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EX-32 - EXHIBIT 32 - TWO RIVER BANCORPexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - TWO RIVER BANCORPexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - TWO RIVER BANCORPexhibit311.htm
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 June 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 August 8, 2017, there were 8,432,130 shares of the registrant’s common stock, no par value, outstanding.



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



PART I.   FINANCIAL INFORMATION
Item 1.        Financial Statements
TWO RIVER BANCORP
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except share data)
 
June 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Cash and due from banks
$
21,267

 
$
19,844

Interest-bearing deposits in bank
23,431

 
22,233

Cash and cash equivalents
44,698

 
42,077

 
 
 
 
Securities available for sale
31,598

 
34,464

Securities held to maturity (fair value of $56,449 and $57,284 at June 30, 2017 and December 31, 2016, respectively)
55,750

 
57,843

Restricted investments, at cost
5,286

 
4,805

Loans held for sale
6,786

 
4,537

Loans
794,908

 
753,092

Allowance for loan losses
(9,953
)
 
(9,565
)
Net loans
784,955

 
743,527

 
 
 
 
Other real estate owned (“OREO”)
233

 
259

Bank owned life insurance
21,303

 
21,029

Premises and equipment, net
5,215

 
4,662

Accrued interest receivable
2,337

 
2,234

Goodwill
18,109

 
18,109

Other assets
6,829

 
6,665

 
 
 
 
Total Assets
$
983,099

 
$
940,211

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
172,737

 
$
160,104

Interest-bearing
637,988

 
616,463

Total Deposits
810,725

 
776,567

 
 
 
 
Securities sold under agreements to repurchase
25,823

 
19,915

FHLB and other borrowings
24,300

 
25,300

Subordinated debt
9,871

 
9,855

Accrued interest payable
94

 
100

Other liabilities
7,762

 
7,758

 
 
 
 
Total Liabilities
878,575

 
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 – 8,740,865 and 8,677,536 at June 30, 2017 and December 31, 2016, respectively
 

 
 

Outstanding – 8,428,771and 8,365,442 at June 30, 2017 and December 31, 2016, respectively
79,394

 
79,056

Retained earnings
27,722

 
24,447

Treasury stock, at cost; 312,094 shares at June 30, 2017 and December 31, 2016
(2,396
)
 
(2,396
)
Accumulated other comprehensive loss
(196
)
 
(391
)
Total Shareholders' Equity
104,524


100,716

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
983,099

 
$
940,211

See notes to the unaudited consolidated financial statements.

3




TWO RIVER BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three and Six Months Ended June 30, 2017 and 2016
(in thousands, except per share data)     
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Interest Income
 
 
 
 
 
 
 
Loans, including fees
$
8,733

 
$
8,085

 
$
17,136

 
$
15,998

Securities:
 
 
 
 
 
 
 

Taxable
235

 
192

 
468

 
384

Tax-exempt
279

 
230

 
564

 
430

Interest-bearing deposits
102

 
32

 
174

 
65

Total Interest Income
9,349

 
8,539

 
18,342

 
16,877

Interest Expense
 
 
 
 
 
 
 
Deposits
1,063

 
945

 
2,101

 
1,828

Securities sold under agreements to repurchase
17

 
15

 
32

 
29

FHLB and other borrowings
147

 
147

 
292

 
295

Subordinated debt
164

 
163

 
329

 
328

Total Interest Expense
1,391

 
1,270

 
2,754

 
2,480

Net Interest Income
7,958

 
7,269

 
15,588

 
14,397

Provision for Loan Losses
375

 
390

 
600

 
390

Net Interest Income after Provision for Loan Losses
7,583

 
6,879

 
14,988

 
14,007

 
 
 
 
 
 
 
 
Non-Interest Income
 
 
 
 
 
 
 
Service fees on deposit accounts
161

 
137

 
311

 
273

Mortgage banking
474

 
281

 
900

 
515

Other loan fees
122

 
62

 
214

 
123

Earnings from investment in bank owned life insurance
138

 
110

 
274

 
219

Gain on sale of SBA loans
394

 
365

 
511

 
459

Net gain on sale of securities

 

