Attached files
file | filename |
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EX-99.4 - EX-99.4 - LAKELAND BANCORP INC | d232329dex994.htm |
EX-99.2 - EX-99.2 - LAKELAND BANCORP INC | d232329dex992.htm |
EX-99.1 - EX-99.1 - LAKELAND BANCORP INC | d232329dex991.htm |
EX-23.1 - EX-23.1 - LAKELAND BANCORP INC | d232329dex231.htm |
8-K - FORM 8-K - LAKELAND BANCORP INC | d232329d8k.htm |
Exhibit 99.3
1ST CONSTITUTION BANCORP
INDEX
Page | ||||
FINANCIAL INFORMATION |
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Financial Statements |
1 | |||
Consolidated Balance Sheets at June 30, 2021 and December 31, 2020 (unaudited) |
1 | |||
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2021 and June 30, 2020 (unaudited) |
2 | |||
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2021 and June 30, 2020 (unaudited) |
3 | |||
Consolidated Statements of Changes in Shareholders Equity for the Three and Six Months Ended June 30, 2021 and June 30, 2020 (unaudited) |
4 | |||
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and June 30, 2020 (unaudited) |
5 | |||
Notes to Consolidated Financial Statements (unaudited) |
6 |
FINANCIAL INFORMATION
Financial Statements.
1ST Constitution Bancorp
Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
June 30, 2021 | December 31, 2020 | |||||||
ASSETS |
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Cash and due from banks |
$ | 18,386 | $ | 3,661 | ||||
Interest-earning deposits |
197,291 | 18,334 | ||||||
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Total cash and cash equivalents |
215,677 | 21,995 | ||||||
Investment securities |
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Available for sale, at fair value |
130,886 | 125,197 | ||||||
Held to maturity (fair value of $100,764 and $95,640 at June 30, 2021 and December 31, 2020, respectively) |
97,993 | 92,552 | ||||||
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Total investment securities |
228,879 | 217,749 | ||||||
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Loans held for sale |
6,017 | 29,782 | ||||||
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Loans |
1,235,442 | 1,433,706 | ||||||
Less: allowance for loan losses |
(16,925 | ) | (15,641 | ) | ||||
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Net loans |
1,218,517 | 1,418,065 | ||||||
Premises and equipment, net |
14,043 | 14,345 | ||||||
Right-of-use assets |
15,707 | 16,548 | ||||||
Accrued interest receivable |
4,306 | 5,273 | ||||||
Bank-owned life insurance |
37,658 | 37,316 | ||||||
Other real estate owned |
48 | 92 | ||||||
Goodwill and intangible assets |
35,844 | 36,003 | ||||||
Other assets |
12,549 | 9,741 | ||||||
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Total assets |
$ | 1,789,245 | $ | 1,806,909 | ||||
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LIABILITIES AND SHAREHOLDERS EQUITY |
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LIABILITIES |
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Deposits |
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Non-interest bearing |
$ | 489,302 | $ | 425,210 | ||||
Interest bearing |
1,056,759 | 1,137,629 | ||||||
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Total deposits |
1,546,061 | 1,562,839 | ||||||
Short-term borrowings |
| 9,825 | ||||||
Redeemable subordinated debentures |
18,557 | 18,557 | ||||||
Accrued interest payable |
530 | 851 | ||||||
Lease liability |
16,612 | 17,387 | ||||||
Accrued expenses and other liabilities |
11,828 | 9,793 | ||||||
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Total liabilities |
1,593,588 | 1,619,252 | ||||||
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SHAREHOLDERS EQUITY |
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Preferred stock, no par value; 5,000,000 shares authorized; none issued |
| | ||||||
Common stock, no par value; 30,000,000 shares authorized; 10,340,551 and 10,293,535 shares issued and 10,284,848 and 10,245,826 shares outstanding as of June 30, 2021 and December 31, 2020, respectively |
111,775 | 111,135 | ||||||
Retained earnings |
83,333 | 75,201 | ||||||
Treasury stock, 55,703 and 47,709 shares at June 30, 2021 and December 31, 2020, respectively |
(739 | ) | (611 | ) | ||||
Accumulated other comprehensive income |
1,288 | 1,932 | ||||||
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Total shareholders equity |
195,657 | 187,657 | ||||||
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Total liabilities and shareholders equity |
$ | 1,789,245 | $ | 1,806,909 | ||||
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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 June 30, | Six Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
INTEREST INCOME |
||||||||||||||||
Loans, including fees |
$ | 14,845 | $ | 15,374 | $ | 30,770 | $ | 30,179 | ||||||||
Securities: |
||||||||||||||||
Taxable |
504 | 852 | 1,024 | 1,908 | ||||||||||||
Tax-exempt |
458 | 496 | 936 | 934 | ||||||||||||
Federal funds sold and short-term investments |
58 | 4 | 95 | 93 | ||||||||||||
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Total interest income |
15,865 | 16,726 | 32,825 | 33,114 | ||||||||||||
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INTEREST EXPENSE |
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Deposits |
1,342 | 2,724 | 2,940 | 5,962 | ||||||||||||
Borrowings |
| 48 | | 110 | ||||||||||||
Redeemable subordinated debentures |
83 | 106 | 167 | 258 | ||||||||||||
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Total interest expense |
1,425 | 2,878 | 3,107 | 6,330 | ||||||||||||
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Net interest income |
14,440 | 13,848 | 29,718 | 26,784 | ||||||||||||
PROVISION FOR LOAN LOSSES |
600 | 2,125 | 2,000 | 3,020 | ||||||||||||
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Net interest income after provision for loan losses |
13,840 | 11,723 | 27,718 | 23,764 | ||||||||||||
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NON-INTEREST INCOME |
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Service charges on deposit accounts |
107 | 132 | 224 | 345 | ||||||||||||
Gain on sales of loans |
2,766 | 2,121 | 5,861 | 3,591 | ||||||||||||
Income on bank-owned life insurance |
168 | 264 | 342 | 444 | ||||||||||||
Gain on sales and calls of securities |
2 | 10 | 4 | 18 | ||||||||||||
Other income |
692 | 573 | 1,382 | 1,158 | ||||||||||||
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Total non-interest income |
3,735 | 3,100 | 7,813 | 5,556 | ||||||||||||
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NON-INTEREST EXPENSES |
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Salaries and employee benefits |
6,459 | 6,001 | 13,411 | 12,170 | ||||||||||||
Occupancy expense |
1,161 | 1,205 | 2,472 | 2,375 | ||||||||||||
Data processing expenses |
505 | 470 | 996 | 916 | ||||||||||||
FDIC insurance expense |
155 | 225 | 425 | 259 | ||||||||||||
Other real estate owned expenses |
3 | 14 | 55 | 31 | ||||||||||||
Merger-related expenses |
447 | | 447 | 64 | ||||||||||||
Other operating expenses |
1,801 | 1,922 | 3,826 | 3,815 | ||||||||||||
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Total non-interest expenses |
10,531 | 9,837 | 21,632 | 19,630 | ||||||||||||
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Income before income taxes |
7,044 | 4,986 | 13,899 | 9,690 | ||||||||||||
INCOME TAXES |
1,892 | 1,296 | 3,818 | 2,579 | ||||||||||||
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Net income |
$ | 5,152 | $ | 3,690 | $ | 10,081 | $ | 7,111 | ||||||||
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EARNINGS PER COMMON SHARE |
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Basic |
$ | 0.50 | $ | 0.36 | $ | 0.98 | $ | 0.70 | ||||||||
Diluted |
$ | 0.50 | $ | 0.36 | $ | 0.98 | $ | 0.69 | ||||||||
WEIGHTED AVERAGE SHARES OUTSTANDING |
||||||||||||||||
Basic |
10,272,906 | 10,209,295 | 10,267,343 | 10,205,065 | ||||||||||||
Diluted |
10,325,335 | 10,248,156 | 10,315,780 | 10,256,481 |
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 June 30, |
Six Months Ended June 30, |
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2021 | 2020 | 2021 | 2020 | |||||||||||||
Net income |
$ | 5,152 | $ | 3,690 | $ | 10,081 | $ | 7,111 | ||||||||
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Other comprehensive (loss) income: |
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Unrealized holding gains (losses) on securities available for sale |
52 | 1,716 | (626 | ) | 1,529 | |||||||||||
Tax effect |
(15 | ) | (418 | ) | 148 | (372 | ) | |||||||||
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Net of tax amount |
37 | 1,298 | (478 | ) | 1,157 | |||||||||||
