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1ST CONSTITUTION 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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, 2020
or
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 Jersey22-3665653
(State of Other Jurisdiction
of Incorporation or Organization)
(I.R.S. Employer Identification No.)

2650 Route 130P.O. Box 634CranburyNew Jersey08512
(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 classTrading Symbol(s)Name of each exchange on which registered
Common stock, no par valueFCCY
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 filerAccelerated filer
Non-accelerated filerSmaller 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 3, 2020, there were 10,237,851 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
Consolidated Balance Sheets at September 30, 2020 and December 31, 2019 (unaudited)
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2020 and September 30, 2019 (unaudited)
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and September 30, 2019 (unaudited)
Consolidated Statements of Changes in Shareholders' Equity for the Three and Nine Months Ended September 30, 2020 and September 30, 2019 (unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and September 30, 2019 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
PART II.OTHER INFORMATION
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities



Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
SIGNATURES



PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements.
1ST Constitution Bancorp
Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
September 30, 2020December 31, 2019
ASSETS
Cash and due from banks$8,811 $2,547 
Interest-earning deposits11,244 12,295 
Total cash and cash equivalents20,055 14,842 
Investment securities  
Available for sale, at fair value135,123 155,782 
Held to maturity (fair value of $90,735 and $78,223 at September 30, 2020
    and December 31, 2019, respectively)
87,811 76,620 
Total investment securities222,934 232,402 
Loans held for sale28,196 5,927 
Loans1,455,684 1,216,028 
  Less: allowance for loan losses(14,450)(9,271)
    Net loans1,441,234 1,206,757 
Premises and equipment, net14,503 15,262 
Right-of-use assets16,910 17,957 
Accrued interest receivable5,689 4,945 
Bank-owned life insurance37,131 36,678 
Other real estate owned267 571 
Goodwill and intangible assets36,471 36,779 
Other assets20,640 14,142 
Total assets$1,844,030 $1,586,262 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
LIABILITIES  
Deposits  
Non-interest bearing$426,528 $287,555 
Interest bearing1,084,505 989,807 
Total deposits1,511,033 1,277,362 
Short-term borrowings105,867 92,050 
Redeemable subordinated debentures18,557 18,557 
Accrued interest payable1,069 1,592 
Lease liability17,714 18,617 
Accrued expenses and other liabilities7,783 7,506 
Total liabilities1,662,023 1,415,684 
SHAREHOLDERS' EQUITY  
Preferred stock, no par value; 5,000,000 shares authorized; none issued
  
Common stock, no par value; 30,000,000 shares authorized; 10,285,229 and 10,224,974 shares issued and 10,237,520 and 10,191,676 shares outstanding as of September 30, 2020 and December 31, 2019, respectively
110,825 109,964 
Retained earnings70,058 60,791 
Treasury stock, 47,709 and 33,298 shares at September 30, 2020 and December 31, 2019, respectively
(611)(368)
Accumulated other comprehensive income1,735 191 
Total shareholders' equity182,007 170,578 
Total liabilities and shareholders' equity$1,844,030 $1,586,262 
The accompanying notes are an integral part of these consolidated financial statements.
1


