UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 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 August 2, 2019 was 8,714,222.

Stewardship Financial Corporation

INDEX



	PAGE
	NUMBER
PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

Consolidated Statements of Financial Condition at June 30, 2019 (Unaudited) and December 31, 2018	1

Consolidated Statements of Income for the Three and Six Months ended June 30, 2019 and 2018 (Unaudited)	2

Consolidated Statements of Comprehensive Income for the Three and Six Months ended June 30, 2019 and 2018 (Unaudited)	3

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months ended June 30, 2019 and 2018 (Unaudited)	4

Consolidated Statements of Cash Flows for the Six Months ended June 30, 2019 and 2018 (Unaudited)	6

Notes to Consolidated Financial Statements (Unaudited)	8

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	35

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	46

ITEM 4 - CONTROLS AND PROCEDURES	46

PART II - OTHER INFORMATION

ITEM 1A - RISK FACTORS	47

ITEM 6 - EXHIBITS	48

SIGNATURES	49

EXHIBIT INDEX	50

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition



	June 30, 2019			December 31, 2018
	(Unaudited)
	(Dollars in thousands)
Assets
Cash and due from banks	$	12,317		$	16,340
Other interest-earning assets	293			483
Cash and cash equivalents	12,610			16,823

Securities available-for-sale	96,117			108,811
Securities held-to-maturity; estimated fair value of $62,446 (at June 30, 2019) and $60,997 (at December 31, 2018)	62,264			62,308
Other equity investments, at fair value	1,693			1,648
Federal Home Loan Bank of New York stock, at cost	4,091			3,965
Loans held for sale	469			—
Loans, net of allowance for loan losses of $8,404 (at June 30, 2019) and $7,926 (at December 31, 2018)	748,055			725,404
Premises and equipment, net	7,146			7,007
Accrued interest receivable	2,640			2,696
Right of use asset	2,917			—
Bank owned life insurance	21,908			21,636
Other assets	4,354			5,332
Total assets	$	964,264		$	955,630

Liabilities and Shareholders' equity

Liabilities
Deposits:
Noninterest-bearing	$	182,971		$	174,717
Interest-bearing	598,974			607,374
Total deposits	781,945			782,091

Federal Home Loan Bank of New York advances	67,400			65,700
Subordinated Debentures and Subordinated Notes	23,415			23,382
Lease liability	3,043			—
Accrued interest payable	906			1,106
Accrued expenses and other liabilities	3,465			3,201
Total liabilities	880,174			875,480

Shareholders' equity

Common stock, no par value: 20,000,000 shares authorized at June 30, 2019 and December 31, 2018; 8,714,222 and 8,680,388 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively	61,338			61,030
Retained earnings	23,419			21,056
Accumulated other comprehensive loss, net	(667		)	(1,936		)
Total Shareholders' equity	84,090			80,150
Total liabilities and Shareholders' equity	$	964,264		$	955,630

See accompanying notes to unaudited consolidated financial statements.

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Income

(Unaudited)



