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 March 31, 2020

☐	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 001-12569

SB ONE BANCORP

(Exact name of registrant as specified in its charter)

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

95 State Route 17, Paramus, NJ	07652
(Address of principal executive offices)	(Zip Code)

(844) 256‑7328

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	SBBX	The NASDAQ Stock Market LLC

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 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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act).

Yes ☐ No ☒

As of May 4, 2020 there were 9,432,466 shares of common stock, no par value, outstanding.

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SB ONE BANCORP

FORM 10‑Q

INDEX


FORWARD-LOOKING STATEMENTS	i
PART I – FINANCIAL INFORMATION	1
Item 1 - Financial Statements	1
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3 - Quantitative and Qualitative Disclosures about Market Risk	42
Item 4 - Controls and Procedures	43
PART II – OTHER INFORMATION	43
Item 1 - Legal Proceedings	43
Item 1A - Risk Factors	43
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3 - Defaults Upon Senior Securities	48
Item 4 - Mine Safety Disclosures	48
Item 5 - Other Information	48
Item 6 - Exhibits	48

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FORWARD-LOOKING STATEMENTS

We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities and Exchange Commission (the “SEC”), our reports to shareholders and in other communications by us. This Quarterly Report on Form 10‑Q contains “forward-looking statements” which may be identified by the use of such words as “believe,” “project,” “expect,” “anticipate,” “should,” “may,” “will,” “intend,” “planned,” “estimated,” “potential” or similar expressions. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operation and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

effects of the coronavirus disease 2019 ("COVID-19") pandemic on the economy generally and on us in particular;

the expected growth opportunities or cost savings from the merger (the "Merger") with Provident Financial Services, Inc. ("Provident") may not be fully realized or may take longer to realize than expected;

our business and Provident's business may not be combined successfully, or such combination may take longer, be more difficult, time-consuming or costly to accomplish than expected;

deposit attrition, operating costs, customer losses and business disruption following the Merger, including adverse effects on relationships with employees and customers, may be greater than expected;

the regulatory approvals required for the Merger may not be obtained on the proposed terms or on the anticipated schedule;

our shareholders may fail to approve the Merger;

changes in the interest rate environment that reduce margins;

changes in the regulatory environment;

the highly competitive industry and market area in which we operate;

general economic conditions, either nationally or regionally, resulting in, among other things, a deterioration in credit quality;

changes in business conditions and inflation;

changes in credit market conditions;

changes in the securities markets which affect investment management revenues;

increases in Federal Deposit Insurance Corporation (“FDIC”) deposit insurance premiums and assessments, which could adversely affect our financial condition;

changes in technology used in the banking business;

the soundness of other financial services institutions, which may adversely affect our credit risk;

our controls and procedures may fail or be circumvented;

new lines of business or new products and services, which may subject us to additional risks;

changes in key management personnel which may adversely impact our operations;

the effect on our operations of recent legislative and regulatory initiatives that were or may be enacted in response to the recent financial crisis;

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severe weather, natural disasters, acts of war or terrorism and other external events which could significantly impact our business;

the inability to realize expected cost savings or to implement integration plans and other adverse consequences associated with the acquisition of Community Bank of Bergen County (“Community”);

the inability to realize expected cost savings or to implement integration plans and other adverse consequences associated with the acquisition of Enterprise Bank, NJ (“Enterprise”); and

other factors detailed from time to time in our filings with the SEC.

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

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PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

SB ONE BANCORP

CONSOLIDATED BALANCE SHEETS

(Unaudited)


