UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~September 30, 2020~~March 31, 2021


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

For the transition period from _____ to _____

Commission file Number: 000-32891


1ST CONSTITUTION BANCORP

(Exact Name of Registrant as Specified in Its Charter)


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

2650 Route 130

P.O. Box 634

Cranbury

New Jersey

08512

(Address of Principal Executive Offices)

(Zip Code)


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



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

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


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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒☐

Non-accelerated filer

☐☒

Smaller reporting company

☒

Emerging growth company

☐

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

☐

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

As of ~~November 3, 2020,~~May 6, 2021, there were ~~10,237,851~~ 10,265,563 shares of the registrant’s common stock, no par value, outstanding.

1ST CONSTITUTION BANCORP

FORM 10-Q

INDEX


		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Consolidated Balance Sheets at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (unaudited)	1

	Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~ (unaudited)	2

	Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~ (unaudited)	3

	Consolidated Statements of Changes in Shareholders' Equity for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~ (unaudited)	4

	Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~ (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	76

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3831

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6654

Item 4.	Controls and Procedures	6755

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	6856

Item 1A.	Risk Factors	6856

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6856

Item 3.	Defaults Upon Senior Securities	6856



Item 4.	Mine Safety Disclosures	6856

Item 5.	Other Information	6856

Item 6.	Exhibits	6957

SIGNATURES		7058

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

1ST Constitution Bancorp

Consolidated Balance Sheets

(Dollars in thousands)

(Unaudited)


		September 30, 2020		December 31, 2019			March 31, 2021		December 31, 2020
ASSETS	ASSETS					ASSETS
Cash and due from banks	Cash and due from banks	$	8,811	$	2,547	Cash and due from banks	$	7,483	$	3,661
Interest-earning deposits	Interest-earning deposits	11,244		12,295		Interest-earning deposits	158,418		18,334
Total cash and cash equivalents	Total cash and cash equivalents	20,055		14,842		Total cash and cash equivalents	165,901		21,995
Investment securities	Investment securities					Investment securities
Available for sale, at fair value	Available for sale, at fair value	135,123		155,782		Available for sale, at fair value	130,897		125,197
Held to maturity (fair value of $90,735 and $78,223 at September 30, 2020 and December 31, 2019, respectively)		87,811		76,620
Held to maturity (fair value of $97,899 and $95,640 at March 31, 2021 and December 31, 2020, respectively)						Held to maturity (fair value of $97,899 and $95,640 at March 31, 2021 and December 31, 2020, respectively)	95,371		92,552
Total investment securities	Total investment securities	222,934		232,402		Total investment securities	226,268		217,749
Loans held for sale	Loans held for sale	28,196		5,927		Loans held for sale	15,679		29,782
Loans	Loans	1,455,684		1,216,028		Loans	1,294,988		1,433,706
Less: allowance for loan losses	Less: allowance for loan losses	(14,450)		(9,271)		Less: allowance for loan losses	(17,044)		(15,641)
Net loans	Net loans	1,441,234		1,206,757		Net loans	1,277,944		1,418,065
Premises and equipment, net	Premises and equipment, net	14,503		15,262		Premises and equipment, net	14,207		14,345
Right-of-use assets	Right-of-use assets	16,910		17,957		Right-of-use assets	16,121		16,548
Accrued interest receivable	Accrued interest receivable	5,689		4,945		Accrued interest receivable	4,663		5,273
Bank-owned life insurance	Bank-owned life insurance	37,131		36,678		Bank-owned life insurance	37,490		37,316
Other real estate owned	Other real estate owned	267		571		Other real estate owned	48		92
Goodwill and intangible assets	Goodwill and intangible assets	36,471		36,779		Goodwill and intangible assets	35,922		36,003
Other assets	Other assets	20,640		14,142		Other assets	11,988		9,741
Total assets	Total assets	$	1,844,030	$	1,586,262	Total assets	$	1,806,231	$	1,806,909
LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES	LIABILITIES					LIABILITIES
Deposits	Deposits					Deposits
Non-interest bearing	Non-interest bearing	$	426,528	$	287,555	Non-interest bearing	$	469,339	$	425,210
Interest bearing	Interest bearing	1,084,505		989,807		Interest bearing	1,091,880		1,137,629
Total deposits	Total deposits	1,511,033		1,277,362		Total deposits	1,561,219		1,562,839
Short-term borrowings	Short-term borrowings	105,867		92,050		Short-term borrowings	0		9,825
Redeemable subordinated debentures	Redeemable subordinated debentures	18,557		18,557		Redeemable subordinated debentures	18,557		18,557
Accrued interest payable	Accrued interest payable	1,069		1,592		Accrued interest payable	699		851
Lease liability	Lease liability	17,714		18,617		Lease liability	16,993		17,387
Accrued expenses and other liabilities	Accrued expenses and other liabilities	7,783		7,506		Accrued expenses and other liabilities	17,500		9,793
Total liabilities	Total liabilities	1,662,023		1,415,684		Total liabilities	1,614,968		1,619,252
SHAREHOLDERS' EQUITY	SHAREHOLDERS' EQUITY					SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 shares authorized; NaN issued	Preferred stock, no par value; 5,000,000 shares authorized; NaN issued	0		0		Preferred stock, no par value; 5,000,000 shares authorized; NaN issued	0		0
Common stock, no par value; 30,000,000 shares authorized; 10,285,229 and 10,224,974 shares issued and 10,237,520 and 10,191,676 shares outstanding as of September 30, 2020 and December 31, 2019, respectively		110,825		109,964
Common stock, no par value; 30,000,000 shares authorized; 10,320,866 and 10,293,535 shares issued and 10,265,163 and 10,245,826 shares outstanding as of March 31, 2021 and December 31, 2020, respectively						Common stock, no par value; 30,000,000 shares authorized; 10,320,866 and 10,293,535 shares issued and 10,265,163 and 10,245,826 shares outstanding as of March 31, 2021 and December 31, 2020, respectively	111,460		111,135
Retained earnings	Retained earnings	70,058		60,791		Retained earnings	79,208		75,201
Treasury stock, 47,709 and 33,298 shares at September 30, 2020 and December 31, 2019, respectively		(611)		(368)
Treasury stock, 55,703 and 47,709 shares at March 31, 2021 and December 31, 2020, respectively						Treasury stock, 55,703 and 47,709 shares at March 31, 2021 and December 31, 2020, respectively	(739)		(611)
Accumulated other comprehensive income	Accumulated other comprehensive income	1,735		191		Accumulated other comprehensive income	1,334		1,932
Total shareholders' equity	Total shareholders' equity	182,007		170,578		Total shareholders' equity	191,263		187,657
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	1,844,030	$	1,586,262	Total liabilities and shareholders' equity	$	1,806,231	$	1,806,909

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

1ST Constitution Bancorp

Consolidated Statements of Income

(Dollars in thousands, except per share data)

(Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019				2021		2020
INTEREST INCOME	INTEREST INCOME									INTEREST INCOME
Loans, including fees	Loans, including fees	$	16,477	$	13,316	$	46,656	$	38,342	Loans, including fees		$	15,925	$	14,805
Securities:	Securities:									Securities:
Taxable	Taxable	725		1,130		2,633		3,615		Taxable		520		1,056
Tax-exempt	Tax-exempt	504		393		1,438		1,256		Tax-exempt		478		438
Federal funds sold and short-term investments	Federal funds sold and short-term investments	2		35		95		129		Federal funds sold and short-term investments		37		89
Total interest income	Total interest income	17,708		14,874		50,822		43,342		Total interest income		16,960		16,388
INTEREST EXPENSE	INTEREST EXPENSE									INTEREST EXPENSE
Deposits	Deposits	2,171		2,904		8,133		7,892		Deposits		1,598		3,238
Borrowings	Borrowings	95		268		205		698		Borrowings		0		62
Redeemable subordinated debentures	Redeemable subordinated debentures	90		185		348		575		Redeemable subordinated debentures		84		152
Total interest expense	Total interest expense	2,356		3,357		8,686		9,165		Total interest expense		1,682		3,452
Net interest income	Net interest income	15,352		11,517		42,136		34,177		Net interest income		15,278		12,936
PROVISION FOR LOAN LOSSES	PROVISION FOR LOAN LOSSES	2,320		350		5,340		1,050		PROVISION FOR LOAN LOSSES		1,400		895
Net interest income after provision for loan losses	Net interest income after provision for loan losses	13,032		11,167		36,796		33,127		Net interest income after provision for loan losses		13,878		12,041
NON-INTEREST INCOME	NON-INTEREST INCOME									NON-INTEREST INCOME
Service charges on deposit accounts	Service charges on deposit accounts	126		165		471		490		Service charges on deposit accounts		117		213
Gain on sales of loans	Gain on sales of loans	3,396		1,351		6,987		3,556		Gain on sales of loans		3,095		1,470
Income on bank-owned life insurance	Income on bank-owned life insurance	188		149		632		437		Income on bank-owned life insurance		174		180
Gain on sales and calls of securities	Gain on sales and calls of securities	79		16		97		16		Gain on sales and calls of securities		2		8
Other income	Other income	947		525		2,105		1,743		Other income		690		585
Total non-interest income	Total non-interest income	4,736		2,206		10,292		6,242		Total non-interest income		4,078		2,456
NON-INTEREST EXPENSES	NON-INTEREST EXPENSES									NON-INTEREST EXPENSES
Salaries and employee benefits	Salaries and employee benefits	7,106		5,231		19,276		15,472		Salaries and employee benefits		6,952		6,169
Occupancy expense	Occupancy expense	1,222		972		3,597		2,984		Occupancy expense		1,311		1,170
Data processing expenses	Data processing expenses	486		379		1,402		1,072		Data processing expenses		491		446
FDIC insurance expense	FDIC insurance expense	225		(47)		484		113		FDIC insurance expense		270		34
Other real estate owned expenses	Other real estate owned expenses	27		52		58		134		Other real estate owned expenses		52		17
Merger-related expenses		0		302		64		575

Other operating expenses	Other operating expenses	1,896		1,546		5,711		4,746		Other operating expenses		2,025		1,957
Total non-interest expenses	Total non-interest expenses	10,962		8,435		30,592		25,096		Total non-interest expenses		11,101		9,793
Income before income taxes	Income before income taxes	6,806		4,938		16,496		14,273		Income before income taxes		6,855		4,704
INCOME TAXES	INCOME TAXES	1,896		1,315		4,475		3,883		INCOME TAXES		1,926		1,283
Net income	Net income	$	4,910	$	3,623	$	12,021	$	10,390	Net income		$	4,929	$	3,421
EARNINGS PER COMMON SHARE	EARNINGS PER COMMON SHARE									EARNINGS PER COMMON SHARE
Basic	Basic	$	0.48	$	0.42	$	1.18	$	1.20	Basic		$	0.48	$	0.34
Diluted	Diluted	$	0.48	$	0.42	$	1.17	$	1.19	Diluted		$	0.48	$	0.33
WEIGHTED AVERAGE SHARES OUTSTANDING	WEIGHTED AVERAGE SHARES OUTSTANDING									WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	Basic	10,230,488		8,666,251		10,213,601		8,641,684		Basic		10,261,718		10,200,836
Diluted	Diluted	10,268,951		8,722,349		10,260,477		8,698,959		Diluted		10,307,559		10,262,047

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

1ST Constitution Bancorp

Consolidated Statements of Comprehensive Income

(Dollars in thousands)

(Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019				2021		2020

Net income	Net income	$	4,910	$	3,623	$	12,021	$	10,390	Net income		$	4,929	$	3,421
Other comprehensive income:
Unrealized holding gains on securities available for sale		435		200		1,964		2,631
Other comprehensive loss:										Other comprehensive loss:
Unrealized holding losses on securities available for sale										Unrealized holding losses on securities available for sale		(678)		(187)
Tax effect	Tax effect	(103)		(48)		(475)		(638)		Tax effect		163		46
Net of tax amount	Net of tax amount	332		152		1,489		1,993		Net of tax amount		(515)		(141)

Reclassification adjustment for losses (gains) on securities available for sale(1)		14		(16)		3		(16)
Reclassification adjustment for gains on securities available for sale(1)										Reclassification adjustment for gains on securities available for sale(1)		0		(1)
Tax effect (2)	Tax effect (2)	(4)		4		(1)		4		Tax effect (2)		0		0
Net of tax amount	Net of tax amount	10		(12)		2		(12)		Net of tax amount		0		(1)

Reclassification adjustment for unrealized impairment loss on held to maturity security(3)	Reclassification adjustment for unrealized impairment loss on held to maturity security(3)	6		2		14		6		Reclassification adjustment for unrealized impairment loss on held to maturity security(3)		6		3
Tax effect	Tax effect	(1)		0		(4)		(1)		Tax effect		(1)		(1)
Net of tax amount	Net of tax amount	5		2		10		5		Net of tax amount		5		2

Pension liability	Pension liability	70		56		211		167		Pension liability		(32)		56
Tax effect	Tax effect	(20)		(18)		(62)		(49)		Tax effect		8		(17)
Net of tax amount	Net of tax amount	50		38		149		118		Net of tax amount		(24)		39

Reclassification adjustment for actuarial gains for unfunded pension liability(4)	Reclassification adjustment for actuarial gains for unfunded pension liability(4)	(51)		(44)		(151)		(132)		Reclassification adjustment for actuarial gains for unfunded pension liability(4)		(89)		(44)
Tax effect (2)	Tax effect (2)	15		14		45		40		Tax effect (2)		25		13
Net of tax amount	Net of tax amount	(36)		(30)		(106)		(92)		Net of tax amount		(64)		(31)

Total other comprehensive income		361		150		1,544		2,012
Total other comprehensive loss										Total other comprehensive loss		(598)		(132)

Comprehensive income	Comprehensive income	$	5,271	$	3,773	$	13,565	$	12,402	Comprehensive income		$	4,331	$	3,289

(1) Included in gain on sales and calls of securities on the consolidated statements of income

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

(3) Included in investment securities held to maturity on the consolidated balance sheets

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

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

1ST Constitution Bancorp

Consolidated Statements of Changes in Shareholders’ Equity

For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

(Dollars in thousands)

(Unaudited)

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


	Common Stock		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance, January 1, 2020	$	109,964	$	60,791	$	(368)	$	191	$	170,578
Net income	—		3,421		—		—		3,421
Issuance of restricted shares (15,650 shares)	—		—		—		—		—
Share-based compensation	290		—		—		—		290
Cash dividends ($0.09 per share)	—		(917)		—		—		(917)
Treasury stock purchased (6,028 shares)	—		—		(135)		—		(135)
Other comprehensive loss	—		—		—		(132)		(132)
Balance, March 31, 2020	$	110,254	$	63,295	$	(503)	$	59	$	173,105

Balance, January 1, 2021	$	111,135	$	75,201	$	(611)	$	1,932	$	187,657
Net income	—		4,929		—		—		4,929
Exercise of stock options and issuance of restricted shares (6,481 shares and 20,850 shares, respectively)	54		—		—		—		54
Share-based compensation	271		—		—		—		271
Cash dividends ($0.09 per share)	—		(922)		—		—		(922)
Treasury stock purchase (7,994 shares)					(128)				(128)
Other comprehensive loss	—		—		—		(598)		(598)
Balance, March 31, 2021	$	111,460	$	79,208	$	(739)	$	1,334	$	191,263

Common
Stock Retained
Earnings Treasury
Stock Accumulated
Other
Comprehensive
Income (Loss) Total
Shareholders’
Equity
Balance, January 1, 2019 $ 79,536 $ 49,750 $ (368) $ (1,833) $ 127,085
Net income — 10,390 — — 10,390
Exercise of stock options and issuance of restricted shares (24,277 shares and 53,931 shares, respectively) 149 — — — 149
Share-based compensation 833 — — — 833
Cash dividends ($0.225 per share) — (1,942) — — (1,942)
Other comprehensive income — — — 2,012 2,012
Balance, September 30, 2019 $ 80,518 $ 58,198 $ (368) $ 179 $ 138,527
Balance, January 1, 2020 $ 109,964 $ 60,791 $ (368) $ 191 $ 170,578
Net income — 12,021 — — 12,021
Exercise of stock options and issuance of restricted shares (755 shares and 59,500 shares, respectively) 5 — — — 5
Share-based compensation 856 — — — 856
Cash dividends ($0.27 per share) — (2,754) — — (2,754)
Treasury stock purchased (14,411 shares) — — (243) — (243)
Other comprehensive income — — — 1,544 1,544
Balance, September 30, 2020 $ 110,825 $ 70,058 $ (611) $ 1,735 $ 182,007

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

1ST Constitution Bancorp

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)


		Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019			2021		2020
OPERATING ACTIVITIES:	OPERATING ACTIVITIES:					OPERATING ACTIVITIES:
Net income	Net income	$	12,021	$	10,390	Net income	$	4,929	$	3,421
Adjustments to reconcile net income to net cash (used in) provided by operating activities-
Adjustments to reconcile net income to net cash provided by (used in) operating activities-						Adjustments to reconcile net income to net cash provided by (used in) operating activities-
Provision for loan losses	Provision for loan losses	5,340		1,050		Provision for loan losses	1,400		895
Depreciation and amortization	Depreciation and amortization	1,561		1,020		Depreciation and amortization	476		542
Net amortization of premiums and discounts on securities	Net amortization of premiums and discounts on securities	956		425		Net amortization of premiums and discounts on securities	320		306
SBA loan discount accretion	SBA loan discount accretion	(300)		(289)		SBA loan discount accretion	(88)		(106)
Loss (gain) on sales and calls of securities available for sale		3		(16)
Gain on sales and calls of securities available for sale						Gain on sales and calls of securities available for sale	0		(1)
Gain on sales and calls of securities held to maturity	Gain on sales and calls of securities held to maturity	(100)		0		Gain on sales and calls of securities held to maturity	(2)		(7)
Gain on sales of other real estate owned		(71)		(137)
Write-down of other real estate owned						Write-down of other real estate owned	44		0
Gain on sales of loans held for sale	Gain on sales of loans held for sale	(6,987)		(3,556)		Gain on sales of loans held for sale	(3,095)		(1,470)
Originations of loans held for sale	Originations of loans held for sale	(238,201)		(100,664)		Originations of loans held for sale	(89,927)		(42,459)
Proceeds from sales of loans held for sale	Proceeds from sales of loans held for sale	222,919		100,502		Proceeds from sales of loans held for sale	107,125		38,101
Increase in cash surrender value on bank–owned life insurance	Increase in cash surrender value on bank–owned life insurance	(557)		(437)		Increase in cash surrender value on bank–owned life insurance	(174)		(180)
Gain on cash surrender value on bank-owned life insurance		(75)		0

Share-based compensation expense	Share-based compensation expense	856		833		Share-based compensation expense	271		290
Decrease in deferred tax asset		498		1,146
Increase in deferred tax asset						Increase in deferred tax asset	(1,911)		(41)
Noncash rent and equipment expense	Noncash rent and equipment expense	144		152		Noncash rent and equipment expense	33		49
(Increase) decrease in accrued interest receivable		(744)		208
(Increase) in other assets		(9,492)		(3,442)
(Decrease) increase in accrued interest payable		(523)		374
Decrease in accrued interest receivable						Decrease in accrued interest receivable	610		102
Increase in other assets						Increase in other assets	(656)		(628)
Decrease in accrued interest payable						Decrease in accrued interest payable	(152)		(162)
Increase (decrease) in accrued expenses and other liabilities	Increase (decrease) in accrued expenses and other liabilities	338		(693)		Increase (decrease) in accrued expenses and other liabilities	7,586		(131)
Net cash (used in) provided by operating activities		(12,414)		6,866
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	26,789		(1,479)
INVESTING ACTIVITIES:	INVESTING ACTIVITIES:					INVESTING ACTIVITIES:
Purchases of securities:	Purchases of securities:					Purchases of securities:
Available for sale	Available for sale	(23,415)		(28,472)		Available for sale	(16,414)		(18,416)
Held to maturity	Held to maturity	(32,665)		(9,101)		Held to maturity	(19,203)		(16,729)
Proceeds from sales, calls, maturities and payments of securities:	Proceeds from sales, calls, maturities and payments of securities:					Proceeds from sales, calls, maturities and payments of securities:
Available for sale	Available for sale	45,425		27,988		Available for sale	9,811		10,051
Held to maturity	Held to maturity	21,244		13,592		Held to maturity	16,297		4,889
Proceeds from bank-owned life insurance benefits paid		179		—

Net redemption (purchase) of restricted stock	Net redemption (purchase) of restricted stock	1,753		(2,062)		Net redemption (purchase) of restricted stock	442		(1,038)
Net increase in loans		(239,517)		(142,053)
Net decrease (increase) in loans						Net decrease (increase) in loans	138,809		(1,838)
Capital expenditures	Capital expenditures	(248)		(657)		Capital expenditures	(184)		(37)

Proceeds from sales of other real estate owned	Proceeds from sales of other real estate owned	375		1,192		Proceeds from sales of other real estate owned	0		101
Net cash used in investing activities		(226,869)		(139,573)
Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	129,558		(23,017)
FINANCING ACTIVITIES:	FINANCING ACTIVITIES:					FINANCING ACTIVITIES:
Exercise of stock options	Exercise of stock options	5		149		Exercise of stock options	54		0
Purchase of treasury shares	Purchase of treasury shares	(243)		0		Purchase of treasury shares	(128)		(135)
Cash dividends paid to shareholders	Cash dividends paid to shareholders	(2,754)		(1,942)		Cash dividends paid to shareholders	(922)		(917)
Net increase in deposits		233,671		72,387
Increase in short-term borrowings		13,817		66,025
Net cash provided by financing activities		244,496		136,619
Increase in cash and cash equivalents		5,213		3,912
Net (decrease) increase in deposits						Net (decrease) increase in deposits	(1,620)		20,670
(Decrease) increase in short-term borrowings						(Decrease) increase in short-term borrowings	(9,825)		2,075
Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(12,441)		21,693
Increase (decrease) in cash and cash equivalents						Increase (decrease) in cash and cash equivalents	143,906		(2,803)
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	14,842		16,844		Cash and cash equivalents at beginning of period	21,995		14,842
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	20,055	$	20,756	Cash and cash equivalents at end of period	$	165,901	$	12,039

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


Supplemental Disclosures of Cash Flow Information
Cash paid during the period for -
Interest	$	1,834	$	3,614
Income taxes	165		101

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

1ST Constitution Bancorp

Notes to Consolidated Financial Statements

~~September 30, 2020~~March 31, 2021

(Unaudited)

(1) Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements include 1ST Constitution Bancorp (the “Company”), its wholly-owned subsidiary, 1ST Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1ST Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc and 1st Constitution Real Estate Investment ~~Corporation.~~Corporation (the "REIT"), which is indirectly owned by the Bank. To qualify as a real estate investment trust for tax purposes, the REIT must have 100 or more shareholders. As a result, less than 20 percent of the REIT’s outstanding non-voting preferred stock has been issued to individual shareholders, consisting of officers, directors and employees of the Bank and their adult family members. The Bank owns the remaining issued and outstanding preferred stock and common stock of the REIT. 1ST Constitution Capital Trust II, a subsidiary of the Company, is not included in the Company’s consolidated financial statements, as it is a variable interest entity and the Company is not the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, filed with the SEC on March ~~16, 2020.~~15, 2021.

~~Goodwill~~

The Company completed its annual testing of goodwill for impairment in the 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, the Company performed a 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 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 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, management concluded that it was more likely than not the fair value of the reporting unit exceeded the carrying value of the reporting unit. Accordingly, goodwill was 0t impaired at September 30, 2020.

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

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of ~~September 30, 2020~~March 31, 2021 for items that should potentially be recognized or disclosed in these ~~consolidated~~ financial statements. The evaluation was conducted through the date these ~~consolidated~~ financial statements were issued.

~~COVID-19 Impact~~

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

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

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act to provide relief for individuals and businesses that have been negatively impacted by the COVID-19 pandemic.

~~The~~ Among the provisions, the CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” accounting guidance in Accounting Standards Codification (“ASC”) Topic 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019. The Bank adopted this provision as of March 31, 2020.

