Edgar Filing: PARKE BANCORP, INC.

f10q_0063014-0343.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, 2014.

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

For the transition period from ____________ to ____________

Commission File No. 000-51338

PARKE BANCORP, INC.

(Exact name of registrant as specified in its charter)

New Jersey		65-1241959
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

601 Delsea Drive, Washington Township, New Jersey		08080
(Address of principal executive offices)		(Zip Code)

856-256-2500

(Registrant's telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

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

Yes [X] No [ ]

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

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

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

Yes [ ] No [X]

As of August 14, 2014, there were issued and outstanding 5,991,859 shares of the registrant's common stock.

PARKE BANCORP, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2014

INDEX

		Page
Part I	FINANCIAL INFORMATION

Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	48
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	49

SIGNATURES

EXHIBITS and CERTIFICATIONS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Parke Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
(in thousands except share and per share data)
	June 30,			December 31,
	2014			2013
Assets
Cash and due from financial institutions	$	3,163		$	4,278
Federal funds sold and cash equivalents		66,585			41,383
Total cash and cash equivalents		69,748			45,661
Investment securities available for sale, at fair value		30,407			35,695
Investment securities held to maturity (fair value of $2,283 at June 30, 2014 and $2,155 at December 31, 2013)		2,121			2,103
Total investment securities		32,528			37,798
Loans held for sale		12,098			12,069
Loans, net of unearned income		658,395			654,541
Less: Allowance for loan losses		(17,459	)		(18,560	)
Net loans		640,936			635,981
Accrued interest receivable		2,763			2,717
Premises and equipment, net		3,801			3,864
Other real estate owned (OREO)		24,156			28,910
Restricted stock, at cost		3,512			3,618
Bank owned life insurance (BOLI)		11,284			11,106
Deferred tax asset		12,335			12,260
Other assets		6,099			959
Total Assets	$	819,260		$	794,943

Liabilities and Equity
Liabilities
Deposits
Noninterest-bearing deposits	$	39,398		$	35,986
Interest-bearing deposits		609,385			590,782
Total deposits		648,783			626,768
FHLBNY borrowings		50,692			55,280
Subordinated debentures		13,403			13,403
Accrued interest payable		462			423
Other liabilities		7,517			5,105
Total liabilities		720,857			700,979
Equity
Preferred stock, 1,000,000 shares authorized, $1,000 liquidation value Series B - non-cumulative convertible; Issued: 20,000 shares at June 30, 2014 and December 31, 2013		20,000			20,000
Common stock, $.10 par value; authorized 10,000,000 shares; Issued: 6,202,759 shares at June 30, 2014 and 6,193,710 shares at December 31, 2013		620			619
Additional paid-in capital		51,264			51,204
Retained earnings		28,222			24,308
Accumulated other comprehensive loss		112			(235	)
Treasury stock, 210,900 shares at June 30, 2014 and December 31, 2013, at cost		(2,180	)		(2,180	)
Total shareholders’ equity		98,038			93,716
Noncontrolling interest in consolidated subsidiaries		365			248
Total equity		98,403			93,964
Total liabilities and equity	$	819,260		$	794,943

