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, 2018.
or
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File No. 000-51338

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

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

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

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]                No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]                No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 [ ] Emerging growth company [  ] 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]                No [X]

As of July 31, 2018, there were 9,774,221 shares of the registrant's common stock ($0.10 par value) outstanding.





INDEX

 
 
Page
Part I
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
Item 2.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
Part II
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
 
 
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,
2018
 
December 31,
2017
Assets
 
 
 
Cash and due from financial institutions
$
6,319

 
$
14,452

Federal funds sold and cash equivalents
103,892

 
27,661

Total cash and cash equivalents
110,211

 
42,113

Investment securities available for sale, at fair value
34,235

 
37,991

Investment securities held to maturity (fair value of $1,258 at June 30, 2018 and $2,468 at December 31, 2017)
1,086

 
2,268

Total investment securities
35,321

 
40,259

Loans held for sale
1,839

 
1,541

Loans, net of unearned income
1,101,243

 
1,011,717

Less: Allowance for loan losses
(17,273
)
 
(16,533
)
Net loans
1,083,970

 
995,184

Accrued interest receivable
4,271

 
4,025

Premises and equipment, net
6,964

 
7,025

Other real estate owned (OREO)
6,158

 
7,248

Restricted stock, at cost
5,858

 
6,172

Bank owned life insurance (BOLI)
25,499

 
25,196

Deferred tax asset
6,624

 
6,420

Other assets
2,920

 
2,269

Total Assets
$
1,289,635

 
$
1,137,452

Liabilities and Equity
 

 
 

Liabilities
 

 
 

Deposits
 

 
 

Noninterest-bearing deposits
$
210,669

 
$
124,356

Interest-bearing deposits
807,227

 
742,027

Total deposits
1,017,896

 
866,383

FHLBNY borrowings
104,650

 
114,650

Subordinated debentures
13,403

 
13,403

Accrued interest payable
1,116

 
719

Other liabilities
7,928

 
7,517

Total liabilities
1,144,993

 
1,002,672

Equity
 

 
 

Preferred stock, 1,000,000 shares authorized, $1,000 liquidation value Series B - non-cumulative convertible; 9,195 shares outstanding at June 30, 2018 and 15,971 shares outstanding at December 31, 2017
9,195

 
15,971

Common stock, $0.10 par value; authorized 15,000,000 shares; Issued: 9,956,210 shares at June 30, 2018 and 8,301,497 shares at December 31, 2017
996

 
830

Additional paid-in capital
104,866

 
81,940

Retained earnings
32,156

 
39,184

Accumulated other comprehensive loss
(797
)
 
(130
)
Treasury stock, at cost, 284,522 shares at June 30, 2018 and at December 31, 2017, respectively,
(3,015
)
 
(3,015
)
Total shareholders’ equity
143,401

 
134,780

Non-Controlling Interest
1,241

 
—

Total equity
144,642

 
134,780

Total liabilities and equity
$
1,289,635

 
$
1,137,452

See accompanying notes to consolidated financial statements

1


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

 
For the Three Months Ended 
 June 30,
 
For the Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands except share data)
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
14,243

 
$
11,356

 
$
27,256

 
$
22,006

Interest and dividends on investments
332

 
351

 
681

 
725

Interest on federal funds sold and cash equivalents
305

 
63

 
448

 
135

Total interest income
14,880

 
11,770

 
28,385

 
22,866

Interest expense:
 
 
 
 
 

 
 

Interest on deposits
2,620

 
1,547

 
4,573

 
3,012

Interest on borrowings
665

 
420

 
1,196

 
795

Total interest expense
3,285

 
1,967

 
5,769

 
3,807

Net interest income
11,595

 
9,803

 
22,616

 
19,059

Provision for loan losses
200

 
1,000

 
600

 
1,500

Net interest income after provision for loan losses
11,395

 
8,803

 
22,016

 
17,559

Noninterest income:
 

 
 

 
 

 
 