(Dollars in Thousands)	March 31, 2020		December 31, 2019
ASSETS
Cash and due from banks	$	12,377	$	9,525
Interest-bearing deposits with other banks		27,928		34,161
Cash and cash equivalents		40,305		43,686
Interest bearing time deposits with other banks		200		200
Securities available for sale, at fair value		232,205		212,181
Securities held to maturity, at amortized cost (fair value of $6,399 and $4083 at March 31, 2020 and December 31, 2019, respectively)		6,339		4,012
Other Bank Stock, at cost		12,487		12,498
Loans receivable, net of unearned income		1,685,138		1,628,846
Less: allowance for loan losses		10,867		10,267
Net loans receivable		1,674,271		1,618,579
Foreclosed real estate		3,097		3,793
Premises and equipment, net		19,055		19,080
Right-of-use assets, net		4,535		4,644
Accrued interest receivable		6,856		6,175
Goodwill and intangibles		28,948		29,039
Bank-owned life insurance		36,936		37,209
Other assets		15,002		10,561
Total Assets	$	2,080,236	$	2,001,657
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	285,857	$	258,311
Interest bearing		1,312,694		1,266,730
Total deposits		1,598,551		1,525,041
Short-term borrowings		196,145		193,000
Long-term borrowings		34,127		40,114
Lease liability		4,676		4,727
Accrued interest payable and other liabilities		23,952		11,677
Subordinated debentures		27,871		27,869
Total Liabilities		1,885,322		1,802,428
Stockholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized; none issued		—		—
Common stock, no par value, 15,000,000 shares authorized; 9,649,140 and 9,589,201 shares issued and 9,417,933 and 9,357,994 shares outstanding at March 31, 2020 and December 31, 2019, respectively		151,543		151,165
Treasury stock, at cost; 231,207 shares at March 31, 2020 and December 31, 2019, respectively		(5,132)		(5,132)
Deferred compensation obligation under Rabbi Trust		1,882		1,852
Retained earnings		59,037		54,706
Accumulated other comprehensive (loss)		(10,534)		(1,510)
Stock held by Rabbi Trust		(1,882)		(1,852)
Total Stockholders' Equity		194,914		199,229
Total Liabilities and Stockholders' Equity	$	2,080,236	$	2,001,657

See Notes to Consolidated Financial Statements

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SB ONE BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended March 31,
(Dollars in thousands except per share data)	2020		2019
INTEREST INCOME
Loans receivable, including fees	$	19,330	$	18,160
Securities:
Taxable		1,508		1,175
Tax-exempt		119		448
Interest bearing deposits		20		49
Total Interest Income		20,977		19,832
INTEREST EXPENSE
Deposits		4,340		3,864
Borrowings		1,141		1,214
Subordinated debentures		316		315
Total Interest Expense		5,797		5,393
Net Interest Income		15,180		14,439
PROVISION FOR LOAN LOSSES		879		571
Net Interest Income after Provision for Loan Losses		14,301		13,868
NON -INTEREST INCOME
Service fees on deposit accounts		319		330
ATM and debit card fees		245		231
Bank-owned life insurance		228		230
Insurance commissions and fees		2,598		2,562
Investment brokerage fees		15		56
Other		276		224
Total Non-Interest Income		3,681		3,633
NON-INTEREST EXPENSES
Salaries and employee benefits		6,770		6,130
Occupancy, net		879		779
Data processing		1,054		940
Furniture and equipment		318		318
Advertising and promotion		112		132
Professional fees		443		462
Director fees		177		145
FDIC assessment		252		166
Insurance		32		30
Stationary and supplies		91		84
Merger-related expenses		315		—
Loan collection costs		75		120
Net expenses and write-downs related to foreclosed real estate		90		65
Amortization of intangible assets		91		102
Other		668		705
Total Non-Interest Expenses		11,367		10,178
Income before Income Taxes		6,615		7,323
EXPENSE FOR INCOME TAXES		1,487		1,500
Net Income		5,128		5,823
OTHER COMPREHENSIVE INCOME:
Unrealized gain (loss) on available for sale securities arising during the period		1,073		2,912
Fair value adjustments on derivatives		(13,933)		(1,734)
Income tax related to items of other comprehensive income		3,836		(302)
Other comprehensive (loss) income, net of income taxes		(9,024)		876
Comprehensive (loss) income	$	(3,896)	$	6,699
EARNINGS PER SHARE
Basic	$	0.55	$	0.62
Diluted	$	0.55	$	0.62

See Notes to Consolidated Financial Statements

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SB ONE BANCORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2020 and 2019

(Unaudited)