	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2019		2018			2019		2018
	(Dollars in thousands, except per share amounts)
Interest income:
Loans	$	8,660	$	7,770		$	16,898	$	15,288
Securities held-to-maturity:
Taxable	379		279			754		529
Nontaxable	17		23			36		56
Securities available-for-sale:
Taxable	613		637			1,284		1,230
Nontaxable	14		15			28		29
Other equity investments	11		26			23		51
FHLB dividends	59		58			119		122
Other interest-earning assets	19		60			31		102
Total interest income	9,772		8,868			19,173		17,407
Interest expense:
Deposits	1,844		1,269			3,552		2,334
FHLB-NY Borrowings	371		198			687		457
Subordinated Debentures and Subordinated Notes	393		393			786		785
Total interest expense	2,608		1,860			5,025		3,576
Net interest income before provision for loan losses	7,164		7,008			14,148		13,831
Provision for loan losses	330		(780		)	395		(1,115		)
Net interest income after provision for loan losses	6,834		7,788			13,753		14,946
Noninterest income:
Fees and service charges	572		551			1,134		1,058
Bank owned life insurance	138		138			273		276
Gain on calls and sales of securities, net	1		—			3		6
Gain on sales of mortgage loans	23		9			48		31
Gain on sales of SBA loans	71		59			112		59
Gain (loss) on equity investments	24		(29		)	46		(103		)
Miscellaneous	106		131			225		257
Total noninterest income	935		859			1,841		1,584
Noninterest expenses:
Salaries and employee benefits	3,102		3,129			6,239		6,238
Occupancy, net	417		403			866		845
Equipment	234		188			439		369
Data processing	515		478			1,018		962
Advertising	194		207			377		364
FDIC insurance premium	65		70			129		134
Charitable contributions	175		195			370		375
Bank-card related services	138		131			269		258
Merger-related expenses	291		—			291		—
Miscellaneous	655		703			1,380		1,387
Total noninterest expenses	5,786		5,504			11,378		10,932
Income before income tax expense	1,983		3,143			4,216		5,598
Income tax expense	530		842			1,116		1,489
Net income	$	1,453	$	2,301		$	3,100	$	4,109
Basic and diluted earnings per common share	$	0.17	$	0.27		$	0.36	$	0.47
Weighted average number of basic and diluted common shares outstanding	8,713,110		8,675,868			8,700,609		8,667,235

See accompanying notes to unaudited consolidated financial statements.

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
	(In thousands)

Net income	$	1,453		$	2,301		$	3,100		$	4,109
Other comprehensive income (loss), net of tax:
Change in unrealized holding gains (losses) on securities available-for-sale during the period	911			(359		)	1,873			(1,352		)
Reclassification adjustment for securities available-for-sale gains in net income	(1		)	—			(2		)	(4		)
Accretion of loss on securities reclassified to held-to-maturity	3			4			5			13
Change in fair value of interest rate swap in a cash flow hedging relationship	(395		)	53			(614		)	211
Reclassification adjustment for interest rate swap interest expense in net income	5			2			7			11
Total other comprehensive income (loss)	523			(300		)	1,269			(1,121		)

Total comprehensive income	$	1,976		$	2,001		$	4,369		$	2,988

See accompanying notes to unaudited consolidated financial statements.

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Changes in Shareholders' Equity

(Unaudited)



	Six Months Ended June 30, 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

Cash dividends declared on common stock	—		—			(262		)	—			(262		)
Payment of discount on dividend reinvestment plan	—		(1		)	—			—			(1		)
Common stock issued under dividend reinvestment plan	2,453		20			—			—			20
Common stock issued under stock plans	—		—			—			—			—
Compensation expense on restricted stock	—		—			68			—			68
Restricted stock forfeited	(254	)	(2		)	—			—			(2		)
Net income	—		—			1,453			—			1,453
Other comprehensive income	—		—			—			523			523
Balance -- June 30, 2019	8,714,222		$	61,338		$	23,419		$	(667	)	$	84,090

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Changes in Shareholders' Equity, continued

(Unaudited)



	Six Months Ended June 30, 2018
	Common Stock					Retained			Accumulated Other Comprehen-sive
	Shares		Amount			Earnings			Loss			Total
	(Dollars in thousands, except per share amounts)

Balance -- December 31, 2017	8,652,804		$	60,742		$	14,307		$	(1,384	)	$	73,665
Cash dividends declared on common stock	—		—			(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

Cash dividends declared on common stock	—		—			(260		)	—			(260		)
Payment of discount on dividend reinvestment plan	—		(1		)	—			—			(1		)
Common stock issued under dividend reinvestment plan	1,934		22			—			—			22
Common stock issued under stock plans	19		—			—			—			—
Compensation expense on restricted stock	—		—			54			—			54
Net income	—		—			2,301			—			2,301
Other comprehensive loss	—		—			—			(300		)	(300		)
Reclassification due to adoption of ASU 2016-01	—		—			—			—			—
Balance -- June 30, 2018	8,676,843		$	60,996		$	17,534		$	(2,342	)	$	76,188

See accompanying notes to unaudited consolidated financial statements.

