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EX-31.2 - EXHIBIT 31.2 - STEWARDSHIP FINANCIAL CORPssfn_2017930xex31-2.htm
EX-32.1 - EXHIBIT 32.1 - STEWARDSHIP FINANCIAL CORPssfn_2017930xex32-1.htm
EX-31.1 - EXHIBIT 31.1 - STEWARDSHIP FINANCIAL CORPssfn_2017930xex31-1.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 September 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 November 9, 2017 was 8,645,335.




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

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

 
 

Cash and due from banks
$
16,807

 
$
11,508

Other interest-earning assets
406

 
172

Cash and cash equivalents
17,213

 
11,680

 
 
 
 
Securities available-for-sale
115,733

 
98,583

Securities held to maturity; estimated fair value of $52,808 (at September 30, 2017) and $51,530 (at December 31, 2016)
53,323

 
52,330

Federal Home Loan Bank of New York stock, at cost
3,919

 
3,515

Loans held for sale
688

 
773

Loans, net of allowance for loan losses of $8,614 (at September 30, 2017) and $7,905 (at December 31, 2016)
682,917

 
595,952

Premises and equipment, net
6,705

 
6,566

Accrued interest receivable
2,432

 
2,133

Other real estate owned, net

 
401

Bank owned life insurance
20,943

 
16,558

Other assets
6,821

 
7,044

Total assets
$
910,694

 
$
795,535

 
 
 
 
Liabilities and Shareholders' equity
 

 
 

 
 
 
 
Liabilities
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
171,609

 
$
169,306

Interest-bearing
569,352

 
489,624

Total deposits
740,961

 
658,930

 
 
 
 
Federal Home Loan Bank of New York advances
68,760

 
59,200

Subordinated Debentures and Subordinated Notes
23,301

 
23,252

Accrued interest payable
685

 
794

Accrued expenses and other liabilities
2,879

 
1,972

Total liabilities
836,586

 
744,148

 
 
 
 
Shareholders' equity
 

 
 

 
 

 
 

Common stock, no par value: 20,000,000 and 10,000,000 shares authorized at September 30, 2017 and December 31, 2016, respectively;
8,645,316 and 6,121,329 shares issued and outstanding
at September 30, 2017 and December 31, 2016, respectively
60,670

 
41,626

Retained earnings
14,250

 
11,082

Accumulated other comprehensive loss, net
(812
)
 
(1,321
)
Total Shareholders' equity
74,108

 
51,387

Total liabilities and Shareholders' equity
$
910,694

 
$
795,535


See accompanying notes to unaudited consolidated financial statements.      


1


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

 
 

 
 
 
 
Loans
$
7,359

 
$
5,833

 
$
20,953

 
$
17,601

Securities held to maturity:
 

 
 

 


 


Taxable
245

 
272

 
732

 
840

Nontaxable
45

 
77

 
157

 
280

Securities available-for-sale:
 

 
 

 


 


Taxable
617

 
408

 
1,673

 
1,194

Nontaxable
14

 
9

 
43

 
21

FHLB dividends
58

 
30

 
136

 
93

Other interest-earning assets
62

 
28

 
73

 
56

Total interest income
8,400

 
6,657

 
23,767

 
20,085

Interest expense:
 

 
 

 
 
 
 
Deposits
869

 
586

 
2,221

 
1,704

FHLB-NY Borrowings
333

 
164

 
895

 
568

Subordinated Debentures and Subordinated Notes
375

 
363

 
1,114

 
1,138

Total interest expense
1,577

 
1,113

 
4,230

 
3,410

Net interest income before provision for loan losses
6,823

 
5,544

 
19,537

 
16,675

Provision for loan losses
20

 
(250
)
 
580

 
(1,050
)
Net interest income after provision for loan losses
6,803

 
5,794

 
18,957

 
17,725

Noninterest income:
 

 
 

 
 
 
 
Fees and service charges
524

 
536

 
1,578

 
1,595

Bank owned life insurance
141

 
120

 
385

 
328

Gain on calls and sales of securities, net
1

 
6

 
1

 
62

Gain on sales of mortgage loans
68

 
33

 
123

 
70

Gain on sale of other real estate owned

 

