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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, 2015

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.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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

  

 

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 9, 2015, there were 7,922,776 shares of the registrant’s common stock, no par value, outstanding.

 

 
 

 

 

TWO RIVER BANCORP

 

FORM 10-Q

 

INDEX

 

 

PART I. 

      

FINANCIAL INFORMATION

  

 Page

 

  

  

  

  

  

  

 Item 1.

Financial Statements

  

3

  

  

  

  

  

 

  

  

  

Consolidated Balance Sheets (unaudited)

at September 30, 2015 and December 31, 2014

  

3

  

  

  

  

  

 

  

  

  

Consolidated Statements of Operations (unaudited)

for the three months and nine months ended September 30, 2015 and 2014

  

4

  

  

  

  

  

 

  

  

  

Consolidated Statements of Comprehensive Income (unaudited)

for the three months and nine months ended September 30, 2015 and 2014

  

5

  

  

  

  

  

 

  

  

  

Consolidated Statements of Shareholders’ Equity (unaudited)

for the nine months ended September 30, 2015 and 2014

  

6

  

  

  

  

  

 

  

  

  

Consolidated Statements of Cash Flows (unaudited)

for the nine months ended September 30, 2015 and 2014

  

7

  

  

  

  

  

 

  

  

  

Notes to Consolidated Financial Statements (unaudited) 

  

8

  

  

  

  

  

 

  

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

33

  

  

  

  

  

 

  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

53

  

  

  

  

  

 

  

Item 4.

  

Controls and Procedures

  

53

  

  

  

  

  

 

PART II.

  

OTHER INFORMATION

  

 

  

  

  

  

  

 
 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

55

           

  

Item 6.

  

Exhibits

  

56

  

  

  

  

  

 

SIGNATURES

  

57

 

 
 

 

 

PART I.   FINANCIAL INFORMATION

Item 1.           Financial Statements

TWO RIVER BANCORP

CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands, except share data)

   

September 30,

   

December 31,

 
   

2015

   

2014

 

ASSETS

               

Cash and due from banks

  $ 20,756     $ 18,349  

Interest-bearing deposits in bank

    22,142       17,761  

Cash and cash equivalents

    42,898       36,110  
                 

Securities available for sale, at fair value

    35,676       45,431  

Securities held to maturity (fair value of $42,923 and $25,407 at September 30, 2015 and December 31, 2014, respectively)

    42,851       25,280  

Restricted investments, at cost

    3,554       3,029  

Loans held for sale

    1,909       1,589  

Loans

    675,584       627,614  

Allowance for loan losses

    (8,429

)

    (8,069

)

Net loans

    667,155       619,545  
                 

OREO and repossessed assets

    495       1,603  

Bank-owned life insurance

    17,184       16,849  

Premises and equipment, net

    5,204       5,696  

Accrued interest receivable

    1,767       1,636  

Goodwill

    18,109       18,109  

Other intangible assets, net of accumulated amortization of $2,087 and $2,049 at September 30, 2015 and December 31, 2014, respectively

    19       57  

Other assets

    5,448       6,262  
                 

TOTAL ASSETS

  $ 842,269     $ 781,196  
                 

LIABILITIES

               

Deposits:

               

Non-interest bearing

  $ 151,958     $ 140,459  

Interest bearing

    538,707       501,931  

Total Deposits

    690,665       642,390  
                 

Securities sold under agreements to repurchase

    21,303       23,290  

Accrued interest payable

    49       46  

Long-term debt

    26,500       16,000  

Other liabilities

    6,112       5,538  

Total Liabilities

    744,629       687,264  
                 

SHAREHOLDERS' EQUITY

               

Preferred stock, no par value; 6,500,000 shares authorized;

               

Preferred stock, Series B, none issued or outstanding

    -       -  

Preferred stock, Series C, $1,000 liquidation preference per share; 12,000 shares authorized; 6,000 issued and outstanding at September 30, 2015, and December 31, 2014, respectively

    6,000       6,000  
Common stock, no par value; 25,000,000 shares authorized;                
Issued – 8,202,266 and 8,167,296 at September 30, 2015 and December 31, 2014, respectively                

Outstanding – 7,918,266 and 7,939,684 at September 30, 2015 and December 31, 2014, respectively