				Deferred				Accumulated		Stock
	Number of			Compensation				Other		Held by				Total
	Shares	Common		Obligation Under		Retained		Comprehensive		Rabbi		Treasury		Stockholders'
(Dollars in Thousands)	Outstanding	Stock		Rabbi Trust		Earnings		Income		Trust		Stock		Equity
Balance December 31, 2018	9,532,943	$	150,419	$	1,647	$	35,192	$	(167)	$	(1,647)	$	—	$	185,444
Net income	—		—		—		5,823		—		—		—		5,823
Other comprehensive loss	—		—		—		—		876		—		—		876
Funding of Supplemental Director Retirement Plan	—		—		42		—		—		(42)		—		—
Common stock issued	—		—		—		—		—		—		—		—
Treasury shares purchased	(88,091)		—		—		—		—		—		(1,926)		(1,926)
Restricted stock granted	41,832		—		—		—		—		—		—		—
Restricted stock forfeited	(15,954)		—		—		—		—		—		—		—
Compensation expense related to stock option and restricted stock grants	—		190		—		—		—		—		—		190
Dividends declared on common stock ($0.75 per share)	—		—		—		(712)		—		—		—		(712)
Balance March 31, 2019	9,470,730	$	150,609	$	1,689	$	40,303	$	709	$	(1,689)	$	(1,926)	$	189,695

Balance December 31, 2019	9,357,994	$	151,165		1,852	$	54,706	$	(1,510)		(1,852)	$	(5,132)	$	199,229
Net income	—		—		—		5,128		—		—		—		5,128
Other comprehensive (loss)	—		—		—		—		(9,024)		—		—		(9,024)
Funding of Supplemental Director Retirement Plan	—		—		30		—		—		(30)		—		—
Treasury shares issued	—		—		—		—		—		—		—		—
Restricted stock granted	59,939		—		—		—		—		—		—		—
Compensation expense related to stock option and restricted stock grants	—		378		—		—		—		—		—		378
Dividends declared on common stock ($0.15 per share)	—		—		—		(797)		—		—		—		(797)
Balance March 31, 2020	9,417,933	$	151,543	$	1,882	$	59,037	$	(10,534)	$	(1,882)	$	(5,132)	$	194,914

See Notes to Consolidated Financial Statements

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SB ONE BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31,
(Dollars in thousands)	2020		2019
Cash Flows from Operating Activities
Net income	$	5,128	$	5,823
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		879		571
Depreciation and amortization		479		537
Net amortization of securities premiums and discounts		313		501
Amortization of subordinated debt issuance costs		2		3
Net realized (gain) on sale of foreclosed real estate		(54)		9
Write-downs of and provisions for foreclosed real estate		51		6
Deferred income tax (benefit)		(257)		(1,534)
Earnings on bank-owned life insurance		(228)		(230)
Compensation expense for stock options and restricted stock grants		378		191
Decrease (increase) in assets:
Accrued interest receivable		(681)		(43)
Other assets		(132)		(1,556)
Increase in accrued interest payable and other liabilities		(1,815)		(454)
Net Cash Provided by Operating Activities		4,063		3,824
Cash Flows from Investing Activities
Securities available for sale:
Purchases		(22,903)		(9,565)
Maturities, calls and principal repayments		3,645		2,072
Securities held to maturity:
Purchases		(2,534)		(200)
Maturities, calls and principal repayments		200		239
Net (increase) in loans		(56,571)		(39,026)
Proceeds from the sale of foreclosed real estate		699		893
Purchases of bank premises and equipment		(363)		(678)
Payback of bank owned life insurance		501		—
Net (increase) in other bank stock		11		2,417
Net Cash Used in Investing Activities		(77,315)		(43,848)
Cash Flows from Financing Activities
Net increase in deposits		73,510		107,385
Net increase (decrease) in short-term borrowed funds		3,145		(60,495)
Proceeds from long-term borrowings		13		46
Repayment of long-term borrowings		(6,000)		(7,949)
Purchase of treasury stock		—		(1,926)
Dividends paid		(797)		(712)
Net Cash Provided by Financing Activities		69,871		36,349
Net increase in Cash and Cash Equivalents		(3,381)		(3,675)
Cash and Cash Equivalents - Beginning		43,686		26,678
Cash and Cash Equivalents - Ending	$	40,305	$	23,003
Supplementary Cash Flows Information
Interest paid	$	5,594	$	5,252
Income taxes paid	$	5,498	$	96

