Changes in the components of accumulated other comprehensive income (loss) are as follows and are presented net of tax for the three and nine months ended ~~March 31,~~September 30, 2020 and September 30, 2019:


(Dollars in thousands)	Unrealized Holding Gains (Losses) on Available for Sale Securities		Unrealized Impairment Loss on Held to Maturity Security		Unfunded Pension Liability		Accumulated Other Comprehensive Income (Loss)
Balance - July 1, 2020	$	1,452	$	(369)	$	291	$	1,374
Other comprehensive income before reclassifications	332		0		50		382
Amounts reclassified from accumulated other comprehensive income	—		5		(36)		(31)
Reclassification adjustment for losses realized in income	10		—		—		10
Other comprehensive income	342		5		14		361
Balance - September 30, 2020	$	1,794	$	(364)	$	305	$	1,735

Balance - July 1, 2019	$	162	$	(379)	$	246	$	29
Other comprehensive income before reclassifications	152		0		38		190
Amounts reclassified from accumulated other comprehensive income	—		2		(30)		(28)
Reclassification adjustment for gains realized in income	(12)		—		—		(12)
Other comprehensive income	140		2		8		150
Balance - September 30, 2019	$	302	$	(377)	$	254	$	179

January 1, 2020	$	303	$	(374)	$	262	$	191
Other comprehensive income before reclassifications	1,489		0		149		1,638
Amounts reclassified from accumulated other comprehensive income	—		10		(106)		(96)
Reclassification adjustment for losses realized in income	2		—		—		2
Other comprehensive income	1,491		10		43		1,544
Balance - September 30, 2020	$	1,794	$	(364)	$	305	$	1,735

January 1, 2019	$	(1,679)	$	(382)	$	228	$	(1,833)
Other comprehensive income before reclassifications	1,993		0		118		2,111
Amounts reclassified from accumulated other comprehensive income	—		5		(92)		(87)
Reclassification adjustment for gains realized in income	(12)		—		—		(12)
Other comprehensive income	1,981		5		26		2,012
Balance - September 30, 2019	$	302	$	(377)	$	254	$	179

(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 - January 1, 2020 $ 303
$ (374 ) $ 262
$ 191
Other comprehensive (loss) income before reclassifications (141 ) —
39
(102 )
Amounts reclassified from accumulated other comprehensive income —
2
(31 ) (29 )
Reclassification adjustment for gains realized in income (1 ) —
—
(1 )
Other comprehensive (loss) income (142 ) 2
8
(132 )
Balance - March 31, 2020 $ 161
$ (372 ) $ 270
$ 59

Balance - January 1, 2019 $ (1,679 ) $ (382 ) $ 228
$ (1,833 )
Other comprehensive income before reclassifications 1,071
—
38
1,109
Amounts reclassified from accumulated other comprehensive income —
1
(31 ) (30 )
Other comprehensive income 1,071
1
7
1,079
Balance - March 31, 2019 $ (608 ) $ (381 ) $ 235
$ (754 )

(10) Recent Accounting Pronouncements

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

In June 2016, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ~~Accounting Standards Update (“ASU”)~~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 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.

The Company has completed the initial analysis of its financial assets and will continue to build and validate the CECL models in 2020 to evaluate the impact of the adoption of the new standard on its consolidated financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial ~~Instruments~~.Instruments. The amendments in this ASU make minor improvements to the Codification by eliminating certain inconsistencies and 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 within the scope of Topic 326 if the instruments are eligible for the fair value option under Topic 825. The new guidance is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019.

In November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). ASU 2019-10 provides that the FASB’s recently developed philosophy regarding the implementation of effective dates applies to ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), among other ASUs. For the Company, the provisions of this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for all entities as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years. See the discussions regarding the adoption of ASU 2016-13 above.

Also in November 2019, the FASB issued ASU No. 2019-11, “Financial Instruments - Credit Losses: Codification Improvements (Topic 326)” to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. ASU 2019-11 clarifies that expected recoveries are to be included in the 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 the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving the amortized cost basis. 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. See the discussions regarding the adoption of ASU 2016-13 above.

ASU ~~Update~~ 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 ~~Update~~ 2020-03 - Codification Improvements to Financial Instruments

In March 2020, the FASB issued ASU No. ~~2020-3,~~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 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)" 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 March 12, 2020 and will apply to all LIBOR reference rate modifications through December 31, 2022.

(11) Fair Value Disclosures

U.S. GAAP has established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:


~~Level 1:~~	~~Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities.~~


~~Level 2:~~	~~Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.~~

~~Level 3:~~

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 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 Level 1 and Level 2 inputs. For Level 2 securities, the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things.

Interest Rate Lock Derivatives. Interest rate lock commitments do not trade in active markets with readily observable prices. The fair value of an interest rate lock commitment is estimated based upon the forward sales price that is obtained in the best efforts

commitment at the time the borrower locks in the interest rate on the loan and the probability that the locked rate commitment will close.

Impaired Loans. 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 appraisals of the collateral or discounted cash flows based on the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less specific valuation allowances.

Other Real Estate Owned. Foreclosed properties are adjusted to fair value less estimated selling costs at the time of foreclosure in preparation for transfer from portfolio loans to other real estate owned (“OREO”), thereby establishing a new accounting basis. The Company subsequently adjusts the fair value of the OREO, utilizing Level 3 inputs on a non-recurring basis to reflect partial write-downs based on the observable market price, current appraised value of the asset or other estimates of fair value. The fair value of other real estate owned is determined using appraisals, which may be discounted based on management’s review and changes in market conditions.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	September 30, 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”) and agencies	$	0	$	3,569	$	0	$	3,569
Residential collateralized mortgage obligations - GSE	0		41,421		0		41,421
Residential mortgage backed securities - GSE	0		15,082		0		15,082
Obligations of state and political subdivisions	0		29,564		0		29,564
Trust preferred debt securities - single issuer	0		1,388		0		1,388
Corporate debt securities	9,311		10,614		0		19,925
Other debt securities	0		24,174		0		24,174
Interest rate lock derivative	0		673		0		673
Total	$	9,311	$	126,485	$	0	$	135,796

March 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”) and agencies
$ —
$ 3,952
$ —
$ 3,952
Residential collateralized mortgage obligations - GSE —
47,770
—
47,770
Residential mortgage backed securities - GSE —
19,847
—
19,847
Obligations of state and political subdivisions —
35,577
—
35,577
Trust preferred debt securities - single issuer —
1,263
—
1,263
Corporate debt securities 11,808
14,002
—
25,810
Other debt securities —
29,506
—
29,506
Interest rate lock derivative —
359
—
359
Total $ 11,808
$ 152,276
$ —
$ 164,084

December 31, 2019
(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”) and agencies
$ —
$ 764
$ —
$ 764
Residential collateralized mortgage obligations - GSE ��
53,175
—
53,175
Residential mortgage backed securities - GSE —
18,387
—
18,387
Obligations of state and political subdivisions —
33,519
—
33,519
Trust preferred debt securities - single issuer —
1,442
—
1,442
Corporate debt securities 11,151
12,128
—
23,279
Other debt securities —
25,216
—
25,216
Interest rate lock derivative —
159
—
159
Total $ 11,151
$ 144,790
$ —
$ 155,941


	December 31, 2019
(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”) and agencies	$	0	$	764	$	0	$	764
Residential collateralized mortgage obligations - GSE	0		53,175		0		53,175
Residential mortgage backed securities - GSE	0		18,387		0		18,387
Obligations of state and political subdivisions	0		33,519		0		33,519
Trust preferred debt securities - single issuer	0		1,442		0		1,442
Corporate debt securities	11,151		12,128		0		23,279
Other debt securities	0		25,216		0		25,216
Interest rate lock derivative	0		159		0		159
Total	$	11,151	$	144,790	$	0	$	155,941

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets and liabilities subject to fair value adjustments (impairment) on a nonrecurring basis at ~~March 31,~~September 30, 2020 and December 31, 2019 were as follows:

(Dollars in thousands)
Level 1
Inputs

Level 2
Inputs

Level 3
Inputs

Total Fair
Value
March 31, 2020
Impaired loans $ —
$ —
$ 4,180
$ 4,180
Other real estate owned —
—
93
93
December 31, 2019
Impaired loans $ —
$ —
$ 7,092
$ 7,092
Other real estate owned —
—
93
93


(Dollars in thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
September 30, 2020
Impaired loans	$	0	$	0	$	8,265	$	8,265

December 31, 2019
Impaired loans	$	0	$	0	$	7,092	$	7,092
Other real estate owned	0		0		93		93

Impaired loans measured at fair value and included in the above table at ~~March 31,~~September 30, 2020 consisted of 68 loans having an aggregate recorded investment of ~~$4.3~~$9.9 million and specific loan loss allowance of ~~$91,000.~~$1.6 million. Impaired loans measured at fair value and included in the above table at December 31, 2019 consisted of 12 loans having an aggregate balance of $7.2 million with specific loan loss allowance of $69,000.

The following table presents additional qualitative information about assets measured at fair value on a nonrecurring basis, where there was evidence of impairment, and for which the Company has utilized Level 3 inputs to determine fair value:

(Dollars in thousands)
Fair Value
Estimate

Valuation
Techniques
Unobservable Input
Range
(Weighted Average)
March 31, 2020
Impaired loans $ 4,180

Appraisal of collateral ⁽¹⁾

Appraisal adjustments ⁽²⁾
0.1% - 40.4%
(12.6%)
Other real estate owned $ 93

Appraisal of
collateral ⁽¹⁾

Appraisal adjustments ⁽²⁾
47.0%
(47.0%)
December 31, 2019
Impaired loans $ 7,092

Appraisal of collateral ⁽¹⁾

Appraisal adjustments ⁽²⁾
0.1% - 40.4%
(12.6%)
Other real estate owned $ 93

Appraisal of
collateral⁽¹⁾

Appraisal adjustments⁽²⁾
47.0%
(47.0%)

⁽¹⁾(Dollars in thousands)

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

Valuation
Techniques

Unobservable Input

Range
(Weighted Average)

September 30, 2020
Impaired loans	$	8,265	⁽²⁾Appraisal of collateral (1)	~~Includes qualitative~~	Appraisal adjustments ~~by management and estimated liquidation expenses.~~(2)	0% - 28.5% (12.2%)

December 31, 2019
Impaired loans	$	7,092	Appraisal of collateral (1)		Appraisal adjustments (2)	0.1% - 40.4% (12.6%)
Other real estate owned	$	93	Appraisal of collateral (1)		Appraisal adjustments (2)	47.0% (47.0%)

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

When used in this Quarterly Report on Form 10-Q for the ~~three-month~~ period ended ~~March 31,~~September 30, 2020 (this “Form 10-Q”), the words “the Company,” “we,” “our,” and “us” refer to ~~1ST~~1ST Constitution Bancorp and, as the context requires, its wholly-owned subsidiary, ~~1ST~~1ST Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, ~~1ST~~1ST Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc.~~, 204 South Newman Street Corp.~~ and ~~249 New York Avenue, LLC.~~1st Constitution Real Estate Investment Corporation. 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.

This discussion and analysis of the operating results for the three and nine months ended ~~March 31,~~September 30, 2020 and financial condition at ~~March 31,~~September 30, 2020 is intended to help readers analyze the accompanying financial statements, notes and other supplemental information contained in this Form 10-Q. Results of operations for the ~~three-month period~~three- and nine-month periods ended ~~March 31,~~September 30, 2020 are not necessarily indicative of results to be attained for any other periods.

This discussion and analysis should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this Form 10-Q and Part II, Item 7 of the Company’s Form 10-K (Management’s Discussion and Analysis of Financial Condition and Results of Operation) for the year ended December 31, 2019, as filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2020 (the “2019 Form 10-K”), as well as the risk factors set forth under Part I, Item 1A of the 2019 Form 10-K, as modified and supplemented by the risk factors under Part II, Item 1A of the Company’s Form 10-Q for the period ended March 31, 2020, as filed with the SEC on May 11, 2020.

Forward-Looking Statements

This 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 written and oral statements made with the approval of an authorized executive officer of the Company, the words or phrases “will,” “will likely result,” “could,” “anticipates,” “believes,” “continues,” “expects,” “plans,” “will continue,” “is anticipated,” “estimated,” “project” or “outlook” or similar expressions (including confirmations by an authorized executive officer of the Company of any such expressions made by a third party with respect to the Company) are intended to identify forward-looking statements. The Company cautions readers not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.

