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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2021


☐			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: 000-32891


1ST CONSTITUTION BANCORP

(Exact Name of Registrant as Specified in Its Charter)


New Jersey						22-3665653
(State of Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification No.)

2650 Route 130

P.O. Box 634

Cranbury

New Jersey

08512

(Address of Principal Executive Offices)

(Zip Code)


(Registrant’s Telephone Number, Including Area Code)			(609)			655-4500



(Former name, former address and former fiscal year, if changed since last report)

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	FCCY	NASDAQ Global Market

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 ☒ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

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

As of November 5, 2021, there were 10,321,669 shares of the registrant’s common stock, no par value, outstanding.

1ST CONSTITUTION BANCORP

FORM 10-Q

INDEX


		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Consolidated Balance Sheets at September 30, 2021 (unaudited) and December 31, 2020	1

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2021 and September 30, 2020 (unaudited)	2

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and September 30, 2020 (unaudited)	3

	Consolidated Statements of Changes in Shareholders' Equity for the Three and Nine Months Ended September 30, 2021 and September 30, 2020 (unaudited)	4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and September 30, 2020 (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59

Item 4.	Controls and Procedures	60

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	61

Item 1A.	Risk Factors	61

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3.	Defaults Upon Senior Securities	64



Item 4.	Mine Safety Disclosures	64

Item 5.	Other Information	64

Item 6.	Exhibits	65

SIGNATURES		66

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

1ST Constitution Bancorp

Consolidated Balance Sheets

(Dollars in thousands)

(Unaudited)


	September 30, 2021		December 31, 2020
ASSETS
Cash and due from banks	$	14,956	$	3,661
Interest-earning deposits	258,990		18,334
Total cash and cash equivalents	273,946		21,995
Investment securities
Available for sale, at fair value	203,940		125,197
Held to maturity (fair value of $127,234 and $95,640 at September 30, 2021 and December 31, 2020, respectively)	125,198		92,552
Total investment securities	329,138		217,749
Loans held for sale	6,768		29,782
Loans	1,198,455		1,433,706
Less: allowance for loan losses	(17,160)		(15,641)
Net loans	1,181,295		1,418,065
Premises and equipment, net	13,835		14,345
Right-of-use assets	15,282		16,548
Accrued interest receivable	4,379		5,273
Bank-owned life insurance	37,398		37,316
Other real estate owned	48		92
Goodwill and intangible assets	35,765		36,003
Other assets	12,686		9,741
Total assets	$	1,910,540	$	1,806,909
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits
Non-interest bearing	$	534,436	$	425,210
Interest bearing	1,104,125		1,137,629
Total deposits	1,638,561		1,562,839
Short-term borrowings	—		9,825
Redeemable subordinated debentures	18,557		18,557
Accrued interest payable	425		851
Lease liability	16,216		17,387
Accrued expenses and other liabilities	36,858		9,793
Total liabilities	1,710,617		1,619,252
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 shares authorized; none issued	—		—
Common stock, no par value; 30,000,000 shares authorized; 10,376,085 and 10,293,535 shares issued and 10,318,907 and 10,245,826 shares outstanding as of September 30, 2021 and December 31, 2020, respectively	112,138		111,135
Retained earnings	87,735		75,201
Treasury stock, 57,178 and 47,709 shares at September 30, 2021 and December 31, 2020, respectively	(771)		(611)
Accumulated other comprehensive income	821		1,932
Total shareholders' equity	199,923		187,657
Total liabilities and shareholders' equity	$	1,910,540	$	1,806,909

The accompanying notes are an integral part of these consolidated financial statements.

1ST Constitution Bancorp

Consolidated Statements of Income

(Dollars in thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
INTEREST INCOME
Loans, including fees	$	14,995	$	16,477	$	45,765	$	46,656
Securities:
Taxable	545		725		1,569		2,633
Tax-exempt	456		504		1,392		1,438
Federal funds sold and short-term investments	108		2		203		95
Total interest income	16,104		17,708		48,929		50,822
INTEREST EXPENSE
Deposits	1,215		2,171		4,155		8,133
Borrowings	—		95		—		205
Redeemable subordinated debentures	81		90		248		348
Total interest expense	1,296		2,356		4,403		8,686
Net interest income	14,808		15,352		44,526		42,136
PROVISION FOR LOAN LOSSES	600		2,320		2,600		5,340
Net interest income after provision for loan losses	14,208		13,032		41,926		36,796
NON-INTEREST INCOME
Service charges on deposit accounts	116		126		340		471
Gain on sales of loans	2,632		3,396		8,493		6,987
Income on bank-owned life insurance	379		188		721		632
Gain on sales and calls of securities	2		79		6		97
Other income	774		947		2,156		2,105
Total non-interest income	3,903		4,736		11,716		10,292
NON-INTEREST EXPENSES
Salaries and employee benefits	6,623		7,106		20,034		19,276
Occupancy expense	1,221		1,222		3,693		3,597
Data processing expenses	490		486		1,486		1,402
FDIC insurance expense	108		225		533		484
Other real estate owned (recoveries) expenses	(22)		27		33		58
Merger-related expenses	737		—		1,184		64
Other operating expenses	1,684		1,896		5,510		5,711
Total non-interest expenses	10,841		10,962		32,473		30,592
Income before income taxes	7,270		6,806		21,169		16,496
INCOME TAXES	1,840		1,896		5,658		4,475
Net income	$	5,430	$	4,910	$	15,511	$	12,021
EARNINGS PER COMMON SHARE
Basic	$	0.53	$	0.48	$	1.51	$	1.18
Diluted	$	0.53	$	0.48	$	1.51	$	1.17
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	10,289,434		10,230,488		10,274,787		10,213,601
Diluted	10,319,637		10,268,951		10,299,029		10,260,477

The accompanying notes are an integral part of these consolidated financial statements.

1ST Constitution Bancorp

Consolidated Statements of Comprehensive Income

(Dollars in thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

Net income	$	5,430	$	4,910	$	15,511	$	12,021
Other comprehensive (loss) income:
Unrealized holding gains (losses) on securities available for sale	(507)		435		(1,133)		1,964
Tax effect	122		(103)		270		(475)
Net of tax amount	(385)		332		(863)		1,489

Reclassification adjustment for (gains) losses on securities available for sale(1)	—		14		(2)		3
Tax effect (2)	—		(4)		—		(1)
Net of tax amount	—		10		(2)		2

Reclassification adjustment for unrealized impairment loss on held to maturity security(3)	6		6		19		14
Tax effect	(1)		(1)		(4)		(4)
Net of tax amount	5		5		15		10

Pension liability	(32)		70		(95)		211
Tax effect	9		(20)		25		(62)
Net of tax amount	(23)		50		(70)		149

Reclassification adjustment for actuarial gains for unfunded pension liability(4)	(89)		(51)		(267)		(151)
Tax effect (2)	25		15		76		45
Net of tax amount	(64)		(36)		(191)		(106)

Total other comprehensive (loss) income	(467)		361		(1,111)		1,544

Comprehensive income	$	4,963	$	5,271	$	14,400	$	13,565

(1) Included in gain on sales and calls of securities on the consolidated statements of income

(2) Included in income taxes on the consolidated statements of income

(3) Included in investment securities held to maturity on the consolidated balance sheets

(4) Included in salaries and employee benefits expense on the consolidated statements of income

The accompanying notes are an integral part of these consolidated financial statements.

