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Section 1: 10-Q (10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018
o
TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No x

The number of shares outstanding, net of treasury stock, of the Registrant’s Common Stock, no par value, as of August 6, 2018 was 8,676,370.




Stewardship Financial Corporation 
INDEX
 
 
PAGE
 
NUMBER
 
 
 
 
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition

 
June 30,
2018
 
December 31, 2017
 
(Unaudited)
 
 
 
(Dollars in thousands)
Assets
 

 
 

Cash and due from banks
$
13,199

 
$
20,558

Other interest-earning assets
330

 
712

Cash and cash equivalents
13,529

 
21,270

 
 
 
 
Securities available-for-sale
112,594

 
109,259

Securities held to maturity; estimated fair value of $56,624 (at June 30, 2018) and $51,551 (at December 31, 2017)
58,471

 
52,442

Other equity investments, at fair value
3,694

 
3,756

Federal Home Loan Bank of New York stock, at cost
3,087

 
3,715

Loans held for sale
607

 
370

Loans, net of allowance for loan losses of $8,353 (at June 30, 2018) and $8,762 (at December 31, 2017)
713,311

 
702,561

Premises and equipment, net
6,952

 
6,909

Accrued interest receivable
2,467

 
2,566

Bank owned life insurance
21,360

 
21,084

Other assets
5,615

 
4,834

Total assets
$
941,687

 
$
928,766

 
 
 
 
Liabilities and Shareholders' equity
 

 
 

 
 
 
 
Liabilities
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
188,343

 
$
172,861

Interest-bearing
603,718

 
591,238

Total deposits
792,061

 
764,099

 
 
 
 
Federal Home Loan Bank of New York advances
46,700

 
63,760

Subordinated Debentures and Subordinated Notes
23,350

 
23,317

Accrued interest payable
1,111

 
1,116

Accrued expenses and other liabilities
2,277

 
2,809

Total liabilities
865,499

 
855,101

 
 
 
 
Shareholders' equity
 

 
 

 
 

 
 

Common stock, no par value: 20,000,000 shares authorized
at June 30, 2018 and December 31, 2017;
8,676,843 and 8,652,804 shares issued and outstanding
at June 30, 2018 and December 31, 2017, respectively
60,996

 
60,742

Retained earnings
17,534

 
14,307

Accumulated other comprehensive loss, net
(2,342
)
 
(1,384
)
Total Shareholders' equity
76,188

 
73,665

Total liabilities and Shareholders' equity
$
941,687

 
$
928,766


See accompanying notes to unaudited consolidated financial statements.


1


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands, except per share amounts)
Interest income:
 

 
 

 
 
 
 
Loans
$
7,770

 
$
7,008

 
$
15,288

 
$
13,594

Securities held to maturity:
 

 
 

 


 


Taxable
279

 
247

 
529

 
487

Nontaxable
23

 
53

 
56

 
112

Securities available-for-sale:
 

 
 

 


 


Taxable
637

 
547

 
1,230

 
1,007

Nontaxable
15

 
15

 
29

 
29

Other equity investments
26

 
23

 
51

 
49

FHLB dividends
58

 
44

 
122

 
78

Other interest-earning assets
60

 
6

 
102

 
11

Total interest income
8,868

 
7,943

 
17,407

 
15,367

Interest expense:
 

 
 

 
 
 
 
Deposits
1,269

 
719

 
2,334

 
1,352

FHLB-NY Borrowings
198

 
319

 
457

 
562

Subordinated Debentures and Subordinated Notes
393

 
371

 
785

 
739

Total interest expense
1,860

 
1,409

 
3,576

 
2,653

Net interest income before provision for loan losses
7,008

 
6,534

 
13,831

 
12,714

Provision for loan losses
(780
)
 
260

 
(1,115
)
 
560

Net interest income after provision for loan losses
7,788

 
6,274

 
14,946

 
12,154

Noninterest income:
 

 
 

