Edgar Filing: PARKE BANCORP, INC.

f10q_063011-0343.htm

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, 2011.

[ ] 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 [ ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer”, “accelerated filer", and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

Yes [ ] No [X]

As of August 15, 2011, there were issued and outstanding 4,886,178 shares of the registrant's common stock.

PARKE BANCORP, INC.

FORM 10-Q

FOR THE QUARTER ENDED June 30, 2011

INDEX

Page

Part I FINANCIAL INFORMATION

Item 1.

Financial Statements

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

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.

Reserved

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)
	June 30,			December 31,
	2011			2010
	(in thousands except share data)
ASSETS
Cash and due from financial institutions	$	54,685		$	57,628
Investment securities available for sale, at fair value		25,184			27,730
Investment securities held to maturity (fair value of $2,001 at June 30, 2011 and $2,048 at December 31, 2010)		2,015			1,999
Total investment securities		27,199			29,729
Loans held for sale		1,228			11,454
Loans, net of unearned income		630,293			626,739
Less: Allowance for loan losses		16,540			14,789
Net loans and leases		613,753			611,950
Accrued interest receivable		3,055			3,273
Premises and equipment, net		4,191			4,279
Other real estate owned (OREO)		18,682			16,701
Restricted stock, at cost		3,119			3,040
Bank owned life insurance (BOLI)		5,450			5,362
Other assets		14,163			13,437
Total Assets	$	745,525		$	756,853

LIABILITIES AND EQUITY
Liabilities
Deposits
Noninterest-bearing deposits	$	25,036		$	23,168
Interest-bearing deposits		576,843			581,554
Total deposits		601,879			604,722
FHLB borrowings		40,684			40,759
Other borrowed funds		10,000			21,454
Subordinated debentures		13,403			13,403
Accrued interest payable		640			828
Other liabilities		3,939			4,955
Total liabilities		670,545			686,121
Equity
Preferred stock, $1,000 liquidation value per share; authorized 1,000,000 shares; Issued: 16,288 shares at June 30, 2011 and December 31, 2010		15,774			15,683
Common stock, $.10 par value; authorized 10,000,000 shares; Issued: 5,097,078 shares at June 30, 2011 and 4,653,133 shares at December 31, 2010		510			465
Additional paid-in capital		45,844			41,931
Retained earnings		15,472			15,494
Accumulated other comprehensive loss		(569	)		(693	)
Treasury stock, 210,900 shares at June 30, 2011 and December 31, 2010, at cost		(2,180	)		(2,180	)
Total shareholders’ equity		74,851			70,700
Noncontrolling (minority) interest in consolidated subsidiaries		129			32
Total equity		74,980			70,732
Total liabilities and equity	$	745,525		$	756,853

See accompanying notes to consolidated financial statements

Parke Bancorp Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
	For the six months ended June 30,							For the three months ended June 30,
	2011				2010			2011			2010

