Edgar Filing: TWO RIVER BANCORP

trcb20160831_10q.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 September 30, 2016

☐	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

(I.R.S. Employer Identification No.)

of Incorporation or Organization)

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	☐	Smaller reporting company	☒
(Do not check if a 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 8, 2016, there were 7,961,318 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, 2016 and December 31, 2015	3

			Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2016 and 2015	4

			Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2016 and 2015	5

			Consolidated Statements of Shareholders’ Equity (unaudited) for the nine months ended September 30, 2016 and 2015	6

			Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2016 and 2015	7

			Notes to Consolidated Financial Statements (unaudited)	8

	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

	Item 3.		Quantitative and Qualitative Disclosures About Market Risk	51

	Item 4.		Controls and Procedures	51

PART II.			OTHER INFORMATION

	Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	53

	Item 6.		Exhibits	54

SIGNATURES				55

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TWO RIVER BANCORP

CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands, except share data)

	September 30,			December 31,
	2016			2015
ASSETS
Cash and due from banks	$	18,102		$	21,566
Interest-bearing deposits in bank		8,843			25,161
Cash and cash equivalents		26,945			46,727

Securities available for sale		31,366			33,530
Securities held to maturity (fair value of $47,693 and $43,668 at September 30, 2016 and December 31, 2015, respectively)		46,349			43,167
Restricted investments, at cost		4,962			3,596
Loans held for sale		2,561			3,050
Loans		753,982			693,150
Allowance for loan losses		(9,452	)		(8,713	)
Net loans		744,530			684,437

Other real estate owned (“OREO”)		259			411
Bank owned life insurance		20,889			17,294
Premises and equipment, net		4,835			5,083
Goodwill		18,109			18,109
Other intangible assets, net of accumulated amortization of $2,106 and $2,097 at September 30, 2016 and December 31, 2015, respectively		-			9
Accrued interest receivable		1,928			1,912
Other assets		6,437			6,371

Total Assets	$	909,170		$	863,696

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	152,412		$	144,627
Interest bearing		586,835			563,809
Total Deposits		739,247			708,436

Securities sold under agreements to repurchase		18,645			19,545
Federal Home Loan Bank (“FHLB”) and other borrowings		35,300			26,500
Subordinated debt		9,847			9,824
Accrued interest payable		89			118
Other liabilities		7,448			6,271

Total Liabilities		810,576			770,694

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 – 8,257,170 and 8,213,196 at September 30, 2016 and December 31, 2015, respectively
Outstanding – 7,959,938 and 7,929,196 at September 30, 2016 and December 31, 2015, respectively		73,181			72,890
Retained earnings		27,948			22,759
Treasury stock, at cost; 297,232 shares and 284,000 shares at September 30, 2016 and December 31, 2015, respectively		(2,396	)		(2,248	)
Accumulated other comprehensive loss		(139	)		(399	)
Total Shareholders' Equity		98,594			93,002

Total Liabilities And Shareholders’ Equity	$	909,170		$	863,696

See notes to the unaudited consolidated financial statements.

TWO RIVER BANCORP

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

For the Three and Nine Months Ended September 30, 2016 and 2015

(in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Interest Income
Loans, including fees	$	8,337		$	7,834		$	24,335		$	22,720
Securities:
Taxable		187			178			571			607
Tax-exempt		234			188			664			412
Interest-bearing deposits		19			18			84			58
Total Interest Income		8,777			8,218			25,654			23,797
Interest Expense
Deposits		972			799			2,800			2,325
Securities sold under agreements to repurchase		15			19			44			51
FHLB and other borrowings		157			155			452			468
Subordinated debt		164			-			492			-
Total Interest Expense		1,308			973			3,788			2,844
Net Interest Income		7,469			7,245			21,866			20,953
Provision For Loan Losses		470			120			860			400
Net Interest Income after Provision for Loan Losses		6,999			7,125			21,006			20,553

Non-Interest Income
Service fees on deposit accounts		154			142			427			433
Mortgage banking		316			327			831			613
Other loan fees		188			32			311			112
Earnings from investment in bank owned life insurance		118			112			337			335
Death benefit on bank owned life insurance		862			-			862			-
Gain on sale of SBA loans		116			32			575			309
Net gain on sale of securities		-			9			72			37
Gain on sale of premises and equipment		-			-			-			208
Other income		229			182			627			506
Total Non-Interest Income		1,983			836			4,042			2,553

Non-Interest Expenses
Salaries and employee benefits		3,309			3,198			9,609			9,318
Occupancy and equipment		1,056			964			3,084			2,940
Professional		273			272			888			718
Insurance		56			74			160			249
FDIC insurance and assessments		114			119			324			324
Advertising		85			120			315			365
Data processing		135			110			405			352
Outside services fees		131			131			369			376
Amortization of identifiable intangibles		-			10			9			38
OREO expenses, impairments and sales, net		(245	)		(137	)		(271	)		(161	)
Loan workout expenses		44			65			142			278
Other operating		381			382			1,081			1,049
Total Non-Interest Expenses		5,339			5,308			16,115			15,846

Income before Income Taxes		3,643			2,653			8,933			7,260
Income tax expense		999			961			2,869			2,664
Net Income		2,644			1,692			6,064			4,596
Preferred stock dividend		-			(15	)		-			(45	)
Net income available to common shareholders	$	2,644		$	1,677		$	6,064		$	4,551
Earnings Per Common Share:
Basic	$	0.33		$	0.21		$	0.77		$	0.57
Diluted	$	0.33		$	0.21		$	0.75		$	0.56
Weighted average common shares outstanding
Basic		7,926			7,930			7,923			7,932
Diluted		8,131			8,130			8,109			8,130

See notes to the unaudited consolidated financial statements.

TWO RIVER BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

For the Three and Nine Months Ended September 30, 2016 and 2015

(in thousands)

	Three Months Ended September 30,
	2016		2015


Net income	$	2,644	$	1,692
Other comprehensive income:
Reclassification adjustment for gains on sales of securities recognized in income, net of income tax expense 2015: $3		-		(6	)
Unrealized holdings gain on securities available for sale, net of income tax expense 2016: $4; 2015: $94		7		144

Other comprehensive income		7		138

Total comprehensive income	$	2,651	$	1,830

	Nine Months Ended September 30,
	2016		2015


Net income	$	6,064	$	4,596
Other comprehensive income:
Reclassification adjustment for gains on sales of securities recognized in income, net of income tax expense 2015: $14		-		(23	)
Unrealized holdings gain on securities available for sale, net of income tax expense 2016: $169; 2015: $81		260		128

Other comprehensive income		260		105

Total comprehensive income	$	6,324	$	4,701

See notes to the unaudited consolidated financial statements.

TWO RIVER BANCORP

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

For the Nine Months Ended September 30, 2016 and 2015

(dollars in thousands, except per share data)

			Common Stock											Accumulated Other			Total
	Preferred Stock		Outstanding Shares			Amount		Retained Earnings			Treasury Stock			Comprehensive Income (Loss)			Shareholders’ Equity
Balance, January 1, 2016	$	-		7,929,196		$	72,890	$	22,759		$	(2,248	)	$	(399	)	$	93,002

Net income		-		-			-		6,064			-			-			6,064

Other comprehensive income		-		-			-		-			-			260			260

Stock-based compensation expense		-		-			162		-			-			-			162

Cash dividends on common stock ($0.11 per share)		-		-			-		(875	)		-			-			(875	)

Options exercised		-		22,957			89		-			-			-			89

Restricted stock and other awards		-		17,000			-		-			-			-			-

Common stock repurchased		-		(13,232	)		-		-			(148	)		-			(148	)

Employee stock purchase plan		-		4,017			40		-			-			-			40

Balance, September 30, 2016	$	-		7,959,938		$	73,181	$	27,948		$	(2,396	)	$	(139	)	$	98,594

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 plan		-		4,573			40		-			-			-			40
Balance, September 30, 2015	$	6,000		7,918,266		$	72,830	$	21,298		$	(2,248	)	$	(240	)	$	97,640

See notes to the unaudited consolidated financial statements.

TWO RIVER BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Nine Months Ended September 30, 2016 and 2015

	Nine Months Ended September 30,
	2016			2015
	(in thousands)
Cash Flows From Operating Activities
Net income	$	6,064		$	4,596
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		586			592
Provision for loan losses		860			400
Intangible amortization		9			38
Amortization of subordinated debt issuance costs		23			-
Net amortization of securities premiums and discounts		518			380
Earnings from investment in bank owned life insurance		(337	)		(335	)
Proceeds from sale of loans held for sale		44,816			27,946
Origination of loans held for sale		(43,580	)		(27,668	)
Gain on sale of loans held for sale		(747	)		(485	)
Gain on sale of loans transferred from held for investment to held for sale		-			(113	)
Proceeds from sale of SBA loans		6,081			3,665
Origination of SBA loans sold		(5,506	)		(3,356	)
Gain from sale of SBA loans		(575	)		(309	)
Net realized loss (gain) on sale of OREO		45			(107	)
Stock-based compensation expense		162			154
Net realized gain on sale of securities available for sale		-			(37	)
Net realized gain on sale of securities held to maturity		(72	)		-
Death benefit on bank owned life insurance		(862	)		-
Gain on sale of premises and equipment		-			(208	)
Decrease (increase) in assets:
Accrued interest receivable		(16	)		(131	)
Other assets		(235	)		743
Increase (decrease) in liabilities:
Accrued interest payable		(29	)		3
Other liabilities		1,177			574
Net Cash Provided by Operating Activities		8,382			6,342
Cash Flows From Investing Activities
Purchase of securities available for sale		(2,257	)		(20,707	)
Purchase of securities held to maturity		(9,210	)		(19,721	)
Proceeds from repayments, calls and maturities of securities available for sale		4,598			6,131
Proceeds from repayments, calls and maturities of securities held to maturity		4,758			2,008
Proceeds from sales of securities available for sale		-			24,306
Proceeds from sales of securities held to maturity		1,076			-
Proceeds from sale of loans transferred from held for investment to held for sale		-			5,727
Net increase in loans		(60,953	)		(53,889	)
Purchases of premises and equipment		(338	)		(817	)
Proceeds from sale of premises and equipment		-			925
Purchase of restricted investments, net		(1,366	)		(525	)
Purchase of bank owned life insurance		(3,918	)		-
Proceeds from death benefit on bank owned life insurance		1,522			-
Proceeds from sale of OREO		107			1,367
Net Cash Used In Investing Activities		(65,981	)		(55,195	)
Cash flows From Financing Activities
Net increase in deposits		30,811			48,275
Net decrease in securities sold under agreements to repurchase		(900	)		(1,987	)
Proceeds from FHLB and other borrowings		13,000			12,000
Repayment of FHLB and other borrowings		(4,200	)		(1,500	)
Cash dividends paid - preferred stock		-			(45	)
Cash dividends paid - common stock		(875	)		(754	)
Proceeds from employee stock purchase plan		40			40
Proceeds from exercise of stock options		89			103
Common stock repurchased		(148	)		(497	)
Tax benefit of stock options exercised		-			6
Net Cash Provided by Financing Activities		37,817			55,641
Net (Decrease) Increase in Cash and Cash Equivalents		(19,782	)		6,788
Cash And Cash Equivalents - Beginning		46,727			36,110
Cash And Cash Equivalents - Ending	$	26,945		$	42,898
Supplementary cash flow information:
Interest paid	$	3,817		$	2,841
Income taxes paid		3,280			2,133
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

See notes to the unaudited consolidated financial statements.

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, TRCB Holdings Two LLC, TRCB Holdings Three 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, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 25, 2016 (the “2015 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 2015 Form 10-K.

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2016 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 both the origination of SBA loans sold and the proceeds from sale of SBA loans. 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 nine months ended September 30, 2015 by presenting these amounts within operating activities as opposed to within the investing activities. The net impact of the error increased net cash provided by operating activities by $309,000 and decreased the Company's cash flows from investing activities by an equivalent amount for the nine month period ended September 30, 2015.

NOTE 2 – NEW ACCOUNTING STANDARDS

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 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.

NOTE 2 – NEW ACCOUNTING STANDARDS (Continued)

ASU 2016-02: In February 2016, the FASB issued ASU 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 is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.

ASU 2016-09: In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU introduces targeted amendments intended to simplify the accounting for stock compensation. Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise. Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain and track an “APIC pool.” The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows. In addition, the ASU elevates the statutory tax withholding threshold to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures when they occur. Further, the ASU provides two accounting alternatives to nonpublic entities: A nonpublic entity can make an accounting policy election to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that meet certain conditions. Also a nonpublic entity can make a one-time accounting policy election to switch from measuring all liability-classified awards at fair value to intrinsic value. The amendments are effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.

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. Management is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.

NOTE 2 – NEW ACCOUNTING STANDARDS (Continued)

ASU 2016-15: In August 2016, the Financial Accounting Standard Board (“FASB”) issued ASU 2016-15, Statement of Cash Flows (Topic 230). 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.

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.

During the third quarter of 2016, the Company prospectively changed its annual goodwill impairment testing date from September 30, 2016 to August 31, 2016. The voluntary change provides additional time for the completion of the annual goodwill impairment testing prior to the end of the quarter. This change in accounting principle does not delay, accelerate, or avoid an impairment loss, nor does the change have a cumulative effect on pre-tax income, net income or loss, retained earnings, or net assets. This change was applied prospectively beginning on August 31, 2016. Retrospective application to prior periods did not occur, as it is impracticable to objectively determine the assumptions that would have been used in those earlier periods to estimate fair value.

The Company performed its annual step one goodwill impairment analysis as of August 31, 2016, 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 August 31, 2016.

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.

NOTE 4 – EARNINGS PER COMMON SHARE

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

	Three Months Ended September 30, 2016					Nine Months Ended September 30, 2016
	2016		2015			2016		2015

	(dollars in thousands, except per share data)
Net income	$	2,644	$	1,692		$	6,064	$	4,596
Preferred stock dividend		-		(15	)		-		(45	)
Net income applicable to common shareholders	$	2,644	$	1,677		$	6,064	$	4,551
Weighted average common shares outstanding		7,926,230		7,929,876			7,922,606		7,932,100
Effect of dilutive stock options		204,617		199,665			186,699		198,156
Weighted average common shares outstanding used to calculate diluted earnings per share		8,130,847		8,129,541			8,109,305		8,130,256

Basic earnings per common share	$	0.33	$	0.21		$	0.77	$	0.57
Diluted earnings per common share	$	0.33	$	0.21		$	0.75	$	0.56

Dilutive securities in the table above exclude common stock options with exercise prices that exceed the average market price of the Company’s common stock during the periods presented. Inclusion of these common stock options would be anti-dilutive to the diluted earnings per common share calculation. There were no stock options that were anti-dilutive for the three and nine months ended September 30, 2016, while for the three and nine month periods ended September 30, 2015, there were 9,129 stock options that had no intrinsic value because their effect was anti-dilutive and therefore, were not included in the diluted earnings per common share calculations.