 

 
72

Other income
249

 
211

 
453

 
398

Total Non-Interest Income
1,538

 
1,166

 
2,663

 
2,059

 
 
 
 
 
 
 
 
Non-Interest Expenses
 
 
 
 
 
 
 
Salaries and employee benefits
3,460

 
3,195

 
6,913

 
6,300

Occupancy and equipment
1,049

 
1,033

 
2,103

 
2,028

Professional
395

 
280

 
736

 
615

Insurance
53

 
57

 
101

 
104

FDIC insurance and assessments
108

 
105

 
231

 
210

Advertising
125

 
120

 
235

 
230

Data processing
125

 
135

 
255

 
270

Outside services fees
124

 
115

 
227

 
238

Amortization of identifiable intangibles

 

 

 
9

OREO expenses, impairments and sales, net
22

 
(45
)
 
19

 
(26
)
Loan workout expenses
139

 
18

 
166

 
98

Other operating
471

 
366

 
862

 
700

Total Non-Interest Expenses
6,071

 
5,379

 
11,848

 
10,776

 
 
 
 
 
 
 
 
Income before Income Taxes
3,050

 
2,666

 
5,803

 
5,290

Income tax expense
922

 
939

 
1,873

 
1,870

Net Income
$
2,128

 
$
1,727

 
$
3,930

 
$
3,420

 
 
 
 
 
 
 
 
Earnings Per Common Share:
 
 
 
 
 
 
 
Basic
$
0.25

 
$
0.21

 
$
0.47

 
$
0.41

Diluted
$
0.25

 
$
0.20

 
$
0.45

 
$
0.40

Weighted average common shares outstanding
 
 
 
 
 
 
 

Basic
8,372

 
8,323

 
8,363

 
8,319

Diluted
8,654

 
8,516

 
8,642

 
8,506

See notes to the unaudited consolidated financial statements.

4


TWO RIVER BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the Three and Six Months Ended June 30, 2017 and 2016
(in thousands)
 
 
 
Three Months Ended
 
June 30,
 
2017
 
2016
Net income
$
2,128

 
$
1,727

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized holdings gains on securities available for sale, net of income tax expense 2017: $82; 2016: $106
126

 
158

 
 
 
 
Other comprehensive income
126

 
158

 
 
 
 
Total comprehensive income
$
2,254

 
$
1,885

 
 
Six Months Ended
 
June 30,
 
2017
 
2016
Net income
$
3,930

 
$
3,420

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized holdings gain on securities available for sale, net of income tax expense 2017: $126; 2016: $165
195

 
253

 
 
 
 
Other comprehensive income
195

 
253

 
 
 
 
Total comprehensive income
$
4,125

 
$
3,673


See notes to the unaudited consolidated financial statements.

5


TWO RIVER BANCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
For the Six Months Ended June 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

 

 
3,930

 

 

 
3,930

Common stock dividend – adjustment
(1,069
)
 

 

 

 

 

Other comprehensive income

 

 

 

 
195

 
195

Stock-based compensation expense

 
144

 

 

 

 
144

Cash dividends on common stock ($0.08 per share)

 

 
(655
)
 

 

 
(655
)
Options exercised
41,339

 
161

 

 

 

 
161

Restricted stock awards
21,018

 

 

 

 

 

Employee stock purchase program
2,041

 
33

 

 

 

 
33

Balance, June 30, 2017
8,428,771

 
$
79,394

 
$
27,722

 
$
(2,396
)
 
$
(196
)
 
$
104,524

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
7,929,196

 
$
72,890

 
$
22,759

 
$
(2,248
)
 
$
(399
)
 
$
93,002

Net income

 

 
3,420

 

 

 
3,420

Other comprehensive income

 

 

 

 
253

 
253

Stock-based compensation expense

 
80

 

 

 

 
80

Cash dividends on common stock ($0.067 per share)

 

 
(556
)
 

 

 
(556
)
Options exercised
19,057

 
73

 

 

 

 
73

Restricted stock and other awards
17,000

 


 


 


 


 


Common stock repurchased
(732
)
 

 

 
(6
)
 

 
(6
)
Employee stock purchase program
2,826

 
27

 

 

 

 
27

Balance, June 30, 2016
7,967,347

 
$
73,070

 
$
25,623

 
$
(2,254
)
 
$
(146
)
 
$
96,293

 
See notes to the unaudited consolidated financial statements.