Interest income:
Interest and fees on loans		$	19,890		$	19,577		$	10,074		$	9,927
Interest and dividends on investments			704			863			330			436
Total interest income			20,594			20,440			10,404			10,363
Interest expense:
Interest on deposits			4,005			4,866			1,950			2,362
Interest on borrowings			714			886			362			436
Total interest expense			4,719			5,752			2,312			2,798
Net interest income			15,875			14,688			8,092			7,565
Provision for loan losses			4,500			4,301			2,100			2,200
Net interest income after provision for loan losses			11,375			10,387			5,992			5,365
Noninterest income (loss):
Loan fees			164			81			101			32
Net income from BOLI			88			89			44			45
Service fees on deposit accounts			108			129			53			67
Gain on sale of SBA loans			3,142			676			899			676
Other than temporary impairment losses			(84	)		(44	)		(37	)		—
Portion of loss recognized in other comprehensive income (OCI) (before taxes)			27			26			—			—
Net impairment losses recognized in earnings			(57	)		(18	)		(37	)		—
Gain on sale of real estate owned			52			46			—			46
Other			161			60			87			37
Total noninterest income			3,658			1,063			1,147			903
Noninterest expense:
Compensation and benefits			2,822			2,478			1,408			1,285
Professional services			645			581			389			321
Occupancy and equipment			503			438			242			226
Data processing			224			161			114			89
FDIC insurance			685			437			343			212
Other operating expense			1,578			882			766			542
Total noninterest expense			6,457			4,977			3,262			2,675
Income before income tax expense			8,576			6,473			3,877			3,593
Income tax expense			3,444			2,621			1,564			1,470
Net income attributable to Company and noncontrolling (minority) interest			5,132			3,852			2,313			2,123
Net income attributable to noncontrolling (minority) interest			(696	)		(55	)		(169	)		(119	)
Net income attributable to Company			4,436			3,797			2,144			2,004
Preferred stock dividend and discount accretion			499			493			250			247
Net income available to common shareholders		$	3,937		$	3,304		$	1,894		$	1,757

Earnings per common share
Basic		$	0.81		$	0.68		$	0.39		$	0.36
Diluted		$	0.79		$	0.67		$	0.38		$	0.35
Weighted average shares outstanding
Basic			4,886,178			4,850,458			4,866,178			4,859,608
Diluted			5,009,515			4,967,981			4,987,195			5,005,078
See accompanying notes to consolidated financial statements

Parke Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGE IN TOTAL EQUITY

(unaudited)

	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Shareholders' Equity			Non-Controlling (Minority) Interest			Total Equity
	(in thousands)
Balance, December 31, 2009	$	15,508	$	421	$	37,020	$	14,071		$	(2,867	)	$	(2,180	)	$	61,973		$	—		$	61,973
Stock options exercised						8											8						8
Capital contribution by noncontrolling (minority) interest 10% common stock dividend				44		4,879		(4,929	)								(6	)		196			196 (6	)
Comprehensive income:																							196
Net income								3,797									3,797			55			3,852
Non-credit unrealized losses on debt securities with OTTI, net of taxes											47						47						47
Net unrealized gains on available for sale securities without OTTI, net of taxes											1,987						1,987						1,987
Pension liability adjustments, net of tax											22						22						22
Total comprehensive income																	5,853			55			5,908
Dividend on preferred stock (5% annually)								(407	)								(407	)					(407	)
Accretion of discount on preferred stock		86						(86	)								—						—
Balance, June 30, 2010	$	15,594	$	465	$	41,907	$	12,446		$	(811	)	$	(2,180	)	$	67,421		$	251		$	67,672



Balance, December 31, 2010	$	15,683	$	465	$	41,931	$	15,494		$	(693	)	$	(2,180	)	$	70,700		$	32		$	70,732
Capital withdrawals by noncontrolling (minority) interest 10% common stock dividend				45		3,913		(3,959	)								(1	)		(599	)		(599 (1	) )
Comprehensive income:
Net income								4,436									4,436			696			5,132
Non-credit unrealized gain on debt securities with OTTI, net of taxes											34						34						34
Net unrealized gains on available for sale securities without OTTI, net of taxes											70						70						70
Pension liability adjustments, net of taxes											20						20						20
Total comprehensive income																	4,560			696			5,256
Dividend on preferred stock (5% annually)								(408	)								(408	)					(408	)
Accretion of discount on preferred stock		91						(91	)								—						—
Balance, June 30, 2011	$	15,774	$	510	$	45,844	$	15,472		$	(569	)	$	(2,180	)	$	74,851		$	129		$	74,980

