10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2015.
or
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File No. 000-51338

PARKE BANCORP, INC.
(Exact name of registrant as specified in its charter)

New Jersey
65-1241959
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
 
601 Delsea Drive, Washington Township, New Jersey
08080
(Address of principal executive offices)
(Zip Code)

856-256-2500
(Registrant's telephone number, including area code)

N/A
(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 [X]                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 [X]                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 [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]                No [X]

 
As of August 14, 2015, there were issued and outstanding 6,126,560 shares of the registrant's common stock.





PARKE BANCORP, INC.
 

 
FORM 10-Q
 

 
FOR THE QUARTER ENDED June 30, 2015

INDEX

 
 
Page

Part I
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
1

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
28

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
35

Item 4.
Controls and Procedures
35

 
 
 
Part II
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
35

Item 1A.
Risk Factors
35

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
35

Item 3.
Defaults Upon Senior Securities
36

Item 4.
Mine Safety Disclosures
36

Item 5.
Other Information
36

Item 6.
Exhibits
36

 
 
 
SIGNATURES
 
 
 
 
EXHIBITS and CERTIFICATIONS
 





PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Parke Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
(in thousands except share and per share data)
 
June 30,
2015
 
December 31,
2014
Assets
 
 
 
Cash and due from financial institutions
$
3,530

 
$
4,033

Federal funds sold and cash equivalents
45,845

 
32,205

Total cash and cash equivalents
49,375

 
36,238

Investment securities available for sale, at fair value
45,435

 
28,208

Investment securities held to maturity (fair value of $2,406 at June 30, 2015 and $2,377 at December 31, 2014)
2,161

 
2,141

Total investment securities
47,596

 
30,349

Loans held for sale
1,063

 
2,932

Loans, net of unearned income
729,980

 
713,061

Less: Allowance for loan losses
(16,979
)
 
(18,043
)
Net loans
713,001

 
695,018

Accrued interest receivable
2,840

 
2,827

Premises and equipment, net
4,525

 
4,490

Other real estate owned (OREO)
19,752

 
20,931

Restricted stock, at cost
4,119

 
3,152

Bank owned life insurance (BOLI)
11,640

 
11,464

Deferred tax asset
10,751

 
10,518

Other assets
4,077

 
3,787

Total Assets
$
868,739

 
$
821,706

Liabilities and Equity
 

 
 

Liabilities
 

 
 

Deposits
 

 
 

Noninterest-bearing deposits
$
44,982

 
$
42,554

Interest-bearing deposits
627,697

 
605,379

Total deposits
672,679

 
647,933

FHLBNY borrowings
69,760

 
49,352

Subordinated debentures
13,403

 
13,403

Accrued interest payable
507

 
445

Other liabilities
5,342

 
7,523

Total liabilities
761,691

 
718,656

Equity
 

 
 

Preferred stock, 1,000,000 shares authorized, $1,000 liquidation value Series B - non-cumulative convertible; Issued: 20,000 shares at June 30, 2015 and December 31, 2014
20,000

 
20,000

Common stock, $.10 par value; authorized 15,000,000 shares; Issued: 6,338,237 shares at June 30, 2015 and 6,208,259 shares at December 31, 2014
634

 
621

Additional paid-in capital
52,466

 
51,316

Retained earnings
36,378

 
32,983

Accumulated other comprehensive income
(142
)
 
165

Treasury stock, 241,900 shares at June 30, 2015 and 210,900 shares at December 31, 2014, at cost
(2,531
)
 
(2,180
)
Total shareholders’ equity
106,805

 
102,905

Noncontrolling interest in consolidated subsidiaries
243

 
145

Total equity
107,048

 
103,050

Total liabilities and equity
$
868,739

 
$
821,706

See accompanying notes to consolidated financial statements

1



Parke Bancorp Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

 
For the three months ended 
 June 30,
 
For the six months ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands except share data)
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
9,567

 
$
9,442

 
$
18,705

 
$
18,732

Interest and dividends on investments
339

 
262

 
585

 
556

Interest on federal funds sold and cash equivalents
27

 
32

 
42

 
55

Total interest income
9,933

 
9,736

 
19,332

 
19,343

Interest expense:
 
 
 
 
 

 
 

Interest on deposits
1,198

 
1,186

 
2,329

 
2,363

Interest on borrowings
276

 
216

 
489

 
437

Total interest expense
1,474

 
1,402

 
2,818

 
2,800

Net interest income
8,459

 
8,334

 
16,514

 
16,543

Provision for loan losses
750

 
1,000

 
1,590

 
2,000

Net interest income after provision for loan losses
7,709

 
7,334

 
14,924

 
14,543

Noninterest income:
 

 
 

 
 

 
 

Gain on sale of SBA loans
1,200

 
1,011

 
1,757

 
1,332

Loan fees
341

 
246

 
655

 
461

Net income from BOLI
89

 
90

 
176

 
178

Service fees on deposit accounts
66

 
58

 
136

 
115

Loss on sale and write-down of real estate owned
(954
)
 
(39
)
 
(1,123
)
 
(435
)
Realized gain on sale of AFS securities

 

 

 
178

Other
112

 
293

 
510

 
788

Total noninterest income
854

 
1,659

 
2,111

 
2,617

Noninterest expense:
 

 
 

 
 

 
 

Compensation and benefits
1,920

 
1,761

 
3,909

 
3,605

Professional services
364

 
338

 
873

 
748

Occupancy and equipment
306

 
296

 
629

 
592

Data processing
111

 
128

 
250

 
245

FDIC insurance
169

 
251

 
334

 
491

OREO expense
425

 
1,248

 
911

 
2,008

Other operating expense
963

 
872

 
1,699

 
1,748

Total noninterest expense
4,258

 
4,894

 
8,605

 
9,437

Income before income tax expense
4,305

 
4,099

 
8,430

 
7,723

Income tax expense
1,387

 
1,264

 
2,908

 
2,426

Net income attributable to Company and noncontrolling interest
2,918

 
2,835

 
5,522

 
5,297

Net income attributable to noncontrolling interest
(395
)
 
(349
)
 
(501
)
 
(486
)
Net income attributable to Company
2,523

 
2,486

 
5,021

 
4,811

Preferred stock dividend and discount accretion
300

 
300

 
600

 
600

Net income available to common shareholders
$
2,223

 
$
2,186

 
$
4,421

 
$
4,211

Earnings per common share:
 

 
 

 
 

 
 

Basic
$
0.37

 
$
0.36

 
$
0.73

 
$
0.70

Diluted
$
0.32

 
$
0.31

 
$
0.63

 
$
0.61

Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
6,034,613

 
5,991,859

 
6,022,768

 
5,990,309

Diluted
7,961,720

 
7,930,518

 
7,944,347

 
7,923,201

See accompanying notes to consolidated financial statements

2



Parke Bancorp Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

 
For the three months ended 
 June 30,
 
For the six months ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
(in thousands)
Net income attributable to Company
$
2,523

 
$
2,486

 
$
5,021

 
$
4,811

Unrealized gains (losses) on securities:
 

 
 

 
 

 
 

Non-credit related unrealized gains on securities with OTTI

 

 
26

 

Unrealized (losses) gains on securities without OTTI
(544
)
 
341

 
(536
)
 
579

Less reclassification adjustment for gains on securities included in net income

 

 

 
(178
)
Tax impact
218

 
(136
)
 
203

 
(232
)
Total unrealized (losses) gains on securities
(326
)
 
205

 
(307
)
 
169

 
 
 
 
 
 
 
 
Total comprehensive income
2,197

 
2,691

 
4,714

 
4,980

See accompanying notes to consolidated financial statements


3



Parke Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)

 
Preferred
Stock
 
Shares of Common
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
 
Retained
Earnings
 
Accumulated
Other Comprehensive Income
 
Treasury
Stock
 
Total Shareholders’ 
Equity
 
Non-Controlling Interest
 
Total
Equity
 
(in thousands except share data)
Balance, December 31, 2014
$
20,000

 
6,208,259

 
$
621

 
$
51,316

 
$
32,983

 
$
165

 
$
(2,180
)
 
$
102,905

 
$
145

 
$
103,050

Capital withdrawals by noncontrolling interest
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(403
)
 
(403
)
Stock options exercised
 

 
129,978

 
13

 
1,150

 
 

 
 

 
 

 
1,163

 
 

 
1,163

Net income
 

 
 

 
 

 
 

 
5,021

 
 

 
 

 
5,021

 
501

 
5,522

Changes in other comprehensive income
 

 
 

 
 

 
 

 
 

 
(307
)
 
 

 
(307
)
 
 

 
(307
)
Purchase of treasury stock
 

 
 

 
 

 
 

 
 

 
 

 
(351
)
 
(351
)
 
 

 
(351
)
Dividend on preferred stock
 

 
 

 
 

 
 

 
(600
)
 
 

 
 

 
(600
)
 
 

 
(600
)
Dividend on common stock
 

 
 

 
 

 
 

 
(1,026
)
 
 

 
 

 
(1,026
)
 
 

 
(1,026
)
Balance, June 30, 2015
$
20,000

 
6,338,237

 
$
634

 
$
52,466

 
$
36,378

 
$
(142
)
 
$
(2,531
)
 
$
106,805

 
$
243

 
$
107,048

See accompanying notes to consolidated financial statements


4



Parke Bancorp Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

 
For the six months ended 
 June 30,
 
2015
 
2014
 
(amounts in thousands)
Cash Flows from Operating Activities:
 
 
 
Net income
$
5,522

 
$
5,297

Adjustments to reconcile net income to net cash provided by (used in)
 

 
 

operating activities:
 
 
 
Depreciation and amortization
157

 
175

Provision for loan losses
1,590

 
2,000

Provision for OREO

 
500

Net gain from sales of investment securities

 
(178
)
Bank owned life insurance
(176
)
 
(178
)
Gain on sale of SBA loans
(1,757
)
 
(1,332
)
SBA loans originated for sale
(13,653
)
 
(11,678
)
Proceeds from sale of SBA loans originated for sale
17,280

 
12,981

Loss on sale & write down of OREO
1,123

 
435

Net accretion of purchase premiums and discounts on securities
(659
)
 
5

Contribution of OREO property

 
22

Deferred income tax benefit
(233
)
 
(7,889
)
Changes in operating assets and liabilities:
 

 
 

(Increase) decrease in accrued interest receivable and other assets
(466
)
 
3,256

(Decrease) increase in accrued interest payable and other accrued liabilities
(2,119
)
 
1,051

Net cash provided by operating activities
6,609

 
4,467

Cash Flows from Investing Activities:
 

 
 

Purchases of investment securities available for sale
(19,976
)
 

(Purchases) redemptions of restricted stock
(967
)
 
106

Proceeds from sale and call of securities available for sale

 
3,974

Proceeds from maturities and principal payments on mortgage backed securities
2,877

 
2,048

Proceeds from sale of OREO
2,639

 
5,871

Advances on OREO
(292
)
 
(361
)
Net increase in loans
(21,864
)
 
(8,667
)
Purchases of bank premises and equipment
(192
)
 
(112
)
Net cash (used in) provided by investing activities
(37,775
)
 
2,859

Cash Flows from Financing Activities:
 

 
 

Payment of dividend on preferred stock
(1,261
)
 
(357
)
Purchase of treasury stock
(351
)
 

Minority interest capital withdrawal, net
(403
)
 
(370
)
Proceeds from exercise of stock options and warrants
1,163

 
61

Net increase (decrease) in FHLBNY and short term borrowings
20,408

 
(4,588
)
Net increase in noninterest-bearing deposits
2,429

 
3,412

Net increase in interest-bearing deposits
22,318

 
18,603

Net cash provided by financing activities
44,303

 
16,761

Net increase in cash and cash equivalents
13,137

 
24,087

Cash and Cash Equivalents, January 1,
36,238

 
45,661

Cash and Cash Equivalents, June 30,
$
49,375

 
$
69,748

Supplemental Disclosure of Cash Flow Information:
 

 
 

Cash paid during the year for:
 

 
 

Interest on deposits and borrowed funds
$
2,756

 
$
2,761

Income taxes
$
2,904

 
$
4,300

Supplemental Schedule of Noncash Activities:
 

 
 

Real estate acquired in settlement of loans
$
2,291

 
$
1,712

See accompanying notes to consolidated financial statements

5



Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. ORGANIZATION

Parke Bancorp, Inc. ("Parke Bancorp” or the "Company") is a bank holding company incorporated under the laws of the State of New Jersey in January 2005 for the sole purpose of becoming the holding company of Parke Bank (the "Bank").