NOTE 5 - SECURITIES

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s securities are summarized as follows:

			Gross		Gross
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value

September 30, 2016:

Securities available for sale:
U.S. Government agency securities	$	3,402	$	6	$	(14	)	$	3,394
Municipal securities		503		10		-			513
U.S. Government-sponsored enterprises (“GSE”) – residential mortgage-backed securities		12,271		21		(94	)		12,198
U.S. Government collateralized residential mortgage obligations		10,487		35		(64	)		10,458
Corporate debt securities, primarily financial institutions		2,492		13		(160	)		2,345

		29,155		85		(332	)		28,908

Community Reinvestment Act (“CRA”) mutual fund		2,436		22		-			2,458

	$	31,591	$	107	$	(332	)	$	31,366

Securities held to maturity:
Municipal securities	$	38,199	$	1,478	$	-		$	39,677
GSE – residential mortgage-backed securities		3,339		39		(4	)		3,374
U.S. Government collateralized residential mortgage obligations		2,990		25		(5	)		3,010
Corporate debt securities, primarily financial institutions		1,821		-		(189	)		1,632

	$	46,349	$	1,542	$	(198	)	$	47,693

NOTE 5 – SECURITIES (Continued)

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

December 31, 2015:

Securities available for sale:
U.S. Government agency securities	$	1,241	$	-	$	(3	)	$	1,238
Municipal securities		508		9		-			517
GSE – residential mortgage-backed securities		14,646		5		(202	)		14,449
U.S. Government collateralized residential mortgage obligations		12,900		13		(286	)		12,627
Corporate debt securities, primarily financial institutions		2,492		-		(175	)		2,317

		31,787		27		(666	)		31,148

CRA mutual fund		2,397		-		(15	)		2,382

	$	34,184	$	27	$	(681	)	$	33,530

Securities held to maturity:
Municipal securities	$	33,956	$	824	$	(9	)	$	34,771
GSE – residential mortgage-backed securities		3,789		9		(44	)		3,754
U.S. Government collateralized residential mortgage obligations		3,602		-		(46	)		3,556
Corporate debt securities, primarily financial institutions		1,820		-		(233	)		1,587

	$	43,167	$	833	$	(332	)	$	43,668

The amortized cost and fair value of the Company’s debt securities at September 30, 2016, 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

8,264

8,284

Due in one year through five years

3,259

3,285

3,990

4,125

Due in five years through ten years

5,006

5,307

Due after ten years

3,138

2,967

22,760

23,593

6,397

6,252

40,020

41,309

GSE – residential mortgage-backed securities

12,271

12,198

3,339

3,374

U.S. Government collateralized residential mortgage obligations

10,487

10,458

2,990

3,010

29,155

28,908

46,349

47,693

NOTE 5 – SECURITIES (Continued)

The Company had no security sales during the three months ended September 30, 2016, compared to 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. For the nine months ended September 30, 2016, the Company had one security sale totaling $1.0 million in which the Company recorded a gross realized gain of $72,000, as compared to gross realized gains and losses of $70,000 and $33,000, respectively, during the nine months ended September 30, 2015. The sale during the first quarter of 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 $27,564,000 and $32,596,000 at September 30, 2016 and December 31, 2015, respectively, were pledged as collateral to secure securities sold under agreements to repurchase and for 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, 2016 and December 31, 2015:

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2016:	(in thousands)

U.S. Government agency securities	$	2,130	$	(14	)	$	-	$	-		$	2,130	$	(14	)
Municipal securities		303		-			-		-			303		-
GSE – residential mortgage-backed securities		674		(4	)		6,547		(94	)		7,221		(98	)
U.S. Government collateralized residential mortgage obligations		618		(1	)		5,399		(68	)		6,017		(69	)
Corporate debt securities, primarily financial institutions		-		-			2,967		(349	)		2,967		(349	)

Total Temporarily
Impaired Securities	$	3,725	$	(19	)	$	14,913	$	(511	)	$	18,638	$	(530	)

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2015:	(in thousands)

U.S. Government agency securities	$	1,238	$	(3	)	$	-	$	-		$	1,238	$	(3	)
Municipal securities		5,858		(5	)		498		(4	)		6,356		(9	)
GSE – residential mortgage-backed securities		11,946		(151	)		5,006		(95	)		16,952		(246	)
U.S. Government collateralized residential mortgage obligations		8,284		(72	)		6,861		(260	)		15,145		(332	)
Corporate debt securities, primarily financial institutions		496		(1	)		2,907		(407	)		3,403		(408	)
CRA mutual fund		2,382		(15	)		-		-			2,382		(15	)

Total Temporarily
Impaired Securities	$	30,204	$	(247	)	$	15,272	$	(766	)	$	45,476	$	(1,013	)

The Company had 26 securities in an unrealized loss position at September 30, 2016. In management’s opinion, the unrealized losses in corporate debt, U.S. Government agencies, U.S. Government collateralized residential mortgage obligations and GSE residential mortgage-backed securities 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. At September 30, 2016, the Company does not intend to sell these debt securities prior to recovery.

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 Baa1 to Ba1. At September 30, 2016, all of these securities are current with their scheduled interest payments. These single issue securities are all from large money center banks. Management concluded that these securities were not other-than-temporarily impaired as of September 30, 2016. These four securities have an amortized cost value of $2.8 million and a fair value of $2.5 million at September 30, 2016.

There were no other-than-temporary impairments recognized during the three and nine months ended September 30, 2016 and 2015.

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. The Company did not transfer any loans from held for investment to held for sale during the three and nine months ended September 30, 2016. For the three and nine months ended September 30, 2015, the Company transferred $5.6 million, respectively, from held for investment to held for sale. Transfers from held for investment are infrequent and occur at fair value less costs to sell, with any charge-off to allowance for loan losses. 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 September 30, 2016 and December 31, 2015, 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.

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:

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

The loan’s observable market price;

The fair value of the underlying collateral; or

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:

Changes in lending policy and procedures, including changes in underwriting standards and collection practices not previously considered in estimating credit losses.

Changes in relevant economic and business conditions.

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

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

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.

Changes in the quality of the loan review system.

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

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

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.

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.

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

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.

The components of the loan portfolio held for investment at September 30, 2016 and December 31, 2015 are as follows:

	September 30, 2016			December 31, 2015
	(In Thousands)

Commercial and industrial	$	103,050		$	100,154
Real estate – construction		102,658			104,231
Real estate – commercial		467,118			422,665
Real estate – residential		54,580			39,524
Consumer		27,162			27,136

		754,568			693,710
Allowance for loan losses		(9,452	)		(8,713	)
Unearned fees		(586	)		(560	)

Net Loans	$	744,530		$	684,437

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

The performance and credit quality of the loan portfolio is monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of September 30, 2016 and December 31, 2015:

30-59 Days

Past Due

60-89 Days

Past Due

90 Days &

Greater

Total Past

Due

Current

Total Loans

Receivable

Loans

Receivable

>90 Days and

Accruing

September 30, 2016:

(In Thousands)

Commercial and industrial

201

407

131

739

102,311

103,050

Real estate – construction

150

102,508

102,658

Real estate – commercial

461

155

674

1,290

465,828

467,118

Real estate – residential

292

782

1,074

53,506

54,580

Consumer

197

26,965

27,162

Total

954

909

1,587

3,450

751,118

754,568

	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, 2015:					(In Thousands)

Commercial and industrial	$	107	$	-	$	31	$	138	$	100,016	$	100,154	$	-
Real estate – construction		-		150		-		150		104,081		104,231		-
Real estate – commercial		112		-		2,075		2,187		420,478		422,665		-
Real estate – residential		-		-		796		796		38,728		39,524		-
Consumer		-		-		-		-		27,136		27,136		-

Total	$	219	$	150	$	2,902	$	3,271	$	690,439	$	693,710	$	-

The following table presents non-accrual loans by classes of the loan portfolio at September 30, 2016 and December 31, 2015:

	September 30, 2016		December 31, 2015
	(In Thousands)

Commercial and industrial	$	131	$	138
Real estate – construction		-		-
Real estate – commercial		674		2,244
Real estate – residential		782		796
Consumer		-		-

Total	$	1,587	$	3,178

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

The following tables present newly troubled debt restructured loans that occurred during the three and nine months ended September 30, 2016 and 2015:

Three months ended September 30, 2016

Number of

Contracts

Pre-Modification

Outstanding

Recorded

Investment

Post-Modification

Outstanding

Recorded

Investment

Troubled Debt Restructuring:

(Dollars in Thousands)

Commercial and industrial

Nine months ended September 30, 2016

Number of

Contracts

Pre-Modification

Outstanding

Recorded

Investment

Post-Modification

Outstanding

Recorded

Investment

Troubled Debt Restructuring:

(Dollars in Thousands)

Commercial and industrial

257

Three months ended September 30, 2015

Number of

Contracts

Pre-Modification

Outstanding

Recorded

Investment

Post-Modification

Outstanding

Recorded

Investment

Troubled Debt Restructuring:

(Dollars in Thousands)

Commercial and industrial

	Nine months ended September 30, 2015
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructuring:	(Dollars in Thousands)

Commercial and industrial		6	$	3,227	$	3,227

Loans whose terms are modified are classified as troubled debt restructurings (“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 are designated as impaired.

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

The Company’s TDR modifications are made on terms typically up to 12 months in order to aggressively monitor and track performance of the credit. The short-term modifications are monitored for continued performance for an additional period of time after the expiration of the concession. Balance reductions and annualized loss rates are also important metrics that are monitored. The main objective of the modification program is to reduce the payment burden for the borrower and improve the net present value of the Company’s expected cash flows. All the loans identified as troubled debt restructured as of September 30, 2016, generally involve a temporary reduction in interest rate or a modification of a loan’s amortization schedule.

The Company classifies all TDRs as impaired loans. Impaired loans are individually assessed to determine that the loan’s carrying value is not in excess of the estimated fair value of the collateral (less cost to sell), if the loan is collateral dependent, or the present value of the expected future cash flows, if the loan is not collateral dependent. Management performs a detailed evaluation of each impaired loan and generally obtains updated appraisals as part of the evaluation. In addition, management adjusts estimated fair value down to appropriately consider recent market conditions, our willingness to accept a lower sales price to effect a quick sale, and costs to dispose of any supporting collateral.

At September 30, 2016, TDRs totaled $8.5 million, including $8.4 million that were current and two non-accrual loans totaling $157,000. As of December 31, 2015, TDRs totaled $10.8 million, including $9.3 million that were current and three non-accrual loans totaling $1.5 million. At September 30, 2016, the Company established a specific reserve of $4,000 against one loan relationship classified as TDR. As of December 31, 2015, a specific reserve of $49,000 was recorded against one loan relationships classified as TDR.

There were no financing receivables modified as TDRs and with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the three and nine months ended September 30, 2016 and 2015, respectively.

It is the Company’s policy to classify a troubled debt restructured loan that is either 90 days or greater delinquent or that has been placed on a non-accrual status as a subsequently defaulted TDR loan.

The following tables summarize information in regards to impaired loans by loan portfolio class at September 30, 2016 and December 31, 2015, and for the three and nine months ended September 30, 2016 and 2015, respectively.

	As of September 30, 2016						For the three months ended September 30, 2016				For the nine months ended September 30, 2016
	Recorded Investment, Net of Charge-offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In Thousands)

With no related allowance recorded:
Commercial and industrial	$	3,515	$	3,515	$	-	$	3,531	$	43	$	3,615	$	131
Real estate – construction		3,212		3,212		-		3,217		34		3,264		103
Real estate – commercial		1,564		1,564		-		1,572		10		1,637		37
Real estate – residential		1,159		1,159		-		1,162		5		1,168		14
Consumer		-		-		-		-		-		-		-

With an allowance recorded:
Commercial and industrial		503		503		4		505		4		509		12
Real estate – construction		-		-		-		-		-		-		-
Real estate – commercial		-		-		-		-		-		-		-
Real estate – residential		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-

Total:
Commercial and industrial		4,018		4,018		4		4,036		47		4,124		143
Real estate – construction		3,212		3,212		-		3,217		34		3,264		103
Real estate – commercial		1,564		1,564		-		1,572		10		1,637		37
Real estate – residential		1,159		1,159		-		1,162		5		1,168		14
Consumer		-		-		-		-		-		-		-

	$	9,953	$	9,953	$	4	$	9,987	$	96	$	10,193	$	297

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

	As of December 31, 2015						For the three months ended September 30, 2015				For the nine months ended September 30, 2015
	Recorded Investment, Net of Charge-offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In Thousands)

With no related allowance recorded:
Commercial and industrial	$	652	$	652	$	-	$	4,215	$	49	$	4,016	$	124
Real estate – construction		3,855		3,855		-		4,111		41		4,390		145
Real estate – commercial		3,267		3,542		-		5,986		32		5,963		100
Real estate – residential		1,178		1,178		-		927		5		928		14
Consumer		209		209		-		413		2		423		7

With an allowance recorded:
Commercial and industrial		3,305		3,305		49		-		-		-		-
Real estate – construction		-		-		-		-		-		-		-
Real estate – commercial		-		-		-		-		-		-		-
Real estate – residential		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-

Total:
Commercial and industrial		3,957		3,957		49		4,215		49		4,016		124
Real estate – construction		3,855		3,855		-		4,111		41		4,390		145
Real estate – commercial		3,267		3,542		-		5,986		32		5,963		100
Real estate – residential		1,178		1,178		-		927		5		928		14
Consumer		209		209		-		413		2		423		7

	$	12,466	$	12,741	$	49	$	15,652	$	129	$	15,720	$	390

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of September 30, 2016 and December 31, 2015:

Pass

Special

Mention

Substandard

Doubtful

Total

September 30, 2016:

(In Thousands)

Commercial and industrial

96,192

3,097

3,761

103,050

Real estate – construction

99,296

1,903

1,459

102,658

Real estate – commercial

459,823

6,048

1,247

467,118

Real estate – residential

53,798

782

54,580

Consumer

26,732

234

196

27,162

Total

735,841

11,282

7,445

754,568

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

	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2015:	(In Thousands)

Commercial and industrial	$	96,038	$	159	$	3,957	$	-	$	100,154
Real estate – construction		100,376		1,830		2,025		-		104,231
Real estate – commercial		414,872		4,667		3,126		-		422,665
Real estate – residential		38,631		-		893		-		39,524
Consumer		26,891		38		207		-		27,136

Total	$	676,808	$	6,694	$	10,208	$	-	$	693,710

The following tables present the balance in the allowance for loan losses at September 30, 2016 and December 31, 2015 disaggregated on the basis of the Company’s impairment method by class of loans receivable along with the balance of loans receivable by class disaggregated on the basis of the Company’s impairment methodology:

Allowance for Loan Losses

Loans Receivable

Balance

Related to

Loans

Individually

Evaluated

for

Impairment

Balance

Related to

Loans

Collectively

Evaluated

for

Impairment

Balance

Individually

Evaluated for

Impairment

Balance

Collectively

Evaluated for

Impairment

September 30, 2016:

(In Thousands)

Commercial and industrial

918

914

103,050

4,018

99,032

Real estate – construction

1,166

102,658

3,212

99,446

Real estate – commercial

6,481

467,118

1,564

465,554

Real estate – residential

423

54,580

1,159

53,421

Consumer

236

27,162

Unallocated

228

Total

9,452

9,448

754,568

9,953

744,615

	Allowance for Loan Losses						Loans Receivable
	Balance		Balance Related to Loans Individually Evaluated for Impairment		Balance Related to Loans Collectively Evaluated for Impairment		Balance		Balance Individually Evaluated for Impairment		Balance Collectively Evaluated for Impairment
December 31, 2015:					(In Thousands)

