Edgar Filing: PARKE BANCORP, INC.

Document

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, 2016.

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

For the transition period from ____________ to ____________

Commission File 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 15, 2016, there were issued and outstanding 6,843,059 shares of the registrant's common stock.

PARKE BANCORP, INC.

FORM 10-Q

FOR THE QUARTER ENDED June 30, 2016

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	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	37

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, 2016			December 31, 2015
Assets
Cash and due from financial institutions	$	3,648		$	3,131
Federal funds sold and cash equivalents	48,985			24,298
Total cash and cash equivalents	52,633			27,429
Investment securities available for sale, at fair value	40,140			42,567
Investment securities held to maturity (fair value of $2,535 at June 30, 2016 and $2,471 at December 31, 2015)	2,202			2,181
Total investment securities	42,342			44,748
Loans held for sale	—			2,640
Loans, net of unearned income	783,388			758,501
Less: Allowance for loan losses	(14,165		)	(16,136		)
Net loans	769,223			742,365
Accrued interest receivable	2,877			3,012
Premises and equipment, net	4,829			4,591
Other real estate owned (OREO)	12,815			16,629
Restricted stock, at cost	4,208			4,789
Bank owned life insurance (BOLI)	24,180			23,822
Deferred tax asset	10,593			10,928
Other assets	790			4,171
Total Assets	$	924,490		$	885,124
Liabilities and Equity
Liabilities
Deposits
Noninterest-bearing deposits	$	47,301		$	52,773
Interest-bearing deposits	665,494			612,437
Total deposits	712,795			665,210
FHLBNY borrowings	69,650			84,650
Subordinated debentures	13,403			13,403
Accrued interest payable	597			494
Other liabilities	5,876			9,160
Total liabilities	802,321			772,917
Equity
Preferred stock, 1,000,000 shares authorized, $1,000 liquidation value Series B - non-cumulative convertible; Issued: 20,000 shares at June 30, 2016 and December 31, 2015	20,000			20,000
Common stock, $.10 par value; authorized 15,000,000 shares; Issued: 7,127,581 shares at June 30, 2016 and 6,501,610 at December 31, 2015	713			650
Additional paid-in capital	62,076			53,984
Retained earnings	42,063			40,582
Accumulated other comprehensive income (loss)	337			(165		)
Treasury stock, 284,522 shares at June 30, 2016 and 280,354 shares at December 31, 2015, at cost	(3,015		)	(3,011		)
Total shareholders’ equity	122,174			112,040
Noncontrolling interest in consolidated subsidiaries	(5		)	167
Total equity	122,169			112,207
Total liabilities and equity	$	924,490		$	885,124

See accompanying notes to consolidated financial statements

Parke Bancorp Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)



	For the three months ended June 30,						For the six months ended June 30,
	2016			2015			2016			2015
	(in thousands except share data)						(in thousands except share data)
Interest income:
Interest and fees on loans	$	10,100		$	9,567		$	20,062		$	18,705
Interest and dividends on investments	316			339			672			585
Interest on federal funds sold and cash equivalents	55			27			78			42
Total interest income	10,471			9,933			20,812			19,332
Interest expense:
Interest on deposits	1,375			1,198			2,630			2,329
Interest on borrowings	339			276			673			489
Total interest expense	1,714			1,474			3,303			2,818
Net interest income	8,757			8,459			17,509			16,514
Provision for loan losses	(638		)	750			62			1,590
Net interest income after provision for loan losses	9,395			7,709			17,447			14,924
Noninterest income:
Gain on sale of SBA loans	372			1,200			1,803			1,757
Loan fees	159			341			506			655
Net income from BOLI	182			89			359			176
Service fees on deposit accounts	69			66			143			136
Loss on sale and write-down of real estate owned	(75		)	(954		)	(1,042		)	(1,123		)
Gain on sale of SBA related assets	7,611			—			7,611			—
Other	152			112			263			510
Total noninterest income	8,470			854			9,643			2,111
Noninterest expense:
Compensation and benefits	1,781			1,920			3,865			3,909
Professional services	369			364			825			873
Occupancy and equipment	311			306			643			629
Data processing	131			111			263			250
FDIC insurance	174			169			349			334
OREO expense	270			425			598			911
Other operating expense	955			963			2,138			1,699
Total noninterest expense	3,991			4,258			8,681			8,605
Income before income tax expense	13,874			4,305			18,409			8,430
Income tax expense	5,154			1,387			6,700			2,908
Net income attributable to Company and noncontrolling interest	8,720			2,918			11,709			5,522
Net income attributable to noncontrolling interest	(72		)	(395		)	(452		)	(501		)
Net income attributable to Company	8,648			2,523			11,257			5,021
Preferred stock dividend and discount accretion	300			300			600			600
Net income available to common shareholders	$	8,348		$	2,223		$	10,657		$	4,421
Earnings per common share:
Basic	$	1.22		$	0.33		$	1.56		$	0.67
Diluted	$	0.97		$	0.29		$	1.26		$	0.57
Weighted average shares outstanding:
Basic	6,843,059			6,638,075			6,843,067			6,625,045
Diluted	8,960,501			8,753,081			8,956,376			8,734,523