The Bank is a commercial bank which commenced operations on January 28, 1999. The Bank is chartered by the New Jersey Department of Banking and Insurance (the “Department”) and insured by the Federal Deposit Insurance Corporation ("FDIC"). Parke Bancorp and the Bank maintain their principal offices at 601 Delsea Drive, Washington Township, New Jersey. The Bank also conducts business through branches in Galloway Township, Northfield and Washington Township, New Jersey and Philadelphia, Pennsylvania.

The Bank competes with other banking and financial institutions in its primary market areas. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time certificates of deposit and all types of loans. Such institutions, as well as consumer financial and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders.

The Bank is subject to the regulations of certain state and federal agencies, and accordingly, the Bank is periodically examined by such regulatory authorities. As a consequence of the regulation of commercial banking activities, the Bank’s business is particularly susceptible to future state and federal legislation and regulations.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Financial Statement Presentation: The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and predominant practices within the banking industry.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary the Bank. Also included are the accounts of 44 Business Capital Partners LLC, a joint venture formed in 2009 to originate and service SBA loans. The Bank has a 51% ownership interest in the joint venture. Parke Capital Trust I, Parke Capital Trust II and Parke Capital Trust III are wholly-owned subsidiaries but are not consolidated because they do not meet the requirements for consolidation under applicable accounting guidance. All significant inter-company balances and transactions have been eliminated.

The accompanying interim financial statements should be read in conjunction with the annual financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 since they do not include all of the information and footnotes required by GAAP. The accompanying interim financial statements for the three and six months ended June 30, 2015 and 2014 are unaudited. The balance sheet as of December 31, 2014, was derived from the audited financial statements. In the opinion of management, these financial statements include all normal and recurring adjustments necessary for a fair statement of the results for such interim periods. Results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results for the full year. Certain reclassifications have been made to prior period amounts to conform to the current year presentation, with no impact on current earnings or shareholders’ equity.

Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the allowance for loan losses, other than temporary impairment losses on investment securities, the valuation of deferred income taxes, servicing assets and carrying value of OREO.

Recently Issued Accounting Pronouncements:

In January 2014, the FASB issued ASU 2014-4, "Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." ASU 2014-4 clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU 2014-4 requires interim and annual disclosure of both (a) the amount of foreclosed residential real estate property held by the creditor and (b) the recorded investment in consumer mortgage loans collateralized by residential real

6



estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in ASU 2014-4 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. There was no significant impact to amounts reported in the consolidated financial position or results of operations from the adoption of the ASU.

In May 2014, the FASB issued Accounting Standards Update No. 2014-9, “Revenue from Contracts with Customers (ASU 2014-9),” which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-9 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-9 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-9 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-9 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.

In June 2014, the FASB issued ASU No. 2014-11, “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures,” which changes the accounting for repurchase-to-maturity transactions (repos-to-maturity) and enhances the required disclosures for repurchase agreements and other similar transactions (repos). Repos-to-maturity and the repurchase financings will be accounted for as secured borrowings. In addition, the standard requires new disclosures for repos. ASU No. 2014-11 provisions are effective for the first interim or annual period beginning after December 15, 2014. There was no significant impact to amounts reported in the consolidated financial position or results of operations from the adoption of the ASU.

In August 2014, the FASB issued ASU No. 2014-14, “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure,” which will require creditors to derecognize certain foreclosed government-guaranteed mortgage loans and to recognize a separate other receivable that is measured at the amount the creditor expects to recover from the guarantor, and to treat the guarantee and the receivable as a single unit of account. ASU 2014-14 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. There was no significant impact to amounts reported in the consolidated financial position or results of operations from the adoption of the ASU.

NOTE 3. INVESTMENT SECURITIES

The following is a summary of the Company's investments in available for sale and held to maturity securities as of June 30, 2015 and December 31, 2014

As of June 30, 2015
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Other-than-
temporary
impairments
in OCI
 
Fair value
 
(amounts in thousands)
Available for sale:
 
 
 
 
 
 
 
 
 
Corporate debt obligations
$
500

 
$
20

 
$

 
$

 
$
520

Residential mortgage-backed securities
44,063

 
579

 
415

 

 
44,227

Collateralized mortgage obligations
302

 
11

 

 

 
313

Collateralized debt obligations
806

 

 

 
431

 
375

Total available for sale
$
45,671

 
$
610

 
$
415

 
$
431

 
$
45,435

 
 

 
 

 
 

 
 

 
 

Held to maturity:
 

 
 

 
 

 
 

 
 

States and political subdivisions
$
2,161

 
$
245

 
$

 
$

 
$
2,406



7



As of December 31, 2014
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Other-than-
temporary
impairments
in OCI
 
Fair value
 
(amounts in thousands)
Available for sale:
 
 
 
 
 
 
 
 
 
Corporate debt obligations
$
500

 
$
22

 
$

 
$

 
$
522

Residential mortgage-backed securities
26,252

 
754

 
59

 

 
26,947

Collateralized mortgage obligations
375

 
15

 

 

 
390

Collateralized debt obligations
806

 

 

 
457

 
349

Total available for sale
$
27,933

 
$
791

 
$
59

 
$
457

 
$
28,208

 
 

 
 

 
 

 
 

 
 

Held to maturity:
 

 
 

 
 

 
 

 
 

States and political subdivisions
$
2,141

 
$
236

 
$

 
$

 
$
2,377


The amortized cost and fair value of debt securities classified as available for sale and held to maturity, by contractual maturity as of June 30, 2015 are as follows:

 
Amortized
Cost
 
Fair
Value
 
(amounts in thousands)
Available for sale:
 
Due within one year
$

 
$

Due after one year through five years

 

Due after five years through ten years

 

Due after ten years
1,306

 
894

Residential mortgage-backed securities and collateralized mortgage obligations
44,365

 
44,541

Total available for sale
$
45,671

 
$
45,435

 
 
 
 
Held to maturity:
 
 
 
Due within one year
$

 
$

Due after one year through five years

 

Due after five years through ten years

 

Due after ten years
2,161

 
2,406

Total held to maturity
$
2,161

 
$
2,406


Expected maturities will differ from contractual maturities for mortgage related securities because the issuers of certain debt securities do have the right to call or prepay their obligations without any penalty.

There were no securities pledged as collateral for borrowed funds as of June 30, 2015 and December 31, 2014. Securities with a carrying value of $12.9 million and $15.0 million were pledged to secure public deposits at June 30, 2015 and December 31, 2014, respectively.

The following tables show the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other than temporarily impaired (“OTTI”), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2015 and December 31, 2014:


8



As of June 30, 2015
 
Less Than 12 Months
 
12 Months or Greater
 
Total
Description of Securities
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
(amounts in thousands)
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
 
20,464

 
350

 
3,578

 
65

 
24,042

 
415

Total available for sale
 
$
20,464

 
$
350

 
3,578

 
$
65

 
$
24,042

 
$
415


As of December 31, 2014
 
Less Than 12 Months
 
12 Months or Greater
 
Total
Description of Securities
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
(amounts in thousands)
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
 
3,968

 
59

 

 

 
3,968

 
59

Total available for sale
 
$
3,968

 
$
59

 
$

 
$

 
$
3,968

 
$
59


Residential Mortgage-Backed Securities: The unrealized losses on the Company’s investment in mortgage-backed securities relates to seven securities at June 30, 2015 versus three securities at December 31, 2014. The losses were caused by movement in interest rates. The securities were issued by FNMA, a government sponsored entity. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider the investment in these securities to be OTTI at June 30, 2015.

Other Than Temporarily Impaired Debt Securities

We assess whether we intend to sell or it is more likely than not that we will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered OTTI and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income.

The present value of expected future cash flows is determined using the best estimate of cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best estimate cash flows vary depending on the type of security. The asset-backed securities cash flow estimates are based on bond specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds and structural support, including subordination and guarantees. The corporate bond cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using bond specific facts and circumstances including timing, security interests and loss severity.

We have a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. On a quarterly basis, we review all securities to determine whether an OTTI exists and whether losses should be recognized. We consider relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events; and (4) for fixed maturity securities, our intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity.

The following table presents a roll-forward of the credit loss component of the amortized cost of debt securities that we have written down for OTTI and the credit component of the loss that is recognized in earnings. OTTI recognized in earnings for credit-impaired debt securities is presented as additions in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairments). The credit loss component is reduced if we sell, intend to sell or believe we will be required to sell previously

9



credit-impaired debt securities. Additionally, the credit loss component is reduced if we receive cash flows in excess of what we expected to receive over the remaining life of the credit-impaired debt security, the security matures or is fully written down. Changes in the credit loss component of credit-impaired debt securities were as follows for the six month periods ended June 30, 2015 and 2014. There were no changes for the three month periods ended for June 30, 2015 and 2014.

 
For the Six Months Ended 
 June 30,
 
2015
 
2014
 
(amounts in thousands)
Beginning balance
$
171

 
$
1,126

Initial credit impairment

 

Subsequent credit impairments

 

Reductions for amounts recognized in earnings due to intent or requirement to sell

 

Reductions for securities sold

 
(955
)
Reductions for securities deemed worthless

 

Reductions for increases in cash flows expected to be collected

 

Ending balance
$
171

 
$
171

 
 
 
 

During the six months ended June 30, 2014, the Bank sold three Trust Preferred securities, which resulted in a $178,000 gain reflected in the income statement.

