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: March 31, 2018.

[ ] 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, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer”, “accelerated filer", “smaller reporting company” and “emerging growth company in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Yes [ ] No [X]

As of May 10, 2018, there were outstanding 8,024,402 shares of the registrant's common stock.

INDEX



		Page
Part I	FINANCIAL INFORMATION

Item 1.	Financial Statements	1
	Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017	1
	Consolidated Statements of Income for the three months ended March 31, 2018 and 2017	2
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017	3
	Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2018 and 2017	4
	Consolidated Statements of Cash Flow for the three months ended March 31, 2018 and 2017	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	34

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	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35

SIGNATURES		37

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)



	March 31, 2018			December 31, 2017
Assets
Cash and due from financial institutions	$	5,432		$	14,452
Federal funds sold and cash equivalents	41,273			27,661
Total cash and cash equivalents	46,705			42,113
Investment securities available for sale, at fair value	35,905			37,991
Investment securities held to maturity (fair value of $1,252 at March 31, 2018 and $2,468 at December 31, 2017)	1,074			2,268
Total investment securities	36,979			40,259
Loans held for sale	1,703			1,541
Loans, net of unearned income	1,041,940			1,011,717
Less: Allowance for loan losses	(17,081		)	(16,533		)
Net loans	1,024,859			995,184
Accrued interest receivable	4,139			4,025
Premises and equipment, net	7,008			7,025
Other real estate owned (OREO)	6,838			7,248
Restricted stock, at cost	5,722			6,172
Bank owned life insurance (BOLI)	25,346			25,196
Deferred tax asset	6,577			6,420
Other assets	1,113			2,269
Total Assets	$	1,166,989		$	1,137,452
Liabilities and Equity
Liabilities
Deposits
Noninterest-bearing deposits	$	125,571		$	124,356
Interest-bearing deposits	776,633			742,027
Total deposits	902,204			866,383
FHLBNY borrowings	104,650			114,650
Subordinated debentures	13,403			13,403
Accrued interest payable	731			719
Other liabilities	7,090			7,517
Total liabilities	1,028,078			1,002,672
Equity
Preferred stock, 1,000,000 shares authorized, $1,000 liquidation value Series B - non-cumulative convertible; 15,946 shares outstanding March 31, 2018 and 15,971 shares outstanding December 31, 2017	15,946			15,971
Common stock, $0.10 par value; authorized 15,000,000 shares; Issued: 8,308,924 shares at March 31, 2018 and 8,301,497 at December 31, 2017	831			830
Additional paid-in capital	82,029			81,940
Retained earnings	43,743			39,184
Accumulated other comprehensive loss	(623		)	(130		)
Treasury stock, 284,522 shares at March 31, 2018 and 284,522 shares at December 31, 2017, at cost	(3,015		)	(3,015		)
Total shareholders’ equity	138,911			134,780
Total liabilities and equity	$	1,166,989		$	1,137,452

See accompanying notes to consolidated financial statements

Parke Bancorp Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)



	For the three months ended March 31,
	2018		2017
	(in thousands except share data)
Interest income:
Interest and fees on loans	$	13,013	$	10,651
Interest and dividends on investments	349		374
Interest on federal funds sold and cash equivalents	143		72
Total interest income	13,505		11,097
Interest expense:
Interest on deposits	1,953		1,466
Interest on borrowings	531		375
Total interest expense	2,484		1,841
Net interest income	11,021		9,256
Provision for loan losses	400		500
Net interest income after provision for loan losses	10,621		8,756
Noninterest income:
Gain on sale of SBA loans	178		—
Loan fees	151		66
Gain on Bank Owned Life Insurance	150		160
Service fees on deposit accounts	286		88
Loss on sale and write-down of real estate owned	—		(6		)
Other	104		87
Total noninterest income	869		395
Noninterest expense:
Compensation and benefits	1,954		1,901
Professional services	374		365
Occupancy and equipment	421		343
Data processing	197		181
FDIC insurance	77		70
OREO expense	169		157
Other operating expense	703		672
Total noninterest expense	3,895		3,689
Income before income tax expense	7,595		5,462
Income tax expense	1,835		2,004
Net income attributable to Company and noncontrolling interest	5,760		3,458
Net income (loss) attributable to noncontrolling interest	—		1
Net income attributable to Company	5,760		3,459
Preferred stock dividend and discount accretion	239		299
Net income available to common shareholders	$	5,521	$	3,160
Earnings per common share:
Basic	$	0.69	$	0.42
Diluted	$	0.58	$	0.35
Weighted average shares outstanding:
Basic	8,020,232		7,564,607
Diluted	9,916,498		9,901,919

All share and per share information has been adjusted for the 10% stock dividend paid May 19, 2017.