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,
	2014			2013			2014			2013
	(in thousands except share data)						(in thousands except share data)
Interest income:
Interest and fees on loans	$	18,732		$	17,811		$	9,442		$	8,765
Interest and dividends on investments		556			383			262			179
Interest on federal funds sold and cash equivalents		55			73			32			33
Total interest income		19,343			18,267			9,736			8,977
Interest expense:
Interest on deposits		2,363			2,664			1,186			1,289
Interest on borrowings		437			426			216			204
Total interest expense		2,800			3,090			1,402			1,493
Net interest income		16,543			15,177			8,334			7,484
Provision for loan losses		2,000			2,000			1,000			1,000
Net interest income after provision for loan losses		14,543			13,177			7,334			6,484
Noninterest income:
Gain on sale of SBA loans		1,332			1,468			1,011			969
Loan fees		461			323			246			161
Net income from BOLI		178			185			90			94
Service fees on deposit accounts		115			116			58			65
Loss on sale and write-down of real estate owned		(435	)		(455	)		(39	)		(91	)
Realized gain on sale of AFS securities		178			—			—			—
Other		788			323			293			113
Total noninterest income		2,617			1,960			1,659			1,311
Noninterest expense:
Compensation and benefits		3,605			3,382			1,761			1,724
Professional services		748			756			338			439
Occupancy and equipment		592			483			296			239
Data processing		245			243			128			132
FDIC insurance		491			544			251			296
OREO expense		2,008			788			1,248			403
Other operating expense		1,748			1,759			872			994
Total noninterest expense		9,437			7,955			4,894			4,227
Income before income tax expense		7,723			7,182			4,099			3,568
Income tax expense		2,426			2,645			1,264			1,275
Net income attributable to Company and noncontrolling interest		5,297			4,537			2,835			2,293
Net income attributable to noncontrolling interest		(486	)		(412	)		(349	)		(305	)
Net income attributable to Company		4,811			4,125			2,486			1,988
Preferred stock dividend and discount accretion		600			510			300			256
Net income available to common shareholders	$	4,211		$	3,615		$	2,186		$	1,732

Earnings per common share:
Basic	$	0.70		$	0.61		$	0.36		$	0.29
Diluted	$	0.61		$	0.61		$	0.31		$	0.29
Weighted average shares outstanding:
Basic		5,990,309			5,944,915			5,991,859			5,962,623
Diluted		7,923,201			5,944,915			7,930,518			5,963,606
See accompanying notes to consolidated financial statements

Parke Bancorp Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
	For the six months ended June 30,								For the three months ended June 30,
	2014				2013				2014			2013
	(in thousands)								(in thousands)
Net income attributable to Company		$	4,811			$	4,125		$	2,486		$	1,988
Unrealized (losses) gains on securities:
Non-credit related unrealized gains on securities with OTTI			—				15			—			3
Unrealized gains (losses) on securities without OTTI			579				(304	)		341			(243	)
Less re-class adjustment for gains on securities included in net income			(178	)			—			—			—
Tax Impact			(232	)			116			(136	)		96
Total unrealized gains (losses) on securities			169				(173	)		205			(144	)
Gross pension liability adjustments			—				100			—			47
Tax Impact			—				(40	)		—			(19	)
Total pension liability adjustment			—				60			—			28
Total other comprehensive income (loss)			169				(113	)		205			(116	)
Total comprehensive income		$	4,980			$	4,012		$	2,691		$	1,872
See accompanying notes to consolidated financial statements