NOTE 4. LOANS
 
The portfolio of loans outstanding consists of the following:

 
June 30, 2015
 
December 31, 2014
 
Amount
 
Percentage
of Total
Loans
 
Amount
 
Percentage
of Total
Loans
 
(amounts in thousands)
Commercial and Industrial
$
36,813

 
5.0
%
 
$
30,092

 
4.2
%
Real Estate Construction:
 

 
 

 
 

 
 

Residential
6,238

 
0.9

 
5,859

 
0.8

Commercial
47,432

 
6.5

 
47,921

 
6.7

Real Estate Mortgage:
 

 
 

 
 

 
 

Commercial – Owner Occupied
157,335

 
21.6

 
176,649

 
24.8

Commercial – Non-owner Occupied
266,571

 
36.5

 
237,918

 
33.4

Residential – 1 to 4 Family
186,384

 
25.5

 
171,894

 
24.1

Residential – Multifamily
19,086

 
2.6

 
25,173

 
3.5

Consumer
10,121

 
1.4

 
17,555

 
2.5

Total Loans
$
729,980

 
100.0
%
 
$
713,061

 
100.0
%

Loan Origination/Risk Management: In the normal course of business the Company is exposed to a variety of operational, reputational, legal, regulatory, and credit risks that could adversely affect our financial performance. Most of our asset risk is primarily tied to credit (lending) risk. The Company has lending policies, guidelines and procedures in place that are designed to maximize loan income within an acceptable level of risk. The Board of Directors reviews and approves these policies, guidelines and procedures. When we originate a loan we make certain subjective judgments about the borrower’s ability to meet the loan’s terms and conditions. We also make objective and subjective value assessments on the assets we finance. The borrower’s ability to repay can be adversely affected by economic changes. Likewise, changes in market conditions and other external factors can affect asset valuations. The Company actively monitors the quality of its loan portfolio. A reporting system supplements the credit

10



review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit risk, loan delinquencies, troubled debt restructures, nonperforming and potential problem loans. Diversification in the loan portfolio is another means of managing risk associated with fluctuations in economic conditions.

Construction Loans: With respect to construction loans to developers and builders that are secured by non-owner occupied properties, loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analyses of the developers and property owners. Construction loans are also generally underwritten based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Commercial Real Estate: Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. Commercial real estate loans may be riskier than loans for one-to-four family residences and are typically larger in dollar size. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. The repayment of these loans is generally largely dependent on the successful operation and management of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location within our market area. This diversity helps reduce the Company's exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also monitors economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Residential Mortgage: The Company originates adjustable and fixed-rate residential mortgage loans. Such mortgage loans are generally originated under terms, conditions and documentation acceptable to the secondary mortgage market. Although the Company has placed all of these loans into its portfolio, a substantial majority of such loans can be sold in the secondary market or pledged for potential borrowings.

Consumer Loans: Consumer loans may carry a higher degree of repayment risk than residential mortgage loans. Repayment is typically dependent upon the borrower’s financial stability which is more likely to be adversely affected by job loss, illness, or personal bankruptcy. To monitor and manage consumer loan risk, policies and procedures have been developed and modified as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements. Historically the Company’s losses on consumer loans have been negligible.

The Company maintains an outsourced independent loan review program that reviews and validates the credit risk assessment program on a periodic basis. Results of these external independent reviews are presented to management. The external independent loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit risk management personnel.

Non-accrual and Past Due Loans: Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when a loan is 90 days past due, unless the loan is well secured and in the process of collection, as required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.


11



An age analysis of past due loans by class at June 30, 2015 and December 31, 2014 follows:
June 30, 2015
30-59
Days Past
Due
 
60-89
Days Past
Due
 
Greater
than 90
Days and
Not
Accruing
 
Total Past
Due
 
Current
 
Total
Loans
 
(amounts in thousands)
Commercial and Industrial
$

 
$

 
$
2,462

 
$
2,462

 
$
34,351

 
$
36,813

Real Estate Construction:
 

 
 

 
 

 
 

 
 

 
 

Residential

 

 

 

 
6,238

 
6,238

Commercial

 

 
7,140

 
7,140

 
40,292

 
47,432

Real Estate Mortgage:
 

 
 

 
 

 
 

 
 

 
 

Commercial – Owner Occupied
833

 

 
106

 
939

 
156,396

 
157,335

Commercial – Non-owner Occupied
59

 

 
5,220

 
5,279

 
261,292

 
266,571

Residential – 1 to 4 Family
590

 
76

 
6,526

 
7,192

 
179,192

 
186,384

Residential – Multifamily
360

 

 

 
360

 
18,726

 
19,086

Consumer
107

 

 
65

 
172

 
9,949

 
10,121

Total Loans
$
1,949

 
$
76

 
$
21,519

 
$
23,544

 
$
706,436

 
$
729,980

December 31, 2014
30-59
Days Past
Due
 
60-89
Days Past
Due
 
Greater
than 90
Days and
Not
Accruing
 
Total Past
Due
 
Current
 
Total
Loans
 
(amounts in thousands)
Commercial and Industrial
$

 
$
1,874

 
$
61

 
$
1,935

 
$
28,157

 
$
30,092

Real Estate Construction:
 

 
 

 
 

 
 

 
 

 
 

Residential

 

 
238

 
238

 
5,621

 
5,859

Commercial

 

 
10,773

 
10,773

 
37,148

 
47,921

Real Estate Mortgage:
 

 
 

 
 

 
 

 
 

 
 

Commercial – Owner Occupied

 

 
735

 
735

 
175,914

 
176,649

Commercial – Non-owner Occupied

 

 
8,624

 
8,624

 
229,294

 
237,918

Residential – 1 to 4 Family
629

 
20

 
6,367

 
7,016

 
164,878

 
171,894

Residential – Multifamily
364

 

 

 
364

 
24,809

 
25,173

Consumer

 

 
94

 
94

 
17,461

 
17,555

Total Loans
$
993

 
$
1,894

 
$
26,892

 
$
29,779

 
$
683,282

 
$
713,061


Impaired Loans: Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments.

All impaired loans have are assessed for recoverability based on an independent third-party full appraisal to determine the net realizable value (“NRV”) based on the fair value of the underlying collateral, less cost to sell and other costs, such as unpaid real estate taxes, that have been identified, or the present value of discounted cash flows in the case of certain impaired loans that are not collateral dependent. The appraisal will be based on an "as-is" valuation and will follow a reasonable valuation method that addresses the direct sales comparison, income, and cost approaches to market value, reconciles those approaches, and explains the elimination of each approach not used. Appraisals are generally updated every 12 months or sooner if we have identified possible further deterioration in value. Prior to receiving the updated appraisal, we will establish a specific reserve for any estimated deterioration, based upon our assessment of market conditions, adjusted for estimated costs to sell and other identified costs. If the NRV is greater than the loan amount, then no impairment loss exists. If the NRV is less than the loan amount, the shortfall is recognized by a specific reserve. If the borrower fails to pledge additional collateral in the ninety day period, a charge-off equal to the difference between the loan’s carrying value and NRV will occur. In certain circumstances, however, a direct charge-off may be taken at the time that the NRV calculation reveals a shortfall. All impaired loans are evaluated based on the criteria stated above on a quarterly basis and any change in the reserve requirements are recorded in the period identified. All partially charged-off loans remain on nonaccrual status until they are brought current as to both principal and interest and have at least nine months of payment history and future collectability of principal and interest is assured.

12



Impaired loans at June 30, 2015 and December 31, 2014 are set forth in the following tables.

June 30, 2015
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
(amounts in thousands)
With no related allowance recorded:
 
 
 
 
 
Commercial and Industrial
$
36

 
$
36

 
$

Real Estate Construction:
 

 
 

 
 

Residential

 

 

Commercial
2,964

 
3,056

 

Real Estate Mortgage:
 

 
 

 
 

Commercial – Owner Occupied
106

 
106

 

Commercial – Non-owner Occupied
2,052

 
2,052

 

Residential – 1 to 4 Family
5,759

 
6,624

 

Residential – Multifamily

 

 

Consumer

 

 

 
10,917

 
11,874

 

With an allowance recorded:
 

 
 

 
 

Commercial and Industrial
2,883

 
2,884

 
1,621

Real Estate Construction:
 

 
 

 
 

Residential

 

 

Commercial
7,360

 
9,814

 
497

Real Estate Mortgage:
 

 
 

 
 

Commercial – Owner Occupied
4,736

 
4,765

 
85

Commercial – Non-owner Occupied
24,085

 
25,575

 
796

Residential – 1 to 4 Family
2,142

 
2,274

 
255

Residential – Multifamily
360

 
360

 
5

Consumer
65

 
65

 
7

 
41,631

 
45,737

 
3,266

Total:
 

 
 

 
 

Commercial and Industrial
2,919

 
2,920

 
1,621

Real Estate Construction:
 

 
 

 
 

Residential

 

 

Commercial
10,324

 
12,870

 
497

Real Estate Mortgage:
 

 
 

 
 

Commercial – Owner Occupied
4,842

 
4,871

 
85

Commercial – Non-owner Occupied
26,137

 
27,627

 
796

Residential – 1 to 4 Family
7,901

 
8,898

 
255

Residential – Multifamily
360

 
360

 
5

Consumer
65

 
65

 
7

 
$
52,548

 
$
57,611

 
$
3,266



13



December 31, 2014
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
(amounts in thousands)
With no related allowance recorded:
 
 
 
 
 
Commercial and Industrial
$
61

 
$
401

 
$

Real Estate Construction:
 

 
 

 
 

Residential

 

 

Commercial
4,033

 
4,161

 

Real Estate Mortgage:
 

 
 

 
 

Commercial – Owner Occupied
735

 
1,132

 

Commercial – Non-owner Occupied
8,175

 
10,616

 

Residential – 1 to 4 Family
2,548

 
3,291

 

Residential – Multifamily

 

 

Consumer
94

 
94

 

 
15,646

 
19,695

 

With an allowance recorded:
 

 
 

 
 

Commercial and Industrial
2,346

 
2,346

 
1,040

Real Estate Construction:
 

 
 

 
 

Residential
238

 
979

 
238

Commercial
10,025

 
10,025

 
2,535

Real Estate Mortgage:
 

 
 

 
 

Commercial – Owner Occupied
5,216

 
5,245

 
114

Commercial – Non-owner Occupied
22,232

 
22,232

 
828

Residential – 1 to 4 Family
5,412

 
5,575

 
573

Residential – Multifamily
364

 
364

 
5

Consumer

 

 

 
45,833

 
46,766

 
5,333

Total:
 

 
 

 
 

Commercial and Industrial
2,407

 
2,747

 
1,040

Real Estate Construction:
 

 
 

 
 

Residential
238

 
979

 
238

Commercial
14,058

 
14,186

 
2,535

Real Estate Mortgage:
 

 
 

 
 

Commercial – Owner Occupied
5,951

 
6,377

 
114

Commercial – Non-owner Occupied
30,407

 
32,848

 
828

Residential – 1 to 4 Family
7,960

 
8,866

 
573

Residential – Multifamily
364

 
364

 
5

Consumer
94

 
94

 

