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Section 1: 10-Q (10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549
___________________

FORM 10-Q

(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________to ________

Commission File Number 0-29030

SB ONE BANCORP
(Exact name of registrant as specified in its charter)   

New Jersey
22-3475473
 
 
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

100 Enterprise Drive, Suite 700,  Rockaway, NJ
07866
(Address of principal executive offices)
(Zip Code)

(844) 256-7328
(Registrant’s telephone number, including area code)

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 ☐

Indicate by check mark whether the registrant has submitted electronically every interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 
Yes x     No ☐

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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer x
Non-accelerated filer ☐
Smaller reporting company x
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 Act).        
Yes ☐     No x







Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, no par value
SBBX
The NASDAQ Stock Market LLC

As of May 2, 2019 there were 9,475,378 shares of common stock, no par value, outstanding.




SB ONE BANCORP
FORM 10-Q

INDEX





3



FORWARD-LOOKING STATEMENTS

We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities and Exchange Commission (the “SEC”), our reports to shareholders and in other communications by us. This Quarterly Report on Form 10-Q contains “forward-looking statements” which may be identified by the use of such words as “believe,” “project,” “expect,” “anticipate,” “should,” “may,” “will,” “intend,” “planned,” “estimated,” “potential” or similar expressions.  Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operation and business that are subject to various factors which could cause actual results to differ materially from these estimates.  These factors include, but are not limited to:
changes in the interest rate environment that reduce margins;
changes in the regulatory environment;
the highly competitive industry and market area in which we operate;
general economic conditions, either nationally or regionally, resulting in, among other things, a deterioration in credit quality;
changes in business conditions and inflation;
changes in credit market conditions;
changes in the securities markets which affect investment management revenues;
increases in Federal Deposit Insurance Corporation (“FDIC”) deposit insurance premiums and assessments, which could adversely affect our financial condition;
changes in technology used in the banking business;
the soundness of other financial services institutions, which may adversely affect our credit risk;
our controls and procedures may fail or be circumvented;
new lines of business or new products and services, which may subject us to additional risks;
changes in key management personnel which may adversely impact our operations;
the effect on our operations of recent legislative and regulatory initiatives that were or may be enacted in response to the ongoing financial crisis;
severe weather, natural disasters, acts of war or terrorism and other external events which could significantly impact our business;
the inability to realize expected cost savings or to implement integration plans and other adverse consequences associated with the acquisition of Community Bank of Bergen County (“Community”);
the inability to realize expected cost savings or to implement integration plans and other adverse consequences associated with the acquisition of Enterprise Bank, NJ (“Enterprise”); and
other factors detailed from time to time in our filings with the SEC.

Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 

i



PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
SB ONE BANCORP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
March 31, 2019
 
December 31, 2018
 
 
 
 
ASSETS
 
 
 
Cash and due from banks
$
12,509

 
$
11,768

Interest-bearing deposits with other banks
10,494

 
14,910

Cash and cash equivalents
23,003

 
26,678

 
 
 
 
Interest bearing time deposits with other banks
200

 
200

Securities available for sale, at fair value
192,050

 
182,139

Securities held to maturity, at amortized cost (fair value of $4,117 and $4,152 at March 31, 2019 and December 31, 2018, respectively)
4,031

 
4,078

Other Bank Stock, at cost
9,347

 
11,764

 
 
 
 
Loans receivable, net of unearned income
1,513,645

 
1,474,775

Less:  allowance for loan losses
9,190

 
8,775

Net loans receivable
1,504,455

 
1,466,000

Foreclosed real estate
3,241

 
4,149

Premises and equipment, net
19,459

 
19,215

Right-of-use assets, net
2,564

 

Accrued interest receivable
6,589

 
6,546

Goodwill and intangibles
29,344

 
29,446

Bank-owned life insurance
36,008

 
35,778

Other assets
9,838

 
9,710

 
 
 
 
Total Assets
$
1,840,129

 
$
1,795,703

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
269,949

 
$
259,807

Interest bearing
1,191,375

 
1,094,132

Total deposits
1,461,324

 
1,353,939

Short-term borrowings
114,800

 
175,295

Long-term borrowings
36,708

 
44,611

Lease liability
2,568

 

Accrued interest payable and other liabilities
7,172

 
8,555

Subordinated debentures
27,862

 
27,859

 
 
 
 
Total Liabilities
1,650,434

 
1,610,259

 
 
 
 
Stockholders' Equity:
 
 
 
Preferred stock, no par value, 1,000,000 shares authorized; none issued

 

Common stock, no par value, 10,000,000 shares authorized; 9,470,730 and 9,532,943 shares issued and 9,470,730 and 9,532,943 shares outstanding at March 31, 2019 and December 31, 2018, respectively
150,609

 
150,419

Treasury stock, at cost; 88,091 shares at March 31, 2019
(1,926
)
 

Deferred compensation obligation under Rabbi Trust
1,689

 
1,647

Retained earnings
40,303

 
35,192

Accumulated other comprehensive income (loss)
709

 
(167
)
Stock held by Rabbi Trust
(1,689
)
 
(1,647
)
 
 
 
 
Total Stockholders' Equity
189,695

 
185,444

 
 
 
 
Total Liabilities and Stockholders' Equity
$
1,840,129

 
$
1,795,703

See Notes to Consolidated Financial Statements

1



SB ONE BANCORP
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited) 
 
Three Months Ended March 31,
(Dollars in thousands except per share data)
2019
 
2018
INTEREST INCOME
 
 
 
Loans receivable, including fees
$
18,160

 
$
11,900

Securities:
 
 
 
Taxable
1,175

 
736

Tax-exempt
448

 
381

Interest bearing deposits
49

 
30

Total Interest Income
19,832

 
13,047

INTEREST EXPENSE
 
 
 
Deposits
3,864

 
1,458

Borrowings
1,214

 
506

Subordinated debentures
315

 
315

Total Interest Expense
5,393

 
2,279

Net Interest Income
14,439

 
10,768

PROVISION FOR LOAN LOSSES
571

 
508

Net Interest Income after Provision for Loan Losses
13,868

 
10,260

OTHER INCOME
 
 
 
Service fees on deposit accounts
330

 
328

ATM and debit card fees
231

 
213

Bank-owned life insurance
230

 
185

Insurance commissions and fees
2,562

 
1,895

Investment brokerage fees
56

 
22

Other
224

 
214

Total Other Income
3,633

 
2,857

OTHER EXPENSES
 
 
 
Salaries and employee benefits
6,130

 
5,058

Occupancy, net
779

 
602

Data processing
940

 
791

Furniture and equipment
318

 
281

Advertising and promotion
132

 
56

Professional fees
462

 
329

Director fees
145

 
147

FDIC assessment
166

 
110

Insurance
30

 
95

Stationary and supplies
84

 
57

Merger-related expenses

 
3,293

Loan collection costs
120

 
61

Net expenses and write-downs related to foreclosed real estate
65

 
207

Amortization of intangible assets
102

 
61

Other
705

 
446

Total Other Expenses
10,178

 
11,594

Income before Income Taxes
7,323

 
1,523

EXPENSE FOR INCOME TAXES
1,500

 
215

Net Income
5,823

 
1,308

OTHER COMPREHENSIVE INCOME:
 