 
 
 
 
Fees and service charges
551

 
519

 
1,058

 
1,054

Bank owned life insurance
138

 
129

 
276

 
244

Gain on calls and sales of securities, net

 

 
6

 

Gain on sales of mortgage loans
9

 
38

 
31

 
55

Gain on sales of SBA loans
59

 

 
59

 

Gain on sale of other real estate owned

 
13

 

 
13

Miscellaneous
102

 
114

 
154

 
246

Total noninterest income
859

 
813

 
1,584

 
1,612

Noninterest expenses:
 

 
 

 
 
 
 
Salaries and employee benefits
3,129

 
2,880

 
6,238

 
5,724

Occupancy, net
403

 
393

 
845

 
802

Equipment
188

 
162

 
369

 
324

Data processing
478

 
456

 
962

 
925

Advertising
207

 
211

 
364

 
347

FDIC insurance premium
70

 
109

 
134

 
186

Charitable contributions
195

 
120

 
375

 
245

Bank-card related services
131

 
142

 
258

 
284

Other real estate owned, net

 
9

 

 
24

Miscellaneous
703

 
601

 
1,387

 
1,336

Total noninterest expenses
5,504

 
5,083

 
10,932

 
10,197

Income before income tax expense
3,143

 
2,004

 
5,598

 
3,569

Income tax expense
842

 
736

 
1,489

 
1,310

Net income
$
2,301

 
$
1,268

 
$
4,109

 
$
2,259

Basic and diluted earnings per common share
$
0.27

 
$
0.16

 
$
0.47

 
$
0.32

Weighted average number of basic and diluted common shares outstanding
8,675,868

 
8,174,484

 
8,667,235

 
7,155,367


See accompanying notes to unaudited consolidated financial statements. 

2


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
 
 
 
 
 
 
 
 
Net income
$
2,301

 
$
1,268

 
$
4,109

 
$
2,259

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized holding gains (losses) on securities available-for-sale during the period
(359
)
 
187

 
(1,352
)
 
392

Reclassification adjustment for gains in net income

 

 
(4
)
 

Accretion of loss on securities reclassified to held to maturity
4

 
6

 
13

 
13

Change in fair value of interest rate swap
55

 
(37
)
 
222

 
(37
)
Total other comprehensive income (loss)
(300
)
 
156

 
(1,121
)
 
368

 
 
 
 
 
 
 
 
Total comprehensive income
$
2,001

 
$
1,424

 
$
2,988

 
$
2,627

 
See accompanying notes to unaudited consolidated financial statements.


3


Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
 
Six Months Ended June 30, 2018
 
Common Stock
 
Retained
 
Accumulated
Other
Comprehen-sive
 
 
 
Shares
 
Amount
 
Earnings
 
Loss
 
Total
 
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
Balance -- December 31, 2017
8,652,804

 
$
60,742

 
$
14,307

 
$
(1,384
)
 
$
73,665

Cash dividends declared on common stock

 

 
(520
)
 

 
(520
)
Payment of discount on dividend reinvestment plan

 
(2
)
 

 

 
(2
)
Common stock issued under dividend reinvestment plan
3,996

 
44

 

 

 
44

Common stock issued under stock plans
1,657

 
16

 

 

 
16

Issuance of restricted stock
28,221

 
301

 
(301
)
 

 

Amortization of restricted stock, net
(9,835
)
 
(105
)
 
102

 

 
(3
)
Net income

 

 
4,109

 

 
4,109

Other comprehensive loss

 

 

 
(1,121
)
 
(1,121
)
Balance -- Reclassification due to the adoption of ASU 2016-01

 

 
(163
)
 
163

 

Balance -- June 30, 2018
8,676,843

 
$
60,996

 
$
17,534

 
$
(2,342
)
 
$
76,188


 
Six Months Ended June 30, 2017
 
Common Stock
 
Retained
 
Accumulated
Other
Comprehen-sive
 
 
 