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)



	Six Months Ended
	June 30,
	2019			2018
	(In thousands)
Cash flows from operating activities:
Net income	$	3,100		$	4,109
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment	286			227
Amortization of premiums and accretion of discounts, net	212			244
Compensation expense on restricted stock, net of forfeitures	40			(3		)
Amortization of subordinated debenture issuance costs	33			33
Accretion of deferred loan fees	47			67
Fair value adjustment for equity security	(46		)	103
Provision for loan losses	395			(1,115		)
Originations of mortgage loans held-for-sale	(3,143		)	(2,771		)
Proceeds from sale of mortgage loans	2,722			2,565
Gain on sales of mortgage loans	(48		)	(31		)
Gain on sale of SBA loans	(112		)	(59		)
Gain on calls and sales of securities	(3		)	(6		)
Deferred income tax expense (benefit)	(1,499		)	173
Decrease in accrued interest receivable	56			99
Decrease in accrued interest payable	(200		)	(5		)
Earnings on bank owned life insurance	(273		)	(276		)
(Increase) decrease in other assets	1,729			(476		)
Decrease in other liabilities	(219		)	(310		)
Net cash provided by operating activities	3,077			2,568
Cash flows from investing activities:
Purchase of securities available-for-sale	—			(14,191		)
Proceeds from maturities and principal repayments on securities available-for-sale	6,976			7,827
Proceeds from sales and calls on securities available-for-sale	8,170			1,006
Purchase of securities held-to-maturity	(3,968		)	(9,829		)
Proceeds from maturities and principal repayments on securities held-to-maturity	2,374			3,485
Proceeds from calls on securities held-to-maturity	1,605			280
Purchase of equity securities	—			(42		)
Purchase of FHLB-NY stock	(5,632		)	(1,203		)
Redemption of FHLB-NY stock	5,506			1,831
Net increase in loans	(22,981		)	(9,643		)
Additions to premises and equipment	(425		)	(270		)
Net cash used in investing activities	(8,375		)	(20,749		)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits	8,254			15,482
Net increase (decrease) in interest-bearing deposits	(8,400		)	12,480
Net increase in long term borrowings	25,000			—
Repayment of long term borrowings	(20,000		)	(20,760		)
Net increase (decrease) in short-term borrowings	(3,300		)	3,700



Stewardship Financial Corporation and Subsidiary Consolidated Statements of Cash Flows, continued (Unaudited)


	Six Months Ended
	June 30,
	2019			2018
	(In thousands)
Cash flows from financing activities (continued):
Cash dividends paid on common stock	(522		)	(520		)
Payment of discount on dividend reinvestment plan	(2		)	(2		)
Issuance of common stock for cash	55			60
Net cash provided by financing activities	1,085			10,440
Net decrease in cash and cash equivalents	(4,213		)	(7,741		)
Cash and cash equivalents - beginning	16,823			21,270
Cash and cash equivalents - ending	$	12,610		$	13,529



Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	5,225	$	3,581
Cash paid during the period for income taxes	$	512	$	1,335

See accompanying notes to unaudited consolidated financial statements.

Stewardship Financial Corporation and Subsidiary

Notes to Consolidated Financial Statements

June 30, 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 six months ended June 30, 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.

Merger with Columbia Financial, Inc.

As previously announced on June 6, 2019, the Corporation entered into an Agreement and Plan of Merger (the "Merger Agreement") with Columbia Financial, Inc. ("Columbia") and Broadway Acquisition Corp., a wholly owned subsidiary of Columbia, pursuant to which Broadway Acquisition Corp. will merge with and into the Corporation and, immediately thereafter, the Corporation will merge with and into Columbia (the "Merger") with Columbia being the surviving corporation. Immediately after the Merger, the Corporation’s wholly owned bank subsidiary, Atlantic Stewardship Bank, will merge with and into Columbia’s wholly owned bank subsidiary, Columbia Bank (the “Bank Merger”) with Columbia Bank being the surviving bank in the merger. On a pro forma basis at June 30, 2019, the consolidated entity would have approximately $7.9 billion in assets, $5.8 billion of loans and $5.5 billion of deposits. The Merger Agreement, the Merger and the Bank Merger have been approved by the boards of directors of the Corporation and Columbia and the transaction is expected to close in the fourth quarter of 2019 pending the receipt of all regulatory approvals, the approval of the Corporation’s shareholders, and the satisfaction of customary closing conditions. Under the terms of the Merger Agreement, cash consideration of $15.75 will be paid to the shareholders of the Corporation for each of their shares of the Corporation’s common stock.