 
 
Unrealized gain (loss) on available for sale securities arising during the period
2,912

 
(2,167
)
Fair value adjustments on derivatives
(1,734
)
 
1,107

Reclassification adjustment for net (gain) on securities transactions included in net income

 

Income tax related to items of other comprehensive (loss) income 
(302
)
 
277

Other comprehensive income (loss), net of income taxes
876

 
(783
)
Comprehensive income
$
6,699

 
$
525

EARNINGS PER SHARE
 
 
 
Basic
$
0.62

 
$
0.17

Diluted
$
0.62

 
$
0.17

See Notes to Consolidated Financial Statements

2



SB ONE BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2019 and 2018
(Unaudited)
(Dollars in Thousands)
Number of
Shares
Outstanding
 
Common
Stock
 
Deferred Compensation Obligation Under Rabbi Trust
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Stock Held by Rabbi Trust
 
Treasury
Stock
 
Total
Stockholders'
Equity
 
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

Balance December 31, 2017
6,040,564

 
$
65,274

 
1,399

 
$
27,532

 
$
1,387

 
(1,399
)
 
$

 
$
94,193

Net income

 

 

 
1,308

 

 

 

 
1,308

Other comprehensive loss

 

 

 

 
(783
)
 

 

 
(783
)
Shares issued in merger
1,873,028

 
51,883

 

 

 

 

 

 
51,883

Funding of Supplemental Director Retirement Plan

 

 
46

 
 
 
 
 
(46
)
 
 
 

Common stock issued

 

 

 

 

 

 

 

Restricted stock granted
20,169

 

 

 

 

 

 

 

Restricted stock forfeited
(4,148
)
 

 

 

 

 

 

 

Compensation expense related to stock option and restricted stock grants

 
165

 

 

 

 

 

 
165

Dividends declared on common stock ($0.06 per share)

 

 

 
(474
)
 

 

 

 
(474
)
Balance March 31, 2018
7,929,613

 
$
117,322

 
$
1,445

 
$
28,366

 
$
604

 
$
(1,445
)
 
$

 
$
146,292

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2018
9,532,943

 
$
150,419

 
1,647

 
$
35,192

 
$
(167
)
 
(1,647
)
 
$

 
$
185,444

Net income

 

 

 
5,823

 

 
 
 

 
5,823

Other comprehensive income

 

 

 

 
876

 

 

 
876

Treasury shares purchased
(88,091
)
 

 

 

 

 
 
 
(1,926
)
 
(1,926
)
Funding of Supplemental Director Retirement Plan

 

 
42

 

 

 
(42
)
 

 

Restricted stock granted
41,832

 

 

 

 

 
 
 

 

Restricted stock forfeited
(15,954
)
 

 

 

 

 

 

 

Compensation expense related to stock option and restricted stock grants

 
190

 

 

 

 
 
 

 
190

Dividends declared on common stock ($0.075 per share)

 

 

 
(712
)
 

 
 
 

 
(712
)
Balance March 31, 2019
9,470,730

 
$
150,609

 
$
1,689

 
$
40,303

 
$
709

 
$
(1,689
)
 
$
(1,926
)
 
$
189,695

See Notes to Consolidated Financial Statements


3



SB ONE BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended March 31,
(Dollars in thousands)
2019
 
2018
Cash Flows from Operating Activities
 
 
 
Net income
$
5,823

 
$
1,308

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
571

 
508

Depreciation and amortization
537

 
454

Net amortization of securities premiums and discounts
501

 
485

Amortization of subordinated debt issuance costs
3

 
3

Net realized gain on sale of foreclosed real estate
9

 

Write-downs of and provisions for foreclosed real estate
6

 
105

Deferred income tax (benefit) expense
(1,534
)
 
488

Earnings on bank-owned life insurance
(230
)
 
(185
)
Compensation expense for stock options and stock awards
191

 
165

(Increase) decrease in assets:
 

 
 

Accrued interest receivable
(43
)
 
(1,789
)
Other assets
1,556

 
1,081

 Decrease in accrued interest payable and other liabilities
(454
)
 
(1,114
)
Net Cash Provided by Operating Activities
6,936

 
1,509

Cash Flows from Investing Activities
 
 
 
Net cash acquired in acquisition

 
6,651

Securities available for sale:
 
 
 
Purchases
(9,565
)
 
(79,863
)
Sales

 
75,909

Maturities, calls and principal repayments
2,072

 
1,850

Securities held to maturity:
 
 
 
Purchases
(200
)
 
(240
)
Maturities, calls and principal repayments
239

 

Net increase in loans
(39,026
)
 
(31,674
)
Proceeds from the sale of foreclosed real estate
893

 

Purchases of bank premises and equipment
(678
)
 
(64
)
Net decrease (increase) in Federal Home Loan Bank stock
2,417

 
(2,528
)
Net Cash Used in Investing Activities
(43,848
)
 
(29,959
)
Cash Flows from Financing Activities
 
 
 
Net increase (decrease) in deposits
107,385

 
(20,317
)
Net (decrease) increase in short-term borrowed funds
(60,495
)
 
57,675

Proceeds from long-term borrowings
46

 

Repayment of long-term borrowings
(7,949
)
 
(5,000
)
Purchase of treasury stock
(1,926
)
 

Dividends paid
(712
)
 
(474
)
Net Cash Provided by Financing Activities
36,349

 
31,884

Net (decrease) increase in Cash and Cash Equivalents
(563
)
 
3,434

Cash and Cash Equivalents - Beginning
26,678

 
11,646

Cash and Cash Equivalents - Ending
$
26,115

 
$
15,080

 
 
 
 
Supplementary Cash Flows Information
 
 
 
Interest paid
$
5,252

 
$
2,215

Income taxes paid
$
96

 
$
55

 
 
 
 
Operating Leases
 
 
 
Operating lease right-of-use asset, net
$
2,564

 
$

Operating lease liability
$
2,568

 
$


4



Supplementary Schedule of Noncash Investing and Financing Activities
 
 
 
Acquisitions of Community:
 
 
 
Non-cash assets acquired:
 
 
 
Other bank stock

 
1,155

Securities available for sale

 
75,909

Loans

 
236,010

Foreclosed real estate

 
1,312

Premises and equipment

 
10,612

Interest receivable

 
824

Bank owned life insurance

 
7,963

Goodwill and intangibles assets

 
23,629

Other assets

 
1,777

Total non-cash assets acquired

 
359,191

Liabilities assumed:
 
