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 ~~September~~June 30, ~~2017~~2021



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

For the transition period from _____ to _____

Commission file Number: 000-32891

~~1ST CONSTITUTION BANCORP~~

~~(Exact Name of Registrant as Specified in Its Charter)~~



~~New Jersey~~ 1ST CONSTITUTION BANCORP

(Exact Name of Registrant as Specified in Its Charter)

	~~22-3665653~~
New Jersey		22-3665653
(State of Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2650 Route 130

P.O. Box 634

Cranbury

New Jersey

08512

(Address of Principal Executive Offices)

(Zip Code)


(Registrant’s Telephone Number, Including Area Code)			(609)			655-4500


~~2650 Route 130, P.O. Box 634, Cranbury, NJ~~				~~08512~~
~~(Address of Principal Executive Offices)~~				~~(Zip Code)~~

~~(609) 655-4500~~

~~(Issuer’s Telephone Number, Including Area Code)~~

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, no par value	FCCY	NASDAQ 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 filer

o☐

Accelerated filer

ý☐

Non-accelerated filer

o☒

Smaller reporting company

o☒

~~(Do not check if a smaller reporting company)~~

Emerging growth company

o☐

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

o☐

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

As of ~~November 1, 2017,~~August 4, 2021, there were ~~8,073,155~~10,285,016 shares of the registrant’s common stock, no par value, outstanding.

1ST CONSTITUTION BANCORP

FORM 10-Q

INDEX


					Page

PART I.			FINANCIAL INFORMATION

				~~Page~~

~~PART I.~~	~~FINANCIAL INFORMATION~~

Item 1.	Financial Statements			1

			Consolidated Balance Sheets ~~(unaudited)~~ at ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016~~2020 (unaudited)		1

			Consolidated Statements of Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2021 and ~~September~~June 30, ~~2016~~2020 (unaudited)		2

			Consolidated Statements of Comprehensive Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2021 and ~~September~~June 30, ~~2016~~2020 (unaudited)		3

			Consolidated Statements of Changes in Shareholders' Equity for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2021 and ~~September~~June 30, ~~2016~~2020 (unaudited)		4

			Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2021 and ~~September~~June 30, ~~2016~~2020 (unaudited)		5

			Notes to Consolidated Financial Statements (unaudited)		6

Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations		3433

Item 3.			Quantitative and Qualitative Disclosures About Market Risk		5359

Item 4.			Controls and Procedures		5360

PART II.			OTHER INFORMATION

Item 1.			Legal Proceedings		5461

Item 1A.			Risk Factors		5461

Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds		5563

Item 3.			Defaults Upon Senior Securities		5563

~~Item 4.~~	~~Mine Safety Disclosures~~	55

~~Item 5.~~	~~Other Information~~	55

~~Item 6.~~	~~Exhibits~~	56

~~SIGNATURES~~		57



Item 4.	Mine Safety Disclosures	63

Item 5.	Other Information	63

Item 6.	Exhibits	64

SIGNATURES		65

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

1^ST Constitution Bancorp

Consolidated Balance Sheets

(Dollars in thousands)

(Unaudited)

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


	June 30, 2021		December 31, 2020
ASSETS
Cash and due from banks	$	18,386	$	3,661
Interest-earning deposits	197,291		18,334
Total cash and cash equivalents	215,677		21,995
Investment securities
Available for sale, at fair value	130,886		125,197
Held to maturity (fair value of $100,764 and $95,640 at June 30, 2021 and December 31, 2020, respectively)	97,993		92,552
Total investment securities	228,879		217,749
Loans held for sale	6,017		29,782
Loans	1,235,442		1,433,706
Less: allowance for loan losses	(16,925)		(15,641)
Net loans	1,218,517		1,418,065
Premises and equipment, net	14,043		14,345
Right-of-use assets	15,707		16,548
Accrued interest receivable	4,306		5,273
Bank-owned life insurance	37,658		37,316
Other real estate owned	48		92
Goodwill and intangible assets	35,844		36,003
Other assets	12,549		9,741
Total assets	$	1,789,245	$	1,806,909
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits
Non-interest bearing	$	489,302	$	425,210
Interest bearing	1,056,759		1,137,629
Total deposits	1,546,061		1,562,839
Short-term borrowings	0		9,825
Redeemable subordinated debentures	18,557		18,557
Accrued interest payable	530		851
Lease liability	16,612		17,387
Accrued expenses and other liabilities	11,828		9,793
Total liabilities	1,593,588		1,619,252
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 shares authorized; NaN issued	0		0
Common stock, no par value; 30,000,000 shares authorized; 10,340,551 and 10,293,535 shares issued and 10,284,848 and 10,245,826 shares outstanding as of June 30, 2021 and December 31, 2020, respectively	111,775		111,135
Retained earnings	83,333		75,201
Treasury stock, 55,703 and 47,709 shares at June 30, 2021 and December 31, 2020, respectively	(739)		(611)
Accumulated other comprehensive income	1,288		1,932
Total shareholders' equity	195,657		187,657
Total liabilities and shareholders' equity	$	1,789,245	$	1,806,909

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

1^ST 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		2016				2021		2020		2021		2020
INTEREST INCOME										INTEREST INCOME
Loans, including fees	$	9,416	$	9,054	$	26,161	$	25,088		Loans, including fees	$	14,845	$	15,374	$	30,770	$	30,179
Securities:										Securities:
Taxable	846		827		2,500		2,459			Taxable	504		852		1,024		1,908
Tax-exempt	527		514		1,628		1,554			Tax-exempt	458		496		936		934
Federal funds sold and short-term investments	25		13		183		79			Federal funds sold and short-term investments	58		4		95		93
Total interest income	10,814		10,408		30,472		29,180			Total interest income	15,865		16,726		32,825		33,114

INTEREST EXPENSE										INTEREST EXPENSE
Deposits	1,204		1,051		3,351		2,989			Deposits	1,342		2,724		2,940		5,962
Borrowings	113		197		349		498			Borrowings	0		48		0		110
Redeemable subordinated debentures	134		107		380		311			Redeemable subordinated debentures	83		106		167		258
Total interest expense	1,451		1,355		4,080		3,798			Total interest expense	1,425		2,878		3,107		6,330

Net interest income	9,363		9,053		26,392		25,382			Net interest income	14,440		13,848		29,718		26,784
PROVISION/(CREDIT) FOR LOAN LOSSES	150		—		450		(300		)
Net interest income after provision/(credit) for loan losses	9,213		9,053		25,942		25,682

PROVISION FOR LOAN LOSSES										PROVISION FOR LOAN LOSSES	600		2,125		2,000		3,020
Net interest income after provision for loan losses										Net interest income after provision for loan losses	13,840		11,723		27,718		23,764
NON-INTEREST INCOME										NON-INTEREST INCOME
Service charges on deposit accounts	142		185		445		558			Service charges on deposit accounts	107		132		224		345
Gain on sales of loans, net	1,329		876		3,936		2,525
Income on Bank-owned life insurance	131		113		391		414
Gain on sales of securities	24		—		128		—
Gain on sales of loans										Gain on sales of loans	2,766		2,121		5,861		3,591
Income on bank-owned life insurance										Income on bank-owned life insurance	168		264		342		444
Gain on sales and calls of securities										Gain on sales and calls of securities	2		10		4		18
Other income	490		586		1,385		1,392			Other income	692		573		1,382		1,158
Total non-interest income	2,116		1,760		6,285		4,889			Total non-interest income	3,735		3,100		7,813		5,556

NON-INTEREST EXPENSES										NON-INTEREST EXPENSES
Salaries and employee benefits	4,617		4,102		13,882		11,887			Salaries and employee benefits	6,459		6,001		13,411		12,170
Occupancy expense	865		911		2,604		2,618			Occupancy expense	1,161		1,205		2,472		2,375
Data processing expenses	338		314		983		941			Data processing expenses	505		470		996		916
FDIC insurance expense	95		105		255		328			FDIC insurance expense	155		225		425		259
Other real estate owned expenses	11		12		26		76			Other real estate owned expenses	3		14		55		31
Merger-related expenses										Merger-related expenses	447		0		447		64
Other operating expenses	1,691		1,218		5,204		3,875			Other operating expenses	1,801		1,922		3,826		3,815
Total non-interest expenses	7,617		6,662		22,954		19,725			Total non-interest expenses	10,531		9,837		21,632		19,630

Income before income taxes	3,712		4,151		9,273		10,846			Income before income taxes	7,044		4,986		13,899		9,690
INCOME TAXES	1,227		1,456		2,920		3,616			INCOME TAXES	1,892		1,296		3,818		2,579
Net income	$	2,485	$	2,695	$	6,353	$	7,230		Net income	$	5,152	$	3,690	$	10,081	$	7,111

NET INCOME PER COMMON SHARE
EARNINGS PER COMMON SHARE										EARNINGS PER COMMON SHARE
Basic	$	0.31	$	0.34	$	0.79	$	0.91		Basic	$	0.50	$	0.36	$	0.98	$	0.70

Diluted	$	0.30	$	0.33	$	0.76	$	0.89		Diluted	$	0.50	$	0.36	$	0.98	$	0.69

WEIGHTED AVERAGE SHARES OUTSTANDING										WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	8,063,119		7,974,323		8,040,955		7,954,212			Basic	10,272,906		10,209,295		10,267,343		10,205,065
Diluted	8,328,252		8,185,840		8,309,363		8,159,419			Diluted	10,325,335		10,248,156		10,315,780		10,256,481

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

1^ST Constitution Bancorp

Consolidated Statements of Comprehensive Income

(Dollars in thousands)

(Unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Net income $ 2,485
$ 2,695
$ 6,353
$ 7,230
Other comprehensive income:
Unrealized holding gains/(losses) on securities available for sale 18
(211 ) 745
1,046
Tax effect (7 ) 77
(275 ) (380 )
Net of tax amount 11
(134 ) 470
666

Reclassification adjustment for gains on securities available for sale ⁽¹⁾
(12 ) —
(92 ) —
Tax effect ⁽²⁾
5
—
37
—
Net of tax amount (7 ) —
(55 ) —

Pension liability —
28
—
62
Tax effect —
(11 ) —
(25 )
Net of tax amount —
17
—
37

Reclassification adjustment for actuarial gains for unfunded pension liability
Income ⁽³⁾
(32 ) (48 ) (75 ) (120 )
Tax effect ⁽²⁾
13
19
30
48
Net of tax amount (19 ) (29 ) (45 ) (72 )
Total other comprehensive income (15 ) (146 ) 370
631
Comprehensive income $ 2,470
$ 2,549
$ 6,723
$ 7,861


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020

Net income	$	5,152	$	3,690	$	10,081	$	7,111
Other comprehensive (loss) income:
Unrealized holding gains (losses) on securities available for sale	52		1,716		(626)		1,529
Tax effect	(15)		(418)		148		(372)
Net of tax amount	37		1,298		(478)		1,157

Reclassification adjustment for gains on securities available for sale(1)	(2)		(10)		(2)		(11)
Tax effect (2)	0		3		0		3
Net of tax amount	(2)		(7)		(2)		(8)

Reclassification adjustment for unrealized impairment loss on held to maturity security(3)	7		5		13		8
Tax effect	(2)		(2)		(3)		(3)
Net of tax amount	5		3		10		5

Pension liability	(31)		85		(63)		141
Tax effect	8		(25)		16		(42)
Net of tax amount	(23)		60		(47)		99

Reclassification adjustment for actuarial gains for unfunded pension liability(4)	(89)		(56)		(178)		(100)
Tax effect (2)	26		17		51		30
Net of tax amount	(63)		(39)		(127)		(70)

Total other comprehensive (loss) income	(46)		1,315		(644)		1,183

Comprehensive income	$	5,106	$	5,005	$	9,437	$	8,294

⁽¹⁾Included in ~~non-interest income~~gain on sales and calls 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.

1^ST Constitution Bancorp

Consolidated Statements of Changes in Shareholders’ Equity

For the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020

(Dollars in thousands)

(Unaudited)


	Common Stock		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance, April 1, 2020	$	110,254	$	63,295	$	(503)	$	59	$	173,105
Net income	—		3,690		—		—		3,690
Issuance of restricted shares (17,750 shares)	—		—		—		—		—
Share-based compensation	292		—		—		—		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

Balance, April 1, 2021	$	111,460	$	79,208	$	(739)	$	1,334	$	191,263
Net income	—		5,152		—		—		5,152
Exercise of stock options and issuance of restricted shares (1,185 shares and 18,500 shares, respectively)	13		—		—		—		13
Share-based compensation	302		—		—		—		302
Cash dividends ($0.10 per share)	—		(1,027)		—		—		(1,027)

Other comprehensive loss	—		—		—		(46)		(46)
Balance, June 30, 2021	$	111,775	$	83,333	$	(739)	$	1,288	$	195,657

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, January 1, 2020	$	109,964	$	60,791	$	(368)	$	191	$	170,578
Net income	—		7,111		—		—		7,111
Issuance of restricted shares (33,400 shares)	—		—		—		—		—
Share-based compensation	582		—		—		—		582
Cash dividends ($0.18 per share)	—		(1,835)		—		—		(1,835)
Purchase of treasury shares (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

Balance, January 1, 2021	$	111,135	$	75,201	$	(611)	$	1,932	$	187,657
Net income	—		10,081		—		—		10,081
Exercise of stock options and issuance of restricted shares (7,666 shares and 39,350 shares, respectively)	67		—		—		—		67
Share-based compensation	573		—		—		—		573
Cash dividends ($0.20 per share)	—		(1,949)		—		—		(1,949)
Purchase of treasury shares (7,994 shares)	—		—		(128)		—		(128)
Other comprehensive loss	—		—		—		(644)		(644)
Balance, June 30, 2021	$	111,775	$	83,333	$	(739)	$	1,288	$	195,657

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

1^ST Constitution Bancorp

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

Nine Months Ended September 30,
2017 2016
OPERATING ACTIVITIES:
Net income $ 6,353
$ 7,230
Adjustments to reconcile net income to net cash provided by operating activities-
Provision/(credit) for loan losses 450
(300 )
Depreciation and amortization 1,037
970
Net amortization of premiums and discounts on securities 678
864
Gains on sales of securities (128 ) —
Gains on sales of other real estate owned (14 ) (31 )
Gains on sales of loans held for sale (3,936 ) (2,525 )
Originations of loans held for sale (83,754 ) (55,090 )
Proceeds from sales of loans held for sale 96,500
51,928
Income on bank–owned life insurance (391 ) (414 )
Share-based compensation expense 739
530
Increase in accrued interest receivable (46 ) (2 )
(Increase)/decrease in other assets (114 ) 829
Decrease in accrued interest payable (151 ) (52 )
(Decrease)/increase in accrued expenses and other liabilities (824 ) 874
Net cash provided by operating activities 16,399
4,811
INVESTING ACTIVITIES:
Purchases of securities -
Available for sale (29,729 ) (28,157 )
Held to maturity (16,460 ) (16,591 )
Proceeds from maturities and payments of securities -
Available for sale 15,892
17,034
Held to maturity 30,538
18,432
Proceeds from sales of securities available for sale 7,602
—
Proceeds from sales of securities held to maturity 1,033
—
Proceeds from bank-owned life insurance benefits paid —
248
Net redemption/(purchase) of restricted stock 494
(1,740 )
Net increase in loans (47,771 ) (67,315 )
Capital expenditures (575 ) (319 )
Cost of improvement to other real estate owned (5 ) (60 )
Proceeds from sales of other real estate owned 284
1,033
Purchase of bank-owned life insurance (1,550 ) (300 )
Net cash used in investing activities (40,247 ) (77,735 )
FINANCING ACTIVITIES:
Exercise of stock options 150
19
Purchase of treasury stock —
(24 )
Cash dividends paid to shareholders (803 ) —
Net increase in deposits 35,297
40,305
Net (decrease)/increase in short-term borrowings (25 ) 38,203
Repayment of Federal Home Loan Bank advances (10,000 ) —
Net cash provided by financing activities 24,619
78,503
Increase in cash and cash equivalents 771
5,579
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,886
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 taxes 2,572
3,656
Non-cash items: Transfer of loans to other real estate owned 455
142


	Six Months Ended June 30,
	2021		2020
OPERATING ACTIVITIES:
Net income	$	10,081	$	7,111
Adjustments to reconcile net income to net cash provided by operating activities-
Provision for loan losses	2,000		3,020
Depreciation and amortization	959		1,061
Net amortization of premiums and discounts on securities	642		655
SBA loan discount accretion	(172)		(206)
Gain on sales and calls of securities available for sale	(2)		(11)
Gain on sales and calls of securities held to maturity	(2)		(7)
Write-down of other real estate owned	44		0
Gain on sales of loans held for sale	(5,861)		(3,591)
Originations of loans held for sale	(156,649)		(118,467)
Proceeds from sales of loans held for sale	186,275		116,856
Increase in cash surrender value on bank–owned life insurance	(342)		(369)
Gain on cash surrender value on bank-owned life insurance	0		(75)
Share-based compensation expense	573		582
(Increase) decrease in deferred tax asset	(1,911)		384
Noncash rent and equipment expense	65		94
Decrease (increase) in accrued interest receivable	967		(795)
Increase in other assets	(1,242)		(1,226)
Decrease in accrued interest payable	(321)		(296)
Increase in accrued expenses and other liabilities	1,793		1,470
Net cash provided by operating activities	36,897		6,190
INVESTING ACTIVITIES:
Purchases of securities:
Available for sale	(26,350)		(18,417)
Held to maturity	(30,033)		(31,364)
Proceeds from sales, calls, maturities and payments of securities:
Available for sale	19,590		23,624
Held to maturity	24,410		13,347
Proceeds from bank-owned life insurance benefits paid	0		179
Net redemption (purchase) of restricted stock	411		(1,706)
Net decrease (increase) in loans	197,720		(139,367)
Capital expenditures	(350)		(107)


Proceeds from sales of other real estate owned	0		101
Net cash provided by (used in) investing activities	185,398		(153,710)
FINANCING ACTIVITIES:
Exercise of stock options	67		0
Purchase of treasury shares	(128)		(135)
Cash dividends paid to shareholders	(1,949)		(1,835)
Net (decrease) increase in deposits	(16,778)		132,030
(Decrease) increase in short-term borrowings	(9,825)		15,200
Net cash (used in) provided by financing activities	(28,613)		145,260
Increase (decrease) in cash and cash equivalents	193,682		(2,260)
Cash and cash equivalents at beginning of period	21,995		14,842
Cash and cash equivalents at end of period	$	215,677	$	12,582


Supplemental Disclosures of Cash Flow Information
Cash paid during the period for -
Interest	$	3,428	$	6,626
Income taxes	6,079		1,241

Noncash items
Right-of-use assets	0		0
Lease liability	11		144

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

1^ST Constitution Bancorp

Notes Toto Consolidated Financial Statements

~~September~~June 30, ~~2017~~2021

(Unaudited)

(1) Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements include 1^ST Constitution Bancorp (the “Company”), its wholly-owned subsidiary, 1^ST Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1^ST Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, ~~Inc.~~Inc and 1st Constitution Real Estate Investment Corporation (the "REIT"), ~~204 South Newman Street Corp.,~~which is indirectly owned by the Bank. To qualify as a real estate investment trust for tax purposes, the REIT must have 100 or more shareholders. As a result, less than 20 percent of the REIT’s outstanding non-voting preferred stock has been issued to individual shareholders, consisting of officers, directors and ~~249~~employees of the Bank and their adult family members. 1ST Constitution Investment Company of New ~~York Avenue, LLC. 1st~~Jersey, Inc. owns the remaining issued and outstanding preferred stock and common stock of the REIT. 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/A~~10-K for the year ended December 31, ~~2016,~~2020, filed with the SEC on March ~~20, 2017.~~15, 2021.

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

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 ~~September~~June 30, ~~2017~~2021 for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through the date these financial statements were issued.

Novel Coronavirus ("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), have caused, and are continuing to cause, widespread uncertainty, social and economic disruption, highly volatile financial markets and higher levels of unemployment. As a result, many 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, including but not limited to the enactment of further legislation or the adoption of policies designed to deliver monetary aid and other relief to borrowers. In addition, 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 are unable to work due to illness or restrictions.

On ~~November 6, 2017,~~March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act to provide relief for individuals and businesses that have been negatively impacted by the COVID-19 pandemic. Among the provisions, the CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” accounting guidance in Accounting Standards Codification (“ASC”) Topic 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 ~~entered into an Agreement~~adopted this provision as of March 31, 2020.

The Economic Aid to Hard Hit Small Business, Not for Profits and ~~Plan~~Venues Act (“Economic Aid Act”) was enacted in December 2020 in further response to the COVID-19 pandemic. Among other things, the Economic Aid Act provides relief to borrowers in the form of ~~Merger (the “Merger Agreement”~~access to additional credit through the Small Business Administration’s (“SBA”) ~~with New Jersey Community~~Paycheck Protection Program (“PPP”) as originally constituted under the CARES Act. In addition, the Economic Aid Act extended the relief from ASC Topic 310-40, such that the Company is able to opt out of applying the “troubled-debt restructuring” accounting guidance for loan modifications made between January 1, 2021 and the earlier of (i) December 30, 2021 or (ii) 60 days after the President declares a termination of the COVID-19 national emergency; provided, that, the modified loans were not more than 30 days past due as of December 31, 2019. The Bank ~~(“NJCB”), providing for the merger~~adopted this provision as of ~~NJCB with and into the Bank, with the Bank as the surviving entity (the “Merger”). See Note 10 - Subsequent Event - for further information.~~December 31, 2020.

(2) ~~Net Income~~Earnings Per Common Share

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

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

Dilutive securities in the tables below exclude common stock options ~~and warrants~~ with exercise prices that exceed the average market price of the Company’s common stock during the periods presented. Inclusion of these common stock options ~~and warrants~~ would be anti-dilutive to the diluted earnings per common share calculation.