Shares
 
Amount
 
Earnings
 
Loss
 
Total
 
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
Balance -- December 31, 2016
6,121,329

 
$
41,626

 
$
11,082

 
$
(1,321
)
 
$
51,387

 
 
 
 
 
 
 
 
 
 
Cash dividends declared on common stock

 

 
(443
)
 

 
(443
)
Payment of discount on dividend
reinvestment plan

 
(2
)
 

 

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

 
44

 

 

 
44

Common stock issued under stock plans
1,547

 
14

 

 

 
14

Issuance of restricted stock
20,876

 
185

 
(185
)
 

 

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

 

 
(24
)
Tax benefit from restricted stock vesting

 
48

 

 

 
48

Net income

 

 
2,259

 

 
2,259

Other comprehensive income

 

 

 
368

 
368

Balance -- June 30, 2017
8,644,566

 
$
60,657

 
$
12,807

 
$
(953
)
 
$
72,511


See accompanying notes to unaudited consolidated financial statements.

4


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended
 
June 30,
 
2018
 
2017
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income
$
4,109

 
$
2,259

Adjustments to reconcile net income to
 

 
 

net cash provided by operating activities:
 

 
 

Depreciation and amortization of premises and equipment
227

 
190

Amortization of premiums and accretion of discounts, net
244

 
258

Amortization of restricted stock
(3
)
 
(24
)
Amortization of subordinated debenture issuance costs
33

 
32

Accretion of deferred loan fees
67

 
69

Fair value adjustment for equity security
104

 

Provision for loan losses
(1,115
)
 
560

Originations of mortgage loans held for sale
(2,771
)
 
(4,257
)
Proceeds from sale of mortgage loans
2,565

 
4,639

Gain on sale of SBA loans
(59
)
 

Gain on sales of mortgage loans
(31
)
 
(55
)
Gain on calls and sales of securities
(6
)
 

Gain on sale of other real estate owned

 
(13
)
Deferred income tax expense (benefit)
173

 
(178
)
Excess tax benefit from restricted stock vesting

 
48

(Increase) decrease in accrued interest receivable
99

 
(194
)
Increase (decrease) in accrued interest payable
(5
)
 
171

Earnings on bank owned life insurance
(276
)
 
(244
)
(Increase) decrease in other assets
(477
)
 
67

Decrease in other liabilities
(310
)
 
(115
)
Net cash provided by operating activities
2,568

 
3,213

Cash flows from investing activities:
 

 
 

Purchase of securities available-for-sale
(14,191
)
 
(24,128
)
Proceeds from maturities and principal repayments on securities available-for-sale
7,827

 
6,902

Proceeds from sales and calls on securities available-for-sale
1,006

 

Purchase of securities held to maturity
(9,829
)
 
(3,675
)
Proceeds from maturities and principal repayments on securities held to maturity
3,485

 
3,154

Proceeds from calls on securities held to maturity
280

 
720

Purchase of equity securities
(42
)
 

Purchase of FHLB-NY stock
(1,203
)
 
(9,890
)
Redemption of FHLB-NY stock
1,831

 
8,236

Net increase in loans
(9,643
)
 
(87,839
)
Proceeds from sale of other real estate owned

 
414

Purchase of bank owned life insurance

 
(4,000
)
Additions to premises and equipment
(270
)
 
(324
)
Net cash used in investing activities
(20,749
)
 
(110,430
)
Cash flows from financing activities:
 

 
 

Net increase in noninterest-bearing deposits
15,482

 
8,372

Net increase in interest-bearing deposits
12,480

 
53,591

Increase in loan term borrowings

 
25,000

Repayment of long term borrowings
(20,760
)
 
(5,000
)
Net increase in short term borrowings
3,700

 
14,560

Proceeds from issuance of common stock, net of costs

 
18,860


5


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows, continued
(Unaudited)
 
 
 
 
 
 
 
 
 