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Reclassification adjustment for gains on securities available for sale(1) |
(2 | ) | (10 | ) | (2 | ) | (11 | ) | ||||||||
Tax effect (2) |
| 3 | | 3 | ||||||||||||
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Net of tax amount |
(2 | ) | (7 | ) | (2 | ) | (8 | ) | ||||||||
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Reclassification adjustment for unrealized impairment loss on held to maturity security(3) |
7 | 5 | 13 | 8 | ||||||||||||
Tax effect |
(2 | ) | (2 | ) | (3 | ) | (3 | ) | ||||||||
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Net of tax amount |
5 | 3 | 10 | 5 | ||||||||||||
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Pension liability |
(31 | ) | 85 | (63 | ) | 141 | ||||||||||
Tax effect |
8 | (25 | ) | 16 | (42 | ) | ||||||||||
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Net of tax amount |
(23 | ) | 60 | (47 | ) | 99 | ||||||||||
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Reclassification adjustment for actuarial gains for unfunded pension liability(4) |
(89 | ) | (56 | ) | (178 | ) | (100 | ) | ||||||||
Tax effect (2) |
26 | 17 | 51 | 30 | ||||||||||||
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Net of tax amount |
(63 | ) | (39 | ) | (127 | ) | (70 | ) | ||||||||
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Total other comprehensive (loss) income |
(46 | ) | 1,315 | (644 | ) | 1,183 | ||||||||||
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Comprehensive income |
$ | 5,106 | $ | 5,005 | $ | 9,437 | $ | 8,294 | ||||||||
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(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 Six Months Ended June 30, 2021 and 2020
(Dollars in thousands)
(Unaudited)
Common Stock |
Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Income (Loss) |
Total Shareholders Equity |
||||||||||||||||
Balance, April 1, 2020 |
$ | 110,254 | $ | 63,295 | $ | (503 | ) | $ | 59 | $ | 173,105 | |||||||||
Net income |
| 3,690 | | | 3,690 | |||||||||||||||
Issuance of restricted shares (17,750 shares) |
| | | | | |||||||||||||||
Share-based compensation |
292 | | | | 292 | |||||||||||||||
Cash dividends ($0.09 per share) |
| (918 | ) | | | (918 | ) | |||||||||||||
Other comprehensive income |
| | | 1,315 | 1,315 | |||||||||||||||
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Balance, June 30, 2020 |
$ | 110,546 | $ | 66,067 | $ | (503 | ) | $ | 1,374 | $ | 177,484 | |||||||||
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Balance, April 1, 2021 |
$ | 111,460 | $ | 79,208 | $ | (739 | ) | $ | 1,334 | $ | 191,263 | |||||||||
Net income |
| 5,152 | | | 5,152 | |||||||||||||||
Exercise of stock options and issuance of restricted shares (1,185 shares and 18,500 shares, respectively) |
13 | | | | 13 | |||||||||||||||
Share-based compensation |
302 | | | | 302 | |||||||||||||||
Cash dividends ($0.10 per share) |
| (1,027 | ) | | | (1,027 | ) | |||||||||||||
Other comprehensive loss |
| | | (46 | ) | (46 | ) | |||||||||||||
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Balance, June 30, 2021 |
$ | 111,775 | $ | 83,333 | $ | (739 | ) | $ | 1,288 | $ | 195,657 | |||||||||
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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 |
| 7,111 | | | 7,111 | |||||||||||||||
Issuance of restricted shares (33,400 shares) |
| | | | | |||||||||||||||
Share-based compensation |
582 | | | | 582 | |||||||||||||||
Cash dividends ($0.18 per share) |
| (1,835 | ) | | | (1,835 | ) | |||||||||||||
Purchase of treasury shares (6,028 shares) |
| | (135 | ) | | (135 | ) | |||||||||||||
Other comprehensive income |
| | | 1,183 | 1,183 | |||||||||||||||
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Balance, June 30, 2020 |
$ | 110,546 | $ | 66,067 | $ | (503 | ) | $ | 1,374 | $ | 177,484 | |||||||||
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Balance, January 1, 2021 |
$ | 111,135 | $ | 75,201 | $ | (611 | ) | $ | 1,932 | $ | 187,657 | |||||||||
Net income |
| 10,081 | | | 10,081 | |||||||||||||||
Exercise of stock options and issuance of restricted shares (7,666 shares and 39,350 shares, respectively) |
67 | | | | 67 | |||||||||||||||
Share-based compensation |
573 | | | | 573 | |||||||||||||||
Cash dividends ($0.20 per share) |
| (1,949 | ) | | | (1,949 | ) | |||||||||||||
Purchase of treasury shares (7,994 shares) |
| | (128 | ) | | (128 | ) | |||||||||||||
Other comprehensive loss |
| | | (644 | ) | (644 | ) | |||||||||||||
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Balance, June 30, 2021 |
$ | 111,775 | $ | 83,333 | $ | (739 | ) | $ | 1,288 | $ | 195,657 | |||||||||
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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)
Six Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
OPERATING ACTIVITIES: |
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Net income |
$ | 10,081 | $ | 7,111 | ||||
Adjustments to reconcile net income to net cash provided by operating activities- |
||||||||
Provision for loan losses |
2,000 | 3,020 | ||||||
Depreciation and amortization |
959 | 1,061 | ||||||
Net amortization of premiums and discounts on securities |
642 | 655 | ||||||
SBA loan discount accretion |
(172 | ) | (206 | ) | ||||
Gain on sales and calls of securities available for sale |
(2 | ) | (11 | ) | ||||
Gain on sales and calls of securities held to maturity |
(2 | ) | (7 | ) | ||||
Write-down of other real estate owned |
44 | | ||||||
Gain on sales of loans held for sale |
(5,861 | ) | (3,591 | ) | ||||
Originations of loans held for sale |
(156,649 | ) | (118,467 | ) | ||||
Proceeds from sales of loans held for sale |
186,275 | 116,856 | ||||||
Increase in cash surrender value on bankowned life insurance |
(342 | ) | (369 | ) | ||||
Gain on cash surrender value on bank-owned life insurance |
| (75 | ) | |||||
Share-based compensation expense |
573 | 582 | ||||||
(Increase) decrease in deferred tax asset |
(1,911 | ) | 384 | |||||
Noncash rent and equipment expense |
65 | 94 | ||||||
Decrease (increase) in accrued interest receivable |
967 | (795 | ) | |||||
Increase in other assets |
(1,242 | ) | (1,226 | ) | ||||
Decrease in accrued interest payable |
(321 | ) | (296 | ) | ||||
Increase in accrued expenses and other liabilities |
1,793 | 1,470 | ||||||
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Net cash provided by operating activities |
36,897 | 6,190 | ||||||
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INVESTING ACTIVITIES: |
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Purchases of securities: |
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Available for sale |
(26,350 | ) | (18,417 | ) | ||||
Held to maturity |
(30,033 | ) | (31,364 | ) | ||||
Proceeds from sales, calls, maturities and payments of securities: |
||||||||
Available for sale |
19,590 | 23,624 | ||||||
Held to maturity |
24,410 | 13,347 | ||||||
Proceeds from bank-owned life insurance benefits paid |
| 179 | ||||||
Net redemption (purchase) of restricted stock |
411 | (1,706 | ) | |||||
Net decrease (increase) in loans |
197,720 | (139,367 | ) | |||||
Capital expenditures |
(350 | ) | (107 | ) | ||||
Proceeds from sales of other real estate owned |
| 101 | ||||||
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Net cash provided by (used in) investing activities |
185,398 | (153,710 | ) | |||||
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FINANCING ACTIVITIES: |
||||||||
Exercise of stock options |
67 | | ||||||
Purchase of treasury shares |
(128 | ) | (135 | ) | ||||
Cash dividends paid to shareholders |
(1,949 | ) | (1,835 | ) | ||||
Net (decrease) increase in deposits |
(16,778 | ) | 132,030 | |||||
(Decrease) increase in short-term borrowings |
(9,825 | ) | 15,200 | |||||
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Net cash (used in) provided by financing activities |
(28,613 | ) | 145,260 | |||||
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Increase (decrease) in cash and cash equivalents |
193,682 | (2,260 | ) | |||||
Cash and cash equivalents at beginning of period |
21,995 | 14,842 | ||||||
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Cash and cash equivalents at end of period |
$ | 215,677 | $ | 12,582 | ||||
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Supplemental Disclosures of Cash Flow Information |
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Cash paid during the period for - |
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Interest |
$ | 3,428 | $ | 6,626 | ||||
Income taxes |
6,079 | 1,241 | ||||||
Noncash items |
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Right-of-use assets |
| | ||||||
Lease liability |
11 | 144 |
The accompanying notes are an integral part of these consolidated financial statements.