    72,830       72,527  

Retained earnings

    21,298       17,501  

Treasury stock, at cost; 284,000 shares and 227,612 shares at September 30, 2015 and December 31, 2014, respectively

    (2,248

)

    (1,751

)

Accumulated other comprehensive loss

    (240

)

    (345

)

Total Shareholders' Equity

    97,640       93,932  
                 

TOTAL LIABILITIES and SHAREHOLDERS’ EQUITY

  $ 842,269     $ 781,196  

 

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, 2015 and 2014

     (in thousands, except per share data)

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2015

   

2014

   

2015

   

2014

 

INTEREST INCOME:

                               

Loans, including fees

  $ 7,834     $ 7,299     $ 22,720     $ 21,578  

Securities:

                               

Taxable

    178       233       607       732  

Tax-exempt

    188       109       412       326  

Interest bearing deposits

    18       14       58       51  

Total Interest Income

    8,218       7,655       23,797       22,687  

INTEREST EXPENSE:

                               

Deposits

    799       713       2,325       2,176  

Securities sold under agreements to repurchase

    19       17       51       47  

Borrowings

    155       121       468       365  

Total Interest Expense

    973       851       2,844       2,588  

Net Interest Income

    7,245       6,804       20,953       20,099  

PROVISION FOR LOAN LOSSES

    120       -       400       521  

Net Interest Income after Provision for Loan Losses

    7,125       6,804       20,553       19,578  

NON-INTEREST INCOME:

                               

Service fees on deposit accounts

    142       166       433       526  

Mortgage banking

    327       54       613       160  

Other loan fees

    32       69       112       310  

Earnings from investment in bank-owned life insurance

    112       116       335       347  

Gain on sale of SBA loans

    32       106       309       384  

Net realized gain on sale of securities

    9       19       37       19  

Gain on sale of premises and equipment

    -       -       208       -  

Other income

    182       182       506       450  

Total Non-Interest Income

    836       712       2,553       2,196  

NON-INTEREST EXPENSES:

                               

Salaries and employee benefits

    3,198       2,842       9,318       8,581  

Occupancy and equipment

    964       868       2,940       2,594  

Professional

    272       191       718       572  

Insurance

    74       77       249       231  

FDIC insurance and assessments

    119       113       324       373  

Advertising

    120       128       365       294  

Data processing

    110       95       352       283  

Outside services fees

    131       119       376       348  

Amortization of identifiable intangibles

    10       19       38       67  

OREO and repossessed asset expenses, impairment and sales, net

    (137

)

    (7

)

    (161 )     (72

)

Loan workout expenses

    65       59       278       217  

Other operating

    382       318       1,049       1,030  

Total Non-Interest Expenses

    5,308       4,822       15,846       14,518  

Income before Income Taxes

    2,653       2,694       7,260       7,256  

INCOME TAX EXPENSE

    961       1,006       2,664       2,698  

Net Income

    1,692       1,688       4,596       4,558  

Preferred stock dividend

    (15

)

    (30

)

    (45

)

    (90

)

Net Income Available to Common Shareholders

  $ 1,677     $ 1,658     $ 4,551     $ 4,468  

EARNINGS PER COMMON SHARE:

                               

Basic

  $ 0.21     $ 0.21     $ 0.57     $ 0.56  

Diluted

  $ 0.21     $ 0.20     $ 0.56     $ 0.55  

Weighted average common shares outstanding:

                               

Basic

    7,930       7,923       7,932       7,939  

Diluted

    8,130       8,105       8,130       8,116  

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, 2015 and 2014

     (in thousands)

 

 

   

Three Months Ended

September 30,

 
   

2015

   

2014

 
                 
                 

Net income

  $ 1,692     $ 1,688  

Other comprehensive income:

               

Reclassification adjustment for net realized gain on sales of securities recognized in income, net of income tax 2015: $3; 2014: $8

    (6

)

    (11

)

Unrealized holdings gains on securities available for sale, net of income tax 2015: $94; 2014: $16

    144       23  
                 

Other comprehensive income

    138       12  
                 

Total comprehensive income

  $ 1,830     $ 1,700  

 

   

Nine Months Ended

September 30,

 
   

2015

   

2014

 
                 