Six Months Ended
 
June 30,
 
2018
 
2017
 
(In thousands)
Cash flows from financing activities:
 
 
 
Cash dividends paid on common stock
(520
)
 
(443
)
Payment of discount on dividend reinvestment plan
(2
)
 
(2
)
Issuance of common stock for cash
60

 
58

Net cash provided by financing activities
10,440

 
114,996

Net decrease in cash and cash equivalents
(7,741
)
 
7,779

Cash and cash equivalents - beginning
21,270

 
11,680

Cash and cash equivalents - ending
$
13,529

 
$
19,459

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
3,581

 
$
2,482

Cash paid during the period for income taxes
$
1,335

 
$
1,197


See accompanying notes to unaudited consolidated financial statements.  


6


Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
June 30, 2018
(Unaudited)
 
Note 1. Summary of Significant Accounting Policies
 
Certain information and note disclosures normally included in the unaudited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Stewardship Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 23, 2018.
 
The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the SEC and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the interim consolidated financial statements, have been included. The results of operations for the six months ended June 30, 2018 are not necessarily indicative of the results which may be expected for the entire year. Certain prior period amounts have been reclassified to conform with the current period presentation.
 
Principles of consolidation
 
The consolidated financial statements include the accounts of Stewardship Financial Corporation and its wholly-owned subsidiary, Atlantic Stewardship Bank (the “Bank”), together referred to as “the Corporation”. The Bank includes its wholly-owned subsidiaries, Stewardship Investment Corporation, Stewardship Realty LLC, Atlantic Stewardship Insurance Company, LLC and several other subsidiaries formed to hold title to properties acquired through foreclosure or deed in lieu of foreclosure. The Bank’s subsidiaries have an insignificant impact on the Bank’s daily operations. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
 
The consolidated financial statements of the Corporation have been prepared in conformity with GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions, based on available information, that affect the amounts reported in the consolidated financial statements and disclosures provided. Actual results could differ significantly from those estimates.
 
Material estimates
 
Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses and deferred income taxes. Management believes the Corporation’s policies with respect to the methodology for the determination of the allowance for loan losses and the evaluation of deferred income taxes involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. These critical policies and their application are periodically reviewed with the Audit Committee and the Board of Directors.
 
Adoption of New Accounting Standards
 
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". The objective of this amendment is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are in the scope of other standards. The ASU is effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2017, and early adoption is permitted. Subsequently, the FASB issued the following standards related to ASU 2014-09: ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations;” ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing;” ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and

7


Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting;” and ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” These amendments are intended to improve and clarify the implementation guidance of ASU 2014-09 and have the same effective date as the original standard. The Corporation’s implementation efforts include the identification of revenue within the scope of the guidance, as well as the evaluation of revenue contracts and the respective performance obligations within those contracts. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the the Condensed Consolidated Statement of Income was not necessary. We generally satisfy our performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying this ASU that significantly affect the determination of the amount and timing of the revenue from contracts with customers. The Corporation has completed its evaluation and adopted this ASU effective January 1, 2018 using the modified retrospective approach. Adoption of ASU 2014-09 did not have a material impact on our consolidated financial statements and related disclosures as our primary sources of revenues are derived from interest and dividends earned on loans, securities and other financial instruments that are not within the scope of the new standard. Our revenue recognition pattern for revenue streams within the scope of the new standard, including but not limited to service charges on deposit accounts and debit card interchange, did not change significantly from prior practice. The modified retrospective method requires application of ASU 2014-09 to uncompleted contracts at the date of adoption, however, periods prior to the date of adoption have not been retrospectively revised as the impact of the new standard on uncompleted contracts as the date of adoption was not material. As such, a cumulative effective adjustment to opening retained earnings was not deemed necessary.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This amendment supersedes the guidance to classify equity securities with readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment requires public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. The amendment requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. The amendment reduces diversity in current practice by clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. This amendment is effective for fiscal years, including interim periods, beginning after December 15, 2017. Entities should apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Corporation's adoption of the guidance resulted in the reclassification from accumulated other comprehensive income (loss) to retained earnings of $163,000, reflected in the Consolidated Statements of Changes in Shareholders' Equity. In addition, the fair value of loans has been estimated using the exit price notion as described in Note 4.
 