Gain on sale of SBA loans
36

 
84

 
214

 
84

Loan fees
409

 
175

 
560

 
241

Gain on Bank Owned Life Insurance
153

 
163

 
303

 
323

Service fees on deposit accounts
399

 
99

 
685

 
187

Loss on sale of OREO and valuation adjustments
(509
)
 
(389
)
 
(509
)
 
(395
)
Other
161

 
459

 
265

 
547

Total noninterest income
649

 
591

 
1,518

 
987

Noninterest expense:
 

 
 

 
 

 
 

Compensation and benefits
1,953

 
1,692

 
3,907

 
3,593

Professional services
418

 
382

 
792

 
747

Occupancy and equipment
419

 
326

 
840

 
669

Data processing
194

 
186

 
391

 
368

FDIC insurance
92

 
71

 
169

 
142

OREO expense
165

 
146

 
334

 
303

Other operating expense
753

 
758

 
1,456

 
1,428

Total noninterest expense
3,994

 
3,561

 
7,889

 
7,250

Income before income tax expense
8,050

 
5,833

 
15,645

 
11,296

Income tax expense
1,923

 
2,151

 
3,758

 
4,155

Net income attributable to Company and noncontrolling interest
6,127

 
3,682

 
11,887

 
7,141

Net (income) loss attributable to noncontrolling interest
(16
)
 
17

 
(16
)
 
18

Net income attributable to Company
6,111

 
3,699

 
11,871

 
7,159

Preferred stock dividend and discount accretion
168

 
297

 
407

 
596

Net income available to common shareholders
$
5,943

 
$
3,402

 
$
11,464

 
$
6,563

Earnings per common share:
 

 
 

 
 

 
 

Basic
$
0.66

 
$
0.41

 
$
1.28

 
$
0.79

Diluted
$
0.56

 
$
0.34

 
$
1.09

 
$
0.66

Weighted average shares outstanding:
 

 
 

 
 
 
 
Basic
9,044,159

 
8,335,041

 
8,933,820

 
8,328,093

Diluted
10,909,130

 
10,913,227

 
10,909,294

 
10,901,965

All share and per share information has been adjusted for the stock dividend paid on May 18, 2018.
See accompanying notes to consolidated financial statements

2


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

 
For the Three Months Ended 
 June 30,
 
For the Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Net income
6,127

 
3,682

 
11,887

 
7,141

Unrealized (losses) gains on investment securities:
 

 
 
 
 
 
 
Non-credit related net unrealized gains (losses) on OTTI securities
—

 
8

 
—

 
18

Unrealized (losses) gains on non-OTTI securities
(194
)
 
144

 
(844
)
 
211

Tax impact on unrealized gain (loss)
47

 
(61
)
 
204

 
(91
)
  Reclassification of stranded tax effects
(27
)
 
—

 
(27
)
 
—

Total unrealized (losses) gains on investment securities
(174
)
 
91

 
(667
)
 
138

Comprehensive income
$
5,953

 
$
3,773

 
$
11,220

 
$
7,279

Less: Comprehensive income attributable to noncontrolling interests
(16
)
 
17

 
(16
)
 
18

Comprehensive income attributable to the Company
$
5,937

 
$
3,790

 
$
11,204

 
$
7,297

See accompanying notes to consolidated financial statements


3


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


 
Preferred
Stock
 
Shares of Common
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
 
Retained
Earnings
 
Accumulated
Other Comprehensive (Loss) Income
 
Treasury
Stock
 
Total Shareholders' Equity
 
Non-Controlling 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

Capital withdrawal by non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(53
)
 
(53
)
Net income
—

 
—

 
—

 
—

 
7,159

 
—

 
—

 
7,159

 
(18
)
 
7,141

Common stock options exercised
—

 
7,260

 
—

 
232

 
—

 
—

 
—

 
232

 
—

 
232

Preferred stock shares conversion
(172
)
 
17,774

 
2

 
13

 
—

 
—

 
—

 
(157
)
 
—

 
(157
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
138

 
—

 
138

 
—

 
138

Stock compensation expense
—

 
—

 
—

 
36

 
—

 
—

 
—

 
36

 
—

 
36

Stock dividend
—

 
688,846

 
69

 
15,499

 
(15,568
)
 
