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Section 1: 10-Q (10-Q)

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

For the quarterly period ended March 31, 2019
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, a smaller reporting company, or an emerging growth 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 o
Accelerated filer x
  Non-accelerated filer o 
Smaller reporting company x
 
Emerging growth company o 
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. o 

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

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

The number of shares outstanding, net of treasury stock, of the Registrant’s Common Stock, no par value, as of May 7, 2019 was 8,712,023.




Stewardship Financial Corporation 
INDEX
 
 
PAGE
 
NUMBER
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition

 
March 31,
2019
 
December 31, 2018
 
(Unaudited)
 
 
 
(Dollars in thousands)
Assets
 

 
 

Cash and due from banks
$
12,836

 
$
16,340

Other interest-earning assets
321

 
483

Cash and cash equivalents
13,157

 
16,823

 
 
 
 
Securities available-for-sale
102,519

 
108,811

Securities held-to-maturity; estimated fair value of $61,110 (at March 31, 2019) and $60,997 (at December 31, 2018)
61,586

 
62,308

Other equity investments, at fair value
1,670

 
1,648

Federal Home Loan Bank of New York stock, at cost
3,922

 
3,965

Loans, net of allowance for loan losses of $8,018 (at March 31, 2019) and $7,926 (at December 31, 2018)
738,703

 
725,404

Premises and equipment, net
7,262

 
7,007

Accrued interest receivable
2,718

 
2,696

Right of use asset
3,092

 

Bank owned life insurance
21,771

 
21,636

Other assets
4,730

 
5,332

Total assets
$
961,130

 
$
955,630

 
 
 
 
Liabilities and Shareholders' equity
 

 
 

 
 
 
 
Liabilities
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
176,356

 
$
174,717

Interest-bearing
607,260

 
607,374

Total deposits
783,616

 
782,091

 
 
 
 
Federal Home Loan Bank of New York advances
63,900

 
65,700

Subordinated Debentures and Subordinated Notes
23,398

 
23,382

Lease liability
3,217

 

Accrued interest payable
1,369

 
1,106

Accrued expenses and other liabilities
3,339

 
3,201

Total liabilities
878,839

 
875,480

 
 
 
 
Shareholders' equity
 

 
 

 
 

 
 

Common stock, no par value: 20,000,000 shares authorized
at March 31, 2019 and December 31, 2018;
8,712,023 and 8,680,388 shares issued and outstanding
at March 31, 2019 and December 31, 2018, respectively
61,321

 
61,030

Retained earnings
22,160

 
21,056

Accumulated other comprehensive loss, net
(1,190
)
 
(1,936
)
Total Shareholders' equity
82,291

 
80,150

Total liabilities and Shareholders' equity
$
961,130

 
$
955,630


See accompanying notes to unaudited consolidated financial statements.

1


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(Dollars in thousands, except per share amounts)
Interest income:
 
 
 
Loans
$
8,238

 
$
7,518

Securities held-to-maturity:


 


Taxable
375

 
250

Nontaxable
19

 
33

Securities available-for-sale:


 


Taxable
671

 
593

Nontaxable
14

 
14

Other equity investments
12

 
25

FHLB dividends
60

 
64

Other interest-earning assets
12

 
42

Total interest income
9,401

 
8,539

Interest expense:
 
 
 
Deposits
1,708

 
1,065

FHLB-NY Borrowings
316

 
259

Subordinated Debentures and Subordinated Notes
393

 
392

Total interest expense
2,417

 
1,716

Net interest income before provision for loan losses
6,984

 
6,823

Provision for loan losses
65

 
(335
)
Net interest income after provision for loan losses
6,919

 
7,158

Noninterest income:
 
 
 
Fees and service charges
562

 
507

Bank owned life insurance
135

 
138

Gain on calls and sales of securities, net
2

 
6

Gain on sales of mortgage loans
25

 
22

Gain on sales of SBA loans
41

 

Gain (loss) on equity investments
22

 
(74
)
Miscellaneous
119

 
126

Total noninterest income
906

 
725

Noninterest expenses:
 
 
 
Salaries and employee benefits
3,137

 
3,109

Occupancy, net
449

 
442

Equipment
205

 
181

Data processing
503

 
484

Advertising
183

 
157

FDIC insurance premium
64

 
64

Charitable contributions
195

 
180

Bank-card related services
131

 
127

Miscellaneous
725

 
684

Total noninterest expenses
5,592

 
5,428

Income before income tax expense
2,233

 
2,455

Income tax expense
586

 
647

Net income
$
1,647

 
$
1,808

Basic and diluted earnings per common share
$
0.19

 
$
0.21

Weighted average number of basic and diluted common shares outstanding
8,687,969

 
8,658,506


See accompanying notes to unaudited consolidated financial statements. 