See accompanying notes to consolidated financial statements

Parke Bancorp Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)



	For the three months ended March 31,
	2018			2017
	(in thousands)
Net income	$	5,760		$	3,459
Unrealized gains on securities:
Non-credit related unrealized gains on securities with OTTI	—			10
Unrealized (losses) gains on securities without OTTI	(650		)	67
Tax impact	157			(31		)
Total unrealized (losses) gains on securities	(493		)	46
Total comprehensive income	$	5,267		$	3,505

See accompanying notes to consolidated financial statements

Parke Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)



	Preferred Stock $1,000 par			Shares of Common Stock	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Total Shareholders Equity			Minority Interest			Total Equity
	(in thousands except share data)
Balance, December 31, 2016	$	20,000		7,147,952	$	715	$	62,300	$	47,483		$	(349	)	$	(3,015	)	$	127,134		$	(44	)	$	127,090
Common stock options exercised				24,033			163											163						163
Preferred stock options exercised	(97		)	1,001	1		7											(89		)				(89		)
Net income									3,459									3,459			(1		)	3,458
Changes in other comprehensive income												46						46						46
Stock compensation							18											18						18
Dividend on preferred stock									(299		)							(299		)				(299		)
Dividend on common stock									(688		)							(688		)				(688		)
Balance, March 31, 2017	$	19,903		7,172,986	$	716	$	62,488	$	49,955		$	(303	)	$	(3,015	)	$	129,744		$	(45	)	$	129,699

Balance, December 31, 2017	$	15,971		8,301,497	$	830	$	81,940	$	39,184		$	(130	)	$	(3,015	)	$	134,780					$	134,780
Common stock options exercised				4,586	1		46											47						$	47
Preferred stock shares conversion	(25		)	2,841			25											—						$	—
Net income									5,760									5,760						$	5,760
Other comprehensive income												(493		)				(493		)				$	(493	)
Stock compensation							18											18						$	18
Dividend on preferred stock									(239		)							(239		)				$	(239	)
Dividend on common stock ($0.12 per share)									(962		)							(962		)				$	(962	)
Balance, March 31, 2018	$	15,946		8,308,924	$	831	$	82,029	$	43,743		$	(623	)	$	(3,015	)	$	138,911		$	—		$	138,911

All share information has been adjusted for the 10% stock dividend paid May 19, 2017.

See accompanying notes to consolidated financial statements

Parke Bancorp Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



	For the Three Months Ended March 31,
	2018			2017
	(amounts in thousands)
Cash Flows from Operating Activities:
Net income	$	5,760		$	3,458
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	91			69
Provision for loan losses	400			500
Gain on bank owned life insurance	(150		)	(160		)
Gain on sale of SBA loans	(178		)	—
SBA loans originated for sale	(2,548		)	(1,542		)
Proceeds from sale of SBA loans originated for sale	2,564			—
Loss on sale & write down of OREO	—			6
Net accretion of purchase premiums and discounts on securities	13			17
Deferred income tax benefit	—			307
Changes in operating assets and liabilities:
Decrease in accrued interest receivable and other assets	1,042			1,058
Decrease in accrued interest payable and other accrued liabilities	(415		)	(758		)
Net cash provided by operating activities	6,579			2,955
Cash Flows from Investing Activities:
Redemptions of restricted stock	450			—
Proceeds from maturities and principal payments on mortgage-backed securities	1,412			1,597
Donated OREO property	—			(30		)
Advances on OREO	(79		)	(103		)
Proceeds from sale and call of securities available for sale	1,205			—
Proceeds from sale of OREO	779			885
Net increase in loans	(30,365		)	(33,800		)
Purchases of bank premises and equipment	(74		)	(48		)
Net cash used in investing activities	(26,672		)	(31,499		)
Cash Flows from Financing Activities:
Payment of dividend on common & preferred stock	(1,201		)	(987		)
Proceeds from exercise of stock options	47			171
Stock compensation	18			18
Net decrease in FHLBNY and short-term borrowings	(10,000		)	—
Net increase (decrease) in noninterest-bearing deposits	1,215			(30,695		)
Net increase in interest-bearing deposits	34,606			29,047
Net cash provided by (used in) financing activities	24,685			(2,446		)
Net increase (decrease) in cash and cash equivalents	4,592			(30,990		)
Cash and Cash Equivalents, January 1,	42,113			70,720
Cash and Cash Equivalents, March 31,	$	46,705		$	39,730
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest on deposits and borrowed funds	$	2,472		$	1,875
Income taxes	$	—		$	2,004
Supplemental Schedule of Noncash Activities:
Real estate acquired in settlement of loans	$	290		$	59
Dividends accrued during the period	$	1,201		$	985

