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: September 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 [ X] 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 October 30, 2018, there were 10,396,958 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)
 
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Cash and due from financial institutions
$
5,998

 
$
14,452

Federal funds sold and cash equivalents
80,737

 
27,661

Total cash and cash equivalents
86,735

 
42,113

Investment securities available for sale, at fair value
32,580

 
37,991

Investment securities held to maturity (fair value of $1,253 at September 30, 2018 and $2,468 at December 31, 2017)
1,099

 
2,268

Total investment securities
33,679

 
40,259

Loans held for sale
2,217

 
1,541

Loans, net of unearned income
1,179,849

 
1,011,717

Less: Allowance for loan losses
(17,918
)
 
(16,533
)
Net loans
1,161,931

 
995,184

Accrued interest receivable
4,869

 
4,025

Premises and equipment, net
6,874

 
7,025

Other real estate owned (OREO)
5,014

 
7,248

Restricted stock, at cost
5,858

 
6,172

Bank owned life insurance (BOLI)
25,654

 
25,196

Deferred tax asset
6,525

 
6,420

Other assets
2,634

 
2,269

Total Assets
$
1,341,990

 
$
1,137,452

Liabilities and Equity
 

 
 

Liabilities
 

 
 

Deposits
 

 
 

Noninterest-bearing deposits
$
236,030

 
$
124,356

Interest-bearing deposits
829,172

 
742,027

Total deposits
1,065,202

 
866,383

FHLBNY borrowings
104,650

 
114,650

Subordinated debentures
13,403

 
13,403

Accrued interest payable
1,211

 
719

Other liabilities
8,319

 
7,517

Total liabilities
1,192,785

 
1,002,672

Equity
 

 
 

Preferred stock, 1,000,000 shares authorized, $1,000 liquidation value Series B - non-cumulative convertible; 3,417 shares outstanding at September 30, 2018 and 15,971 shares outstanding at December 31, 2017
3,417

 
15,971

Common stock, $0.10 par value; authorized 15,000,000 shares; Issued: 10,678,855 shares at September 30, 2018 and 8,301,497 shares at December 31, 2017
1,068

 
830

Additional paid-in capital
110,599

 
81,940

Retained earnings
36,764

 
39,184

Accumulated other comprehensive loss
(961
)
 
(130
)
Treasury stock, at cost, 284,522 shares at September 30, 2018 and at December 31, 2017, respectively,
(3,015
)
 
(3,015
)
Total shareholders’ equity
147,872

 
134,780

Non-Controlling Interest
1,333

 
—

Total equity
149,205

 
134,780

Total liabilities and equity
$
1,341,990

 
$
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 
 September 30,
 
For the Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands except share data)
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
15,337

 
$
12,404

 
$
42,593

 
$
34,409

Interest and dividends on investments
333

 
349

 
1,014

 
1,073

Interest on federal funds sold and cash equivalents
343

 
85

 
791

 
220

Total interest income
16,013

 
12,838

 
44,398

 
35,702

Interest expense:
 
 
 
 
 

 
 

Interest on deposits
3,051

 
1,667

 
7,624

 
4,679

Interest on borrowings
686

 
480

 
1,882

 
1,276

Total interest expense
3,737

 
2,147

 
9,506

 
5,955

Net interest income
12,276

 
10,691

 
34,892

 
29,747

Provision for loan losses
600

 
500

 
1,200

 
2,000

Net interest income after provision for loan losses
11,676

 
10,191

 
33,692

 
27,747

Noninterest income:
 

 
 

 
 

 
 

Gain on sale of SBA loans
13

 
351

 
227

 
435

Loan fees
277

 
221

 
837

 
463

Bank owned life insurance income
155

 
165

 
458

 
489

Service fees on deposit accounts
420

 
107

 
1,105

 
294

Gain (loss) on sale and valuation adjustments of OREO
150

 
(958
)
 
(359
)
 