Commercial and industrial	$	990	$	49	$	941	$	100,154	$	3,957	$	96,197
Real estate – construction		1,283		-		1,283		104,231		3,855		100,376
Real estate – commercial		5,599		-		5,599		422,665		3,267		419,398
Real estate – residential		304		-		304		39,524		1,178		38,346
Consumer		242		-		242		27,136		209		26,927
Unallocated		295		-		295		-		-		-

Total	$	8,713	$	49	$	8,664	$	693,710	$	12,466	$	681,244

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

The following table presents the change in the allowance for loan losses by classes of loans for the three and nine months ended September 30, 2016 and 2015:

Allowance for Loan Losses	Commercial and Industrial		Real Estate - Construction		Real Estate - Commercial			Real Estate - Residential		Consumer			Unallocated		Total
					(In Thousands)

Beginning balance, July 1, 2016	$	905	$	1,165	$	6,495		$	387	$	241		$	225	$	9,418
Charge-offs		-		-		(444	)		-		(5	)		-		(449	)
Recoveries		3		-		3			-		7			-		13
Provision		10		1		427			36		(7	)		3		470

Ending balance, September 30, 2016	$	918	$	1,166	$	6,481		$	423	$	236		$	228	$	9,452

Allowance for Loan Losses	Commercial and Industrial			Real Estate - Construction			Real Estate - Commercial			Real Estate - Residential		Consumer			Unallocated			Total
							(In Thousands)

Beginning balance, January 1, 2016	$	990		$	1,283		$	5,599		$	304	$	242		$	295		$	8,713
Charge-offs		-			-			(444	)		-		(5	)		-			(449	)
Recoveries		9			8			249			-		62			-			328
Provision		(81	)		(125	)		1,077			119		(63	)		(67	)		860

Ending balance, September 30, 2016	$	918		$	1,166		$	6,481		$	423	$	236		$	228		$	9,452

Allowance for Loan Losses	Commercial and Industrial			Real Estate - Construction		Real Estate - Commercial		Real Estate - Residential			Consumer			Unallocated		Total
						(In Thousands)

Beginning balance, July 1, 2015	$	923		$	1,704	$	4,933	$	301		$	328		$	106	$	8,295
Charge-offs		-			-		-		-			-			-		-
Recoveries		3			10		-		-			1			-		14
Provision		(18	)		165		48		(26	)		(56	)		7		120

Ending balance, September 30, 2015	$	908		$	1,879	$	4,981	$	275		$	273		$	113	$	8,429

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

Allowance for Loan Losses	Commercial and Industrial			Real Estate - Construction		Real Estate - Commercial		Real Estate - Residential		Consumer			Unallocated			Total
						(In Thousands)

Beginning balance, January 1, 2015	$	1,044		$	1,454	$	4,624	$	223	$	565		$	159		$	8,069
Charge-offs		-			-		-		-		(80	)		-			(80	)
Recoveries		7			29		-		-		4			-			40
Provision		(143	)		396		357		52		(216	)		(46	)		400

Ending balance, September 30, 2015	$	908		$	1,879	$	4,981	$	275	$	273		$	113		$	8,429

NOTE 7 – STOCK-BASED COMPENSATION PLANS

General. On March 20, 2007, the Board of Directors adopted the Two River Bancorp 2007 Equity Incentive Plan (the “Plan”) which was approved by the Company’s shareholders at the 2007 annual meeting. This plan provides that the Compensation Committee of the Board of Directors (the “Committee”) may grant to those individuals who are eligible under the terms of the Plan stock options, shares of restricted stock, or such other awards as the Committee may determine. As of September 30, 2016, the number of shares of Company common stock remaining and available for future issuance under the Plan is 166,418. Shares reserved under the Plan will be issued out of authorized and unissued shares, or treasury shares, or partly out of each, as determined by the Board.

Options awarded under the Plan may be either options that qualify as incentive stock options (“ISOs”) under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or options that do not, or cease to, qualify as ISOs under the Code (“nonqualified stock options” or “NQSOs”). Awards may be granted under the Plan to directors and employees and to other persons who provide substantial services to the Company.

The exercise price per share purchasable under either an ISO or a NQSO may not be less than the fair market value of a share of stock on the date of grant of the option. The Committee will determine the vesting period and term of each option, provided that no ISO may have a term in excess of ten years after the date of grant.

Restricted stock is stock which is subject to certain transfer restrictions and to a risk of forfeiture. The Committee will determine the period over which any restricted stock which is issued under the Plan will vest, and will impose such restrictions on transferability, risk of forfeiture and other restrictions as the Committee may in its discretion determine. Unless restricted by the Committee, a participant granted restricted stock will have all of the rights of a shareholder, including the right to vote the restricted stock and the right to receive dividends with respect to that stock.

Unless otherwise provided by the Committee in the award document or subject to other applicable restrictions, in the event of a Change in Control (as defined in the Plan) all non-forfeited options and awards carrying a right to exercise that was not previously exercisable and vested will become fully exercisable and vested as of the time of the Change in Control, and all restricted stock and awards subject to risk of forfeiture will become fully vested.

Stock Options. During the third quarter of 2016, there were no stock option grants awarded to either directors or officers.

Stock based compensation expense related to stock option grants was approximately $29,000 and $86,000 during the three and nine months ended September 30, 2016, respectively, as compared to $22,000 and $79,000 for the same three and nine month periods in 2015, respectively, and is included in salaries and employee benefits on the statement of operations.

Total unrecognized compensation cost related to non-vested options under the Plan was $206,000 as of September 30, 2016 and will be recognized over the subsequent 1.8 years.

NOTE 7 – STOCK-BASED COMPENSATION PLANS (continued)

The following table presents information regarding the Company’s outstanding stock options at September 30, 2016:

	Number of Shares					Weighted Average Price		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value
Options outstanding, December 31, 2015		438,056				$	5.16
Options granted		-					-
Options exercised		(22,957			)		3.86
Options forfeited		(376			)		5.19
Options outstanding, September 30, 2016		414,723				$	5.21		4.8	$	2,625,369
Options exercisable, September 30, 2016		305,044				$	4.29		3.8	$	2,210,699
Option price range at September 30, 2016		$3.01	to	$9.66

The total intrinsic value of options exercised during the three and nine months ended September 30, 2016 was $28,000 and $140,000 respectively. Cash received from such exercises was $16,000 and $89,000, respectively. The total intrinsic value of options exercised during the three and nine months ended September 30, 2015 was $48,000 and $121,000, respectively. Cash received from such exercises was $39,000 and $103,000, respectively. There was no tax benefit recognized in the three and nine months ended September 30, 2016, respectively, and a $3,000 and $6,000 tax benefit recognized during the three and nine months ended September 30, 2015, respectively.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.

Restricted Stock. Restricted stock is valued at the market value on the date of grant and expense is evenly attributed to the period in which the restrictions lapse.

On June 28, 2016, the Company awarded an officer 5,000 shares of the Company’s common stock. These restricted stock awards are scheduled to vest 20% per year over five years beginning June 28, 2017. Also on June 28, 2016, the Company awarded directors an aggregate of 11,000 shares of the Company’s common stock, which will vest on June 28, 2017.

Compensation expense related to restricted stock was $53,000 and $76,000 for the three and nine month periods ended September 30, 2016, respectively, as compared to $24,000 and $75,000 for the three and nine month periods ended September 30, 2015, respectively, and is included in salaries and employee benefits on the statement of operations. There was no deferred tax benefit recognized during the three and nine month periods ended September 30, 2016 and 2015 related to the restricted stock compensation.

Total unrecognized compensation cost related to restricted stock under the Plan as of September 30, 2016 and 2015, was $277,000 and $128,000, respectively, and will be recognized, on a weighted average basis, over the subsequent 2.8 years.

The following table summarizes information about restricted stock at September 30, 2016:

	Number of Shares			Weighted Average Price
Unvested at December 31, 2015		22,932		$	8.36
Restricted stock earned during nine months ended September 30, 2016		(2,000	)		7.90
Restricted stock granted during nine months ended September 30, 2016		16,000			10.39
Unvested at September 30, 2016		36,932		$	9.26

Other Awards. During the quarter ended June 30, 2016, the Company granted 1,000 shares of stock to certain other persons who will provide substantial services to the Company. The Company placed no restrictions on these shares. These shares were valued at the market value on the date of grant and were expensed during the second quarter of 2016.

NOTE 8 – GUARANTEES

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risks involved in issuing letters of credit are essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. As of September 30, 2016, the Company had $3.8 million of commercial and similar letters of credit. Management believes that the current amount of the liability as of September 30, 2016 for guarantees under standby letters of credit issued is not material.

NOTE 9 – FHLB AND OTHER BORROWINGS

The Bank utilizes an account relationship with Atlantic Community Bankers Bank to borrow funds through its Federal funds borrowing line in an aggregate amount up to $10.0 million. The Bank also has $36.0 million in unsecured credit facilities with three correspondent banks. These borrowings are priced on a daily basis. The Company had no borrowings outstanding on these lines. The Bank also has a remaining borrowing capacity with the FHLB of approximately $46.3 million based on the current loan collateral pledged of $102.5 million at September 30, 2016.

At September 30, 2016 and December 31, 2015, FHLB and other borrowings consisted of advances from the FHLB, which amounted to $35.3 million and $26.5 million, respectively. These advances had an average interest rate of 1.85% and 2.28% at September 30, 2016 and December 31, 2015, respectively. These advances are contractually scheduled for repayment as follows:

	September 30 2016		December 31, 2015		Rate			Original Term (years)		Maturity
	(dollars in thousands)
Fixed Rate Note	$	7,500	$	7,500		3.97	%		10	November 2017
Fixed Rate Note		-		1,500		2.41	%		6	August 2016
Fixed Rate Note		1,500		1,500		2.71	%		7	August 2017
Fixed Rate Note		2,000		2,000		1.28	%		4	October 2017
Fixed Rate Note		2,000		2,000		1.65	%		5	October 2018
Fixed Rate Note		-		2,700		0.60	%		1	January 2016
Fixed Rate Note		1,000		1,000		0.97	%		2	January 2017
Fixed Rate Note		1,300		1,300		1.31	%		3	January 2018
Fixed Rate Note		1,800		1,800		1.59	%		4	January 2019
Fixed Rate Note		2,700		2,700		1.81	%		5	January 2020
Fixed Rate Note		2,500		2,500		2.03	%		6	January 2021
Fixed Rate Note		1,000		-		1.09	%		3	July 2019
Fixed Rate Note		1,000		-		1.42	%		5	July 2021
Fixed Rate Note		1,000		-		1.70	%		7	July 2023
Fixed Rate Note		10,000		-		0.59	%		90 days	December 2016
	$	35,300	$	26,500

In August 2016, the FHLB issued a $20.1 million municipal deposit letter of credit in the name of the Bank naming the NJ Department of Banking and Insurance as beneficiary. This letter of credit will take the place of securities previously pledged to the State of New Jersey for the Bank’s various municipal deposits.

The Bank enters into Sweep Account Agreements with certain of its deposit account holders for repo sweep arrangements under which funds in excess of a predetermined amount are removed from each such depositor’s account at the end of each banking day, and the Bank’s obligation to restore those funds to the account at the beginning of the following banking day is evidenced by a retail repurchase agreement (a “Repurchase Agreement”) secured by a collateral interest in favor of the depositor in certain government securities held by a third party custodian. The Bank’s obligation to restore the funds under the Repurchase Agreements is accounted for as a collateralized financing arrangement (i.e., secured borrowings), and not as a sale and subsequent repurchase of securities. The obligation to restore the funds to each account is reflected as a liability in the Company's consolidated balance sheets, while the securities underlying the repurchase agreements remain in the respective securities accounts. There is no offsetting or netting of the securities against the Repurchase Agreement obligation.

NOTE 9 - FHLB AND OTHER BORROWINGS (continued)

The following table presents the contractual maturities of the Repurchase Agreements as of September 30, 2016, disaggregated by the class of collateral pledged:

Maturity of Repurchase Agreements

(dollars in thousands)

Overnight

and

Continuous

Up to

30 days

30 to 90

days

Over 90

days

Total

September 30, 2016:

Class of Collateral Pledged:

U.S. Government agency securities

1,250

U.S. Government collateralized residential mortgage obligations

10,097

GSE – residential mortgage-backed securities

12,649

Total

23,996

Gross amount of recognized liabilities for repurchase agreements and securities lending

18,645

Excess of collateral pledged over recognized liability

5,351

The potential risks associated with the Repurchase Agreements and related pledged collateral, including obligations arising from a decline in the fair value of the pledged collateral, are minimal due to the fact that the Repurchase Agreements pertain to overnight borrowings and therefore not subject to fluctuations in fair market value.

NOTE 10 - SUBORDINATED DEBENTURES

In December 2015, the Company completed a private placement of $10 million in aggregate principal amount of fixed to floating rate subordinated debentures to certain institutional accredited investors. The subordinated debentures have a maturity date of December 31, 2025 and bear interest, payable quarterly, at the rate of 6.25% per annum until January 1, 2021. On that date, the interest rate will be adjusted to float at an annual rate equal to the prevailing three-month LIBOR rate plus 464 basis points (4.64%) until maturity. The debentures include a right of prepayment, without penalty, on or after December 14, 2020 and, in certain limited circumstances, before that date. The indebtedness evidenced by the subordinated debentures, including principal and interest, is unsecured and subordinate and junior in right to payment to general and secured creditors of the Company and depositors and all other creditors of the Bank. The subordinated debentures have been structured to qualify as Tier 2 capital for regulatory purposes. Subordinated debentures totaled $9.8 million at September 30, 2016 and December 31, 2015, which includes $153,000 of remaining unamortized debt issuance costs at September 30, 2016. The debt issuance costs are being amortized over the expected life of the issue. The effective interest rate of the subordinated debentures is 6.67% as of September 30, 2016.

NOTE 11 - FAIR VALUE MEASUREMENTS

Accounting guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1:

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2:

Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3:

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

NOTE 11 - FAIR VALUE MEASUREMENTS (continued)

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2016 and December 31, 2015 are as follows:

Description	(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs		Total
	(in thousands)
At September 30, 2016:
Securities available for sale:
U.S. Government agency securities	$	-	$	3,394	$	-	$	3,394
Municipal securities		-		513		-		513
GSE - residential mortgage-backed securities		-		12,198		-		12,198
U.S. Government collateralized residential mortgage obligations		-		10,458		-		10,458
Corporate debt securities, primarily financial institutions		-		2,345		-		2,345
CRA mutual fund		2,458		-		-		2,458

Total	$	2,458	$	28,908	$	-	$	31,366

At December 31, 2015:
Securities available for sale:
U.S. Government agency securities	$	-	$	1,238	$	-	$	1,238
Municipal securities		-		517		-		517
GSE - residential mortgage-backed securities		-		14,449		-		14,449
U.S. Government collateralized residential mortgage obligations		-		12,627		-		12,627
Corporate debt securities, primarily financial institutions		-		2,317		-		2,317
CRA mutual fund		2,382		-		-		2,382

Total	$	2,382	$	31,148	$	-	$	33,530

As of September 30, 2016 and December 31, 2015, there were no securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2016 and December 31, 2015 are as follows:

Description	(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs		Total
	(in thousands)

At September 30, 2016:
Impaired loans, net of allowance recorded	$	-	$	-	$	499	$	499
OREO		-		-		259		259

At December 31, 2015:
Impaired loans, net of allowance recorded	$	-	$	-	$	3,256	$	3,256
Impaired loans, net of partial charge-offs		-		-		1,389		1,389
OREO		-		-		411		411

The Company’s policy is to recognize transfers between levels as of the beginning of the period. There were no transfers between Levels 1, 2 and 3 for the three and nine months ended September 30, 2016 and 2015.