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 its deposits are 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, Washington Township, and Collingswood, 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 Company and the Bank are subject to the regulations of certain state and federal agencies, and accordingly, the Company and the Bank are 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.

In December of 2013, the Company completed a private placement of newly designated 6.00% Non-Cumulative Perpetual Convertible Preferred Stock, Series B, with a liquidation preference of $1,000 per share. The Company sold 20,000 shares in the placement for gross proceeds of $20.0 million. Each share of Series B Preferred Stock is convertible, at the option of the holder into 113.679 shares of Common Stock.

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. 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, 2017. The accompanying interim financial statements for the three months ended March 31, 2018 and 2017 are unaudited. The balance sheet as of December 31, 2017, 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 months ended March 31, 2018 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 other real estate owned ("OREO").

Recently Issued Accounting Pronouncements:

In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendment in this update allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the December 22, 2017, enactment of the reduced federal corporate income tax rate, which is effective in 2018. For public companies, the update is effective for annual periods beginning

after December 15, 2018, with early adoption permitted. The amendment can be adopted at the beginning of the period or on a retrospective basis. The Company is in the process of evaluating this ASU and doesn't expect that the adoption of this standard will have any material impact on the company's consolidated financial statements.

During August 2016, the FASB issued ASU 2016-15, which is new guidance related to the Statement of Cash Flows. The new guidance clarifies the classification within the statement of cash flows for certain transactions, including debt extinguishment costs, zero-coupon debt, contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interests in securitizations. The guidance also clarifies that cash flows with aspects of multiple classes of cash flows or that cannot be separated by source or use should be classified based on the activity that is likely to be the predominant source or use of cash flows for the item. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of this guidance does not have a material effect on the consolidated financial statements.

During June 2016, the FASB issued 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 in the process of gathering historical loan data required for the credit loss methodology and is reviewing a model from a third-party vendor. While we expect this standard will have an impact on the Company’s financial statements, we are still in process of conducting our evaluation.

On January 5, 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU's 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 15, 2017, including interim periods within those fiscal years. The Company adopted the guidance effective January 1, 2018, using the modified retrospective method. Upon adoption, the Company is no longer required to disclose the methodologies used for estimating fair value of financial assets and liabilities that are not measured at fair value on a recurring or nonrecurring basis. The remaining requirements of this update did not have a material impact on the Company consolidated financial statements.

On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 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 working on gathering all key lease data elements to meet the requirements of the new guidance. The resulting change from this ASU should not have a major impact on the Company's financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 (Topic 606) supersedes the revenue recognition requirements in Accounting Standards Codification, Topic 605. The amendment requires a contract-based approach revenue model. For public companies, this update was effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018, using the modified retrospective method. The Company’s revenue is primarily composed of interest income on financial instruments, including investment securities and loans, which are excluded from the scope of this update. Also excluded from the scope of the update is revenue from bank-owned life insurance, loan fees, and letter of credit fees. Deposit account related fees are within the scope of the guidance; however, revenue recognition practices did not change under the guidance, as deposits agreements are considered day to day contracts. Deposits account transaction related fees will continue to be recognized as the services are performed. Implementation of this guidance did not change current business practices. Implementation of this guidance did not have a material impact on the Company’s 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 March 31, 2018 and December 31, 2017:



As of March 31, 2018	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	$	27	$	—	$	—	$	1,027
Residential mortgage-backed securities	35,680		23		909		—		34,794
Collateralized mortgage obligations	82		2		—		—		84
Total available for sale	$	36,762	$	52	$	909	$	—	$	35,905

Held to maturity:
States and political subdivisions	$	1,074	$	178	$	—	$	—	$	1,252



As of December 31, 2017	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	$	33	$	—	$	—	$	1,033
Residential mortgage-backed securities	37,105		194		436		—		36,863
Collateralized mortgage obligations	93		2		—		—		95
Total available for sale	$	38,198	$	229	$	436	$	—	$	37,991

Held to maturity:
States and political subdivisions	$	2,268	$	200	$	—	$	—	$	2,468

The amortized cost and fair value of debt securities classified as available for sale and held to maturity, by contractual maturity as of March 31, 2018 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	500		527
Residential mortgage-backed securities and collateralized mortgage obligations	35,762		34,878
Total available for sale	$	36,762	$	35,905

Held to maturity:
Due within one year	$	—	$	—
Due after one year through five years	—		—
Due after five years through ten years	1,074		1,252
Due after ten years	—		—
Total held to maturity	$	1,074	$	1,252

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.

For the quarter ended March 31, 2018, the Bank used a line of credit of $40.0 million as collateral to secure public deposits as compared to $32.5 million of securities available for sale pledged to secure public deposits at December 31, 2017.

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 March 31, 2018 and December 31, 2017:



As of March 31, 2018	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	$	11,575	$	247	$	14,186	$	662	$	25,761	$	909
Total available for sale	$	11,575	$	247	$	14,186	$	662	$	25,761	$	909



As of December 31, 2017	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	$	2,729	$	16	$	15,117	$	420	$	17,846	$	436
Total available for sale	$	2,729	$	16	$	15,117	$	420	$	17,846	$	436

The unrealized losses on the Company’s investment in residential mortgage-backed securities relate to 12 securities at March 31, 2018 versus 10 securities at December 31, 2017. The losses were caused by movement in interest rates. The 12 securities were issued or guaranteed by government and government sponsored entities. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider the investment in these securities to be OTTI at March 31, 2018.

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 of 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 restructuring 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 Company did not sell any securities during the three months ended March 31, 2018.

NOTE 4. LOANS

The portfolio of loans outstanding consists of the following:



	March 31, 2018				December 31, 2017
	Amount		Percentage of Total Loans		Amount		Percentage of Total Loans
	(amounts in thousands)
Commercial and Industrial	$	30,200	2.9	%	$	38,972	4.0	%
Real Estate Construction:
Residential	31,190		3.0		28,486		2.8
Commercial	71,166		6.8		67,139		6.6
Real Estate Mortgage:
Commercial – Owner Occupied	127,778		12.3		126,250		12.5
Commercial – Non-owner Occupied	273,289		26.2		270,472		26.7
Residential – 1 to 4 Family	442,805		42.5		416,317		41.1
Residential – Multifamily	49,612		4.8		47,832		4.7
Consumer	15,900		1.5		16,249		1.6
Total Loans	$	1,041,940	100.0	%	$	1,011,717	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 analyses 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, or 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 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. 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. 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 March 31, 2018 and December 31, 2017 follows:



March 31, 2018	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	$	—	$	—	$	16	$	16	$	30,184	$	30,200
Real Estate Construction:
Residential	—		—		—		—		31,190		31,190
Commercial	—		—		1,392		1,392		69,774		71,166
Real Estate Mortgage:
Commercial – Owner Occupied	—		—		152		152		127,626		127,778
Commercial – Non-owner Occupied	—		—		326		326		272,963		273,289
Residential – 1 to 4 Family	463		62		2,285		2,810		439,995		442,805
Residential – Multifamily	—		—		—		—		49,612		49,612
Consumer	—		—		—		—		15,900		15,900
Total Loans	$	463	$	62	$	4,171	$	4,696	$	1,037,244	$	1,041,940