(1,352
)
Other
76

 
128

 
341

 
674

Total noninterest income
1,091

 
14

 
2,609

 
1,003

Noninterest expense:
 

 
 

 
 

 
 

Compensation and benefits
2,048

 
1,677

 
5,955

 
5,270

Professional services
258

 
405

 
1,050

 
1,151

Occupancy and equipment
444

 
376

 
1,284

 
1,045

Data processing
213

 
164

 
604

 
532

FDIC insurance and other assessments
122

 
77

 
291

 
218

OREO expense
146

 
152

 
480

 
456

Other operating expense
703

 
761

 
2,159

 
2,189

Total noninterest expense
3,934

 
3,612

 
11,823

 
10,861

Income before income tax expense
8,833

 
6,593

 
24,478

 
17,889

Income tax expense
2,615

 
2,435

 
6,373

 
6,590

Net income attributable to Company and noncontrolling interest
6,218

 
4,158

 
18,105

 
11,299

Net (income) loss attributable to noncontrolling interest
(92
)
 
3

 
(108
)
 
21

Net income attributable to Company
6,126

 
4,161

 
17,997

 
11,320

Preferred stock dividend and discount accretion
22

 
297

 
429

 
893

Net income available to common shareholders
$
6,104

 
$
3,864

 
$
17,568

 
$
10,427

Earnings per common share:
 

 
 

 
 

 
 

Basic
$
0.60

 
$
0.46

 
$
1.88

 
$
1.25

Diluted
$
0.56

 
$
0.38

 
$
1.65

 
$
1.05

Weighted average shares outstanding:
 

 
 

 
 
 
 
Basic
10,168,991

 
8,417,694

 
9,350,068

 
8,358,288

Diluted
10,920,025

 
10,889,186

 
10,912,879

 
10,828,260

All share and per share information has been adjusted for the stock dividend effective 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 
 September 30,
 
For the Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Net income
6,218

 
4,158

 
18,105

 
11,299

Unrealized (losses) gains on investment securities:
 

 
 
 
 
 
 
Non-credit related net unrealized gains on OTTI securities
—

 
4

 
—

 
22

Unrealized (losses) gains on non-OTTI securities
(218
)
 
111

 
(1,062
)
 
322

Tax impact on unrealized gain (loss)
54

 
(46
)
 
258

 
(138
)
  Reclassification of stranded tax effects
—

 
—

 
(27
)
 
—

Total unrealized (losses) gains on investment securities
(164
)
 
69

 
(831
)
 
206

Comprehensive income
$
6,054

 
$
4,227

 
$
17,274

 
$
11,505

Less: Comprehensive income (loss) attributable to noncontrolling interests
(92
)
 
3

 
(108
)
 
21

Comprehensive income attributable to the Company
$
5,962

 
$
4,230

 
$
17,166

 
$
11,526

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
—

 
—

 
—

 
—

 
11,320

 
—

 
—

 
11,320

 
(21
)
 
11,299

Common stock options exercised
—

 
7,270

 
—

 
992

 
—

 
—

 
—

 
992

 
—

 
992

Preferred stock shares conversion
(1,005
)
 
112,467

 
12

 
76

 
—

 
—

 
—

 
(917
)
 
—

 
(917
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
206

 
—

 
206

 
—

 
206

Stock compensation expense
—

 
—

 
—

 
54

 
—

 
—

 
—

 
54

 
—

 
54

Stock dividend
—

 
688,846

 
69

 
15,499

 
(15,568
)
 
—

 
—

 
—

 
—

 
—

Dividend on preferred stock
—

 
—

 
—

 
—

 
(880
)
 
—

 
—

 
(880
)
 
—

 
(880
)
Dividend on common stock
—

 
—

 
—

 
—

 
(2,520
)
 
—

 
—

 
(2,520
)
 
—

 
(2,520
)
Balance, September 30, 2017
$
18,995

 
7,956,535

 
$
796

 
$
78,921

 
$
39,835

 
$
(143
)
 