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,
2020201920202019
INTEREST INCOME
Loans, including fees$16,477 $13,316 $46,656 $38,342 
Securities:
Taxable725 1,130 2,633 3,615 
Tax-exempt504 393 1,438 1,256 
Federal funds sold and short-term investments2 35 95 129 
Total interest income17,708 14,874 50,822 43,342 
INTEREST EXPENSE
Deposits2,171 2,904 8,133 7,892 
Borrowings95 268 205 698 
Redeemable subordinated debentures90 185 348 575 
Total interest expense2,356 3,357 8,686 9,165 
Net interest income15,352 11,517 42,136 34,177 
PROVISION FOR LOAN LOSSES2,320 350 5,340 1,050 
Net interest income after provision for loan losses
13,032 11,167 36,796 33,127 
NON-INTEREST INCOME
Service charges on deposit accounts126 165 471 490 
Gain on sales of loans3,396 1,351 6,987 3,556 
Income on bank-owned life insurance188 149 632 437 
Gain on sales and calls of securities79 16 97 16 
Other income947 525 2,105 1,743 
Total non-interest income4,736 2,206 10,292 6,242 
NON-INTEREST EXPENSES
Salaries and employee benefits7,106 5,231 19,276 15,472 
Occupancy expense1,222 972 3,597 2,984 
Data processing expenses486 379 1,402 1,072 
FDIC insurance expense225 (47)484 113 
Other real estate owned expenses27 52 58 134 
Merger-related expenses 302 64 575 
Other operating expenses1,896 1,546 5,711 4,746 
Total non-interest expenses10,962 8,435 30,592 25,096 
Income before income taxes6,806 4,938 16,496 14,273 
INCOME TAXES1,896 1,315 4,475 3,883 
Net income
$4,910 $3,623 $12,021 $10,390 
EARNINGS PER COMMON SHARE
Basic
$0.48 $0.42 $1.18 $1.20 
Diluted
$0.48 $0.42 $1.17 $1.19 
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic
10,230,488 8,666,251 10,213,601 8,641,684 
Diluted
10,268,951 8,722,349 10,260,477 8,698,959 
The accompanying notes are an integral part of these consolidated financial statements.
2


1ST Constitution Bancorp
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net income $4,910 $3,623 $12,021 $10,390 
Other comprehensive income:
Unrealized holding gains on securities available for sale
435 200 1,964 2,631 
Tax effect
(103)(48)(475)(638)
Net of tax amount
332 152 1,489 1,993 
Reclassification adjustment for losses (gains) on securities available for sale(1)
14 (16)3 (16)
   Tax effect (2)
(4)4 (1)4 
Net of tax amount
10 (12)2 (12)
Reclassification adjustment for unrealized impairment loss on held to maturity security(3)
6 2 14 6 
Tax effect
(1) (4)(1)
Net of tax amount5 2 10 5 
Pension liability70 56 211 167 
Tax effect(20)(18)(62)(49)
Net of tax amount50 38 149 118 
Reclassification adjustment for actuarial gains for unfunded pension liability(4)
(51)(44)(151)(132)
Tax effect (2)
15 14 45 40 
Net of tax amount
(36)(30)(106)(92)
Total other comprehensive income361 150 1,544 2,012 
Comprehensive income$5,271 $3,773 $13,565 $12,402 
(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.