 
13

 
6

Miscellaneous
111

 
128

 
357

 
413

Total noninterest income
845

 
823

 
2,457

 
2,474

Noninterest expenses:
 

 
 

 
 
 
 
Salaries and employee benefits
2,843

 
2,788

 
8,567

 
8,245

Occupancy, net
414

 
400

 
1,216

 
1,202

Equipment
173

 
155

 
497

 
453

Data processing
444

 
485

 
1,369

 
1,434

Advertising
182

 
165

 
529

 
473

FDIC insurance premium
50

 
100

 
236

 
296

Charitable contributions
130

 
80

 
375

 
240

Stationery and supplies
54

 
42

 
142

 
122

Legal
40

 
58

 
124

 
148

Bank-card related services
137

 
150

 
421

 
431

Other real estate owned, net

 
27

 
24

 
129

Miscellaneous
569

 
549

 
1,733

 
1,727

Total noninterest expenses
5,036

 
4,999

 
15,233

 
14,900

Income before income tax expense
2,612

 
1,618

 
6,181

 
5,299

Income tax expense
972

 
583

 
2,282

 
1,911

Net income
1,640

 
1,035

 
$
3,899

 
$
3,388

Basic and diluted earnings per common share
$
0.19

 
$
0.17

 
$
0.51

 
$
0.55

Weighted average number of basic and diluted common shares outstanding
8,643,737

 
6,115,987

 
7,656,942

 
6,106,723


See accompanying notes to unaudited consolidated financial statements. 

2


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Net income
$
1,640

 
$
1,035

 
$
3,899

 
$
3,388

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized holding gains on securities available-for-sale
138

 
(86
)
 
530

 
830

Reclassification adjustment for gains in net income
(1
)
 
(3
)
 
(1
)
 
(38
)
Accretion of loss on securities reclassified to held to maturity
10

 
39

 
23

 
109

Change in fair value of interest rate swap
(6
)
 

 
(43
)
 
37

 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
141

 
(50
)
 
509

 
938

 
 
 
 
 
 
 
 
Total comprehensive income
$
1,781

 
$
985

 
$
4,408

 
$
4,326

 
See accompanying notes to unaudited consolidated financial statements.


3


Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
 
Nine Months Ended September 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

 

 
(702
)
 

 
(702
)
Payment of discount on dividend reinvestment plan

 
(4
)
 

 

 
(4
)
Common stock issued under dividend reinvestment plan
7,592

 
67

 

 

 
67

Common stock issued under stock plans
2,976

 
27

 

 

 
27

Issuance of restricted stock
20,876

 
185

 
(185
)
 

 

Amortization of restricted stock, net
(16,547
)
 
(139
)
 
156

 

 
17

Tax benefit from restricted stock vesting

 
48

 

 

 
48

Net income

 

 
3,899

 

 
3,899

Other comprehensive income

 

 

 
509

 
509

Balance -- September 30, 2017
8,645,316

 
$
60,670

 
$
14,250

 
$
(812
)
 
$
74,108


 
Nine Months Ended September 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

 

 
(488
)
 

 
(488
)
Payment of discount on dividend reinvestment plan

 
(3
)
 

 

 
(3
)
Common stock issued under dividend reinvestment plan
10,089

 
59

 

 

 
59

Common stock issued under stock plans
3,590

 
21

 

 

 
21

Issuance of restricted stock
34,332

 
198

 
(198
)
 

 

Amortization of restricted stock, net
(15,291
)
 
(86
)
 
161

 

 
75

Tax benefit from restricted stock vesting

 
5

 

 

 
5

Net income

 

 
3,388

 

 
3,388

Other comprehensive income

 

 

 
938

 
938

Balance -- September 30, 2016
6,118,248

 
$
41,604

 
$
9,871

 
$
93

 
$
51,568


See accompanying notes to unaudited consolidated financial statements.