In February 2016, the FASB issued ASU 2016-02, “Leases (Subtopic 842).” This ASU requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The amendments in ASU 2016-02 are effective for fiscal years, including interim periods, beginning after December 15, 2018. Early adoption of ASU 2016-02 is permitted. The Corporation is currently assessing the impact that the adoption of the guidance will have on the Corporation's consolidated financial statements.
 
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments by a reporting entity at each reporting date. The amendments in this ASU require financial assets measured at amortized cost to be presented at

8


the net amount expected to be collected. The allowance for credit losses would represent a valuation account that would be deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement would reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses would be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity will be required to use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The amendments in ASU 2016-13 are effective for fiscal years, including interim periods, beginning after December 15, 2019. Early adoption of this ASU is permitted for fiscal years beginning after December 15, 2018. The Corporation is currently evaluating the potential impact of ASU 2016-13 on the Corporation's consolidated financial statements. The Corporation has formed a working group, under the direction of the Chief Financial Officer, which is currently developing an implementation plan to include assessment of processes, portfolio segmentation, model development, system requirements and the identification of data and resource needs, among other things. Also, the Corporation is currently evaluating third-party vendor solutions to assist in the application of ASU 2016-13. The adoption of ASU 2016-13 may result in an increase in the allowance for loan losses due to changing from an "incurred loss" model, which encompasses allowances for current known and inherent losses within the portfolio, to an "expected loss" model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate establishing an allowance for expected credit losses on debt securities. The Corporation is currently unable to reasonably estimate the impact of adopting ASU 2016-13, and it is expected that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.

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


9


Note 2. Securities – Available-for-Sale and Held to Maturity
 
The amortized cost, gross unrealized gains and losses and fair value of the available-for-sale securities were as follows:
 
June 30, 2018
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. government-sponsored agencies
$
26,753

 
$
8

 
$
658

 
$
26,103

Obligations of state and political subdivisions
3,214

 

 
113

 
3,101

Mortgage-backed securities
66,736

 
27

 
2,155

 
64,608

Asset-backed securities (a)
5,870

 
19

 
1

 
5,888

Corporate debt
13,403

 
61

 
570

 
12,894

 
 
 
 
 
 
 
 
Total debt securities
$
115,976

 
$
115

 
$
3,497

 
$
112,594

 
 
December 31, 2017
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. government-sponsored agencies
$
21,699

 
$
30

 
$
396

 
$
21,333

Obligations of state and political subdivisions
3,221

 

 
56

 
3,165

Mortgage-backed securities
64,775

 
70

 
1,011

 
63,834

Asset-backed securities (a)
6,672

 
30

 
4

 
6,698

Corporate debt
14,437

 
94

 
302

 
14,229

 
 
 
 
 
 
 
 
Total debt securities
$
110,804

 
$
224

 
$
1,769

 
$
109,259

 
(a) Collateralized by student loans.

Cash proceeds from sales and calls of securities available-for-sale for the three and six months ended June 30, 2018, were $0 and $1,006,000, respectively. There were no cash proceeds realized from sales and calls of securities available-for-sale for the three and six months ended June 30, 2017. Gross gains realized on sales or calls during the three and six months ended June 30, 2018, were $0 and $6,000, respectively. There were no gross losses realized on sales or calls during the three and six months ended June 30, 2018, respectively. There were no gross gains and no gross losses realized on sales or calls during the three and six months ended June 30, 2017.