 
$
61,479

 
$
66,461

 
$
5,333



14



The following tables present by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the six and three months ended June 30, 2015 and 2014:

  
Six Months Ended June 30,
 
2015
 
2014
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(amounts in thousands)
Commercial and Industrial
$
4,239

 
$
38

 
$
822

 
$
8

Real Estate Construction:
 

 
 

 
 

 
 

Residential

 

 
652

 

Commercial
13,073

 
123

 
18,348

 
231

Real Estate Mortgage:
 

 
 

 
 

 
 

Commercial – Owner Occupied
5,888

 
101

 
6,868

 
133

Commercial – Non-owner Occupied
27,867

 
496

 
32,658

 
624

Residential – 1 to 4 Family
8,969

 
103

 
12,776

 
115

Residential – Multifamily
362

 
14

 
368

 
12

Consumer
65

 

 
94

 
1

Total
$
60,463

 
$
875

 
$
72,586

 
$
1,124

 
 
 
 
 
 
 
 
  
Three Months Ended June 30,
 
2015
 
2014
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(amounts in thousands)
Commercial and Industrial
$
4,045

 
$
6

 
$
753

 
$
4

Real Estate Construction:
 

 
 

 
 

 
 

Residential

 

 
588

 

Commercial
13,008

 
51

 
18,329

 
115

Real Estate Mortgage:
 

 
 

 
 

 
 

Commercial – Owner Occupied
5,854

 
50

 
6,783

 
59

Commercial – Non-owner Occupied
27,732

 
267

 
32,111

 
304

Residential – 1 to 4 Family
8,943

 
49

 
12,580

 
56

Residential – Multifamily
361

 
8

 
367

 
6

Consumer
65

 

 
94

 
1

Total
$
60,008

 
$
431

 
$
71,605

 
$
545


Troubled debt restructurings: Periodically management evaluates our loans in order to determine the appropriate risk rating, interest accrual status and potential classification as a troubled debt restructuring (TDR), some of which are performing and accruing interest. A TDR is a loan on which we have granted a concession due to a borrower’s financial difficulty. These are concessions that would not otherwise be considered. The terms of these modified loans may include extension of maturity, renewals, changes in interest rate, additional collateral requirements or infusion of additional capital into the project by the borrower to reduce debt or to support future debt service. On construction and land development loans we may modify the loan as a result of delays or other project issues such as slower than anticipated sell-outs, insufficient leasing activity and/or a decline in the value of the underlying collateral securing the loan. Management believes that working with a borrower to restructure a loan provides us with a better likelihood of collecting our loan. It is our policy not to renegotiate the terms of a commercial loan simply because of a delinquency status. However, we will use our Troubled Debt Restructuring Program to work with delinquent borrowers when the delinquency is temporary. We consider all TDRs to be impaired.


15



At the time a loan is modified in a TDR, we consider the following factors to determine whether the loan should accrue interest:
 
Whether there is a period of current payment history under the current terms, typically 6 months;
Whether the loan is current at the time of restructuring; and
Whether we expect the loan to continue to perform under the restructured terms with a debt coverage ratio that complies with the Bank’s credit underwriting policy of 1.25 times debt service.

We also review the financial performance of the borrower over the past year to be reasonably assured of repayment and performance according to the modified terms. This review consists of an analysis of the borrower’s historical results; the borrower’s projected results over the next four quarters; current financial information of the borrower and any guarantors. The projected repayment source needs to be reliable, verifiable, quantifiable and sustainable. In addition, all TDRs are reviewed quarterly to determine the amount of any impairment. At the time of restructuring, the amount of the loan principal for which we are not reasonably assured of repayment is charged-off, but not forgiven.
 
A borrower with a restructured loan must make a minimum of six consecutive monthly payments at the restructured level and be current as to both interest and principal to be returned to accrual status.

Performing TDRs (not reported as non-accrual loans) totaled $31.0 million and $32.7 million with related allowances of $711,000 and $812,000 as of June 30, 2015 and December 31, 2014, respectively. Nonperforming TDRs totaled $7.4 million and $9.5 million with related allowances of $0 and $293,000 as of June 30, 2015 and December 31, 2014, respectively. All TDRs are classified as impaired loans and are included in the impaired loan disclosures above.

There were no new loans modified as a TDR during the three months and six months periods ended June 30, 2015 and 2014.
 
There were no loans that were modified and deemed TDRs that subsequently defaulted during the three and six months ended June 30, 2015. Some loans classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and result in potential incremental losses. These potential incremental losses have been factored into our overall allowance for loan losses estimate. The level of any re-defaults will likely be affected by future economic conditions. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is repaid in full, foreclosed, sold or it meets the criteria to be removed from TDR status.

Credit Quality Indicators: As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends related to the risk grades of loans, the level of classified loans, net charge-offs, nonperforming loans (see details above) and the general economic conditions in the region.
 
The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 7. Grades 1 through 4 are considered “Pass”. A description of the general characteristics of the seven risk grades is as follows:

1.
Good: Borrower exhibits the strongest overall financial condition and represents the most creditworthy profile.
2.
Satisfactory (A): Borrower reflects a well-balanced financial condition, demonstrates a high level of creditworthiness and typically will have a strong banking relationship with the Bank.
3.
Satisfactory (B): Borrower exhibits a balanced financial condition and does not expose the Bank to more than a normal or average overall amount of risk. Loans are considered fully collectable.
4.
Watch List: Borrower reflects a fair financial condition, but there exists an overall greater than average risk. Risk is deemed acceptable by virtue of increased monitoring and control over borrowings. Probability of timely repayment is present.
5.
Other Assets Especially Mentioned (OAEM): Financial condition is such that assets in this category have a potential weakness or pose unwarranted financial risk to the Bank even though the asset value is not currently impaired. The asset does not currently warrant adverse classification but if not corrected could weaken and could create future increased risk exposure. Includes loans which require an increased degree of monitoring or servicing as a result of internal or external changes.
6.
Substandard: This classification represents more severe cases of #5 (OAEM) characteristics that require increased monitoring. Assets are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral. Asset has a well-defined weakness or weaknesses that impairs the ability to repay debt and jeopardizes the timely liquidation or realization of the collateral at the asset’s net book value.

16



7.
Doubtful: Assets which have all the weaknesses inherent in those assets classified #6 (Substandard) but the risks are more severe relative to financial deterioration in capital and/or asset value; accounting/evaluation techniques may be questionable and the overall possibility for collection in full is highly improbable. Borrowers in this category require constant monitoring, are considered work-out loans and present the potential for future loss to the Bank.

An analysis of the credit risk profile by internally assigned grades as of June 30, 2015 and December 31, 2014 is as follows:

At June 30, 2015
Pass
 
OAEM
 
Substandard
 
Doubtful
 
Total
 
(amounts in thousands)
Commercial and Industrial
$
33,681

 
$
615

 
$
2,517

 
$

 
$
36,813

Real Estate Construction:
 

 
 

 
 

 
 

 
 

Residential
6,238

 

 

 

 
6,238

Commercial
23,439

 
16,853

 
7,140

 

 
47,432

Real Estate Mortgage:
 

 
 

 
 

 
 

 
 

Commercial – Owner Occupied
152,511

 
4,351

 
473

 

 
157,335

Commercial – Non-owner Occupied
250,737

 
5,404

 
10,430

 

 
266,571

Residential – 1 to 4 Family
176,925

 
1,183

 
8,276

 

 
186,384

Residential – Multifamily
18,726

 

 
360

 

 
19,086

Consumer
10,001

 
55

 
65

 

 
10,121

Total
$
672,258

 
$
28,461

 
$
29,261

 
$

 
$
729,980

 
At December 31, 2014
Pass
 
OAEM
 
Substandard
 
Doubtful
 
Total
 
(amounts in thousands)
Commercial and Industrial
$
27,104

 
$
642

 
$
2,346

 
$

 
$
30,092

Real Estate Construction:
 

 
 

 
 

 
 

 
 

Residential
5,621

 

 
238

 

 
5,859

Commercial
34,255

 
2,893

 
10,773

 

 
47,921

Real Estate Mortgage:
 

 
 

 
 

 
 

 
 

Commercial – Owner Occupied
170,685

 
4,051

 
1,913

 

 
176,649

Commercial – Non-owner Occupied
218,230

 
5,791

 
13,897

 

 
237,918

Residential – 1 to 4 Family
162,787

 
613

 
8,494

 

 
171,894

Residential – Multifamily
24,809

 

 
364

 

 
25,173

Consumer
17,461

 

 
94

 

 
17,555

Total
$
660,952

 
$
13,990

 
$
38,119

 
$

 
$
713,061


NOTE 5. ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management's best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company's allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, "Receivables" and allowance allocations calculated in accordance with ASC Topic 450, "Contingencies." Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company's process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of, and trends related to, nonaccrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for possible loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

The level of the allowance reflects management's continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent

17



in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management's judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company's loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor's ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a grade of 6 or higher, the loan is analyzed to determine whether the loan is impaired and, if impaired, whether there is a need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower's ability to repay amounts owed, any collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower's industry, among other things.

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company's pools of similar loans include similarly risk-graded groups of commercial loans, commercial real estate loans, consumer real estate loans and consumer and other loans.

General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank's lending management and staff; (ii) the effectiveness of the Bank's loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks; and (ix) the impact of rising interest rates on portfolio risk. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, high-moderate, moderate, low-moderate or low degree of risk. The results are then input into a "general allocation matrix" to determine an appropriate general valuation allowance.