See accompanying notes to consolidated financial statements

Parke Bancorp Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
	For the six months ended June 30,
	2011			2010
	(in thousands)
Cash Flows from Operating Activities
Net income	$	5,132		$	3,852
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		182			157
Provision for loan losses		4,500			4,301
Bank owned life insurance income		(88	)		(89	)
Supplemental executive retirement plan expense		225			222
Gain on sale of SBA loans		(3,142	)		(676	)
SBA loans originated for sale		(14,629	)		(6,903	)
Proceeds from sale of SBA loans originated for sale		16,277			7,525
Gain on sale of other real estate owned		(52	)		(46	)
Other than temporary impairment of investments		57			18
Net accretion of purchase premiums and discounts on securities		(39	)		(45	)
Changes in operating assets and liabilities:
Increase in accrued interest receivable and other assets		(670	)		(649	)
(Decrease) increase in accrued interest payable and other accrued liabilities		(1,056	)		983
Net cash provided by operating activities		6,697			8,650
Cash Flows from Investing Activities
Purchases of investment securities available for sale		—			(1,796	)
Purchases (redemptions) of restricted stock		(79	)		6
Proceeds from sale of securities available for sale		500			—
Proceeds from maturities and principal payments on mortgage-backed securities		2,192			3,212
Proceeds from the sale of REO property		2,483			—
Advances for other real estate owned		(3,730	)		375
Net (increase) in loans		(6,985	)		(30,508	)
Purchases of bank premises and equipment		(94	)		(1,680	)
Net cash provided by (used in) investing activities		(5,713	)		(30,391	)
Cash Flows from Financing Activities
Payment of dividend on preferred stock		408			(407	)
Cash payment of fractional shares on 10% stock dividend		(2	)		(6	)
Proceeds from exercise of stock options and warrants		—			8
Net decrease in other borrowed funds		—			—
Net decrease in Federal Home Loan Bank short term borrowings		—			(2,525	)
Minority interest capital withdrawal		(599	)
Payments of Federal Home Loan Bank advances		(75	)		(71	)
Net increase/(decrease) in noninterest-bearing deposits		1,868			(441	)
Net increase/(decrease) increase in interest-bearing deposits		(4,711	)		41,335
Net cash (used in) provided by financing activities		(3,927	)		37,893
(Decrease) increase in cash and cash equivalents		(2,943	)		16,152
Cash and Cash Equivalents, beginning of period		57,628			4,154
Cash and Cash Equivalents, end of period	$	54,685		$	20,306
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest on deposits and borrowed funds	$	4,907		$	5,788
Income taxes	$	3,444		$	4,150
Supplemental Schedule of Noncash Activities:
Real estate acquired in settlement of loans	$	682		$	10,712
Transfer of loans in settlement of secured borrowings	$	11,454		$	—

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 insured by the Federal Deposit Insurance Corporation ("FDIC"). Parke Bancorp and the Bank maintain their principal offices at 601 Delsea Drive, Washington Township, New Jersey. The Bank also conducts business through branches in Galloway Township, Northfield and Washington Township, New Jersey and Philadelphia, Pennsylvania.

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

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Financial Statement Presentation: The accounting and reporting policies of the Bank 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 Parke Bancorp, Inc. and its wholly-owned subsidiaries Parke Bank, Parke Capital Markets, Farm Folly, Inc. and Taylors Glen LLC. Also included are the accounts of 44 Business Capital Partners LLC, a joint venture formed in 2009 to originate and service SBA loans. Parke Bank has a 51% ownership interest in the joint venture. Parke Capital Trust I, Parke Capital Trust II and Parke Capital Trust III are wholly-owned subsidiaries but are not consolidated because they do not meet the requirements for consolidation under applicable accounting guidance. All significant inter-company balances and transactions have been eliminated.

The accompanying interim financial statements should be read in conjunction with the annual financial statements and notes thereto included in Parke Bancorp Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010 since they do not include all of the information and footnotes required by GAAP. The accompanying interim financial statements for the three and six months ended June 30, 2011 and 2010 are unaudited. The balance sheet as of December 31, 2010, 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 and six months ended June 30, 2011 are not necessarily indicative of the results for the full year.