10


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

 
June 30, 2018
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. Treasury
$
999

 
$

 
$
19

 
$
980

U.S. government-sponsored agencies
29,567

 

 
1,317

 
28,250

Obligations of state and political subdivisions
2,563

 
16

 
33

 
2,546

Mortgage-backed securities
25,342

 
42

 
536

 
24,848

 
 
 
 
 
 
 
 
 
$
58,471

 
$
58

 
$
1,905

 
$
56,624

 
 
December 31, 2017
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. Treasury
$
999

 
$

 
$
11

 
$
988

U.S. government-sponsored agencies
27,075

 
4

 
760

 
26,319

Obligations of state and political subdivisions
4,057

 
21

 
23

 
4,055

Mortgage-backed securities
20,311

 
76

 
198

 
20,189

 
 
 
 
 
 
 
 
 
$
52,442

 
$
101

 
$
992

 
$
51,551

 
Cash proceeds from calls of securities held to maturity for the three and six months ended June 30, 2018 were $0 and $280,000, respectively. Cash proceeds from calls of securities held to maturity for the three and six months ended June 30, 2017 were $380,000 and $720,000, respectively. There were no gross gains and no gross losses realized on calls during the three and six months ended June 30, 2018 and June 30, 2017.
 
Mortgage-backed securities are a type of asset-backed security secured by a mortgage or collection of mortgages, purchased by government agencies such as the Government National Mortgage Association and government sponsored agencies such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, which then issue securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool.
 

11



The following table presents the amortized cost and fair value of the debt securities portfolio by contractual maturity. As issuers may have the right to call or prepay obligations with or without call or prepayment premiums, the actual maturities may differ from contractual maturities. Securities not due at a single maturity date, such as mortgage-backed securities and asset-backed securities, are shown separately.
 
 
June 30, 2018
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
 
 
 
 
Available-for-sale
 

 
 

Within one year
$

 
$

After one year, but within five years
13,515

 
13,275

After five years, but within ten years
25,095

 
24,255

After ten years
4,760

 
4,568

Mortgage-backed securities
66,736

 
64,608

Asset-backed securities
5,870

 
5,888

 
 
 
 
Total
$
115,976

 
$
112,594

 
 
 
 
Held to maturity
 

 
 

Within one year
$
535

 
$
536

After one year, but within five years
14,037

 
13,700

After five years, but within ten years
18,064

 
17,080

After ten years
493

 
460

Mortgage-backed securities
25,342

 
24,848

 
 
 
 
Total
$
58,471

 
$
56,624

 
The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at June 30, 2018 and December 31, 2017, and if the unrealized loss position was continuous for the twelve months prior to June 30, 2018 and December 31, 2017.
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
June 30, 2018
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government- sponsored agencies
$
11,204

 
$
(221
)
 
$
9,668

 
$
(437
)
 
$
20,872

 
$
(658
)
Obligations of state and political subdivisions
1,373

 
(14
)
 
1,728

 
(99
)
 
3,101

 
(113
)
Mortgage-backed securities
35,003

 
(902
)
 
24,420

 
(1,253
)
 
59,423

 
(2,155
)
Asset-backed securities
3,013

 
(1
)
 

 

 
3,013

 
(1
)
Corporate debt

 

 
8,833

 
(570
)
 
8,833

 
(570
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
50,593

 
$
(1,138
)
 
$
44,649

 
$
(2,359
)
 
$
95,242

 
$
(3,497
)


12


December 31, 2017
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government- sponsored agencies
$
8,260

 
$
(70
)
 
$
11,174

 
$
(326
)
 
$
19,434

 
$
(396
)
Obligations of state and political subdivisions
1,384

 
(7
)
 
1,781

 
(49
)
 
3,165

 
(56
)
Mortgage-backed securities
30,575

 
(201
)
 
26,809

 
(810
)
 
57,384

 
(1,011
)
Asset-backed securities

 

 
3,013

 
(4
)
 
3,013

 
(4
)
Corporate debt

 

 
9,135

 
(302
)
 
9,135

 
(302
)
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
$
40,219

 
$
(278
)
 