 
 
Deposits

 
(301,157
)
Borrowings

 
(12,000
)
Other liabilities

 
(844
)
Total liabilities assumed

 
(314,001
)
Common stock issued for acquisitions

 
(51,883
)
See Notes to Consolidated Financial Statements໿໿

5




NOTE 1 – SUMMARY OF SIGNIFICANT ACOUNTING POLICIES
 
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of SB One Bancorp, (“we,” “us,” “our” or the “Company”) and our wholly owned subsidiary SB One Bank (the “Bank”).  The Bank’s wholly owned subsidiaries are SCB Investment Company, Inc., SCBNY Company, Inc., ClassicLake Enterprises, LLC, GFR Maywood, LLC, PPD Holding Company, LLC, Community Investing Company, Inc., 490 Boulevard Realty Corp., and SB One Insurance Agency Inc. ("SB One Insurance Agency"), a full service insurance agency located in Sussex County, New Jersey with a satellite office located in Bergen County, New Jersey.  SB One Insurance Agency’s operations are considered a separate segment for financial disclosure purposes.  All inter-company transactions and balances have been eliminated in consolidation.  The Bank operates seventeen banking offices: seven located in Sussex County, New Jersey, four located in Bergen County, New Jersey, two located in Essex County, New Jersey, one located in Middlesex County, New Jersey, one located in Union County, New Jersey, one located in Warren County, New Jersey, and one located in Queens County, New York.
 
We are subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “FRB”).  The Bank’s deposits are insured by the Deposit Insurance Fund (“DIF”) of the FDIC up to applicable limits.  The operations of the Company and the Bank are subject to the supervision and regulation of the FRB, the FDIC and the New Jersey Department of Banking and Insurance (the “Department”) and the operations of SB One Insurance Agency are subject to supervision and regulation by the Department.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information.  Accordingly, they do not include all of the information and footnotes required by the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for full year financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature.  Operating results for the three month period ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto that are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.  

New Accounting Standards

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees are required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases which was issued to clarify and correct untended application of the guidance in ASU 2016-02 (Topic 842). The amendments in this ASU affect aspects of the guidance issued in ASU 2016-02 and provide clarification to related topics, such as 1) Rate implicit in the lease; 2) Reassessment of leases; 3) Transition guidance; and 4) Impairment of net investment in the lease. In July 2018, the FASB also issued ASU 2018-11 Leases (Topic 842) Targeted Improvements, which provides guidance related to comparative reporting requirements for initial adoption and separating lease and non-lease components. Currently, entities are required to adopt the new standard utilizing the modified retrospective approach. This amendment provides entities with an additional transition method which allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Currently, ASU 2016-02 provides a practical expedient to lessees to allow them to not separate non-lease components from lease components; however, it does not provide a similar practical expedient to lessors. This amendment provides a practical expedient to lessors which allows them the option to not separate non-lease components from the associated lease components. However, the lessor practical expedient is limited to circumstances in which the non-lease components would otherwise be account for under the new revenue guidance (Topic 606). In addition, both of the following conditions must be met: 1) the timing and pattern of transfer are the same for non-lease components and associated lease components 2) the lease component, if accounted for separately, would be classified as an operating lease. An entity that elects the lessor practical expedient is also required to provide certain disclosures. For entities that early adopted Topic 842 the amendments in these ASUs are effective upon issuance. The Company adopted both ASU No. 2016-02 and ASU No. 2018-11 effective January 1, 2019 and elected to apply the guidance as of the beginning of the period of adoption (January 1, 2019) and not restate comparative periods. The Company also elected certain optional practical

6



expedients, which allow the Company to forego a reassessment of (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) the initial direct costs for any existing leases.   Additionally, the Company elected to adopt the practical expedient use of hindsight to determine right of use asset and lease liability for each lease with a renewal option through their first option date. Adoption of the standard did not result in material changes to the Company's consolidated results of operations. The Company's adoption of the ASU resulted in a right of use asset and lease liability of approximately $2.7 million at January 1, 2019. The impact of the adoption on the Company's operating results was not significant.

In June, 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. This ASU will be effective for public business entities that are SEC filers in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All other entities will have one additional year. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements. The Company has determined that a third-party vendor will assist with model development, data governance and operational controls to support the adoption of this ASU.  Model implementation, including development and validation, is set to begin in the second quarter of 2019, as is the establishment of the control activities required to support the models.

In January 2017, FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350). The main objective of this ASU is to simplify the accounting for goodwill impairment by requiring impairment charges be based upon the first step in the current two-step impairment test under Accounting Standards Codification (ASC) 350. Currently, if the fair value of a reporting unit is lower than its carrying amount (Step 1), an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). This ASU’s objective is to simplify how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The standard will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.

In March 2017, FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20). The update shortens the amortization period for premiums on purchased callable debt securities to the earliest call date. The amendment will apply only to callable debt securities with explicit, noncontingent call features that are callable at fixed prices and on preset dates, apply to all premiums on callable debt securities, regardless of how they were generated, and require companies to reset the effective yield using the payment terms of the debt security if the call option is not exercised on the earliest call date. The ASU does not require an accounting change for securities held at a discount. The discount continues to be amortized to maturity and does not apply when the investor has already incorporated prepayments into the calculation of its effective yield under other GAAP. The amendments in the ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company's adoption of the ASU did not have a significant impact on the Company's consolidated financial statements.

In August 2017, FASB issued ASU 2017-12 Derivatives and Hedging (Topic 815). The objective of the ASU is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make improvements to simplify the application of hedge accounting guidance in current GAAP. The amendments in the ASU will, among other things, 1) permit hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risks; 2) change the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk; 3) modify disclosures to include a tabular disclosure related to the effect on the income statement of fair value and cash flow hedges; and 4) eliminate the requirement to disclose the ineffective portion of the change in fair value of hedging instruments. These changes will more closely align the results of cash flow and fair value hedge accounting with risk management activities and the presentation of hedge results in the financial statements. ASU 2017-12 will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For all other entities, the ASU will be effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the update with all transition requirements and elections being applied to

7



hedging relationships existing on the date of adoption. The Company's adoption of the ASU will not have a significant impact on the Company's consolidated financial statements.

In June 2018, FASB issued ASU 2018-07 Compensation - Stock Compensation (Topic 718). The main objective of this ASU is to simplify the accounting for share-based payment transactions in current GAAP by expanding the scope to include nonemployee share-based payment transactions. This ASU will apply to all share-based payment transactions in which a grantor acquires goods or services to be used in their own operations by issuing share-based payments. This ASU does not apply to share-based payments used to provide financing to the issuer or awards issued in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in the ASU will require an entity to, among other things, 1) measure nonemployee share-based payment awards at the fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered; 2) measure equity classified nonemployee share-based payment awards at the grant date; and 3) take into consideration the probability of satisfying performance conditions when accounting for nonemployee share-based payment awards with such conditions. ASU 2018-07 will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted; however, an entity’s adoption date shall not be earlier than the entity’s adoption date of Topic 606. Per review of the ASU, the Company determined that it does not pertain to its current operations; therefore, no evaluation regarding adoption is required.