Parke Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
	Preferred Stock			Shares of Common Stock		Common Stock			Additional Paid-In Capital			Retained Earnings				Accumulated Other Comprehensive Loss				Treasury Stock				Total Shareholders’ Equity				Non- Controlling Interest				Total Equity
	(in thousands except share data)
Balance, December 31, 2013		$	20,000		6,193,710		$	619		$	51,204		$	24,308			$	(235	)		$	(2,180	)		$	93,716			$	248			$	93,964
Capital withdrawals by noncontrolling interest																														(369	)			(369	)
Stock options exercised					9,049			1			60															61								61
Net income														4,811												4,811				486				5,297
Changes in other comprehensive income																		347								347								347
Dividend on preferred stock														(600	)											(600	)							(600	)
Dividend on common stock														(297	)											(297	)							(297	)
Balance, June 30, 2014		$	20,000		6,202,759		$	620		$	51,264		$	28,222			$	112			$	(2,180	)		$	98,038			$	365			$	98,403
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,
	2014			2013
	(amounts in thousands)
Cash Flows from Operating Activities:
Net income	$	5,297		$	4,537
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		175			169
Provision for loan losses		2,000			2,000
Provision for OREO		500			—
Net gain from sales of investment securities		(178	)		—
Bank owned life insurance		(178	)		(185	)
Supplemental executive retirement plan expense		—			17
Gain on sale of SBA loans		(1,332	)		(1,468	)
SBA loans originated for sale		(11,678	)		(11,831	)
Proceeds from sale of SBA loans originated for sale		12,981			13,096
Loss on sale & write down of OREO		434			454
Net accretion of purchase premiums and discounts on securities		5			21
Contribution of OREO property		22			—
Deferred income tax benefit		(7,889	)		(284	)
Changes in operating assets and liabilities:
Decrease in accrued interest receivable and other assets		3,256			894
Increase (decrease) in accrued interest payable and other accrued liabilities		1,052			(605	)
Net cash provided by operating activities		4,467			6,815
Cash Flows from Investing Activities:
Purchases of investment securities available for sale		—			(2,022	)
Redemptions of restricted stock		106			176
Proceeds from sale and call of securities available for sale		3,974			1,000
Proceeds from maturities and principal payments on mortgage backed securities		2,048			2,501
Proceeds from sale of OREO		5,871			3,157
Advances on OREO		(361	)		(63	)
Net increase in loans		(8,667	)		(15,541	)
Purchases of bank premises and equipment		(112	)		(94	)
Net cash provided by (used in) investing activities		2,859			(10,886	)
Cash Flows from Financing Activities:
Payment of dividend on preferred stock		(357	)		(409	)
Cash payment of fractional shares on 10% stock dividend		—			(2	)
Minority interest capital withdrawal, net		(370	)		(1,164	)
Proceeds from exercise of stock options and warrants		61			290
Redemption payment for TARP Warrant		—			(1,650	)
Net decrease in FHLBNY and short term borrowings		(4,588	)		(83	)
Net decrease in other borrowed funds		—			(5,000	)
Net increase (decrease) in noninterest-bearing deposits		3,412			(397	)
Net increase (decrease) in interest-bearing deposits		18,603			(27,291	)
Net cash provided by (used in) financing activities		16,761			(35,706	)
Net increase (decrease) in cash and cash equivalents		24,087			(39,777	)
Cash and Cash Equivalents, January 1,		45,661			76,866
Cash and Cash Equivalents, June 30,	$	69,748		$	37,089
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest on deposits and borrowed funds	$	2,761		$	3,152
Income taxes	$	4,300		$	2,708
Supplemental Schedule of Noncash Activities:
Real estate acquired in settlement of loans	$	1,712		$	1,160

See accompanying notes to consolidated financial statements

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. ORGANIZATION

Parke Bancorp, Inc. ("Parke Bancorp” or the "Company") is a bank holding company incorporated under the laws of the State of New Jersey in January 2005 for the sole purpose of becoming the holding company of Parke Bank (the "Bank").

The Bank is a commercial bank which commenced operations on January 28, 1999. The Bank is chartered by the New Jersey Department of Banking and Insurance (the “Department”) and insured by the Federal Deposit Insurance Corporation ("FDIC"). Parke Bancorp and the Bank maintain their principal offices at 601 Delsea Drive, Washington Township, New Jersey. The Bank also conducts business through branches in Galloway Township, Northfield and Washington Township, New Jersey and Philadelphia, Pennsylvania.

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

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

The FDIC and the Department Consent Orders: On April 9, 2012, the Bank entered into Consent Orders with the FDIC and the Department. Under the Consent Orders, the terms of which are substantially identical, the Bank was required to: (i) to adopt and implement a plan to reduce the Bank’s position in delinquent or classified assets; (ii) to adopt and implement a program providing for a periodic independent review of the Bank’s loan portfolio and the identification of problem credits; (iii) to review and revise the Bank’s loan policies and procedures to address identified lending deficiencies; and (iv) to adopt and implement a plan to reduce and manage each of the concentrations of credit identified by the FDIC and the Department. Effective May 19, 2014, the FDIC and the Department terminated the Consent Orders entered into between Parke Bank, the Company’s wholly owned subsidiary, and the FDIC and the Department.

