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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, 2021
or
☐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 Jersey22-3665653
(State of Other Jurisdiction
of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2650 Route 130P.O. Box 634CranburyNew Jersey08512
(Address of Principal Executive Offices)(Zip Code)
(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 classTrading Symbol(s)Name of each exchange on which registered
Common stock, no par valueFCCY
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 5, 2021, there were 10,321,669 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, 2021 (unaudited) and December 31, 2020
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2021 and September 30, 2020 (unaudited)
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and September 30, 2020 (unaudited)
Consolidated Statements of Changes in Shareholders' Equity for the Three and Nine Months Ended September 30, 2021 and September 30, 2020 (unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and September 30, 2020 (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, 2021December 31, 2020
ASSETS
Cash and due from banks$14,956 $3,661 
Interest-earning deposits258,990 18,334 
Total cash and cash equivalents273,946 21,995 
Investment securities  
Available for sale, at fair value203,940 125,197 
Held to maturity (fair value of $127,234 and $95,640 at September 30, 2021
    and December 31, 2020, respectively)
125,198 92,552 
Total investment securities329,138 217,749 
Loans held for sale6,768 29,782 
Loans1,198,455 1,433,706 
  Less: allowance for loan losses(17,160)(15,641)
    Net loans1,181,295 1,418,065 
Premises and equipment, net13,835 14,345 
Right-of-use assets15,282 16,548 
Accrued interest receivable4,379 5,273 
Bank-owned life insurance37,398 37,316 
Other real estate owned48 92 
Goodwill and intangible assets35,765 36,003 
Other assets12,686 9,741 
Total assets$1,910,540 $1,806,909 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
LIABILITIES  
Deposits  
Non-interest bearing$534,436 $425,210 
Interest bearing1,104,125 1,137,629 
Total deposits1,638,561 1,562,839 
Short-term borrowings— 9,825 
Redeemable subordinated debentures18,557 18,557 
Accrued interest payable425 851 
Lease liability16,216 17,387 
Accrued expenses and other liabilities36,858 9,793 
Total liabilities1,710,617 1,619,252 
SHAREHOLDERS' EQUITY  
Preferred stock, no par value; 5,000,000 shares authorized; none issued
— — 
Common stock, no par value; 30,000,000 shares authorized; 10,376,085 and 10,293,535 shares issued and 10,318,907 and 10,245,826 shares outstanding as of September 30, 2021 and December 31, 2020, respectively
112,138 111,135 
Retained earnings87,735 75,201 
Treasury stock, 57,178 and 47,709 shares at September 30, 2021 and December 31, 2020, respectively
(771)(611)
Accumulated other comprehensive income821 1,932 
Total shareholders' equity199,923 187,657 
Total liabilities and shareholders' equity$1,910,540 $1,806,909 
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,
2021202020212020
INTEREST INCOME
Loans, including fees$14,995 $16,477 $45,765 $46,656 
Securities:
Taxable545 725 1,569 2,633 
Tax-exempt456 504 1,392 1,438 
Federal funds sold and short-term investments108 2 203 95 
Total interest income16,104 17,708 48,929 50,822 
INTEREST EXPENSE
Deposits1,215 2,171 4,155 8,133 
Borrowings— 95 — 205 
Redeemable subordinated debentures81 90 248 348 
Total interest expense1,296 2,356 4,403 8,686 
Net interest income14,808 15,352 44,526 42,136 
PROVISION FOR LOAN LOSSES600 2,320 2,600 5,340 
Net interest income after provision for loan losses
14,208 13,032 41,926 36,796 
NON-INTEREST INCOME
Service charges on deposit accounts116 126 340 471 
Gain on sales of loans2,632 3,396 8,493 6,987 
Income on bank-owned life insurance379 188 721 632 
Gain on sales and calls of securities2 79 6 97 
Other income774 947 2,156 2,105 
Total non-interest income3,903 4,736 11,716 10,292 
NON-INTEREST EXPENSES
Salaries and employee benefits6,623 7,106 20,034 19,276 
Occupancy expense1,221 1,222 3,693 3,597 
Data processing expenses490 486 1,486 1,402 
FDIC insurance expense108 225 533 484 
Other real estate owned (recoveries) expenses(22)27 33 58 
Merger-related expenses737 — 1,184 64 
Other operating expenses1,684 1,896 5,510 5,711 
Total non-interest expenses10,841 10,962 32,473 30,592 
Income before income taxes7,270 6,806 21,169 16,496 
INCOME TAXES1,840 1,896 5,658 4,475 
Net income
$5,430 $4,910 $15,511 $12,021 
EARNINGS PER COMMON SHARE
Basic
$0.53 $0.48 $1.51 $1.18 
Diluted
$0.53 $0.48 $1.51 $1.17 
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic
10,289,434 10,230,488 10,274,787 10,213,601 
Diluted
10,319,637 10,268,951 10,299,029 10,260,477 
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,
2021202020212020
Net income $5,430 $4,910 $15,511 $12,021 
Other comprehensive (loss) income:
Unrealized holding gains (losses) on securities available for sale(507)435 (1,133)1,964 
Tax effect
122 (103)270 (475)
Net of tax amount
(385)332 (863)1,489 
Reclassification adjustment for (gains) losses on securities available for sale(1)
— 14 (2)3 
   Tax effect (2)
— (4)— (1)
Net of tax amount
— 10 (2)2 
Reclassification adjustment for unrealized impairment loss on held to maturity security(3)
6 6 19 14 
Tax effect
(1)(1)(4)(4)
Net of tax amount5 5 15 10 
Pension liability(32)70 (95)211 
Tax effect9 (20)25 (62)
Net of tax amount(23)50 (70)149 
Reclassification adjustment for actuarial gains for unfunded pension liability(4)
(89)(51)(267)(151)
Tax effect (2)
25 15 76 45 
Net of tax amount
(64)(36)(191)(106)
Total other comprehensive (loss) income(467)361 (1,111)1,544 
Comprehensive income$4,963 $5,271 $14,400 $13,565 
(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.

3

1ST Constitution Bancorp
Consolidated Statements of Changes in Shareholders’ Equity
For the Three and Nine Months Ended September 30, 2021 and 2020
(Dollars in thousands) (Unaudited)
Common
Stock		Retained
Earnings		Treasury
Stock		Accumulated
Other
Comprehensive
Income (Loss)		Total
Shareholders’
Equity
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 compensation274 — — — 274 
Cash dividends ($0.09 per share)
— (919)— — (919)
Purchase of treasury shares (8,383 shares)
— — (108)— (108)
Other comprehensive income— — — 361 361 
Balance, September 30, 2020$110,825 $70,058 $(611)$1,735 $182,007 
Balance, July 1, 2021$111,775 $83,333 $(739)$1,288 $195,657 
Net income— 5,430 — — 5,430 
Exercise of stock options (35,534 shares)
104 — — — 104 
Share-based compensation259 — — — 259 
Cash dividends ($0.10 per share)
— (1,028)— — (1,028)
Purchase of treasury shares (1,475 shares)
— — (32)— (32)
Other comprehensive loss— — — (467)(467)
Balance, September 30, 2021$112,138 $87,735 $(771)$821 $199,923 


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— 12,021 — — 12,021 
Exercise of stock options and issuance of restricted shares (755 shares and 59,500 shares, respectively)
5 — — — 5 
Share-based compensation856 — — — 856 
Cash dividends ($0.27 per share)
— (2,754)— — (2,754)
Purchase of treasury shares (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 
Balance, January 1, 2021$111,135 $75,201 $(611)$1,932 $187,657 
Net income— 15,511 — — 15,511 
Exercise of stock options and issuance of restricted shares (43,200 shares and 39,350 shares, respectively)
172 — — — 172 
Share-based compensation831 — — — 831 
Cash dividends ($0.30 per share)
— (2,977)— — (2,977)
Purchase of treasury shares (9,469 shares)
— — (160)— (160)
Other comprehensive loss— — — (1,111)(1,111)
Balance, September 30, 2021$112,138 $87,735 $(771)$821 $199,923 

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,
20212020
OPERATING ACTIVITIES:
Net income$15,511 $12,021 
Adjustments to reconcile net income to net cash provided by (used in) operating activities-
Provision for loan losses2,600 5,340 
Depreciation and amortization1,426 1,561 
Net amortization of premiums and discounts on securities906 956 
SBA loan discount accretion
(256)(300)
(Gain) loss on sales and calls of securities available for sale(2)3 
Gain on sales and calls of securities held to maturity(4)(100)
Gain on sales of other real estate owned— (71)
Write-down of other real estate owned44 — 
Gain on sales of loans held for sale(8,493)(6,987)
Originations of loans held for sale(219,674)(238,201)
Proceeds from sales of loans held for sale251,181 222,919 
Increase in cash surrender value on bank–owned life insurance(521)(557)
Gain on cash surrender value on bank-owned life insurance
(200)(75)
Share-based compensation expense831 856 
Decrease in deferred tax asset23 498 
Noncash rent and equipment expense95 144 
Decrease (increase) in accrued interest receivable894 (744)
Increase in other assets(3,238)(9,492)
Decrease in accrued interest payable(426)(523)
Increase in accrued expenses and other liabilities26,703 338 
                Net cash provided by (used in) operating activities67,400 (12,414)
INVESTING ACTIVITIES:
Purchases of securities:
Available for sale(108,360)(23,415)
Held to maturity(63,192)(32,665)
Proceeds from sales, calls, maturities and payments of securities:
Available for sale27,861 45,425 
Held to maturity30,286 21,244 
Proceeds from bank-owned life insurance benefits paid639 179 
Net redemption of restricted stock411 1,753 
Net decrease (increase) in loans234,426 (239,517)
Capital expenditures(452)(248)
Proceeds from sales of other real estate owned— 375 
Net cash provided by (used in) investing activities121,619 (226,869)
FINANCING ACTIVITIES:
Exercise of stock options 172 5 
Purchase of treasury shares(160)(243)
Cash dividends paid to shareholders(2,977)(2,754)
Net increase in deposits75,722 233,671 
(Decrease) increase in short-term borrowings(9,825)13,817 
Net cash provided by financing activities62,932 244,496 
Increase in cash and cash equivalents251,951 5,213 
Cash and cash equivalents at beginning of period21,995 14,842 
Cash and cash equivalents at end of period$273,946 $20,055 
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for -
Interest$4,829 $9,209 
Income taxes7,315 4,311 
Noncash items
Right-of-use assets20 250 
Lease liability20 250 

The accompanying notes are an integral part of these consolidated financial statements.
5

1ST Constitution Bancorp
Notes to Consolidated Financial Statements
September 30, 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 (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. 1ST Constitution Investment Company of New Jersey, Inc. owns the remaining issued and outstanding preferred stock and common stock of the REIT. 1ST Constitution Capital Trust II, a subsidiary of the Company, is not included in the Company’s consolidated financial statements, as it is a variable interest entity and the Company is not the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation. 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, 2020, filed with the SEC on March 15, 2021.

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

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

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

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act to provide relief for individuals and businesses that have been negatively impacted by the COVID-19 pandemic. Among the provisions, the CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” accounting guidance in Accounting Standards Codification (“ASC”) Topic 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019. The Bank adopted this provision as of March 31, 2020.
6


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 COVID-19 national emergency; provided, that, the modified loans were not more than 30 days past due as of December 31, 2019. The Bank adopted this provision as of December 31, 2020.

(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, 2021 and 2020, 12,580 and 54,930 options, respectively, were anti-dilutive and were not included in the computation of diluted earnings per share. For the nine months ended September 30, 2021 and 2020, 21,700 and 41,430 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, 2021 and 2020:
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in thousands, except per share data)2021202020212020
Net income$5,430 $4,910 $15,511 $12,021 
Basic weighted average shares outstanding10,289,434 10,230,488 10,274,787 10,213,601 
Plus: common stock equivalents
30,203 38,463 24,242 46,876 
Diluted weighted average shares outstanding10,319,637 10,268,951 10,299,029 10,260,477 
Earnings per share:
Basic
$0.53 $0.48 $1.51 $1.18 
Diluted
$0.53 $0.48 $1.51 $1.17 



7

(3) Investment Securities
A summary of amortized cost and fair value of investment securities available for sale follows:
September 30, 2021
(Dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)
$82,455 $25 $(138)$82,342 
Residential collateralized mortgage obligations - GSE32,443 261 (50)32,654 
Residential mortgage backed securities - GSE27,129 436 (204)27,361 
Obligations of state and political subdivisions22,799 810 — 23,609 
Corporate debt securities21,010 250 (41)21,219 
Other debt securities16,623 177 (45)16,755 
Total
$202,459 $1,959 $(478)$203,940 
December 31, 2020
(Dollars in thousands) Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)
$3,437 $7 $(5)$3,439 
Residential collateralized mortgage obligations - GSE36,282 503 (6)36,779 
Residential mortgage backed securities - GSE13,031 572 (6)13,597 
Obligations of state and political subdivisions26,445 1,007 — 27,452 
Corporate debt securities20,997 465 (95)21,367 
Other debt securities22,389 254 (80)22,563 
Total
$122,581 $2,808 $(192)$125,197 




8

A summary of amortized cost, carrying value and fair value of investment securities held to maturity follows:
September 30, 2021
(Dollars in thousands)Amortized
Cost		Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Loss		Carrying
Value		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
Residential collateralized mortgage obligations - GSE$3,006 $— $3,006 $93 $— $3,099 
Residential mortgage backed securities - GSE18,416 — 18,416 880 — 19,296 
Obligations of state and political subdivisions99,927 — 99,927 888 (261)100,554 
Trust preferred debt securities - pooled638 (453)185 456 — 641 
Other debt securities3,664 — 3,664 48 (68)3,644 
Total
$125,651 $(453)$125,198 $2,365 $(329)$127,234 

