10-Q 1 fccy-20180930x10q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file Number:        000-32891
1ST 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, NJ
 
08512
(Address of Principal Executive Offices)
 
(Zip Code)
(609) 655-4500
(Issuer’s Telephone Number, Including Area Code)
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý       No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý       No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
 
Accelerated filer
ý
Non-accelerated filer
o
 
Smaller reporting company
o
(Do not check if a smaller reporting company)
 
 
Emerging growth company
o
If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  ý
As of November 6, 2018, there were 8,404,292 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
 
 
 
 
Consolidated Balance Sheets at September 30, 2018 and December 31, 2017 (unaudited)
 
 
 
 
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and September 30, 2017 (unaudited)
 
 
 
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and September 30, 2017 (unaudited)
 
 
 
 
Consolidated Statements of Changes in Shareholders' Equity for the Nine Months Ended September 30, 2018 and September 30, 2017 (unaudited)
 
 
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and September 30, 2017 (unaudited)
 
 
 
 
Notes to Consolidated Financial Statements (unaudited)
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 




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




PART I. FINANCIAL INFORMATION
Item 1.        Financial Statements.

1ST Constitution Bancorp
Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
 
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
 
Cash and due from banks
 
$
5,133

 
$
5,037

Interest-earning deposits
 
14,131

 
13,717

Total cash and cash equivalents
 
19,264

 
18,754

Investment securities:
 
 

 
 

Available for sale, at fair value
 
131,192

 
105,458

Held to maturity (fair value of $91,220 and $111,865 at September 30, 2018
and December 31, 2017, respectively)
 
91,379

 
110,267

Total investment securities
 
222,571

 
215,725

Loans held for sale
 
4,362

 
4,254

Loans
 
881,538

 
789,906

Less: allowance for loan losses
 
(8,265
)
 
(8,013
)
Net loans
 
873,273

 
781,893

Premises and equipment, net
 
11,768

 
10,705

Accrued interest receivable
 
3,652

 
3,478

Bank-owned life insurance
 
28,555

 
25,051

Other real estate owned
 
2,515

 

Goodwill and intangible assets
 
12,294

 
12,496

Other assets
 
14,228

 
6,918

Total assets
 
$
1,192,482

 
$
1,079,274

Liabilities and Shareholders Equity
 
 

 
 

Liabilities:
 
 

 
 

Deposits
 
 

 
 

Non-interest bearing
 
$
211,492

 
$
196,509

Interest bearing
 
730,185

 
725,497

Total deposits
 
941,677

 
922,006

 
 
 
 
 
Short-term borrowings
 
99,475

 
20,500

Redeemable subordinated debentures
 
18,557

 
18,557

Accrued interest payable
 
927

 
804

Accrued expenses and other liabilities
 
8,072

 
5,754

Total liabilities
 
1,068,708

 
967,621

Shareholders Equity:
 
 

 
 

Preferred stock, no par value; 5,000,000 shares authorized; none issued
 

 

Common stock, no par value; 30,000,000 shares authorized; 8,437,590 and 8,116,201 shares issued and 8,404,292 and 8,082,903 shares outstanding as of September 30, 2018 and December 31, 2017, respectively
 
79,256

 
72,935

Retained earnings
 
47,067

 
39,822

Treasury stock, 33,298 shares at September 30, 2018 and December 31, 2017
 
(368
)
 
(368
)
Accumulated other comprehensive loss
 
(2,181
)
 
(736
)
Total shareholders’ equity
 
123,774

 
111,653

Total liabilities and shareholders’ equity
 
$
1,192,482

 
$
1,079,274

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

1



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,
 
2018
 
2017
 
2018
 
2017
Interest income
 
 
 
 
 
 
 
     Loans, including fees
$
12,193

 
$
9,416

 
$
33,078

 
$
26,161

     Securities:
 
 
 
 
 
 
 
           Taxable
1,060

 
846

 
2,915

 
2,500

           Tax-exempt
494

 
527

 
1,518

 
1,628

     Federal funds sold and short-term investments
36

 
25

 
208

 
183

               Total interest income
13,783

 
10,814

 
37,719

 
30,472

Interest expense
 
 
 
 
 
 
 
     Deposits
1,854

 
1,204

 
4,542

 
3,351

     Borrowings
349

 
113

 
576

 
349

     Redeemable subordinated debentures
184

 
134

 
508

 
380

Total interest expense
2,387

 
1,451

 
5,626

 
4,080

               Net interest income
11,396

 
9,363

 
32,093

 
26,392

Provision for loan losses
225

 
150

 
675

 
450

Net interest income after provision for loan losses
11,171

 
9,213

 
31,418

 
25,942

Non-interest income
 
 
 