See accompanying notes to consolidated financial statements

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,
	2016			2015			2016			2015
	(in thousands)						(in thousands)
Net income attributable to Company	$	8,648		$	2,523		$	11,257		$	5,021
Unrealized gains (losses) on securities:
Non-credit related unrealized gains on securities with OTTI	9			—			9			26
Unrealized gains (losses) on securities without OTTI	203			(544		)	826			(536		)
Tax impact	(85		)	218			(333		)	203
Total unrealized gains (losses) on securities	127			(326		)	502			(307		)
Total comprehensive income	$	8,775		$	2,197		$	11,759		$	4,714

See accompanying notes to consolidated financial statements

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 (Loss) Income			Treasury Stock			Total Shareholders Equity			Non-Controlling Interest			Total Equity
	(in thousands except share data)
Balance, December 31, 2015	$	20,000	6,501,610	$	650	$	53,984	$	40,582		$	(165	)	$	(3,011	)	$	112,040		$	167		$	112,207
Capital withdraws by non-controlling interest																				(624		)	(624		)
Net income								11,257									11,257			452			11,709
Other comprehensive income											502						502						502
Stock compensation						30								(4		)	26						26
Stock dividend 10%			625,971	63		8,062		(8,125		)							—						—
Dividend on preferred stock								(600		)							(600		)				(600		)
Dividend on common stock								(1,051		)							(1,051		)				(1,051		)
Balance, June 30, 2016	$	20,000	7,127,581	$	713	$	62,076	$	42,063		$	337		$	(3,015	)	$	122,174		$	(5	)	$	122,169

See accompanying notes to consolidated financial statements

Parke Bancorp Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



	For the six months ended June 30,
	2016			2015
	(amounts in thousands)
Cash Flows from Operating Activities:
Net income	$	11,709		$	5,522
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization	154			157
Provision for loan losses	62			1,590
Bank owned life insurance	(359		)	(176		)
Gain on sale of SBA related assets	(7,611		)	—
Gain on sale of SBA loans	(1,803		)	(1,757		)
SBA loans originated for sale	(14,041		)	(13,653		)
Proceeds from sale of SBA loans originated for sale	18,039			17,280
Gain on sale & write down of OREO	1,042			1,123
Net accretion of purchase premiums and discounts on securities	36			(659		)
Deferred income tax benefit	334			(233		)
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest receivable and other assets	3,518			(466		)
Decrease in accrued interest payable and other accrued liabilities	(3,181		)	(2,119		)
Net cash provided by operating activities	7,899			6,609
Cash Flows from Investing Activities:
Purchases of investment securities available for sale	—			(19,976		)
Redemptions (purchases) of restricted stock	581			(967		)
Proceeds from maturities and principal payments on mortgage backed securities	3,205			2,877
Proceeds from sale of SBA related assets	50,348			—
Proceeds from sale of OREO	3,398			2,639
Capital improvements on OREO	(37		)	(292		)
Net increase in loans	(70,246		)	(21,864		)
Purchases of bank premises and equipment	(392		)	(192		)
Net cash used in investing activities	(13,143		)	(37,775		)
Cash Flows from Financing Activities:
Payment of dividend on common & preferred stock	(1,539		)	(1,261		)
Purchase of treasury stock	(4		)	(351		)
Minority interest capital withdrawal, net	(624		)	(403		)
Proceeds from exercise of stock options and warrants	—			1,163
Stock compensation	30			—
Net (decrease) increase in FHLBNY and short term borrowings	(15,000		)	20,408
Net (decrease) increase in noninterest-bearing deposits	(5,472		)	2,429
Net increase in interest-bearing deposits	53,057			22,318
Net cash provided by financing activities	30,448			44,303
Net increase in cash and cash equivalents	25,204			13,137
Cash and Cash Equivalents, January 1,	27,429			36,238
Cash and Cash Equivalents, June 30,	$	52,633		$	49,375
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest on deposits and borrowed funds	$	3,201		$	2,756
Income taxes	$	4,321		$	2,904
Supplemental Schedule of Noncash Activities:
Real estate acquired in settlement of loans	$	589		$	2,291
Dividends accrued during the period	$	847		$	665