See Notes to Consolidated Financial Statements໿໿

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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of SB One Bancorp, (“we,” “us,” “our” or the “Company”) and our wholly owned subsidiary SB One Bank (the “Bank”). The Bank’s wholly owned subsidiaries are SCB Investment Company, Inc., SCBNY Company, Inc., ClassicLake Enterprises, LLC, GFR Maywood, LLC, PPD Holding Company, LLC, Community Investing Company, Inc., 490 Boulevard Realty Corp., and SB One Insurance Agency Inc. ("SB One Insurance Agency"), a full service insurance agency located in Sussex County, New Jersey with a satellite office located in Bergen County, New Jersey. SB One Insurance Agency’s operations are considered a separate segment for financial disclosure purposes. All inter-company transactions and balances have been eliminated in consolidation. The Bank operates nineteen banking offices: eight located in Sussex County, New Jersey, four located in Bergen County, New Jersey, two located in Essex County, New Jersey, one located in Hudson County, New Jersey, one located in Middlesex County, New Jersey, one located in Union County, New Jersey, one located in Warren County, New Jersey, and one located in Queens County, New York.

We are subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “FRB”). The Bank’s deposits are insured by the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”) up to applicable limits. The operations of the Company and the Bank are subject to the supervision and regulation of the FRB, the FDIC and the New Jersey Department of Banking and Insurance (the “Department”) and the operations of SB One Insurance Agency are subject to supervision and regulation by the Department.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for full year financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. Operating results for the three month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto that are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Announcement of Merger Agreement

On March 12, 2020, the Company announced the signing of a definitive merger agreement with Provident Financial Services, Inc. (“Provident”) where Provident will acquire the Company in an all-stock transaction (the “Merger”). Each outstanding share of Company common stock will be exchanged for 1.357 shares of Provident common stock. The Merger is expected to close in the third quarter of 2020, subject to satisfaction of customary closing conditions, including receipt of required regulatory approvals and approval by the shareholders of the Company.

New Accounting Standards

In February 2016, FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). Under the new guidance, lessees are required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-10, Codification

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Improvements to Topic 842, Leases which was issued to clarify and correct untended application of the guidance in ASU 2016-02 (Topic 842). The amendments in this ASU affect aspects of the guidance issued in ASU 2016-02 and provide clarification to related topics, such as 1) Rate implicit in the lease; 2) Reassessment of leases; 3) Transition guidance; and 4) Impairment of net investment in the lease. In July 2018, the FASB also issued ASU 2018-11 Leases (Topic 842) Targeted Improvements, which provides guidance related to comparative reporting requirements for initial adoption and separating lease and non-lease components. Currently, entities are required to adopt the new standard utilizing the modified retrospective approach. This amendment provides entities with an additional transition method which allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Currently, ASU 2016-02 provides a practical expedient to lessees to allow them to not separate non-lease components from lease components; however, it does not provide a similar practical expedient to lessors. This amendment provides a practical expedient to lessors which allows them the option to not separate non-lease components from the associated lease components. However, the lessor practical expedient is limited to circumstances in which the non-lease components would otherwise be account for under the new revenue guidance (Topic 606). In addition, both of the following conditions must be met: the timing and pattern of transfer are the same for non-lease components and associated lease components 2) the lease component, if accounted for separately, would be classified as an operating lease. An entity that elects the lessor practical expedient is also required to provide certain disclosures. For entities that early adopted Topic 842 the amendments in these ASUs are effective upon issuance. The Company adopted both ASU No. 2016-02 and ASU No. 2018-11 effective January 1, 2019 and elected to apply the guidance as of the beginning of the period of adoption (January 1, 2019) and not restate comparative periods. The Company also elected certain optional practical expedients, which allow the Company to forego a reassessment of (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) the initial direct costs for any existing leases. Additionally, the Company elected to adopt the practical expedient use of hindsight to determine right of use asset and lease liability for each lease with a renewal option through their first option date. Adoption of the standard did not result in material changes to the Company's consolidated results of operations. The Company's adoption of the ASU resulted in a right of use asset and lease liability of approximately $2.7 million at January 1, 2019. The impact of the adoption on the Company's operating results was not significant.