~~Adoption of New Accounting Standards~~

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

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

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

The amendments in this ASU also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The term of the hosting arrangement includes the

~~non-cancellable period~~

The Economic Aid to Hard Hit Small Business, Not for Profits and Venues Act (“Economic Aid Act”) was enacted in December 2020 in further response to the COVID-19 pandemic. Among other things, the Economic Aid Act provides relief to borrowers in the form of access to additional credit through the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) as originally constituted under the CARES Act. In addition, the Economic Aid Act extended the relief from ASC Topic 310-40, such that the Company is able to opt out of applying the “troubled-debt restructuring” accounting guidance for loan modifications made between January 1, 2021 and the earlier of (i) December 30, 2021 or (ii) 60 days after the President declares a termination of the ~~arrangement plus periods covered by (1) an option to extend~~COVID-19 national emergency; provided, that, the ~~arrangement if the customer is reasonably certain to exercise that option, (2) an option to terminate the arrangement if the customer is reasonably certain~~modified loans were not ~~to exercise the termination option, and (3) an option to extend (or not to terminate) the arrangement in which exercise~~more than 30 days past due as of ~~the option is in the control~~December 31, 2019. The Bank adopted this provision as of ~~the vendor. The entity also is required to apply the existing impairment guidance in Subtopic 350-40 to the capitalized implementation costs as if the costs were long-lived assets.~~

December 31, 2020.

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

~~The adoption of this guidance in 2020 did not have a material impact on the Company's consolidated financial statements.~~

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

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

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

1.Goodwill: ~~The amounts in accumulated other comprehensive income expected to~~Goodwill is reviewed for potential impairment on an annual basis, or more often if events or circumstances indicate that there may be ~~recognized as components of net periodic benefit cost over the next fiscal year;~~

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

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

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

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

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

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

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

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

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

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

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

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

For the Company, the provisions of this ASU are effective for fiscal years ending after December 15, 2020. Early adoption was permitted. The adoption of this guidance in 2020 did not have a material impact on the Company's consolidated financial statements.

~~(2) Acquisition of Shore Community Bank~~

On November 8, 2019, the Company completed its acquisition of 100 percent of the shares of common stock of Shore Community Bank ("Shore"), which merged with and into the Bank (the “Shore Merger”). The former shareholders of Shore received total consideration of $54.3 million, which was comprised of 1,509,275 shares of common stock of the Company with a market value of $29.2 million and cash of $25.1 million, of which $925,000 was cash paid in exchange for unexercised outstanding stock options.

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

The assets acquired and liabilities assumed in the merger were recorded at their estimated fair values based on management’s best estimates, using information available at the date of the merger, including the use of third party valuation specialists. The measurement period may not exceed one year from the acquisition date and the measurement period for the Shore Merger is expected to end on November 7, 2020.

~~The following table summarizes the fair value of the acquired assets and liabilities assumed as of November 8, 2019:~~


~~(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~~

ASC Topic 805-10 provides that if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report, in its financial statements, provisional amounts for the items for which the accounting is incomplete. During the measurement period, the acquirer shall adjust the provisional amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the acquisition date. Thus, the acquirer shall adjust its financial statements as needed, including recognizing in its current-period earnings the full effect of a change in depreciation, amortization, or other income effects, if any, as a result of the change to provisional amounts calculated as if the accounting had been completed at the acquisition date. The measurement period may not exceed one year from the acquisition date.

Investments were recorded at fair value, utilizing quoted market prices on nationally recognized exchanges (Level 1) or by using Level 2 inputs. For Level 2 securities, the Company obtained fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things.

~~Loans acquired in the Shore Merger were recorded at fair value and subsequently accounted for~~impairment, in accordance with ASC Topic ~~310.~~350, “Intangibles – Goodwill and Other.” The ~~fair values of loans acquired were estimated, utilizing cash flow projections based~~Company evaluates its goodwill for impairment on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses of approximately $3.6 million and estimated prepayments. Projected cash flows were then discounted to present value, utilizing a risk-adjusted market rate for similar loans that management determined market participants would likely use.

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

~~The following table summarizes the composition of the loans acquired and recorded at fair value:~~

At November 8, 2019
(Dollars in thousands) Loans acquired with no credit quality 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

~~The following~~an annual basis, or more often if there is a ~~summary of the loans acquired with evidence of deteriorated credit quality in the Shore Merger as of the date of the closing of the merger:~~


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

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

~~Fair value of acquired loans~~	$	~~4,571~~

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

indicates that there is an impairment. The Company ~~recorded~~did not identify a ~~core deposit intangible asset related to a value ascribed to demand, interest checking, money market and savings account, referred to as core deposits, acquired as part of~~triggering event during the acquisition. The value assigned to the acquired core deposits represents the future economic benefit of the potential cost savings from acquiring the core deposits, net of operating expenses and including ancillary fee income, compared to the cost of obtaining alternative funds from available market sources. Management used estimates including the expected attrition rates of depository accounts, future interest rate levels, and the cost of servicing various depository products. The core deposit intangible asset totaled $1.5 million and is being amortized over its estimated useful life of approximately 10 years, using an accelerated method.

three months ended March 31, 2021.

If the Company’s common stock price is lower than the Company’s book value per common share in future periods, the Company will evaluate goodwill for impairment. 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 ~~following table presents the projected amortization~~Company may determine that goodwill becomes impaired in a future period and a portion or all of the ~~core deposit intangible asset for each period beginning October 1, 2020:~~

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

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

~~Direct costs~~goodwill may be written off. Any impairment loss related to the Shore Merger were expensed as incurred. For the year ended December 31, 2019, the Company incurred $1.7 million of expenses for termination of contracts, legal and financial advisory fees, severancegoodwill and other ~~integration related expenses, which have been separately stated~~intangible assets is reflected as ~~merger-related expenses~~other non-interest expense in the ~~Company’s Consolidated Statements~~statements of ~~Income.~~

~~Supplemental Financial Information~~

~~The following table presents financial information regarding the former Shore operations included~~income in the ~~Company’s Consolidated Statements of Income for~~period in which the nine months ended September 30, 2020 under the column "Shore Nine Months Ended September 30, 2020." In addition, the table presents unaudited condensed pro forma financial information for the three and nine months ended September 30, 2019 assumingimpairment was determined. No assurance can be given that ~~the Shore Merger had been completed as of January 1, 2019.~~

~~The table has been prepared for comparative purposes only and is~~future impairment tests will not necessarily indicative of the actual results that would have been attained had the Shore Merger occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma financial information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred asresult in a ~~result of the integration and consolidation of Shore’s operations.~~

(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

charge to earnings.

~~(3)~~(2) Earnings Per Common Share

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

Awards of restricted shares are included in outstanding shares when granted. Unvested restricted shares are entitled to non-forfeitable dividends and participate in undistributed earnings with common shares. Awards of this nature are considered participating securities and basic and diluted earnings per share are computed under the two-class method.

Dilutive securities in the tables below exclude common stock options with exercise prices that exceed the average market price of the Company’s common stock during the periods presented. Inclusion of these common stock options would be anti-dilutive to the diluted earnings per common share calculation. For the three months ended ~~September 30,~~March 31, 2021 and 2020, 62,030 and ~~2019, 54,930 and 27,930 options, respectively, were anti-dilutive and were not included in the computation of diluted earnings per share. For the nine months ended September 30, 2020 and 2019,~~ 41,430 ~~and 27,930~~ options, respectively, were anti-dilutive and were not included in the computation of diluted earnings per share.

The following table illustrates the calculation of both basic and diluted earnings per share for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(Dollars in thousands, except per share data)	(Dollars in thousands, except per share data)	2020		2019		2020		2019		(Dollars in thousands, except per share data)		2021		2020

Net income	Net income	$	4,910	$	3,623	$	12,021	$	10,390	Net income		$	4,929	$	3,421

Basic weighted average shares outstanding	Basic weighted average shares outstanding	10,230,488		8,666,251		10,213,601		8,641,684		Basic weighted average shares outstanding		10,261,718		10,200,836
Plus: common stock equivalents	Plus: common stock equivalents	38,463		56,098		46,876		57,275		Plus: common stock equivalents		45,841		61,211
Diluted weighted average shares outstanding	Diluted weighted average shares outstanding	10,268,951		8,722,349		10,260,477		8,698,959		Diluted weighted average shares outstanding		10,307,559		10,262,047
Earnings per share:	Earnings per share:									Earnings per share:
Basic	Basic	$	0.48	$	0.42	1.18		1.20		Basic		0.48		0.34
Diluted	Diluted	$	0.48	$	0.42	1.17		1.19		Diluted		0.48		0.33

~~(4)~~

(3) Investment Securities

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


		September 30, 2020									March 31, 2021
(Dollars in thousands)	(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		(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”)	U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)	$	3,574	$	1	$	(6)	$	3,569	U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)	$	3,017	$	13	$	(4)	$	3,026
Residential collateralized mortgage obligations - GSE	Residential collateralized mortgage obligations - GSE	41,047		533		(159)		41,421		Residential collateralized mortgage obligations - GSE	33,355		403		(78)		33,680
Residential mortgage backed securities - GSE	Residential mortgage backed securities - GSE	14,478		611		(7)		15,082		Residential mortgage backed securities - GSE	26,228		495		(228)		26,495
Obligations of state and political subdivisions	Obligations of state and political subdivisions	28,538		1,026		0		29,564		Obligations of state and political subdivisions	24,655		897		0		25,552
Trust preferred debt securities - single issuer		1,493		0		(105)		1,388
Corporate debt securities	Corporate debt securities	19,500		497		(72)		19,925		Corporate debt securities	21,001		386		(68)		21,319
Other debt securities	Other debt securities	24,112		323		(261)		24,174		Other debt securities	20,703		195		(73)		20,825
Total	Total	$	132,742	$	2,991	$	(610)	$	135,123	Total	$	128,959	$	2,389	$	(451)	$	130,897


		December 31, 2019									December 31, 2020
(Dollars in thousands)	(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		(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”)	U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)	$	774	$	0	$	(10)	$	764	U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)	$	3,437	$	7	$	(5)	$	3,439
Residential collateralized mortgage obligations - GSE	Residential collateralized mortgage obligations - GSE	53,223		194		(242)		53,175		Residential collateralized mortgage obligations - GSE	36,282		503		(6)		36,779
Residential mortgage backed securities - GSE	Residential mortgage backed securities - GSE	18,100		292		(5)		18,387		Residential mortgage backed securities - GSE	13,031		572		(6)		13,597
Obligations of state and political subdivisions	Obligations of state and political subdivisions	33,177		342		0		33,519		Obligations of state and political subdivisions	26,445		1,007		0		27,452
Trust preferred debt securities - single issuer		1,492		0		(50)		1,442
Corporate debt securities	Corporate debt securities	23,224		139		(84)		23,279		Corporate debt securities	20,997		465		(95)		21,367
Other debt securities	Other debt securities	25,378		80		(242)		25,216		Other debt securities	22,389		254		(80)		22,563
Total	Total	$	155,368	$	1,047	$	(633)	$	155,782	Total	$	122,581	$	2,808	$	(192)	$	125,197

A summary of amortized cost, carrying value and fair value of investment securities held to maturity follows:


		September 30, 2020													March 31, 2021
(Dollars in thousands)	(Dollars in thousands)	Amortized Cost		Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss		Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		(Dollars in thousands)	Amortized Cost		Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss		Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Residential collateralized mortgage obligations - GSE	Residential collateralized mortgage obligations - GSE	$	5,831	$	0	$	5,831	$	246	$	0	$	6,077	Residential collateralized mortgage obligations - GSE	$	3,976	$	0	$	3,976	$	110	$	(18)	$	4,068
Residential mortgage backed securities - GSE	Residential mortgage backed securities - GSE	26,863		0		26,863		1,260		0		28,123		Residential mortgage backed securities - GSE	22,293		0		22,293		992		0		23,285
Obligations of state and political subdivisions	Obligations of state and political subdivisions	52,842		0		52,842		970		(10)		53,802		Obligations of state and political subdivisions	64,938		0		64,938		1,092		(78)		65,952
Trust preferred debt securities - pooled	Trust preferred debt securities - pooled	652		(478)		174		382		0		556		Trust preferred debt securities - pooled	645		(466)		179		479		0		658
Other debt securities	Other debt securities	2,101		0		2,101		76		0		2,177		Other debt securities	3,985		0		3,985		23		(72)		3,936
Total	Total	$	88,289	$	(478)	$	87,811	$	2,934	$	(10)	$	90,735	Total	$	95,837	$	(466)	$	95,371	$	2,696	$	(168)	$	97,899

December 31, 2019
(Dollars in thousands) Amortized
Cost Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Loss Carrying
Value Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
Residential collateralized mortgage obligations - GSE $ 5,117 $ 0 $ 5,117 $ 76 $ (35) $ 5,158
Residential mortgage backed securities - GSE 36,528 0 36,528 481 (54) 36,955
Obligations of state and political subdivisions 32,533 0 32,533 690 (25) 33,198
Trust preferred debt securities - pooled 657 (492) 165 479 0 644
Other debt securities 2,277 0 2,277 0 (9) 2,268
Total $ 77,112 $ (492) $ 76,620 $ 1,726 $ (123) $ 78,223


	December 31, 2020
(Dollars in thousands)	Amortized Cost		Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss		Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

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

At ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019, $89.4~~2020, $71.7 million and ~~$92.2~~$81.7 million of investment securities, respectively, were pledged to secure public funds and collateralized borrowings from the Federal Home Loan Bank of New York (“FHLB”) and for other purposes required or permitted by law.

Restricted stock was included in other assets at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 and totaled ~~$2.6~~$1.2 million and ~~$4.3~~$1.7 million, respectively. Restricted stock consisted of ~~$2.4~~$1.1 million of FHLB stock and $160,000 of Atlantic Community Bankers Bank stock at ~~September 30, 2020~~March 31, 2021 and ~~$4.1~~$1.5 million of FHLB and $160,000 of Atlantic Community Bankers Bank stock at December 31, ~~2019.~~

2020.

The following table sets forth certain information regarding the amortized cost, carrying value, fair value, weighted average yields and contractual maturities of the Company’s investment portfolio as of ~~September 30, 2020.~~March 31, 2021. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


		September 30, 2020							March 31, 2021
(Dollars in thousands)	(Dollars in thousands)	Amortized Cost		Fair Value		Yield		(Dollars in thousands)	Amortized Cost		Fair Value		Yield
Available for sale	Available for sale							Available for sale
Due in one year or less	Due in one year or less	$	5,047	$	5,041	1.11	%	Due in one year or less	$	1,590	$	1,601	2.12	%
Due after one year through five years	Due after one year through five years	28,103		29,194		2.38	%	Due after one year through five years	31,779		32,757		2.44	%
Due after five years through ten years	Due after five years through ten years	33,831		34,088		1.77	%	Due after five years through ten years	26,697		27,135		1.74	%
Due after ten years	Due after ten years	65,761		66,800		2.15	%	Due after ten years	68,893		69,404		1.94	%
Total	Total	$	132,742	$	135,123	2.07	%	Total	$	128,959	$	130,897	2.02	%

		Carrying Value		Fair Value		Yield			Carrying Value		Fair Value		Yield
Held to maturity	Held to maturity							Held to maturity
Due in one year or less	Due in one year or less	$	18,359	$	18,411	2.43	%	Due in one year or less	$	19,831	$	19,873	1.36	%
Due after one year through five years	Due after one year through five years	6,279		6,464		4.56	%	Due after one year through five years	4,937		5,110		3.58	%
Due after five years through ten years	Due after five years through ten years	16,842		17,565		2.87	%	Due after five years through ten years	14,253		14,808		2.76	%
Due after ten years	Due after ten years	46,331		48,295		2.81	%	Due after ten years	56,350		58,108		2.63	%
Total	Total	$	87,811	$	90,735	2.87	%	Total	$	95,371	$	97,899	2.44	%

During the third quarter of 2020, $2.6 million of residential mortgage backed securities that were classified as held to maturity were sold and a gain of $87,000 was recognized. The remaining par values of all of these securities that were sold were less than 15% of the original par value. Accordingly, the securities sold were considered to be equivalent to holding the securities to their maturity.

Gross unrealized losses on available for sale and held to maturity securities and the fair value of the related securities aggregated by

security category and length of time that individual securities have been in a continuous unrealized loss position at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were as follows:


		September 30, 2020														March 31, 2021
			Less than 12 months				12 months or longer				Total						Less than 12 months				12 months or longer				Total
(Dollars in thousands)	(Dollars in thousands)	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		(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)
U.S. Treasury securities and obligations of U.S. Government sponsored entities (GSE)															U.S. Treasury securities and obligations of U.S. Government sponsored entities (GSE)	1	$	0	$	0	$	518	$	(4)	$	518	$	(4)
Residential collateralized mortgage obligations - GSE	Residential collateralized mortgage obligations - GSE	7	7,948		(37)		11,610		(122)		19,558		(159)		Residential collateralized mortgage obligations - GSE	4	5,818		(93)		1,449		(3)		7,267		(96)
Residential mortgage backed securities - GSE	Residential mortgage backed securities - GSE	3	212		(7)		0		0		212		(7)		Residential mortgage backed securities - GSE	10	14,096		(222)		200		(6)		14,296		(228)
Obligations of state and political subdivisions	Obligations of state and political subdivisions	3	2,782		(10)		0		0		2,782		(10)		Obligations of state and political subdivisions	7	9,208		(78)		0		0		9,208		(78)
Trust preferred debt securities - single issuer		2	0		0		1,389		(105)		1,389		(105)
Corporate debt securities	Corporate debt securities	3	2,980		(19)		4,947		(53)		7,927		(72)		Corporate debt securities	3	0		0		3,427		(68)		3,427		(68)
Other debt securities	Other debt securities	9	0		0		14,822		(261)		14,822		(261)		Other debt securities	8	4,792		(75)		9,155		(70)		13,947		(145)
Total temporarily impaired securities	Total temporarily impaired securities	28	$	14,510	$	(79)	$	32,768	$	(541)	$	47,278	$	(620)	Total temporarily impaired securities	33	$	33,914	$	(468)	$	14,749	$	(151)	$	48,663	$	(619)


		December 31, 2019														December 31, 2020
			Less than 12 months				12 months or longer				Total						Less than 12 months				12 months or longer				Total
(Dollars in thousands)	(Dollars in thousands)	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		(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	$	764	$	(10)	$	0	$	0	$	764	$	(10)
U.S. Treasury securities and obligations of U.S. Government sponsored entities (GSE)															U.S. Treasury securities and obligations of U.S. Government sponsored entities (GSE)	1	$	0	$	0	$	548	$	(5)	$	548	$	(5)
Residential collateralized mortgage obligations - GSE	Residential collateralized mortgage obligations - GSE	39	18,328		(138)		13,300		(139)		31,628		(277)		Residential collateralized mortgage obligations - GSE	3	5,153		(2)		2,060		(4)		7,213		$	(6)
Residential mortgage backed securities - GSE	Residential mortgage backed securities - GSE	13	5,505		(59)		0		0		5,505		(59)		Residential mortgage backed securities - GSE	3	203		(6)		0		0		203		(6)
Obligations of state and political subdivisions	Obligations of state and political subdivisions	4	2,311		(25)		527		0		2,838		(25)		Obligations of state and political subdivisions	1	1,295		(2)		0		0		1,295		(2)
Trust preferred debt securities - single issuer		2	0		0		1,442		(50)		1,442		(50)
Corporate debt securities	Corporate debt securities	4	2,994		(5)		7,954		(79)		10,948		(84)		Corporate debt securities	3	0		0		3,399		(95)		3,399		(95)
Other debt securities	Other debt securities	12	13,692		(151)		5,598		(100)		19,290		(251)		Other debt securities	7	0		0		11,230		(80)		11,230		(80)
Total temporarily impaired securities	Total temporarily impaired securities	75	$	43,594	$	(388)	$	28,821	$	(368)	$	72,415	$	(756)	Total temporarily impaired securities	18	$	6,651	$	(10)	$	17,237	$	(184)	$	23,888	$	(194)

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

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

Obligations of state and political subdivisions: The unrealized losses on investments in these securities were caused by increases in market interest rates. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. None of the issuers have defaulted on interest payments. These investments are not considered to be other than temporarily impaired because the decline in fair value is attributable to changes in interest rates and not credit quality. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.

~~Trust preferred~~Corporate debt securities ~~– single issuer~~:. The unrealized losses on investments in ~~these~~corporate debt securities ~~with unrealized losses are comprised of 2 corporate trust preferred securities issued~~were caused by ~~1 large financial institution that mature~~an increase in ~~2027. The contractual terms~~market interest rates, which includes the yield required by market participants for the issuer's credit risk. None of the trust preferred securities do not allow the issuer to settle the securities at a price less than the face value of the trust preferred securities, which is greater than the amortized cost of the trust preferred securities. The issuer maintains an investment grade credit rating and has notcorporate issuers have defaulted on interest payments. ~~The decline in fair value is attributable to the widening of interest rate and credit spreads and the lack of an active trading market for these securities.~~ The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.

~~Corporate debt securities~~. The unrealized losses on investments in corporate debt securities were caused by an increase in market interest rates, which includes the yield required by market participants for the issuer’s credit risk. All of the issuers maintain an investment grade rating and none of the corporate issuers have defaulted on interest payments. The decline in fair value is attributable to changes in market interest rates. The Company does not intend to sell these investments and it is not more likely than

~~not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.~~

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

Trust preferred debt securities – pooled: This trust preferred debt security was issued by a ~~two~~2 issuer pool (Preferred Term Securities XXV, Ltd. co-issued by Keefe, Bruyette and Woods, Inc. and First Tennessee (“PRETSL XXV”)), consisting primarily of financial institution holding companies. During 2009, the Company recognized an other-than-temporary impairment charge of $865,000, of which $364,000 was determined to be a credit loss and charged to operations and $501,000 was recognized in the other comprehensive income (loss) component of shareholders’ equity. The primary factor used to determine the credit portion of the impairment loss to be recognized in the income statement for this security was the discounted present value of projected cash flow, where that present value of cash flow was less than the amortized cost basis of the security. The present value of cash flow was developed using a model that considered performing collateral ratios, the level of subordination to senior tranches of the security and credit ratings of and projected credit defaults in the underlying collateral. Due to recovery of the cash flows underlying the security, the Company began to accrete the $501,000 of impairment charge in the other comprehensive income component in 2019. Total accretion of ~~$14,000~~$6,000 was recognized in the first ~~nine~~three months of ~~2020~~2021 as an increase in the carrying amount of the security. On a quarterly basis, management evaluates this security to determine if any additional other-than-temporary impairment is required. As of ~~September 30, 2020,~~March 31, 2021, management concluded that no additional other-than-temporary impairment had occurred.

~~(5)~~(4) Allowance for Loan Losses and Credit Quality

The Company’s primary lending emphasis is the origination of commercial real estate loans, mortgage warehouse lines of credit and commercial business loans. Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy and a decline in New Jersey and New York City metropolitan area real estate market values. Any one, or a combination, of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.

~~The following table provides an aging of the loan portfolio by loan class at September 30, 2020:~~

(Dollars in thousands) 30-59 Days 60-89
Days Greater
than 90
Days Total Past
Due Current Total
Loans
Receivable Recorded
Investment
> 90 Days
Accruing Non-accrual
Loans
Commercial 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

1711

The following table provides an aging of the loan portfolio by loan class at March 31, 2021:


(Dollars in thousands)	30-59 Days		60-89 Days		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days Accruing		Non-accrual Loans
Commercial real estate	$	0	$	0	$	1,322	$	1,322	$	606,711	$	608,033	$	0	$	5,812
Mortgage warehouse lines	0		0		0		0		267,580		267,580		0		0
Construction	216		0		7,500		7,716		131,208		138,924		0		7,500
Commercial business	0		0		84		84		187,305		187,389		0		217
Residential real estate	291		0		1,289		1,580		73,468		75,048		0		1,653
Loans to individuals	96		0		47		143		19,298		19,441		0		151
Other loans	0		0		0		0		103		103		0		0
Total loans	$	603	$	0	$	10,242	$	10,845	$	1,285,673	1,296,518		$	0	$	15,333
Deferred loan fees, net											(1,530)
Total loans											$	1,294,988

The following table provides an aging of the loan portfolio by loan class at December 31, ~~2019:~~2020:


(Dollars in thousands)	(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		(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	Commercial real estate	$	238	$	1,927	$	3,882	$	6,047	$	561,608	$	567,655	$	0	$	2,596	Commercial real estate	$	0	$	0	$	7,008	$	7,008	$	611,970	$	618,978	$	0	$	7,565
Mortgage warehouse lines	Mortgage warehouse lines	0		0		0		0		236,672		236,672		0		0		Mortgage warehouse lines	0		0		0		0		388,366		388,366		0		0
Construction	Construction	0		0		0		0		148,939		148,939		0		0		Construction	0		0		7,500		7,500		121,745		129,245		0		7,500
Commercial business	Commercial business	381		0		330		711		138,560		139,271		0		501		Commercial business	1		0		84		85		188,643		188,728		0		225
Residential real estate	Residential real estate	2,459		271		677		3,407		86,852		90,259		0		708		Residential real estate	1,356		91		1,534		2,981		85,280		88,261		871		798
Loans to individuals	Loans to individuals	296		0		311		607		31,997		32,604		0		692		Loans to individuals	12		99		264		375		20,894		21,269		0		273
Other loans	Other loans	0		0		0		0		137		137		0		0		Other loans	0		0		0		0		113		113		0		0
Total loans	Total loans	$	3,374	$	2,198	$	5,200	$	10,772	$	1,204,765	1,215,537		$	0	$	4,497	Total loans	$	1,369	$	190	$	16,390	$	17,949	$	1,417,011	1,434,960		$	871	$	16,361
Deferred loan costs, net												491
Deferred loan fees, net																		Deferred loan fees, net											(1,254)
Total loans	Total loans											$	1,216,028					Total loans											$	1,433,706

As provided by (“ASC”) 310-30, the excess of cash flows expected at acquisition over the initial investment in the loan is recognized as interest income over the life of the loan. At ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, there were ~~$4.0~~$1.8 million and ~~$5.4~~$2.4 million of purchased credit impaired loans, respectively, that were not classified as non-performing loans due to the accretion of income.