Use of Estimates: In preparing the interim financial statements, management makes estimates and assumptions based on available information that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the balance sheet and reported amounts of expenses and revenues. Actual results could differ from such estimates. The allowance for loan losses, deferred taxes, evaluation of investment securities for other-than-temporary impairment and fair values of financial instruments and other real estate owned (“OREO”) are significant estimates and particularly subject to change.

Recently Issued Accounting Pronouncements:

On July 1, 2009, the Accounting Standards Codification (“ASC”) became the Financial Accounting Standards Board’s (“FASB”) officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

FASB ASC Topic 310, “Receivables.”

New authoritative accounting guidance (Accounting Standards Update No. 2011-01) under ASC Topic 310, "Receivables", temporarily delayed the effective date of the disclosures about troubled debt restructurings in Update 2010-20. The delay was intended to allow the Board time to complete its deliberations on what constituted a troubled debt restructuring. In April 2011, new authoritative guidance (Accounting Standards Update No. 2011-02) under ASC Topic 310 was released to assist creditors in determining whether a restructuring is a troubled debt restructuring. This update clarifies the guidance on a whether a creditor has made a concession and whether a debtor is experiencing financial difficulties. In addition, the disclosures that were deferred under ASU 2011-01 will now be required. ASU 2011-02 is effective for the first interim or annual period beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Early adoption is permitted. The Company will evaluate this new disclosure guidance, but does not expect it to have any effect on the Company's reported financial condition or results of operations.

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, 2011 and December 31, 2010:

As of June 30, 2011	Amortized cost			Gross unrealized gains		Gross unrealized losses		Other-than- temporary impairments in OCI		Fair value
Available-for-sale:	(amounts in thousands)

U.S. Government sponsored entities	$	3,006		$	12	$	20	$	—	$	2,998
Corporate debt obligations		1,500			55		—		—		1,555
Residential mortgage-backed securities	14,031			747		5		—		14,773
Collateralized mortgage obligations	1,729			96		—		—		1,825
Collateralized debt obligations	5,562			—		1,014		515		4,033
Total available-for-sale	$	25,828		$	910	$	1,039	$	515	$		25,184

Held to maturity:
States and political subdivisions	$		2,015	$	31	$	45	$	—	$	2,001

As of December 31, 2010	Amortized cost			Gross unrealized gains		Gross unrealized losses		Other-than- temporary impairments in OCI		Fair value
Available-for-sale:	(amounts in thousands)

U.S. Government sponsored entities	$	3,006		$	14	$	95	$	—	$	2,925
Corporate debt obligations		2,000			94		—		—		2,094
Residential mortgage-backed securities	15,938			645		24		—		16,559
Collateralized mortgage obligations	2,045			107		—		—		2,152
Collateralized debt obligations	5,562			—		1,014		548		4,000
Total available-for-sale	$	28,551		$	860	$	1,133	$	548	$		27,730

Held to maturity:
States and political subdivisions	$		1,999	$	60	$	11	$	—	$	2,048

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, 2011 are as follows:

	Amortized Cost		Fair Value
	(amounts in thousands)
Available-for-sale:
Due within one year	$	—	$	—
Due after one year through five years		1,000		1,012
Due after five years through ten years		2,000		1,980
Due after ten years		7,066		5,594
Residential mortgage-backed securities and collateralized mortgage obligations		15,762		16,598
Total available-for-sale	$	25,828	$	25,184

Held-to-maturity:
Due within one year	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		—		—
Due after ten years		2,015		2,001
Total held-to-maturity	$	2,015	$	2,001

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.

As of June 30, 2011, securities with a carrying value of $10.4 million, and fair value of $10.8 million, are pledged as collateral for borrowed funds. In addition, securities with carrying value of $9.3 million and fair value of $9.7 million were pledged to secure public deposits.