 
 
 
 
Service charges on deposit accounts
173

 
142

 
476

 
445

Gain on sales of loans
1,292

 
1,329

 
3,425

 
3,936

Income on Bank-owned life insurance
152

 
131

 
425

 
391

Gain from bargain purchase

 

 
184

 

Gain on sales of securities

 
24

 
12

 
128

Other income
537

 
490

 
1,560

 
1,385

Total non-interest income
2,154

 
2,116

 
6,082

 
6,285

Non-interest expenses
 
 
 
 
 
 
 
Salaries and employee benefits
4,900

 
4,617

 
14,714

 
13,882

Occupancy expense
907

 
865

 
2,604

 
2,604

Data processing expenses
331

 
338

 
1,009

 
983

FDIC insurance expense
105

 
95

 
381

 
255

Other real estate owned expenses
73

 
11

 
75

 
26

Merger-related expenses

 

 
2,141

 

Other operating expenses
1,578

 
1,691

 
4,866

 
5,204

 Total non-interest expenses
7,894

 
7,617

 
25,790

 
22,954

                  Income before income taxes
5,431

 
3,712

 
11,710

 
9,273

Income taxes
1,420

 
1,227

 
2,975

 
2,920

Net income
$
4,011

 
$
2,485

 
$
8,735

 
$
6,353

 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 
 
 
Basic
$
0.48

 
$
0.31

 
$
1.05

 
$
0.79

Diluted
$
0.46

 
$
0.30

 
$
1.02

 
$
0.76

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
8,392,631

 
8,063,119

 
8,282,889

 
8,040,955

Diluted
8,678,679

 
8,328,252

 
8,565,401

 
8,309,363

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

2



1ST Constitution Bancorp
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income
$
4,011

 
$
2,485

 
$
8,735

 
$
6,353

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized holding (losses) gains on securities available for sale
(513
)
 
18

 
(2,015
)
 
745

            Tax effect
126

 
(7
)
 
484

 
(275
)
Net of tax amount
(387
)
 
11

 
(1,531
)
 
470

 
 
 
 
 
 
 
 
Reclassification adjustment for gains on securities available for sale (1)

 
(12
)
 
(12
)
 
(92
)
            Tax effect (2)

 
5

 
3

 
37

 Net of tax amount

 
(7
)
 
(9
)
 
(55
)
 
 
 
 
 
 
 
 
Pension liability
89

 

 
178

 

Tax effect
(25
)
 

 
(50
)
 

Net of tax amount
64

 

 
128

 

 
 
 
 
 
 
 
 
 Reclassification adjustment for actuarial gains for unfunded pension liability
 
 
 
 
 
 
 
Income (3)
(15
)
 
(32
)
 
(45
)
 
(75
)
Tax effect (2)
4

 
13

 
12

 
30

Net of tax amount
(11
)
 
(19
)
 
(33
)
 
(45
)
 
 
 
 
 
 
 
 
Total other comprehensive (loss) income
(334
)
 
(15
)
 
(1,445
)
 
370

 
 
 
 
 
 
 
 
Comprehensive income
$
3,677

 
$
2,470

 
$
7,290

 
$
6,723

(1) Included in gain on sales of securities on the consolidated statements of income
(2) Included in income taxes on the consolidated statements of income
(3) 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.


3



1ST Constitution Bancorp
Consolidated Statements of Changes in Shareholders’ Equity
For the Nine Months Ended September 30, 2018 and 2017
(Dollars in thousands)
(Unaudited)
 
Common
Stock
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
Balance, January 1, 2017
$
71,695

 
$
34,074

 
$
(368
)
 
$
(600
)
 
$
104,801

Net income

 
6,353

 

 

 
6,353

Exercise of stock options (18,790 shares)
150

 

 

 

 
150

Share-based compensation
739

 

 

 

 
739

Cash dividends declared ($0.10 per share)

 
(803
)
 

 

 
(803
)
Other comprehensive income

 

 

 
370

 
370

Balance, September 30, 2017
$
72,584

 
$
39,624

 
$
(368
)
 
$
(230
)
 
$
111,610

 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2018
$
72,935

 
$
39,822

 
$
(368
)
 
$
(736
)
 
$
111,653

Net income

 
8,735

 

 

 
8,735

Exercise of stock options (9,307 shares)
67

 

 

 

 
67

Share-based compensation
759

 

 

 

 
759

Issuance of common stock (249,785 shares)
5,495

 

 

 

 
5,495

Cash dividends declared ($0.18 per share)

 
(1,490
)
 

 

 
(1,490
)
Other comprehensive loss

 

 

 
(1,445
)
 
(1,445
)
Balance, September 30, 2018
$
79,256

 
$
47,067

 
$
(368
)
 
$
(2,181
)
 
$
123,774

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

4



1ST Constitution Bancorp
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Operating Activities:
 
 
 
Net income
$
8,735

 
$
6,353

Adjustments to reconcile net income to net cash provided by operating activities-
 
 
 
Provision for loan losses
675

 
450

Depreciation and amortization
1,056

 
1,037

Net amortization of premiums and discounts on securities
435

 
678

SBA discount accretion
(235
)
 

Gain from bargain purchase of NJCB
(184
)
 

Gains on sales and calls of securities available for sale
(12
)
 
(128
)
Gains on sales of other real estate owned

 
(14
)
Gains on sales of loans held for sale
(3,425
)
 
(3,936
)
Originations of loans held for sale
(85,285
)
 
(83,754
)
Proceeds from sales of loans held for sale
88,602

 
96,500

Income on Bank–owned life insurance
(439
)
 
(391
)
Loss on cash surrender value on Bank-owned life insurance
14

 

Share-based compensation expense
759

 
739

(Increase) decrease in accrued interest receivable
85

 
(46
)
Increase in other assets
(499
)
 
(114
)
Increase (decrease) in accrued interest payable
123

 
(151
)
Increase (decrease) in accrued expenses and other liabilities
1,816

 
(824
)
                Net cash provided by operating activities
12,221

 
16,399

Investing Activities:
 
 
 
Purchases of securities:
 
 
 
Available for sale
(30,122
)
 
(29,729
)
Held to maturity
(2,868
)
 
(16,460
)
Proceeds from maturities and payments of securities:
 
 
 
Available for sale
13,282

 
15,892

Held to maturity
21,584

 
30,538

Proceeds from sales of securities:
 
 
 
Available for sale

 
7,602

Held to maturity

 
1,033

Proceeds from Bank-owned life insurance benefits paid
893

 

Net (purchase)/redemption of restricted stock
(3,756
)
 
494

Net increase in loans
(19,368
)
 
(47,771
)
Capital expenditures
(535
)
 
(575
)
Forfeitable deposit on other real estate owned
175

 

Cost of improvements to other real estate owned

 
(5
)
Net cash paid for acquisition of NJCB
(996
)
 

Proceeds from sales of other real estate owned

 
284

Purchase of Bank-owned life insurance

 
(1,550
)
Net cash used in investing activities
(21,711
)
 
(40,247
)
Financing Activities:
 
 
 
Exercise of stock options
67

 
150

Cash dividends paid to shareholders
(1,490
)
 
(803
)
Net (decrease) increase in deposits
(67,552
)
 
35,297

Increase (decrease) in short-term borrowings
78,975

 
(25
)
Repayment of long-term borrowing

 
(10,000
)
Net cash provided by financing activities
10,000

 
24,619

Increase (decrease) in cash and cash equivalents
510

 
771

Cash and Cash Equivalents at Beginning of Period
18,754

 
14,886

Cash and Cash Equivalents at End of Period
$
19,264

 
$
15,657

 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period for -
 
 
 
Interest
$
5,503

 
$
4,231

Income taxes
3,226

 
2,572

Transfer of loans to other real estate owned
1,460

 
455

Non-cash activities.
 
 
 
Acquisition of New Jersey Community Bank
 
 
 
Noncash assets acquired:
 
 
 
Investment securities available for sale
11,173

 
 
Loans
75,144

 
 
Premises and equipment, net
1,120

 
 
Bank-owned life insurance
3,972

 
 
Accrued interest receivable
259

 
 
Core deposit intangible asset
80

 
 
Other assets
2,786

 
 
 
94,534

 
 
Liabilities assumed:
 
 
 
Deposits
87,223

 
 
Other liabilities
636

 
 
 
87,859

 
 
 
 
 
 
Common stock issued as consideration
5,495

 
 


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

5



1ST Constitution Bancorp
Notes to Consolidated Financial Statements
September 30, 2018
(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., 204 South Newman Street Corp. and 249 New York Avenue, LLC. 1ST Constitution Capital Trust II, a subsidiary of the Company, is not included in the Company’s consolidated financial statements, as it is a variable interest entity and the Company is not the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation and certain prior period amounts have been reclassified to conform to current year presentation. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the year ended December 31, 2017, filed with the SEC on March 19, 2018.

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, 2018 for items that should potentially be recognized or disclosed in these financial statements.  The evaluation was conducted through the date these financial statements were issued.

Adoption of New Accounting Standards         

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

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” and all subsequent amendments to the ASU (collectively, “Topic 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain or loss from the transfer of nonfinancial assets, such as other real estate owned (“OREO”). The majority of the Company’s revenues come from interest income, other services to customers and other sources, including loans, leases and securities that are outside the scope of Topic 606. The Company’s services that fall within the scope of Topic 606 are presented within non-interest income and are recognized as revenue as the Company satisfies its obligations to customers. Services within the scope of Topic 606 include service charges on deposits, interchange income, other services and the sale of OREO. Refer to Note 6 - Revenue from Contracts with Customers - for further discussion on the Company’s accounting policies for revenue sources within the scope of Topic 606.

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

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

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


6



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

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

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

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

The ASU introduces a “screen” to assist entities in determining when a set should not be considered a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business. If the screen is not met, the ASU requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Further, the ASU removes the evaluation of whether a market participant could replace missing elements (as required under current U.S. GAAP).

For the Company, the ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The adoption of this guidance in 2018 did not have a material impact on the Company’s consolidated financial statements.

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

In August 2016, the FASB issued ASU 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which clarifies whether the following items should be categorized as operating, investing or financing in the statement of cash flows: (1) debt prepayment and extinguishment costs, (2) settlement of zero-coupon debt, (3) settlement of contingent consideration, (4) insurance proceeds, (5) settlement of corporate-owned life insurance (“COLI”) and bank-owned life insurance (“BOLI”) policies, (6) distributions from equity method investees, (7) beneficial interests in securitization transactions and (8) receipts and payments with aspects of more than one class of cash flows.
 
For the Company, the provisions of this ASU are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company classifies cash flows related to BOLI in accordance with the guidance, and the adoption of this guidance in 2018 did not have a material impact on its consolidated financial statements.

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

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


7



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

(2) Acquisition of New Jersey Community Bank
On April 11, 2018, the Company completed its acquisition of 100 percent of the shares of common stock of New Jersey Community Bank (“NJCB”), which merged with and into the Bank. The shareholders of NJCB received total consideration of $8.6 million, which was comprised of 249,785 shares of common stock of the Company with a market value of $5.5 million and cash of $3.1 million, of which $401,000 was placed in escrow to cover costs and expenses, including settlement costs, if any, that the Company may incur after closing the merger as a result of a certain litigation matter.
The 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 acquisition date. NJCB’s results of operations have been included in the Company’s Consolidated Statements of Income since April 11, 2018.
The assets acquired and liabilities assumed in the merger were recorded at their estimated fair values based on management’s best estimates, using information available at the date of the merger, including the use of third party valuation specialists. The fair values are preliminary estimates and subject to adjustment for up to one year after the closing date of the merger.
The following table summarizes the estimated fair value of the acquired assets and liabilities assumed:

(Dollars in thousands)
Amount
Consideration paid:
 
Company stock issued
$
5,495

Cash payment
2,668

Cash held in escrow
401

Total consideration paid
$
8,564

 
 
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed at fair value:
 
Cash and cash equivalents
$
2,073

Investment securities available for sale
11,173

Loans
75,144

Premises and equipment, net
1,120

Core deposit intangible asset
80

Bank-owned life insurance
3,972

Accrued interest receivable
259

Other assets
2,786

Deposits
(87,223
)
Other liabilities
(636
)
Total identifiable assets and liabilities, net
$
8,748

 
 
Gain from bargain purchase
$
184

Accounting Standards Codification (“ASC”) Topic 805-10 provides that if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report, in its financial statements, provisional amounts for the items for which the accounting is incomplete. During the measurement period, the acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. The measurement period may not exceed one year from the acquisition date.

8



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 obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things.
Loans acquired in the NJCB merger were recorded at fair value and subsequently accounted for in accordance with ASC Topic 310. The fair values of loans acquired were estimated, utilizing cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses of approximately $1.6 million and estimated prepayments. Projected cash flows were then discounted to present value, utilizing a risk-adjusted market rate for similar loans that management determined market participants would likely use.
At the acquisition date, the Company recorded $74.3 million of loans without evidence of credit quality deterioration and $881,000 of loans with evidence of credit quality deterioration.
The following table summarizes the composition of the loans acquired and recorded at fair value:

 
 
 
At April 11, 2018
 
 
(Dollars in thousands)
Loans acquired with no credit quality deterioration
 
Loans acquired with credit quality deterioration
 
Total
Commercial
 
 
 
 
 
  Construction
$
798

 
$

 
$
798

  Commercial real estate
58,191

 
873

 
59,064

  Commercial business
1,293

 
8

 
1,302

Residential real estate
7,572

 
 
 
7,572

Consumer
6,409

 
 
 
6,409

  Total loans
$
74,263

 
$
881

 
$
75,144


The following is a summary of the loans acquired with evidence of deteriorated credit quality in the NJCB acquisition as of the date of the closing of the merger:

(Dollars in thousands)
Acquired Credit Impaired Loans
 
 
Contractually required principal and interest at acquisition
$
1,658

Contractual cash flows not expected to be collected
609

(non-accretable difference)
 
 
 
Expected cash flows at acquisition
1,049

Interest component of expected cash flows (accretable difference)
168

 
 
Fair value of acquired loans
$
881




9



Bank-owned life insurance was recorded at the cash surrender value of the insurance policies, which approximates the redemption value of the policies.
The core deposit intangible asset totaled $80,000 and is being amortized over its estimated useful life of approximately 10 years, using an accelerated method. No goodwill was recognized in the transaction.
The following table presents the projected amortization of the core deposit intangible asset for each period:
(Dollars in thousands)
Amount
Year
 
2018
$
15

2019
13

2020
12

2021
10

2022
8

Thereafter
22

 
$
80

The fair values of deposit liabilities with no stated maturities, such as checking, money market and savings accounts, were assumed to equal the carrying value amounts since these deposits are payable on demand. The fair values of certificates of deposit represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.
Direct costs related to the acquisition were expensed as incurred. No merger-related expenses were incurred for the three months ended September 30, 2018. During the nine months ended September 30, 2018, the Company incurred $2.1 million of expenses for termination of contracts, legal and financial advisory fees, severance and other integration related expenses, which have been separately stated as merger-related expenses in the Company’s Consolidated Statements of Income.
Supplemental Pro Forma Financial Information
The following table presents financial information regarding the former NJCB operations included in the Company’s Consolidated Statements of Income from the date of the acquisition (April 11, 2018) through September 30, 2018 under the column “Actual from Acquisition Date to September 30, 2018.” In addition, the table presents unaudited condensed pro forma financial information assuming that the NJCB acquisition had been completed as of January 1, 2018 and January 1, 2017, respectively. In the table, merger-related expenses of $2.1 million were excluded from the pro forma non-interest expenses for the nine months ended September 30, 2018. Income taxes were also adjusted to exclude income tax benefits of $568,000 related to the merger expenses for the nine months ended September 30, 2018.
The table has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma financial information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the integration and consolidation of NJCB’s operations. The pro forma financial information reflects adjustments related to certain merger expenses and the related income tax effects.
(Dollars in thousands)
Actual from Acquisition Date to 9/30/2018
 
Pro Forma for the Nine Months Ended 9/30/2018
 
Pro Forma for the Nine Months Ended 9/30/2017
 
 
 
 
 
 
Net interest income
$
1,577

 
$
32,941

 
$
28,582

Non-interest income
70

 
6,074

 
6,502

Non-interest expenses
823

 
24,737

 
26,248

Income taxes
248

 
3,543

 
2,920

Net income
576

 
10,060

 
5,466


10



(3) Net Income Per Common Share

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

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 and warrants with exercise prices that exceed the average market price of the Company’s common stock during the periods presented. Inclusion of these common stock options and warrants would be anti-dilutive to the diluted earnings per common share calculation. For the three and nine months ended September 30, 2018 and 2017, no options and 9,500 options, respectively, were anti-dilutive and were not included in the computation of diluted earnings per common share.

The following table illustrates the calculation of both basic and diluted earnings per share for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in thousands, except per share data)
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income
$
4,011

 
$
2,485

 
$
8,735

 
$
6,353

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
8,392,631

 
8,063,119

 
8,282,889

 
8,040,955

Plus: common stock equivalents
286,048

 
265,133

 
282,512

 
268,408

Diluted weighted average shares outstanding
8,678,679

 
8,328,252

 
8,565,401

 
8,309,363

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.48

 
$
0.31

 
$
1.05

 
$
0.79

Diluted
$
0.46

 
$
0.30

 
$
1.02

 
$
0.76




(4) Investment Securities
A summary of amortized cost and approximate fair value of investment securities available for sale follows:
 
September 30, 2018
(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”) and agencies
$
3,989

 
$

 
$
(74
)
 
$
3,915

Residential collateralized mortgage obligations - GSE
45,362

 
4

 
(1,097
)
 
44,269

Residential mortgage backed securities - GSE
14,802

 
14

 
(254
)
 
14,562

Obligations of state and political subdivisions
23,869

 
56

 
(593
)
 
23,332

Trust preferred debt securities - single issuer
1,489

 

 
(83
)
 
1,406

Corporate debt securities
28,349

 

 
(532
)
 
27,817

Other debt securities
15,930

 
50

 
(89
)
 
15,891

Total
$
133,790

 
$
124

 
$
(2,722
)
 
$
131,192


11



 
December 31, 2017
(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”) and agencies
$
1,997

 
$

 
$
(30
)
 
$
1,967

Residential collateralized mortgage obligations - GSE
27,688

 
18

 
(381
)
 
27,325

Residential mortgage backed securities - GSE
14,231

 
129

 
(72
)
 
14,288

Obligations of state and political subdivisions
19,575

 
227

 
(82
)
 
19,720

Trust preferred debt securities - single issuer
2,481

 

 
(132
)
 
2,349

Corporate debt securities
27,917

 
14

 
(248
)
 
27,683

Other debt securities
12,140

 
12

 
(26
)
 
12,126

Total
$
106,029

 
$
400

 
$
(971
)
 
$
105,458



12



A summary of amortized cost, carrying value and approximate fair value of investment securities held to maturity follows:
 
September 30, 2018
(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
U.S. treasury securities and obligations of U.S. government-sponsored entities (“GSE”) and agencies
$

 
$

 
$

 
$

 
$

 
$

Residential collateralized mortgage obligations - GSE
7,118

 

 
7,118

 
7

 
(231
)
 
6,894

Residential mortgage backed securities - GSE
31,625

 

 
31,625

 
51

 
(789
)
 
30,887

Obligations of state and political subdivisions
49,259

 

 
49,259

 
591

 
(225
)
 
49,625

Trust preferred debt securities - pooled
657

 
(501
)
 
156

 
600

 

 
756

Other debt securities
3,221

 

 
3,221

 

 
(163
)
 
3,058

Total
$
91,880

 
$
(501
)
 
$
91,379

 
$
1,249

 
$
(1,408
)
 
$
91,220


 
December 31, 2017
(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
U.S. treasury securities and obligations of U.S. government-sponsored entities (“GSE”) and agencies
$
3,234

 
$

 
$
3,234

 
$

 
$
(84
)
 
$
3,150

Residential collateralized mortgage obligations - GSE
8,701

 

 
8,701

 
94

 
(123
)
 
8,672

Residential mortgage backed securities - GSE
34,072

 

 
34,072

 
231

 
(127
)
 
34,176

Obligations of state and political subdivisions
63,797

 

 
63,797

 
1,224

 
(35
)
 
64,986

Trust preferred debt securities - pooled
657

 
(501
)
 
156

 
418

 

 
574

Other debt securities
307

 

 
307

 

 

 
307

Total
$
110,768

 
$
(501
)
 
$
110,267

 
$
1,967

 
$
(369
)
 
$
111,865


At September 30, 2018 and December 31, 2017, $83.0 million and $98.4 million of investment securities, respectively, were pledged to secure public funds and collateralized borrowings from the FHLB and for other purposes required or permitted by law.

Restricted stock was included in other assets at September 30, 2018 and December 31, 2017 and totaled $5.3 million and $1.6 million, respectively. Restricted stock consisted of $5.2 million of Federal Home Loan Bank of New York stock and $135,000 of Atlantic Community Bankers Bank stock at September 30, 2018 and $1.5 million of Federal Home Loan Bank of New York stock and $65,000 of Atlantic Community Bankers Bank stock at December 31, 2017.

13




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, 2018.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
September 30, 2018
(Dollars in thousands)
Amortized Cost
 

Fair Value
 
Yield
Available for sale
 
 
 
 
 
Due in one year or less
$
9,464

 
$
9,422

 
2.07
%
Due after one year through five years
29,731

 
29,189

 
2.91
%
Due after five years through ten years
23,074

 
22,681

 
2.92
%
Due after ten years
71,521

 
69,900

 
2.86
%
Total
$
133,790

 
$
131,192

 
2.83
%
 
 
 
 
 
 
 
Carrying Value
 

Fair Value
 
Yield
Held to maturity
 

 
 

 
 

Due in one year or less
$
19,224

 
$
19,252

 
2.28
%
Due after one year through five years
19,185

 
19,405

 
3.64
%
Due after five years through ten years
23,649

 
23,392

 
3.04
%
Due after ten years
29,321

 
29,171

 
3.23
%
Total
$
91,379

 
$
91,220

 
3.07
%
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, 2018 and December 31, 2017 were as follows:
 
September 30, 2018
 
 
 
Less than 12 months
 
12 months or longer
 
Total
(Dollars in thousands)
Number
of
Securities
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
U.S. Treasury securities and
obligations of U.S.     
Government sponsored
entities (GSE) and   
agencies
4
 
$
1,989

 
$
(2
)
 
$
1,926

 
$
(72
)
 
$
3,915

 
$
(74
)
Residential collateralized
mortgage obligations - GSE
36
 
33,858

 
(504
)
 
15,486

 
(824
)
 
$
49,344

 
$
(1,328
)
Residential mortgage backed
securities - GSE
49
 
30,396

 
(708
)
 
8,160

 
(335
)
 
$
38,556

 
$
(1,043
)
Obligations of state and
political subdivisions
91
 
25,712

 
(626
)
 
5,310

 
(192
)
 
$
31,022

 
$
(818
)
Trust preferred debt securities -
single issuer
2
 

 

 
1,406

 
(83
)
 
$
1,406

 
$
(83
)
Corporate debt securities
10
 
20,321

 
(264
)
 
7,496

 
(268
)
 
$
27,817

 
$
(532
)
Other debt securities
6
 
7,932

 
(89
)
 
2,868

 
(163
)
 
$
10,800

 
$
(252
)
Total temporarily impaired
securities
198
 
$
120,208

 
$
(2,193
)
 
$
42,652

 
$
(1,937
)
 
$
162,860

 
$
(4,130
)

14



 
December 31, 2017
 
 
 
Less than 12 months
 
12 months or longer
 
Total
(Dollars in thousands)
Number
of
Securities
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
U.S. Treasury securities and
obligations of U.S.      
Government sponsored
entities (GSE) and   
agencies
2
 
$
1,967

 
$
(30
)
 
$
3,150

 
$
(84
)
 
$
5,117

 
$
(114
)
Residential collateralized
mortgage obligations - GSE
11
 
19,237

 
(205
)
 
8,788

 
(299
)
 
$
28,025

 
$
(504
)
Residential mortgage backed
securities - GSE
35
 
21,770

 
(141
)
 
3,074

 
(58
)
 
$
24,844

 
$
(199
)
Obligations of state and
political subdivisions
42
 
11,594

 
(82
)
 
2,717

 
(35
)
 
$
14,311

 
$
(117
)
Trust preferred debt securities - single issuer
4
 

 

 
2,349

 
(132
)
 
$
2,349

 
$
(132
)
Corporate debt securities
7
 
11,967

 
(98
)
 
7,662

 
(150
)
 
$
19,629

 
$
(248
)
Other debt securities
4
 
8,840

 
(25
)
 
21

 
(1
)
 
$
8,861

 
$
(26
)
Total temporarily impaired
securities
105
 
$
75,375

 
$
(581
)
 
$
27,761

 
$
(759
)
 
$
103,136

 
$
(1,340
)
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.

Corporate debt securities:  The unrealized losses on investments in corporate debt securities were caused by increases in market interest rates.  None of the corporate issuers have defaulted on interest payments.   The decline in fair value is attributable to changes in interest rates and not a decline in credit quality. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.

Trust preferred debt securities – single issuer: The investments in these securities with unrealized losses are comprised of two corporate trust preferred securities issued by one large financial institution that mature in 2027. The contractual terms of the trust preferred securities do not allow the issuer to settle the securities at a price less than the face value of the trust preferred securities, which is greater than the amortized cost of the trust preferred securities. The issuer maintains an investment grade credit rating and has not defaulted on interest payments. The decline in fair value is attributable to the widening of interest rate and credit spreads and the lack of an active trading market for these securities. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.

15




Trust preferred debt securities – pooled:  This trust preferred debt security was issued by a two-issuer pool (Preferred Term Securities XXV, Ltd. co-issued by Keefe, Bruyette and Woods, Inc. and First Tennessee (“PRETSL XXV”)) consisting primarily of debt securities issued by financial institution holding companies. During 2009, the Company recognized an other-than-temporary impairment 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 recognized in the income statement for this security was the discounted present value of projected cash flow where that present value of cash flow was less than the amortized cost basis of the security.  The present value of cash flow was developed using a model that considered performing collateral ratios, the level of subordination to senior tranches of the security and credit ratings of and projected credit defaults in the underlying collateral.