An analysis of the allowance for loan losses for the six and three month periods ended June 30, 2015 and 2014 is as follows:

Allowance for Loan Losses:
For the six months ended June 30, 2015
 
Beginning
Balance
 
Charge-offs
 
Recoveries
 
Provisions
(Credits)
 
Ending
Balance
 
(amounts in thousands)
Commercial and Industrial
$
1,679

 
$

 
$
32

 
$
646

 
$
2,357

Real Estate Construction:
 

 
 

 
 

 
 

 
 

Residential
316

 
(238
)
 

 
119

 
197

Commercial
3,015

 
(2,380
)
 

 
1,030

 
1,665

Real Estate Mortgage:
 

 
 

 
 

 
 

 
 

Commercial – Owner Occupied
3,296

 

 
10

 
(307
)
 
2,999

Commercial – Non-owner Occupied
4,962

 
(381
)
 
398

 
492

 
5,471

Residential – 1 to 4 Family
4,156

 
(128
)
 
33

 
(200
)
 
3,861

Residential – Multifamily
357

 

 

 
(86
)
 
271

Consumer
262

 

 

 
(104
)
 
158

Total
$
18,043

 
$
(3,127
)
 
$
473

 
$
1,590

 
$
16,979

 
 

18



Allowance for Loan Losses:
For the six months ended June 30, 2014
 
Beginning
Balance
 
Charge-offs
 
Recoveries
 
Provisions
(Credits)
 
Ending
Balance
 
(amounts in thousands)
Commercial and Industrial
$
591

 
$
(395
)
 
$

 
$
504

 
$
700

Real Estate Construction:
 

 
 

 
 

 
 

 
 

Residential
414

 

 
5

 
(330
)
 
89

Commercial
948

 

 

 
(272
)
 
676

Real Estate Mortgage:
 

 
 

 
 

 
 

 
 

Commercial – Owner Occupied
4,735

 
(263
)
 
2

 
(179
)
 
4,295

Commercial – Non-owner Occupied
7,530

 

 

 
(1,504
)
 
6,026

Residential – 1 to 4 Family
3,612

 
(2,437
)
 
11

 
3,810

 
4,996

Residential – Multifamily
389

 

 

 
(7
)
 
382

Consumer
341

 
(24
)
 

 
(22
)
 
295

Total
$
18,560

 
$
(3,119
)
 
$
18

 
$
2,000

 
$
17,459


Allowance for Loan Losses:
For the three months ended June 30, 2015
 
Beginning
Balance
 
Charge-offs
 
Recoveries
 
Provisions
(Credits)
 
Ending
Balance
 
(amounts in thousands)
Commercial and Industrial
$
1,869

 
$

 
$
14

 
$
474

 
$
2,357

Real Estate Construction:
 

 
 

 
 

 
 

 
 

Residential
186

 

 

 
11

 
197

Commercial
1,618

 

 

 
47

 
1,665

Real Estate Mortgage:
 

 
 

 
 

 
 

 
 

Commercial – Owner Occupied
3,344

 

 

 
(345
)
 
2,999

Commercial – Non-owner Occupied
4,581

 

 

 
890

 
5,471

Residential – 1 to 4 Family
4,045

 

 
32

 
(216
)
 
3,861

Residential – Multifamily
279

 

 

 
(8
)
 
271

Consumer
261

 

 

 
(103
)
 
158

Total
$
16,183

 
$

 
$
46

 
$
750

 
$
16,979


Allowance for Loan Losses:
For the three months ended June 30, 2014
 
Beginning
Balance
 
Charge-offs
 
Recoveries
 
Provisions
(Credits)
 
Ending
Balance
 
(amounts in thousands)
Commercial and Industrial
$
873

 
$
(395
)
 
$

 
$
222

 
$
700

Real Estate Construction:
 

 
 

 
 

 
 

 
 

Residential
138

 

 
5

 
(54
)
 
89

Commercial
749

 

 

 
(73
)
 
676

Real Estate Mortgage:
 

 
 

 
 

 
 

 
 

Commercial – Owner Occupied
4,710

 
(182
)
 

 
(233
)
 
4,295

Commercial – Non-owner Occupied
5,973

 

 

 
53

 
6,026

Residential – 1 to 4 Family
6,001

 
(2,417
)
 
11

 
1,401

 
4,996

Residential – Multifamily
370

 

 

 
12

 
382

Consumer
319

 

 

 
(24
)
 
295

Unallocated
304

 

 

 
(304
)
 

Total
$
19,437

 
$
(2,994
)
 
$
16

 
$
1,000

 
$
17,459



19



Allowance for Loan Losses, at  
 June 30, 2015
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 
Total
 
(amounts in thousands)
Commercial and Industrial
$
1,621

 
$
736

 
$
2,357

Real Estate Construction:
 

 
 

 
 

Residential

 
197

 
197

Commercial
497

 
1,168

 
1,665

Real Estate Mortgage:
 

 
 

 
 

Commercial – Owner Occupied
85

 
2,914

 
2,999

Commercial – Non-owner Occupied
796

 
4,675

 
5,471

Residential – 1 to 4 Family
255

 
3,606

 
3,861

Residential – Multifamily
5

 
266

 
271

Consumer
7

 
151

 
158

Total
$
3,266

 
$
13,713

 
$
16,979



Allowance for Loan Losses, at  
 December 31, 2014
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 
Total
 
(amounts in thousands)
Commercial and Industrial
$
1,040

 
$
639

 
$
1,679

Real Estate Construction:
 

 
 

 
 

Residential
238

 
78

 
316

Commercial
2,535

 
480

 
3,015

Real Estate Mortgage:
 

 
 

 
 

Commercial – Owner Occupied
114

 
3,182

 
3,296

Commercial – Non-owner Occupied
828

 
4,134

 
4,962

Residential – 1 to 4 Family
573

 
3,583

 
4,156

Residential – Multifamily
5

 
352

 
357

Consumer

 
262

 
262

Total
$
5,333

 
$
12,710

 
$
18,043


Loans, at June 30, 2015:
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 
Total
 
(amounts in thousands)
Commercial and Industrial
$
2,919

 
$
33,894

 
$
36,813

Real Estate Construction:
 

 
 

 
 

Residential

 
6,238

 
6,238

Commercial
10,324

 
37,108

 
47,432

Real Estate Mortgage:
 

 
 

 
 

Commercial – Owner Occupied
4,842

 
152,493

 
157,335

Commercial – Non-owner Occupied
26,137

 
240,434

 
266,571

Residential – 1 to 4 Family
7,901

 
178,483

 
186,384

Residential – Multifamily
360

 
18,726

 
19,086

Consumer
65

 
10,056

 
10,121

Total
$
52,548

 
$
677,432

 
$
729,980


20




Loans, at December 31, 2014:
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 
Total
 
(amounts in thousands)
Commercial and Industrial
$
2,407

 
$
27,685

 
$
30,092

Real Estate Construction:
 

 
 

 
 

Residential
238

 
5,621

 
5,859

Commercial
14,058

 
33,863

 
47,921

Real Estate Mortgage:
 

 
 

 
 

Commercial – Owner Occupied
5,951

 
170,698

 
176,649

Commercial – Non-owner Occupied
30,407

 
207,511

 
237,918

Residential – 1 to 4 Family
7,960

 
163,934

 
171,894

Residential – Multifamily
364

 
24,809

 
25,173

Consumer
94

 
17,461

 
17,555

Total
$
61,479

 
$
651,582

 
$
713,061


NOTE 6. REGULATORY RESTRICTIONS

The Company and the Bank are subject to various regulatory capital requirements of federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators 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 assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

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 table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).

 
Actual
 
For Capital Adequacy
Purposes
 
To be Well- Capitalized
Under Prompt Corrective
Action Provisions
Parke Bancorp, Inc.
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
As of June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
(amounts in thousands except ratios)
 
 
 
 
 
 
 
 
 
 
 
Total Risk Based Capital
(to Risk Weighted Assets)
$
129,629

 
17.34
%
 
$
59,803

 
8
%
 
N/A
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital
(to Risk Weighted Assets)
$
120,190

 
16.08
%
 
$
29,901

 
4
%
 
N/A
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital
(to Average Assets)
$
120,190

 
14.28
%
 
$
33,676

 
4
%
 
N/A
 
N/A


21



 
Actual
 
For Capital Adequacy
Purposes
 
To be Well- Capitalized
Under Prompt Corrective
Action Provisions
Parke Bancorp, Inc.
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
(amounts in thousands except ratios)
 
 
 
 
 
 
 
 
 
 
 
Total Risk Based Capital
(to Risk Weighted Assets)
$
123,539

 
17.23
%
 
$
57,367

 
8
%
 
N/A
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital
(to Risk Weighted Assets)
$
114,593

 
15.98
%
 
$
28,684

 
4
%
 
N/A
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital
(to Average Assets)
$
114,593

 
14.12
%
 
$
32,460

 
4
%
 
N/A
 
N/A

 
Actual
 
For Capital Adequacy
Purposes
 
To be Well- Capitalized
Under Prompt Corrective
Action Provisions
Parke Bank
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
As of June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
(amounts in thousands except ratios)
 
 
 
 
 
 
 
 
 
 
 
Total Risk Based Capital
(to Risk Weighted Assets)
$
128,842

 
17.23
%
 
$
59,803

 
8
%
 
$
74,754

 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital
(to Risk Weighted Assets)
$
119,396

 
15.97
%
 
$
29,901

 
4
%
 
$
44,852

 
6
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital Common Equity
(to Risk Weighted Assets)
$
119,396

 
15.97
%
 
$
29,901

 
4
%
 
$
44,852

 
6
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital
(to Average Assets)
$
119,396

 
14.20
%
 
$
33,635

 
4
%
 
$
42,043

 
5
%

 
Actual
 
For Capital Adequacy
Purposes
 
To be Well- Capitalized
Under Prompt Corrective
Action Provisions
Parke Bank
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
(amounts in thousands except ratios)
 
 
 
 
 
 
 
 
 
 
 
Total Risk Based Capital
(to Risk Weighted Assets)
$
123,609

 
17.22
%
 
$
57,426

 
8
%
 
$
71,783

 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital
(to Risk Weighted Assets)
$
114,664

 
15.97
%
 
$
28,713

 
4
%
 
$
43,070

 
6
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital
(to Average Assets)
$
114,664

 
14.27
%
 
$
32,150

 
4
%
 
$
40,188

 
5
%

NOTE 7. OTHER COMPREHENSIVE INCOME

The Company’s accumulated other comprehensive income consisted of the following at June 30, 2015 and December 31, 2014:

 
June 30,
2015
 
December 31,
2014
 
(amounts in thousands)
Securities:
 
 
 
Non-credit unrealized losses on securities with OTTI
$
(431
)
 
$
(457
)
Unrealized gains on securities without OTTI
195

 
731

Tax impact
94

 
(109
)
Accumulated other comprehensive income
$
(142
)
 
$
165


22




NOTE 8. FAIR VALUE

Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures Topic 820 of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its assets and liabilities carried at fair value in three levels as follows:

Level 1 Input:

1)
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 Inputs:

1)
Quoted prices for similar assets or liabilities in active markets.
2)
Quoted prices for identical or similar assets or liabilities in markets that are not active.
3)
Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (e.g., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”

Level 3 Inputs:

1)
Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.
2)
These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.


23



Fair Value on a Recurring Basis:

The following is a description of the Company’s valuation methodologies for assets carried at fair value. These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes that its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting measurement date.

Investment Securities Available for Sale:

Where quoted prices are available in an active market, securities are classified in Level 1 of the valuation hierarchy. Securities in Level 1 are exchange-traded equities. If quoted market prices are not available for the specific security, then fair values are provided by independent third-party valuations services. These valuations services estimate fair values using pricing models and other accepted valuation methodologies, such as quotes for similar securities and observable yield curves and spreads. As part of the Company’s overall valuation process, management evaluates these third-party methodologies to ensure that they are representative of exit prices in the Company’s principal markets. Securities in Level 2 include U.S. Government agencies, mortgage-backed securities, state and municipal securities and TruPS.