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, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011:

As of June 30, 2011	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:
U.S. Government sponsored entities	$	1,980	$	20	$	—	$	—	$	1,980	$	20
Residential mortgage-backed securities and collateralized mortgage obligations		2,523		5		—		—		2,523		5
Collateralized debt obligations		—		—		3,736		1,014		3,736		1,014
Total available-for-sale	$	4,503	$	25	$	3,736	$	1,014	$	8,239	$	1,039

Held-to-maturity:
States and political subdivisions	$	733	$	45	$	—	$	—	$	733	$	45

U.S. Government Sponsored Entities: The unrealized losses on the Company’s investment in U.S. Government sponsored entities relates to two securities. The losses were caused by movement in interest rates. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider the investment in these securities to be other-than-temporarily impaired at June 30, 2011 or December 31, 2010.

Residential Mortgage-Backed Securities and Collateralized Mortgage Obligations: The unrealized losses on the Company’s investment in mortgage-backed securities relates to two securities. The losses were caused by movement in interest rates. The securities were issued by FNMA and FHLMC, government sponsored entities. It is expected that the U.S. government will guarantee all contractual cash flows. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider the investment in these securities to be other-than-temporarily impaired at June 30, 2011 or December 31, 2010.

Collateralized Debt Obligations: The Company’s unrealized loss on investments in collateralized debt obligations (“CDOs”) relates to three securities issued by financial institutions, totaling $3.7 million. CDOs are pooled securities primarily secured by trust preferred securities (“TruPS”), subordinated debt and surplus notes issued by small and mid-sized banks and insurance companies. These securities are generally floating rate instruments with 30-year maturities, and are callable at par by the issuer after five years. The current economic downturn has had a significant adverse impact on the financial services industry, consequently, TruPS CDOs do not have an active trading market. With the assistance of

competent third-party valuation specialists, the Company utilized the following methodology to determine the fair value:

Cash flows were developed based on the estimated speeds at which the trust preferred securities are expected to prepay, the estimated rates at which the trust preferred securities are expected to defer payments, the estimated rates at which the trust preferred securities are expected to default, and the severity of the losses on securities which default. Trust preferred securities generally allow for prepayment by the issuer without a prepayment penalty any time after five years. Due to the lack of new trust preferred issuances and the relatively poor conditions of the financial institution industry, a relatively modest rate of prepayment was assumed going forward. Estimates for conditional default rates (“CDR”) are based on the payment characteristics of the trust preferred securities themselves (e.g. current, deferred, or defaulted) as well as the financial condition of the trust preferred issuers in the pool. Estimates for the near-term rates of deferral and CDR are based on key financial ratios relating to the financial institutions’ capitalization, asset quality, profitability and liquidity. Finally, we consider whether or not the financial institution has received TARP funding, and if it has, the amount. Longer-term rates of deferral and defaults on based on historical averages. The fair value of each bond was assessed by discounting their projected cash flows by a discount rate. The discount rates were based on the yields of publicly traded TruPS and preferred stock issued by comparably rated banks. The fair value for previous reporting periods was based on indicative market bids and resulted in much lower values due to the inactive trading market.

The underlying issuers have been analyzed, and projections have been made regarding the future performance, considering factors including defaults and interest deferrals. The analysis indicates that the Company should expect to receive all contractual cash flows. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider these investments to be other-than-temporarily impaired at June 30, 2011 or December 31, 2010.

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 other-than-temporarily impaired (“OTTI”) and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income.

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

We have a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. On a quarterly basis, we review all securities to determine whether an other-than-temporary decline in value 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 and for equity securities, our ability and intent to hold the security for a period of time that allows for the recovery in value.