5
1ST Constitution Bancorp
Notes to Consolidated Financial Statements
June 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 Banks 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 REITs 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 Companys 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 Companys 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 June 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 higher levels of unemployment. As a result, many businesses located in the Banks 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 Companys 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 Banks customers are not able to fulfill their contractual obligations, the Companys 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 Companys 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 Companys operations could also be adversely impacted if key personnel or a significant number of employees are unable to work due to illness or restrictions.
6
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.
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 Administrations (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 Companys 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 June 30, 2021 and 2020, 23,300 and 54,930 options, respectively, were anti-dilutive and were not included in the computation of diluted earnings per share. For the six months ended June 30, 2021 and 2020, 40,450 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 six months ended June 30, 2021 and 2020:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in thousands, except per share data) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Net income |
$ | 5,152 | $ | 3,690 | $ | 10,081 | $ | 7,111 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic weighted average shares outstanding |
10,272,906 | 10,209,295 | 10,267,343 | 10,205,065 | ||||||||||||
Plus: common stock equivalents |
52,429 | 38,861 | 48,437 | 51,416 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted weighted average shares outstanding |
10,325,335 | 10,248,156 | 10,315,780 | 10,256,481 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.50 | $ | 0.36 | $ | 0.98 | $ | 0.70 | ||||||||
Diluted |
$ | 0.50 | $ | 0.36 | $ | 0.98 | $ | 0.69 |
7
(3) Investment Securities
A summary of amortized cost and fair value of investment securities available for sale follows:
June 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) |
$ | 2,747 | $ | 22 | $ | | $ | 2,769 | ||||||||
Residential collateralized mortgage obligations - GSE |
36,800 | 339 | (68 | ) | 37,071 | |||||||||||
Residential mortgage backed securities - GSE |
26,738 | 483 | (95 | ) | 27,126 | |||||||||||
Obligations of state and political subdivisions |
24,096 | 911 | | 25,007 | ||||||||||||
Corporate debt securities |
21,006 | 322 | (39 | ) | 21,289 | |||||||||||
Other debt securities |
17,511 | 175 | (62 | ) | 17,624 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 128,898 | $ | 2,252 | $ | (264 | ) | $ | 130,886 | |||||||
|
|
|
|
|
|
|
|
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 - GSE |
36,282 | 503 | (6 | ) | 36,779 | |||||||||||
Residential mortgage backed securities - GSE |
13,031 | 572 | (6 | ) | 13,597 | |||||||||||
Obligations of state and political subdivisions |
26,445 | 1,007 | | 27,452 | ||||||||||||
Corporate debt securities |
20,997 | 465 | (95 | ) | 21,367 | |||||||||||
Other debt securities |
22,389 | 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:
June 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 |
$ | 3,417 | $ | | $ | 3,417 | $ | 124 | $ | | $ | 3,541 | ||||||||||||
Residential mortgage backed securities - GSE |
20,047 | | 20,047 | 923 | | 20,970 | ||||||||||||||||||
Obligations of state and political subdivisions |
70,631 | | 70,631 | 1,295 | (80 | ) | 71,846 | |||||||||||||||||
Trust preferred debt securities - pooled |
641 | (459 | ) | 182 | 464 | | 646 | |||||||||||||||||
Other debt securities |
3,716 | | 3,716 | 57 | (12 | ) | 3,761 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 98,452 | $ | (459 | ) | $ | 97,993 | $ | 2,863 | $ | (92 | ) | $ | 100,764 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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 - GSE |
24,517 | | 24,517 | 1,208 | | 25,725 | ||||||||||||||||||
Obligations of state and political subdivisions |
61,249 | | 61,249 | 1,248 | (2 | ) | 62,495 | |||||||||||||||||
Trust preferred debt securities - pooled |
648 | (472 | ) | 176 | 405 | | 581 | |||||||||||||||||
Other debt securities |
1,970 | | 1,970 | 63 | | 2,033 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 93,024 | $ | (472 | ) | $ | 92,552 | $ | 3,090 | $ | (2 | ) | $ | 95,640 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2021 and December 31, 2020, $65.0 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 June 30, 2021 and December 31, 2020 and totaled $1.2 million and $1.7 million, respectively. Restricted stock consisted of $1.0 million of FHLB stock and $160,000 of Atlantic Community Bankers Bank stock at June 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 Companys investment portfolio as of June 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.
June 30, 2021 | ||||||||||||
(Dollars in thousands) | Amortized Cost |
Fair Value |
Yield | |||||||||
Available for sale |
||||||||||||
Due in one year or less |
$ | 4,317 | $ | 4,409 | 3.16 | % | ||||||
Due after one year through five years |
28,838 | 29,660 | 2.34 | % | ||||||||
Due after five years through ten years |
25,996 | 26,481 | 1.75 | % | ||||||||
Due after ten years |
69,747 | 70,336 | 1.74 | % | ||||||||
|
|
|
|
|
|
|||||||
Total | $ | 128,898 | $ | 130,886 | 1.92 | % | ||||||
|
|
|
|
|
|
Carrying Value |
Fair Value |
Yield | ||||||||||
Held to maturity |
||||||||||||
Due in one year or less |
$ | 23,898 | $ | 23,922 | 1.05 | % | ||||||
Due after one year through five years |
4,491 | 4,643 | 3.58 | % | ||||||||
Due after five years through ten years |
13,705 | 14,281 | 2.77 | % | ||||||||
Due after ten years |
55,899 | 57,918 | 2.59 | % | ||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 97,993 | $ | 100,764 | 2.29 | % | ||||||
|
|
|
|
|
|
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 June 30, 2021 and December 31, 2020 were as follows:
June 30, 2021 | ||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
(Dollars in thousands) | Number of Securities |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||||||||||
Residential collateralized mortgage obligations - GSE |
4 | $ | 10,888 | $ | (66 | ) | $ | 1,202 | $ | (2 | ) | $ | 12,090 | $ | (68 | ) | ||||||||||||
Residential mortgage backed securities - GSE |
8 | 9,935 | (89 | ) | 187 | (6 | ) | 10,122 | (95 | ) | ||||||||||||||||||
Obligations of state and political subdivisions |
4 | 7,828 | (80 | ) | | | 7,828 | (80 | ) | |||||||||||||||||||
Corporate debt securities |
3 | | | 3,456 | (39 | ) | 3,456 | (39 | ) | |||||||||||||||||||
Other debt securities |
7 | 3,066 | (12 | ) | 8,858 | (62 | ) | 11,924 | (74 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total temporarily impaired securities |
26 | $ | 31,717 | $ | (247 | ) | $ | 13,703 | $ | (109 | ) | $ | 45,420 | $ | (356 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
December 31, 2020 | ||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
(Dollars in thousands) |
Number of Securities |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||||||||||
U.S. Treasury securities and obligations of U.S. Government sponsored entities (GSE) |
1 | $ | | $ | | $ | 548 | $ | (5 | ) | $ | 548 | $ | (5 | ) | |||||||||||||
Residential collateralized mortgage obligations - GSE |
3 | 5,153 | (2 | ) | 2,060 | (4 | ) | 7,213 | (6 | ) | ||||||||||||||||||
Residential mortgage backed securities - GSE |
3 | 203 | (6 | ) | | | 203 | (6 | ) | |||||||||||||||||||
Obligations of state and political subdivisions |
1 | 1,295 | (2 | ) | | | 1,295 | (2 | ) | |||||||||||||||||||
Corporate debt securities |
3 | | | 3,399 | (95 | ) | 3,399 | (95 | ) | |||||||||||||||||||
Other debt securities |
7 | | | 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 issuers 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 issuers 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.