$
(3,015
)
 
$
135,389

 
$
(118
)
 
$
135,271

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
—

 
—

 
—

 
—

 
17,997

 
—

 
—

 
17,997

 
108

 
18,105

Common stock options exercised


 
5,539

 
1

 
42

 
—

 
—

 
—

 
43

 
—

 
43

Preferred stock shares conversion
(12,554
)
 
1,569,535

 
157

 
12,397

 
—

 
—

 
—

 
—

 
—

 
—

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
(831
)
 
—

 
(831
)
 
—

 
(831
)
Stock compensation expense


 


 


 
67

 


 


 
—

 
67

 
—

 
67

Stock dividend
—

 
802,284

 
80

 
16,153

 
(16,237
)
 
—

 
—

 
(4
)
 
—

 
(4
)
Dividend on preferred stock
—

 
—

 
—

 
—

 
(429
)
 
—

 
—

 
(429
)
 
—

 
(429
)
Dividend on common stock
—

 
—

 
—

 
—

 
(3,778
)
 
—

 
—

 
(3,778
)
 
—

 
(3,778
)
Balance, September 30, 2018
$
3,417

 
10,678,855

 
$
1,068

 
$
110,599

 
$
36,764

 
$
(961
)
 
$
(3,015
)
 
$
147,872

 
$
1,333

 
$
149,205

See accompanying notes to consolidated financial statements


4


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

 
For the Nine Months Ended 
 September 30,
 
2018
 
2017
 
(amounts in thousands)
Cash Flows from Operating Activities:
 
 
 
Net income
$
18,105

 
$
11,299

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

 
 

Depreciation of premises and equipment
282

 
229

Provision for loan losses
1,200

 
2,000

Increase in value of bank-owned life insurance
(458
)
 
(489
)
Gain on sale of SBA loans
(227
)
 
(435
)
SBA loans originated for sale
(3,579
)
 
(5,189
)
Proceeds from sale of SBA loans originated for sale
3,130

 
4,274

Loss on sale of OREO and valuation adjustments
359

 
1,352

Net accretion of purchase premiums and discounts on securities
38

 
51

Stock based compensation
67

 
54

Deferred income tax benefit
—

 
576

Net changes in:
 

 
 

Increase in accrued interest receivable and other assets
(1,056
)
 
(2,471
)
Increase in accrued interest payable and other accrued liabilities
989

 
219

Net cash provided by operating activities
$
18,850

 
$
11,470

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
4,275

 
4,873

Net increase in loans
(169,004
)
 
(103,263
)
Purchases of bank premises and equipment
(131
)
 
(2,090
)
Sale of OREO, net
2,932

 
1,820

Redemptions (purchases) of restricted stock
314

 
(839
)
Net cash used in investing activities
$
(160,409
)
 
$
(99,499
)
Cash Flows from Financing Activities:
 

 
 

Cash dividend payment
(3,906
)
 
(3,178
)
Proceeds from exercise of stock options
43

 
1,080

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
111,674

 
7,590

Net increase in interest-bearing deposits
87,145

 
47,267

Net cash provided by financing activities
$
186,181

 
$
72,706

Net increase (decrease) in cash and cash equivalents
44,622

 
(15,323
)
Cash and Cash Equivalents, January 1,
42,113

 
70,720

Cash and Cash Equivalents, September 30,
$
86,735

 
$
55,397

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 

 
 

Cash paid during the year for:
 

 
 

Interest on deposits and borrowed funds
$
9,014

 
$
5,841

Income taxes
$
5,754

 
$
5,654

Non-cash Investing and Financing Items
 

 
 

Loans transferred to OREO
$
1,057

 
$
131

 


 


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 and its wholly-owned subsidiary the Bank (including 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 nine months ended September 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 nine months ended September 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 the 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 material 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 September 30, 2018 and December 31, 2017: 

