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Section 1: 10-Q (10-Q)

Document
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, 2017
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:   000-51889
  
TWO RIVER BANCORP
  
  
(Exact Name of Registrant as Specified in Its Charter)
  
New Jersey
  
20-3700861
(State of Other Jurisdiction
of Incorporation or Organization)
  
(I.R.S. Employer Identification No.)
766 Shrewsbury Avenue, Tinton Falls, New Jersey
  
07724
(Address of Principal Executive Offices)
  
(Zip Code)
 
(732) 389-8722
 
 
(Registrant’s Telephone Number, Including Area Code)
 
  
   
  
  
(Former name, former address and former fiscal year, if changed since last report)
  

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒     No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ☒      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 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. (Check one):
Large accelerated filer
 ☐
Accelerated filer
  ☐
Non-accelerated filer
 ☐  (Do not check if a smaller reporting company)
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 Exchange Act).    Yes ☐    No ☒  
 
As of November 7, 2017, there were 8,456,930 shares of the registrant’s common stock, no par value, outstanding.



TWO RIVER BANCORP
 
FORM 10-Q
 
INDEX
 
 
      
Page
 
  
  
  
  
  
  
  
  
 
 
  
  
  
Consolidated Balance Sheets (unaudited) at September 30, 2017 and December 31, 2016
  
  
  
  
 
  
  
  
Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2017 and 2016
  
  
  
 
 
  
  
  
Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2017 and 2016
  
  
  
 
 
  
  
  
Consolidated Statements of Shareholders' Equity (unaudited) for the nine months ended September 30, 2017 and 2016
  
  
  
 
 
  
  
  
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2017 and 2016
  
  
  
  
 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
 
  
  
  
  
  
  
 
  
  
  
  
  
  
 
  
 
  
  
  
  
 
 
 
 
 
 
 
 
  
  
  
  
  
  
 



PART I.   FINANCIAL INFORMATION
Item 1.        Financial Statements
TWO RIVER BANCORP
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except share data)
 
September 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Cash and due from banks
$
24,858

 
$
19,844

Interest-bearing deposits in bank
21,445

 
22,233

Cash and cash equivalents
46,303

 
42,077

 
 
 
 
Securities available for sale
30,061

 
34,464

Securities held to maturity (fair value of $57,719 and $57,284 at September 30, 2017 and December 31, 2016, respectively)
57,058

 
57,843

Restricted investments, at cost
5,522

 
4,805

Loans held for sale
1,082

 
4,537

Loans
816,078

 
753,092

Allowance for loan losses
(10,223
)
 
(9,565
)
Net loans
805,855

 
743,527

 
 
 
 
Other real estate owned (“OREO”)

 
259

Bank owned life insurance
21,440

 
21,029

Premises and equipment, net
5,350

 
4,662

Accrued interest receivable
2,313

 
2,234

Goodwill
18,109

 
18,109

Other assets
7,152

 
6,665

 
 
 
 
Total Assets
$
1,000,245

 
$
940,211

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
163,841

 
$
160,104

Interest-bearing
658,031

 
616,463

Total Deposits
821,872

 
776,567

 
 
 
 
Securities sold under agreements to repurchase
22,576

 
19,915

FHLB and other borrowings
30,300

 
25,300

Subordinated debt
9,879

 
9,855

Accrued interest payable
114

 
100

Other liabilities
8,937

 
7,758

 
 
 
 
Total Liabilities
893,678

 
839,495

 
 
 
 
Shareholders' Equity
 
 
 
Preferred stock, no par value; 6,500,000 shares authorized, no shares issued and outstanding

 

Common stock, no par value; 25,000,000 shares authorized;
 

 
 

Issued – 8,766,577 and 8,677,536 at September 30, 2017 and December 31, 2016, respectively
 

 
 

Outstanding – 8,454,483 and 8,365,442 at September 30, 2017 and December 31, 2016, respectively
79,576

 
79,056

Retained earnings
29,580

 
24,447

Treasury stock, at cost; 312,094 shares at September 30, 2017 and December 31, 2016
(2,396
)
 
(2,396
)
Accumulated other comprehensive loss
(193
)
 
(391
)
Total Shareholders' Equity
106,567


100,716

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
1,000,245

 
$
940,211

See notes to the unaudited consolidated financial statements.