The Company’s internal credit risk grades are based on the definitions currently utilized by the banking regulatory agencies. The grades assigned and their definitions are as follows:

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

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

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

3w. Watch - Included in this category are loans evidencing problems identified by Company management that require closer supervision, but do not require a “special mention” rating. This category also covers situations where the Company does not have adequate current information upon which credit quality can be determined. The account officer has the obligation to correct these deficiencies within 30 days from the time of notification. ~~Loans that received modification to provide a deferral of interest and or principal for up to 90 days that complied with the CARES Act criteria were rated watch by management.~~

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

5. Substandard - A “substandard” loan is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize

the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

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

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

~~Loans graded as “excellent,” “above average,” “good” and “watch” are treated as “pass” for grading purposes.~~ The following table provides a breakdown of the loan portfolio by credit quality indicator at ~~September 30, 2020:~~March 31, 2021:

(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


(Dollars in thousands)
Credit Exposure by Internally Assigned Grade	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate
Pass	$	131,208	$	174,619	$	568,046	$	267,206	$	72,003
Special Mention	216		3,139		18,678		374		354
Substandard	7,500		9,547		21,309		0		2,691
Doubtful	0		84		0		0		0
Total	$	138,924	$	187,389	$	608,033	$	267,580	$	75,048


Credit Exposure by Payment Activity	Loans To Individuals		Other Loans
Performing	$	19,290	$	103
Non-performing	151		0
Total	$	19,441	$	103

The following table provides a breakdown of the loan portfolio by credit quality indicator at December 31, ~~2019:~~2020:


(Dollars in thousands)	(Dollars in thousands)											(Dollars in thousands)
Commercial Credit Exposure - By Internally Assigned Grade		Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate
Credit Exposure by Internally Assigned Grade												Credit Exposure by Internally Assigned Grade	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate
Pass	Pass	$	147,132	$	135,804	$	538,104	$	235,808	$	87,512	Pass	$	121,745	$	175,895	$	580,699	$	387,483	$	85,203
Special Mention	Special Mention	0		1,990		9,994		864		922		Special Mention	0		5,942		15,419		883		358
Substandard	Substandard	1,807		1,477		19,557		0		1,825		Substandard	7,500		6,806		22,860		0		2,700
Doubtful	Doubtful	0		0		0		0		0		Doubtful	0		85		0		0		0

Total	Total	$	148,939	$	139,271	$	567,655	$	236,672	$	90,259	Total	$	129,245	$	188,728	$	618,978	$	388,366	$	88,261


Consumer Credit Exposure - By Payment Activity		Loans To Individuals		Other loans
Credit Exposure by Payment Activity						Credit Exposure by Payment Activity	Loans To Individuals		Other Loans
Performing	Performing	$	31,912	$	137	Performing	$	20,996	$	113
Non-performing	Non-performing	692		0		Non-performing	273		0
Total	Total	$	32,604	$	137	Total	$	21,269	$	113

Impaired Loans

Loans are considered to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan agreement, including scheduled interest payments. When a loan is placed on non-accrual status, it is also considered to be impaired. Loans are placed on non-accrual status when: (1) the full collection of

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

The following tables summarize the distribution of the allowance for loan losses and loans receivable by loan class and impairment method at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


		September 30, 2020																			March 31, 2021
(Dollars in thousands)	(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
Allowance for loan losses:	Allowance for loan losses:																			Allowance for loan losses:
Individually evaluated for impairment	Individually evaluated for impairment	$	1,433	$	89	$	87	$	0	$	0	$	0	$	0	$	0	$	1,609	Individually evaluated for impairment	$	3,664	$	7	$	141	$	0	$	0	$	0	$	0	$	0	$	3,812
Loans acquired with deteriorated credit quality	Loans acquired with deteriorated credit quality	0		0		9		0		0		0		0		0		9		Loans acquired with deteriorated credit quality	0		0		0		0		0		0		0		0		0
Collectively evaluated for impairment	Collectively evaluated for impairment	1,786		2,482		5,981		1,707		524		179				173		12,832		Collectively evaluated for impairment	1,804		2,903		6,538		1,212		478		120		0		177		13,232
Ending Balance	Ending Balance	$	3,219	$	2,571	$	6,077	$	1,707	$	524	$	179	$	0	$	173	$	14,450	Ending Balance	$	5,468	$	2,910	$	6,679	$	1,212	$	478	$	120	$	0	$	177	$	17,044

Loans receivable:	Loans receivable:																			Loans receivable:
Individually evaluated for impairment	Individually evaluated for impairment	$	7,500	$	1,183	$	12,634	$	0	$	817	$	310	$	0	$	0	$	22,444	Individually evaluated for impairment	$	7,500	$	943	$	10,444	$	0	$	1,653	$	151	$	0	$	0	$	20,691
Loans acquired with deteriorated credit quality	Loans acquired with deteriorated credit quality	0		315		4,863		0		402		0		0		0		5,580		Loans acquired with deteriorated credit quality	0		302		2,515		0		417		0		0		0		3,234
Collectively evaluated for impairment	Collectively evaluated for impairment	134,083		208,506		598,460		374,007		86,987		27,122		122		0		1,429,287		Collectively evaluated for impairment	131,424		186,144		595,074		267,580		72,978		19,290		103		0		1,272,593
Ending Balance	Ending Balance	$	141,583	$	210,004	$	615,957	$	374,007	$	88,206	$	27,432	$	122	$	0	1,457,311		Ending Balance	$	138,924	$	187,389	$	608,033	$	267,580	$	75,048	$	19,441	$	103	$	0	1,296,518
Deferred loan fees, net	Deferred loan fees, net																	(1,627)		Deferred loan fees, net																	(1,530)
																		$	1,455,684																		$	1,294,988

December 31, 2019
(Dollars in thousands) Construction Commercial
Business Commercial
Real Estate Mortgage
Warehouse Lines Residential
Real
Estate Loans to
Individuals Other Loans Unallocated Total
Allowance for loan losses:
Individually evaluated for impairment $ 8 $ 7 $ 50 $ 0 $ 0 $ 0 $ 0 $ 0 $ 65
Loans acquired with deteriorated credit quality 0 3 1 0 0 0 0 0 4
Collectively evaluated for impairment 1,381 1,399 4,473 1,083 412 185 0 269 9,202
Ending Balance $ 1,389 $ 1,409 $ 4,524 $ 1,083 $ 412 $ 185 $ 0 $ 269 $ 9,271
Loans receivable:
Individually evaluated for impairment $ 1,807 $ 1,251 $ 6,171 $ 0 $ 708 $ 692 $ 0 $ 0 $ 10,629
Loans acquired with deteriorated credit quality 0 334 5,419 0 504 0 0 0 6,257
Collectively evaluated for impairment 147,132 137,686 556,065 236,672 89,047 31,912 137 0 1,198,651
Ending Balance $ 148,939 $ 139,271 $ 567,655 $ 236,672 $ 90,259 $ 32,604 $ 137 $ 0 1,215,537
Deferred loan costs, net 491
$ 1,216,028

2014


	December 31, 2020
(Dollars in thousands)	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate		Loans to Individuals		Other Loans		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	2,089	$	4	$	19	$	0	$	0	$	0	$	0	$	0	$	2,112
Loans acquired with deteriorated credit quality	0		0		0		0		0		0		0		0		0
Collectively evaluated for impairment	1,652		2,723		6,403		1,807		619		125		0		200		13,529
Ending Balance	$	3,741	$	2,727	$	6,422	$	1,807	$	619	$	125	$	0	$	200	$	15,641

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

At ~~September 30, 2020,~~March 31, 2021, there were ~~$75.6~~$59.5 million of Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans which are included in commercial business loans and are 100% guaranteed by the ~~SBA, and, accordingly,~~SBA. Accordingly, 0 allowance was provided for such loans.

The activity in the allowance for loan loss by loan class for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ was as follows:


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 - (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		$	1,661	$	1,780	$	6,619	$	1,337	$	506	$	182	$	0	$	41	$	12,126
Balance - January 1, 2021																				Balance - January 1, 2021	$	3,741	$	2,727	$	6,422	$	1,807	$	619	$	125	$	0	$	200	$	15,641
Provision charged/(credited) to operations	Provision charged/(credited) to operations	1,558		791		(549)		370		18		0		0		132		2,320		Provision charged/(credited) to operations	1,727		180		257		(595)		(141)		(5)		0		(23)		1,400
Loans charged off	Loans charged off	0		0		0		0		0		(3)		0		0		(3)		Loans charged off	0		0		0		0		0		0		0		0		0
Recoveries of loans charged off	Recoveries of loans charged off	0		0		7		0		0		0		0		0		7		Recoveries of loans charged off	0		3		0		0		0		0		0		0		3
Balance - September 30, 2020		$	3,219	$	2,571	$	6,077	$	1,707	$	524	$	179	$	0	$	173	$	14,450
Balance - March 31, 2021																				Balance - March 31, 2021	$	5,468	$	2,910	$	6,679	$	1,212	$	478	$	120	$	0	$	177	$	17,044

Balance - July 1, 2019		$	1,760	$	1,546	$	3,754	$	933	$	480	$	142	$	0	$	26	$	8,641
Provision charged/(credited) to operations		(175)		(148)		533		204		(74)		8		0		2		350
Loans charged off		0		0		(18)		0		0		0		0		0		(18)
Recoveries of loans charged off		0		0		0		0		0		4		0		0		4
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
Balance - January 1, 2020	Balance - January 1, 2020	$	1,389	$	1,409	$	4,524	$	1,083	$	412	$	185	$	0	$	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	Provision charged/(credited) to operations	1,830		1,327		1,546		624		112		(3)		0		(96)		5,340		Provision charged/(credited) to operations	317		527		276		(56)		18		3		0		(190)		895
Loans charged off	Loans charged off	0		(165)		0		0		0		(3)		0		0		(168)		Loans charged off	0		(165)		0		0		0		0		0		0		(165)
Recoveries of loans charged off	Recoveries of loans charged off	0		0		7		0		0		0		0		0		7		Recoveries of loans charged off	0		0		0		0		0		0		0		0		0
Balance - September 30, 2020		$	3,219	$	2,571	$	6,077	$	1,707	$	524	$	179	$	0	$	173	$	14,450
Balance - March 31, 2020																				Balance - March 31, 2020	$	1,706	$	1,771	$	4,800	$	1,027	$	430	$	188	$	0	$	79	$	10,001

January 1, 2019		$	1,732	$	1,829	$	3,439	$	731	$	431	$	148	$	0	$	92	$	8,402
Provision charged/(credited) to operations		(147)		(86)		923		406		(25)		0		43		(64)		1,050
Loans charged off		0		(345)		(93)		0		0		0		(43)		0		(481)
Recoveries of loans charged off		0		0		0		0		0		6		0		0		6
Balance - September 30, 2019		$	1,585	$	1,398	$	4,269	$	1,137	$	406	$	154	$	0	$	28	$	8,977

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

2115

Impaired Loans Receivables (By Class)


								Three Months Ended September 30, 2020				Nine Months Ended September 30, 2020											Three Months Ended March 31, 2021
(Dollars in thousands)	(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment		Interest Income Recognized
With no allowance:	With no allowance:															With no allowance:
Commercial:	Commercial:															Commercial:
Construction	Construction	$	0	$	0	$	—	$	6,185	$	0	$	6,197	$	0	Construction	$	0	$	0	$	—		$	0	$	0
Commercial Business	Commercial Business	1,284		2,686		—		1,509		17		1,408		51		Commercial Business	709		2,704		—			845		37
Commercial Real Estate	Commercial Real Estate	15,327		16,541		—		14,328		146		10,334		439		Commercial Real Estate	6,906		7,537		—			8,859		61
Mortgage Warehouse Lines	Mortgage Warehouse Lines	0		0		—		0		0		0		0		Mortgage Warehouse Lines	0		0		—			0		0
Subtotal	Subtotal	16,611		19,227		—		22,022		163		17,939		490		Subtotal	7,615		10,241		—			9,704		98
Residential Real Estate	Residential Real Estate	1,219		1,470		—		1,265		7		1,277		25		Residential Real Estate	2,071		2,230		—			2,074		7
Consumer:	Consumer:															Consumer:
Loans to Individuals	Loans to Individuals	310		337		—		419		0		539		0		Loans to Individuals	151		157		—			297		0
Other loans	Other loans	0		2		—		0		0		0		0		Other loans	0		0		—			0		0
Subtotal	Subtotal	310		339		—		419		0		539		0		Subtotal	151		157		—			297		0
With no allowance:	With no allowance:	$	18,140	$	21,036	$	—	$	23,706	$	170	$	19,755	$	515	With no allowance:	$	9,837	$	12,628	$	—		$	12,075	$	105

With an allowance:	With an allowance:															With an allowance:
Commercial:	Commercial:															Commercial:
Construction	Construction	$	7,500	$	7,500	$	1,433	$	2,500	$	0	$	1,235	$	0	Construction	$	7,500	$	7,500	$	3,664		$	7,500	$	0
Commercial Business	Commercial Business	214		214		89		214		0		337		0		Commercial Business	536		536		7			406		7
Commercial Real Estate	Commercial Real Estate	2,170		3,478		96		2,923		21		3,717		63		Commercial Real Estate	6,053		6,053		141			7,237		62
Mortgage Warehouse Lines	Mortgage Warehouse Lines	0		0		0		0		0		0		0		Mortgage Warehouse Lines	0		0		0			0		0
Subtotal	Subtotal	9,884		11,192		1,618		5,637		21		5,289		63		Subtotal	14,089		14,089		3,812			15,143		69
Residential Real Estate	Residential Real Estate	0		0		0		0		0		0		0		Residential Real Estate	0		0		0			0		0
Consumer:	Consumer:															Consumer:
Loans to Individuals	Loans to Individuals	0		0		0		0		0		0		0		Loans to Individuals	0		0		0			0		0
Other loans	Other loans	0		0		0		0		0		0		0		Other loans	0		0		0			0		0
Subtotal	Subtotal	0		0		0		0		0		0		0		Subtotal	0		0		0			0		0
With an allowance:	With an allowance:	$	9,884	$	11,192	$	1,618	$	5,637	$	21	$	5,289	$	63	With an allowance:	$	14,089	$	14,089	$	3,812		$	15,143	$	69
Total:	Total:															Total:
Construction	Construction	7,500		7,500		1,433		8,685		0		7,432		0		Construction	7,500		7,500		3,664			7,500		0
Commercial Business	Commercial Business	1,498		2,900		89		1,723		17		1,745		51		Commercial Business	1,245		3,240		7			1,251		44
Commercial Real Estate	Commercial Real Estate	17,497		20,019		96		17,251		167		14,051		502		Commercial Real Estate	12,959		13,590		141			16,096		123
Mortgage Warehouse Lines	Mortgage Warehouse Lines	0		0		0		0		0		0		0		Mortgage Warehouse Lines	0		0		0			0		0
Residential Real Estate	Residential Real Estate	1,219		1,470		0		1,265		7		1,277		25		Residential Real Estate	2,071		2,230		0			2,074		7
Consumer	Consumer	310		339		0		419		0		539		0		Consumer	151		157		0			297		0
Total	Total	$	28,024	$	32,228	$	1,618	$	29,343	$	191	$	25,044	$	578	Total	$	23,926	$	26,717	$	3,812		$	27,218	$	174

2216

Impaired Loans Receivables (By Class)


		December 31, 2019						December 31, 2020
(Dollars in thousands)	(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance			(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no allowance:	With no allowance:								With no allowance:
Commercial:	Commercial:								Commercial:
Construction	Construction	$	0	$	0	$	—		Construction	$	0	$	0	$	—
Commercial Business	Commercial Business	680		1,971		—			Commercial Business	1,120		2,500		—
Commercial Real Estate	Commercial Real Estate	7,141		8,204		—			Commercial Real Estate	11,806		13,833		—
Mortgage Warehouse Lines	Mortgage Warehouse Lines	0		0		—			Mortgage Warehouse Lines	0		0		—
Subtotal	Subtotal	7,821		10,175		—			Subtotal	12,926		16,333		—
Residential Real Estate	Residential Real Estate	1,212		1,465		—			Residential Real Estate	1,208		1,465		—
Consumer:	Consumer:								Consumer:
Loans to Individuals	Loans to Individuals	692		802		—			Loans to Individuals	273		297		—
Other loans	Other loans	0		0		—			Other loans	0		0		—
Subtotal	Subtotal	692		802		—			Subtotal	273		297		—
With no allowance	With no allowance	$	9,725	$	12,442	$	—		With no allowance	$	14,407	$	18,095	$	—
With an allowance:	With an allowance:								With an allowance:
Commercial:	Commercial:								Commercial:
Construction	Construction	$	1,807	$	1,807	$	8		Construction	$	7,500	$	7,500	$	2,089
Commercial Business	Commercial Business	905		993		10			Commercial Business	147		147		4
Commercial Real Estate	Commercial Real Estate	4,449		5,757		51			Commercial Real Estate	3,234		3,234		19
Mortgage Warehouse Lines	Mortgage Warehouse Lines	0		0		0			Mortgage Warehouse Lines	0		0		0
Subtotal	Subtotal	7,161		8,557		69			Subtotal	10,881		10,881		2,112
Residential Real Estate	Residential Real Estate	0		0		0			Residential Real Estate	0		0		0
Consumer:	Consumer:								Consumer:
Loans to Individuals	Loans to Individuals	0		0		0			Loans to Individuals	0		0		0
Other loans	Other loans	0		0		0			Other loans	0		0		0
Subtotal	Subtotal	0		0		0			Subtotal	0		0		0
With an allowance	With an allowance	$	7,161	$	8,557	$	69		With an allowance	$	10,881	$	10,881	$	2,112

Total:	Total:								Total:
Construction	Construction	$	1,807	$	1,807	$	8		Construction	$	7,500	$	7,500	$	2,089
Commercial Business	Commercial Business	1,585		2,964		10			Commercial Business	1,267		2,647		4
Commercial Real Estate	Commercial Real Estate	11,590		13,961		51			Commercial Real Estate	15,040		17,067		19
Mortgage Warehouse Lines	Mortgage Warehouse Lines	0		0		0			Mortgage Warehouse Lines	0		0		0
Residential Real Estate	Residential Real Estate	1,212		1,465		0			Residential Real Estate	1,208		1,465		0
Consumer	Consumer	692		802		0			Consumer	273		297		0
Total	Total	$	16,886	$	20,999	$	69		Total	$	25,288	$	28,976	$	2,112

2317

Impaired Loans Receivables (By Class)


		Three Months Ended September 30, 2019				Nine Months Ended September 30, 2019					Three Months Ended March 31, 2020
(Dollars in thousands)	(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		(Dollars in thousands)		Average Recorded Investment		Interest Income Recognized
With no allowance:	With no allowance:									With no allowance:
Commercial:	Commercial:									Commercial:
Construction	Construction	$	0	$	0	$	46	$	2	Construction		$	3,102	$	25
Commercial Business	Commercial Business	951		4		952		56		Commercial Business		1,095		18
Commercial Real Estate	Commercial Real Estate	2,819		17		1,999		50		Commercial Real Estate		7,792		94
Mortgage Warehouse Lines	Mortgage Warehouse Lines	0		0				0		Mortgage Warehouse Lines		0		0
Subtotal	Subtotal	3,770		21		2,997		108		Subtotal		11,989		137
Residential Real Estate	Residential Real Estate	1,402		0		1,296		0		Residential Real Estate		1,204		9

Consumer:	Consumer:									Consumer:
Loans to Individuals	Loans to Individuals	792		0		675		0		Loans to Individuals		680		0
Other loans	Other loans	0		0				0		Other loans		0		0
Subtotal	Subtotal	792		0		675		0		Subtotal		680		0
With no allowance	With no allowance	$	5,964	$	21	$	4,968	$	108	With no allowance		$	13,873	$	146
With an allowance:	With an allowance:									With an allowance:
Commercial:	Commercial:									Commercial:
Construction	Construction	$	602	$	29	$	201	$	29	Construction		$	1,204	$	0
Commercial Business	Commercial Business	578		20		1,008		23		Commercial Business		656		0
Commercial Real Estate	Commercial Real Estate	4,782		59		4,611		176		Commercial Real Estate		4,552		50
Mortgage Warehouse Lines	Mortgage Warehouse Lines	0		0		0		0		Mortgage Warehouse Lines		0		0
Subtotal	Subtotal	5,962		108		5,820		228		Subtotal		6,412		50
Residential Real Estate	Residential Real Estate	0		0		0		0		Residential Real Estate		0		0
Consumer:	Consumer:									Consumer:
Loans to Individuals	Loans to Individuals	0		0		0		0		Loans to Individuals		0		0
Other loans	Other loans	0		0		0		0		Other loans		0		0
Subtotal	Subtotal	0		0		0		0		Subtotal		0		0
With an allowance	With an allowance	$	5,962	$	108	$	5,820	$	228	With an allowance		$	6,412	$	50
Total:	Total:									Total:
Construction	Construction	$	602	$	29	247		31		Construction		4,306		25
Commercial Business	Commercial Business	1,529		24		1,960		79		Commercial Business		1,751		18
Commercial Real Estate	Commercial Real Estate	7,601		76		6,610		226		Commercial Real Estate		12,344		144
Mortgage Warehouse Lines	Mortgage Warehouse Lines	0		0		0		0		Mortgage Warehouse Lines		0		0
Residential Real Estate	Residential Real Estate	1,402		0		1,296		0		Residential Real Estate		1,204		9
Consumer	Consumer	792		0		675		0		Consumer		680		0
Total	Total	$	11,926	$	129	$	10,788	$	336	Total		$	20,285	$	196

2418

Purchased Credit-Impaired Loans

Purchased credit-impaired ~~loans~~ (“PCI”) loans are loans acquired at a discount due in part to the deteriorated credit quality. On November 8, 2019, as part of the merger of Shore ~~Merger,~~Community Bank with and into the Bank, the Company acquired ~~purchased credit-impaired~~PCI loans with loan balances totaling $6.3 million and fair values totaling $4.6 million. The following table presents additional information regarding ~~purchased credit-impaired~~PCI loans at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


(Dollars in thousands)	(Dollars in thousands)	September 30, 2020		December 31, 2019		(Dollars in thousands)	March 31, 2021		December 31, 2020
Outstanding balance	Outstanding balance	$	6,907	$	8,038	Outstanding balance	$	4,347	$	5,221
Carrying amount	Carrying amount	$	5,581	$	6,257	Carrying amount	$	3,234	$	4,041

Changes in accretable discount for purchased credit-impaired loans for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~ were as follows:


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019		(Dollars in thousands)		2021		2020
Balance at beginning of period	Balance at beginning of period	$	426	$	94	$	657	$	164	Balance at beginning of period		$	232	$	657
Acquisition of impaired loans	Acquisition of impaired loans	0		0		0		0		Acquisition of impaired loans		0		0
Transfer from non-accretable discount										Transfer from non-accretable discount		229		0
Accretion of discount	Accretion of discount	(112)		(23)		(343)		(93)		Accretion of discount		(73)		(135)
Balance at end of period	Balance at end of period	$	314	$	71	$	314	$	71	Balance at end of period		$	388	$	522

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

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

September 30, 2020 December 31, 2019
Number of loans Recorded Investment Number of loans Recorded Investment
1 $ 311 2 $ 382


March 31, 2021			December 31, 2020
Number of loans	Recorded Investment		Number of loans	Recorded Investment
3	$	464	1	$	311

Troubled Debt Restructurings

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

If the Bank restructures a loan to a troubled borrower, the loan terms (i.e., interest rate, payment, amortization period and maturity date) may be modified in various ways to enable the borrower to cover the modified debt service payments based on current financial statements and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms may be offered for only that time period. Where possible, the Bank attempts to obtain additional collateral and/or secondary repayment sources at the time of the restructuring in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default. In evaluating whether a restructuring constitutes a TDR, applicable guidance requires that a creditor must separately conclude that the restructuring constitutes a concession and the borrower is experiencing financial difficulties.