The following table presents a roll-forward of the credit loss component of the amortized cost of debt securities that we have written down for OTTI and the credit component of the loss that is recognized in earnings. OTTI recognized in earnings for credit-impaired debt securities is presented as additions in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairments). The credit loss component is reduced if we sell, intend to sell or believe we will be required to sell previously credit-impaired debt securities. Additionally, the credit loss component is reduced if we receive cash flows in excess of what we expected to receive over the remaining life of the credit-impaired debt security, the security matures or is fully written down. Changes in the credit loss component of credit-impaired debt securities were as follows for the periods ended June 30, 2011 and 2010.

	For the Six Months Ended June 30,
	2011		2010

	(amounts in thousands)
Beginning balance	$	2,657	$	4,008
Initial credit impairment		—		—
Subsequent credit impairments		57		18
Reductions for amounts recognized in earnings due to intent or requirement to sell		—		—
Reductions for securities sold		—		—
Reductions for securities deemed worthless		316		1,218
Reductions for increases in cash flows expected to be collected		—		—
Ending balance	$	2,398	$	2,808

	For the Three Months Ended June 30,
	2011		2010

	(amounts in thousands)
Beginning balance	$	2,596	$	2,957
Initial credit impairment		—		—
Subsequent credit impairments		37		—
Reductions for amounts recognized in earnings due to intent or requirement to sell		—		—
Reductions for securities sold		—		—
Reductions for securities deemed worthless		235		149
Reductions for increases in cash flows expected to be collected		—		—
Ending balance	$	2,398	$	2,808

A summary of investment gains and losses recognized in income during the six month and three month periods ended June 30, 2011 and 2010 are as follows:

	For the Six Months Ended June 30,
	2011			2010

	(amounts in thousands)
Available-for-sale securities:
Realized gains	$	—		$	—
Realized (losses)		—			—
Other than temporary impairment		(57	)		(18	)
Total available-for-sale securities	$	(57	)	$	(18	)

Held-to-maturity securities:
Realized gains	$	—		$	—
Realized (losses)		—			—
Other than temporary impairment		—			—
Total held-to-maturity securities	$	—		$	—

	For the Three Months Ended June 30,
	2011			2010

	(amounts in thousands)
Available-for-sale securities:
Realized gains	$	—		$	—
Realized (losses)		—			—
Other than temporary impairment		(37	)		—
Total available-for-sale securities	$	(37	)	$	—

Held-to-maturity securities:
Realized gains	$	—		$	—
Realized (losses)		—			—
Other than temporary impairment		—			—
Total held-to-maturity securities	$	—		$	—

During the first six months of 2011, the Company recognized $57,000 of other-than-temporary impairment losses on available-for-sale securities, attributable to impairment charges recognized on a

privately issued CMO.

The impairment charges for the CMO were recognized in light of significant deterioration of housing values in the residential real estate market, the significant rise in delinquencies and charge-offs of underlying mortgage loans and resulting decline in market value of the securities.

With the assistance of competent third-party valuation specialists, the Company utilized the following methodologies to quantify the OTTI. The underlying mortgage collateral was analyzed in order to project future cash flows and to calculate the credit component of the OTTI. Four major assumptions were utilized; prepayment (CPR), conditional default rate (CDR), loss severity and risk adjusted discount rate. The methodologies for the four assumptions are:

CPR assumptions were based on evaluation of the lifetime conditional prepayment rates; 3 month CPR over the most recent period, past 6 months and past 12 months; estimated prepayment rates provided by the Securities Industry & Financial Markets Association (SIFMA), forecasts from other industry experts, and judgment given recent deterioration in credit conditions and declines in property values. The CRP assumption utilized ranged from 7.73% to 8.51%.

CDR estimates were based on the status of the loans – current, 30-59 days delinquent, 60-89 days delinquent, 90+ days delinquent, foreclosure or REO – and proprietary loss migration models (i.e. percentage of 30 day delinquents that will ultimately migrate to default, percentage of 60 day delinquents that will ultimately migrate to default, etc.). The model assumes that the 60 day plus population will move to repossession inventory subject to the loss migration assumptions and liquidate over the next 36 months. Defaults vector from month 37 to month 48 to the month 49 CDR value and ultimately vector to zero over an extended period of time of at least 15 years. The CDR assumption utilized started at a range of 5.58% to 6.23%, and ramped down to a range of 1.80% to 4.14% by month 49.