3




TWO RIVER BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(in thousands, except per share data)     
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Interest Income
 
 
 
 
 
 
 
Loans, including fees
$
9,227

 
$
8,337

 
$
26,363

 
$
24,335

Securities:
 
 
 
 
 
 
 

Taxable
247

 
187

 
715

 
571

Tax-exempt
267

 
234

 
831

 
664

Interest-bearing deposits
83

 
19

 
257

 
84

Total Interest Income
9,824

 
8,777

 
28,166

 
25,654

Interest Expense
 
 
 
 
 
 
 
Deposits
1,069

 
972

 
3,170

 
2,800

Securities sold under agreements to repurchase
18

 
15

 
50

 
44

FHLB and other borrowings
157

 
157

 
449

 
452

Subordinated debt
164

 
164

 
493

 
492

Total Interest Expense
1,408

 
1,308

 
4,162

 
3,788

Net Interest Income
8,416

 
7,469

 
24,004

 
21,866

Provision for Loan Losses
255

 
470

 
855

 
860

Net Interest Income after Provision for Loan Losses
8,161

 
6,999

 
23,149

 
21,006

 
 
 
 
 
 
 
 
Non-Interest Income
 
 
 
 
 
 
 
Service fees on deposit accounts
224

 
154

 
535

 
427

Mortgage banking
358

 
316

 
1,258

 
831

Other loan fees
188

 
188

 
402

 
311

Earnings from investment in bank owned life insurance
137

 
118

 
411

 
337

Death benefit on bank owned life insurance

 
862

 

 
862

Gain on sale of SBA loans
306

 
116

 
817

 
575

Net gain on sale of securities

 

 

 
72

Other income
240

 
229

 
693

 
627

Total Non-Interest Income
1,453

 
1,983

 
4,116

 
4,042

 
 
 
 
 
 
 
 
Non-Interest Expenses
 
 
 
 
 
 
 
Salaries and employee benefits
3,641

 
3,309

 
10,554

 
9,609

Occupancy and equipment
1,112

 
1,056

 
3,215

 
3,084

Professional
366

 
273

 
1,102

 
888

Insurance
57

 
56

 
158

 
160

FDIC insurance and assessments
123

 
114

 
354

 
324

Advertising
110

 
85

 
345

 
315

Data processing
151

 
135

 
406

 
405

Outside services fees
120

 
131

 
347

 
369

Amortization of identifiable intangibles

 

 

 
9

OREO expenses, impairments and sales, net
25

 
(245
)
 
44

 
(271
)
Loan workout expenses
8

 
44

 
174

 
142

Other operating
462

 
381

 
1,324

 
1,081

Total Non-Interest Expenses
6,175

 
5,339

 
18,023

 
16,115

 
 
 
 
 
 
 
 
Income before Income Taxes
3,439

 
3,643

 
9,242

 
8,933

Income tax expense
1,202

 
999

 
3,075

 
2,869

Net Income
$
2,237

 
$
2,644

 
$
6,167

 
$
6,064

 
 
 
 
 
 
 
 
Earnings Per Common Share:
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.32

 
$
0.74

 
$
0.73

Diluted
$
0.26

 
$
0.31

 
$
0.71

 
$
0.71

Weighted average common shares outstanding
 
 
 
 
 
 
 

Basic
8,393

 
8,323

 
8,373

 
8,319

Diluted
8,656

 
8,537

 
8,647

 
8,515

See notes to the unaudited consolidated financial statements.

4


TWO RIVER BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(in thousands)
 
 
 
Three Months Ended
 
September 30,
 
2017
 
2016
Net income
$
2,237

 
$
2,644

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized holdings gains on securities available for sale, net of income tax expense 2017: $1; 2016: $4
3

 
7

 
 
 
 
Other comprehensive income
3

 
7

 
 
 
 
Total comprehensive income
$
2,240

 
$
2,651

 
 
Nine Months Ended
 
September 30,
 
2017
 
2016
Net income
$
6,167

 
$
6,064

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized holdings gains on securities available for sale, net of income tax expense 2017: $127; 2016: $169
198

 
260

 
 
 
 
Other comprehensive income
198

 
260

 
 
 
 
Total comprehensive income
$
6,365

 
$
6,324


See notes to the unaudited consolidated financial statements.

5


TWO RIVER BANCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
For the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands, except per share data)
 
Common Stock
 
 
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Outstanding
Shares
 
Amount
 
Retained
Earnings
 
Treasury
Stock
 
 
Balance, January 1, 2017
8,365,442

 
$
79,056

 
$
24,447

 
$
(2,396
)
 
$
(391
)
 
$
100,716

Net income

 

 
6,167

 

 

 
6,167

Common stock dividend – adjustment
(1,069
)
 

 

 

 

 

Other comprehensive income

 

 

 

 
198

 
198

Stock-based compensation expense

 
202

 

 

 

 
202

Cash dividends on common stock ($0.125 per share)

 

 
(1,034
)
 

 

 
(1,034
)
Options exercised
65,948

 
266

 

 

 

 
266

Restricted stock awards
21,018

 

 

 

 

 

Employee stock purchase program
3,144

 
52

 

 

 

 
52

Balance, September 30, 2017
8,454,483

 
$
79,576

 
$
29,580

 
$
(2,396
)
 