—

 
—

 
—

 
—

 
—

Dividend on preferred stock
—

 
—

 
—

 
—

 
(596
)
 
—

 
—

 
(596
)
 
—

 
(596
)
Dividend on common stock
—

 
—

 
—

 
—

 
(1,599
)
 
—

 
—

 
(1,599
)
 
—

 
(1,599
)
Balance, June 30, 2017
$
19,828

 
7,861,832

 
$
786

 
$
78,080

 
$
36,879

 
$
(211
)
 
$
(3,015
)
 
$
132,347

 
$
(115
)
 
$
132,232

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
$
15,971

 
8,301,497

 
$
830

 
$
81,940

 
$
39,184

 
$
(130
)
 
$
(3,015
)
 
$
134,780

 
$
—

 
$
134,780

Retained earnings adjustment for stranded tax effects
—

 
—

 
—

 
—

 
27

 
—

 
—

 
27

 
—

 
27

Capital activity by non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,225

 
1,225

Net income
—

 
—

 
—

 
—

 
11,871

 
—

 
—

 
11,871

 
16

 
11,887

Common stock options exercised


 
5,406

 
1

 
40

 
—

 
—

 
—

 
41

 
—

 
41

Preferred stock shares conversion
(6,776
)
 
847,023

 
85

 
6,692

 
—

 
—

 
—

 
1

 
—

 
1

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
(667
)
 
—

 
(667
)
 
—

 
(667
)
Stock compensation expense


 


 


 
41

 


 


 
—

 
41

 
—

 
41

Stock dividend
—

 
802,284

 
80

 
16,153

 
(16,236
)
 
—

 
—

 
(3
)
 
—

 
(3
)
Dividend on preferred stock
—

 
—

 
—

 
—

 
(407
)
 
—

 
—

 
(407
)
 
—

 
(407
)
Dividend on common stock
—

 
—

 
—

 
—

 
(2,283
)
 
—

 
—

 
(2,283
)
 
—

 
(2,283
)
Balance, June 30, 2018
$
9,195

 
9,956,210

 
$
996

 
$
104,866

 
$
32,156

 
$
(797
)
 
$
(3,015
)
 
$
143,401

 
$
1,241

 
$
144,642

See accompanying notes to consolidated financial statements


4


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

 
For the Six Months Ended 
 June 30,
 
2018
 
2017
 
(amounts in thousands)
Cash Flows from Operating Activities:
 
 
 
Net income
$
11,887

 
$
7,141

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation of premises and equipment
185

 
144

Provision for loan losses
600

 
1,500

Increase in value of bank-owned life insurance
(303
)
 
(323
)
Gain on sale of SBA loans
(214
)
 
(84
)
SBA loans originated for sale
(3,075
)
 
(2,546
)
Proceeds from sale of SBA loans originated for sale
2,991

 
748

Loss on sale of OREO and valuation adjustments
509

 
395

Net accretion of purchase premiums and discounts on securities
27

 
33

Stock based compensation
41

 
36

Deferred income tax benefit
—

 
179

Net changes in:
 

 
 

Increase in accrued interest receivable and other assets
(897
)
 
(2,794
)
Increase (decrease) in accrued interest payable and other accrued liabilities
523

 
(254
)
Net cash provided by operating activities
$
12,274

 
$
4,175

Cash Flows from Investing Activities:
 

 
 

Proceeds from sale and call of investment securities
1,205

 
—

Proceeds from maturities and principal payments on mortgage backed securities
2,862

 
3,178

Net increase in loans
(90,443
)
 
(77,217
)
Purchases of bank premises and equipment
(124
)
 
(1,846
)
Donated OREO property
—

 
(30
)
Sale of OREO, net
1,638

 
1,500

Redemptions(purchases) of restricted stock
314

 
(1,035
)
Net cash used in investing activities
$
(84,548
)
 
$
(75,450
)
Cash Flows from Financing Activities:
 

 
 

Cash dividend payment
(2,407
)
 