Federal Reserve Bank Memorandum of Understanding: On December 18, 2012, the Company entered into a Memorandum of Understanding (“MOU”) with the Federal Reserve Bank of Philadelphia (the “Federal Reserve Bank”). Pursuant to the terms of the MOU, the Company: (i) was required to submit an updated comprehensive capital plan to address the Bank’s long-term capital needs and the repayment of the Series A Preferred Stock; (ii) was prohibited from paying any common stock dividend or paying interest on our outstanding trust preferred securities without prior Federal Reserve Bank approval if the Bank was less than well capitalized or the payment would cause it to be less than well capitalized; (iii) was prohibited from redeeming any securities without prior Federal Reserve Bank approval or incurring any debt with a maturity greater than one year; and (iv) required to submit various budget and cash flow projections and other reports. Effective August 4, 2014, the MOU was lifted by the Federal Reserve Bank.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Financial Statement Presentation: The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and predominant practices within the banking industry.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary the Bank. Also included are the accounts of 44 Business Capital Partners LLC, a joint venture formed in 2009 to originate and service SBA loans. The Bank has a 51% ownership interest in the joint venture. Parke Capital Trust I, Parke Capital Trust II and Parke Capital Trust III are wholly-owned subsidiaries but are not consolidated because they do not meet the requirements for consolidation under applicable accounting guidance. All significant inter-company balances and transactions have been eliminated.

The accompanying interim financial statements should be read in conjunction with the annual financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 since they do not include all of the information and footnotes required by GAAP. The accompanying interim financial statements for the six months and three months ended June 30, 2014 and 2013 are unaudited. The balance sheet as of December 31, 2013, was derived from the audited financial statements. In the opinion of management, these financial statements include all normal and recurring adjustments necessary for a fair statement of the results for such interim periods. Results of operations for the six months ended June 30, 2014 are not necessarily indicative of the results for the full year. Certain reclassifications have been made to prior period amounts to conform to the current year presentation, with no impact on current earnings or shareholders’ equity.

Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the allowance for loan losses, other than temporary impairment losses on investment securities, the valuation of deferred income taxes, servicing assets and carrying value of OREO.

Recently Issued Accounting Pronouncements:

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (ASU 2014-09),” which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.

In January 2014, the FASB issued ASU 2014-04, "Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." ASU 2014-04 clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU 2014-04 requires interim and annual disclosure of both (a) the amount of foreclosed residential real estate property held by the creditor and (b) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in ASU 2014-04 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. An entity can elect to adopt the amendments using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. The Company is currently evaluating the impact of these amendments.

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, 2014 and December 31, 2013:

As of June 30, 2014	Amortized cost		Gross unrealized gains		Gross unrealized losses		Other-than- temporary impairments in OCI		Fair value
	(amounts in thousands)
Available for sale:
Corporate debt obligations	$	500	$	17	$	—	$	—	$	517
Residential mortgage-backed securities		28,456		681		78		—		29,059
Collateralized mortgage obligations		458		24		—		—		482
Collateralized debt obligations		806		—		—		457		349
Total available for sale	$	30,220	$	722	$	78	$	457	$	30,407

Held to maturity:
States and political subdivisions	$	2,121	$	162	$	—	$	—	$	2,283

As of December 31, 2013	Amortized cost		Gross unrealized gains		Gross unrealized losses		Other-than- temporary impairments in OCI		Fair Value
	(amounts in thousands)
Available for sale:
Corporate debt obligations	$	500	$	6	$	—	$	—	$	506
Residential mortgage-backed securities		30,422		285		257		—		30,450
Collateralized mortgage obligations		564		31		—		—		595
Collateralized debt obligations		4,601		—		—		457		4,144
Total available for sale	$	36,087	$	322	$	257	$	457	$	35,695

Held to maturity:
States and political subdivisions	$	2,103	$	52	$	—	$	—	$	2,155

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, 2014 are as follows:

	Amortized Cost		Fair Value
	(amounts in thousands)
Available for sale:
Due within one year	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		—		—
Due after ten years		1,306		866
Residential mortgage-backed securities and collateralized mortgage obligations		28,914		29,541
Total available for sale	$	30,220	$	30,407

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		2,121		2,283
Total held to maturity	$	2,121	$	2,283

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.

There were no securities pledged as collateral for borrowed funds as of June 30, 2014 and December 31, 2013. Securities with a carrying value of $11.1 million and $12.3 million were pledged to secure public deposits at June 30, 2014 and December 31, 2013, respectively.