$
(193
)
 
$
106,567

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
7,929,196

 
$
72,890

 
$
22,759

 
$
(2,248
)
 
$
(399
)
 
$
93,002

Net income

 

 
6,064

 

 

 
6,064

Other comprehensive income

 

 

 

 
260

 
260

Stock-based compensation expense

 
162

 

 

 

 
162

Cash dividends on common stock ($0.105 per share)

 

 
(875
)
 

 

 
(875
)
Options exercised
22,957

 
89

 

 

 

 
89

Restricted stock and other awards
17,000

 


 


 


 


 

Common stock repurchased
(13,232
)
 

 

 
(148
)
 

 
(148
)
Employee stock purchase program
4,017

 
40

 

 

 

 
40

Balance, September 30, 2016
7,959,938

 
$
73,181

 
$
27,948

 
$
(2,396
)
 
$
(139
)
 
$
98,594

 
See notes to the unaudited consolidated financial statements.

6


TWO RIVER BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2017 and 2016  
 
Nine Months Ended September 30,
 
2017
 
2016
 
(in thousands)
Cash Flows From Operating Activities
 
 
 
Net income
$
6,167

 
$
6,064

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
588

 
586

Provision for loan losses
855

 
860

Intangible amortization

 
9

Amortization of subordinated debt issuance costs
24

 
23

Net amortization of securities premiums and discounts
637

 
518

Earnings from investment in bank owned life insurance
(411
)
 
(337
)
Proceeds from sale of mortgage loans held for sale
56,620

 
44,816

Origination of mortgage loans held for sale
(53,429
)
 
(43,580
)
Gain on sale of mortgage loans held for sale
(1,003
)
 
(747
)
Gain on sale of loans transferred from held for investment to held for sale
(177
)
 

Net realized loss on sale of OREO
17

 
45

OREO writedown
26

 

Stock-based compensation expense
202

 
162

Net realized gain on sale of securities held to maturity

 
(72
)
Proceeds from sale of SBA loans held for sale
9,172

 
6,081

Origination of SBA loans held for sale
(7,088
)
 
(5,506
)
Gain from sale of SBA loans held for sale
(817
)
 
(575
)
Death benefit on bank owned life insurance

 
(862
)
Increase in assets:
 
 
 
Accrued interest receivable
(79
)
 
(16
)
Other assets
(614
)
 
(235
)
Increase (decrease) in liabilities:
 
 
 
Accrued interest payable
14

 
(29
)
Other liabilities
1,179

 
1,177

Net Cash Provided by Operating Activities
11,883

 
8,382

Cash Flows From Investing Activities
 
 
 
Purchase of securities available for sale

 
(2,257
)
Purchase of securities held to maturity
(3,295
)
 
(9,210
)
Proceeds from repayments, calls and maturities of securities available for sale
4,431

 
4,598

Proceeds from repayments, calls and maturities of securities held to maturity
3,740

 
4,758

Proceeds from sales of securities held to maturity

 
1,076

Proceeds from sale of loans transferred from held for investment to held for sale
8,357

 

Net increase in loans
(71,363
)
 
(60,953
)
Purchases of premises and equipment
(1,276
)
 
(338
)
Purchase of restricted investments, net
(717
)
 
(1,366
)
Purchase of bank owned life insurance

 
(3,918
)
Proceeds from death benefit of bank owned life insurance

 
1,522

Proceeds from sale of OREO
216

 
107

Net Cash Used In Investing Activities
(59,907
)
 
(65,981
)
Cash Flows From Financing Activities
 
 
 
Net increase in deposits
45,305

 
30,811

Net increase (decrease) in securities sold under agreements to repurchase
2,661

 
(900
)
Proceeds from FHLB and other borrowings
7,500

 
13,000

Repayment of FHLB and other borrowings
(2,500
)
 
(4,200
)
Cash dividends paid – common stock
(1,034
)
 
(875
)
Proceeds from employee stock purchase plan
52

 
40

Proceeds from exercise of stock options
266

 
89

Common stock repurchased

 
(148
)
Net Cash Provided by Financing Activities
52,250

 
37,817

Net Increase (Decrease) in Cash and Cash Equivalents
4,226

 
(19,782
)
Cash And Cash Equivalents – Beginning
42,077

 
46,727

Cash And Cash Equivalents - Ending
$
46,303

 
$
26,945





7


TWO RIVER BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Nine Months Ended September 30, 2017 and 2016 
Supplementary cash flow information:
 
 
 
Interest paid
$
4,148

 
$
3,817

Income taxes paid
$
3,857

 
$
3,280

Supplemental schedule of non-cash activities:
 
 
 
Transfer of loans held for investment to loans held for sale
$
8,180

 
$

See notes to the unaudited consolidated financial statements.