See accompanying notes to consolidated financial statements

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 LLC, a joint venture formed in 2009 to originate and service SBA loans. The assets of 44 Business Capital were sold on April 28, 2016. 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, 2015 since they do not include all of the information and footnotes required by GAAP. The accompanying interim financial statements for the six months ended June 30, 2016 and 2015 are unaudited. The balance sheet as of December 31, 2015, 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 six months ended June 30, 2016 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:

During June 2016, the FASB issued Accounting Standards Update ASU 2016-13, Financial Instruments Credit Losses. ASU 2016-13 (Topic 326) replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at -amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. This guidance is effective for fiscal years

beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

On January 5, 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (the ASU). Changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. ASU 2016-01 is effective for public business entities for fiscal years beginning after December 17, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of these amendments.

On February 25, 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). ASU No. 2016-02 includes a lessee accounting model that recognizes two types of leases - finance leases and operating leases. The standard requires that a lessee recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Leases with terms of less than 12 months are exempt from the new standard. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as finance or operating lease. New disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases are also required. These disclosures include qualitative and quantitative requirements, providing information about the amounts recorded in the financial statements. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; that is, for a calendar year-end public entity, the changes take effect beginning January 1, 2019. The Company is currently evaluating the impact of these amendments.

During March 2016, the FASB issued Accounting Standards Update No. 2016-09, Stock Compensation. ASU No. 2016-09(Topic 718) eliminates the concept of APIC pools for stock-based awards and requires that the related excess tax benefits and tax deficiencies be classified as an operating activity in the statement of cash flows. The new guidance also allows entities to make a one-time policy election to account for forfeitures when they occur, instead of accruing compensation cost based on the number of awards expected to vest. Additionally, the new guidance changes the requirement for an award to qualify for equity classification by permitting tax withholding up to the maximum statutory tax rate instead of the minimum statutory tax rate. Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

During May 2014, the FASB issued Accounting Standards No. 2014-09, Revenue from Contracts with Customers. ASU No.2014-09 (Topic 606) supersedes the revenue recognition requirements in Accounting Standards Codification Topic 606, Revenue Recognition, and most industry-specific guidance throughout the Accounting Standards Codification. The guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. During August 2015, the FASB provided a one-year deferral of the effective date; therefore, the guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The FASB has also issued clarification guidance as it relates to principal versus agent considerations for revenue recognition purposes and clarification guidance on other various considerations related to the new revenue recognition guidance. Additionally, during April 2016, the FASB issued further clarification guidance related to identifying performance obligations and licensing. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

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, 2016 and December 31, 2015:



As of June 30, 2016	Amortized cost		Gross unrealized gains		Gross unrealized losses		Other-than- temporary impairments in AOCI		Fair value
	(amounts in thousands)
Available for sale:
Corporate debt obligations	$	1,000	$	17	$	—	$	—	$	1,017
Residential mortgage-backed securities	37,593		887		16		—		38,464
Collateralized mortgage obligations	195		9		—		—		204
Collateralized debt obligations	790		—		—		335		455
Total available for sale	$	39,578	$	913	$	16	$	335	$	40,140