                 

Net income

  $ 4,596     $ 4,558  

Other comprehensive income:

               

Reclassification adjustment for net realized gain on sales of securities recognized in income, net of income tax 2015: $14; 2014: $8

    (23

)

    (11

)

Unrealized holdings gains on securities available for sale, net of income tax 2015: $81; 2014: $208

    128       313  
                 

Other comprehensive income

    105       302  
                 

Total comprehensive income

  $ 4,701     $ 4,860  

 

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, 2015 and 2014

(dollars in thousands, except per share data)

 

           

Common Stock

                   

 

         
   

Preferred

Stock

   

Outstanding

Shares

   

Amount

   

Retained

Earnings

   

Treasury

Stock

   

Accumulated

Other

Comprehensive

Loss

   

Total

Shareholders’

Equity

 

Balance, January 1, 2015

  $ 6,000       7,939,684     $ 72,527     $ 17,501     $ (1,751

)

  $ (345

)

  $ 93,932  
                                                         

Net income

    -       -       -       4,596       -       -       4,596  
                                                         

Other comprehensive income

    -       -       -       -       -       105       105  
                                                         

Dividends on preferred stock, Series C

    -       -       -       (45

)

    -       -       (45

)

                                                         

Stock-based compensation expense

    -       -       154       -       -       -       154  
                                                         

Cash dividends on common stock ($0.095 per share)

    -       -       -       (754

)

    -       -       (754

)

                                                         

Options exercised

    -       25,397       103       -       -       -       103  
                                                         

Tax benefit of exercised stock options

    -       -       6       -       -       -       6  
                                                         

Common stock repurchased

    -       (56,388

)

    -       -       (497

)

    -       (497

)

                                                         

Restricted stock awards

    -       5,000       -       -       -       -       -  
                                                         

Employee stock purchase program

    -       4,573       40       -       -       -       40  
                                                         

Balance, September 30, 2015

  $ 6,000       7,918,266     $ 72,830     $ 21,298     $ (2,248

)

  $ (240

)

  $ 97,640  
                                                         

Balance, January 1, 2014

  $ 12,000       8,036,368     $ 72,191     $ 12,474     $ (554

)

  $ (684

)

  $ 95,427  
                                                         

Net income

    -       -       -       4,558       -       -       4,558  
                                                         

Other comprehensive income

    -       -       -       -       -       302       302  
                                                         

Dividends on preferred stock, Series C

    -       -       -       (90

)

    -       -       (90

)

                                                         

Stock-based compensation expense

    -       -       120       -       -       -       120  
                                                         

Cash dividends on common stock ($0.08 per share)

    -       -       -       (637

)

    -       -       (637

)

                                                         

Options exercised

    -       27,397       112       -       -       -       112  
                                                         

Tax benefit of exercised stock options

    -       -       6       -       -       -       6  
                                                         

Common stock repurchased

    -       (150,900

)

    -       -       (1,197

)

    -       (1,197

)

                                                         

Restricted stock awards

    -       15,000       -       -       -       -       -  
                                                         

Employee stock purchase program

    -       4,501       36       -       -       -       36  
                                                         

Balance, September 30, 2014

  $ 12,000       7,932,366     $ 72,465     $ 16,305     $ (1,751

)

  $ (382

)

  $ 98,637  

 

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, 2015 and 2014

(in thousands)

   

Nine Months Ended

September 30,

 
   

2015

   

2014

 

Cash flows from operating activities:

               

Net income

  $ 4,596     $ 4,558  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    592       436  

Provision for loan losses

    400       521  

Intangible amortization

    38       67  

Net amortization of securities premiums and discounts

    380       151  

Earnings from investment in bank-owned life insurance

    (335

)

    (347

)

Proceeds on sale of loans held for sale

    27,946       5,699  

Originated loans held for sale

    (27,668

)

    (6,491

)

Gain on sale of loans held for sale

    (598

)

    (154

)

Net realized gain on sale of OREO and repossessed assets

    (107

)

    (176

)

Stock based compensation expense

    154       120  

Net realized gain on sale of securities available for sale

    (37

)

    (19

)

Gain on sale of SBA loans

    (309

)

    (384

)

Gain on sale of premises and equipment

    (208

)