6


TWO RIVER BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 2017 and 2016  
 
Six Months Ended June 30,
 
2017
 
2016
 
(in thousands)
Cash Flows From Operating Activities
 
 
 
Net income
$
3,930

 
$
3,420

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
374

 
391

Provision for loan losses
600

 
390

Intangible amortization

 
9

Amortization of subordinated debt issuance costs
16

 
15

Net amortization of securities premiums and discounts
420

 
335

Earnings from investment in bank owned life insurance
(274
)
 
(219
)
Proceeds from sale of mortgage loans held for sale
37,486

 
26,800

Origination of mortgage loans held for sale
(36,928
)
 
(26,137
)
Gain on sale of mortgage loans held for sale
(662
)
 
(462
)
Gain on sale of loans transferred from held for investment to held for sale
(177
)
 

Net realized loss on sale of OREO

 
45

OREO writedown
26

 

Stock-based compensation expense
144

 
80

Net realized gain on sale of securities held to maturity

 
(72
)
Proceeds from sale of SBA loans held for sale
5,116

 
4,754

Origination of SBA loans held for sale
(6,750
)
 
(4,295
)
Gain from sale of SBA loans held for sale
(511
)
 
(459
)
Increase in assets:
 
 
 
Accrued interest receivable
(103
)
 
(124
)
Other assets
(290
)
 
(277
)
Increase (decrease) in liabilities:
 
 
 
Accrued interest payable
(6
)
 
(34
)
Other liabilities
4

 
466

Net Cash Provided by Operating Activities
2,415

 
4,626

Cash Flows From Investing Activities
 
 
 
Purchase of securities available for sale

 
(2,257
)
Purchase of securities held to maturity
(634
)
 
(9,130
)
Proceeds from repayments, calls and maturities of securities available for sale
2,993

 
2,953

Proceeds from repayments, calls and maturities of securities held to maturity
2,501

 
3,876

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
(50,208
)
 
(32,949
)
Purchases of premises and equipment
(927
)
 
(189
)
Purchase of restricted investments, net
(481
)
 
(316
)
Proceeds from sale of OREO

 
107

Net Cash Used In Investing Activities
(38,399
)
 
(36,829
)
Cash Flows From Financing Activities
 
 
 
Net increase in deposits
34,158

 
17,828

Net increase in securities sold under agreements to repurchase
5,908

 
2,138

Repayment of FHLB and other borrowings
(1,000
)
 
(2,700
)
Cash dividends paid – common stock
(655
)
 
(556
)
Proceeds from employee stock purchase plan
33

 
27

Proceeds from exercise of stock options
161

 
73

Common stock repurchased

 
(6
)
Net Cash Provided by Financing Activities
38,605

 
16,804

Net Increase (Decrease) in Cash and Cash Equivalents
2,621

 
(15,399
)
Cash And Cash Equivalents – Beginning
42,077

 
46,727

Cash And Cash Equivalents - Ending
$
44,698

 
$
31,328

Supplementary cash flow information:
 
 
 
Interest paid
$
2,760

 
$
2,514

Income taxes paid
$
2,650

 
$
2,300

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.

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, 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 six months ended June 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 June 30, 2017 for items that should potentially be recognized or disclosed in these consolidated financial statements.
 
Correction of an Immaterial Error on the Consolidated Statement of Cash Flows
 
The Company identified an immaterial error related to its consolidated statement of cash flows for the origination of SBA loans sold. The Company determined that in the prior period reported, these amounts were improperly reflected in cash flow from investing activities instead of in cash flow from operating activities. The Company reviewed the impact of this error on the prior period and determined that the error was not material to the prior period consolidated financial statements. The Company has corrected the consolidated statement of cash flows for the six months ended June 30, 2016 by presenting these amounts within operating activities as opposed to within the investing activities. The impact of the error decreased net cash provided by operating activities by $4.3 million and increased the Company’s cash flows from investing activities by an equivalent amount for the six months ended June 30, 2016.
 