(1,973
)
Proceeds from exercise of stock options
41

 
247

Capital contribution (withdrawal) from non-controlling interest
1,225

 
(53
)
Net (decrease) increase in FHLBNY and short-term borrowings
(10,000
)
 
20,000

Net increase (decrease) in noninterest-bearing deposits
86,313

 
(12,179
)
Net increase in interest-bearing deposits
65,200

 
14,013

Net cash provided by financing activities
140,372

 
20,055

Net increase (decrease) in cash and cash equivalents
68,098

 
(51,220
)
Cash and Cash Equivalents, January 1,
42,113

 
70,720

Cash and Cash Equivalents, June 30,
$
110,211

 
$
19,500

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 

 
 

Cash paid during the year for:
 

 
 

Interest on deposits and borrowed funds
$
5,384

 
$
3,835

Income taxes
$
3,354

 
$
5,654

Non-cash Investing and Financing Items
 

 
 

Loans transferred to OREO
$
1,057

 
$
59

 


 


See accompanying notes to consolidated financial statements

5


Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. ORGANIZATION

Parke Bancorp, Inc. (the “Company, we, us, our”) is a bank holding company headquartered in Sewell, New Jersey. Through subsidiaries, the Company provides individuals, corporations and other businesses, and institutions with commercial and retail banking services, principally loans and deposits. The Company was incorporated in January 2005 under the laws of the State of New Jersey for the sole purpose of becoming the holding company of Parke Bank (the "Bank").
The Bank is a commercial bank, which was incorporated on August 25, 1998, and commenced operations on January 28, 1999. The Bank is chartered by the New Jersey Department of Banking and Insurance and its deposits are insured by the Federal Deposit Insurance Corporation. The Bank maintains its principal office at 601 Delsea Drive, Sewell, New Jersey, and seven additional branch office locations; 501 Tilton Road, Northfield, New Jersey, 567 Egg Harbor Road, Washington Township, New Jersey, 67 East Jimmie Leeds Road, Galloway Township, New Jersey, 1150 Haddon Avenue, Collingswood, New Jersey, 1610 Spruce Street, Philadelphia, Pennsylvania, and 1032 Arch Street, Philadelphia, Pennsylvania.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Financial Statement Presentation: We prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary the Bank, and certain partnership interests. 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. We have eliminated inter-company balances and transactions. We have also reclassified certain prior year amounts to conform to the current year presentation, which did not have a material impact on our consolidated financial condition or results of operations.

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 and six months ended June 30, 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 and six months ended June 30, 2018 are not necessarily indicative of the results for the full year.

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, 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 early adopted the ASU in the second quarter of 2018. The reclassification of the cumulative-effect of $27,000 from accumulated other comprehensive income to retained earnings was immaterial to our 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.


6


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. Also, the ASU requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. 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's 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.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The ASU is effective for public business entities for fiscal years beginning after December 15, 2018. The Company does not expect the amendments will have any material impact on our consolidated financial statements.



7



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, 2018 and December 31, 2017: 

As of June 30, 2018
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
 
(amounts in thousands)
Available for sale:
 
 
 
 
 
 
 

Corporate debt obligations
$
1,000

 
$
28

 
$
—

 
$
1,028

Residential mortgage-backed securities
34,213

 
62

 
1,142

 
33,133

Collateralized mortgage obligations
73

 
1

 
—

 
74

Total available for sale
$
35,286

 
$
91

 
$
1,142

 
$
34,235

 
 

 
 

 
 

 
 

Held to maturity:
 

 
 

 
 

 
 

States and political subdivisions
$
1,086

 
$
172

 
$
—

 
$
1,258


As of December 31, 2017
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
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




8


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, 2018 are as follows:
 
Amortized
Cost
 
Fair
Value
 
(amounts in thousands)
Available for sale:
 
Due within one year
$
6

 
$
6

Due after one year through five years
349

 
331

Due after five years through ten years
8,537

 
8,224

Due after ten years
26,394

 
25,674

Total available for sale
$
35,286

 
$
34,235

 
 
 
 
Held to maturity:
 
 
 
Due within one year
$
—

 
$
—

Due after one year through five years
—

 
—

Due after five years through ten years
1,086

 
1,258

Due after ten years
—

 
—

Total held to maturity
$
1,086

 
$
1,258


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

During the three and six months ended June 30, 2018, the Company did not sell any securities.