The following tables show the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other than temporarily impaired (“OTTI”), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2014 and December 31, 2013:

As of June 30, 2014	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 and collateralized mortgage obligations			4,376			78			—			—			4,376			78
Total available for sale		$	4,376		$	78		$	—		$	—		$	4,376		$	78

As of December 31, 2013	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			25,286			257			—			—			25,286			257
Total available for sale		$	25,286		$	257		$	—		$	—		$	25,286		$	257

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

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

We have a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. On a quarterly basis, we review all securities to determine whether an OTTI exists and whether losses should be recognized. We consider relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events; and (4) for fixed maturity securities, our intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity.

The 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 six month and three month periods ended June 30, 2014 and 2013:

	For the Six Months Ended June 30,
	2014			2013

	(amounts in thousands)
Beginning balance	$	1,126		$	1,219
Initial credit impairment		—			—
Subsequent credit impairments		—			—
Reductions for amounts recognized in earnings due to intent or requirement to sell		—			—
Reductions for securities sold		(955	)		—
Reductions for securities deemed worthless		—			(54	)
Reductions for increases in cash flows expected to be collected		—			—
Ending balance	$	171		$	1,165

	For the Three Months Ended June 30,
	2014		2013

	(amounts in thousands)
Beginning balance	$	171	$	1,165
Initial credit impairment		—		—
Subsequent credit impairments		—		—
Reductions for amounts recognized in earnings due to intent or requirement to sell		—		—
Reductions for securities sold		—		—
Reductions for securities deemed worthless		—		—
Reductions for increases in cash flows expected to be collected		—		—
Ending balance	$	171	$	1,165

During the six months ended June 30, 2014, the Bank sold three Trust Preferred securities, which resulted in a $178,000 gain reflected in the income statement.

NOTE 4. LOANS

The portfolio of loans outstanding consists of the following:

	June 30, 2014					December 31, 2013
	Amount		Percentage of Total Loans			Amount		Percentage of Total Loans
	(amounts in thousands)
Commercial and Industrial	$	27,717		4.2	%	$	23,001		3.5	%
Real Estate Construction:
Residential		6,147		0.9			7,389		1.1
Commercial		36,609		5.6			43,749		6.7
Real Estate Mortgage:
Commercial – Owner Occupied		172,167		26.2			170,122		26.0
Commercial – Non-owner Occupied		226,023		34.3			220,364		33.7
Residential – 1 to 4 Family		149,427		22.7			148,160		22.6
Residential – Multifamily		23,635		3.6			24,103		3.7
Consumer		16,670		2.5			17,653		2.7
Total Loans	$	658,395		100.0	%	$	654,541		100.0	%

Loan Origination/Risk Management: In the normal course of business the Company is exposed to a variety of operational, reputational, legal, regulatory, and credit risks that could adversely affect our financial performance. Most of our asset risk is primarily tied to credit (lending) risk. The Company has lending policies, guidelines and procedures in place that are designed to maximize loan income within an acceptable level of risk. The Board of Directors reviews and approves these policies, guidelines and procedures. When we originate a loan we make certain subjective judgments about the borrower’s ability to meet the loan’s terms and conditions. We also make objective and subjective value assessments on the assets we finance. The borrower’s ability to repay can be adversely affected by economic changes. Likewise, changes in market conditions and other external factors can affect asset valuations. The Company actively monitors the quality of its loan portfolio. A reporting system supplements the credit review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit risk, loan delinquencies, troubled debt restructures, nonperforming and potential problem loans. Diversification in the loan portfolio is another means of managing risk associated with fluctuations in economic conditions.

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 analyses of the developers and property owners. Construction loans are generally underwritten based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property 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. Commercial real estate loans may be riskier than loans for one-to-four family residences and are typically larger in dollar size. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. The repayment of these loans is generally largely dependent on the successful operation and management of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location within our market area. This diversity helps reduce the Company's exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also monitors economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Consumer loans may carry a higher degree of repayment risk than residential mortgage loans. Repayment is typically dependent upon the borrower’s financial stability which is more likely to be adversely affected by job loss, illness, or personal bankruptcy. To monitor and manage consumer loan risk, policies and procedures have been developed and modified as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements. Historically the Company’s losses on consumer loans have been negligible.