2


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
 
 
 
 
Net income
$
1,647

 
$
1,808

Other comprehensive income (loss), net of tax:
 
 
 
Change in unrealized holding gains (losses) on securities available-for-sale during the period
962

 
(993
)
Reclassification adjustment for securities available-for-sale gains in net income
(1
)
 
(4
)
Accretion of loss on securities reclassified to held-to-maturity
2

 
9

Change in fair value of interest rate swap in a cash flow hedging relationship
(219
)
 
158

Reclassification adjustment for interest rate swap interest expense in net income
2

 
9

Total other comprehensive income (loss)
746

 
(821
)
 
 
 
 
Total comprehensive income
$
2,393

 
$
987

 
See accompanying notes to unaudited consolidated financial statements.


3


Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
 
Three Months Ended March 31, 2019
 
Common Stock
 
Retained
 
Accumulated
Other
Comprehen-sive
 
 
 
Shares
 
Amount
 
Earnings
 
Loss
 
Total
 
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
Balance -- December 31, 2018
8,680,388

 
$
61,030

 
$
21,056

 
$
(1,936
)
 
$
80,150

Cash dividends declared on common stock

 

 
(260
)
 

 
(260
)
Payment of discount on dividend reinvestment plan

 
(1
)
 

 

 
(1
)
Common stock issued under dividend reinvestment plan
2,475

 
21

 

 

 
21

Common stock issued under stock plans
1,593

 
14

 

 

 
14

Issuance of restricted stock
36,415

 
340

 
(340
)
 

 

Compensation expense on restricted stock

 

 
57

 

 
57

Restricted stock forfeited
(8,848
)
 
(83
)
 

 

 
(83
)
Net income

 

 
1,647

 

 
1,647

Other comprehensive income

 

 

 
746

 
746

Balance -- March 31, 2019
8,712,023

 
$
61,321

 
$
22,160

 
$
(1,190
)
 
$
82,291


 
Three Months Ended March 31, 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

 

 
(260
)
 

 
(260
)
Payment of discount on dividend reinvestment plan

 
(1
)
 

 

 
(1
)
Common stock issued under dividend reinvestment plan
2,062

 
22

 

 

 
22

Common stock issued under stock plans
1,638

 
16

 

 

 
16

Issuance of restricted stock
28,221

 
301

 
(301
)
 

 

Compensation expense on restricted stock

 

 
48

 

 
48

Restricted stock forfeited
(9,835
)
 
(105
)
 
 
 
 
 
(105
)
Net income

 

 
1,808

 

 
1,808

Other comprehensive loss

 

 

 
(821
)
 
(821
)
Balance -- Reclassification due to adoption of ASU 2016-01

 

 
(163
)
 
163

 

Balance -- March 31, 2018
8,674,890

 
$
60,975

 
$
15,439

 
$
(2,042
)
 
$
74,372


See accompanying notes to unaudited consolidated financial statements.

4


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income
$
1,647

 
$
1,808

Adjustments to reconcile net income to
 

 
 

net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization of premises and equipment
139

 
111

Amortization of premiums and accretion of discounts, net
105

 
132

Compensation expense on restricted stock, net of forfeitures
57

 
47

Amortization of subordinated debenture issuance costs
16

 
16

Accretion of deferred loan fees
41

 
26

Fair value adjustment for equity security
(22
)
 
74

Provision for loan losses
65

 
(335
)
Originations of mortgage loans held-for-sale
(985
)
 
(847
)
Proceeds from sale of mortgage loans
1,010

 
1,239

Gain on sales of mortgage loans
(25
)
 
(22
)
Gain on sale of SBA loans
(41
)
 

Gain on calls and sales of securities
(2
)
 
(6
)
Deferred income tax expense (benefit)
(766
)
 
