJune 30, 2016. Proceeds from the sale of investment securities totaled $8.6 million for the nine months ended September 30, 2017.2019. There were no sales of investment securities in the prior year period.six months ended June 30, 2020 and 2019.

Net cash provided by financing activities was $24.6$145.3 million for the ninesix months ended SeptemberJune 30, 20172020 compared to $78.5$103.0 million for the ninesix months ended SeptemberJune 30, 2016.2019. The primary source of funds for the 20172020 period was the increase in both the deposits of $35.3 million, which was partially offset by the decrease inand short-term borrowings of $10$132.0 million and the payment of cash dividends of $803,000.$15.2 million, respectively. The primary sourcessource of funds for the six months ended June 30, 2019 was the $71.2 million increase in the 2016 period wasdeposits and $33.1 million increase in short-term borrowings. Management estimated that approximately $30.0 million of the increase in non-interest-bearing demand deposits of $40.3 millionrepresented proceeds from SBA PPP loans that had not been expended by the borrowers at June 30, 2020. The Company anticipates that these deposit balances will decline over time as the funds are used for intended business purposes; however, this deposit outflow should be partially offset as the associated SBA PPP loans are forgiven and loan reimbursement is received. Management believes that the Company’s and the increase in borrowed funds of $38.2 million.Bank’s liquidity resources are adequate to provide for the Company’s and the Bank’s planned operations over the next 12 months following June 30, 2020.

Shareholders’ Equity and Dividends

Shareholders’ equity increased by $6.8$6.9 million, or 6.5%4.0%, to $111.6$177.5 million at SeptemberJune 30, 20172020 from $104.8$170.6 million at December 31, 2016.  Tangible book value per common share increased by $0.77 to $12.27 at September 30, 2017 from $11.50 at December 31, 2016.2019.  The ratio of averageincrease in shareholders’ equity to total average assets was 10.51% for the three months ended September 30, 2017 compared to 10.06% for the year ended December 31, 2016.
Shareholders’ equity increased $6.8 million due primarily to an increase of $5.6$5.3 million in retained earnings anand a $1.2 million increase of $889,000 from the exercise of options and share-based compensation andin accumulated other comprehensive income of $370,000.income.
On
The Company began declaring and paying cash dividends on its common stock in September 15, 2016 the Board of Directors of the Companyand has declared and paid a cash dividend of $0.05 per common share. The cash dividend was paid on October 21, 2016 to all shareholders of record as of the close of business on September 28, 2016. This action represented the first cash dividend declared by the Company on its common shares. The Company also paid a $0.05 per common share dividend on January 24, 2017, April 25, 2017 and July 25, 2017. On October 26, 2017, the Company announced an increase in the quarterly cash dividend to $0.06 per common share payable on November 24, 2017 to shareholders of record on November 16, 2017.for each quarter since then. The timing and the amount of the payment of future cash dividends, if any, on the Company'sCompany’s common sharesstock will be at the discretion of the Company'sCompany’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.

The Company’s common stock is quoted on the Nasdaq Global Market under the symbol, “FCCY."

”

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 repurchase in the open market or privately negotiated transactions up to five (5%) percent5% of its common stock outstanding on the date of approval of the stock repurchase program, which limitation will beis adjusted for any futuresubsequent stock dividends. This new repurchase program replacesIn the repurchase program authorizedfirst six months of 2020, 6,028 shares of common stock were repurchased to satisfy income tax withholding requirements on August 3, 2005.taxable income from the vesting of restricted share grants.

Disclosure of repurchases of shares of common stock of the Company that were made during the quarter ended SeptemberJune 30, 20172020 is set forth under Part II, Item 2 of this report,Form 10-Q, “Unregistered Sales of Equity Securities and Use of Proceeds.”
Actual


Capital Resources

The Company and the Bank are subject to various regulatory capital amountsrequirements administered by federal and ratiosstate 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 Company’s and the 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 SeptemberCommon Equity Tier 1, Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier I capital to average assets (Leverage ratio, as defined). As of June 30, 20172020 and December 31, 20162019, the Company and the Bank met all capital adequacy requirements to which they were subject.