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 anticipated, expressed or implied include, without limitation, changes in the overall economy and interest rate changes; inflation, market and monetary fluctuations; the ability of our customers to repay their obligations; the accuracy of our financial statement estimates and assumptions, including the adequacy of the estimate made in connection with determining the adequacy of the allowance for loan losses; increased competition and its effect on the availability and pricing of deposits and loans; significant changes in accounting, tax or regulatory practices and requirements; changes in deposit flows, loan demand or real estate values; the enactment of legislation or regulatory changes; changes in monetary and fiscal policies of the U.S. government; changes to the method that LIBOR rates are determined and to the ~~potential~~ phasing out of LIBOR after 2021; changes in loan delinquency rates or in our levels of non-performing assets; our ability to declare and pay dividends; changes in the economic climate in the market areas in which we operate; the frequency and magnitude of foreclosure of our loans; changes in consumer spending and saving habits; the effects of the health and soundness of other financial institutions, including the need of the FDIC to increase the Deposit Insurance Fund assessments; technological changes; the effects of climate change and harsh weather conditions, including hurricanes and man-made disasters; the economic impact of any future terrorist threats and attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks; our ability to integrate acquisitions and achieve cost savings; other risks described from time to time in our filings with the SEC; and our ability to manage the risks involved in the foregoing. Further, the foregoing factors may be exacerbated by the ultimate impact of the COVID-19 pandemic, which is unknown at this time.

In addition, statements about the COVID-19 pandemic and the potential effects and impacts of the COVID-19 pandemic on the Company’s 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 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. Further, the foregoing factors may be exacerbated by the ultimate impact of the COVID-19 pandemic, which is unknown at this time. For a discussion of certain COVID-19-related risks, see Part II, Item 1A - Risk Factors of this Form 10-Q.

Although management has taken certain steps to mitigate any negative effect of the aforementioned factors and the COVID-19 pandemic, significant unfavorable changes could severely impact the assumptions used and have an adverse effect on profitability. Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances, except as required by law.

OVERVIEW

~~General~~

The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was organized under the laws of the State of New Jersey in February 1999 for the purpose of acquiring all of the issued and outstanding stock of the Bank, a full-service commercial bank that began operations in August 1989, thereby enabling the Bank to operate within a bank holding company structure. The Company became an active bank holding company on July 1, 1999. Other than its ownership interest in the Bank, the Company currently conducts no other significant business activities.

The Bank operates 26 branches and manages its investment portfolio through its subsidiary, 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 8, 2019, the Company and the Bank completed the merger of Shore Community Bank (“Shore”) with and into the Bank (the "Shore Merger"). Shore’s results of operations have been included in the Company’s Consolidated Financial Statements since November 8, 2019. Therefore, comparisons of the Company’s Consolidated Financial Statements from before and after the Shore Merger are impacted by the inclusion of former Shore operations after November 7, 2019. See Note 2 - Acquisition of Shore Community Bank - for further information.

COVID-19 Impact and Response

The sudden emergence of the COVID-19 ~~global~~ pandemic in the first quarter of 2020 has created widespread uncertainty, social and economic disruption, ~~and~~ highly volatile financial ~~markets.~~markets and unprecedented increases in unemployment levels in a short period of time. Mandated business and school closures, restrictions on travel and social distancing have resulted in almost all businesses and employees being adversely ~~impacted~~impacted. The businesses located in the Bank’s primary market areas of northern and central New Jersey, communities along the New Jersey shore, and the New York City metropolitan area, and their employees, have been adversely impacted. As a ~~dramatic increase in unemployment levels in a short period~~result of ~~time.~~

In the ~~first quarter~~COVID-19 pandemic and the resulting economic disruption and uncertainty, it is not possible to determine the overall impact of ~~2020,~~the pandemic on the Company’s business. To the extent that customers are not able to fulfill their contractual obligations to the Company, ~~did not experience~~the Company’s business operations, asset valuations, financial condition, cash flows and results of operations could be materially adversely impacted. Material adverse impacts may include all or a ~~significant increase in loan delinquencies~~combination of valuation impairments on our intangible assets, investments, loans, deferred tax assets, or down- grades in credit ratings of loans directly related to the pandemic. However, the economic disruption will more severely impact businesses, borrowers and consumers in the second quarter of 2020, which may continue with increasing severity in future periods. Management increased the provision for loan losses in response to the deterioration in the economic operating conditions and higher incurred losses in the loan portfolio. Management may further increase the provision and allowance for loan losses in response to changes in economic conditions and the performance of the loan portfolio in future periods.other real estate owned ("OREO").

The ~~future effect~~ultimate impact of the COVID-19 pandemic on the Company’s operations and financial performance will depend on future developments related to the duration, extent and severity of the ~~pandemic and~~pandemic; the length of time that ~~mandated business and school closures,~~ restrictions on travel and gatherings, capacity and other operational limitations or closures imposed on or by businesses and schools, and social distancing measures remain in ~~place.~~place; and the enactment of further legislation or the adoption of policies designed to deliver monetary aid and other relief to borrowers, including but not limited to federal stimulus, forbearance or Federal Reserve monetary policy. In addition, 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 further negatively impact customers’ ability to conduct banking and other financial transactions. The Company’s operations could be adversely impacted if key personnel or a significant number of employees were unable to work due to illness or restrictions.

In the event that the COVID-19 pandemic continues to disrupt business for a prolonged period of time, the fair value of assets could be negatively impacted, which could result in a combination of valuation impairments on our intangible assets, investments, loans, deferred tax assets and OREO. As a result of the recent emergence of the pandemic and the uncertainty, it is not possible to determine the overall future impact of the pandemic on the Company’s business and the results of operations. However, if the pandemic continues for an extended period of time, there could be a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.

On 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.

The CARES ~~Act”) was signed into law. Among other things,~~Act includes a provision for the ~~CARES ACT provides~~Company to opt out of applying the “troubled-debt restructuring” accounting guidance in ASC 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of (i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief ~~to borrowers, including~~if the ~~option to defer loan payments while~~related loans were not ~~affecting their credit and access to additional credit through the Small Business Administration (“SBA”) Pay Check Protection Program (“PPP”).~~more than 30 days past due as of December 31, 2019. The Bank adopted this provision as of March 31, 2020.

In the Company's Forms 10-Q for the quarters ended March 31, 2020 and June 30, 2020, the Company reported the steps that it took in response to the sudden emergence of the COVID-19 ~~pandemic,~~pandemic. During the third quarter of 2020, the Company ~~has taken~~continued working with customers severely impacted by the ~~following actions:~~resulting economic disruption. Management significantly increased the provision for loan losses in response to the higher incurred losses in the loan portfolio. Management may further adjust the provision and allowance for loan losses in response to changes in economic conditions and the performance of the loan portfolio in future periods.

~~To protect~~

As we conduct our daily operations, the safety of our employees and customers remains our primary concern and we ~~have:~~continue to maintain the same measures and protective procedures that we implemented in the second quarter of 2020.

~~Adjusted branch hours and temporarily closed our branch lobbies, except on an appointment only basis.~~

Continued to service our customers through drive-up facilities, ATMs and our robust technology capabilities that allow customers to execute transactions and apply for residential mortgage loans through our website www.momentummortgage.com through their mobile devices and computers.

~~Assigned employees to work remotely where practical.~~

To support our loan and deposit customers and the communities we serve:

•We ~~are working tirelessly~~continue to provide access to additional credit and ~~provided~~ forbearance on loan interest and or principal ofpayments for up to 90 days where management has determined that it is warranted. ~~As of March 31,~~For the nine months ended September 30, 2020, ~~$16.6~~$149.3 million of loans ($140.9 million of commercial loans and $8.4 million of consumer loans) were modified to provide deferral of interest and or principal by borrowers for up to 90 days. As of April 30, 2020, $77.5 million of commercial loans and $5.2 million of residential mortgage and home equity loans had been modified and the Bank had committed to modify $47.6 million of commercial loans and $446,000 of residential mortgage and home equity loans to provide deferral of interest and or principal by borrowers up to 90 days.

•As a long-standing Small Business Administration ("SBA") preferred lender, we ~~are~~ actively ~~participating~~participated in the SBA’s ~~PPP program. As of April~~Paycheck Protection Program ("PPP") established under the CARES Act. For the nine months ended September 30, 2020, we ~~have accepted and~~ funded ~~162 applications for~~467 SBA PPP loans totaling ~~$48.7 million and have 218 SBA approved applications for $23.3 million of PPP loans in process.~~$75.6 million.

~~As more information becomes available, we intend~~•We are registered to ~~evaluate the benefits of utilizing~~utilize the Main Street New Loan Facility (“Facility”) established by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the CARES Act to provide financing to our customers and communities. This Facility is intended to facilitate lending by banks to small and medium-sized businesses, ~~that were not eligible~~which we believe may be beneficial to ~~participate in the PPP.~~certain of our customers.

•We are participating in the Federal Reserve's PPP loan funding program and are pledging the PPP loans to collateralize a like amount of borrowings from the Federal Reserve at a favorable interest rate of 0.35% up to a ~~2 year~~two-year term.

~~The spread~~Modification of ~~COVID-19~~Loans and ~~the restrictions implemented to contain its spread did not significantly impact the Company’s financial condition as~~Deferral of March 31, 2020. However, the future impact of the pandemic is highly uncertain and cannot be predicted and there is no assurance that it will not have a material adverse impact on our future results. The extent of the impact will depend on future developments, including further actions taken to mitigate the spread of COVID-19, the extent and severity of the outbreak and the duration of the government mandates and business closures. Payments

During the nine months ended September 30, 2020, $140.9 million of commercial business and commercial real estate loans and $8.4 million of consumer loans had been modified to provide deferral of interest and or principal by borrowers for up to 90 days. As of September 30, 2020, $123.6 million of commercial business and commercial real estate loans that had previously received deferrals were no longer deferred and had made the contractually due payments in the third quarter ~~ended March 31,~~of 2020. During the third quarter of 2020, ~~we did not experience~~commercial business and commercial real estate loans to three borrowers totaling $10.3 million received a ~~significant increase in loan delinquencies~~second modification and commercial real estate loans to three borrowers totaling $1.8 million received a first modification to defer principal and or ~~downgrades in credit ratings of~~interest up to 90 days. Two commercial real estate loans ~~directed related to the pandemic, but we expect the economic disruption will more severely impact the businesses, clients and communities we serve, and therefore our business,~~totaling $4.6 million that had received a modification in the second quarter of 2020 were placed on non-accrual during the third quarter of 2020. ~~For~~One commercial real estate loan with a ~~discussion~~balance of ~~certain COVID-19-related risks, see Part II, Item 1A – Risk Factors~~$595,000 had not made the first payment after the end of ~~this Form 10-Q.~~the deferral period. Commercial business and commercial real estate loans with a modification to defer principal and or interest up to 90 days totaled $12.1 million at September 30, 2020.

All but two loans totaling $974,000 of the $8.4 million of consumer loans that had received a deferral made the contractually due payments during the third quarter of 2020.

RESULTS OF OPERATIONS

Three and Nine Months Ended ~~March 31,~~September 30, 2020 Compared to Three and Nine Months Ended ~~March 31,~~September 30, 2019

Summary

The Company reported net income of ~~$3.4~~$4.9 million and diluted earnings per share of ~~$0.33~~$0.48 for the three months ended ~~March 31,~~September 30, 2020 compared to net income of ~~$3.4~~$3.6 million and diluted earnings per share of ~~$0.39~~$0.42 for the three months ended ~~March 31,~~September 30, 2019. For the nine months ended September 30, 2020, net income was $12.0 million and diluted earnings per share were $1.17 compared to net income of $10.4 million and diluted earnings per share of $1.19 for the nine months ended September 30, 2019.

Return on average total assets and return on average shareholders' equity were ~~0.89%~~1.08% and ~~8.01%~~10.92%, respectively, for the three months ended ~~March 31,~~September 30, 2020 compared to return on average total assets and return on average shareholders' equity of ~~1.18%~~1.14% and ~~10.75%~~10.57%, respectively, for the three months ended ~~March 31,~~September 30, 2019. Return on average total assets and return on average shareholders' equity were 0.96% and 9.17%, respectively, for the nine months ended September 30, 2020 compared to return on average assets and return on average shareholders' equity of 1.14% and 10.52%, respectively, for the nine months ended September 30, 2019. Book value per share was ~~$16.97~~$17.78 at ~~March 31,~~September 30, 2020 compared to $16.74 at December 31, 2019.

Management anticipates that the Company’s results of operations and net income will continue to be impacted infor the foreseeable future due to the economic disruption related to the COVID-19 pandemic.