8




TWO RIVER BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
 
NOTE 1 – BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements include the accounts of Two River Bancorp (the “Company”), a bank holding company, and its wholly-owned subsidiary, Two River Community Bank (“Two River” or the “Bank”); Two River’s wholly-owned subsidiaries, TRCB Investment Corporation and TRCB Holdings Eight LLC. All inter-company balances and transactions have been eliminated in the consolidated financial statements.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by 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 and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2017 (the “2016 Form 10-K”). For a description of the Company’s significant accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in the 2016 Form 10-K.
 
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2017 for items that should potentially be recognized or disclosed in these consolidated financial statements.
 

NOTE 2 – NEW ACCOUNTING STANDARDS
 
ASU 2014-09: In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers. Subsequently, the FASB issued guidance codified in ASC 606, "Revenue from Contracts with Customers," which amends the guidance in former ASC 605 "Revenue Recognition." The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This will be achieved in a five-step process. Enhanced disclosures also will be required. This guidance is effective on a retrospective basis, either to each reporting period presented or with the cumulative effect of initially applying this guidance recognized at the date of initial application for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

The Company's revenue is comprised of net interest income and non-interest income. The scope of the guidance excludes net interest income. Accordingly, the majority of our revenues will not be affected. The Company has prepared the initial review of its contracts and other agreements that are within the scope of this guidance and will complete the process pending review of additional guidance. While we are continuing to assess all potential impacts these standards will have on our financial position and results of operations, our initial conclusions indicate that these standards will not materially change the timing of revenue recognition.

The Company will adopt the requirements of the new standard on January 1, 2018, utilizing the modified retrospective transition method. Upon adoption, the Company will recognize the cumulative effect of adopting this ASU as an adjustment to the opening balance of retained earnings. Prior periods will not be retrospectively adjusted. The Company continues to evaluate the impact of the guidance on disclosures.

 

9


NOTE 2 – NEW ACCOUNTING STANDARDS (Continued)

ASU 2016-01: In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; provides for a practicability exception election for equity investments without readily determinable fair values; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for nonpublic business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

ASU 2016-02: In February 2016, the FASB issued ASU No. 2016-02, Leases. From the lessee’s perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessee. From the lessor’s perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has determined that the provisions of ASU 2016-02 will result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities, however, the Company does not expect this to have a material impact on its financial position, results of operations or cash flows.
 
ASU 2016-13: In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). This ASU requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. For public entities that are SEC filers, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public entities that are not SEC filers, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For non-public entities, this ASU is effective for fiscal years beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. While the Company is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on its consolidated financial statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals and evaluating its current IT systems.

ASU 2016-15: In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses changes to reduce the presentation diversity of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. The guidance becomes effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The new standard will be applied retrospectively, but may be applied prospectively if retrospective application would be impracticable. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated statement of cash flows.
 

10


NOTE 2 – NEW ACCOUNTING STANDARDS (Continued)

ASU 2016-18: In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 was issued to address divergence in the way restricted cash is classified and presented. The amendments in the update require that a statement of cash flows explain the change during a reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. The amendments in this update apply to entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The amendment says that transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents are not part of the entity's operating, investing, and financing activities. For public business entities, ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of ASU 2016-18 on its consolidated financial statements.
 
ASU 2017-04: In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350). ASU 2017-04 removes Step 2 from the goodwill impairment test. Under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. For public entities that are SEC filers, this ASU is effective for its annual, or any goodwill impairment tests in fiscal years, beginning after December 15, 2019. For public entities that are not SEC filers, this ASU is effective for its annual, or any goodwill impairment tests in fiscal years, beginning after December 15, 2020. For non-public entities, this ASU is effective for its annual, or any goodwill impairment tests in fiscal years, beginning after December 15, 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the new guidance but has determined that this standard should not have a material impact on its consolidated financial statements.

ASU 2017-09: In May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No. 2017-09 is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE 3 – GOODWILL

The Company’s goodwill was recognized in connection with the acquisition of The Town Bank (“Town Bank”) in April 2006. GAAP requires that goodwill be tested for impairment annually or more frequently if impairment indicators arise utilizing a two-step methodology. However, a qualitative factor test can be performed to determine whether it is necessary to perform the two-step quantitative impairment test. If this qualitative test determines it is not likely (less than 50% probability) the fair value of the reporting unit is less than book value, then the Company does not have to perform a step one quantitative test and goodwill can be considered not impaired. The Company reviewed the requirements of ASU 350-20 and examples of qualitative assessments to determine whether the weight of evidence indicates greater than 50% likelihood exists that the carrying value of the reporting unit exceeds it's fair value. The nine qualitative assessments used are macroeconomic factors, banking industry conditions, banking industry merger and acquisition trends, bank historical performance, parent stock price, expected bank performance, change of control premium (parent), change of control premium (peer), and other factors.