1ST Constitution Bancorp

Consolidated Statements of Changes in Shareholders’ Equity

For the Three and Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands) (Unaudited)


	Common Stock		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance, July 1, 2020	$	110,546	$	66,067	$	(503)	$	1,374	$	177,484
Net income	—		4,910		—		—		4,910
Exercise of stock options and issuance of restricted shares (755 shares and 26,100 shares, respectively)	5		—		—		—		5
Share-based compensation	274		—		—		—		274
Cash dividends ($0.09 per share)	—		(919)		—		—		(919)
Purchase of treasury shares (8,383 shares)	—		—		(108)		—		(108)
Other comprehensive income	—		—		—		361		361
Balance, September 30, 2020	$	110,825	$	70,058	$	(611)	$	1,735	$	182,007

Balance, July 1, 2021	$	111,775	$	83,333	$	(739)	$	1,288	$	195,657
Net income	—		5,430		—		—		5,430
Exercise of stock options (35,534 shares)	104		—		—		—		104
Share-based compensation	259		—		—		—		259
Cash dividends ($0.10 per share)	—		(1,028)		—		—		(1,028)
Purchase of treasury shares (1,475 shares)	—		—		(32)		—		(32)
Other comprehensive loss	—		—		—		(467)		(467)
Balance, September 30, 2021	$	112,138	$	87,735	$	(771)	$	821	$	199,923


	Common Stock		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance, January 1, 2020	$	109,964	$	60,791	$	(368)	$	191	$	170,578
Net income	—		12,021		—		—		12,021
Exercise of stock options and issuance of restricted shares (755 shares and 59,500 shares, respectively)	5		—		—		—		5
Share-based compensation	856		—		—		—		856
Cash dividends ($0.27 per share)	—		(2,754)		—		—		(2,754)
Purchase of treasury shares (14,411 shares)	—		—		(243)		—		(243)
Other comprehensive income	—		—		—		1,544		1,544
Balance, September 30, 2020	$	110,825	$	70,058	$	(611)	$	1,735	$	182,007

Balance, January 1, 2021	$	111,135	$	75,201	$	(611)	$	1,932	$	187,657
Net income	—		15,511		—		—		15,511
Exercise of stock options and issuance of restricted shares (43,200 shares and 39,350 shares, respectively)	172		—		—		—		172
Share-based compensation	831		—		—		—		831
Cash dividends ($0.30 per share)	—		(2,977)		—		—		(2,977)
Purchase of treasury shares (9,469 shares)	—		—		(160)		—		(160)
Other comprehensive loss	—		—		—		(1,111)		(1,111)
Balance, September 30, 2021	$	112,138	$	87,735	$	(771)	$	821	$	199,923

The accompanying notes are an integral part of these consolidated financial statements.

1ST Constitution Bancorp

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2021		2020
OPERATING ACTIVITIES:
Net income	$	15,511	$	12,021
Adjustments to reconcile net income to net cash provided by (used in) operating activities-
Provision for loan losses	2,600		5,340
Depreciation and amortization	1,426		1,561
Net amortization of premiums and discounts on securities	906		956
SBA loan discount accretion	(256)		(300)
(Gain) loss on sales and calls of securities available for sale	(2)		3
Gain on sales and calls of securities held to maturity	(4)		(100)
Gain on sales of other real estate owned	—		(71)
Write-down of other real estate owned	44		—
Gain on sales of loans held for sale	(8,493)		(6,987)
Originations of loans held for sale	(219,674)		(238,201)
Proceeds from sales of loans held for sale	251,181		222,919
Increase in cash surrender value on bank–owned life insurance	(521)		(557)
Gain on cash surrender value on bank-owned life insurance	(200)		(75)
Share-based compensation expense	831		856
Decrease in deferred tax asset	23		498
Noncash rent and equipment expense	95		144
Decrease (increase) in accrued interest receivable	894		(744)
Increase in other assets	(3,238)		(9,492)
Decrease in accrued interest payable	(426)		(523)
Increase in accrued expenses and other liabilities	26,703		338
Net cash provided by (used in) operating activities	67,400		(12,414)
INVESTING ACTIVITIES:
Purchases of securities:
Available for sale	(108,360)		(23,415)
Held to maturity	(63,192)		(32,665)
Proceeds from sales, calls, maturities and payments of securities:
Available for sale	27,861		45,425
Held to maturity	30,286		21,244
Proceeds from bank-owned life insurance benefits paid	639		179
Net redemption of restricted stock	411		1,753
Net decrease (increase) in loans	234,426		(239,517)
Capital expenditures	(452)		(248)
Proceeds from sales of other real estate owned	—		375
Net cash provided by (used in) investing activities	121,619		(226,869)
FINANCING ACTIVITIES:
Exercise of stock options	172		5
Purchase of treasury shares	(160)		(243)
Cash dividends paid to shareholders	(2,977)		(2,754)
Net increase in deposits	75,722		233,671
(Decrease) increase in short-term borrowings	(9,825)		13,817
Net cash provided by financing activities	62,932		244,496
Increase in cash and cash equivalents	251,951		5,213
Cash and cash equivalents at beginning of period	21,995		14,842
Cash and cash equivalents at end of period	$	273,946	$	20,055


Supplemental Disclosures of Cash Flow Information
Cash paid during the period for -
Interest	$	4,829	$	9,209
Income taxes	7,315		4,311

Noncash items
Right-of-use assets	20		250
Lease liability	20		250

The accompanying notes are an integral part of these consolidated financial statements.

1ST Constitution Bancorp

Notes to Consolidated Financial Statements

September 30, 2021

(Unaudited)

(1) Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements include 1ST Constitution Bancorp (the “Company”), its wholly-owned subsidiary, 1ST Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1ST Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc and 1st Constitution Real Estate Investment Corporation (the "REIT"), which is indirectly owned by the Bank. To qualify as a real estate investment trust for tax purposes, the REIT must have 100 or more shareholders. As a result, less than 20 percent of the REIT’s outstanding non-voting preferred stock has been issued to individual shareholders, consisting of officers, directors and employees of the Bank and their adult family members. 1ST Constitution Investment Company of New Jersey, Inc. owns the remaining issued and outstanding preferred stock and common stock of the REIT. 1ST Constitution Capital Trust II, a subsidiary of the Company, is not included in the Company’s consolidated financial statements, as it is a variable interest entity and the Company is not the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 15, 2021.