•The provision for loan losses and allowance for loan losses may increase as borrowers continue to be negatively affected by the contraction of economic activity and the dramatic increase in unemployment.

•Due to the asset sensitive nature of the Company’s balance sheet, the Federal Reserve’s reduction in the targeted fed funds rate to zero to 0.25% and the concomitant decline in the prime rate to 3.25% in March 2020 ~~will cause~~caused a reduction in the average yield of loans tied to the prime rate and the overall lower market interest rate environment negatively impacted the net interest ~~margin and may cause a reduction in net interest income in the second quarter of 2020.~~margin. The net interest margin ~~will~~was also be impacted by the funding of the PPP loans with a 1.0% interest rate, which will be partially offset by the recognition of the loan fees earned on these loans. The timing and impact to the net interest margin will be contingent on how quickly and the extent to which the PPP loans become grants that are repaid by the SBA over the next two years. The net interest margin and the net interest income may decline in future periods if the Company cannot reduce the cost of interest-bearing liabilities at the same time and to the same extent as the decline in the average yield of assets.

~~It is expected that residential~~•Residential real estate sales, and therefore the origination and sale of residential mortgages ~~will~~may decline as a result of the restrictions implemented to contain the spread of COVID-19, such as ~~mandated~~ business closures and social distancing measures. This decline in turn, would result in lower gain on sales of loans and a decrease in non-interest ~~income and lower gains on sales of loans.~~income.

•A significant increase in non-performing loans could result in increased non-interest expense due to higher expenses for loan collection and recovery costs.

~~During~~Goodwill

The Company completed its annual testing of goodwill for impairment in the ~~first~~fourth quarter of 2019 and concluded at that time that the fair value of the reporting unit exceeded the carrying amount of the reporting unit. In completing the impairment testing the Company identified a single reporting unit and the $35.0 million of goodwill at December 31, 2019 was assigned to the single reporting unit.

The decline in the market price of the Company’s common stock and the resulting aggregate market capitalization of the Company declining below the total amount of common shareholders’ equity at September 30, 2020, was an indication that the carrying amount of goodwill may exceed its fair value. Even though the decline in the market price of the Company’s common stock during 2020 was consistent with a broad decline in the market value of all banking company stocks and was not specific to the Company, it was a triggering event that required an evaluation of the potential impairment of goodwill.

For the third quarter of 2020, ~~management determined that~~the Company performed a ~~triggering event had occurred with respect to goodwill, which required a review~~quantitative impairment test of goodwill utilizing a discounted cash flow valuation methodology based upon an updated five year projection of the Company’s financial performance. A discount rate was estimated utilizing the build up method with a risk free rate, an equity risk premium and a size premium. This discount rate was applied to the projected cash flows over the five year period, which included a terminal value in year five based on a multiple of the projected cash flow in year five. The year five terminal multiple was based upon the observed average market price to earnings multiple for ~~impairment. Management completed~~the trailing last twelve months of earnings for companies included in the SNL US Bank Index at September 30, 2020. This multiple does not include a control premium. This estimated fair value exceeded the carrying value of shareholders’ equity at September 30, 2020 by 10.3%.

The five year projection was based on the Company’s 2020 business plan, historical operating results and internal financial models and included key assumptions for significantly elevated loan losses as a result of the COVID pandemic in the first three years of the projection. The Company’s actual financial results for the quarter ended June 30, 2020 and September 30, 2020 exceeded the financial projections for those periods.

It is not possible to know the severity and duration of the COVID-19 pandemic and the severity and duration of the economic disruption that will occur in the near term. While the Company has projected loan losses significantly higher than its ~~review~~historical experience in its five year projections, the actual loan losses may vary due to the uncertainty of the severity and duration of the economic disruption. Changes in market interest rates and the economic conditions in the Company’s market area may also affect the Company’s future net interest income and net income.

If the Company’s common stock price remains below the Company’s book value per common share in future periods, the Company will continue to evaluate goodwill for impairment on a quarterly basis. Changes in economic conditions, actual loan losses at levels higher than projected, changes in market interest rates and changes in discount rates and valuation multiples may affect the Company’s financial projections and valuation. The Company may determine that goodwill becomes impaired in a future period and a portion or all of the goodwill may be written off.

On the basis of the evaluation of goodwill, ~~and~~management concluded that it was more likely than not ~~that~~ the fair value of ~~goodwill~~the reporting unit exceeded the carrying ~~amount~~value of ~~goodwill at March 31, 2020.~~the reporting unit. Accordingly, goodwill was not impaired at ~~March 31,~~September 30, 2020.

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

~~FIRST QUARTER~~Third Quarter 2020 ~~HIGHLIGHTS~~Highlights

•Return on average total assets and return on average ~~shareholders’~~shareholders' equity were ~~0.89%~~1.08% and ~~8.01%~~10.92%, respectively.

~~Book value per share was $16.97 at March 31, 2020.~~

•Net interest income was ~~$12.9~~$15.4 million and net interest margin was ~~3.68%~~3.67% on a tax equivalent basis.

•A provision for loan losses of ~~$895,000~~$2.3 million was recorded for the third quarter of 2020 and net ~~charge-offs of $165,000~~recoveries were ~~recorded.~~$5,000.

•Total loans were ~~$1.2~~$1.5 billion at ~~March 31,~~September 30, 2020 and increased $100.2 million from June 30, 2020. ~~Commercial business,~~Mortgage warehouse loans increased $76.9 million and commercial real estate ~~and construction~~ loans ~~totaled $872.6 million, and~~ increased ~~$16.7~~$23.7 million from ~~December 31, 2019. During~~June 30, 2020.

•As of September 30, 2020, the ~~first quarter of 2020, mortgage warehouse~~Bank had funded $75.6 million in SBA PPP loans ~~declined $11.9 million to $224.8 million, reflecting~~under the ~~seasonal nature of residential lending in the Bank's markets.~~CARES Act.

•Total deposits were ~~$1.3~~$1.5 billion at ~~March 31,~~September 30, 2020 and increased ~~$20.7~~$101.6 million, with non-interest demand deposits increasing $29.3 million, from ~~$1.28 billion at December 31, 2019.~~June 30, 2020.

•Non-performing assets ~~increased $8.6 million to $13.7~~were $17.5 million, or ~~0.85%~~0.95% of total assets, at September 30, 2020, increasing $3.5 million from June 30, 2020 and included ~~$470,000~~$267,000 of ~~OREO at March 31, 2020.~~other real estate owned ("OREO").

The following table reflects the reconciliation of non-GAAP measures for the three and nine months ended September 30, 2020 and 2019.


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2020			2019			2020			2019
Adjusted net income
Net income	$	4,910		$	3,623		$	12,021		$	10,390
Adjustments:
Merger-related expenses	—			302			64			575
Income tax effect of adjustments	—			(37)			(19)			(119)
Adjusted net income	$	4,910		$	3,888		$	12,066		$	10,846

Adjusted net income per diluted share
Adjusted net income	$	4,910		$	3,888		$	12,066		$	10,846
Diluted shares outstanding	10,268,951			8,722,349			10,260,477			8,698,959
Adjusted net income per diluted share	$	0.48		$	0.45		$	1.18		$	1.25

Adjusted return on average total assets
Adjusted net income	$	4,910		$	3,888		$	12,066		$	10,846
Average assets	1,804,198			1,264,298			1,675,200			1,221,410
Adjusted return on average total assets	1.08		%	1.22		%	0.96		%	1.19		%

Adjusted return on average shareholders' equity
Adjusted net income	$	4,910		$	3,888		$	12,066		$	10,846
Average equity	178,946			135,975			175,141			132,079
Adjusted return on average shareholders' equity	10.92		%	11.34		%	9.20		%	10.98		%

Book value and tangible book value per common share
Shareholders' equity							$	182,007		$	138,527
Less: goodwill and intangible assets							36,471			12,165
Tangible shareholders' equity							145,536			126,362
Shares outstanding							10,237,520			8,682,401
Book value per common share							$	17.78		$	15.95
Tangible book value per common share							$	14.22		$	14.55

1 The Company used the non-GAAP financial measures, Adjusted net income, Adjusted net income per diluted share, Adjusted return on average total assets, Adjusted return on average shareholders' equity and tangible book value per common share, because the Company believes that it is helpful to readers in understanding the Company's financial performance and the effect on its financial statements of the merger-related expenses related to the Shore Merger in 2019. These non-GAAP measures improve the comparability of the current period results with the results of the prior periods. The Company cautions that the non-GAAP financial measures should be considered in addition to, but not as a substitute for, the Company's GAAP financial results.

Earnings Analysis

The Company’s results of operations depend primarily on net interest income, which is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve and the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Other factors that may affect the 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 ~~84.0%~~76.4% of the Company’s net revenues (defined as net interest income plus non-interest income) for the three months ended ~~March 31,~~September 30, 2020 compared to ~~85.7%~~83.9% of net revenues for the three months ended ~~March 31,~~September 30, 2019. Net interest income also depends upon the relative amount of average interest-earning assets, average interest-bearing liabilities and the interest rate earned or paid on them, respectively.

The following 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 months ended ~~March 31,~~September 30, 2020 and 2019. The average rates are derived by dividing interest income and interest expense by the average balance of assets and liabilities, respectively.


	Three months ended March 31, 2020							Three months ended March 31, 2019								Three months ended September 30, 2020						Three months ended September 30, 2019
(Dollars in thousands except yield/cost information)	Average Balance			Interest		Average Yield		Average Balance			Interest		Average Yield		(Dollars in thousands except yield/cost information)	Average Balance		Interest		Average Yield		Average Balance		Interest		Average Yield
Assets															Assets
Interest-earning assets:															Interest-earning assets:
Federal funds sold/short-term investments	$	24,557		$	89	1.46	%	$	8,004		$	47	2.38	%	Federal funds sold/short-term investments	$	8,027	$	2	0.10	%	$	6,452	$	35	2.15	%
Investment securities:															Investment securities:
Taxable	168,376			1,056		2.51	%	160,825			1,270		3.16	%	Taxable	155,242		725		1.87	%	161,538		1,130		2.80	%
Tax-exempt ⁽¹⁾	65,194			555		3.40	%	59,837			558		3.73	%	Tax-exempt (1)	83,461		638		3.06	%	52,990		498		3.76	%
Total investment securities	233,570			1,611		2.76	%	220,662			1,828		3.31	%	Total investment securities	238,703		1,363		2.28	%	214,528		1,628		3.04	%
Loans: ⁽²⁾															Loans: (2)
Commercial real estate	574,640			7,355		5.06	%	390,251			5,011		5.14	%	Commercial real estate	609,917		7,789		5.00	%	405,885		5,295		5.10	%
Mortgage warehouse lines	175,275			2,035		4.64	%	123,394			1,824		5.91	%	Mortgage warehouse lines	333,461		3,383		4.06	%	191,812		2,644		5.39	%
Construction	147,496			2,179		5.94	%	155,864			2,662		6.93	%	Construction	136,252		1,794		5.24	%	157,752		2,705		6.80	%
Commercial business	142,793			1,803		5.08	%	122,878			1,823		6.02	%	Commercial business	138,073		1,445		4.16	%	117,465		1,731		5.85	%
SBA PPP loans															SBA PPP loans	75,484		470		2.48	%	—		—		—	%
Residential real estate	90,360			996		4.36	%	47,274			535		4.53	%	Residential real estate	89,755		1,137		4.96	%	57,026		624		4.38	%
Loans to individuals	30,497			392		5.08	%	22,748			275		4.84	%	Loans to individuals	27,284		293		4.20	%	20,555		260		4.95	%
Loans held for sale	3,986			35		3.51	%	1,363			17		4.99	%	Loans held for sale	23,914		155		2.59	%	5,160		49		3.80	%
All other loans	1,803			10		2.19	%	1,013			10		3.95	%	All other loans	643		11		6.69	%	772		8		4.05	%
Deferred (fees) costs, net															Deferred (fees) costs, net	(1,736)		—		—	%	450		—		—	%
Total loans	1,166,850			14,805		5.10	%	864,785			12,157		5.70	%	Total loans	1,433,047		16,477		4.57	%	956,877		13,316		5.67	%
Total interest-earning assets	1,424,977			$	16,505	4.66	%	1,093,451			$	14,032	5.20	%	Total interest-earning assets	1,679,777		$	17,842	4.23	%	1,177,857		$	14,979	5.15	%
Non-interest-earning assets:															Non-interest-earning assets:
Allowance for loan losses	(9,454		)					(8,535		)					Allowance for loan losses	(12,348)						(8,786)
Cash and due from banks	13,383							10,479							Cash and due from banks	11,460						11,684
Other assets	122,482							74,307							Other assets	125,309						83,543
Total non-interest-earning assets	126,411							76,251							Total non-interest-earning assets	124,421						86,441
Total assets	$	1,551,388						$	1,169,702						Total assets	$	1,804,198					$	1,264,298
Liabilities and shareholders’ equity															Liabilities and shareholders’ equity
Interest-bearing liabilities:															Interest-bearing liabilities:
Money market and NOW accounts	$	401,837		$	760	0.76	%	$	334,955		$	574	0.69	%	Money market and NOW accounts	$	425,401	$	542	0.51	%	$	335,997	$	720	0.85	%
Savings accounts	265,053			604		0.92	%	189,175			426		0.91	%	Savings accounts	290,055		461		0.63	%	190,985		491		1.02	%
Certificates of deposit	359,881			1,874		2.09	%	247,735			1,317		2.16	%	Certificates of deposit	350,654		1,168		1.33	%	291,674		1,693		2.30	%
Federal Reserve Bank PPPLF borrowings															Federal Reserve Bank PPPLF borrowings	35,296		33		0.37	%	—		—		—	%
Short-term borrowings	18,915			62		1.32	%	26,199			173		2.68	%	Short-term borrowings	63,175		62		0.39	%	45,378		268		2.34	%
Redeemable subordinated debentures	18,557			152		3.24	%	18,557			198		4.27	%	Redeemable subordinated debentures	18,557		90		1.90	%	18,557		185		3.99	%
Total interest-bearing liabilities	1,064,243			$	3,452	1.30	%	816,621			$	2,688	1.33	%	Total interest-bearing liabilities	1,183,138		$	2,356	0.79	%	882,591		$	3,357	1.51	%
Non-interest-bearing liabilities:															Non-interest-bearing liabilities:
Demand deposits	283,520							208,079							Demand deposits	413,350						221,166
Other liabilities	31,793							16,798							Other liabilities	28,764						24,566
Total non-interest-bearing liabilities	315,313							224,877							Total non-interest-bearing liabilities	442,114						245,732
Shareholders’ equity	171,832							128,204							Shareholders’ equity	178,946						135,975
Total liabilities and shareholders’ equity	$	1,551,388						$	1,169,702						Total liabilities and shareholders’ equity	$	1,804,198					$	1,264,298
Net interest spread ⁽³⁾						3.36	%						3.87	%	Net interest spread (3)					3.44	%					3.54	%
Net interest income and margin ⁽⁴⁾				$	13,053	3.68	%				$	11,344	4.21	%	Net interest income and margin (4)			$	15,486	3.67	%			$	11,622	3.91	%