NOTE 11 - FAIR VALUE MEASUREMENTS (continued)

The following valuation techniques were used to measure fair value of assets in the tables above:

●

Impaired loans – Impaired loans measured at fair value are those loans in which the Company has measured impairment generally based on the fair value of the loan’s collateral. This method of fair value measurement is used on all of the Company’s impaired loans. Fair value is generally determined based upon either independent third party appraisals of the properties or discounted cash flows based upon the expected proceeds. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. At September 30, 2016 and December 31, 2015, there were no discounts applied to appraisal values as all impaired appraisals were current. At September 30, 2016 and December 31, 2015, the liquidation expenses were 5.0% (weighted average of 5.0%). These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

●

OREO – Real estate properties acquired through, or in lieu of, loan foreclosure are carried at fair value less cost to sell. Fair value is based upon the appraised value of the collateral, adjusted by management for factors such as economic conditions and other market factors. At September 30, 2016, the discount rate and liquidation expenses for collateral adjustments to our one OREO property was 5.95%, while at December 31, 2015, the discount range and liquidation expenses for collateral adjustments to OREO ranged from 0.4% to 6.0% (weighted average of 3.9%). These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement. At September 30, 2016 and December 31, 2015, OREO totaling $259,000 and $411,000 were acquired by deed in lieu of foreclosure and are carried at fair value less estimated selling costs based on current appraisals. At September 30, 2016, the Company had no residential real estate properties held in OREO while at December 31, 2015, there was one residential loan for $153,000 held in OREO, which was subsequently sold during the first quarter of 2016. As of September 30, 2016 and December 31, 2015, the Company initiated foreclosure proceedings on one residential mortgage loan collateralized by a real estate property in the amount of $542,000.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2016 and December 31, 2015:

Cash and Cash Equivalents (carried at cost):

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.

Securities:

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). At September 30, 2016 and December 31, 2015, there were no Level 3 securities.

Restricted Investments (carried at cost):

The carrying amount of restricted investment in Federal Home Loan Bank stock, Atlantic Community Bankers Bank stock and Solomon Hess SBA Loan Fund approximates fair value, and considers the limited marketability of such securities.

Loans Held for Sale:

Loans held for sale are carried at the lower of aggregate cost or estimated fair value, less costs to sell. The fair value of these loans are equal to the contractual sales price.

Loans Receivable (carried at cost):

The fair values of loans, excluding collateral dependent impaired loans, are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans, including liquidity. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. The valuation of the loan portfolio reflects discounts that the Company believes are consistent with transactions occurring in the marketplace for both performing and distressed loan types. The carrying value that fair value is compared to is net of the allowance for loan losses and other associated premiums and discounts. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Due to the significant judgment involved in evaluating credit quality risk, loans are classified within Level 3 of the fair value hierarchy.

NOTE 11 - FAIR VALUE MEASUREMENTS (continued)

Accrued Interest Receivable and Payable (carried at cost):

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit Liabilities (carried at cost):

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date, (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Securities Sold Under Agreements to Repurchase (carried at cost):

The carrying amounts of these short-term borrowings approximate their fair values.

Long-term Debt (carried at cost):

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Subordinated Debentures (carried at cost):

The fair value of subordinated debentures is estimated by using a discounted cash flow analysis that, at September 30, 2016 and December 31, 2015, applies a 5.20% and 4.49% credit spread, respectively, plus the U.S. Treasury rate (all-in issue spread) to the time remaining until the issue’s call option date.

Off-Balance Sheet Financial Instruments (disclosed at cost):

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing. The fair values of such fees are not material at September 30, 2016 and December 31, 2015.

NOTE 11 - FAIR VALUE MEASUREMENTS (continued)

The estimated fair values of the Company’s financial instruments at September 30, 2016 and December 31, 2015 were as follows:

Fair Value Measurements at September 30, 2016

(in thousands)

Carrying

Amount

Estimated

Fair

Value

(Level 1)

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 2)

Significant

Other

Observable

Inputs

(Level 3)

Significant

Unobservable

Inputs

Financial assets:

Cash and cash equivalents

26,945

Securities available for sale

31,366

2,458

28,908

Securities held to maturity

46,349

47,693

Restricted stock

4,962

Loans held for sale

2,561

2,583

Loans receivable, net

744,530

745,815

Accrued interest receivable

1,928

410

1,518

Financial liabilities:

Deposits

739,247

740,210

Securities sold under agreements to repurchase

18,645

FHLB and other borrowings

35,300

Subordinated debt

9,847

9,848

Accrued interest payable

	Fair Value Measurements at December 31, 2015
(in thousands)	Carrying Amount		Estimated Fair Value		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs

Financial assets:
Cash and cash equivalents	$	46,727	$	46,727	$	46,727	$	-	$	-
Securities available for sale		33,530		33,530		2,382		31,148		-
Securities held to maturity		43,167		43,668		-		43,668		-
Restricted stock		3,596		3,596		-		-		3,596
Loans held for sale		3,050		3,105		-		-		3,105
Loans receivable, net		684,437		676,703		-		-		676,703
Accrued interest receivable		1,912		1,912		-		422		1,490

Financial liabilities:
Deposits		708,436		707,908		-		707,908		-
Securities sold under agreements to repurchase		19,545		19,545		-		19,545		-
FHLB and other borrowings		26,500		26,882		-		26,823		-
Subordinated debt		9,824		9,823		-		9,823		-
Accrued interest payable		118		118		-		118		-

NOTE 12 – SHAREHOLDERS’ EQUITY

On August 11, 2011, the Company received $12 million under the Small Business Lending Fund (“SBLF”), created as part of the Small Business Jobs Act. The SBLF provided Tier 1 Capital to community banks, and the terms of this capital contained incentives for making small business loans, defined as certain loans of up to $10 million to businesses with up to $50 million in annual revenues. In exchange for the $12 million, the Company issued to the U.S. Department of the Treasury (“Treasury”) 12,000 shares of its Non-Cumulative Perpetual Preferred Stock, Series C, having a $1,000 liquidation preference per share (the “SBLF Preferred Shares”). The SBLF Preferred Shares qualified as Tier 1 Capital. On December 15, 2014, the Company redeemed $6.0 million (6,000 shares) of the outstanding SBLF Preferred Shares, and on December 15, 2015, the remaining $6.0 million (6,000 shares) was redeemed. From July 1, 2013 to their redemption on December 15, 2015, the dividend rate on the SBLF Preferred Shares was 1.00%.

On December 17, 2015, the Company announced that its Board of Directors approved a new Share Repurchase Program. This new program allows for the Company to repurchase up to $2.0 million of its common stock from January 1, 2016 to December 31, 2016. During the three months ended September 30, 2016, the Company repurchased 12,500 shares for a total of approximately $142,000 while for the nine months ended September 30, 2016, the Company repurchased 13,232 shares for a total of approximately $148,000. Since the initial share repurchase program was introduced back in 2013, the Company has repurchased a total of 297,232 shares for a total cost of approximately $2.4 million.

NOTE 13 – SUBSEQUENT EVENT

On October 19, 2016, the Board of Directors declared a quarterly cash dividend to $0.04 per share to common shareholders of record at the close of business on November 9, 2016 payable on November 30, 2016.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward looking statements. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, relationships, opportunities, taxation, technology and market conditions. When used in this and in our future filings with the SEC in our press releases and in oral statements made with the approval of an authorized executive officer, the words or phrases “will,” “will likely result,” “could,” “anticipates,” “believes,” “continues,” “expects,” “plans,” “will continue,” “is anticipated,” “estimated,” “project” or “outlook” or similar expressions (including confirmations by one of our authorized executive officers of any such expressions made by a third party with respect to us) are intended to identify forward-looking statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made, even if subsequently made available on our website or otherwise. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.

Factors that may cause actual results to differ from those results, expressed or implied, include, but are not limited to, those discussed under “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2015 Form 10-K, under this Item 2, and in our other filings with the SEC.

Although management has taken certain steps to mitigate any negative effect of these factors, significant unfavorable changes could severely impact the assumptions used and have an adverse effect on profitability. The Company undertakes no obligation to publicly revise any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

This Report contains certain financial information determined by methods other than in accordance with generally accepted accounting policies in the United States (GAAP). These non-GAAP financial measures are “tangible book value per common share,” “return on average tangible assets,” “return on average tangible equity,” and “average tangible equity to average tangible assets.” This non-GAAP disclosure has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. Our management uses these non-GAAP measures in its analysis of our performance because it believes these measures are material and will be used as a measure of our performance by investors.

The following information should be read in conjunction with the consolidated financial statements and the related notes thereto included in the 2015 Form 10-K and in this Form 10-Q.

Critical Accounting Policies and Estimates

The following discussion is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

Note 1 to our audited consolidated financial statements contains a summary of the Company’s significant accounting policies. Management believes the following critical accounting policies encompass the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Allowance for Loan Losses. Management believes our policy with respect to the methodology for the determination of the allowance for loan losses (“ALLL”) involves a high degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact the results of operations. This critical policy and its application are reviewed quarterly with our audit committee and Board of Directors.

Management is responsible for preparing and evaluating the ALLL on a quarterly basis in accordance with Bank policy, and the Interagency Policy Statement on the ALLL released by the Board of Governors of the Federal Reserve System on December 13, 2006 as well as GAAP. We believe that our allowance for loan losses is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable. The allowance for loan losses is based upon management’s evaluation of the adequacy of the allowance account, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management utilizes the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short term change. Various regulatory agencies may require us and our banking subsidiaries to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of our loans are secured by real estate in New Jersey, primarily in Monmouth and Union counties. Accordingly, the collectability of a substantial portion of the carrying value of our loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or the New Jersey and/or our local market areas experience economic shock.

Stock-Based Compensation. Stock based compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option pricing model. The model requires the use of numerous assumptions, many of which are highly subjective in nature.

Goodwill Impairment. Although goodwill is not subject to amortization, the Company must test the carrying value for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment testing requires that the fair value of our reporting unit be compared to the carrying amount of its net assets, including goodwill. Our reporting unit was identified as our community bank operations. If the fair value of the reporting unit exceeds the book value, no write-down of recorded goodwill is necessary. If the fair value of a reporting unit is less than book value, an expense may be required on the Company’s books to write-down the related goodwill to the proper carrying value.

Investment Securities Impairment Valuation. Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. The analysis of other-than-temporary impairment requires the use of various assumptions including, but not limited to, the length of time the investment’s book value has been greater than fair value, the severity of the investment’s decline and the credit deterioration of the issuer. For debt securities, management assesses whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment.

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is more likely than not that it will not be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Other Real Estate Owned (“OREO”). OREO includes real estate acquired through foreclosure or by deed in lieu of foreclosure. OREO is carried at the lower of cost or fair value of the property, adjusted by management for factors such as economic conditions and other market factors, less estimated costs to sell. When a property is acquired, the excess of the loan balance over fair value, less selling costs, is charged to the allowance for loan losses. Operating results from real estate owned, including rental income, operating expenses, and gains and losses realized from the sales of real estate owned are recorded as incurred. OREO is periodically reviewed to ensure that the fair value of the property supports the carrying value.

Deferred Tax Assets and Liabilities. We recognize deferred tax assets and liabilities for future tax effects of temporary differences, net operating loss carry forwards and tax credits. Deferred tax assets are subject to management’s judgment based upon available evidence, primarily management’s forecast of its ability to generate future earnings, that future realization is more likely than not. If management determines that we may be unable to realize all or part of net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the expected realizable amount.

Overview

The Company reported net income to common shareholders of $2.6 million, or $0.33 per diluted share, for the third quarter of 2016, compared to $1.7 million, or $0.21 per diluted share, for the same period in 2015, an increase of $967,000, or 57.7%. The increase was primarily due to both higher non-interest income, which included the receipt of an $862,000 tax-free Bank Owned Life Insurance (“BOLI”) death benefit, and higher net interest income, which were partially offset by a higher provision for loan losses. Expenses during this period were unchanged. The annualized return on average assets was 1.16% for the three months ended September 30, 2016 as compared to 0.79% for the same period in 2015. The annualized return on average shareholders’ equity was 10.81% for the three month period ended September 30, 2016 as compared to 6.95% for the three month period ended September 30, 2015. Tangible book value per common share rose to $10.11 at September 30, 2016 as compared to $9.28 at September 30, 2015, as disclosed in the Non-GAAP Financial Measures table.

Net interest income increased by $224,000, or 3.1%, for the quarter ended September 30, 2016 from the same period in 2015. Average earning assets totaled $837.3 million, an increase of $49.5 million, or 6.3%, from the quarter ended September 30, 2015, primarily due to an increase in average loans. The Company reported a net interest margin of 3.55% for the third quarter of 2016, which was 2 basis points lower when compared to 3.57% in the second quarter of 2016, and 10 basis points lower when compared to the 3.65% reported for the third quarter of 2015. The decline from the third quarter of 2015 primarily resulted from the interest expense associated with the Company’s $10 million subordinated debenture placement, which funded in December 2015. The subordinated debentures have a maturity date of December 31, 2025 and currently bear an annual interest rate of 6.25%.

There was a provision for loan losses of $470,000 for the three months ended September 30, 2016 as compared to $120,000 for the corresponding 2015 period. During the current quarter, the Company recorded a specific allowance of $113,000 against one commercial loan whereby the underlying collateral value had been impaired by an environmental issue, which the Company fully charged off during the quarter. The remaining $357,000 of loan loss provision was to support the Company’s strong loan growth. The provision for loan losses for the nine months ended September 30, 2016 was $860,000, as compared to $400,000 for the corresponding 2015 period. The Company’s provision considers a number of factors, including our assessment of the current state of the economy, allowances related to impaired loans and loan growth. The provision for the comparable 2015 period considered the same factors.

Non-interest income for the quarter ended September 30, 2016 totaled $2.0 million, an increase of $1.1 million, or 137.2%, compared to the same period in 2015. This was largely a result of the receipt of an $862,000 tax-free BOLI death benefit, coupled with an increase of 156,000 in other loan fees and higher gains on the sale of SBA loans of $84,000. On a linked quarter basis, non-interest income increased $817,000 or 70.1%, from $1.2 million in the second quarter of 2016. For the nine months ended September 30, 2016, non-interest income increased $1.5 million, or 58.3%, to $4.0 million from the same period in 2015.

Non-interest expense for the quarter ended September 30, 2016 totaled $5.3 million, remaining largely flat from the same period in 2015 and on a linked quarter basis, as higher salaries and benefits were offset by lower other real estate owned (“OREO”) property expenses resulting primarily from a $250,000 recovery of settlement expenses from an OREO property. For the nine months ended September 30, 2016, non-interest expense increased $269,000, or 1.7%, to $16.1 million compared to the same prior year period.