In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The updates in this ASU are part of the disclosure framework project and modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The modifications include removal, modification, and removal of disclosure requirements. The ASU removed the following disclosure requirements: a) The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, b) The policy for timing of transfers between levels, c) The valuation process for Level 3 fair value measurements, c) For nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU added the following disclosure requirements: a) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; b) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU also modified the following disclosure requirements: a) in lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; b) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and c) clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 will be effective for public business entities for fiscal years and interim periods within those years beginning after December 15, 2019. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.

In August 2018, FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The updates in this ASU are part of the disclosure framework project ASU 2018-14 and modify the disclosure requirements under ASC 715-201 for employers that sponsor defined benefit pension or other postretirement plans. Those modifications include the removal, addition, and of disclosure requirements as well as clarifying specific disclosure requirements. The ASU removed the following disclosures: a) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; b) the amount and timing of plan assets expected to be returned to the employer; c) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law; d) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan; e) for nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy; however, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets and f) for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (i) aggregate of the service and interest cost components of net periodic benefit costs and (ii) benefit obligation for postretirement health care benefits. The ASU added the following disclosures: x) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and y) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU then clarified the following disclosures: 1) the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs more than plan assets; and 2) the accumulated benefit obligation (ABO) and fair value

8



of plan assets for plans with ABOs more than plan assets. ASU 2018-14 will be effective for public business entities for fiscal years ending after December 15, 2020. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.

In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815)-Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The ASU permits the use of the Overnight Index Swap (OIS) Rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes. ASU 2018-16 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. Early adoption is permitted in any interim period upon issuance of this ASU if an entity already has adopted ASU 2017-12. The amendments in this update should be applied prospectively for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The Company's adoption of the ASU did not have a significant impact on the Company's consolidated financial statements.

NOTE 2 – ACQUISITIONS

On January 4, 2018 the Company announced the successful closing of the merger with Community Bank of Bergen County, NJ, a New Jersey-chartered bank (“Community”) in an all-stock transaction (the “Community Merger”). The Community Merger enhanced and expanded SB One Bank’s presence in Bergen County, New Jersey with the addition of 3 full service branch locations in that county, which complements SB One Bank’s existing location in Oradell, New Jersey. Under the terms of the agreement, Community merged with and into SB One Bank, with SB One Bank being the surviving entity and each outstanding share of Community common stock was exchanged for 0.97 shares of the Company's common stock. The Company issued 1,873,028 shares of its common stock, having an aggregate fair value of $51.9 million in the Community Merger and paid approximately $2 thousand in cash for fractional shares. Outstanding Community stock options were paid out in cash by the Company for a total payment of $140 thousand. Expenses related to the Community merger totaled $4.0 million and $1.2 million for the years ended December 31 2018 and 2017, respectively.

On December 21, 2018, the Company announced the successful completion of the merger with Enterprise Bank N.J. (“Enterprise”) in an all-stock transaction (the "Enterprise Merger"). The Enterprise Merger is expected to enhance and expand the Company's presence in Union, Middlesex and Essex Counties, New Jersey with the addition of 4 full service branch locations in those counties. Pursuant to the terms of the merger agreement, Enterprise merged with and into SB One Bank and each outstanding share of Enterprise common stock was exchanged for 0.4538 shares of the Company’s common stock. The Company issued 1,573,454 shares of its common stock, having an aggregate fair value of $32.4 million and paid approximately $1 thousand in cash for fractional shares. Outstanding Enterprise stock options were paid out in cash by the Company for a total payment of $1.6 million. Expenses related to the Enterprise merger totaled $1.8 million for the year ended December 31, 2018.

Community

The Community acquisition was accounted for under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values based on management's best estimate using information available at the date of the acquisition, including the use of a third party valuation specialist. The following table summarized the estimated fair value of the acquired assets and liabilities assumed at the date of acquisition for Community.

9



(Dollars in thousands)
 
January 4, 2018

 
 
 
Cash and cash equivalents
 
$
6,693

Interest bearing time deposits with other banks
 
100

Securities available for sale
 
75,909

Other bank stock
 
1,155

Loans
 
236,010

Foreclosed real estate
 
1,312

Premises and equipment, net
 
10,612

Accrued interest receivable
 
824

Goodwill (banking segment)
 
22,298

Intangibles assets
 
1,331

Bank-owned life insurance
 
7,963

Other assets
 
1,677

Total Assets
 
$
365,884

 
 
 
Deposits
 
$
(301,157
)
Borrowings
 
(12,000
)
Other liabilities
 
(844
)
Total Liabilities
 
$
(314,001
)
Net consideration paid - common shares issued
 
$
51,883

The fair values of deposit liabilities with no stated maturities such as checking, money market and savings accounts, were assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.
The Company has finalized the accounting as a result of the merger with Community.
Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:
Investment securities available-for-sale
The estimated fair values of the investment securities available for sale, primarily comprised of U.S. Government agency mortgage-backed securities, U.S. government agencies and municipal bonds, were determined using open market pricing provided by multiple independent securities brokers. Management reviewed the open market quotes used in pricing the securities. A fair value discount of $261 thousand was recorded on the investments.
Loans
Loans acquired in the Community acquisition were recorded at fair value, and there was no carryover related allowance for loan and lease losses. The fair values of loans acquired from Community were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. The fair value of the acquired loans receivable had a gross amortized cost basis of $242.5 million. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired. The credit adjustment on purchased credit impaired loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that has been deemed uncollectible based on the Company’s expectations of future cash flows for each respective loan on a level yield amortization over 3.5 years.
(Dollars in thousands)
 
 
Gross amortized cost basis at January 4, 2018
 
$
242,471

Fair value adjustment on general pooled loans
 
(3,737
)
Credit fair value adjustment on purchased credit impaired loans
 
(2,664
)
Fair value of acquired loans at January 4, 2018
 
$
236,070

For loans acquired without evidence of credit quality deterioration, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into general pools by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for

10



reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value premium of $324 thousand.
Additionally for loans acquired without credit deterioration, a credit fair value adjustment was calculated using a two-part credit fair value analysis: 1) expected lifetime credit migration losses; and 2) estimated fair value adjustment for certain qualitative factors. The expected lifetime losses were calculated using historical losses observed at the Bank, Community and peer banks. The Company also estimated an environmental factor to apply to each loan type. The environmental factor represents potential discount which may arise due to general credit and economic factors. A credit fair value discount of $4.1 million was determined. Both the interest rate and credit fair value adjustments relate to performing loans and loans acquired with evidence of credit quality deterioration will be substantially recognized as interest income on a level yield amortization method over the weighted average life of the loans of 4 years.
The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the Community acquisition as of the closing date.
(Dollars in thousands)
 