On a quarterly basis, management evaluates the security to determine if any additional other-than-temporary impairment is required. As of September 30, 2018, the security was in an unrealized gain position.

(5)   Allowance for Loan Losses and Credit Quality
The Company’s primary lending emphasis is the origination of commercial business and commercial real estate loans and mortgage warehouse lines of credit. 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 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, 2018:
(Dollars in thousands)
30-59 Days
 
60-89
Days
 
Greater
than 90
Days
 
Total Past
Due
 
Current
 
Total
Loans
Receivable
 
Recorded
Investment
> 90 Days
Accruing
 
Non-accrual
Loans
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
$

 
$

 
$

 
$

 
$
144,601

 
$
144,601

 
$

 
$

Commercial Business
185

 
10

 
623

 
818

 
105,178

 
105,996

 

 
3,583

Commercial Real Estate
1,045

 
506

 
1,251

 
2,802

 
373,201

 
376,003

 

 
1,608

Mortgage Warehouse Lines

 

 

 

 
182,791

 
182,791

 

 

Residential Real Estate
1,343

 

 
707

 
2,050

 
45,515

 
47,565

 

 
1,162

Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans to Individuals
255

 
8

 
207

 
470

 
23,603

 
24,073

 

 
408

Other

 

 

 

 
174

 
174

 

 

Total loans
$
2,828

 
$
524

 
$
2,788

 
$
6,140

 
$
875,063

 
881,203

 
$

 
$
6,761

Deferred loan costs, net
 
 
 
 
 
 
 
 
 
 
335

 
 
 
 
Total loans, including deferred loan costs, net
 
 
 
 
 
 
 
 
 
 
$
881,538

 
 
 
 

16



The following table provides an aging of the loan portfolio by loan class at December 31, 2017:
(Dollars in thousands)
30-59 Days
 
60-89
Days
 
Greater than
90 Days
 
Total Past
Due
 
Current
 
Total
Loans
Receivable
 
Recorded
Investment
> 90 Days
Accruing
 
Non-accrual
Loans
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
$

 
$

 
$

 
$

 
$
136,412

 
$
136,412

 
$

 
$

Commercial Business
180

 
545

 
619

 
1,344

 
91,562

 
92,906

 

 
4,212

Commercial Real Estate
540

 

 
2,465

 
3,005

 
305,919

 
308,924

 

 
2,465

Mortgage Warehouse Lines

 

 

 

 
189,412

 
189,412

 

 

Residential Real Estate
911

 
256

 
69

 
1,236

 
39,258

 
40,494

 

 
69

Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans to Individuals
119

 

 
116

 
235

 
20,790

 
21,025

 

 
368

Other

 

 

 

 
183

 
183

 

 

Total loans
$
1,750

 
$
801

 
$
3,269

 
$
5,820

 
$
783,536

 
789,356

 
$

 
$
7,114

Deferred loan costs, net
 
 
 
 
 
 
 
 
 
 
550

 
 
 
 
Total loans, including deferred loan costs, net
 
 
 
 
 
 
 
 
 
 
$
789,906

 
 
 
 
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, 2018, there was one purchased credit impaired (“PCI”) loan for $506,000 that was not classified as a non-performing loan. At December 31, 2017, there were no PCI loans that were not classified as non-performing loans.
The Company’s internal credit risk grades are based on the definitions currently utilized by the banking regulatory agencies.  The grades assigned and their definitions are as follows, and loans graded excellent, above average, good and watch list are treated as “pass” for grading purposes:

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 in categories 1 and 2 above. Loans to individuals are supported by their high 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.  Such problems have not developed to the point that requires 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.

4.  Special Mention - A “special mention” loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the 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.

17




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

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

The following table provides a breakdown of the loan portfolio by credit quality indicator at September 30, 2018:
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
Commercial Credit Exposure - By
Internally Assigned Grade
Construction
 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse Lines
 
Residential
Real Estate
Grade:
 
 
 
 
 
 
 
 
 
Pass
$
141,333

 
$
91,454

 
$
355,755

 
$
182,359

 
$
46,119

Special Mention
3,268

 
10,754

 
11,313

 
432

 
110

Substandard

 
3,528

 
8,935

 

 
1,336

Doubtful

 
260

 

 

 

Total
$
144,601

 
$
105,996

 
$
376,003

 
$
182,791

 
$
47,565

Consumer Credit Exposure -
By Payment Activity
Loans To
Individuals
 
Other
 
 
 
 
Performing
$
23,665

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