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. 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 is in the process of reviewing its revenue streams to evaluate the impact that this guidance will have on its consolidated financial statements.
 

8


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 September 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.
 

9


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 adoptions 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. 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 August 31, 2016. 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.


10


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
 
Six Months Ended
 
June 30,
 
June 30,
 
(dollars in thousands, except per share data)
 
(dollars in thousands, except per share data)
 
2017
 
2016
 
2017
 
2016
Net income
$
2,128

 
$
1,727

 
$
3,930

 
$
3,420

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – Basic
8,372,032

 
8,322,906

 
8,362,742

 
8,318,736

Effect of dilutive stock options and restricted stock
281,632

 
192,691

 
279,639

 
186,814

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – Diluted
8,653,664

 
8,515,597

 
8,642,381

 
8,505,550

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.25

 
$
0.21

 
$
0.47

 
$
0.41

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
0.25

 
$
0.20

 
$
0.45

 
$
0.40

 
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 six months ended June 30, 2017 and 2016.


11


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
 
 
 
 
 
 
 
 
 
June 30, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
U.S. Government agency securities
 
$
8,096

 
$
16

 
$
(26
)
 
$
8,086

Municipal securities
 
498

 
7

 

 
505

U.S. Government-sponsored enterprises (“GSE”) – residential mortgage-backed securities
 
9,813

 

 
(117
)
 
9,696

U.S. Government collateralized residential mortgage obligations
 
8,542

 
17

 
(128
)
 
8,431

 Corporate debt securities, primarily financial institutions
 
2,493

 
13

 
(62
)
 
2,444

 
 
 
 
 
 
 
 
 
Sub-total
 
29,442

 
53

 
(333
)
 
29,162

 
 
 
 
 
 
 
 
 
Community Reinvestment Act (“CRA”) mutual fund
 
2,476

 

 
(40
)
 
2,436

 
 
 
 
 
 
 
 
 
Total securities available for sale
 
$
31,918

 
$
53

 
$
(373
)
 
$
31,598

 
 
 
 
 
 
 
 
 
Securities held to maturity:
 
 
 
 
 
 
 
 
Municipal securities
 
$
43,432

 
$
883

 
$
(80
)
 
$
44,235

GSE – Residential mortgage-backed securities
 
7,990

 
8

 
(24
)
 
7,974

U.S. Government collateralized residential mortgage obligations
 
2,504

 
10

 
(14
)
 
2,500

Corporate debt securities, primarily financial institutions
 
1,824

 

 
(84
)
 
1,740

 
 
 
 
 
 
 
 
 
Total securities held to maturity
 
$
55,750

 
$
901

 
$
(202
)
 
$
56,449




12


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 June 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
 
$
1,247

 
$
1,246

 
$
9,345

 
$
9,368

Due in one year through five years
 
2,062

 
2,081

 
3,393

 
3,476

Due in five years through ten years
 

 

 
6,912

 
7,046

Due after ten years
 
7,778

 
7,708

 
25,606

 
26,085

 
 
 
 
 
 
 
 
 
Sub-total
 
11,087

 
11,035

 
45,256

 
45,975

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE – residential mortgage-backed securities
 
9,813

 
9,696

 
7,990

 
7,974

U.S. Government collateralized residential mortgage obligations
 
8,542

 
8,431

 
2,504

 
2,500

 
 
 
 
 
 
 
 
 
Total
 
$
29,442


$
29,162

 
$
55,750

 
$
56,449

 

13


NOTE 5 – SECURITIES (Continued)


The Company had no security sales during the three months ended June 30, 2017 and 2016. The Company had no security sales for the six months ended June 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 six months ended June 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 $35.0 million and $33.1 million at June 30, 2017 and December 31, 2016, 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 June 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
June 30, 2017:
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency securities
 
$
4,418

 
$
(14
)
 
$
1,900

 
$
(12
)
 