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 $— $4,640 $166 $— $4,806 
Residential mortgage backed securities - GSE24,517 — 24,517 1,208 — 25,725 
Obligations of state and political subdivisions61,249 — 61,249 1,248 (2)62,495 
Trust preferred debt securities - pooled648 (472)176 405 — 581 
Other debt securities1,970 — 1,970 63 — 2,033 
Total
$93,024 $(472)$92,552 $3,090 $(2)$95,640 

At September 30, 2021 and December 31, 2020, $57.7 million and $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, 2021 and December 31, 2020 and totaled $1.2 million and $1.7 million, respectively. Restricted stock consisted of $1.1 million of FHLB stock and $160,000 of Atlantic Community Bankers Bank stock at September 30, 2021 and $1.5 million of FHLB and $160,000 of Atlantic Community Bankers Bank stock at December 31, 2020.
9


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, 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, 2021
(Dollars in thousands)Amortized Cost
Fair Value		Yield
Available for sale   
Due in one year or less$6,635 $6,754 3.11 %
Due after one year through five years106,832 107,424 1.11 %
Due after five years through ten years23,302 23,701 1.73 %
Due after ten years65,690 66,061 1.68 %
Total$202,459 $203,940 1.47 %
 Carrying Value
Fair Value		Yield
Held to maturity   
Due in one year or less$51,840 $51,843 0.50 %
Due after one year through five years4,114 4,242 3.51 %
Due after five years through ten years14,033 14,588 2.71 %
Due after ten years55,211 56,561 2.55 %
Total$125,198 $127,234 1.80 %
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, 2021 and December 31, 2020 were as follows:
September 30, 2021
Less than 12 months12 months or longerTotal
(Dollars in thousands)Number
of
Securities		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
U.S. Treasury securities and obligations of U.S. Government sponsored
entities (GSE)		11$54,853 $(138)$— $— $54,853 $(138)
Residential collateralized
mortgage obligations - GSE		45,727 (7)2,955 (43)8,682 (50)
Residential mortgage backed
securities - GSE		1217,369 (200)141 (4)17,510 (204)
Obligations of state and
political subdivisions		1012,687 (261)— — 12,687 (261)
Corporate debt securities3— — 3,456 (41)3,456 (41)
Other debt securities31,896 (68)4,108 (45)6,004 (113)
Total temporarily impaired
securities		43$92,532 $(674)$10,660 $(133)$103,192 $(807)
10

December 31, 2020
Less than 12 months12 months or longerTotal
(Dollars in thousands)Number
of
Securities		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
U.S. Treasury securities and obligations of U.S. Government sponsored
    entities (GSE)
1$— $— $548 $(5)$548 $(5)
Residential collateralized
mortgage obligations - GSE		35,153 (2)2,060 (4)7,213 (6)
Residential mortgage backed
securities - GSE		3203 (6)— — 203 (6)
Obligations of state and
political subdivisions		11,295 (2)— — 1,295 (2)
Corporate debt securities3— — 3,399 (95)3,399 (95)
Other debt securities7— — 11,230 (80)11,230 (80)
Total temporarily impaired
securities		18$6,651 $(10)$17,237 $(184)$23,888 $(194)
U.S. Treasury securities and obligations of U.S. government-sponsored entities: The unrealized losses on investments in these securities were caused by increases in market interest rates. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity.  Therefore, these investments are not considered other-than-temporarily impaired.

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

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

Corporate debt securities.  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. None of the corporate issuers have defaulted on interest payments. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.

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

Trust preferred debt securities – pooled:  This trust preferred debt security was issued by a two issuer pool (Preferred Term Securities XXV, Ltd. co-issued by Keefe, Bruyette and Woods, Inc. and First Tennessee (“PRETSL XXV”)), consisting primarily of 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
11

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 $19,000 was recognized in the first nine months of 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, 2021, management concluded that no additional other-than-temporary impairment had occurred.

(4)   Allowance for Loan Losses and Credit Quality
The Company’s primary lending emphasis is the origination of commercial real estate loans, mortgage warehouse lines of credit and commercial business loans. Based on the composition of the loan portfolio, the primary inherent 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, 2021:
(Dollars in thousands)30-59 Days60-89
Days		Greater
than 90
Days		Total Past
Due		CurrentTotal
Loans
Receivable		Recorded
Investment
> 90 Days
Accruing		Non-Accrual
Loans
Commercial real estate$659 $625 $— $1,284 $611,543 $612,827 $— $625 
Mortgage warehouse lines— — — — 235,897 235,897 — — 
Construction— — 7,024 7,024 122,612 129,636 — 7,024 
Commercial business3 136 4 143 139,511 139,654 — 124 
Residential real estate665 — 1,007 1,672 61,551 63,223 — 1,621 
Loans to individuals— — 47 47 17,898 17,945 — 143 
Other loans— — — — 93 93 — — 
Total loans$1,327 $761 $8,082 $10,170 $1,189,105 1,199,275 $— $9,537 
Deferred loan fees, net(820)
Total loans$1,198,455 

The following table provides an aging of the loan portfolio by loan class at December 31, 2020:
(Dollars in thousands)30-59 Days60-89
Days		Greater than
90 Days		Total Past
Due		CurrentTotal
Loans
Receivable		Recorded
Investment
> 90 Days
Accruing		Non-Accrual
Loans
Commercial real estate$— $— $7,008 $7,008 $611,970 $618,978 $— $7,565 
Mortgage warehouse lines— — — — 388,366 388,366 — — 
Construction— — 7,500 7,500 121,745 129,245 — 7,500 
Commercial business1 — 84 85 188,643 188,728 — 225 
Residential real estate1,356 91 1,534 2,981 85,280 88,261 871 798 
Loans to individuals12 99 264 375 20,894 21,269 — 273 
Other loans— — — — 113 113 — — 
Total loans$1,369 $190 $16,390 $17,949 $1,417,011 1,434,960 $871 $16,361 
Deferred loan fees, net(1,254)
Total loans$1,433,706 
As provided by ASC 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, 2021 and December 31, 2020, there were $254,000 and $2.4 million of purchased credit impaired loans, respectively, that were not classified as non-performing loans due to the accretion of income.
12

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.

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.


13

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

(Dollars in thousands)
 Credit Exposure by Internally Assigned GradeConstructionCommercial
Business		Commercial
Real Estate		Mortgage
Warehouse Lines		Residential
Real Estate
Pass$118,132 $124,711 $579,753 $235,897 $60,505 
Special Mention4,696 2,363 19,293 — 349 
Substandard— 12,576 13,781 — 2,369 
Doubtful6,808 4 — — — 
Total$129,636 $139,654 $612,827 $235,897 $63,223 
Credit Exposure by Payment ActivityLoans To
Individuals		Other Loans
Performing$17,802 $93 
Non-performing143 — 
Total$17,945 $93 


The following table provides a breakdown of the loan portfolio by credit quality indicator at December 31, 2020:
(Dollars in thousands)
Credit Exposure by Internally Assigned GradeConstructionCommercial
Business		Commercial
Real Estate		Mortgage
Warehouse
Lines		Residential
Real Estate
Pass$121,745 $175,895 $580,699 $387,483 $85,203 
Special Mention— 5,942 15,419 883 358 
Substandard7,500 6,806 22,860 — 2,700 
Doubtful— 85 — — — 
Total$129,245 $188,728 $618,978 $388,366 $88,261 
Credit Exposure by Payment ActivityLoans To
Individuals		Other Loans
Performing$20,996 $113 
Non-performing273 — 
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.


14

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

September 30, 2021
(Dollars in thousands)
ConstructionCommercial
Business		Commercial
Real Estate		Mortgage
Warehouse Lines		Residential
Real Estate		Loans to
Individuals		Other LoansUnallocatedTotal
Allowance for loan losses:
Individually evaluated for impairment
$2,961 $138 $53 $— $— $— $— $— $3,152 
Loans acquired with deteriorated credit quality
— — — — — — — — — 
Collectively evaluated for impairment
2,122 2,854 6,606 1,062 389 102 873 14,008 
Ending Balance$5,083 $2,992 $6,659 $1,062 $389 $102 $— $873 $17,160 
Loans receivable:
Individually evaluated for impairment
$7,024 $717 $5,111 $— $1,621 $143 $— $— $14,616 
Loans acquired with deteriorated credit quality
— 288 2,413 — 136 — — — 2,837 
Collectively evaluated for impairment
122,612 138,649 605,303 235,897 61,466 17,802 93 — 1,181,822 
Ending Balance$129,636 $139,654 $612,827 $235,897 $63,223 $17,945 $93 $— 1,199,275 
Deferred loan fees, net(820)
$1,198,455 


December 31, 2020
(Dollars in thousands)
ConstructionCommercial
Business		Commercial
Real Estate		Mortgage
Warehouse Lines		Residential
Real
Estate		Loans to
Individuals		Other LoansUnallocatedTotal
Allowance for loan losses:
Individually evaluated for impairment
$2,089 $4 $19 $— $— $— $— $— $2,112 
Loans acquired with deteriorated credit quality
— — — — — — — — — 
Collectively evaluated for impairment
1,652 2,723 6,403 1,807 619 125 — 200 13,529 
Ending Balance$3,741 $2,727 $6,422 $1,807 $619 $125 $— $200 $15,641 
Loans receivable:
Individually evaluated for impairment
$7,500 $959 $11,717 $— $798 $273 $— $— $21,247 
Loans acquired with deteriorated credit quality
— 308 3,323 — 410 — — — 4,041 
Collectively evaluated for impairment
121,745 187,461 603,938 388,366 87,053 20,996 113 — 1,409,672 
Ending Balance$129,245 $188,728 $618,978 $388,366 $88,261 $21,269 $113 $— 1,434,960 
Deferred loan fees, net(1,254)
$1,433,706 
15

At September 30, 2021 and December 31, 2020, there were $23.1 million and $58.8 million, respectively, of Small Business Administration (“SBA”) PPP loans which are included in commercial business loans and are 100% guaranteed by the SBA. Accordingly, no 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, 2021 and 2020 was as follows:

Balance - (Dollars in thousands)ConstructionCommercial
Business		Commercial
Real Estate		Mortgage
Warehouse Lines		Residential
Real
Estate		Loans to IndividualsOther LoansUnallocatedTotal
Balance - July 1, 2021$5,025 $2,662 $6,875 $1,088 $418 $110 $— $747 $16,925 
Provision charged (credited) to operations58 366 113 (26)(29)(8)— 126 600 
Loans charged off— (36)(334)— — — — — (370)
Recoveries of loans charged off— — 5 — — — — — 5 
Balance - September 30, 2021$5,083 $2,992 $6,659 $1,062 $389 $102 $— $873 $17,160 
Balance - July 1, 2020$1,661 $1,780 $6,619 $1,337 $506 $182 $— $41 $12,126 
Provision charged (credited) to operations1,558 791 (549)370 18 — — 132 2,320 
Loans charged off— — — — — (3)— — (3)
Recoveries of loans charged off— — 7 — — — — — 7 
Balance - September 30, 2020$3,219 $2,571 $6,077 $1,707 $524 $179 $— $173 $14,450 
Balance - (Dollars in thousands)ConstructionCommercial
Business		Commercial
Real Estate		Mortgage
Warehouse Lines		Residential
Real
Estate		Loans to IndividualsOther LoansUnallocatedTotal
Balance - January 1, 2021$3,741 $2,727 $6,422 $1,807 $619 $125 $— $200 $15,641 
Provision charged (credited) to operations2,034 310 580 (745)(230)(23)1 673 2,600 
Loans charged off(692)(48)(348)— — — (1)— (1,089)
Recoveries of loans charged off— 3 5 — — — — — 8 
Balance - September 30, 2021$5,083 $2,992 $6,659 $1,062 $389 $102 $— $873 $17,160 
Balance - January 1, 2020$1,389 $1,409 $4,524 $1,083 $412 $185 $— $269 $9,271 
Provision charged (credited) to operations1,830 1,327 1,546 624 112 (3)— (96)5,340 
Loans charged off— (165)— — — (3)— — (168)
Recoveries of loans charged off— — 7 — — — — — 7 
Balance - September 30, 2020$3,219 $2,571 $6,077 $1,707 $524 $179 $— $173 $14,450 

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.
16

Impaired Loans Receivables (By Class)
Three Months Ended September 30, 2021Nine Months Ended September 30, 2021
(Dollars in thousands)Recorded
Investment		Unpaid
Principal
Balance		Related
Allowance		Average
Recorded
Investment		Interest
Income
Recognized		Average
Recorded
Investment		Interest
Income
Recognized
With no allowance:
Commercial:
Construction$216 $216 $— $216 $— $96 $— 
Commercial Business483 1,789 — 488 45 644 131 
Commercial Real Estate3,037 3,352 — 2,770 77 4,966 243 
Mortgage Warehouse Lines— — — — — — — 
Subtotal3,736 5,357 — 3,474 122 5,706 374 
Residential Real Estate1,757 1,911 — 1,762 9 1,967 24 
Consumer:  
 Loans to Individuals143 152 — 145 — 197 — 
 Other Loans— — — — — — — 
Subtotal143 152 — 145 — 197 — 
With no allowance:$5,636 $7,420 $— $5,381 $131 $7,870 $398 
  
With an allowance:
Commercial:
Construction$6,808 $7,500 $2,961 $6,808 $— $7,115 $— 
Commercial Business522 522 138 523 6 486 20 
Commercial Real Estate4,487 4,487 53 6,733 63 7,283 188 
Mortgage Warehouse Lines— — — — — — — 
Subtotal11,817 12,509 3,152 14,064 69 14,884 208 
Residential Real Estate— — — — — — — 
Consumer:
 Loans to Individuals— — — — — — — 
 Other Loans— — — — — — — 
Subtotal— — — — — — — 
With an allowance:$11,817 $12,509 $3,152 $14,064 $69 $14,884 $208 
Total:  
Construction7,024 7,716 2,961 7,024 — 7,211 — 
Commercial Business1,005 2,311 138 1,011 51 1,130 151 
Commercial Real Estate7,524 7,839 53 9,503 140 12,249 431 
Mortgage Warehouse Lines— — — — — — — 
Residential Real Estate1,757 1,911 — 1,762 9 1,967 24 
Consumer143 152 — 145 — 197 — 
Total$17,453 $19,929 $3,152 $19,445 $200 $22,754 $606 
17