(Dollars in thousands, except per share data) 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 ~~September~~June 30, ~~2017~~2021 and ~~2016, 9,500~~2020, 23,300 and ~~11,130~~54,930 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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016, 9,500~~2020, 40,450 and ~~20,060~~41,430 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, 2021 and 2020:


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands, except per share data)	2021		2020		2021		2020

Net income	$	5,152	$	3,690	$	10,081	$	7,111

Basic weighted average shares outstanding	10,272,906		10,209,295		10,267,343		10,205,065
Plus: common stock equivalents	52,429		38,861		48,437		51,416
Diluted weighted average shares outstanding	10,325,335		10,248,156		10,315,780		10,256,481
Earnings per share:
Basic	$	0.50	$	0.36	$	0.98	$	0.70
Diluted	$	0.50	$	0.36	$	0.98	$	0.69

(3) Investment Securities

~~Amortized~~A summary of amortized cost and fair value of investment securities available for sale follows:


	June 30, 2021
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)	$	2,747	$	22	$	0	$	2,769
Residential collateralized mortgage obligations - GSE	36,800		339		(68)		37,071
Residential mortgage backed securities - GSE	26,738		483		(95)		27,126
Obligations of state and political subdivisions	24,096		911		0		25,007
Corporate debt securities	21,006		322		(39)		21,289
Other debt securities	17,511		175		(62)		17,624
Total	$	128,898	$	2,252	$	(264)	$	130,886


	December 31, 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”)	$	3,437	$	7	$	(5)	$	3,439
Residential collateralized mortgage obligations - GSE	36,282		503		(6)		36,779
Residential mortgage backed securities - GSE	13,031		572		(6)		13,597
Obligations of state and political subdivisions	26,445		1,007		0		27,452
Corporate debt securities	20,997		465		(95)		21,367
Other debt securities	22,389		254		(80)		22,563
Total	$	122,581	$	2,808	$	(192)	$	125,197

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


	June 30, 2021
(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	$	3,417	$	0	$	3,417	$	124	$	0	$	3,541
Residential mortgage backed securities - GSE	20,047		0		20,047		923		0		20,970
Obligations of state and political subdivisions	70,631		0		70,631		1,295		(80)		71,846
Trust preferred debt securities - pooled	641		(459)		182		464		0		646
Other debt securities	3,716		0		3,716		57		(12)		3,761
Total	$	98,452	$	(459)	$	97,993	$	2,863	$	(92)	$	100,764

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


	December 31, 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	$	4,640	$	0	$	4,640	$	166	$	0	$	4,806
Residential mortgage backed securities - GSE	24,517		0		24,517		1,208		0		25,725
Obligations of state and political subdivisions	61,249		0		61,249		1,248		(2)		62,495
Trust preferred debt securities - pooled	648		(472)		176		405		0		581
Other debt securities	1,970		0		1,970		63		0		2,033
Total	$	93,024	$	(472)	$	92,552	$	3,090	$	(2)	$	95,640

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

December 31, 2016
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 $ 3,514
$ —
$ (35 ) $ 3,479
Residential collateralized mortgage obligations- GSE 22,647
58
(145 ) 22,560
Residential mortgage backed securities - GSE 31,207
388
(119 ) 31,476
Obligations of state and political subdivisions 21,604
152
(356 ) 21,400
Trust preferred debt securities-single issuer 2,478
—
(206 ) 2,272
Corporate debt securities 21,963
10
(205 ) 21,768
Other debt securities 845
—
(6 ) 839
$ 104,258
$ 608
$ (1,072 ) $ 103,794

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

~~Restricted stock is included in other assets at September~~At June 30, ~~2017~~2021 and December 31, ~~2016 and totaled $3.5~~2020, $65.0 million and ~~$4.0~~$81.7 million ~~respectively. Restricted stock consisted~~ of ~~$3.4 million of~~investment securities, respectively, were pledged to secure public funds and collateralized borrowings from the Federal Home Loan Bank of New York (“FHLB”) and for other purposes required or permitted by law.

Restricted stock was included in other assets at June 30, 2021 and December 31, 2020 and totaled $1.2 million and $1.7 million, respectively. Restricted stock consisted of $1.0 million of FHLB stock and ~~$65,000~~$160,000 of Atlantic Community Bankers Bank stock at ~~September~~June 30, ~~2017~~2021 and ~~$3.9~~$1.5 million of ~~Federal Home Loan Bank of New York stock~~FHLB and ~~$65,000~~$160,000 of Atlantic Community Bankers Bank stock at December 31, ~~2016.~~2020.

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.

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 ~~September~~June 30, ~~2017.~~2021. 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, 2017
(Dollars in thousands) Amortized Cost

Fair Value
Yield
Available for sale
Due in one year or less $ 4,259
$ 4,252
3.01%
Due after one year through five years 20,820
20,897
2.29%
Due after five years through ten years 30,969
31,120
2.67%
Due after ten years 54,039
54,007
2.65%
Total $ 110,087
$ 110,276
2.60%

Carrying Value

Fair Value
Yield
Held to maturity

Due in one year or less $ 25,413
$ 25,449
1.69%
Due after one year through five years 17,683
18,449
4.65%
Due after five years through ten years 18,861
19,390
3.55%
Due after ten years 49,597
50,469
3.18%
Total $ 111,554
$ 113,757
3.14%


	June 30, 2021
(Dollars in thousands)	Amortized Cost		Fair Value		Yield
Available for sale
Due in one year or less	$	4,317	$	4,409	3.16	%
Due after one year through five years	28,838		29,660		2.34	%
Due after five years through ten years	25,996		26,481		1.75	%
Due after ten years	69,747		70,336		1.74	%
Total	$	128,898	$	130,886	1.92	%

	Carrying Value		Fair Value		Yield
Held to maturity
Due in one year or less	$	23,898	$	23,922	1.05	%
Due after one year through five years	4,491		4,643		3.58	%
Due after five years through ten years	13,705		14,281		2.77	%
Due after ten years	55,899		57,918		2.59	%
Total	$	97,993	$	100,764	2.29	%

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 ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016~~2020 were as follows:


	June 30, 2021
		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

Residential collateralized mortgage obligations - GSE	4	$	10,888	$	(66)	$	1,202	$	(2)	$	12,090	$	(68)
Residential mortgage backed securities - GSE	8	9,935		(89)		187		(6)		10,122		(95)
Obligations of state and political subdivisions	4	7,828		(80)		0		0		7,828		(80)
Corporate debt securities	3	0		0		3,456		(39)		3,456		(39)
Other debt securities	7	3,066		(12)		8,858		(62)		11,924		(74)
Total temporarily impaired securities	26	$	31,717	$	(247)	$	13,703	$	(109)	$	45,420	$	(356)

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 )

December 31, 2016 Less than 12 months 12 months or longer Total
(Dollars in thousands)
Number
of
Securities
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Treasury securities and
obligations of U.S.
Government sponsored
corporations (GSE) and
agencies
3 $ 7,090
$ (151 ) $ —
$ —
$ 7,090
$ (151 )
Residential collateralized
mortgage obligations –GSE
7 17,242
(275 ) —
—
17,242
(275 )
Residential mortgage backed
securities - GSE
29 26,581
(216 ) 3,542
(16 ) 30,123
(232 )
Obligations of state and
political subdivisions
74 25,545
(611 ) —
—
25,545
(611 )
Trust preferred debt securities- single issuer 4 —
—
2,272
(206 ) 2,272
(206 )
Corporate debt securities 6 12,700
(204 ) 1,999
(1 ) 14,699
(205 )
Other debt securities 3 —
—
1,276
(7 ) 1,276
(7 )
Total temporarily impaired
securities
126 $ 89,158
$ (1,457 ) $ 9,089
$ (230 ) $ 98,247
$ (1,687 )


	December 31, 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)	1	$	0	$	0	$	548	$	(5)	$	548	$	(5)
Residential collateralized mortgage obligations - GSE	3	5,153		(2)		2,060		(4)		7,213		(6)
Residential mortgage backed securities - GSE	3	203		(6)		0		0		203		(6)
Obligations of state and political subdivisions	1	1,295		(2)		0		0		1,295		(2)
Corporate debt securities	3	0		0		3,399		(95)		3,399		(95)
Other debt securities	7	0		0		11,230		(80)		11,230		(80)
Total temporarily impaired securities	18	$	6,651	$	(10)	$	17,237	$	(184)	$	23,888	$	(194)

U.S. Treasury securities and obligations of U.S. ~~Government sponsored corporations and agencies:~~government-sponsored entities: 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 residential 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:~~ securities. The unrealized losses on investments in corporate debt securities were caused by ~~increases~~an increase in market interest ~~rates.~~rates, which includes the yield required by market participants for the issuer's credit risk. None of the corporate issuers have defaulted on interest payments. ~~The decline in fair value is attributable to changes in 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~~

Other debt securities ~~– single issuer~~:. The unrealized losses on investments in ~~these~~other debt securities ~~with unrealized losses are comprised of four corporate trust preferred securities issued~~were caused by ~~two large financial institutions that mature~~an increase in ~~2027. The contractual terms of~~market interest rates, which includes the ~~trust preferred securities do not allow~~yield required by market participants for 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~~issuer's credit risk. None of the issuers ~~continues to maintain an investment grade credit rating and neither has~~have defaulted on interest payments. The decline in fair value is attributable to ~~the widening of~~changes in market interest ~~rate and credit spreads and the lack of an active trading market for these securities.~~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~~2 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 $12,000 was recognized in the first six months of 2021 as an increase in the carrying amount of the security. On a quarterly basis, management evaluates ~~the~~this security to determine if any additional other-than-temporary impairment is required. As of ~~September~~June 30, ~~2017, the security was in an unrealized gain position.~~2021, management concluded that no additional other-than-temporary impairment had occurred.

(4) 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 ~~September~~June 30, ~~2017:~~2021:


(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	$	0	$	0	$	3,113	$	3,113	$	612,519	$	615,632	$	0	$	3,113
Mortgage warehouse lines	0		0		0		0		241,827		241,827		0		0
Construction	0		0		7,024		7,024		124,246		131,270		0		7,024
Commercial business	0		0		4		4		160,052		160,056		0		131
Residential real estate	658		0		1,296		1,954		66,533		68,487		0		1,638
Loans to individuals	327		0		47		374		18,979		19,353		0		148
Other loans	0		0		0		0		104		104		0		0
Total loans	$	985	$	0	$	11,484	$	12,469	$	1,224,260	1,236,729		$	0	$	12,054
Deferred loan fees, net											(1,287)
Total loans											$	1,235,442

(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

The following table provides an aging of the loan portfolio by loan class at December 31, ~~2016:~~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 $ —
$ —
$ 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	$	0	$	0	$	7,008	$	7,008	$	611,970	$	618,978	$	0	$	7,565
Mortgage warehouse lines	0		0		0		0		388,366		388,366		0		0
Construction	0		0		7,500		7,500		121,745		129,245		0		7,500
Commercial business	1		0		84		85		188,643		188,728		0		225
Residential real estate	1,356		91		1,534		2,981		85,280		88,261		871		798
Loans to individuals	12		99		264		375		20,894		21,269		0		273
Other loans	0		0		0		0		113		113		0		0
Total loans	$	1,369	$	190	$	16,390	$	17,949	$	1,417,011	1,434,960		$	871	$	16,361
Deferred loan fees, net											(1,254)
Total loans											$	1,433,706

As provided by ~~ASC~~(“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 ~~September~~June 30, ~~2017,~~2021 and December 31, 2020, there were ~~no acquired~~$542,000 and $2.4

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 quality~~respectively, 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 ~~Bank~~Company 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 ~~worths~~worth and liquid assets.

3. Good - Loans to companies whose balance sheets show good liquidity and cash flow adequate to meet maturities of long-term debt with a comfortable margin. Such companies have established profitable records over a number of years, and there has been growth in net worth. Operating ratios are in line with those of the industry, and expenses are in proper relationship to the volume of business done and the profits achieved. Management is well-balanced and competent in their responsibilities. Economic environment is favorable; however, competition is strong. The prospects for growth are good. Loans in this category do not meet the collateral requirements of loans ~~in categories 1~~graded excellent and ~~2 above.~~above average. Loans to individuals are supported by good net worth but whose supporting assets are illiquid.

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

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

5. Substandard - A ~~"substandard"~~“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 ~~Bank~~Company will sustain some loss if the deficiencies are not corrected.

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

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

The following table provides a breakdown of the loan portfolio by credit quality indicator at ~~September~~June 30, ~~2017:~~2021:

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

Commercial
Real Estate

Mortgage
Warehouse Lines

Residential
Real Estate
Grade:
Pass $ 127,277
$ 86,668
$ 271,440
$ 193,535
$ 40,994
Special Mention 327
3,574
13,888
—
673
Substandard —
780
6,054
—
291
Doubtful —
3,009
—
—
—
Total $ 127,604
$ 94,031
$ 291,382
$ 193,535
$ 41,958


(Dollars in thousands)
Credit Exposure by Internally Assigned Grade	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate
Pass	$	124,246	$	147,994	$	579,040	$	241,827	$	65,457
Special Mention	216		2,686		20,088		0		351
Substandard	0		9,372		16,504		0		2,679
Doubtful	6,808		4		0		0		0
Total	$	131,270	$	160,056	$	615,632	$	241,827	$	68,487


Consumer Credit Exposure - By Payment Activity	Loans To Individuals		Other

Credit Exposure by Payment Activity					Credit Exposure by Payment Activity	Loans To Individuals		Other Loans
Performing	$	22,233	$	186	Performing	$	19,205	$	104
Non-performing	378		—		Non-performing	148		0
Total	$	22,611	$	186	Total	$	19,353	$	104

The following table provides a breakdown of the loan portfolio by credit quality indicator at December 31, ~~2016:~~2020:

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

Commercial
Real Estate

Mortgage
Warehouse
Lines

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


(Dollars in thousands)
Credit Exposure by Internally Assigned Grade	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate
Pass	$	121,745	$	175,895	$	580,699	$	387,483	$	85,203
Special Mention	0		5,942		15,419		883		358
Substandard	7,500		6,806		22,860		0		2,700
Doubtful	0		85		0		0		0

Total	$	129,245	$	188,728	$	618,978	$	388,366	$	88,261

Consumer Credit Exposure - By
Payment Activity

Loans To
Individuals
Other
Performing $ 23,375
$ 207
Non-performing 361
—
Total $ 23,736
$ 207


Credit Exposure by Payment Activity	Loans To Individuals		Other Loans
Performing	$	20,996	$	113
Non-performing	273		0
Total	$	21,269	$	113

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) ~~they~~the loans are contractually past due 90 days or more as to interest or principal payments unless the loans are both well secured and in the process of collection.

The following tables summarize the distribution of the allowance for loan losses and loans receivable by loan class and impairment method at ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016:~~ 2020:

~~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

~~December 31, 2016~~

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

Loans receivable:
Individually evaluated for impairment $ 391
$ 947
$ 3,817
$ —
$ 544
$ 337
$ —
$ —
$ 6,036
Loans acquired with deteriorated credit quality —
191
930
—
—
—
—
—
1,121
Collectively evaluated for impairment 95,644
98,512
237,646
216,259
44,247
23,399
207
—
715,914
Ending Balance $ 96,035
$ 99,650
$ 242,393
$ 216,259
$ 44,791
$ 23,736
$ 207
$ —
$ 723,071


	June 30, 2021
(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	$	2,972	$	5	$	479	$	0	$	0	$	0	$	0	$	0	$	3,456
Loans acquired with deteriorated credit quality	0		0		0		0		0		0		0		0		0
Collectively evaluated for impairment	2,053		2,657		6,396		1,088		418		110		0		747		13,469
Ending Balance	$	5,025	$	2,662	$	6,875	$	1,088	$	418	$	110	$	0	$	747	$	16,925

Loans receivable:
Individually evaluated for impairment	$	7,024	$	730	$	7,810	$	0	$	1,638	$	148	$	0	$	0	$	17,350
Loans acquired with deteriorated credit quality	0		295		2,401		0		425		0		0		0		3,121
Collectively evaluated for impairment	124,246		159,031		605,421		241,827		66,424		19,205		104		0		1,216,258
Ending Balance	$	131,270	$	160,056	$	615,632	$	241,827	$	68,487	$	19,353	$	104	$	0	1,236,729
Deferred loan fees, net																	(1,287)
																	$	1,235,442


	December 31, 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	$	2,089	$	4	$	19	$	0	$	0	$	0	$	0	$	0	$	2,112
Loans acquired with deteriorated credit quality	0		0		0		0		0		0		0		0		0
Collectively evaluated for impairment	1,652		2,723		6,403		1,807		619		125		0		200		13,529
Ending Balance	$	3,741	$	2,727	$	6,422	$	1,807	$	619	$	125	$	0	$	200	$	15,641

Loans receivable:
Individually evaluated for impairment	$	7,500	$	959	$	11,717	$	0	$	798	$	273	$	0	$	0	$	21,247
Loans acquired with deteriorated credit quality	0		308		3,323		0		410		0		0		0		4,041
Collectively evaluated for impairment	121,745		187,461		603,938		388,366		87,053		20,996		113		0		1,409,672
Ending Balance	$	129,245	$	188,728	$	618,978	$	388,366	$	88,261	$	21,269	$	113	$	0	1,434,960
Deferred loan fees, net																	(1,254)
																	$	1,433,706

At June 30, 2021 and December 31, 2020, there were $36.0 million and $58.8 million, respectively, of Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans which are included in commercial business loans and are 100% guaranteed by the SBA. Accordingly, 0 allowance was provided for such loans.

The activity in the allowance for loan loss by loan class for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020 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
Balance - (Dollars in thousands)																									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, 2021																									Balance - April 1, 2021	$	5,468	$	2,910	$	6,679	$	1,212	$	478	$	120	$	0	$	177	$	17,044
Provision charged/(credited) to operations	139		39			(252		)	(31		)	3		(4		)	—		256			150			Provision charged/(credited) to operations	(443)		456		210		(124)		(60)		(10)		1		570		600
Loans charged off	—		(61		)	—			—			—		—			—		—			(61		)	Loans charged off	0		(704)		(14)		0		0		0		(1)		0		(719)
Recoveries of loans charged off	—		—			4			—			—		2			—		—			6			Recoveries of loans charged off	0		0		0		0		0		0		0		0		0
Balance - September 30, 2017	$	1,594	$	1,415		$	2,743		$	871		$	388	$	118		$	—	$	673		$	7,802
Balance - June 30, 2021																									Balance - June 30, 2021	$	5,025	$	2,662	$	6,875	$	1,088	$	418	$	110	$	0	$	747	$	16,925

Balance - July 1, 2016	$	975	$	1,230		$	3,150		$	1,190		$	294	$	119		$	—	$	524		$	7,482
Balance - April 1, 2020																									Balance - April 1, 2020	$	1,706	$	1,771	$	4,800	$	1,027	$	430	$	188	$	0	$	79	$	10,001
Provision charged/(credited) to operations	190		486			(448		)	(46		)	5		(9		)	—		(178		)	—			Provision charged/(credited) to operations	(45)		9		1,819		310		76		(6)		0		(38)		2,125
Loans charged off	—		—			—			—			—		—			—		—			—			Loans charged off	0		0		0		0		0		0		0		0		0
Recoveries of loans charged off	—		3			—			—			—		1			—		—			4			Recoveries of loans charged off	0		0		0		0		0		0		0		0		0
Balance - September 30, 2016	$	1,165	$	1,719		$	2,702		$	1,144		$	299	$	111		$	—	$	346		$	7,486
Balance - June 30, 2020																									Balance - June 30, 2020	$	1,661	$	1,780	$	6,619	$	1,337	$	506	$	182	$	0	$	41	$	12,126


Balance - (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, 2021	$	3,741	$	2,727	$	6,422	$	1,807	$	619	$	125	$	0	$	200	$	15,641
Provision charged/(credited) to operations	1,284		636		467		(719)		(201)		(15)		1		547		2,000
Loans charged off	0		(704)		(14)		0		0		0		(1)		0		(719)
Recoveries of loans charged off	0		3		0		0		0		0		0		0		3
Balance - June 30, 2021	$	5,025	$	2,662	$	6,875	$	1,088	$	418	$	110	$	0	$	747	$	16,925

Balance - January 1, 2020	$	1,389	$	1,409	$	4,524	$	1,083	$	412	$	185	$	0	$	269	$	9,271
Provision charged/(credited) to operations	272		536		2,095		254		94		(3)		0		(228)		3,020
Loans charged off	0		(165)		0		0		0		0		0		0		(165)
Recoveries of loans charged off	0		0		0		0		0		0		0		0		0
Balance - June 30, 2020	$	1,661	$	1,780	$	6,619	$	1,337	$	506	$	182	$	0	$	41	$	12,126

(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

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) –


							Three Months Ended June 30, 2021				Six Months Ended June 30, 2021
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no allowance:
Commercial:
Construction	$	216	$	216	$	—	$	72	$	0	$	36	$	0
Commercial Business	499		1,818		—		600		49		722		86
Commercial Real Estate	2,401		2,767		—		3,269		105		6,064		166
Mortgage Warehouse Lines	0		0		—		0		0		0		0
Subtotal	3,116		4,801		—		3,941		154		6,822		252
Residential Real Estate	2,063		2,227		—		2,065		8		2,070		15
Consumer:
Loans to Individuals	148		155		—		148		0		223		0
Other Loans	0		0		—		0		0		0		0
Subtotal	148		155		—		148		0		223		0
With no allowance:	$	5,327	$	7,183	$	—	$	6,154	$	162	$	9,115	$	267

With an allowance:
Commercial:
Construction	$	6,808	$	6,808	$	2,972	$	7,038	$	0	$	7,269	$	0
Commercial Business	526		526		5		529		7		468		14
Commercial Real Estate	7,810		7,961		479		7,879		63		7,558		125
Mortgage Warehouse Lines	0		0		0		0		0		0		0
Subtotal	15,144		15,295		3,456		15,446		70		15,295		139
Residential Real Estate	0		0		0		0		0		0		0
Consumer:
Loans to Individuals	0		0		0		0		0		0		0
Other Loans	0		0		0		0		0		0		0
Subtotal	0		0		0		0		0		0		0
With an allowance:	$	15,144	$	15,295	$	3,456	$	15,446	$	70	$	15,295	$	139
Total:
Construction	7,024		7,024		2,972		7,110		0		7,305		0
Commercial Business	1,025		2,344		5		1,129		56		1,190		100
Commercial Real Estate	10,211		10,728		479		11,148		168		13,622		291
Mortgage Warehouse Lines	0		0		0		0		0		0		0
Residential Real Estate	2,063		2,227		0		2,065		8		2,070		15
Consumer	148		155		0		148		0		223		0
Total	$	20,471	$	22,478	$	3,456	$	21,600	$	232	$	24,410	$	406

~~September 30, 2017~~

(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
With no allowance:
Commercial:
Construction $ 231
$ 231
$ —
$ 231
$ 3
$ 201
$ 9
Commercial Business 675
675
—
693
25
725
123
Commercial Real Estate 3,465
3,465
—
2,880
18
2,808
128
Mortgage Warehouse Lines —
—
—
—
—
—
—
Subtotal 4,371
4,371
—
3,804
46
3,734
260
Residential Real Estate 74
74
—
76
—
166
—
Consumer:

Loans to Individuals 378
378
—
366
—
332
—
Other —
—
—
—
—
—
—
Subtotal 378
378
—
366
—
332
—
With no allowance: $ 4,823
$ 4,823
$ —
$ 4,246
$ 46
$ 4,232
$ 260

With an allowance:
Commercial:
Construction $ —
$ —
$ —
$ —
$ —
$ 114
$ —
Commercial Business 3,104
3,104
245
3,045
44
2,745
171
Commercial Real Estate 2,977
2,977
79
3,092
44
2,764
129
Mortgage Warehouse Lines —
—
—
—
—
—
—
Subtotal 6,081
6,081
324
6,137
88
5,623
300
Residential Real Estate —
—
—
—
—
100
—
Consumer:
Loans to Individuals —
—
—
—
—
—
—
Other —
—
—
—
—
—
—
Subtotal —
—
—
—
—
—
—
With an allowance: $ 6,081
$ 6,081
$ 324
$ 6,137
$ 88
$ 5,723
$ 300
Total:

Construction 231
231
—
231
3
315
9
Commercial Business 3,779
3,779
245
3,738
69
3,470
294
Commercial Real Estate 6,442
6,442
79
5,972
62
5,572
257
Mortgage Warehouse Lines —
—
—
—
—
—
—
Residential Real Estate 74
74
—
76
—
266
—
Consumer 378
378
—
366
—
332
—
Total $ 10,904
$ 10,904
$ 324
$ 10,383
$ 134
$ 9,955
$ 560

Impaired Loans Receivables (By Class) ~~– December 31, 2016~~


								December 31, 2020
(Dollars in thousands
	Recorded Investment		Unpaid Principal Balance		Related Allowance
(Dollars in thousands)							(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no allowance:							With no allowance:
Commercial:							Commercial:
Construction	$	186	$	186	$	—	Construction	$	0	$	0	$	—
Commercial Business	883		1,054		—		Commercial Business	1,120		2,500		—
Commercial Real Estate	1,380		1,380		—		Commercial Real Estate	11,806		13,833		—
Mortgage Warehouse Lines	—		—		—		Mortgage Warehouse Lines	0		0		—
Subtotal	2,449		2,620		—		Subtotal	12,926		16,333		—
Residential Real Estate	244		244		—		Residential Real Estate	1,208		1,465		—
Consumer:							Consumer:
Loans to Individuals	337		337		—		Loans to Individuals	273		297		—
Other	—		—		—
Other Loans							Other Loans	0		0		—
Subtotal	337		337		—		Subtotal	273		297		—
With no allowance	$	3,030	$	3,201	$	—	With no allowance	$	14,407	$	18,095	$	—
With an allowance:							With an allowance:
Commercial:							Commercial:
Construction	$	205	$	205	$	7	Construction	$	7,500	$	7,500	$	2,089
Commercial Business	255		255		101		Commercial Business	147		147		4
Commercial Real Estate	3,367		3,367		114		Commercial Real Estate	3,234		3,234		19
Mortgage Warehouse Lines	—		—		—		Mortgage Warehouse Lines	0		0		0
Subtotal	3,827		3,827		222		Subtotal	10,881		10,881		2,112
Residential Real Estate	300		316		38		Residential Real Estate	0		0		0
Consumer:							Consumer:
Loans to Individuals	—		—		—		Loans to Individuals	0		0		0
Other	—		—		—
Other Loans							Other Loans	0		0		0
Subtotal	—		—		—		Subtotal	0		0		0
With an allowance	$	4,127	$	4,143	$	260	With an allowance	$	10,881	$	10,881	$	2,112

Total:							Total:
Construction	391		391		7		Construction	$	7,500	$	7,500	$	2,089
Commercial Business	1,138		1,309		101		Commercial Business	1,267		2,647		4
Commercial Real Estate	4,747		4,747		114		Commercial Real Estate	15,040		17,067		19
Mortgage Warehouse Lines	—		—		—		Mortgage Warehouse Lines	0		0		0
Residential Real Estate	544		560		38		Residential Real Estate	1,208		1,465		0
Consumer	337		337		—		Consumer	273		297		0
Total	$	7,157	$	7,344	$	260	Total	$	25,288	$	28,976	$	2,112

Impaired Loans Receivables (By Class) – September 30, 2016
Three Months Ended September 30, 2016 Nine Months Ended September 30, 2016
(Dollars in thousands)
Average
Recorded
Investment
Interest Income Recognized Average
Recorded
Investment Interest Income Recognized
With no allowance:
Commercial:
Construction $ 342
$ 2
$ 284
$ 5
Commercial Business 742
3
537
11
Commercial Real Estate 1,640
23
1,577
70
Mortgage Warehouse Lines —
—
—
—
Subtotal 2,724
28
2,398
86
Residential Real Estate 259
—
885
(2 )

Consumer:

Loans to Individuals 263
—
263
—
Other —
—
—
—
Subtotal 263
—
263
—
With no allowance: $ 3,246
$ 28
$ 3,546
$ 84
With an allowance:

Commercial:
Construction $ —
$ —
$ —
$ —
Commercial Business 345
—
233
13
Commercial Real Estate 3,372
11
3,681
34
Mortgage Warehouse Lines —
—
—
—
Subtotal 3,717
11
3,914
47
Residential Real Estate 301
—
167
—
Consumer:

Loans to Individuals —
—
—
—
Other —
—
—
—
Subtotal —
—
—
—
With an allowance: $ 4,018
$ 11
$ 4,081
$ 47
Total:

Construction 342
2
284
5
Commercial Business 1,087
3
770
24
Commercial Real Estate 5,012
34
5,258
104
Mortgage Warehouse Lines —
—
—
—
Residential Real Estate 560
—
1,052
(2 )
Consumer 263
—
263
—
Total $ 7,264
$ 39
$ 7,627
$ 131
18

Impaired Loans Receivables (By Class)


	Three Months Ended June 30, 2020				Six Months Ended June 30, 2020
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no allowance:
Commercial:
Construction	$	9,304	$	23	$	6,203	$	48
Commercial Business	1,621		17		1,358		35
Commercial Real Estate	8,884		91		8,338		182
Mortgage Warehouse Lines	0		0		0		0
Subtotal	19,809		131		15,899		265
Residential Real Estate	1,360		9		1,282		18

Consumer:
Loans to Individuals	517		0		599		0
Other Loans	0		0		0		0
Subtotal	517		0		599		0
With no allowance	$	21,686	$	140	$	17,780	$	283
With an allowance:
Commercial:
Construction	$	0	$	0	$	0	$	0
Commercial Business	140		0		398		0
Commercial Real Estate	3,675		51		4,113		104
Mortgage Warehouse Lines	0		0		0		0
Subtotal	3,815		51		4,511		104
Residential Real Estate	0		0		0		0
Consumer:
Loans to Individuals	0		0		0		0
Other Loans	0		0		0		0
Subtotal	0		0		0		0
With an allowance	$	3,815	$	51	$	4,511	$	104
Total:
Construction	$	9,304	$	23	6,203		48
Commercial Business	1,761		17		1,756		35
Commercial Real Estate	12,559		142		12,451		286
Mortgage Warehouse Lines	0		0		0		0
Residential Real Estate	1,360		9		1,282		18
Consumer	517		0		599		0
Total	$	25,501	$	191	$	22,291	$	387

Purchased Credit-Impaired Loans

Purchased credit-impaired ~~loans~~ (“PCI”) loans are loans acquired at a discount ~~that are~~ due in part to the deteriorated credit quality. On November 8, 2019, as part of the merger of Shore Community Bank with and into the Bank, the Company acquired PCI 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~~PCI loans at ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016:~~2020:

(Dollars in thousands) September 30, 2017
December 31, 2016
Outstanding balance $ 1,016
$ 1,470
Carrying amount $ 854
$ 1,121


(Dollars in thousands)	June 30, 2021		December 31, 2020
Outstanding balance	$	4,284	$	5,221
Carrying amount	$	3,121	$	4,041

Changes in accretable discount for purchased credit-impaired loans for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~September~~June 30, ~~2016~~2020 were as follows:

Three months ended September 30, Nine months ended September 30,
(Dollars in thousands) 2017 2016 2017 2016
Balance at beginning of period $ 171
$ 44
$ 30
$ 73
Transfer from non-accretable discount —
—
161
—
Accretion of discount (23 ) (7 ) (43 ) (36 )
Balance at end of period $ 148
$ 37
$ 148
$ 37


	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2021		2020		2021		2020
Balance at beginning of period	$	388	$	522	$	232	$	657
Acquisition of impaired loans	0		0		0		0
Transfer from non-accretable discount					229		0
Accretion of discount	(87)		(96)		(160)		(231)
Balance at end of period	$	301	$	426	$	301	$	426

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~~(Dollars in thousands):

September 30, 2017 December 31, 2016
Number
of loans

Recorded
Investment

Number of
loans

Recorded
Investment
— $ —
4 $ 822

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.


June 30, 2021			December 31, 2020
Number of loans	Recorded Investment		Number of loans	Recorded Investment
3	$	471	1	$	311

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 attempt~~attempts 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 ~~three~~six months ended ~~September~~June 30, ~~2017~~2021 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 September 30, 2017. The concession to the borrower was a change in monthly payments to interest only for a period of time.2020. 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 ~~twelve~~12 months of restructuring during the six months ended June 30, 2021 and 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. The Economic Aid Act, which was enacted in December 2020 in further response to the COVID-19 pandemic, provides relief to borrowers in the form of access to additional credit through the SBA's PPP

as originally constituted under the CARES Act. Pursuant to the Economic Aid Act, the Company may opt out of applying the “troubled-debt restructuring” accounting guidance for loan modifications made between January 1, 2021 and the earlier of (i) December 30, 2021 or (ii) 60 days after the President declares a termination of the COVID-19 national emergency, provided that the modified loans were not more than 30 days past due as of December 31, 2019.

As of June 30, 2021, all commercial business, commercial real estate and consumer loans, except for 2 loans, that had previously received deferrals in 2020 and 2021 were no longer deferred and had made the contractually due payments. These modified loans were not considered TDRs under the CARES Act and the Economic Aid Act. The 2 loans consisted of 1 hotel loan totaling $3.1 million that was placed on non-accrual in the third quarter of 2020 and 1 residential mortgage loan for $871,000 that was placed on non-accrual in the first quarter of 2021.

(5) Revenue from Contracts with Customers

All of the Company’s revenue from contracts with customers within 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 ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2021 and 2020. Items outside the scope of ASC 606 are noted as such.


	Three months ended				Six months ended
(Dollars in thousands)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Service charges on deposit accounts:
Overdraft fees	$	32	$	30	$	69	$	125
Other	75		102		155		220
Interchange income	187		152		350		301
Other income - in scope	119		112		217		215

Income on bank-owned life insurance (1)	168		264		342		444
Gain on sales of loans (1)	2,766		2,121		5,861		3,591
Loan servicing fees (1)	165		157		324		323
Gain on sales and calls of securities (1)	2		10		4		18
Other income (1)	221		152		491		319
	$	3,735	$	3,100	$	7,813	$	5,556

(1) Not within the scope of ASC 606

~~(5)~~(6) Share-Based Compensation

The Company’s share-based incentive plans (“Stock Plans”) authorize the issuance of an aggregate of ~~485,873~~945,873 shares of the Company’s common stock (as adjusted for stock dividends) ~~pursuant to~~through 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 ~~September~~June 30, ~~2017,~~2021, there were ~~127,292~~314,416 shares of common stock available for future grants under the Stock Plans.

The following table summarizes ~~stock option~~Options activity during the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2021:

(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, 2021	134,122	$	11.61	4.3	$	731
Granted	21,500	15.56		9.5	0
Exercised	(7,666)	8.94


Outstanding at June 30, 2021	147,956	$	12.32	4.7	$	1,254

Exercisable at June 30, 2021	109,046	$	10.69	3.3	$	1,097

The fair value of each ~~option~~Option and the significant weighted average assumptions used to calculate the fair value of the ~~options~~Options granted ~~for~~during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 were as follows:

Fair value of options granted $ 6.05
Risk-free rate of return 2.45 %
Expected option life in years 7
Expected volatility 31.25 %
Expected dividends ⁽¹⁾
1.19 %

⁽¹⁾ ~~The Company declared its first cash dividend on September 15, 2016.~~


	Grant Date
	January 4, 2021
Fair value of options granted	$	3.38
Risk-free rate of return	0.64		%
Expected option life in years	7
Expected volatility	28.47		%
Expected dividends	2.27		%

Share-based compensation expense related to ~~options~~Options was ~~$16,000~~$43,000 and ~~$11,000~~$45,000 for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2021 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,~~2020, respectively. As of ~~September~~June 30, ~~2017,~~2021, there was approximately ~~$87,000~~$124,000 of unrecognized compensation cost related to ~~non-vested stock options.~~unvested Options.

The following table summarizes the activity in ~~non-vested restricted shares~~Stock Awards for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2021:

(Dollars in thousands, except share amounts) Number of Shares Average Grant-Date Fair Value
Non-vested at January 1, 2017 143,259
$ 9.02
Granted 61,900
17.96
Vested (48,037 ) 10.60
Forfeited (1,539 ) 12.49
Non-vested at September 30, 2017 155,583
$ 12.06


(Dollars in thousands, except share amounts)	Number of Shares	Average Grant-Date Fair Value
Outstanding at January 1, 2021	129,883	$	12.61
Granted	39,350	18.18
Vested	(36,817)	18.26

Non-vested at June 30, 2021	132,416	$	12.70

Share-based compensation expense related to ~~stock grants~~Stock Awards was ~~$239,000~~$530,000 and ~~$157,000~~$537,000 for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2021 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,~~2020, respectively. As of ~~September~~June 30, ~~2017,~~2021, there was approximately ~~$1.8~~$1.7 million of unrecognized compensation cost related to ~~non-vested~~unvested Stock Awards.

The following table summarizes the activity in RSUs for the six months ended June 30, 2021:


(Dollars in thousands, except share amounts)	Number of Shares	Average Grant-Date Fair Value
Outstanding at January 1, 2021	25,817	$	21.24
Granted	14,250	15.56
Vested	(9,083)	16.82

Non-vested at June 30, 2021	30,984	$	19.92

Share-based compensation expense related to RSUs was $203,000 and $112,000 for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, there was approximately $441,000 of unrecognized compensation cost related to unvested RSUs.

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 upon certification of performance achievement by the Compensation Committee following each annual performance period. On March 3, 2021, the Compensation Committee certified that the applicable performance metrics were achieved at 142% of target for 2020 and 2019 vested awards. 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)~~(7) Benefit Plans

The Bank has a 401(k) plan ~~which~~that covers substantially all employees with six months or more of service. The ~~Bank's~~Bank’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, 2021 and December 31, 2020, 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~~$37.7 million and ~~$22.2~~$37.3 million at ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, respectively.

The components of net periodic expense for the Company’s supplemental executive retirement plans for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020 were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2021		2020		2021		2020
Service cost	$	50	$	45	$	99	$	92
Interest cost	46		41		92		82
Actuarial gain recognized	(89)		(56)		(178)		(100)
Total	$	7	$	30	$	13	$	74

(Dollars in thousands) Three Months Ended
September 30, Nine Months Ended
September 30,
2017
2016
2017
2016
Service cost $ 67
$ 58
$ 178
$ 162
Interest cost 39
49
117
134
Actuarial gain recognized (32 ) (48 ) (75 ) (120 )
Total $ 74
$ 59
$ 220
$ 176

~~(7)~~(8) 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, 2021
(Dollars in thousands)	Before-Tax Amount		Income Tax Effect		Net-of-Tax Amount
Net unrealized holding gains on investment securities available for sale	$	1,988	$	(496)	$	1,492
Unrealized impairment loss on held to maturity security	(459)		109		(350)
Gains on unfunded pension liability	203		(57)		146
Accumulated other comprehensive income	$	1,732	$	(444)	$	1,288

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, 2020
(Dollars in thousands)	Before-Tax Amount		Income Tax Effect		Net-of-Tax Amount
Net unrealized holding gains on investment securities available for sale	$	2,616	$	(644)	$	1,972
Unrealized impairment loss on held to maturity security	(472)		112		(360)
Gains on unfunded pension liability	444		(124)		320
Accumulated other comprehensive income	$	2,588	$	(656)	$	1,932

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, 2021 and June 30, 2020:


(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, 2021	$	1,457	$	(355)	$	232	$	1,334
Other comprehensive income (loss) before reclassifications	37		0		(23)		14
Amounts reclassified from accumulated other comprehensive income (loss)	0		5		(63)		(58)
Reclassification adjustment for gains realized in income	(2)		0		0		(2)
Other comprehensive income (loss)	35		5		(86)		(46)
Balance - June 30, 2021	$	1,492	$	(350)	$	146	$	1,288

Balance - Balance - April 1, 2020	$	161	$	(372)	$	270	$	59
Other comprehensive income before reclassifications	1,298		0		60		1,358
Amounts reclassified from accumulated other comprehensive income (loss)	0		3		(39)		(36)
Reclassification adjustment for gains realized in income	(7)		0		0		(7)
Other comprehensive income	1,291		3		21		1,315
Balance - June 30, 2020	$	1,452	$	(369)	$	291	$	1,374

Balance - January 1, 2021	$	1,972	$	(360)	$	320	$	1,932
Other comprehensive loss before reclassifications	(478)		0		(47)		(525)
Amounts reclassified from accumulated other comprehensive income (loss)	0		10		(127)		(117)
Reclassification adjustment for gains realized in income	(2)		0		0		(2)
Other comprehensive (loss) income	(480)		10		(174)		(644)
Balance - June 30, 2021	$	1,492	$	(350)	$	146	$	1,288

Balance - January 1, 2020	$	303	$	(374)	$	262	$	191
Other comprehensive income before reclassifications	1,157		0		99		1,256
Amounts reclassified from accumulated other comprehensive income (loss)	0		5		(70)		(65)
Reclassification adjustment for gains realized in income	(8)		0		0		(8)
Other comprehensive income	1,149		5		29		1,183
Balance - June 30, 2020	$	1,452	$	(369)	$	291	$	1,374

(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

~~(8)~~(9) Recent Accounting Pronouncements

~~ASU Update 2017-12 - 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~~2016-13 - ~~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.

~~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 FASB issued 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 ~~amendments~~Company, 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 evaluating~~has completed the initial analysis of its financial assets and will continue to build and validate the CECL models in 2021 to evaluate the impact of the ~~pending~~ adoption of the new standard on its consolidated financial statements.

~~ASU Update 2016-02: Leases.~~

In ~~February 2016,~~April 2019, the FASB issued ASU ~~2016-02 "Leases~~." ~~From the lessee's perspective, the new standard establishes a right- of-use ("ROU") model that requires a lessee~~2019-04, Codification Improvements to ~~record a ROU asset~~Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognitionHedging, and Topic 825, Financial Instruments. The amendments 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,this ASU make minor improvements to the ~~lessee. If risks~~Codification by eliminating certain inconsistencies and ~~rewards~~clarifying the current guidance.

In June 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. This ASU provides optional targeted transition relief that allows reporting entities to irrevocably elect the fair value option on financial instruments that 1) were previously recorded at amortized cost and 2) are ~~conveyed without~~within the ~~transfer~~scope of ~~control,~~Topic 326 if the ~~lease is treated as a financing. If~~instruments are eligible for the ~~lessor doesn’t convey risks and rewards or control, an operating lease results.~~

fair value option under Topic 825. The new ~~standard~~guidance is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. See the discussion regarding the adoption of ASU 2016-13 above.

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 ~~beginning~~discussion regarding the adoption of ~~the earliest comparative period presented~~ASU 2016-13 above.

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

~~In January 2016,~~November 2019, the FASB issued ASU ~~2016-01 "Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The~~No. 2019-11, “Financial Instruments - Credit Losses: Codification improvements (Topic 326)” to clarify its new credit impairment guidance in ~~the~~ASC 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 changes~~included in ~~fair value recognized in net income; simplifies~~ the ~~impairment assessment~~allowance 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 assessment~~the prepayment assumptions applicable immediately prior to ~~identify impairment; eliminates~~ the ~~requirement for public business entities~~restructuring event; and extends the practical expedient to ~~disclose~~exclude 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 use~~Company, the ~~exit price notion when measuring the fair value~~provisions 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 expect~~Early 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 discussion 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 Customers~~2019-12 - Income Taxes (Topic ~~606)~~740) - Simplifying the Accounting for Income Taxes

In ~~May 2014,~~December 2019, the FASB issued ASU ~~2014-9, deferred by~~2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” This ASU ~~2015-14, “Revenue~~removes the exception to the incremental approach for intraperiod tax allocation when there is a loss from ~~Contracts with Customers (Topic 606).” The amendments in this update establish~~continuing operations and income or a ~~comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry specific guidance such as~~gain from other items and removes the ~~real estate, construction and software industries. The revenue standard's core principle is built on~~exception to the ~~contract between~~interim period income tax accounting when a ~~vendor and a customer~~year-to-date loss exceeds the anticipated loss for the ~~provision of~~

~~goods and services. It attempts to depict~~year. ASU 2019-12 also simplifies the ~~exchange of rights and obligations between the parties~~accounting for income taxes by requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax, that an entity evaluate when a step up in the ~~pattern~~tax basis of ~~revenue recognition based on~~goodwill should be considered part of the ~~consideration to~~business combination in which the ~~vendor is entitled. To accomplish this objective,~~book goodwill originally was recognized, and that an entity reflect the ~~standard requires five basic steps: (1) identify the contract with the customer, (2) identify the performance obligations~~effect of an enacted change in tax laws or rates in the ~~contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations~~annual effective tax rate computation in the ~~contract and (5) recognize revenue when (or as)~~interim period that includes the ~~entity satisfies a performance obligation. This~~enactment date. For public business entities, ASU 2019-12 is effective for interim and annual ~~reporting~~ periods beginning after December 15, ~~2017.~~2020. The Company adopted this standard as of January 1, 2021. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

ASU 2020-02 - Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842)

In January 2020, the FASB issued ASU No. 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 is effective upon issuance. See the discussion regarding the adoption of ASU 2016-13 above.

ASU 2020-03 - Codification Improvements to Financial Instruments

In March 2020, the FASB issued ASU No. 2020-03, “Codification Improvements to Financial Instruments.” This ASU clarifies 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 upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted ~~only~~before 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)" which 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 after~~March 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~~31, 2022. For the Company, the provisions of this ~~guidance excludes net interest income as well as other revenues associated with financial assets~~ASU were effective upon issuance and ~~liabilities (such as gains~~did not have a material impact on the ~~sale~~Company's consolidated financial statements.

ASU 2021-01 - Reference Rate Reform (Topic 848)

In January 2021, the FASB issued ASU No. 2021-01, "Reference Rate Reform (Topic 848)." The amendments in this update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of ~~loans, loan fees~~reference rate reform. Amendments in this update to the expedients and ~~loan servicing fees), including loans, leases and securities. Accordingly, a significant portion~~exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. ASU No. 2021-01 became immediately effective for all entities, which may elect to apply the update retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively to new modifications from any date within an interim period that includes or is subsequent to the issuance date of ASU No. 2021-01 up to the date that financial statements are available to be issued. In addition, ASU No.2021-01 applies to all contract modifications made through December 31, 2022. For the Company, the provisions of this ASU were effective upon issuance and did not have a material impact on 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.consolidated financial statements.