11
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 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 $12,000 was recognized in the first six 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 June 30, 2021, management concluded that no additional other-than-temporary impairment had occurred.
(4) Allowance for Loan Losses and Credit Quality
The Companys primary lending emphasis is the origination of commercial real estate loans, mortgage warehouse lines of credit and commercial business loans. Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy and a decline in New Jersey and New York City metropolitan area real estate market values. Any one, or a combination, of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.
The following table provides an aging of the loan portfolio by loan class at June 30, 2021:
(Dollars in thousands) | 30-59 Days |
60-89 Days |
Greater than 90 Days |
Total Past Due |
Current | Total Loans Receivable |
Recorded Investment > 90 Days Accruing |
Non-Accrual Loans |
||||||||||||||||||||||||
Commercial real estate |
$ | | $ | | $ | 3,113 | $ | 3,113 | $ | 612,519 | $ | 615,632 | $ | | $ | 3,113 | ||||||||||||||||
Mortgage warehouse lines |
| | | | 241,827 | 241,827 | | | ||||||||||||||||||||||||
Construction |
| | 7,024 | 7,024 | 124,246 | 131,270 | | 7,024 | ||||||||||||||||||||||||
Commercial business |
| | 4 | 4 | 160,052 | 160,056 | | 131 | ||||||||||||||||||||||||
Residential real estate |
658 | | 1,296 | 1,954 | 66,533 | 68,487 | | 1,638 | ||||||||||||||||||||||||
Loans to individuals |
327 | | 47 | 374 | 18,979 | 19,353 | | 148 | ||||||||||||||||||||||||
Other loans |
| | | | 104 | 104 | | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total loans |
$ | 985 | $ | | $ | 11,484 | $ | 12,469 | $ | 1,224,260 | 1,236,729 | $ | | $ | 12,054 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Deferred loan fees, net |
(1,287 | ) | ||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
Total loans |
$ | 1,235,442 | ||||||||||||||||||||||||||||||
|
|
12
The following table provides an aging of the loan portfolio by loan class at December 31, 2020:
(Dollars in thousands) | 30-59 Days |
60-89 Days |
Greater than 90 Days |
Total Past Due |
Current | Total Loans Receivable |
Recorded Investment > 90 Days Accruing |
Non-Accrual Loans |
||||||||||||||||||||||||
Commercial real estate |
$ | | $ | | $ | 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 business |
1 | | 84 | 85 | 188,643 | 188,728 | | 225 | ||||||||||||||||||||||||
Residential real estate |
1,356 | 91 | 1,534 | 2,981 | 85,280 | 88,261 | 871 | 798 | ||||||||||||||||||||||||
Loans to individuals |
12 | 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 June 30, 2021 and December 31, 2020, there were $542,000 and $2.4 million of purchased credit impaired loans, respectively, that were not classified as non-performing loans due to the accretion of income.
The Companys 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 managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the Companys 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.
13
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.
14
The following table provides a breakdown of the loan portfolio by credit quality indicator at June 30, 2021:
(Dollars in thousands) | ||||||||||||||||||||
Credit Exposure by Internally Assigned Grade | Construction | Commercial Business |
Commercial Real Estate |
Mortgage Warehouse Lines |
Residential Real Estate |
|||||||||||||||
Pass |
$ | 124,246 | $ | 147,994 | $ | 579,040 | $ | 241,827 | $ | 65,457 | ||||||||||
Special Mention |
216 | 2,686 | 20,088 | | 351 | |||||||||||||||
Substandard |
| 9,372 | 16,504 | | 2,679 | |||||||||||||||
Doubtful |
6,808 | 4 | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 131,270 | $ | 160,056 | $ | 615,632 | $ | 241,827 | $ | 68,487 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Credit Exposure by Payment Activity | Loans To Individuals |
Other Loans | ||||||
Performing |
$ | 19,205 | $ | 104 | ||||
Non-performing |
148 | | ||||||
|
|
|
|
|||||
Total |
$ | 19,353 | $ | 104 | ||||
|
|
|
|
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 Grade | Construction | Commercial 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 | |||||||||||||||
Substandard |
7,500 | 6,806 | 22,860 | | 2,700 | |||||||||||||||
Doubtful |
| 85 | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 129,245 | $ | 188,728 | $ | 618,978 | $ | 388,366 | $ | 88,261 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Credit Exposure by Payment Activity | Loans To Individuals |
Other Loans | ||||||
Performing |
$ | 20,996 | $ | 113 | ||||
Non-performing |
273 | | ||||||
|
|
|
|
|||||
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.