In March 2019, FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which amends certain aspects of FASB's leasing standard, ASU 2016-02.1 ASU 2019-01 is the result of a proposed ASU issued in December 2018. The ASU addresses the following issues:

Determining the fair value of the underlying asset by lessors that are not manufacturers or dealers.

Statement of cash flows presentation for sales-type and direct financing leases by lessors within the scope of ASC 942.3

Clarification of interim disclosure requirements during transition.

ASU 2019-01 will be effective for public business entities for fiscal years ending after December 15, 2019. The adoption of the ASU did not have a material impact on the Company’s consolidated financial statements.

In June 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for- sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. In April 2019, FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. ASU 2019-04 made amendments to the following categories in ASU 2016-13 which include Accrued interest, transfers between classifications or categories for loans and debt securities, recoveries, reinsurance recoverables, projections of interest rate environments for variable-rate financial instruments, costs to sell when foreclosure is probable, consideration of expected prepayments when determining the effective interest rate, vintage disclosures and extension and renewal options. In May 2019, FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief, ASU 2019-05 allows the Company to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of Topic 326 if the instruments are eligible for the fair value option

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under authoritative guidance for fair value. The fair value option election does not apply to held-to-maturity debt securities. We are required to make this election on an instrument-by-instrument basis. This ASU will be effective for public business entities that are SEC filers and considered smaller reporting companies in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company elected not to adopt ASU 2016-13 early. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements. The Company has determined that a third-party vendor will assist with model development, data governance and operational controls to support the adoption of this ASU. Model implementation, including development and validation, began in the second quarter of 2019, as did the establishment of the control activities required to support the models.

In January 2017, FASB issued ASU 2017‑04, Simplifying the Test for Goodwill Impairment (Topic 350). The main objective of this ASU is to simplify the accounting for goodwill impairment by requiring impairment charges be based upon the first step in the current two-step impairment test under Accounting Standards Codification (ASC) 350. Currently, if the fair value of a reporting unit is lower than its carrying amount (Step 1), an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). This ASU’s objective is to simplify how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The standard will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The adoption of the ASU did not have a material impact on the Company’s consolidated financial statements.

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

In August 2017, FASB issued ASU 2017‑12 Derivatives and Hedging (Topic 815). The objective of the ASU is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make improvements to simplify the application of hedge accounting guidance in current GAAP. The amendments in the ASU will, among other things, 1) permit hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risks; 2) change the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk; 3) modify disclosures to include a tabular disclosure related to the effect on the income statement of fair value and cash flow hedges; and 4) eliminate the requirement to disclose the ineffective portion of the change in fair value of hedging instruments. These changes will more closely align the results of cash flow and fair value hedge accounting with risk management activities and the presentation of hedge results in the financial statements. ASU 2017‑12 will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For all other entities, the ASU will be effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the update with all transition requirements and elections being applied to hedging relationships existing on the date of adoption. The Company’s adoption of the ASU did not have a significant impact on the Company’s consolidated financial statements.

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In August 2018, FASB issued ASU 2018‑13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The updates in this ASU are part of the disclosure framework project and modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The modifications include removal, modification, and removal of disclosure requirements. The ASU removed the following disclosure requirements: a) The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, b) The policy for timing of transfers between levels, c) The valuation process for Level 3 fair value measurements, c) For nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU added the following disclosure requirements: a) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; b) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU also modified the following disclosure requirements: a) In lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; b) For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; c) Clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018‑13 will be effective for public business entities for fiscal years and interim periods within those years beginning after December 15, 2019. The adoption of the ASU did not have a material impact on the Company’s consolidated financial statements.