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, 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 and a $3.3 million 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. Subsequently, the FASB issued the following standards related to ASU 2016-13: ASU 2019-04 "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” and ASU 2019-05 "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief.” 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 had 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. As of June 30, 2019, the Corporation continues to be heavily focused on reasonable and supportable assumptions and forecasts for the new reserve calculation. In addition, the Corporation has begun to complete, review and refine parallel calculations.

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.

Note 2. Securities – Available-for-Sale and Held-to-Maturity

The amortized cost, gross unrealized gains and losses and fair value of the available-for-sale securities were as follows:



	June 30, 2019
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
	(In thousands)

U.S. government-sponsored agencies	$	17,475	$	13	$	(46	)	$	17,442
Obligations of state and political subdivisions	3,198		17		(1		)	3,214
Mortgage-backed securities	58,293		316		(246		)	58,363
Asset-backed securities (a)	3,770		1		(27		)	3,744
Corporate debt (b)	13,334		103		(83		)	13,354

Total available-for-sale securities	$	96,070	$	450	$	(403	)	$	96,117



	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 and six months ended June 30, 2019 were $4,000,000 and $8,170,000, respectively. Cash proceeds realized from sales and calls of securities available-for-sale for the three and six months ended June 30, 2018 were $0 and $1,006,000, respectively. Gross gains realized on sales and calls during the three and six months ended June 30, 2019, were $1,000 and $3,000, respectively. There were no gross losses realized on sales or calls during the three and six months ended June 30, 2019, respectively. Gross gains realized on sales and calls during the three and six months ended June 30, 2018, were $0 and $6,000, respectively. There were no gross losses realized on sales or calls during the three and six months ended June 30, 2018, respectively.

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



	June 30, 2019
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
	(In thousands)

U.S. Treasury	$	1,000	$	—	$	(5	)	$	995
U.S. government-sponsored agencies	36,563		50		(84		)	36,529
Obligations of state and political subdivisions	1,914		11		(11		)	1,914
Mortgage-backed securities	22,787		246		(25		)	23,008

Total held-to-maturity securities	$	62,264	$	307	$	(125	)	$	62,446



	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 and six months ended June 30, 2019 were $500,000 and $1,605,000, respectively. Cash proceeds realized from calls of securities held-to-maturity for the three and six months ended June 30, 2018 were $0 and $280,000, respectively. There were no gross gains and no gross losses realized on calls during the three and six months ended June 30, 2019 and June 30, 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.

The following table presents the amortized cost and fair value of the debt securities portfolio by contractual maturity. As issuers may have the right to call or prepay obligations with or without call or prepayment premiums, the actual maturities may differ from contractual maturities. Securities not due at a single maturity date, such as mortgage-backed securities and asset-backed securities, are shown separately.



	June 30, 2019
	Amortized Cost		Fair Value
	(In thousands)

Available-for-sale
Within one year	$	2,134	$	2,129
After one year, but within five years	13,870		13,840
After five years, but within ten years	14,008		14,077
After ten years	3,995		3,964
Mortgage-backed securities	58,293		58,363
Asset-backed securities	3,770		3,744

Total	$	96,070	$	96,117

Held-to-maturity
Within one year	$	1,670	$	1,670
After one year, but within five years	20,329		20,327
After five years, but within ten years	16,994		16,968
After ten years	484		473
Mortgage-backed securities	22,787		23,008

Total	$	62,264	$	62,446

The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at June 30, 2019 and December 31, 2018, and if the unrealized loss position was continuous for the twelve months prior to June 30, 2019 and December 31, 2018.