At June 30, 2018, the Company used a letter 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 which are aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2018 and December 31, 2017:

As of June 30, 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
 
$
18,472

 
$
412

 
$
13,426

 
$
730

 
$
31,898

 
$
1,142

Total available for sale
 
$
18,472

 
$
412

 
$
13,426

 
$
730

 
$
31,898

 
$
1,142


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








9


Other Than Temporarily Impaired Debt Securities (OTTI)

On at least a quarterly basis, we review all debt securities that are in an unrealized loss position for OTTI. An investment security is deemed impaired if the fair value of the investment is less than its amortized cost. Amortized cost includes adjustments (if any) made to the cost basis of an investment for accretion, amortization, previous other-than-temporary impairments. After an investment security is determined to be impaired, we evaluate whether the decline in value is other-than-temporary. Estimating recovery of the amortized cost basis of a debt security is based upon an assessment of the cash flows expected to be collected. If the present value of the cash flows expected to be collected, discounted at the security’s effective yield, is less than the security’s amortized cost, OTTI is considered to have occurred.

For a debt security for which there has been a decline in the fair value below amortized cost basis, if we intend to sell the security, or if it is more likely than not we will be required to sell the security before recovery of amortized cost basis, an OTTI write-down is recognized in earnings equal to the entire difference between the amortized cost basis and fair value of the security. 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 discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of expected future cash flows is due to factors that are not credit-related and, therefore, is recognized in other comprehensive income.

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. 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; (4) any change in rating agencies’ credit ratings at evaluation date from acquisition date and any likely imminent action; (5) for asset-backed securities, the credit performance of the underlying collateral, including delinquency rates, level of non-performing assets, cumulative losses to date, collateral value and the remaining credit enhancement compared with expected credit losses.

The Company’s unrealized loss for the debt securities is comprised of 15 securities and 11 residential mortgage backed securities at June 30, 2018 and December 31, 2017, respectively. The mortgage backed securities that had unrealized losses were issued or guaranteed by US government or government sponsored entities. The unrealized losses associated with those mortgage backed securities are generally driven by changes in interest rates and not due to credit losses given the explicit or implicit guarantees provided by the U.S. government. Because the Company does not intend to sell the securities 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, the Company does not consider the unrealized loss in these securities to be OTTI at June 30, 2018.






















10



NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES

As of June 30, 2018, the Company had $1.1 billion in loans receivable outstanding. Loans held for sale totaled $1.8 million at June 30, 2018. The portfolios of loans receivable at June 30, 2018 and December 31, 2017, consist of the following:
 
June 30, 2018
 
December 31, 2017
 
Amount
 
Amount
 
(amounts in thousands)
Commercial and Industrial
$
27,833

 
$
38,972

Construction
130,383

 
95,625

Real Estate Mortgage:
 

 
 

Commercial – Owner Occupied
130,313

 
126,250

Commercial – Non-owner Occupied
272,277

 
270,472

Residential – 1 to 4 Family
475,702

 
416,317

Residential – Multifamily
49,349

 
47,832

Consumer
15,386

 
16,249

Total Loans
$
1,101,243

 
$
1,011,717



An age analysis of past due loans by class at June 30, 2018 and December 31, 2017 as follows:

June 30, 2018
30-59
Days Past
Due
 
60-89
Days Past
Due
 
Greater
than 90
Days and
Not
Accruing
 
Total Past
Due
 
Current
 
Total
Loans
 
Loans > 90 Days and Accruing
 
(amounts in thousands)
 
 
Commercial and Industrial
$
—

 
$
—

 
$
15

 
$
15

 
$
27,818

 
$
27,833

 
$
—

Construction
—

 
—

 
1,365

 
1,365

 
129,018

 
130,383

 
—

Real Estate Mortgage:
 

 
 

 
 

 
 