    -  

(Increase) decrease in assets:

               

Accrued interest receivable

    (131

)

    162  

Other assets

    743       355  

Increase (decrease) increase in liabilities:

               

Accrued interest payable

    3       (11

)

Other liabilities

    574       650  

Net cash provided by operating activities

    6,033       5,137  

Cash flows from investing activities:

               

Purchase of securities available for sale

    (20,707

)

    (10,752

)

Purchase of securities held to maturity

    (19,721

)

    (4,923

)

Proceeds from repayments, calls and maturities of securities available for sale

    6,131       5,930  

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

    2,008       6,649  

Proceeds from sales of securities available for sale

    24,306       5,577  

Proceeds from sale of SBA loans

    3,665       4,449  

Proceeds from sale of loans held for sale

    5,727       -  

Net increase in loans

    (57,245

)

    (17,052

)

Redemption (purchase) of restricted investments, net

    (525

)

    181  

Purchases of premises and equipment

    (817

)

    (1,506

)

Proceeds from sale of premises and equipment

    925       -  

Improvements on OREO

    -       (207

)

Proceeds from sale of OREO and repossessed assets

    1,367       2,500  

Net cash used in investing activities

    (54,886

)

    (9,154

)

Cash flows from financing activities:

               

Net increase (decrease) in deposits

    48,275       (5,684

)

Net increase in securities sold under agreements to repurchase

    (1,987

)

    9,122  

Proceeds of long-term debt

    12,000       -  

Repayment of long-term debt

    (1,500

)

    (1,500

)

Cash dividends paid - preferred stock

    (45

)

    (90

)

Cash dividends paid - common stock

    (754

)

    (637

)

Proceeds from employee stock purchase plan

    40       36  

Proceeds from exercise of stock options

    103       112  

Common stock repurchased

    (497

)

    (1,197

)

Tax benefit of options exercised

    6       6  

Net cash provided by financing activities

    55,641       168  

Net increase (decrease) in cash and cash equivalents

    6,788       (3,849

)

Cash and cash equivalents – beginning

    36,110       47,865  

Cash and cash equivalents - ending

  $ 42,898     $ 44,016  

Supplementary cash flow information:

               

Interest paid

  $ 2,841     $ 2,599  

Income taxes paid

    2,133       2,215  

Supplementary schedule of non-cash activities:

               

Transfer of loans held for investment to loans held for sale

  $ 5,614     $ -  

OREO acquired in settlement of loans

    152       415  

 

See notes to the unaudited consolidated financial statements.

 

 
7

 

 

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, formerly known as Community Partners Bancorp; and its wholly-owned subsidiary, Two River Community Bank (“Two River” or the “Bank”); Two River’s wholly-owned subsidiaries, TRCB Investment Corporation, TRCB Holdings Two LLC, TRCB Holdings Three LLC, TRCB Holdings Five LLC, TRCB Holdings Seven LLC 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, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2015 (the “2014 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 2014 Form 10-K.

 

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2015 for items that should potentially be recognized or disclosed in these consolidated financial statements.

  

NOTE 2 – NEW ACCOUNTING STANDARDS

 

ASU 2014-04: In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. This ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The ASU also requires additional related interim and annual disclosures. The guidance in this ASU is effective for annual and interim periods beginning after December 15, 2014. The Company adopted ASU 2014-01 effective January 1, 2015, and the adoption did not have a material impact on our financial position or results of operation.

 

ASU 2014-09: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU establishes a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. The guidance in this ASU for public companies is effective for the annual periods beginning after December 15, 2016, including interim periods therein. In August 2015, the FASB approved a one-year delay of the effective date of this standard. The deferral would require public entities to apply the standard for annual reporting periods beginning after December 15, 2017. Public companies would be permitted to elect to early adopt for annual reporting periods beginning after December 15, 2016. The Company will be evaluating the provisions of ASU 2014-09 and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on our financial position or results of operation.

 

ASU 2014-11: In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this ASU establish two accounting changes. First, repurchase-to-maturity transactions will be accounted for as secured borrowing transactions on the balance sheet, rather than sales. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with (or in contemplation of) a repurchase agreement with the same counterparty, which also will generally result in secured borrowing accounting for the repurchase agreement. The guidance in this ASU for public companies is effective for the first interim or annual period beginning after December 31, 2014. The Company adopted ASU 2014-11 effective January 1, 2015, and the adoption did not have a material impact on our financial position or results of operation.