Available-for-sale
June 30, 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	$	998	$	(2	)	$	6,798	$	(44	)	$	7,796	$	(46	)
Obligations of state and political subdivisions	—		—			310		(1		)	310		(1		)
Mortgage-backed securities	530		(1		)	22,966		(245		)	23,496		(246		)
Asset-backed securities	—		—			2,650		(27		)	2,650		(27		)
Corporate debt	499		(1		)	7,703		(82		)	8,202		(83		)

Total temporarily impaired securities	$	2,027	$	(4	)	$	40,427	$	(399	)	$	42,454	$	(403	)



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
June 30, 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	$	—	$	—		$	995	$	(5	)	$	995	$	(5	)
U.S. government- sponsored agencies	1,993		(7		)	11,811		(77		)	13,804		(84		)
Obligations of state and political subdivisions	—		—			473		(11		)	473		(11		)
Mortgage-backed securities	—		—			6,123		(25		)	6,123		(25		)

Total temporarily impaired securities	$	1,993	$	(7	)	$	19,402	$	(118	)	$	21,395	$	(125	)



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	)

Other-Than-Temporary Impairment

At June 30, 2019, there were available-for-sale investments comprising nine U.S. government-sponsored agency securities, one obligation of state and political subdivision security, forty-four mortgage-backed securities, one asset backed security, and eight corporate debt securities in a continuous loss position for twelve months or longer. At June 30, 2019, there were held-to-maturity investments comprising one U.S. Treasury security, eleven U.S. government-sponsored agency securities, one obligation of state and political subdivision security, and seventeen mortgage-backed securities in a continuous loss position for twelve months or longer. Management has assessed the securities that were in an unrealized loss position at June 30, 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 June 30, 2019 and December 31, 2018, respectively, the loan portfolio consisted of the following:



	June 30, 2019		December 31, 2018
	(In thousands)
Commercial:
Secured by real estate	$	30,139	$	28,790
Other	76,753		64,965
Commercial real estate	514,289		504,522
Commercial construction	11,419		9,787
Residential real estate	78,798		82,491
Consumer:
Secured by real estate	38,421		36,120
Other	661		455
Government Guaranteed Loans - guaranteed portion	6,419		6,559
Other	95		98

Total gross loans	756,994		733,787

Less: Deferred loan costs, net	535		457
Allowance for loan losses	8,404		7,926
	8,939		8,383

Loans, net	$	748,055	$	725,404

Included in Commercial - Other and Commercial real estate at June 30, 2019 were $946,000 and $4,245,000, respectively, of Small Business Administration ("SBA") loans for which the guaranteed portions have been sold.

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 $15.8 million and $14.3 million of unpaid principal balances of loans serviced for others at June 30, 2019 and December 31, 2018.

Activity in the allowance for loan losses is summarized as follows:



	Three Months Ended June 30, 2019
	Balance, beginning of period		Provision charged to operations			Loans charged off		Recoveries of loans charged off		Balance, end of period
	(In thousands)

Commercial	$	2,966	$	153		$	—	$	40	$	3,159
Commercial real estate	4,753		178			—		16		4,947
Commercial construction	150		27			—		—		177
Residential real estate	76		(27		)	—		—		49
Consumer	61		3			—		—		64
Other loans	1		—			—		—		1
Unallocated	11		(4		)	—		—		7

Total	$	8,018	$	330		$	—	$	56	$	8,404

	Six Months Ended June 30, 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	$	404		$	—	$	52	$	3,159
Commercial real estate	4,947		(31		)	—		31		4,947
Commercial construction	131		46			—		—		177
Residential real estate	65		(16		)	—		—		49
Consumer	68		(4		)	—		—		64
Other loans	1		—			—		—		1
Unallocated	11		(4		)	—		—		7

Total	$	7,926	$	395		$	—	$	83	$	8,404



	Three Months Ended June 30, 2018
	Balance, beginning of period		Provision charged to operations			Loans charged off			Recoveries of loans charged off		Balance, end of period
	(In thousands)

Commercial	$	2,865	$	(9	)	$	—		$	75	$	2,931
Commercial real estate	5,349		(757		)	—			612		5,204
Commercial construction	81		(10		)	—			—		71
Residential real estate	72		(3		)	—			—		69
Consumer	67		2			—			—		69
Other loans	—		—			—			1		1
Unallocated	11		(3		)	—			—		8

Total	$	8,445	$	(780	)	$	—		$	688	$	8,353

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

Commercial	$	3,058	$	(198	)	$	(29	)	$	100	$	2,931
Commercial real estate	5,531		(961		)	—			634		5,204
Commercial construction	33		38			—			—		71
Residential real estate	68		1			—			—		69
Consumer	64		4			—			1		69
Other loans	1		—			(1		)	1		1
Unallocated	7		1			—			—		8

Total	$	8,762	$	(1,115	)	$	(30	)	$	736	$	8,353

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2019 and December 31, 2018.



	June 30, 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	$	95	$	602	$	—	$	—	$	—	$	—	$	—	$	—	$	697

Collectively evaluated for impairment	3,064		4,345		177		49		64		—		1		7		7,707

Total ending allowance balance	$	3,159	$	4,947	$	177	$	49	$	64	$	—	$	1	$	7	$	8,404


Loans:
Loans individually evaluated for impairment	$	593	$	3,890	$	—	$	1,229	$	—	$	—	$	—	$	—	$	5,712

Loans collectively evaluated for impairment	106,299		510,399		11,419		77,569		39,082		6,419		95		—		751,282

Total ending loan balance	$	106,892	$	514,289	$	11,419	$	78,798	$	39,082	$	6,419	$	95	$	—	$	756,994



	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:



	June 30, 2019		December 31, 2018
	(In thousands)
Commercial:
Secured by real estate	$	369	$	394
Commercial real estate	308		574
Residential real estate	1,229		576
Total nonaccrual loans	$	1,906	$	1,544

At June 30, 2019 and December 31, 2018, there were no loans that were past due 90 days and still accruing.

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



	At June 30, 2019
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
With no related allowance recorded:
Commercial:
Secured by real estate	$	415	$	384
Commercial real estate	936		676
Residential Real Estate	1,255		1,229
	2,606		2,289

With an allowance recorded:
Commercial:
Secured by real estate	91		91		$	91
Other	118		118		4
Commercial real estate	3,214		3,214		602
	3,423		3,423		697

Total:
Commercial:
Secured by real estate	506		475		91
Other	118		118		4
Commercial real estate	4,150		3,890		602
Residential Real Estate	1,255		1,229		—
	$	6,029	$	5,712	$	697



	At December 31, 2018
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
With no related allowance recorded:
Commercial:
Secured by real estate	$	447	$	416
Commercial real estate	3,329		3,001
Residential real estate	587		576
	4,363		3,993

With an allowance recorded:
Commercial:
Secured by real estate	95		95		$	83
Other	122		122		5
Commercial real estate	3,078		3,078		561
	3,295		3,295		649

Total:
Commercial:
Secured by real estate	542		511		83
Other	122		122		5
Commercial real estate	6,407		6,079		561
Residential real estate	587		576		—
	$	7,658	$	7,288	$	649



	Three Months Ended June 30,
	2019				2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no related allowance recorded:
Commercial:
Secured by real estate	$	399	$	1	$	525	$	4
Commercial real estate	1,817		24		3,076		28
Residential Real Estate	894		—		285		—
Consumer:
Secured by real estate	—		—		31		—
Total	3,110		25		3,917		32

With allowance
Commercial:
Secured by real estate	92		1		50		1
Other	119		2		126		2
Commercial real estate	3,219		40		3,099		41
	3,430		43		3,275		44

Total	$	6,540	$	68	$	7,192	$	76

Six Months Ended June 30,

2019

2018

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

(In thousands)

With no related allowance recorded:

Commercial:

Secured by real estate

STEWARDSHIP FINANCIAL CORP 10-Q