Acquired Credit Impaired Loans
Contractually required principal and interest at acquisition
 
$
6,289

Contractual cash flows not expected to be collected (non-accretable difference)
 
1,819

Expected cash flows at acquisition
 
4,470

Interest component of expected cash flows (accretable difference)
 
846

Fair value of acquired loans
 
$
3,624

Bank Premises
The Company acquired three branches of Community, all of which were owned by Community, at a premium of $3.5 million. The fair value of Community’s premises was determined based upon independent third-party appraisals performed by licensed appraisers in the market in which the premises are located which will be amortized on a straight line basis over 40 years.
Core Deposit Intangible
The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through national brokered CD offering rates. The projected cash flows were developed using projected deposit attrition rates. The core deposit intangible will be amortized over ten years using the sum-of-years digits method.
The core deposit intangible totaled $1.3 million and is being amortized over its estimated useful life of approximately 10 years using an accelerated method of the sum of the years digits. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes. The goodwill recognized from the merger with Community was created based on the consideration paid by the Company for enhancing its presence in the Bergen County, NJ area in addition to our expected synergies from the combined operations of the Company and Community.
Time Deposits
The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit discount of approximately $965 thousand is being amortized into income on a level yield amortization method over the contractual life of the deposits of 22.5 months and a weighted average life of 16.5 months.
Bank Owned Life Insurance
Community's bank-owned life insurance book value was $8.0 million with no fair value adjustment.



11




Borrowings
The Company acquired borrowings at Community's carrying value of $12.0 million with no fair value adjustment. The remaining maturity of Community's borrowings was less than thirty days at a weighted average cost of funds equivalent to the current market rate for the similar term borrowing type.
The following table presents certain pro forma information as if Community had been acquired on January 1, 2017 and January 1, 2018. These results combine the historical results of the Company in the Company’s Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2017 and January 1, 2018. In particular, no adjustments have been made to eliminate the amount of Community’s provision for loan losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2017 and January 1,2 018. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below:
(Dollars in thousands)
 
Year Ended December 31, 2018
 
Year Ended December 31, 2017
Total revenues (net interest income plus non-interest income)
 
$
54,941

 
$
47,280

Net Income
 
9,935

 
6,257

Basic and diluted earnings per share applicable to common stockholders
 
$
1.25

 
$
0.79

Following the closing of the Community Merger on January 4, 2018, the Company reported the results of the combined Company. The Company cannot disaggregate the additional revenue and income before extraordinary items provided by Community since the Company operates as one consolidated entity on its internal systems. The cumulative effect to the Company's net income and net income per share are reported on a consolidated basis for the period ended December 31, 2018.
Enterprise

The Enterprise acquisition was accounted for under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values based on management's best estimate using information available at the date of the acquisition, including the use of a third party valuation specialist. The following table summarized the estimated fair value of the acquired assets and liabilities assumed at the date of acquisition for Enterprise.

(Dollars in thousands)
 
December 21, 2018

 
 
 
Cash and cash equivalents, net of stock options paid in cash
 
$
9,153

Securities available for sale
 
2,193

Other bank stock
 
2,380

Loans
 
257,170

Foreclosed real estate
 
1,250

Premises and equipment, net
 
422

Accrued interest receivable
 
880

Goodwill (banking segment)
 
2,204

Intangibles assets
 
1,039

Other assets
 
3,064

Total Assets
 
$
279,755

 
 
 
Deposits
 
$
(197,321
)
Borrowings
 
(47,106
)
Other liabilities
 
(2,882
)
Total Liabilities
 
$
(247,309
)
Net consideration paid - common shares issued
 
$
32,446


12




The fair values of deposit liabilities with no stated maturities such as checking, money market and savings accounts, were assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.
Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:
Investment securities available-for-sale
The estimated fair values of the investment securities available for sale, primarily comprised of U.S. Government agency mortgage-backed securities, U.S. government agencies and municipal bonds, were determined using open market pricing provided by multiple independent securities brokers. Management reviewed the open market quotes used in pricing the securities. A fair value discount of $100 thousand was recorded on the investments.
Loans
Loans acquired in the Enterprise acquisition were recorded at fair value, and there was no carryover related allowance for loan and lease losses. The fair values of loans acquired from Enterprise were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. The fair value of the acquired loans receivable had a gross amortized cost basis of $262.1 million. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired. There was no credit adjustment for purchased credit impaired loans in the Enterprise acquisition.
(Dollars in thousands)
 
 
Gross amortized cost basis at December 21, 2018
 
$
262,126

Fair value adjustment on general pooled loans
 
(4,956
)
Fair value of acquired loans at December 21, 2018
 
$
257,170

For loans acquired without evidence of credit quality deterioration, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into general pools by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value discount of $1.1 million.
Additionally for loans acquired without credit deterioration, a credit fair value adjustment was calculated using a two-part credit fair value analysis: 1) expected lifetime credit migration losses; and 2) estimated fair value adjustment for certain qualitative factors. The expected lifetime losses were calculated using historical losses observed at the Bank, Enterprise and peer banks. The Company also estimated an environmental factor to apply to each loan type. The environmental factor represents potential discount which may arise due to general credit and economic factors. A credit fair value discount of $3.9 million was determined. Both the interest rate and credit fair value adjustments will be substantially recognized as interest income on a level yield amortization method over the expected life of the loans.
Bank Premises
The Company acquired four branches of Enterprise, all of which were leased by Enterprise, at a discount of $282 thousand. The fair value of Enterprise’s premises was determined based upon independent third-party appraisals performed by licensed appraisers in the market in which the premises are located which will be amortized on a straight line basis over 3 years.
Core Deposit Intangible
The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through national brokered CD offering rates. The projected cash flows were developed using projected deposit attrition rates. The core deposit intangible will be amortized over ten years using the sum-of-years digits method.

13



The core deposit intangible totaled $1.0 million and is being amortized over its estimated useful life of approximately 10 years using an accelerated method of the sum of the years digits. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes. The goodwill recognized from the merger with Enterprise was created based on the consideration paid by the Company for enhancing its presence in the Bergen County, NJ area in addition to our expected synergies from the combined operations of the Company and Enterprise.
Time Deposits
The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit discount of approximately $1.0 million is being amortized into income on a level yield amortization method over the contractual life of the deposits of 11.4 months and a weighted average life of 11.4 months.
Borrowings
The Company acquired borrowings at Enterprise's carrying value of $47.3 million at a weighted average rate of 2.23% with a fair value adjustment of $149 thousand. The fair value of borrowings represents the present value of the borrowings expected contracted payments discounted by market rates for similar borrowings. Market rates were obtained from the Federal Home Loan Bank (“FHLB”) of New York as of December 21, 2018.
The following table presents certain pro forma information as if Enterprise had been acquired on January 1, 2017 and January 1, 2018. These results combine the historical results of the Company in the Company’s Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and January 1, 2017 and January 1, 2018. In particular, no adjustments have been made to eliminate the amount of Enterprise’s provision for loan losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2017 and January 1, 2018. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below:
(Dollars in thousands)
 
Year Ended December 31, 2018
 
Year Ended December 31, 2017
Total revenues (net interest income plus non-interest income)
 
$
64,827

 
$
46,175

Net Income
 
12,496

 
7,283

Basic and diluted earnings per share applicable to common stockholders
 
$
1.80

 
$
0.84

The merger transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition. Management has not finalized the accounting in connection with the merger and is still in the process of assessing the fair value of loans, other assets and other liabilities which can result in an adjustment to the Company's goodwill and deferred tax asset.