$
51,912

 
$
(1,491
)
 
$
92,131

 
$
(1,769
)
 
Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
June 30, 2018
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
980

 
$
(19
)
 
$

 
$

 
$
980

 
$
(19
)
U.S. government- sponsored agencies
12,337

 
(344
)
 
14,913

 
(973
)
 
27,250

 
(1,317
)
Obligations of state and political subdivisions

 

 
460

 
(33
)
 
460

 
(33
)
Mortgage-backed securities
14,794

 
(297
)
 
5,528

 
(239
)
 
20,322

 
(536
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
28,111

 
$
(660
)
 
$
20,901

 
$
(1,245
)
 
$
49,012

 
$
(1,905
)
 
December 31, 2017
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
988

 
$
(11
)
 
$

 
$

 
$
988

 
$
(11
)
U.S. government- sponsored agencies
10,032

 
(139
)
 
15,265

 
(621
)
 
25,297

 
(760
)
Obligations of state and political subdivisions

 

 
474

 
(23
)
 
474

 
(23
)
Mortgage-backed securities
9,531

 
(114
)
 
3,896

 
(84
)
 
13,427

 
(198
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
20,551

 
$
(264
)
 
$
19,635

 
$
(728
)
 
$
40,186

 
$
(992
)
 

13


Other-Than-Temporary Impairment
 
At June 30, 2018, there were available-for-sale investments comprising twelve U.S. government-sponsored agency securities, four obligations of state and political subdivision securities, forty-two mortgage-backed securities, and nine corporate debt securities in a continuous loss position for twelve months or longer. At June 30, 2018, there were held to maturity investments comprising fifteen U.S. government-sponsored agency securities, one obligation of state and political subdivision security, and fourteen mortgage-backed securities in a continuous loss position for twelve months or longer. Management has assessed the securities that were in an unrealized loss position at June 30, 2018 and December 31, 2017 and has determined that any decline in fair value below amortized cost primarily relates to changes in interest rates and market spreads and was temporary.

In making this determination management considered the following factors: the period of time the securities were in an unrealized loss position; the percentage decline in comparison to the securities’ amortized cost; any adverse conditions specifically related to the security, an industry or a geographic area; the rating or changes to the rating by a credit rating agency; the financial condition of the issuer and guarantor and any recoveries or additional declines in fair value subsequent to the balance sheet date.
 
The Corporation does not intend to sell securities in an unrealized loss position and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity.
 
Note 3. Loans and Allowance for Loan Losses
 
At June 30, 2018 and December 31, 2017, respectively, the loan portfolio consisted of the following:

 
June 30,
2018
 
December 31,
2017
 
(In thousands)
Commercial:
 

 
 

Secured by real estate
$
29,237

 
$
31,684

Other
61,653

 
57,372

Commercial real estate
498,982

 
493,542

Commercial construction
4,622

 
2,152

Residential real estate
85,427

 
85,760

Consumer:
 

 
 

Secured by real estate
34,358

 
32,207

Other
410

 
563

Government Guaranteed Loans - guaranteed portion
7,282

 
8,334

Other
177

 
106

 
 
 
 
Total gross loans
722,148

 
711,720

 
 
 
 
Less: Deferred loan costs, net
484

 
397

          Allowance for loan losses
8,353

 
8,762

 
8,837

 
9,159

 
 
 
 
Loans, net
$
713,311

 
$
702,561

 
Included in Commercial - Other and Commercial real estate at June 30, 2018 were $175,000 and $714,000 of Small Business Administration ("SBA") loans originated during 2018. The guaranteed portions of these loans were sold during the three months ended June 30, 2018.
 
The Corporation has purchased the guaranteed portion of several Government Guaranteed loans. Due to the guarantee of the principal amount of these loans, no allowance for loan losses is established for these loans.