In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the operating results for the interim periods have been included. The results of operations for periods of less than a year are not necessarily indicative of results for the full year.

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2021 for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through the date these financial statements were issued.

Novel Coronavirus ("COVID-19") Impact: The sudden emergence of the COVID-19 global pandemic in the first quarter of 2020, and the responses thereto (including business and school closures, restrictions on travel and social distancing protocols), have caused, and are continuing to cause, widespread uncertainty, social and economic disruption, highly volatile financial markets and elevated levels of unemployment. As a result, many businesses located in the Bank’s primary market areas of northern and central New Jersey, communities along the New Jersey shore, and the New York City metropolitan area, and their employees, have been adversely impacted.

The ultimate impact of the COVID-19 pandemic on the businesses and the people in the communities that the Bank serves, and on the Company’s operations and financial performance, will depend on future developments related to the duration, extent and severity of the pandemic and measures taken by governmental and private parties in response thereto, including but not limited to the enactment of further legislation or the adoption of policies designed to deliver monetary aid and other relief to borrowers. In addition, to the extent that the Bank’s customers are not able to fulfill their contractual obligations, the Company’s business operations, asset valuations, financial condition, cash flows and results of operations could be materially adversely impacted. Material adverse impacts may also include all or a combination of valuation impairments on our intangible assets, investments, loans, deferred tax assets, or other real estate owned ("OREO"). Similarly, the Company’s operations rely on third-party vendors to process, record and monitor transactions. If any of these vendors are unable to provide these services, our ability to serve customers could be disrupted. The pandemic could also negatively impact customers’ ability to conduct banking and other financial transactions. The Company’s operations could also be adversely impacted if key personnel or a significant number of employees are unable to work due to illness or restrictions.

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act to provide relief for individuals and businesses that have been negatively impacted by the COVID-19 pandemic. Among the provisions, the CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” accounting guidance in Accounting Standards Codification (“ASC”) Topic 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019. The Bank adopted this provision as of March 31, 2020.

The Economic Aid to Hard Hit Small Business, Not for Profits and Venues Act (“Economic Aid Act”) was enacted in December 2020 in further response to the COVID-19 pandemic. Among other things, the Economic Aid Act provides relief to borrowers in the form of access to additional credit through the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) as originally constituted under the CARES Act. In addition, the Economic Aid Act extended the relief from ASC Topic 310-40, such that the Company is able to opt out of applying the “troubled-debt restructuring” accounting guidance for loan modifications made between January 1, 2021 and the earlier of (i) December 30, 2021 or (ii) 60 days after the President declares a termination of the COVID-19 national emergency; provided, that, the modified loans were not more than 30 days past due as of December 31, 2019. The Bank adopted this provision as of December 31, 2020.

(2) Earnings Per Common Share

Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during each period. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding, as adjusted for the assumed exercise of dilutive common stock options using the treasury stock method.

Awards of restricted shares are included in outstanding shares when granted. Unvested restricted shares are entitled to non-forfeitable dividends and participate in undistributed earnings with common shares. Awards of this nature are considered participating securities and basic and diluted earnings per share are computed under the two-class method.

Dilutive securities in the tables below exclude common stock options with exercise prices that exceed the average market price of the Company’s common stock during the periods presented. Inclusion of these common stock options would be anti-dilutive to the diluted earnings per common share calculation. For the three months ended September 30, 2021 and 2020, 12,580 and 54,930 options, respectively, were anti-dilutive and were not included in the computation of diluted earnings per share. For the nine months ended September 30, 2021 and 2020, 21,700 and 41,430 options, respectively, were anti-dilutive and were not included in the computation of diluted earnings per share.

The following table illustrates the calculation of both basic and diluted earnings per share for the three and nine months ended September 30, 2021 and 2020:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2021		2020		2021		2020

Net income	$	5,430	$	4,910	$	15,511	$	12,021

Basic weighted average shares outstanding	10,289,434		10,230,488		10,274,787		10,213,601
Plus: common stock equivalents	30,203		38,463		24,242		46,876
Diluted weighted average shares outstanding	10,319,637		10,268,951		10,299,029		10,260,477
Earnings per share:
Basic	$	0.53	$	0.48	$	1.51	$	1.18
Diluted	$	0.53	$	0.48	$	1.51	$	1.17

(3) Investment Securities

A summary of amortized cost and fair value of investment securities available for sale follows:


	September 30, 2021
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)	$	82,455	$	25	$	(138)	$	82,342
Residential collateralized mortgage obligations - GSE	32,443		261		(50)		32,654
Residential mortgage backed securities - GSE	27,129		436		(204)		27,361
Obligations of state and political subdivisions	22,799		810		—		23,609
Corporate debt securities	21,010		250		(41)		21,219
Other debt securities	16,623		177		(45)		16,755
Total	$	202,459	$	1,959	$	(478)	$	203,940


	December 31, 2020
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury securities and obligations of U.S. Government sponsored entities (“GSE”)	$	3,437	$	7	$	(5)	$	3,439
Residential collateralized mortgage obligations - GSE	36,282		503		(6)		36,779
Residential mortgage backed securities - GSE	13,031		572		(6)		13,597
Obligations of state and political subdivisions	26,445		1,007		—		27,452
Corporate debt securities	20,997		465		(95)		21,367
Other debt securities	22,389		254		(80)		22,563
Total	$	122,581	$	2,808	$	(192)	$	125,197

A summary of amortized cost, carrying value and fair value of investment securities held to maturity follows:


	September 30, 2021
(Dollars in thousands)	Amortized Cost		Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss		Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Residential collateralized mortgage obligations - GSE	$	3,006	$	—	$	3,006	$	93	$	—	$	3,099
Residential mortgage backed securities - GSE	18,416		—		18,416		880		—		19,296
Obligations of state and political subdivisions	99,927		—		99,927		888		(261)		100,554
Trust preferred debt securities - pooled	638		(453)		185		456		—		641
Other debt securities	3,664		—		3,664		48		(68)		3,644
Total	$	125,651	$	(453)	$	125,198	$	2,365	$	(329)	$	127,234


	December 31, 2020
(Dollars in thousands)	Amortized Cost		Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss		Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Residential collateralized mortgage obligations - GSE	$	4,640	$	—	$	4,640	$	166	$	—	$	4,806
Residential mortgage backed securities - GSE	24,517		—		24,517		1,208		—		25,725
Obligations of state and political subdivisions	61,249		—		61,249		1,248		(2)		62,495
Trust preferred debt securities - pooled	648		(472)		176		405		—		581
Other debt securities	1,970		—		1,970		63		—		2,033
Total	$	93,024	$	(472)	$	92,552	$	3,090	$	(2)	$	95,640

At September 30, 2021 and December 31, 2020, $57.7 million and $81.7 million of investment securities, respectively, were pledged to secure public funds and collateralized borrowings from the Federal Home Loan Bank of New York (“FHLB”) and for other purposes required or permitted by law.