 
 

 
 

 
 
Commercial – Owner Occupied
—

 
—

 
150

 
150

 
130,163

 
130,313

 
—

        Commercial – Non-owner Occupied
—

 
—

 
277

 
277

 
272,000

 
272,277

 
—

Residential – 1 to 4 Family


 
504

 
1,419

 
1,923

 
473,779

 
475,702

 
—

Residential – Multifamily
—

 
—

 
—

 
—

 
49,349

 
49,349

 
—

Consumer
112

 
—

 
—

 
112

 
15,274

 
15,386

 
—

Total Loans
$
112

 
$
504

 
$
3,226

 
$
3,842

 
$
1,097,401

 
$
1,101,243

 
$
—



11


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
 
Loans > 90 Days and Accruing
 
(amounts in thousands)
 
 
Commercial and Industrial
$
—

 
$
—

 
$
17

 
$
17

 
$
38,955

 
$
38,972

 
$
—

Construction
—

 
—

 
1,392

 
1,392

 
94,233

 
95,625

 
—

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

 
$
—



Allowance For Loan and Lease Losses (ALLL)
We maintain the ALLL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan portfolios as of the balance sheet date. We established our allowance in accordance with guidance provided in Accounting Standard Codification ("ASC") - Contingencies (ASC 450) and Receivables (ASC 310).

Determining the appropriateness of the allowance is complex and requires significant judgment reflecting the best estimate of credit losses related to specifically identified impaired loans as well as probable loan losses in the remaining loan portfolio. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change. The allowance for loan and lease losses is reviewed by the management of the Company monthly and discussed with the audit committee at least quarterly.

Our allowance for loan losses includes a formula based component and an asset-specific component. The asset-specific component of the allowance relates to loans considered to be impaired, which includes loans that have been modified in TDRs as well as nonperforming loans. To determine the asset-specific component of the allowance, the loans are evaluated individually based on the borrower's ability to repay amounts owed, collateral, relative risk grade of the loans, and other factors given current events and conditions. The Company generally measures the asset-specific allowance as the difference between the fair value (net realizable value) and the recorded investment of a loan.

The formula based component of the allowance incorporates historical valuation allowance and general valuation allowance. The historical loss experience is measured by type of credit and internal risk grade, loss severity, specific homogeneous risk pools. A historical loss ratio and valuation allowance are established for each pool of similar loans and updated periodically based on actual charge-off experience and current events. The general valuation allowance is based on general economic conditions and other qualitative risk factors both internal and external to the Company. It is generally 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; (ix) the impact of rising interest rates on portfolio risk; and (x) national and local economic trends and conditions, and industry conditions. 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.

When evaluating the adequacy of the allowance, the assessment is highly judgmental as the measurement relies upon estimates such as loss severity, asset valuations, default rates, the amounts and timing of interest or principal payments or other factors that are reflective of current and expected market conditions. These estimates are, in turn, dependent on factors such as the duration of current overall economic conditions, industry, portfolio, or borrower-specific factors, the expected outcome of insolvency proceedings as well as, in certain circumstances, other economic factors, including the level of future home prices. All of these estimates and assumptions require significant management judgment and certain assumptions are highly subjective.



12


The following tables present the information regarding the allowance for loan and lease losses and associated loan data:
 
 
 
 
 
Real Estate Mortgage
 
 
 
 
 
Commercial and Industrial
 
Construction
 
Commercial Owner Occupied
 
Commercial Non-owner Occupied
 
Residential 1 to 4 Family
 
Residential Multifamily
 
Consumer
 
Total
Allowance for loan losses
(amounts in thousands)
Three months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
$
555

 
$
2,227

 
$
1,991

 
$
4,781

 
$
6,644

 
$
648

 
$
235

 
17,081

    Charge-offs
—

 
(27
)
 
—

 
(49
)
 
—

 
—

 
(1
)
 
(77
)
    Recoveries
10

 
—


5


50


4


—


—

 
69

    Provisions
(26
)
 
(202
)
 
(35
)
 
478

 
18

 
(29
)
 
(4
)
 