~~(9)~~

(10) 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).~~

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 using~~Level 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, taking into consideration 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 party~~third-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, the 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, 2021
(Dollars in thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Securities available for sale:
U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)	$	0	$	2,769	$	0	$	2,769
Residential collateralized mortgage obligations - GSE	0		37,071		0		37,071
Residential mortgage backed securities - GSE	0		27,126		0		27,126
Obligations of state and political subdivisions	3,487		21,520		0		25,007
Corporate debt securities	6,186		15,103		0		21,289
Other debt securities	0		17,624		0		17,624
Interest rate lock derivatives	0		351		0		351
Total	$	9,673	$	121,564	$	0	$	131,237

(Dollars in thousands)
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
Obligations of state and political subdivisions —
20,330
—
20,330
Trust preferred debt securities – single issuer —
2,357
—
2,357
Corporate debt securities 19,055
5,910
—
24,965
Other debt securities —
12,598
—
12,598
Interest rate lock derivative —
65
—
65
Total $ 19,055
$ 91,286
$ —
$ 110,341

(Dollars in thousands)
Level 1
Inputs

Level 2
Inputs

Level 3
Inputs

Total Fair
Value
December 31, 2016:
Securities available for sale:
U.S. Treasury securities and obligations of U.S. Government
sponsored corporations (“GSE”) and agencies
$ —
$ 3,479
$ —
$ 3,479
Residential collateralized mortgage obligations- GSE —
22,560
—
22,560
Residential mortgage backed securities – GSE —
31,476
—
31,476
Obligations of state and political subdivisions —
21,400
—
21,400
Trust preferred debt securities – single issuer —
2,272
—
2,272
Corporate debt securities 12,826
8,942
—
21,768
Other debt securities —
839
—
839
Interest rate lock derivative —
123
—
123
Total $ 12,826
$ 91,091
$ —
$ 103,917


	December 31, 2020
(Dollars in thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Securities available for sale:
U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)	$	0	$	3,439	$	0	$	3,439
Residential collateralized mortgage obligations - GSE	0		36,779		0		36,779
Residential mortgage backed securities - GSE	0		13,597		0		13,597
Obligations of state and political subdivisions	0		27,452		0		27,452
Corporate debt securities	9,287		12,080		0		21,367
Other debt securities	0		22,563		0		22,563
Interest rate lock derivatives	0		537		0		537
Total	$	9,287	$	116,447	$	0	$	125,734

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 September~~at June 30, ~~2017~~2021 and ~~the twelve months ended~~ December 31, ~~2016~~2020 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, 2021
Impaired loans	$	0	$	0	$	11,689	$	11,689
Other real estate owned	0		0		48		48
December 31, 2020
Impaired loans	$	0	$	0	$	8,769	$	8,769
Other real estate owned	0		0		92		92

Impaired loans measured at fair value and included in the above table at ~~September~~June 30, ~~2017~~2021 consisted of ~~sixteen~~7 loans having an aggregate recorded investment of ~~$7.6~~$15.1 million and specific loan loss ~~allowances~~allowance of ~~$324,000.~~$3.4 million. Impaired loans measured at fair value and included in the above table at December 31, ~~2016~~2020 consisted of ~~nine~~5 loans having an aggregate balance of ~~$4.4~~$10.9 million with a specific loan loss allowance of ~~$255,000.~~$2.1 million.

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)
September 30, 2017
Impaired loans $ 7,261
Appraisal of
collateral (1) Appraisal adjustments (2) 1% - 16% (7.5%)
Other real estate owned $ 190
Appraisal of
collateral (1) Appraisal adjustments (2) —%
December 31, 2016
Impaired loans $ 4,130
Appraisal of collateral (1) Appraisal adjustments (2) 3%-100% (29.1%)

~~(1)~~(Dollars in thousands)

Fair ~~value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.~~Value
Estimate

Valuation
Techniques

Unobservable Input

Range
(Weighted Average)

June 30, 2021
~~(2)~~Impaired loans	~~Includes qualitative~~$	11,689	Appraisal of collateral (1)	Appraisal adjustments ~~by management and estimated liquidation expenses.~~(2)	5.3% - 29.6% (16.8%)
Other real estate owned	$	48	Appraisal of collateral (1)	Appraisal adjustments (2)	89.0% (89.0%)
December 31, 2020
Impaired loans	$	8,769	Appraisal of collateral (1)	Appraisal adjustments (2)	0.1% - 40.4% (12.6%)
Other real estate owned	$	92	Appraisal of collateral (1)	Appraisal adjustments (2)	79.0% (79.0%)

(1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs that are not identifiable.

(2)Includes qualitative adjustments by management and estimated liquidation expenses.

The 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 ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016~~2020 were as follows:


	June 30, 2021
	Carrying		Level 1		Level 2		Level 3		Fair
(Dollars in thousands)	Value		Inputs		Inputs		Inputs		Value
Cash and cash equivalents	$	215,677	$	215,677	$	0	$	0	$	215,677
Securities available for sale	130,886		9,673		121,213		0		130,886
Securities held to maturity	97,993		0		100,764		0		100,764
Loans held for sale	6,017		0		6,165		0		6,165
Net loans	1,218,517		0		0		1,259,926		1,259,926
SBA servicing asset	827		0		1,209		0		1,209
Interest rate lock derivative	351		0		351		0		351
Accrued interest receivable	4,306		0		4,306		0		4,306
FHLB stock	1,087		0		1,087		0		1,087
Deposits	(1,546,061)		0		(1,546,586)		0		(1,546,586)
Short-term borrowings	0		0		0		0		0
Redeemable subordinated debentures	(18,557)		0		(14,191)		0		(14,191)
Accrued interest payable	(530)		0		(530)		0		(530)

September 30, 2017
Carrying Level 1 Level 2 Level 3 Fair
(Dollars in thousands) Value Inputs Inputs Inputs Value
Cash and cash equivalents $ 15,657
$ 15,657
$ —
$ —
$ 15,657
Securities available for sale 110,276
19,055
91,221
—
110,276
Securities held to maturity 111,554
—
113,757
—
113,757
Loans held for sale 6,019
—
6,262
—
6,262
Loans, net 764,180
—
—
764,426
764,426
SBA servicing asset 745
—
822
—
822
Interest rate lock derivative 65
—
65
—
65
Accrued interest receivable 3,141
—
3,141
—
3,141
FHLB stock 3,403
—
3,403
—
3,403
Deposits (869,813 ) —
(869,202 ) —
(869,202 )
Borrowings (63,025 ) —
(63,025 ) —
(63,025 )
Redeemable subordinated debentures (18,557 ) —
(12,166 ) —
(12,166 )
Accrued interest payable (715 ) —
(715 ) —
(715 )

December 31, 2016
Carrying Level 1 Level 2 Level 3 Fair
(Dollars in thousands) Value Inputs Inputs Inputs Value
Cash and cash equivalents $ 14,886
$ 14,668
$ —
$ —
$ 14,668
Securities available for sale 103,794
12,826
90,968
—
103,794
Securities held to maturity 126,810
—
128,559
—
128,559
Loans held for sale 14,829
—
15,103
—
15,103
Loans, net 717,314
—
—
721,285
721,285
SBA servicing asset 605
—
822
—
822
Interest rate lock derivative 123
—
123
—
123
Accrued interest receivable 3,095
—
3,095
—
3,095
FHLB stock 3,962
—
3,962
—
3,962
Deposits (834,516 ) —
(834,050 ) —
(834,050 )
Borrowings (73,050 ) —
(73,222 ) —
(73,222 )
Redeemable subordinated debentures (18,557 ) —
(11,922 ) —
(11,922 )
Accrued interest payable (866 ) —
(866 ) —
(866 )


	December 31, 2020
	Carrying		Level 1		Level 2		Level 3		Fair
(Dollars in thousands)	Value		Inputs		Inputs		Inputs		Value
Cash and cash equivalents	$	21,995	$	21,995	$	0	$	0	$	21,995
Securities available for sale	125,197		9,287		115,910		0		125,197
Securities held to maturity	92,552		0		95,640		0		95,640
Loans held for sale	29,782		0		30,618		0		30,618
Net loans	1,418,065		0		0		1,463,821		1,463,821
SBA servicing asset	795		0		1,209		0		1,209
Interest rate lock derivative	537		0		537		0		537
Accrued interest receivable	5,273		0		5,273		0		5,273
FHLB stock	1,498		0		1,498		0		1,498
Deposits	(1,562,839)		0		(1,564,431)		0		(1,564,431)
Short-term borrowings	(9,825)		0		(9,825)		0		(9,825)
Redeemable subordinated debentures	(18,557)		0		(10,932)		0		(10,932)
Accrued interest payable	(851)		0		(851)		0		(851)

Loan commitments and standby letters of credit as of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016~~2020 were based on fees charged for similar agreements; accordingly, the estimated fair value of loan commitments and standby letters of credit was nominal.

(11) Leases

At June 30, 2021, the Company had 34 operating leases under which the Company is a lessee. Of the 34 leases, 22 leases were for real property, including leases for 18 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 1 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 12 leases for office equipment, consisting primarily of copiers and printers. None of these leases include extensions and generally have three to five year terms.

At June 30, 2021, the Company did not have any finance leases.

For the three and six months ended June 30, 2021 and 2020, the Company recognized rent and equipment expense associated with leases as follows:


(In thousands)	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Operating lease cost:
Fixed rent expense and equipment expense	$	622	$	670	$	1,289	$	1,337
Variable rent expense	0		0		0		0
Short-term lease expense	4		11		6		23
Sublease income	0		0		0		0
Net lease cost	$	626	$	681	$	1,295	$	1,360


(In thousands)	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Lease cost - occupancy expense	$	619	$	626	$	1,232	$	1,240
Lease cost - other expense	7		55		63		120
Net lease cost	$	626	$	681	$	1,295	$	1,360

For the six months ended June 30, 2021 and 2020, the following cash and non-cash activities were associated with the leases:


	Six Months Ended June 30,
(In thousands)	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,229	$	1,266

Non-cash investing and financing activities:
Additions to right-of-use assets obtained from:
Net lease cost	0		0
New operating lease liabilities	11		144

~~(10)Subsequent Event~~

The future payments due under operating leases at June 30, 2021 and 2020 were as follows:


	At June 30,
(In thousands)	2021		2020
Due in less than one year	$	2,113	$	2,058
Due in one year but less than two years	2,056		2,030
Due in two years but less than three years	1,930		2,021
Due in three years but less than four years	1,766		1,929
Due in four years but less than five years	1,682		1,766
Thereafter	12,601		14,243
Total future payments	$	22,148	$	24,047
Less: Implied interest	(5,536)		(6,011)
Total lease liability	$	16,612	$	18,036

At June 30, 2021 and 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, 2021, the weighted-average remaining lease term for all operating leases was 14.5 years. The weighted average discount rate associated with the operating leases at June 30, 2021 was 3.32%.

(12) Borrowings

The Company has borrowing lines established with the FHLB and other correspondent banks. At June 30, 2021, the Company had 0 borrowings. Overnight or short-term borrowings at December 31, 2020 totaled $9.8 million with an average interest rate of 0.34%. These borrowings are primarily used to fund asset growth not supported by deposit generation.

At June 30, 2021, unused overnight or borrowing potential totaled $247.6 million from the FHLB and unused Fed Funds borrowing commitments were $46.0 million from correspondent banks.

(13) Pending Merger With and Into Lakeland Bancorp

On ~~November 6, 2017,~~July 11, 2021, the Company ~~and the Bank~~ entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lakeland Bancorp, Inc., a New Jersey ~~Community Bank~~corporation (“~~NJCB”~~Lakeland”)~~, providing for~~. The Merger Agreement provides that, upon the ~~merger of NJCB~~terms and subject to the conditions set forth therein, the Company will merge with and into ~~the Bank,~~Lakeland, with ~~the Bank~~Lakeland continuing 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~~Agreement also provides that, immediately following 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 value as of September 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~~Bank will ~~have approximately $1.2 billion in assets~~merge with ~~20 branch banking offices located in Bergen, Middlesex, Monmouth, Mercer~~ and ~~Somerset Counties,~~into Lakeland Bank, a New ~~Jersey.~~Jersey-chartered commercial bank (“Lakeland Bank”) and a wholly-owned subsidiary of Lakeland, with Lakeland Bank continuing as the surviving bank. The Merger Agreement was approved by the Boards of Directors of each of Lakeland and the Company.

~~A description~~

Subject to the terms and ~~copy~~conditions of the Merger Agreement, ~~is available~~upon completion of the Merger (the “Effective Time”), shareholders of the Company will receive, for each outstanding share of 1st Constitution Bancorp common stock that they own at the Effective Time, 1.3577 shares of Lakeland common stock. Cash will be paid in lieu of fractional shares.

Also at the Effective Time (i) all shares of 1st Constitution Bancorp common stock held by 1st Constitution Bancorp as treasury stock and (ii) all shares of 1st Constitution Bancorp common stock owned directly or indirectly by Lakeland or the Company or any of their respective subsidiaries (other than shares in trust accounts, managed accounts and the like for the benefit of customers or shares held in satisfaction of a debt previously contracted), will be canceled and no consideration will be delivered in exchange therefor. Outstanding 1st Constitution Bancorp stock options and performance-based restricted stock units will be cashed out in the ~~Company’s Current Report on Form 8-K filed on November 7, 2017.~~

Merger. Outstanding 1st Constitution Bancorp restricted stock will vest and will be converted into the right to receive, at the Effective Time, the same consideration that holders of 1st Constitution Bancorp common stock are receiving in the Merger. Each outstanding share of Lakeland common stock will remain outstanding and be unaffected by the Merger.

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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 (this “Form 10-Q”), the words “the Company,” “we,” “our,” and financial condition at September 30, 2017 is intended 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~~“us” refer to 1^ST Constitution Bancorp and, as the context requires, its wholly-owned subsidiary, 1^ST Constitution Bank (the “Bank”), ~~and~~ the Bank’s wholly-owned subsidiaries, 1^ST Constitution Investment Company of New Jersey, Inc., and FCB Assets Holdings, Inc., ~~LLC, 204 South Newman Street Corp.~~ and ~~249 New York Avenue, LLC.~~ 1^ST Constitution Real Estate Investment Corporation, which is indirectly owned by the Bank. 1ST 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 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 18 branches and manages an investment portfolio through its subsidiary, 1~~^ST ~~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 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 on Form 10-Q~~operating results for the three and ~~nine month period~~six months ended ~~September~~June 30, ~~2017 (this "Form 10-Q"),~~2021 and financial condition at June 30, 2021 is intended to help readers analyze the ~~words "the Company," "we," "our,"~~accompanying financial statements, notes and ~~"us" refer~~other supplemental information contained in this Form 10-Q. Results of operations for the three- and six-month periods ended June 30, 2021 are not necessarily indicative of results to ~~1st Constitution Bancorp~~be attained for any other period.

This discussion and ~~its wholly-owned subsidiaries, unless we indicate otherwise.~~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 Company’s Form 10-K (Management’s Discussion and Analysis of Financial Condition and Results of Operation) for the year ended December 31, 2020, as filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2021 (the "2020 Form 10-K").

Forward-Looking Statements

This ~~report~~Form 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 releases~~written 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,” “should,” “may,” “anticipates,” “believes,” “continues,” “expects,” “intends,” “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 ~~results~~anticipated, 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 estimates 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 investments~~changes 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 limited~~fiscal policies of the U.S. government; changes to the ~~following: (1)~~method that LIBOR rates are determined and to the ~~occurrence~~phasing out of LIBOR after 2021; changes in loan delinquency rates or in our levels of nonperforming 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, change~~future terrorist threats and attacks, acts of war or ~~other circumstances that could give rise to~~threats thereof and the ~~termination~~response of the ~~Merger Agreement; (2)~~United States to any such threats and attacks; failure to consummate the merger of 1st Constitution Bancorp with and into Lakeland Bancorp, Inc. (“Lakeland”), with Lakeland as the surviving entity (the “Merger”), for any reason, including the failure to obtain necessary regulatory approvals (and the risk that ~~NJCB’s shareholders may not adopt the Merger Agreement; (3) the risk that the necessary regulatory~~such approvals may ~~not be obtained or may be obtained~~

~~subject to~~result in the imposition of conditions that ~~are not anticipated; (4) delays in closing~~could adversely affect the ~~Merger~~combined company), failure to obtain shareholder approvals or ~~other risks that~~failure to satisfy any of the other 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~~basis or ~~in the timeframe anticipated; (6)~~at all; the diversion of management’s time from ongoing business operations due to issues relating to the Merger; ~~(7) costs~~the occurrence of any event, change or ~~difficulties relating~~other circumstances that could give rise to ~~integration matters might~~the right of one or both of the parties to terminate the

Agreement and Plan of Merger, dated as of July 11, 2021, by and between Lakeland and 1st Constitution Bancorp (the “Merger Agreement”); the outcome of any legal proceedings that may be ~~greater than expected; (8) material~~instituted against Lakeland or the Company; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the transaction; other risks described from time to time in our filings with the SEC; and our ability to manage the risks involved in the ~~Company’s or NJCB’s operations or earnings; (9) potential litigation in connection with~~foregoing. Further, the ~~Merger; (10) an increase or decrease in~~foregoing factors may be exacerbated by the ~~common stock price~~ultimate impact of the ~~Company during~~Novel Coronavirus ("COVID-19") pandemic, which is unknown at this time.

In addition, statements about the ~~10 day pricing period prior to~~COVID-19 pandemic and the ~~closing~~potential effects and impacts 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 benefits~~business, 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~~Additional information concerning the factors that could cause actual results to differ materially from those in the forward-looking statements is contained in Item 1. "Business," Item 1A. “Risk Factors,” Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations," elsewhere in the 2020 Form 10-K and in our other filings with the SEC, and in Part II, Item 1A of this Form 10-Q. However, other factors besides those listed in Item 1A. “Risk Factors” or discussed in the 2020 Form 10-K or this Form 10-Q also could adversely affect our results and you should not consider any such list of factors to be a complete list of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We undertake no obligation to publicly revise any forward-looking statements ~~to reflect anticipated~~ or ~~unanticipated events or circumstances occurring after the date of such statements,~~cautionary factors, 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 25 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 July 11, 2021, the Company and Lakeland (NASDAQ: LBAI), the holding company for Lakeland Bank, entered into the Merger Agreement, providing for the Merger of the Company with and into Lakeland, with Lakeland continuing as the surviving entity. The Merger Agreement provides that, immediately following the consummation of the Merger, the Bank will merge with and into Lakeland Bank (the “Bank Merger”). For additional discussion of the Merger and the Bank Merger, see Note 13 to the financial statements contained in Part I, Item 1 of this Form 10-Q.

COVID-19 Impact and Response

As the Company conducts its daily operations, the health and safety of our employees and customers remains our primary concern and we continue to maintain the same measures and protective procedures that we implemented in 2020.

During the first half of 2021, the Company continued working with customers impacted by the economic disruption. To support our loan and deposit customers and the communities we serve, we continue 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.

•All loans except for two that had previously received deferrals were no longer deferred at June 30, 2021. The two loans consisted of one hotel loan for $3.1 million that was placed on non-accrual in the third quarter of 2020 and one residential mortgage loan for $871,000 that was placed on non-accrual in the first quarter of 2021.

•As a long-standing SBA preferred lender, we actively participated in the SBA’s PPP lending program established under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). In 2020, we funded 467 SBA PPP loans totaling $75.6 million, $70.6 million of which had been forgiven by the SBA through the end of the second quarter of 2021.

•The Economic Aid to Hard-Hit Small Business, Not for Profits and Venues Act (“Economic Aid Act”) was enacted in December 2020 in further response to the COVID-19 pandemic. Among other things, the Economic Aid Act provided

relief to borrowers to access additional credit through a second round of the SBA’s PPP. We actively participated in the second round PPP and funded loans totaling $35.3 million, $4.4 million of which had been forgiven by the SBA through the end of the second quarter of 2021.

RESULTS OF OPERATIONS

Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2021 Compared to Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~2020

Summary

The Company reported net income of ~~$2.5~~$5.2 million ~~or $0.30~~and diluted earnings per ~~diluted~~ share of $0.50 for the three months ended ~~September~~June 30, ~~2017~~2021 compared to ~~$2.7~~net income of $3.7 million ~~or $0.33~~and diluted earnings per ~~diluted~~ share of $0.36 for the three months ended ~~September~~June 30, ~~2016.~~2020. Net income increased 39.6% and diluted earnings per share increased 38.9% for the second quarter of 2021 compared to the second quarter of 2020. For the ~~nine~~six months ended ~~September~~June 30, ~~2017, the Company reported~~2021, net income ~~of $6.4~~was $10.1 million, or ~~$0.76~~$0.98 per diluted share, compared to net income of ~~$7.2~~$7.1 million, or ~~$0.89~~$0.69 per diluted share, for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020. Net income increased 41.8% and diluted earnings per share increased 42.0% for the first six months of 2021 compared to the first six months of 2020.

Return on average total assets and return on average shareholders' equity were ~~0.94%~~1.15% and ~~8.94%~~10.73%, respectively, for the three months ended ~~September~~June 30, ~~2017~~2021 compared to return on average total assets and return on average shareholders' equity of ~~1.03%~~0.89% and ~~10.45%~~8.50%, respectively, for the three months ended ~~September~~June 30, ~~2016.~~2020. Return on average total assets and return on average shareholders' equity were ~~0.83%~~1.12% and ~~7.87%~~10.66%, respectively, for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 compared to return on average total assets and return on average shareholders' equity of ~~0.97%~~0.89% and ~~9.68%~~8.26%, respectively, for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020. Book value per share was $19.02 at June 30, 2021 compared to $18.32 at December 31, 2020.

On July 11, 2021, the Company entered into the Merger Agreement with Lakeland pursuant to which the Company will merge with and into Lakeland and the Bank will merge with and into Lakeland Bank. Expenses of $447,000 related to the Merger were incurred in the three months ended June 30, 2021. No merger-related expenses were incurred in the three months ended June 30, 2020.

Adjusted net income increased 49.1% to $5.5 million, for the second quarter of 2021 compared to adjusted net income of $3.7 million for the second quarter of 2020. Adjusted net income per diluted share increased 47.2% to $0.53 for the second quarter of 2021 compared to adjusted net income per diluted share of $0.36 for the second quarter of 2020. For the six months ended June 30, 2021, adjusted net income was $10.4 million, or $1.01 per diluted share, compared to adjusted net income of $7.2 million, or $0.70 per diluted share, for the six months ended June 30, 2020.

Adjusted net income and adjusted net income per diluted share are non-GAAP financial measures that exclude the after-tax effect of merger-related expenses from the comparable GAAP financial measure. These and other non-GAAP financial measures should be considered in addition to, but not as a substitute for, the Company’s GAAP financial results. A reconciliation of these non-GAAP financial measures to the GAAP financial results is included in the following table.