Restricted stock was included in other assets at September 30, 2021 and December 31, 2020 and totaled $1.2 million and $1.7 million, respectively. Restricted stock consisted of $1.1 million of FHLB stock and $160,000 of Atlantic Community Bankers Bank stock at September 30, 2021 and $1.5 million of FHLB and $160,000 of Atlantic Community Bankers Bank stock at December 31, 2020.

The following table sets forth certain information regarding the amortized cost, carrying value, fair value, weighted average yields and contractual maturities of the Company’s investment portfolio as of September 30, 2021. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2021
(Dollars in thousands)	Amortized Cost		Fair Value		Yield
Available for sale
Due in one year or less	$	6,635	$	6,754	3.11	%
Due after one year through five years	106,832		107,424		1.11	%
Due after five years through ten years	23,302		23,701		1.73	%
Due after ten years	65,690		66,061		1.68	%
Total	$	202,459	$	203,940	1.47	%

	Carrying Value		Fair Value		Yield
Held to maturity
Due in one year or less	$	51,840	$	51,843	0.50	%
Due after one year through five years	4,114		4,242		3.51	%
Due after five years through ten years	14,033		14,588		2.71	%
Due after ten years	55,211		56,561		2.55	%
Total	$	125,198	$	127,234	1.80	%

Gross unrealized losses on available for sale and held to maturity securities and the fair value of the related securities aggregated by

security category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2021 and December 31, 2020 were as follows:


	September 30, 2021
		Less than 12 months				12 months or longer				Total
(Dollars in thousands)	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. Government sponsored entities (GSE)	11	$	54,853	$	(138)	$	—	$	—	$	54,853	$	(138)
Residential collateralized mortgage obligations - GSE	4	5,727		(7)		2,955		(43)		8,682		(50)
Residential mortgage backed securities - GSE	12	17,369		(200)		141		(4)		17,510		(204)
Obligations of state and political subdivisions	10	12,687		(261)		—		—		12,687		(261)
Corporate debt securities	3	—		—		3,456		(41)		3,456		(41)
Other debt securities	3	1,896		(68)		4,108		(45)		6,004		(113)
Total temporarily impaired securities	43	$	92,532	$	(674)	$	10,660	$	(133)	$	103,192	$	(807)


	December 31, 2020
		Less than 12 months				12 months or longer				Total
(Dollars in thousands)	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. Government sponsored entities (GSE)	1	$	—	$	—	$	548	$	(5)	$	548	$	(5)
Residential collateralized mortgage obligations - GSE	3	5,153		(2)		2,060		(4)		7,213		(6)
Residential mortgage backed securities - GSE	3	203		(6)		—		—		203		(6)
Obligations of state and political subdivisions	1	1,295		(2)		—		—		1,295		(2)
Corporate debt securities	3	—		—		3,399		(95)		3,399		(95)
Other debt securities	7	—		—		11,230		(80)		11,230		(80)
Total temporarily impaired securities	18	$	6,651	$	(10)	$	17,237	$	(184)	$	23,888	$	(194)

U.S. Treasury securities and obligations of U.S. government-sponsored entities: The unrealized losses on investments in these securities were caused by increases in market interest rates. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.

Residential collateralized mortgage obligations and residential mortgage backed securities: The unrealized losses on investments in residential collateralized mortgage obligations and residential mortgage backed securities were caused by increases in market interest rates. The contractual cash flows of these securities are guaranteed by the issuers, which are primarily government or government sponsored agencies. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. The decline in fair value is attributable to changes in interest rates and not credit quality. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.

Obligations of state and political subdivisions: The unrealized losses on investments in these securities were caused by increases in market interest rates. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. None of the issuers have defaulted on interest payments. These investments are not considered to be other than temporarily impaired because the decline in fair value is attributable to changes in interest rates and not credit quality. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.

Corporate debt securities. The unrealized losses on investments in corporate debt securities were caused by an increase in market interest rates, which includes the yield required by market participants for the issuer's credit risk. None of the corporate issuers have defaulted on interest payments. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.

Other debt securities. The unrealized losses on investments in other debt securities were caused by an increase in market interest rates, which includes the yield required by market participants for the issuer's credit risk. None of the issuers have defaulted on interest payments. The decline in fair value is attributable to changes in market interest rates. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.

Trust preferred debt securities – pooled: This trust preferred debt security was issued by a two issuer pool (Preferred Term Securities XXV, Ltd. co-issued by Keefe, Bruyette and Woods, Inc. and First Tennessee (“PRETSL XXV”)), consisting primarily of financial institution holding companies. During 2009, the Company recognized an other-than-temporary impairment charge of $865,000, of which $364,000 was determined to be a credit loss and charged to operations and $501,000 was recognized in the other

comprehensive income (loss) component of shareholders’ equity. The primary factor used to determine the credit portion of the impairment loss to be recognized in the income statement for this security was the discounted present value of projected cash flow, where that present value of cash flow was less than the amortized cost basis of the security. The present value of cash flow was developed using a model that considered performing collateral ratios, the level of subordination to senior tranches of the security and credit ratings of and projected credit defaults in the underlying collateral. Due to recovery of the cash flows underlying the security, the Company began to accrete the $501,000 of impairment charge in the other comprehensive income component in 2019. Total accretion of $19,000 was recognized in the first nine months of 2021 as an increase in the carrying amount of the security. On a quarterly basis, management evaluates this security to determine if any additional other-than-temporary impairment is required. As of September 30, 2021, management concluded that no additional other-than-temporary impairment had occurred.

(4) Allowance for Loan Losses and Credit Quality

The Company’s primary lending emphasis is the origination of commercial real estate loans, mortgage warehouse lines of credit and commercial business loans. Based on the composition of the loan portfolio, the primary inherent risks are deteriorating credit quality, a decline in the economy and a decline in New Jersey and New York City metropolitan area real estate market values. Any one, or a combination, of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.