Loss severity estimates are based on the initial loan to value ratio, the loan’s lien position, private mortgage insurance proceeds available (if any), and the estimated change in the price of the property since origination. The loss severity assumption is static for twelve months at 50.9% then decreases monthly based on future market appreciation to a floor of 23%.

The risk adjusted discount rate of 15% was derived based on the spread from the most recent active market indication for either the instrument in question or a proxy of the instrument. The resulting spread was then used in conjunction with the swap curve to discount the expected cash flow stream.

NOTE 4. LOANS

The portfolio of the loans outstanding consists of:

	June 30, 2011					December 31, 2010
	Amount		Percentage of Total Loans			Amount		Percentage of Total Loans
	(amounts in thousands)
Commercial and industrial	$	24,310		3.9	%	$	24,782		4.0	%
Real estate construction:
Residential		24,415		3.9			38,810		6.2
Commercial		57,917		9.2			57,086		9.1
Real estate mortgage:
Commercial – owner occupied		139,983		22.2			141,035		22.5
Commercial – non owner occupied		196,296		31.1			178,755		28.6
Residential – 1 to 4 family		146,421		23.2			141,315		22.5
Residential - Multifamily		23,126		3.7			27,841		4.4
Consumer		17,825		2.8			17,115		2.7
Total Loans	$	630,293		100.0	%	$	626,739		100.0	%

The Company maintains interest reserves for the purpose of making periodic and timely interest payments for borrowers that qualify. Total loans with interest reserves were $36.5 million and $65.6 million at June 30, 2011 and December 31, 2010 respectively. On a monthly basis management reviews loans with interest reserves to assess current and projected performance.

Loan Origination/Risk Management: The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower's management possesses sound ethics and solid business acumen, the Company's management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and

almost always will incorporate a personal guarantee. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

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

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location within our market area. This diversity helps reduce the Company's exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also monitors economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At June 30, 2011, approximately 41.6% of the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-occupied properties.

To monitor and manage consumer loan risk, policies and procedures are developed and modified as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.

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

Nonaccrual 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 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 follows:

As of June 30, 2011	30-59 Days Past Due			60-89 Days Past Due		Greater than 90 Days and Accruing		Greater than 90 Days and Not Accruing		Total Past Due			Current		Total Loans
	(Amounts in thousands)
Commercial and industrial	$	594	$	—	$	—	$	—	$	594	$	23,716		$	24,310
Real estate construction:
Residential		327		—		—		4,609		4,936		19,479			24,415
Commercial		3		—		—		7,888		7,891		50,026			57,917
Real estate mortgage:
Commercial – owner occupied		158		—		—		4,795		4,953		135,030			139,983
Commercial – non owner occupied		1,510		—		—		5,343		6,853		189,443			196,296
Residential – 1 to 4 family		680		71		—		11,398		12,149		134,272			146,421
Residential - Multifamily		—		—		—		587		587		22,539			23,126
Consumer		—		—		—		—		—		17,825			17,825
Total Loans	$	3,272	$	71	$	—	$	34,620	$	37,963	$	592,330		$	630,293

As of December 31, 2010	30-59 Days Past Due			60-89 Days Past Due		Greater than 90 Days and Accruing		Greater than 90 Days and Not Accruing		Total Past Due			Current		Total Loans
	(Amounts in thousands)
Commercial and industrial	$	21	$	98	$	—	$	—	$	119	$	24,663		$	24,782
Real estate construction:
Residential		1,657		—		—		8,546		10,203		28,607			38,810
Commercial		266		—		—		6,701		6,967		50,119			57,086
Real estate mortgage:
Commercial – owner occupied		4,157		—		—		546		4,703		136,332			141,035
Commercial – non owner occupied		406		5,670		—		826		6,902		171,853			178,755
Residential – 1 to 4 family		1,334		2,161		—		9,415		12,910		128,405			141,315
Residential - Multifamily		75		—		—		1,350		1,425		26,416			27,841
Consumer		—		—		—		61		61		17,054			17,115
Total Loans	$	7,916	$	7,929	$	—	$	27,445	$	43,290	$	583,449		$	626,739