134

(Increase) decrease in accrued interest receivable
(22
)
 
128

Increase (decrease) in accrued interest payable
263

 
(451
)
Earnings on bank owned life insurance
(135
)
 
(138
)
(Increase) decrease in other assets
984

 
(173
)
Increase in other liabilities
47

 
452

Net cash provided by operating activities
2,376

 
2,195

Cash flows from investing activities:
 

 
 

Purchase of securities available-for-sale

 
(4,016
)
Proceeds from maturities and principal repayments on securities available-for-sale
3,381

 
4,359

Proceeds from sales and calls on securities available-for-sale
4,170

 
1,006

Purchase of securities held-to-maturity
(1,468
)
 
(1,493
)
Proceeds from maturities and principal repayments on securities held-to-maturity
1,069

 
1,741

Proceeds from calls on securities held-to-maturity
1,105

 
280

Purchase of equity securities

 
(24
)
Purchase of FHLB-NY stock
(2,902
)
 
(756
)
Redemption of FHLB-NY stock
2,945

 
1,432

Net (increase) decrease in loans
(13,364
)
 
3,594

Additions to premises and equipment
(394
)
 
(200
)
Net cash proved by (used in) investing activities
(5,458
)
 
5,923

Cash flows from financing activities:
 

 
 

Net increase in noninterest-bearing deposits
1,639

 
5,711

Net increase (decrease) in interest-bearing deposits
(114
)
 
2,406

Net increase (decrease) in long term borrowings
5,000

 
(15,000
)
Net decrease in short-term borrowings
(6,800
)
 

 
 
 
 

5


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows, continued
(Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
Cash flows from financing activities:
 
 
 
Cash dividends paid on common stock
(260
)
 
(260
)
Payment of discount on dividend reinvestment plan
(1
)
 
(1
)
Taxes paid related to net share settlement of restricted stock
(83
)
 
(104
)
Issuance of common stock for cash
35

 
38

Net cash used in financing activities
(584
)
 
(7,210
)
Net increase (decrease) in cash and cash equivalents
(3,666
)
 
908

Cash and cash equivalents - beginning
16,823

 
21,270

Cash and cash equivalents - ending
$
13,157

 
$
22,178

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
2,154

 
$
2,166

Cash paid during the period for income taxes
$
14

 
$


See accompanying notes to unaudited consolidated financial statements.  


6


Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
March 31, 2019
(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, 2018, filed with the SEC on March 15, 2019.
 
The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the SEC and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the interim consolidated financial statements, have been included. The results of operations for the three months ended March 31, 2019 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 from those estimates and assumptions.
 
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 February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, “Leases (Subtopic 842).” This ASU requires all lessees to recognize a lease liability and a right of use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The amendments in ASU 2016-02 are effective for fiscal years, including interim periods, beginning after December 15, 2018. Early adoption of ASU 2016-02 was 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,

7


Leases" ASU 2018-11, "Leases (Topic 842): Targeted Improvements" and ASU 2019-01, "Leases (Topic 842): Codification Improvements". The Corporation adopted the modified retrospective approach under ASU 2018-11. The Corporation's adoption of the modified retrospective approach under ASU 2018-11 on January 1, 2019 resulted in the recording of a $3.4 million lease liability with a corresponding right of use asset on the Consolidated Statements of Financial Condition.
 
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. As of March 31, 2019, the Corporation has evaluated available historical data, identified the expected loan pools, put in place preliminary shadow accounting and is currently continuing to review assumptions and sample forecasts.

In March 2017, the 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. ASU 2017-08 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 ASU 2017-08 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. As the Corporation already amortizes these premiums to the call date, the adoption of this ASU on January 1, 2019 did not have any impact on the Corporation's consolidated financial statements.