The following table provides an aging of the loan portfolio by loan class at September 30, 2021:


(Dollars in thousands)	30-59 Days		60-89 Days		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days Accruing		Non-Accrual Loans
Commercial real estate	$	659	$	625	$	—	$	1,284	$	611,543	$	612,827	$	—	$	625
Mortgage warehouse lines	—		—		—		—		235,897		235,897		—		—
Construction	—		—		7,024		7,024		122,612		129,636		—		7,024
Commercial business	3		136		4		143		139,511		139,654		—		124
Residential real estate	665		—		1,007		1,672		61,551		63,223		—		1,621
Loans to individuals	—		—		47		47		17,898		17,945		—		143
Other loans	—		—		—		—		93		93		—		—
Total loans	$	1,327	$	761	$	8,082	$	10,170	$	1,189,105	1,199,275		$	—	$	9,537
Deferred loan fees, net											(820)
Total loans											$	1,198,455

The following table provides an aging of the loan portfolio by loan class at December 31, 2020:


(Dollars in thousands)	30-59 Days		60-89 Days		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days Accruing		Non-Accrual Loans
Commercial real estate	$	—	$	—	$	7,008	$	7,008	$	611,970	$	618,978	$	—	$	7,565
Mortgage warehouse lines	—		—		—		—		388,366		388,366		—		—
Construction	—		—		7,500		7,500		121,745		129,245		—		7,500
Commercial business	1		—		84		85		188,643		188,728		—		225
Residential real estate	1,356		91		1,534		2,981		85,280		88,261		871		798
Loans to individuals	12		99		264		375		20,894		21,269		—		273
Other loans	—		—		—		—		113		113		—		—
Total loans	$	1,369	$	190	$	16,390	$	17,949	$	1,417,011	1,434,960		$	871	$	16,361
Deferred loan fees, net											(1,254)
Total loans											$	1,433,706

As provided by ASC 310-30, the excess of cash flows expected at acquisition over the initial investment in the loan is recognized as interest income over the life of the loan. At September 30, 2021 and December 31, 2020, there were $254,000 and $2.4 million of purchased credit impaired loans, respectively, that were not classified as non-performing loans due to the accretion of income.

The Company’s internal credit risk grades are based on the definitions currently utilized by the banking regulatory agencies. The grades assigned and their definitions are as follows:

1. Excellent - Loans that are based upon cash collateral held at the Company and adequately margined. Loans that are based upon “blue chip” stocks listed on the major stock exchanges and adequately margined.

2. Above Average - Loans to companies whose balance sheets show excellent liquidity and long-term debt is on well-spread schedules of repayment easily covered by cash flow. Such companies have been consistently profitable and have diversification in their product lines or sources of revenue. The continuation of profitable operations for the foreseeable future is likely. Management is comprised of a mix of ages, experience and backgrounds and management succession is in place. Sources of raw materials and, for service companies, the sources of revenue are abundant. Future needs have been planned for. Character and management ability of individuals or company principals are excellent. Loans to individuals are supported by their high net worth and liquid assets.

3. Good - Loans to companies whose balance sheets show good liquidity and cash flow adequate to meet maturities of long-term debt with a comfortable margin. Such companies have established profitable records over a number of years, and there has been growth in net worth. Operating ratios are in line with those of the industry, and expenses are in proper relationship to the volume of business done and the profits achieved. Management is well-balanced and competent in their responsibilities. Economic environment is favorable; however, competition is strong. The prospects for growth are good. Loans in this category do not meet the collateral requirements of loans graded excellent and above average. Loans to individuals are supported by good net worth but whose supporting assets are illiquid.

3w. Watch - Included in this category are loans evidencing problems identified by Company management that require closer supervision, but do not require a “special mention” rating. This category also covers situations where the Company does not have adequate current information upon which credit quality can be determined. The account officer has the obligation to correct these deficiencies within 30 days from the time of notification.

4. Special Mention - A “special mention” loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

5. Substandard - A “substandard” loan is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

6. Doubtful - A loan classified as “doubtful” has all the weaknesses inherent of a loan classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

7. Loss - A loan classified as “loss” is considered uncollectible and of such little value that its continuance on the books is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value. Rather, this classification indicates that it is not practical or desirable to defer writing off this loan even though partial recovery may occur in the future.

The following table provides a breakdown of the loan portfolio by credit quality indicator at September 30, 2021:


(Dollars in thousands)
Credit Exposure by Internally Assigned Grade	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate
Pass	$	118,132	$	124,711	$	579,753	$	235,897	$	60,505
Special Mention	4,696		2,363		19,293		—		349
Substandard	—		12,576		13,781		—		2,369
Doubtful	6,808		4		—		—		—
Total	$	129,636	$	139,654	$	612,827	$	235,897	$	63,223


Credit Exposure by Payment Activity	Loans To Individuals		Other Loans
Performing	$	17,802	$	93
Non-performing	143		—
Total	$	17,945	$	93

The following table provides a breakdown of the loan portfolio by credit quality indicator at December 31, 2020:


(Dollars in thousands)
Credit Exposure by Internally Assigned Grade	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate
Pass	$	121,745	$	175,895	$	580,699	$	387,483	$	85,203
Special Mention	—		5,942		15,419		883		358
Substandard	7,500		6,806		22,860		—		2,700
Doubtful	—		85		—		—		—

Total	$	129,245	$	188,728	$	618,978	$	388,366	$	88,261


Credit Exposure by Payment Activity	Loans To Individuals		Other Loans
Performing	$	20,996	$	113
Non-performing	273		—
Total	$	21,269	$	113

Impaired Loans

Loans are considered to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan agreement, including scheduled interest payments. When a loan is placed on non-accrual status, it is also considered to be impaired. Loans are placed on non-accrual status when: (1) the full collection of interest or principal becomes uncertain or (2) the loans are contractually past due 90 days or more as to interest or principal payments unless the loans are both well secured and in the process of collection.

The following tables summarize the distribution of the allowance for loan losses and loans receivable by loan class and impairment method at September 30, 2021 and December 31, 2020:


	September 30, 2021
(Dollars in thousands)	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate		Loans to Individuals		Other Loans		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	2,961	$	138	$	53	$	—	$	—	$	—	$	—	$	—	$	3,152
Loans acquired with deteriorated credit quality	—		—		—		—		—		—		—		—		—
Collectively evaluated for impairment	2,122		2,854		6,606		1,062		389		102				873		14,008
Ending Balance	$	5,083	$	2,992	$	6,659	$	1,062	$	389	$	102	$	—	$	873	$	17,160

Loans receivable:
Individually evaluated for impairment	$	7,024	$	717	$	5,111	$	—	$	1,621	$	143	$	—	$	—	$	14,616
Loans acquired with deteriorated credit quality	—		288		2,413		—		136		—		—		—		2,837
Collectively evaluated for impairment	122,612		138,649		605,303		235,897		61,466		17,802		93		—		1,181,822
Ending Balance	$	129,636	$	139,654	$	612,827	$	235,897	$	63,223	$	17,945	$	93	$	—	1,199,275
Deferred loan fees, net																	(820)
																	$	1,198,455