The Company performed its annual qualitative factor impairment test as of August 31, 2017. Based on the results of this analysis, the Company determined that there was no impairment on the current goodwill balance of $18,109,000.


11


NOTE 4 – EARNINGS PER COMMON SHARE
 
Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding excluding restricted stock awards outstanding during the period. Diluted earnings per common share reflects additional shares of common stock that would have been outstanding if dilutive potential shares of common stock had been issued relating to outstanding stock options and restricted stock awards. Potential shares of common stock issuable upon the exercise of stock options are determined using the treasury stock method. All share and per share data have been adjusted to reflect a 5% stock dividend paid on February 28, 2017. 
 
The following table sets forth the computations of basic and diluted earnings per common share:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
(dollars in thousands, except per share data)
 
(dollars in thousands, except per share data)
 
2017
 
2016
 
2017
 
2016
Net income
$
2,237

 
$
2,644

 
$
6,167

 
$
6,064

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – Basic
8,392,924

 
8,322,542

 
8,372,913

 
8,318,736

Effect of dilutive stock options and restricted stock
263,062

 
214,848

 
274,241

 
196,034

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – Diluted
8,655,986

 
8,537,390

 
8,647,154

 
8,514,770

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.27

 
$
0.32

 
$
0.74

 
$
0.73

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
0.26

 
$
0.31

 
$
0.71

 
$
0.71

 
Dilutive securities in the table above 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. There were no stock options that were anti-dilutive for the three and nine months ended September 30, 2017 and 2016.


12


NOTE 5 – SECURITIES
 
The amortized cost, gross unrealized gains and losses, and fair values of the Company’s securities are summarized as follows:
(in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
 
 
 
 
September 30, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
U.S. Government agency securities
 
$
7,860

 
$
5

 
$
(19
)
 
$
7,846

Municipal securities
 
496

 
8

 

 
504

U.S. Government-sponsored enterprises (“GSE”) – residential mortgage-backed securities
 
8,956

 

 
(100
)
 
8,856

U.S. Government collateralized residential mortgage obligations
 
8,082

 
10

 
(130
)
 
7,962

 Corporate debt securities, primarily financial institutions
 
2,493

 
11

 
(62
)
 
2,442

 
 
 
 
 
 
 
 
 
Sub-total
 
27,887

 
34

 
(311
)
 
27,610

 
 
 
 
 
 
 
 
 
Community Reinvestment Act (“CRA”) mutual fund
 
2,490

 

 
(39
)
 
2,451

 
 
 
 
 
 
 
 
 
Total securities available for sale
 
$
30,377

 
$
34

 
$
(350
)
 
$
30,061

 
 
 
 
 
 
 
 
 
Securities held to maturity:
 
 
 
 
 
 
 
 
Municipal securities
 
$
45,234

 
$
887

 
$
(74
)
 
$
46,047

GSE – Residential mortgage-backed securities
 
7,636

 
3

 
(46
)
 
7,593

U.S. Government collateralized residential mortgage obligations
 
2,363

 
8

 
(17
)
 
2,354

Corporate debt securities, primarily financial institutions
 
1,825

 

 
(100
)
 
1,725

 
 
 
 
 
 
 
 
 
Total securities held to maturity
 
$
57,058

 
$
898

 
$
(237
)
 
$
57,719


13


NOTE 5 – SECURITIES (Continued)


(in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
 
 
 
 
December 31, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
U.S. Government agency securities
 
$
8,474

 
$
1

 
$
(62
)
 
$
8,413

Municipal securities
 
501

 
2

 

 
503

GSE – residential mortgage-backed securities
 
11,455

 
2

 
(202
)
 
11,255

U.S. Government collateralized residential mortgage obligations
 
9,731

 
6

 
(200
)
 
9,537

Corporate debt securities, primarily financial institutions
 
2,493

 
7

 
(141
)
 
2,359

 
 
 
 
 
 
 
 
 
Sub-total
 
32,654

 
18

 
(605
)
 
32,067

 
 
 
 
 
 
 
 
 
CRA mutual fund
 
2,451

 

 
(54
)
 
2,397

 
 
 
 
 
 
 
 
 
Total securities available for sale
 
$
35,105

 
$
18

 
$
(659
)
 
$
34,464

 
 
 
 
 
 
 
 
 
Securities held to maturity:
 
 
 
 
 
 
 
 
Municipal securities
 
$
47,806

 
$
224

 
$
(528
)
 
$
47,502

GSE – residential mortgage-backed securities
 
5,414

 
6

 
(65
)
 
5,355

U.S. Government collateralized residential mortgage obligations
 
2,801

 
1

 
(29
)
 
2,773

Corporate debt securities, primarily financial institutions
 
1,822

 

 
(168
)
 
1,654

 
 
 
 
 
 
 
 
 
Total securities held to maturity
 
$
57,843

 
$
231

 
$
(790
)
 
$
57,284

 
The amortized cost and fair value of the Company’s debt securities at September 30, 2017, by contractual maturity, are shown below. 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. 
 