In August 2018, FASB issued ASU 2018‑14, Compensation-Retirement Benefits-Defined Benefit Plans - General (Topic 715‑20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The updates in this ASU are part of the disclosure framework project ASU 2018‑14 and modify the disclosure requirements under ASC 715‑201 for employers that sponsor defined benefit pension or other postretirement plans. Those modifications include the removal, addition, and of disclosure requirements as well as clarifying specific disclosure requirements. The ASU removed the following disclosures: a) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; b) the amount and timing of plan assets expected to be returned to the employer; c) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law; d) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan; and e) for nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. However, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets. For public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits. The ASU added the following disclosures: a) The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates; and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU then clarified the following disclosures: a) the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs more than plan assets; and b) the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs more than plan assets. ASU 2018‑14 will be effective for public business entities for fiscal years ending after December 15, 2020. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements and does not expect a material impact on its consolidated financial statements.

In October 2018, the FASB issued ASU 2018‑16: “Derivatives and Hedging (Topic 815)-Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes”. The amendment permits the use of the Overnight Index Swap (OIS) Rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes. ASU 2018‑16 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. Early adoption is permitted in any interim

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period upon issuance of this ASU if an entity already has adopted ASU 2017‑12. The amendments in this update should be applied prospectively for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The Company’s adoption of the ASU did not have a significant impact on the Company’s consolidated financial statements.

NOTE 2 – SECURITIES

Available for Sale

The amortized cost and approximate fair value of securities available for sale as of March 31, 2020 and December 31, 2019 are summarized as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
March 31, 2020
U.S. government agencies	$	8,235	$	—	$	(135)	$	8,100
U.S. government-sponsored enterprises		53,906		22		(2,908)		51,020
State and political subdivisions		45,232		2,682		—		47,914
Mortgage-backed securities -
U.S. government-sponsored enterprises		82,891		3,160		(377)		85,674
Private mortgage-backed securities		26,858		331		(357)		26,832
Corporate Debt		13,005		92		(432)		12,665
	$	230,127	$	6,287	$	(4,209)	$	232,205
December 31, 2019
U.S. government agencies	$	8,758	$	5	$	(84)	$	8,679
U.S. government-sponsored enterprises		54,338		—		(1,089)		53,249
State and political subdivisions		31,501		938		(225)		32,214
Mortgage-backed securities -
U.S. government-sponsored enterprises		81,449		1,198		(178)		82,469
Private mortgage-backed securities		22,110		368		(33)		22,445
Corporate Debt		13,019		113		(7)		13,125
	$	211,175	$	2,622	$	(1,616)	$	212,181

Securities with a carrying value of approximately $4.1 million and $2.5 million at March 31, 2020 and December 31, 2019, respectively, were pledged to secure public deposits and for borrowings at the Federal Reserve Bank as required or permitted by applicable laws and regulations.

The amortized cost and fair value of securities available for sale at March 31, 2020 are shown below by contractual maturity. Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations

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with or without call or prepayment penalties. Investments which pay principal on a periodic basis are not included in the maturity categories.


	Amortized		Fair
(Dollars in thousands)	Cost		Value
Due in one year or less	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		12,914		13,013
Due after ten years		45,323		47,566
Total bonds and obligations		58,237		60,579
U.S. government agencies		8,235		8,100
U.S. government-sponsored enterprises		53,906		51,020
Mortgage-backed securities:
U.S. government-sponsored enterprises		82,891		85,674
Private mortgage-backed securities (1)		26,858		26,832
Total available for sale securities	$	230,127	$	232,205

There were no gross realized gains or losses on sales of securities available for sale and no gross realized losses for the three months ended March 31, 2020 and 2019, respectively.

Temporarily Impaired Securities

The following table shows gross unrealized losses and fair value of securities with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by category and length of time that individual available for sale securities have been in a continuous unrealized loss position at March 31, 2020 and December 31, 2019.