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

Corporate debt obligations
$
1,000

 
$
21

 
$
—

 
$
1,021

Residential mortgage-backed securities
32,785

 
52

 
1,342

 
31,495

Collateralized mortgage obligations
63

 
1

 
—

 
64

Total available for sale
$
33,848

 
$
74

 
$
1,342

 
$
32,580

 
 

 
 

 
 

 
 

Held to maturity:
 

 
 

 
 

 
 

States and political subdivisions
$
1,099

 
$
154

 
$
—

 
$
1,253


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 September 30, 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
309

 
291

Due after five years through ten years
12,997

 
12,567

Due after ten years
20,542

 
19,722

Total available for sale
$
33,848

 
$
32,580

 
 
 
 
Held to maturity:
 
 
 
Due within one year
$
—

 
$
—

Due after one year through five years
—

 
—

Due after five years through ten years
1,099

 
1,253

Due after ten years
—

 
—

Total held to maturity
$
1,099

 
$
1,253


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 nine months ended September 30, 2018, the Company did not sell any securities.

At September 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 September 30, 2018 and December 31, 2017:

As of September 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
 
$
17,593

 
$
550

 
$
12,714

 
$
792

 
$
30,307

 
$
1,342

Total available for sale
 
$
17,593

 
$
550

 
$
12,714

 
$
792

 
$
30,307

 
$
1,342


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 13 securities and 11 residential mortgage-backed securities at September 30, 2018 and December 31, 2017, respectively. The mortgage-backed securities that had unrealized losses were issued or guaranteed by the 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 September 30, 2018.






















10


NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES

As of September 30, 2018, the Company had $1.2 billion in loans receivable outstanding. Loans held for sale totaled $2.2 million at September 30, 2018. The portfolios of loans receivable at September 30, 2018 and December 31, 2017, consist of the following:
 
September 30, 2018
 
December 31, 2017
 
Amount
 
Amount
 
(amounts in thousands)
Commercial and Industrial
$
37,689

 
$
38,972

Construction
134,436

 
95,625

Real Estate Mortgage:
 

 
 

Commercial – Owner Occupied
130,491

 
126,250

Commercial – Non-owner Occupied
291,700

 
270,472

Residential – 1 to 4 Family
518,561

 
416,317

Residential – Multifamily
52,038

 
47,832

Consumer
14,934

 
16,249

Total Loans
$
1,179,849

 
$
1,011,717



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

September 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
$
—

 
$
128

 
$
14

 
$
142

 
$
37,547

 
$
37,689

 
$
—

Construction
—

 
—

 
1,365

 
1,365

 
133,071

 
134,436

 
—

Real Estate Mortgage:
 

 
 

 
 

 
 

 
 

 
 

 
 
Commercial – Owner Occupied
—

 
—

 
—

 
—

 
130,491

 
130,491

 
—

        Commercial – Non-owner Occupied
—

 
—

 
290

 
290

 
291,410

 
291,700

 
—

Residential – 1 to 4 Family


 
928

 
1,417

 
2,345

 
516,216

 
518,561

 
—

Residential – Multifamily
—

 
—

 
—

 
—

 
52,038

 
52,038

 
—

Consumer
134

 
—

 
—

 
134

 
14,800

 
14,934

 
—

Total Loans
$
134

 
$
1,056

 
$
3,086

 
$
4,276

 
$
1,175,573

 
$
1,179,849

 
$
—



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 troubled debt restructuring (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 Sept.30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2018
$
539

 
$
1,998

 
$
1,961

 
$
5,260

 
$
6,666

 
$
619

 
$
230

 
17,273

    Charge-offs
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
    Recoveries
10

 
—


12


6


18


—


—

 
46

    Provisions
298

 
30

 
(12
)
 
(314
)
 
575

 
32

 
(9
)
 
600

Ending Balance at Sept. 30, 2018
$
847

 
$
2,028

 
$
1,961

 
$
4,952

 
$
7,259

 
$
651

 
$
220

 
$
17,918

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses


 




