 

 
8

 

 

NOTE 2 – NEW ACCOUNTING STANDARDS (Continued)

 

ASU 2014-12: In June 2014 the FASB issued ASU 2014-12, Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in this ASU requires that a performance target included in a share-based payment award that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Therefore, such performance target should not be reflected in estimating the grant-date fair value of the award. A reporting entity should apply existing guidance in Topic 718 as it relates to the award with performance conditions that affect vesting. The guidance in this ASU is effective for annual periods and interim periods with those annual periods beginning after December 15, 2015. The implementation of ASU 2014-12 is not expected to have a material impact on our financial position or results of operation.

 

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. Step one requires the Company to determine the fair value of the reporting unit and compare it to the carrying value, including goodwill, of such reporting unit. The reporting unit was determined to be our community banking operations, which is our only operating segment. If the fair value of the reporting unit exceeds the carrying value, goodwill is not impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to determine the amount of impairment, if any. The second step compares the fair value of the reporting unit to the aggregate fair values of its individual assets, liabilities and identified intangibles.

 

The Company performed its annual step one goodwill impairment analysis as of September 30, 2015, using the fair value of the reporting unit based on the income approach and market approach. The income approach uses a dividend discount analysis. This approach calculates cash flows based on anticipated financial results assuming a change of control transaction. This change of control assumes that an acquirer will achieve an expected base level of earnings, achieve integration cost savings and incur certain transaction costs (including such items as legal and financial advisors fees, contract cancellations, severance and employment obligations, and other transaction costs). The present value of all excess cash flows generated by the Company (above the minimum tangible capital ratio) plus the present value of a terminal sale value is calculated to arrive at the fair value for the income approach.

 

The market approach is used to calculate the fair value of a company by calculating median earnings and book value pricing multiples for recent actual acquisitions of companies of similar size and performance and then applying these multiples to our community banking reporting unit. No company or transaction in the analysis is identical to our community banking reporting unit and, accordingly, the results of the analysis are only indicative of comparable value. This technique uses historical data to create a current pricing level and is thus a trailing indicator. Results of the market approach need to be understood in this context, especially in periods of rapid price change and market uncertainty. The Company applied the market valuation approach to our then current stock price adjusted by an appropriate control premium and also to a peer group adjusted by an appropriate control premium.

 

Based on the results of the step one goodwill impairment analysis, the Company determined that there was no impairment on the current goodwill balance of $18,109,000 at September 30, 2015.

 

 
9

 

 

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, warrants and restricted stock awards.  Potential shares of common stock issuable upon the exercise of stock options and warrants are determined using the treasury stock method.  

 

The following table sets forth the computations of basic and diluted earnings per common share:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(dollars in thousands, except per share data)

 
                                 

Net income

  $ 1,692     $ 1,688     $ 4,596     $ 4,558  
                                 

Preferred stock dividend

    (15

)

    (30

)

    (45

)

    (90

)

                                 

Net income applicable to common shareholders

  $ 1,677     $ 1,658     $ 4,551     $ 4,468  
                                 

Weighted average common shares outstanding

    7,929,876       7,922,510       7,932,100       7,939,224  
                                 

Effect of dilutive securities and stock options

    199,665       182,484       198,156       176,402  
                                 

Weighted average common shares outstanding used to calculate diluted earnings per share

    8,129,541       8,104,994       8,130,256       8,115,626  
                                 

Basic earnings per common share

  $ 0.21     $ 0.21     $ 0.57     $ 0.56  

Diluted earnings per common share

  $ 0.21     $ 0.20     $ 0.56     $ 0.55  

 

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. Stock options that had no intrinsic value, because their effect would be anti-dilutive and therefore would not be included in the diluted earnings per common share calculation, were 9,129 for the three and nine month periods ended September 30, 2015, respectively, as compared to 13,231 and 23,231for the three and nine month periods ended September 30, 2014.