There were 0 loans modified as a TDR during the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020. There were 3 commercial business loans with an aggregate pre- and post-modified recorded investment of $596,000 and 1 construction loan with a pre- and post-modified recorded investment of $1.8 million that were each modified as a TDR during the nine months ended September 30, 2019. There were 0 TDRs that subsequently defaulted within 12 months of restructuring during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020.

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were

not more than 30 days past due as of December 31, 2019. ~~For~~The Economic Aid Act, which was enacted in December 2020 in further response to the ~~nine months ended September 30, 2020, $149.3 million of loans~~COVID-19 pandemic, provides relief to borrowers in the form of access to additional credit through the SBA's PPP

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

As of March 31, 2021, all commercial business, commercial real estate and consumer loans that had ~~been modified to defer~~previously received deferrals in 2020 were no longer deferred and had made the ~~payment~~contractually due payments, except for 2 hotel loans totaling $4.6 million that were placed on non-accrual in the third quarter of ~~interest~~2020 and or1 residential mortgage loan for $871,000 that was placed on non-accrual in the first quarter of 2021. NaN commercial real estate loan with a balance of $1.4 million received an additional deferral of principal ~~for~~payments up to 90 ~~days.~~days in the first quarter of 2021. These modified loans were not considered to be TDRs under the CARES Act and the Economic Aid Act.

Through 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 these modified loans that had previously received deferrals were no longer deferred and had made the contractually due payments. During the third quarter of 2020, commercial business and commercial real estate loans totaling $10.3 million received a second deferral and commercial real estate loans totaling $1.8 million received a first deferral of interest and or principal for up to 90 days. Commercial real estate loans totaling $4.6 million that had received deferrals in the second quarter of 2020 were placed on non-accrual in the third quarter of 2020. One commercial real estate loan in the amount of $595,000 had not made the first payment after the end of the deferral period. Commercial business and commercial real estate loans with a deferral of principal and or interest for up to 90 days totaled $12.1 million at September 30, 2020.

~~During the third quarter of 2020, all but $974,000 of the $8.4 million of consumer loans that had received a deferral made the contractually due payments.~~

~~(6)~~(5) Revenue from Contracts with Customers

All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The following table presents the Company’s sources of non-interest income for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020. Items outside the scope of ASC 606 are noted as such.


		Three months ended				Nine months ended					Three months ended
(Dollars in thousands)	(Dollars in thousands)	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019		(Dollars in thousands)	March 31, 2021		March 31, 2020
Service charges on deposit accounts:	Service charges on deposit accounts:									Service charges on deposit accounts:
Overdraft fees	Overdraft fees	$	32	$	100	$	157	$	272	Overdraft fees	$	37	$	95
Other	Other	94		65		314		218		Other	80		118
Interchange income	Interchange income	186		122		487		343		Interchange income	163		149
Other income - in scope	Other income - in scope	105		103		320		309		Other income - in scope	98		103
Gain on sale of OREO		71		0		71		137

Income on bank-owned life insurance (1)	Income on bank-owned life insurance (1)	188		149		632		437		Income on bank-owned life insurance (1)	174		180
Gain on sales of loans (1)	Gain on sales of loans (1)	3,396		1,351		6,987		3,556		Gain on sales of loans (1)	3,095		1,470
Loan servicing fees (1)	Loan servicing fees (1)	164		181		487		540		Loan servicing fees (1)	159		166
Gain on sales and calls of securities (1)	Gain on sales and calls of securities (1)	79		16		97		16		Gain on sales and calls of securities (1)	2		8
Other income (1)	Other income (1)	421		119		740		414		Other income (1)	270		167
		$	4,736	$	2,206	$	10,292	$	6,242		$	4,078	$	2,456

(1) Not within the scope of ASC 606

~~(7)~~(6) Share-Based Compensation

The Company’s share-based incentive plans (“Stock Plans”) authorize the issuance of an aggregate of 945,873 shares of the Company’s common stock (as adjusted for stock dividends) through awards that may be granted in the form of stock options to purchase common stock (each an “Option” and collectively, “Options”), awards of restricted shares of common stock (“Stock Awards”), restricted stock units (“RSUs”), stock appreciation rights or such other awards as the Compensation Committee of the Board of Directors (the “Compensation Committee”) may determine.

As of ~~September 30, 2020,~~March 31, 2021, there were ~~372,491~~332,916 shares of common stock available for future grants under the Stock Plans.

The following table summarizes Options activity during the ~~nine~~three months ended ~~September 30, 2020:~~March 31, 2021:


(Dollars in thousands, except share amounts)	(Dollars in thousands, except share amounts)	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value		(Dollars in thousands, except share amounts)	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2020		122,151	$	9.85	3.9	1,500
Outstanding at January 1, 2021								Outstanding at January 1, 2021	134,122	$	11.61	4.3	$	835
Granted	Granted	27,000	17.53		9.4			Granted	21,500	15.56		9.8	44
Exercised	Exercised	(755)	6.93					Exercised	(6,481)	8.41

Outstanding at September 30, 2020		148,396	$	11.26	4.3	$	440
Outstanding at March 31, 2021								Outstanding at March 31, 2021	149,141	$	12.32	5.0	$	879

Exercisable at September 30, 2020		114,996	$	9.30	3.0	$	440
Exercisable at March 31, 2021								Exercisable at March 31, 2021	105,931	$	10.50	3.3	$	799

The fair value of each Option and the significant weighted average assumptions used to calculate the fair value of the Options granted during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 were as follows:

Grant Date
January 6, 2020 March 19, 2020
Fair value of options granted $ 5.27 $ 2.09
Risk-free rate of return 1.72 % 1.00 %
Expected option life in years 7 7
Expected volatility 24.53 % 24.63 %
Expected dividends 1.35 % 2.86 %


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

Share-based compensation expense related to Options was ~~$58,000~~$28,000 and ~~$47,000~~$32,000 for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. As of ~~September 30, 2020,~~March 31, 2021, there was approximately ~~$109,000~~$138,000 of unrecognized compensation cost related to unvested Options.

The following table summarizes the activity in Stock Awards for the ~~nine~~three months ended ~~September 30, 2020:~~March 31, 2021:


(Dollars in thousands, except share amounts)	(Dollars in thousands, except share amounts)	Number of Shares	Average Grant-Date Fair Value		(Dollars in thousands, except share amounts)	Number of Shares	Average Grant-Date Fair Value
Outstanding at January 1, 2020		134,359	$	13.84
Outstanding at January 1, 2021					Outstanding at January 1, 2021	129,883	$	12.61
Granted	Granted	59,500	14.45		Granted	20,850	15.56
Vested	Vested	(62,501)	17.31		Vested	(20,937)	16.14

Non-vested at September 30, 2020		131,358	$	12.46
Non-vested at March 31, 2021					Non-vested at March 31, 2021	129,796	$	12.51

Share-based compensation expense related to Stock Awards was ~~$798,000~~$243,000 and ~~$786,000~~$258,000 for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. As of ~~September 30, 2020,~~March 31, 2021, there was approximately ~~$1.8~~$1.6 million of unrecognized compensation cost related to unvested Stock Awards.

The following table summarizes the activity in RSUs for the ~~nine~~three months ended ~~September 30, 2020:~~March 31, 2021:


(Dollars in thousands, except share amounts)	(Dollars in thousands, except share amounts)	Number of Shares	Average Grant-Date Fair Value		(Dollars in thousands, except share amounts)	Number of Shares	Average Grant-Date Fair Value
Outstanding at January 1, 2020		10,300	$	19.38
Outstanding at January 1, 2021					Outstanding at January 1, 2021	25,817	$	21.24
Granted	Granted	18,950	21.92		Granted	14,250	15.56
Vested	Vested	(3,433)	19.38		Vested	(9,083)	16.82

Non-vested at September 30, 2020		25,817	$	21.24
Non-vested at March 31, 2021					Non-vested at March 31, 2021	30,984	$	19.92

Share-based compensation expense related to RSUs was ~~$130,000~~$108,000 and ~~$50,000~~$76,000 for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. As of ~~September 30, 2020,~~March 31, 2021, there was approximately ~~$229,000~~$501,000 of unrecognized compensation cost related to unvested RSUs.

2721

RSUs vest pro-rata over 3 years subject to achievement of certain established performance metrics. The ultimate number of RSUs earned, if any, will depend on the performance measured over each annual period during the applicable 3-year performance period. If performance measures are achieved, the RSUs will vest ~~on the date of~~upon certification of performance achievement by the Compensation Committee following each annual performance period. On March ~~19, 2020,~~3, 2021, the Compensation Committee certified that the applicable performance metrics were achieved at ~~138%~~142% of target for ~~2019.~~2020 and 2019 vested awards. Awards of RSUs are settled in cash unless the recipient timely elects for the RSUs to be settled in shares of common stock. The RSUs are recorded as a liability by the Company and the liability is adjusted as the market value of the Company's stock price changes.

~~(8)~~(7) Benefit Plans

The Bank has a 401(k) plan that covers substantially all employees with six months or more of service. The Bank’s 401(k) plan permits all eligible employees to make contributions to the plan up to the IRS salary deferral limit. The Bank’s contributions to the 401(k) plan are expensed as incurred.

The Company also provides retirement benefits to certain employees under supplemental executive retirement plans. The plans are unfunded and the Company accrues actuarially determined benefit costs over the estimated service period of the employees in the plans. The Company recognizes the over-funded or under-funded status of a defined benefit post-retirement plan as an asset or liability on its balance sheet and recognizes changes in that funded status in the year in which the changes occur through comprehensive income. At ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company’s President and Chief Executive Officer was the only eligible participant in the supplemental executive retirement plans.

In connection with the benefit plans, the Bank has life insurance policies on the lives of its executive officers, directors and certain employees. The Bank is the owner and beneficiary of these policies. The cash surrender values of these policies totaled approximately ~~$37.1~~$37.5 million and ~~$36.7~~$37.3 million at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively.

The components of net periodic expense for the Company’s supplemental executive retirement plans for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ were as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019		(Dollars in thousands)	2021		2020
Service cost	Service cost	$	46	$	48	$	138	$	142	Service cost	$	49	$	47
Interest cost	Interest cost	42		40		124		122		Interest cost	46		41
Actuarial gain recognized	Actuarial gain recognized	(51)		(44)		(151)		(132)		Actuarial gain recognized	(89)		(44)
Total	Total	$	37	$	44	$	111	$	132	Total	$	6	$	44

~~(9)~~(8) Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)

Other comprehensive income (loss) is the total of (1) net income (loss) and (2) all other changes in equity from non-shareholder sources, which are referred to as other comprehensive income (loss). The components of accumulated other comprehensive income (loss), and the related tax effects, are as follows:

September 30, 2020
(Dollars in thousands) Before-Tax
Amount Income Tax
Effect Net-of-Tax
Amount
Net unrealized holding gains on investment securities available for sale $ 2,381 $ (587) $ 1,794
Unrealized impairment loss on held to maturity security (478) 114 (364)
Gains on unfunded pension liability 424 (119) 305
Accumulated other comprehensive income $ 2,327 $ (592) $ 1,735


		December 31, 2019							March 31, 2021
(Dollars in thousands)	(Dollars in thousands)	Before-Tax Amount		Income Tax Effect		Net-of-Tax Amount		(Dollars in thousands)	Before-Tax Amount		Income Tax Effect		Net-of-Tax Amount
Net unrealized holding gains on investment securities available for sale	Net unrealized holding gains on investment securities available for sale	$	414	$	(111)	$	303	Net unrealized holding gains on investment securities available for sale	$	1,938	$	(481)	$	1,457
Unrealized impairment loss on held to maturity security	Unrealized impairment loss on held to maturity security	(492)		118		(374)		Unrealized impairment loss on held to maturity security	(466)		111		(355)
Gains on unfunded pension liability	Gains on unfunded pension liability	364		(102)		262		Gains on unfunded pension liability	323		(91)		232
Accumulated other comprehensive income	Accumulated other comprehensive income	$	286	$	(95)	$	191	Accumulated other comprehensive income	$	1,795	$	(461)	$	1,334

2822


	December 31, 2020
(Dollars in thousands)	Before-Tax Amount		Income Tax Effect		Net-of-Tax Amount
Net unrealized holding gains on investment securities available for sale	$	2,616	$	(644)	$	1,972
Unrealized impairment loss on held to maturity security	(472)		112		(360)
Gains on unfunded pension liability	444		(124)		320
Accumulated other comprehensive income	$	2,588	$	(656)	$	1,932

Changes in the components of accumulated other comprehensive income (loss) are as follows and are presented net of tax for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~September 30, 2019:~~March 31, 2020:

(Dollars in thousands) Unrealized
Holding
Gains
(Losses) on
Available for Sale
Securities Unrealized
Impairment
Loss on
Held to Maturity
Security Unfunded
Pension
Liability Accumulated
Other
Comprehensive
Income (Loss)
Balance - 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)














January 1, 2021	$	1,972	$	(360)	$	320	$	1,932
Other comprehensive (loss) income before reclassifications	(515)		0		(24)		(539)
Amounts reclassified from accumulated other comprehensive income	0		5		(64)		(59)

Other comprehensive (loss) income	(515)		5		(88)		(598)
Balance - March 31, 2021	$	1,457	$	(355)	$	232	$	1,334

January 1, 2020	$	303	$	(374)	$	262	$	191
Other comprehensive (loss) income before reclassifications	(141)		0		39		(102)
Amounts reclassified from accumulated other comprehensive income	0		2		(31)		(29)
Reclassification adjustment for gains realized in income	(1)		0		0		(1)
Other comprehensive (loss) income	(142)		2		8		(132)
Balance - March 31, 2020	$	161	$	(372)	$	270	$	59

~~(10)~~(9) Recent Accounting Pronouncements

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

In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which requires credit losses on most financial assets to be measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model).

Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated

prepayments but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists)

from the date of initial recognition of that instrument.

The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for

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

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

For 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~~2021 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. 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~~.

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. See the discussion regarding the adoption of ASU 2016-13 above.

In November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivatives and

Hedging (Topic 815), and Leases (Topic 842). ASU 2019-10 provides that the FASB’s recently developed philosophy regarding the implementation of effective dates applies to ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), among other ASUs. For the Company, the provisions of this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for all entities as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years. See the ~~discussions~~discussion 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~~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~~discussion regarding the adoption of ASU 2016-13 above.

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

In January 2020, the FASB issued ASU No. 2020-02, “Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” This ASU adds and amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. See the discussion regarding the adoption of ASU 2016-13 above.

ASU 2020-03 - Codification Improvements to Financial Instruments

In March 2020, the FASB issued ASU No. 2020-03, “Codification Improvements to Financial Instruments.” This ASU clarifies various financial instruments topics, including the CECL standard issued in 2016. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Other amendments are effective upon issuance of this ASU. See the discussion regarding the adoption of ASU 2016-13 above.

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

In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848)" which provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued, subject to meeting certain criteria. Under the new guidance, an entity can elect by accounting topic or industry subtopic to account for the modification of a contract affected by reference rate reform as a continuation of the existing

contract, if certain conditions are met. In addition, the new guidance allows an entity to elect on a hedge-by-hedge basis to continue to apply hedge accounting for hedging relationships in which the critical terms change due to reference rate reform, if certain conditions are met. A one-time election to sell and/or transfer held-to-maturity debt securities that reference a rate affected by reference rate reform is also allowed. ASU No. 2020-04 became effective for all entities as of March 12, 2020 and will apply to all LIBOR reference rate modifications through December 31, 2022.

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

~~(11)~~

In January 2021, the FASB issued ASU No. 2021-01, "Reference Rate Reform (Topic 848)". The amendments in this update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this update to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. ASU No. 2021-01 became immediately effective for all entities, which may elect to apply the update retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively to new modifications from any date within an interim period that includes or is subsequent to the issuance date of ASU No. 2021-01 up to the date that financial statements are available to be issued. In addition, ASU No.2021-01 applies to all contract modifications made through December 31, 2022.

(10) Fair Value Disclosures

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

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

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

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

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~~taking into consideration 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									March 31, 2021
(Dollars in thousands)	(Dollars in thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value		(Dollars in thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Securities available for sale:	Securities available for sale:									Securities available for sale:
U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”) and agencies	U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”) and agencies	$	0	$	3,569	$	0	$	3,569	U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”) and agencies	$	0	$	3,026	$	0	$	3,026
Residential collateralized mortgage obligations - GSE	Residential collateralized mortgage obligations - GSE	0		41,421		0		41,421		Residential collateralized mortgage obligations - GSE	0		33,680		0		33,680
Residential mortgage backed securities - GSE	Residential mortgage backed securities - GSE	0		15,082		0		15,082		Residential mortgage backed securities - GSE	0		26,495		0		26,495
Obligations of state and political subdivisions	Obligations of state and political subdivisions	0		29,564		0		29,564		Obligations of state and political subdivisions	0		25,552		0		25,552
Trust preferred debt securities - single issuer		0		1,388		0		1,388
Corporate debt securities	Corporate debt securities	9,311		10,614		0		19,925		Corporate debt securities	6,110		15,209		0		21,319
Other debt securities	Other debt securities	0		24,174		0		24,174		Other debt securities	0		20,825		0		20,825
Interest rate lock derivative	Interest rate lock derivative	0		673		0		673		Interest rate lock derivative	0		429		0		429
Total	Total	$	9,311	$	126,485	$	0	$	135,796	Total	$	6,110	$	125,216	$	0	$	131,326


		December 31, 2019									December 31, 2020
(Dollars in thousands)	(Dollars in thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value		(Dollars in thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Securities available for sale:	Securities available for sale:									Securities available for sale:
U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”) and agencies	U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”) and agencies	$	0	$	764	$	0	$	764	U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”) and agencies	$	0	$	3,439	$	0	$	3,439
Residential collateralized mortgage obligations - GSE	Residential collateralized mortgage obligations - GSE	0		53,175		0		53,175		Residential collateralized mortgage obligations - GSE	0		36,779		0		36,779
Residential mortgage backed securities - GSE	Residential mortgage backed securities - GSE	0		18,387		0		18,387		Residential mortgage backed securities - GSE	0		13,597		0		13,597
Obligations of state and political subdivisions	Obligations of state and political subdivisions	0		33,519		0		33,519		Obligations of state and political subdivisions	0		27,452		0		27,452
Trust preferred debt securities - single issuer		0		1,442		0		1,442
Corporate debt securities	Corporate debt securities	11,151		12,128		0		23,279		Corporate debt securities	9,287		12,080		0		21,367
Other debt securities	Other debt securities	0		25,216		0		25,216		Other debt securities	0		22,563		0		22,563
Interest rate lock derivative	Interest rate lock derivative	0		159		0		159		Interest rate lock derivative	0		537		0		537
Total	Total	$	11,151	$	144,790	$	0	$	155,941	Total	$	9,287	$	116,447	$	0	$	125,734

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets and liabilities subject to fair value adjustments (impairment) on a nonrecurring basis at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were as follows:

3226


(Dollars in thousands)	(Dollars in thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value		(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
March 31, 2021										March 31, 2021
Impaired loans	Impaired loans	$	0	$	0	$	7,092	$	7,092	Impaired loans	$	0	$	0	$	10,276	$	10,276
Other real estate owned	Other real estate owned	0		0		93		93		Other real estate owned	0		0		48		48
December 31, 2020										December 31, 2020
Impaired loans										Impaired loans	$	0	$	0	$	8,769	$	8,769
Other real estate owned										Other real estate owned	0		0		92		92

Impaired loans measured at fair value and included in the above table at ~~September 30, 2020~~March 31, 2021 consisted of 87 loans having an aggregate recorded investment of ~~$9.9~~$14.1 million and specific loan loss allowance of ~~$1.6~~$3.8 million. Impaired loans measured at fair value and included in the above table at December 31, ~~2019~~2020 consisted of 125 loans having an aggregate balance of ~~$7.2~~$10.9 million with specific loan loss allowance of ~~$69,000.~~$2.1 million.

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

(Dollars in thousands)

Fair Value
Estimate

Valuation
Techniques

Unobservable Input

Range
(Weighted Average)

~~September 30, 2020~~March 31, 2021

Impaired loans

~~8,265~~10,276

Appraisal of collateral (1)

Appraisal adjustments (2)

0%2.6% - ~~28.5%~~32.2%

~~(12.2%~~(11.8%)

Other real estate owned

Appraisal of collateral (1)

Appraisal adjustments (2)

89.0%

(89.0%)

December 31, ~~2019~~2020

Impaired loans

~~7,092~~8,769

Appraisal of collateral (1)

Appraisal adjustments (2)

0.1% - 40.4%

(12.6%)

Other real estate owned

9392

Appraisal of
collateral (1)

Appraisal adjustments (2)

~~47.0%~~79.0%

~~(47.0%~~(79.0%)

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

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

The following is a summary of fair value versus carrying value of all of the Company’s financial instruments. For the Company and the Bank, as with most financial institutions, the bulk of assets and liabilities are considered financial instruments. Many of the financial instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimations and present value calculations were used for the purpose of this note. Changes in assumptions could significantly affect these estimates.

3327

The estimated fair values and carrying amounts of financial assets and liabilities as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were as follows:


		September 30, 2020											March 31, 2021
		Carrying		Level 1		Level 2		Level 3		Fair			Carrying		Level 1		Level 2		Level 3		Fair
(Dollars in thousands)	(Dollars in thousands)	Value		Inputs		Inputs		Inputs		Value		(Dollars in thousands)	Value		Inputs		Inputs		Inputs		Value
Cash and cash equivalents	Cash and cash equivalents	$	20,055	$	20,055	$	0	$	0	$	20,055	Cash and cash equivalents	$	165,901	$	165,901	$	0	$	0	$	165,901
Securities available for sale	Securities available for sale	135,123		9,311		125,812		0		135,123		Securities available for sale	130,897		6,110		124,787		0		130,897
Securities held to maturity	Securities held to maturity	87,811		0		90,735		0		90,735		Securities held to maturity	95,371		0		97,899		0		97,899
Loans held for sale	Loans held for sale	28,196		0		29,099		0		29,099		Loans held for sale	15,679		0		15,931		0		15,931
Net loans	Net loans	1,441,234		0		0		1,498,557		1,498,557		Net loans	1,277,944		0		0		1,318,213		1,318,213
SBA servicing asset	SBA servicing asset	855		0		1,245		0		1,245		SBA servicing asset	761		0		1,209		0		1,209
Interest rate lock derivative	Interest rate lock derivative	673		—		673		0		673		Interest rate lock derivative	429		0		429		0		429
Accrued interest receivable	Accrued interest receivable	5,689		0		5,689		0		5,689		Accrued interest receivable	4,663		0		4,663		0		4,663
FHLB stock	FHLB stock	2,422		0		2,422		0		2,422		FHLB stock	1,056		0		1,056		0		1,056
Deposits	Deposits	(1,511,033)		0		(1,513,161)		0		(1,513,161)		Deposits	(1,561,219)		0		(1,562,140)		0		(1,562,140)
Short-term borrowings	Short-term borrowings	(105,867)		0		(105,867)		0		(105,867)		Short-term borrowings	0		0		0		0		0
Redeemable subordinated debentures	Redeemable subordinated debentures	(18,557)		0		(10,877)		0		(10,877)		Redeemable subordinated debentures	(18,557)		0		(14,161)		0		(14,161)
Accrued interest payable	Accrued interest payable	(1,069)		0		(1,069)		0		(1,069)		Accrued interest payable	(699)		0		(699)		0		(699)


		December 31, 2019											December 31, 2020
		Carrying		Level 1		Level 2		Level 3		Fair			Carrying		Level 1		Level 2		Level 3		Fair
(Dollars in thousands)	(Dollars in thousands)	Value		Inputs		Inputs		Inputs		Value		(Dollars in thousands)	Value		Inputs		Inputs		Inputs		Value
Cash and cash equivalents	Cash and cash equivalents	$	14,842	$	14,842	$	0	$	0	$	14,842	Cash and cash equivalents	$	21,995	$	21,995	$	0	$	0	$	21,995
Securities available for sale	Securities available for sale	155,782		11,151		144,631		0		155,782		Securities available for sale	125,197		9,287		115,910		0		125,197
Securities held to maturity	Securities held to maturity	76,620		0		78,223		0		78,223		Securities held to maturity	92,552		0		95,640		0		95,640
Loans held for sale	Loans held for sale	5,927		0		6,093		0		6,093		Loans held for sale	29,782		0		30,618		0		30,618
Net loans	Net loans	1,206,757		0		0		1,243,088		1,243,088		Net loans	1,418,065		0		0		1,463,821		1,463,821
SBA servicing asset	SBA servicing asset	930		0		1,245		0		1,245		SBA servicing asset	795		0		1,209		0		1,209
Interest rate lock derivative	Interest rate lock derivative	159		0		159		0		159		Interest rate lock derivative	537		0		537		0		537
Accrued interest receivable	Accrued interest receivable	4,945		0		4,945		0		4,945		Accrued interest receivable	5,273		0		5,273		0		5,273
FHLB stock	FHLB stock	4,176		0		4,176		0		4,176		FHLB stock	1,498		0		1,498		0		1,498
Deposits	Deposits	(1,277,362)		0		(1,278,166)		0		(1,278,166)		Deposits	(1,562,839)		0		(1,564,431)		0		(1,564,431)
Short-term borrowings	Short-term borrowings	(92,050)		0		(92,050)		0		(92,050)		Short-term borrowings	(9,825)		0		(9,825)		0		(9,825)
Redeemable subordinated debentures	Redeemable subordinated debentures	(18,557)		0		(12,837)		0		(12,837)		Redeemable subordinated debentures	(18,557)		0		(10,932)		0		(10,932)
Accrued interest payable	Accrued interest payable	(1,592)		0		(1,592)		0		(1,592)		Accrued interest payable	(851)		0		(851)		0		(851)

Loan commitments and standby letters of credit as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were based on fees charged for similar agreements; accordingly, the estimated fair value of loan commitments and standby letters of credit was nominal.