8


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:
 
March 31, 2019
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. government-sponsored agencies
$
21,744

 
$
9

 
$
(284
)
 
$
21,469

Obligations of state and political subdivisions
3,202

 
1

 
(17
)
 
3,186

Mortgage-backed securities
61,249

 
138

 
(845
)
 
60,542

Asset-backed securities (a)
4,201

 
3

 
(13
)
 
4,191

Corporate debt (b)
13,351

 
31

 
(251
)
 
13,131

 
 
 
 
 
 
 
 
Total available-for-sale securities
$
103,747

 
$
182

 
$
(1,410
)
 
$
102,519

 
 
December 31, 2018
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. government-sponsored agencies
$
26,232

 
$
15

 
$
(498
)
 
$
25,749

Obligations of state and political subdivisions
3,205

 

 
(84
)
 
3,121

Mortgage-backed securities
63,659

 
68

 
(1,564
)
 
62,163

Asset-backed securities (a)
4,916

 
6

 

 
4,922

Corporate debt (b)
13,369

 
48

 
(561
)
 
12,856

 
 
 
 
 
 
 
 
Total available-for-sale securities
$
111,381

 
$
137

 
$
(2,707
)
 
$
108,811

 
(a) Collateralized by student loans.
(b) Corporate debt securities are primarily in financial institutions.

Cash proceeds realized from sales and calls of securities available-for-sale for the three months ended March 31, 2019 were $4,170,000. Cash proceeds realized from sales and calls of securities available-for-sale for the three months ended March 31, 2018 were $1,006,000. There were gross gains totaling $2,000 and no gross losses realized on sales or calls during the three months ended March 31, 2019. There were gross gains totaling $6,000 and no gross losses realized on sales or calls during the three months ended March 31, 2018.


9


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

 
March 31, 2019
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. Treasury
$
1,000

 
$

 
$
(10
)
 
$
990

U.S. government-sponsored agencies
34,564

 
33

 
(453
)
 
34,144

Obligations of state and political subdivisions
2,031

 
13

 
(20
)
 
2,024

Mortgage-backed securities
23,991

 
133

 
(172
)
 
23,952

 
 
 
 
 
 
 
 
Total held-to-maturity securities
$
61,586

 
$
179

 
$
(655
)
 
$
61,110

 
 
December 31, 2018
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
 
 
 
 
 
 
 
 
U.S. Treasury
$
999

 
$

 
$
(14
)
 
$
985

U.S. government-sponsored agencies
35,565

 
20

 
(976
)
 
34,609

Obligations of state and political subdivisions
2,358

 
14

 
(27
)
 
2,345

Mortgage-backed securities
23,386

 
47

 
(375
)
 
23,058

 
 
 
 
 
 
 
 
Total held-to-maturity securities
$
62,308

 
$
81

 
$
(1,392
)
 
$
60,997

 
Cash proceeds realized from calls of securities held-to-maturity for the three months ended March 31, 2019 were $1,105,000. Cash proceeds realized from calls of securities held-to-maturity for the three months ended March 31, 2018 were $280,000. There were no gross gains and no gross losses realized on calls during the three months ended March 31, 2019 and March 31, 2018.
 
Mortgage-backed securities are a type of asset-backed security secured by a mortgage or collection of mortgages, purchased by government agencies such as the Government National Mortgage Association and government-sponsored agencies such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, which then issue securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool.
 

10


The following table presents the amortized cost and fair value of the debt securities portfolio by contractual maturity. As issuers may have the right to call or prepay obligations with or without call or prepayment premiums, the actual maturities may differ from contractual maturities. Securities not due at a single maturity date, such as mortgage-backed securities and asset-backed securities, are shown separately.
 
 
March 31, 2019
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
 
 
 
 
Available-for-sale
 

 
 

Within one year
$
1,635

 
$
1,626

After one year, but within five years
11,728

 
11,610

After five years, but within ten years
20,708

 
20,465

After ten years
4,226

 
4,085

Mortgage-backed securities
61,249

 
60,542

Asset-backed securities
4,201

 
4,191

 
 
 
 
Total
$
103,747

 
$
102,519

 
 
 
 
Held-to-maturity
 

 
 

Within one year
$
1,655

 
$
1,650

After one year, but within five years
17,065

 
16,928

After five years, but within ten years
18,389

 
18,114

After ten years
486

 
466

Mortgage-backed securities
23,991

 
23,952

 
 
 
 
Total
$
61,586

 
$
61,110

 
The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at March 31, 2019 and December 31, 2018, and if the unrealized loss position was continuous for the twelve months prior to March 31, 2019 and December 31, 2018.
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
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
$

 
$

 
$
15,414

 
$
(284
)
 
$
15,414

 
$
(284
)
Obligations of state and political subdivisions

 