The following table reflects the reconciliation of non-GAAP financial measures(1) for the three and six months ended June 30, 2021 and 2020.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2021			2020			2021			2020
Adjusted net income
Net income	$	5,152		$	3,690		$	10,081		$	7,111
Adjustments:
Merger-related expenses	447			—			447			64
Income tax effect of adjustments	(98)			—			(98)			(19)
Adjusted net income	$	5,501		$	3,690		$	10,430		$	7,156

Adjusted net income per diluted share
Adjusted net income	$	5,501		$	3,690		$	10,430		$	7,156
Diluted shares outstanding	10,325,335			10,248,156			10,315,780			10,256,481
Adjusted net income per diluted share	$	0.53		$	0.36		$	1.01		$	0.70

Adjusted return on average total assets
Adjusted net income	$	5,501		$	3,690		$	10,430		$	7,156
Average assets	1,804,555			1,668,600			1,811,984			1,609,991
Adjusted return on average total assets	1.22		%	0.89		%	1.16		%	0.89		%

Adjusted return on average shareholders’ equity
Adjusted net income	$	5,501		$	3,690		$	10,430		$	7,156
Average equity	192,675			174,603			190,692			173,217
Adjusted return on average shareholders’ equity	11.45		%	8.50		%	11.03		%	8.31		%

Adjusted efficiency ratio
Adjusted non-interest expenses(2)	$	10,084		$	9,837		$	21,185		$	19,566
Total revenue - tax-equivalent	18,297			17,079			37,780			32,588
Adjusted efficiency ratio	55.11		%	57.60		%	56.07		%	60.04		%

Book value and tangible book value per common share
Shareholders’ equity							$	195,657		$	177,484
Less: goodwill and intangible assets							35,844			36,563
Tangible shareholders’ equity							159,813			140,921
Shares outstanding							10,284,848			10,219,048
Book value per common share							$	19.02		$	17.37
Tangible book value per common share							$	15.54		$	13.79

(1) The Company uses the non-GAAP financial measures of adjusted net income, adjusted net income per diluted share, adjusted return on average total assets, adjusted return on average shareholders’ equity, adjusted efficiency ratio, adjusted non-interest expenses and tangible book value per common share because management believes that it is helpful to readers in understanding the Company’s financial performance and the effect of the expenses related to the pending Merger on its financial statements. These non-GAAP financial 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.

(2) Adjusted non-interest expenses is calculated by subtracting merger-related expenses from total non-interest expenses. Accordingly, adjusted non-interest expenses for the three and six months ended June 30, 2021 is calculated as total non-interest expenses of $10.5 million and $21.6 million for the three- and six-month periods ended June 30, 2021 less $447,000 for the three and six months ended June 30, 2021, and adjusted non-interest expenses for the three and six months ended June 30, 2020 is calculated as total non-interest expenses of $9.8 million and $19.6 million for the three- and six-month periods ended June 30, 2020 less merger-related expenses of $64,000 for the six months ended June 30, 2020. There were ~~$13.83 and $12.27, respectively, at September~~no merger-related expenses incurred in the three months ended June 30, ~~2017~~2020. Total revenue- tax equivalent is calculated as net interest income tax-equivalent plus total non-interest income.

Second Quarter 2021 Highlights

•Net income increased $1.5 million, or 39.6%, to $5.2 million as compared to ~~$13.11~~the second quarter of 2020. Return on average total assets and ~~$11.50, respectively, at December 31, 2016.~~return on average shareholders' equity were 1.15% and 10.73%, respectively.

~~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.

•Net interest income was ~~$9.4~~$14.4 million and the net interest margin was ~~3.85%~~3.47% on a ~~tax equivalent~~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 a~~•A provision for loan losses of ~~$150,000~~$600,000 was recorded and net charge-offs were ~~$55,000.~~$719,000.

•Total loans were $1.2 billion at June 30, 2021 and decreased $59.5 million from March 31, 2021. During the second quarter of 2021, mortgage warehouse lines decreased $25.8 million to $241.8 million at June 30, 2021, reflecting primarily a lower volume of funding than in the first quarter of 2021. Commercial business loans decreased $27.3 million due primarily to the forgiveness and pay-off of the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans. Residential real estate loans held in the portfolio decreased $6.6 million due to pay-offs of loans.

•Non-interest income was $3.7 million for the second quarter of 2021, as residential mortgage banking operations and SBA lending generated $2.0 million and $775,000 gain on sales of loans, respectively.

•Non-interest-bearing demand deposits increased $20.0 million, savings and interest-bearing transaction accounts increased $56.6 million and certificates of deposit declined $91.8 million during the second quarter of 2021.

•Non-performing assets were ~~$6.9~~$12.1 million, or ~~0.64%~~0.68% of total assets at June 30, 2021, representing a decrease of $3.3 million from March 31, 2021 and included ~~$356,000~~$48,000 of other real estate owned (“OREO ~~at September 30, 2017.~~”). Two non-performing hotel loans totaling $2.6 million were paid off and a charge-off of $12,000 was incurred.

Earnings Analysis

The ~~Bank’s~~Company’s results of operations depend primarily on net interest income, which is primarily affected by the market interest rate environment, the monetary policy of the Board of Governors of the Federal Reserve System, 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’s~~Company’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%~~79.4% of the Company’s net revenues (defined as net interest income plus non-interest income) for the three months ended ~~September~~June 30, ~~2017~~2021 compared to ~~83.7%~~81.7% of net revenues for the three months ended ~~September~~June 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.~~2020. 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 set~~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 three ~~and nine~~ months ended ~~September~~June 30, ~~2017~~2021 and ~~2016.~~2020. The average rates are derived by dividing interest income and interest expense by the average balance of assets and liabilities, respectively.


	Three months ended June 30, 2021						Three months ended June 30, 2020
(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	$	210,857	$	58	0.11	%	$	16,807	$	4	0.10	%
Investment securities:
Taxable	131,618		504		1.53	%	168,415		852		2.02	%
Tax-exempt (1)	91,817		580		2.53	%	82,709		627		3.03	%
Total investment securities	223,435		1,084		1.95	%	251,124		1,479		2.36	%
Loans: (2)
Commercial real estate	617,365		7,800		5.00	%	579,640		7,791		5.32	%
Mortgage warehouse lines	221,289		2,303		4.12	%	223,696		2,284		4.08	%
Construction	132,337		1,829		5.47	%	140,593		1,992		5.70	%
Commercial business	128,306		1,225		3.83	%	145,209		1,567		4.34	%
SBA PPP loans	54,208		704		5.21	%	54,285		348		2.58	%
Residential real estate	71,137		734		4.13	%	87,878		952		4.29	%
Loans to individuals	18,507		179		3.88	%	28,809		316		4.34	%
Loans held for sale	7,342		65		3.54	%	14,472		114		3.15	%
All other loans	847		6		2.80	%	629		10		4.44	%
Deferred (fees) costs, net	(1,583)		—		—	%	261		—		—	%
Total loans	1,249,755		14,845		4.76	%	1,275,472		15,374		4.85	%
Total interest-earning assets	1,684,047		$	15,987	3.81	%	1,543,403		$	16,857	4.39	%
Non-interest-earning assets:
Allowance for loan losses	(17,118)						(10,232)
Cash and due from banks	18,808						11,712
Other assets	118,818						123,717
Total non-interest-earning assets	120,508						125,197
Total assets	$	1,804,555					$	1,668,600
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Money market and NOW accounts	$	474,591	$	421	0.36	%	$	425,347	$	611	0.58	%
Savings accounts	395,586		409		0.41	%	271,772		547		0.81	%
Certificates of deposit	212,573		512		0.97	%	353,160		1,566		1.78	%
Federal Reserve Bank PPPLF borrowings	—		—		—	%	3,970		3		0.30	%
Short-term borrowings	1		—		—	%	35,679		45		0.51	%
Redeemable subordinated debentures	18,557		83		1.77	%	18,557		106		2.26	%
Total interest-bearing liabilities	1,101,308		$	1,425	0.52	%	1,108,485		$	2,878	1.04	%
Non-interest-bearing liabilities:
Demand deposits	479,618						356,322
Other liabilities	30,954						29,190
Total non-interest-bearing liabilities	510,572						385,512
Shareholders’ equity	192,675						174,603
Total liabilities and shareholders’ equity	$	1,804,555					$	1,668,600
Net interest spread (3)					3.29	%					3.35	%
Net interest income and margin (4)			$	14,562	3.47	%			$	13,979	3.64	%

(1) Tax equivalent basis, using federal tax rate of 21% in 2021 and 2020.

(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.

(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
Assets:
Federal funds sold/short-term investments $ 12,383
$ 25
0.80 % $ 12,434
$ 13
0.40 %
Investment securities:
Taxable 142,353
846
2.38 % 148,715
827
2.22 %
Tax-exempt ⁽⁴⁾
89,034
781
3.51 % 79,917
760
3.81 %
Total investment securities 231,387
1,627
2.81 % 228,632
1,587
2.78 %
Loan portfolio: ⁽¹⁾

Construction 123,822
1,895
6.07 % 89,682
1,248
5.54 %
Residential real estate 42,436
445
4.19 % 45,919
514
4.48 %
Loans to individuals 22,379
228
4.04 % 23,286
257
4.40 %
Commercial real estate 286,130
3,573
4.95 % 234,218
3,271
5.56 %
Commercial business 71,338
956
5.32 % 79,834
909
4.53 %
SBA loans 22,238
370
6.60 % 21,662
319
5.86 %
Mortgage warehouse lines 174,610
1,901
4.32 % 245,654
2,505
4.06 %
Loans held for sale 3,715
37
3.95 % 3,802
16
1.67 %
All other loans 1,526
11
2.86 % 2,683
15
2.22 %
Total loans 748,194
9,416
4.99 % 746,740
9,054
4.83 %
Total interest-earning assets 991,964
$ 11,068
4.43 % 987,806
$ 10,654
4.30 %
Allowance for loan losses (7,770 ) (7,552 )
Cash and due from bank 5,371
5,019

Other assets 59,328
59,886

Total assets $ 1,048,893
$ 1,045,159

Liabilities and shareholders’ equity:
Money market and NOW accounts $ 324,940
$ 358
0.44 % $ 296,554
$ 281
0.38 %
Savings accounts 208,548
338
0.64 % 209,703
316
0.60 %
Certificates of deposit 158,737
508
1.27 % 173,652
454
1.04 %
Other borrowed funds 27,533
113
1.63 % 64,463
197
1.22 %
Redeemable subordinated debentures 18,557
134
2.89 % 18,557
107
2.31 %
Total interest-bearing liabilities 738,315
$ 1,451
0.78 % 762,929
$ 1,355
0.71 %
Net interest spread ⁽²⁾
3.65 % 3.59 %
Demand deposits 193,937
171,631

Other liabilities 6,395
7,962

Total liabilities 938,647
942,522

Shareholders’ equity 110,246
102,637

Total liabilities and shareholders’ equity $ 1,048,893
$ 1,045,159

Net interest income and net interest margin ⁽³⁾
$ 9,617
3.85 % $ 9,299
3.75 %

⁽¹⁾

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,~~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, 2021 and 2020. The average rates are derived by dividing interest income and interest expense by the average balance of assets and liabilities, respectively.


	Six months ended June 30, 2021						Six months ended June 30, 2020
(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	$	179,576	$	95	0.11	%	$	20,682	$	93	0.90	%
Investment securities:
Taxable	130,425		1,024		1.57	%	168,393		1,908		2.27	%
Tax-exempt (1)	90,316		1,185		2.62	%	73,954		1,182		3.20	%
Total investment securities	220,741		2,209		2.00	%	242,347		3,090		2.55	%
Loans: (2)
Commercial real estate	614,878		15,478		5.01	%	577,140		15,146		5.19	%
Mortgage warehouse lines	250,352		5,088		4.04	%	199,485		4,319		4.33	%
Construction	132,747		3,651		5.47	%	144,044		4,171		5.82	%
Commercial business	128,393		2,496		3.92	%	144,001		3,370		4.71	%
SBA PPP loans	57,888		1,729		6.02	%	27,143		348		2.58	%
Residential real estate	76,051		1,682		4.42	%	89,119		1,948		4.32	%
Loans to individuals	18,996		399		4.24	%	29,653		708		4.72	%
Loans held for sale	14,709		235		3.20	%	9,229		149		3.23	%
All other loans	706		12		3.38	%	989		20		4.00	%
Deferred (fees) costs, net	(1,363)		—		—	%	357		—		—	%
Total loans	1,293,357		30,770		4.80	%	1,221,160		30,179		4.97	%
Total interest-earning assets	1,693,674		$	33,074	3.94	%	1,484,189		$	33,362	4.52	%
Non-interest-earning assets:
Allowance for loan losses	(16,584)						(9,843)
Cash and due from banks	15,678						12,547
Other assets	119,216						123,098
Total non-interest-earning assets	118,310						125,802
Total assets	$	1,811,984					$	1,609,991
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Money market and NOW accounts	$	466,706	$	885	0.38	%	$	413,592	$	1,371	0.67	%
Savings accounts	375,096		836		0.45	%	268,413		1,151		0.86	%
Certificates of deposit	269,436		1,219		0.91	%	356,521		3,440		1.94	%
Federal Reserve Bank PPPLF borrowings	—		—		—	%	1,984		3		0.30	%
Short-term borrowings	163		—		—	%	27,298		107		0.79	%
Redeemable subordinated debentures	18,557		167		1.79	%	18,557		258		2.75	%
Total interest-bearing liabilities	1,129,958		$	3,107	0.55	%	1,086,365		$	6,330	1.17	%
Non-interest-bearing liabilities:
Demand deposits	460,232						319,920
Other liabilities	31,102						30,489
Total non-interest-bearing liabilities	491,334						350,409
Shareholders’ equity	190,692						173,217
Total liabilities and shareholders’ equity	$	1,811,984					$	1,609,991
Net interest spread (3)					3.38	%					3.35	%
Net interest income and margin (4)			$	29,967	3.57	%			$	27,032	3.66	%

(1) Tax equivalent basis, using federal tax rate of 21% in 2021 and 2020.

(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.

(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:
Taxable 141,662
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 securities 234,003
4,909
2.80 % 224,737
4,758
2.82 %
Loan portfolio: ⁽¹⁾

Construction 111,436
4,817
5.78 % 92,795
3,673
5.29 %
Residential real estate 42,136
1,335
4.22 % 42,375
1,338
4.21 %
Loans to individuals 22,428
701
4.18 % 23,454
715
4.07 %
Commercial real estate 267,247
10,088
5.05 % 227,481
9,304
5.46 %
Commercial business 73,461
2,919
5.31 % 70,760
2,827
5.34 %
SBA loans 22,420
1,087
6.48 % 21,507
919
5.71 %
Mortgage warehouse lines 155,755
5,014
4.30 % 201,322
6,187
4.11 %
Loans held for sale 4,408
165
5.00 % 4,378
83
2.53 %
All other loans 1,828
35
2.56 % 2,282
42
2.47 %
Total loans 701,119
26,161
4.99 % 686,354
25,088
4.88 %
Total interest-earning assets 965,321
$ 31,253
4.33 % 935,599
$ 29,925
4.27 %
Allowance for loan losses (7,646 ) (7,534 )
Cash and due from bank 5,234
5,086

Other assets 58,736
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 accounts 210,056
992
0.63 % 206,355
888
0.57 %
Certificates of deposit 147,109
1,327
1.21 % 153,544
1,280
1.11 %
Other borrowed funds 20,494
349
2.28 % 46,257
498
1.44 %
Redeemable subordinated debentures 18,557
380
2.73 % 18,557
311
2.23 %
Total interest-bearing liabilities 725,305
$ 4,080
0.75 % 720,489
$ 3,798
0.70 %
Net interest spread ⁽²⁾
3.58 % 3.57 %
Demand deposits 181,892
164,963

Other liabilities 6,577
7,612

Total liabilities 913,774
893,064

Shareholders’ equity 107,871
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 %

⁽¹⁾


⁽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 ~~September~~June 30, ~~2017~~2021 compared to three months ended ~~September~~June 30, ~~2016~~2020

Net interest income was ~~$9.4~~$14.4 million for the second quarter ~~ended September 30, 2017~~of 2021 and increased ~~$310,000, or 3.4%,~~$592,000 compared to net interest income of ~~$9.1~~$13.8 million for the ~~third~~second 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.

2020. Total interest income was ~~$10.8~~$15.9 million for the three months ended ~~September~~June 30, ~~2017~~2021 compared to ~~$10.4~~$16.7 million for the three months ended ~~September~~June 30, ~~2016, an increase of $406,000~~2021. The decrease in total interest income was due primarily to the ~~increase in the~~lower yield on ~~loans, which was partially offset by declines~~average interest-earning assets and the decline in the average ~~balances~~balance of ~~mortgage warehouse~~investments and ~~commercial business~~total loans.

~~For the third quarters of 2017 and 2016, the~~

Average interest-earning assets were $1.7 billion, with a tax-equivalent yield onof 3.81%, for the second quarter of 2021 compared to average interest-earning assets ~~was 4.43% and 4.30%~~of $1.5 billion, with a tax-equivalent yield of 4.39%, ~~respectively.~~for the second quarter of 2020. The ~~higher~~tax-equivalent yield on average interest-earning assets for the ~~third~~second quarter of ~~2017 when compared~~2021 declined 58 basis points to 3.81%, due primarily to the ~~third~~decline in market interest rates during 2020 to a low level that continued through the second quarter of ~~2016 was primarily due to~~2021 and the ~~higher yield earned on the loan portfolio. The 75 basis point~~significant increase in the average balance of federal funds sold/short-term investments with a yield of 0.11%.

The Federal Reserve reduced the targeted federal funds rate ~~and~~150 basis points in March 2020 in response to the ~~corresponding increase~~economic uncertainty resulting from the COVID-19 pandemic. As a result of the reductions in the ~~Bank's~~targeted federal funds rate, the prime rate ~~since December~~declined to 3.25% in March 2020 and was unchanged through the second quarter of ~~2016 have~~2021. The Bank had ~~a positive effect on the yields for construction, commercial business, SBA, home equity and warehouse~~approximately $428.4 million of loans with ~~variable~~an interest rate ~~terms in the third quarter of 2017.~~

Average interest-bearing liabilities decreased $24.6 million, or 3.23%, to $738.3 million for the three months ended September 30, 2017 from $762.9 million for the same three months of 2016 due primarily to declines in other borrowed 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 matured in the third quarter and total average borrowings declined by $36.9 million from the third quarter of 2016tied to the ~~third quarter~~prime rate and approximately $48.6 million of ~~2017. The increase in average non-interest bearing demand deposits~~loans with an interest rate tied to either 1- or 3-month LIBOR at June 30, 2021. Unearned fees, net of ~~$22.3 million provided additional funding that partially offset~~deferred costs, related to the decrease in FHLB borrowings. Average certificates of deposit declined by $14.9 million, or 8.6%, to $158.7 million for the third quarter of 2017 from $173.7 million during the third quarter of 2016 , while average savings accounts declinedSBA PPP loans were $1.2 million to $208.5 million during the third quarter of 2017 from the same prior year 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%.at June 30, 2021.

Interest expense on average interest-bearing liabilities was ~~$1.5 million, with an interest cost of 0.78%, for the third quarter of 2017 compared to~~ $1.4 million, with an interest cost of ~~0.71%~~0.52%, for the ~~third~~second quarter of ~~2016. The increase~~2021, compared to $1.7 million, with an interest cost of ~~$96,000 in interest expense on interest-bearing liabilities~~0.59%, for the ~~third~~first quarter of ~~2017~~2021 and $2.9 million, with an interest cost of 1.04%, for the second quarter of 2020. Interest expense declined $1.5 million for the second quarter of 2021 compared to the ~~same~~second quarter of ~~2016~~2020 due primarily ~~reflected higher~~to the decline in interest ~~costs~~rates paid on deposits as a direct result of the lower interest rate environment. The average cost of interest-bearing deposits was 0.50% for the second quarter of 2021, 0.57% for the first quarter of 2021 and ~~borrowings due~~1.04% for the second quarter of 2020. The interest rates paid on deposits generally do not adjust quickly to ~~higher short-term~~rapid changes in market interest rates ~~which were partially offset by~~and decline over time in a falling interest rate environment. Management will continue to monitor and adjust the ~~decline in balances of other borrowings.~~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 ~~increased to 3.85%~~was 3.47% for the ~~three months ended September 30, 2017~~second quarter of 2021 compared to ~~3.75%~~3.64% for the ~~three months ended September 30, 2016, primarily due to~~second quarter of 2020. The net interest margin for the second quarter of 2021 was negatively impacted by the higher ~~yield on interest-earning assets.~~

~~Nine months ended September 30, 2017 compared to~~average balance of federal funds sold/short-term investments resulting from the ~~nine months ended September 30, 2016~~

~~For~~$155.5 million increase in total average deposits, the ~~nine months ended September 30, 2017,~~$27.7 million decrease in average investments and the ~~Company's net interest~~$25.7 million decrease in average total loans from the second quarter of 2020. Interest income ~~increased by $1.0 million, or 3.98%, to $26.4 million compared to $25.4 million~~ for the ~~nine months ended September 30, 2016. This increase was~~second quarter of 2021 included $455,000 of fee income related to PPP loans that were forgiven and paid off by the SBA. Excluding the effect of the higher average balance of federal funds sold/short-term investments due primarily to the increase in average deposits, the net interest margin was approximately 3.81% for the second quarter of 2021.

Six months ended June 30, 2021 compared to the six months ended June 30, 2020

For the six months ended June 30, 2021, net interest income increased $2.9 million, or 11.0%, to $29.7 million compared to $26.8 million for the six months ended June 30, 2020. Total interest income was $32.8 million for the six months ended June 30, 2021 compared to $33.1 million for the six months ended June 30, 2020. Despite an increase in average loans outstanding year over year, total interest income decreased due primarily to the lower yield on average interest-earning assets and anthe significant increase in ~~the average~~federal funds sold/short-term investments with a low yield ~~on loans.~~

of 0.11%. Average interest-earning assets increased ~~$29.7~~$209.5 million to ~~$965.3 million~~$1.69 billion for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 compared to ~~$935.6 million~~$1.48 billion for the same period ~~of 2016.~~in 2020. This increase was due primarily to a $158.9 million increase in average federal funds sold/short-term investments and a $72.2 million increase in average loans, partially offset by a $21.6 million decrease in average total investment securities. The ~~increase, when comparing 2017 with~~tax-equivalent yield on average interest earnings assets was 3.94% for the six months ended June 30, 2021 compared to 4.52% for the same period in the prior year. The decline of 58 basis points in tax-equivalent yield year over year was due primarily to ~~increases~~the lower interest rate environment and the significant increase in ~~average loans, average~~ federal funds sold/short-term investments, and average investment securities balances. Average loans were $701.1 million and $686.4 million for 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 aswhich had a result of lower volume of refinancing activity of residential mortgages in 2017 due to higher residential mortgage rates in 2017 than 2016. Average federal funds increased $5.7 million and average investment securities increased $9.3 million when comparing the nine months ended September 30, 2017 to the same nine months of 2016 due to the investment of excess cash.