Nine months ended Sept. 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
$
684

 
$
2,068

 
$
2,017

 
$
4,630

 
$
6,277

 
$
627

 
$
230

 
16,533

    Charge-offs
—

 
(27
)
 
—

 
(49
)
 
—

 
—

 
(19
)
 
(95
)
    Recoveries
40

 
—

 
153

 
61

 
26

 
—

 
—

 
280

    Provisions
123

 
(13
)
 
(209
)
 
310

 
956

 
24

 
9

 
1,200

Ending Balance at Sept. 30, 2018
$
847

 
$
2,028

 
$
1,961

 
$
4,952

 
$
7,259

 
$
651

 
$
220

 
$
17,918

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
14

 
$
71

 
$
49

 
$
194

 
$
14

 
$
—

 
$
—

 
$
342

Collectively evaluated for impairment
833

 
1,957

 
1,912

 
4,758

 
7,245

 
651

 
220

 
17,576

Balance at Sept. 30, 2018
$
847

 
$
2,028

 
$
1,961

 
$
4,952

 
$
7,259

 
$
651

 
$
220

 
$
17,918

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
14

 
$
5,690

 
$
3,320

 
$
11,716

 
$
2,294

 
$
—

 
$
—

 
$
23,034

Collectively evaluated for impairment
37,675

 
128,746

 
127,171

 
279,984

 
516,267

 
52,038

 
14,934

 
1,156,815

Balance at Sept. 30, 2018
$
37,689

 
$
134,436

 
$
130,491

 
$
291,700

 
$
518,561

 
$
52,038

 
$
14,934

 
$
1,179,849



















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 Sept. 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
$
1,202

 
$
2,258

 
$
1,835

 
$
4,915

 
$
5,422

 
$
699

 
$
228

 
16,559

    Charge-offs
—

 
(687
)
 
—

 
(621
)
 
—

 
(50
)
 
—

 
(1,358
)
    Recoveries
3

 
—

 
25

 
102

 
10

 
—

 
—

 
140

    Provisions
(549
)
 
454

 
(33
)
 
225

 
386

 
18

 
(1
)
 
500

Ending Balance at Sept. 30, 2017
$
656

 
$
2,025

 
$
1,827

 
$
4,621

 
$
5,818

 
$
667

 
$
227

 
$
15,841

 
 
 


 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended Sept. 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
$
1,188

 
$
2,764

 
$
2,082

 
$
3,889

 
$4,916
 
$
505

 
$
236

 
$
15,580

    Charge-offs
(134
)
 
(687
)
 
(430
)
 
(622
)
 
(118
)
 
(50
)
 
—

 
(2,041
)
    Recoveries
45

 
—

 
94

 
148

 
15

 
—

 
—

 
302

    Provisions
(443
)
 
(52
)
 
81

 
1,206

 
1,005

 
212

 
(9
)
 
2,000

Ending Balance at Sept. 30, 2017
$
656

 
$
2,025

 
$
1,827

 
$
4,621

 
$
5,818

 
$
667

 
$
227

 
$
15,841

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
124

 
$
55

 
$
208

 
$
15

 
$
—

 
$
—

 
$
402

Collectively evaluated for impairment
656

 
1,901

 
1,772

 
4,413

 
5,803

 
667

 
227

 
15,439

Balance at Sept. 30, 2017
$
656

 
$
2,025

 
$
1,827

 
$
4,621

 
$
5,818

 
$
667

 
$
227

 
$
15,841

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
18

 
$
6,146

 
$
3,881

 
$
12,523

 
$
4,339

 
$
—

 
$
17

 
$
26,924

Collectively evaluated for impairment
28,028

 
81,679

 
110,265

 
262,791

 
377,128

 
50,532

 
15,999

 
926,422

Balance at Sept. 30, 2017
$
28,046