	December 31, 2020
(Dollars in thousands)	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate		Loans to Individuals		Other Loans		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	2,089	$	4	$	19	$	—	$	—	$	—	$	—	$	—	$	2,112
Loans acquired with deteriorated credit quality	—		—		—		—		—		—		—		—		—
Collectively evaluated for impairment	1,652		2,723		6,403		1,807		619		125		—		200		13,529
Ending Balance	$	3,741	$	2,727	$	6,422	$	1,807	$	619	$	125	$	—	$	200	$	15,641

Loans receivable:
Individually evaluated for impairment	$	7,500	$	959	$	11,717	$	—	$	798	$	273	$	—	$	—	$	21,247
Loans acquired with deteriorated credit quality	—		308		3,323		—		410		—		—		—		4,041
Collectively evaluated for impairment	121,745		187,461		603,938		388,366		87,053		20,996		113		—		1,409,672
Ending Balance	$	129,245	$	188,728	$	618,978	$	388,366	$	88,261	$	21,269	$	113	$	—	1,434,960
Deferred loan fees, net																	(1,254)
																	$	1,433,706

At September 30, 2021 and December 31, 2020, there were $23.1 million and $58.8 million, respectively, of Small Business Administration (“SBA”) PPP loans which are included in commercial business loans and are 100% guaranteed by the SBA. Accordingly, no allowance was provided for such loans.

The activity in the allowance for loan loss by loan class for the three and nine months ended September 30, 2021 and 2020 was as follows:


Balance - (Dollars in thousands)	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate		Loans to Individuals		Other Loans		Unallocated		Total
Balance - July 1, 2021	$	5,025	$	2,662	$	6,875	$	1,088	$	418	$	110	$	—	$	747	$	16,925
Provision charged (credited) to operations	58		366		113		(26)		(29)		(8)		—		126		600
Loans charged off	—		(36)		(334)		—		—		—		—		—		(370)
Recoveries of loans charged off	—		—		5		—		—		—		—		—		5
Balance - September 30, 2021	$	5,083	$	2,992	$	6,659	$	1,062	$	389	$	102	$	—	$	873	$	17,160

Balance - July 1, 2020	$	1,661	$	1,780	$	6,619	$	1,337	$	506	$	182	$	—	$	41	$	12,126
Provision charged (credited) to operations	1,558		791		(549)		370		18		—		—		132		2,320
Loans charged off	—		—		—		—		—		(3)		—		—		(3)
Recoveries of loans charged off	—		—		7		—		—		—		—		—		7
Balance - September 30, 2020	$	3,219	$	2,571	$	6,077	$	1,707	$	524	$	179	$	—	$	173	$	14,450


Balance - (Dollars in thousands)	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate		Loans to Individuals		Other Loans		Unallocated		Total
Balance - January 1, 2021	$	3,741	$	2,727	$	6,422	$	1,807	$	619	$	125	$	—	$	200	$	15,641
Provision charged (credited) to operations	2,034		310		580		(745)		(230)		(23)		1		673		2,600
Loans charged off	(692)		(48)		(348)		—		—		—		(1)		—		(1,089)
Recoveries of loans charged off	—		3		5		—		—		—		—		—		8
Balance - September 30, 2021	$	5,083	$	2,992	$	6,659	$	1,062	$	389	$	102	$	—	$	873	$	17,160

Balance - January 1, 2020	$	1,389	$	1,409	$	4,524	$	1,083	$	412	$	185	$	—	$	269	$	9,271
Provision charged (credited) to operations	1,830		1,327		1,546		624		112		(3)		—		(96)		5,340
Loans charged off	—		(165)		—		—		—		(3)		—		—		(168)
Recoveries of loans charged off	—		—		7		—		—		—		—		—		7
Balance - September 30, 2020	$	3,219	$	2,571	$	6,077	$	1,707	$	524	$	179	$	—	$	173	$	14,450

When a loan is identified as impaired, the measurement of impairment is based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole remaining source of repayment for the loan is the liquidation of the collateral. In such cases, the current fair value of the collateral less selling costs is used. If the value of the impaired loan is less than the recorded investment in the loan, the impairment is recognized through an allowance estimate or a charge to the allowance.

Impaired Loans Receivables (By Class)


							Three Months Ended September 30, 2021				Nine Months Ended September 30, 2021
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no allowance:
Commercial:
Construction	$	216	$	216	$	—	$	216	$	—	$	96	$	—
Commercial Business	483		1,789		—		488		45		644		131
Commercial Real Estate	3,037		3,352		—		2,770		77		4,966		243
Mortgage Warehouse Lines	—		—		—		—		—		—		—
Subtotal	3,736		5,357		—		3,474		122		5,706		374
Residential Real Estate	1,757		1,911		—		1,762		9		1,967		24
Consumer:
Loans to Individuals	143		152		—		145		—		197		—
Other Loans	—		—		—		—		—		—		—
Subtotal	143		152		—		145		—		197		—
With no allowance:	$	5,636	$	7,420	$	—	$	5,381	$	131	$	7,870	$	398

With an allowance:
Commercial:
Construction	$	6,808	$	7,500	$	2,961	$	6,808	$	—	$	7,115	$	—
Commercial Business	522		522		138		523		6		486		20
Commercial Real Estate	4,487		4,487		53		6,733		63		7,283		188
Mortgage Warehouse Lines	—		—		—		—		—		—		—
Subtotal	11,817		12,509		3,152		14,064		69		14,884		208
Residential Real Estate	—		—		—		—		—		—		—
Consumer:
Loans to Individuals	—		—		—		—		—		—		—
Other Loans	—		—		—		—		—		—		—
Subtotal	—		—		—		—		—		—		—
With an allowance:	$	11,817	$	12,509	$	3,152	$	14,064	$	69	$	14,884	$	208
Total:
Construction	7,024		7,716		2,961		7,024		—		7,211		—
Commercial Business	1,005		2,311		138		1,011		51		1,130		151
Commercial Real Estate	7,524		7,839		53		9,503		140		12,249		431
Mortgage Warehouse Lines	—		—		—		—		—		—		—
Residential Real Estate	1,757		1,911		—		1,762		9		1,967		24
Consumer	143		152		—		145		—		197		—
Total	$	17,453	$	19,929	$	3,152	$	19,445	$	200	$	22,754	$	606

Impaired Loans Receivables (By Class)


	December 31, 2020
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no allowance:
Commercial:
Construction	$	—	$	—	$	—
Commercial Business	1,120		2,500		—
Commercial Real Estate	11,806		13,833		—
Mortgage Warehouse Lines	—		—		—
Subtotal	12,926		16,333		—
Residential Real Estate	1,208		1,465		—
Consumer:
Loans to Individuals	273		297		—
Other Loans	—		—		—
Subtotal	273		297		—
With no allowance	$	14,407	$	18,095	$	—
With an allowance:
Commercial:
Construction	$	7,500	$	7,500	$	2,089
Commercial Business	147		147		4
Commercial Real Estate	3,234		3,234		19
Mortgage Warehouse Lines	—		—		—
Subtotal	10,881		10,881		2,112
Residential Real Estate	—		—		—
Consumer:
Loans to Individuals	—		—		—
Other Loans	—		—		—
Subtotal	—		—		—
With an allowance	$	10,881	$	10,881	$	2,112