Held to maturity:
States and political subdivisions	$	2,202	$	333	$	—	$	—	$	2,535



As of December 31, 2015	Amortized cost		Gross unrealized gains		Gross unrealized losses		Other-than- temporary impairments in AOCI		Fair value
	(amounts in thousands)
Available for sale:
Corporate debt obligations	$	1,000	$	31	$	—	$	—	$	1,031
Residential mortgage-backed securities	40,788		451		418		—		40,821
Collateralized mortgage obligations	246		7		—		—		253
Collateralized debt obligations	806		—		—		344		462
Total available for sale	$	42,840	$	489	$	418	$	344	$	42,567

Held to maturity:
States and political subdivisions	$	2,181	$	290	$	—	$	—	$	2,471

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, 2016 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	500		500
Due after ten years	1,290		972
Residential mortgage-backed securities and collateralized mortgage obligations	37,789		38,668
Total available for sale	$	39,579	$	40,140

Held to maturity:
Due within one year	$	—	$	—
Due after one year through five years	—		—
Due after five years through ten years	1,214		1,283
Due after ten years	988		1,252
Total held to maturity	$	2,202	$	2,535

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.

Securities with a carrying value of $14.8 million and $15.0 million were pledged to secure public deposits at June 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015:



As of June 30, 2016	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	$	33	$	3	$	1,247	$	13	$	1,280	$	16
Total available for sale	$	33	$	3	$	1,247	$	13	$	1,280	$	16



As of December 31, 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	$	19,191	$	343	$	3,221	$	75	$	22,412	$	418
Total available for sale	$	19,191	$	343	$	3,221	$	75	$	22,412	$	418

The unrealized losses on the Company’s investment in mortgage-backed securities relates to four securities at June 30, 2016 versus three securities at December 31, 2015. 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, 2016.

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 credit loss component of credit-impaired debt securities was $171,000. This impairment was taken in a prior year and no OTTI was realized in the current year.

The Company did not sell any securities during the six ended June 30, 2016.

NOTE 4. LOANS

The portfolio of loans outstanding consists of the following:



	June 30, 2016				December 31, 2015
	Amount		Percentage of Total Loans		Amount		Percentage of Total Loans
	(amounts in thousands)
Commercial and Industrial	$	23,980	3.1	%	$	27,140	3.6	%
Real Estate Construction:
Residential	7,800		1.0		7,750		1.0
Commercial	57,812		7.4		45,245		6.0
Real Estate Mortgage:
Commercial – Owner Occupied	123,152		15.7		172,040		22.7
Commercial – Non-owner Occupied	264,356		33.7		256,471		33.8
Residential – 1 to 4 Family	253,415		32.4		213,266		28.1
Residential – Multifamily	35,318		4.5		18,113		2.4
Consumer	17,555		2.2		18,476		2.4
Total Loans	$	783,388	100.0	%	$	758,501	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 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.

Commercial and Industrial Loans: The Company originates secured loans for business purposes. Loans are made to provide working capital to businesses in the form of lines of credit, which may be secured by accounts receivable, inventory, equipment or other assets. The financial condition and cash flow of commercial borrowers are closely monitored by means of corporate financial statements, personal financial statements and income tax returns. The frequency of submissions of required financial information depends on the size and complexity of the credit and the collateral that secures the loan. The Company’s general policy is to obtain personal guarantees from the principals of the commercial loan borrowers. Such loans are made to businesses located in the Company’s market area.

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 risk 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 the 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 the 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.

An age analysis of past due loans by class at June 30, 2016 and December 31, 2015 follows:



June 30, 2016	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	$	—	$	—	$	432	$	432	$	23,548	$	23,980
Real Estate Construction:
Residential	—		—		—		—		7,800		7,800
Commercial	—		—		4,123		4,123		53,689		57,812
Real Estate Mortgage:
Commercial – Owner Occupied	—		—		990		990		122,162		123,152
Commercial – Non-owner Occupied	—		—		3,878		3,878		260,478		264,356
Residential – 1 to 4 Family	568		—		1,760		2,328		251,087		253,415
Residential – Multifamily	—		—		308		308		35,010		35,318
Consumer	24		—		31		55		17,500		17,555
Total Loans	$	592	$	—	$	11,522	$	12,114	$	771,274	$	783,388