~~(12)~~(11) Leases

At ~~September 30, 2020,~~March 31, 2021, the Company had 3734 operating leases under which the Company is a lessee. Of the 3734 leases, 2322 leases were for real property, including leases for 1918 of the Company’s branch offices and 4 leases for general office space including the Company’s headquarters. All of the real property leases include 1 or more options to extend the lease term. NaN of the branch office leases are for the land on which the branch offices are located and the Company owns the leasehold improvements.

In addition, the Company had 12 leases for office equipment, consisting primarily of copiers and ~~printers, and 2 automobile leases.~~printers. None of these leases include extensions and generally have three to five year terms.

At ~~September 30, 2020,~~March 31, 2021, the Company did not have any finance leases.

3428

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the Company recognized rent and equipment expense associated with leases as follows:


(In thousands)	(In thousands)	Three Months Ended September 30,				Nine Months Ended September 30,				(In thousands)	Three Months Ended March 31,
		2020		2019		2020		2019				2021		2020
Operating lease cost:	Operating lease cost:									Operating lease cost:
Fixed rent expense and equipment expense	Fixed rent expense and equipment expense	$	1,338	$	501	$	2,005	$	1,477	Fixed rent expense and equipment expense		$	667	$	667
Variable rent expense	Variable rent expense	0		0		0		0		Variable rent expense		0		0
Short-term lease expense	Short-term lease expense	23		3		35		7		Short-term lease expense		2		12
Sublease income	Sublease income	0		0		0		0		Sublease income		0		0
Net lease cost	Net lease cost	$	1,361	$	504	$	2,040	$	1,484	Net lease cost		$	669	$	679


(In thousands)	(In thousands)	Three Months Ended September 30,				Nine Months Ended September 30,				(In thousands)	Three Months Ended March 31,
		2020		2019		2020		2019				2021		2020
Lease cost - occupancy expense	Lease cost - occupancy expense	$	1,245	$	438	$	1,859	$	1,295	Lease cost - occupancy expense		$	613	$	614
Lease cost - other expense	Lease cost - other expense	116		66		181		189		Lease cost - other expense		56		65
Net lease cost	Net lease cost	$	1,361	$	504	$	2,040	$	1,484	Net lease cost		$	669	$	679

For the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the following cash and non-cash activities were associated with the leases:


		Nine Months Ended September 30,					Three Months Ended March 31,
(In thousands)	(In thousands)	2020		2019		(In thousands)	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:	Cash paid for amounts included in the measurement of lease liabilities:					Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	Operating cash flows from operating leases	$	1,896	$	1,332	Operating cash flows from operating leases	$	636	$	630

Non-cash investing and financing activities:	Non-cash investing and financing activities:					Non-cash investing and financing activities:
Additions to ROU assets obtained from:	Additions to ROU assets obtained from:					Additions to ROU assets obtained from:
Net lease cost	Net lease cost	0		0		Net lease cost	0		0
New operating lease liabilities	New operating lease liabilities	250		417		New operating lease liabilities	0		0

3529

The future payments due under operating leases at ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ were as follows:


		At September 30,					At March 31,
(In thousands)	(In thousands)	2020		2019		(In thousands)	2021		2020
Due in less than one year	Due in less than one year	$	2,071	$	1,841	Due in less than one year	$	1,579	$	2,065
Due in one year but less than two years	Due in one year but less than two years	2,059		1,796		Due in one year but less than two years	2,091		2,033
Due in two years but less than three years	Due in two years but less than three years	2,014		1,784		Due in two years but less than three years	1,996		2,018
Due in three years but less than four years	Due in three years but less than four years	1,882		1,767		Due in three years but less than four years	1,841		1,969
Due in four years but less than five years	Due in four years but less than five years	1,712		1,644		Due in four years but less than five years	1,672		1,802
Thereafter	Thereafter	13,836		12,483		Thereafter	13,438		14,673
Total future payments	Total future payments	$	23,574	$	21,315	Total future payments	$	22,617	$	24,560
Less: Implied interest	Less: Implied interest	(5,860)		(5,616)		Less: Implied interest	(5,624)		(6,303)
Total lease liability	Total lease liability	$	17,714	$	15,699	Total lease liability	$	16,993	$	18,257

At ~~September 30,~~March 31, 2021 and 2020, future payments due under operating leases were based on ASC Topic 842 and included, in general, at least one lease renewal option on all real estate leases except on one land lease where all renewal options were included. As of ~~September 30, 2020,~~March 31, 2021, the weighted-average remaining lease term for all operating leases was ~~14.8~~14.6 years. The weighted average discount rate associated with the operating leases at ~~September 30, 2020~~March 31, 2021 was ~~3.34%~~3.31%.

~~(13)~~(12) Borrowings

The Company has ~~overnight or short-term~~ borrowing lines established with the FHLB and other correspondent ~~banks and participates in Federal Reserve Bank's PPPLF funding program.~~banks. At ~~September 30, 2020,~~March 31, 2021, the Company had ~~overnight~~0 borrowings. Overnight or short-term borrowings ~~totaling $105.9~~at December 31, 2020 totaled $9.8 million with an average interest rate of ~~0.35%. Overnight or short-term borrowings at December 31, 2019 totaled $92.1 million with an average interest rate of 1.81%~~0.34%. These borrowings are primarily used to fund asset growth not supported by deposit generation.

At ~~September 30, 2020,~~March 31, 2021, unused overnight or ~~short-term~~ borrowing potential totaled ~~$281.1~~$331.4 million from the FHLB and unused Fed Funds borrowing commitments ofwere $46.0 million from correspondent banks.

3630

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 period ended ~~September 30, 2020~~March 31, 2021 (this “Form 10-Q”), the words “the Company,” “we,” “our,” and “us” refer to 1ST Constitution Bancorp and, as the context requires, its wholly-owned subsidiary, 1ST Constitution Bank (the “Bank”), ~~and~~ the Bank’s wholly-owned subsidiaries, 1ST Constitution Investment Company of New Jersey, Inc., and FCB Assets Holdings, Inc., and ~~1st~~1ST Constitution Real Estate Investment ~~Corporation. 1ST~~Corporation, which is indirectly owned by the Bank. 1ST Constitution Capital Trust II (“Trust II”), a subsidiary of the Company, is not included in the Company’s consolidated financial statements as it is a variable interest entity and the Company is not the primary beneficiary. Trust II, a subsidiary of the Company, was created in May 2006 to issue trust preferred securities to assist the Company in raising additional capital.

This discussion and analysis of the operating results for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and financial condition at ~~September 30, 2020~~March 31, 2021 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- and nine-month periods~~three-month period ended ~~September 30, 2020~~March 31, 2021 are not necessarily indicative of results to be attained for any other ~~periods.~~period.

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,~~2020, as filed with the Securities and Exchange Commission (the “SEC”) on March ~~16, 2020~~15, 2021 (the ~~“2019~~"2020 Form ~~10-K”~~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~~estimates 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 phasing out of LIBOR after 2021; changes in loan delinquency rates or in our levels of ~~non-performing~~nonperforming assets; our ability to declare and pay dividends; changes in the economic climate in the market areas in which we operate; the frequency and magnitude of foreclosure of our loans; changes in consumer spending and saving habits; the effects of the health and soundness of other financial institutions, including the need of the FDIC to increase the Deposit Insurance Fund assessments; technological changes; the effects of climate change and harsh weather conditions, including hurricanes and man-made disasters; the economic impact of any 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~~Novel Coronavirus ("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.

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. Additional information concerning the factors that could cause actual results to differ materially from those in the forward-looking statements is contained in Item 1. "Business," Item 1A. “Risk Factors,” Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in the 2020 Form 10-K and in our other filings with the SEC. However, other factors besides those listed in Item 1A. “Risk Factors” or discussed in the 2020 Form 10-K or this Form 10-Q also could adversely affect our results and you should not consider any such list of factors to be a complete list of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are ~~made, and we do not~~made. We undertake ~~any~~no obligation to ~~update~~publicly revise any forward-looking ~~statement to reflect the impact of subsequent events~~statements or ~~circumstances,~~cautionary factors, except as required by law.

OVERVIEW

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

The Bank operates 2625 branches and manages its investment portfolio through its subsidiary, 1ST Constitution Investment Company of New Jersey, Inc. FCB Assets Holdings, Inc., a subsidiary of the Bank, is used by the Bank to manage and dispose of repossessed real estate.

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

COVID-19 Impact and Response

~~The sudden emergence~~As the Company conducts its daily operations, the health and safety of our employees and customers remains our primary concern and we continue to maintain the same measures and protective procedures that we implemented in 2020. In addition, the Company is providing paid time off to employees to obtain COVID-19 ~~pandemic in~~vaccinations.

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

The ultimate impact of the COVID-19 pandemic on the Company’s operations and financial performance will depend on future developments related to the duration, extent and severity of the pandemic; the length of time that 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; 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.

The CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” accounting guidance in ASC 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of (i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019. The Bank adopted this provision as of March 31, 2020.

In the Company's 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. During the third quarter of 2020,2021, the Company continued working with customers ~~severely~~ impacted by the ~~resulting~~ economic disruption. ~~Management significantly~~In addition, management increased the ~~provision~~allowance for loan losses in response to the higher estimated 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.

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

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

•We continue to provide access to additional credit and forbearance on loan interest and or principal payments for up to 90 days where management has determined that it is warranted. ~~For~~As of March 31, 2021, all loans that had previously received deferrals were no longer deferred, except for two hotel loans totaling $4.6 million that were placed on non-accrual in the ~~nine months ended September 30,~~third quarter of 2020 ~~$149.3~~and one residential mortgage loan with a balance of $871,000 that was placed on non-accrual in the first quarter of 2021. One commercial real estate loan with a balance of $1.4 million ~~of loans~~ ~~($140.9~~ ~~million of commercial loans and~~ ~~$8.4 million of consumer loans) were modified to provide~~received an additional deferral of ~~interest and or~~ principal ~~by borrowers for~~payments up to 90 ~~days.~~days in the first quarter of 2021.

•As a long-standing ~~Small Business Administration ("SBA")~~SBA preferred lender, we actively participated in the SBA’s ~~Paycheck Protection Program ("PPP")~~PPP lending program established under the ~~CARES Act. For the nine months ended September 30,~~Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). In 2020, we funded 467 SBA PPP loans totaling $75.6 ~~million.~~million, $50.2 million of which had been forgiven by the SBA through the end of the first quarter of 2021.

•The Economic Aid to Hard-Hit Small Business, Not for Profits and Venues Act (the “Economic Aid Act”) was enacted in December 2020 in further response to the COVID-19 pandemic. Among other things, the Economic Aid Act provides relief to borrowers to access additional credit through the SBA's PPP. We ~~are registered~~continue to utilize the Main Street New Loan Facility (“Facility”) established by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the CARES Act to provide financing to our customers and communities. This Facility is intended to facilitate lending by banks to small and medium-sized businesses, which we believe may be beneficial to certain of our customers.

•~~We are participating~~actively participate in the ~~Federal Reserve's~~ PPP ~~loan funding program~~ and ~~are pledging the~~have accepted 303 applications for PPP loans ~~to collateralize a like amount~~totaling $35.9 million through April 30, 2021. The SBA has approved 298 of ~~borrowings from the Federal Reserve at a favorable interest rate~~such applications totaling $35.3 million of ~~0.35% up to a two-year term.~~PPP loans, all of which have been funded.

Modification of Loans and Deferral of Payments

~~During the nine months ended September 30, 2020, $140.9 million~~As of March 31, 2021, all 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 in 2020 were no longer deferred and had made the contractually due payments, except for two hotel loans totaling $4.6 million that were placed on non-accrual in the third quarter of ~~2020. During the third quarter of~~ 2020 ~~commercial business~~ and commercial real estate loans to three borrowers totaling $10.3 million received a second modification and commercial real estate loans to three borrowers totaling $1.8 million received a first modification to defer principal and or interest up to 90 days. Two commercial real estate loans totaling $4.6 millionone residential mortgage loan for $871,000 that ~~had received a modification in the second quarter of 2020 were~~was placed on non-accrual ~~during~~in the ~~third~~first quarter of ~~2020.~~2021. One commercial real estate loan with a balance of ~~$595,000 had not made the first payment after the end~~$1.4 million received an additional deferral of ~~the deferral period. Commercial business and commercial real estate loans with a modification to defer~~ principal ~~and or interest~~payments up to 90 days ~~totaled $12.1 million at September 30, 2020.~~

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

2021.

3933

RESULTS OF OPERATIONS

Three ~~and Nine~~ Months Ended ~~September 30, 2020~~March 31, 2021 Compared to Three ~~and Nine~~ Months Ended ~~September 30, 2019~~March 31, 2020

Summary

The Company reported net income of $4.9 million and diluted earnings per share of $0.48 for the three months ended ~~September 30, 2020~~March 31, 2021 compared to net income of ~~$3.6~~$3.4 million and diluted earnings per share of ~~$0.42~~$0.33 for the three months ended 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.March 31, 2020.

Return on average total assets and return on average shareholders' equity were ~~1.08%~~1.10% and ~~10.92%~~10.59%, respectively, for the three months ended ~~September 30, 2020~~March 31, 2021 compared to return on average total assets and return on average shareholders' equity of ~~1.14%~~0.89% and ~~10.57%~~8.01%, respectively, for the three months ended 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.March 31, 2020. Book value per share was ~~$17.78~~$18.63 at ~~September 30, 2020~~March 31, 2021 compared to ~~$16.74~~$18.32 at December 31, ~~2019.~~2020.

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

•~~The provision~~During the first quarter of 2021, management increased the allowance for loan losses in response to the higher estimated incurred losses in the loan portfolio due to the impact of the COVID-19 pandemic. Management may further adjust the provision and allowance for loan losses ~~may increase as borrowers continue~~in response to ~~be negatively affected by the contraction of~~changes in economic ~~activity~~conditions and the ~~dramatic increase~~performance of the loan portfolio in ~~unemployment.~~future periods. For additional discussion, see below under “Provision for Loan Losses.”

•~~Due to the~~The asset sensitive nature of the Company’s balance sheet, the Federal Reserve’s reduction in the targeted fed funds rate to zero to 0.25% and the concomitant decline in the prime rate to 3.25% in March 2020 caused a reduction in the average yield of loans tied to the prime rate. The prime rate was unchanged during the first quarter of 2021 and the overall lower market interest rate environment negatively impacted the net interest margin. The net interest margin was also impacted by the funding of the SBA PPP loans with a ~~1.0%~~1% interest ~~rate,~~yield, which will be ~~partially offset~~increased 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 SBA PPP loans become grants that are repaid by the ~~SBA over the next two years.~~SBA. The net interest margin was also negatively affected by the higher average balance of federal funds sold/short-term investments. 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.~~assets and/or the Company does not reduce the amount of lower yielding short-term investments by increasing loans or higher yielding investment securities.

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

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

~~Goodwill~~

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

~~Third~~First Quarter ~~2020~~2021 Highlights

•Net income increased $1.5 million, or 44%, to $4.9 million as compared to the first quarter of 2020. Return on average total assets and return on average shareholders' equity were ~~1.08%~~1.10% and ~~10.92%~~10.59%, respectively.

•Net interest income was ~~$15.4~~$15.3 million and the net interest margin was 3.67% on a tax equivalent basis.

•A provision for loan losses of ~~$2.3~~$1.4 million was recorded ~~for the third quarter of 2020~~ and net recoveries were ~~$5,000.~~$3,000.

•Total loans were ~~$1.5~~$1.3 billion at ~~September 30, 2020~~March 31, 2021 and ~~increased $100.2~~decreased $138.7 million from ~~June 30,~~December 31, 2020. ~~Mortgage~~During the first quarter of 2021, mortgage warehouse lines decreased $120.8 million to $267.6 million at March 31, 2021, reflecting primarily a lower volume of funding of home purchase mortgages due to the seasonal nature of home purchases in the Bank's market. Residential mortgage loans ~~increased $76.9~~held in portfolio decreased $13.2 million due to sales and ~~commercial real estate loans increased $23.7 million from June 30, 2020.~~pay-offs of loans.

•AsNon-interest income increased $1.6 million for the first quarter of ~~September 30, 2020, the Bank had funded $75.6~~2021, as residential mortgage banking operations originated $88.2 million ~~in SBA PPP loans under the CARES Act.~~

•~~Total deposits were $1.5 billion at September 30, 2020~~of residential mortgages, sold $102.2 million of residential mortgages and ~~increased $101.6~~recorded a $2.9 million ~~with non-interest demand deposits increasing $29.3 million, from June 30, 2020.~~gain on sales of loans.

•Non-performing assets were ~~$17.5~~$15.4 million, or ~~0.95%~~0.85% of total assets at ~~September 30, 2020, increasing $3.5~~March 31, 2021, representing a decrease of $1.9 million from ~~June 30,~~December 31, 2020 and included ~~$267,000~~$48,000 of other real estate owned ~~("OREO"~~(“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.

4234

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 monetary policy of the Board of Governors of the Federal Reserve System, the shape of the U.S. Treasury yield curve and the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Other factors that may affect the 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 ~~76.4%~~78.9% of the Company’s net revenues (defined as net interest income plus non-interest income) for the three months ended ~~September 30, 2020~~March 31, 2021 compared to ~~83.9%~~84.0% of net revenues for the three months ended ~~September 30, 2019.~~March 31, 2020. Net interest income also depends upon the relative amount of average interest-earning assets, average interest-bearing liabilities and the interest rate earned or paid on them, respectively.

4335

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 ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020. The average rates are derived by dividing interest income and interest expense by the average balance of assets and liabilities, respectively.


		Three months ended September 30, 2020						Three months ended September 30, 2019							Three months ended March 31, 2021						Three months ended March 31, 2020
(Dollars in thousands except yield/cost information)	(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													Assets
Interest-earning assets:	Interest-earning assets:													Interest-earning assets:
Federal funds sold/short-term investments	Federal funds sold/short-term investments	$	8,027	$	2	0.10	%	$	6,452	$	35	2.15	%	Federal funds sold/short-term investments	$	147,948	$	37	0.10	%	$	24,557	$	89	1.46	%
Investment securities:	Investment securities:													Investment securities:
Taxable	Taxable	155,242		725		1.87	%	161,538		1,130		2.80	%	Taxable	129,217		520		1.61	%	168,376		1,056		2.15	%
Tax-exempt (1)	Tax-exempt (1)	83,461		638		3.06	%	52,990		498		3.76	%	Tax-exempt (1)	88,800		605		2.73	%	65,194		555		3.40	%
Total investment securities	Total investment securities	238,703		1,363		2.28	%	214,528		1,628		3.04	%	Total investment securities	218,017		1,125		2.06	%	233,570		1,611		2.76	%
Loans: (2)	Loans: (2)													Loans: (2)
Commercial real estate	Commercial real estate	609,917		7,789		5.00	%	405,885		5,295		5.10	%	Commercial real estate	612,363		7,677		5.01	%	574,640		7,355		5.06	%
Mortgage warehouse lines	Mortgage warehouse lines	333,461		3,383		4.06	%	191,812		2,644		5.39	%	Mortgage warehouse lines	279,739		2,785		3.98	%	175,275		2,035		4.64	%
Construction	Construction	136,252		1,794		5.24	%	157,752		2,705		6.80	%	Construction	133,160		1,822		5.47	%	147,496		2,179		5.94	%
Commercial business	Commercial business	138,073		1,445		4.16	%	117,465		1,731		5.85	%	Commercial business	128,481		1,272		4.02	%	142,793		1,803		5.08	%
SBA PPP loans	SBA PPP loans	75,484		470		2.48	%	—		—		—	%	SBA PPP loans	61,610		1,023		6.73	%	—		—		—	%
Residential real estate	Residential real estate	89,755		1,137		4.96	%	57,026		624		4.38	%	Residential real estate	81,020		949		4.69	%	90,360		996		4.36	%
Loans to individuals	Loans to individuals	27,284		293		4.20	%	20,555		260		4.95	%	Loans to individuals	19,490		220		4.58	%	30,497		392		5.08	%
Loans held for sale	Loans held for sale	23,914		155		2.59	%	5,160		49		3.80	%	Loans held for sale	22,158		170		3.07	%	3,986		35		3.51	%
All other loans	All other loans	643		11		6.69	%	772		8		4.05	%	All other loans	563		7		4.97	%	1,350		10		2.96	%
Deferred (fees) costs, net	Deferred (fees) costs, net	(1,736)		—		—	%	450		—		—	%	Deferred (fees) costs, net	(1,141)		—		—	%	453		—		—	%
Total loans	Total loans	1,433,047		16,477		4.57	%	956,877		13,316		5.67	%	Total loans	1,337,443		15,925		4.83	%	1,166,850		14,805		5.10	%
Total interest-earning assets	Total interest-earning assets	1,679,777		$	17,842	4.23	%	1,177,857		$	14,979	5.15	%	Total interest-earning assets	1,703,408		$	17,087	4.07	%	1,424,977		$	16,505	4.66	%
Non-interest-earning assets:	Non-interest-earning assets:													Non-interest-earning assets:
Allowance for loan losses	Allowance for loan losses	(12,348)						(8,786)						Allowance for loan losses	(16,044)						(9,454)
Cash and due from banks	Cash and due from banks	11,460						11,684						Cash and due from banks	12,513						13,383
Other assets	Other assets	125,309						83,543						Other assets	119,620						122,482
Total non-interest-earning assets	Total non-interest-earning assets	124,421						86,441						Total non-interest-earning assets	116,089						126,411
Total assets	Total assets	$	1,804,198					$	1,264,298					Total assets	$	1,819,497					$	1,551,388
Liabilities and shareholders’ equity	Liabilities and shareholders’ equity													Liabilities and shareholders’ equity
Interest-bearing liabilities:	Interest-bearing liabilities:													Interest-bearing liabilities:
Money market and NOW accounts	Money market and NOW accounts	$	425,401	$	542	0.51	%	$	335,997	$	720	0.85	%	Money market and NOW accounts	$	458,734	$	464	0.41	%	$	401,837	$	760	0.76	%
Savings accounts	Savings accounts	290,055		461		0.63	%	190,985		491		1.02	%	Savings accounts	354,378		427		0.49	%	265,053		604		0.92	%
Certificates of deposit	Certificates of deposit	350,654		1,168		1.33	%	291,674		1,693		2.30	%	Certificates of deposit	326,930		707		0.88	%	359,881		1,874		2.09	%
Federal Reserve Bank PPPLF borrowings		35,296		33		0.37	%	—		—		—	%

Short-term borrowings	Short-term borrowings	63,175		62		0.39	%	45,378		268		2.34	%	Short-term borrowings	328		—		—	%	18,915		62		1.32	%
Redeemable subordinated debentures	Redeemable subordinated debentures	18,557		90		1.90	%	18,557		185		3.99	%	Redeemable subordinated debentures	18,557		84		1.81	%	18,557		152		3.24	%
Total interest-bearing liabilities	Total interest-bearing liabilities	1,183,138		$	2,356	0.79	%	882,591		$	3,357	1.51	%	Total interest-bearing liabilities	1,158,927		$	1,682	0.59	%	1,064,243		$	3,452	1.30	%
Non-interest-bearing liabilities:	Non-interest-bearing liabilities:													Non-interest-bearing liabilities:
Demand deposits	Demand deposits	413,350						221,166						Demand deposits	440,632						283,520
Other liabilities	Other liabilities	28,764						24,566						Other liabilities	31,252						31,793
Total non-interest-bearing liabilities	Total non-interest-bearing liabilities	442,114						245,732						Total non-interest-bearing liabilities	471,884						315,313
Shareholders’ equity	Shareholders’ equity	178,946						135,975						Shareholders’ equity	188,686						171,832
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	1,804,198					$	1,264,298					Total liabilities and shareholders’ equity	$	1,819,497					$	1,551,388
Net interest spread (3)	Net interest spread (3)					3.44	%					3.54	%	Net interest spread (3)					3.48	%					3.36	%
Net interest income and margin (4)	Net interest income and margin (4)			$	15,486	3.67	%			$	11,622	3.91	%	Net interest income and margin (4)			$	15,405	3.67	%			$	13,053	3.68	%

(1) Tax equivalent basis, using federal tax rate of 21% in ~~2020~~2021 and ~~2019.~~2020.