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.

low yield.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 reduced the targeted federal funds rate ~~and~~in March 2020 in response to the ~~corresponding increase~~COVID-19 pandemic. As a result of the reductions in the ~~Bank's~~targeted federal funds rate, the prime rate ~~since December of 2016 have had a positive effect on the yields of most loan categories~~declined to 3.25% 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~~March 2020 and was ~~primarily due to~~unchanged through 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~~second 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%.2021.

Interest expense on average interest-bearing liabilities was ~~$4.1~~$3.1 million, with an interest cost of ~~0.75%~~0.55%, for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 compared to ~~$3.8~~$6.3 million, with an interest cost of ~~0.70%~~1.17%, for the same ~~nine months of 2016.~~period in the prior year. The interest cost declined 62 basis points at June 30, 2021 compared to June 30, 2020 due primarily to lower market interest rates. Of the total increase ~~of $282,000~~ in ~~interest expense on~~average interest-bearing liabilities ~~when comparing~~of $43.6 million, money market and NOW accounts increased $53.1 million and savings accounts increased $106.7 million, while certificates of deposit decreased $87.1 million and short-term borrowings decreased $29.1 million. Management will continue to monitor the ~~nine-month periods of 2017 and 2016, primarily reflected higher deposit and borrowings interest costs due to higher short-term market~~ interest rates ~~which were partially offset by the decline in balances of other borrowings~~paid 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 3.57% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 compared to ~~3.73%~~3.66% for the ~~nine~~six months ended ~~September~~June 30, ~~2016, primarily due to~~2020. The decline in the ~~higher yield on interest-earning assets.~~net interest margin year over year was a result of a lower market interest rate environment and the significant increase in federal funds sold/short-term investments.

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, over~~As a result of the ~~last three years,~~continuing 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 reflected~~COVID-19 pandemic, in the ~~current level~~second quarter of ~~non-performing loans at September 30, 2017. Net charge-offs of~~2021 management reviewed construction, commercial business and commercial real estate loans ~~in 2017, 2016~~that had been modified to defer interest and ~~2015~~or principal for up to 90 days with a special emphasis on the hotel and restaurant-food service industries that have ~~declined significantly, which has resulted in a reduction~~been 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 of~~COVID-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 estimate~~credit quality over the ~~allowance for loan losses at September 30, 2017.~~past five years.

Three months ended ~~September~~June 30, ~~2017~~2021 compared to three months ended ~~September~~June 30, ~~2016~~

During the third quarter of 2017, 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 allowance for loan losses was $7.8 million, or 1.01% of loans, at September 30, 2017 compared to $7.5 million, or 1.00% of loans, at September 30, 2016 and $7.5 million, or 1.03% of loans, at December 31, 2016.

2020

~~Nine months ended September 30, 2017 compared to nine months ended September 30, 2016~~

The Company recorded a provision for loan losses of ~~$450,000~~$600,000 for the ~~nine months ended September 30, 2017~~second quarter of 2021 compared to a ~~credit (negative)~~provision for loan losses of $2.1 million for the second quarter of 2020. The provision for loan losses in the ~~amount~~second quarter of ~~$300,000~~2021 reflected the decrease in the size of the loan portfolio, net charge-offs and changes in loan ratings, risk elements and mix of the loan portfolio at June 30, 2021. The higher provision for loan losses in the ~~nine~~second quarter of 2020 reflected, in part, a $1.6 million increase in qualitative loss factors related to the COVID-19 pandemic. Management determined that no adjustment to these qualitative factors was appropriate at June 30, 2021. At June 30, 2021, total loans were $1.2 billion and the allowance for loan losses was $16.9 million, or 1.37% of total loans, compared to total loans of $1.4 billion and an allowance for loan losses of $12.1 million, or 0.89% of total loans, at June 30, 2020. The allowance for loan losses, excluding the allocated reserve for mortgage warehouse lines, was $15.8 million, or 1.59% of total loans excluding mortgage warehouse lines at June 30, 2021. In addition, at June 30, 2021, there were $36.0 million of SBA PPP loans which are 100% guaranteed by the SBA and, accordingly, no allowance was provided.

Six months ended ~~September~~June 30, ~~2016. For the nine~~2021 compared to six months ended ~~September~~June 30, ~~2017,~~2020

During the first six months of 2021, the Company recorded a provision for loan losses of $2.0 million compared to a provision for loan losses of $3.0 million for the first six months of 2020. The provision for loan losses for the 2020 period included an increase in the allowance for the estimated increase in incurred loan losses due primarily to the economic and social disruption caused by the COVID-19 pandemic and reflected charge-offs of ~~$162,000~~$165,000. The provision for loan losses for the first six months of 2021 reflected primarily a $2.0 million increase in specific reserves on impaired loans, charge-offs of $719,000 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.~~$3,000.

Non-Interest Income

Three months ended ~~September~~June 30, ~~2017~~2021 compared to three months ended ~~September~~June 30, ~~2016~~2020

~~Total~~Non-interest income was $3.7 million for the second quarter of 2021, representing an increase of $635,000, or 20.5%, compared to $3.1 million for the second quarter of 2020. The increase in non-interest income was ~~$2.1 million and $1.8 million for the third quarters of 2017 and 2016, respectively, an~~driven primarily by a $645,000 increase ~~of $356,000, or 20.2%, when the 2017 quarter is compared to the 2016 quarter and was due to increases~~ in gain ofon 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 ~~Bank~~Company originates and sells commercial loans guaranteed by the SBA and residential mortgage loans in the secondary market. ~~SBA guaranteed commercial lending activity and loan sales vary from period to period.~~ In the ~~third~~second quarter of ~~2017, $5.8~~2021, $6.3 million of SBA loans were sold and ~~gains~~gain on sales of ~~$520,000 were~~loans of $775,000 was recorded compared to ~~$3.5~~no SBA loans originated or sold and no gain on sales of loans recorded in the second quarter of 2020. In the second quarter of 2021, residential mortgage banking operations originated $60.3 million of residential mortgages, sold $70.1 million of residential mortgages and recorded a $2.0 million gain on sales of loans compared to $76.0 million of residential mortgages originated, $76.6 million of residential mortgage loans sold and ~~gains~~a $2.1 million gain on sales of ~~$347,000~~loans recorded in the ~~third~~second quarter of ~~2016. At September~~2020. Income from bank-owned life insurance (“BOLI”) decreased $96,000 for the second quarter of 2021 compared to the second quarter of 2020, which included $75,000 of income from a death benefit. Other income increased $119,000 in the second quarter of 2021 compared to the second quarter of 2020 due primarily to fees collected on expired loan commitments and higher interchange fees.

Six months ended June 30, ~~2017,~~2021 compared to six months ended June 30, 2020

Total non-interest income for the ~~pipeline~~six months ended June 30, 2021 increased $2.3 million, or 40.6%, to $7.8 million compared to total non-interest income of ~~approved~~$5.6 million for the six months ended June 30, 2020 due primarily to increases in gain on the sales of loans.

For the six months ended June 30, 2021, $148.5 million of residential mortgages were originated and ~~committed~~$172.3 million of residential mortgages were sold, which generated gain on sales of loans of $4.9 million, as compared to $115.8 million of residential mortgages originated and $110.6 million of residential mortgage sold, which generated gain on sales of loans of $3.3 million, for the six months ended June 30, 2020. Management believes that the increase in residential mortgage loans originated and sold was due primarily to increased residential mortgage financing activity as a result of lower mortgage interest rates.

For the six months ended June 30, 2021, $8.1 million of SBA loans ~~was $5.7 million with another $10.2 million in process.~~

~~Residential mortgages totaling $28.9 million~~ were sold and ~~$809,000~~gain on sales of ~~gains were~~loans of $964,000 was recorded ~~in the third quarter of 2017~~ compared to ~~$12.2~~$2.7 million of SBA loans sold and ~~$529,000~~gain on sales of ~~gains~~loans of $226,000 recorded infor 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.six months ended June 30, 2020.

Service charges on deposit accounts decreased ~~$43,000, or 23.24%,~~$121,000 to ~~$142,000~~$224,000 for the ~~third quarter~~six months ended June 30, 2021 from $345,000 for the six months ended June 30, 2020, due primarily to lower overdraft fees.

For the six months ended June 30, 2021, income on BOLI decreased $102,000 to $342,000 compared to $444,000 for the six months ended June 30, 2020, which included $75,000 of ~~2017~~income from ~~$185,000~~a death benefit. Other income increased $224,000 to $1.4 million for the six months ended June 30, 2021 compared to $1.2 million for the six months ended June 30, 2020, due primarily to recoveries on PCI loans in excess of the ~~same quarter~~fair value of ~~2016, primarily~~the acquired loan, fees collected on expired loan commitments and higher interchange fees.

In future periods, originations and sales of residential mortgages may decline due to a lower ~~customer fees for insufficient funds.~~level of refinancing activity and or a lower level of residential home purchases resulting from the economic and social disruption caused by the COVID-19 pandemic. A decline in sales of residential mortgages would result in a lower gain on sales of loans and a decline of non-interest income. The future origination and sale of SBA loans may also be negatively affected by the pandemic.

~~Non-interest income also includes income from BOLI, which amounted~~

Non-Interest Expenses

For the three months ended June 30, 2021, non-interest expenses were $10.5 million compared to ~~$131,000~~$9.8 million for the three months ended ~~September~~June 30, ~~2017 compared~~2020, representing an increase of $694,000, or 7.1%, due primarily to ~~$113,000 for~~merger-related expenses of $447,000 incurred in the ~~three months ended September 30, 2016.~~

~~For the third~~second quarter of ~~2017,~~2021 in connection with the ~~Company recorded other income~~pending Merger. Adjusted non-interest expenses, which excludes the $447,000 of ~~$490,000, representing a decrease of $96,000 from $586,000 for the third quarter of 2016, which included a recovery of $77,000 on an acquired loan during such period.~~

~~Nine months ended September 30, 2017 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~~merger-related expenses, increased ~~$1.4 million,~~$247,000, or ~~28.6%~~2.5%, compared to ~~total non-interest income of $4.9 million for~~ the ~~nine months ended September 30, 2016, primarily due to increases in gains on the sale of loans and securities, which were partially offset by decreases in service charge income and income from BOLI.~~

Gains on sales 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 in the secondary market. For the nine months ended September 30, 2017, SBA loan sales were $11.8 million and generated gains on sales 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.

~~Non-Interest Expenses~~

~~For the third~~second quarter of 2017, non-interest expenses were $7.6 million compared to $6.7 million for the same quarter of 2016, an increase of $955,000, or 14.3%, primarily due to increases 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.2020.

The following table presents the major components of non-interest expenses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016:~~2020:


	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2021		2020		2021		2020
Salaries and employee benefits	$	6,459	$	6,001	$	13,411	$	12,170
Occupancy expense	1,161		1,205		2,472		2,375
Data processing expenses	505		470		996		916
Equipment expense	388		412		820		823
Marketing	32		34		57		78
Telephone	120		129		250		254
Regulatory, professional and consulting fees	452		497		1,045		961
Insurance	97		127		202		246
Supplies	50		111		111		208
FDIC insurance expense	155		225		425		259
Other real estate owned expenses	3		14		55		31
Merger-related expenses	447		—		447		64
Amortization of intangible assets	79		91		160		213
Other expenses	583		521		1,181		1,032
Total	$	10,531	$	9,837	$	21,632	$	19,630

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 expense 865
911
2,604
2,618
Data processing expenses 338
314
983
941
FDIC insurance expense 95
105
255
328
Other real estate owned expenses 11
12
26
76
Equipment expense 151
98
436
346
Marketing 42
59
182
163
Regulatory, professional and other fees 625
413
1,762
1,230
Directors’ fees 26
20
73
67
Amortization of intangible assets 96
101
289
303
Other expenses 751
527
2,462
1,766
Total $ 7,617
$ 6,662
$ 22,954
$ 19,725

Three months ended ~~September~~June 30, ~~2017~~2021 compared to three months ended ~~September~~June 30, ~~2016~~2020

Salaries and employee benefits expense increased $458,000 or 7.6%, for the second quarter of 2021 compared to the second quarter of 2020 due primarily to a $118,000 increase in mortgage commissions, $71,000 in temporary staffing costs and $265,000 in lower deferred loan origination expenses.

FDIC insurance expense decreased $70,000 due primarily to a decrease in the FDIC assessment rate in the second quarter of 2021 compared to the assessment rate in the second quarter of 2020.

Merger-related expenses of $447,000 were incurred in the second quarter of 2021 for legal and other expenses incurred in connection with the pending Merger compared to no merger-related expenses in the second quarter of 2020.

Non-interest expenses may increase, if there is a significant increase in non-performing loans, as a result of higher expenses incurred in connection with loan collection and 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, 2021 compared to six months ended June 30, 2020

Non-interest expenses were $21.6 million for the six months ended June 30, 2021 compared to $19.6 million for the six months ended June 30, 2020, representing an increase of $2.0 million, or 10.2%, due primarily to a $847,000 increase in commissions related to the origination of residential mortgages for sale and $447,000 in merger-related expenses in connection with the pending Merger.

Salaries and employee benefits, which represent the largest portion of non-interest expenses, increased ~~by $515,000,~~$1.2 million, or ~~12.6%~~10.2%, to ~~$4.6~~$13.4 million for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2021 compared to ~~$4.1~~$12.2 million for the ~~three~~six months ended ~~September~~June 30, ~~2016. The increase~~2020, due primarily to higher commissions expense of $847,000 related to the origination of residential mortgage loans primarily for sale, $147,000 in ~~salaries~~temporary staffing costs, merit increases and increases in employee ~~benefits was~~benefit expenses.

Occupancy expense increased $97,000 to $2.5 million for the six months ended June 30, 2021 compared $2.4 million for the six months ended June 30, 2020, due primarily to higher snow removal costs in the first quarter of 2021.

Regulatory, professional and consulting fees increased $84,000 to $1.0 for the six months ended June 30, 2021 compared to $961,000 for the six months ended June 30, 2020, due primarily to an increase ~~of $199,000~~ in ~~commissions paid~~legal services related to ~~residential~~ loan ~~officers~~collections and workouts.

Supplies expense decreased $97,000 to $111,000 for the six months ended June 30, 2021 compared to $208,000 for the six months ended June 30, 2020, due in part to the ~~higher volume~~purchase of ~~residential mortgages originated and sold~~a larger amount of COVID-19-related protective supplies in 2020 than in the ~~third quarter of 2017~~comparable period in 2021.

FDIC insurance expense increased $166,000 to $425,000 for the six months ended June 30, 2021 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~~$259,000 for the ~~third quarters of 2017 and 2016, respectively, declining $138,000 between periods. Merit increases, increases~~six months ended June 30, 2020, due primarily to a $123,000 credit received from the FDIC in ~~employer payroll taxes and increases in employee benefits expense comprised the balance of the increase.~~

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.~~2020.

~~The cost of data processing services increased $24,000 to $338,000~~

Merger-related expenses were $447,000 for the ~~third quarter of 2017 as~~six months ended June 30, 2021 compared to ~~$314,000~~$64,000 for the ~~third quarter of 2016 due to increases~~six months ended June 30, 2020, reflecting the legal and other expenses incurred in ~~customers' accounts and higher transaction activity.~~

~~The Company recorded FDIC insurance expense of $95,000 and $105,000 for~~connection with the ~~third quarters of 2017 and 2016, respectively, a decrease of $10,000 primarily due to a lower assessment rate that reflected the improvement in asset quality~~pending Merger and the ~~improved financial performance~~acquisition of ~~the~~Shore Community Bank, ~~in the last two years and a lower assessment rate for smaller banks.~~

Regulatory, professional and other fees increased $212,000, or 51.3%, to $625,000 for the three months ended September 30, 2017 from $413,000 for the same period of 2016 primarily 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, primarily for loan collection and related litigation costs, were incurred. The levels of regulatory, professional and consulting fees have also increased over the last several years due primarily to compliance with increased regulatory requirements, management of enterprise risk and information security and additional internal and external audit fees, including attestation requirements regarding internal controls over financial reporting as a result 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.

respectively.

~~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 $13.9 million and $11.9 million for the nine months ended September 30, 2017 and 2016, respectively, an increase of $2.0 million, or 16.8%. The increase in salary and employee benefits expense includes $741,000 of commissions paid to residential loan officers as a result of the higher volume 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 and merit increases, as well as a $220,000 increase in benefits expense and an increase of $215,000 in share-based compensation expense. In addition, deferred loan origination costs were $174,000 lower for the nine months ended September 30, 2017 compared to the same period in 2016.

The cost of data processing services increased to $983,000 for the nine months ended September 30, 2017 from $941,000 for the nine months ended September 30, 2016 due to increases in customers' accounts and transaction activity. The Company recorded FDIC insurance expense of $255,000 and $328,000 for the nine months ended September 30, 2017 and 2016, respectively, a decline 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.

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 other fees~~ increased ~~by $532,000, or 43.3%, to $1.8 million for the nine months ended September 30, 2017 compared~~$85,000 to $1.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016 due~~2021 compared to increases in consulting and legal expenses, 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 result of the Company becoming an "Accelerated Filer" for SEC purposes for the year ended December 31, 2016 and subsequent periods.

~~The Company recorded an increase in other expenses of $696,000 to $2.5~~$1.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017 as compared~~2020, due primarily to $1.8 million 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 was due to smallergeneral increases in various other operating expense ~~categories.~~categories year over year.

Income Taxes

Three months ended ~~September~~June 30, ~~2017~~2021 compared to three months ended ~~September~~June 30, ~~2016~~2020

~~Pre-tax income~~Income tax expense was ~~$3.7~~$1.9 million for the ~~three months ended September 30, 2017~~second quarter of 2021, resulting in an effective tax rate of 26.9%, compared to ~~$4.2 million for the three months ended September 30, 2016.~~

~~The Company recorded~~ income tax expense of ~~$1.2~~$1.3 million, for the third 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,~~ which resulted in an effective tax rate of ~~31.5% and 33.3%, respectively.~~ 26.0% for the second quarter of 2020. The increase in income tax expense was due primarily to a $2.1 million increase in pre-tax income in the second quarter of 2021 compared to the second quarter of 2020. The higher effective tax rate in the second quarter of 2021 reflected primarily the higher New Jersey statutory tax rate in effect compared to the statutory tax rate in effect in the second quarter of 2020.

Six months ended June 30, 2021 compared to six months ended June 30, 2020

Income tax expense ~~decreased primarily due to~~was $3.8 million for the ~~decrease~~six months ended June 30, 2021, resulting in ~~pre-tax income. The~~an effective tax rate ~~decreased~~of 27.5%, compared to income tax expense of $2.6 million, which resulted in an effective tax rate of 26.6% for the six months ended June 30, 2020. The increase in income tax expense was due primarily to a of $4.2 million increase in pre-tax income in the first six months of 2021 compared to the first six months of 2020. The higher ~~percentage~~effective tax rate in the first six months of ~~tax-exempt interest income and income on bank-owned life insurance as~~2021 reflected the higher New Jersey statutory tax rate in effect compared to ~~pre-tax income~~the New Jersey statutory tax rate in effect for the ~~nine~~first six months ~~ended September~~of 2020.

FINANCIAL CONDITION

June 30, ~~2017~~2021 compared to ~~such percentage in the nine months ended September 30, 2016.~~

~~Financial Condition~~

~~September 30, 2017 Compared with~~ December 31, ~~2016~~2020

Total consolidated assets ~~at September 30, 2017~~ were ~~$1.07 billion, representing an increase of $31.2 million, or 3.0%, from total consolidated assets of $1.04~~$1.79 billion at June 30, 2021, relatively unchanged from December 31, ~~2016. The increase in assets was primarily attributable to an increase of $47.2~~2020. Total cash and cash equivalents increased $193.7 million inand total ~~loans,~~investment securities increased $11.1 million, which ~~was partially~~amounts were offset by decreases of ~~$8.8~~$198.3 million in ~~investment securities~~total portfolio loans and ~~$8.8~~$23.8 million in loans held for sale.

Cash and Cash Equivalents

Cash and cash equivalents totaled $215.7 million at ~~September~~June 30, ~~2017 totaled $15.7 million~~2021 compared to ~~$14.9~~$22.0 million at December 31, ~~2016,~~2020, representing an increase of ~~$771,000. To the extent that the Bank does not utilize funds for loan originations or securities purchases,~~$193.7 million. The increase in cash and cash equivalents reflects an increase in interest-earning deposits due primarily to the cash ~~inflows are invested~~flows resulting from a decline in ~~overnight deposits at the Federal Reserve Bank of New York.~~total portfolio loans.

Loans Held for Sale

Loans held for sale ~~at September 30, 2017~~ were $6.0 million at June 30, 2021 compared to ~~$14.8~~$29.8 million at December 31, ~~2016.~~2020, representing a decrease of $23.8 million due primarily to loan sales in excess of loan originations. 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%~~12.8% of total assets at ~~September~~June 30, ~~2017~~2021 and approximately ~~22.2%~~12.1% of total assets at December 31, ~~2016.~~2020. Total investment securities ~~decreased $8.8~~increased $11.1 million ~~or 3.8%,~~ to ~~$221.8~~$228.8 million at ~~September~~June 30, ~~2017~~2021 from ~~$230.6~~$217.7 million at December 31, ~~2016.~~2020. Purchases of investment securities totaled ~~$46.2~~$56.4 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021 and proceeds from ~~sales,~~ calls, maturities and payments totaled ~~$55.1~~$44.0 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 ~~September~~June 30, ~~2017,~~2021, securities available for sale ~~totaled $110.3~~were $130.9 million, representing an increase of ~~$6.5~~$5.7 million ~~or 6.2%, compared to~~from securities available for sale ~~totaling $103.8~~of $125.2 million at December 31, ~~2016.~~2020.

At ~~September~~June 30, ~~2017,~~2021, the securities available for sale portfolio had net unrealized gains of ~~$189,000~~$2.0 million compared to net unrealized ~~losses~~gains of ~~$464,000~~$2.6 million at December 31, ~~2016.~~2020. These net unrealized gains ~~and losses~~ were reflected, net of tax, in shareholders’ equity as a component of accumulated other comprehensive ~~income.~~income (loss).

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 ~~September~~June 30, ~~2017,~~2021, securities held to maturity were ~~$111.6~~$98.0 million, ~~a decrease~~representing an increase of ~~$15.3~~$5.4 million from ~~$126.8~~$92.6 million at December 31, ~~2016.~~2020. The fair value of the held to maturity portfolio was $100.8 million and represented a net unrealized gain of $2.8 million at ~~September~~June 30, ~~2017 was $113.8 million.~~2021.