December 31, 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	$	—	$	—	$	740	$	740	$	26,400	$	27,140
Real Estate Construction:
Residential	—		—		—		—		7,750		7,750
Commercial	—		—		5,204		5,204		40,041		45,245
Real Estate Mortgage:
Commercial – Owner Occupied	812		—		358		1,170		170,870		172,040
Commercial – Non-owner Occupied	—		—		4,002		4,002		252,469		256,471
Residential – 1 to 4 Family	—		—		3,255		3,255		210,011		213,266
Residential – Multifamily	357		—		—		357		17,756		18,113
Consumer	31		32		—		63		18,413		18,476
Total Loans	$	1,200	$	32	$	13,559	$	14,791	$	743,710	$	758,501

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.

Impaired loans at June 30, 2016 and December 31, 2015 are set forth in the following tables:



June 30, 2016	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(amounts in thousands)
With no related allowance recorded:
Commercial and Industrial	$	432	$	1,686	$	—
Real Estate Construction:
Residential	—		—		—
Commercial	4,096		7,899		—
Real Estate Mortgage:
Commercial – Owner Occupied	990		990		—
Commercial – Non-owner Occupied	3,878		5,717		—
Residential – 1 to 4 Family	1,760		1,973		—
Residential – Multifamily	308		354		—
Consumer	31		31		—
	11,495		18,650		—
With an allowance recorded:
Commercial and Industrial	—		—		—
Real Estate Construction:
Residential	—		—		—
Commercial	5,280		5,377		92
Real Estate Mortgage:
Commercial – Owner Occupied	4,079		4,109		70
Commercial – Non-owner Occupied	15,299		15,299		226
Residential – 1 to 4 Family	1,574		1,574		28
Residential – Multifamily	—		—		—
Consumer	—		—		—
	26,232		26,359		416
Total:
Commercial and Industrial	432		1,686		—
Real Estate Construction:
Residential	—		—		—
Commercial	9,376		13,276		92
Real Estate Mortgage:
Commercial – Owner Occupied	5,069		5,099		70
Commercial – Non-owner Occupied	19,177		21,016		226
Residential – 1 to 4 Family	3,334		3,547		28
Residential – Multifamily	308		354		—
Consumer	31		31		—
	$	37,727	$	45,009	$	416



December 31, 2015	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(amounts in thousands)
With no related allowance recorded:
Commercial and Industrial	$	680	$	1,934	$	—
Real Estate Construction:
Residential	—		—		—
Commercial	1,420		1,517		—
Real Estate Mortgage:
Commercial – Owner Occupied	358		358		—
Commercial – Non-owner Occupied	1,281		1,281		—
Residential – 1 to 4 Family	1,858		1,910		—
Residential – Multifamily	—		—		—
Consumer	—		—		—
	5,597		7,000		—
With an allowance recorded:
Commercial and Industrial	503		504		67
Real Estate Construction:
Residential	—		—		—
Commercial	5,696		8,420		1,149
Real Estate Mortgage:
Commercial – Owner Occupied	4,341		4,370		73
Commercial – Non-owner Occupied	23,303		24,988		486
Residential – 1 to 4 Family	2,426		3,200		709
Residential – Multifamily	356		356		5
Consumer	—		—		—
	36,625		41,838		2,489
Total:
Commercial and Industrial	1,183		2,438		67
Real Estate Construction:
Residential	—		—		—
Commercial	7,116		9,937		1,149
Real Estate Mortgage:
Commercial – Owner Occupied	4,699		4,728		73
Commercial – Non-owner Occupied	24,584		26,269		486
Residential – 1 to 4 Family	4,284		5,110		709
Residential – Multifamily	356		356		5
Consumer	—		—		—
	$	42,222	$	48,838	$	2,489

The following table presents by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2016 and 2015:



	Three Months Ended June 30,
	2016				2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(amounts in thousands)
Commercial and Industrial	$	1,691	$	—	$	4,045	$	6
Real Estate Construction:
Residential	—		—		—		—
Commercial	13,302		59		13,008		51
Real Estate Mortgage:
Commercial – Owner Occupied	5,152		44		5,854		50
Commercial – Non-owner Occupied	21,078		191		27,732		267
Residential – 1 to 4 Family	3,645		32		8,943		49
Residential – Multifamily	354		4		361		8
Consumer	31		—		65		—
Total	$	45,253	$	330	$	60,008	$	431



	Six Months Ended June 30,
	2016				2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(amounts in thousands)
Commercial and Industrial	$	1,740	$	—	$	4,239	$	38
Real Estate Construction:
Residential	—		—		—		—
Commercial	13,328		118		13,073		123
Real Estate Mortgage:
Commercial – Owner Occupied	6,036		89		5,888		101
Commercial – Non-owner Occupied	21,140		373		27,867		496
Residential – 1 to 4 Family	3,688		65		8,969		103
Residential – Multifamily	355		8		362		14
Consumer	31		1		65		—
Total	$	46,318	$	654	$	60,463	$	875

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. The Bank considers all TDRs to be impaired.

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 $26.2 million and $28.7 million with related allowances of $408,760 and $530,000 as of June 30, 2016 and December 31, 2015, respectively. Nonperforming TDRs were $3.2 million with no related allowances as of June 30, 2016 and 603,000 as of December 31, 2015, 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 and six month periods ended June 30, 2016 and 2015. Also, there were no loans that were modified and deemed a TDR that subsequently defaulted during the three and six month period ended June 30, 2016 and 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.

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.

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.

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, 2016 and December 31, 2015 is as follows:



At June 30, 2016	Pass		OAEM		Substandard		Doubtful		Total
	(amounts in thousands)
Commercial and Industrial	$	23,167	$	381	$	432	$	—	$	23,980
Real Estate Construction:
Residential	7,800		—		—		—		7,800
Commercial	32,966		20,723		4,123		—		57,812
Real Estate Mortgage:
Commercial – Owner Occupied	118,746		3,416		990		—		123,152
Commercial – Non-owner Occupied	256,064		1,475		6,817		—		264,356
Residential – 1 to 4 Family	249,708		387		3,320		—		253,415
Residential – Multifamily	35,010		—		308		—		35,318
Consumer	17,554		—		1		—		17,555
Total	$	741,015	$	26,382	$	15,991	$	—	$	783,388



At December 31, 2015	Pass		OAEM		Substandard		Doubtful		Total
	(amounts in thousands)
Commercial and Industrial	$	25,658	$	688	$	794	$	—	$	27,140
Real Estate Construction:
Residential	7,750		—		—		—		7,750
Commercial	24,210		15,831		5,204		—		45,245
Real Estate Mortgage:
Commercial – Owner Occupied	163,765		7,225		1,050		—		172,040
Commercial – Non-owner Occupied	242,607		7,044		6,820		—		256,471
Residential – 1 to 4 Family	207,911		515		4,840		—		213,266
Residential – Multifamily	17,757		—		356		—		18,113
Consumer	18,475		—		1		—		18,476
Total	$	708,133	$	31,303	$	19,065	$	—	$	758,501

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 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 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 three and six month periods ended June 30, 2016 and 2015 is as follows:



Allowance for Loan Losses:	For the three months ended June 30, 2016
	Beginning Balance		Charge-offs			Recoveries		Provisions (Credits) *			Ending Balance
	(amounts in thousands)
Commercial and Industrial	$	900	$	(40	)	$	1	$	9		$	870
Real Estate Construction:
Residential	180		—			—		72			252
Commercial	2,831		(1,081		)	—		762			2,512
Real Estate Mortgage:
Commercial – Owner Occupied	3,225		—			—		(1,539		)	1,686
Commercial – Non-owner Occupied	3,944		(154		)	—		133			3,923
Residential – 1 to 4 Family	5,096		(698		)	1		(177		)	4,222
Residential – Multifamily	381		(45		)	—		116			452
Consumer	262		—			—		(14		)	248
Total	$	16,819	$	(2,018	)	$	2	$	(638	)	$	14,165

* Includes $1,050 in provision for loan losses and $1,688 credit related to the sale of the SBA loan portfolio.



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