	Less Than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
March 31, 2020
U.S. government agencies	$	2,404	$	(64)	$	5,696	$	(71)	$	8,100	$	(135)
U.S. government-sponsored enterprises		28,184		(1,411)		20,400		(1,497)		48,584		(2,908)
State and political subdivisions		—		—		—		—		—		—
Mortgage-backed securities -
U.S. government-sponsored enterprises		19,331		(323)		4,310		(54)		23,641		(377)
Private mortgage-backed securities		12,101		(357)		—		—		12,101		(357)
Corporate Debt		8,089		(432)		—		—		8,089		(432)
Total temporarily impaired securities	$	70,109	$	(2,587)	$	30,406	$	(1,622)	$	100,515	$	(4,209)
December 31, 2019
U.S. government agencies	$	—	$	—	$	5,966	$	(84)	$	5,966	$	(84)
U.S. government-sponsored enterprises		44,110		(770)		9,139		(319)		53,249		(1,089)
State and political subdivisions		17,421		(225)		—		—		17,421		(225)
Mortgage-backed securities -
U.S. government-sponsored enterprises		17,205		(113)		4,973		(65)		22,178		(178)
Private mortgage-backed securities		6,973		(33)		—		—		6,973		(33)
Corporate Debt		2,142		(7)		—		—		2,142		(7)
Total temporarily impaired securities	$	87,851	$	(1,148)	$	20,078	$	(468)	$	107,929	$	(1,616)

For each security whose fair value is less than its amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred. As of March 31, 2020, we reviewed our available for sale securities portfolio for indications of impairment. This review included analyzing the length of time and the extent to which the fair value was

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lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and likelihood of selling the security. The intent and likelihood of sale of debt and equity securities are evaluated based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position.

U.S. Government Agencies

At March 31, 2020 and December 31, 2019, the declines in fair value and the unrealized losses for our U.S. government agencies securities were primarily due to changes in spreads and market conditions and not credit quality. At March 31, 2020, there were seven securities with a fair value of $8.1 million that had an unrealized loss that amounted to $135 thousand. As of March 31, 2020, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of the U.S. government agencies securities at March 31, 2020 were deemed to be other-than-temporarily impaired (“OTTI”).

At December 31, 2019, there were six securities with a fair value of $6.0 million that had an unrealized loss that amounted to $84 thousand.

U.S. Government Sponsored Enterprises

At March 31, 2020 and December 31, 2019, the change in fair value and unrealized losses for our U.S. government sponsored enterprises securities were primarily due to changes in spreads and market conditions and not credit quality. At March 31, 2020, there were 25 securities with a fair value of $48.6 million that had an unrealized loss that amounted to $2.9 million. As of March 31, 2020, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of the U.S. government sponsored enterprise securities at March 31, 2020, were deemed to be OTTI.

At December 31, 2019, there were 26 securities with a fair value of $53.2 million that had an unrealized loss of $1.1 million in the aggregate.

State and Political Subdivisions

At March 31, 2020, there were no state and political subdivisions securities that had an unrealized loss.

At December 31, 2019, there were fourteen securities with a fair value of $17.4 million that had an unrealized loss that amounted to $225 thousand.

Mortgage-Backed Securities - U.S. government-sponsored enterprises

At March 31, 2020 and December 31, 2019, the change in fair value and unrealized losses for our mortgage-backed securities guaranteed by U.S. government-sponsored enterprises were primarily due to changes in spreads and market conditions and not credit quality. At March 31, 2020 there were 15 securities with a fair value of $23.6 million that had an unrealized loss that amounted to $377 thousand. As of March 31, 2020, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of our mortgage-backed securities at March 31, 2020 were deemed to be OTTI.

At December 31, 2019, there were 13 securities with a fair value of $22.2 million that had an unrealized loss that amounted to $178 thousand.

Mortgage-Backed Securities – Private mortgage-backed securities

At March 31, 2020 and December 31, 2019, the change in fair value and the unrealized losses for our private mortgage-backed securities were primarily due to changes in spreads and mark conditions and not credit quality. At March 31, 2020, there were five securities with a fair value of $12.1 million that had an unrealized loss that amounted to $357 thousand.

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As of March 31, 2020, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of our mortgage-backed securities at March 31, 2020, were deemed to be other-then-temporarily impaired.

At December 31, 2019, there were three securities with a fair value of $7.0 million that had an unrealized loss that amounted to $33 thousand.

Corporate Debt

At March 31, 2020, there were four securities with a fair value of $8.1 million that had an unrealized loss of $432 thousand. These securities typically have maturity dates greater than 5 years and the fair values are more sensitive to changes in market interest rates. As of March 31, 2020, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of our corporate debt securities at March 31, 2020, were deemed to be OTTI.

At December 31, 2019, there was one security with a fair value of $2.1 million that had an unrealized loss of $7 thousand.