15
The following tables summarize the distribution of the allowance for loan losses and loans receivable by loan class and impairment method at June 30, 2021 and December 31, 2020:
June 30, 2021 | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Construction | Commercial Business |
Commercial Real Estate |
Mortgage Warehouse Lines |
Residential Real Estate |
Loans to Individuals |
Other Loans |
Unallocated | Total | |||||||||||||||||||||||||||
Allowance for loan losses: |
|
|||||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 2,972 | $ | 5 | $ | 479 | $ | | $ | | $ | | $ | | $ | | $ | 3,456 | ||||||||||||||||||
Loans acquired with deteriorated credit quality |
| | | | | | | | | |||||||||||||||||||||||||||
Collectively evaluated for impairment |
2,053 | 2,657 | 6,396 | 1,088 | 418 | 110 | 747 | 13,469 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending Balance |
$ | 5,025 | $ | 2,662 | $ | 6,875 | $ | 1,088 | $ | 418 | $ | 110 | $ | | $ | 747 | $ | 16,925 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Loans receivable: |
||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 7,024 | $ | 730 | $ | 7,810 | $ | | $ | 1,638 | $ | 148 | $ | | $ | | $ | 17,350 | ||||||||||||||||||
Loans acquired with deteriorated credit quality |
| 295 | 2,401 | | 425 | | | | 3,121 | |||||||||||||||||||||||||||
Collectively evaluated for impairment |
124,246 | 159,031 | 605,421 | 241,827 | 66,424 | 19,205 | 104 | | 1,216,258 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending Balance |
$ | 131,270 | $ | 160,056 | $ | 615,632 | $ | 241,827 | $ | 68,487 | $ | 19,353 | $ | 104 | $ | | 1,236,729 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Deferred loan fees, net |
(1,287 | ) | ||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||
$ | 1,235,442 | |||||||||||||||||||||||||||||||||||
|
|
December 31, 2020 | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Construction | Commercial Business |
Commercial Real Estate |
Mortgage Warehouse Lines |
Residential Real Estate |
Loans to Individuals |
Other Loans |
Unallocated | Total | |||||||||||||||||||||||||||
Allowance for loan losses: |
|
|||||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 2,089 | $ | 4 | $ | 19 | $ | | $ | | $ | | $ | | $ | | $ | 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 | |||||||||||||||||||||||||||||||||||
|
|
16
At June 30, 2021 and December 31, 2020, there were $36.0 million and $58.8 million, respectively, of Small Business Administration (SBA) Paycheck Protection Program (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 six months ended June 30, 2021 and 2020 was as follows:
Balance - (Dollars in thousands) | Construction | Commercial Business |
Commercial Real Estate |
Mortgage Warehouse Lines |
Residential Real Estate |
Loans to Individuals |
Other Loans |
Unallocated | Total | |||||||||||||||||||||||||||
Balance - April 1, 2021 |
$ | 5,468 | $ | 2,910 | $ | 6,679 | $ | 1,212 | $ | 478 | $ | 120 | $ | | $ | 177 | $ | 17,044 | ||||||||||||||||||
Provision charged/(credited) to operations |
(443 | ) | 456 | 210 | (124 | ) | (60 | ) | (10 | ) | 1 | 570 | 600 | |||||||||||||||||||||||
Loans charged off |
| (704 | ) | (14 | ) | | | | (1 | ) | | (719 | ) | |||||||||||||||||||||||
Recoveries of loans charged off |
| | | | | | | | | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance - June 30, 2021 |
$ | 5,025 | $ | 2,662 | $ | 6,875 | $ | 1,088 | $ | 418 | $ | 110 | $ | | $ | 747 | $ | 16,925 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance - April 1, 2020 |
$ | 1,706 | $ | 1,771 | $ | 4,800 | $ | 1,027 | $ | 430 | $ | 188 | $ | | $ | 79 | $ | 10,001 | ||||||||||||||||||
Provision charged/(credited) to operations |
(45 | ) | 9 | 1,819 | 310 | 76 | (6 | ) | | (38 | ) | 2,125 | ||||||||||||||||||||||||
Loans charged off |
| | | | | | | | | |||||||||||||||||||||||||||
Recoveries of loans charged off |
| | | | | | | | | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance - June 30, 2020 |
$ | 1,661 | $ | 1,780 | $ | 6,619 | $ | 1,337 | $ | 506 | $ | 182 | $ | | $ | 41 | $ | 12,126 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - (Dollars in thousands) | Construction | Commercial Business |
Commercial Real Estate |
Mortgage Warehouse Lines |
Residential Real Estate |
Loans to Individuals |
Other Loans |
Unallocated | Total | |||||||||||||||||||||||||||
Balance - January 1, 2021 |
$ | 3,741 | $ | 2,727 | $ | 6,422 | $ | 1,807 | $ | 619 | $ | 125 | $ | | $ | 200 | $ | 15,641 | ||||||||||||||||||
Provision charged/(credited) to operations |
1,284 | 636 | 467 | (719 | ) | (201 | ) | (15 | ) | 1 | 547 | 2,000 | ||||||||||||||||||||||||
Loans charged off |
| (704 | ) | (14 | ) | | | | (1 | ) | | (719 | ) | |||||||||||||||||||||||
Recoveries of loans charged off |
| 3 | | | | | | | 3 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance - June 30, 2021 |
$ | 5,025 | $ | 2,662 | $ | 6,875 | $ | 1,088 | $ | 418 | $ | 110 | $ | | $ | 747 | $ | 16,925 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance - January 1, 2020 |
$ | 1,389 | $ | 1,409 | $ | 4,524 | $ | 1,083 | $ | 412 | $ | 185 | $ | | $ | 269 | $ | 9,271 | ||||||||||||||||||
Provision charged/(credited) to operations |
272 | 536 | 2,095 | 254 | 94 | (3 | ) | | (228 | ) | 3,020 | |||||||||||||||||||||||||
Loans charged off |
| (165 | ) | | | | | | | (165 | ) | |||||||||||||||||||||||||
Recoveries of loans charged off |
| | | | | | | | | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance - June 30, 2020 |
$ | 1,661 | $ | 1,780 | $ | 6,619 | $ | 1,337 | $ | 506 | $ | 182 | $ | | $ | 41 | $ | 12,126 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 loans 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.
17
Impaired Loans Receivables (By Class)
Three Months Ended June 30, 2021 |
Six Months Ended June 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 | $ | | $ | 72 | $ | | $ | 36 | $ | | ||||||||||||||
Commercial Business |
499 | 1,818 | | 600 | 49 | 722 | 86 | |||||||||||||||||||||
Commercial Real Estate |
2,401 | 2,767 | | 3,269 | 105 | 6,064 | 166 | |||||||||||||||||||||
Mortgage Warehouse Lines |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Subtotal |
3,116 | 4,801 | | 3,941 | 154 | 6,822 | 252 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Residential Real Estate |
2,063 | 2,227 | | 2,065 | 8 | 2,070 | 15 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Consumer: |
||||||||||||||||||||||||||||
Loans to Individuals |
148 | 155 | | 148 | | 223 | | |||||||||||||||||||||
Other Loans |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Subtotal |
148 | 155 | | 148 | | 223 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
With no allowance: |
$ | 5,327 | $ | 7,183 | $ | | $ | 6,154 | $ | 162 | $ | 9,115 | $ | 267 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
With an allowance: |
||||||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||||||
Construction |
$ | 6,808 | $ | 6,808 | $ | 2,972 | $ | 7,038 | $ | | $ | 7,269 | $ | | ||||||||||||||
Commercial Business |
526 | 526 | 5 | 529 | 7 | 468 | 14 | |||||||||||||||||||||
Commercial Real Estate |
7,810 | 7,961 | 479 | 7,879 | 63 | 7,558 | 125 | |||||||||||||||||||||
Mortgage Warehouse Lines |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Subtotal |
15,144 | 15,295 | 3,456 | 15,446 | 70 | 15,295 | 139 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Residential Real Estate |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Consumer: |
||||||||||||||||||||||||||||
Loans to Individuals |
| | | | | | | |||||||||||||||||||||
Other Loans |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Subtotal |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
With an allowance: |
$ | 15,144 | $ | 15,295 | $ | 3,456 | $ | 15,446 | $ | 70 | $ | 15,295 | $ | 139 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total: |
||||||||||||||||||||||||||||
Construction |
7,024 | 7,024 | 2,972 | 7,110 | | 7,305 | | |||||||||||||||||||||
Commercial Business |
1,025 | 2,344 | 5 | 1,129 | 56 | 1,190 | 100 | |||||||||||||||||||||
Commercial Real Estate |
10,211 | 10,728 | 479 | 11,148 | 168 | 13,622 | 291 | |||||||||||||||||||||
Mortgage Warehouse Lines |
| | | | | | | |||||||||||||||||||||
Residential Real Estate |
2,063 | 2,227 | | 2,065 | 8 | 2,070 | 15 | |||||||||||||||||||||
Consumer |
148 | 155 | | 148 | | 223 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 20,471 | $ | 22,478 | $ | 3,456 | $ | 21,600 | $ | 232 | $ | 24,410 | $ | 406 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Impaired Loans Receivables (By Class)
December 31, 2020 | ||||||||||||
(Dollars in thousands) | Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
|||||||||
With no allowance: |
||||||||||||
Commercial: |
||||||||||||
Construction |
$ | | $ | | $ | | ||||||
Commercial Business |
1,120 | 2,500 | | |||||||||
Commercial Real Estate |
11,806 | 13,833 | | |||||||||
Mortgage Warehouse Lines |
| | | |||||||||
|
|
|
|
|
|
|||||||
Subtotal |
12,926 | 16,333 | | |||||||||
|
|
|
|
|
|
|||||||
Residential Real Estate |
1,208 | 1,465 | | |||||||||
|
|
|
|
|
|
|||||||
Consumer: |
||||||||||||
Loans to Individuals |
273 | 297 | | |||||||||
Other Loans |
| | | |||||||||
|
|
|
|
|
|
|||||||
Subtotal |
273 | 297 | | |||||||||
|
|
|
|
|
|
|||||||
With no allowance |
$ | 14,407 | $ | 18,095 | $ | | ||||||
|
|
|
|
|
|
|||||||
With an allowance: |
||||||||||||
Commercial: |
||||||||||||
Construction |
$ | 7,500 | $ | 7,500 | $ | 2,089 | ||||||
Commercial Business |
147 | 147 | 4 | |||||||||
Commercial Real Estate |
3,234 | 3,234 | 19 | |||||||||
Mortgage Warehouse Lines |
| | | |||||||||
|
|
|
|
|
|
|||||||
Subtotal |
10,881 | 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 Business |
1,267 | 2,647 | 4 | |||||||||
Commercial Real Estate |
15,040 | 17,067 | 19 | |||||||||
Mortgage Warehouse Lines |
| | | |||||||||
Residential Real Estate |
1,208 | 1,465 | | |||||||||
Consumer |
273 | 297 | | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 25,288 | $ | 28,976 | $ | 2,112 | ||||||
|
|
|
|
|
|
19
Impaired Loans Receivables (By Class)
Three Months Ended June 30, 2020 |
Six Months Ended June 30, 2020 |
|||||||||||||||
(Dollars in thousands) | Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||
With no allowance: |
||||||||||||||||
Commercial: |
||||||||||||||||
Construction |
$ | 9,304 | $ | 23 | $ | 6,203 | $ | 48 | ||||||||
Commercial Business |
1,621 | 17 | 1,358 | 35 | ||||||||||||
Commercial Real Estate |
8,884 | 91 | 8,338 | 182 | ||||||||||||
Mortgage Warehouse Lines |
| | | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal |
19,809 | 131 | 15,899 | 265 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Residential Real Estate |
1,360 | 9 | 1,282 | 18 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Consumer: |
||||||||||||||||
Loans to Individuals |
517 | | 599 | | ||||||||||||
Other Loans |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal |
517 | | 599 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
With no allowance |
$ | 21,686 | $ | 140 | $ | 17,780 | $ | 283 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
With an allowance: |
||||||||||||||||
Commercial: |
||||||||||||||||
Construction |
$ | | $ | | $ | | $ | | ||||||||
Commercial Business |
140 | | 398 | | ||||||||||||
Commercial Real Estate |
3,675 | 51 | 4,113 | 104 | ||||||||||||
Mortgage Warehouse Lines |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal |
3,815 | 51 | 4,511 | 104 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Residential Real Estate |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Consumer: |
||||||||||||||||
Loans to Individuals |
| | | | ||||||||||||
Other Loans |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
With an allowance |
$ | 3,815 | $ | 51 | $ | 4,511 | $ | 104 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total: |
||||||||||||||||
Construction |
$ | 9,304 | $ | 23 | 6,203 | 48 | ||||||||||
Commercial Business |
1,761 | 17 | 1,756 | 35 | ||||||||||||
Commercial Real Estate |
12,559 | 142 | 12,451 | 286 | ||||||||||||
Mortgage Warehouse Lines |
| | | | ||||||||||||
Residential Real Estate |
1,360 | 9 | 1,282 | 18 | ||||||||||||
Consumer |
517 | | 599 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 25,501 | $ | 191 | $ | 22,291 | $ | 387 | ||||||||
|
|
|
|
|
|
|
|
20
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 June 30, 2021 and December 31, 2020:
(Dollars in thousands) | June 30, 2021 | December 31, 2020 | ||||||
Outstanding balance |
$ | 4,284 | $ | 5,221 | ||||
Carrying amount |
$ | 3,121 | $ | 4,041 |
Changes in accretable discount for purchased credit-impaired loans for the three and six months ended June 30, 2021 and June 30, 2020 were as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Balance at beginning of period |
$ | 388 | $ | 522 | $ | 232 | $ | 657 | ||||||||
Acquisition of impaired loans |
| | | | ||||||||||||
Transfer from non-accretable discount |
229 | | ||||||||||||||
Accretion of discount |
(87 | ) | (96 | ) | (160 | ) | (231 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 301 | $ | 426 | $ | 301 | $ | 426 | ||||||||
|
|
|
|
|
|
|
|
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):
June 30, 2021 |
December 31, 2020 | |||||||||||
Number of loans |
Recorded Investment | Number of loans | Recorded Investment | |||||||||
|
|
|
|
|
|
|
||||||
3 |
$ | 471 | 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 loans repayment stream with the borrowers 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 borrowers 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 six months ended June 30, 2021 and 2020. There were no TDRs that subsequently defaulted within 12 months of restructuring during the six months ended June 30, 2021 and 2020.
21
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 SBAs PPP as originally constituted under the CARES Act. Pursuant to the Economic Aid Act, the Company may opt out of applying the troubled-debt restructuring accounting guidance for loan modifications made between January 1, 2021 and the earlier of (i) December 30, 2021 or (ii) 60 days after the President declares a termination of the COVID-19 national emergency, provided that the modified loans were not more than 30 days past due as of December 31, 2019.
As of June 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 hotel loan totaling $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.
(5) Revenue from Contracts with Customers
All of the Companys revenue from contracts with customers within the scope of ASC 606 is recognized within non-interest income. The following table presents the Companys sources of non-interest income for the three and six months ended June 30, 2021 and 2020. Items outside the scope of ASC 606 are noted as such.
Three months ended | Six months ended | |||||||||||||||
(Dollars in thousands) |
June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | ||||||||||||
Service charges on deposit accounts: |
||||||||||||||||
Overdraft fees |
$ | 32 | $ | 30 | $ | 69 | $ | 125 | ||||||||
Other |
75 | 102 | 155 | 220 | ||||||||||||
Interchange income |
187 | 152 | 350 | 301 | ||||||||||||
Other income-in scope |
119 | 112 | 217 | 215 | ||||||||||||
Income on bank-owned life insurance (1) |
168 | 264 | 342 | 444 | ||||||||||||
Gain on sales of loans (1) |
2,766 | 2,121 | 5,861 | 3,591 | ||||||||||||
Loan servicing fees (1) |
165 | 157 | 324 | 323 | ||||||||||||
Gain on sales and calls of securities (1) |
2 | 10 | 4 | 18 | ||||||||||||
Other income (1) |
221 | 152 | 491 | 319 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 3,735 | $ | 3,100 | $ | 7,813 | $ | 5,556 | |||||||||
|
|
|
|
|
|
|
|
(1) | Not within the scope of ASC 606 |
(6) Share-Based Compensation
The Companys share-based incentive plans (Stock Plans) authorize the issuance of an aggregate of 945,873 shares of the Companys 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 June 30, 2021, there were 314,416 shares of common stock available for future grants under the Stock Plans.
22
The following table summarizes Options activity during the six months ended June 30, 2021:
(Dollars in thousands, except share amounts) | Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (Years) |
Aggregate Intrinsic Value |
||||||||||||
Outstanding at January 1, 2021 |
134,122 | $ | 11.61 | 4.3 | $ | 731 | ||||||||||
Granted |
21,500 | 15.56 | 9.5 | |||||||||||||
Exercised |
(7,666 | ) | 8.94 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Outstanding at June 30, 2021 |
147,956 | $ | 12.32 | 4.7 | $ | 1,254 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Exercisable at June 30, 2021 |
109,046 | $ | 10.69 | 3.3 | $ | 1,097 | ||||||||||
|
|
|
|
|
|
|
|
The fair value of each Option and the significant weighted average assumptions used to calculate the fair value of the Options granted during the six months ended June 30, 2021 were as follows:
Grant Date January 4, 2021 |
||||
Fair value of options granted |
$ | 3.38 | ||
Risk-free rate of return |
0.64 | % | ||
Expected option life in years |
7 | |||
Expected volatility |
28.47 | % | ||
Expected dividends |
2.27 | % |
Share-based compensation expense related to Options was $43,000 and $45,000 for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, there was approximately $124,000 of unrecognized compensation cost related to unvested Options.
The following table summarizes the activity in Stock Awards for the six months ended June 30, 2021:
(Dollars in thousands, except share amounts) | Number of Shares |
Average Grant- Date Fair Value |
||||||
Outstanding at January 1, 2021 |
129,883 | $ | 12.61 | |||||
Granted |
39,350 | 18.18 | ||||||
Vested |
(36,817 | ) | 18.26 | |||||
|
|
|
|
|||||
Non-vested at June 30, 2021 |
132,416 | $ | 12.70 | |||||
|
|
|
|
Share-based compensation expense related to Stock Awards was $530,000 and $537,000 for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, there was approximately $1.7 million of unrecognized compensation cost related to unvested Stock Awards.
The following table summarizes the activity in RSUs for the six months ended June 30, 2021:
(Dollars in thousands, except share amounts) | Number of Shares |
Average Grant- Date Fair Value |
||||||
Outstanding at January 1, 2021 |
25,817 | $ | 21.24 | |||||
Granted |
14,250 | 15.56 | ||||||
Vested |
(9,083 | ) | 16.82 | |||||
|
|
|
|
|||||
Non-vested at June 30, 2021 |
30,984 | $ | 19.92 | |||||
|
|
|
|
Share-based compensation expense related to RSUs was $203,000 and $112,000 for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, there was approximately $441,000 of unrecognized compensation cost related to unvested RSUs.
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.
23
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 Companys 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 Banks 401(k) plan permits all eligible employees to make contributions to the plan up to the IRS salary deferral limit. The Banks 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 June 30, 2021 and December 31, 2020, the Companys 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 $37.7 million and $37.3 million at June 30, 2021 and December 31, 2020, respectively.
The components of net periodic expense for the Companys supplemental executive retirement plans for the three and six months ended June 30, 2021 and 2020 were as follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Service cost |
$ | 50 | $ | 45 | $ | 99 | $ | 92 | ||||||||
Interest cost |
46 | 41 | 92 | 82 | ||||||||||||
Actuarial gain recognized |
(89 | ) | (56 | ) | (178 | ) | (100 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 7 | $ | 30 | $ | 13 | $ | 74 | ||||||||
|
|
|
|
|
|
|
|
(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:
June 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 |
$ | 1,988 | $ | (496 | ) | $ | 1,492 | |||||
Unrealized impairment loss on held to maturity security |
(459 | ) | 109 | (350 | ) | |||||||
Gains on unfunded pension liability |
203 | (57 | ) | 146 | ||||||||
|
|
|
|
|
|
|||||||
Accumulated other comprehensive income |
$ | 1,732 | $ | (444 | ) | $ | 1,288 | |||||
|
|
|
|
|
|
24
December 31, 2020 | ||||||||||||
(Dollars in thousands) | Before-Tax Amount |
Income Tax Effect |
Net-of-Tax Amount |
|||||||||
Net unrealized holding gains on investment securities available for sale |
$ | 2,616 | $ | (644 | ) | $ | 1,972 | |||||
Unrealized impairment loss on held to maturity security |
(472 | ) | 112 | (360 | ) | |||||||
Gains on unfunded pension liability |
444 | (124 | ) | 320 | ||||||||
|
|
|
|
|
|
|||||||
Accumulated other comprehensive income |
$ | 2,588 | $ | (656 | ) | $ | 1,932 | |||||
|
|
|
|
|
|
Changes in the components of accumulated other comprehensive income (loss) are as follows and are presented net of tax for the three and six months ended June 30, 2021 and June 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 - April 1, 2021 |
$ | 1,457 | $ | (355 | ) | $ | 232 | $ | 1,334 | |||||||
Other comprehensive income (loss) before reclassifications |
37 | | (23 | ) | 14 | |||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
| 5 | (63 | ) | (58 | ) | ||||||||||
Reclassification adjustment for gains realized in income |
(2 | ) | | | (2 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income (loss) |
35 | 5 | (86 | ) | (46 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance - June 30, 2021 |
$ | 1,492 | $ | (350 | ) | $ | 146 | $ | 1,288 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Balance - Balance - April 1, 2020 |
$ | 161 | $ | (372 | ) | $ | 270 | $ | 59 | |||||||
Other comprehensive income before reclassifications |
1,298 | | 60 | 1,358 | ||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
| 3 | (39 | ) | (36 | ) | ||||||||||
Reclassification adjustment for gains realized in income |
(7 | ) | | | (7 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income |
1,291 | 3 | 21 | 1,315 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance - June 30, 2020 |
$ | 1,452 | $ | (369 | ) | $ | 291 | $ | 1,374 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Balance - January 1, 2021 |
$ | 1,972 | $ | (360 | ) | $ | 320 | $ | 1,932 | |||||||
Other comprehensive loss before reclassifications |
(478 | ) | | (47 | ) | (525 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
| 10 | (127 | ) | (117 | ) | ||||||||||
Reclassification adjustment for gains realized in income |
(2 | ) | | | (2 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive (loss) income |
(480 | ) | 10 | (174 | ) | (644 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance - June 30, 2021 |
$ | 1,492 | $ | (350 | ) | $ | 146 | $ | 1,288 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Balance - January 1, 2020 |
$ | 303 | $ | (374 | ) | $ | 262 | $ | 191 | |||||||
Other comprehensive income before reclassifications |
1,157 | | 99 | 1,256 | ||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
| 5 | (70 | ) | (65 | ) | ||||||||||
Reclassification adjustment for gains realized in income |
(8 | ) | | | (8 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income |
1,149 | 5 | 29 | 1,183 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance - June 30, 2020 |
$ | 1,452 | $ | (369 | ) | $ | 291 | $ | 1,374 | |||||||
|
|
|
|
|
|
|
|
25
(9) Recent Accounting Pronouncements
Accounting Standards Update (ASU) 2016-13Financial InstrumentsCredit 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 InstrumentsCredit Losses (Topic 326), Derivatives and
Hedging (Topic 815), and Leases (Topic 842). ASU 2019-10 provides that the FASBs recently developed philosophy regarding the implementation of effective dates applies to ASU 2016-13, Financial InstrumentsCredit 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 InstrumentsCredit 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
26
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.
ASU 2019-12Income 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 Companys consolidated financial statements.
ASU 2020-02Financial InstrumentsCredit Losses (Topic 326) and Leases (Topic 842)
In January 2020, the FASB issued ASU No. 2020-02, Financial InstrumentsCredit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842). This ASU adds and amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. See the discussion regarding the adoption of ASU 2016-13 above.
ASU 2020-03Codification 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 entitys adoption of ASU 2016-13. Other amendments are effective upon issuance of this ASU. See the discussion regarding the adoption of ASU 2016-13 above.
ASU 2020-04Reference Rate Reform (Topic 848)
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) which provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued, subject to meeting certain criteria. Under the new guidance, an entity can elect by accounting topic or industry subtopic to account for the modification of a contract affected by reference rate reform as a continuation of the existing contract, if certain conditions are met. In addition, the new guidance allows an entity to elect on a hedge-by-hedge basis to continue to apply hedge accounting for hedging relationships in which the critical terms change due to reference rate reform, if certain conditions are met. A one-time election to sell and/or transfer held-to-maturity debt securities that reference a rate affected by reference rate reform is also allowed. ASU No. 2020-04 became effective for all entities as of March 12, 2020 and will apply to all LIBOR reference rate modifications through December 31, 2022. For the Company, the provisions of this ASU were effective upon issuance and did not have a material impact on the Companys consolidated financial statements.