 
 
Available for Sale
 
Held to Maturity
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
1,248

 
$
1,247

 
$
11,453

 
$
11,474

Due in one year through five years
 
2,118

 
2,136

 
3,183

 
3,255

Due in five years through ten years
 

 

 
8,291

 
8,448

Due after ten years
 
7,483

 
7,409

 
24,132

 
24,595

 
 
 
 
 
 
 
 
 
Sub-total
 
10,849

 
10,792

 
47,059

 
47,772

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE – residential mortgage-backed securities
 
8,956

 
8,856

 
7,636

 
7,593

U.S. Government collateralized residential mortgage obligations
 
8,082

 
7,962

 
2,363

 
2,354

 
 
 
 
 
 
 
 
 
Total
 
$
27,887


$
27,610

 
$
57,058

 
$
57,719




14


NOTE 5 – SECURITIES (Continued)


The Company had no security sales during the three months ended September 30, 2017 and 2016. The Company had no security sales for the nine months ended September 30, 2017 as compared to one security sale totaling $1.1 million in which the Company recorded a gross realized gain of $72,000 during the nine months ended September 30, 2016. The sale during 2016 was a municipal bond, which was carried in our held to maturity portfolio. The Company sold this bond out of its held to maturity portfolio due to significant deterioration in the issuer’s creditworthiness. 

Investment securities with a carrying value of $33.1 million at both September 30, 2017 and December 31, 2016, were pledged as collateral to secure securities sold under agreements to repurchase and public deposits as required or permitted by law. 
 
The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at September 30, 2017 and December 31, 2016:
 
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
September 30, 2017:
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency securities
 
$
1,247

 
$
(1
)
 
$
1,816

 
$
(18
)
 
$
3,063

 
$
(19
)
Municipal securities
 
7,435

 
(63
)
 
1,858

 
(11
)
 
9,293

 
(74
)
GSE – residential mortgage-backed securities
 
9,799

 
(56
)
 
6,112

 
(90
)
 
15,911

 
(146
)
U.S. Government collateralized residential mortgage obligations
 
2,721

 
(12
)
 
5,244

 
(135
)
 
7,965

 
(147
)
Corporate debt securities, primarily financial institutions
 

 

 
2,658

 
(162
)
 
2,658

 
(162
)
CRA mutual fund
 

 

 
2,451

 
(39
)
 
2,451

 
(39
)
Total temporarily impaired securities
 
$
21,202

 
$
(132
)
 
$
20,139

 
$
(455
)
 
$
41,341

 
$
(587
)
 
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
December 31, 2016:
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency securities
 
$
7,125

 
$
(62
)
 
$

 
$

 
$
7,125

 
$
(62
)
Municipal securities
 
22,036

 
(528
)
 

 

 
22,036

 
(528
)
GSE – residential mortgage-backed securities
 
9,632

 
(163
)
 
5,949

 
(104
)
 
15,581

 
(267
)
U.S. Government collateralized residential mortgage obligations
 
5,630

 
(50
)
 
4,990

 
(179
)
 
10,620

 
(229
)
Corporate debt securities, primarily financial institutions
 

 

 
3,009

 
(309
)
 
3,009

 
(309
)
CRA mutual fund
 
2,397

 
(54
)
 

 

 
2,397

 
(54
)
Total temporarily impaired securities
 
$
46,820

 
$
(857
)
 
$
13,948

 
$
(592
)
 
$
60,768

 
$
(1,449
)
 
The Company had 49 securities in an unrealized loss position at September 30, 2017. In management’s opinion, the unrealized losses in corporate debt, U.S. Government agencies, U.S. Government collateralized residential mortgage obligations, GSE residential mortgage-backed securities and the CRA mutual fund reflect changes in interest rates subsequent to the acquisition of specific securities. The unrealized loss for corporate debt securities also reflects a widening of spreads due to the liquidity and credit concerns in the financial markets. The Company may, if conditions warrant, elect to sell debt securities at a loss and redeploy the proceeds into other investments in an effort to improve returns, risk profile and overall portfolio diversification. The Company will recognize any losses when the decision is made. As of September 30, 2017, the Company did not intend to sell these debt securities prior to market recovery.
 