Total assets at September 30, 2016 were $909.2 million, an increase of 5.3% from $863.7 million at December 31, 2015. Total loans at September 30, 2016 were $754.0 million, an increase of $60.8 million, or 8.8%, from the $693.2 million recorded at December 31, 2015. Total deposits were $739.2 million at September 30, 2016, an increase of $30.8 million, or 4.3%, from the $708.4 million at December 31, 2015. Core checking deposits at September 30, 2016 decreased slightly by $2.4 million, or 0.8%, to $290.6 million from year-end 2015, while savings accounts, money market deposits and time deposits increased $33.2 million, or 8.0%. The Company has continued to focus on building non-interest bearing deposits, as this lowers the institution’s cost of funds. Additionally, its savings accounts and other interest-bearing deposit products provide an efficient and cost-effective source to fund loan originations.

At September 30, 2016, the Company’s allowance for loan losses was $9.5 million, compared with $8.7 million at December 31, 2015. The allowance for loan losses as a percentage of total loans at September 30, 2016 was 1.25%, compared to 1.26% at December 31, 2015. Non-performing assets at September 30, 2016 as a percentage of total assets improved to 0.20%, compared to 0.42% at December 31, 2015 and 0.50% at September 30, 2015. Non-performing assets decreased to $1.8 million at September 30, 2016 as compared to $3.6 million at December 31, 2015 and $4.2 million at September 30, 2015.

Results of Operations

The Company’s principal source of revenue is net interest income, which is the difference between interest income on earning assets and interest expense on deposits and borrowings. Interest earning assets consist primarily of loans, investment securities and federal funds sold. Sources to fund interest-earning assets consist primarily of deposits and borrowed funds. The Company’s net income is also affected by its provision for loan losses, other income and non-interest expenses. Non-interest income consists primarily of service charges, commissions and fees, earnings from investment in life insurance and gains on security and loan sales, while non-income expenses are comprised of salaries and employee benefits, occupancy costs and other operating expenses.

The following table provides information on our performance ratios for the dates indicated.

	For the Three months ended September 30,						For the Nine months ended September 30,
	2016			2015			2016			2015
Return on average assets		1.16	%		0.79	%		0.91	%		0.75	%
Return on average tangible assets (1)		1.19	%		0.80	%		0.93	%		0.76	%
Return on average shareholders’ equity		10.81	%		6.95	%		8.48	%		6.44	%
Return on average tangible shareholders’ equity (1)		13.29	%		8.55	%		10.46	%		7.94	%
Net interest margin		3.55	%		3.65	%		3.56	%		3.69	%
Average equity to average assets		10.77	%		11.30	%		10.76	%		11.59	%
Average tangible equity to average tangible assets (1)		8.94	%		9.40	%		8.90	%		9.60	%

(1)

The following table provides the reconciliation of Non-GAAP Financial Measures for the dates indicated:

(in thousands except per share data and percentages)	For the Three months ended September 30,						For the Nine months ended September 30,
	2016			2015			2016			2015
Total shareholders’ equity	$	98,594		$	97,640		$	98,594		$	97,640
Less: preferred stock		-			(6,000	)		-			(6,000	)

Common shareholders’ equity	$	98,594		$	91,640		$	98,594		$	91,640
Less: goodwill and other intangible assets		(18,109	)		(18,128	)		(18,109	)		(18,128	)
Tangible common shareholders’ equity	$	80,485		$	73,512		$	80,485		$	73,512

Common shares outstanding (in thousands)		7,960			7,918			7,960			7,918
Book value per common share	$	12.39		$	11.57		$	12.39		$	11.57

Book value per common share	$	12.39		$	11.57		$	12.39		$	11.57
Effect of intangible assets		(2.28	)		(2.29	)		(2.28	)		(2.29	)
Tangible book value per common share	$	10.11		$	9.28		$	10.11		$	9.28

Return on average assets		1.16	%		0.79	%		0.91	%		0.75	%
Effect of intangible assets		0.03	%		0.01	%		0.02	%		0.01	%
Return on average tangible assets		1.19	%		0.80	%		0.93	%		0.76	%

Return on average equity		10.81	%		6.95	%		8.48	%		6.44	%
Effect of average intangible assets		2.48	%		1.60	%		1.98	%		1.50	%
Return on average tangible equity		13.29	%		8.55	%		10.46	%		7.94	%

Average equity to average assets		10.77	%		11.30	%		10.76	%		11.59	%
Effect of average intangible assets		(1.83	%)		(1.90	%)		(1.86	%)		(1.99	%)
Average tangible equity to average tangible assets		8.94	%		9.40	%		8.90	%		9.60	%

This Report contains certain financial information determined by methods other than in accordance with GAAP. These non-GAAP financial measures are “tangible book value per common share,” “return on average tangible assets,” “return on average tangible equity,” and “average tangible equity to average tangible assets.” This non-GAAP disclosure has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. Our management uses these non-GAAP measures in its analysis of our performance because it believes these measures are material and will be used as a measure of our performance by investors.

Three months ended September 30, 2016 compared to September 30, 2015

Net Interest Income

Net interest income for the quarter ended September 30, 2016 totaled $7.5 million, an increase of $224,000, or 3.1%, compared to $7.2 million for the corresponding period in 2015. Average interest earning assets for the third quarter 2016 were $837.3 million, an increase of $49.5 million, or 6.3%, from $787.9 million for the same period in 2015, primarily due to an increase in average loans of $56.3 million funded in part by a higher level of average time deposits of $34.0 million. This increase in average time deposits was due to increases in both brokered and deposits obtained through the use of deposit listed services (“Listed Service CDs”), as the Company took advantage of extending the maturity of its certificates of deposit (“CDs”) portfolio by utilizing a laddered strategy of both types of funding during the year. Additionally, average NOW deposits and non-interest demand deposits collectively grew $10.5 million from the same period in 2015. These positives were partially offset by the 10 basis point decline in our net interest margin.

The net interest margin and net interest spread decreased to 3.55% and 3.36%, respectively, for the three months ended September 30, 2016, from 3.65% and 3.50%, respectively, for the same prior year period, primarily resulting from the maturity, prepayment or contractual repricing of loans and investment securities in this extended period of low interest rates as well as the interest expense associated with the Company’s issuance of subordinated debentures with an aggregate principal of $10 million in December 2015. This subordinated debt impacted our margin by approximately 8 basis points.

Total interest income for the three months ended September 30, 2016 increased by $559,000, or 6.8%. The increase in interest income was primarily due to a volume related increase in interest income of $658,000, partially offset by a rate related decrease in interest income of $99,000 for the third quarter of 2016 as compared to the same prior year period.

Interest and fees on loans increased $503,000, or 6.4%, to $8.3 million for the three months ended September 30, 2016 compared to $7.8 million for the corresponding period in 2015. Volume related increases of $650,000 were partially offset by rate related decreases of $147,000. The average balance of the loan portfolio for the three months ended September 30, 2016 increased by $56.3 million, or 8.3%, to $735.6 million from $679.3 million for the corresponding period in 2015. The average annualized yield on the loan portfolio was 4.51% for the quarter ended September 30, 2016 compared to 4.58% for the quarter ended September 30, 2015. Additionally, the average balance of total non-accrual loans, which amounted to $1.6 million and $3.6 million at September 30, 2016 and 2015, respectively, impacted the Company’s loan yield for both periods presented.

Interest income on investment securities totaled $421,000 for the three months ended September 30, 2016 compared to $366,000 for the three months ended September 30, 2015, an increase of $55,000, or 15.0%. For the three months ended September 30, 2016, investment securities had an average balance of $83.5 million with an average annualized yield of 2.02% compared to an average balance of $80.5 million with an average annualized yield of 1.82% for the three months ended September 30, 2015.

Interest income on interest-bearing deposits was $19,000 for the three months ended September 30, 2016, representing an increase of $1,000, or 5.6%, from $18,000 for the three months ended September 30, 2015. For the three months ended September 30, 2016, interest bearing deposits had an average balance of $18.2 million and an average annualized yield of 0.42% as compared to an average balance of $28.1 million and an average annualized yield of 0.25% for the same period in 2015.

Interest expense on interest-bearing liabilities amounted to $1.3 million for the three months ended September 30, 2016 compared to $973,000 for the corresponding period in 2015, an increase of $335,000, or 34.4%. This increase in interest expense was comprised of a $113,000 volume related increase as well as a $222,000 rate related increase.

The Bank continues to focus on developing core deposit relationships. The average balance of interest-bearing liabilities increased to $645.4 million for the three months ended September 30, 2016 from $600.8 million for the same period last year, an increase of $44.6 million, or 7.4%. Average NOW accounts increased $6.7 million from $142.0 million with an average annualized rate of 0.40% during the third quarter of 2015, to $148.7 million with an average annualized rate of 0.45% during the third quarter of 2016. Average time deposits increased $34.0 million from $105.1 million with an average annualized rate of 1.32% for the third quarter of 2015 to $139.1 million with an average annualized rate of 1.41% for the third quarter of 2016. These average balance increases were partially offset by a decrease in average savings deposits of $1.1 million over this same period while the average annualized rate rose by one basis point and our average money market deposits increased by $500,000 while the average annualized rate rose by one basis point as well. During the third quarter of 2016, average demand deposits totaled $153.3 million, an increase of $3.9 million, or 2.6%, over the same period last year. For the three months ended September 30, 2016, the average annualized cost for all interest-bearing liabilities was 0.81%, which increased from the 0.64% for the three months ended September 30, 2015, primarily due to the interest expense associated with the Company’s issuance of subordinated debentures discussed above and effected our cost of interest-bearing liabilities by approximately 9 basis points.

Our strategies for increasing and retaining core relationship deposits, managing loan originations within our acceptable credit criteria and loan category concentrations, and our planned branch network growth have combined to meet our liquidity needs. The Company also offers agreements to repurchase securities, commonly known as repurchase agreements, to our customers as an alternative to other insured deposits. Average balances of repurchase agreements for the third quarter of 2016 were $19.0 million, with an average interest rate of 0.31%, compared to $23.9 million, with an average interest rate of 0.32%, for the third quarter of 2015.

The Company also utilizes FHLB term borrowings as an additional funding source. The average balance of such borrowings for the third quarter of 2016 and 2015 was $27.0 million and $27.3 million, respectively, with an average interest rate of 2.32% and 2.26%, respectively.

The $10 million of subordinated debentures, net of $153,000 of remaining unamortized debt issuance costs, totaled $9.8 million at September 30, 2016. The debt issuance costs are being amortized over the expected life of the issue. The effective interest rate of the subordinated debt is 6.67% as of September 30, 2016.

The following tables reflect, for the periods presented, the components of our net interest income, setting forth (1) average assets, liabilities, and shareholders’ equity, (2) interest income earned on interest-earning assets and interest expenses paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) our net interest spread (i.e., the average yield on interest-earning assets less the average rate on interest-bearing liabilities), and (5) our margin on interest-earning assets. Yields on tax-exempt assets have not been calculated on a fully tax-exempt basis.

.	Three Months Ended September 30, 2016								Three Months Ended September 30, 2015
(dollars in thousands)	Average Balance			Interest Income/ Expense		Average Yield/ Rate			Average Balance			Interest Income/ Expense		Average Yield/ Rate
ASSETS
Interest Earning Assets:
Interest-bearing deposits in banks	$	18,179		$	19		0.42	%	$	28,062		$	18		0.25	%
Investment securities		83,541			421		2.02	%		80,533			366		1.82	%
Loans, net of unearned fees (1) (2)		735,626			8,337		4.51	%		679,279			7,834		4.58	%

Total Interest Earning Assets		837,346			8,777		4.17	%		787,874			8,218		4.14	%

Non-Interest Earning Assets:
Allowance for loan losses		(9,519	)							(8,344	)
All other assets		75,277								73,829

Total Assets	$	903,104							$	853,359

LIABILITIES & SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW deposits	$	148,664			167		0.45	%	$	142,022			143		0.40	%
Savings deposits		228,862			281		0.49	%		229,999			278		0.48	%
Money market deposits		73,031			31		0.17	%		72,520			29		0.16	%
Time deposits		139,052			493		1.41	%		105,048			349		1.32	%
Securities sold under agreements to repurchase		18,995			15		0.31	%		23,907			19		0.32	%
FHLB and other borrowings		26,967			157		2.32	%		27,299			155		2.26	%
Subordinated debt		9,844			164		6.66	%		-			-		-

Total Interest Bearing Liabilities		645,415			1,308		0.81	%		600,795			973		0.64	%

Non-Interest Bearing Liabilities:
Demand deposits		153,274								149,381
Other liabilities		7,144								6,541

Total Non-Interest Bearing Liabilities		160,418								155,922

Shareholders' Equity		97,271								96,642

Total Liabilities and Shareholders' Equity	$	903,104							$	853,359

NET INTEREST INCOME				$	7,469							$	7,245
NET INTEREST SPREAD (3)							3.36	%							3.50	%
NET INTEREST MARGIN (4)							3.55	%							3.65	%

(1)	Included in interest income on loans are loan fees.

(2)	Includes non-performing loans.

(3)	The interest rate spread is the difference between the weighted average yield on average interest earning and the weighted average cost of average interest bearing liabilities.

(4)	The interest rate margin is calculated by dividing annualized net interest income by average interest earning assets.

	Nine Months Ended September 30, 2016								Nine Months Ended September 30, 2015
(dollars in thousands)	Average Balance			Interest Income/ Expense		Average Yield/ Rate			Average Balance			Interest Income/ Expense		Average Yield/ Rate
ASSETS
Interest Earning Assets:
Interest-bearing deposits in banks	$	22,411		$	84		0.50	%	$	30,754		$	58		0.25	%
Investment securities		82,346			1,235		2.00	%		76,145			1,019		1.78	%
Loans, net of unearned fees (1) (2)		715,260			24,335		4.54	%		652,822			22,720		4.65	%

Total Interest Earning Assets		820,017			25,654		4.18	%		759,721			23,797		4.19	%

Non-Interest Earning Assets:
Allowance for loan losses		(9,117	)							(8,192	)
All other assets		77,185								72,167

Total Assets	$	888,085							$	823,696

LIABILITIES & SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW deposits	$	151,299			491		0.43	%	$	126,284			402		0.43	%
Savings deposits		226,877			829		0.49	%		229,516			828		0.48	%
Money market deposits		73,869			91		0.16	%		72,050			86		0.16	%
Time deposits		131,325			1,389		1.41	%		102,088			1,009		1.32	%
Securities sold under agreements to repurchase		18,713			44		0.31	%		22,340			51		0.31	%
FHLB and other borrowings		24,985			452		2.42	%		27,236			468		2.30	%
Subordinated debt		9,836			492		6.67	%		-			-		-

Total Interest Bearing Liabilities		636,904			3,788		0.79	%		579,514			2,844		0.66	%

Non-Interest Bearing Liabilities:
Demand deposits		148,139								142,326
Other liabilities		7,470								6,380

Total Non-Interest Bearing Liabilities		155,609								148,706

Shareholders' Equity		95,572								95,476

Total Liabilities and Shareholders' Equity	$	888,085							$	823,696

NET INTEREST INCOME				$	21,866							$	20,953
NET INTEREST SPREAD (3)							3.39	%							3.53	%
NET INTEREST MARGIN (4)							3.56	%							3.69	%

(1)	Included in interest income on loans are loan fees.

(2)	Includes non-performing loans.

(3)	The interest rate spread is the difference between the weighted average yield on average interest earning and the weighted average cost of average interest bearing liabilities.

(4)	The interest rate margin is calculated by dividing annualized net interest income by average interest earning assets.