To be categorized as follows:adequately capitalized, the Company and the Bank must maintain minimum Common Equity Tier 1, Total capital to risk-weighted assets, Tier 1 capital to risk-weighted assets and Tier I leverage capital ratios as set forth in the below table. As of June 30, 2020 and December 31, 2019, the Bank’s capital ratios 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.
  Actual 
For Capital
Adequacy Purposes
 
To Be Well Capitalized
Under Prompt
Corrective Action
Provision
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
As of September 30, 2017            
Company            
Common equity Tier 1 (CET1) $99,394
 10.41% $42,972
 >4.5% N/A N/A
Total Capital to Risk Weighted Assets 125,196
 13.11% 76,395
 >8% N/A N/A
Tier 1 Capital to Risk Weighted Assets 117,394
 12.26% 57,296
 >6% N/A N/A
Tier 1 Leverage Capital 117,394
 11.33% 41,458
 >4% N/A N/A
Bank            
Common equity Tier 1 (CET1) $114,730
 12.01% $42,972
 >4.5% $62,071
 ≥6.5%
Total Capital to Risk Weighted Assets 122,532
 12.83% 76,395
 >8% 95,493
 ≥10%
Tier 1 Capital to Risk Weighted Assets 114,730
 12.01% 57,296
 >6% 76,395
 ≥8%
Tier 1 Leverage Capital 114,730
 11.07% 41,458
 >4% 51,822
 >5%
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%

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 Wall Street Reform and Consumer Protection 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 equityCommon Equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increased the minimum Tier 1 capital to risk-weightedrisk-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 2.50%2.5% of common equityCommon 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 requirementsrequirement began phasing in on January 1, 2016 at 0.625% of common equityCommon Equity Tier 1 capital to risk-weighted assets and will increaseincreased by that amount each year until fully implemented in January 2019 at 2.50%2.5% of common equityCommon Equity Tier 1 capital to risk-weighted assets. As of January 1, 2017,At June 30, 2020, the Company and the Bank were required to maintainmaintained a capital conservation buffer in excess of 1.25%2.5%. At September 30, 2017,

Management believes that the Company'sCompany’s and the Bank's common equity Tier 1Bank’s capital ratio of 10.41%resources are adequate to support the Company’s and 12.01%, respectively, exceeded the combined common equity Tier 1 minimum capitalBank’s current strategic and capital conservation buffer of 5.75%.
At September 30, 2017,operating plans. However, if the capital ratiosfinancial position of the Company and the Bank exceededare materially adversely impacted by the minimum Basel III capital requirements.  It is management’s goal to monitoreconomic disruption caused by the COVID-19 pandemic, the Company and maintain adequate capital levels to continue to support asset growth and the expansion ofor the Bank may be required to increase its regulatory capital position.



The Company’s actual capital amounts and to continue its status as a well-capitalized institution.ratios are presented in the following table:
 Actual 
For Capital
Adequacy Purposes
 
To Be Well Capitalized
Under Prompt
Corrective Action
Provision
(Dollars in thousands)Amount Ratio Amount Ratio Amount Ratio
As of June 30, 2020           
Common equity Tier 1 (CET1)$139,006
 9.33% $67,083
 4.50%  N/A N/A
Total capital to risk-weighted assets169,132
 11.35% 119,179
 8.00%  N/A N/A
Tier 1 capital to risk-weighted assets157,006
 10.54% 89,384
 6.00%  N/A N/A
Tier 1 leverage capital157,006
 9.65% 65,061
 4.00%  N/A N/A
            
As of December 31, 2019:           
Common equity Tier 1 (CET1)$133,046
 9.70% $61,604
 4.50%  N/A  N/A
Total capital to risk-weighted assets160,317
 11.69% 109,519
 8.00%  N/A  N/A
Tier 1 capital to risk-weighted assets151,046
 11.01% 82,139
 6.00%  N/A  N/A
Tier 1 leverage capital151,046
 10.56% 57,245
 4.00%  N/A  N/A

The Bank’s actual capital amounts and ratios are presented in the following table:
 Actual 
For Capital
Adequacy Purposes
 