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

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

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

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

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.~~

4536

Three months ended ~~September 30, 2020~~March 31, 2021 compared to three months ended ~~September 30, 2019~~

March 31, 2020

Net interest income was ~~$15.4~~$15.3 million for the ~~third~~first quarter of ~~2020~~2021 and increased ~~$3.8~~$2.3 million compared to net interest income of ~~$11.5~~$12.9 million for the ~~third~~first quarter of ~~2019.~~2020. Total interest income was ~~$17.7~~$17.0 million for the three months ended ~~September 30, 2020~~March 31, 2021 compared to ~~$14.9~~$16.4 million for the three months ended ~~September 30, 2019.~~March 31, 2020. The increase in total interest income was primarily due to a net increase of ~~$476.2~~$170.6 million in average loans, reflecting growth in ~~all segments of the loan portfolio except construction~~commercial real estate, mortgage warehouse and commercial business loans, ~~and included $75.5 million in average~~including SBA PPP loans. ~~The growth in average loans included approximately $193.4 million of loans from the Shore Merger.~~

Average interest-earning assets were $1.7 billion, with a tax-equivalent yield of ~~4.23%~~4.07%, for the ~~third~~first quarter of ~~2020~~2021 compared to average interest-earning assets of ~~$1.2~~$1.4 billion, with a tax-equivalent yield of ~~5.05%,~~4.66% for the ~~third~~first quarter of ~~2019.~~2020. The tax-equivalent yield on average interest-earning assets for the ~~third~~first quarter of ~~2020~~2021 declined 8259 basis points to ~~4.23%~~4.07%, due primarily ~~due~~ to the ~~steep~~ decline in market interest rates ~~beginning in~~during 2020 to a low level that continued through the ~~third~~first quarter of ~~2019~~2021 and ~~continuing for~~ the ~~first nine months~~higher average balance of ~~2020.~~federal funds sold/short-term investments with a yield of 0.10%.

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 points in March ~~2020. The prime rate was 5.00% at September 30, 2019.~~2020 in response to the economic uncertainty resulting from the COVID-19 pandemic. 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.~~2020 and was unchanged through the first quarter of 2021. The Bank had approximately ~~$571.8~~$455.5 million of loans with an interest rate tied to the prime rate and approximately ~~$49.2~~$49.3 million of loans with an interest rate tied to either 11- or 3-month LIBOR at ~~September 30, 2020.~~March 31, 2021.

Interest expense on average interest-bearing liabilities was ~~$2.4~~$1.7 million, with an interest cost of ~~0.79%~~0.59%, for the ~~third~~first quarter of ~~2020,~~2021, compared to ~~$2.9~~$2.0 million, with an interest cost of ~~1.04%~~0.65%, for the ~~second~~fourth quarter of 2020 and ~~$3.4~~$3.5 million, with an interest cost of ~~1.51%~~1.30%, for the ~~third~~first quarter of ~~2019.~~2020. Despite an increase of ~~$300.5~~$94.7 million in average interest-bearing liabilities for the ~~third~~first quarter of 2021 compared to the first quarter of 2020, ~~compared to the third quarter of 2019,~~ interest expense declined ~~$1.0~~$1.8 million due largely ~~due~~ to the decline in interest rates paid on deposits ~~borrowings~~ and the redeemable subordinated debentures ~~resulting from~~as a direct result of the ~~falling~~lower interest rate environment. The average cost of interest-bearing deposits was ~~0.81%~~0.57% for the ~~third~~first quarter of ~~2020, 1.04%~~2021, 0.64% for the ~~second~~fourth quarter of 2020 and ~~1.41%~~1.27% for the ~~third~~first quarter of ~~2019.~~2020. The lower interest cost of interest-bearing deposits for the ~~third~~first quarter of 2021 compared to the first quarter of 2020 ~~compared to the third quarter of 2019~~reflected primarily ~~reflects a steep decline in deposit~~lower market interest rates ~~beginning in the fourth quarter of 2019 and continuing for the first nine months of~~since March 2020. The interest rates paid on deposits generally do not adjust quickly to rapid changes in market interest rates and ~~tend to~~ decline over time in a falling interest rate environment.

~~The growth 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, money market and NOW accounts increased $56.9 million, savings accounts increased $89.3 million and certificates of deposit ~~which generally have a higher interest cost than other types~~and short-term borrowings decreased $33.0 million and $18.6 million, respectively, for the first quarter of ~~interest-bearing deposits, increased by $59.0 million at September 30, 2020 as compared to September 30, 2019.~~2021. At ~~September 30, 2020,~~March 31, 2021, there were ~~$260.0~~$135.1 million of retail certificates of ~~deposit~~deposits with an average interest cost of ~~1.33%~~1.20% that mature within the following ~~nine~~12 months. Management will continue to monitor and 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 24 basis points to~~was 3.67% for the ~~third~~first quarter of ~~2020~~2021 compared to ~~3.91%~~3.68% for the ~~third~~first quarter of ~~2019 due primarily to~~2020. The net interest margin for the ~~82 basis point decline~~first quarter of 2021 was negatively impacted by the higher average balance of federal funds sold/short-term investments resulting from the growth in the ~~yield~~average balance of ~~average interest-earning assets, partially offset~~deposits and the continuing low interest rate environment. Interest income for the first quarter of 2021 included $398,000 of fee income related to PPP loans that were forgiven and paid-off by the ~~72 basis points decline in~~SBA, $151,000 of interest income collected on a purchased credit-impaired ("PCI") commercial real estate loan that was paid-off and $50,000 of prepayment fees collected on commercial real estate loans that were paid-off. Excluding the effect of the higher average balance of federal funds sold/short-term investments, the net interest ~~cost~~margin was approximately 3.95% for the first quarter of average interest-bearing liabilities. Due to the decline in the prime rate in the third and fourth quarters of 2019 followed by the further decline in the prime rate in March 2020, the yield of loans declined 95 basis points to 4.57% and the interest cost of interest-bearing liabilities was not reduced to the same extent as the decline in the yield of loans.2021.

~~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 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 adjust them based on then current market conditions.

The net interest 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 year over year was a result of a decline of 72 basis points in the yield of average interest-bearing assets, which was partially offset by a decline of 40 basis points in interest cost of the average interest-bearing liabilities.

Provision for Loan Losses

Management considers a complete review of the following specific factors in determining the provisions for loan losses: historical losses by loan category, the level of non-accrual loans and problem loans as identified through internal review and classification, collateral values and the growth, size and risk elements of the loan portfolio. In addition to these factors, management takes into consideration current economic conditions and local real estate market conditions. As a result of the continuing economic and social disruption caused by the COVID-19 pandemic, in the ~~third~~first quarter of ~~2020,~~2021 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 the hotel and restaurant-food service industries ~~as most likely to be~~that have been 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 ~~$2.3~~$1.4 million for the ~~third~~first quarter of ~~2020~~2021 compared to a provision for loan losses of ~~$350,000~~$895,000 for the ~~third~~first quarter of ~~2019.~~2020. The ~~significant increase in the~~ provision for loan losses in the ~~third~~first quarter of ~~2020 included an additional provision of approximately $1.5~~2021 reflected primarily a $1.7 million to increase in specific reserves on impaired loans. ~~The higher~~This provision also ~~reflects~~reflected changes in loan ratings and ~~the growth and change in~~ mix of the loan ~~portfolio.~~portfolio at March 31, 2021. At ~~September 30, 2020,~~March 31, 2021, total loans were ~~$1.5~~$1.3 billion and the allowance for loan losses was ~~$14.5~~$17.0 million, or ~~0.99%~~1.32% of total loans, compared to total loans of ~~$1.0~~$1.2 billion and an allowance for loan losses of ~~$9.0~~$10.0 million, or ~~0.88%~~0.82% of total loans at ~~September 30, 2019. Included in~~March 31, 2020. The allowance for loan losses, excluding the allocated reserve for mortgage warehouse lines, was $15.8 million, or 1.54% of total loans excluding mortgage warehouse lines at ~~September 30, 2020 were $186.6 million of loans that were acquired in the Shore Merger.~~March 31, 2021. Acquisition accounting for the Shore Merger in 2019 and the merger with New Jersey Community Bank ~~(“NJCB”~~("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~~$1.4 million and ~~$0.5~~$0.4 million at ~~September 30, 2020,~~March 31, 2021, respectively. In addition, at ~~September 30, 2020,~~March 31, 2021, there were ~~$75.6~~$59.5 million of SBA PPP loans which are 100% guaranteed by the SBA and, accordingly, no ~~reserve~~allowance 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 the weakening economic operating environment; a provision of~~ ~~$1.1 million for an increase in the qualitative factors attributed to the modification of loans and deferral of principal and or interest on $149.3 million of loans; and an~~ ~~$850,000~~ ~~provision related to the down-grade of the credit ratings on certain loans.~~

The higher provision also reflects, to a lesser extent, the growth and change in mix of the loan portfolio. Net charge-offs were $161,000 for the nine months ended September 30, 2020 compared to $475,000 for the nine months ended September 30, 2019.

Non-Interest Income

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

Non-interest income was ~~$4.7~~$4.1 million for the ~~third~~first quarter of ~~2020,~~2021, representing an increase of ~~$2.5~~$1.6 million, or ~~114.7%~~66.0%, compared to ~~$2.2~~$2.5 million for the ~~third~~first quarter of ~~2019.~~2020. The significant increase in non-interest income was driven primarily by a ~~$2.0~~$1.6 million increase in gain on ~~sale~~sales of loans.

~~For~~In the ~~third~~first quarter of ~~2020,~~2021, residential mortgage banking operations originated ~~approximately $118.0~~$88.2 million of residential mortgages, sold ~~$97.5~~$102.2 million of residential mortgages and recorded a $2.9 million of gain on ~~sale~~sales of loans compared to ~~$53.3~~approximately $40.0 million of residential mortgages originated, ~~$38.8~~$34.0 million of residential mortgage loans sold and ~~$1.1~~a $1.2 million of gain on ~~sale~~sales of loans recorded in the ~~third~~first quarter of ~~2019.~~2020. The residential mortgage loan pipeline was ~~$71.7~~$32.1 million at ~~September 30, 2020 and was comprised 64% and 36% of refinance and purchase loan applications and commitments for mortgages, respectively.~~March 31, 2021. Management believes that the increase in residential mortgage loans originated and sold was due primarily to increased residential mortgage ~~lending~~refinancing activity as a result of ~~significantly~~continued lower mortgage interest ~~rates in the 2020 period compared to the 2019 period.~~rates. In the ~~third~~first quarter of ~~2020, $5.1~~2021, $1.8 million of SBA loans were sold and ~~gain~~gains of ~~$463,000 was~~$190,000 were recorded compared to ~~$2.4~~$2.7 million of SBA loans sold and ~~gain~~gains of ~~$205,000~~$226,000 recorded in the ~~third~~first quarter of ~~2019.~~

~~For the third quarter of 2020 compared to the third quarter of 2019, service~~2020. Service charges on deposit accounts decreased ~~$39,000,~~$96,000 for the first quarter of 2021 compared to the first quarter of 2020, due primarily to lower overdraft ~~fees and~~fees. Other income ~~on bank-owned life insurance (“BOLI”)~~ increased ~~$39,000~~$105,000 in the first quarter of 2021 compared to the first quarter of 2020 due primarily to recoveries on PCI loans in excess of the ~~increase in BOLI~~fair value of the 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.loans.

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 a 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 attributable to a lower interest rate environment for the first nine months of 2020 compared to the same period in 2019.

For the nine months ended September 30, 2020, SBA loan sales, excluding SBA PPP loans, were $7.8 million and gain on sales of loans of $688,000 was recorded compared to $10.4 million of SBA loans sold and gain on sales of loans of $817,000 recorded for the nine months ended September 30, 2019.

~~Service charges on deposit accounts decreased to $471,000 for the nine months ended September 30, 2020 from $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 $632,000, due primarily to the increase in BOLI acquired in the Shore Merger compared to $437,000 for the nine months ended September 30, 2019. Other income increased $362,000 to $2.1 million compared to $1.7 million for the nine months ended September 30, 2019 in part due to an interest rate swap fee collected of $172,000, an expired loan commitment fee of $59,000 and general increases in other income components.

4838

Non-Interest Expenses

For the three months ended ~~September 30, 2020,~~March 31, 2021, non-interest expenses were ~~$11.0~~$11.1 million compared to ~~$8.4~~$9.8 million for the three months ended ~~September 30, 2019,~~March 31, 2020, representing an increase of ~~$2.5~~$1.3 million, or ~~30.0%~~13.4%. The primary ~~reasons~~reason for the increase ~~were~~was higher commissions related to the origination of residential mortgages for sale of ~~$1.2 million and $941,000 of expenses due to the inclusion of the former Shore operations in the third quarter of 2020.~~$729,000.

The following table presents the major components of non-interest expenses for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:

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


	Three months ended March 31,
(Dollars in thousands)	2021		2020
Salaries and employee benefits	$	6,952	$	6,169
Occupancy expense	1,311		1,170
Data processing expenses	491		446
Equipment expense	431		411
Marketing	25		44
Telephone	130		125
Regulatory, professional and consulting fees	593		464
Insurance	105		119
Supplies	60		97
FDIC insurance expense	270		34
Other real estate owned expenses	52		17

Amortization of intangible assets	81		122
Other expenses	600		575
Total	$	11,101	$	9,793

Salaries and employee benefits expense ~~which represents the largest portion of non-interest expenses,~~ increased ~~$1.9 million,~~$783,000 or ~~35.8%~~12.7%, ~~to $7.1 million~~ for the ~~third~~first quarter of ~~2020~~2021 compared to ~~$5.2 million for~~ the ~~third~~first quarter of ~~2019,~~2020 due primarily to a ~~$1.2 million~~$729,000 increase in mortgage commissions resulting from significantly higher residential mortgage lending activity, ~~salaries~~$75,000 in temporary staffing costs and ~~benefits for former Shore employees ($478,000) who joined the Company,~~$171,000 in merit increases and increases in employee benefit expenses, which ~~amounts~~ were partially offset by higher deferred loan origination expenses of approximately ~~$142,000 related to the origination of loans.~~$180,000.

Occupancy expense increased ~~$250,000,~~$141,000, or ~~25.7%~~12.1%, to $1.3 million for the three months ended March 31, 2021 compared to $1.2 million for the three months ended ~~September 30,~~March 31, 2020, due primarily to ~~the addition of the five former Shore branch offices compared to $1.0 million for the three months ended September 30, 2019.~~

Data processing expenses increased $107,000, or 28.2%, to $486,000 for the third quarter of 2020 compared to $379,000 for the third quarter of 2019, due primarily to the addition of the Shore operations and increases in loans, deposits and other customer services.higher snow removal costs.

Regulatory, professional and consulting fees increased ~~$149,000,~~$129,000, or ~~35.0%~~27.8%, to ~~$575,000 in~~$593,000 for the ~~third~~first quarter of 2021 compared to $464,000 for the first quarter of 2020 ~~compared to $426,000 for the third quarter of 2019~~ due primarily to an increase in legal ~~services.~~services related to loan collections and workouts.

FDIC insurance expense increased ~~$272,000~~$236,000 for the ~~third~~first quarter of ~~2020,~~2021, due primarily to ~~the acquisition of Shore,~~ the growth of assets, a credit of ~~$87,000~~$106,000 from the FDIC applied toin the ~~second~~first quarter of 2020 for the fourth quarter of 2019 assessment and an increase in the FDIC assessment rate in ~~2020.~~2021.

~~For the third quarter of 2020, there were no merger-related expenses compared to $302,000 for the third quarter of 2019 related to legal and financial advisory fees incurred for the Shore Merger.~~

Amortization of intangible assets ~~increased $61,000,~~decreased $41,000, or ~~203.3%~~33.6%, to ~~$91,000~~$81,000 for the three months ended ~~September 30, 2020~~March 31, 2021 compared to ~~$30,000~~$122,000 for the three months ended ~~September 30, 2019~~March 31, 2020 due primarily to ~~the $67,000~~a reduction of amortization expense for the core deposit intangible ~~related to the Shore Merger.~~

~~Other expenses increased $65,000, or 14.5%, due to general increases in other operating expenses.~~asset.

Non-interest expenses may increase, if there is a significant increase in non-performing loans, as a result of higher expenses incurred in connection with loan collection and recovery costs. In addition, FDIC insurance expense may increase if the Bank’s financial condition is adversely impacted by a higher level of non-performing loans and assets.

~~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 $1.9 million for the ~~third~~first quarter of ~~2020,~~2021, resulting in an effective tax rate of ~~27.9%~~28.1%, compared to income tax expense of $1.3 million, which resulted in an effective tax rate of ~~26.6%~~27.3% for the ~~third~~first quarter of ~~2019.~~2020. The increase in ~~the effective~~income tax ~~rate for the third quarter~~expense was primarily due to an increase of ~~2020 was due primarily to the lower percentage of the total of income on BOLI and tax-exempt interest to~~$2.2 million in pre-tax income in the ~~third~~first quarter of ~~2020~~2021 compared to the ~~third~~first quarter of ~~2019.~~2020. The higher effective tax rate in the first quarter of 2021 reflected the higher New Jersey statutory tax rate in effect compared to the New Jersey statutory tax rate in effect in the first quarter of 2020.

~~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

~~September 30, 2020~~March 31, 2021 compared to December 31, ~~2019~~2020

Total consolidated assets were ~~$1.84~~$1.81 billion at ~~September 30, 2020, representing an increase of $257.8 million~~March 31, 2021, relatively unchanged from ~~total consolidated assets of $1.59 billion at~~ December 31, ~~2019. This increase was due primarily to a $239.7~~2020. Total cash and cash equivalents increased $143.9 million ~~increase~~and total investment securities increased $8.5 million, which amounts were offset by decreases of $138.7 million in total portfolio loans ~~a $22.3~~and $14.1 million ~~increase~~ in loans held for 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 $233.7 million increase in deposits and a $13.8 million increase in short-term borrowings.sale.

Cash and Cash Equivalents

Cash and cash equivalents totaled ~~$20.1~~$165.9 million at ~~September 30, 2020~~March 31, 2021 compared to ~~$14.8~~$22.0 million at December 31, ~~2019,~~2020, representing an increase of ~~$5.2~~$143.9 million. The increase in cash and cash equivalents reflects an increase in ~~cash and due from banks, partially offset by a decrease in~~ interest-earning deposits due primarily to the ~~timing of~~ cash ~~flows.~~flows resulting from a decline in total portfolio loans.

Loans Held for Sale

Loans held for sale were ~~$28.2~~$15.7 million at ~~September 30, 2020~~March 31, 2021 compared to ~~$5.9~~$29.8 million at December 31, ~~2019,~~2020, representing ~~an increase~~a decrease of ~~$22.3 million.~~$14.1 million due to loan sales in excess of loan originations. The amount of loans held for sale varies from period to period due to changes in the amount and timing of sales of residential mortgage loans and SBA guaranteed commercial loans.

Investment Securities

Investment securities represented approximately ~~12.1%~~12.5% of total assets at ~~September 30, 2020~~March 31, 2021 and approximately ~~14.7%~~12.1% of total assets at December 31, ~~2019.~~2020. Total investment securities ~~decreased $9.5~~increased $8.5 million to ~~$222.9~~$226.3 million at ~~September 30, 2020~~March 31, 2021 from ~~$232.4~~$217.7 million at December 31, ~~2019.~~2020. Purchases of investment securities totaled ~~$56.1~~$35.6 million during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 and proceeds from sales, calls, maturities and payments totaled ~~$66.7~~$26.1 million during this same period.

Securities available for sale are investments that may be sold in response to changing market and interest rate conditions or for other business purposes. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create economically attractive returns. At ~~September 30, 2020,~~March 31, 2021, securities available for sale were ~~$135.1~~$130.9 million, representing ~~a decrease~~an increase of ~~$20.7~~$5.7 million from securities available for sale of ~~$155.8~~$125.2 million at December 31, ~~2019.~~2020.

At ~~September 30, 2020,~~March 31, 2021, the securities available for sale portfolio had net unrealized gains of ~~$2.4~~$1.9 million compared to net unrealized gains of ~~$414,000~~$2.6 million at December 31, ~~2019.~~2020. 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 ~~September 30, 2020,~~March 31, 2021, securities held to maturity were ~~$87.8~~$95.4 million, representing an increase of ~~$11.2~~$2.8 million from ~~$76.6~~$92.6 million at December 31, ~~2019.~~2020. The fair value of the held to maturity portfolio was ~~$90.7~~$97.9 million and represented an unrealized gain of $2.5 million at ~~September 30, 2020.~~March 31, 2021.

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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


		September 30, 2020				December 31, 2019					March 31, 2021				December 31, 2020
(Dollars in thousands)	(Dollars in thousands)	Amount		%		Amount		%		(Dollars in thousands)	Amount		%		Amount		%
Commercial real estate	Commercial real estate	$	615,957	42	%	$	567,655	47	%	Commercial real estate	$	608,033	47	%	$	618,978	43	%
Mortgage warehouse lines	Mortgage warehouse lines	374,007		26		236,672		20		Mortgage warehouse lines	267,580		21		388,366		27
Construction loans		141,583		10		148,939		12
Construction										Construction	138,924		11		129,245		9
Commercial business	Commercial business	210,004		14		139,271		11		Commercial business	187,389		14		188,728		13
Residential real estate	Residential real estate	88,206		6		90,259		7		Residential real estate	75,048		6		88,261		6
Loans to individuals	Loans to individuals	27,432		2		32,604		3		Loans to individuals	19,441		1		21,269		2
Other loans	Other loans	122		—		137		—		Other loans	103		—		113		—
Total loans	Total loans	1,457,311		100	%	1,215,537		100	%	Total loans	1,296,518		100	%	1,434,960		100	%
Deferred loan (fees) costs, net		(1,627)				491
Deferred loan fees, net										Deferred loan fees, net	(1,530)				(1,254)
Total loans, including deferred loans (fees) costs, net	Total loans, including deferred loans (fees) costs, net	$	1,455,684			$	1,216,028			Total loans, including deferred loans (fees) costs, net	$	1,294,988			$	1,433,706

Total portfolio loans ~~increased $239.7 million, or 19.7%, to $1.5~~at March 31, 2021 were $1.29 billion, ~~at September 30, 2020~~ compared to ~~$1.2~~$1.43 billion at December 31, ~~2019. Commercial business~~2020. The $138.7 million decrease in portfolio loans ~~increased $70.7 million, which included $75.6~~was due primarily to a decrease of $120.8 million in ~~SBA PPP loans,~~ mortgage warehouse ~~loans increased $137.3~~lines, a decrease of $10.9 million ~~and~~in commercial real estate loans ~~increased $48.3 million. Partially offsetting these increases, construction loans decreased $7.4~~and a decrease of $13.2 million ~~loans to individuals decreased $5.2 million and~~in residential real estate loans, ~~decreased $2.1 million.~~and was partially offset by a $9.7 million increase in construction loans.

Commercial real estate loans totaled ~~$616.0~~$608.0 million at ~~September 30, 2020,~~March 31, 2021, representing an increase of ~~$48.3~~$10.9 million compared to ~~$567.7~~$619.0 million at December 31, ~~2019.~~2020. 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 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 ~~$374.0~~$267.6 million at ~~September 30, 2020~~March 31, 2021 compared to ~~$236.7~~$388.4 million at December 31, ~~2019.~~2020. The decline was due to a lower level of mortgage funding in the first quarter of 2021 compared to the fourth quarter of 2020. In the first ~~nine months~~quarter of ~~2020, $3.6~~2021, $1.4 billion of residential mortgage loans were financed through the mortgage warehouse funding group compared to ~~$2.5 billion~~$855.6 million during the first ~~nine months~~quarter of ~~2019.~~2020. The higher level of funding activity was due primarily to the lower mortgage interest rate environment that began in March 2020 ~~than in 2019,~~and persisted through the first quarter of 2021, which resulted in an increase in ~~refinance activity in 2020 compared to 2019.~~refinancing activity.