⁽¹⁾ Tax equivalent basis, using federal tax rate of 21% in 2020 and 2019.

⁽²⁾ Loan origination fees are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include non-accrual

loans with no related interest income and the average balance of loans held for sale.

⁽³⁾ The net interest spread is the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities.

⁽⁴⁾ The net interest margin is equal to net interest income divided by average interest-earning assets.

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 nine months ended September 30, 2020 and 2019. The average rates are derived by dividing interest income and interest expense by the average balance of assets and liabilities, respectively.


	Nine months ended September 30, 2020						Nine months ended September 30, 2019
(Dollars in thousands except yield/cost information)	Average Balance		Interest		Average Yield		Average Balance		Interest		Average Yield
Assets
Interest-earning assets:
Federal funds sold/short-term investments	$	16,433	$	95	0.77	%	$	7,140	$	129	2.42	%
Investment securities:
Taxable	163,979		2,633		2.14	%	162,809		3,615		2.96	%
Tax-exempt (1)	77,145		1,821		3.15	%	56,723		1,590		3.74	%
Total investment securities	241,124		4,454		2.46	%	219,532		5,205		3.16	%
Loans: (2)
Commercial real estate	588,145		22,935		5.12	%	400,096		15,494		5.11	%
Mortgage warehouse lines	244,470		7,702		4.20	%	155,962		6,682		5.71	%
Construction	141,428		5,965		5.63	%	157,245		8,135		6.92	%
Commercial business	142,010		4,815		4.53	%	120,774		5,386		5.96	%
SBA PPP loans	43,374		818		2.52	%	—		—		—	%
Residential real estate	89,333		3,085		4.54	%	50,562		1,682		4.39	%
Loans to individuals	28,857		1,001		4.56	%	21,748		827		5.01	%
Loans held for sale	14,160		304		2.86	%	3,556		107		4.01	%
All other loans	872		31		4.67	%	799		29		4.79	%
Deferred (fees) costs, net	(345)		—		—	%	233		—		—	%
Total loans	1,292,304		46,656		4.82	%	910,975		38,342		5.63	%
Total interest-earning assets	1,549,861		$	51,205	4.41	%	1,137,647		$	43,676	5.13	%
Non-interest-earning assets:
Allowance for loan losses	(10,684)						(8,693)
Cash and due from banks	12,182						11,270
Other assets	123,841						81,186
Total non-interest-earning assets	125,339						83,763
Total assets	$	1,675,200					$	1,221,410
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Money market and NOW accounts	$	417,557	$	1,913	0.61	%	$	337,004	$	1,977	0.78	%
Savings accounts	275,679		1,612		0.78	%	190,589		1,380		0.97	%
Certificates of deposit	354,551		4,608		1.74	%	268,851		4,535		2.26	%
Federal Reserve Bank PPPLF borrowings	13,169		36		0.37	%	—		—		—	%
Short-term borrowings	39,344		169		0.58	%	36,992		698		2.52	%
Redeemable subordinated debentures	18,557		348		2.46	%	18,557		575		4.13	%
Total interest-bearing liabilities	1,118,857		$	8,686	1.04	%	851,993		$	9,165	1.44	%
Non-interest-bearing liabilities:
Demand deposits	351,291						214,618
Other liabilities	29,911						22,720
Total non-interest-bearing liabilities	381,202						237,338
Shareholders’ equity	175,141						132,079
Total liabilities and shareholders’ equity	$	1,675,200					$	1,221,410
Net interest spread (3)					3.37	%					3.69	%
Net interest income and margin (4)			$	42,519	3.66	%			$	34,511	4.06	%

(1) Tax equivalent basis, using federal tax rate of 21% in 2020 and 2019.

(2) Loan origination fees are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include non-accrual

loans with no related interest income and the average balance of loans held for sale.

(3) The net interest spread is the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities.

(4) The net interest margin is equal to net interest income divided by average interest-earning assets.

Three months ended September 30, 2020 compared to three months ended September 30, 2019

Net interest income was ~~$12.9~~$15.4 million for the third quarter ~~ended March 31,~~of 2020 and increased ~~$1.7~~$3.8 million compared to net interest income of ~~$11.2~~$11.5 million for the ~~first~~third quarter of 2019. Total interest income was ~~$16.4~~$17.7 million for the three months ended ~~March 31,~~September 30, 2020 compared to ~~$13.9~~$14.9 million for the three months ended ~~March 31,~~September 30, 2019. The increase in total interest income was primarily due to a net increase of ~~$302.1~~$476.2 million in average loans, reflecting growth in all segments of the loan portfolio except construction loans and included $75.5 million in average SBA PPP loans. The growth in average loans included approximately ~~$207.2~~$193.4 million of loans from the Shore Merger.

Average interest-earning assets were ~~$1.4~~$1.7 billion with a tax-equivalent yield of ~~4.66%,~~4.23% for the ~~first~~third quarter of 2020 compared to average interest-earning assets of ~~$1.1~~$1.2 billion, with a tax-equivalent yield of ~~5.20%~~5.05%, for the ~~first~~third quarter of 2019. The yield on average interest-earning assets for the ~~first~~third quarter of 2020 declined 5482 basis points to ~~4.66%~~4.23%, primarily due to the ~~sharp~~steep decline in market interest rates beginning in the third quarter of 2019 and continuing ~~through~~for the first ~~quarter~~nine months of 2020.

The Federal Reserve reduced the targeted federal funds rate 50 basis points in the third quarter ~~and~~of 2019, 25 basis points in the fourth quarter of 2019 and, in response to the COVID-19 pandemic, further reduced the targeted federal funds rate by 150 basis points in March 2020. The prime rate was ~~5.50% in the first quarter of~~5.00% at September 30, 2019. As a result of the reductions in the targeted federal funds rate in 2019, the prime rate declined to 4.75% in October 2019 and declined further to 3.25% in March 2020. ~~At March 31, 2020, the~~The Bank had approximately ~~$434~~$571.8 million of loans with an interest rate tied to the prime rate and approximately ~~$51~~$49.2 million of loans with an interest rate tied to either 1-1 or 3-month ~~LIBOR. The decline in market interest rates and the prime rate had a negative effect on the yield of the loan portfolio and investment securities in the first quarter of~~LIBOR at September 30, 2020.

Interest expense on average interest-bearing liabilities was ~~$3.5~~$2.4 million, with an interest cost of ~~1.30%~~0.79%, for the ~~first~~third quarter of 2020, compared to ~~$2.7~~$2.9 million, with an interest cost of ~~1.33%~~1.04%, for the ~~first~~second quarter of 2020 and $3.4 million, with an interest cost of 1.51%, for the third quarter of 2019. ~~The $764,000~~Despite an increase of $300.5 million in ~~interest expense on~~average interest-bearing liabilities for the ~~first~~third quarter of 2020 ~~reflected primarily an increase~~compared to the third quarter of ~~$247.6~~2019, interest expense declined $1.0 million largely due to the decline in ~~average~~ interest ~~bearing liabilities.~~rates paid on deposits, borrowings and the redeemable subordinated debentures resulting from the falling interest rate environment. The average cost of interest-bearing deposits was ~~1.27% for the first quarter of 2020 compared to 1.22% for the first quarter of 2019 and declined from the peak interest cost~~0.81% for the third quarter of ~~2019~~2020, 1.04% for the second quarter of 2020 and 1.41%. for the third quarter of 2019. The ~~higher~~lower interest cost of interest-bearing deposits for the ~~first~~third quarter of 2020 compared to the ~~first~~third quarter of 2019 primarily reflects ~~(i) the rising and higher interest rate environment~~a steep decline in ~~2018, which carried into the first two quarters of 2019, (ii) the lag effect on the interest cost of deposits as~~deposit market interest rates ~~declined sharply~~beginning in the ~~first~~fourth quarter of ~~2020, (iii) competitive factors~~2019 and continuing for ~~deposits and (iv)~~ the ~~term structure~~first nine months of ~~certificates of deposit (“CDs”).~~2020. The interest rates paid on deposits generally do not adjust quickly to ~~sharp~~rapid changes in market interest rates and tend to decline over time in a falling interest rate environment. The lower level of short-term interest rates in the first quarter of 2020 compared to the first quarter of 2019 resulted in a decline in the interest cost of short-term borrowings and the redeemable subordinated debentures.

The growth in average interest-bearing liabilities included average interest-bearing deposits of ~~$176.5~~$174.0 million acquired in the Shore Merger. Of the total increase in average interest-bearing liabilities, ~~CDs increased $112.1 million,~~certificates of deposit which generally have a higher interest cost than other types of interest-bearing ~~deposits.~~deposits, increased by $59.0 million at September 30, 2020 as compared to September 30, 2019. At ~~March 31,~~September 30, 2020, there were ~~$259~~$260.0 million of ~~CDs~~certificates of deposit with an average interest cost of ~~2.10%~~1.33% that mature within the ~~next 12~~following nine months. Management will continue to adjust the interest rates paid on deposits to reflect the then current interest rate environment and competitive factors.

The net interest margin on a tax-equivalent basis decreased 5324 basis points to ~~3.68%~~3.67% for the ~~first~~third quarter of 2020 compared to ~~4.21%~~3.91% for the ~~first~~third quarter of 2019 due primarily to the 5482 basis point decline in the yield of average interest-earning ~~assets.~~assets, partially offset by the 72 basis points decline in the interest cost of average interest-bearing liabilities. Due to the ~~sharp~~ decline in the prime rate in the third and fourth quarters of 2019 followed by the further decline in the prime rate in March of 2020, the yield of loans declined 6095 basis points to ~~5.10%~~4.57% and the interest cost of ~~deposits~~interest-bearing liabilities was not reduced ~~as quickly and~~ to the same extent as the decline in the yield of loans.

Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019

For the nine months ended September 30, 2020, net interest income increased $8.0 million, or 23.3%, to $42.1 million compared to $34.2 million for the comparable period in 2019. Total interest income was $50.8 million for the nine months ended September 30, 2020 compared to $43.3 million for the nine months ended September 30, 2019. This increase was due primarily to the $381.3 million increase in average loans, reflecting growth in all segments of the loan portfolio except construction loans and includes $43.4 million in average SBA PPP loans. The increase in average loans included approximately $200.7 million of average loans acquired from the Shore Merger.

Average interest-earning assets increased $412.2 million to $1.55 billion for the nine months ended September 30, 2020 compared to $1.14 billion for the same period in 2019. This increase was due primarily to the $381.3 million increase in average loans, a $21.6 million increase in average total investment securities and a $9.3 million increase in average federal funds sold/short-term investments.

The tax-equivalent yield on average interest earnings assets was 4.41% for the nine months ended September 30, 2020 compared to 5.13% for the same period in the prior year. The decline of 72 basis points in tax-equivalent yield year over year was due primarily to the steady decline in market interest rates beginning in the third quarter of 2019 and continuing into the first nine months of 2020. The Federal Reserve reduced the targeted federal funds rate 50 basis points in the third quarter of 2019, 25 basis points in the fourth quarter of 2019 and, in response to the COVID-19 pandemic, further reduced the targeted federal funds rate by 150 basis ~~point decline~~points in March 2020. The prime rate was 5.00% at September 30, 2019. As a result of the reductions in the targeted federal funds rate in 2019, the prime rate declined to 4.75% in October 2019 and declined further to 3.25% in March 2020.

Interest expense on average interest-bearing liabilities was $8.7 million, with an interest cost of 1.04%, for the nine months ended September 30, 2020 compared to $9.2 million, with an interest cost of 1.44%, for the same period in the prior year. The average interest cost declined 40 basis points largely due to lower market interest rates. The increase in average interest-bearing liabilities included average interest-bearing deposits of $174.0 million acquired in the Shore Merger. Of the total increase in average interest-bearing liabilities of $266.9 million, certificates of deposit, which generally have a higher interest cost than non-maturity deposits, increased $85.7 million. Management will continue to monitor the interest rates paid on deposits and ~~the significantly lower interest rate environment had only a partial effect~~adjust them based on ~~the yield of loans tied to the prime rate,~~then current market conditions.

The net interest ~~income and~~margin on a tax-equivalent basis was 3.66% for the nine months ended September 30, 2020 compared to 4.06% for the nine months ended September 30, 2019. The 40 basis points decline in the net interest margin ~~in the first quarter~~year over year was a result of ~~2020. Management anticipates that the net interest margin will~~a decline ~~in the second quarter~~ of 2020 due to the full quarter’s effect of the lower prime rate. The net interest margin will also be impacted by the funding of the PPP loans with a 1.0% interest rate, which will be partially offset by the recognition of the loan fees earned on these loans. The timing and impact to the net interest margin will be contingent on how quickly and to the extent that the PPP loans become grants that are repaid by the SBA over the next two years. The interest cost of interest bearing deposits is not expected to decline as quickly and to the same extent as the decline72 basis points in the yield of average interest-bearing assets, which was partially offset by a decline of 40 basis points in interest ~~earning assets.~~cost of the average interest-bearing liabilities.

Provision for Loan Losses

Management considers a complete review of the following specific factors in determining the provisions for loan losses: historical losses by loan category, the level of non-accrual loans and problem loans as identified through internal review and classification, collateral values and the growth, size and risk elements of the loan portfolio. In addition to these factors, management takes into consideration current economic conditions and local real estate market conditions. As a result of the economic and social disruption caused by the COVID-19 pandemic, in the third quarter of 2020, management reviewed construction, commercial business and commercial real estate loans that had been modified to defer interest and or principal for up to 90 days with special emphasis on hotel and restaurant-food service industries as most likely to be adversely impacted by the economic disruption caused by the pandemic. Prior to March 2020, when the impacts of the 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 credit quality over the past five years.

Three months ended September 30, 2020 compared to three months ended September 30, 2019

The Company recorded a provision for loan losses of ~~$895,000~~$2.3 million for the ~~first~~third quarter of 2020 compared to a provision for loan losses of ~~$300,000~~$350,000 for the ~~first~~third quarter of 2019. The significant increase in the provision for loan losses in the ~~first~~third quarter of 2020 ~~includes~~included an additional provision of approximately $1.5 million to increase specific reserves on impaired loans. The higher provision also reflects changes in loan ratings and the growth and change in mix of the loan portfolio. At September 30, 2020, total loans were $1.5 billion and the allowance for loan losses was $14.5 million, or 0.99% of total loans, compared to total loans of $1.0 billion and an allowance for loan losses of $9.0 million, or 0.88% of total loans, at September 30, 2019. Included in total loans at September 30, 2020 were $186.6 million of loans that were acquired in the Shore Merger. Acquisition accounting for the Shore Merger 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 effective time of the respective mergers. The unaccreted general credit fair value discounts related to the former Shore and NJCB loans were approximately $1.8 million and $0.5 million at September 30, 2020, respectively. In addition, at September 30, 2020, there were $75.6 million of SBA PPP loans which are 100% guaranteed by the SBA and, accordingly, no reserve was provided.

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019

For the nine months ended September 30, 2020, the Company recorded a provision for loan losses of $5.3 million, representing an increase of $4.3 million from a provision for loan losses of $1.0 million for the nine months ended September 30, 2019. The significant increase in the provision for loan losses for the first nine months of 2020 was to reserve for the estimated increase in incurred loan losses due primarily to the economic disruption caused by the COVID-19 pandemic. The principal components of the increase were: a provision of approximately $1.5 million to increase specific reserves, a provision of$388,000, which reflected an increase in the qualitative factors for national and local economic conditions due to athe weakening economic operating ~~environment primarily resulting from~~environment; a provision of $1.1 million for an increase in the ~~existing~~qualitative factors attributed to the modification of loans and ~~anticipated impacts~~deferral of principal and or interest on $149.3 million of loans; and an $850,000 provision related to the down-grade of the ~~COVID-19 pandemic.~~ credit ratings on certain loans.

The higher provision also reflects, to a lesser extent, the growth and change in mix of the loan portfolio. ~~At March 31,~~Net charge-offs were $161,000 for the nine months ended September 30, 2020 ~~total loans were $1.2 billion and the allowance for loan losses was $10.0 million, or 0.82% of total loans,~~ compared to total loans of $874.3 million and an allowance for loan losses of $8.7 million, or 1.00% of total loans, at March 31, 2019. Included in loans at March 31, 2020 were $208.4 million of loans that were acquired in the Shore Merger. The decrease in the allowance as a percentage of loans was due primarily to acquisition accounting$475,000 for the Shore Merger, which resulted in the Shore loans being recorded at their fair value as of the effective time of the merger. The unaccreted general credit fair value discount related to the former Shore loans was $2.2 million at March 31, 2020.nine months ended September 30, 2019.

Due to the economic disruption and uncertainty caused by the COVID-19 pandemic, the provision for loan losses may increase in future periods as borrowers are affected by the expected severe contraction of economic activity and the dramatic increase in unemployment. This may result in increases in loan delinquencies, down-grades of loan credit ratings and charge-offs in future periods. The provision for loan losses may increase significantly to reflect the decline in the performance of the loan portfolio and the higher level of incurred losses.

Non-Interest Income

Three months ended September 30, 2020 compared to three months ended September 30, 2019

Non-interest income was ~~$2.5~~$4.7 million for the ~~first~~third quarter of 2020, representing an increase of ~~$590,000~~$2.5 million, or 114.7%, compared to ~~$1.9~~$2.2 million for the ~~first~~third quarter of 2019. ~~Gains~~The significant increase in non-interest income was driven primarily by a $2.0 million increase in gain on ~~the~~ sale of ~~loans increased $425,000, service charges on deposit accounts increased $47,000, income on Bank-owned life insurance increased $41,000 and other income increased $69,000 as compared to~~loans.

For the ~~prior year period. In the first~~third quarter of 2020, ~~$34.0~~residential mortgage banking operations originated approximately $118.0 million of residential mortgages, ~~were~~ sold ~~and $1.2~~$97.5 million of ~~gains were~~residential mortgages and recorded $2.9 million of gain on sale of loans compared to ~~$19.6~~$53.3 million of residential mortgages originated, $38.8 million of residential mortgage loans sold and ~~$715,000~~$1.1 million of ~~gains~~gain on sale of loans recorded in the ~~first~~third quarter of 2019. The residential mortgage loan pipeline was $71.7 million at September 30, 2020 and was comprised 64% and 36% of refinance and purchase loan applications and commitments for mortgages, respectively. Management believes that the increase in residential mortgage loans originated and sold was due primarily to increased residential mortgage lending activity as a result of significantly lower mortgage interest rates in the 2020 period compared to the 2019 period. In the third quarter of 2020, $5.1 million of SBA loans were sold and gain of $463,000 was recorded compared to $2.4 million of SBA loans sold and gain of $205,000 recorded in the third quarter of 2019.

For the third quarter of 2020 compared to the third quarter of 2019, service charges on deposit accounts decreased $39,000, due primarily to lower overdraft fees and income on bank-owned life insurance (“BOLI”) increased $39,000 due primarily to the increase in BOLI acquired in the Shore Merger. Gain on sales and calls of securities increased $63,000 for the third quarter of 2020 as a result of sales and calls of approximately $14.4 million of investment securities. Other income increased $422,000 in the third quarter of 2020 compared to the third quarter of 2019 primarily due to an interest rate swap fee collected of $172,000, an expired loan commitment fee of $59,000, gain from the sale of OREO of $71,000 and general increases in other income components.

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

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019

Total non-interest income for the nine months ended September 30, 2020 increased $4.1 million, or 64.9%, to $10.3 million compared to total non-interest income of $6.2 million for the nine months ended September 30, 2019 due primarily to increases in gain on the sales of loans.

For the nine months ended September 30, 2020, $233.8 million of residential mortgages were originated and $208.1 million of residential mortgages were sold, which generated gain on sales of loans of $6.3 million, as compared to $107.4 million of residential mortgages originated and $86.7 million of residential mortgage sold, which generated gain on sales of loans of $2.7 million, for the nine months ended September 30, 2019. The increase in residential mortgage loans sold was due primarily to increased residential mortgage lending activity asattributable to a ~~result~~lower interest rate environment for the first nine months of ~~lower mortgage interest rates in the~~ 2020 ~~period~~ compared to the ~~2019 period. In~~same period in 2019.

For the ~~first quarter of~~nine months ended September 30, 2020, ~~$2.7 million of~~ SBA loan sales, excluding SBA PPP loans, were ~~sold~~$7.8 million and ~~gains~~gain on sales of ~~$226,000 were~~loans of $688,000 was recorded compared to ~~$4.7~~$10.4 million of SBA loans sold and ~~gains~~gain on sales of ~~$330,000~~loans of $817,000 recorded infor the ~~first quarter of~~nine months ended September 30, 2019. ~~SBA guaranteed commercial lending activity and loan sales vary~~

Service charges on deposit accounts decreased to $471,000 for the nine months ended September 30, 2020 from ~~period~~$490,000 for the nine months ended September 30, 2019.

For the nine months ended September 30, 2020, income on BOLI increased $195,000 to ~~period, and the level of activity is~~$632,000, due primarily to the ~~timing of loan originations.~~

~~Non-interest~~increase in BOLI acquired in the Shore Merger compared to $437,000 for the nine months ended September 30, 2019. Other income ~~may decline as~~increased $362,000 to $2.1 million compared to $1.7 million for the ~~origination and sale of residential mortgages may decrease~~nine months ended September 30, 2019 in part due to ~~the negative effect that mandated business closures~~an interest rate swap fee collected of $172,000, an expired loan commitment fee of $59,000 and ~~social distancing may have on the purchase of homes, which would result~~general increases in ~~lower gains on sales of loans. The origination and sale of SBA loans may also decrease due to lower demand for financing by customers.~~other income components.

Non-Interest Expenses

For the three months ended ~~March 31,~~September 30, 2020, non-interest expenses were ~~$9.8~~$11.0 million compared to ~~$8.1~~$8.4 million for the three months ended ~~March 31,~~September 30, 2019, representing an increase of ~~$1.7~~$2.5 million, or ~~21.0%~~30.0%. The primary ~~reason~~reasons for the increase ~~was $979,000~~were higher commissions related to the origination of residential mortgages for sale of $1.2 million and $941,000 of expenses ~~included with respect~~due to the inclusion of the former Shore operations in the ~~first~~third quarter of 2020.