15


NOTE 5 – SECURITIES (Continued)



Included in corporate debt securities are four individual trust preferred securities issued by large financial institutions with Moody’s ratings from Baa1to Ba1. At September 30, 2017, all of these securities are current with their scheduled interest payments. These single issue securities are all from large money center banks. Management concluded that these securities were not other-than-temporarily impaired as of September 30, 2017. These four securities have an amortized cost value of $2.8 million and a fair value of $2.7 million at September 30, 2017
 
There were no other-than-temporary impairments recognized during the three and nine months ended September 30, 2017 and 2016.


NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
 
Loans receivable, which management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan.
 
Generally, loans held for sale are designated at time of origination, generally consist of newly originated fixed rate residential mortgage loans and are recorded at the lower of aggregate cost or estimated fair value in the aggregate. During the three months ended September 30, 2017, the Company did not transfer any loans from held for investment to held for sale, while during the nine months ended September 30, 2017, the Company transferred $8.2 million from held for investment to held for sale. During the three and nine months ended September 30, 2016, the Company did not transfer any loans from held for investment to held for sale. Gains are recognized on a settlement-date basis and are determined by the difference between the net sales proceeds and the carrying value of the loans, including any net deferred fees or costs.
 
The loans receivable portfolio is segmented into five categories, those being a) Commercial and industrial, b) Real estate-construction (consisting of both residential and commercial construction), c) Real estate-commercial, d) Real estate-residential, and e) Consumer.
 
For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest previously accrued on these loans is reversed from income. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.
 
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet, which at September 30, 2017 and December 31, 2016, the Company had no such reserves. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectable are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.
 
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a monthly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
  

16


NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)


The allowance consists of specific, general and unallocated components. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of the loan. The specific component relates to loans that are classified as impaired. When a loan is impaired, there are three acceptable methods under ASC 310-10-35 for measuring the impairment:
 
1.
The loan’s observable market price;

2.
The fair value of the underlying collateral; or

3.
The present value (PV) of expected future cash flows.
 
Loans that are considered “collateral-dependent” should be evaluated under the “Fair market value of collateral.” Loans that are still expected to be supported by repayment from the borrower should be evaluated under the “Present value of future cash flows.”
 
For the most part, the Company measures impairment under the “Fair market value of collateral” for any loan that would rely on the value of collateral for recovery in the event of default. The individual impairment analysis for each loan is clearly documented as to the chosen valuation method.

The general component covers pools of loans by loan class including commercial and industrial, real estate-construction and real estate-commercial not considered impaired as well as smaller balance homogeneous loans such as real estate-residential and consumer.
 
These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include: 

1.
Changes in lending policy and procedures, including changes in underwriting standards and collection practices not previously considered in estimating credit losses.
 
2.
Changes in relevant economic and business conditions.

3.
Changes in nature and volume of the loan portfolio and in the terms of loans.

4.
Changes in experience, ability and depth of lending management and staff.

5.
Changes in the volume and severity of past due loans, the volume of non-accrual loans and the volume and severity of adversely classified loans.

6.
Changes in the quality of the loan review system.

7.
Changes in the value of underlying collateral for collateral-dependent loans.

8.
The existence and effect of any concentration of credit and changes in the level of such concentrations.

9.
The effect of other external forces such as competition, legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.
 
Each factor is assigned a risk value to reflect low, moderate or high risk assessments based on management’s best judgment using current market, macro and other relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation in each factor and accompany the allowance for loan loss calculation.
 
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

17


NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)


 
A loan is considered impaired when it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial, real estate-commercial, real estate-construction, real estate-residential and consumer loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
 
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.
 
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
 
For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristics that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectable and are charged to the allowance for loan losses. Loans not classified are rated pass.
 
In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

18


NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)


 
The components of the loan portfolio held for investment at September 30, 2017 and December 31, 2016 are as follows: 
 
 
September 30,
 
December 31,
 
 
2017
 
2016
 
 
(In Thousands)
 
 
 
 
 
Commercial and industrial
 
$
99,601

 
$
93,697

Real estate – construction
 
118,553

 
111,914

Real estate – commercial
 
507,507

 
460,685

Real estate – residential
 
62,416

 
59,065

Consumer
 
28,773

 
28,279

 
 
 
 
 
 
 
816,850

 
753,640

Allowance for loan losses
 
(10,223
)
 
(9,565
)
Unearned fees
 
(772
)
 
(548
)
 
 
 
 
 
Net Loans
 
$
805,855

 
$
743,527


The performance and credit quality of the loan portfolio is monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of September 30, 2017 and December 31, 2016:
 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days &
Greater
 
Total Past
Due
 
Current
 
Total Loans
Receivable
 
Loans
Receivable
>90 Days and
Accruing
September 30, 2017:
 
 
 
 
 
(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$

 
$

 
$
756

 
$
756

 
$
98,845

 
$
99,601

 
$

Real estate – construction
 

 

 
150

 
150

 
118,403

 
118,553

 