200

Ending Balance at June 30, 2018
$
539

 
$
1,998

 
$
1,961

 
$
5,260

 
$
6,666

 
$
619

 
$
230

 
$
17,273

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses


 




















Six months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
$
684

 
$
2,068

 
$
2,017

 
$
4,630

 
$
6,277

 
$
627

 
$
230

 
16,533

    Charge-offs
—

 
(27
)
 
—

 
(49
)
 
—

 
—

 
(18
)
 
(94
)
    Recoveries
30

 
—

 
141

 
55

 
8

 
—

 
—

 
234

    Provisions
(175
)
 
(43
)
 
(197
)
 
624

 
381

 
(8
)
 
18

 
600

Ending Balance at June 30, 2018
$
539

 
$
1,998

 
$
1,961

 
$
5,260

 
$
6,666

 
$
619

 
$
230

 
$
17,273

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
15

 
$
73

 
$
51

 
$
196

 
$
14

 
$
—

 
$
—

 
$
349

Collectively evaluated for impairment
524

 
1,925

 
1,910

 
5,064

 
6,652

 
619

 
230

 
16,924

Balance at June 30, 2018
$
539

 
$
1,998

 
$
1,961

 
$
5,260

 
$
6,666

 
$
619

 
$
230

 
$
17,273

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
15

 
$
5,780

 
$
3,609

 
$
11,829

 
$
2,310

 
$
—

 
$
—

 
$
23,543

Collectively evaluated for impairment
27,818

 
124,603

 
126,704

 
260,448

 
473,392

 
49,349

 
15,386

 
1,077,700

Balance at June 30, 2018
$
27,833

 
$
130,383

 
$
130,313

 
$
272,277

 
$
475,702

 
$
49,349

 
$
15,386

 
$
1,101,243



















13


 
 
 
 
 
Real Estate Mortgage
 
 
 
 
 
Commercial and Industrial
 
Construction
 
Commercial Owner Occupied
 
Commercial Non-owner Occupied
 
Residential 1 to 4 Family
 
Residential Multifamily
 
Consumer
 
Total
Allowance for loan losses
(amounts in thousands)
Three months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2017
$
1,165

 
$
2,169

 
$
1,869

 
$
4,240

 
$
5,136

 
$
662

 
$
234

 
15,475

    Charge-offs
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

    Recoveries
8

 
—

 
69

 
5

 
2

 
—

 
—

 
84

    Provisions
29

 
89

 
(103
)
 
670

 
284

 
37

 
(6
)
 
1,000

Ending Balance at June 30, 2017
$
1,202

 
$
2,258

 
$
1,835

 
$
4,915

 
$
5,422

 
$
699

 
$
228

 
$
16,559

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
$
1,188

 
$
2,764

 
$
2,082

 
$
3,889

 
$4,916
 
$
505

 
$
236

 
$
15,580

    Charge-offs
(134
)
 
—

 
(430
)
 
—

 
(118
)
 
—

 
—

 
(682
)
    Recoveries
42

 
—

 
69

 
45

 
5

 
—

 
—

 
161

    Provisions
106

 
(506
)
 
114

 
981

 
619

 
194

 
(8
)
 
1,500

Ending Balance at June 30, 2017
$
1,202

 
$
2,258

 
$
1,835

 
$
4,915

 
$
5,422

 
$
699

 
$
228

 
$
16,559

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
810

 
$
57

 
$
906

 
$
212

 
$
50

 
$
—

 
$
2,035

Collectively evaluated for impairment
1,202

 
1,448

 
1,778

 
4,009

 
5,210

 
649

 
228

 
14,524

Balance at June 30, 2017
$
1,202

 
$
2,258

 
$
1,835

 
$
4,915

 
$
5,422

 
$
699

 
$
228

 
$
16,559

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
19

 
$
7,182

 
$
3,971

 
$
17,280

 
$
4,124

 
$
50

 
$
90

 
$
32,716

Collectively evaluated for impairment
27,078

 
70,793

 
118,083

 
266,116

 
346,321

 
51,411

 
16,072

 
895,874