The following table presents the major components of non-interest expenses for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019:


	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2020		2019		2020		2019
Salaries and employee benefits	$	7,106	$	5,231	$	19,276	$	15,472
Occupancy expense	1,222		972		3,597		2,984
Data processing expenses	486		379		1,402		1,072
Equipment expense	388		323		1,211		942
Marketing	21		62		99		253
Telephone	124		97		378		290
Regulatory, professional and consulting fees	575		426		1,536		1,259
Insurance	118		96		364		283
Supplies	67		65		275		188
FDIC insurance expense	225		(47)		484		113
Other real estate owned expenses	27		52		58		134
Merger-related expenses	—		302		64		575
Amortization of intangible assets	91		30		304		93
Other expenses	512		447		1,544		1,438
Total	$	10,962	$	8,435	$	30,592	$	25,096

Three months ended March 31,
(Dollars in thousands) 2020 2019
Salaries and employee benefits $ 6,169
$ 4,963
Occupancy expense 1,170
1,021
Data processing expenses 446
348
Equipment expense 411
324
Marketing 44
80
Telephone 125
96
Regulatory, professional and consulting fees 464
457
Insurance 119
90
Supplies 97
66
FDIC insurance expense 34
100
Other real estate owned expenses 17
48
Amortization of intangible assets 122
32
Other expenses 575
469
Total $ 9,793
$ 8,094
Three months ended September 30, 2020 compared to three months ended September 30, 2019

Salaries and employee benefits expense, which ~~represent~~represents the largest portion of non-interest expenses, increased ~~by $1.2~~$1.9 million, or ~~24.3%~~35.8%, to ~~$6.2~~$7.1 million for the ~~three months ended March 31,~~third quarter of 2020 compared to ~~$5.0~~$5.2 million for the ~~three months ended March 31,~~third quarter of 2019, due primarily to a $1.2 million increase in mortgage commissions resulting from significantly higher residential mortgage lending activity, salaries and benefits for former Shore employees ($~~486,000)~~478,000) who joined the Company, ~~higher commissions expense of $328,000 related to the origination of residential mortgage loans primarily for sale,~~ merit increases and increases in employee benefit ~~expenses.~~expenses, which amounts were partially offset by higher deferred loan origination expenses of approximately $142,000 related to the origination of loans.

Occupancy expense increased ~~$149,000~~$250,000, or 25.7%, to $1.2 million ~~or 14.6%,~~for the three months ended September 30, 2020, due primarily to the addition of the five former Shore branch offices compared to $1.0 million infor the three months ended September 30, 2019.

Data processing expenses increased $107,000, or 28.2%, to ~~$446,000 in~~$486,000 for the ~~first~~third quarter of 2020 compared to ~~$348,000~~$379,000 for the ~~first~~third quarter of 2019, due primarily to the addition of the Shore operations ~~($85,000)~~ and increases in loans, deposits and other customer services.

Regulatory, professional and consulting fees increased $149,000, or 35.0%, to $575,000 in the third quarter of 2020 compared to $426,000 for the third quarter of 2019 due primarily to an increase in legal services.

FDIC insurance expense ~~declined~~increased $272,000 for the third quarter of 2020, due primarily to ~~$34,000~~the acquisition of Shore, the growth of assets, a credit of $87,000 from the ~~$100,000 in~~FDIC applied to the ~~first~~second quarter of 2019 ~~due~~assessment and an increase in the FDIC assessment rate in 2020.

For the third quarter of 2020, there were no merger-related expenses compared to ~~the small bank assessment credit received of $123,000~~$302,000 for the ~~fourth~~third quarter of ~~2019. The full credit has been applied~~2019 related to legal and ~~no further credits will be received.~~financial advisory fees incurred for the Shore Merger.

Amortization of intangible assets increased ~~$90,000~~$61,000, or 203.3%, to ~~$122,000~~$91,000 for the three months ended ~~March 31,~~September 30, 2020 compared to ~~$32,000~~$30,000 for the three months ended ~~March 31,~~September 30, 2019 due primarily to the ~~$94,000~~$67,000 of amortization ~~of a~~expense for the core deposit intangible related to the Shore Merger.

Other expenses increased ~~$106,000,~~$65,000, or ~~22.6%~~14.5%, ~~primarily resulting from additional expenses incurred as a result of the Shore Merger ($73,000).~~due to general increases in other operating expenses.

Non-interest expenses may increase, if there is a significant increase in non-performing loans, ~~due to~~as a result of higher expenses ~~for~~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.

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019

Non-interest expenses were $30.6 million for the nine months ended September 30, 2020 compared to $25.1 million for the nine months ended September 30, 2019, representing an increase of $5.5 million, or 21.9%, due primarily to $2.0 million in higher commissions related to the origination of residential mortgages for sale and $2.9 million of expenses related to the inclusion of the former Shore operations and general increases year-over-year due to the growth of the Company.

Salaries and employee benefits, which represent the largest portion of non-interest expenses, increased $3.8 million, or 24.6%, to $19.3 million for the nine months ended September 30, 2020 compared to $15.5 million for the nine months ended September 30, 2019, due primarily to salaries and benefits for former Shore employees ($1.4 million) who joined the Company, higher commissions of $2.0 million related to the higher origination volume of residential mortgage loans primarily for sale, merit increases and increases in employee benefit expenses.

Occupancy expense increased $613,000 or 20.5% to $3.6 million for the nine months ended September 30, 2020 compared $3.0 million for the nine months ended September 30, 2019, due primarily to the addition of the five former Shore branch offices.

Data processing expenses increased $330,000, or 30.8%, to $1.4 million for the nine months ended September 30, 2020 compared to $1.1 million for the nine months ended September 30, 2019, due primarily to the addition of the Shore operations ($272,000) and increases in loans, deposits and other customer services.

Equipment expense increased $269,000, or 28.6%, to $1.2 million for the nine months ended September 30, 2020 compared to $942,000 for the nine months ended September 30, 2019, due primarily to additional equipment and maintenance agreements related to the inclusion of the Shore operations.

Regulatory, professional and consulting fees increased $277,000, or 22.0%, to $1.5 million for the nine months ended September 30, 2020 compared to $1.3 million for the nine months ended September 30, 2019, due primarily to an increase in legal services.

Supplies increased $87,000, or 46.3%, to $275,000 for the nine months ended September 30, 2020 compared to $188,000 for the nine months ended September 30, 2019, due primarily to growth of the Company, the inclusion of the former Shore operations and the purchase of COVID-19-related protective supplies.

FDIC insurance expense increased $371,000 to $484,000 for the nine months ended September 30, 2020 compared to $113,000 for the nine months ended September 30, 2019, due primarily to the acquisition of Shore, the growth in assets, the $87,000 credit from the FDIC for the third quarter of 2019 and an increase in the FDIC assessment rate.

Merger-related expenses declined to $64,000 for the nine months ended September 30, 2020 compared to $575,000 for the nine months ended September 30, 2019, due to the legal and financial advisory fees incurred in connection with the Shore Merger in 2019.

Amortization of intangible assets increased $211,000 to $304,000 for the nine months ended September 30, 2020 compared to $93,000 for the nine months ended September 30, 2019, due primarily to the amortization of the core deposit intangible related to the Shore Merger.

Income Taxes

Three months ended September 30, 2020 compared to three months ended September 30, 2019

Income tax expense was ~~$1.3~~$1.9 million for the ~~first~~third quarter of 2020, resulting in an effective tax rate of ~~27.3%~~27.9%, compared to income tax expense of $1.3 million, which resulted in an effective tax rate of ~~27.7%~~26.6% for the ~~first~~third quarter of 2019. The increase in the effective tax rate for the third quarter of 2020 was due primarily to the lower percentage of the total of income on BOLI and tax-exempt interest to pre-tax income in the third quarter of 2020 compared to the third quarter of 2019.

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019

Income tax expense was $4.5 million for the nine months ended September 30, 2020, which resulted in an effective tax rate of 27.1%, compared to income tax expense of $3.9 million, which resulted in an effective tax rate of 27.2% for the nine months ended September 30, 2019. The reduction in the effective tax rate for 2020 was due primarily to the effect of non-deductible merger expenses in the 2019 period.

FINANCIAL CONDITION

~~March 31,~~September 30, 2020 compared to December 31, 2019

Total consolidated assets were ~~$1.61~~$1.84 billion at ~~March 31,~~September 30, 2020, representing an increase of ~~$24.6~~$257.8 million from total consolidated assets of $1.59 billion at December 31, 2019. This increase was due primarily to a ~~$19.7~~$239.7 million increase in total ~~investment securities and~~loans, a ~~$5.8~~$22.3 million increase in loans held for ~~sale.~~sale and a $5.2 million increase in total cash and cash equivalents partially offset by a $9.5 million decrease in total investment securities. The increase in assets was funded primarily by a ~~$20.7~~$233.7 million increase in deposits and a ~~$2.1~~$13.8 million increase in short-term borrowings.

Cash and Cash Equivalents

Cash and cash equivalents totaled ~~$12.0~~$20.1 million at ~~March 31,~~September 30, 2020 compared to $14.8 million at December 31, 2019, representing ~~a decrease~~an increase of ~~$2.8~~$5.2 million. The ~~decrease~~increase in cash and cash equivalents reflects ~~a short-term decrease in interest-earning deposits, partially offset by~~ an increase in cash and due from banks, aspartially offset by a ~~result~~decrease in interest-earning deposits, due to the timing of ~~current market conditions.~~cash flows.

Loans Held for Sale

Loans held for sale were ~~$11.8~~$28.2 million at ~~March 31,~~September 30, 2020 compared to $5.9 million at December 31, ~~2019.~~2019, representing an increase of $22.3 million. The amount of loans held for sale varies from period to period due to changes in the amount and timing of sales of residential mortgage loans and SBA guaranteed commercial loans.

Investment Securities

Investment securities represented approximately ~~15.7%~~12.1% of total assets at ~~March 31,~~September 30, 2020 and approximately 14.7% of total assets at December 31, 2019. Total investment securities ~~increased $19.7~~decreased $9.5 million to ~~$252.1~~$222.9 million at ~~March 31,~~September 30, 2020 from $232.4 million at December 31, 2019. Purchases of investment securities totaled ~~$35.1~~$56.1 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and proceeds from sales, calls, maturities and payments totaled ~~$14.9~~$66.7 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 ~~March 31,~~September 30, 2020, securities available for sale were ~~$163.7~~$135.1 million, ~~an increase~~representing a decrease of ~~$7.9~~$20.7 million ~~or 5.1%, compared to~~from securities available for sale of $155.8 million at December 31, 2019.

At ~~March 31,~~September 30, 2020, the securities available for sale portfolio had net unrealized gains of ~~$226,000~~$2.4 million compared to net unrealized gains of $414,000 at December 31, 2019. These net unrealized gains were reflected, net of tax, in shareholders’ equity as a component of accumulated other comprehensive 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 ~~March 31,~~September 30, 2020, securities held to maturity were ~~$88.4~~$87.8 million, representing an increase of ~~$11.8~~$11.2 million from $76.6 million at December 31, 2019. The fair value of the held to maturity portfolio was ~~$91.1~~$90.7 million at ~~March 31,~~September 30, 2020.

Loans

The loan portfolio, which represents the 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 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 ~~March 31,~~September 30, 2020 and December 31, 2019:

March 31, 2020 December 31, 2019
(Dollars in thousands) Amount % Amount %
Commercial real estate $ 576,886
47 % $ 567,655
47 %
Mortgage warehouse lines 224,793
19
236,672
20
Construction loans 145,599
12
148,939
12
Commercial business 150,068
12
139,271
11
Residential real estate 89,347
7
90,259
7
Loans to individuals 30,556
3
32,604
3
Other loans 141
—
137
—
Total loans 1,217,390
100 % 1,215,537
100 %
Deferred loan costs, net 417
491

Total loans, including deferred loans costs, net $ 1,217,807
$ 1,216,028


	September 30, 2020				December 31, 2019
(Dollars in thousands)	Amount		%		Amount		%
Commercial real estate	$	615,957	42	%	$	567,655	47	%
Mortgage warehouse lines	374,007		26		236,672		20
Construction loans	141,583		10		148,939		12
Commercial business	210,004		14		139,271		11
Residential real estate	88,206		6		90,259		7
Loans to individuals	27,432		2		32,604		3
Other loans	122		—		137		—
Total loans	1,457,311		100	%	1,215,537		100	%
Deferred loan (fees) costs, net	(1,627)				491
Total loans, including deferred loans (fees) costs, net	$	1,455,684			$	1,216,028

Total loans ~~remained relatively steady, increasing only $1.8~~increased $239.7 million, or ~~0.1%~~19.7%, to ~~$1.2~~$1.5 billion at ~~March 31,~~September 30, 2020 compared to $1.2 billion at December 31, 2019. Commercial business loans increased $70.7 million, which included $75.6 million in SBA PPP loans, mortgage warehouse loans increased $137.3 million and commercial real estate loans increased ~~by $10.8 million and $9.2 million, respectively.~~$48.3 million. Partially offsetting these increases, ~~mortgage warehouse lines and~~ construction loans decreased ~~$11.9~~$7.4 million, loans to individuals decreased $5.2 million and ~~$3.3 million, respectively.~~residential real estate loans decreased $2.1 million.