Analysis of Changes in Net Interest Income

The following table sets forth for the periods indicated a summary of changes in interest earned and interest paid resulting from changes in volume and changes in rates:

	Three Months Ended September 30, 2016									Nine Months Ended September 30, 2016
	Compared to Three Months Ended									Compared to Nine Months Ended
	September 30, 2015									September 30, 2015
	Increase (decrease) due to change in
	Volume			Rate			Net			Volume			Rate			Net
	(in thousands)									(in thousands)
Interest Earned On:
Interest-bearing deposits in banks	$	(6	)	$	7		$	1		$	(16	)	$	42		$	26
Investment securities		14			41			55			83			133			216
Loans, net of unearned fees		650			(147	)		503			2,173			(558	)		1,615

Total Interest Income		658			(99	)		559			2,240			(383	)		1,857

Interest Paid On:
NOW deposits		7			17			24			80			9			89
Savings deposits		(1	)		4			3			(10	)		11			1
Money market deposits		-			2			2			2			3			5
Time deposits		113			31			144			289			91			380
Securities sold under agreements to repurchase		(4	)		-			(4	)		(8	)		1			(7	)
FHLB and other borrowings		(2	)		4			2			(39	)		23			(16	)
Subordinated debt		164			-			164			492			-			492

Total Interest Expense		277			58			335			806			138			944

Net Interest Income	$	381		$	(157	)	$	224		$	1,434		$	(521	)	$	913

The change in interest due to both volume and rate has been allocated proportionally to both, based on their relative absolute values.

Provision for Loan Losses

The provision for loan losses for the three months ended September 30, 2016 was $470,000 as compared to a provision for loan losses of $120,000 for the corresponding 2015 period. During the current quarter, the Company recorded a specific allowance of $113,000 against one commercial loan whereby the underlying collateral value had been impaired by an environmental issue, which the Company fully charged off during the quarter. The remaining $357,000 of loan loss provision was to support the Company’s strong loan growth. The provision for the three months ended September 30, 2016 was driven by a number of factors, including the level of charge-offs and recoveries, our assessment of the current state of the economy, allowances related to impaired loans and loan activity. The provision for the comparable 2015 period considered the same factors. The provision for loan losses is determined by an allocation process whereby an estimated allowance is allocated to the specific allowance for impaired loans and the general allowance for pools of loans. The allocation reflects management’s assessment of economic conditions, credit quality and other risk factors inherent in the loan portfolio. The allowance for loan losses totaled $9.5 million, or 1.25% of total loans at September 30, 2016, as compared to $8.7 million, or 1.26% at December 31, 2015.

In management’s opinion, the level of allowance for loan losses, totaling $9.5 million at September 30, 2016, is appropriate to adequately provide for known and inherent risks in the portfolio. In the current interest rate and credit quality environment, our risk management philosophy has been to stay within our established credit culture. Management will continue to review the need for additions to its allowance for loan losses based upon its ongoing review of the loan portfolio and credit quality trends, the level of delinquencies as well as general market and economic conditions.

Non-Interest Income

For the three months ended September 30, 2016, non-interest income amounted to $2.0 million compared to $836,000, an increase of $1.1 million, or 137.2%, from the corresponding period in 2015. Non-interest income for the period included an $862,000 tax-free BOLI death benefit, coupled with an increase of 156,000 in other loan fees resulting from higher loan prepayment fees and higher gains on the sale of SBA loans of $84,000.

Non-Interest Expenses

Non-interest expense for the three months ended September 30, 2016 totaled $5.3 million, remaining largely flat from the same period in 2015, as higher salaries and benefits were offset by lower OREO property expenses resulting primarily from a $250,000 recovery of settlement expenses from an OREO property.

Income Taxes

The Company recorded income tax expense of $999,000 for the third quarter of 2016 as compared to $961,000 for the same period last year. The effective tax rate for the three months ended September 30, 2016 and 2015 was 27.4% and 36.2%, respectively. This decline was primarily due to the tax-free BOLI death benefit received in the third quarter of 2016 and, to a lesser degree, a higher level of tax-exempt municipal securities.

Nine months ended September 30, 2016 compared to September 30, 2015

Net Interest Income

Net interest income for the nine months ended September 30, 2016 totaled $21.9 million, an increase of $913,000, or 4.4%, compared to $20.9 million for the corresponding period in 2015. Average interest earning assets for the nine months ended September 30, 2016 were $820.0 million, an increase of $60.3 million, or 7.9%, from $759.7 million for the same period in 2015, primarily due to an increase in average loans of $62.4 million funded in part by a higher level of average NOW deposits and non-interest demand deposits of $25.0 million and $5.8 million, respectively, from the same period in 2015. Additionally, average time deposits increased $29.2 million, or 28.6%, due to increases in both brokered and Listed Service CDs, as the Company took advantage of extending the maturity of its CDs portfolio by utilizing a laddered strategy of both types of funding during the year. These positives were partially offset by the 13 basis point decline in our net interest margin.

The net interest margin and net interest spread decreased to 3.56% and 3.39%, respectively, for the nine months ended September 30, 2016, from 3.69% and 3.53%, respectively, for the same prior year period, primarily resulting from the maturity, prepayment or contractual repricing of loans and investment securities in this extended period of low interest rates as well as the interest expense associated with the Company’s issuance of subordinated debentures discussed above. This subordinated debt impacted our margin by approximately 8 basis points.

Total interest income for the nine months ended September 30, 2016 increased by $1.9 million, or 7.8%. The increase in interest income was primarily due to a volume related increase in interest income of $2.2 million, partially offset by a rate related decrease in interest income of $383,000 for the first nine months of 2016 as compared to the same prior year period. Interest and fees on loans increased $1.6 million, or 7.1%, to $24.3 million for the nine months ended September 30, 2016 compared to $22.7 million for the corresponding period in 2015. Volume related increases of $2.2 million were partially offset by rate related decreases of $558,000. The average balance of the loan portfolio for the nine months ended September 30, 2016 increased by $62.5 million, or 9.6%, to $715.3 million from $652.8 million for the corresponding period in 2015. The average annualized yield on the loan portfolio was 4.54% for the nine months ended September 30, 2016 compared to 4.65% for the nine months ended September 30, 2015. Additionally, the average balance of total non-accrual loans, which amounted to $1.6 million and $3.7 million at September 30, 2016 and 2015, respectively, impacted the Company’s loan yield for both periods presented.

Interest income on investment securities totaled $1.2 million for the nine months ended September 30, 2016 compared to $1.0 million for the nine months ended September 30, 2015, an increase of $216,000, or 21.2%. For the nine months ended September 30, 2016, investment securities had an average balance of $82.3 million with an average annualized yield of 2.00% compared to an average balance of $76.1 million with an average annualized yield of 1.78% for the nine months ended September 30, 2015.

Interest income on interest-bearing deposits was $84,000 for the nine months ended September 30, 2016, representing an increase of $26,000 or 44.8%, from $58,000 for the nine months ended September 30, 2015. For the nine months ended September 30, 2016, interest bearing deposits had an average balance of $22.4 million and an average annualized yield of 0.50% as compared to an average balance of $30.8 million and an average annualized yield of 0.25% for the same period in 2015.

Interest expense on interest-bearing liabilities amounted to $3.8 million for the nine months ended September 30, 2016 compared to $2.8 million for the corresponding period in 2015, an increase of $944,000, or 33.2%. This increase in interest expense was comprised of a $806,000 volume related increase as well as a $138,000 rate related increase.

The Bank continues to focus on developing core deposit relationships. The average balance of interest-bearing liabilities increased to $636.9 million for the nine months ended September 30, 2016 from $579.5 million for the same period last year, an increase of $57.4 million, or 9.9%. Average NOW accounts increased $25.0 million from $126.3 million with an average annualized rate of 0.43% during the nine months of 2015, to $151.3 million with an average annualized rate of 0.43% during the nine months ended September 30, 2016. Average time deposits increased $29.2 million from $102.1 million with an average annualized rate of 1.32% for the first nine months of 2015 to $131.3 million with an average annualized rate of 1.41% for the nine months ended September 30, 2016. These average balance increases were partially offset by a decrease in average savings deposits of $2.7 million over this same period while the average annualized rate rose by one basis point and our average money market deposits increased by $1.8 million, while the average annualized rate remained unchanged. During the nine months ended September 30, 2016, our average demand deposits totaled $148.1 million, an increase of $5.8 million, or 4.1%, over the same period last year. For the nine months ended September 30, 2016, the average annualized cost for all interest-bearing liabilities was 0.79%, which increased from the 0.66% for the nine months ended September 30, 2015, primarily due to the interest expense associated with the Company’s issuance of subordinated debentures discussed above and effected our cost of interest-bearing liabilities by approximately 9 basis points.

Our strategies for increasing and retaining core relationship deposits, managing loan originations within our acceptable credit criteria and loan category concentrations, and our planned branch network growth have combined to meet our liquidity needs. The Company also offers agreements to repurchase securities, commonly known as repurchase agreements, to our customers as an alternative to other insured deposits. Average balances of repurchase agreements for the nine months ended September 30, 2016 were $18.7 million, with an average interest rate of 0.31%, compared to $22.3 million, with an average interest rate of 0.31%, for the nine months of 2015.

The Company also utilizes FHLB term borrowings as an additional funding source. The average balance of such borrowings for the nine months ended September 30, 2016 and 2015 was $25.0 million and $27.2 million, respectively, with an average interest rate of 2.42% and 2.30%, respectively.

The $10 million of subordinated debentures totaled $9.8 million at September 30, 2016, which includes $153,000 of remaining unamortized debt issuance costs. The debt issuance costs are being amortized over the expected life of the issue. The effective interest rate of the subordinated debt is 6.67% as of September 30, 2016.

Provision for Loan Losses

The provision for loan losses for the nine months ended September 30, 2016 was $860,000 as compared to a provision for loan losses of $400,000 for the corresponding 2015 period. The majority of the 2016 provision was to record a specific allowance of $444,000 against one commercial loan, subsequently charged off during the quarter, whereby the underlying collateral value has been impaired by an environmental issue. On October 26, 2016, the Company entered into a purchase agreement with the borrower whereby the borrower would purchase the note enabling the Company to receive a full recovery of the principal amount of the charge off. On October 31, 2016, the Company received the full $444,000 of principal. The Company had $121,000 of net loan charge-offs through the first three quarters of 2016. The provision for nine months ended September 30, 2016 was driven by a number of factors, including the level of charge-offs and recoveries, our assessment of the current state of the economy, allowances related to impaired loans and loan activity. The provision for the comparable 2015 period considered the same factors. The provision for loan losses is determined by an allocation process whereby an estimated allowance is allocated to the specific allowance for impaired loans and the general allowance for pools of loans. The allocation reflects management’s assessment of economic conditions, credit quality and other risk factors inherent in the loan portfolio. The allowance for loan losses totaled $9.5 million, or 1.25% of total loans at September 30, 2016, as compared to $8.7 million, or 1.26% at December 31, 2015.

Non-Interest Income

For the nine months ended September 30, 2016, non-interest income amounted to $4.0 million compared to $2.6 million, an increase of $1.5 million or 58.3%, from the corresponding period in 2015. Non-interest income for the period included the receipt of an $862,000 tax-free BOLI death benefit, an increase of $266,000, or 86.1%, in gains on the sale of SBA loans and an increase of $218,000, or 35.6%, in residential mortgage banking revenue due to higher origination volume. Additionally, other loan fees were up $199,000 due to higher loan prepayment fees while securities gains increased $35,000. These increases were partially offset by a $208,000 gain on the sale of a branch property during the third quarter of 2015.

Non-Interest Expenses

Non-interest expenses for the nine months ended September 30, 2016 increased $269,000, or 1.7%, to $16.1 million compared to $15.8 million for the nine months ended September 30, 2015. This increase was primarily due to higher salaries and benefits of $291,000 resulting from both annual merit increases and commissions from higher residential mortgage banking volume. Additionally, professional fees were $170,000 higher due to increased legal and consulting fees. These increases were partially offset by a decrease of $136,000 in loan workout expenses and lower OREO expenses.

Income Taxes

The Company recorded income tax expense of $2.9 million for the nine months ended September 30, 2016 compared to $2.7 million for the nine months ended September 30, 2015. The effective tax rate for the nine months ended September 30, 2016 and 2015 was 32.1% and 36.7%, respectively, due primarily to the tax-free BOLI death benefit and a higher level of tax-exempt municipal securities.

FINANCIAL CONDITION

Assets

At September 30, 2016, our total assets were $909.2 million, an increase of $45.5 million, or 5.3%, from $863.7 million at December 31, 2015. At September 30, 2016, total loans were $754.0 million, an increase of $60.8 million, or 8.8%, from the $693.2 million reported at December 31, 2015. Investment securities, including restricted stock, were $82.7 million at September 30, 2016 as compared to $80.3 million at December 31, 2015, an increase of $2.4 million, or 3.0%. At September 30, 2016, cash and cash equivalents totaled $26.9 million compared to $46.7 million at December 31, 2015, a decrease of $19.8 million, or 42.4%. Goodwill totaled $18.1 million at both September 30, 2016 and December 31, 2015.

Liabilities

Total liabilities increased $39.9 million, or 5.2%, to $810.6 million at September 30, 2016, from $770.7 million at December 31, 2015. Total deposits increased $30.8 million, or 4.3%, to $739.2 million at September 30, 2016, from $708.4 million at December 31, 2015. FHLB and other borrowings increased $8.8 million to $35.3 million at September 30, 2016, from $26.5 million at December 31, 2015, and the Company issued $9.8 million of subordinated debentures in December 2015.

Securities Portfolio

Investment securities, including restricted investments, totaled $82.7 million at September 30, 2016 compared to $80.3 million at December 31, 2015, an increase of $2.4 million, or 3.0%. During the nine months ended September 30, 2016 and 2015, investment security and restricted stock purchases amounted to $11.5 million and $40.4 million, respectively, while repayments, calls and maturities amounted to $9.4 million and $8.1 million, respectively. For the nine months ended September 30, 2016 and 2015, there were investment security sales of $1.0 million and $24.3 million, respectively, in which the Company recorded net gains of $72,000 and $37,000, respectively.

The Company maintains an investment portfolio to fund increased loans and liquidity needs (resulting from decreased deposits or otherwise) and to provide an additional source of interest income. The portfolio is composed of obligations of the U.S. Government agencies and U.S. Government-sponsored entities, municipal securities, a limited amount of corporate debt securities and a Community Reinvestment Act (“CRA”) mutual fund. U.S. Government agencies are considered to have the lowest risk due to the “full faith and credit” guarantee by the U.S. Government. All of our mortgage-backed investment securities are collateralized by pools of mortgage obligations that are guaranteed by privately managed, U.S. Government-sponsored enterprises (“GSE”), such as Fannie Mae, Freddie Mac and Government National Mortgage Association. Due to these GSE guarantees, these investment securities are susceptible to less risk of non-performance and default than other corporate securities which are collateralized by private pools of mortgages. At September 30, 2016, the Company maintained $15.5 million of GSE residential mortgage-backed securities in the investment portfolio and $13.4 million of collateralized residential mortgage obligations, all of which are current as to payment of principal and interest and are performing in accordance with the terms set forth in their respective prospectuses. Municipal securities are evaluated by a review of the credit ratings of the underlying issuer, any changes in such ratings that have occurred, adverse conditions relating to the security or its issuer, as well as other factors.