3


1ST Constitution Bancorp
Consolidated Statements of Changes in Shareholders’ Equity
For the Three and Nine Months Ended September 30, 2020 and 2019
(Dollars in thousands)
(Unaudited)
Common
Stock
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
Balance, July 1, 2019$80,190 $55,224 $(368)$29 $135,075 
Net income— 3,623 — — 3,623 
Exercise of stock options and issuance of restricted shares (8,358 shares and 25,350 shares, respectively)
60 — — — 60 
Share-based compensation268 — — — 268 
Cash dividends ($0.075 per share)
— (649)— — (649)
Other comprehensive income— — — 150 150 
Balance, September 30, 2019$80,518 $58,198 $(368)$179 $138,527 
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 compensation274 — — — 274 
Cash dividends ($0.09 per share)
— (919)— — (919)
Treasury stock purchase (8,383 shares)
(108)(108)
Other comprehensive income— — — 361 361 
Balance, September 30, 2020$110,825 $70,058 $(611)$1,735 $182,007 
Common
Stock
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
Balance, January 1, 2019$79,536 $49,750 $(368)$(1,833)$127,085 
Net income— 10,390 — — 10,390 
Exercise of stock options and issuance of restricted shares (24,277 shares and 53,931 shares, respectively)
149 — — — 149 
Share-based compensation833 — — — 833 
Cash dividends ($0.225 per share)
— (1,942)— — (1,942)
Other comprehensive income— — — 2,012 2,012 
Balance, September 30, 2019$80,518 $58,198 $(368)$179 $138,527 
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 compensation856 — — — 856 
Cash dividends ($0.27 per share)
— (2,754)— — (2,754)
Treasury stock purchased (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 
The accompanying notes are an integral part of these consolidated financial statements.
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1ST Constitution Bancorp
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine Months Ended September 30,
20202019
OPERATING ACTIVITIES:
Net income$12,021 $10,390 
Adjustments to reconcile net income to net cash (used in) provided by operating activities-
Provision for loan losses5,340 1,050 
Depreciation and amortization1,561 1,020 
Net amortization of premiums and discounts on securities956 425 
SBA loan discount accretion
(300)(289)
Loss (gain) on sales and calls of securities available for sale3 (16)
Gain on sales and calls of securities held to maturity(100) 
Gain on sales of other real estate owned(71)(137)
Gain on sales of loans held for sale(6,987)(3,556)
Originations of loans held for sale(238,201)(100,664)
Proceeds from sales of loans held for sale222,919 100,502 
Increase in cash surrender value on bank–owned life insurance(557)(437)
Gain on cash surrender value on bank-owned life insurance
(75) 
Share-based compensation expense856 833 
Decrease in deferred tax asset
498 1,146 
Noncash rent and equipment expense144 152 
(Increase) decrease in accrued interest receivable(744)208 
(Increase) in other assets(9,492)(3,442)
(Decrease) increase in accrued interest payable(523)374 
Increase (decrease) in accrued expenses and other liabilities338 (693)
                Net cash (used in) provided by operating activities(12,414)6,866 
INVESTING ACTIVITIES:
Purchases of securities:
Available for sale(23,415)(28,472)
Held to maturity(32,665)(9,101)
Proceeds from sales, calls, maturities and payments of securities:
Available for sale45,425 27,988 
Held to maturity21,244 13,592 
Proceeds from bank-owned life insurance benefits paid179 — 
Net redemption (purchase) of restricted stock1,753 (2,062)
Net increase in loans(239,517)(142,053)
Capital expenditures(248)(657)
Proceeds from sales of other real estate owned375 1,192 
Net cash used in investing activities(226,869)(139,573)
FINANCING ACTIVITIES:
Exercise of stock options 5 149 
Purchase of treasury shares(243) 
Cash dividends paid to shareholders(2,754)(1,942)
Net increase in deposits233,671 72,387 
Increase in short-term borrowings13,817 66,025 
Net cash provided by financing activities244,496 136,619 
Increase in cash and cash equivalents5,213 3,912 
Cash and cash equivalents at beginning of period14,842 16,844 
Cash and cash equivalents at end of period$20,055 $20,756 
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for -
Interest$9,209 $8,791 
Income taxes4,311 4,528 
Noncash items:
Right-of-use assets$250 $15,080 
Lease liability250 15,699 






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

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1ST Constitution Bancorp
Notes to Consolidated Financial Statements
September 30, 2020
(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. 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, 2019, filed with the SEC on March 16, 2020.

Goodwill
The Company completed its annual testing of goodwill for impairment in the fourth quarter of 2019 and concluded at that time that the fair value of the reporting unit exceeded the carrying amount of the reporting unit. In completing the impairment testing the Company identified a single reporting unit and the $35.0 million of goodwill at December 31, 2019 was assigned to the single reporting unit.

The decline in the market price of the Company’s common stock and the resulting aggregate market capitalization of the Company declining below the total amount of common shareholders’ equity at September 30, 2020, was an indication that the carrying amount of goodwill may exceed its fair value. Even though the decline in the market price of the Company’s common stock during 2020 was consistent with a broad decline in the market value of all banking company stocks and was not specific to the Company, it was a triggering event that required an evaluation of the potential impairment of goodwill.

For the third quarter of 2020, the Company performed a quantitative impairment test of goodwill utilizing a discounted cash flow valuation methodology based upon an updated five year projection of the Company’s financial performance. A discount rate was estimated utilizing the build up method with a risk free rate, an equity risk premium and a size premium. This discount rate was applied to the projected cash flows over the five year period, which included a terminal value in year five based on a multiple of the projected cash flow in year five. The year five terminal multiple was based upon the observed average market price to earnings multiple for the trailing last twelve months of earnings for companies included in the SNL US Bank Index at September 30, 2020. This multiple does not include a control premium. This estimated fair value exceeded the carrying value of shareholders’ equity at September 30, 2020 by 10.3%.

The five year projection was based on the Company’s 2020 business plan, historical operating results and internal financial models and included key assumptions for significantly elevated loan losses as a result of the COVID pandemic in the first three years of the projection. The Company’s actual financial results for the quarter ended June 30, 2020 and September 30, 2020 exceeded the financial projections for those periods.