Commercial real estate loans totaled ~~$576.9~~$616.0 million at ~~March 31,~~September 30, 2020, representing an increase of ~~$9.2~~$48.3 million compared to $567.7 million at December 31, 2019. Commercial real estate loans consist primarily of loans to businesses that are collateralized by real estate assets employed in the operation of the business and loans to real estate investors to finance the acquisition and/or improvement of ~~owned~~ income-producing commercial properties.

The Bank’s mortgage warehouse funding group provides revolving lines of credit that are available to licensed mortgage banking companies. The warehouse line of credit is used by the mortgage banker to finance the origination of one-to-four family residential mortgage loans that are pre-sold to the secondary mortgage market, which includes state and national banks, national mortgage banking firms, insurance companies and government-sponsored enterprises, including the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. On average, an advance under the warehouse line of credit remains outstanding for a period of less than 30 days, with repayment coming directly from the sale of the loan into the secondary mortgage market. The Bank collects interest and a transaction fee at the time of repayment. Mortgage warehouse loans totaled ~~$224.8~~$374.0 million at ~~March 31,~~September 30, 2020 compared to $236.7 million at December 31, 2019. In the first ~~quarter~~nine months of 2020, ~~$855.6 million~~$3.6 billion of residential mortgage loans were financed through the mortgage warehouse funding group compared to ~~$644.0 million~~$2.5 billion during the first ~~quarter~~nine months of 2019. The higher level of funding activity was due primarily to the lower interest rate environment in 2020 than in 2019, which resulted in an increase in refinance activity in 2020 compared to 2019.

Construction loans totaled ~~$145.6~~$141.6 million at ~~March 31,~~September 30, 2020 compared to $148.9 million at December 31, 2019. Construction financing is provided to businesses to expand their facilities and operations and to real estate developers for the acquisition, development and construction of residential properties and income-producing properties. First mortgage construction loans are made to developers and builders for single family homes or multi-family buildings that are 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. In many cases the Bank also provides the mortgage loan to the customer upon completion of the project.

Commercial business loans totaled ~~$150.1~~$210.0 million at ~~March 31,~~September 30, 2020 compared to $139.3 million at December 31, 2019. As a SBA preferred lender, the Bank is participating in the SBA PPP loan program, which was established under the CARES Act and has funded $75.6 million in SBA PPP loans for the nine months ended September 30, 2020. Commercial business loans consist primarily of loans to small and middle market businesses and are typically working capital loans used to finance inventory, receivables or equipment needs. These loans are generally secured by business assets of the commercial borrower.

Residential real estate loans totaled ~~$89.3~~$88.2 million at ~~March 31,~~September 30, 2020 compared to $90.3 million at December 31, 2019. Loans to individuals, which are comprised primarily of home equity loans, totaled ~~$30.6~~$27.4 million at ~~March 31,~~September 30, 2020 compared to $32.6 million at December 31, 2019.

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

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

Non-Performing Assets

Non-performing assets consist of non-performing loans and other real estate owned. Non-performing loans are composed of (1) loans on 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, 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 have not performed in accordance with the restructured terms. Loan payments that are deferred due to COVID-19 continue to accrue interest and are not presented as past due in the table below.

The Bank’s policy with regard to non-accrual loans is that, generally, loans are placed on 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 ~~March 31,~~September 30, 2020, non-performing loans increased by ~~$8.7~~$12.7 million to ~~$13.2~~$17.2 million from $4.5 million at December 31, 2019, and the ratio of non-performing loans to total loans increased to ~~1.08%~~1.18% at ~~March 31,~~September 30, 2020 compared to 0.37% at December 31, 2019. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, ~~$513,000~~$2.2 million of non-performing loans were resolved, ~~$165,000 of loans~~net charge-offs were ~~charged-off~~$161,000 and ~~$9.2~~$14.9 million of loans were placed on ~~non-accrual. During~~non-accrual status. For the ~~first quarter of~~nine months ended September 30, 2020, a $7.5 million participation in a construction loan, ~~$1.5~~$6.9 million in commercial real estate loans, a $84,000 in commercial business ~~loans and $108,000~~loan, $248,000 of loans to individuals and a $160,000 residential loan were placed on ~~non-accrual.~~non-accrual status.

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


(Dollars in thousands)	March 31, 2020			December 31, 2019			(Dollars in thousands)	September 30, 2020			December 31, 2019
Non-performing loans:							Non-performing loans:
Loans 90 days or more past due and still accruing	$	—		$	—		Loans 90 days or more past due and still accruing	$	92		$	—
Non-accrual loans	13,198			4,497			Non-accrual loans	17,153			4,497
Total non-performing loans	13,198			4,497			Total non-performing loans	17,245			4,497
Other real estate owned	470			571			Other real estate owned	267			571
Other repossessed assets							Other repossessed assets	—			—
Total non-performing assets	13,668			5,068			Total non-performing assets	17,512			5,068
Performing troubled debt restructurings	6,112			6,132			Performing troubled debt restructurings	6,092			6,132
Performing troubled debt restructurings and total non-performing assets	$	19,780		$	11,200		Performing troubled debt restructurings and total non-performing assets	$	23,604		$	11,200

Non-performing loans to total loans	1.08		%	0.37		%	Non-performing loans to total loans	1.18		%	0.37		%
Non-performing loans to total loans excluding mortgage warehouse lines	1.33		%	0.46		%	Non-performing loans to total loans excluding mortgage warehouse lines	1.59		%	0.46		%
Non-performing assets to total assets	0.85		%	0.32		%	Non-performing assets to total assets	0.95		%	0.32		%
Non-performing assets to total assets excluding mortgage warehouse lines	0.99		%	0.38		%	Non-performing assets to total assets excluding mortgage warehouse lines	1.19		%	0.38		%
Total non-performing assets and performing troubled debt restructurings to total assets	1.23		%	0.71		%	Total non-performing assets and performing troubled debt restructurings to total assets	1.28		%	0.71		%



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



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



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


				Page

PART I.		FINANCIAL INFORMATION

			~~Page~~

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

Item 1.	Financial Statements		1

		Consolidated Balance Sheets at ~~March 31,~~September 30, 2020 and December 31, 2019 (unaudited)		1

		Consolidated Statements of Income for the Three and Nine Months Ended ~~March 31,~~September 30, 2020 and ~~March 31,~~September 30, 2019 (unaudited)		2

		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended ~~March 31,~~September 30, 2020 and ~~March 31,~~September 30, 2019 (unaudited)		3

		Consolidated Statements of Changes in Shareholders' Equity for the Three and Nine Months Ended ~~March 31,~~September 30, 2020 and ~~March 31,~~September 30, 2019 (unaudited)		4

		Consolidated Statements of Cash Flows for the ~~Three~~Nine Months Ended ~~March 31,~~September 30, 2020 and ~~March 31,~~September 30, 2019 (unaudited)		5

		Notes to Consolidated Financial Statements (unaudited)		67

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		3538

Item 3.		Quantitative and Qualitative Disclosures About Market Risk		5766

Item 4.		Controls and Procedures		5867

PART II.		OTHER INFORMATION

Item 1.		Legal Proceedings		5968

Item 1A.		Risk Factors		5968

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		6068

Item 3.		Defaults Upon Senior Securities		6168



Item 4.	Mine Safety Disclosures	6168

Item 5.	Other Information	6168

Item 6.	Exhibits	6269

SIGNATURES		6370



☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934



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



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




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


	Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019			2020		2019		2020		2019
INTEREST INCOME					INTEREST INCOME
Loans, including fees	$	14,805	$	12,157	Loans, including fees	$	16,477	$	13,316	$	46,656	$	38,342
Securities:					Securities:
Taxable	1,056		1,270		Taxable	725		1,130		2,633		3,615
Tax-exempt	438		441		Tax-exempt	504		393		1,438		1,256
Federal funds sold and short-term investments	89		47		Federal funds sold and short-term investments	2		35		95		129
Total interest income	16,388		13,915		Total interest income	17,708		14,874		50,822		43,342
INTEREST EXPENSE					INTEREST EXPENSE
Deposits	3,238		2,317		Deposits	2,171		2,904		8,133		7,892
Borrowings	62		173		Borrowings	95		268		205		698
Redeemable subordinated debentures	152		198		Redeemable subordinated debentures	90		185		348		575
Total interest expense	3,452		2,688		Total interest expense	2,356		3,357		8,686		9,165
Net interest income	12,936		11,227		Net interest income	15,352		11,517		42,136		34,177
PROVISION FOR LOAN LOSSES	895		300		PROVISION FOR LOAN LOSSES	2,320		350		5,340		1,050
Net interest income after provision for loan losses	12,041		10,927		Net interest income after provision for loan losses	13,032		11,167		36,796		33,127
NON-INTEREST INCOME					NON-INTEREST INCOME
Service charges on deposit accounts	213		166		Service charges on deposit accounts	126		165		471		490
Gain on sales of loans	1,470		1,045		Gain on sales of loans	3,396		1,351		6,987		3,556
Income on bank-owned life insurance	180		139		Income on bank-owned life insurance	188		149		632		437
Gain on sales of securities	8		—
Gain on sales and calls of securities					Gain on sales and calls of securities	79		16		97		16
Other income	585		516		Other income	947		525		2,105		1,743
Total non-interest income	2,456		1,866		Total non-interest income	4,736		2,206		10,292		6,242
NON-INTEREST EXPENSES					NON-INTEREST EXPENSES
Salaries and employee benefits	6,169		4,963		Salaries and employee benefits	7,106		5,231		19,276		15,472
Occupancy expense	1,170		1,021		Occupancy expense	1,222		972		3,597		2,984
Data processing expenses	446		348		Data processing expenses	486		379		1,402		1,072
FDIC insurance expense	34		100		FDIC insurance expense	225		(47)		484		113
Other real estate owned expenses	17		48		Other real estate owned expenses	27		52		58		134
Merger-related expenses					Merger-related expenses	0		302		64		575
Other operating expenses	1,957		1,614		Other operating expenses	1,896		1,546		5,711		4,746
Total non-interest expenses	9,793		8,094		Total non-interest expenses	10,962		8,435		30,592		25,096
Income before income taxes	4,704		4,699		Income before income taxes	6,806		4,938		16,496		14,273
INCOME TAXES	1,283		1,302		INCOME TAXES	1,896		1,315		4,475		3,883
Net income	$	3,421	$	3,397	Net income	$	4,910	$	3,623	$	12,021	$	10,390
EARNINGS PER COMMON SHARE					EARNINGS PER COMMON SHARE
Basic	$	0.34	$	0.39	Basic	$	0.48	$	0.42	$	1.18	$	1.20
Diluted	$	0.33	$	0.39	Diluted	$	0.48	$	0.42	$	1.17	$	1.19
WEIGHTED AVERAGE SHARES OUTSTANDING					WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	10,200,836		8,624,088		Basic	10,230,488		8,666,251		10,213,601		8,641,684
Diluted	10,262,047		8,694,004		Diluted	10,268,951		8,722,349		10,260,477		8,698,959


	Common Stock		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance, July 1, 2019	$	80,190	$	55,224	$	(368)	$	29	$	135,075
Net income	—		3,623		—		—		3,623
Exercise of stock options and issuance of restricted shares (8,358 shares and 25,350 shares, respectively)	60		—		—		—		60
Share-based compensation	268		—		—		—		268
Cash dividends ($0.075 per share)	—		(649)		—		—		(649)
Other comprehensive income	—		—		—		150		150
Balance, September 30, 2019	$	80,518	$	58,198	$	(368)	$	179	$	138,527