Securities in Level 3 include thinly-traded and collateralized debt obligations. With the assistance of competent third-party valuation specialists, the Company utilized the following methodology to determine the fair value:

Cash flows were developed based on the estimated speeds at which the TruPS are expected to prepay (a range of 1% to 2%), the estimated rates at which the TruPS are expected to defer payments, the estimated rates at which the TruPS are expected to default (a range of 0.57% to 0.66%), and the severity of the losses on securities which default 95%. TruPS generally allow for prepayment by the issuer without a prepayment penalty any time after five years. Due to the lack of new TruPS and the relatively poor conditions of the financial institution industry, a relatively modest rate of prepayment was assumed going forward. Estimates for the Constant Default Rate (“CDR”) are based on the payment characteristics of the TruPS themselves (e.g. current, deferred, or defaulted) as well as the financial condition of the TruPS issuers in the pool. Estimates for the near-term rates of deferral and CDR are based on key financial ratios relating to the financial institutions’ capitalization, asset quality, profitability and liquidity. Finally, we consider whether or not the financial institution has received TARP funding, and if it has, the amount. Longer-term rates of deferral and defaults are based on historical averages. The fair value of each bond was assessed by discounting its projected cash flows by a discount rate. The discount rates were based on the yields of publicly traded TruPS and preferred stock issued by comparably rated banks (3 month LIBOR plus a spread of 4.0% to 9.59%).

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.

Financial Assets
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(amounts in thousands)
Securities Available for Sale
 
 
 
 
 
 
 
 
As of June 30, 2015
 
 
 
 
 
 
 
 
Corporate debt obligations
 
$

 
$
520

 
$

 
$
520

Residential mortgage-backed securities
 

 
44,227

 

 
44,227

Collateralized mortgage-backed securities
 

 
313

 

 
313

Collateralized debt obligations
 

 

 
375

 
375

Total
 
$

 
$
45,060

 
$
375

 
$
45,435

As of December 31, 2014
 
 

 
 

 
 

 
 

Corporate debt obligations
 
$

 
$
522

 
$

 
$
522

Residential mortgage-backed securities
 

 
26,947

 

 
26,947

Collateralized mortgage-backed securities
 

 
390

 

 
390

Collateralized debt obligations
 

 

 
349

 
349

Total
 
$

 
$
27,859

 
$
349

 
$
28,208


For the three and six months ended June 30, 2015, there were no transfers between the levels within the fair value hierarchy.


24



The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows for the three and six months ended June 30,:

 
Securities Available for Sale
 
June 30, 2015
 
June 30, 2014
 
 
 
 
 
(amounts in thousands)
Beginning balance at January 1,
$
349

 
$
4,144

Total net gains included in:
 

 
 

Net gain

 
178

Other comprehensive income
26

 

Settlements

 
(3,973
)
Net transfers into Level 3

 

Ending balance
$
375

 
$
349


Fair Value on a Non-recurring Basis:

Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Financial Assets
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(amounts in thousands)
As of June 30, 2015
 
 
 
 
 
 
 
 
Collateral dependent impaired loans
 
$

 
$

 
$
28,144

 
$
28,144

OREO
 

 

 
19,752

 
19,752

As of December 31, 2014
 
 

 
 

 
 

 
 

Collateral dependent impaired loans
 
$

 
$

 
$
35,711

 
$
35,711

OREO
 

 

 
20,931

 
20,931


Collateral dependent impaired loans, which are measured in accordance with FASB ASC Topic 310 “Receivables”, for impairment, had a carrying amount of $28.1 million and $35.7 million at June 30, 2015 and December 31, 2014 respectively, with a valuation allowance of $2.7 million and $4.7 million at June 30, 2015 and December 31, 2014, respectively. The valuation allowance for collateral dependent impaired loans is included in the allowance for loan losses on the balance sheet. All collateral dependent impaired loans have an independent third-party full appraisal to determine the NRV based on the fair value of the underlying collateral, less cost to sell (a range of 5% to 10%) and other costs, such as unpaid real estate taxes, that have been identified, or the present value of discounted cash flows in the case of certain impaired loans that are not collateral dependent. The appraisal will be based on an "as-is" valuation and will follow a reasonable valuation method that addresses the direct sales comparison, income, and cost approaches to market value, reconciles those approaches, and explains the elimination of each approach not used. Appraisals are updated every 12 months or sooner if we have identified possible further deterioration in value.

OREO consists of commercial real estate properties which are recorded at fair value based upon current appraised value, or agreements of sale less estimated disposition costs on level 3 inputs. Properties are reappraised annually.

Fair Value of Financial Instruments

The Company discloses estimated fair values for its significant financial instruments in accordance with FASB ASC Topic 825, “Disclosures about Fair Value of Financial Instruments”. The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for estimating the fair value of other financial assets and liabilities are discussed below.

For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include cash and cash equivalents, restricted stock, accrued interest receivable, demand and other non-maturity deposits and accrued interest payable.

25




The Company used the following methods and assumptions in estimating the fair value of the following financial instruments:

Investment Securities: Fair value of securities available for sale is described above. Fair value of held to maturity securities is based upon quoted market prices.

Loans (other than impaired): Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, residential mortgage and other consumer. Each loan category is further segmented into groups by fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of performing loans is calculated by discounting scheduled cash flows through their estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in each group of loans. The estimate of maturity is based on contractual maturities for loans within each group, or on the Company’s historical experience with repayments for each loan classification, modified as required by an estimate of the effect of current economic conditions.

Deposits: The fair value of time deposits is based on the discounted value of contractual cash flows, where the discount rate is estimated using the market rates currently offered for deposits of similar remaining maturities.

Borrowings: The fair values of FHLB borrowings, other borrowed funds and subordinated debt are based on the discounted value of estimated cash flows. The discounted rate is estimated using market rates currently offered for similar advances or borrowings.

Bank premises and equipment, customer relationships, deposit base and other information required to compute the Company’s aggregate fair value are not included in the above information. Accordingly, the above fair values are not intended to represent the aggregate fair value of the Company.

The following table summarizes the carrying amounts and fair values for financial instruments at June 30, 2015 and December 31, 2014:

 
Level in
Fair Value
Hierarchy
 
June 30, 2015
 
December 31, 2014
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
 
(amounts in thousands)
Financial Assets:
 
 
 
Cash and cash equivalents
Level 1
 
$
49,375

 
$
49,375

 
$
36,238

 
$
36,238

Investment securities AFS
(1)
 
45,435

 
45,435

 
28,208

 
28,208

Investment securities HTM
Level 2
 
2,161

 
2,405

 
2,141

 
2,377

Restricted stock
Level 2
 
4,119

 
4,119

 
3,152

 
3,152

Loans held for sale
Level 2
 
1,063

 
1,063

 
2,932

 
3,328

Loans, net
(2)
 
729,980

 
733,176

 
695,018

 
698,843

Accrued interest receivable
Level 2
 
2,840

 
2,840

 
2,827

 
2,827

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Demand and savings deposits
Level 2
 
$
380,763

 
$
380,763

 
$
372,827

 
$
372,827

Time deposits
Level 2
 
291,916

 
293,635

 
275,106

 
276,528

Borrowings
Level 2
 
83,163

 
79,928

 
62,755

 
60,297

Accrued interest payable
Level 2
 
507

 
507

 
445

 
445


(1) See the recurring fair value table above.
(2) For non-impaired loans, Level 2; for impaired loans, Level 3.
 


26



NOTE 9. EARNINGS PER SHARE (“EPS”)

The following tables set forth the calculation of basic and diluted EPS for the six and three month periods ended June 30, 2015 and 2014.

 
For the six months ended 
 June 30,
 
For the three months ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(amounts in thousands except share data)
 
(amounts in thousands except share data)
Basic earnings per common share
 
 
 
 
 
 
 
Net income available to common shareholders
$
4,421

 
$
4,211

 
$
2,223

 
$
2,186

Average common shares outstanding
6,022,768

 
5,990,309

 
6,034,613

 
5,991,859

Basic earnings per common share
$
0.73

 
$
0.70

 
$
0.37

 
$
0.36

Diluted earnings per common share
 

 
 

 
 

 
 

Net income available to common shareholders
$
4,421

 
$
4,211

 
$
2,223

 
$
2,186

Dividend on Preferred Series B
600

 
600

 
300

 
300

Average common shares outstanding
6,022,768

 
5,990,309

 
6,034,613

 
5,991,859

Dilutive potential common shares
1,921,579

 
1,932,892

 
1,927,107

 
1,938,659

Total diluted average common shares outstanding
7,944,347

 
7,923,201

 
7,961,720

 
7,930,518

Diluted earnings per common share
$
0.63

 
$
0.61

 
$
0.32

 
$
0.31


On June 23, 2015 the Company declared a quarterly cash dividend of $0.06 per share to shareholders of record as of July 15, 2015 and payable on July 30, 2015.

NOTE 10. SUBSEQUENT EVENTS

Accounting guidance establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Accordingly, Management has evaluated subsequent events after June 30, 2015 through the date the financial statements were issued and determined that no subsequent events warranted recognition in or disclosure in the interim financial statements.


27



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The Company may from time to time make written or oral "forward-looking statements" including statements contained in this Report and in other communications by the Company which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, such as statements of the Company's plans, objectives, expectations, estimates and intentions, involve risks and uncertainties and are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

The Company cautions that the foregoing list of important factors is not exclusive. The Company also cautions readers not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date on which they are given. The Company is not obligated to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after any such date.

General

The Company's results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on its interest-earning assets, such as loans and securities, and the interest expense paid on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as service charges, gains from the sale of loans, earnings from BOLI, loan exit fees and other fees. The Company's non-interest expenses primarily consist of employee compensation and benefits, occupancy expenses, marketing expenses, data processing costs and other operating expenses. The Company is also subject to losses in its loan portfolio if borrowers fail to meet their obligations. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory agencies.

Comparison of Financial Condition at June 30, 2015 and December 31, 2014

At June 30, 2015, the Company’s total assets increased to $868.7 million from $821.7 million at December 31, 2014, an increase of $47.0 million or 5.7%.

Cash and cash equivalents increased $13.2 million to $49.4 million at June 30, 2015 from $36.2 million at December 31, 2014, an increase of 36.5%.

Total investment securities increased to $47.6 million at June 30, 2015, from $30.3 million at December 31, 2014, an increase of $17.3 million or 57.0%. During the first quarter, the company purchased $20.7 million in mortgage-backed securities to increase on-balance sheet liquidity to fund future growth. The purchase was funded with borrowings from the FHLB.

Management evaluates the investment portfolio for OTTI on a quarterly basis. Factors considered in the analysis include, but are not limited to, whether an adverse change in cash flows has occurred, the length of time and the extent to which the fair value has been less than cost, whether the Company intends to sell, or will more likely than not be required to sell, the investment before recovery of its amortized cost basis, which may be maturity, credit rating downgrades, the percentage of performing collateral that would need to default or defer to cause a break in yield or a temporary interest shortfall, and management’s assessment of the financial condition of the underlying issuers. For the six months ended June 30, 2015, the Company did not recognize any credit-related OTTI charges.

Total gross loans increased to $730.0 million at June 30, 2015 from $713.1 million at December 31, 2014, an increase of $16.9 million or 2.4%.