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ASU 2021-01Reference 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 Companys consolidated financial statements.
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(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 assets or liabilitys 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 Companys 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 Companys 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 Companys 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 securitys 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 loans 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 managements review and changes in market conditions.
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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:
June 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) |
$ | | $ | 2,769 | $ | | $ | 2,769 | ||||||||
Residential collateralized mortgage obligations - GSE |
| 37,071 | | 37,071 | ||||||||||||
Residential mortgage backed securities - GSE |
| 27,126 | | 27,126 | ||||||||||||
Obligations of state and political subdivisions |
3,487 | 21,520 | | 25,007 | ||||||||||||
Corporate debt securities |
6,186 | 15,103 | | 21,289 | ||||||||||||
Other debt securities |
| 17,624 | | 17,624 | ||||||||||||
Interest rate lock derivatives |
| 351 | | 351 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 9,673 | $ | 121,564 | $ | | $ | 131,237 | ||||||||
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|
|
|
|
|
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 securities |
9,287 | 12,080 | | 21,367 | ||||||||||||
Other debt securities |
| 22,563 | | 22,563 | ||||||||||||
Interest rate lock derivatives |
| 537 | | 537 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 9,287 | $ | 116,447 | $ | | $ | 125,734 | ||||||||
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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 June 30, 2021 and December 31, 2020 were as follows:
(Dollars in thousands) | Level 1 Inputs |
Level 2 Inputs |
Level 3 Inputs |
Total Fair Value |
||||||||||||
June 30, 2021 |
||||||||||||||||
Impaired loans |
$ | | $ | | $ | 11,689 | $ | 11,689 | ||||||||
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 June 30, 2021 consisted of 7 loans having an aggregate recorded investment of $15.1 million and specific loan loss allowance of $3.4 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.
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The following table presents additional qualitative information about assets measured at fair value on a nonrecurring basis, where there was evidence of impairment, and for which the Company has utilized Level 3 inputs to determine fair value:
(Dollars in thousands) | Fair Value Estimate |
Valuation Techniques |
Unobservable Input |
Range (Weighted Average) |
||||||||
June 30, 2021 |
||||||||||||
Impaired loans |
$ | 11,689 | Appraisal of collateral (1) | Appraisal adjustments (2) | |
5.3% - 29.6% (16.8%) |
| |||||
Other real estate owned |
$ | 48 | Appraisal of collateral (1) | Appraisal adjustments (2) | |
89.0% (89.0%) |
| |||||
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 Companys 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 June 30, 2021 and December 31, 2020 were as follows:
June 30, 2021 | ||||||||||||||||||||
(Dollars in thousands) | Carrying Value |
Level 1 Inputs |
Level 2 Inputs |
Level 3 Inputs |
Fair Value |
|||||||||||||||
Cash and cash equivalents |
$ | 215,677 | $ | 215,677 | $ | | $ | | $ | 215,677 | ||||||||||
Securities available for sale |
130,886 | 9,673 | 121,213 | | 130,886 | |||||||||||||||
Securities held to maturity |
97,993 | | 100,764 | | 100,764 | |||||||||||||||
Loans held for sale |
6,017 | | 6,165 | | 6,165 | |||||||||||||||
Net loans |
1,218,517 | | | 1,259,926 | 1,259,926 | |||||||||||||||
SBA servicing asset |
827 | | 1,209 | | 1,209 | |||||||||||||||
Interest rate lock derivative |
351 | | 351 | | 351 | |||||||||||||||
Accrued interest receivable |
4,306 | | 4,306 | | 4,306 | |||||||||||||||
FHLB stock |
1,087 | | 1,087 | | 1,087 | |||||||||||||||
Deposits |
(1,546,061 | ) | | (1,546,586 | ) | | (1,546,586 | ) | ||||||||||||
Short-term borrowings |
| | | | | |||||||||||||||
Redeemable subordinated debentures |
(18,557 | ) | | (14,191 | ) | | (14,191 | ) | ||||||||||||
Accrued interest payable |
(530 | ) | | (530 | ) | | (530 | ) |
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December 31, 2020 | ||||||||||||||||||||
(Dollars in thousands) | Carrying Value |
Level 1 Inputs |
Level 2 Inputs |
Level 3 Inputs |
Fair Value |
|||||||||||||||
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 loans |
1,418,065 | | | 1,463,821 | 1,463,821 | |||||||||||||||
SBA servicing asset |
795 | | 1,209 | | 1,209 | |||||||||||||||
Interest rate lock derivative |
537 | | 537 | | 537 | |||||||||||||||
Accrued interest receivable |
5,273 | | 5,273 | | 5,273 | |||||||||||||||
FHLB stock |
1,498 | | 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 June 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 June 30, 2021, the Company had 34 operating leases under which the Company is a lessee. Of the 34 leases, 22 leases were for real property, including leases for 18 of the Companys branch offices and 4 leases for general office space including the Companys 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 12 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 June 30, 2021, the Company did not have any finance leases.
For the three and six months ended June 30, 2021 and 2020, the Company recognized rent and equipment expense associated with leases as follows:
(In thousands) |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Operating lease cost: |
||||||||||||||||
Fixed rent expense and equipment expense |
$ | 622 | $ | 670 | $ | 1,289 | $ | 1,337 | ||||||||
Variable rent expense |
| | | | ||||||||||||
Short-term lease expense |
4 | 11 | 6 | 23 | ||||||||||||
Sublease income |
| | | | ||||||||||||
|
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|
|
|
|
|
|
|||||||||
Net lease cost |
$ | 626 | $ | 681 | $ | 1,295 | $ | 1,360 | ||||||||
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|
(In thousands) |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Lease cost - occupancy expense |
$ | 619 | $ | 626 | $ | 1,232 | $ | 1,240 | ||||||||
Lease cost - other expense |
7 | 55 | 63 | 120 | ||||||||||||
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|
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Net lease cost |
$ | 626 | $ | 681 | $ | 1,295 | $ | 1,360 | ||||||||
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32
For the six months ended June 30, 2021 and 2020, the following cash and non-cash activities were associated with the leases:
Six Months Ended June 30, |
||||||||
(In thousands) |
2021 | 2020 | ||||||
Cash paid for amounts included in the measurement of lease liabilities: |
||||||||
Operating cash flows from operating leases |
$ | 1,229 | $ | 1,266 | ||||
Non-cash investing and financing activities: |
||||||||
Additions to right-of-use assets obtained from: |
||||||||
Net lease cost |
| | ||||||
New operating lease liabilities |
11 | 144 |
The future payments due under operating leases at June 30, 2021 and 2020 were as follows:
At June 30, | ||||||||
(In thousands) |
2021 | 2020 | ||||||
Due in less than one year |
$ | 2,113 | $ | 2,058 | ||||
Due in one year but less than two years |
2,056 | 2,030 | ||||||
Due in two years but less than three years |
1,930 | 2,021 | ||||||
Due in three years but less than four years |
1,766 | 1,929 | ||||||
Due in four years but less than five years |
1,682 | 1,766 | ||||||
Thereafter |
12,601 | 14,243 | ||||||
|
|
|
|
|||||
Total future payments |
$ | 22,148 | $ | 24,047 | ||||
Less: Implied interest |
(5,536 | ) | (6,011 | ) | ||||
|
|
|
|
|||||
Total lease liability |
$ | 16,612 | $ | 18,036 | ||||
|
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|
|
At June 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 June 30, 2021, the weighted-average remaining lease term for all operating leases was 14.5 years. The weighted average discount rate associated with the operating leases at June 30, 2021 was 3.32%.
(12) Borrowings
The Company has borrowing lines established with the FHLB and other correspondent banks. At June 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 June 30, 2021, unused overnight or borrowing potential totaled $247.6 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.
33
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.
34