To Be Well Capitalized
Under Prompt
Corrective Action
Provision
(Dollars in thousands)Amount Ratio Amount Ratio Amount Ratio
As of June 30, 2020           
Common equity Tier 1 (CET1)$156,746
 10.53% $67,013
 4.50% $96,797
 6.50%
Total capital to risk-weighted assets168,872
 11.34% 119,134
 8.00% 148,918
 10.00%
Tier 1 capital to risk-weighted assets156,746
 10.53% 89,351
 6.00% 119,134
 8.00%
Tier 1 leverage capital156,746
 9.64% 65,039
 4.00% 81,298
 5.00%
            
As of December 31, 2019:           
Common equity Tier 1 (CET1)$150,725
 10.99% $61,579
 4.50% $88,948
 6.50%
Total capital to risk-weighted assets159,996
 11.67% 109,474
 8.00% 136,843
 10.00%
Tier 1 capital to risk-weighted assets150,725
 10.99% 82,106
 6.00% 109,474
 8.00%
Tier 1 leverage capital150,725
 10.54% 57,222
 4.00% 71,528
 5.00%

Interest Rate Sensitivity Analysis
The largest component of the Company’s total income is net interest income, and the majority of the Company’s financial instruments are composed of interest rate-sensitive assets and liabilities with various terms and maturities. The primary objective of management is to maximize net interest income while minimizing interest rate risk. Interest rate risk is derived from timing differences and the magnitude of relative changes in the repricing of assets and liabilities, loan prepayments, deposit withdrawals and differences in lending and funding rates. Management actively seeks to monitor and control the mix of interest rate-sensitive assets and interest rate-sensitive liabilities.
Under the interest rate risk policy established by the Company'sCompany’s Board of Directors, the Company established quantitative guidelines with respect to interest rate risk and how interest rate shocks are projected to affect net interest income and the economic value of equity. Due to the current low level of market interest rates, the current monetary policy of the Federal Reserve Board and recent communications from the Federal Reserve Board, management believes that it is more likely that market interest rates may increase than decrease over the intermediate term. Summarized below is the projected effect of a parallel shift of an increase of 200 and 300 basis points, respectively, in market interest rates on net interest income and the economic value of equity. Due to the historically low interest rate environment at June 30, 2020 a parallel shift down was not presented.
Based upon the current interest rate environment, as of SeptemberJune 30, 2017,2020, sensitivity to interest rate risk was as follows:


(Dollars in thousands)   Next 12 Months
Net Interest Income		   
Economic Value of Equity (2)
   Next 12 Months
Net Interest Income		   
Economic Value of Equity (2)
Interest Rate Change in Basis Points (1)
 Dollar Amount $ Change % Change Dollar Amount $ Change % Change Dollar Amount $ Change % Change Dollar Amount $ Change % Change
+300 $42,594
 $3,453
 8.82% $148,242
 $898
 0.61% $62,128
 $1,971
 3.28% $201,981
 $(1,532) (0.75)%
+200 41,423
 2,282
 5.83% 148,544
 1,200
 0.81% 61,132
 975
 1.62% 203,550
 37
 0.02 %
— 39,141
 — —% 147,344
 — —% 60,157
 —
 —% 203,513
 —
 — %
(1) 
Assumes an instantaneous and parallel shift in interest rates at all maturities.
(2) 
Economic value of equity is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

The Company employs many assumptions to calculate the impact of changes in interest rates on assets and liabilities, and actual results may not be similar to projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. Actual results may also differ due to management'smanagement’s actions, if any, in response to changing rates. In calculating these exposures, the Company utilized an interest rate simulation model that is validated by third-party reviewers on an annual basis.periodically.

Off-Balance Sheet Arrangements and Contractual Obligations
As of June 30, 2020, there were no material changes to the Company’s off-balance sheet arrangements and contractual obligations disclosed under Part II, Item 7 of the 2019 Form 10-K. Management continues to believe that the Company has adequate capital and liquidity available from various sources to fund projected contractual obligations and commitments.




Item 3.    Quantitative and Qualitative Disclosures About Market Risk.Risk
Not required.
The Company’s Asset Liability Committee (“ALCO”) is responsible for developing, implementing and monitoring asset liability management strategies and advising the Company’s Board of Directors on such strategies, as well as the related level of interest rate risk. Interest rate risk simulation models are prepared on a quarterly basis. These models demonstrate balance sheet gaps and predict changes to net interest income and the economic market value of equity under various interest rate scenarios.