$
6,318

 
$
(26
)
Municipal securities
 
9,088

 
(80
)
 

 

 
9,088

 
(80
)
GSE – residential mortgage-backed securities
 
8,266

 
(53
)
 
5,519

 
(88
)
 
13,785

 
(141
)
U.S. Government collateralized residential mortgage obligations
 
3,921

 
(19
)
 
4,466

 
(123
)
 
8,387

 
(142
)
Corporate debt securities, primarily financial institutions
 

 

 
2,673

 
(146
)
 
2,673

 
(146
)
CRA mutual fund
 

 

 
2,436

 
(40
)
 
2,436

 
(40
)
Total temporarily impaired securities
 
$
25,693

 
$
(166
)
 
$
16,994

 
$
(409
)
 
$
42,687

 
$
(575
)
 
 
 
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 50 securities in an unrealized loss position at June 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 June 30, 2017, the Company did not intend to sell these debt securities prior to market recovery.
 

14


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 June 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 June 30, 2017. These four securities have an amortized cost value of $2.8 million and a fair value of $2.7 million at June 30, 2017
 
There were no other-than-temporary impairments recognized during the three and six months ended June 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 loans and are recorded at the lower of aggregate cost or estimated fair value in the aggregate. During the three and six months ended June 30, 2017, the Company transferred $3.6 million and $8.2 million, respectively, from held for investment to held for sale. During the three and six months ended June 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 commercial and consumer loans. Commercial loans consist of the following classes: commercial and industrial, real estate-construction and real estate-commercial. Consumer loans consist of the following classes: real estate-residential and 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 June 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.
  

15


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.

16


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.

17


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


 
The components of the loan portfolio held for investment at June 30, 2017 and December 31, 2016 are as follows: 
 
 
June 30,
 
December 31,
 
 
2017
 
2016
 
 
(In Thousands)
 
 
 
 
 
Commercial and industrial
 
$
99,688

 
$
93,697

Real estate – construction
 
112,102

 
111,914

Real estate – commercial
 
496,400

 
460,685

Real estate – residential
 
59,624

 
59,065

Consumer
 
27,828

 
28,279

 
 
 
 
 
 
 
795,642

 
753,640

Allowance for loan losses
 
(9,953
)
 
(9,565
)
Unearned fees
 
(734
)
 
(548
)
 
 
 
 
 
Net Loans
 
$
784,955

 
$
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 June 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
June 30, 2017:
 
 
 
 
 
(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$

 
$

 
$
1,484

 
$
1,484

 
$
98,204

 
$
99,688

 
$

Real estate – construction
 

 

 
150

 
150

 
111,952

 
112,102

 

Real estate – commercial
 

 
152

 
281

 
433

 
495,967

 
496,400

 

Real estate – residential
 

 

 
731

 
731

 
58,893

 
59,624

 

Consumer
 
35

 

 
300

 
335

 
27,493

 
27,828

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
35

 
$
152

 
$
2,946

 
$
3,133

 
$
792,509

 
$
795,642

 
$


 
 
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

 
$



18


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


The following table presents non-accrual loans by classes of the loan portfolio at June 30, 2017 and December 31, 2016:
 
 
 
June 30,
 
December 31,
 
 
2017
 
2016
 
 
(In Thousands)
 
 
 
 
 
Commercial and industrial
 
$
1,484

 
$
119

Real estate – construction
 
150

 

Real estate – commercial
 
281

 
666

Real estate – residential
 
731

 
763

Consumer
 
300

 

 
 
 
 
 
Total
 
$
2,946

 
$
1,548

 
There were no new troubled debt restructured loan ("TDR's) that occurred during the three months ended June 30, 2017 and 2016.

The following table presents new TDR's that occurred during the six months ended June 30, 2017 and 2016:
 
 
 
Six months ended June 30, 2017
 
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
 
(Dollars in Thousands)
Troubled debt restructuring:
 
 
 
 
 
 
Commercial and industrial
 
1
 
$
150

 
$
150

Real estate – construction
 
1
 
150

 
150

 
 
2
 
$
300

 
$
300

 

 
 
Six months ended June 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.