Included within the Company’s investment portfolio are trust preferred securities, which consists of four single issue securities issued by large financial institutions with Moody’s ratings from Baa1 to Ba1. These securities have an amortized cost value of $2.8 million and a fair value of $2.5 million at September 30, 2016. The unrealized loss on these securities is related to general market conditions, the widening of interest rate spread and downgrades in credit ratings.

Management evaluates all securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant such evaluations. As of September 30, 2016, all of these securities are current with their scheduled interest payments. Future deterioration in the cash flow of these instruments or the credit quality of the financial institution issuers could result in additional impairment charges in the future.

The Company accounts for its investment securities as available for sale or held to maturity. Management determines the appropriate classification at the time of purchase. Based on an evaluation of the probability of the occurrence of future events, we determine if we have the ability and intent to hold the investment securities to maturity, in which case we classify them as held to maturity. All other investments are classified as available for sale.

Securities classified as available for sale must be reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of taxes. Gains or losses on the sales of securities available for sale are recognized upon realization utilizing the specific identification method. The net effect of unrealized gains or losses, caused by marking our available for sale portfolio to fair value, could cause fluctuations in the level of shareholders’ equity and equity-related financial ratios as changes in market interest rates cause the fair value of fixed-rate securities to fluctuate.

Securities classified as held to maturity are carried at cost, adjusted for amortization of premium and accretion of discount over the terms of the maturity in a manner that approximates the interest method.

Loan Portfolio

The following table summarizes total loans outstanding, by loan category and amount, as of September 30, 2016 and December 31, 2015.

	September 30,						December 31,
	2016						2015
	Amount			Percent			Amount			Percent
	(in thousands, except for percentages)

Commercial and industrial	$	103,050			13.7	%	$	100,154			14.5	%
Real estate – construction		102,658			13.6	%		104,231			15.0	%
Real estate – commercial		467,118			62.0	%		422,665			61.0	%
Real estate – residential		54,580			7.2	%		39,524			5.7	%
Consumer		27,162			3.6	%		27,136			3.9	%
Unearned fees		(586	)		(0.1	%)		(560	)		(0.1	%)
Total loans	$	753,982			100.0	%	$	693,150			100.0	%

For the nine months ended September 30, 2016, total loans increased by $60.8 million, or 8.8%, to $754.0 million from $693.2 million at December 31, 2015. The increase was due to growth in commercial real estate and residential lending sectors during the period. Our local economy seems to reflect some strengthening in certain sectors. As such, we remain optimistic in our growth prospects for lending in 2016, recognizing that we will continue to be challenged due in part to both the competitive landscape and pricing pressures in this low rate environment. However, our loan pipeline remains strong as we continue to remain focused on growing our portfolio. We have taken the approach of opening low cost loan production offices (“LPOs”) in different markets and once a certain level of business is achieved, the intention is to replace some of these LPOs with a full service branch at an appropriate location within that market. During the first quarter of 2016, the Bank re-opened a LPO in the Summit, New Jersey market, which now complements our other LPO in Toms River, New Jersey. Both of our LPOs are staffed by experienced seasoned loan officers who are knowledgeable within these markets and have begun to produce positive results.

The mix of our loan composition at September 30, 2016 reflects our desire to continue emphasizing commercial and industrial, commercial real estate, construction and residential lending. Within the loan portfolio, commercial real estate remains the largest component, constituting 62.0% of our total loans at September 30, 2016, up slightly from 61.0% at December 31, 2015. These loans increased $44.5 million, or 10.5%, to $467.1 million at September 30, 2016 from $422.6 million at December 31, 2015, due to both increased production as well as completed construction projects which, at the time of renewal, were converted to commercial real estate loans. Real estate residential loans increased $15.1 million, or 38.1%, to $54.6 million at September 30, 2016 from $39.5 million at December 31, 2015 as we continue to portfolio adjustable rate mortgages while selling our fixed rate residential product. Commercial and industrial loans increased $2.9 million, or 2.9%, to $103.1 million at September 30, 2016 from $100.2 million at December 31, 2015. These increases were partially offset by a decrease in real estate construction loans, which decreased $1.5 million or 1.5%, to $102.7 million at September 30, 2016 from $104.2 million at December 31, 2015.

Asset Quality

One of our key operating objectives has been, and continues to be, to maintain a high level of asset quality. We continually analyze our credit quality through a variety of strategies. We have been proactive in addressing problem and non-performing assets and management believes our allowance for loan losses is adequate to cover known and potential losses. These strategies, as well as our underwriting standards for new loan originations, have resulted in relatively low levels of non-performing loans and charge-offs. Our loan portfolio composition generally consists of loans secured by commercial real estate, land development and construction of real estate projects mainly in the Union, Monmouth and Middlesex County, New Jersey market area. We continue to have lending success and growth in the medical markets through our Private Banking Department. We have experienced signs of improvement in our markets as our loan pipeline remains strong. Efficient and effective asset-management strategies reflect the type and quality of assets being underwritten and originated.

The Company continues to be proactive in identifying troubled credits, to record charge-offs promptly based on current collateral values, and to maintain an adequate allowance for loan losses at all times. We closely monitor local and regional real estate markets and other risk factors related to our loan portfolio.

The Bank does not originate or purchase loans with payment options, negative amortization loans or sub-prime loans. We evaluate the classification of all our loans and the financial results of some of those loans which may be adversely impacted by changes in the prevailing economic conditions, either nationally or in our local market areas, including decreases in real estate values, adverse employment conditions, the monetary and fiscal policies of the federal and state government and other significant external events. For loans involved in a workout situation, a new or updated appraisal or evaluation, as appropriate, is ordered to address current project plans and market conditions that were considered in the development of the workout plan. The consideration includes whether there has been material deterioration in the following factors: the performance of the project; conditions of the geographic market and property type; variances between actual conditions and original appraisal assumptions; changes in project specifications (e.g., changing a planned condominium project to an apartment building); loss of a significant lease or a take-out commitment. A new appraisal may not be necessary in all instances where an internal evaluation is used to appropriately update the original appraisal assumptions reflecting current market conditions along with providing an estimate of the collateral’s fair market value for impairment analysis testing.

Non-Performing Assets

Non-performing assets include loans that are not accruing interest (non-accrual loans), loans past due 90 days or more and still accruing and other real estate owned, which consists of real estate acquired as the result of a defaulted loan. A loan is placed on non-accrual status when collection of all principal or interest is considered unlikely or when principal or interest is past due for 90 days or more, unless the loan is well-secured and in the process of collection, in which case, the loan will continue to accrue interest. Any unpaid interest previously accrued on those loans is reversed from income. Interest income on other non-accrual loans is recognized only to the extent of interest payments received. A troubled debt restructuring loan (“TDR”) is a loan in which the contractual terms have been modified resulting in the Bank granting a concession to a borrower who is experiencing financial difficulties in order for the Bank to have a greater opportunity of collecting the indebtedness from the borrower. Non-accruing TDRs are included in non-performing loans.

At September 30, 2016 and December 31, 2015, the Company had $1.6 million and $3.2 million in non-accrual loans, respectively. Our non-performing loans are primarily secured by real estate. At September 30, 2016 and December 31, 2015, the Company had no loans past due 90 days or more and still accruing.

The following table summarizes our non-performing assets as of September 30, 2016 and December 31, 2015.Total TDRs are broken out at the bottom of the table.

	September 30, 2016			December 31, 2015
	(dollars in thousands)
Non-Performing Assets:
Non-Accrual Loans:
Commercial and industrial	$	131		$	138
Real estate-construction		-			-
Real estate-commercial		674			2,244
Real estate-residential		782			796
Consumer		-			-

Total Non-Performing Loans		1,587			3,178

Loans past due 90 days or more and still accruing					-

OREO		259			411

Total Non-Performing Assets	$	1,846		$	3,589

Ratios:
Non-Performing loans to total loans		0.21	%		0.46	%
Non-Performing assets to total assets		0.20	%		0.42	%

Troubled Debt Restructured Loans:
Performing	$	8,366		$	9,289
Non-performing (included in non-performing assets above)		157			1,552

Total non-performing loans decreased by $1.6 million from December 31, 2015. At September 30, 2016, ten loans comprise the $1.6 million as compared to nine loans for the $3.2 million at December 31, 2015. At September 30, 2016, the Company believes it has a manageable level of non-performing loans, many of which are in the late stages of loss mitigation or legal resolution.

At September 30, 2016, non-performing commercial and industrial loans from December 31, 2015, decreased by $7,000 during the nine months ended September 30, 2016, primarily due to paydowns. The $131,000 is comprised of four commercial term loans.

At September 30, 2016, non-performing real estate commercial loans decreased by $1.6 million from December 31, 2015, due primarily to one loan totaling $1.4 million, which paid off during the first quarter of 2016, partially offset by the addition of one credit. One non-performing real estate commercial loan, totaling $444,000, was charged off in the third quarter of 2016, due to an environmental issue related to the underlying collateral value of the property. As discussed above, on October 31, 2016, the Company received full recovery of the $444,000 principal balance.

At September 30, 2016, non-performing real estate residential loans decreased by $14,000 to $782,000 from December 31, 2015.

OREO represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure. These assets are carried at the lower of cost or fair value less estimated selling costs. When a property is acquired, the excess of the loan balance over fair value, less selling costs, is charged to the allowance for loan losses. Operating results from real estate owned, including rental income, operating expenses, and gains and losses realized from the sales of real estate owned are recorded as incurred. At September 30, 2016, the Bank had $259,000 in OREO consisting of one property, as compared to $411,000 at December 31, 2015, which consisted of two properties. During the nine months ended September 30, 2016, one property totaling $152,000 was sold for a loss of $45,000.

All of our OREO are aggressively marketed and are monitored on a regular basis to ensure valuations are in line with current fair market values.

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 troubled debt restructuring generally involve a temporary reduction in interest rate or a modification of a loan’s amortization schedule. Non-accrual troubled debt restructurings 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 troubled debt restructurings are designated as impaired from a cash flow perspective. Modifications involving troubled borrowers may include a modification of a loan’s amortization schedule, reduction in the stated interest rate and rescheduling of future cash flows.

As of September 30, 2016, TDRs totaled $8.5 million as compared to $10.8 million at December 31, 2015, a decrease of $2.3 million. This decrease was primarily due to pay downs and payoffs. Concessions made on TDRs generally involved a temporary reduction in interest rate or a modification of a loan’s amortization schedule. The main objective of the modification is to reduce the payment burden for the borrower and improve the net present value of the Company’s expected cash flows. The $8.5 million is comprised of $944,000 in real estate commercial loans, $3.2 million in real estate construction loans, $4.0 million in commercial and industrial, and $378,000 in real estate residential loans. All but two identified TDR’s, as of September 30, 2016, are collateral-dependent loans while the two others are cash flow dependent. Of the $8.5 million, one relationship totaling $502,000, has a specific reserves of $4,000 in our ALLL computation. The remaining $8.0 million of TDRs are adequately collateralized requiring no specific reserves.

The $944,000 in real estate commercial loans identified as TDR’s are all accruing, with the exception of one non-accrual loan totaling $54,000, one of which is secured by real estate. The remaining $890,000 are amortizing on various terms. The TDR designation was given primarily due to concessions granted for interest rate or amortization. These factors were all a result of the weak economy, which resulted in the borrowers having financial and cash flow difficulties.

The $3.2 million in real estate construction loans is partially comprised of three relationships, which are currently being developed, under contract and/or amortizing.

The $4.0 million in commercial and industrial loans are all performing, with the exception of one non-accrual loan totaling $103,000.

The $378,000 in real estate residential loans are all performing.

Potential Problem Loans

Overall credit quality in the portfolio remains strong even though the economic weakness has impacted several potential problem loans. Potential problem loans consist of special mention and substandard loans. At September 30, 2016, the Company had $18.7 million in loans that were risk rated as special mention or substandard, representing 2.5% of total loans. This $18.7 million of special mention and substandard loans represents an increase of $1.8 million from the $16.9 million reported at December 31, 2015. The change in risk rated loans was primarily attributable to one loan that was downgraded due to the borrowers weakening financial condition.

At September 30, 2016, other than the loans set forth above, the Company is not aware of any loans which present serious doubts as to the ability of its borrowers to comply with present loan repayment terms and which are expected to fall into one of the risk categories set forth in the description herein.

Allowance for Loan Losses

The following table summarizes our allowance for loan losses for the nine months ended September 30, 2016 and 2015 and for the year ended December 31, 2015.

	September 30,						December 31,
	2016			2015			2015
	(in thousands, except percentages)

Balance at beginning of year	$	8,713		$	8,069		$	8,069
Provision charged to expense		860			400			490
Recoveries (charge-offs), net		(121	)		(40	)		154
Balance of allowance at end of period	$	9,452		$	8,429		$	8,713

Ratio of net charge-offs (recoveries) to average loans outstanding (annualized)		.02	%		0.01	%		0.02	%
Balance of allowance as a percent of loans at period-end		1.25	%		1.25	%		1.26	%
Ratio of allowance to non-performing loans at period-end		595.59	%		229.05	%		274.17	%

At September 30, 2016, the Company’s allowance for loan losses was $9.5 million compared with $8.7 million at December 31, 2015. The allowance for loan losses as a percentage of total loans at September 30, 2016 was 1.25%, compared with 1.26% at December 31, 2015. The Company recorded an $860,000 provision to the allowance for loan losses for the nine month period ended September 30, 2016 as compared to $400,000 for the comparable period in 2015. Of the 2016 provision, $444,000 was to record a specific allowance against one commercial loan, whose underlying collateral had been impaired by an environmental issue, which the Company fully charged off during the current quarter. The remaining $416,000 of loan loss provision was to support the strong loan growth during 2016. As discussed above, on October 31, 2016, the Company received a full recovery of the $444,000 principal balance. The Company had $121,000 of net loan charge offs during the first nine months of 2016. Non-performing loans at September 30, 2016 are either well-collateralized or adequately reserved for in the allowance for loan losses.

Management maintains the allowance for credit losses at a level estimated to absorb probable loan losses of the loan portfolio. The allowance is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio. Our methodology for evaluating the appropriateness of the allowance includes segmentation of the loan portfolio into its various asset components, tracking the historical levels of criticized loans and delinquencies, and assessing the nature and trends of loan charge-offs. Additionally, the volume of non-performing loans, concentration of risks by size, type, and geography, new products and markets, collateral adequacy, credit policies and procedures, staffing, underwriting consistency, and economic conditions are also taken into consideration. Risks within the loan portfolio are analyzed on a continuous basis by the Bank’s senior management, outside independent loan review auditors, directors’ loan committee, and board of directors. A risk system, consisting of multiple grading categories, is utilized as an analytical tool to assess risk and set appropriate reserves.

While the overall New Jersey economy remains somewhat constrained by the recovering economic environment, our local economy seems to reflect some strengthening in certain sectors. While we remain optimistic in our growth prospects for lending in 2016, we recognize that we will continue to be challenged due in part to both the competitive landscape and pricing pressures in this low rate environment and as such, prudent risk management practices must be maintained. Along with this conservative approach, we have further stressed our qualitative and quantitative allowance factors to primarily reflect the current state of the economy, the housing market and levels of unemployment. We apply this process and methodology in a consistent manner and reassess and modify the estimation of methods and assumptions on a regular basis.