 

 
10

 

 

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, 2015:

                               
                                 

Securities available for sale:

                               

U.S. Government agency securities

  $ 1,241     $ 6     $ -     $ 1,247  

Municipal securities

    510       9       -       519  

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

    15,559       14       (107

)

    15,466  

U.S. Government collateralized residential mortgage obligations

    13,880       25       (196

)

    13,709  

Corporate debt securities, primarily financial institutions

    2,491       4       (156

)

    2,339  
                                 
      33,681       58       (459

)

    33,280  

Community Reinvestment Act (“CRA”) mutual fund

    2,385       11       -       2,396  
                                 
    $ 36,066     $ 69     $ (459

)

  $ 35,676  
                                 

Securities held to maturity:

                               

Municipal securities

  $ 33,311     $ 406     $ (101

)

  $ 33,616  

GSE – residential mortgage-backed securities

    4,024       21       (20

)

    4,025  

U.S. Government collateralized residential mortgage obligations

    3,697       4       (8

)

    3,693  

Corporate debt securities, primarily financial institutions

    1,819       -       (230

)

    1,589  
                                 
    $ 42,851     $ 431     $ (359

)

  $ 42,923  

 

 
11

 

 

NOTE 5 – SECURITIES (Continued) 

           

 

   

 

         

(in thousands)

 

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
                                 

December 31, 2014:

                               
                                 

Securities available for sale:

                               

U.S. Government agency securities

  $ 2,715     $ 1     $ (7

)

  $ 2,709  

Municipal securities

    515       7       -       522  

GSE – residential mortgage-backed securities

    21,403       31       (113

)

    21,321  

U.S. Government collateralized residential mortgage obligations

    16,419       53       (349

)

    16,123  

Corporate debt securities, primarily financial institutions

    2,494       4       (187

)

    2,311  
                                 
      43,546       96       (656

)

    42,986  
                                 

CRA mutual fund

    2,447       -       (2

)

    2,445  
                                 
    $ 45,993     $ 96     $ (658

)

  $ 45,431  
                                 

Securities held to maturity:

                               

Municipal securities

  $ 18,138     $ 450     $ (33

)

  $ 18,555  

GSE – residential mortgage-backed securities

    2,100       19       (20

)

    2,099  

U.S. Government collateralized residential mortgage obligations

    3,225       -       (25

)

    3,200  

Corporate debt securities, primarily financial institutions

    1,817       -       (264

)

    1,553  
                                 
    $ 25,280     $ 469     $ (342

)

  $ 25,407  

  

The amortized cost and fair value of the Company’s debt securities at September 30, 2015, 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

  $ -     $ -     $ 6,041     $ 6,049  

Due in one year through five years

    3,072       3,083       3,728       3,811  

Due in five years through ten years

    175       176       3,134       3,211  

Due after ten years

    995       846       22,227       22,134  
                                 
      4,242       4,105       35,130       35,205  
                                 

GSE – residential mortgage-backed securities

    15,559       15,466       4,024       4,025  

U.S. Government collateralized residential mortgage obligations

    13,880       13,709       3,697       3,693  
                                 
    $ 33,681     $ 33,280     $ 42,851     $ 42,923  

 

The Company had two securities sales in which the Company recorded gross realized gains and losses of $9,000 and $0, respectively, during the three months ended September 30, 2015 as compared to one security sale during the three months ended September 30, 2014. For the nine months ended September 30, 2015, the Company had 19 securities sales in which it recorded gross realized gains and losses of $70,000 and $33,000, respectively, as compared to five securities sales during the nine months ended September 30, 2014.

 

 
12

 

 

NOTE 5 – SECURITIES (Continued)

 

Certain of the Company’s GSE residential mortgage-backed securities and U.S Government collateralized residential mortgage obligations, totaling $32,141,000 and $31,945,000 at September 30, 2015 and December 31, 2014, respectively, 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, 2015 and December 31, 2014:

 

   

Less than 12 Months

   

12 Months or More

   

Total

 
   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

 

 

 

(in thousands)

 
September 30, 2015:                                                

Municipal securities

  $ 9,392     $ (93

)

  $ 492     $ (8

)

  $ 9,884     $ (101

)

GSE – residential mortgage-backed securities

    8,954       (50

)

    6,399       (77

)

    15,353       (127

)

U.S. Government collateralized residential mortgage obligations

    4,711