 
2,201

 
(17
)
 
2,201

 
(17
)
Mortgage-backed securities
158

 

 
46,607

 
(845
)
 
46,765

 
(845
)
Asset-backed securities
2,769

 
(13
)
 

 

 
2,769

 
(13
)
Corporate debt

 

 
9,101

 
(251
)
 
9,101

 
(251
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
2,927

 
$
(13
)
 
$
73,323

 
$
(1,397
)
 
$
76,250

 
$
(1,410
)


11


Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$

 
$

 
$
17,432

 
$
(498
)
 
$
17,432

 
$
(498
)
Obligations of state and political subdivisions

 

 
3,121

 
(84
)
 
3,121

 
(84
)
Mortgage-backed securities
4,177

 
(19
)
 
47,479

 
(1,545
)
 
51,656

 
(1,564
)
Asset-backed securities
2,892

 

 

 

 
2,892

 

Corporate debt

 

 
8,808

 
(561
)
 
8,808

 
(561
)
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
$
7,069

 
$
(19
)
 
$
76,840

 
$
(2,688
)
 
$
83,909

 
$
(2,707
)
 
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
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
$

 
$

 
$
990

 
$
(10
)
 
$
990

 
$
(10
)
U.S. government- sponsored agencies
497

 
(2
)
 
25,442

 
(451
)
 
25,939

 
(453
)
Obligations of state and political subdivisions

 

 
466

 
(20
)
 
466

 
(20
)
Mortgage-backed securities
1,460

 
(3
)
 
13,778

 
(169
)
 
15,238

 
(172
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
1,957

 
$
(5
)
 
$
40,676

 
$
(650
)
 
$
42,633

 
$
(655
)
 
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$

 
$

 
$
985

 
$
(14
)
 
$
985

 
$
(14
)
U.S. government- sponsored agencies
2,496

 
(9
)
 
24,595

 
(967
)
 
27,091

 
(976
)
Obligations of state and political subdivisions

 

 
461

 
(27
)
 
461

 
(27
)
Mortgage-backed securities
5,885

 
(67
)
 
11,081

 
(308
)
 
16,966

 
(375
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
8,381

 
$
(76
)
 
$
37,122

 
$
(1,316
)
 
$
45,503

 
$
(1,392
)
 

12


Other-Than-Temporary Impairment
 
At March 31, 2019, there were available-for-sale investments comprising nineteen U.S. government-sponsored agency securities, five obligations of state and political subdivision securities, seventy-three mortgage-backed securities, and nine corporate debt securities in a continuous loss position for twelve months or longer. At March 31, 2019, there were held-to-maturity investments comprising one U.S. Treasury security, twenty-six U.S. government-sponsored agency securities, one obligation of state and political subdivision security, and thirty-two 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 March 31, 2019 and December 31, 2018 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.
 
Management does not intend to sell securities in an unrealized loss position and it is not more likely than not that the Corporation 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 March 31, 2019 and December 31, 2018, respectively, the loan portfolio consisted of the following:

 
March 31,
2019
 
December 31,
2018
 
(In thousands)
Commercial:
 

 
 

Secured by real estate
$
30,351

 
$
28,790

Other
75,458

 
64,965

Commercial real estate
504,961

 
504,522

Commercial construction
11,225

 
9,787

Residential real estate
81,215

 
82,491

Consumer:
 

 
 

Secured by real estate
36,919

 
36,120

Other
476

 
455

Government Guaranteed Loans - guaranteed portion
6,492

 
6,559

Other
82

 
98

 
 
 
 
Total gross loans
747,179

 
733,787

 
 
 
 
Less: Deferred loan costs, net
458

 
457

          Allowance for loan losses
8,018

 
7,926

 
8,476

 
8,383

 
 
 
 
Loans, net
$
738,703

 
$
725,404

 
Included in Commercial - Other and Commercial real estate at March 31, 2019 were $167,000 and $$3,589,000, respectively, of Small Business Administration ("SBA") loans for which the guaranteed portions have been sold.
 

13


In addition to the origination of SBA loans, prior to 2017, the Corporation purchased the guaranteed portion of several Government Guaranteed loans. These loans are listed separately in the table above. Due to the guarantee of the principal amount of these loans, no allowance for loan losses is established for these loans.