Following the closing of the Enterprise Merger on December 21, 2018, the Company reported the results of the combined Company. The Company cannot disaggregate the additional revenue and income before extraordinary items provided by Enterprise since the Company operates as one consolidated entity on its internal systems. The cumulative effect to the Company's net income and net income per share are reported on a consolidated basis for the period ended December 31, 2018.













14






NOTE 3 – SECURITIES

Available for Sale

The amortized cost and approximate fair value of securities available for sale as of March 31, 2019 and December 31, 2018 are summarized as follows:
໿
(Dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
March 31, 2019
 
 
 
 
 
 
 
U.S. government agencies
$
23,833

 
$
1

 
$
(345
)
 
$
23,489

U.S. government-sponsored enterprises
22,958

 
2

 
(227
)
 
22,733

State and political subdivisions
61,528

 
1,688

 
(18
)
 
63,198

Mortgage-backed securities -
 
 
 
 
 
 
 
U.S. government-sponsored enterprises
79,372

 
555

 
(337
)
 
79,590

 Corporate Debt
3,000

 
40

 

 
3,040

 
$
190,691

 
$
2,286

 
$
(927
)
 
$
192,050

December 31, 2018
 
 
 
 
 
 
 
U.S. government agencies
$
25,161

 
$
4

 
$
(371
)
 
$
24,794

U.S. government-sponsored enterprises
20,404

 
38

 
(80
)
 
20,362

State and political subdivisions
60,457

 
445

 
(540
)
 
60,362

Mortgage-backed securities -
 
 
 
 
 
 
 
U.S. government-sponsored enterprises
74,670

 
100

 
(1,157
)
 
73,613

 Corporate Debt
3,000

 
8

 

 
3,008

 
$
183,692

 
$
595

 
$
(2,148
)
 
$
182,139


Securities with a carrying value of approximately $2.4 million and $2.5 million at March 31, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and for borrowings at the Federal Reserve Bank as required or permitted by applicable laws and regulations.
 
The amortized cost and fair value of securities available for sale at March 31, 2019 are shown below by contractual maturity.  Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.  Investments which pay principal on a periodic basis are not included in the maturity categories.
໿
(Dollars in thousands)
Amortized
Cost
 
Fair
Value
Due in one year or less
$

 
$

Due after one year through five years
1,269

 
1,281

Due after five years through ten years
6,799

 
6,934

Due after ten years
56,460

 
58,023

Total bonds and obligations
64,528

 
66,238

U.S. government agencies
23,833

 
23,489

U.S. government-sponsored enterprises
22,958

 
22,733

Mortgage-backed securities:
 
 
 
U.S. government-sponsored enterprises
79,372

 
79,590

Total available for sale securities
$
190,691

 
$
192,050


There were no gross realized gains on sales of securities available for sale and no gross realized losses for the three months ended March 31, 2019. There were no gross gains or gross losses for the three months ended March 31, 2018.

15






Temporarily Impaired Securities

The following table shows gross unrealized losses and fair value of securities with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by category and length of time that individual available for sale securities have been in a continuous unrealized loss position at March 31, 2019 and December 31, 2018.
໿
 
Less Than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
$
3,017

 
$
(10
)
 
$
18,962

 
$
(335
)
 
$
21,979

 
$
(345
)
U.S. government-sponsored enterprises
16,737

 
(167
)
 
5,021

 
(60
)
 
21,758

 
(227
)
State and political subdivisions

 

 
3,692

 
(18
)
 
3,692

 
(18
)
Mortgage-backed securities -
 
 
 
 
 
 
 
 
 
 
 
U.S. government-sponsored enterprises
3,305

 
(17
)
 
14,739

 
(320
)
 
18,044

 
(337
)
Total temporarily impaired securities
$
23,059

 
$
(194
)
 
$
42,414

 
$
(733
)
 
$
65,473

 
$
(927
)
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
$
18,998

 
$
(316
)
 
$
2,593

 
$
(55
)
 
$
21,591

 
$
(371
)
U.S. government-sponsored enterprises
10,348

 
(80
)
 

 

 
10,348

 
(80
)
State and political subdivisions
17,164

 
(204
)
 
18,785

 
(336
)
 
35,949

 
(540
)
Mortgage-backed securities -
 
 
 
 
 
 
 
 
 
 
 
U.S. government-sponsored enterprises
30,547

 
(271
)
 
28,773

 
(886
)
 
59,320

 
(1,157
)
Total temporarily impaired securities
$
77,057

 
$
(871
)
 
$
50,151

 
$
(1,277
)
 
$
127,208

 
$
(2,148
)

For each security whose fair value is less than its amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred. As of March 31, 2019, we reviewed our available for sale securities portfolio for indications of impairment. This review included analyzing the length of time and the extent to which the fair value was lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and likelihood of selling the security.  The intent and likelihood of sale of debt and equity securities are evaluated based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. 
 
U.S. Government Agencies 
At March 31, 2019 and December 31, 2018, the declines in fair value and the unrealized losses for our U.S. government agencies securities were primarily due to changes in spreads and market conditions and not credit quality.  At March 31, 2019, there were nineteen securities with a fair value of $22.0 million that had an unrealized loss that amounted to $345 thousand.  As of March 31, 2019, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis.  Therefore, none of the U.S. government agency securities at March 31, 2019 were deemed to be other-than-temporarily impaired (“OTTI”).

At December 31, 2018, there were eighteen securities with a fair value of $21.6 million that had an unrealized loss that amounted to $371 thousand.

U.S. Government Sponsored Enterprises
At March 31, 2019 and December 31, 2018, the change in fair value and unrealized losses for our U.S. government sponsored enterprises securities were primarily due to changes in spreads and market conditions and not credit quality.  At March 31, 2019, there were ten securities with a fair value of $21.8 million that had an unrealized loss that amounted to $227 thousand.  As of March 31, 2019, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis.  Therefore, none of the U.S. government sponsored enterprise securities at March 31, 2019, were deemed to be OTTI.


16



At December 31, 2018, there were six securities with a fair value of $10.3 million that had an unrealized loss that amounted to $80 thousand.