December 31, 2017	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	$	—	$	—	$	17	$	17	$	38,955	$	38,972
Real Estate Construction:
Residential	—		—		—		—		28,486		28,486
Commercial	—		—		1,392		1,392		65,747		67,139
Real Estate Mortgage:
Commercial – Owner Occupied	—		—		155		155		126,095		126,250
Commercial – Non-owner Occupied	—		—		597		597		269,875		270,472
Residential – 1 to 4 Family	—		352		2,292		2,644		413,673		416,317
Residential – Multifamily	—		—		—		—		47,832		47,832
Consumer	92		—		81		173		16,076		16,249
Total Loans	$	92	$	352	$	4,534	$	4,978	$	1,006,739	$	1,011,717

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 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 non-accrual 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 March 31, 2018 and December 31, 2017 are set forth in the following tables:



March 31, 2018	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(amounts in thousands)
With no related allowance recorded:
Commercial and Industrial	$	—	$	—	$	—
Real Estate Construction:
Residential	—		—		—
Commercial	1,366		5,855		—
Real Estate Mortgage:
Commercial – Owner Occupied	152		152		—
Commercial – Non-owner Occupied	277		277		—
Residential – 1 to 4 Family	2,285		2,326		—
Residential – Multifamily	—		—		—
Consumer	—		—		—
	4,080		8,610		—
With an allowance recorded:
Commercial and Industrial	16		20		16
Real Estate Construction:
Residential	—		—		—
Commercial	4,531		4,629		132
Real Estate Mortgage:
Commercial – Owner Occupied	3,547		3,577		55
Commercial – Non-owner Occupied	11,727		11,727		248
Residential – 1 to 4 Family	904		905		15
Residential – Multifamily	—		—		—
Consumer	—		—		—
	20,725		20,858		466
Total:
Commercial and Industrial	16		20		16
Real Estate Construction:
Residential	—		—		—
Commercial	5,897		10,484		132
Real Estate Mortgage:
Commercial – Owner Occupied	3,699		3,729		55
Commercial – Non-owner Occupied	12,004		12,004		248
Residential – 1 to 4 Family	3,189		3,231		15
Residential – Multifamily	—		—		—
Consumer	—		—		—
	$	24,805	$	29,468	$	466



December 31, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(amounts in thousands)
With no related allowance recorded:
Commercial and Industrial	$	17	$	21	$	—
Real Estate Construction:
Residential	—		—		—
Commercial	1,365		5,856		—
Real Estate Mortgage:
Commercial – Owner Occupied	155		155		—
Commercial – Non-owner Occupied	277		277		—
Residential – 1 to 4 Family	2,292		2,354		—
Residential – Multifamily	—		—		—
Consumer	81		81		—
	4,187		8,744		—
With an allowance recorded:
Commercial and Industrial	—		—		—
Real Estate Construction:
Residential	—		—		—
Commercial	4,587		4,684		135
Real Estate Mortgage:
Commercial – Owner Occupied	3,635		3,665		58
Commercial – Non-owner Occupied	12,124		13,941		250
Residential – 1 to 4 Family	919		919		15
Residential – Multifamily	—		—		—
Consumer	—		—		—
	21,265		23,209		458
Total:
Commercial and Industrial	17		21		—
Real Estate Construction:
Residential	—		—		—
Commercial	5,952		10,540		135
Real Estate Mortgage:
Commercial – Owner Occupied	3,790		3,820		58
Commercial – Non-owner Occupied	12,401		14,218		250
Residential – 1 to 4 Family	3,211		3,273		15
Residential – Multifamily	—		—		—
Consumer	81		81		—
	$	25,452	$	31,953	$	458

The following table presents by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(amounts in thousands)
Commercial and Industrial	$	21	$	—	$	23	$	—
Real Estate Construction:
Residential	—		—		—		—
Commercial	10,512		48		8,188		57
Real Estate Mortgage:
Commercial – Owner Occupied	3,774		48		4,081		57
Commercial – Non-owner Occupied	12,081		148		18,978		173
Residential – 1 to 4 Family	3,241		14		4,021		19
Residential – Multifamily	—		—		287		—
Consumer	—		—		90		1
Total	$	29,629	$	258	$	35,668	$	307

Troubled debt restructuring: 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; and 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 $20.6 million and $20.9 million with related allowances of $382,000 and $385,000 as of March 31, 2018 and December 31, 2017, respectively. Nonperforming TDRs were $277,000 at March 31, 2018 and December 31, 2017, with no related allowances as of March 31, 2018 and December 31, 2017. All TDRs, performing and nonperforming, 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-month periods ended March 31, 2018 and 2017. Also, there were no loans that were modified and deemed a TDR that subsequently defaulted during the three-month periods ended March 31, 2018 and 2017.