Real estate – commercial
 

 
152

 
252

 
404

 
507,103

 
507,507

 

Real estate – residential
 

 

 
717

 
717

 
61,699

 
62,416

 

Consumer
 
49

 

 
300

 
349

 
28,424

 
28,773

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
49

 
$
152

 
$
2,175

 
$
2,376

 
$
814,474

 
$
816,850

 
$


 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days &
Greater
 
Total Past
Due
 
Current
 
Total Loans
Receivable
 
Loans
Receivable
>90 Days and
Accruing
December 31, 2016:
 
 
 
 
 
(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$

 
$

 
$
119

 
$
119

 
$
93,578

 
$
93,697

 
$

Real estate – construction
 

 

 

 

 
111,914

 
111,914

 

Real estate – commercial
 
154

 

 
666

 
820

 
459,865

 
460,685

 

Real estate – residential
 

 

 
533

 
533

 
58,532

 
59,065

 

Consumer
 

 

 

 

 
28,279

 
28,279

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
154

 
$

 
$
1,318

 
$
1,472

 
$
752,168

 
$
753,640

 
$



19


NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)


The following table presents non-accrual loans by classes of the loan portfolio at September 30, 2017 and December 31, 2016:
 
 
 
September 30,
 
December 31,
 
 
2017
 
2016
 
 
(In Thousands)
 
 
 
 
 
Commercial and industrial
 
$
926

 
$
119

Real estate – construction
 
150

 

Real estate – commercial
 
252

 
666

Real estate – residential
 
717

 
763

Consumer
 
300

 

 
 
 
 
 
Total
 
$
2,345

 
$
1,548

 
There was one new commercial and industrial troubled debt restructured loan ("TDR's), which had a pre- and post-modification outstanding recorded investment in the amount of $170,000 that occurred during the three months ended September 30, 2017. There were no new TDR's that occurred during the three months ended September 30, 2016.

The following table presents new TDR's that occurred during the nine months ended September 30, 2017 and 2016:
 
 
 
Nine months ended September 30, 2017
 
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
 
(Dollars in Thousands)
Troubled debt restructuring:
 
 
 
 
 
 
Commercial and industrial
 
2
 
$
320

 
$
320

Real estate – construction
 
1
 
150

 
150

 
 
3
 
$
470

 
$
470

 

 
 
Nine months ended September 30, 2016
 
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
 
(Dollars in Thousands)
Troubled debt restructuring:
 
 
 
 
 
 
Commercial and industrial
 
1

 
$
257

 
$
257



Loans whose terms are modified are classified as TDRs if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a TDR generally involve a temporary reduction in interest rate or a modification of a loan’s amortization schedule. Non-accrual TDRs are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after the modification is in place. Loans classified as TDRs, including those restored to accrual status, are designated as impaired.
 





20


NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)



The Company’s TDR modifications are made on terms typically up to 12 months in order to aggressively monitor and track performance of the credit. The short-term modifications are monitored for continued performance for an additional period of time after the expiration of the concession. Balance reductions and annualized loss rates are also important metrics that are monitored. The main objective of the modification program is to reduce the payment burden for the borrower and improve the net present value of the Company’s expected cash flows.
 
Impaired loans are individually assessed to determine that the loan’s carrying value is not in excess of the estimated fair value of the collateral (less cost to sell), if the loan is collateral dependent, or the present value of the expected future cash flows, if the loan is not collateral dependent. Management performs a detailed evaluation of each impaired loan and generally obtains updated appraisals as part of the evaluation. In addition, management adjusts estimated fair value down to appropriately consider recent market conditions, our willingness to accept a lower sales price to effect a quick sale, and costs to dispose of any supporting collateral.  
 
At September 30, 2017, TDRs totaled $8.1 million, including $7.0 million that were current and eight non-accrual loans totaling $1.1 million. As of December 31, 2016, TDRs totaled $8.2 million, including $8.1 million that were current and two non-accrual loans totaling $157,000. At September 30, 2017, the Company had no specific reserve against any loan relationship classified as TDR, while at December 31, 2016, a specific reserve of $2,000 was established against one loan relationships classified as TDR.
 
There were no loans receivable modified as TDRs and with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the three and nine months ended September 30, 2017 and 2016, respectively.
 
It is the Company’s policy to classify a TDR that is either 90 days or greater delinquent or that has been placed on a non-accrual status as a subsequently defaulted TDR. 

The following tables summarize information in regards to impaired loans by loan portfolio class at September 30, 2017 and December 31, 2016, and for the three and nine months ended September 30, 2017 and 2016, respectively:
 

21


NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)


 
 
As of September 30, 2017
 
For the three months ended September 30, 2017
 
For the nine months ended September 30, 2017
 
 
Recorded
Investment,
Net of
Charge-offs
 
Unpaid
Principal
Balance