State and Political Subdivisions
At March 31, 2019 and December 31, 2018, the change in fair value and unrealized losses for our state and political subdivisions securities were caused by changes in interest rates and spreads and were not the result of credit quality.  At March 31, 2019, there were four securities with a fair value of $3.7 million that had an unrealized loss that amounted to $18 thousand. These securities typically have maturity dates greater than 10 years and the fair values are more sensitive to changes in market interest rates.  As of March 31, 2019, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis.  Therefore, none of the state and political subdivision securities at March 31, 2019, were deemed to be OTTI.
 
At December 31, 2018, there were thirty-four securities with a fair value of $35.9 million that had an unrealized loss that amounted to $540 thousand

Mortgage-Backed Securities
At March 31, 2019 and December 31, 2018, the change in fair value and unrealized losses for our mortgage-backed securities guaranteed by U.S. government-sponsored enterprises were primarily due to changes in spreads and market conditions and not credit quality.  At March 31, 2019, there were fourteen securities with a fair value of $18.0 million that had an unrealized loss that amounted to $337 thousand.  As of March 31, 2019, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis.  Therefore, none of our mortgage-backed securities at March 31, 2019 were deemed to be OTTI.  

At December 31, 2018, there were thirty-eight securities with a fair value of $59.3 million that had an unrealized loss that amounted to $1.2 million

Corporate Debt
At March 31, 2019, there were no securities that had an unrealized loss. These securities typically have maturity dates greater than 5 years and the fair values are more sensitive to changes in market interest rates. As of March 31, 2019, we did not intend to sell and it was more-likely-than-no that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of our corporate debt securities at March 31, 2019, were deemed to be OTTI.

At December 31, 2018, there were no securities with an unrealized loss.

Held to Maturity Securities
 
The amortized cost and approximate fair value of securities held to maturity as of March 31, 2019 and December 31, 2018 are summarized as follows:
໿
(Dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
March 31, 2019
 
 
 
 
 
 
 
State and political subdivisions
$
4,031

 
$
86

 
$

 
$
4,117

December 31, 2018
 
 
 
 
 
 
 
State and political subdivisions
$
4,078

 
$
74

 
$

 
$
4,152


The amortized cost and carrying value of securities held to maturity at March 31, 2019 are shown below by contractual maturity.  Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

17



(Dollars in thousands)
Amortized
Cost
 
Fair
Value
Due in one year or less
$
1,239

 
$
1,239

Due after one year through five years
251

 
251

Due after five years through ten years
2,541

 
2,627

Due after ten years

 

Total held to maturity securities
$
4,031

 
$
4,117



Temporarily Impaired Securities

For each security whose fair value is less than its amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred. As of March 31, 2019, there were no securities that had an unrealized loss. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and likelihood of selling the security.  The intent and likelihood of sale of debt securities is evaluated based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. For each security whose fair value is less than their amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred.

At December 31, 2018, there were no securities with an unrealized loss.

NOTE 4 – LOANS

The composition of net loans receivable at March 31, 2019 and December 31, 2018 is as follows:
(Dollars in thousands)
March 31, 2019
 
December 31, 2018
 
 

 
 

Commercial and industrial
$
93,567

 
$
81,709

Construction
120,340

 
142,321

Commercial real estate
929,091

 
878,449

Residential real estate
369,100

 
370,955

Consumer and other
2,654

 
2,393

Total loans receivable
1,514,752

 
1,475,827

Unearned net loan origination fees
(1,107
)
 
(1,052
)
Allowance for loan losses
(9,190
)
 
(8,775
)
Net loans receivable
$
1,504,455

 
$
1,466,000


Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets.  The total amount of loans serviced for the benefit of others was approximately $226 thousand and $229 thousand at March 31, 2019 and December 31, 2018, respectively. Mortgage servicing rights were immaterial at December 31, 2018 and 2017. 

Purchased Credit Impaired Loans

The carrying value of loans acquired in the Community acquisition and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $3.0 million at March 31, 2019, which was $700 thousand less than the balance at the time of acquisition on January 4, 2018. Under ASC Subtopic 310-30, these loans, referred to as purchased credit impaired (“PCI”) loans, may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. The Company elected to account for the loans with evidence of credit deterioration individually rather than aggregate them into pools. The difference between the undiscounted cash flows expected at acquisition and the investment in the acquired loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or as a valuation allowance.


18



Increases in expected cash flows subsequent to the acquisition are recognized prospectively through an adjustment of the yield on the loans over the remaining life, while decreases in expected cash flows are recognized as impairments through a loss provision and an increase in the allowance for loan and lease losses. Valuation allowances (recognized in the allowance for loan and lease losses) on these impaired loans reflect only losses incurred after the acquisition (representing all cash flows that were expected at acquisition but currently are not expected to be received).






The following table presents changes in the accretable yield for PCI loans:

(Dollars in thousands)
 
Three months ended March 31, 2019
 
Three months ended March 31, 2018
Accretable yield, beginning balance
 
$
539

 
$

Acquisition of impaired loans
 

 
846

Accretable yield amortized to interest income
 
(79
)
 
(77
)
Reclassification from non-accretable difference
 

 

Accretable yield, ending balance
 
$
460

 
$
769




NOTE 5 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES
 
The following table presents changes in the allowance for loan losses disaggregated by the class of loans receivable for the three months ended March 31, 2019 and 2018:  ໿
໿
(Dollars in thousands)
Commercial
and
Industrial
 
Construction
 
Commercial
Real
Estate
 
Residential
Real
Estate
 
Consumer
and
Other
 
Unallocated
 
Total
Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
603

 
$
663

 
$
5,575

 
$
1,371

 
$
23

 
$
540

 
$
8,775

Charge-offs
(45
)
 

 
(5
)
 
(93
)
 
(25
)
 

 
(168
)
Recoveries
1

 

 
1

 
7

 
3

 

 
12

Provision
88

 
(304
)
 
733

 
64

 
18

 
(28
)
 
571

Ending balance
$
647

 
$
359

 
$
6,304

 
$
1,349

 
$
19

 
$
512

 
$
9,190

 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
208

 
$
336

 
$
5,185

 
$
1,032

 
$
26

 
$
548

 
$
7,335

Charge-offs
(11
)
 

 

 
(12
)
 
(11
)
 

 
(34
)
Recoveries
1

 

 
1

 
10

 
7

 

 
19

Provision
191

 
9

 
615

 
(58
)
 
9

 
(258
)
 
508

Ending balance
$
389

 
$
345

 
$
5,801

 
$
972

 
$
31

 
$
290

 
$
7,828



19



The following table presents the balance of the allowance of loan losses and loans receivable by class at March 31, 2019 and December 31, 2018 disaggregated on the basis of our impairment methodology.
໿
໿
 