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 March 31, 2018 and December 31, 2017 is as follows:



At March 31, 2018	Pass		OAEM		Substandard		Doubtful		Total
	(amounts in thousands)
Commercial and Industrial	$	30,109	$	91	$	—	$	—	$	30,200
Real Estate Construction:
Residential	26,069		5,121		—		—		31,190
Commercial	63,108		—		8,058		—		71,166
Real Estate Mortgage:
Commercial – Owner Occupied	125,097		2,529		152		—		127,778
Commercial – Non-owner Occupied	272,824		—		465		—		273,289
Residential – 1 to 4 Family	439,837		550		2,418		—		442,805
Residential – Multifamily	49,612		—		—		—		49,612
Consumer	15,883		17		—		—		15,900
Total	$	1,022,539	$	8,308	$	11,093	$	—	$	1,041,940



At December 31, 2017	Pass		OAEM		Substandard		Doubtful		Total
	(amounts in thousands)
Commercial and Industrial	$	38,875	$	97	$	—	$	—	$	38,972
Real Estate Construction:
Residential	23,430		5,056		—		—		28,486
Commercial	58,921		—		8,218		—		67,139
Real Estate Mortgage:
Commercial – Owner Occupied	123,491		2,604		155		—		126,250
Commercial – Non-owner Occupied	269,736		—		736		—		270,472
Residential – 1 to 4 Family	413,327		560		2,430		—		416,317
Residential – Multifamily	47,832		—		—		—		47,832
Consumer	16,168		—		81		—		16,249
Total	$	991,780	$	8,317	$	11,620	$	—	$	1,011,717

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, non-accrual 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 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-month periods ended March 31, 2018 and 2017 is as follows:



Allowance for Loan Losses:	For the three months ended March 31, 2018
	Beginning Balance		Charge-offs			Recoveries		Provisions (Credits)			Ending Balance
	(amounts in thousands)
Commercial and Industrial	$	684	$	—		$	20	$	(149	)	$	555
Real Estate Construction:
Residential	399		—			—		38			437
Commercial	1,669		—			—		121			1,790
Real Estate Mortgage:
Commercial – Owner Occupied	2,017		—			136		(162		)	1,991
Commercial – Non-owner Occupied	4,630		—			5		146			4,781
Residential – 1 to 4 Family	6,277		—			4		363			6,644
Residential – Multifamily	627		—			—		21			648
Consumer	230		(17		)	—		22			235
Total	$	16,533	$	(17	)	$	165	$	400		$	17,081



Allowance for Loan Losses:	For the three months ended March 31, 2017
	Beginning Balance		Charge-offs			Recoveries		Provisions (Credits)			Ending Balance
	(amounts in thousands)
Commercial and Industrial	$	1,188	$	(134	)	$	35	$	76		$	1,165
Real Estate Construction:
Residential	268		—			—		(39		)	229
Commercial	2,496		—			—		(556		)	1,940
Real Estate Mortgage:
Commercial – Owner Occupied	2,082		(430		)	—		217			1,869
Commercial – Non-owner Occupied	3,889		—			40		311			4,240
Residential – 1 to 4 Family	4,916		(118		)	2		336			5,136
Residential – Multifamily	505		—			—		157			662
Consumer	236		—			—		(2		)	234
Total	$	15,580	$	(682	)	$	77	$	500		$	15,475



Allowance for Loan Losses, at March 31, 2018	Individually evaluated for impairment		Collectively evaluated for impairment		Total
	(amounts in thousands)
Commercial and Industrial	$	16	$	539	$	555
Real Estate Construction:
Residential	—		437		437
Commercial	132		1,658		1,790
Real Estate Mortgage:
Commercial – Owner Occupied	55		1,936		1,991
Commercial – Non-owner Occupied	248		4,533		4,781
Residential – 1 to 4 Family	15		6,629		6,644
Residential – Multifamily	—		648		648
Consumer	—		235		235
Total	$	466	$	16,615	$	17,081



Allowance for Loan Losses, at December 31, 2017	Individually evaluated for