28



Delinquent loans totaled $23.5 million or 3.2% of total loans at June 30, 2015, a decrease of $6.2 million from December 31, 2014. Delinquent loan balances by number of days delinquent at June 30, 2015 were: 30 to 89 days --- $2.0 million; 90 days and greater not accruing interest --- $21.5 million.

At June 30, 2015, the Company had $21.5 million in nonaccrual loans or 2.9% of total loans, a decrease from $26.9 million or 3.8% of total loans at December 31, 2014. The three largest nonperforming loan relationships are a $4.4 million land development loan, a $2.8 residential home loan and a $2.5 million land development loan.

The composition of nonaccrual loans as of June 30, 2015 and December 31, 2014 was as follows:
 
June 30,
2015
 
December 31,
2014
 
(amounts in thousands except ratios)
Commercial and Industrial
$
2,462

 
$
61

Real Estate Construction:
 

 
 

Residential

 
238

Commercial
7,140

 
10,773

Real Estate Mortgage:
 

 
 

Commercial – Owner Occupied
106

 
735

Commercial – Non-owner Occupied
5,220

 
8,624

Residential – 1 to 4 Family
6,526

 
6,367

Residential – Multifamily

 

Consumer
65

 
94

Total
$
21,519

 
$
26,892

Nonperforming loans to total loans
2.9
%
 
3.8
%

At June 30, 2015, the allowance for loan losses was $17.0 million, as compared to $18.0 million at December 31, 2014 The ratio of allowance for loan losses to total loans was 2.3% at June 30, 2015, compared to 2.5% at December 31, 2014. The decrease is due to continuing improvements in the credit quality of the loan portfolio. The ratio of allowance for loan losses to non-performing loans improved to 78.9% at June 30, 2015, compared to 67.1% at December 31, 2014. During the six month period ended June 30, 2015, the Company charged-off $3.1 million in loans, and recovered $473,000, compared to $3.0 million in loans charged off in the six months ended June 30, 2014, and $18,000 in recoveries. Specific allowances for loan losses have been established in the amount of $3.3 million on impaired loans totaling $52.5 million at June 30, 2015, as compared to $5.3 million on impaired loans totaling $61.5 million at December 31, 2014. We have provided for all losses that are both probable and reasonably estimable at June 30, 2015 and December 31, 2014. There can be no assurance, however, that further additions to the allowance will not be required in future periods.

OREO at June 30, 2015 was $19.8 million, compared to $20.9 million at December 31, 2014 the largest being a condominium development valued at $7.9 million.


29



An analysis of OREO activity is as follows:
 
For the six months ended
 
June 30,
 
2015
 
2014
 
(amounts in thousands)
Balance at beginning of period
$
20,931

 
$
28,910

Real estate acquired in settlement of loans
2,291

 
1,712

Allowance for OREO

 
(500
)
Sales of real estate
(2,639
)
 
(5,871
)
(Loss) gain on sale of real estate
(242
)
 
250

Write-down of real estate carrying values
(881
)
 
(684
)
Donated property

 
(22
)
 Reimbursment of funds

 
(30
)
Capitalized improvements to real estate
292

 
391

Balance at end of period
$
19,752

 
$
24,156


At June 30, 2015, the Bank’s total deposits increased to $672.7 million from $647.9 million at December 31, 2014, an increase of $24.7 million or 3.8%.

Total borrowings increased to $69.8 million at June 30, 2015 from $49.4 million at December 31, 2014 an increase of $20.4 million or 41.4% due to the additional borrowings used to fund the mortgage-backed securities purchases described above.

Total shareholders’ equity increased to $106.8 million at June 30, 2015 from $102.9 million at December 31, 2014, an increase of $3.9 million or 3.8%, due to the retention of earnings from the period.

Comparison of Operating Results for the Six Months Ended June 30, 2015 and 2014

General: Net income available to common shareholders for the six months ended June 30, 2015 was $4.4 million, compared to $4.2 million for the same period in 2014. The change was impacted by the following:

Interest Income: Interest income remained unchanged at $19.3 million for the six months ended June 30, 2015, and for the six months ended June 30, 2014. Although average loan balances increased, the average yield decreased for the six months ended June 30, 2015. Average loans for the six month period ended June 30, 2015 were $718.1 million compared to $671.3 million for the same period last year. The average yield on loans was 5.25% for the six months ended June 30, 2015 compared to 5.63% for the same period in 2014.

Interest Expense: Interest expense remained unchanged at $2.8 million for the six months ended June 30, 2015, and the six months ended June 30, 2014. Average interest bearing deposits increased to $612.7 million from $600.4 million the year before. The average rate paid on deposits for the six month period ended June 30, 2015 was 0.77% compared to 0.79% for the same period last year. While the average rate on borrowings decreased to 1.32% for the six months ended June 30, 2015 from 1.36% for the same period last year, this was more than offset by the $9.9 million increase in the average balance of borrowings in the current period as compared to the first six months of 2014.

Net Interest Income: Net interest income remained unchanged at $16.5 million for the six months ended June 30, 2015, and for the same period last year. Although our net interest spread decreased to 4.05% from 4.31%, our average interest bearing liabilities increased to $687.3 million from $665.1 million. Our net interest margin decreased 24 basis points to 4.17% for the six months ended June 30, 2015, from 4.41% for the same period last year.

Provision for Loan Losses: We recorded a provision for loan losses of $1.6 million for the six months ended June 30, 2015 compared to $2.0 million for the same period last year for a decrease of $400,000. The decrease was due to continuing improvements in the credit quality of the loan portfolio.

Non-interest Income: Non-interest income was $2.1 million for the six months ended June 30, 2015, compared to $2.6 million for the same period last year. The decrease was primarily attributable to a $1.1 million write down and loss on the sale of OREO property in the current period. This was offset by a $425,000 increase in gain on sale of loans.

30



Non-interest Expense: Non-interest expense decreased $832,000 to $8.6 million for the six months ended June 30, 2015, from $9.4 million for the six months ended June 30, 2014. The decrease was primarily due to a $1.1 million decrease in OREO expenses offset by a $300,000 increase in compensation and benefits due to salary increases and additional staffing.

Income Taxes: The Company recorded income tax expense of $2.9 million, on income before taxes of $8.4 million for the six months ended June 30, 2015, resulting in an effective tax rate of 34.5%, compared to income tax expense of $2.4 million on income before taxes of $7.7 million for the same period of 2014, resulting in an effective tax rate of 31.4%. The increase in the rate is due to curtailing the year to date SERP tax accrual which had a favorable impact on tax expense.
 
For the Six Months Ended June 30,
 
2015
 
2014
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Cost
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Cost
 
(amounts in thousands, except percentages)
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans
$
718,058

 
$
18,705

 
5.25
%
 
$
671,288

 
$
18,732

 
5.63
%
Investment securities
43,758

 
585

 
2.70
%
 
38,053

 
556

 
2.95
%
Federal funds sold and cash equivalents
36,500

 
42

 
0.23
%
 
46,680

 
55

 
0.24
%
Total interest-earning assets
798,316

 
$
19,332

 
4.88
%
 
756,021

 
$
19,343

 
5.16
%
Other assets
60,710

 
 

 
 

 
64,006

 
 

 
 

Allowance for loan losses
(17,444
)
 
 

 
 

 
(19,435
)
 
 

 
 

Total assets
$
841,582

 
 

 
 

 
$
800,592

 
 

 
 

Liabilities and Shareholders’ Equity
 

 
 

 
 

 
 

 
 

 
 

Interest bearing deposits:
 

 
 

 
 

 
 

 
 

 
 

NOWs
$
30,791

 
$
75

 
0.49
%
 
$
26,755

 
$
67

 
0.50
%
Money markets
108,549

 
269

 
0.50
%
 
96,091

 
273

 
0.57
%
Savings
193,259

 
511

 
0.53
%
 
217,911

 
654

 
0.61
%
Time deposits
251,837

 
1,391

 
1.11
%
 
251,402

 
1,332

 
1.07
%
Brokered certificates of deposit
28,289

 
83

 
0.59
%
 
8,266

 
37

 
0.90
%
Total interest-bearing deposits
612,725

 
2,329

 
0.77
%
 
600,425

 
2,363

 
0.79
%
Borrowings
74,528

 
489

 
1.32
%
 
64,654

 
437

 
1.36
%
Total interest-bearing liabilities
687,253

 
2,818

 
0.83
%
 
665,079

 
2,800

 
0.85
%
Non-interest bearing deposits
43,433

 
 

 
 

 
33,959

 
 

 
 

Other liabilities
5,346

 
 

 
 

 
5,466

 
 

 
 

Total non-interest bearing liabilities
48,779

 
 

 
 

 
39,425

 
 

 
 

Shareholders’ equity
105,550

 
 

 
 

 
96,088

 
 

 
 

Total liabilities and shareholders’ equity
$
841,582

 
 

 
 

 
$
800,592

 
 

 
 

Net interest income
 

 
$
16,514

 
 

 
 

 
$
16,543

 
 

Interest rate spread
 

 
 

 
4.05
%
 
 

 
 

 
4.31
%
Net interest margin
 

 
 

 
4.17
%
 
 

 
 

 
4.41
%

Comparison of Operating Results for the Three Months Ended June 30, 2015 and 2014

General: Net income available to common shareholders for the three months ended June 30, 2015 and 2014 was $2.2 million.

Interest Income: Interest income increased $197,000, or 2.0%, to $9.9 million for the three months ended June 30, 2015, from $9.7 million for the three months ended June 30, 2014. The increase is attributable to an increase in the average outstanding loan balances, offset by lower yield on loans. Average loans for the three month period ended June 30, 2015 were $722.6 million compared to $675.6 million for the same period last year. The average yield on loans was 5.31% for the three months ended June 30, 2015 compared to 5.61% for the same period in 2014.

Interest Expense: Interest expense increased $72,000 to $1.5 million for the three months ended June 30, 2015, from $1.4 million for the three months ended June 30, 2014. The increase is primarily attributable to an increase in average borrowings. Average borrowings for the three month period ended June 30, 2015 were $83.2 million, compared to $64.1 million for the same period last year. The average rate paid on borrowings for the three month period ended June 30, 2015 was 1.33%, compared to 1.35% for the same period last year. Average deposits for the three month period ended June 30, 2015 were $621.6 million compared to

31



$603.7 million for the same period last year. The average rate paid on deposits for the three month period ended June 30, 2015 was 0.77% compared to 0.79% for the same period last year.

Net Interest Income: Net interest income increased $125,000 to $8.5 million for the three months ended June 30, 2015, as compared to $8.3 million for the same period last year. We experienced a larger increase in the average loans outstanding than we did in our average deposits outstandings. This situation allowed us to increase out net interest income. Our net interest rate spread was 4.02% for the three months ended June 30, 2015, from 4.28% for the same period last year. Our net interest margin decreased 24 basis points to 4.14% for the three months ended June 30, 2015, from 4.38% for the same period last year.