Total:
Construction	$	7,500	$	7,500	$	2,089
Commercial Business	1,267		2,647		4
Commercial Real Estate	15,040		17,067		19
Mortgage Warehouse Lines	—		—		—
Residential Real Estate	1,208		1,465		—
Consumer	273		297		—
Total	$	25,288	$	28,976	$	2,112

Impaired Loans Receivables (By Class)


	Three Months Ended September 30, 2020				Nine Months Ended September 30, 2020
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no allowance:
Commercial:
Construction	$	6,185	$	—	$	6,197	$	—
Commercial Business	1,509		17		1,408		51
Commercial Real Estate	14,328		146		10,334		439
Mortgage Warehouse Lines	—		—		—		—
Subtotal	22,022		163		17,939		490
Residential Real Estate	1,265		7		1,277		25

Consumer:
Loans to Individuals	419		—		539		—
Other Loans	—		—		—		—
Subtotal	419		—		539		—
With no allowance	$	23,706	$	170	$	19,755	$	515
With an allowance:
Commercial:
Construction	$	2,500	$	—	$	1,235	$	—
Commercial Business	214		—		337		—
Commercial Real Estate	2,923		21		3,717		63
Mortgage Warehouse Lines	—		—		—		—
Subtotal	5,637		21		5,289		63
Residential Real Estate	—		—		—		—
Consumer:
Loans to Individuals	—		—		—		—
Other Loans	—		—		—		—
Subtotal	—		—		—		—
With an allowance	$	5,637	$	21	$	5,289	$	63
Total:
Construction	$	8,685	$	—	7,432		—
Commercial Business	1,723		17		1,745		51
Commercial Real Estate	17,251		167		14,051		502
Mortgage Warehouse Lines	—		—		—		—
Residential Real Estate	1,265		7		1,277		25
Consumer	419		—		539		—
Total	$	29,343	$	191	$	25,044	$	578

Purchased Credit-Impaired Loans

Purchased credit-impaired (“PCI”) loans are loans acquired at a discount due in part to the deteriorated credit quality. On November 8, 2019, as part of the merger of Shore Community Bank with and into the Bank, the Company acquired PCI loans with loan balances totaling $6.3 million and fair values totaling $4.6 million. The following table presents additional information regarding PCI loans at September 30, 2021 and December 31, 2020:


(Dollars in thousands)	September 30, 2021		December 31, 2020
Outstanding balance	$	3,910	$	5,221
Carrying amount	$	2,837	$	4,041

Changes in accretable discount for purchased credit-impaired loans for the three and nine months ended September 30, 2021 and September 30, 2020 were as follows:


	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
Balance at beginning of period	$	301	$	426	$	232	$	657
Acquisition of impaired loans	—		—		—		—
Transfer from non-accretable discount	59		—		288		—
Accretion of discount	(88)		(112)		(248)		(343)
Balance at end of period	$	272	$	314	$	272	$	314

Consumer Mortgage Loans Secured by Residential Real Estate in Process of Foreclosure

The following table summarizes the recorded investment in consumer mortgage loans secured by residential real estate in the process of foreclosure (Dollars in thousands):


September 30, 2021			December 31, 2020
Number of loans	Recorded Investment		Number of loans	Recorded Investment
3	$	1,053	1	$	311

Troubled Debt Restructurings

In the normal course of business, the Bank may consider modifying loan terms for various reasons. These reasons may include as a retention strategy to compete in the current interest rate environment or to re-amortize or extend a loan term to better match the loan’s repayment stream with the borrower’s cash flow. A modified loan would be considered a troubled debt restructuring (“TDR”) if the Bank grants a concession to a borrower and has determined that the borrower is troubled (i.e., experiencing financial difficulties).

If the Bank restructures a loan to a troubled borrower, the loan terms (i.e., interest rate, payment, amortization period and maturity date) may be modified in various ways to enable the borrower to cover the modified debt service payments based on current financial statements and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms may be offered for only that time period. Where possible, the Bank attempts to obtain additional collateral and/or secondary repayment sources at the time of the restructuring in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default. In evaluating whether a restructuring constitutes a TDR, applicable guidance requires that a creditor must separately conclude that the restructuring constitutes a concession and the borrower is experiencing financial difficulties.

There were no loans modified as a TDR during the nine months ended September 30, 2021 and 2020. There were no TDRs that subsequently defaulted within 12 months of restructuring during the nine months ended September 30, 2021 and 2020.

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. The Economic Aid Act, which was enacted in December 2020 in further response to the COVID-19 pandemic, provides relief to borrowers in the form of access to additional credit through the SBA's PPP

as originally constituted under the CARES Act. Pursuant to the Economic Aid Act, the Company may opt out of applying the “troubled-debt restructuring” accounting guidance for loan modifications made between January 1, 2021 and the earlier of (i) December 30, 2021 or (ii) 60 days after the President declares a termination of the COVID-19 national emergency, provided that the modified loans were not more than 30 days past due as of December 31, 2019.

As of September 30, 2021, all commercial business, commercial real estate and consumer loans, except for two loans, that had previously received deferrals in 2020 and 2021 were no longer deferred and had made the contractually due payments. These modified loans were not considered TDRs under the CARES Act and the Economic Aid Act. The two loans consisted of one non-performing commercial real estate loan totaling $3.1 million which was charged down $334,000 to its estimated fair value of $2.7 million and was transferred to loans held for sale in the third quarter of 2021 and one residential mortgage loan for $871,000 that was placed on non-accrual in the first quarter of 2021.

(5) Revenue from Contracts with Customers

All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within non-interest income. The following table presents the Company’s sources of non-interest income for the three and nine months ended September 30, 2021 and 2020. Items outside the scope of ASC 606 are noted as such.


	Three months ended				Nine months ended
(Dollars in thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Service charges on deposit accounts:
Overdraft fees	$	37	$	32	$	106	$	157
Other	79		94		234		314
Interchange income	202		186		552		487
Other income - in scope	106		105		323		320
Gain on sale of OREO	—		71		—		71
Income on bank-owned life insurance (1)	379		188		721		632
Gain on sales of loans (1)	2,632		3,396		8,493		6,987
Loan servicing fees (1)	175		164		500		487
Gain on sales and calls of securities (1)	2		79		6		97
Other income (1)	291		421		781		740
	$	3,903	$	4,736	$	11,716	$	10,292

(1) Not within the scope of ASC 606

(6) Share-Based Compensation

The Company’s share-based incentive plans (“Stock Plans”) authorize the issuance of an aggregate of 945,873 shares of the Company’s common stock (as adjusted for stock dividends) through awards that may be granted in the form of stock options to purchase common stock (each an “Option” and collectively, “Options”), awards of restricted shares of common stock (“Stock Awards”), restricted stock units (“RSUs”), stock appreciation rights or such other awards as the Compensation Committee of the Board of Directors (the “Compensation Committee”) may determine.