Excluded from the table above are $15.5 million and $14.3 million of unpaid principal balances of loans serviced for others at March 31, 2019 and December 31, 2018.

Activity in the allowance for loan losses is summarized as follows:
 
 
Three Months Ended March 31, 2019
 
Balance,
beginning
of period
 
Provision
charged
to operations
 
Loans
charged off
 
Recoveries
of loans
charged off
 
Balance,
end
of period
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Commercial
$
2,703

 
$
251

 
$

 
$
12

 
$
2,966

Commercial real estate
4,947

 
(209
)
 

 
15

 
4,753

Commercial construction
131

 
19

 

 

 
150

Residential real estate
65

 
11

 

 

 
76

Consumer
68

 
(7
)
 

 

 
61

Other loans
1

 

 

 

 
1

Unallocated
11

 

 

 

 
11

 
 
 
 
 
 
 
 
 
 
Total
$
7,926

 
$
65

 
$

 
$
27

 
$
8,018

 
 
Three Months Ended March 31, 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

 
$
(189
)
 
$
(29
)
 
$
25

 
$
2,865

Commercial real estate
5,531

 
(204
)
 

 
22

 
5,349

Commercial construction
33

 
48

 

 

 
81

Residential real estate
68

 
4

 

 

 
72

Consumer
64

 
2

 

 
1

 
67

Other loans
1

 

 
(1
)
 

 

Unallocated
7

 
4

 

 

 
11

 
 
 
 
 
 
 
 
 
 
Total
$
8,762

 
$
(335
)
 
$
(30
)
 
$
48

 
$
8,445

 
 
 
 
 
 
 
 
 
 



14


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 March 31, 2019 and December 31, 2018.

 
March 31, 2019
 
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
$
97

 
$
605

 
$

 
$

 
$

 
$

 
$

 
$

 
$
702

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
2,869

 
4,148

 
150

 
76

 
61

 

 
1

 
11

 
7,316

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total ending allowance balance
$
2,966

 
$
4,753

 
$
150

 
$
76

 
$
61

 
$

 
$
1

 
$
11

 
$
8,018

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
$
627

 
$
6,182

 
$

 
$
558

 
$

 
$

 
$

 
$

 
$
7,367

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans collectively evaluated for impairment
105,182

 
498,779

 
11,225

 
80,657

 
37,395

 
6,492

 
82

 

 
739,812

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total ending loan balance
$
105,809

 
$
504,961

 
$
11,225

 
$
81,215

 
$
37,395

 
$
6,492

 
$
82

 
$

 
$
747,179



15


 
December 31, 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
$
88

 
$
561

 
$

 
$

 
$

 
$

 
$

 
$

 
$
649

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
2,615

 
4,386

 
131

 
65

 
68

 

 
1

 
11

 
7,277

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total ending allowance balance
$
2,703

 
$
4,947

 
$
131

 
$
65

 
$
68

 
$

 
$
1

 
$
11

 
$
7,926

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
$
633

 
$
6,079

 
$

 
$
576

 
$

 
$

 
$

 
$

 
$
7,288

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans collectively evaluated for impairment
93,122

 
498,443

 
9,787

 
81,915

 
36,575

 
6,559

 
98

 

 
726,499

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total ending loan balance
$
93,755

 
$
504,522

 
$
9,787

 
$
82,491

 
$
36,575

 
$
6,559

 
$
98

 
$

 
$
733,787


The following table presents the recorded investment in nonaccrual loans at the dates indicated:
 
March 31,
2019
 
December 31,
2018
 
(In thousands)
Commercial:
 
 
 
    Secured by real estate
$
396

 
$
394

Commercial real estate
822

 
574

Residential real estate
558

 
576

Total nonaccrual loans
$
1,776

 
$
1,544


At March 31, 2019 and December 31, 2018, there were no loans that were past due 90 days and still accruing.

16



The following table presents information regarding loans individually evaluated for impairment by class of loan at and for the periods indicated:

 
At March 31, 2019
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Allowance for
Loan Losses
Allocated
 
(In thousands)
With no related allowance recorded:
 
 
 
 
 
Commercial:
 
 
 
 
 
Secured by real estate
$
421

 
$
414

 
 
Commercial real estate
3,288

 
2,959

 
 
Residential Real Estate
579

 
558