Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - STEWARDSHIP FINANCIAL CORPssfn_2017630xex32-1.htm
EX-31.2 - EXHIBIT 31.2 - STEWARDSHIP FINANCIAL CORPssfn_2017630xex31-2.htm
EX-31.1 - EXHIBIT 31.1 - STEWARDSHIP FINANCIAL CORPssfn_2017630xex31-1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017
o
TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________
 
Commission file number 1-33377
Stewardship Financial Corporation
(Exact name of registrant as specified in its charter)
 
 
New Jersey
22-3351447
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
630 Godwin Avenue, Midland Park, NJ
07432
(Address of principal executive offices)
(Zip Code)
 
 
(201) 444-7100
(Registrant's telephone number, including area code)
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
  Large accelerated filer o
Accelerated filer o
  Non-accelerated filer o  (Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
 
 
 
Emerging growth company [ ]
 
 
 
 
 
If an emerging growth company, indicate 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 o     No x

The number of shares outstanding, net of treasury stock, of the Registrant’s Common Stock, no par value, as of August 8, 2017 was 8,642,716.




Stewardship Financial Corporation 
INDEX
 
 
PAGE
 
NUMBER
 
 
 
 
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition

 
June 30,
2017
 
December 31, 2016
 
(Unaudited)
 
 
 
(Dollars in thousands)
Assets
 

 
 

Cash and due from banks
$
19,314

 
$
11,508

Other interest-earning assets
145

 
172

Cash and cash equivalents
19,459

 
11,680

 
 
 
 
Securities available-for-sale
116,244

 
98,583

Securities held to maturity; estimated fair value of $51,573 (at June 30, 2017) and $51,530 (at December 31, 2016)
52,091

 
52,330

Federal Home Loan Bank of New York stock, at cost
5,169

 
3,515

Loans held for sale
446

 
773

Loans, net of allowance for loan losses of $8,550 (at June 30, 2017) and $7,905 (at December 31, 2016)
683,162

 
595,952

Premises and equipment, net
6,700

 
6,566

Accrued interest receivable
2,327

 
2,133

Other real estate owned, net

 
401

Bank owned life insurance
20,802

 
16,558

Other assets
6,907

 
7,044

Total assets
$
913,307

 
$
795,535

 
 
 
 
Liabilities and Shareholders' equity
 

 
 

 
 
 
 
Liabilities
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
177,678

 
$
169,306

Interest-bearing
543,215

 
489,624

Total deposits
720,893

 
658,930

 
 
 
 
Federal Home Loan Bank of New York advances
93,760

 
59,200

Subordinated Debentures and Subordinated Notes
23,284

 
23,252

Accrued interest payable
965

 
794

Accrued expenses and other liabilities
1,894

 
1,972

Total liabilities
840,796

 
744,148

 
 
 
 
Shareholders' equity
 

 
 

 
 

 
 

Common stock, no par value: 20,000,000 and 10,000,000 shares authorized at June 30, 2017 and December 31, 2016, respectively;
8,644,566 and 6,121,329 shares issued and outstanding
at June 30, 2017 and December 31, 2016, respectively
60,657

 
41,626

Retained earnings
12,807

 
11,082

Accumulated other comprehensive income (loss), net
(953
)
 
(1,321
)
Total Shareholders' equity
72,511

 
51,387

Total liabilities and Shareholders' equity
$
913,307

 
$
795,535


See accompanying notes to unaudited consolidated financial statements.      


1


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except per share amounts)
Interest income:
 

 
 

 
 
 
 
Loans
$
7,008

 
$
6,116

 
$
13,594

 
$
11,768

Securities held to maturity:
 

 
 

 


 


Taxable
247

 
298

 
487

 
568

Nontaxable
53

 
100

 
112

 
203

Securities available-for-sale:
 

 
 

 


 


Taxable
570

 
409

 
1,056

 
786

Nontaxable
15

 
6

 
29

 
12

FHLB dividends
44

 
31

 
78

 
63

Other interest-earning assets
6

 
19

 
11

 
28

Total interest income
7,943

 
6,979

 
15,367

 
13,428

Interest expense:
 

 
 

 
 
 
 
Deposits
719

 
561

 
1,352

 
1,118

FHLB-NY Borrowings
319

 
201

 
562

 
404

Subordinated Debentures and Subordinated Notes
371

 
362

 
739

 
775

Total interest expense
1,409

 
1,124

 
2,653

 
2,297

Net interest income before provision for loan losses
6,534

 
5,855

 
12,714

 
11,131

Provision for loan losses
260

 
(450
)
 
560

 
(800
)
Net interest income after provision for loan losses
6,274

 
6,305

 
12,154

 
11,931

Noninterest income:
 

 
 

 
 
 
 
Fees and service charges
519

 
530

 
1,054

 
1,059

Bank owned life insurance
129

 
107

 
244

 
208

Gain on calls and sales of securities, net

 
32

 

 
56

Gain on sales of mortgage loans
38

 
19

 
55

 
37

Gain on sale of other real estate owned
13

 
6

 
13

 
6

Miscellaneous
114

 
138

 
246

 
285

Total noninterest income
813

 
832

 
1,612

 
1,651

Noninterest expenses:
 

 
 

 
 
 
 
Salaries and employee benefits
2,880

 
2,742

 
5,724

 
5,457

Occupancy, net
393

 
404

 
802

 
802

Equipment
162

 
148

 
324

 
298

Data processing
456

 
477

 
925

 
949

Advertising
211

 
157

 
347

 
308

FDIC insurance premium
109

 
90

 
186

 
196

Charitable contributions
120

 
90

 
245

 
160

Stationery and supplies
48

 
47

 
88

 
80

Legal
48

 
46

 
84

 
90

Bank-card related services
142

 
150

 
284

 
281

Other real estate owned, net
9

 
28

 
24

 
102

Miscellaneous
505

 
620

 
1,164

 
1,178

Total noninterest expenses
5,083

 
4,999

 
10,197

 
9,901

Income before income tax expense
2,004

 
2,138

 
3,569

 
3,681

Income tax expense
736

 
776

 
1,310

 
1,328

Net income
1,268

 
1,362

 
$
2,259

 
$
2,353

Basic and diluted earnings per common share
$
0.16

 
$
0.22

 
$
0.32

 
$
0.39

Weighted average number of basic and diluted common shares outstanding
8,174,484

 
6,111,729

 
7,155,367

 
6,102,040


See accompanying notes to unaudited consolidated financial statements. 

2


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Net income
$
1,268

 
$
1,362

 
$
2,259

 
$
2,353

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized holding gains on securities available-for-sale
187

 
244

 
392

 
916

Reclassification adjustment for gains in net income

 
(20
)
 

 
(35
)
Accretion of loss on securities reclassified to held to maturity
6

 
25

 
13

 
70

Change in fair value of interest rate swap
(37
)
 

 
(37
)
 
37

 
 
 
 
 
 
 
 
Total other comprehensive income
156

 
249

 
368

 
988

 
 
 
 
 
 
 
 
Total comprehensive income
$
1,424

 
$
1,611

 
$
2,627

 
$
3,341

 
See accompanying notes to unaudited consolidated financial statements.


3


Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
Accumulated
Other
Comprehen-sive
 
 
 
Common Stock
 
Retained
 
Income
 
 
 
Shares
 
Amount
 
Earnings
 
(Loss), Net
 
Total
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Balance -- December 31, 2016
6,121,329

 
$
41,626

 
$
11,082

 
$
(1,321
)
 
$
51,387

Issuance of common stock, net of costs
2,509,090

 
18,860

 

 

 
18,860

Cash dividends declared on common stock

 

 
(443
)
 

 
(443
)
Payment of discount on dividend reinvestment plan

 
(2
)
 

 

 
(2
)
Common stock issued under dividend reinvestment plan
5,012

 
44

 

 

 
44

Common stock issued under stock plans
1,547

 
14

 

 

 
14

Issuance of restricted stock
20,876

 
185

 
(185
)
 

 

Amortization of restricted stock, net
(13,288
)
 
(118
)
 
94

 

 
(24
)
Tax benefit from restricted stock vesting

 
48

 

 

 
48

Net income

 

 
2,259

 

 
2,259

Other comprehensive income

 

 

 
368

 
368

Balance -- June 30, 2017
8,644,566

 
$
60,657

 
$
12,807

 
$
(953
)
 
$
72,511


 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
Accumulated
Other
Comprehen-sive
 
 
 
Common Stock
 
Retained
 
Income
 
 
 
Shares
 
Amount
 
Earnings
 
(Loss), Net
 
Total
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Balance -- December 31, 2015
6,085,528

 
$
41,410

 
$
7,008

 
$
(845
)
 
$
47,573

Cash dividends declared on common stock

 

 
(305
)
 

 
(305
)
Payment of discount on dividend reinvestment plan

 
(2
)
 

 

 
(2
)
Common stock issued under dividend reinvestment plan
6,700

 
36

 

 

 
36

Common stock issued under stock plans
1,761

 
10

 

 

 
10

Issuance of restricted stock
34,332

 
198

 
(198
)
 

 

Amortization of restricted stock, net
(15,291
)
 
(86
)
 
114

 

 
28

Tax benefit from restricted stock vesting

 
5

 

 

 
5

Net income

 

 
2,353

 

 
2,353

Other comprehensive income

 

 

 
988

 
988

Balance -- June 30, 2016
6,113,030

 
$
41,571

 
$
8,972

 
$
143

 
$
50,686


See accompanying notes to unaudited consolidated financial statements.

4


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended
 
June 30,
 
2017
 
2016
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income
$
2,259

 
$
2,353

Adjustments to reconcile net income to
 

 
 

net cash provided by operating activities:
 

 
 

Depreciation and amortization of premises and equipment
190

 
185

Amortization of premiums and accretion of discounts, net
258

 
285

Amortization of restricted stock
(24
)
 
28

Amortization of subordinated debenture issuance costs
32

 
33

Accretion of deferred loan fees
69

 
34

Provision for loan losses
560

 
(800
)
Originations of mortgage loans held for sale
(4,257
)
 
(2,825
)
Proceeds from sale of mortgage loans
4,639

 
3,803

Gain on sales of mortgage loans
(55
)
 
(37
)
Gain on calls and sales of securities

 
(56
)
Gain on sale of other real estate owned
(13
)
 
(6
)
Deferred income tax expense (benefit)
(178
)
 
248

Excess tax benefit from restricted stock vesting
48

 

Increase in accrued interest receivable
(194
)
 
55

Increase (decrease) in accrued interest payable
171

 
(9
)
Earnings on bank owned life insurance
(244
)
 
(208
)
(Increase) decrease in other assets
67

 
339

Decrease in other liabilities
(115
)
 
(117
)
Net cash provided by operating activities
3,213

 
3,305

Cash flows from investing activities:
 

 
 

Purchase of securities available-for-sale
(24,128
)
 
(21,288
)
Proceeds from maturities and principal repayments on securities available-for-sale
6,902

 
6,305

Proceeds from sales and calls on securities available-for-sale

 
11,050

Purchase of securities held to maturity
(3,675
)
 
(24,898
)
Proceeds from maturities and principal repayments on securities held to maturity
3,154

 
3,464

Proceeds from calls on securities held to maturity
720

 
16,570

Purchase of FHLB-NY stock
(9,890
)
 
(866
)
Sale of FHLB-NY stock
8,236

 
824

Net increase in loans
(87,839
)
 
(11,055
)
Proceeds from sale of other real estate owned
414

 
184

Purchase of bank owned life insurance
(4,000
)
 
(2,000
)
Additions to premises and equipment
(324
)
 
(64
)
Net cash used in investing activities
(110,430
)
 
(21,774
)
Cash flows from financing activities:
 

 
 

Net increase in noninterest-bearing deposits
8,372

 
12,633

Net increase in interest-bearing deposits
53,591

 
9,083

Increase in long term borrowings
25,000

 

Repayment of long term borrowings
(5,000
)
 

Net increase in short term borrowings
14,560

 

Proceeds from issuance of common stock, net of costs
18,860

 

Cash dividends paid on common stock
(443
)
 
(305
)
Payment of discount on dividend reinvestment plan
(2
)
 
(2
)
Issuance of common stock for cash
58

 
46

Excess tax benefit from restricted stock vesting

 
5

Net cash provided by financing activities
114,996

 
21,460

Net increase in cash and cash equivalents
7,779

 
2,991

Cash and cash equivalents - beginning
11,680

 
10,910

Cash and cash equivalents - ending
$
19,459

 
$
13,901



5


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows, continued
(Unaudited)
 
Six Months Ended
 
June 30,
 
2017
 
2016
 
(In thousands)
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
2,482

 
$
2,306

Cash paid during the period for income taxes
$
1,197

 
$
746

Transfers from loans to other real estate owned
$

 
$
152


See accompanying notes to unaudited consolidated financial statements.  


6


Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
June 30, 2017
(Unaudited)
 
Note 1. Summary of Significant Accounting Policies
 
Certain information and note disclosures normally included in the unaudited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Stewardship Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on March 22, 2017 (the “2016 Annual Report”).
 
The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the SEC and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the interim consolidated financial statements, have been included. The results of operations for the six months ended June 30, 2017 are not necessarily indicative of the results which may be expected for the entire year.
 
Principles of consolidation
 
The consolidated financial statements include the accounts of Stewardship Financial Corporation and its wholly-owned subsidiary, Atlantic Stewardship Bank (the “Bank”), together referred to as “the Corporation”. The Bank includes its wholly-owned subsidiaries, Stewardship Investment Corporation, Stewardship Realty LLC, Atlantic Stewardship Insurance Company, LLC and several other subsidiaries formed to hold title to properties acquired through foreclosure or deed in lieu of foreclosure. The Bank’s subsidiaries have an insignificant impact on the Bank’s daily operations. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
 
The consolidated financial statements of the Corporation have been prepared in conformity with GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions, based on available information, that affect the amounts reported in the consolidated financial statements and disclosures provided. Actual results could differ significantly from those estimates.
 
Material estimates
 
Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses and deferred income taxes. Management believes the Corporation’s policies with respect to the methodology for the determination of the allowance for loan losses and the evaluation of deferred income taxes involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. These critical policies and their application are periodically reviewed with the Audit Committee and the Board of Directors.
 
Adoption of New Accounting Standards
 
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will be effective for interim and annual periods beginning after December 15, 2017 and will replace most existing revenue recognition guidance in U.S. GAAP. The Corporation does not expect the guidance to have a material effect on its consolidated financial statements as the ASU is not applicable to financial instruments, the Corporation's main source of revenue, and, therefore, will not affect the majority of the Corporation's revenues.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This amendment supersedes the guidance to classify equity securities with

7


readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment requires public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. The amendment requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. The amendment reduces diversity in current practice by clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. This amendment is effective for fiscal years, including interim periods, beginning after December 15, 2017. Entities should apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Corporation is currently evaluating the impact that the adoption of the guidance will have on the Corporation's consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Subtopic 842).” This ASU requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The amendments in ASU 2016-02 are effective for fiscal years, including interim periods, beginning after December 15, 2018. Early adoption of ASU 2016-02 is permitted. The Corporation is currently assessing the impact that the adoption of the guidance will have on the Corporation's consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The objective of this ASU is to simplify accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under ASU 2016-09, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current accounting) or account for forfeitures when they occur. Within the cash flow statement, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. The amendments in ASU 2016-09 are effective for fiscal years, including interim periods, beginning after December 15, 2016. The Corporation's adoption of the guidance in the first quarter of 2017 did not have a material impact on the Corporation's consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments by a reporting entity at each reporting date. The amendments in this ASU require financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses would represent a valuation account that would be deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement would reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses would be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity will be required to use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The amendments in ASU 2016-13 are effective for fiscal years, including interim periods, beginning after December 15, 2019. Early adoption of ASU 2016-09 is permitted for fiscal years beginning after December 15, 2018. The Corporation is currently evaluating the potential impact that the adoption of the guidance will have on the Corporation's consolidated financial statements.


8


Note 2. Securities – Available-for-Sale and Held to Maturity
 
The amortized cost, gross unrealized gains and losses and fair value of the available-for-sale securities were as follows:
 
 
June 30, 2017
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. government-sponsored agencies
$
20,721

 
$
59

 
$
302

 
$
20,478

Obligations of state and political subdivisions
3,230

 
8

 
49

 
3,189

Mortgage-backed securities
67,742

 
130

 
784

 
67,088

Asset-backed securities (a)
7,524

 
36

 
36

 
7,524

Corporate debt
14,471

 
108

 
347

 
14,232

 
 
 
 
 
 
 
 
Total debt securities
113,688

 
341

 
1,518

 
112,511

Other equity investments
3,935

 

 
202

 
3,733

 
 
 
 
 
 
 
 
 
$
117,623

 
$
341

 
$
1,720

 
$
116,244

 
 
December 31, 2016
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. government-sponsored agencies
$
17,789

 
$
61

 
$
405

 
$
17,445

Obligations of state and political subdivisions
3,238

 

 
142

 
3,096

Mortgage-backed securities
52,785

 
150

 
889

 
52,046

Asset-backed securities (a)
8,392

 

 
125

 
8,267

Corporate debt
14,504

 
50

 
517

 
14,037

 
 
 
 
 
 
 
 
Total debt securities
96,708

 
261

 
2,078

 
94,891

Other equity investments
3,886

 

 
194

 
3,692

 
 
 
 
 
 
 
 
 
$
100,594

 
$
261

 
$
2,272

 
$
98,583

 
(a) Collateralized by student loans.
 

9


There were no cash proceeds realized from sales and calls of securities available-for-sale for the three and six months ended June 30, 2017. Cash proceeds realized from sales and calls of securities available-for-sale for the three and six months ended June 30, 2016 were $9,000,000 and $11,050,000, respectively. There were no gross gains and no gross losses realized on sales or calls during the three and six months ended June 30, 2017. There were gross gains totaling $7,000 and no gross losses realized on sales or calls during the three and six months ended June 30, 2016.

The following is a summary of the amortized cost, gross unrealized gains and losses and fair value of the held to maturity securities:

 
June 30, 2017
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. Treasury
$
999

 
$

 
$
3

 
$
996

U.S. government-sponsored agencies
22,829

 
24

 
560

 
22,293

Obligations of state and political subdivisions
5,473

 
44

 
17

 
5,500

Mortgage-backed securities
22,790

 
127

 
133

 
22,784

 
 
 
 
 
 
 
 
 
$
52,091

 
$
195

 
$
713

 
$
51,573

 
 
December 31, 2016
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. Treasury
$
999

 
$

 
$
4

 
$
995

U.S. government-sponsored agencies
19,162

 
28

 
865

 
18,325

Obligations of state and political subdivisions
7,102

 
75

 
30

 
7,147

Mortgage-backed securities
25,067

 
163

 
167

 
25,063

 
 
 
 
 
 
 
 
 
$
52,330

 
$
266

 
$
1,066

 
$
51,530

 
Cash proceeds realized from calls of securities held to maturity for the three and six months ended June 30, 2017 were $380,000 and $720,000, respectively. Cash proceeds realized from calls of securities held to maturity for the three and six months ended June 30, 2016 were $10,230,000 and $16,570,000, respectively. There were no gross gains and no gross losses realized on calls during the three and six months ended June 30, 2017. There were gross gains totaling $25,000 and no gross losses realized on calls during the three months ended June 30, 2016. There were gross gains totaling $49,000 and no gross losses realized on calls during the six months ended June 30, 2016.
 
Mortgage-backed securities are a type of asset-backed security secured by a mortgage or collection of mortgages, purchased by government agencies such as the Government National Mortgage Association and government sponsored agencies such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, which then issue securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool.
 

10



The following table presents the amortized cost and fair value of the debt securities portfolio by contractual maturity. As issuers may have the right to call or prepay obligations with or without call or prepayment premiums, the actual maturities may differ from contractual maturities. Securities not due at a single maturity date, such as mortgage-backed securities and asset-backed securities, are shown separately.
 
 
June 30, 2017
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
 
 
 
 
Available-for-sale
 

 
 

Within one year
$
1,000

 
$
998

After one year, but within five years
9,033

 
9,026

After five years, but within ten years
22,840

 
22,484

After ten years
5,549

 
5,391

Mortgage-backed securities
67,742

 
67,088

Asset-backed securities
7,524

 
7,524

 
 
 
 
Total
$
113,688

 
$
112,511

 
 
 
 
Held to maturity
 

 
 

Within one year
$
2,271

 
$
2,281

After one year, but within five years
8,790

 
8,814

After five years, but within ten years
17,738

 
17,209

After ten years
502

 
485

Mortgage-backed securities
22,790

 
22,784

 
 
 
 
Total
$
52,091

 
$
51,573

 
The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at June 30, 2017 and December 31, 2016, and if the unrealized loss position was continuous for the twelve months prior to June 30, 2017 and December 31, 2016.
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government- sponsored agencies
$
13,025

 
$
(210
)
 
$
3,192

 
$
(92
)
 
$
16,217

 
$
(302
)
Obligations of state and political subdivisions
1,784

 
(49
)
 

 

 
1,784

 
(49
)
Mortgage-backed securities
46,810

 
(647
)
 
6,771

 
(137
)
 
53,581

 
(784
)
Asset-backed securities

 

 
2,984

 
(36
)
 
2,984

 
(36
)
Corporate debt
7,185

 
(286
)
 
1,939

 
(61
)
 
9,124

 
(347
)
Other equity investments

 

 
3,673

 
(202
)
 
3,673

 
(202
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
68,804

 
$
(1,192
)
 
$
18,559

 
$
(528
)
 
$
87,363

 
$
(1,720
)


11


December 31, 2016
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government- sponsored agencies
$
10,548

 
$
(260
)
 
$
3,402

 
$
(145
)
 
$
13,950

 
$
(405
)
Obligations of state and political subdivisions
3,095

 
(142
)
 

 

 
3,095

 
(142
)
Mortgage-backed securities
35,009

 
(779
)
 
3,360

 
(110
)
 
38,369

 
(889
)
Asset-backed securities

 

 
8,267

 
(125
)
 
8,267

 
(125
)
Corporate debt
8,031

 
(473
)
 
956

 
(44
)
 
8,987

 
(517
)
Other equity investments

 

 
3,632

 
(194
)
 
3,632

 
(194
)
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
$
56,683

 
$
(1,654
)
 
$
19,617

 
$
(618
)
 
$
76,300

 
$
(2,272
)
 
Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
996

 
$
(3
)
 
$

 
$

 
$
996

 
$
(3
)
U.S. government- sponsored agencies
16,458

 
(529
)
 
1,865

 
(31
)
 
18,323

 
(560
)
Obligations of state and political subdivisions
484

 
(17
)
 

 

 
484

 
(17
)
Mortgage-backed securities
13,401

 
(133
)
 

 

 
13,401

 
(133
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
31,339

 
$
(682
)
 
$
1,865

 
$
(31
)
 
$
33,204

 
$
(713
)
 
December 31, 2016
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
995

 
$
(4
)
 
$

 
$

 
$
995

 
$
(4
)
U.S. government- sponsored agencies
17,022

 
(865
)
 

 

 
17,022

 
(865
)
Obligations of state and political subdivisions
476

 
(30
)
 

 

 
476

 
(30
)
Mortgage-backed securities
12,901

 
(167
)
 

 

 
12,901

 
(167
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
31,394

 
$
(1,066
)
 
$

 
$

 
$
31,394

 
$
(1,066
)
 

12


Other-Than-Temporary-Impairment
 
At June 30, 2017, there were available-for-sale investments comprising two U.S. government-sponsored agency securities, ten mortgage-backed securities, one asset-backed security, two corporate debt securities, and one other equity investment security in a continuous loss position for twelve months or longer. At June 30, 2017, there were held to maturity investments comprising two U.S. government-sponsored agency securities in a continuous loss position for twelve months or longer. Management has assessed the securities that were in an unrealized loss position at June 30, 2017 and December 31, 2016 and has determined that any decline in fair value below amortized cost primarily relates to changes in interest rates and market spreads and was temporary.

In making this determination management considered the following factors: the period of time the securities were in an unrealized loss position; the percentage decline in comparison to the securities’ amortized cost; any adverse conditions specifically related to the security, an industry or a geographic area; the rating or changes to the rating by a credit rating agency; the financial condition of the issuer and guarantor and any recoveries or additional declines in fair value subsequent to the balance sheet date.
 
The Corporation does not intend to sell these securities in an unrealized loss position and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity.
 
Note 3. Loans and Allowance for Loan Losses
 
At June 30, 2017 and December 31, 2016, respectively, the loan portfolio consisted of the following:

 
June 30,
2017
 
December 31,
2016
 
(In thousands)
Commercial:
 

 
 

Secured by real estate
$
32,573

 
$
34,213

Other
50,296

 
47,852

Commercial real estate
470,349

 
382,551

Commercial construction
11,695

 
14,943

Residential real estate
85,666

 
84,321

Consumer:
 

 
 

Secured by real estate
30,826

 
30,176

Other
478

 
244

Government Guaranteed Loans - guaranteed portion
9,532

 
9,732

Other
641

 
51

 
 
 
 
Total gross loans
692,056

 
604,083

 
 
 
 
Less: Deferred loan costs, net
344

 
226

          Allowance for loan losses
8,550

 
7,905

 
8,894

 
8,131

 
 
 
 
Loans, net
$
683,162

 
$
595,952

 
The Corporation has purchased the guaranteed portion of several Government Guaranteed loans. Due to the guarantee of the principal amount of these loans, no allowance for loan losses is established for these loans.
 


13



Activity in the allowance for loan losses is summarized as follows:
 
 
For the three months ended June 30, 2017
 
Balance,
beginning
of period
 
Provision
charged
to operations
 
Loans
charged off
 
Recoveries
of loans
charged off
 
Balance,
end
of period
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Commercial
$
2,560

 
$
84

 
$
(1
)
 
$
19

 
$
2,662

Commercial real estate
5,149

 
327

 

 
26

 
5,502

Commercial construction
384

 
(131
)
 

 

 
253

Residential real estate
65

 
(7
)
 

 

 
58

Consumer
73

 
(10
)
 

 

 
63

Other loans

 
5

 
(1
)
 
1

 
5

Unallocated
15

 
(8
)
 

 

 
7

 
 
 
 
 
 
 
 
 
 
Total
$
8,246

 
$
260

 
$
(2
)
 
$
46

 
$
8,550

 
 
For the six months ended June 30, 2017
 
Balance,
beginning
of period
 
Provision
charged
to operations
 
Loans
charged off
 
Recoveries
of loans
charged off
 
Balance,
end
of period
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Commercial
$
2,663

 
$
(34
)
 
$
(2
)
 
$
35

 
$
2,662

Commercial real estate
4,734

 
717

 

 
51

 
5,502

Commercial construction
355

 
(102
)
 

 

 
253

Residential real estate
66

 
(8
)
 

 

 
58

Consumer
75

 
(13
)
 

 
1

 
63

Other loans

 
5

 
(1
)
 
1

 
5

Unallocated
12

 
(5
)
 

 

 
7

 
 
 
 
 
 
 
 
 
 
Total
$
7,905

 
$
560

 
$
(3
)
 
$
88

 
$
8,550


 
For the three months ended June 30, 2016
 
Balance,
beginning
of period
 
Provision
charged
to operations
 
Loans
charged off
 
Recoveries
of loans
charged off
 
Balance,
end
of period
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Commercial
$
3,720

 
$
(386
)
 
$
(1
)
 
$
340

 
$
3,673

Commercial real estate
4,413

 
(156
)
 
(64
)
 
31

 
4,224

Commercial construction
112

 
72

 

 

 
184

Residential real estate
106

 

 

 

 
106

Consumer
119

 
19

 
(7
)
 
1

 
132

Other loans
1

 
1

 
(2
)
 

 

Unallocated
69

 

 

 

 
69

 
 
 
 
 
 
 
 
 
 
Total
$
8,540

 
$
(450
)
 
$
(74
)
 
$
372

 
$
8,388



14


 
For the six months ended June 30, 2016
 
Balance,
beginning
of period
 
Provision
charged
to operations
 
Loans
charged off
 
Recoveries
of loans
charged off
 
Balance,
end
of period
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Commercial
$
3,698

 
$
(402
)
 
$
(3
)
 
$
380

 
$
3,673

Commercial real estate
4,660

 
(431
)
 
(64
)
 
59

 
4,224

Commercial construction
114

 
70

 

 

 
184

Residential real estate
109

 
(3
)
 

 

 
106

Consumer
118

 
19

 
(7
)
 
2

 
132

Other loans
3

 
(1
)
 
(2
)
 

 

Unallocated
121

 
(52
)
 

 

 
69

Total
$
8,823

 
$
(800
)
 
$
(76
)
 
$
441

 
$
8,388




The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2017 and December 31, 2016.

 
June 30, 2017
 
Commercial
 
Commercial
Real Estate
 
Commercial
Construction
 
Residential
Real Estate
 
Consumer
 
Government
Guaranteed
 
Other
Loans
 
Unallocated
 
Total
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending allowance balance attributable to loans
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
35

 
$
588

 
$

 
$

 
$