Impaired Loans: Loans with a risk rating of substandard or worse are deemed impaired. In addition, Troubled Debt Restructurings are also deemed impaired.

All impaired loans have 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 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 carrying value and NRV will occur. In certain circumstances, however, a direct charge-off may be taken at the time that the NRV calculation reveals a shortfall. All impaired loans are evaluated based on the criteria stated above on a quarterly basis and any change in the reserve requirements are recorded in the period identified. All partially charged-off loans remain on nonaccrual status until they are brought current as to both principal and interest and have at least six months of payment history and future collectability of principal and interest is assured.

Impaired loans are set forth in the following tables.

As of June 30, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized1
	(Amounts in thousands)
With no related allowance recorded:
Commercial and industrial	$	594	$	594	$	—	$	594	$	10
Real estate construction:
Residential		4,756		4,947		—		5,082		42
Commercial		16,146		16,146		—		15,846		263
Real estate mortgage:
Commercial – owner occupied		5,171		5,171		—		5,209		28
Commercial – non owner occupied		25,039		25,038		—		28,213		744
Residential – 1 to 4 family		6,231		6,231		—		6,203		82
Residential - Multifamily		587		659		—		627		22
Consumer		—		—		—		—		—
		58,524		58,786		—		61,774		1,191

With an allowance recorded:
Commercial and industrial		—		—		—		—		—
Real estate construction:
Residential		6,427		7,628		1,449		7,129		146
Commercial		1,659		2,248		344		1,954		—
Real estate mortgage:
Commercial – owner occupied		2,397		2,397		36		2,397		80
Commercial – non owner occupied		15,730		15,850		210		15,798		490
Residential – 1 to 4 family		8,711		9,401		1,055		9,319		67
Residential - Multifamily		3,909		3,909		22		4,377		142
Consumer		—		—		—		—		—
		38,833		41,433		3,116		40,974		925

Total:
Commercial and industrial		594		594		—		594		10
Real estate construction:
Residential		11,183		12,575		1,449		12,211		188
Commercial		17,805		18,394		344		17,800		263
Real estate mortgage:
Commercial – owner occupied		7,568		7,568		36		7,606		108
Commercial – non owner occupied		40,769		40,888		210		44,011		1,234
Residential – 1 to 4 family		14,942		15,632		1,055		15,522		149
Residential - Multifamily		4,496		4,568		22		5,004		164
Consumer		—		—		—		—		—
Total	$	97,357	$	100,219	$	3,116	$	102,748	$	2,116

1Reflects the interest income recognized on impaired loans, which includes troubled debt restructurings accruing interest, during the six month period ending June 30, 2011. Interest income recognized on a cash basis subsequent to a loan being placed on nonaccrual was $149,000 during the period.

As of December 31, 2010	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized1
	(Amounts in thousands)
With no related allowance recorded:
Commercial and industrial	$	785	$	785	$	—	$	509	$	11
Real estate construction:
Residential		13,180		14,147		—		12,789		106
Commercial		18,181		18,770		—		7,845		214
Real estate mortgage:
Commercial – owner occupied		9,022		9,022		—		5,209		395
Commercial – non owner occupied		33,281		33,282		—		10,994		1,167
Residential – 1 to 4 family		6,185		6,211		—		6,203		153
Residential - Multifamily		2,355		2,425		—		1,676		77
Consumer		61		61		—		31