Impaired Loans Receivables (By Class)
December 31, 2020
(Dollars in thousands)Recorded
Investment		Unpaid
Principal Balance		Related
Allowance
With no allowance:
Commercial:
Construction$— $— $— 
Commercial Business1,120 2,500 — 
Commercial Real Estate11,806 13,833 — 
Mortgage Warehouse Lines— — — 
Subtotal12,926 16,333 — 
Residential Real Estate1,208 1,465 — 
Consumer:
 Loans to Individuals273 297 — 
 Other Loans— — — 
Subtotal273 297 — 
With no allowance$14,407 $18,095 $— 
With an allowance:
Commercial:
Construction$7,500 $7,500 $2,089 
Commercial Business147 147 4 
Commercial Real Estate3,234 3,234 19 
Mortgage Warehouse Lines— — — 
Subtotal10,881 10,881 2,112 
Residential Real Estate— — — 
Consumer:
 Loans to Individuals— — — 
 Other Loans— — — 
Subtotal— — — 
With an allowance$10,881 $10,881 $2,112 
Total:
Construction$7,500 $7,500 $2,089 
Commercial Business1,267 2,647 4 
Commercial Real Estate15,040 17,067 19 
Mortgage Warehouse Lines— — — 
Residential Real Estate1,208 1,465 — 
Consumer273 297 — 
Total$25,288 $28,976 $2,112 

18

Impaired Loans Receivables (By Class)
Three Months Ended September 30, 2020Nine Months Ended September 30, 2020
(Dollars in thousands)Average
Recorded
Investment		Interest Income RecognizedAverage
Recorded
Investment		Interest Income Recognized
With no allowance: 
Commercial:
Construction$6,185 $— $6,197 $— 
Commercial Business1,509 17 1,408 51 
Commercial Real Estate14,328 146 10,334 439 
Mortgage Warehouse Lines— — — — 
Subtotal22,022 163 17,939 490 
Residential Real Estate1,265 7 1,277 25 
Consumer:  
Loans to Individuals419 — 539 — 
Other Loans— — — — 
Subtotal419 — 539 — 
With no allowance$23,706 $170 $19,755 $515 
With an allowance:  
Commercial:
Construction$2,500 $— $1,235 $— 
Commercial Business214 — 337 — 
Commercial Real Estate2,923 21 3,717 63 
Mortgage Warehouse Lines— — — — 
Subtotal5,637 21 5,289 63 
Residential Real Estate— — — — 
Consumer:  
Loans to Individuals— — — — 
Other Loans— — — — 
Subtotal— — — — 
With an allowance$5,637 $21 $5,289 $63 
Total:  
Construction$8,685 $— 7,432 — 
Commercial Business1,723 17 1,745 51 
Commercial Real Estate17,251 167 14,051 502 
Mortgage Warehouse Lines— — — — 
Residential Real Estate1,265 7 1,277 25 
Consumer419 — 539 — 
Total$29,343 $191 $25,044 $578 
19

Purchased Credit-Impaired Loans
Purchased credit-impaired (“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 Community Bank with and into the Bank, the Company acquired PCI loans with loan balances totaling $6.3 million and fair values totaling $4.6 million. The following table presents additional information regarding PCI loans at September 30, 2021 and December 31, 2020:
(Dollars in thousands)September 30, 2021December 31, 2020
Outstanding balance$3,910 $5,221 
Carrying amount$2,837 $4,041 
Changes in accretable discount for purchased credit-impaired loans for the three and nine months ended September 30, 2021 and September 30, 2020 were as follows:
Three months ended September 30,Nine months ended September 30,
(Dollars in thousands)2021202020212020
Balance at beginning of period$301 $426 $232 $657 
Acquisition of impaired loans— — — — 
Transfer from non-accretable discount59 — 288 — 
Accretion of discount(88)(112)(248)(343)
Balance at end of period$272 $314 $272 $314 
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, 2021December 31, 2020
Number of loansRecorded InvestmentNumber of loansRecorded Investment
3$1,053 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 no loans modified as a TDR during the nine months ended September 30, 2021 and 2020. There were no TDRs that subsequently defaulted within 12 months of restructuring during the nine months ended September 30, 2021 and 2020.

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. The Economic Aid Act, which was enacted in December 2020 in further response to the COVID-19 pandemic, provides relief to borrowers in the form of access to additional credit through the SBA's PPP
20

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 September 30, 2021, all commercial business, commercial real estate and consumer loans, except for two loans, that had previously received deferrals in 2020 and 2021 were no longer deferred and had made the contractually due payments. These modified loans were not considered TDRs under the CARES Act and the Economic Aid Act. The two loans consisted of one non-performing commercial real estate loan totaling $3.1 million which was charged down $334,000 to its estimated fair value of $2.7 million and was transferred to loans held for sale in the third quarter of 2021 and one residential mortgage loan for $871,000 that was placed on non-accrual in the first quarter of 2021.

(5)   Revenue from Contracts with Customers

All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within non-interest income. The following table presents the Company’s sources of non-interest income for the three and nine months ended September 30, 2021 and 2020. Items outside the scope of ASC 606 are noted as such.
Three months endedNine months ended
(Dollars in thousands)September 30, 2021September 30, 2020September 30, 2021September 30, 2020
Service charges on deposit accounts:
  Overdraft fees$37 $32 $106 $157 
  Other79 94 234 314 
Interchange income202 186 552 487 
Other income - in scope106 105 323 320 
Gain on sale of OREO— 71 — 71 
Income on bank-owned life insurance (1)
379 188 721 632 
Gain on sales of loans (1)
2,632 3,396 8,493 6,987 
Loan servicing fees (1)
175 164 500 487 
Gain on sales and calls of securities (1)
2 79 6 97 
Other income (1)
291 421 781 740 
$3,903 $4,736 $11,716 $10,292 
(1) Not within the scope of ASC 606

(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, 2021, there were 314,416 shares of common stock available for future grants under the Stock Plans.

21

The following table summarizes Options activity during the nine months ended September 30, 2021:
(Dollars in thousands, except share amounts)Number of SharesWeighted Average Exercise PriceWeighted Average Remaining Contractual Term (Years)Aggregate Intrinsic Value
Outstanding at January 1, 2021134,122 $11.61 4.3$731 
Granted21,500 15.56 9.3
Exercised(43,200)7.41 
Expired or exchanged(9,869)— 
Outstanding at September 30, 2021102,553 $14.61 6.1$930 
Exercisable at September 30, 202163,643 $13.21 4.6$666 
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 months ended September 30, 2021 were as follows:
Grant Date
January 4, 2021
Fair value of options granted$3.38 
Risk-free rate of return0.64 %
Expected option life in years7
Expected volatility28.47 %
Expected dividends2.27 %
Share-based compensation expense related to Options was $57,000 and $58,000 for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, there was approximately $109,000 of unrecognized compensation cost related to unvested Options.
The following table summarizes the activity in Stock Awards for the nine months ended September 30, 2021:
(Dollars in thousands, except share amounts)Number of SharesAverage Grant-Date Fair Value
Outstanding at January 1, 2021129,883 $17.12 
Granted39,350 18.18 
Vested(60,717)17.52 
Non-vested at September 30, 2021108,516 $17.28 
Share-based compensation expense related to Stock Awards was $774,000 and $798,000 for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, there was approximately $1.5 million of unrecognized compensation cost related to unvested Stock Awards.
The following table summarizes the activity in RSUs for the nine months ended September 30, 2021:
(Dollars in thousands, except share amounts)Number of SharesAverage Grant-Date Fair Value
Outstanding at January 1, 202125,817 $21.24 
Granted14,250 15.56 
Vested(9,083)16.82 
Non-vested at September 30, 202130,984 $19.92 
Share-based compensation expense related to RSUs was $306,000 and $130,000 for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, there was approximately $456,000 of unrecognized compensation cost related to unvested RSUs.
22

RSUs vest pro-rata over 3 years subject to achievement of certain established performance metrics. The ultimate number of RSUs earned, if any, will depend on the performance measured over each annual period during the applicable 3-year performance period. If performance measures are achieved, the RSUs will vest upon certification of performance achievement by the Compensation Committee following each annual performance period. On March 3, 2021, the Compensation Committee certified that the applicable performance metrics were achieved at 142% of target for 2020 and 2019 vested awards. Awards of RSUs are settled in cash unless the recipient timely elects for the RSUs to be settled in shares of common stock. The RSUs are recorded as a liability by the Company and the liability is adjusted as the market value of the Company's stock price changes.
(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, 2021 and December 31, 2020, the Company’s President and Chief Executive Officer was the only eligible participant in the supplemental executive retirement plans.

In connection with the benefit plans, the Bank has life insurance policies on the lives of its 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 $37.4 million and $37.3 million at September 30, 2021 and December 31, 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, 2021 and 2020 were as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
(Dollars in thousands)2021202020212020
Service cost$49 $46 $148 $138 
Interest cost46 42 138 124 
Actuarial gain recognized(89)(51)(267)(151)
Total$6 $37 $19 $111 

(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, 2021
(Dollars in thousands)Before-Tax
Amount		Income Tax
Effect		Net-of-Tax
Amount
Net unrealized holding gains on investment securities available for sale$1,481 $(374)$1,107 
Unrealized impairment loss on held to maturity security(453)108 (345)
Gains on unfunded pension liability82 (23)59 
Accumulated other comprehensive income$1,110 $(289)$821 
23

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 liability444 (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, 2021 and September 30, 2020:
(Dollars in thousands)Unrealized
Holding
Gains
(Losses) on
Available for Sale
Securities		Unrealized
Impairment
Loss on
Held to Maturity
Security		Unfunded
Pension
Liability		Accumulated
Other
Comprehensive
Income (Loss)
Balance - July 1, 2021$1,492 $(350)$146 $1,288 
Other comprehensive income (loss) before reclassifications(385)— (23)(408)
Amounts reclassified from accumulated other comprehensive income (loss)— 5 (64)(59)
Reclassification adjustment for gains realized in income— — — — 
Other comprehensive loss(385)5 (87)(467)
Balance - September 30, 2021$1,107 $(345)$59 $821 
Balance - July 1, 2020$1,452 $(369)$291 $1,374 
Other comprehensive income before reclassifications332 — 50 382 
Amounts reclassified from accumulated other comprehensive income (loss)— 5 (36)(31)
Reclassification adjustment for losses realized in income10 — — 10 
Other comprehensive income342 5 14 361 
Balance - September 30, 2020$1,794 $(364)$305 $1,735 
Balance - January 1, 2021$1,972 $(360)$320 $1,932 
Other comprehensive loss before reclassifications(863)— (70)(933)
Amounts reclassified from accumulated other comprehensive income (loss)— 15 (191)(176)
Reclassification adjustment for gains realized in income(2)— — (2)
Other comprehensive (loss) income(865)15 (261)(1,111)
Balance - September 30, 2021$1,107 $(345)$59 $821 
Balance - January 1, 2020$303 $(374)$262 $191 
Other comprehensive income before reclassifications1,489 — 149 1,638 
Amounts reclassified from accumulated other comprehensive income (loss)— 10 (106)(96)
Reclassification adjustment for losses realized in income2 — — 2 
Other comprehensive income1,491 10 43 1,544 
Balance - September 30, 2020$1,794 $(364)$305 $1,735 


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(9) Recent Accounting Pronouncements    
Accounting Standards Update ("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 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. 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 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 (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 discussion regarding the adoption of ASU 2016-13 above.


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ASU 2019-12 - Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” This ASU removes the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items and removes the exception to the interim period income tax accounting when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 also simplifies the accounting for income taxes by requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax, that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill originally was recognized, and that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. For public business entities, ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020. The Company adopted this standard as of January 1, 2021. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

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

In January 2020, the FASB issued ASU No. 2020-02, “Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842):” Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” This ASU adds and amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU was 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 were 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 applies to all LIBOR reference rate modifications through December 31, 2022. For the Company, the provisions of this ASU were effective upon issuance and did not have a material impact on the Company's consolidated financial statements.

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

In January 2021, the FASB issued ASU No. 2021-01, "Reference Rate Reform (Topic 848)." The amendments in this update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of 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. For the Company, the provisions of this ASU were effective upon issuance and did not have a material impact on the Company's consolidated financial statements.

26

(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, 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, the current appraised value of the asset or other estimates of fair value. The fair value of other real estate owned is determined using appraisals, which may be discounted based on management’s review and changes in market conditions.
27

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, 2021
(Dollars in thousands)Level 1
Inputs		Level 2
Inputs		Level 3
Inputs		Total Fair
Value
Securities available for sale:
U.S. Treasury securities and obligations of U.S. Government
sponsored entities (“GSE”)		$9,980 $72,362 $— $82,342 
Residential collateralized mortgage obligations - GSE— 32,654 — 32,654 
Residential mortgage backed securities - GSE— 27,361 — 27,361 
Obligations of state and political subdivisions509 23,100 — 23,609 
Corporate debt securities8,755 12,464 — 21,219 
Other debt securities— 16,755 — 16,755 
Interest rate lock derivatives— 319 — 319 
Total$19,244 $185,015 $— $204,259 
December 31, 2020
(Dollars in thousands)Level 1
Inputs		Level 2
Inputs		Level 3
Inputs		Total Fair
Value
Securities available for sale:
U.S. Treasury securities and obligations of U.S. Government
sponsored entities (“GSE”)		$— $3,439 $— $3,439 
Residential collateralized mortgage obligations - GSE— 36,779 — 36,779 
Residential mortgage backed securities - GSE— 13,597 — 13,597 
Obligations of state and political subdivisions— 27,452 — 27,452 
Corporate debt securities9,287 12,080 — 21,367 
Other debt securities— 22,563 — 22,563 
Interest rate lock derivatives— 537 — 537 
Total$9,287 $116,447 $— $125,734 
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  Assets and liabilities subject to fair value adjustments (impairment) on a nonrecurring basis at September 30, 2021 and December 31, 2020 were as follows:
(Dollars in thousands)Level 1
Inputs		Level 2
Inputs		Level 3
Inputs		Total Fair
Value
September 30, 2021
Impaired loans$— $— $8,665 $8,665 
Other real estate owned— — 48 48 
December 31, 2020
Impaired loans$— $— $8,769 $8,769 
Other real estate owned— — 92 92 
Impaired loans measured at fair value and included in the above table at September 30, 2021 consisted of 6 loans having an aggregate recorded investment of $11.8 million and specific loan loss allowance of $3.2 million. Impaired loans measured at fair value and included in the above table at December 31, 2020 consisted of 5 loans having an aggregate balance of $10.9 million with specific loan loss allowance of $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:
28

(Dollars in thousands)Fair Value
Estimate		Valuation
Techniques		Unobservable InputRange
(Weighted Average)
September 30, 2021
Impaired loans$8,665 
Appraisal of collateral (1)
Appraisal adjustments (2)
 0.3% - 15.7%
 (6.7%)
Other real estate owned$48 
Appraisal of collateral (1)
Appraisal adjustments (2)
41.0%
 (41.0%)
December 31, 2020
Impaired loans$8,769 
Appraisal of collateral (1)
Appraisal adjustments (2)
 0.1% - 40.4%
 (12.6%)
Other real estate owned$92 
Appraisal of
collateral (1)
Appraisal adjustments (2)
 79.0%
 (79.0%)
(1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs that are not identifiable.
(2)Includes qualitative adjustments by management and estimated liquidation expenses.
The following is a summary of fair value versus carrying value of all of the Company’s financial instruments. For the Company and the Bank, as with most financial institutions, the bulk of assets and liabilities are considered financial instruments. Many of the financial instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimations and present value calculations were used for the purpose of this note. Changes in assumptions could significantly affect these estimates.
The estimated fair values and carrying amounts of financial assets and liabilities as of September 30, 2021 and December 31, 2020 were as follows:
September 30, 2021
CarryingLevel 1Level 2Level 3Fair
(Dollars in thousands)ValueInputsInputsInputsValue
Cash and cash equivalents$273,946 $273,946 $— $— $273,946 
Securities available for sale203,940 19,244 184,696 — 203,940 
Securities held to maturity125,198 — 127,234 — 127,234 
Loans held for sale6,768 — 6,883 — 6,883 
Net loans1,181,295 — — 1,220,628 1,220,628 
SBA servicing asset931 — 1,209 — 1,209 
Interest rate lock derivatives319 — 319 — 319 
Accrued interest receivable4,379 — 4,379 — 4,379 
FHLB stock1,087 — 1,087 — 1,087 
Deposits(1,638,561)— (1,638,791)— (1,638,791)
Redeemable subordinated debentures(18,557)— (14,238)— (14,238)
Accrued interest payable(425)— (425)— (425)

29

December 31, 2020
CarryingLevel 1Level 2Level 3Fair
(Dollars in thousands)ValueInputsInputsInputsValue
Cash and cash equivalents$21,995 $21,995 $— $— $21,995 
Securities available for sale 125,197 9,287 115,910 — 125,197 
Securities held to maturity 92,552 — 95,640 — 95,640 
Loans held for sale 29,782 — 30,618 — 30,618 
Net loans1,418,065 — — 1,463,821 1,463,821 
SBA servicing asset795 — 1,209 — 1,209 
Interest rate lock derivatives537 — 537 — 537 
Accrued interest receivable5,273 — 5,273 — 5,273 
FHLB stock1,498 — 1,498 — 1,498 
Deposits (1,562,839)— (1,564,431)— (1,564,431)
Short-term borrowings (9,825)— (9,825)— (9,825)
Redeemable subordinated debentures(18,557)— (10,932)— (10,932)
Accrued interest payable(851)— (851)— (851)
Loan commitments and standby letters of credit as of September 30, 2021 and December 31, 2020 were based on fees charged for similar agreements; accordingly, the estimated fair value of loan commitments and standby letters of credit was nominal.

(11) Leases

At September 30, 2021, the Company had 34 operating leases under which the Company is a lessee. Of the 34 leases, 23 leases were for real property, including leases for 19 of the Company’s branch offices and 4 leases for general office space including the Company’s headquarters. All of the real property leases include one or more options to extend the lease term. Four 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 11 leases for office equipment, consisting primarily of copiers and printers. None of these leases include extensions and generally have three to five year terms.

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

For the three and nine months ended September 30, 2021 and 2020, the Company recognized rent and equipment expense associated with leases as follows:
(In thousands)Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
 Operating lease cost:
 Fixed rent expense and equipment expense$644 $716 $1,933 $2,005 
Variable rent expense— — — — 
Short-term lease expense4 29 10 35 
Sublease income— — — — 
Net lease cost$648 $745 $1,943 $2,040 

(In thousands)Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Lease cost - occupancy expense$621 $627 $1,853 $1,859 
Lease cost - other expense27 118 90 181 
Net lease cost$648 $745 $1,943 $2,040 



30

For the nine months ended September 30, 2021 and 2020, the following cash and non-cash activities were associated with the leases:
Nine Months Ended September 30,
(In thousands)20212020
 Cash paid for amounts included in the measurement of lease liabilities:
 Operating cash flows from operating leases$1,849 $1,896 
 Non-cash investing and financing activities:
 Additions to right-of-use assets obtained from:
 Net lease cost— — 
 New operating lease liabilities20 250 

The future payments due under operating leases at September 30, 2021 and 2020 were as follows:
At September 30,
(In thousands)20212020
Due in less than one year$2,113 $2,071 
Due in one year but less than two years2,035 2,059 
Due in two years but less than three years1,894 2,014 
Due in three years but less than four years1,727 1,882 
Due in four years but less than five years1,685 1,712 
Thereafter12,179 13,836 
Total future payments$21,633 $23,574 
Less: Implied interest(5,417)(5,860)
Total lease liability$16,216 $17,714 

At September 30, 2021 and 2020, future payments due under operating leases were based on ASC Topic 842 and included, in general, at least one lease renewal option on all real estate leases except on one land lease where all renewal options were included. As of September 30, 2021, the weighted-average remaining lease term for all operating leases was 14.4 years. The weighted average discount rate associated with the operating leases at September 30, 2021 was 3.34%.

(12) Borrowings

The Company has borrowing lines established with the FHLB and other correspondent banks. At September 30, 2021, the Company had no borrowings. Overnight or short-term borrowings at December 31, 2020 totaled $9.8 million with an average interest rate of 0.34%. These borrowings are primarily used to fund asset growth not supported by deposit generation.

At September 30, 2021, unused overnight or borrowing potential totaled $270.6 million from the FHLB and unused Fed Funds borrowing commitments were $46.0 million from correspondent banks.

(13) Pending Merger With and Into Lakeland Bancorp

On July 11, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lakeland Bancorp, Inc., a New Jersey corporation (“Lakeland”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into Lakeland, with Lakeland continuing as the surviving entity (the “Merger”). The Merger Agreement also provides that, immediately following the consummation of the Merger, the Bank will merge with and into Lakeland Bank, a New Jersey-chartered commercial bank (“Lakeland Bank”) and a wholly-owned subsidiary of Lakeland, with Lakeland Bank continuing as the surviving bank. The Merger Agreement was approved by the Boards of Directors of each of Lakeland and the Company.

31

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

Also at the Effective Time (i) all shares of 1st Constitution Bancorp common stock held by 1st Constitution Bancorp as treasury stock and (ii) all shares of 1st Constitution Bancorp common stock owned directly or indirectly by Lakeland or the Company or any of their respective subsidiaries (other than shares in trust accounts, managed accounts and the like for the benefit of customers or shares held in satisfaction of a debt previously contracted), will be canceled and no consideration will be delivered in exchange therefor. Outstanding 1st Constitution Bancorp stock options and performance-based restricted stock units will be cashed out in the Merger. Outstanding 1st Constitution Bancorp restricted stock will vest and will be converted into the right to receive, at the Effective Time, the same consideration that holders of 1st Constitution Bancorp common stock are receiving in the Merger. Each outstanding share of Lakeland common stock will remain outstanding and be unaffected by the Merger.
32

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

When used in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 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”), the Bank’s wholly-owned subsidiaries, 1ST Constitution Investment Company of New Jersey, Inc. and FCB Assets Holdings, Inc., and 1ST Constitution Real Estate Investment Corporation, which is indirectly owned by the Bank.  1ST Constitution Capital Trust II (“Trust II”), a subsidiary of the Company, is not included in the Company’s consolidated financial statements as it is a variable interest entity and the Company is not the primary beneficiary. Trust II, a subsidiary of the Company, was created in May 2006 to issue trust preferred securities to assist the Company in raising additional capital.

This discussion and analysis of the operating results for the three and nine months ended September 30, 2021 and financial condition at September 30, 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 six-month periods ended September 30, 2021 are not necessarily indicative of results to be attained for any other 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, 2020, as filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2021 (the "2020 Form 10-K").

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

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 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 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; failure to consummate the merger of 1st Constitution Bancorp with and into Lakeland Bancorp, Inc. (“Lakeland”), with Lakeland as the surviving entity (the “Merger”), for any reason, including the failure to obtain all necessary regulatory approvals (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company), failure to obtain shareholder approvals or failure to satisfy any of the other closing conditions in a timely basis or at all; the diversion of management’s time from ongoing business operations due to issues relating to the Merger; the
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occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the Agreement and Plan of Merger, dated as of July 11, 2021, by and between Lakeland and 1st Constitution Bancorp (the “Merger Agreement”); the outcome of legal proceedings that have been, or may in the future, be instituted against Lakeland and/or the Company related to the Merger; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the transaction; other risks described from time to time in our filings with the SEC; and our ability to manage the risks involved in the foregoing. Further, the foregoing factors may be exacerbated by the ultimate impact of the 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," elsewhere in the 2020 Form 10-K and in our other filings with the SEC, and in Part II, Item 1A of this Form 10-Q. However, other factors besides those listed in Item 1A. “Risk Factors” or discussed in the 2020 Form 10-K or this Form 10-Q also could adversely affect our results and you should not consider any such list of factors to be a complete list of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We undertake no obligation to publicly revise any forward-looking statements or cautionary factors, except as required by law.

OVERVIEW

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

The Bank operates 25 branches and manages its investment portfolio through its subsidiary, 1ST Constitution Investment Company of New Jersey, Inc. FCB Assets Holdings, Inc., a subsidiary of the Bank, is used by the Bank to manage and dispose of repossessed real estate.

On July 11, 2021, the Company and Lakeland (NASDAQ: LBAI), the holding company for Lakeland Bank, entered into the Merger Agreement, providing for the Merger of the Company with and into Lakeland, with Lakeland continuing as the surviving entity. The Merger Agreement provides that, immediately following the consummation of the Merger, the Bank will merge with and into Lakeland Bank (the “Bank Merger”). On November 5, 2021, the Company and Lakeland issued a joint press release announcing the receipt of approval of the proposed Merger from both the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance. For additional discussion of the Merger and the Bank Merger, see Note 13 to the financial statements contained in Part I, Item 1 of this Form 10-Q.

COVID-19 Impact and Response

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

During the first nine months of 2021, the Company continued working with customers impacted by the economic disruption resulting from the COVID-19 pandemic. To support our loan and deposit customers and the communities we serve, we continue to provide access to additional credit and forbearance on loan interest and or principal payments for up to 90 days where management has determined that it is warranted.
•All loans except for two that had previously received deferrals were no longer deferred at September 30, 2021. The two loans consisted of one hotel loan for $3.1 million that was placed on non-accrual in the third quarter of 2020 and one residential mortgage loan for $871,000 that was placed on non-accrual in the first quarter of 2021.
•As a long-standing Small Business Administration (“SBA”) preferred lender, we actively participated in the SBA’s Paycheck Protection Program (“PPP”) lending program established under the Coronavirus Aid, Relief and Economic
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Security Act (the “CARES Act”). In 2020, we funded 467 SBA PPP loans totaling $75.6 million, $75.2 million of which had been forgiven by the SBA and paid off through the end of the third quarter of 2021.
•The Economic Aid to Hard-Hit Small Business, Not for Profits and Venues Act (“Economic Aid Act”) was enacted in December 2020 in further response to the COVID-19 pandemic. Among other things, the Economic Aid Act provided relief to borrowers to access additional credit through a second round of the SBA’s PPP. We actively participated in the second round PPP and funded loans totaling $35.3 million, $12.7 million of which had been forgiven by the SBA and paid off through the end of the third quarter of 2021.
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RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months Ended September 30, 2020

Summary

The Company reported net income of $5.4 million and diluted earnings per share of $0.53 for the three months ended September 30, 2021 compared to net income of $4.9 million and diluted earnings per share of $0.48 for the three months ended September 30, 2020. Net income increased 10.6% and diluted earnings per share increased 10.4% for the third quarter of 2021 compared to the third quarter of 2020. For the nine months ended September 30, 2021, net income was $15.5 million, or $1.51 per diluted share, compared to net income of $12.0 million, or $1.17 per diluted share, for the nine months ended September 30, 2020. Net income increased 29.0% and diluted earnings per share increased 29.1% for the first nine months of 2021 compared to the first nine months of 2020.

Return on average total assets and return on average shareholders' equity were 1.16% and 10.94%, respectively, for the three months ended September 30, 2021 compared to return on average total assets and return on average shareholders' equity of 1.08% and 10.92%, respectively, for the three months ended September 30, 2020. Return on average total assets and return on average shareholders' equity were 1.14% and 10.76%, respectively, for the nine months ended September 30, 2021 compared to return on average total assets and return on average shareholders' equity of 0.96% and 9.17%, respectively, for the nine months ended September 30, 2020. Book value per share was $19.37 at September 30, 2021 compared to $18.32 at December 31, 2020.

On July 11, 2021, the Company entered into the Merger Agreement with Lakeland pursuant to which the Company will merge with and into Lakeland and the Bank will merge with and into Lakeland Bank. Expenses of $737,000 and $1.2 million related to the pending Merger were incurred for the three and nine months ended September 30, 2021, respectively. No merger-related expenses were incurred for the three months ended September 30, 2020 and $64,000 of merger-related expenses were incurred for the nine months ended September 30, 2020.

Adjusted net income increased 24.5% to $6.1 million, for the third quarter of 2021 compared to adjusted net income of $4.9 million for the third quarter of 2020. Adjusted net income per diluted share increased 22.9% to $0.59 for the third quarter of 2021 compared to adjusted net income per diluted share of $0.48 for the third quarter of 2020. For the nine months ended September 30, 2021, adjusted net income was $16.5 million, or $1.61 per diluted share, compared to adjusted net income of $12.1 million, or $1.18 per diluted share, for the nine months ended September 30, 2020.

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




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

Three Months EndedNine Months Ended
September 30,September 30,
2021202020212020
Adjusted net income
Net income$5,430 $4,910 $15,511 $12.021 
Adjustments:
  Merger-related expenses737 — 1,184 64 
  Income tax effect of adjustments(52)— (150)(19)
Adjusted net income $6,115 $4,910 $16,545 $12,066 
Adjusted net income per diluted share
  Adjusted net income$6,115 $4,910 $16,545 $12,066 
  Diluted shares outstanding10,319,637 10,268,951 10,299,029 10,260,477 
  Adjusted net income per diluted share$0.59 $0.45 $1.61 $1.18 
Adjusted return on average total assets
  Adjusted net income$6,115 $4,910 $16,545 $12,066 
  Average assets1,854,273 1,804,198 1,826,235 1,675,200 
  Adjusted return on average total assets1.31 %1.08 %1.21 %0.96 %
Adjusted return on average shareholders’ equity
  Adjusted net income$6,115 $4,910 $16,545 $12,066 
  Average equity196,838 178,946 192,763 175,141 
  Adjusted return on average shareholders’ equity12.33 %10.92 %11.48 %9.20 %
Adjusted efficiency ratio
Adjusted non-interest expenses(2)
$10,104 $10,962 $31,289 $30,528 
Total revenue - tax-equivalent18,832 20,222 56,612 52,811 
Adjusted efficiency ratio53.65 %54.21 %55.27 %57.81 %
Book value and tangible book value per common share
  Shareholders’ equity$199,923 $182,007 
  Less: goodwill and intangible assets35,765 36,471 
  Tangible shareholders’ equity164,158 145,536 
  Shares outstanding10,318,907 10,237,520 
  Book value per common share$19.37 $17.78 
  Tangible book value per common share$15.91 $14.22 
(1) We use the non-GAAP financial measures of adjusted net income, adjusted net income per diluted share, adjusted return on average total assets, adjusted return on average shareholders’ equity, tangible book value per common share, adjusted non-interest expenses and adjusted efficiency ratio because management believes that it is helpful to readers in understanding the Company’s financial performance and the effect of the expenses related to the pending Merger on its financial statements. These non-GAAP financial measures improve the comparability of the current period results with the results of the prior periods. The Company cautions that the non-GAAP financial measures should be considered in addition to, but not as a substitute for, the Company’s GAAP financial results.

(2) Adjusted non-interest expenses is calculated by subtracting merger-related expenses from total non-interest expenses. Accordingly, adjusted non-interest expenses for the three and nine months ended September 30, 2021 is calculated as total non-interest expenses of $10.8 million and $32.5 million for the three- and nine-month periods ended September 30, 2021 less $737,000 and $1.2 million for the three and nine months ended September 30, 2021, respectively, and adjusted non-interest expenses for the three and nine months ended September 30, 2020 is calculated as total non-interest expenses of $11.0 million and $30.6 million for the three- and nine-month periods ended September 30, 2020, respectively, less merger-related expenses of $64,000 for the nine months ended September 30, 2020.
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Third Quarter 2021 Highlights
•Return on average total assets and return on average shareholders' equity were 1.16% and 10.94%, respectively. Adjusted return on average total assets and adjusted return on average shareholders' equity were 1.31% and 12.33%, respectively.
•Net interest income was $14.8 million and the net interest margin was 3.42% on a tax-equivalent basis.
•A provision for loan losses of $600,000 was recorded and net charge-offs were $365,000.
•Total loans were $1.2 billion at September 30, 2021 and decreased $37.0 million from June 30, 2021. During the third quarter of 2021, commercial business loans decreased $20.4 million to $139.7 million due primarily to the forgiveness and pay-off of the SBA PPP loans. Mortgage warehouse lines decreased $5.9 million due to the lower volume of funding than in the second quarter of 2021. Residential real estate loans held in the portfolio decreased $5.3 million due to pay-offs of loans. All other components of the loan portfolio decreased a combined $5.4 million.
•Non-interest income was $3.9 million for the third quarter of 2021, as residential mortgage banking and SBA lending operations generated $1.5 million and $1.1 million gain on sales of loans, respectively.
•Non-interest-bearing demand deposits increased $45.1 million, savings and interest-bearing transaction accounts increased $62.4 million and certificates of deposit declined $15.0 million during the third quarter of 2021.
•Non-performing loans were $9.5 million, or 0.80% of total loans at September 30, 2021, representing a decrease of $2.5 million from June 30, 2021. Other real estate owned (“OREO”) was $48,000. One non-performing commercial real estate loan for $3.1 million was transferred to loans held for sale and was charged down $334,000 to its estimated fair value of $2.7 million.

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 79.1% of the Company’s net revenues (defined as net interest income plus non-interest income) for the three months ended September 30, 2021 compared to 76.4% of net revenues for the three months ended September 30, 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.



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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, 2021 and 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, 2021Three months ended September 30, 2020
(Dollars in thousands except yield/cost information)Average
Balance		InterestAverage
Yield		Average
Balance		InterestAverage
Yield
Assets
Interest-earning assets:
Federal funds sold/short-term investments$270,231 $108 0.16 %$8,027 $2 0.10 %
Investment securities:
Taxable145,979 545 1.49 %155,242 725 1.87 %
Tax-exempt (1)
107,693 577 2.14 %83,461 638 3.06 %
Total investment securities253,672 1,122 1.77 %238,703 1,363 2.28 %
Loans: (2)
     
Commercial real estate612,067 8,008 5.12 %609,917 7,789 5.00 %
Mortgage warehouse lines229,034 2,398 4.10 %333,461 3,383 4.06 %
Construction127,567 1,837 5.63 %136,252 1,794 5.24 %
Commercial business122,796 1,228 3.97 %138,073 1,445 4.16 %
SBA PPP loans28,734 566 7.81 %75,484 470 2.48 %
Residential real estate65,587 730 4.45 %89,755 1,137 4.96 %
Loans to individuals17,895 175 3.88 %27,284 293 4.20 %
Loans held for sale5,927 47 3.17 %23,914 155 2.59 %
All other loans486 6 4.83 %643 11 6.69 %
  Deferred (fees) costs, net(1,034)— — %(1,736)— — %
Total loans1,209,059 14,995 4.92 %1,433,047 16,477 4.57 %
Total interest-earning assets1,732,962 $16,225 3.71 %1,679,777 $17,842 4.23 %
Non-interest-earning assets:
Allowance for loan losses(17,302)(12,348)
Cash and due from banks20,243 11,460 
Other assets118,370 125,309 
Total non-interest-earning assets121,311 124,421 
Total assets$1,854,273 $1,804,198 
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Money market and NOW accounts $494,073 $414 0.33 %$425,401 $542 0.51 %
Savings accounts430,398 427 0.39 %290,055 461 0.63 %
Certificates of deposit165,267 374 0.90 %350,654 1,168 1.33 %
Federal Reserve Bank PPPLF borrowings— — — %35,296 33 0.37 %
Short-term borrowings— — — %63,175 62 0.39 %
Redeemable subordinated debentures18,557 81 1.71 %18,557 90 1.90 %
Total interest-bearing liabilities1,108,295 $1,296 0.46 %1,183,138 $2,356 0.79 %
Non-interest-bearing liabilities:
Demand deposits516,527 413,350 
Other liabilities32,613 28,764 
Total non-interest-bearing liabilities549,140 442,114 
Shareholders’ equity196,838 178,946 
Total liabilities and shareholders’ equity$1,854,273 $1,804,198 
Net interest spread (3)
3.25 %3.44 %
Net interest income and margin (4)
$14,929 3.42 %$15,486 3.67 %
(1) Tax equivalent basis, using federal tax rate of 21% in 2021 and 2020.
(2) Loan origination fees are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include non-accrual
loans with no related interest income and the average balance of loans held for sale.
(3) The net interest spread is the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities.
(4) The net interest margin is equal to net interest income divided by average interest-earning assets.
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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, 2021 and 2020. 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, 2021Nine months ended September 30, 2020
(Dollars in thousands except yield/cost information)Average
Balance		InterestAverage
Yield		Average
Balance		InterestAverage
Yield
Assets
Interest-earning assets:
Federal funds sold/short-term investments$210,127 $203 0.13 %$16,433 $95 0.77 %
Investment securities:
Taxable135,665 1,569 1.54 %163,979 2,633 2.14 %
Tax-exempt (1)
96,173 1,762 2.44 %77,145 1,821 3.15 %
Total investment securities231,838 3,331 1.92 %241,124 4,454 2.46 %
Loans: (2)
Commercial real estate613,930 23,487 5.04 %588,145 22,935 5.12 %
Mortgage warehouse lines243,168 7,486 4.06 %244,470 7,702 4.20 %
Construction131,001 5,488 5.52 %141,428 5,965 5.63 %
Commercial business126,508 3,726 3.94 %142,010 4,815 4.53 %
SBA PPP loans48,062 2,292 6.38 %43,374 818 2.52 %
Residential real estate72,525 2,412 4.43 %89,333 3,085 4.54 %
Loans to individuals18,625 574 4.12 %28,857 1,001 4.56 %
Loans held for sale11,750 282 3.20 %14,160 304 2.86 %
All other loans632 18 3.76 %872 31 4.67 %
  Deferred (fees) costs, net(1,252)— — %(345)— — %
Total loans1,264,949 45,765 4.84 %1,292,304 46,656 4.82 %
Total interest-earning assets1,706,914 $49,299 3.86 %1,549,861 $51,205 4.41 %
Non-interest-earning assets:
Allowance for loan losses(16,826)(10,684)
Cash and due from banks17,216 12,182 
Other assets118,931 123,841 
Total non-interest-earning assets119,321 125,339 
Total assets$1,826,235 $1,675,200 
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Money market and NOW accounts $475,929 $1,299 0.36 %$417,557 $1,913 0.61 %
Savings accounts393,733 1,263 0.43 %275,679 1,612 0.78 %
Certificates of deposit234,331 1,593 0.91 %354,551 4,608 1.74 %
Federal Reserve Bank PPPLF borrowings— — — %13,169 36 0.37 %
Short-term borrowings108 — — %39,344 169 0.58 %
Redeemable subordinated debentures18,557 248 1.76 %18,557 348 2.46 %
Total interest-bearing liabilities1,122,658 $4,403 0.52 %1,118,857 $8,686 1.04 %
Non-interest-bearing liabilities:
Demand deposits479,204 351,291 
Other liabilities31,610 29,911 
Total non-interest-bearing liabilities510,814 381,202 
Shareholders’ equity192,763 175,141 
Total liabilities and shareholders’ equity$1,826,235 $1,675,200 
Net interest spread (3)
3.34 %3.37 %
Net interest income and margin (4)
$44,896 3.52 %$42,519 3.66 %

(1) Tax equivalent basis, using federal tax rate of 21% in 2021 and 2020.
(2) Loan origination fees are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include non-accrual
loans with no related interest income and the average balance of loans held for sale.
(3) The net interest spread is the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities.
(4) The net interest margin is equal to net interest income divided by average interest-earning assets.

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Three months ended September 30, 2021 compared to three months ended September 30, 2020
Net interest income was $14.8 million for the third quarter of 2021 and decreased $544,000 compared to net interest income of $15.4 million for the third quarter of 2020. Total interest income was $16.1 million for the three months ended September 30, 2021 compared to $17.7 million for the three months ended September 30, 2020. The decrease in total interest income was due primarily to a significant decline in the average balance of total loans that resulted in a lower yield on average interest-earning assets for the third quarter of 2021 compared to the third quarter of 2020.

Average interest-earning assets were $1.7 billion, with a tax-equivalent yield of 3.71%, for the third quarter of 2021 compared to average interest-earning assets of $1.7 billion, with a tax-equivalent yield of 4.23%, for the third quarter of 2020. The decline in the tax-equivalent yield is due primarily to a significant change in the mix of average interest-earning assets in 2021 compared to 2020. Total average loans were 69.8% of total average earning assets for the third quarter of 2021 compared to 85.3% for the third quarter of 2020. The tax-equivalent yield on average interest-earning assets for the third quarter of 2021 declined 52 basis points to 3.71% due primarily to the lower percentage of average loans to average earning assets, the decline in market interest rates during 2020 to a low level that continued through the third quarter of 2021 and the significant increase in the average balance of federal funds sold/short-term investments with a yield of 0.16%.

The Federal Reserve reduced the targeted federal funds rate 150 basis points in March 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, the prime rate declined to 3.25% in March 2020 and was unchanged through the third quarter of 2021. As a result of the continued economic disruption and uncertainty, the low interest rate environment continued through September 30, 2021. The Bank had approximately $421.3 million of loans with an interest rate tied to the prime rate and approximately $45.2 million of loans with an interest rate tied to either 1- or 3-month LIBOR at September 30, 2021. Unearned fees, net of deferred costs, related to the SBA PPP loans were $736,000 at September 30, 2021.

Interest expense on average interest-bearing liabilities was $1.3 million, with an interest cost of 0.46%, for the third quarter of 2021, compared to $1.4 million, with an interest cost of 0.52%, for the second quarter of 2021 and $2.4 million, with an interest cost of 0.79%, for the third quarter of 2020. Interest expense declined $1.1 million for the third quarter of 2021 compared to the third quarter of 2020 due primarily to the decline in interest rates paid on deposits as a direct result of the low interest rate environment. The average cost of interest-bearing deposits was 0.44% for the third quarter of 2021, 0.50% for the second quarter of 2021 and 0.81% for the third quarter of 2020. The interest rates paid on deposits generally do not adjust quickly to rapid changes in market interest rates and decline over time in a falling interest rate environment. 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 was 3.42% for the third quarter of 2021 compared to 3.67% for the third quarter of 2020. The net interest margin for the third quarter of 2021 was negatively impacted by the $262.2 million increase in the average balance of federal funds sold/short-term investments, which was driven in part by the $224.0 million decrease in average total loans which had a significant impact on net interest income and the yield of average earning assets. The reinvestment of proceeds from maturing and called investment securities and the purchase of new investment securities at the current lower interest rates also contributed to the decline in net interest income. Interest income for the third quarter of 2021 included $451,000 of fee income related to PPP loans that were forgiven and paid off by the SBA. Excluding the effect of the higher average balance of federal funds sold/short-term investments due to the increase in average deposits, the net interest margin was approximately 3.62% for the third quarter of 2021.

Nine months ended September 30, 2021 compared to the nine months ended September 30, 2020
For the nine months ended September 30, 2021, net interest income increased $2.4 million, or 5.7%, to $44.5 million compared to $42.1 million for the nine months ended September 30, 2020. Total interest income was $48.9 million for the nine months ended September 30, 2021 compared to $50.8 million for the nine months ended September 30, 2020. The decrease in total interest income year-over-year was due primarily to a decline in average total loans and the lower interest rate environment that resulted in the lower yield of average earning assets. Average interest-earning assets increased $157.1 million to $1.71 billion for the nine months ended September 30, 2021 compared to $1.55 billion for the same period in 2020. This increase was due primarily to a $184.1 million increase in average deposits partially offset by a $52.4 million decrease in average borrowings. The tax-equivalent yield on average interest earnings assets was 3.86% for the nine months ended September 30, 2021 compared to 4.41% for the same period in the prior year. The decline of 55 basis points in tax-equivalent yield year-over-year was due primarily to the lower interest rate environment and the significant increase in federal funds sold/short-term investments, which had a low yield.

Interest expense on average interest-bearing liabilities was $4.4 million, with an interest cost of 0.52%, for the nine months ended September 30, 2021 compared to $8.7 million, with an interest cost of 1.04%, for the same period in the prior year. Interest expense
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declined $4.3 million for the nine months ended September 30, 2021 compared to the prior year period due primarily to the decline in interest rates paid on deposits as a direct result of the low interest rate environment. The interest cost of interest-bearing liabilities declined 52 basis points at September 30, 2021 compared to September 30, 2020 due primarily to lower market interest rates. Average total interest-bearing liabilities were relatively unchanged year-over-year, however, there was a significant change within the components of interest-bearing liabilities. Money market and NOW accounts increased $58.4 million and savings accounts increased $118.1 million, while certificates of deposit decreased $120.2 million, Federal Reserve Bank PPPLF borrowings decreased $13.2 million and short-term borrowings decreased $39.2 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 3.52% for the nine months ended September 30, 2021 compared to 3.66% for the nine months ended September 30, 2020. The decline in the net interest margin year-over-year was due primarily to the significant increase in low yielding federal funds sold/short-term investments and the decline in yield of investment securities.

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 quarter of 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 a special emphasis on the hotel and restaurant-food service industries 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, 2021 compared to three months ended September 30, 2020

The Company recorded a provision for loan losses of $600,000 for the third quarter of 2021 compared to a provision for loan losses of $2.3 million for the third quarter of 2020 which included a specific reserve of $1.5 million for impaired loans. The provision for loan losses for the third quarter of 2021 reflected the decline in the size of the loan portfolio, net charge-offs of $365,000 and changes in risk elements and mix of the loan portfolio at September 30, 2021. At September 30, 2021, total loans were $1.2 billion and the allowance for loan losses was $17.2 million, or 1.43% of total loans, compared to total loans of $1.5 billion and an allowance for loan losses of $14.5 million, or 0.99% of total loans, at September 30, 2020. The increase in the allowance for loan losses year-over-year is due primarily to the $1.7 million increase in specific reserves for impaired loans, higher charge-offs in 2021 compared to 2020 and the concomitant increase in the historical loss factors, an increase in the allowance due to changes in loan credit risk ratings in 2021, changes in the mix of loans in the loan portfolio and risk factors related to the economic uncertainty due to the COVID-19 pandemic continuing to adversely impact borrowers’ business operations and financial results. The allowance for loan losses, excluding the allocated reserve for mortgage warehouse lines, was $16.1 million, or 1.67% of total loans excluding mortgage warehouse lines at September 30, 2021. In addition, at September 30, 2021, there were $23.1 million of SBA PPP loans, which are 100% guaranteed by the SBA and, accordingly, no allowance was provided.

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020
During the first nine months of 2021, the Company recorded a provision for loan losses of $2.6 million compared to a provision for loan losses of $5.3 million for the first nine months of 2020. The provision for loan losses for the 2020 period included an increase of $2.3 million in the allowance for the estimated increase in incurred loan losses due primarily to the economic and social disruption caused by the COVID-19 pandemic, an increase in specific reserves of $1.5 million, and the effect of net charge-offs of $161,000. The provision for loan losses for the first nine months of 2021 reflected primarily a $1.0 million increase in specific reserves on impaired loans and net charge-offs of $1.1 million.

Non-Interest Income

Three months ended September 30, 2021 compared to three months ended September 30, 2020

Non-interest income was $3.9 million for the third quarter of 2021, representing a decrease of $833,000, or 17.6%, compared to $4.7 million for the third quarter of 2020. The decrease in non-interest income was driven primarily by a $764,000 decrease in gain on sales of loans.

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The Company originates and sells commercial loans guaranteed by the SBA and residential mortgage loans in the secondary market. In the third quarter of 2021, $8.3 million of SBA loans were sold and gain on sales of loans of $1.1 million was recorded compared to $5.1 million of SBA loans sold and gain on sales of loans of $463,000 recorded for the third quarter of 2020. In the third quarter of 2021, residential mortgage banking operations originated $51.0 million of residential mortgages, sold $54.0 million of residential mortgages and recorded a $1.5 million gain on sales of loans compared to approximately $118.0 million of residential mortgages originated, $97.5 million of residential mortgage loans sold and a $2.9 million gain on sales of loans recorded in the third quarter of 2020. Income from bank-owned life insurance (“BOLI”) increased $191,000 for the third quarter of 2021 compared to the third quarter of 2020, due primarily to $200,000 of income from a death benefit. Other income decreased $173,000 in the third quarter of 2021 compared to the third quarter of 2020, which included an interest rate swap fee of $172,000.

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020
Total non-interest income for the nine months ended September 30, 2021 increased $1.4 million, or 13.8%, to $11.7 million compared to total non-interest income of $10.3 million for the nine months ended September 30, 2020 due primarily to increases in gain on the sales of loans.
For the nine months ended September 30, 2021, $199.5 million of residential mortgages were originated and $226.3 million of residential mortgages were sold, which generated gain on sales of loans of $6.4 million, as compared to approximately $233.8 million of residential mortgages originated and $208.1 million of residential mortgage sold, which generated gain on sales of loans of $6.2 million, for the nine months ended September 30, 2020. Management believes that the increase in residential mortgage loans originated and sold was due primarily to increased residential mortgage financing activity as a result of lower mortgage interest rates.

For the nine months ended September 30, 2021, $16.4 million of SBA loans were sold and gain on sales of loans of $2.1 million was recorded compared to $7.8 million of SBA loans sold and gain on sales of loans of $688,000 recorded for the nine months ended September 30, 2020.

Service charges on deposit accounts decreased $131,000 to $340,000 for the nine months ended September 30, 2021 from $471,000 for the nine months ended September 30, 2020, due primarily to lower overdraft fees.

For the nine months ended September 30, 2021, income on BOLI increased $89,000 to $721,000 compared to $632,000 for the nine months ended September 30, 2020 due primarily to income from a death benefit. Gain on sales/calls of securities decreased $91,000 to $6,000 for the nine months ended September 30, 2021 compared to $97,000 for the nine months ended September 30, 2020, which included a higher amount of investment securities called. Other income increased $51,000 to $2.2 million for the nine months ended September 30, 2021 compared to $2.1 million for the nine months ended September 30, 2020, due primarily to general increases in other income components.

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


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Non-Interest Expenses
For the three months ended September 30, 2021, non-interest expenses were $10.8 million compared to $11.0 million for the three months ended September 30, 2020, representing a decrease of $121,000. Adjusted non-interest expenses, which excludes the $737,000 of merger-related expenses incurred in the third quarter of 2021 in connection with the pending Merger, decreased $858,000 compared to the third quarter of 2020. Adjusted non-interest expenses is a non-GAAP measure that excludes merger-related expenses and should be considered in addition to, but not as a substitute for, the Company’s GAAP financial results. A reconciliation of this non-GAAP financial measure to the GAAP financial results is included in the table on page 38 of this Form 10-Q.

The following table presents the major components of non-interest expenses for the three and nine months ended September 30, 2021 and 2020:
Three months ended September 30,Nine months ended September 30,
(Dollars in thousands)2021202020212020
Salaries and employee benefits$6,623 $7,106 $20,034 $19,276 
Occupancy expense1,221 1,222 3,693 3,597 
Data processing expenses490 486 1,486 1,402 
Equipment expense378 388 1,198 1,211 
Marketing19 21 76 99 
Telephone117 124 367 378 
Regulatory, professional and consulting fees431 575 1,476 1,536 
Insurance97 118 299 364 
Supplies49 67 160 275 
FDIC insurance expense108 225 533 484 
Other real estate owned (recoveries) expenses(22)27 33 58 
Merger-related expenses737 — 1,184 64 
Amortization of intangible assets79 91 239 304 
Other expenses514 512 1,695 1,544 
Total$10,841 $10,962 $32,473 $30,592 

Three months ended September 30, 2021 compared to three months ended September 30, 2020

Salaries and employee benefits expense decreased $483,000 for the third quarter of 2021 compared to the third quarter of 2020 due primarily to a $855,000 decrease in mortgage commissions and a $68,000 decrease in overtime expense, partially offset by a $62,000 increase in temporary staffing costs and a $336,000 increase in incentive compensation.

Regulatory, professional and consulting fees declined $144,000 due to lower legal and consulting fees related to loan workout and collection activities.

FDIC insurance expense decreased $117,000 due to a decrease in the FDIC assessment rate for the third quarter of 2021 compared to the assessment rate for the third quarter of 2020.

Merger-related expenses of $737,000 were incurred in the third quarter of 2021 for legal, financial advisory and other expenses incurred in connection with the pending Merger compared to no merger-related expenses in the third quarter of 2020.

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

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020

Non-interest expenses were $32.5 million for the nine months ended September 30, 2021 compared to $30.6 million for the nine months ended September 30, 2020, representing an increase of $1.9 million, or 6.2%, due primarily to $1.2 million in merger-related expenses incurred in connection with the pending Merger and a $758,000 increase in salaries and employee benefits.

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Salaries and employee benefits increased $758,000 to $20.0 million for the nine months ended September 30, 2021 compared to $19.3 million for the nine months ended September 30, 2020, due primarily to a $209,000 increase in temporary staffing costs, a $374,000 increase in incentive compensation, a $151,000 increase in share-based compensation expense, which were partially offset by a $100,000 decrease in the cost of employee benefits and a $49,000 decrease in overtime expense.

Occupancy expense increased $96,000 to $3.7 million for the nine months ended September 30, 2021 compared $3.6 million for the nine months ended September 30, 2020, due primarily to higher snow removal costs in the first quarter of 2021.

Supplies expense decreased $115,000 to $160,000 for the nine months ended September 30, 2021 compared to $275,000 for the nine months ended September 30, 2020, due in part to the purchase of a larger amount of COVID-19-related protective supplies in the 2020 period.

Merger-related expenses were $1.2 million for the nine months ended September 30, 2021 compared to $64,000 for the nine months ended September 30, 2020, reflecting the legal, financial advisory and other expenses incurred in connection with the pending Merger and the expenses incurred in 2020 related to the merger with Shore Community Bank.

Other expenses increased $151,000 to $1.7 million for the nine months ended September 30, 2021 compared to $1.5 million for the nine months ended September 30, 2020, due primarily to general increases in various other operating expense categories year over year.

Income Taxes

Three months ended September 30, 2021 compared to three months ended September 30, 2020

Income tax expense was $1.8 million for the third quarter of 2021, resulting in an effective tax rate of 25.3%, compared to income tax expense of $1.9 million, which resulted in an effective tax rate of 27.9% for the third quarter of 2020. The lower effective tax rate in the third quarter of 2021 reflected primarily the lower state tax rate that resulted from certain tax planning initiatives that reduced the effective tax rate and the tax benefit from higher deductions for share-based compensation in the third quarter of 2021, which was partially offset by non-deductible merger-related expenses, compared to the third quarter of 2020.

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020

Income tax expense was $5.7 million for the nine months ended September 30, 2021, resulting in an effective tax rate of 26.7%, compared to income tax expense of $4.5 million, which resulted in an effective tax rate of 27.1% for the nine months ended September 30, 2020. The increase in income tax expense was due primarily to a $4.7 million increase in pre-tax income in the first nine months of 2021 compared to the first nine months of 2020. The lower effective tax rate for the first nine months of 2021 reflected primarily the lower state tax rate that resulted from certain tax planning initiatives that reduced the effective tax rate and the tax benefit from higher deductions for share-based compensation, which was partially offset by non-deductible merger-related expenses, compared to the same period of 2020.

FINANCIAL CONDITION

September 30, 2021 compared to December 31, 2020

Total consolidated assets were $1.91 billion at September 30, 2021 compared to $1.81 billion at December 31, 2020. Total cash and cash equivalents increased $252.0 million and total investment securities increased $111.4 million from December 31, 2020, which amounts were partially offset by decreases of $235.3 million in total portfolio loans and $23.0 million in loans held for sale.

Cash and Cash Equivalents

Cash and cash equivalents totaled $273.9 million at September 30, 2021 compared to $22.0 million at December 31, 2020, representing an increase of $252.0 million. The increase in cash and cash equivalents reflects an increase in deposits and the cash flows resulting from the decline in total portfolio loans, partially offset by the increase in total investment securities.

Loans Held for Sale

Loans held for sale were $6.8 million at September 30, 2021 compared to $29.8 million at December 31, 2020, representing a decrease of $23.0 million due primarily to loan sales in excess of loan originations and a lower level of residential mortgage loan
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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 17.2% of total assets at September 30, 2021 and approximately 12.1% of total assets at December 31, 2020. Total investment securities increased $111.4 million to $329.1 million at September 30, 2021 from $217.7 million at December 31, 2020. In response to the higher level of liquidity, purchases of investment securities totaled $171.6 million during the nine months ended September 30, 2021. During the same period proceeds from calls, maturities and payments totaled $58.1 million. Bonds with maturities between one and three years were the primary purchases.

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, 2021, securities available for sale were $203.9 million, representing an increase of $78.7 million from securities available for sale of $125.2 million at December 31, 2020.

At September 30, 2021, the securities available for sale portfolio had net unrealized gains of $1.5 million compared to net unrealized gains of $2.6 million at December 31, 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, 2021, securities held to maturity were $125.2 million, representing an increase of $32.6 million from $92.6 million at December 31, 2020. The fair value of the held to maturity portfolio was $127.2 million and represented a net unrealized gain of $2.0 million at September 30, 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, 2021 and December 31, 2020:
September 30, 2021December 31, 2020
(Dollars in thousands)Amount%Amount%
Commercial real estate$612,827 51 %$618,978 43 %
Mortgage warehouse lines235,897 20 388,366 27 
Construction129,636 11 129,245 9 
Commercial business139,654 12 188,728 13 
Residential real estate63,223 5 88,261 6 
Loans to individuals17,945 1 21,269 2 
Other loans93 — 113 — 
Total loans1,199,275 100 %1,434,960 100 %
Deferred loan fees, net(820)(1,254)
Total loans, including deferred loan fees, net$1,198,455 $1,433,706 
Total portfolio loans at September 30, 2021 were $1.20 billion, compared to $1.43 billion at December 31, 2020. The $235.3 million decrease in portfolio loans was due primarily to a decrease of $152.5 million in mortgage warehouse lines as a result of lower funding volume in the third quarter of 2021 compared to the fourth quarter of 2020, a decrease of $49.1 million in commercial business loans as a result of forgiveness and pay-offs of SBA PPP loans, a decrease of $25.0 million in residential real estate loans due to pay-offs and a $6.2 million decrease in commercial real estate loans.

Commercial real estate loans totaled $612.8 million at September 30, 2021 compared to $619.0 million at December 31, 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.
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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 $235.9 million at September 30, 2021 compared to $388.4 million at December 31, 2020. The decline was due primarily to a lower mortgage funding volume in the third quarter of 2021 compared to the fourth quarter of 2020. In the first nine months of 2021, $3.5 billion of residential mortgage loans were financed through the mortgage warehouse funding group compared to $3.6 billion during the first nine months of 2020.

Construction loans totaled $129.6 million at September 30, 2021 relatively unchanged from December 31, 2020. Construction financing is provided to businesses to expand their facilities and operations and to real estate developers for the acquisition, development and construction of residential properties and income-producing properties. First mortgage construction loans are made to developers and builders for single family homes or multi-family buildings that are 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 $139.6 million at September 30, 2021 compared to $188.7 million at December 31, 2020 and declined $49.1 million primarily as a result of the forgiveness and pay-offs of the SBA PPP loans. As a SBA preferred lender, the Bank participated in both rounds of the SBA PPP loan program and had $23.1 million in SBA PPP loans outstanding at September 30, 2021. Commercial business loans consist primarily of loans to small and middle market businesses and are typically working capital loans used to finance inventory, receivables or equipment needs. These loans are generally secured by business assets of the commercial borrower.

Residential real estate loans totaled $63.2 million at September 30, 2021 compared to $88.3 million at December 31, 2020 and declined $25.0 million due primarily to pay-offs. Loans to individuals, which are comprised primarily of home equity loans, totaled $17.9 million at September 30, 2021 compared to $21.3 million at December 31, 2020.

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

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

Non-Performing Assets

Non-performing assets consist of non-performing loans and other real estate owned. Non-performing loans are composed of (1) loans on 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, 2021, non-accrual loans decreased by $7.7 million to $9.5 million from $16.4 million at December 31, 2020, and the ratio of non-performing loans to total loans decreased to 0.80% at September 30, 2021 compared to 1.20% at December 31, 2020. During the nine months ended September 30, 2021, $5.6 million of non-performing loans were resolved as a result of pay-downs, pay-offs and charge-offs, which included $833,000 of purchased credit impaired loans. One non-performing commercial real estate loan for $3.1 million was charged down $334,000 to its estimated fair value and transferred to loans held for sale. For the nine
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months ended September 30, 2021, $1.8 million of loans were placed on non-accrual status and consisted of a $90,000 home equity loan, an $871,000 residential mortgage loan, a $216,000 construction loan and a $625,000 commercial real estate loan.

Non-accrual loans consist of construction, commercial business, commercial real estate and residential real estate loans, which are in the process of collection. The table below sets forth non-performing assets and risk elements in the Bank’s portfolio at the dates indicated.
(Dollars in thousands)September 30, 2021December 31, 2020
Non-performing loans:
Loans 90 days or more past due and still accruing$— $871 
Non-accrual loans9,537 16,361 
Total non-performing loans
9,537 17,232 
Other real estate owned48 92 
Total non-performing assets
9,585 17,324 
Performing troubled debt restructurings5,080 5,768 
Performing troubled debt restructurings and total non-performing assets
$14,665 $23,092 
Non-performing loans to total loans0.80 %1.20 %
Non-performing loans to total loans excluding mortgage warehouse lines0.99 %1.65 %
Non-performing assets to total assets0.50 %0.96 %
Non-performing assets to total assets excluding mortgage warehouse lines0.57 %1.22 %
Total non-performing assets and performing troubled debt restructurings to total assets
0.77 %1.28 %
Non-performing assets decreased by $7.7 million to $9.6 million at September 30, 2021 from $17.3 million at December 31, 2020. OREO totaled $48,000 at September 30, 2021 compared to $92,000 at December 31, 2020. OREO at September 30, 2021 was comprised of one parcel of land.

At September 30, 2021, the Bank had 8 loans totaling $5.2 million that were troubled debt restructurings. Two of these loans totaling $120,000 are included in the above table as non-accrual loans and the remaining six loans totaling approximately $5.1 million were performing at September 30, 2021. At December 31, 2020, the Bank had 10 loans totaling $5.9 million that were troubled debt restructurings. Two of these loans totaling $141,000 are included in the above table as non-accrual loans and the remaining eight loans totaling approximately $5.8 million were performing December 31, 2020.

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, 2021, there were 3 loans acquired with evidence of deteriorated credit quality totaling $254,000 that were not classified as non-performing loans. At December 31, 2020, there were 5 loans acquired with evidence of deteriorated credit quality totaling $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
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portfolio and other extensions of credit. The determination of the adequacy of the allowance for loan losses is a critical accounting policy of the Company.

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

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

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

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

When analyzing groups of loans, 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.

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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.

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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 analyzed as a whole for the purposes of allowance for loan losses. Warehouse lines of credit are subject to the same inherent risks as other commercial lending, but the overall degree of risk differs. While the Company’s loss experience with this type of lending has been non-existent since the product was introduced in 2008, there are other risks unique to this lending that still must be considered in assessing the adequacy of the allowance for loan losses. These unique risks may include, but are not limited to, (i) credit risks relating to the mortgage bankers that borrow from 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.




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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, 2021Year Ended December 31, 2020Nine Months Ended September 30, 2020
Balance, beginning of period$15,641 $9,271 $9,271 
 Provision charged to operating expenses2,600 6,698 5,340 
Loans charged off:
Construction loans(692)— — 
Commercial business and commercial real estate(396)(364)(165)
Loans to individuals— (3)— 
All other loans(1)— (3)
Total loans charged off
(1,089)(367)(168)
Recoveries:
Commercial business and commercial real estate8 39 7 
Total recoveries
8 39 7 
Net charge offs(1,081)(328)(161)
Balance, end of period$17,160 $15,641 $14,450 
Loans:   
At period end$1,198,455 $1,433,706 $1,455,684 
Average during the period1,264,949 1,333,330 1,292,304 
Net charge offs to average loans outstanding(0.09)%(0.02)%(0.01)%
Net charge offs to average loans outstanding, excluding mortgage warehouse loans(0.11)%(0.03)%(0.02)%
Allowance for loan losses to:
 Total loans at period end1.43 %1.09 %0.99 %
   Total loans at period end excluding mortgage warehouse
   loans		1.67 %1.32 %1.18 %
 Non-performing loans179.93 %90.77 %83.79 %
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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, 2021 and December 31, 2020, respectively. The total allowance is available to absorb losses from any portfolio of loans.
September 30, 2021December 31, 2020
(Dollars in thousands)Amount
As a %
of Loan Class		Loans as a % of
Total Loans		Amount
As a %
of Loan Class		Loans as a % of
Total Loans
Commercial real estate$6,659 1.09 %51 %$6,422 1.04 %43 %
Commercial business2,992 2.14 %12 %2,727 1.44 %13 %
Construction5,083 3.92 %11 %3,741 2.89 %9 %
Residential real estate389 0.62 %5 %619 0.70 %6 %
Loans to individuals102 0.57 %1 %125 0.59 %2 %
Subtotal15,225 1.58 %80 %13,634 1.30 %73 %
Mortgage warehouse lines1,062 0.45 %20 %1,807 0.47 %27 %
Unallocated reserves873 — — 200 — — 
Total$17,160 1.43 %100 %$15,641 1.09 %100 %

For the nine months ended September 30, 2021, the Company recorded a provision for loan losses of $2.6 million, and net charge-offs of $1.1 million compared to a provision for loan losses of $5.3 million, and net charge-offs of $161,000 recorded for the first nine months of 2020. The higher provision for loan losses recorded for the first nine months of 2020 was due primarily to an increase in the allowance for the estimated increase in incurred losses resulting from economic and social disruption caused by the COVID-19 pandemic.

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

At September 30, 2021, the allowance for loan losses included $348,000 for loans that were rated Pass-Watch and had received a deferral. This reflects management’s previously reported determination that “Pass-Watch” credit rated loans with modifications or deferrals suggest a weaker financial strength of the borrower than “Pass” credit rated loans, thereby warranting a higher allowance for loan losses than would ordinarily be reserved for “Pass-Watch” credit rated loans.

Within the loan portfolio, hotel and restaurant-food service industries have been adversely impacted by the economic disruption caused by the COVID-19 pandemic. At September 30, 2021, loans to borrowers in the hotel and restaurant-food service industries were $62.2 million and $53.3 million, respectively. Management reviewed over 90% of the hotel loans and over 96% of the restaurant-food service loans. At September 30, 2021, management continued to maintain an additional allowance for loan losses of 75 basis points, or $357,000, attributable to restaurant-food service loans and 25 basis points, or $148,000, attributable to hotel loans due to the challenging operating environment for these businesses as a result of the COVID-19 pandemic.

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.

Management also reviewed loans to schools that are private educational institutions that are generally sponsored or affiliated with religious organizations. These loans totaled $24.4 million at September 30, 2021, and all of these loans were reviewed.

At September 30, 2021, the allowance for loan losses was $17.2 million, or 1.43% of loans, compared to $15.6 million, or 1.09% of loans, at December 31, 2020 and $14.5 million, or 0.99% of loans, at September 30, 2020. The allowance for loan losses was 179.93% of non-performing loans at September 30, 2021 compared to 90.77% of non-performing loans at December 31, 2020 and 83.79% of non-performing loans at September 30, 2020. The allowance for loan losses at September 30, 2021 included $3.2 million in specific reserves for impaired loans and $1.4 million attributed to management's qualitative factors for the estimated increase in incurred losses resulting from economic and social disruption caused by the COVID-19 pandemic.

Acquisition accounting for the merger with Shore Community Bank (“Shore”) in 2019 and the merger with New Jersey Community Bank (“NJCB”) in 2018 resulted in the Shore and NJCB loans being recorded at their fair value and no allowance for loan losses as
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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 $1.1 million and $317,000 at September 30, 2021, respectively. In addition, at September 30, 2021, there were $23.1 million of SBA PPP loans which are 100% guaranteed by the SBA and, accordingly, no allowance was provided.

Management believes that the allowance for loan losses is adequate in relation to credit risk exposure levels and the estimated incurred and inherent losses in the loan portfolio at September 30, 2021. However, management expects that the economic disruption resulting from the COVID-19 pandemic will continue to impact businesses, borrowers, employees and consumers in the near term, notwithstanding the wider distribution and availability of vaccines, as uncertainty remains with respect to variants of the virus and the potential reimplementation of certain restrictions and precautionary measures in the Bank’s primary market areas. Management may further increase the provision for loan losses and the allowance for loan losses in response to changes in economic conditions and the performance of the loan portfolio in future periods.

Deposits

Deposits, which include demand deposits (interest bearing and non-interest bearing), savings deposits and time deposits, are a fundamental and cost-effective source of funding. The flow of deposits is influenced significantly by general economic conditions, changes in market interest rates and competition. The 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, 2021 and December 31, 2020:
(Dollars in thousands)September 30, 2021December 31, 2020
Demand  
Non-interest bearing$534,436 $425,210 
Interest bearing493,207 441,772 
Savings451,309 334,226 
Certificates of deposit159,609 361,631 
Total
$1,638,561 $1,562,839 

Total deposits were $1.6 billion at September 30, 2021, representing an increase of $75.7 million from December 31, 2020. There was a significant change in the composition of total deposits as non-interest-bearing demand deposits increased $109.2 million due in part to the funding of the second round of SBA PPP loans and additional financial assistance received by customers from the Restaurant Revitalization Fund and Closed Venue Fund provided under the Economic Aid Act, while interest-bearing deposits decreased $33.5 million from December 31, 2020 to September 30, 2021. Of the total decrease in interest-bearing deposits, certificates of deposit decreased $202.0 million due primarily to the maturity of approximately $149.9 million of short-term internet listing service certificates of deposit. Funds from a portion of maturing certificates of deposit were also deposited by customers into non-maturity deposits. Due to the low interest rate environment, customers generally chose to deposit funds to non-maturity deposit accounts such as NOW and savings accounts, which resulted in a $117.1 million increase in savings deposits and a $51.4 million increase in interest-bearing demand deposits. There were no short-term borrowings at September 30, 2021 compared to $9.8 million in short-term borrowings at December 31, 2020.

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, 2021, the Company had no borrowings compared to $9.8 million of short-term borrowings December 31, 2020.

Liquidity
At September 30, 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.
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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 $955.3 million, at September 30, 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, 2021 and December 31, 2020, the Bank pledged approximately $346.4 million and $469.5 million of loans, respectively, to support the FHLB borrowing capacity. At September 30, 2021 and December 31, 2020, the Bank had available borrowing capacity of $270.6 million and $301.8 million, respectively, at the FHLB. The Bank also maintains unsecured federal funds lines of $46.0 million with two correspondent banks, all of which were unused and available at September 30, 2021.
The Bank has access to the Federal Reserve Bank of New York Discount Window facility. At this time the Bank has not pledged investment securities or loans, which would be required, to support borrowings through the Discount Window facility.
The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities.  At September 30, 2021, the balance of cash and cash equivalents was $273.9 million.
Net cash provided by operating activities totaled $67.4 million for the nine months ended September 30, 2021 compared to net cash used in operating activities of $12.4 million for the nine months ended September 30, 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 net cash provided by operating activities for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due primarily to the net sales (cash provided) of loans held for sale of approximately $31.5 million and the increase in net accrued expenses and other liabilities of $26.4 million, which reflected primarily a $24.5 million liability for unsettled investment securities purchased. The net cash used in operating activities for the nine months ended September 30, 2020 reflected net cash of $15.3 million used in the origination and sale of loans.

Net cash provided by investing activities totaled $121.6 million for the nine months ended September 30, 2021 compared to net cash used in investing activities of $226.9 million for the nine months ended September 30, 2020. The loans and securities portfolios are a source of liquidity, providing cash flows from maturities and periodic payments of principal. The primary source of cash from investing activities for the nine months ended September 30, 2021 was the cash flow from the decrease in loans. During the nine months ended September 30, 2021, loans decreased $234.4 million compared to an increase in loans of $239.5 million during the nine months ended September 30, 2020.

Net cash provided by financing activities was $62.9 million for the nine months ended September 30, 2021 compared to net cash provided by financing activities of $244.5 million for the nine months ended September 30, 2020. The primary source of funds for the 2021 period was the increase in deposits of $75.7 million. 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, 2021.

Shareholders’ Equity and Dividends

Shareholders’ equity increased by $12.3 million to $199.9 million at September 30, 2021 from $187.7 million at December 31, 2020.  The increase in shareholders’ equity was due primarily to increases of $12.5 million in retained earnings and $1.0 million in common stock, partially offset by a $1.1 million decrease in accumulated other comprehensive income and a $160,000 increase in treasury stock.

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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 months ended September 30, 2021, the Company withheld 9,469 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, 2021 and December 31, 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, 2021 and December 31, 2020, the Bank’s capital ratios exceeded the regulatory standards for well-capitalized institutions. Certain bank regulatory limitations exist on the availability of the Bank’s assets for the payment of dividends by the Bank without prior approval of bank regulatory authorities.

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 is 2.5% of Common Equity Tier 1 capital to risk-weighted assets. At September 30, 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
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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:
ActualFor Capital
Adequacy Purposes		To Be Well Capitalized
Under Prompt
Corrective Action
Provision
(Dollars in thousands)AmountRatioAmountRatioAmountRatio
As of September 30, 2021
Common equity Tier 1 (CET1)$162,742 11.78 %$62,183 4.50 % N/AN/A
Total capital to risk-weighted assets197,902 14.32 %110,547 8.00 % N/AN/A
Tier 1 capital to risk-weighted assets180,742 13.08 %82,910 6.00 % N/AN/A
Tier 1 leverage capital180,742 9.95 %72,632 4.00 % N/AN/A
As of December 31, 2020:
Common equity Tier 1 (CET1)$149,292 9.92 %$67,701 4.50 % N/A N/A
Total capital to risk-weighted assets182,933 12.16 %120,357 8.00 % N/A N/A
Tier 1 capital to risk-weighted assets167,292 11.12 %90,268 6.00 % N/A N/A
Tier 1 leverage capital167,292 9.41 %71,105 4.00 % N/A N/A

The Bank’s actual capital amounts and ratios are presented in the following table:
ActualFor Capital
Adequacy Purposes		To Be Well Capitalized
Under Prompt
Corrective Action
Provision
(Dollars in thousands)AmountRatioAmountRatioAmountRatio
As of September 30, 2021
Common equity Tier 1 (CET1)$180,469 13.07 %$62,158 4.50%$89,783 6.50%
Total capital to risk-weighted assets197,629 14.31 %110,502 8.00%138,128 10.00%
Tier 1 capital to risk-weighted assets180,469 13.07 %82,877 6.00%110,502 8.00%
Tier 1 leverage capital180,469 9.94 %72,610 4.00%90,763 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 assets182,708 12.15 %120,313 8.00%150,391 10.00%
Tier 1 capital to risk-weighted assets167,067 11.11 %90,235 6.00%120,313 8.00%
Tier 1 leverage capital167,067 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, 2021 a parallel shift down of 100 basis points was presented.
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Based upon the current interest rate environment, as of September 30, 2021, sensitivity to interest rate risk was as follows:
(Dollars in thousands)Next 12 Months
Net Interest Income
Economic Value of Equity (2)
Interest Rate Change in Basis Points (1)
Dollar Amount$ Change% ChangeDollar Amount$ Change% Change
+300$62,798 $7,600 13.77 %$258,866 $8,551 3.42 %
+20059,815 4,617 8.36 %255,581 5,266 2.10 %
+10056,781 1,583 2.87 %251,714 1,399 0.56 %
—55,198 — — 250,315 — — 
-10055,386 188 0.34 %233,264 (17,051)(6.81)%
(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, 2021, there were no material changes to the Company’s off-balance sheet arrangements and contractual obligations disclosed under Part II, Item 7 of the 2020 Form 10-K. Management continues to believe that the Company has adequate capital and liquidity available from various sources to fund projected contractual obligations and commitments.


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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, 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, 2021.

In an immediate and sustained 100 basis point increase in market interest rates at September 30, 2021, net interest income for the next 12 months would increase approximately 2.87%, when compared to a flat interest rate scenario. In year two, this sensitivity improves to an increase of 8.30%, 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 0.34% and would decrease approximately 4.70% 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.

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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, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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, 2021, there has been no material change in the risk factors previously disclosed under Part I, Item 1A of the 2020 Form 10-K, as filed with the SEC on March 15, 2021, other than the risks and uncertainties described below related to the pending Merger with Lakeland.

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

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

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

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

•the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;
•the risk that Lakeland’s shareholders may not approve the share issuance;
•the risk that the Company’s shareholders may not adopt and approve the Merger Agreement;
•the risk that the necessary regulatory approvals may not be obtained or may be obtained subject to conditions that are not anticipated;
•delays in closing the Merger or other risks that any of the closing conditions to the Merger may not be satisfied in a timely manner or at all;
•the diversion of management’s time and resources from ongoing business operations due to issues relating to the Merger;
•material adverse changes in the operations or earnings of the Company or Lakeland; and
•the outcome of any claims and proceedings asserted against the Company and/or the Company's Board of Directors in connection with the Merger.

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

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

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The Merger Agreement also provides certain termination rights to Lakeland. If the Merger Agreement is terminated and the Company seeks another merger or business combination, the market price of Company common stock could decline, which could make it more difficult to find a party willing to offer equivalent or more attractive consideration than the consideration Lakeland has agreed to provide in the Merger.

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

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

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

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

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

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

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

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

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

Dissenters’ or appraisal rights are statutory rights that, if applicable under law, enable shareholders to dissent from an extraordinary transaction, such as a Merger, and to demand that the Company pay the fair value for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to shareholders in connection with the extraordinary transaction. Under New Jersey law, holders of Company common stock do not have the right to dissent from the Merger Agreement and seek an appraisal in connection with the Merger.
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Litigation has been filed against the Company and the members of its Board of Directors related to the pending Merger, and this or any additional lawsuits that may be filed against the Company, Lakeland and/or their respective directors could prevent or delay the completion of the Merger or result in the payment of damages following completion of the Merger.

As disclosed in the joint proxy statement/prospectus relating to the Merger, on September 29, 2021, a putative class action captioned Vigliotti v. 1st Constitution Bancorp et al. was filed in the Superior Court of New Jersey, Middlesex County, Chancery Division, naming as defendants the Company and the members of the Company’s Board of Directors, challenging the disclosures made in connection with the Merger (the “Complaint”). The Complaint alleges, among other things, that the preliminary joint proxy statement/prospectus filed by Lakeland with the SEC on August 27, 2021 contains materially incomplete and misleading information regarding the process that culminated in the Merger Agreement and the proposed transaction, the valuation analyses performed by the Company’s financial advisor, and potential conflicts of interest in connection with the proposed transaction. The relief sought includes enjoining the consummation of the Merger unless and until certain additional and allegedly material information is disclosed to Company shareholders, rescinding the Merger, to the extent already implemented, or granting rescissory damages, directing the individual defendants to account to the plaintiff for all alleged damages suffered as a result of the alleged wrongdoing, and awarding the plaintiff the cost and disbursements of the action, including reasonable attorneys’ and experts’ fees. On October 12, 2021, the plaintiff filed a motion for expedited discovery.

As disclosed in the joint proxy statement/prospectus, Lakeland and the Company have also received a demand letter from another Company shareholder challenging the disclosures made in connection with the Merger. The Company subsequently received two demand letters from shareholders, one of which was also directed to Lakeland, that challenge disclosures made in connection with the Merger.

To diminish the risk that lawsuits may delay or otherwise adversely affect the consummation of the Merger and to minimize the expense of defending such actions, and without admitting any liability or wrongdoing, the Company agreed to supplement the joint proxy statement/prospectus as described in the Current Report on Form 8-K filed by the Company with the SEC on November 9, 2021. In consideration of the supplemental disclosures made in such filing, the plaintiff named in the Complaint has agreed that he will consider the claims mooted and will dismiss the Complaint.

The cost to defend against or settle these actions or any similar actions, claims or proceedings that may arise or be asserted against the Company in connection with the Merger could be significant, including, but not limited to, as a result of any indemnification obligations of the Company and Lakeland and delays in the completion of the Merger, and the outcomes could be uncertain.

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

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











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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, 2021, 394,141 shares remained available for repurchase under the common stock repurchase program. The following table sets forth information regarding the Company's repurchases of its common stock for the three months ended September 30, 2021.

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
BeginningEnding    
July 1, 2021July 31, 2021376 $21.50 — 394,141 
August 1, 2021August 31, 20211,099 21.68 — 394,141 
September 1, 2021September 30, 2021— — — 394,141 
Total1,475 $21.63 — 394,141 
(1) Represents shares withheld in connection with the vesting of restricted stock awards to satisfy tax withholding obligations.

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.
Exhibit Index
*
*
**
101.INS*Inline XBRL Instance Document
101.SCH*Inline XBRL Taxonomy Extension Schema Document
101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
_____________________
*    Filed herewith.
**     Furnished herewith.
#    Management contract or compensatory plan or arrangement.


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 1ST CONSTITUTION BANCORP
   
   
Date:November 9, 2021By:/s/ ROBERT F. MANGANO
  Robert F. Mangano
  President and Chief Executive Officer
  (Principal Executive Officer)
   
   
Date:November 9, 2021By:/s/ STEPHEN J. GILHOOLY 
  Stephen J. Gilhooly
  Senior Vice President, Treasurer and Chief Financial Officer
  (Principal Financial Officer)

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