Provision for Loan Losses: We recorded a provision for loan losses of $750,000 for the three months ended June 30, 2015, compared to $1.0 million for the same period last year.

Non-interest Income: Non-interest income was $854,000 for the three months ended June 30, 2015, compared to $1.7 million for the same period last year. The decrease was primarily attributable to a $954,000 write down and loss on sale of OREO. This was partially offset by an increase of $189,000 in the gain on sale of SBA loans.

Non-interest Expense: Non-interest expense decreased $636,000 to $4.3 million for the three months ended June 30, 2015, from $4.9 million for the three months ended June 30, 2014. The decrease was primarily due to a $823,000 decrease in OREO expenses, offset by a $159,000 increase in compensation expenses due to salary increases and additional staffing.

Income Taxes: The Company recorded income tax expense of $1.4 million on income before taxes of $4.3 million for the three months ended June 30, 2015, resulting in an effective tax rate of 32.2%, compared to income tax expense of $1.3 million on income before taxes of $4.1 million for the same period of 2014, resulting in an effective tax rate of 30.8%. The increase in the rate is due to curtailing the year to date SERP tax accrual which had a favorable impact on tax expense.
 
For the Three Months Ended June 30,
 
2015
 
2014
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Cost
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Cost
 
(amounts in thousands, except percentages)
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans
$
722,639

 
$
9,567

 
5.31
%
 
$
675,572

 
$
9,442

 
5.61
%
Investment securities
53,156

 
339

 
2.56
%
 
36,482

 
262

 
2.88
%
Federal funds sold and cash equivalents
44,500

 
27

 
0.24
%
 
50,304

 
32

 
0.26
%
Total interest-earning assets
820,295

 
$
9,933

 
4.86
%
 
762,358

 
$
9,736

 
5.12
%
Other assets
58,380

 
 

 
 

 
65,168

 
 

 
 

Allowance for loan losses
(16,738
)
 
 

 
 

 
(19,795
)
 
 

 
 

Total assets
$
861,937

 
 

 
 

 
$
807,731

 
 

 
 

Liabilities and Shareholders’ Equity
 

 
 

 
 

 
 

 
 

 
 

Interest bearing deposits:
 

 
 

 
 

 
 

 
 

 
 

NOWs
$
31,193

 
$
38

 
0.49
%
 
$
26,285

 
$
33

 
0.50
%
Money markets
112,202

 
139

 
0.50
%
 
98,360

 
135

 
0.55
%
Savings
189,827

 
253

 
0.53
%
 
214,204

 
313

 
0.59
%
Time deposits
254,602

 
714

 
1.12
%
 
256,706

 
689

 
1.08
%
Brokered certificates of deposit
33,758

 
54

 
0.64
%
 
8,134

 
16

 
0.79
%
Total interest-bearing deposits
621,582

 
1,198

 
0.77
%
 
603,689

 
1,186

 
0.79
%
Borrowings
83,179

 
276

 
1.33
%
 
64,110

 
216

 
1.35
%
Total interest-bearing liabilities
704,761

 
1,474

 
0.84
%
 
667,799

 
1,402

 
0.84
%
Non-interest bearing deposits
45,545

 
 

 
 

 
35,931

 
 

 
 

Other liabilities
4,920

 
 

 
 

 
5,977

 
 

 
 

Total non-interest bearing liabilities
50,465

 
 

 
 

 
41,908

 
 

 
 

Shareholders’ equity
106,711

 
 

 
 

 
98,024

 
 

 
 

Total liabilities and shareholders’ equity
$
861,937

 
 

 
 

 
$
807,731

 
 

 
 

Net interest income
 

 
$
8,459

 
 

 
 

 
$
8,334

 
 

Interest rate spread
 

 
 

 
4.02
%
 
 

 
 

 
4.28
%
Net interest margin
 

 
 

 
4.14
%
 
 

 
 

 
4.38
%

32




Critical Accounting Policies
 
In the preparation of our consolidated financial statements, management has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States. The significant accounting policies are described in Note 2 to the Consolidated Financial Statements.
 
Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities. Management considers these accounting policies to be critical accounting policies. The judgments and assumptions used are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of assets and liabilities and results of operations.
 
Allowance for Loan Losses: The allowance for loan losses is considered a critical accounting policy. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment.
 
In evaluating the allowance for loan losses, management considers historical loss factors, the mix of the loan portfolio (types of loans and amounts), geographic and industry concentrations, current national and local economic conditions and other factors related to the collectability of the loan portfolio, including underlying collateral values and estimated future cash flows. All of these estimates are susceptible to significant change. Large groups of smaller balance homogeneous loans, such as residential real estate, home equity loans, and consumer loans, are evaluated in the aggregate under FASB ASC Topic 450, “Accounting for Contingencies”, using historical loss factors adjusted for economic conditions and other qualitative factors which include trends in delinquencies, classified and nonperforming loans, loan concentrations by loan category and by property type, seasonality of the portfolio, internal and external analysis of credit quality, peer group data, loan charge offs, local and national economic conditions and single and total credit exposure. Large balance and/or more complex loans, such as multi-family and commercial real estate loans, commercial business loans, and construction loans are evaluated individually for impairment in accordance with FASB ASC Topic 310 “Receivables”. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s effective interest rate or at the fair value of collateral if repayment is expected solely from the collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available or as projected events change.
 
Management reviews the level of the allowance monthly. Although management used the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the FDIC and the Department, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Other Than Temporary Impairment on Investment Securities: Management periodically performs analyses to determine whether there has been an OTTI in the value of one or more securities. The available for sale securities portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholder’s equity. The held to maturity securities portfolio, consisting of debt securities for which there is a positive intent and ability to hold to maturity, is carried at amortized cost. Management conducts a quarterly review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. If such decline is deemed other-than-temporary, the cost basis of the security is adjusted by writing down the security to estimated fair market value through a charge to current period earnings to the extent that such decline is credit related. All other changes in unrealized gains or losses for investment securities available for sale are recorded, net of tax effect, through other comprehensive income.
 
Income Taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Realization of deferred tax assets is dependent on generating sufficient taxable income in the future.
 

33



When tax returns are filed, it is highly likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
 
Liquidity: Liquidity describes the ability of the Company to meet the financial obligations that arise out of the ordinary course of business. Liquidity addresses the Company's ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund current and planned expenditures. Liquidity is derived from increased repayment and income from interest-earning assets. The loan to deposit ratio was 108.5%% and 110.1% at June 30, 2015 and December 31, 2014, respectively. Funds received from new and existing depositors provided a large source of liquidity for the three month period ended June 30, 2015. The Company seeks to rely primarily on core deposits from customers to provide stable and cost-effective sources of funding to support loan growth. The Company also seeks to augment such deposits with longer term and higher yielding certificates of deposit. To the extent that retail deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds market. Longer term funding can be obtained through advances from the FHLB. As of June 30, 2015, the Company maintained lines of credit with the FHLB of $129.0 million, of which $69.8 million was outstanding at June 30, 2015.

As of June 30, 2015, the Company's investment securities portfolio included $44.2 million of residential mortgage-backed securities that provide cash flow each month. The majority of the investment portfolio is classified as available for sale, is marketable, and is available to meet liquidity needs. The Company's residential real estate portfolio includes loans, which are underwritten to secondary market criteria, and accordingly could be sold in the secondary mortgage market if needed as an additional source of liquidity. The Company's management is not aware of any known trends, demands, commitments or uncertainties that are reasonably likely to result in material changes in liquidity.
 
Capital: On January 1, 2015, new capital rules, approved by the Federal Reserve Board and other federal banking agencies, became effective for Parke Bancorp, Inc’s subsidiary Parke Bank. Under the new capital rules, Parke Bank, as a non-advanced approaches banking organization, had the option to exclude the effects of certain AOCI items from the equity calculation. Parke Bank did exercise the one-time irrevocable option to exclude these certain components of AOCI from the equity calculation.
 
We actively review our capital strategies in light of current and anticipated business risks, future growth opportunities, industry standards, and compliance with regulatory requirements. The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, earnings stability, competitive forces, economic conditions, and strength of management. At June 30, 2015, the capital ratios of Parke Bank exceed the “well capitalized” thresholds under the current capital requirements.


34



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable as the Company is a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Evaluation of disclosure controls and procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, (the "Exchange Act")), the Company's principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms.

Internal Controls

Changes in internal control over financial reporting. During the last quarter, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
 
On June 19, 2015, Devon Drive Lionville, LP, North Charlotte Road Pottstown, LP, Main Street Peckville, LP, Rhoads Avenue Newtown Square, LP, VG West Chester Pike, LP, 1301 Phoenix, LP, John M. Shea and George Spaeder (collectively, the “Plaintiffs”), filed suit in the U.S. District Court for the Eastern District of Pennsylvania, against Parke Bancorp, Inc., Parke Bank and ParkeBank's President and Chief Executive Officer and Senior Vice President (collectively the "Parke Parties") alleging civil violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), among other claims, seeking compensatory and punitive damages. The allegations stem from a series of loans made by Parke Bank to the various Plaintiffs which subsequently went into default. The Plaintiffs are alleging that funds of one or more of the Plaintiffs were used to repay loans of another. The Parke Parties believe the material allegations of wrongdoing are without merit and intend to vigorously defend against the claims asserted in this litigation . The Parke Parties intend to file a motion to dismiss all of the claims asserted against the Parke Parties grounds that, among other things, the claims asserted were, in prior litigation between the parties, including foreclosure actions, resolved in favor of the Parke Parties.

ITEM 1A. RISK FACTORS
 
Not applicable as the Company is a smaller reporting company.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Period
(a) Total Number of Shares (or Units) Purchased
(b) Average Price Paid per Share (or Unit)
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
(d) Maximum Number (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs
January 1 through 31, 2015

$



February 1 through 28, 2015
31,000

11.36



March 1 through 31, 2015




April 1 through 30, 2015




May 1 through 31, 2015




June 1 through 30, 2015




Total
31,000

$
11.36




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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.

ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.

ITEM 5. OTHER INFORMATION
 
None.

ITEM 6. EXHIBITS

31.1
Certification of CEO required by Rule 13a-14(a).
 
 
31.2
Certification of CFO required by Rule 13a-14(a).
 
 
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Certification required by 18 U.S.C. §1350.
 
 
101.INS
XBRL Instance Document *
 
 
101.SCH
XBRL Schema Document *
 
 
101.CAL
XBRL Calculation Linkbase Document *
 
 
101.LAB
XBRL Labels Linkbase Document *
 
 
101.PRE
XBRL Presentation Linkbase Document *
 
 
101.DEF
XBRL Definition Linkbase Document *

*           Submitted as Exhibits 101 to this Form 10-K are documents formatted in XBRL (Extensible Business Reporting Language).


36



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.



 
 
PARKE BANCORP, INC.
 
 
 
Date:
August 14, 2015
/s/ Vito S. Pantilione
 
 
Vito S. Pantilione
 
 
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
Date:
August 14, 2015
/s/ John F. Hawkins
 
 
John F. Hawkins
 
 
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)