Balance, July 1, 2020	$	110,546	$	66,067	$	(503)	$	1,374	$	177,484
Net income	—		4,910		—		—		4,910
Exercise of stock options and issuance of restricted shares (755 shares and 26,100 shares, respectively)	5		—		—		—		5
Share-based compensation	274		—		—		—		274
Cash dividends ($0.09 per share)	—		(919)		—		—		(919)
Treasury stock purchase (8,383 shares)					(108)				(108)
Other comprehensive income	—		—		—		361		361
Balance, September 30, 2020	$	110,825	$	70,058	$	(611)	$	1,735	$	182,007


Supplemental Disclosures of Cash Flow Information
Cash paid during the period for -
Interest	$	9,209	$	8,791
Income taxes	4,311		4,528
Noncash items:
Right-of-use assets	$	250	$	15,080
Lease liability	250		15,699


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


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


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



1^ST CONSTITUTION BANCORP


(Dollars in thousands)	Amount
Year
2020	$	62
2021	236
2022	209
2023	182
2024	156
Thereafter	378
Total	$	1,223



(Dollars in thousands)	Amount
Year
2020	$	262
2021	236
2022	209
2023	182
2024	156
Thereafter	378
Total	$	1,423


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


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


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


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


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


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


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



(Dollars in thousands)	Amount
Consideration paid:
Company stock issued	$	29,175
Cash payment	24,233
Cash payment for unexercised outstanding stock options	925
Total consideration paid	$	54,333


Recognized amounts of identifiable assets acquired and liabilities assumed at fair value:
Cash and cash equivalents	$	32,599
Investment securities available for sale	26,440
Loans	205,833
Premises and equipment, net	4,433
Core deposit intangible asset	1,467
Bank-owned life insurance	7,250
Right-of-use assets	3,226
Accrued interest receivable	778
Other real estate owned	605
Other assets	2,518
Deposits	(249,836		)
Lease liability	(3,226		)
Other liabilities	(948		)
Total identifiable assets and liabilities, net	$	31,139

Goodwill recorded from Shore merger	$	23,194


	At November 8, 2019
(Dollars in thousands)	Loans acquired with no credit quality deterioration		Loans acquired with credit quality deterioration		Total
Commercial
Construction	$	9,733	$	0	$	9,733
Commercial real estate	135,482		4,071		139,553
Commercial business	12,027		0		12,027
Residential real estate	36,849		500		37,349
Consumer	7,171		0		7,171
Total loans	$	201,262	$	4,571	$	205,833


(Dollars in thousands)	Acquired Credit Impaired Loans
Contractually required principal and interest at acquisition	$	7,584
Contractual cash flows not expected to be collected (non-accretable difference)	2,355

Expected cash flows at acquisition	5,229
Interest component of expected cash flows (accretable difference)	658

Fair value of acquired loans	$	4,571


(Dollars in thousands)	Shore Nine Months Ended September 30, 2020		Actual for the Nine Months Ended September 30, 2020		Pro Forma for the Three Months Ended September 30, 2019		Pro Forma for the Nine Months Ended September 30, 2019
Net interest income	$	7,185	$	42,136	$	14,161	$	41,936
Non-interest income	284		10,292		2,373		6,748
Non-interest expenses	2,869		30,528		9,312		29,048
Income taxes	1,108		4,494		1,731		4,939
Net income	2,997		12,066		5,171		13,528



(Dollars in thousands)	Shore Three Months Ended 3/31/2020		Actual for the Three Months Ended 3/31/2020		Pro Forma for the Three Months Ended 3/31/2019
Net interest income	$	2,065	$	12,936	$	13,736
Non-interest income	113		2,456		2,044
Non-interest expenses	979		9,793		9,624
Income taxes	369		1,283		1,632
Net income	830		3,421		4,224


	September 30, 2020
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)	$	3,574	$	1	$	(6)	$	3,569
Residential collateralized mortgage obligations - GSE	41,047		533		(159)		41,421
Residential mortgage backed securities - GSE	14,478		611		(7)		15,082
Obligations of state and political subdivisions	28,538		1,026		0		29,564
Trust preferred debt securities - single issuer	1,493		0		(105)		1,388
Corporate debt securities	19,500		497		(72)		19,925
Other debt securities	24,112		323		(261)		24,174
Total	$	132,742	$	2,991	$	(610)	$	135,123


	September 30, 2020
(Dollars in thousands)	Amortized Cost		Fair Value		Yield
Available for sale
Due in one year or less	$	5,047	$	5,041	1.11	%
Due after one year through five years	28,103		29,194		2.38	%
Due after five years through ten years	33,831		34,088		1.77	%
Due after ten years	65,761		66,800		2.15	%
Total	$	132,742	$	135,123	2.07	%

	Carrying Value		Fair Value		Yield
Held to maturity
Due in one year or less	$	18,359	$	18,411	2.43	%
Due after one year through five years	6,279		6,464		4.56	%
Due after five years through ten years	16,842		17,565		2.87	%
Due after ten years	46,331		48,295		2.81	%
Total	$	87,811	$	90,735	2.87	%


	September 30, 2020
		Less than 12 months				12 months or longer				Total
(Dollars in thousands)	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. Government sponsored entities (GSE) and agencies	1	$	588	$	(6)	$	0	$	0	$	588	$	(6)
Residential collateralized mortgage obligations - GSE	7	7,948		(37)		11,610		(122)		19,558		(159)
Residential mortgage backed securities - GSE	3	212		(7)		0		0		212		(7)
Obligations of state and political subdivisions	3	2,782		(10)		0		0		2,782		(10)
Trust preferred debt securities - single issuer	2	0		0		1,389		(105)		1,389		(105)
Corporate debt securities	3	2,980		(19)		4,947		(53)		7,927		(72)
Other debt securities	9	0		0		14,822		(261)		14,822		(261)
Total temporarily impaired securities	28	$	14,510	$	(79)	$	32,768	$	(541)	$	47,278	$	(620)


(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	$	2,290	$	3,264	$	4,263	$	9,817	$	606,140	$	615,957	$	0	$	8,083
Mortgage warehouse lines	0		0		0		0		374,007		374,007		0		0
Construction	0		0		7,500		7,500		134,083		141,583		0		7,500
Commercial business	961		118		299		1,378		208,626		210,004		0		444
Residential real estate	310		882		754		1,946		86,260		88,206		92		817
Loans to individuals	0		0		300		300		27,132		27,432		0		309
Other loans	0		0		0		0		122		122		0		0
Total loans	$	3,561	$	4,264	$	13,116	$	20,941	$	1,436,370	1,457,311		$	92	$	17,153
Deferred loan (fees) costs, net											(1,627)
Total loans											$	1,455,684


(Dollars in thousands)
Commercial Credit Exposure - By Internally Assigned Grade	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate
Pass	$	134,083	$	199,857	$	576,015	$	373,070	$	85,118
Special Mention	0		3,117		14,930		937		1,243
Substandard	7,500		6,794		25,012		0		1,845
Doubtful	0		236		0		0		0
Total	$	141,583	$	210,004	$	615,957	$	374,007	$	88,206


Consumer Credit Exposure - By Payment Activity	Loans To Individuals		Other loans
Performing	$	27,123	$	122
Non-performing	309		0
Total	$	27,432	$	122


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 - July 1, 2020																								Balance - July 1, 2020	$	1,661	$	1,780	$	6,619	$	1,337	$	506	$	182	$	0	$	41	$	12,126
Provision charged/(credited) to operations																								Provision charged/(credited) to operations	1,558		791		(549)		370		18		0		0		132		2,320
Loans charged off																								Loans charged off	0		0		0		0		0		(3)		0		0		(3)
Recoveries of loans charged off																								Recoveries of loans charged off	0		0		7		0		0		0		0		0		7
Balance - September 30, 2020																								Balance - September 30, 2020	$	3,219	$	2,571	$	6,077	$	1,707	$	524	$	179	$	0	$	173	$	14,450

Balance - July 1, 2019																								Balance - July 1, 2019	$	1,760	$	1,546	$	3,754	$	933	$	480	$	142	$	0	$	26	$	8,641
Provision charged/(credited) to operations																								Provision charged/(credited) to operations	(175)		(148)		533		204		(74)		8		0		2		350
Loans charged off																								Loans charged off	0		0		(18)		0		0		0		0		0		(18)
Recoveries of loans charged off																								Recoveries of loans charged off	0		0		0		0		0		4		0		0		4
Balance - September 30, 2019																								Balance - September 30, 2019	$	1,585	$	1,398	$	4,269	$	1,137	$	406	$	154	$	0	$	28	$	8,977

(Dollars in thousands)	Construction		Commercial Business			Commercial Real Estate		Mortgage Warehouse Lines			Residential Real Estate			Loans to Individuals		Other loans		Unallocated			Total			(Dollars in thousands)	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate		Loans to Individuals		Other Loans		Unallocated		Total
Balance - January 1, 2020	$	1,389	$	1,409		$	4,524	$	1,083		$	412		$	185	$	—	$	269		$	9,271		Balance - January 1, 2020	$	1,389	$	1,409	$	4,524	$	1,083	$	412	$	185	$	0	$	269	$	9,271
Provision charged/(credited) to operations	317		527			276		(56		)	18			3		—		(190		)	895			Provision charged/(credited) to operations	1,830		1,327		1,546		624		112		(3)		0		(96)		5,340
Loans charged off	—		(165		)	—		—			—			—		—		—			(165		)	Loans charged off	0		(165)		0		0		0		(3)		0		0		(168)
Recoveries of loans charged off	—		—			—		—			—			—		—		—			—			Recoveries of loans charged off	0		0		7		0		0		0		0		0		7
Balance - March 31, 2020	$	1,706	$	1,771		$	4,800	$	1,027		$	430		$	188	$	—	$	79		$	10,001
Balance - September 30, 2020																								Balance - September 30, 2020	$	3,219	$	2,571	$	6,077	$	1,707	$	524	$	179	$	0	$	173	$	14,450

January 1, 2019	$	1,732	$	1,829		$	3,439	$	731		$	431		$	148	$	—	$	92		$	8,402		January 1, 2019	$	1,732	$	1,829	$	3,439	$	731	$	431	$	148	$	0	$	92	$	8,402
Provision charged/(credited) to operations	62		(214		)	201		(149		)	(5		)	5		—		400			300			Provision charged/(credited) to operations	(147)		(86)		923		406		(25)		0		43		(64)		1,050
Loans charged off	—		—			—		—			—			—		—		—			—			Loans charged off	0		(345)		(93)		0		0		0		(43)		0		(481)
Recoveries of loans charged off	—		—			—		—			—			2		—		—			2			Recoveries of loans charged off	0		0		0		0		0		6		0		0		6
Balance - March 31, 2019	$	1,794	$	1,615		$	3,640	$	582		$	426		$	155	$	—	$	492		$	8,704
Balance - September 30, 2019																								Balance - September 30, 2019	$	1,585	$	1,398	$	4,269	$	1,137	$	406	$	154	$	0	$	28	$	8,977



							Three Months Ended March 31, 2020
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no allowance:
Commercial:
Construction	$	9,307	$	9,307	$	—	$	3,102	$	25
Commercial Business	1,658		3,190		—		1,095		18
Commercial Real Estate	8,354		9,510		—		7,792		94
Mortgage Warehouse Lines	—		—		—		—		—
Subtotal	19,319		22,007		—		11,989		137
Residential Real Estate	1,201		1,460		—		1,204		9
Consumer:
Loans to Individuals	525		640		—		680		—
Other loans	—		—		—		—		—
Subtotal	525		640		—		680		—
With no allowance:	$	21,045	$	24,107	$	—	$	13,873	$	146

With an allowance:
Commercial:
Construction	$	—	$	—	$	—	$	1,204	$	—
Commercial Business	63		63		19		656		—
Commercial Real Estate	4,208		5,516		72		4,552		50
Mortgage Warehouse Lines	—		—		—		—		—
Subtotal	4,271		5,579		91		6,412		50
Residential Real Estate	—		—		—		—		—
Consumer:
Loans to Individuals	—		—		—		—		—
Other loans	—		—		—		—		—
Subtotal	—		—		—		—		—
With an allowance:	$	4,271	$	5,579	$	91	$	6,412	$	50
Total:
Construction	9,307		9,307		—		4,306		25
Commercial Business	1,721		3,253		19		1,751		18
Commercial Real Estate	12,562		15,026		72		12,344		144
Mortgage Warehouse Lines	—		—		—		—		—
Residential Real Estate	1,201		1,460		—		1,204		9
Consumer	525		640		—		680		—
Total	$	25,316	$	29,686	$	91	$	20,285	$	196