It is not possible to know the severity and duration of the COVID-19 pandemic and the severity and duration of the economic disruption that will occur in the near term. While the Company has projected loan losses significantly higher than its historical experience in its five year projections, the actual loan losses may vary due to the uncertainty of the severity and duration of the economic disruption. Changes in market interest rates and the economic conditions in the Company’s market area may also affect the Company’s future net interest income and net income.

If the Company’s common stock price remains below the Company’s book value per common share in future periods, the Company will continue to evaluate goodwill for impairment on a quarterly basis. Changes in economic conditions, actual loan losses at levels higher than projected, changes in market interest rates and changes in discount rates and valuation multiples may affect the Company’s financial projections and valuation. The Company may determine that goodwill becomes impaired in a future period and a portion or all of the goodwill may be written off.

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On the basis of the evaluation of goodwill, management concluded that it was more likely than not the fair value of the reporting unit exceeded the carrying value of the reporting unit. Accordingly, goodwill was not impaired at September 30, 2020.

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, 2020 for items that should potentially be recognized or disclosed in these consolidated financial statements.  The evaluation was conducted through the date these consolidated financial statements were issued.

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), has caused, and is continuing to cause, widespread uncertainty, social and economic disruption, highly volatile financial markets and unprecedented increases in unemployment levels in a short period of time. As a result, almost all 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 were 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.

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.


Adoption of New Accounting Standards     

ASU 2018-15 - Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license.

The amendments in this Update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this Update.

The amendments in this ASU also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The term of the hosting arrangement includes the
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non-cancellable period of the arrangement plus periods covered by (1) an option to extend the arrangement if the customer is reasonably certain to exercise that option, (2) an option to terminate the arrangement if the customer is reasonably certain not to exercise the termination option, and (3) an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor. The entity also is required to apply the existing impairment guidance in Subtopic 350-40 to the capitalized implementation costs as if the costs were long-lived assets.

The amendments in this ASU also require the entity to present the expense related to the capitalized implementation costs in the same line item in the consolidated statements of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the consolidated statements of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the consolidated balance sheets in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.

The adoption of this guidance in 2020 did not have a material impact on the Company's consolidated financial statements.

ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)
In August 2018, the FASB issued ASU 2018-14 - “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20),” which consists of amendments to the disclosure framework project to improve the effectiveness of disclosures in the notes to the financial statements. The amendments in this Update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

The following disclosure requirements are removed from Subtopic 715-20:

1.The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year;
2.The amount and timing of plan assets expected to be returned to the employer;
3.The disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law;
4.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;
5.For nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. However, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets; and
6.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 following disclosure requirements are added to Subtopic 715-20:

1.The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates; and
2.An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

The amendments in this ASU also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed:

1.The projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs in excess of plan assets; and
2.The accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs in excess of plan assets.

The amendments in this ASU remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. Although narrow in scope, the amendments are considered an important part of the FASB’s efforts to improve the effectiveness of disclosures in the notes to financial statements by applying concepts in the Concepts Statement.

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For the Company, the provisions of this ASU are effective for fiscal years ending after December 15, 2020. Early adoption was permitted. The adoption of this guidance in 2020 did not have a material impact on the Company's consolidated financial statements.

(2) Acquisition of Shore Community Bank
On November 8, 2019, the Company completed its acquisition of 100 percent of the shares of common stock of Shore Community Bank ("Shore"), which merged with and into the Bank (the “Shore Merger”). The former shareholders of Shore received total consideration of $54.3 million, which was comprised of 1,509,275 shares of common stock of the Company with a market value of $29.2 million and cash of $25.1 million, of which $925,000 was cash paid in exchange for unexercised outstanding stock options.

The Shore Merger was accounted for under the acquisition method of accounting, and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at preliminary estimated fair values as of the Shore Merger date. The excess of the fair value of the consideration paid over the preliminary net fair value of Shore's assets and liabilities resulted in the recognition of goodwill of $23.2 million. Shore’s results of operations have been included in the Company’s Consolidated Financial Statements since November 8, 2019.