ALCO is generally authorized to manage interest rate risk through the management of capital, cash flows and duration of assets and liabilities, including sales and purchases of assets, as well as additions of borrowings and other sources of medium or longer-term funding.

The following strategies are among those used to manage interest rate risk:

Actively market commercial business loan originations, which tend to have adjustable rate features and which generate customer relationships that can result in higher core deposit accounts;
Actively market commercial mortgage loan originations, which tend to have shorter maturity terms and higher interest rates than residential mortgage loans and which generate customer relationships that can result in higher core deposit accounts;
Actively market core deposit relationships, which are generally longer duration liabilities;
Utilize short term and long-term certificates of deposit and/or borrowings to manage liability duration;
Closely monitor and actively manage the investment portfolio, including management of duration, prepayment and interest rate risk;
Maintain adequate levels of capital; and
Utilize loan sales and/or loan participations.

ALCO uses simulation modeling to analyze the Company’s net interest income sensitivity as well as the Company’s economic value of portfolio equity under various interest rate scenarios. The model is based on the actual maturity and estimated repricing characteristics of rate sensitive assets and liabilities. The model incorporates certain prepayment and interest rate assumptions, which management believes to be reasonable as of June 30, 2020. The model assumes changes in interest rates without any proactive change in the balance sheet by management. In the model, the forecasted shape of the yield curve remained static as of June 30, 2020.

In an immediate and sustained 200 basis point increase in market interest rates at June 30, 2020, net interest income for the next 12 months would increase approximately 1.6%, when compared to a flat interest rate scenario.

Certain shortcomings are inherent in the methodologies used in determining interest rate risk. Simulation modeling requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the modeling assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the information provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

Model simulation results indicate the Company is asset sensitive, which indicates the Company’s net interest income should increase in a rising rate environment and decline in a falling interest rate environment. Management believes the Company’s interest rate risk position is balanced and reasonable.



Item 4.    Controls and Procedures.Procedures
Evaluation of Disclosure Controls and Procedures

The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act, is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is(ii) accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
The Company’s principal executive officer and principal financial officer, with the assistance of other members of management, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e)


and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report.Form 10-Q. Based upon such evaluation, the Company’s principal executive officer and principal financial officer have concluded that as of September 30, 2017, the Company’s disclosure controls and procedures were not effective in ensuring that information required to be disclosedas of the end of the period covered by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. This is due to a material weakness identified in the process for compiling the income and expense accounts for inclusion in the Consolidated Statements of Income in the second quarter of 2017. The amortization of deferred loan origination costs was incorrectly included in other operating expenses and should have been included in loan interest income in the Consolidated Statements of Income. This control deficiency did not result in a material misstatement to the Company’s previously issued Consolidated Financial Statements for prior periods. There was no effect on pre-tax income, after-tax income, basic and diluted earnings per share, statements of cash flows, balance sheets, book value, return on assets, return on equity, and regulatory capital ratios in any period. However, this control deficiency constitutes a material weakness in the Company’s internal control over financial reporting due to the potential for the control deficiency to result in a material misstatement in the Company’s annual or interim consolidated financial statements that may not be prevented or detected.
Disclosure controls and procedures include, without limitations, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.Form 10-Q.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives,disclosure controls and managementprocedures objectives. Management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Remediation Plan
The Company changed the internal accounting process for compiling the amortization of deferred loan origination costs to include the amortization of deferred loan origination costsChanges in loan interest income and not include it in other operating expenses in the Consolidated Statements of Income.Internal Control Over Financial Reporting
The material weakness cannot be considered remediated until the control has operated for a sufficient period of time and until management has concluded, through testing, that the control is operating effectively. Management’s goal is to remediate this material weakness by December 31, 2017.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s principal executive officer and principal financial officer have concluded that there was no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended SeptemberJune 30, 20172020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; however, during the quarter ended September 30, 2017, the Company implemented the changes to its internal control over financial reporting described under the heading “Remediation Plan” above.

reporting.


PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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. Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, would have a material adverse effect on the Company'sCompany’s financial condition or results of operations.

Item 1A. Risk Factors

ThereAs of June 30, 2020, there has been no material change in the risk factors previously disclosed under Part I, Item 1A of the heading "Risk Factors" within2019 Form 10-K and Part II, Item 1A of the Company's Form 10-K/A10-Q for the yearquarter ended DecemberMarch 31, 2016.


2020.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
On January 21, 2016, the Board of Directors of the Company authorized a new common stock repurchase program. Under the newthis common stock repurchase program, the Company may repurchase in the open market or privately negotiated transactions up to five (5%) percent396,141 shares of its common stock, representing 5% of the shares of common stock outstanding on January 21, 2016, as adjusted for subsequent common stock dividends. At June 30, 2020, 388,113 shares remained available for repurchase under the datecommon stock repurchase program. In the second quarter of approval of2020, there were no repurchases under 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.from employees to withhold and remit income taxes.
The following table provides common stock repurchases made by or on behalf of the Company during the three months ended September 30, 2017.
Issuer Purchases of Equity Securities(1)
Period 
Total

Number of

 Shares

Purchased
 
Average

Price Paid

Per Share
 
Total Number
of
Shares

Purchased As
Part of
Publicly
Announced Plan
or
Program
 
Maximum
Number
of
Shares That
May
Yet be
Purchased
Under the Plan or
Program
BeginningEnding        
JulyApril 1, 20172020July 31, 2017April 30, 2020 —
 $—
 —
 394,141388,113
AugustMay 1, 20172020AugustMay 31, 20172020 —
 $—
 —
 394,141388,113
SeptemberJune 1, 20172020SeptemberJune 30, 20172020 —
 $—
 —
 394,141388,113
Total —
 $—
 —
 394,141388,113
(1)The Company’s common stock repurchase program covers a maximum of 396,141 shares of common stock of the Company, representing 5% of the outstanding common stock of the Company on January 21, 2016, as adjusted for subsequent common stock dividends.

Item 3. Defaults Upon Senior Securities
    
None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.





Item 6.   Exhibits.
2.1
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 filed with the SEC on November 7, 2017)
   
3(i)(A)
 
Certificate of Incorporation of the Company (conformed copy) (incorporated by reference to Exhibit 3(i)(A) to the Company’s Annual Report on Form 10-K (SEC File No. 000-32891) filed with the SEC on March 27, 2009)
   
3(ii)(A)
 
By-laws of the Company, as amended (conformed copy) (incorporated by reference to Exhibit 3(ii)(A) to the Company’s Annual Report on Form 8-K10-K (SEC File No. 000-32891) filed with the SEC on March 23, 2016)15, 2019)
10.1
#
1st Constitution Bancorp 2020 Directors Stock Plan (incorporated by reference to exhibit 99 to the Company's Registration Statement on Form S-8 (SEC File No. 333-239455) filed with the SEC on June 26, 2020 )
10.2
*#
Form of Restricted Stock Agreement for Non-Employee Directors under the 1st Constitution Bancorp 2020 Directors Stock Plan
   
31.1
*
Certification of Robert F. Mangano, principal executive officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)
   
31.2
*
Certification of Stephen J. Gilhooly, 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 Sarbanes-Oxley Act of 2002, signed by Robert F. Mangano, principal executive officer of the Company, and Stephen J. Gilhooly, principal financial officer of the Company
   
101.INS*Inline XBRL Instance Document
   
101.SCH*Inline XBRL Taxonomy Extension Schema Document
   
101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF*Inline XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
_____________________
*    Filed herewith.
**     Furnished herewith.
#    Management contract or compensatory plan or arrangement.



SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 1ST CONSTITUTION BANCORP 
    
    
Date: November 9, 2017        August 7, 2020By:/s/ ROBERT F. MANGANO 
  Robert F. Mangano 
  President and Chief Executive Officer 
  (Principal Executive Officer) 
    
    
Date: November 9, 2017        August 7, 2020By:/s/ STEPHEN J. GILHOOLY  
  Stephen J. Gilhooly 
  Senior Vice President, Treasurer and Chief Financial Officer 
  (Principal Financial Officer) 


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