We attempt to maintain an allowance for loan losses at a sufficient level to provide for probable losses inherent in the loan portfolio. Risks within the loan portfolio are analyzed on a continuous basis by the Bank’s senior management, outside independent loan review consultants, directors’ loan committee, and board of directors. The level of the allowance is determined by assigning specific allowances to impaired loans and general allowances on all other loans. The portion of the allowance that is allocated to impaired loans is determined by estimating the inherent loss on each credit after giving consideration to the value of the underlying collateral or collateral dependent loans and cash flow from operations on cash flow dependent loans. A risk rating system, consisting of multiple grading categories, is utilized as an analytical tool to assess risk and set appropriate reserves. Along with the risk system, senior management evaluates risk characteristics of the loan portfolio under current economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors management feels deserve recognition in establishing an appropriate allowance. These estimates are reviewed at least quarterly, and as adjustments become necessary, they are realized in the periods in which they become known. Although management attempts to maintain the allowance at a level deemed adequate to cover any losses, future additions to the allowance may be necessary based upon changes in market conditions, either generally or specific to our area, or changes in the circumstances of particular borrowers. In addition, various regulatory agencies periodically review our allowance for loan losses. These agencies may require the Company to take additional provisions based on their judgments about information available to them at the time of their examination.

Bank Owned Life Insurance

In November of 2004, the Company invested in $3.5 million of bank-owned life insurance as a source of funding for additional life insurance benefits for officers and employee benefit expenses related to the Company’s non-qualified Supplemental Executive Retirement Plan (“SERP”) implemented for certain executive officers in 2004 that provides for payments upon retirement, death or disability. Since its initial investment in 2004, the Company has purchased an additional $17.0 million of bank-owned life insurance in order to provide additional life insurance benefits for additional officers upon death or disability and to provide a source of funding for future enhancements of the benefits under the SERP, of which $3.9 million was purchased in the third quarter of 2016. Expenses related to the SERP were approximately $154,000 and $187,000 for the nine months ended September 30, 2016 and 2015, respectively. Bank owned life insurance involves our purchase of life insurance on a selected group of officers. The Company is the owner and beneficiary of the policies. Increases in the cash surrender values of this investment are recorded in other income in the statement of operations. Earnings on bank owned life insurance amounted to $337,000 and $335,000 for the nine months ended September 30, 2016 and 2015, respectively. During the third quarter of 2016, the Company received an $862,000 tax-free BOLI death benefit.

Premises and Equipment

Premises and equipment totaled approximately $4.8 million and $5.1 million at September 30, 2016 and December 31, 2015, respectively. Depreciation expense totaled $586,000 and $592,000 for the nine months ended September 30, 2016 and 2015, respectively.

Goodwill and Other Intangible Assets

Intangible assets totaled $18.1 million at September 30, 2016 and December 31, 2015. The Company’s intangible assets at September 30, 2016 consisted of $18.1 million of goodwill. During the nine months ended September 30, 2016, the $2.1 million of core deposit intangible was fully amortized and therefore, no balance remains. The Company performed its annual goodwill impairment analysis as of August 31, 2016. Based on the results of the step one goodwill impairment analysis, the Company concluded that there was no impairment on the current goodwill balance of $18.1 million.

There can be no assurance that future testing will not result in additional material impairment charges due to further developments in the banking industry or our markets or otherwise. Additional goodwill discussion can be referenced in Note 3, “Goodwill,” in the Company’s financial statements.

Deposits

Deposits are the Company’s primary source of funds. The deposit increase during 2016 was primarily attributable to the Company’s strategic initiative to continue to remain focused on growing market share through core deposit relationships. The Company anticipates loan demand to increase during 2016 and beyond, and will depend on the expansion and maturation of the branch network as its primary funding source. As a secondary funding source, the Company intends to utilize borrowed funds, including FHLB advances, brokered CDs and Listed Service CDs, at opportune times during changing rate cycles to help support its growth. The Company continues to experience change in the mix of the deposit products through its branch sales efforts, which are targeted to gain market penetration. In order to fund future loan growth, the Company intends to use the most cost-effective funding mix available within the market area.

At September 30, 2016 total deposits amounted to $739.2 million, reflecting an increase of $30.8 million, or 4.3% from $708.4 million at December 31, 2015. Core checking deposits at September 30, 2016 decreased $2.4 million, or 0.8%, to $290.6 million from year-end 2015, while savings accounts, money market deposits and time deposits, increased $33.2 million, or 8.0%. In light of the low interest rate environment and strong loan pipeline, the Company has continued to take advantage of extending the maturity of its CD portfolio by utilizing a laddered strategy of both brokered and Listed Service CDs over the course of the past year. The Bank continues to focus on building non-interest-bearing deposits, as this lowers our costs of funds. Additionally, our savings accounts and other interest-bearing deposit products provide an efficient and cost-effective source to fund our loan originations.

One of the primary strategies is the accumulation and retention of core deposits. Core deposits consist of all deposits, except CDs $100,000 and over, brokered CDs and Listed Service CDs. Core deposits at September 30, 2016 amounted to $619.9 million and accounted for 83.9% of total deposits, as compared to $614.9 million and 86.8%, at December 31, 2015. During 2016, we continued to price our CDs $100,000 and over at rates that did not exceed our market competition. The balance in our CDs $100,000 and over at September 30, 2016 totaled $77.8 million as compared to $56.9 million at December 31, 2015, an increase of $20.9 million, or 36.7%. At September 30, 2016, the Company had $37.7 million in brokered CDs as compared to $37.9 million at December 31, 2015, with rates ranging from 0.60% to 2.12% and original terms ranging from 12 to 84 months, while Listed Service CDs totaled $47.9 million compared to $33.3 million at December 31, 2015 with rates between 0.96% to 2.10% and original terms ranging from 12 to 60 months.

The Company found this strategy of placing both brokered and Listed Service CDs provides a more cost-effective source of longer-term funding, as the rates paid for these type CDs were very competitive with current fixed rate term advances at the Federal Home Loan Bank of New York (“FHLB”) without any collateral requirements.

Borrowings

The Bank has unsecured lines of credit totaling $46.0 million with four correspondent financial institutions. These borrowings are priced on a daily basis. The Bank has no borrowings outstanding on these lines. The Bank also has remaining borrowing capacity with the FHLB of approximately $46.3 million based on the current loan collateral pledged of $102.5 million at September 30, 2016.

Short-term borrowings consist of Federal funds purchased and overnight borrowings from the FHLB. At September 30, 2016 and 2015, the Company had no short-term borrowings outstanding.

At September 30, 2016 and December 31, 2015, FHLB and other borrowings consisted of advances from the FHLB, which amounted to $35.3 million for September 30, 2016 compared to $26.5 million at December 31, 2015. The FHLB advances had a weighted average interest rate of 1.85% and 2.28% at September 30, 2016 and December 31, 2015, respectively.

The maximum amount outstanding of FHLB advances at any month-end during the nine months ended September 30, 2016 and 2015 was $35.3 million and $28.0 million, respectively. The average interest rates paid on FHLB advances was 2.42% and 2.30% during the nine months ended September 30, 2016 and 2015, respectively.

Subordinated Debentures

In December 2015, the Company completed a private placement of $10 million in aggregate principal amount of fixed to floating rate subordinated debentures to certain institutional accredited investors. The subordinated debentures have a maturity date of December 31, 2025 and bear interest, payable quarterly, at the rate of 6.25% per annum until January 1, 2021. On that date, the interest rate will be adjusted to float at an annual rate equal to the three-month LIBOR rate plus 464 basis points (4.64%) until maturity. The debentures include a right of prepayment, without penalty, on or after December 14, 2020 and, in certain limited circumstances, before that date. The indebtedness evidenced by the subordinated debentures, including principal and interest, is unsecured and subordinate and junior in right to payment to general and secured creditors of the Company and depositors and other creditors of the Bank. The subordinated debentures have been structured to qualify as Tier 2 capital for regulatory purposes. Subordinated debentures totaled $9.8 million at September 30, 2016 and December 31, 2015, which includes $153,000 and $176,000 of remaining unamortized debt issuance costs at September 30, 2016 and December 31, 2015, respectively. The debt issuance costs are being amortized over the expected life of the issue. The effective interest rate of the subordinated debentures is 6.67% as of September 30, 2016.

Repurchase Agreements

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected as the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. Securities sold under agreements to repurchase decreased to $18.6 million at September 30, 2016 from $19.5 million at December 31, 2015, a decrease of $900,000 or 4.6%.

Liquidity

Liquidity defines the Company’s ability to generate funds to support asset growth, meet deposit withdrawals, maintain reserve requirements and otherwise operate on an ongoing basis. An important component of the Company’s asset and liability management structure is the level of liquidity available to meet the needs of our customers and requirements of our creditors. The liquidity needs of the Bank are primarily met by cash on hand, Federal funds sold position, maturing investment securities and short-term borrowings on a temporary basis. The Bank invests the funds not needed to meet its cash requirements in overnight Federal funds sold and an interest bearing account with the Federal Reserve Bank of New York. With adequate deposit inflows coupled with the above-mentioned cash resources, the Bank is maintaining short-term assets which we believe are sufficient to meet its liquidity needs.

At September 30, 2016, the Company had $26.9 million in cash and cash equivalents as compared to $46.7 million at December 31, 2015. Cash and cash equivalent balances include $8.8 million and $25.2 million of interest-bearing deposits at the Federal Reserve Bank of New York at September 30, 2016 and December 31, 2015, respectively.

Off-Balance Sheet Arrangements

The Company’s financial statements do not reflect off-balance sheet arrangements that are made in the normal course of business. These off-balance sheet arrangements consist of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. These instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Company.

Management believes that any amounts actually drawn upon these commitments can be funded in the normal course of operations. The following table sets forth the Bank’s off-balance sheet arrangements as of September 30, 2016 and December 31, 2015:

	September 30, 2016		December 31, 2015
	(dollars in thousands)

Home equity lines of credit	$	22,352	$	21,072
Commitments to fund commercial real estate and construction loans		122,302		92,363
Commitments to fund commercial and industrial loans and other loans		49,730		52,826
Commercial and financial letters of credit		3,814		4,315
	$	198,198	$	170,576

Capital

Shareholders’ equity increased by approximately $5.6 million, or 6.0%, to $98.6 million at September 30, 2016 compared to $93.0 million at December 31, 2015. Net income for the nine month period ended September 30, 2016 added $6.1 million to shareholders’ equity. Additionally, stock-based compensation expense of $162,000, options exercised of $89,000, employee stock purchases of $40,000 and $260,000 in after-tax net unrealized gains on securities available for sale during the nine months ended September 30, 2016, contributed to the increase. These increases were partially offset by $875,000 in cash dividends on common stock and $148,000 in common stock repurchased. During the nine months ended September 30, 2016, the Company repurchased 13,232 shares of common stock for a total of $148,000 under its share repurchase program.

The Company and the Bank are subject to various regulatory and capital requirements administered by the Federal banking agencies. Our federal banking regulators, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) (which regulates bank holding companies) and the Federal Deposit Insurance Corporation (the “FDIC”) (which regulates the Bank), have issued guidelines classifying and defining capital. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank is also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios, set forth in the following tables of Tier 1 Capital to Average Assets (Leverage Ratio), Common Equity Tier 1 Capital to Risk Weighted Assets, Tier 1 Capital to Risk Weighted Assets and Total Capital to Risk Weighted Assets.

As of September 30, 2016, the Company and the Bank met all regulatory requirements for classification as well-capitalized under the applicable regulatory framework. Management believes that there are no conditions or events that have changed the classification.

The capital ratios of the Company and the Bank, at September 30, 2016 and December 31, 2015, are presented below.

	Company			Bank			Minimum Required For Capital Adequacy Purposes			To Be Well Capitalized Under Applicable Prompt Corrective Action Regulations*
As of September 30, 2016
Common Equity Tier 1 Capital to Risk Weighted Assets		10.10	%		11.28	%		4.50	%		6.50	%
Tier 1 Capital to Average Assets (Leverage Ratio)		9.11	%		10.18	%		4.00	%		5.00	%
Tier 1 Capital to Risk Weighted Assets		10.10	%		11.28	%		6.00	%		8.00	%
Total Capital to Risk Weighted Assets		12.54	%		12.46	%		8.00	%		10.00	%

As of December 31, 2015
Common Equity Tier 1 Capital to Risk Weighted Assets		10.13	%		11.39	%		4.50	%		6.50	%
Tier 1 Capital to Average Assets (Leverage Ratio)		8.97	%		10.09	%		4.00	%		5.00	%
Tier 1 Capital to Risk Weighted Assets		10.13	%		11.39	%		6.00	%		8.00	%
Total Capital to Risk Weighted Assets		12.65	%		12.56	%		8.00	%		10.00	%

______________________________________
* Applies to the Bank only. For the Company to be “well capitalized,” the Tier 1 Capital to Risk Weighted Assets has to be at least 6.00%.

Basel III Capital Rules. In July 2013, the federal bank regulatory agencies adopted revisions to the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III.

These revisions generally implemented higher minimum capital requirements, added a new common equity Tier 1 Capital requirement, and established criteria that instruments must meet to be considered common equity Tier 1 Capital, additional Tier 1 Capital or Tier 2 Capital. As of January 1, 2015, the new minimum capital to risk-adjusted assets requirements are a common equity Tier 1 Capital ratio of 4.5% (6.5% for the Bank to be considered “well capitalized”) and a Tier 1 Capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% for the Bank to be considered “well capitalized”); the total capital ratio remains at 8.0% under the new rules (10.0% to be considered “well capitalized”).

Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payment to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 Capital above its minimum risk-based capital requirements. This capital conservation buffer requirement phases in over a three-year period beginning January 1, 2016. At January 1, 2019, the capital conservation buffer must be greater than 2.5% of total risk-weighted assets. Additionally, the Company determined, as permitted under Basel III, to opt-out of including accumulated other comprehensive income in regulatory capital.

As of September 30, 2016, the Bank had a capital conservation buffer greater than 2.5%.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required.

Item 4. Controls and Procedures

The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

The Company’s principal executive officer and principal financial officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon such evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.

The Company’s principal executive officer and principal financial officer have also concluded that there was no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased (1)		Average Price Paid Per Share ($)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ($)

July 1, 2016 through July 31, 2016		-		-		-		1,993,163
August 1, 2016 through August 31, 2016		12,500		11.30		12,500		1,851,411
September 1, 2016 through September 30, 2016		-		-		-		1,851,411

Total		12,500		11.30		12,500

(1)	All shares were repurchased under the Company’s share repurchase program. In December 2015, the Board of Directors approved a new repurchase program, whereby the Company may repurchase up to $2.0 million of its common stock from January 1, 2016 to December 31, 2016.

Item 6. Exhibits

10.1		Deferred Compensation Agreement dated as of September 7, 2016, effective September 1, 2016, between Two River Community Bank and William D. Moss (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-51889) filed on September 9, 2016)

31.1	*	Certification of principal executive officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a)

31.2	*	Certification of principal financial officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a)

32	*	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by the principal executive officer of the Company and the principal financial officer of the Company

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

* Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TWO RIVER BANCORP


Date: November 10, 2016	By:	/s/ WILLIAM D. MOSS
		William D. Moss
		President and Chief Executive Officer
		(Principal Executive Officer)


Date: November 10, 2016	By:	/s/ A. RICHARD ABRAHAMIAN
		A. Richard Abrahamian
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)