Held to Maturity Securities

The amortized cost and approximate fair value of securities held to maturity as of March 31, 2020 and December 31, 2019 are summarized as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
March 31, 2020
State and political subdivisions	$	6,339	$	60	$	—	$	6,399
December 31, 2019
State and political subdivisions	$	4,012	$	71	$	—	$	4,083

The amortized cost and carrying value of securities held to maturity at March 31, 2020 are shown below by contractual maturity. Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized		Fair
(Dollars in thousands)	Cost		Value
Due in one year or less	$	3,823	$	3,824
Due after one year through five years		1,500		1,527
Due after five years through ten years		1,016		1,048
Due after ten years		—		—
Total held to maturity securities	$	6,339	$	6,399

Temporarily Impaired Securities

For each security whose fair value is less than its amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred. As of March 31, 2020, there were no securities that had an unrealized loss. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and likelihood of selling the security. The intent and likelihood of sale of debt securities is evaluated based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. For each security whose fair value is less than their amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred.

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At December 31, 2019, there were no held to maturity securities with an unrealized loss.

NOTE 3 – LOANS

The composition of net loans receivable at March 31, 2020 and December 31, 2019 is as follows:


(Dollars in thousands)	March 31, 2020		December 31, 2019
Commercial and industrial	$	133,654	$	124,937
Construction		114,734		125,291
Commercial real estate		1,056,745		995,220
Residential real estate		379,396		382,567
Consumer and other		1,903		2,097
Total loans receivable		1,686,432		1,630,112
Unearned net loan origination fees		(1,294)		(1,266)
Allowance for loan losses		(10,867)		(10,267)
Net loans receivable	$	1,674,271	$	1,618,579

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The total amount of loans serviced for the benefit of others was approximately $215 thousand and $218 thousand at March 31, 2020 and December 31, 2019, respectively.

Purchased Credit Impaired Loans

The carrying value of loans acquired in the Community acquisition and accounted for in accordance with ASC Subtopic 310‑30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $2.5 million at March 31, 2020, which was $1.1 million less than the balance at the time of acquisition on January 4, 2018. Under ASC Subtopic 310‑30, these loans, referred to as purchased credit impaired (“PCI”) loans, may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. The Company elected to account for the loans with evidence of credit deterioration individually rather than aggregate them into pools. The difference between the undiscounted cash flows expected at acquisition and the investment in the acquired loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or as a valuation allowance.

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

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


	Three months ended		Three months ended
(Dollars in thousands)	March 31, 2020		March 31, 2019
Accretable yield, beginning balance	$	225	$	539
Acquisition of impaired loans		—		—
Accretable yield amortized to interest income		(34)		(79)
Reclassification from non-accretable difference		—		—
Accretable yield, ending balance	$	191	$	460

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NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES

The following table presents changes in the allowance for loan losses disaggregated by the class of loans receivable for the three months ended March 31, 2020 and 2019:


	Commercial				Commercial		Residential		Consumer
	and				Real		Real		and
(Dollars in thousands)	Industrial		Construction		Estate		Estate		Other		Unallocated		Total
Three Months Ended:
March 31, 2020
Beginning balance	$	1,175	$	537	$	6,717	$	1,338	$	9	$	491	$	10,267
Charge-offs		(343)		—		—		—		(10)		—		(353)
Recoveries		46		—		—		25		3		—		74
Provision		42		343		624		119		10		(259)		879
Ending balance	$	920	$	880	$	7,341	$	1,482	$	12	$	232	$	10,867
March 31, 2019
Beginning balance	$	603	$	663	$	5,575	$	1,371	$	23	$	540	$	8,775
Charge-offs		(45)		—		(5)		(93)		(25)		—		(168)
Recoveries		1		—		1		7		3		—		12
Provision		88		(304)		733		64		18		(28)		571
Ending balance	$	647	$	359	$	6,304	$	1,349	$	19	$	512	$	9,190

The following table presents the balance of the allowance of loan losses and loans receivable by class at March 31, 2020 and December 31, 2019 disaggregated on the basis of our impairment methodology.

Allowance for Loan Losses

Loans Receivable

Balance

Related to

SB ONE BANCORP 10-Q