The assets acquired and liabilities assumed in the merger were recorded at their estimated fair values based on management’s best estimates, using information available at the date of the merger, including the use of third party valuation specialists. The measurement period may not exceed one year from the acquisition date and the measurement period for the Shore Merger is expected to end on November 7, 2020.
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The following table summarizes the fair value of the acquired assets and liabilities assumed as of November 8, 2019:
(Dollars in thousands)Amount
Consideration paid:
Company stock issued$29,175 
Cash payment24,233 
Cash payment for unexercised outstanding stock options925 
Total consideration paid$54,333 
Recognized amounts of identifiable assets acquired and liabilities assumed at fair value:
Cash and cash equivalents$32,599 
Investment securities available for sale26,440 
Loans205,833 
Premises and equipment, net4,433 
Core deposit intangible asset1,467 
Bank-owned life insurance7,250 
Right-of-use assets3,226 
Accrued interest receivable778 
Other real estate owned605 
Other assets2,518 
Deposits(249,836)
Lease liability(3,226)
Other liabilities(948)
Total identifiable assets and liabilities, net$31,139 
Goodwill recorded from Shore merger$23,194 
ASC Topic 805-10 provides that if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report, in its financial statements, provisional amounts for the items for which the accounting is incomplete. During the measurement period, the acquirer shall adjust the provisional amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the acquisition date. Thus, the acquirer shall adjust its financial statements as needed, including recognizing in its current-period earnings the full effect of a change in depreciation, amortization, or other income effects, if any, as a result of the change to provisional amounts calculated as if the accounting had been completed at the acquisition date. The measurement period may not exceed one year from the acquisition date.

Investments were recorded at fair value, utilizing quoted market prices on nationally recognized exchanges (Level 1) or by using Level 2 inputs.  For Level 2 securities, the Company obtained fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things.

Loans acquired in the Shore Merger were recorded at fair value and subsequently accounted for in accordance with ASC Topic 310. The fair values of loans acquired were estimated, utilizing cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses of approximately $3.6 million and estimated prepayments. Projected cash flows were then discounted to present value, utilizing a risk-adjusted market rate for similar loans that management determined market participants would likely use.

At the Shore Merger date, the Company recorded $201.3 million of loans without evidence of credit quality deterioration and $4.6 million of loans with evidence of credit quality deterioration.

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The following table summarizes the composition of the loans acquired and recorded at fair value:
At November 8, 2019
(Dollars in thousands)Loans acquired with no credit quality deteriorationLoans acquired with credit quality deteriorationTotal
Commercial
  Construction$9,733 $ $9,733 
  Commercial real estate135,482 4,071 139,553 
  Commercial business12,027  12,027 
Residential real estate36,849 500 37,349 
Consumer7,171  7,171 
  Total loans$201,262 $4,571 $205,833 

The following is a summary of the loans acquired with evidence of deteriorated credit quality in the Shore Merger as of the date of the closing of the merger:
(Dollars in thousands)Acquired Credit Impaired Loans
Contractually required principal and interest at acquisition$7,584 
Contractual cash flows not expected to be collected (non-accretable difference)2,355 
Expected cash flows at acquisition5,229 
Interest component of expected cash flows (accretable difference)658 
Fair value of acquired loans$4,571 

Bank-owned life insurance was recorded at the cash surrender value of the insurance policies, which approximates the redemption value of the policies.

The Company recorded a core deposit intangible asset related to a value ascribed to demand, interest checking, money market and savings account, referred to as core deposits, acquired as part of the acquisition. The value assigned to the acquired core deposits represents the future economic benefit of the potential cost savings from acquiring the core deposits, net of operating expenses and including ancillary fee income, compared to the cost of obtaining alternative funds from available market sources. Management used estimates including the expected attrition rates of depository accounts, future interest rate levels, and the cost of servicing various depository products. The core deposit intangible asset totaled $1.5 million and is being amortized over its estimated useful life of approximately 10 years, using an accelerated method.


The following table presents the projected amortization of the core deposit intangible asset for each period beginning October 1, 2020:
(Dollars in thousands)Amount
Year
2020$62 
2021236 
2022209 
2023182 
2024156 
Thereafter378 
Total$1,223 

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