14


Activity in the allowance for loan losses is summarized as follows:
 
 
Three Months Ended June 30, 2018
 
Balance,
beginning
of period
 
Provision
charged
to operations
 
Loans
charged off
 
Recoveries
of loans
charged off
 
Balance,
end
of period
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Commercial
$
2,865

 
$
(9
)
 
$

 
$
75

 
$
2,931

Commercial real estate
5,349

 
(757
)
 

 
612

 
5,204

Commercial construction
81

 
(10
)
 

 

 
71

Residential real estate
72

 
(3
)
 

 

 
69

Consumer
67

 
2

 

 

 
69

Other loans

 

 

 
1

 
1

Unallocated
11

 
(3
)
 

 

 
8

 
 
 
 
 
 
 
 
 
 
Total
$
8,445

 
$
(780
)
 
$

 
$
688

 
$
8,353

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
Balance,
beginning
of period
 
Provision
charged
to operations
 
Loans
charged off
 
Recoveries
of loans
charged off
 
Balance,
end
of period
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Commercial
$
3,058

 
$
(198
)
 
$
(29
)
 
$
100

 
$
2,931

Commercial real estate
5,531

 
(961
)
 

 
634

 
5,204

Commercial construction
33

 
38

 

 

 
71

Residential real estate
68

 
1

 

 

 
69

Consumer
64

 
4

 

 
1

 
69

Other loans
1

 

 
(1
)
 
1

 
1

Unallocated
7

 
1

 

 

 
8

 
 
 
 
 
 
 
 
 
 
Total
$
8,762

 
$
(1,115
)
 
$
(30
)
 
$
736

 
$
8,353

 



15


 
Three Months Ended June 30, 2017
 
Balance,
beginning
of period
 
Provision
charged
to operations
 
Loans
charged off
 
Recoveries
of loans
charged off
 
Balance,
end
of period
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Commercial
$
2,560

 
$
84

 
$
(1
)
 
$
19

 
$
2,662

Commercial real estate
5,149

 
327

 

 
26

 
5,502

Commercial construction
384

 
(131
)
 

 

 
253

Residential real estate
65

 
(7
)
 

 

 
58

Consumer
73

 
(10
)
 

 

 
63

Other loans

 
5

 
(1
)
 
1

 
5

Unallocated
15

 
(8
)
 

 

 
7

 
 
 
 
 
 
 
 
 
 
Total
$
8,246

 
$
260

 
$
(2
)
 
$
46

 
$
8,550

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
Balance,
beginning
of period
 
Provision
charged
to operations
 
Loans
charged off
 
Recoveries
of loans
charged off
 
Balance,
end
of period
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Commercial
$
2,663

 
$
(34
)
 
$
(2
)
 
$
35

 
$
2,662

Commercial real estate
4,734

 
717

 

 
51

 
5,502

Commercial construction
355

 
(102
)
 

 

 
253

Residential real estate
66

 
(8
)
 

 

 
58

Consumer
75

 
(13
)
 

 
1

 
63

Other loans

 
5

 
(1
)
 
1

 
5

Unallocated
12

 
(5
)
 

 

 
7

 
 
 
 
 
 
 
 
 
 
Total
$
7,905

 
$
560

 
$
(3
)
 
$
88

 
$
8,550

 
 
 
 
 
 
 
 
 
 



16


The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2018 and December 31, 2017.

 
June 30, 2018
 
Commercial
 
Commercial
Real Estate
 
Commercial
Construction
 
Residential
Real Estate
 
Consumer
 
Government
Guaranteed
 
Other
Loans
 
Unallocated
 
Total
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending allowance balance attributable to loans
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
78

 
$
568

 
$

 
$

 
$

 
$

 
$

 
$

 
$
646

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
2,853

 
4,636

 
71

 
69

 
69

 

 
1

 
8

 
7,707

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total ending allowance balance
$
2,931

 
$
5,204

 
$
71

 
$
69

 
$
69

 
$

 
$
1

 
$
8

 
$
8,353

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans: