Toggle SGML Header (+)


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 September 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 November 6, 2018 was 8,678,082.




Stewardship Financial Corporation 
INDEX
 
 
PAGE
 
NUMBER
 
 
 
 
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition

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

 
 

Cash and due from banks
$
10,487

 
$
20,558

Other interest-earning assets
352

 
712

Cash and cash equivalents
10,839

 
21,270

 
 
 
 
Securities available-for-sale
109,764

 
109,259

Securities held to maturity; estimated fair value of $59,947 (at September 30, 2018) and $51,551 (at December 31, 2017)
62,227

 
52,442

Other equity investments, at fair value
3,661

 
3,756

Federal Home Loan Bank of New York stock, at cost
3,552

 
3,715

Loans held for sale

 
370

Loans, net of allowance for loan losses of $7,904 (at September 30, 2018) and $8,762 (at December 31, 2017)
721,088

 
702,561

Premises and equipment, net
6,920

 
6,909

Accrued interest receivable
2,649

 
2,566

Bank owned life insurance
21,498

 
21,084

Other assets
5,915

 
4,834

Total assets
$
948,113

 
$
928,766

 
 
 
 
Liabilities and Shareholders' equity
 

 
 

 
 
 
 
Liabilities
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
190,303

 
$
172,861

Interest-bearing
596,263

 
591,238

Total deposits
786,566

 
764,099

 
 
 
 
Federal Home Loan Bank of New York advances
56,800

 
63,760

Subordinated Debentures and Subordinated Notes
23,366

 
23,317

Accrued interest payable
726

 
1,116

Accrued expenses and other liabilities
2,736

 
2,809

Total liabilities
870,194

 
855,101

 
 
 
 
Shareholders' equity
 

 
 

 
 

 
 

Common stock, no par value: 20,000,000 shares authorized
at September 30, 2018 and December 31, 2017;
8,678,454 and 8,652,804 shares issued and outstanding
at September 30, 2018 and December 31, 2017, respectively
61,013

 
60,742

Retained earnings
19,503

 
14,307

Accumulated other comprehensive loss, net
(2,597
)
 
(1,384
)
Total Shareholders' equity
77,919

 
73,665

Total liabilities and Shareholders' equity
$
948,113

 
$
928,766


See accompanying notes to unaudited consolidated financial statements.


1


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

 
 

 
 
 
 
Loans
$
8,044

 
$
7,359

 
$
23,332

 
$
20,953

Securities held to maturity:
 

 
 

 


 


Taxable
344

 
245

 
873

 
732

Nontaxable
22

 
45

 
78

 
157

Securities available-for-sale:
 

 
 

 


 


Taxable
690

 
594

 
1,920

 
1,601

Nontaxable
14

 
14

 
43

 
43

Other equity investments
24

 
23

 
75

 
72

FHLB dividends
53

 
58

 
175

 
136

Other interest-earning assets
24

 
62

 
126

 
73

Total interest income
9,215

 
8,400

 
26,622

 
23,767

Interest expense:
 

 
 

 
 
 
 
Deposits
1,404

 
869

 
3,738

 
2,221

FHLB-NY Borrowings
214

 
333

 
671

 
895

Subordinated Debentures and Subordinated Notes
395

 
375

 
1,180

 
1,114

Total interest expense
2,013

 
1,577

 
5,589

 
4,230

Net interest income before provision for loan losses
7,202

 
6,823

 
21,033

 
19,537

Provision for loan losses
(490
)
 
20

 
(1,605
)
 
580

Net interest income after provision for loan losses
7,692

 
6,803

 
22,638

 
18,957

Noninterest income:
 

 
 

 
 
 
 
Fees and service charges
542

 
524

 
1,600

 
1,578

Bank owned life insurance
138

 
141

 
414

 
385

Gain on calls and sales of securities, net

 
1

 
6

 
1

Gain on sales of mortgage loans
12

 
68

 
43

 
123

Gain on sales of SBA loans
70

 

 
129

 

Gain on sale of other real estate owned

 

 

 
13

Miscellaneous
75

 
111

 
229

 
357

Total noninterest income
837

 
845

 
2,421

 
2,457

Noninterest expenses:
 

 
 

 
 
 
 
Salaries and employee benefits
3,198

 
2,843

 
9,436

 
8,567

Occupancy, net
426

 
414

 
1,271

 
1,216

Equipment
186

 
173

 
555

 
497

Data processing
489

 
444

 
1,451

 
1,369

Advertising
192

 
182

 
556

 
529

FDIC insurance premium
66

 
50

 
200

 
236

Charitable contributions
180

 
130

 
555

 
375

Bank-card related services
133

 
137

 
391

 
421

Other real estate owned, net

 

 

 
24

Miscellaneous
684

 
663

 
2,071

 
1,999

Total noninterest expenses
5,554

 
5,036

 
16,486

 
15,233

Income before income tax expense
2,975

 
2,612

 
8,573

 
6,181

Income tax expense
813

 
972

 
2,302

 
2,282

Net income
$
2,162

 
$
1,640

 
$
6,271

 
$
3,899

Basic and diluted earnings per common share
$
0.25

 
$
0.19

 
$
0.72

 
$
0.51

Weighted average number of basic and diluted common shares outstanding
8,677,445

 
8,643,737

 
8,670,662

 
7,656,942


See accompanying notes to unaudited consolidated financial statements. 

2


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
 
 
 
 
 
 
 
 
Net income
$
2,162

 
$
1,640

 
$
6,271

 
$
3,899

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized holding gains (losses) on securities available-for-sale during the period
(369
)
 
138

 
(1,721
)
 
530

Reclassification adjustment for gains in net income

 
(1
)
 
(4
)
 
(1
)
Accretion of loss on securities reclassified to held to maturity
6

 
10

 
19

 
23

Change in fair value of interest rate swap
108

 
(6
)
 
330

 
(43
)
Total other comprehensive income (loss)
(255
)
 
141

 
(1,376
)
 
509

 
 
 
 
 
 
 
 
Total comprehensive income
$
1,907

 
$
1,781

 
$
4,895

 
$
4,408

 
See accompanying notes to unaudited consolidated financial statements.


3


Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
 
Nine Months Ended September 30, 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

 

 
(780
)
 

 
(780
)
Payment of discount on dividend reinvestment plan

 
(3
)
 

 

 
(3
)
Common stock issued under dividend reinvestment plan
6,080

 
65

 

 

 
65

Common stock issued under stock plans
2,943

 
30

 

 

 
30

Issuance of restricted stock
28,221

 
301

 
(301
)
 

 

Amortization of restricted stock

 

 
154

 

 
154

Restricted stock forfeited
(11,594
)
 
(122
)
 
15

 

 
(107
)
Net income

 

 
6,271

 

 
6,271

Other comprehensive loss

 

 

 
(1,376
)
 
(1,376
)
Balance -- Reclassification due to the adoption of ASU 2016-01

 

 
(163
)
 
163

 

Balance -- September 30, 2018
8,678,454

 
$
61,013

 
$
19,503

 
$
(2,597
)
 
$
77,919


 
Nine Months Ended September 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

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

 
18,860

 

 

 
18,860

Cash dividends declared on common stock

 

 
(702
)
 

 
(702
)
Payment of discount on dividend
reinvestment plan

 
(4
)
 

 

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

 
67

 

 

 
67

Common stock issued under stock plans
2,976

 
27

 

 

 
27

Issuance of restricted stock
20,876

 
185

 
(185
)
 

 

Amortization of restricted stock

 

 
139

 

 
139

Restricted stock forfeited
(16,547
)
 
(139
)
 
17

 

 
(122
)
Tax benefit from restricted stock vesting

 
48

 

 

 
48

Net income

 

 
3,899

 

 
3,899

Other comprehensive income

 

 

 
509

 
509

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

 
$
60,670

 
$
14,250

 
$
(812
)
 
$
74,108


See accompanying notes to unaudited consolidated financial statements.

4


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

 
 

Net income
$
6,271

 
$
3,899

Adjustments to reconcile net income to
 

 
 

net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization of premises and equipment
345

 
295

Amortization of premiums and accretion of discounts, net
362

 
403

Amortization of restricted stock
47

 
17

Amortization of subordinated debenture issuance costs
49

 
49

Accretion of deferred loan fees
115

 
110

Fair value adjustment for equity security
137

 

Provision for loan losses
(1,605
)
 
580

Originations of mortgage loans held-for-sale
(3,016
)
 
(8,271
)
Proceeds from sale of mortgage loans
3,429

 
8,479

Gain on sale of SBA loans
(129
)
 

Gain on sales of mortgage loans
(43
)
 
(123
)
Gain on calls and sales of securities
(6
)
 
(1
)
Gain on sale of other real estate owned

 
(13
)
Deferred income tax expense (benefit)
2,499

 
(295
)
Excess tax benefit from restricted stock vesting

 
48

Increase in accrued interest receivable
(83
)
 
(299
)
Decrease in accrued interest payable
(390
)
 
(109
)
Earnings on bank owned life insurance
(414
)
 
(385
)
(Increase) decrease in other assets
(2,824
)
 
176

Decrease in other liabilities
257

 
864

Net cash provided by operating activities
5,001

 
5,424

Cash flows from investing activities:
 

 
 

Purchase of securities available-for-sale
(16,199
)
 
(27,667
)
Proceeds from maturities and principal repayments on securities available-for-sale
11,922

 
10,565

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

 
500

Purchase of securities held-to-maturity
(14,828
)
 
(7,175
)
Proceeds from maturities and principal repayments on securities held-to-maturity
4,711

 
5,006

Proceeds from calls on securities held-to-maturity
280

 
1,120

Purchase of equity securities
(42
)
 

Purchase of FHLB-NY stock
(3,162
)
 
(10,639
)
Redemption of FHLB-NY stock
3,325

 
10,235

Net increase in loans
(16,908
)
 
(87,655
)
Proceeds from sale of other real estate owned

 
414

Purchase of bank owned life insurance

 
(4,000
)
Additions to premises and equipment
(356
)
 
(434
)
Net cash used in investing activities
(30,251
)
 
(109,730
)
Cash flows from financing activities:
 

 
 

Net increase in noninterest-bearing deposits
17,442

 
2,303

Net increase in interest-bearing deposits
5,025

 
79,728

Increase in loan term borrowings

 
25,000

Repayment of long term borrowings
(20,760
)
 
(10,000
)
Net increase (decrease) in short-term borrowings
13,800

 
(5,440
)
Proceeds from issuance of common stock, net of costs

 
18,860


5


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows, continued
(Unaudited)
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
September 30,
 
2018
 
2017
 
(In thousands)
Cash flows from financing activities:
 
 
 
Cash dividends paid on common stock
(780
)
 
(702
)
Payment of discount on dividend reinvestment plan
(3
)
 
(4
)
Issuance of common stock for cash
95

 
94

Net cash provided by financing activities
14,819

 
109,839

Net increase (decrease) in cash and cash equivalents
(10,431
)
 
5,533

Cash and cash equivalents - beginning
21,270

 
11,680

Cash and cash equivalents - ending
$
10,839

 
$
17,213

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
5,979

 
$
4,339

Cash paid during the period for income taxes
$
3,014

 
$
1,962


See accompanying notes to unaudited consolidated financial statements.  


6


Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
September 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 nine months ended September 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;” ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients;” ASU 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue Contracts with Customers;" ASU 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments;" and ASU 2017-14, "Income Statement - Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606): Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 116 and SEC Release No. 33-10403." 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

8


adoption of ASU 2016-02 is permitted. Subsequently, the FASB issued the following standards related to ASU 2016-02: ASU 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments;" ASU 2018-1, "Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, "Codification Improvements to Topic 842, Leases;" and ASU 2018-11, "Leases (Topic 842): Targeted Improvements." Based on the current lease portfolio, upon adoption of the new accounting standard, the Corporation anticipates recognizing a lease liability and related right-of-use asset on the Consolidated Statement of financial Condition. Management is continuing to evaluate the Corporation's outstanding inventory of leases and determining the effect of recognizing operating leases on the Consolidated Statements of Financial Condition. The Corporation plans to adopt the modified retrospective approach under ASU 2018-11. The final impact of the standard will depend on the Corporation's lease composition as of the adoption date.
 
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments by a reporting entity at each reporting date. The amendments in this ASU require financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses would represent a valuation account that would be deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement would reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses would be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity will be required to use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The amendments in ASU 2016-13 are effective for fiscal years, including interim periods, beginning after December 15, 2019. Early adoption of 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. As of September 30, 2018, the Corporation has early adopted ASU 2017-12 with no impact to 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:
 
September 30, 2018
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. government-sponsored agencies
$
26,541

 
$
7

 
$
897

 
$
25,651

Obligations of state and political subdivisions
3,210

 

 
132

 
3,078

Mortgage-backed securities
65,251

 
21

 
2,487

 
62,785

Asset-backed securities (a)
5,405

 
16

 
1

 
5,420

Corporate debt
13,386

 
26

 
582

 
12,830

 
 
 
 
 
 
 
 
Total available-for-sale securities
$
113,793

 
$
70

 
$
4,099

 
$
109,764

 
 
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 available-for-sale 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 nine months ended September 30, 2018, were $0 and $1,006,000, respectively. There were $500,000 in cash proceeds realized from sales and calls of securities available-for-sale for the three and nine months ended September 30, 2017. Gross gains realized on sales or calls during the three and nine months ended September 30, 2018, were $0 and $6,000, respectively. There were no gross losses realized on sales or calls during the three and nine months ended September 30, 2018, respectively. There were $1,000 in gross gains and no gross losses realized on sales or calls during the three and nine months ended September 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:

 
September 30, 2018
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. Treasury
$
1,000

 
$

 
$
20

 
$
980

U.S. government-sponsored agencies
34,564

 

 
1,595

 
32,969

Obligations of state and political subdivisions
2,361

 
15

 
36

 
2,340

Mortgage-backed securities
24,302

 
32

 
676

 
23,658

 
 
 
 
 
 
 
 
Total held-to-maturity securities
$
62,227

 
$
47

 
$
2,327

 
$
59,947

 
 
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

 
 
 
 
 
 
 
 
Total held-to-maturity securities
$
52,442

 
$
101

 
$
992

 
$
51,551

 
Cash proceeds from calls of securities held to maturity for the three and nine months ended September 30, 2018 were $0 and $280,000, respectively. Cash proceeds from calls of securities held to maturity for the three and nine months ended September 30, 2017 were $400,000 and $1,120,000, respectively. There were no gross gains and no gross losses realized on calls during the three and nine months ended September 30, 2018 and September 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.
 
 
September 30, 2018
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
 
 
 
 
Available-for-sale
 

 
 

Within one year
$
397

 
$
395

After one year, but within five years
14,072

 
13,758

After five years, but within ten years
24,037

 
23,064

After ten years
4,631

 
4,342

Mortgage-backed securities
65,251

 
62,785

Asset-backed securities
5,405

 
5,420

 
 
 
 
Total
$
113,793

 
$
109,764

 
 
 
 
Held to maturity
 

 
 

Within one year
$
335

 
$
335

After one year, but within five years
18,033

 
17,486

After five years, but within ten years
19,066

 
18,013

After ten years
491

 
455

Mortgage-backed securities
24,302

 
23,658

 
 
 
 
Total
$
62,227

 
$
59,947

 
The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at September 30, 2018 and December 31, 2017, and if the unrealized loss position was continuous for the twelve months prior to September 30, 2018 and December 31, 2017.
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
September 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
$
11,073

 
$
(189
)
 
$
13,394

 
$
(708
)
 
$
24,467

 
$
(897
)
Obligations of state and political subdivisions
1,363

 
(21
)
 
1,715

 
(111
)
 
3,078

 
(132
)
Mortgage-backed securities
19,078

 
(344
)
 
41,106

 
(2,143
)
 
60,184

 
(2,487
)
Asset-backed securities
2,999

 
(1
)
 

 

 
2,999

 
(1
)
Corporate debt
2,490

 
(10
)
 
8,814

 
(572
)
 
11,304

 
(582
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
37,003

 
$
(565
)
 
$
65,029

 
$
(3,534
)
 
$
102,032

 
$
(4,099
)


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
 
 
 
 
 
 
 
 
 
 
 
September 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

 
$
(20
)
 
$
980

 
$
(20
)
U.S. government- sponsored agencies
11,979

 
(201
)
 
20,990

 
(1,394
)
 
32,969

 
(1,595
)
Obligations of state and political subdivisions

 

 
456

 
(36
)
 
456

 
(36
)
Mortgage-backed securities
13,395

 
(250
)
 
9,089

 
(426
)
 
22,484

 
(676
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
25,374

 
$
(451
)
 
$
31,515

 
$
(1,876
)
 
$
56,889

 
$
(2,327
)
 
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 September 30, 2018, there were available-for-sale investments comprising seventeen U.S. government-sponsored agency securities, four obligations of state and political subdivision securities, fifty-two mortgage-backed securities, and nine corporate debt securities in a continuous loss position for twelve months or longer. At September 30, 2018, there were held to maturity investments comprising one U.S. Treasury security, twenty-two U.S. government-sponsored agency securities, one obligation of state and political subdivision security, and twenty-one 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 September 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 September 30, 2018 and December 31, 2017, respectively, the loan portfolio consisted of the following:

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

 
 

Secured by real estate
$
30,576

 
$
31,684

Other
66,309

 
57,372

Commercial real estate
499,571

 
493,542

Commercial construction
6,716

 
2,152

Residential real estate
83,729

 
85,760

Consumer:
 

 
 

Secured by real estate
34,749

 
32,207

Other
421

 
563

Government Guaranteed Loans - guaranteed portion
7,206

 
8,334

Other
198

 
106

 
 
 
 
Total gross loans
729,475

 
711,720

 
 
 
 
Less: Deferred loan costs, net
483

 
397

          Allowance for loan losses
7,904

 
8,762

 
8,387

 
9,159

 
 
 
 
Loans, net
$
721,088

 
$
702,561

 
Included in Commercial - Other and Commercial real estate at September 30, 2018 were $172,000 and $1.6 million of Small Business Administration ("SBA") loans originated during 2018. The guaranteed portions of these loans were sold during the nine months ended September 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 September 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
$
2,931

 
$
(250
)
 
$

 
$
25

 
$
2,706

Commercial real estate
5,204

 
(258
)
 

 
16

 
4,962

Commercial construction
71

 
19

 

 

 
90

Residential real estate
69

 
(5
)
 

 

 
64

Consumer
69

 

 

 
1

 
70

Other loans
1

 
1

 
(1
)
 

 
1

Unallocated
8

 
3

 

 

 
11

 
 
 
 
 
 
 
 
 
 
Total
$
8,353

 
$
(490
)
 
$
(1
)
 
$
42

 
$
7,904

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 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

 
$
(448
)
 
$
(29
)
 
$
125

 
$
2,706

Commercial real estate
5,531

 
(1,219
)
 

 
650

 
4,962

Commercial construction
33

 
57

 

 

 
90

Residential real estate
68

 
(4
)
 

 

 
64

Consumer
64

 
4

 

 
2

 
70

Other loans
1

 
1

 
(2
)
 
1

 
1

Unallocated
7

 
4

 

 

 
11

 
 
 
 
 
 
 
 
 
 
Total
$
8,762

 
$
(1,605
)
 
$
(31
)
 
$
778

 
$
7,904

 



15


 
Three Months Ended September 30, 2017
 
Balance,
beginning
of period
 
Provision
charged
to operations
 
Loans
charged off
 
Recoveries
of loans
charged off
 
Balance,
end
of period
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Commercial
$
2,662

 
$
145

 
$
(1
)
 
$
18

 
$
2,824

Commercial real estate
5,502

 
(80
)
 

 
21

 
5,443

Commercial construction
253

 
(27
)
 

 

 
226

Residential real estate
58

 
(1
)
 

 

 
57

Consumer
63

 
(7
)
 

 
6

 
62

Other loans
5

 
(5
)
 

 

 

Unallocated
7

 
(5
)
 

 

 
2

 
 
 
 
 
 
 
 
 
 
Total
$
8,550

 
$
20

 
$
(1
)
 
$
45

 
$
8,614

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

 
$
111

 
$
(3
)
 
$
53

 
$
2,824

Commercial real estate
4,734

 
637

 

 
72

 
5,443

Commercial construction
355

 
(129
)
 

 

 
226

Residential real estate
66

 
(9
)
 

 

 
57

Consumer
75

 
(20
)
 

 
7

 
62

Other loans

 

 
(1
)
 
1

 

Unallocated
12

 
(10
)
 

 

 
2

 
 
 
 
 
 
 
 
 
 
Total
$
7,905

 
$
580

 
$
(4
)
 
$
133

 
$
8,614

 
 
 
 
 
 
 
 
 
 



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 September 30, 2018 and December 31, 2017.

 
September 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
$
76

 
$
564

 
$

 
$

 
$

 
$

 
$

 
$

 
$
640

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
2,630

 
4,398

 
90

 
64

 
70

 

 
1

 
11

 
7,264

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total ending allowance balance
$
2,706

 
$
4,962

 
$
90

 
$
64

 
$
70

 
$

 
$
1

 
$
11

 
$
7,904