Construction loans totaled ~~$141.6~~$138.9 million at ~~September 30, 2020~~March 31, 2021 compared to ~~$148.9~~$129.2 million at December 31, ~~2019.~~2020. Construction financing is provided to businesses to expand their facilities and operations and to real estate developers for the acquisition, development and construction of residential properties and income-producing properties. First mortgage construction loans are made to developers and builders for single family homes or multi-family buildings that are 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 ~~$210.0~~$187.4 million at ~~September 30, 2020~~March 31, 2021 compared to ~~$139.3~~$188.7 million at December 31, ~~2019.~~2020. 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~~had $59.5 million in SBA PPP loans ~~for the nine months ended September 30, 2020.~~outstanding at March 31, 2021. Commercial business loans consist primarily of loans to small and middle market businesses and are typically working capital loans used to finance inventory, receivables or equipment needs. These loans are generally secured by business assets of the commercial borrower.

Residential real estate loans totaled ~~$88.2~~$75.0 million at ~~September 30, 2020~~March 31, 2021 compared to ~~$90.3~~$88.3 million at December 31, ~~2019.~~2020. Loans to individuals, which are comprised primarily of home equity loans, totaled ~~$27.4~~$19.4 million at ~~September 30, 2020~~March 31, 2021 compared to ~~$32.6~~$21.3 million at December 31, ~~2019.~~2020.

The ability of the Company to enter into larger loan relationships and management’s philosophy of relationship banking are key factors in the Company’s strategy for loan growth. The ultimate collectability of the loan portfolio and recovery of the carrying

amount of real estate are subject to changes in the economic environment and real estate market in the Company’s primary market 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 the COVID-19 pandemic continue to accrue interest and are not presented as past due in the table below.

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

At ~~September 30, 2020,~~March 31, 2021, non-performing loans ~~increased~~decreased by ~~$12.7~~$1.9 million to ~~$17.2~~$15.3 million from ~~$4.5~~$17.2 million at December 31, ~~2019,~~2020, and the ratio of non-performing loans to total loans ~~increased~~decreased to 1.18% at ~~September 30, 2020~~March 31, 2021 compared to ~~0.37%~~1.20% at December 31, ~~2019.~~2020. During the ~~nine~~three months ended ~~September 30, 2020, $2.2~~March 31, 2021, $2.0 million of non-performing loans were resolved ~~net charge-offs~~as a result of pay-downs and pay-offs which included $782,000 of purchased credit impaired loans that were ~~$161,000 and $14.9 million~~repaid. For the three months ended March 31, 2021, $967,000 of loans were placed on non-accrual ~~status. For the nine months ended September 30, 2020,~~status and consisted of a ~~$7.5 million participation in a construction~~$96,000 home equity loan ~~$6.9 million in commercial real estate loans, a $84,000 commercial business loan, $248,000 of loans to individuals~~ and ~~a $160,000~~an $871,000 residential ~~loan were placed on non-accrual status.~~mortgage loan.

5342

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


(Dollars in thousands)	(Dollars in thousands)	September 30, 2020			December 31, 2019			(Dollars in thousands)	March 31, 2021			December 31, 2020
Non-performing loans:	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		$	—		Loans 90 days or more past due and still accruing	$	—		$	871
Non-accrual loans	Non-accrual loans	17,153			4,497			Non-accrual loans	15,333			16,361
Total non-performing loans	Total non-performing loans	17,245			4,497			Total non-performing loans	15,333			17,232
Other real estate owned	Other real estate owned	267			571			Other real estate owned	48			92
Other repossessed assets		—			—

Total non-performing assets	Total non-performing assets	17,512			5,068			Total non-performing assets	15,381			17,324
Performing troubled debt restructurings	Performing troubled debt restructurings	6,092			6,132			Performing troubled debt restructurings	5,456			5,768
Performing troubled debt restructurings and total non-performing assets	Performing troubled debt restructurings and total non-performing assets	$	23,604		$	11,200		Performing troubled debt restructurings and total non-performing assets	$	20,837		$	23,092

Non-performing loans to total loans	Non-performing loans to total loans	1.18		%	0.37		%	Non-performing loans to total loans	1.18		%	1.20		%
Non-performing loans to total loans excluding mortgage warehouse lines	Non-performing loans to total loans excluding mortgage warehouse lines	1.59		%	0.46		%	Non-performing loans to total loans excluding mortgage warehouse lines	1.49		%	1.65		%
Non-performing assets to total assets	Non-performing assets to total assets	0.95		%	0.32		%	Non-performing assets to total assets	0.85		%	0.96		%
Non-performing assets to total assets excluding mortgage warehouse lines	Non-performing assets to total assets excluding mortgage warehouse lines	1.19		%	0.38		%	Non-performing assets to total assets excluding mortgage warehouse lines	1.00		%	1.22		%
Total non-performing assets and performing troubled debt restructurings to total assets	Total non-performing assets and performing troubled debt restructurings to total assets	1.28		%	0.71		%	Total non-performing assets and performing troubled debt restructurings to total assets	1.15		%	1.28		%

Non-performing assets ~~increased~~decreased by ~~$12.4~~$1.9 million to ~~$17.5~~$15.4 million at ~~September 30, 2020~~March 31, 2021 from ~~$5.1~~$17.3 million at December 31, ~~2019.~~2020. OREO totaled ~~$267,000~~$48,000 at ~~September 30, 2020~~March 31, 2021 compared to ~~$571,000~~$92,000 at December 31, ~~2019. Three residential lots acquired in the Shore Merger with a carrying value of $304,000 were sold in the nine months ended September 30,~~ 2020. OREO at ~~September 30, 2020~~March 31, 2021 was comprised of ~~three residential lots acquired in the Shore Merger with a carrying value~~one parcel of ~~$174,000 and land with a carrying value of $93,000 that was foreclosed in the second quarter of 2018.~~land.

At ~~September 30, 2020,~~March 31, 2021, the Bank had 129 loans totaling ~~$6.2~~$5.6 million that were troubled debt restructurings. Two of these loans totaling ~~$146,000~~$134,000 are included in the above table as non-accrual loans and the remaining ~~ten~~seven loans totaling ~~$6.1~~$5.5 million were performing. At December 31, ~~2019,~~2020, the Bank had 1310 loans totaling ~~$6.4~~$5.9 million that were troubled debt restructurings. ~~Three~~Two of these loans totaling ~~$345,000~~$141,000 are included in the above table as non-accrual loans and the remaining ~~nine~~eight loans totaling ~~$6.1~~$5.8 million were performing.

In accordance with U.S. GAAP, the excess of cash flows expected at acquisition over the initial investment in the purchase of a credit impaired loan is recognized as interest income over the life of the loan. At ~~September 30, 2020,~~March 31, 2021, there were 124 loans acquired with evidence of deteriorated credit quality totaling ~~$5.2~~$1.8 million that were not classified as non-performing loans. At December 31, ~~2019,~~2020, there were 135 loans acquired with evidence of deteriorated credit quality totaling ~~$5.4~~$2.4 million that were not classified as non-performing loans.

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

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

Allowance for Loan Losses and Related Provision

The allowance for loan losses is maintained at a level sufficient to absorb estimated credit losses in the loan portfolio as of the date of the financial statements. The allowance for loan losses is a valuation reserve available for losses incurred or inherent in the loan

portfolio and other extensions of credit. The determination of the adequacy of the allowance for loan losses is a critical accounting policy of the Company.

The Company’s primary lending emphasis is the origination of commercial business, construction and commercial real estate loans and mortgage warehouse lines of credit. Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy and a decline in New Jersey and New York City metropolitan area real estate market values. Any one, or a combination, of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.

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

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

Management reviews the adequacy of the allowance on at least a quarterly basis to ensure that the provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is adequate based on management’s assessment of probable estimated losses. The Company’s methodology for assessing the adequacy of the allowance for loan losses consists of several key elements and is consistent with U.S. GAAP and interagency supervisory guidance. The allowance for loan losses methodology consists of two major components. The first component is an estimation of losses associated with individually identified impaired loans, which follows ASC Topic 310. The second major component is an estimation of losses under ASC Topic 450, which provides guidance for estimating losses on groups of loans with similar risk characteristics. The Company’s methodology results in an allowance for loan losses that includes a specific reserve for impaired loans, an allocated reserve and an unallocated portion.

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

•Delinquencies and non-accruals;

•Portfolio quality;

•Concentration of credit;

•Trends in volume of loans;

•Quality of collateral;

•Policy and procedures;

•Experience, ability and depth of management;

•Economic trends - national and local; and

•External factors - competition, legal and regulatory.

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

The watch list includes loans that are assigned a rating of special mention, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current net worth and paying

capacity of the obligor or of the collateral pledged, if any. Loans classified as doubtful have all the weaknesses inherent in loans classified as substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans rated as doubtful are placed in non-accrual status. Loans classified as a loss are considered uncollectible and are charged-off against the allowance for loan losses.

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

The second category of reserves consists of the allocated portion of the allowance. The allocated portion of the allowance is determined by taking pools of outstanding loans that have similar characteristics and applying historical loss experience for each pool. This estimate represents the potential unconfirmed losses within the portfolio. Individual loan pools are created for commercial business loans, commercial real estate loans, construction loans, warehouse lines of credit and various types of loans to individuals. The historical estimation for each loan pool is then adjusted to account for current conditions, current loan portfolio performance, loan policy or management changes or any other qualitative factor that management believes may cause future losses to deviate from historical levels.

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

Commercial Business

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

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

Commercial Real Estate

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

In response to the COVID-19 pandemic, management identified hotel and restaurant-food service as industries that were most likely to be adversely impacted in the near-term by the economic disruption caused by the pandemic. The following table, which presents information as of September 30, 2020, summarizes the amount of loan modifications and forbearance granted and the amount of SBA PPP loans funded.

(Dollars in thousands) Balance % of Total Loans COVID-19 Deferrals through September 30, 2020 COVID-19 Deferrals at September 30, 2020 PPP Loans
Hotel $ 68,487 4.7% $ 43,096 $ 3,338 $ 662
Restaurant-food service 58,218 4.0% 13,745 1,424 10,818

The Company's commercial real estate portfolio is largely secured by real estate collateral located in New Jersey and the New York City metropolitan area. Conditions in the real estate markets in which the collateral for the Company's loans are located strongly influence the level of the Company's non-performing loans. A decline in the New Jersey and New York City metropolitan area real estate markets could adversely affect the Company's loan portfolio. Decreases in local real estate values would adversely affect the

value of property used as collateral for the Company's loans. Adverse changes in the economy also may have a negative effect on the ability of our borrowers to make timely repayments of their loans.

Construction Financing

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

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

Mortgage Warehouse Lines of Credit

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

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

Consumer

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

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

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

•Consumer credit scores;

•Internal credit risk grades;

•Loan-to-value ratios;

•Collateral; and

•Collection experience.

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

(Dollars in thousands) Nine Months Ended September 30, 2020 Year Ended December 31, 2019 Nine Months Ended September 30, 2019
Balance, beginning of period $ 9,271 $ 8,402 $ 8,402
Provision charged to operating expenses 5,340 1,350 1,050
Loans charged off:
Residential real estate loans — — —
Commercial business and commercial real estate (165) (463) (438)
Loans to individuals — (7) —
All other loans (3) (43) (43)
Total loans charged off (168) (513) (481)
Recoveries:
Commercial business and commercial real estate 7 26 —
Loans to individuals — 6 6
All other loans — — —
Total recoveries 7 32 6
Net charge offs (161) (481) (475)
Balance, end of period $ 14,450 $ 9,271 $ 8,977
Loans:
At period end $ 1,455,684 $ 1,216,028 $ 1,025,031
Average during the period 1,292,650 964,920 910,975
Net charge offs to average loans outstanding (0.01) % (0.05) % (0.05) %
Net charge offs to average loans outstanding, excluding mortgage warehouse loans (0.02) % (0.06) % (0.06) %
Allowance for loan losses to:
Total loans at period end 0.99 % 0.76 % 0.88 %
Total loans at period end excluding mortgage warehouse
loans 1.18 % 0.84 % 1.16 %
Non-performing loans 83.79 % 206.16 % 170.47 %


(Dollars in thousands)	Three Months Ended March 31, 2021			Year Ended December 31, 2020			Three Months Ended March 31, 2020
Balance, beginning of period	$	15,641		$	9,271		$	9,271
Provision charged to operating expenses	1,400			6,698			895
Loans charged off:

Residential real estate loans	—			—			—
Commercial business and commercial real estate	—			(364)			(165)
Loans to individuals	—			(3)			—

All other loans	—			—			—
Total loans charged off	—			(367)			(165)
Recoveries:


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

All other loans	—			—			—
Total recoveries	3			39			—
Net recoveries (charge offs)	3			(328)			(165)
Balance, end of period	$	17,044		$	15,641		$	10,001
Loans:
At period end	$	1,294,988		$	1,433,706		$	1,217,807
Average during the period	1,337,443			1,333,330			1,166,850
Net charge offs to average loans outstanding	—		%	(0.02)		%	(0.01)		%
Net recoveries (charge offs) to average loans outstanding, excluding mortgage warehouse loans	0.01		%	(0.03)		%	(0.02)		%
Allowance for loan losses to:
Total loans at period end	1.32		%	1.09		%	0.82		%
Total loans at period end excluding mortgage warehouse loans	1.54		%	1.32		%	0.90		%
Non-performing loans	111.16		%	90.77		%	75.78		%

The following table represents the allocation of the allowance for loan losses among the various categories of loans and certain other information as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. The total allowance is available to absorb losses from any portfolio of loans.


		September 30, 2020						December 31, 2019							March 31, 2021						December 31, 2020
(Dollars in thousands)	(Dollars in thousands)	Amount		As a % of Loan Class		Loans as a % of Total Loans		Amount		As a % of Loan Class		Loans as a % of Total Loans		(Dollars in thousands)	Amount		As a % of Loan Class		Loans as a % of Total Loans		Amount		As a % of Loan Class		Loans as a % of Total Loans
Commercial real estate loans		$	6,077	0.99	%	42	%	$	4,524	0.80	%	47	%
Commercial Business		2,571		1.22	%	14	%	1,409		1.01	%	11	%
Construction loans		3,219		2.27	%	10	%	1,389		0.93	%	12	%
Residential real estate loans		524		0.59	%	6	%	412		0.46	%	7	%
Commercial real estate														Commercial real estate	$	6,679	1.10	%	46	%	$	6,422	1.04	%	43	%
Commercial business														Commercial business	2,910		1.51	%	14	%	2,727		1.44	%	13	%
Construction														Construction	5,468		3.94	%	11	%	3,741		2.89	%	9	%
Residential real estate														Residential real estate	478		0.64	%	6	%	619		0.70	%	6	%
Loans to individuals	Loans to individuals	179		0.65	%	2	%	185		0.57	%	3	%	Loans to individuals	120		0.62	%	2	%	125		0.59	%	2	%
Subtotal	Subtotal	12,570		1.16	%	74	%	7,919		0.81	%	80	%	Subtotal	15,655		1.51	%	79	%	13,634		1.30	%	73	%
Mortgage warehouse lines	Mortgage warehouse lines	1,707		0.46	%	26	%	1,083		0.46	%	20	%	Mortgage warehouse lines	1,212		0.45	%	21	%	1,807		0.47	%	27	%
Unallocated reserves	Unallocated reserves	173		—		—		269		—		—		Unallocated reserves	177		—		—		200		—		—
Total	Total	$	14,450	0.99	%	100	%	$	9,271	0.76	%	100	%	Total	$	17,044	1.32	%	100	%	$	15,641	1.09	%	100	%

For the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, the Company recorded a provision for loan losses of ~~$5.3~~$1.4 million, and net ~~charge-offs~~recoveries of ~~$161,000~~$3,000 compared to a provision for loan losses of ~~$1.1 million,~~$895,000, and net charge-offs of ~~$461,000~~$165,000 recorded for the first ~~nine months~~quarter of ~~2019.~~2020. The higher provision for loan losses recorded for the first ~~nine months~~quarter of ~~2020~~2021 was due primarily to ~~(i) a reserve for~~ the estimated increase in incurred loan losses resulting from the economic and social disruption caused by the COVID-19 pandemic; (ii) the increase in the qualitative factors attributed to the modification of loans, including the deferral of principal and or interest payments and downgrades of the credit ratings on certain loans, (iii) additional provision to increase specific ~~reserves and, (iv) to a lesser extent, the growth and change in the mix of the loan portfolio.~~reserves.

As part of the review of the adequacy of the allowance for loan losses at ~~September 30, 2020,~~March 31, 2021, management reviewed over ~~95%~~98% of the ~~$140.9~~$132.1 million of commercial business and commercial real estate loans that had been modified to defer interest and or principal for up to 90 ~~days.~~days in 2020 and 2021. Loans with balances of less than $250,000 were generally excluded from ~~the review had a balance less than $250,000.~~management’s review.

~~As a result of this review,management had concluded that although loans with modifications and deferrals of~~At March 31, 2021, the allowance for loan payments were credit rated “Pass-Watch,” the deferral of payments indicated a somewhat weaker financial strength than loans that were credit rated “Pass”. Therefore, an additional reserve for incurred losses ~~of $1.0 million was maintained at September 30, 2020~~included $649,000 for loans that were rated Pass-Watch and had received a deferral. This reflects management’s previously reported determination that “Pass-Watch” credit rated loans that had received modifications or deferrals suggest a weaker financial strength of the borrower than “Pass” credit rated loans, thereby warranting additional reserves for loan losses than would ordinarily be reserved for “Pass-Watch” credit rated loans.

~~Management previously identified~~Within the loan portfolio, hotel and restaurant-food service industries ~~as most likely to be~~have been adversely impacted ~~in the near-term~~ by the economic disruption caused by the COVID-19 pandemic. At ~~September 30, 2020~~March 31, 2021 loans to hotel and restaurant-food service ~~industries~~businesses were ~~$68.5~~$67.8 million and ~~$58.2~~$64.4 million, respectively. Management reviewed over 99% of the hotel loans and over ~~95%~~93% of the restaurant-food service loans. ~~Loans excluded from this review had a balance of less than $250,000.~~

Management also evaluated the potential that incurred losses had increased with respect to the concentrations in hotel and restaurant-food service loans. In reviewing the loans in the hotel concentration, management noted that the weighted average loan to value of the hotel loans was 55% and all loans were current, except for three loans with a balance of $5.9 million that was on non-accrual.

With the respect to the restaurant-food service concentration, management observed that the weighted average loan to value of these restaurant-food service loans was 63% and all loans with balances greater than $400,000 in this concentration were current, except for one loan with a balance of $0.5 million that was on non-accrual.

On the basis of this review and the evaluation of the loans in the hotel and restaurant-food service concentrations, management concluded that, at September 30, 2020, an increase in loan defaults would require a substantial decrease in the value of the collateral supporting these loans for there to be a significant increase in incurred losses in the hotel and restaurant-food service concentrations.

~~Construction~~All construction loans are closely monitored on a quarterly basis and are reviewed to assess the progress of construction relative to the plan and budget and lease-up or sales of units. As part of this review, a specific reserve for construction loans was increased by $1.7 million at March 31, 2021.

Management also ~~expanded its loan level review for the third quarter of 2020 to include a review of~~reviewed loans to schools that are private educational institutions that are generally sponsored or affiliated with religious organizations. ~~The~~These loans totaled ~~$28.8~~$24.6 million at ~~September 30, 2020, 99%~~March 31, 2021, and 98% of ~~which~~these loans were ~~reviewed by management.~~reviewed.

The expanded review also included $6.3 million, or over 40%, of commercial loans made under the SBA 7(a) loan program, with loan balances greater than $250,000. These loans were not reviewed in the second quarter of 2020 because the SBA was making the loan payments through September 30, 2020 as part of the CARES Act financial assistance. $6.7totaling $15.5 million ~~or 45% of the total loans of $14.8, million were reviewed.~~at March 31, 2021.

~~In connection with management's review for the third~~As a result of this first quarter of ~~2020,~~2021 review, loans totaling ~~$2.7~~$3.2 million and ~~$7.5 million~~$871,000 were down-graded to “Special Mention” and “Substandard,” respectively. ~~Two hotel loans totaling $4.6~~In addition, a $2.8 million ~~were placed on non-accrual status during the third quarter of 2020.~~shared national credit loan was down-graded to “Substandard.”

At ~~September 30, 2020,~~March 31, 2021, the allowance for loan losses was ~~$14.5~~$17.0 million, or ~~0.99%~~1.32% of loans, compared to ~~$9.3~~$15.6 million, or ~~0.76%~~1.09% of loans, at December 31, ~~2019~~2020 and ~~$9.0~~$10.0 million, or ~~0.88%~~0.82% of loans, at ~~September 30, 2019.~~March 31, 2020. The allowance for loan losses was ~~83.79%~~111.16% of non-performing loans at ~~September 30, 2020~~March 31, 2021 compared to ~~206.16%~~90.77% of non-performing loans at December 31, ~~2019~~2020 and ~~170.47%~~75.78% of non-performing loans at ~~September 30, 2019.~~March 31, 2020.

Management believes that the allowance for loan losses is adequate in relation to credit risk exposure levels and the estimated incurred and inherent losses in the loan portfolio at ~~September 30, 2020.~~March 31, 2021. However, ~~it is expected~~management expects that the economic disruption ~~occurring due to~~resulting from the COVID-19 pandemic will continue to impact businesses, borrowers, employees and consumers in the near term, ~~which may continue with increasing severity~~notwithstanding the wider distribution and availability of vaccines and the recently announced relaxing of certain restrictions and precautionary measures in ~~future periods.~~the Bank’s primary market areas. Management may further increase the provision for loan losses and the allowance for loan losses in response to changes in economic conditions and the performance of the loan portfolio in future periods.

Deposits

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

The following table summarizes deposits at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:

(Dollars in thousands) September 30, 2020 December 31, 2019
Demand
Non-interest bearing $ 426,528 $ 287,555
Interest bearing 429,020 393,392
Savings 299,583 259,033
Certificates of deposit 355,902 337,382
Total $ 1,511,033 $ 1,277,362

~~At September 30, 2020, total deposits were $1.5 billion, representing an increase of $233.7 million, or 18.3%, from $1.3 billion at December 31, 2019.~~


(Dollars in thousands)	March 31, 2021		December 31, 2020
Demand
Non-interest bearing	$	469,339	$	425,210
Interest bearing	448,792		441,772
Savings	376,699		334,226
Certificates of deposit	266,389		361,631
Total	$	1,561,219	$	1,562,839

~~The increase in~~Total deposits were $1.56 billion at March 31, 2021, relatively unchanged from December 31, ~~2019 was due primarily to a $139.0 million increase in non-interest-bearing~~2020. Non-interest-bearing demand deposits ~~a $35.6~~increased $44.1 million ~~increase~~due in part to the funding of the SBA PPP loans. Certificates of deposit decreased $95.2 million primarily due to the maturity of $72 million of short-term internet listing service certificates of deposit that were planned not to renew. Savings deposits increased $42.5 million and interest-bearing demand deposits ~~a $40.6~~increased $7.0 million. There are approximately $70 million ~~increase in savings deposits and an $18.5 million increase in certificates~~ of deposit. Consistent with observed trends in the banking industry, the Company experienced a significant increase in deposits during the nine months ended September 30, 2020. The primary source of the growth of deposits was the increase in deposits from existing customers. In addition,short-term internet listing service certificates of deposit ~~originated through internet deposit listing services increased approximately $54.4 million during 2020, which was partially offset by decreases~~that mature in ~~other certificates~~the second quarter of ~~deposit.~~2021 that management does not plan to renew.

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

Borrowings

Borrowings are mainly comprised of Federal Home Loan Bank of New York (“FHLB”) borrowings and overnight funds purchased. These borrowings are primarily used to fund asset growth not supported by deposit generation. At ~~September 30, 2020,~~March 31, 2021, the Company had ~~$105.9 million of short-term~~no borrowings compared to ~~$92.1~~$9.8 million of short-term borrowings December 31, 2019. In April 2020, the Bank began participating in the Federal Reserve's PPPLF, which is a liquidity and borrowing program to allow participating banks to borrow 100% of the SBA PPP loans funded through the SBA at an interest rate of 0.35% for up to two years. The borrowing under the Federal Reserve PPPLF was $75.5 million at September 30, 2020.

Liquidity

At ~~September 30, 2020,~~March 31, 2021, the amount of liquid assets and the Bank’s access to off-balance sheet liquidity remained at a level management deemed adequate to ensure that contractual liabilities, depositors’ withdrawal requirements and other operational and customer credit needs could be satisfied.

Liquidity management refers to the Company’s ability to support asset growth while satisfying the borrowing needs and deposit withdrawal requirements of customers. In addition to maintaining liquid assets, factors such as capital position, profitability, asset quality and availability of funding affect a bank’s ability to meet its liquidity needs. On the asset side, liquid funds are maintained in the form of cash and cash equivalents, federal funds sold, investment securities held to maturity maturing within one year, securities available for sale and loans held for sale. Additional asset-based liquidity is derived from scheduled loan repayments as well as investment repayments of principal and interest. Investment securities and loans may also be pledged to the FHLB to collateralize additional borrowings. On the liability side, the primary source of liquidity is the ability to generate core deposits. Long-term and short-term borrowings are used as supplemental funding sources when growth in the core deposit base does not keep pace with that of interest-earning assets.

The Bank has established a borrowing relationship with the FHLB that further supports and enhances liquidity. The FHLB provides member banks with a fully secured line of credit of up to 50% of a bank’s quarter-end total assets. Under the terms of this facility, the Bank’s total credit exposure to the FHLB cannot exceed 50% of its total assets, or ~~$922.0~~$903.1 million, at ~~September 30, 2020.~~March 31, 2021. In addition, the aggregate outstanding principal amount of the Bank’s advances, letters of credit, the dollar amount of the FHLB’s minimum collateral requirement for off-balance sheet financial contracts and advance commitments cannot exceed 30% of the Bank’s total assets, unless the Bank obtains approval from the FHLB’s Board of Directors or its Executive Committee. These limits are further restricted by a member’s ability to provide eligible collateral to support its obligations to the FHLB as well as the ability to meet the FHLB’s stock requirement. At ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Bank pledged approximately ~~$492.6~~$459.5 million and ~~$308.5~~$469.5 million of loans, respectively, to support the FHLB borrowing capacity. At ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Bank had available borrowing capacity of ~~$281.1~~$331.4 million and ~~$131.2~~$301.8 million, respectively, at the FHLB. The Bank also maintains unsecured federal funds lines of $46.0 million with two correspondent banks, all of which were unused and available at ~~September 30, 2020.~~March 31, 2021.

The Bank has access to the Federal Reserve Bank of New York Discount Window facility. At this time the Bank has not pledged investment securities or loans, which would be required, to support borrowings through the Discount Window facility.

The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At ~~September 30, 2020,~~March 31, 2021, the balance of cash and cash equivalents was ~~$20.1~~$165.9 million.

Net cash provided by operating activities totaled $26.8 million for the three months ended March 31, 2021 compared to net cash used by operating activities ~~totaled $12.4~~of $1.5 million for the ~~nine~~three months ended ~~September 30, 2020 compared to net cash provided by operating activities of $6.9 million for the nine months ended September 30, 2019.~~March 31, 2020. A source of funds is net income from operations adjusted for activity related to loans originated for sale and sold, the provision for loan losses, depreciation and amortization expenses and net amortization of premiums and discounts on securities. The increase in cash provided by operating activities for the three months ended March 31, 2021 compared to net cash used by operating activities for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 ~~compared to net cash provided by operating activities for the nine months ended September 30, 2019~~ was due primarily to the increase in net income and the higher provision for loan losses for ~~2020 less~~2021 plus the net sales (cash provided) of loans held for sale of approximately $17.2 million for the first three months of 2021 compared to net funding (cash used) of loans held for sale of approximately ~~$15.1~~$4.4 million for the first ~~nine~~three months of ~~2020 compared to net sales (cash used) of loans held for sale of approximately $162,000 for the first nine months of 2019.~~2020.

Net cash provided by investing activities totaled $129.6 million for the three months ended March 31, 2021 compared to net cash used in investing activities ~~totaled $226.9~~of $23.0 million for the ~~nine~~three months ended ~~September 30, 2020 compared to $139.6 million for the nine months ended September 30, 2019.~~March 31, 2020. The loans and securities portfolios are a source of liquidity, providing cash flows from maturities and periodic payments of principal. The primary ~~use~~source of cash byfrom investing activities for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 was the ~~purchase of $56.1 million of investment securities compared to $37.6 million~~cash flow from the decrease in the first nine months of 2019. Sales, calls, payments, and maturities of investment securities for the first nine months of 2020 were $66.7 million compared to $41.6 million of payments, calls and maturities for the first nine months of 2019.loans. During the ~~nine~~three months ended ~~September 30,~~

~~2020, net~~March 31, 2021, loans ~~increased $239.5~~decreased $138.8 million compared to an increase in ~~net~~ loans of ~~$142.1~~$1.8 million during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

Net cash used in financing activities was $12.4 million for the three months ended March 31, 2021 compared to net cash provided by financing activities ~~was $244.5~~of $21.7 million for the ~~nine~~three months ended ~~September 30, 2020 compared to $136.6 million for the nine months ended September 30, 2019.~~March 31, 2020. The primary ~~source~~use of funds for the ~~2020~~2021 period was the ~~increase~~decrease in both ~~the~~ deposits and short-term borrowings of ~~$233.7~~$1.6 million and ~~$13.8~~$9.8 million, respectively. ~~The primary source of funds for the nine months ended September 30, 2019 was the $72.4 million increase in deposits and the $66.0 million increase in short-term borrowings.~~ Management believes that the Company’s and the Bank’s liquidity resources are adequate to provide for the Company’s and the Bank’s planned operations over the next 12 months following ~~September 30, 2020.~~March 31, 2021.

Shareholders’ Equity and Dividends

Shareholders’ equity increased by ~~$11.4~~$3.6 million ~~or 6.7%,~~ to ~~$182.0~~$191.3 million at ~~September 30, 2020~~March 31, 2021 from ~~$170.6~~$187.7 million at December 31, ~~2019.~~2020. The increase in shareholders’ equity was due primarily to an increase of ~~$9.3~~$4.0 million in retained earnings ~~and~~offset by a ~~$1.5 million increase~~$600,000 decrease in accumulated other comprehensive income.

The Company began declaring and paying cash dividends on its common stock in September 2016 and has declared and paid a cash dividend for each quarter since then. The timing and the amount of the payment of future cash dividends, if any, on the Company’s common stock will be at the discretion of the Company’s Board of Directors and will be determined after consideration of various factors, including the level of earnings, cash requirements, regulatory capital and financial condition.

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

On January 21, 2016, the Board of Directors of the Company authorized a common stock repurchase program. Under the common stock repurchase program, the Company may repurchase in the open market or privately negotiated transactions up to 5% of its common stock outstanding on the date of approval of the stock repurchase program, which limitation is adjusted for any subsequent stock dividends. For the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, the Company withheld ~~14,411~~7,994 shares of common stock in connection with the vesting of restricted stock awards to satisfy applicable tax withholding obligations.

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

Capital Resources

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Common Equity Tier 1, Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier I capital to average assets (Leverage ratio, as defined). As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company and the Bank met all capital adequacy requirements to which they were subject.

To be categorized as adequately capitalized, the Company and the Bank must maintain minimum Common Equity Tier 1, Total capital to risk-weighted assets, Tier 1 capital to risk-weighted assets and Tier I leverage capital ratios as set forth in the below table. As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Bank’s capital ratios exceeded the regulatory standards for well-capitalized institutions. Certain bank regulatory limitations exist on the availability of the Bank’s assets for the payment of dividends by the Bank without prior approval of bank regulatory authorities.

In July 2013, the Federal Reserve Board and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implemented and addressed the revised standards of Basel III and addressed relevant provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Federal Reserve Board’s final rules and the FDIC’s interim final rules (which became final in April 2014 with no substantive changes) apply to all depository institutions, top-tier bank holding

companies with total consolidated assets of $500 million or more (which was subsequently increased to $1 billion or more in May 2015) and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rules established a Common Equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets). Banking organizations are also required to have a total capital ratio of at least 8% and a Tier 1 leverage ratio of at least 4%.

The rules also limited a banking organization’s ability to pay dividends, engage in share repurchases or pay discretionary bonuses if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of Common Equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The rules became effective for the Company and the Bank on January 1, 2015. The fully phased in capital conservation buffer ~~requirement began phasing in on January 1, 2016 at 0.625% of Common Equity Tier 1 capital to risk-weighted assets and increased by that amount each year until fully implemented in January 2019 at~~is 2.5% of Common Equity Tier 1 capital to risk-weighted assets. At ~~September 30, 2020,~~March 31, 2021, the Company and the Bank maintained a capital conservation buffer in excess of 2.5%.

Management believes that the Company’s and the Bank’s capital resources are adequate to support the Company’s and the Bank’s current strategic and operating plans. However, if the financial position of the Company and the Bank are materially adversely impacted by the economic disruption caused by the COVID-19 pandemic, the Company and or the Bank may be required to increase its regulatory capital position.

The Company’s actual capital amounts and ratios are presented in the following table:


		Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provision			Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provision
(Dollars in thousands)	(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount	Ratio	(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount	Ratio
As of September 30, 2020
As of March 31, 2021												As of March 31, 2021
Common equity Tier 1 (CET1)	Common equity Tier 1 (CET1)	$	146,678	9.44	%	$	68,276	4.50	%	N/A	N/A	Common equity Tier 1 (CET1)	$	153,579	10.89	%	$	63,471	4.50	%	N/A	N/A
Total capital to risk-weighted assets	Total capital to risk-weighted assets	179,128		11.58	%	121,380		8.00	%	N/A	N/A	Total capital to risk-weighted assets	188,623		13.37	%	112,837		8.00	%	N/A	N/A
Tier 1 capital to risk-weighted assets	Tier 1 capital to risk-weighted assets	164,678		10.62	%	91,035		6.00	%	N/A	N/A	Tier 1 capital to risk-weighted assets	171,579		12.16	%	84,628		6.00	%	N/A	N/A
Tier 1 leverage capital	Tier 1 leverage capital	164,678		9.32	%	69,186		4.00	%	N/A	N/A	Tier 1 leverage capital	171,579		9.64	%	71,229		4.00	%	N/A	N/A

As of December 31, 2019:
As of December 31, 2020:												As of December 31, 2020:
Common equity Tier 1 (CET1)	Common equity Tier 1 (CET1)	$	133,046	9.70	%	$	61,604	4.50	%	N/A	N/A	Common equity Tier 1 (CET1)	$	149,292	9.92	%	$	67,701	4.50	%	N/A	N/A
Total capital to risk-weighted assets	Total capital to risk-weighted assets	160,317		11.69	%	109,519		8.00	%	N/A	N/A	Total capital to risk-weighted assets	182,933		12.16	%	120,357		8.00	%	N/A	N/A
Tier 1 capital to risk-weighted assets	Tier 1 capital to risk-weighted assets	151,046		11.01	%	82,139		6.00	%	N/A	N/A	Tier 1 capital to risk-weighted assets	167,292		11.12	%	90,268		6.00	%	N/A	N/A
Tier 1 leverage capital	Tier 1 leverage capital	151,046		10.56	%	57,245		4.00	%	N/A	N/A	Tier 1 leverage capital	167,292		9.41	%	71,105		4.00	%	N/A	N/A

The Bank’s actual capital amounts and ratios are presented in the following table:

Actual For Capital
Adequacy Purposes To Be Well Capitalized
Under Prompt
Corrective Action
Provision
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
As of September 30, 2020
Common equity Tier 1 (CET1) $ 164,500 10.62 % $ 68,251 4.50% $ 98,585 6.50%
Total capital to risk-weighted assets 178,950 11.57 % 121,335 8.00% 151,669 10.00%
Tier 1 capital to risk-weighted assets 164,500 10.62 % 91,002 6.00% 121,335 8.00%
Tier 1 leverage capital 164,500 9.31 % 69,164 4.00% 86,454 5.00%
As of December 31, 2019:
Common equity Tier 1 (CET1) $ 150,725 10.99 % $ 61,579 4.50% $ 88,948 6.50%
Total capital to risk-weighted assets 159,996 11.67 % 109,474 8.00% 136,843 10.00%
Tier 1 capital to risk-weighted assets 150,725 10.99 % 82,106 6.00% 109,474 8.00%
Tier 1 leverage capital 150,725 10.54 % 57,222 4.00% 71,528 5.00%

6351


	Actual				For Capital Adequacy Purposes			To Be Well Capitalized Under Prompt Corrective Action Provision
(Dollars in thousands)	Amount		Ratio		Amount		Ratio	Amount		Ratio
As of March 31, 2021
Common equity Tier 1 (CET1)	$	171,415	12.16	%	$	63,446	4.50%	$	91,644	6.50%
Total capital to risk-weighted assets	188,459		13.37	%	112,793		8.00%	140,991		10.00%
Tier 1 capital to risk-weighted assets	171,415		12.16	%	84,594		6.00%	112,793		8.00%
Tier 1 leverage capital	171,415		9.63	%	71,207		4.00%	89,009		5.00%

As of December 31, 2020:
Common equity Tier 1 (CET1)	$	167,067	11.11	%	$	67,676	4.50%	$	97,754	6.50%
Total capital to risk-weighted assets	182,708		12.15	%	120,313		8.00%	150,391		10.00%
Tier 1 capital to risk-weighted assets	167,067		11.11	%	90,235		6.00%	120,313		8.00%
Tier 1 leverage capital	167,067		9.40	%	71,083		4.00%	88,854		5.00%

Interest Rate Sensitivity Analysis

The largest component of the Company’s total income is net interest income, and the majority of the Company’s financial instruments are composed of interest rate-sensitive assets and liabilities with various terms and maturities. The primary objective of management is to maximize net interest income while minimizing interest rate risk. Interest rate risk is derived from timing differences and the magnitude of relative changes in the repricing of assets and liabilities, loan prepayments, deposit withdrawals and differences in lending and funding rates. Management actively seeks to monitor and control the mix of interest rate-sensitive assets and interest rate-sensitive liabilities.

Under the interest rate risk policy established by the Company’s Board of Directors, the Company established quantitative guidelines with respect to interest rate risk and how interest rate shocks are projected to affect net interest income and the economic value of equity. Summarized below is the projected effect of a parallel shift of an increase of 100, 200 and 300 basis points, respectively, in market interest rates on net interest income and the economic value of equity. Due to the historically low interest rate environment at ~~September 30, 2020~~March 31, 2021 a parallel shift down of 100 basis points was ~~not~~ presented.

Based upon the current interest rate environment, as of ~~September 30, 2020,~~March 31, 2021, sensitivity to interest rate risk was as follows:


(Dollars in thousands)	(Dollars in thousands)			Next 12 Months Net Interest Income						Economic Value of Equity (2)				(Dollars in thousands)			Next 12 Months Net Interest Income						Economic Value of Equity (2)
Interest Rate Change in Basis Points (1)	Interest Rate Change in Basis Points (1)	Dollar Amount		$ Change		% Change		Dollar Amount		$ Change		% Change		Interest Rate Change in Basis Points (1)	Dollar Amount		$ Change		% Change		Dollar Amount		$ Change		% Change
+300	+300	$	68,939	$	5,198	8.15	%	$	210,420	$	715	0.34	%	+300	$	61,773	$	4,792	8.41	%	$	237,417	$	2,361	1.00	%
+200	+200	66,706		2,965		4.65	%	210,988		1,283		0.61	%	+200	59,758		2,777		4.87	%	236,042		986		0.42	%
+100														+100	57,684		703		1.23	%	234,978		(78)		(0.03)	%
—	—	63,741		—		—	%	209,705		—		—	%	—	56,981		0		0		235,056		0		0
-100														-100	57,214		233		0.41	%	222,649		(12,407)		(5.28)	%

(1)Assumes an instantaneous and parallel shift in interest rates at all maturities.

(2)Economic value of equity is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

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

Off-Balance Sheet Arrangements and Contractual Obligations

As of ~~September 30, 2020,~~March 31, 2021, there were no material changes to the Company’s off-balance sheet arrangements and contractual obligations disclosed under Part II, Item 7 of the ~~2019~~2020 Form 10-K. Management continues to believe that the Company has adequate capital and liquidity available from various sources to fund projected contractual obligations and commitments.

6453

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s Asset Liability Committee (“ALCO”) is responsible for developing, implementing and monitoring asset liability management strategies and advising the Company’s Board of Directors on such strategies, as well as the related level of interest rate risk. Interest rate risk simulation models are prepared on a quarterly basis. These models demonstrate balance sheet gaps and predict changes to net interest income and the economic market value of equity under various interest rate scenarios.

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

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

•Actively market commercial business loan originations, which tend to have adjustable rate features and which generate customer relationships that can result in higher core deposit accounts;

•Actively market commercial mortgage loan originations, which tend to have shorter maturity terms and higher interest rates than residential mortgage loans and which generate customer relationships that can result in higher core deposit accounts;

•Actively market core deposit relationships, which are generally longer duration liabilities;

•Utilize short term and long-term certificates of deposit and/or borrowings to manage liability duration;

•Closely monitor and actively manage the investment portfolio, including management of duration, prepayment and interest rate risk;

•Maintain adequate levels of capital; and

•Utilize loan sales and/or loan participations.

ALCO uses simulation modeling to analyze the Company’s net interest income sensitivity as well as the Company’s economic value of portfolio equity under various interest rate scenarios. The model is based on the actual maturity and estimated repricing characteristics of rate sensitive assets and liabilities. The model incorporates certain prepayment and interest rate assumptions, which management believes to be reasonable as of ~~September 30, 2020.~~March 31, 2021. The model assumes changes in interest rates without any proactive change in the balance sheet by management. In the model, the forecasted shape of the yield curve remained static as of ~~September 30, 2020.~~March 31, 2021.

In an immediate and sustained ~~200~~100 basis point increase in market interest rates at ~~September 30, 2020,~~March 31, 2021, net interest income for the next 12 months would increase approximately ~~4.7%~~1.23%, when compared to a flat interest rate scenario. In year two, this sensitivity improves to an increase of 5.80%, when compared to a flat interest rate scenario. In an immediate and sustained 100 basis points decrease in market interest rates, net interest income for year one would increase approximately 0.41% and would decrease approximately 3.60% in year two.

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

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

6554

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act, is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

The Company’s principal executive officer and principal financial officer, with the assistance of other members of management, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Based upon such evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving disclosure controls and procedures objectives. Management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control Over Financial Reporting

The Company’s principal executive officer and principal financial officer have concluded that there was no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended ~~September 30, 2020~~March 31, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

6655

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of its business. Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, would have a material adverse effect on the Company’s financial condition or results of operations.

Item 1A. Risk Factors

As of ~~September 30, 2020,~~March 31, 2021, there has been no material change in the risk factors previously disclosed under Part I, Item 1A of the ~~2019~~2020 Form 10-K and Part II ~~Item 1A of~~as filed with the ~~Company's Form 10-Q for the quarter ended June 30, 2020.~~SEC on March 15, 2021.

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

Issuer Purchases of Equity Securities

On January 21, 2016, the Board of Directors of the Company authorized a common stock repurchase program. Under this common stock repurchase program, the Company may repurchase in the open market or privately negotiated transactions up to 396,141 shares of its common stock, representing 5% of the shares of common stock outstanding on January 21, 2016, as adjusted for subsequent common stock dividends. At ~~September 30, 2020,~~March 31, 2021, 394,141 shares remained available for repurchase under the common stock repurchase program. ~~The following table sets forth information regarding~~In the ~~Company's repurchases~~first quarter of ~~its~~2021, the Company withheld 7,994 shares of common stock ~~for the three months ended September 30, 2020.~~

Period
Total
Number of
Shares
Purchased(1)
Average
Price Paid
Per Share Total Number
of Shares
Purchased As Part of
Publicly Announced
Program Maximum
Number of
Shares That
May Yet be
Purchased Under the Program
Beginning Ending
July 1, 2020 July 31, 2020 3,998 $ 12.46 — 394,141
August 1, 2020 August 31, 2020 4,385 13.23 — 394,141
September 1, 2020 September 30, 2020 — — — 394,141
Total 8,383 $ 12.86 — 394,141

~~(1)~~ ~~Represents shares withheld~~ in connection with the vesting of restricted stock awards to satisfy applicable tax withholding obligations.


Period		Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased As Part of Publicly Announced Program	Maximum Number of Shares That May Yet be Purchased Under the Program
Beginning	Ending






January 1, 2021	January 31, 2021	7,994	$	16.13	—	394,141
February 1, 2021	February 28, 2021	—	—		—	394,141
March 1, 2021	March 31, 2021	—	—		—	394,141
Total		7,994	$	16.13	—	394,141

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits.



3(i)		Certificate of Incorporation of the Company (conformed copy) (incorporated by reference to Exhibit 3(i)(A) to the Company’s Annual Report on Form 10-K (SEC File No. 000-32891) filed with the SEC on March 27, 2009)

3(ii)		By-laws of the Company, as amended (conformed copy) (incorporated by reference to Exhibit 3(ii) to the Company’s Annual Report on Form 10-K (SEC File No. 000-32891) filed with the SEC on March 15, 2019)

10.1	#	Employment Agreement, dated February 9, 2021, by and among, 1st Constitution Bancorp, 1st Constitution Bank and Stephen J. Gilhooly (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on February 11, 2021)

10.2	#	Change in Control Agreement, dated February 5, 2021, by and among 1st Constitution Bancorp, 1st Constitution Bank and Naqi A. Naqvi (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K (SEC File No. 000-32891) filed with the SEC on March 15, 2021)

10.3	*#	Form of Amended and Restated Executive Life Insurance Agreement

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

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

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

101.INS	*	Inline XBRL Instance Document

101.SCH	*	Inline XBRL Taxonomy Extension Schema Document

101.CAL	*	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	*	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	*	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE	*	Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

_____________________

* Filed herewith.

** Furnished herewith.

# Management contract or compensatory plan or arrangement.

6857

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

1ST CONSTITUTION BANCORP

Date:

~~November 6, 2020~~May 10, 2021

By:

/s/ ROBERT F. MANGANO

Robert F. Mangano

President and Chief Executive Officer

(Principal Executive Officer)

Date:

~~November 6, 2020~~May 10, 2021

By:

/s/ STEPHEN J. GILHOOLY

Stephen J. Gilhooly

Senior Vice President, Treasurer and Chief Financial Officer

(Principal Financial Officer)

6958


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


(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


	Grant Date
	January 6, 2020			March 19, 2020
Fair value of options granted	$	5.27		$	2.09
Risk-free rate of return	1.72		%	1.00		%
Expected option life in years	7			7
Expected volatility	24.53		%	24.63		%
Expected dividends	1.35		%	2.86		%


(Dollars in thousands)	Balance		% of Total Loans	COVID-19 Deferrals through September 30, 2020		COVID-19 Deferrals at September 30, 2020		PPP Loans
Hotel	$	68,487	4.7%	$	43,096	$	3,338	$	662
Restaurant-food service	58,218		4.0%	13,745		1,424		10,818


(Dollars in thousands)	Nine Months Ended September 30, 2020			Year Ended December 31, 2019			Nine Months Ended September 30, 2019
Balance, beginning of period	$	9,271		$	8,402		$	8,402
Provision charged to operating expenses	5,340			1,350			1,050
Loans charged off:

Residential real estate loans	—			—			—
Commercial business and commercial real estate	(165)			(463)			(438)
Loans to individuals	—			(7)			—

All other loans	(3)			(43)			(43)
Total loans charged off	(168)			(513)			(481)
Recoveries:


Commercial business and commercial real estate	7			26			—
Loans to individuals	—			6			6

All other loans	—			—			—
Total recoveries	7			32			6
Net charge offs	(161)			(481)			(475)
Balance, end of period	$	14,450		$	9,271		$	8,977
Loans:
At period end	$	1,455,684		$	1,216,028		$	1,025,031
Average during the period	1,292,650			964,920			910,975
Net charge offs to average loans outstanding	(0.01)		%	(0.05)		%	(0.05)		%
Net charge offs to average loans outstanding, excluding mortgage warehouse loans	(0.02)		%	(0.06)		%	(0.06)		%
Allowance for loan losses to:
Total loans at period end	0.99		%	0.76		%	0.88		%
Total loans at period end excluding mortgage warehouse loans	1.18		%	0.84		%	1.16		%
Non-performing loans	83.79		%	206.16		%	170.47		%


Period		Total Number of Shares Purchased(1)	Average Price Paid Per Share		Total Number of Shares Purchased As Part of Publicly Announced Program	Maximum Number of Shares That May Yet be Purchased Under the Program
Beginning	Ending






July 1, 2020	July 31, 2020	3,998	$	12.46	—	394,141
August 1, 2020	August 31, 2020	4,385	13.23		—	394,141
September 1, 2020	September 30, 2020	—	—		—	394,141
Total		8,383	$	12.86	—	394,141