Loans

The loan portfolio, which represents the ~~Bank's~~Company’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’s~~Company’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 ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016:~~2020:


	September 30, 2017				December 31, 2016					June 30, 2021				December 31, 2020
(Dollars in thousands)	Amount		%		Amount		%		(Dollars in thousands)	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	%	Commercial real estate	$	615,632	50	%	$	618,978	43	%
Mortgage warehouse lines	193,535		25	%	216,259		30	%	Mortgage warehouse lines	241,827		19		388,366		27
Construction									Construction	131,270		11		129,245		9
Commercial business									Commercial business	160,056		13		188,728		13
Residential real estate									Residential real estate	68,487		5		88,261		6
Loans to individuals	22,611		3	%	23,736		3	%	Loans to individuals	19,353		2		21,269		2
Other loans	186		—	%	207		—	%	Other loans	104		—		113		—
Gross loans	771,307				723,071
Deferred loan costs, net	675				1,737
Total loans	$	771,982	100	%	$	724,808	100	%	Total loans	1,236,729		100	%	1,434,960		100	%
Deferred loan fees, net									Deferred loan fees, net	(1,287)				(1,254)
Total loans, including deferred loan fees, net									Total loans, including deferred loan fees, net	$	1,235,442			$	1,433,706

Total portfolio loans ~~increased~~at June 30, 2021 were $1.24 billion, compared to $1.43 billion at December 31, 2020. The $198.3 million decrease in portfolio loans was due primarily to a decrease of $146.5 million in mortgage warehouse lines, a decrease of $28.7 million in commercial business loans and a decrease of $19.8 million in residential real estate loans, and was partially offset by ~~$47.2~~a $2.0 million ~~or 6.5%, to $772.0~~increase in construction loans.

Commercial real estate loans totaled $615.6 million at ~~September~~June 30, ~~2017~~2021 compared to ~~$724.8~~$619.0 million at December 31, ~~2016 due primarily to increases in commercial~~2020. Commercial real estate ~~and construction loans. Commercial business, commercial~~loans 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 quarters~~operation of ~~2017 compared~~the business and loans to real estate investors to finance the ~~first three quarters~~acquisition and/or improvement of ~~2016.~~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. ~~Interest~~The Bank collects interest and a transaction fee ~~are collected by the Bank~~ at the time of repayment. Mortgage warehouse loans totaled $241.8 million at June 30, 2021 compared to $388.4 million at December 31, 2020. The ~~Bank funded $893.6 million of residential mortgages through customers' warehouse lines of credit~~decline was due primarily to a lower mortgage funding volume in the ~~third~~second quarter of ~~2017~~2021 compared to ~~$1.1 billion in~~ the ~~third~~fourth quarter of ~~2016. For~~2020. In the ~~nine~~first six months ~~ended September 30, 2017, the Bank funded $2.6~~of 2021, $2.5 billion of residential ~~mortgages~~mortgage loans were financed through ~~customers'~~the mortgage warehouse ~~lines of credit~~funding group compared to ~~$2.9~~$2.0 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 ~~nine~~six months of ~~2017. Commercial business loans consist~~2020. The higher level of funding activity was due primarily ~~of loans~~ to ~~small~~the lower mortgage interest rate environment that began in March 2020 and middle market businesses and are typically working capital loans used to finance inventory, receivables or equipment needs. These loans are generally secured by business assets of the commercial borrower.

~~Commercial real estate loans increased $49.0 million, or 20.2%, to $291.4 million during~~persisted through the first ~~nine~~six months of ~~2017. Commercial real estate loans consist primarily of loans to businesses collateralized by real estate employed~~2021, which resulted in ~~the business and loans to finance income-producing properties.~~an increase in refinancing activity.

Construction loans ~~increased $31.6~~totaled $131.3 million at June 30, 2021 compared to ~~$127.6~~$129.2 million ~~during the first nine months of 2017.~~at December 31, 2020. 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 ~~presold~~pre-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 ~~finances~~provides the ~~construction~~mortgage loan to the customer upon completion of ~~individual, owner-occupied single family homes.~~the project.

Commercial business loans totaled $160.1 million at June 30, 2021 compared to $188.7 million at December 31, 2020 and declined $28.7 million primarily as a result of the forgiveness and pay-offs of the SBA PPP loans. As a SBA preferred lender, the Bank participated in both rounds of the SBA PPP loan program and had $36.0 million in SBA PPP loans outstanding at June 30, 2021. 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 ~~made~~generally secured by business assets of the commercial borrower.

Residential real estate loans totaled $68.5 million at June 30, 2021 compared to ~~qualified individual borrowers~~$88.3 million at December 31, 2020 and declined $19.8 million due primarily to pay-offs. Loans to individuals, which are ~~generally supported by a take-out commitment from a permanent lender.~~comprised primarily of home equity loans, totaled $19.4 million at June 30, 2021 compared to $21.3 million at December 31, 2020.

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 primary market ~~region.~~area of northern and central New Jersey, communities along the New Jersey shore 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 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, ~~whose~~the 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 the COVID-19 pandemic 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 ~~September~~June 30, ~~2017,~~2021, non-performing loans ~~increased~~decreased by ~~$1.3~~$5.2 million to ~~$6.5~~$12.1 million from ~~$5.2~~$17.2 million at December 31, ~~2016~~2020, and the ratio of non-performing loans to total loans ~~increased~~decreased to ~~0.84%~~0.98% at ~~September~~June 30, ~~2017~~2021 compared to ~~0.72%~~1.20% at December 31, ~~2016.~~2020. During the ~~third quarter~~six months ended June 30, 2021, $5.0 million of ~~2017, $365,000 in~~ non-performing loans were resolved as a result of pay-downs, pay-offs and ~~a commercial loan with a balance~~charge-offs. Hotel loans totaling $2.6 million and purchased credit impaired loans totaling $782,000 were repaid. For the six months ended June 30, 2021, $1.2 million of ~~$775,000 and two residential second mortgages with combined balances of $78,000~~loans 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~~status and consisted of ~~2017. In the second quarter, the borrower was recapitalized through~~a $94,000 home equity loan, an ~~equity contribution by new investors, the~~$871,000 residential mortgage loan ~~balance was reduced by $906,000~~ and ~~all interest was paid current. The major segments of non-accrual~~a $216,000 construction loan.

Non-accrual loans consist of construction, 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~~at the ~~periods~~dates indicated.

September 30, December 31,
(Dollars in thousands) 2017 2016
Non-performing loans:
Loans 90 days or more past due and still accruing $ —
$ 24
Non-accrual loans 6,511
5,174
Total non-performing loans 6,511
5,198
Other real estate owned 356
166
Total non-performing assets 6,867
5,364
Performing troubled debt restructurings 3,538
864
Performing troubled debt restructurings and total non-performing assets $ 10,405
$ 6,228

Non-performing loans to total loans 0.84 % 0.72 %
Non-performing loans to total loans excluding mortgage warehouse lines 1.13 % 1.02 %
Non-performing assets to total assets 0.64 % 0.52 %
Non-performing assets to total assets excluding mortgage warehouse lines 0.78 % 0.65 %
Total non-performing assets and performing troubled debt restructurings to total assets 0.97 % 0.60 %

~~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.~~


(Dollars in thousands)	June 30, 2021			December 31, 2020
Non-performing loans:
Loans 90 days or more past due and still accruing	$	—		$	871
Non-accrual loans	12,054			16,361
Total non-performing loans	12,054			17,232
Other real estate owned	48			92

Total non-performing assets	12,102			17,324
Performing troubled debt restructurings	5,296			5,768
Performing troubled debt restructurings and total non-performing assets	$	17,398		$	23,092

Non-performing loans to total loans	0.98		%	1.20		%
Non-performing loans to total loans excluding mortgage warehouse lines	1.21		%	1.65		%
Non-performing assets to total assets	0.68		%	0.96		%
Non-performing assets to total assets excluding mortgage warehouse lines	0.78		%	1.22		%
Total non-performing assets and performing troubled debt restructurings to total assets	0.97		%	1.28		%

Non-performing assets ~~increased~~decreased by ~~$1.5~~$5.2 million to ~~$6.9~~$12.1 million at ~~September~~June 30, ~~2017~~2021 from ~~$5.4~~$17.3 million at December 31, ~~2016. Other real estate owned~~2020. OREO totaled ~~$356,000~~$48,000 at ~~September~~June 30, ~~2017~~2021 compared to ~~$166,000~~$92,000 at December 31, ~~2016.~~2020. OREO at ~~September~~June 30, ~~2017~~2021 was comprised of one ~~multi-family property and one commercial property.~~parcel of land.

At ~~September~~June 30, ~~2017,~~2021, the Bank had ~~eight~~8 loans totaling ~~$5.3~~$5.4 million ~~which~~that were troubled debt restructurings. Two of these loans totaling ~~$1.8 million~~$127,000 are included in the above table as non-accrual loans and the remaining ~~six~~seven loans totaling ~~$3.5~~approximately $5.3 million ~~are considered~~were performing. At December 31, ~~2016,~~2020, the Bank had ~~nine~~10 loans totaling ~~$4.5~~$5.9 million that were troubled debt restructurings. ~~Five~~Two of these loans totaling ~~$3.6 million~~$141,000 are included in the above table as non-accrual loans and the remaining ~~four~~eight loans totaling ~~$864,000 are considered~~approximately $5.8 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. ~~There~~At June 30, 2021, there were no3 loans acquired with evidence of deteriorated credit quality totaling $542,000 that were not classified as non-performing ~~at September 30, 2017 compared to $439,000 at~~loans. At December 31, ~~2016, which~~2020, there were 5 loans acquired with evidence of deteriorated credit quality totaling $2.4 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-due~~past 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-due~~past 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 COVID-19 pandemic, the allowance for loan losses may increase in future periods as borrowers are affected by the severe contraction of economic activity and the 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 estimated 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 ~~Bank~~Company 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-accruals~~non-accruals;

•Portfolio ~~quality~~quality;

•Concentration of ~~credit~~credit;

•Trends in volume of ~~loans~~loans;

•Quality of ~~collateral~~collateral;

•Policy and ~~procedures~~procedures;

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

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

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

The methodology includes the segregation of the loan portfolio into loan types with a further segregation into risk rating categories, such as special mention, substandard, doubtful and loss. This allows for an allocation of the allowance for loan losses by loan type; however, the allowance is available to absorb any loan loss without restriction. Larger-balance, non-homogeneous loans representing significant individual credit exposures are evaluated individually through the internal loan review process. ~~It is this~~This 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 party~~third-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 warehouse~~portfolios.

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. Included in the commercial business loans are SBA PPP loans, which are fully guaranteed by the SBA and are therefore excluded from the allowance for loan losses.

Much of the Company's lending is in northern and central New Jersey, communities along the New Jersey shore, 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.

The ~~Company’s primary lending emphasis is the origination of commercial business and~~Company's commercial real estate ~~loans. Based on~~portfolio is largely secured by real estate collateral located in New Jersey and the ~~composition~~New York City metropolitan area. Conditions in the real estate markets in which the collateral for the Company's loans are located strongly influence the level of the ~~loan portfolio, the inherent primary risks are deteriorating credit quality, a~~Company's non-performing loans. A decline in the ~~economy 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 ~~Unit~~Funding Group provides revolving lines of credit that are available to licensed mortgage banking companies. The warehouse line of credit is used by the mortgage banker to originate one-to-four family residential mortgage loans that are pre-sold 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 ~~segment~~class of the total loan portfolio, the warehouse loan portfolio is ~~individually~~ analyzed as a whole for the purposes of allowance for loan ~~loss purposes.~~losses. 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 ~~segment~~portfolio 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 ~~scores~~scores;

•Internal credit risk ~~grades~~grades;

•Loan-to-value ~~ratios~~ratios;

~~Collateral~~•Collateral; and

•Collection ~~experience~~experience.

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			2016			(Dollars in thousands)	Six Months Ended June 30, 2021			Year Ended December 31, 2020			Six Months Ended June 30, 2020
Balance, beginning of period	$	7,494		$	7,560		$	7,560		Balance, beginning of period	$	15,641		$	9,271		$	9,271
Provision (credit) charged to operating expenses	450			(300		)	(300		)
Loans charged off :
Provision charged to operating expenses										Provision charged to operating expenses	2,000			6,698			3,020
Loans charged off:										Loans charged off:

Residential real estate loans	(101		)	—			—			Residential real estate loans	—			—			—
Commercial business and commercial real estate	(61		)	(157		)	(161		)
All other loans	—			(1		)	—
	(162		)	(158		)	(161		)
Recoveries
Commercial business and commercial real estate	16			386			383			Commercial business and commercial real estate	(718)			(364)			(165)
Loans to individuals	4			6			4			Loans to individuals	—			(3)			—
	20			392			387
Net (charge offs) recoveries	(142		)	234			226
All other loans										All other loans	(1)			—			—
Total loans charged off										Total loans charged off	(719)			(367)			(165)
Recoveries:										Recoveries:

Commercial business and commercial real estate										Commercial business and commercial real estate	3			39			—
Loans to individuals										Loans to individuals	—			—			—

All other loans										All other loans	—			—			—
Total recoveries										Total recoveries	3			39			—
Net charge offs										Net charge offs	(716)			(328)			(165)
Balance, end of period	$	7,802		$	7,494		$	7,486		Balance, end of period	$	16,925		$	15,641		$	12,126
Loans :
Loans:										Loans:
At period end	$	771,982		$	724,808		$	749,436		At period end	$	1,235,442		$	1,433,706		$	1,355,436
Average during the period	696,711			691,180			681,976			Average during the period	1,293,357			1,333,330			1,221,160
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										Net charge offs to average loans outstanding	(0.06)		%	(0.02)		%	(0.01)		%
Net charge offs to average loans outstanding, excluding mortgage warehouse loans										Net charge offs to average loans outstanding, excluding mortgage warehouse loans	(0.07)		%	(0.03)		%	(0.02)		%
Allowance for loan losses to:										Allowance for loan losses to:
Total loans at period end	1.01		%	1.03		%	1.00		%	Total loans at period end	1.37		%	1.09		%	0.89		%
Total loans at period end excluding mortgage warehouse loans	1.20		%	1.28		%	1.28		%	Total loans at period end excluding mortgage warehouse loans	1.59		%	1.32		%	1.15		%
Non-performing loans	119.83		%	144.17		%	142.90		%	Non-performing loans	140.41		%	90.77		%	89.70		%

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 ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, 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 ~~segment~~portfolio of loans.


	June 30, 2021						December 31, 2020
(Dollars in thousands)	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	$	6,875	1.12	%	50	%	$	6,422	1.04	%	43	%
Commercial business	2,662		1.66	%	13	%	2,727		1.44	%	13	%
Construction	5,025		3.83	%	11	%	3,741		2.89	%	9	%
Residential real estate	418		0.61	%	5	%	619		0.70	%	6	%
Loans to individuals	110		0.57	%	2	%	125		0.59	%	2	%
Subtotal	15,090		1.52	%	81	%	13,634		1.30	%	73	%
Mortgage warehouse lines	1,088		0.45	%	19	%	1,807		0.47	%	27	%
Unallocated reserves	747		—		—		200		—		—
Total	$	16,925	1.37	%	100	%	$	15,641	1.09	%	100	%

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

As a %
of Loan Class

Loans % of
Loans
Amount

As a %
of Loan Class

Loans % of
Loans
Commercial real estate loans $ 2,743
0.94 % 38 % $ 2,574
1.06 % 34 %
Commercial business 1,415
1.50 % 12 % 1,732
1.74 % 14 %
Construction loans 1,594
1.25 % 17 % 1,204
1.25 % 13 %
Residential real estate loans 388
9.30 % 5 % 367
0.82 % 6 %
Loans to individuals 118
0.53 % 3 % 112
0.47 % 3 %
Subtotal 6,258
1.14 % 75 % 5,989
1.18 % 70 %
Mortgage warehouse lines 871
0.45 % 25 % 973
0.45 % 30 %
Unallocated reserves 673
—
—
532
—
—
Total $ 7,802
1.01 % 100 % $ 7,494
1.03 % 100 %

~~During~~For the ~~third quarter of 2017,~~six months ended June 30, 2021, 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~~$2.0 million, and net charge-offs of $716,000 compared to a ~~credit (negative)~~ provision for loan losses of $3.0 million, and net charge-offs of $165,000 recorded for the first six months of 2020. The higher provision for loan losses recorded for the first six months of 2020 was due primarily to an increase in the ~~amount of $300,000~~allowance for the ~~nine months ended September~~estimated increase in incurred losses resulting from economic and social disruption caused by the COVID-19 pandemic.

As part of the review of the adequacy of the allowance for loan losses at June 30, ~~2016. For~~2021, management reviewed substantially all of the ~~nine months ended September~~$132.1 million of commercial business and commercial real estate loans that had been modified to defer interest and or principal for up to 90 days in 2020 and 2021. Loans with balances of less than $250,000 were generally excluded from management’s review.

At June 30, ~~2017,~~2021, the ~~Company recorded charge-offs~~allowance for loan losses included $414,000 for loans that were rated Pass-Watch and had received a deferral. This reflects management’s previously reported determination that “Pass-Watch” credit rated loans with modifications or deferrals suggest a weaker financial strength of ~~$162,000~~the borrower than “Pass” credit rated loans, thereby warranting an additional allowance for loan losses than would ordinarily be reserved for “Pass-Watch” credit rated loans.

Within the loan portfolio, hotel and ~~recoveries~~restaurant-food service industries have been adversely impacted by the economic disruption caused by the COVID-19 pandemic. At June 30, 2021, loans to borrowers in the hotel and restaurant-food service industries were $65.2 million and $61.6 million, respectively. Management reviewed over 92% of ~~previously charged-off~~the hotel loans and over 96% of ~~$20,000, while charge-offs~~the restaurant-food service loans. At June 30, 2021, management continued to maintain the additional allowance for loan losses of ~~$161,000~~75 basis points, or $372,000, attributable to restaurant-food service loans and ~~recoveries~~25 basis points, or $155,000, attributable to hotel loans due to the challenging operating environment for these businesses as a result of ~~previously charged-off~~the COVID-19 pandemic.

All construction loans are closely monitored on a quarterly basis and are reviewed to assess the progress of ~~$387,000~~construction relative to the plan and budget and lease-up or sales of units. As part of this review, a specific reserve for construction loans was increased by $1.7 million in the first quarter of 2021.

Management also reviewed loans to schools that are private educational institutions that are generally sponsored or affiliated with religious organizations. These loans totaled $25.7 million at June 30, 2021, and 96% of these loans were ~~recorded during the nine months ended September 30, 2016.~~reviewed.

At ~~September~~June 30, ~~2017,~~2021, the allowance for loan losses was ~~$7.8~~$16.9 million, or ~~1.01%~~1.37% of loans, compared to ~~$7.5~~$15.6 million, or ~~1.00% of loans, at September 30, 2016 and $7.5 million, or 1.03%~~1.09% of loans, at December 31, ~~2016.~~2020 and $12.1 million, or 0.89% of loans, at June 30, 2020. The allowance for loan losses was ~~120%~~140.41% of non-performing loans at ~~September~~June 30, ~~2017~~2021 compared to ~~144%~~90.77% of non-performing loans at December 31, ~~2016~~2020 and ~~143%~~89.70% of non-performing loans at ~~September~~June 30, ~~2016. Management believes~~2020. The allowance for loan losses at June 30, 2021 included $1.5 million of allowance that was attributable to management's qualitative factors related to the ~~quality~~COVID-19 pandemic and specific reserves of $3.5 million for impaired loans.

Acquisition accounting for the merger with Shore Community Bank (“Shore”) in 2019 and the merger with New Jersey Community Bank (“NJCB”) in 2018 resulted in the Shore and NJCB loans being recorded at their fair value and no allowance for loan losses as of the ~~loan portfolio remains sound, considering~~effective time of the ~~economic climate in~~respective mergers. The unaccreted general credit fair value discounts related to the ~~State~~former Shore and NJCB loans were approximately $1.2 million and $359,000 at June 30, 2021, respectively. In addition, at June 30, 2021, there were $36.0 million of ~~New Jersey~~SBA PPP loans which are 100% guaranteed by the SBA and, accordingly, no allowance was provided.

Management believes 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, 2021. However, management expects that the economic disruption resulting from the COVID-19 pandemic will continue to impact businesses, borrowers, employees and consumers in the near term, notwithstanding the wider distribution and availability of vaccines, as uncertainty remains with respect to variants of the virus and the potential reimplementation of certain restrictions and precautionary measures in the Bank’s primary market areas. 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 ~~Bank~~Company offers a variety of products designed to attract and retain customers, with the ~~Bank’s~~Company’s primary focus on the building and expanding of long-term relationships.

The following table summarizes deposits at ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016.~~2020:


(Dollars in thousands)	June 30, 2021		December 31, 2020
Demand
Non-interest bearing	$	489,302	$	425,210
Interest bearing	469,437		441,772
Savings	412,687		334,226
Certificates of deposit	174,635		361,631
Total	$	1,546,061	$	1,562,839

(Dollars in thousands) September 30, 2017 December 31, 2016
Demand
Non-interest bearing $ 192,191
$ 170,854
Interest bearing 327,559
310,103
Savings 209,471
205,294
Time 140,592
148,265
Total $ 869,813
$ 834,516

~~At September 30, 2017, total~~Total deposits were ~~$869.8 million, an increase of $35.3 million, or 4.2%,~~$1.5 billion at June 30, 2021, relatively unchanged from ~~$834.5 million at~~ December 31, ~~2016. Overall,~~2020. However, there was a significant change in the ~~increase~~composition of deposits as non-interest-bearing demand deposits increased $64.1 million due in ~~deposits was~~part to the funding of the second round of SBA PPP loans. Certificates of deposit decreased $187.0 million primarily due primarily to ~~an increase~~the maturity of ~~$21.3~~approximately $147.2 million of short-term internet listing service certificates of deposit that were not renewed. Due to the low interest rate environment, customers generally chose to deposit funds to non-maturity deposit accounts such as NOW and savings accounts, which resulted in ~~non-interest bearing demand deposits, an increase of $17.5 million in interest-bearing demand deposits and~~ a ~~$4.2~~$78.5 million increase in savings deposits ~~which were partially offset by~~and a ~~decrease of $7.7~~$27.7 million increase in ~~time~~interest-bearing demand deposits.

The COVID-19 pandemic may impact the Bank’s ability to increase and or retain customers’ deposits. As the pandemic continues, businesses may experience a loss of revenue and consumers may experience a reduction of income, which may in turn 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 ~~September~~June 30, ~~2017,~~2021, the Company had ~~$63.0~~no borrowings compared to $9.8 million of ~~overnight~~short-term borrowings ~~from the FHLB compared to $73.1 million of total borrowings at~~ December 31, ~~2016, which consisted of $63.1 million of overnight borrowings from the FHLB and $10.0 million of long-term FHLB borrowings, which matured in July 2017 and was repaid.~~2020.

Liquidity

At ~~September~~June 30, ~~2017,~~2021, the amount of liquid assets and the ~~Bank's~~Bank’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 percent~~50% 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 percent~~50% of its total assets, or ~~$535.0~~$894.6 million, at ~~September~~June 30, ~~2017.~~2021. 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 percent~~30% 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 ~~September~~June 30, ~~2017,~~2021 and December 31, 2020, the Bank pledged ~~collateral~~approximately $350.9 million and $469.5 million of loans, respectively, to support the FHLB ~~to support additional~~borrowing capacity. At June 30, 2021 and December 31, 2020, the Bank had available borrowing capacity of ~~$109.0 million.~~$247.6 million and $301.8 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, 2021.

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 Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At ~~September~~June 30, ~~2017,~~2021, the balance of cash and cash equivalents was ~~$15.7~~$215.7 million.

Net cash provided by operating activities totaled ~~$16.4~~$36.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 compared to net cash provided by operating activities of ~~$4.8~~$6.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020. 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. ~~Net~~The increase in cash provided by operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 compared to the six months ended June 30, 2020 was ~~higher than~~due primarily to the net sales (cash provided) of loans held for sale of approximately $29.6 million and the increase in net income for the first six months of 2021 compared to net funding (cash used) of loans held for sale of approximately $1.6 million for the first six months of 2020.

Net cash provided by ~~operating~~investing activities totaled $185.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016 due primarily~~2021 compared to ~~higher~~ net ~~proceeds from the origination and sale of loans of approximately $15.9 million.~~

~~Net~~ cash used in investing activities ~~totaled $40.2~~of $153.7 million for the ~~nine~~six months ended ~~September~~June 30, 2017 compared to $77.7 million for the nine months ended September 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 2016.2020. The loans and securities portfolios are ~~also~~ a source of liquidity, providing cash flows from maturities and periodic payments of principal. ~~For~~The primary source of cash from investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017 and September~~2021 was the cash flow from the decrease in loans. During the six months ended June 30, ~~2016, payments and maturities~~2021, loans decreased $197.7 million compared to an increase in loans of ~~investment securities totaled $46.4~~$139.4 million ~~and $35.5 million, respectively. Cash~~during the six months ended June 30, 2020.

Net cash used in financing activities was ~~used to purchase investment securities of $46.2~~$28.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 compared to purchases of $44.7 million of investment securities for the nine months ended September 30, 2016. Proceeds from the sale of investment securities totaled $8.6 million for the nine months ended September 30, 2017. There were no sales of investment securities in the prior year period.

~~Net~~net cash provided by financing activities ~~was $24.6~~of $145.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017 compared to $78.5 million for the nine months ended September 30, 2016.~~2020. The primary ~~source~~use of funds for the ~~2017~~2021 period was the ~~increase in deposits of $35.3 million, which was partially offset by the~~ decrease in both deposits and short-term borrowings of ~~$10~~$16.8 million and $9.8 million, respectively. Management believes that the ~~payment of cash dividends of $803,000. The primary sources of funds in the 2016 period was the increase in deposits of $40.3 million~~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, 2021.

Shareholders’ Equity and Dividends

Shareholders’ equity increased by ~~$6.8~~$8.0 million ~~or 6.5%,~~ to ~~$111.6~~$195.7 million at ~~September~~June 30, ~~2017~~2021 from ~~$104.8~~$187.7 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.~~2020. The ~~ratio of average~~increase 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~~increases of ~~$5.6~~$8.1 million in retained earnings ~~an increase of $889,000 from the exercise of options~~ and ~~share-based compensation and~~$640,000 in common stock partially offset by a $644,000 decrease in accumulated other comprehensive income ~~of $370,000.~~and a $128,000 increase in treasury stock.

The Company began declaring and paying cash dividends on its common stock in September ~~15,~~ 2016 ~~the Board of Directors of the Company~~and 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's~~Company’s common ~~shares~~stock will be at the discretion of the ~~Company's~~Company’s Board of Directors and will be determined after consideration of various factors, including the level of earnings, cash requirements, regulatory capital and financial condition.

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%) percent~~5% of its common stock outstanding on the date of approval of the stock repurchase program, which limitation ~~will be~~is adjusted for any ~~future~~subsequent stock dividends. ~~This new repurchase program replaces~~For the ~~repurchase program authorized on August 3, 2005.~~

~~Disclosure of repurchases of~~six months ended June 30, 2021, the Company withheld 7,994 shares of common stock in connection with the vesting of ~~the Company that were made during the quarter ended September 30, 2017 is set forth under~~restricted stock awards to satisfy applicable tax withholding obligations.

See Part II, Item 2 of this ~~report,~~Form 10-Q, “Unregistered Sales of Equity Securities and Use of ~~Proceeds.~~Proceeds,” for additional information regarding the Company's purchases of equity securities.

~~Actual~~

Capital Resources

The Company and the Bank are subject to various regulatory capital ~~amounts~~requirements administered by federal and ~~ratios~~state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the 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 ~~September~~Common 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, ~~2017~~2021 and December 31, ~~2016~~2020, 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, 2021 and December 31, 2020, 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 equity~~Common Equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increased the minimum Tier 1 capital to ~~risk-weighted~~risk-based assets requirement (from 4% to 6% of risk-weighted assets). Banking organizations are also required to have a total capital ratio of at least 8% and a Tier 1 leverage ratio of at least 4%.

The rules also limited a banking organization’s ability to pay dividends, engage in share repurchases or pay discretionary bonuses if the banking organization does not hold a “capital conservation buffer” consisting of ~~2.50%~~2.5% of ~~common equity~~Common Equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The rules became

effective for the Company and the Bank on January 1, 2015. The fully phased in capital conservation buffer ~~requirements began phasing in on January 1, 2016 at 0.625%~~is 2.5% of ~~common equity Tier 1 capital to risk-weighted assets and will increase by that amount each year until fully implemented in January 2019 at 2.50% of common equity~~Common Equity Tier 1 capital to risk-weighted assets. ~~As of January 1, 2017,~~At June 30, 2021, the Company and the Bank ~~were required to maintain~~maintained a capital conservation buffer in excess of ~~1.25%~~2.5%. ~~At September 30, 2017,~~

Management believes that the ~~Company's~~Company’s and the ~~Bank's common equity Tier 1~~Bank’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 capital~~Bank’s current strategic and ~~capital conservation buffer of 5.75%.~~

~~At September 30, 2017,~~operating plans. However, if the ~~capital ratios~~financial position of the Company and the Bank ~~exceeded~~are materially adversely impacted by the ~~minimum Basel III capital requirements. It is management’s goal to monitor~~economic disruption caused by the COVID-19 pandemic, the Company and ~~maintain adequate capital levels to continue to support asset growth and the expansion of~~or 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, 2021
Common equity Tier 1 (CET1)	$	158,028	11.48	%	$	61,959	4.50	%	N/A	N/A
Total capital to risk-weighted assets	192,953		14.01	%	110,150		8.00	%	N/A	N/A
Tier 1 capital to risk-weighted assets	176,028		12.78	%	82,613		6.00	%	N/A	N/A
Tier 1 leverage capital	176,028		9.97	%	70,645		4.00	%	N/A	N/A

As of December 31, 2020:
Common equity Tier 1 (CET1)	$	149,292	9.92	%	$	67,701	4.50	%	N/A	N/A
Total capital to risk-weighted assets	182,933		12.16	%	120,357		8.00	%	N/A	N/A
Tier 1 capital to risk-weighted assets	167,292		11.12	%	90,268		6.00	%	N/A	N/A
Tier 1 leverage capital	167,292		9.41	%	71,105		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, 2021
Common equity Tier 1 (CET1)	$	175,838	12.78	%	$	61,934	4.50%	$	89,461	6.50%
Total capital to risk-weighted assets	192,763		14.01	%	110,106		8.00%	137,632		10.00%
Tier 1 capital to risk-weighted assets	175,838		12.78	%	82,579		6.00%	110,106		8.00%
Tier 1 leverage capital	175,838		9.96	%	70,622		4.00%	88,278		5.00%

As of December 31, 2020:
Common equity Tier 1 (CET1)	$	167,067	11.11	%	$	67,676	4.50%	$	97,754	6.50%
Total capital to risk-weighted assets	182,708		12.15	%	120,313		8.00%	150,391		10.00%
Tier 1 capital to risk-weighted assets	167,067		11.11	%	90,235		6.00%	120,313		8.00%
Tier 1 leverage capital	167,067		9.40	%	71,083		4.00%	88,854		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's~~Company’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 100, 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, 2021 a parallel shift down of 100 basis points was presented.

Based upon the current interest rate environment, as of ~~September~~June 30, ~~2017,~~2021, sensitivity to interest rate risk was as follows:


(Dollars in thousands)			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
+300	$	63,053	$	6,736	11.96	%	$	250,540	$	8,922	3.69	%
+200	60,335		4,018		7.13	%	247,373		5,755		2.38	%
+100	57,542		1,225		2.18	%	244,270		2,652		1.10	%
—	56,317		0		0		241,618		0		0
-100	56,768		451		0.80	%	227,468		(14,150)		(5.86)	%

(Dollars in thousands) 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
+300 $ 42,594
$ 3,453
8.82 % $ 148,242
$ 898
0.61 %
+200 41,423
2,282
5.83 % 148,544
1,200
0.81 %
— 39,141
— — % 147,344
— — %
(1)Assumes an instantaneous and parallel shift in interest rates at all maturities.


⁽¹⁾ (2)Economic value of equity is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.	~~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's~~management’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, 2021, there were no material changes to the Company’s off-balance sheet arrangements and contractual obligations disclosed under Part II, Item 7 of the 2020 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, 2021. 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, 2021.

In an immediate and sustained 100 basis point increase in market interest rates at June 30, 2021, net interest income for the next 12 months would increase approximately 2.18%, when compared to a flat interest rate scenario. In year two, this sensitivity improves to an increase of 7.50%, when compared to a flat interest rate scenario. In an immediate and sustained 100 basis points decrease in market interest rates, net interest income for year one would increase approximately 0.80% and would decrease approximately 3.50% in year two.

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 disclosed~~as 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 ~~management~~procedures 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 costs~~Changes 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 ~~September~~June 30, ~~2017~~2021 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's~~Company’s financial condition or results of operations.

Item 1A. Risk Factors

~~There~~As of June 30, 2021, there has been no material change in the risk factors previously disclosed under Part I, Item 1A of the ~~heading "Risk Factors"~~2020 Form 10-K, as filed with the SEC on March 15, 2021, other than the risks and uncertainties described below related to the pending Merger with Lakeland.

Risks Related to the Pending Merger with Lakeland Bancorp, Inc.

Failure to complete the Merger for any reason could negatively impact the stock price and the future business and financial results of the Company.

Completion of the Merger is subject to customary closing conditions, including, among others, (i) Lakeland shareholder approval of the issuance of shares of Lakeland common stock pursuant to the Merger Agreement; (ii) the adoption and approval of the Merger Agreement by the Company’s shareholders; (iii) the receipt of all required regulatory approvals; (iv) the absence of any law or order prohibiting the closing; and (v) the effectiveness of the registration statement to be filed by Lakeland with respect to the common stock to be issued in the Merger. In addition, each party’s obligation to consummate the Merger is subject to certain other conditions, including the accuracy of the representations and warranties of the other party and compliance of the other party with its covenants in all material respects.

If the Merger is not completed for any reason, the business of the Company may be adversely affected and, without realizing any of the benefits of having completed the Merger, the Company could be subject to a number of risks. In this regard, the Company faces risks and uncertainties due both to the pendency of the Merger and the potential failure to consummate the Merger, including:

•the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;

•the risk that Lakeland’s shareholders may not approve the share issuance;

•the risk that the Company’s shareholders may not adopt and approve the Merger Agreement;

•the risk that the necessary regulatory approvals may not be obtained or may be obtained subject to conditions that are not anticipated;

•delays in closing the Merger or other risks that any of the closing conditions to the Merger may not be satisfied in a timely manner or at all;

•the diversion of management’s time and resources from ongoing business operations due to issues relating to the Merger;

•material adverse changes in the operations or earnings of the Company or Lakeland; and

•potential litigation in connection with the Merger.

The termination fee and the restrictions on third party proposals set forth in the Merger Agreement may discourage othersfrom trying to acquire us.

Until the completion of the Merger, with some exceptions, the Company is prohibited from soliciting, initiating, knowingly encouraging or participating in any discussion of any inquiries or proposals that may lead to an acquisition proposal, such as a merger or other business combination transaction, with any party other than Lakeland. In addition, the Company has agreed to pay to Lakeland a termination fee equal to $9.0 million in certain circumstances, including if the Company terminates the Merger Agreement to enter into a transaction with another party,. These provisions could discourage other parties from trying to acquire us even though those other parties may be willing to offer greater value to the Company’s shareholders than Lakeland has offered in the Merger. Similarly, such a competing acquirer may propose a price lower than it may otherwise have been willing to offer because of the potential added expense of the termination fee that may become payable to Lakeland in certain circumstances under the Merger Agreement.

The Merger Agreement also provides certain termination rights to Lakeland. If the Merger Agreement is terminated and the Company seeks another merger or business combination, the market price of Company common stock could decline, which could

make it more difficult to find a party willing to offer equivalent or more attractive consideration than the consideration Lakeland has agreed to provide in the Merger.

If the Merger is not completed, we will have incurred significant expenses without realizing the expected benefits of theMerger and could be subject to additional risks.

Prior to completion of the Merger, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement. If the Merger is not consummated, the Company would have to recognize these expenses without receiving the Merger consideration. In addition, if the Merger is not completed, the Company may experience negative reactions from the financial markets and from customers and employees. In such an event, the market price of Company common stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the Merger will be consummated. These factors and similar risks could have a material adverse effect on the results of operations, business and common stock price of the Company.

The Company’s shareholders cannot be certain of the precise value of the Merger consideration they may receive in the Merger because the price of Lakeland’s common stock may fluctuate.

Pursuant to the Merger Agreement, each issued and outstanding share of the Company’s common stock will be converted into the right to receive 1.3577 shares of Lakeland common stock. Pending the closing of the Merger, the market value of Lakeland common stock may fluctuate as a result of a variety of factors, including general market and economic conditions, changes in Lakeland’s businesses, operations and prospects, and regulatory considerations. Many of these factors are outside of the control of Lakeland and the Company. Consequently, at the time that the Company’s shareholders vote to adopt and approve the Merger Agreement, they will not know the actual market value of the shares of Lakeland common stock they will receive when the Merger is completed. The actual value of the shares of Lakeland common stock received by the Company’s shareholders will depend on the market value of Lakeland common stock at the time the Merger is completed, which may be less or more than the value used to determine the exchange ratio provided for in the Merger Agreement.

The Company is subject to business uncertainties and contractual restrictions while the Merger is pending.

Uncertainty about the effect of the Merger on employees, customers, suppliers and vendors may have a material adverse effect on the Company’s business, financial condition and results of operations. These uncertainties may impair the Company’s ability to retain and motivate key personnel pending the consummation of the Merger, as such, personnel may experience uncertainty about their future roles following the consummation of the Merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Lakeland, the Company’s business could be harmed and the integration of the respective businesses could be more difficult, costly and time consuming. These uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with the Company to seek to change existing business relationships or fail to extend an existing relationship with the Company. In addition, competitors may target the Company’s existing customers by highlighting potential uncertainties and integration difficulties that may result from the Merger.

The pursuit of the Merger and the preparation for the integration may place a burden on our management and internal resources. Any significant diversion of management attention away from ongoing business matters and any difficulties encountered in the transition and integration process could have a material adverse effect on the Company’s business, financial condition and results of operations.

Furthermore, in the Merger Agreement, the Company agreed to operate its business in the ordinary course prior to closing, and is restricted from taking certain actions without Lakeland’s consent while the Merger is pending. These restrictions may, among other things, limit or prevent the Company from pursuing otherwise attractive business opportunities, selling assets, incurring indebtedness, engaging in significant capital expenditures in excess of certain limits set forth in the Merger Agreement, entering into other transactions or making other changes to the Company’s business prior to the consummation of the Merger or termination of the Merger Agreement. These restrictions could have a material adverse effect on our business, financial condition and results of operations.

The Company’s shareholders will not be entitled to dissenters’ or appraisal rights in the Merger.

Dissenters’ or appraisal rights are statutory rights that, if applicable under law, enable shareholders to dissent from an extraordinary transaction, such as a Merger, and to demand that the Company pay the fair value for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to shareholders in connection with the extraordinary transaction. Under New Jersey law, holders of Company common stock do not have the right to dissent from the Merger Agreement and seek an appraisal in connection with the Merger.

Litigation may be filed against the Boards of Directors of the Company and/or Lakeland that could prevent or delay the completion of the Merger or result in the payment of damages following completion of the Merger.

In connection with the Merger, it is possible that shareholders of the Company or Lakeland or others may file putative class action lawsuits against the Boards of Directors of the Company and/or Lakeland, and the cost to defend or settle any such litigation could be significant. Among other remedies, shareholders could seek to enjoin the Merger. The outcome of any such litigation would be uncertain. If a dismissal is not granted or a settlement is not reached, such potential lawsuits could prevent or delay completion of the Merger and result in substantial costs to the Company or Lakeland, including costs associated with indemnification obligations of the Company and Lakeland, if any.

The Company and its shareholders may be unable to fully realize the expected benefits from the Merger.

The Company expects to achieve substantial operating and capital synergies and cost savings as a result of the Merger. If the respective businesses are not successfully integrated, or are not integrated in a timely fashion, the Company and its shareholders may face material adverse effects including, but not limited to (i) diversion of the attention of management and key personnel and potential disruption of ongoing businesses, (ii) the loss of employees and customers, (iii) declines in the Company’s results of operations and financial condition and (iv) a decline in the market price of Company common stock. Even if the respective businesses are successfully integrated, there can be no assurance that the Merger will result in the realization of the full benefit of the anticipated synergies and cost savings or that these benefits will be realized within the ~~Company's Form 10-K/A for the year ended December 31, 2016.~~expected time frames.

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 new~~this common stock repurchase program, the Company may repurchase in the open market or privately negotiated transactions up to ~~five (5%) percent~~396,141 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, 2021, 394,141 shares remained available for repurchase under the ~~date of approval of the~~common stock repurchase ~~program, which limitation will be adjusted for any future stock dividends. This new~~program. In the second quarter of 2021, there were no repurchase ~~program replaced the repurchase program authorized on August 3, 2005.~~

~~The following table provides~~of shares of common stock ~~repurchases made by or on behalf~~in connection with the vesting of ~~the Company during the three months ended September 30, 2017.~~

~~Issuer Purchases of Equity Securities~~⁽¹⁾

restricted stock awards to satisfy applicable tax withholding obligations.

Period

Total

Number of

Purchased

Average

Price Paid

Per Share

Total Number
of

Purchased As

Part of
Publicly

Announced ~~Plan~~

or
Program

Maximum
Number

of
Shares That
May

Yet be
Purchased

Under the ~~Plan or~~

Program

Beginning

Ending

~~July 1, 2017~~

~~July 31, 2017~~

—

~~394,141~~

~~August 1, 2017~~

~~August 31, 2017~~

—

~~394,141~~

~~September 1, 2017~~

~~September 30, 2017~~

—

~~394,141~~

~~Total~~

—

~~394,141~~


~~(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.




April 1, 2021	April 30, 2021	—	$	—	—	394,141
May 1, 2021	May 31, 2021	—	—		—	394,141
June 1, 2021	June 30, 2021	—	—		—	394,141
Total		—	$	—	—	394,141

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~None.~~

None.

Item 6. Exhibits.


		Exhibit Index
~~2.1~~2		Agreement and Plan of Merger, dated as of ~~November 6, 2017,~~July 11, 2021, by and ~~among the Company, the Bank~~between Lakeland Bancorp, Inc. and ~~NJCB~~1st Constitution Bancorp (incorporated by reference to Exhibit 2.1 to the ~~Company's~~Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on ~~November 7, 2017)~~July 12, 2021)

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-K~~10-K (SEC File No. 000-32891) filed with the SEC on March ~~23, 2016)~~15, 2019)

~~31.1~~10	*#	Form of Amended and Restated Executive Life Insurance Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q (SEC File No. 000-32891) filed with the SEC on May 10, 2021)

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

104		Cover 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~~

August 9, ~~2017~~ 2021

By:

/s/ ROBERT F. MANGANO

Robert F. Mangano

President and Chief Executive Officer

(Principal Executive Officer)

Date: ~~November~~

August 9, ~~2017~~ 2021

By:

/s/ STEPHEN J. GILHOOLY

Stephen J. Gilhooly

Senior Vice President, Treasurer and Chief Financial Officer

(Principal Financial Officer)



(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



(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



(Dollars in thousands)
Commercial Credit Exposure - By Internally Assigned Grade	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate
Grade:
Pass	$	127,277	$	86,668	$	271,440	$	193,535	$	40,994
Special Mention	327		3,574		13,888		—		673
Substandard	—		780		6,054		—		291
Doubtful	—		3,009		—		—		—
Total	$	127,604	$	94,031	$	291,382	$	193,535	$	41,958



September 30, 2017			December 31, 2016
Number of loans	Recorded Investment		Number of loans	Recorded Investment
—	$	—	4	$	822



Fair value of options granted	$	6.05
Risk-free rate of return	2.45		%
Expected option life in years	7
Expected volatility	31.25		%
Expected dividends ⁽¹⁾	1.19		%



(Dollars in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Service cost	$	67		$	58		$	178		$	162
Interest cost	39			49			117			134
Actuarial gain recognized	(32		)	(48		)	(75		)	(120		)
Total	$	74		$	59		$	220		$	176



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	)



(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)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
September 30, 2017
Impaired loans	$	7,261	Appraisal of collateral (1)	Appraisal adjustments (2)	1% - 16% (7.5%)
Other real estate owned	$	190	Appraisal of collateral (1)	Appraisal adjustments (2)	—%
December 31, 2016
Impaired loans	$	4,130	Appraisal of collateral (1)	Appraisal adjustments (2)	3%-100% (29.1%)



	September 30,			December 31,
(Dollars in thousands)	2017			2016
Non-performing loans:
Loans 90 days or more past due and still accruing	$	—		$	24
Non-accrual loans	6,511			5,174
Total non-performing loans	6,511			5,198
Other real estate owned	356			166
Total non-performing assets	6,867			5,364
Performing troubled debt restructurings	3,538			864
Performing troubled debt restructurings and total non-performing assets	$	10,405		$	6,228

Non-performing loans to total loans	0.84		%	0.72		%
Non-performing loans to total loans excluding mortgage warehouse lines	1.13		%	1.02		%
Non-performing assets to total assets	0.64		%	0.52		%
Non-performing assets to total assets excluding mortgage warehouse lines	0.78		%	0.65		%
Total non-performing assets and performing troubled debt restructurings to total assets	0.97		%	0.60		%



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%



(Dollars in thousands)			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
+300	$	42,594	$	3,453	8.82	%	$	148,242	$	898	0.61	%
+200	41,423		2,282		5.83	%	148,544		1,200		0.81	%
—	39,141		—		—	%	147,344		—		—	%