As of September 30, 2021, there were 314,416 shares of common stock available for future grants under the Stock Plans.

The following table summarizes Options activity during the nine months ended September 30, 2021:


(Dollars in thousands, except share amounts)	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2021	134,122	$	11.61	4.3	$	731
Granted	21,500	15.56		9.3
Exercised	(43,200)	7.41

Expired or exchanged	(9,869)	—
Outstanding at September 30, 2021	102,553	$	14.61	6.1	$	930

Exercisable at September 30, 2021	63,643	$	13.21	4.6	$	666

The fair value of each Option and the significant weighted average assumptions used to calculate the fair value of the Options granted during the nine months ended September 30, 2021 were as follows:


	Grant Date
	January 4, 2021
Fair value of options granted	$	3.38
Risk-free rate of return	0.64		%
Expected option life in years	7
Expected volatility	28.47		%
Expected dividends	2.27		%

Share-based compensation expense related to Options was $57,000 and $58,000 for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, there was approximately $109,000 of unrecognized compensation cost related to unvested Options.

The following table summarizes the activity in Stock Awards for the nine months ended September 30, 2021:


(Dollars in thousands, except share amounts)	Number of Shares	Average Grant-Date Fair Value
Outstanding at January 1, 2021	129,883	$	17.12
Granted	39,350	18.18
Vested	(60,717)	17.52

Non-vested at September 30, 2021	108,516	$	17.28

Share-based compensation expense related to Stock Awards was $774,000 and $798,000 for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, there was approximately $1.5 million of unrecognized compensation cost related to unvested Stock Awards.

The following table summarizes the activity in RSUs for the nine months ended September 30, 2021:


(Dollars in thousands, except share amounts)	Number of Shares	Average Grant-Date Fair Value
Outstanding at January 1, 2021	25,817	$	21.24
Granted	14,250	15.56
Vested	(9,083)	16.82

Non-vested at September 30, 2021	30,984	$	19.92

Share-based compensation expense related to RSUs was $306,000 and $130,000 for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, there was approximately $456,000 of unrecognized compensation cost related to unvested RSUs.

RSUs vest pro-rata over 3 years subject to achievement of certain established performance metrics. The ultimate number of RSUs earned, if any, will depend on the performance measured over each annual period during the applicable 3-year performance period. If performance measures are achieved, the RSUs will vest upon certification of performance achievement by the Compensation Committee following each annual performance period. On March 3, 2021, the Compensation Committee certified that the applicable performance metrics were achieved at 142% of target for 2020 and 2019 vested awards. Awards of RSUs are settled in cash unless the recipient timely elects for the RSUs to be settled in shares of common stock. The RSUs are recorded as a liability by the Company and the liability is adjusted as the market value of the Company's stock price changes.

(7) Benefit Plans

The Bank has a 401(k) plan that covers substantially all employees with six months or more of service. The Bank’s 401(k) plan permits all eligible employees to make contributions to the plan up to the IRS salary deferral limit. The Bank’s contributions to the 401(k) plan are expensed as incurred.

The Company also provides retirement benefits to certain employees under supplemental executive retirement plans. The plans are unfunded and the Company accrues actuarially determined benefit costs over the estimated service period of the employees in the plans. The Company recognizes the over-funded or under-funded status of a defined benefit post-retirement plan as an asset or liability on its balance sheet and recognizes changes in that funded status in the year in which the changes occur through comprehensive income. At September 30, 2021 and December 31, 2020, the Company’s President and Chief Executive Officer was the only eligible participant in the supplemental executive retirement plans.

In connection with the benefit plans, the Bank has life insurance policies on the lives of its executive officers, directors and certain employees. The Bank is the owner and beneficiary of these policies. The cash surrender values of these policies totaled approximately $37.4 million and $37.3 million at September 30, 2021 and December 31, 2020, respectively.

The components of net periodic expense for the Company’s supplemental executive retirement plans for the three and nine months ended September 30, 2021 and 2020 were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
Service cost	$	49	$	46	$	148	$	138
Interest cost	46		42		138		124
Actuarial gain recognized	(89)		(51)		(267)		(151)
Total	$	6	$	37	$	19	$	111

(8) Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)

Other comprehensive income (loss) is the total of (1) net income (loss) and (2) all other changes in equity from non-shareholder sources, which are referred to as other comprehensive income (loss). The components of accumulated other comprehensive income (loss), and the related tax effects, are as follows:


	September 30, 2021
(Dollars in thousands)	Before-Tax Amount		Income Tax Effect		Net-of-Tax Amount
Net unrealized holding gains on investment securities available for sale	$	1,481	$	(374)	$	1,107
Unrealized impairment loss on held to maturity security	(453)		108		(345)
Gains on unfunded pension liability	82		(23)		59
Accumulated other comprehensive income	$	1,110	$	(289)	$	821


	December 31, 2020
(Dollars in thousands)	Before-Tax Amount		Income Tax Effect		Net-of-Tax Amount
Net unrealized holding gains on investment securities available for sale	$	2,616	$	(644)	$	1,972
Unrealized impairment loss on held to maturity security	(472)		112		(360)
Gains on unfunded pension liability	444		(124)		320
Accumulated other comprehensive income	$	2,588	$	(656)	$	1,932

Changes in the components of accumulated other comprehensive income (loss) are as follows and are presented net of tax for the three and nine months ended September 30, 2021 and September 30, 2020:


(Dollars in thousands)	Unrealized Holding Gains (Losses) on Available for Sale Securities		Unrealized Impairment Loss on Held to Maturity Security		Unfunded Pension Liability		Accumulated Other Comprehensive Income (Loss)
Balance - July 1, 2021	$	1,492	$	(350)	$	146	$	1,288
Other comprehensive income (loss) before reclassifications	(385)		—		(23)		(408)
Amounts reclassified from accumulated other comprehensive income (loss)	—		5		(64)		(59)
Reclassification adjustment for gains realized in income	—		—		—		—
Other comprehensive loss	(385)		5		(87)		(467)
Balance - September 30, 2021	$	1,107	$	(345)	$	59	$	821

Balance - July 1, 2020	$	1,452	$	(369)	$	291	$	1,374
Other comprehensive income before reclassifications	332		—		50		382

1ST CONSTITUTION BANCORP 10-Q