Allowance for Loan Losses
 
Loans Receivable
(Dollars in thousands)
Balance
 
Balance
Loans
Individually
Evaluated for
Impairment
 
Balance
Related to
Loans
Collectively
Evaluated for
Impairment
 
Balance
 
Individually
Evaluated for
Impairment (a)
 
Collectively
Evaluated for
Impairment
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
647

 
$
104

 
$
543

 
$
93,567

 
$
456

 
$
93,111

Construction
359

 

 
359

 
120,340

 

 
120,340

Commercial real estate
6,304

 
445

 
5,859

 
929,091

 
16,666

 
912,425

Residential real estate
1,349

 
199

 
1,150

 
369,100

 
4,551

 
364,549

Consumer and other loans
19

 

 
19

 
2,654

 

 
2,654

Unallocated
512

 

 

 

 

 

Total
$
9,190

 
$
748

 
$
7,930

 
$
1,514,752

 
$
21,673

 
$
1,493,079

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
603

 
$
152

 
$
451

 
$
81,709

 
$
372

 
$
81,337

Construction
663

 

 
663

 
142,321

 

 
142,321

Commercial real estate
5,575

 
274

 
5,301

 
878,449

 
15,760

 
862,689

Residential real estate
1,371

 
89

 
1,282

 
370,955

 
4,572

 
366,383

Consumer and other loans
23

 

 
23

 
2,393

 

 
2,393

Unallocated
540

 

 

 

 

 

Total
$
8,775

 
$
515

 
$
7,720

 
$
1,475,827

 
$
20,704

 
$
1,455,123

(a) loans individually evaluated for impairment exclude PCI loans.


An age analysis of loans receivable, which were past due as of March 31, 2019 and December 31, 2018, is as follows:
໿
(Dollars in thousands)
30-59 Days
Past Due
 
60-89 days
Past Due
 
Greater
Than
90 Days (a)
 
Total Past
Due
 
Current
 
Total
Financing
Receivables
 
Recorded
Investment
> 90 Days
and
Accruing
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$

 
$

 
$
323

 
$
323

 
$
93,244

 
$
93,567

 
$

Construction

 

 

 

 
120,340

 
120,340

 

Commercial real estate
2,643

 
1,131

 
16,238

 
20,012

 
909,079

 
929,091

 

Residential real estate
743

 
269

 
4,077

 
5,089

 
364,011

 
369,100

 

Consumer and other
55

 
1

 

 
56

 
2,598

 
2,654

 

Total
$
3,441

 
$
1,401

 
$
20,638

 
$
25,480

 
$
1,489,272

 
$
1,514,752

 
$

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
491

 
$

 
$
372

 
$
863

 
$
80,846

 
$
81,709

 
$

Construction

 
582

 

 
582

 
141,739

 
142,321

 

Commercial real estate
2,282

 

 
15,760

 
18,042

 
860,407

 
878,449

 

Residential real estate
393

 
35

 
4,572

 
5,000

 
365,955

 
370,955

 

Consumer and other
4

 
1

 

 
5

 
2,388

 
2,393

 

Total
$
3,170

 
$
618

 
$
20,704

 
$
24,492

 
$
1,451,335

 
$
1,475,827

 
$

(a) includes loans greater than 90 days past due and still accruing and non-accrual loans, excluding PCI loans.








20



Loans for which the accrual of interest has been discontinued, excluding PCI loans, at March 31, 2019 and December 31, 2018 were: 
໿
(Dollars in thousands)
March 31, 2019
 
December 31, 2018
Commercial and industrial
$
323

 
$
372

Commercial real estate
16,238

 
15,760

Residential real estate
4,077

 
4,572

Total
$
20,638

 
$
20,704


In determining the adequacy of the allowance for loan losses, we estimate losses based on the identification of specific problem loans through our credit review process and also estimate losses inherent in other loans on an aggregate basis by loan type.  The credit review process includes the independent evaluation of the loan officer assigned risk ratings by the Chief Credit Officer and a third party loan review company.  Such risk ratings are assigned loss component factors that reflect our loss estimate for each group of loans.  It is management’s and the Board of Directors’ responsibility to oversee the lending process to ensure that all credit risks are properly identified, monitored, and controlled, and that loan pricing, terms and other safeguards against non-performance and default are commensurate with the level of risk undertaken and is rated as such based on a risk-rating system.  Factors considered in assigning risk ratings and loss component factors include: borrower specific information related to expected future cash flows and operating results, collateral values, financial condition and payment status; levels of and trends in portfolio charge-offs and recoveries; levels in portfolio delinquencies; effects of changes in loan concentrations and observed trends in the economy and other qualitative measurements.

Our risk-rating system is consistent with the classification system used by regulatory agencies and with industry practices. Loan classifications of Substandard, Doubtful or Loss are consistent with the regulatory definitions of classified assets.  The classification system is as follows:    

Pass: This category represents loans performing to contractual terms and conditions and the primary source of repayment is adequate to meet the obligation.  We have five categories within the Pass classification depending on strength of repayment sources, collateral values and financial condition of the borrower. 

Special Mention:  This category represents loans performing to contractual terms and conditions; however the primary source of repayment or the borrower is exhibiting some deterioration or weaknesses in financial condition that could potentially threaten the borrowers’ future ability to repay our loan principal and interest or fees due.

Substandard: This category represents loans that the primary source of repayment has significantly deteriorated or weakened which has or could threaten the borrowers’ ability to make scheduled payments.  The weaknesses require close supervision by management and there is a distinct possibility that we could sustain some loss if the deficiencies are not corrected.  Such weaknesses could jeopardize the timely and ultimate collection of our loan principal and interest or fees due.  Loss may not be expected or evident, however, loan repayment is inadequately supported by current financial information or pledged collateral.

Doubtful: Loans so classified have all the inherent weaknesses of a substandard loan with the added provision that collection or liquidation in full is highly questionable and not reasonably assured.  The probability of at least partial loss is high, but extraneous factors might strengthen the asset to prevent loss. The validity of the extraneous factors must be continuously monitored. Once these factors are questionable the loan should be considered for full or partial charge-off.

Loss: Loans so classified are considered uncollectible, and of such little value that their continuance as active assets is not warranted.  Such loans are fully charged off.


21



The following tables illustrate our corporate credit risk profile by creditworthiness category as of March 31, 2019 and December 31, 2018໿
໿
(Dollars in thousands)
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
March 31, 2019
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
92,910

 
$
21

 
$
636

 
$

 
$
93,567

Construction
118,666

 
1,224

 
450

 

 
120,340

Commercial real estate
905,959

 
5,855

 
17,277

 

 
929,091

 
$
1,117,535

 
$
7,100

 
$
18,363

 
$

 
$
1,142,998

December 31, 2018
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
80,977

 
$
32

 
$
700

 
$

 
$
81,709

Construction
141,871

 

 
450

 

 
142,321

Commercial real estate
855,180

 
3,908

 
19,361