4


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

 
 

Net income
$
3,899

 
$
3,388

Adjustments to reconcile net income to
 

 
 

net cash provided by operating activities:
 

 
 

Depreciation and amortization of premises and equipment
295

 
282

Amortization of premiums and accretion of discounts, net
403

 
470

Amortization of restricted stock
17

 
75

Amortization of subordinated debenture issuance costs
49

 
49

Accretion of deferred loan fees
110

 
75

Provision for loan losses
580

 
(1,050
)
Originations of mortgage loans held for sale
(8,271
)
 
(5,115
)
Proceeds from sale of mortgage loans
8,479

 
6,407

Gain on sales of mortgage loans
(123
)
 
(70
)
Gain on calls and sales of securities
(1
)
 
(62
)
Gain on sale of other real estate owned
(13
)
 
(6
)
Deferred income tax expense (benefit)
(295
)
 
208

Excess tax benefit from restricted stock vesting
48

 

Increase in accrued interest receivable
(299
)
 
(31
)
Decrease in accrued interest payable
(109
)
 
(318
)
Earnings on bank owned life insurance
(385
)
 
(328
)
(Increase) decrease in other assets
176

 
(1
)
Increase in other liabilities
864

 
19

Net cash provided by operating activities
5,424

 
3,992

Cash flows from investing activities:
 

 
 

Purchase of securities available-for-sale
(27,667
)
 
(39,683
)
Proceeds from maturities and principal repayments on securities available-for-sale
10,565

 
10,617

Proceeds from sales and calls on securities available-for-sale
500

 
19,852

Purchase of securities held to maturity
(7,175
)
 
(32,403
)
Proceeds from maturities and principal repayments on securities held to maturity
5,006

 
7,321

Proceeds from calls on securities held to maturity
1,120

 
31,720

Purchase of FHLB-NY stock
(10,639
)
 

Sale of FHLB-NY stock
10,235

 
183

Net increase in loans
(87,655
)
 
(25,467
)
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
(434
)
 
(126
)
Net cash used in investing activities
(109,730
)
 
(29,802
)
Cash flows from financing activities:
 

 
 

Net increase in noninterest-bearing deposits
2,303

 
24,244

Net increase in interest-bearing deposits
79,728

 
17,087

Increase in long term borrowings
25,000

 
5,000

Repayment of long term borrowings
(10,000
)
 
(10,000
)
Net decrease in short term borrowings
(5,440
)
 

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

 

Cash dividends paid on common stock
(702
)
 
(488
)
Payment of discount on dividend reinvestment plan
(4
)
 
(3
)
Issuance of common stock for cash
94

 
80

Excess tax benefit from restricted stock vesting

 
5

Net cash provided by financing activities
109,839

 
35,925

Net increase in cash and cash equivalents
5,533

 
10,115

Cash and cash equivalents - beginning
11,680

 
10,910

Cash and cash equivalents - ending
$
17,213

 
$
21,025



5


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows, continued
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2017
 
2016
 
(In thousands)
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
4,339

 
$
3,728

Cash paid during the period for income taxes
$
1,962

 
$
1,486

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
September 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 three and nine months ended September 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 GAAP. The Corporation will adopt the guidance in the first quarter of 2018 using the modified retrospective method with a cumulative-effect adjustment to opening retained earnings. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the new revenue recognition standard is not expected to have a material impact on the Corporation's consolidated financial statements. The Corporation’s implementation efforts include the identification of revenue within the scope of the guidance, as well as the evaluation of revenue contracts. While the Corporation has not identified

7


any material changes related to the timing or amount of revenue recognition, the Corporation will continue to evaluate the need for additional disclosures and disaggregation of significant categories of revenue in the scope of the guidance.

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 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

8


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.

In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in ASU 2017-12 expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This ASU will be effective for interim and annual periods beginning after December 15, 2018. Early adoption of ASU 2017-12 is permitted. The Corporation is currently evaluating the potential impact that the adoption of the guidance will have on the Corporation's consolidated financial statements.

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:
 
 
September 30, 2017
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. government-sponsored agencies
$
21,270

 
$
56

 
$
279

 
$
21,047

Obligations of state and political subdivisions
3,225

 
13

 
45

 
3,193

Mortgage-backed securities
66,885

 
129

 
655

 
66,359

Asset-backed securities (a)
7,096

 
34

 
14

 
7,116

Corporate debt
14,455

 
97

 
294

 
14,258

 
 
 
 
 
 
 
 
Total debt securities
112,931

 
329

 
1,287

 
111,973

Other equity investments
3,958

 

 
198

 
3,760

 
 
 
 
 
 
 
 
 
$
116,889

 
$
329

 
$
1,485

 
$
115,733

 
 
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 cash proceeds of $500,000 realized from sales and calls of securities available-for-sale for the three and nine months ended September 30, 2017. Cash proceeds realized from sales and calls of securities available-for-sale for the three and nine months ended September 30, 2016 were $8,803,000 and $19,852,000, respectively. There were gross gains totaling $1,000 and no gross losses realized on sales or calls during the three and nine months ended September 30, 2017. There were gross gains totaling $3,000 and $10,000 realized on sales or calls during the three and nine months ended September 30, 2016, respectively. There were no gross losses realized on sales or calls during the three and nine months ended September 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:

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

 
$

 
$
4

 
$
995

U.S. government-sponsored agencies
26,328

 
21

 
576

 
25,773

Obligations of state and political subdivisions
4,444

 
35

 
14

 
4,465

Mortgage-backed securities
21,552

 
127

 
104

 
21,575

 
 
 
 
 
 
 
 
 
$
53,323

 
$
183

 
$
698

 
$
52,808

 
 
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 nine months ended September 30, 2017 were $400,000 and $1,120,000, respectively. Cash proceeds realized from calls of securities held to maturity for the three and nine months ended September 30, 2016 were $15,150,000 and $31,720,000, respectively. There were no gross gains and no gross losses realized on calls during the three and nine months ended September 30, 2017. There were gross gains totaling $3,000 and no gross losses realized on calls during the three months ended September 30, 2016. There were gross gains totaling $52,000 and no gross losses realized on calls during the nine months ended September 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.
 
 
September 30, 2017
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
 
 
 
 
Available-for-sale
 

 
 

Within one year
$
1,000

 
$
999

After one year, but within five years
9,941

 
9,925

After five years, but within ten years
22,608

 
22,310

After ten years
5,401

 
5,264

Mortgage-backed securities
66,885

 
66,359

Asset-backed securities
7,096

 
7,116

 
 
 
 
Total
$
112,931

 
$
111,973

 
 
 
 
Held to maturity
 

 
 

Within one year
$
1,845

 
$
1,851

After one year, but within five years
9,189

 
9,211

After five years, but within ten years
20,238

 
19,686

After ten years
499

 
485

Mortgage-backed securities
21,552

 
21,575

 
 
 
 
Total
$
53,323

 
$
52,808

 
The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at September 30, 2017 and December 31, 2016, and if the unrealized loss position was continuous for the twelve months prior to September 30, 2017 and December 31, 2016.
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
September 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
$
7,675

 
$
(96
)
 
$
7,918

 
$
(183
)
 
$
15,593

 
$
(279
)
Obligations of state and political subdivisions
906

 
(17
)
 
880

 
(28
)
 
1,786

 
(45
)
Mortgage-backed securities
40,235

 
(380
)
 
10,654

 
(275
)
 
50,889

 
(655
)
Asset-backed securities

 

 
3,004

 
(14
)
 
3,004

 
(14
)
Corporate debt
1,534

 
(27
)
 
7,626

 
(267
)
 
9,160

 
(294
)
Other equity investments

 

 
3,700

 
(198
)
 
3,700

 
(198
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
50,350

 
$
(520
)
 
$
33,782

 
$
(965
)
 
$
84,132

 
$
(1,485
)


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
 
 
 
 
 
 
 
 
 
 
 
September 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
$
995

 
$
(4
)
 
$

 
$

 
$
995

 
$
(4
)
U.S. government- sponsored agencies
13,231

 
(261
)
 
8,576

 
(315
)
 
21,807

 
(576
)
Obligations of state and political subdivisions

 

 
485

 
(14
)
 
485

 
(14
)
Mortgage-backed securities
11,217

 
(104
)
 

 

 
11,217

 
(104
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
25,443

 
$
(369
)
 
$
9,061

 
$
(329
)
 
$
34,504

 
$
(698
)
 
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 September 30, 2017, there were available-for-sale investments comprising six U.S. government-sponsored agency securities, two obligations of state and political subdivision securities, fifteen mortgage-backed securities, one asset-backed security, eight corporate debt securities, and one other equity investment security in a continuous loss position for twelve months or longer. At September 30, 2017, there were held to maturity investments comprising eight U.S. government-sponsored agency securities and one obligation of state and political subdivision security in a continuous loss position for twelve months or longer. Management has assessed the securities that were in an unrealized loss position at September 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 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 September 30, 2017 and December 31, 2016, respectively, the loan portfolio consisted of the following:

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

 
 

Secured by real estate
$
33,497

 
$
34,213

Other
49,845

 
47,852

Commercial real estate
470,461

 
382,551

Commercial construction
12,868

 
14,943

Residential real estate
84,111

 
84,321

Consumer:
 

 
 

Secured by real estate
31,207

 
30,176

Other
481

 
244

Government Guaranteed Loans - guaranteed portion
9,439

 
9,732

Other
44

 
51

 
 
 
 
Total gross loans
691,953

 
604,083

 
 
 
 
Less: Deferred loan costs, net
422

 
226

          Allowance for loan losses
8,614

 
7,905

 
9,036

 
8,131

 
 
 
 
Loans, net
$
682,917

 
$
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 September 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
$
2,662

 
$
145

 
$
(1
)
 
$
18

 
$
2,824

Commercial real estate
5,502

 
(80
)
 

 
21

 
5,443

Commercial construction
253

 
(27
)
 

 

 
226

Residential real estate
58

 
(1
)
 

 

 
57

Consumer
63

 
(7
)
 

 
6

 
62

Other loans
5

 
(5
)
 

 

 

Unallocated
7

 
(5
)
 

 

 
2

 
 
 
 
 
 
 
 
 
 
Total
$
8,550

 
$
20

 
$
(1
)
 
$
45

 
$
8,614

 
 
For the nine months ended September 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

 
$
111

 
$
(3
)
 
$
53

 
$
2,824

Commercial real estate
4,734

 
637

 

 
72

 
5,443

Commercial construction
355

 
(129
)
 

 

 
226

Residential real estate
66

 
(9
)
 

 

 
57

Consumer
75

 
(20
)
 

 
7

 
62

Other loans

 

 
(1
)
 
1

 

Unallocated
12

 
(10
)
 

 

 
2

 
 
 
 
 
 
 
 
 
 
Total
$
7,905

 
$
580

 
$
(4
)
 
$
133

 
$
8,614


 
For the three months ended September 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
$
3,673

 
$
(460
)
 
$
(68
)
 
$
23

 
$
3,168

Commercial real estate
4,224

 
216

 
(18
)
 
78

 
4,500

Commercial construction
184

 
67

 

 

 
251

Residential real estate
106

 
(32
)
 

 

 
74

Consumer
132

 
(32
)
 
(3
)
 

 
97

Other loans

 

 
(1
)
 
1

 

Unallocated
69

 
(9
)
 

 

 
60

 
 
 
 
 
 
 
 
 
 
Total
$
8,388

 
$
(250
)
 
$
(90
)
 
$
102

 
$
8,150



14


 
For the nine months ended September 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

 
$
(862
)
 
$
(71
)
 
$
403

 
$
3,168

Commercial real estate
4,660

 
(215
)
 
(82
)
 
137

 
4,500

Commercial construction
114

 
137

 

 

 
251

Residential real estate
109

 
(35
)
 

 

 
74

Consumer
118

 
(13
)
 
(10
)
 
2

 
97

Other loans
3

 
(1
)
 
(3
)
 
1

 

Unallocated
121

 
(61
)
 

 

 
60

Total
$
8,823

 
$
(1,050
)
 
$
(166
)
 
$
543

 
$
8,150


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 September 30, 2017 and December 31, 2016.

 
September 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
$
34

 
$
581