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

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 a loan is 90 days past due, unless the loan is well secured and in the process of collection, as required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

An age analysis of past due loans by class at June 30, 2014 and December 31, 2013 follows:

June 30, 2014	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and Not Accruing		Total Past Due		Current		Total Loans
	(amounts in thousands)

Commercial and Industrial	$	—	$	—	$	61	$	61	$	27,656	$	27,717
Real Estate Construction:
Residential		—		—		512		512		5,635		6,147
Commercial		—		—		13,232		13,232		23,377		36,609
Real Estate Mortgage:
Commercial – Owner Occupied		—		—		1,262		1,262		170,905		172,167
Commercial – Non-owner Occupied		—		888		9,214		10,102		215,921		226,023
Residential – 1 to 4 Family		—		320		8,775		9,095		140,332		149,427
Residential – Multifamily		443		—		—		443		23,192		23,635
Consumer		7		—		94		101		16,569		16,670
Total Loans	$	450	$	1,208	$	33,150	$	34,808	$	623,587	$	658,395

December 31, 2013	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and Not Accruing		Total Past Due		Current		Total Loans
	(amounts in thousands)

Commercial and Industrial	$	—	$	—	$	122	$	122	$	22,879	$	23,001
Real Estate Construction:
Residential		—		—		967		967		6,422		7,389
Commercial		—		—		9,908		9,908		33,841		43,749
Real Estate Mortgage:
Commercial – Owner Occupied		710		1,438		976		3,124		166,998		170,122
Commercial – Non-owner Occupied		—		478		10,853		11,331		209,033		220,364
Residential – 1 to 4 Family		1,013		—		12,914		13,927		134,233		148,160
Residential – Multifamily		—		—		99		99		24,004		24,103
Consumer		32		—		115		147		17,506		17,653
Total Loans	$	1,755	$	1,916	$	35,954	$	39,625	$	614,916	$	654,541

Impaired Loans: Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments.

All impaired loans have are assessed for recoverability based on an independent third-party full appraisal to determine the net realizable value (“NRV”) based on the fair value of the underlying collateral, less cost to sell and other costs, such as unpaid real estate taxes, that have been identified, or the present value of discounted cash flows in the case of certain impaired loans that are not collateral dependent. The appraisal will be based on an "as-is" valuation and will follow a reasonable valuation method that addresses the direct sales comparison, income, and cost approaches to market value, reconciles those approaches, and explains the elimination of each approach not used. Appraisals are generally updated every 12 months or sooner if we have identified possible further deterioration in value. Prior to receiving the updated appraisal, we will establish a specific reserve for any estimated deterioration, based upon our assessment of market conditions, adjusted for estimated costs to sell and other identified costs. If the NRV is greater than the loan amount, then no impairment loss exists. If the NRV is less than the loan amount, the shortfall is recognized by a specific reserve. If the borrower fails to pledge additional collateral in the ninety day period, a charge-off equal to the difference between the loan carrying value and NRV will occur. In certain circumstances, however, a direct charge-off may be taken at the time that the NRV calculation reveals a shortfall. All impaired loans are evaluated based on the criteria stated above on a quarterly basis and any change in the reserve requirements are recorded in the period identified. All partially charged-off loans remain on nonaccrual status until they are brought current as to both principal and interest and have at least nine months of payment history and future collectability of principal and interest is assured.

Impaired loans at June 30, 2014 and December 31, 2013 are set forth in the following tables.

June 30, 2014	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(amounts in thousands)
With no related allowance recorded:
Commercial and Industrial	$	61	$	456	$	—
Real Estate Construction:
Residential		512		1,253		—
Commercial		13,166		13,202		—
Real Estate Mortgage:
Commercial – Owner Occupied		977		1,160		—
Commercial – Non-owner Occupied		9,213		11,556		—
Residential – 1 to 4 Family		2,108		2,132		—
Residential – Multifamily		—		—		—
Consumer		94		94		—
		26,131		29,853		—

With an allowance recorded:
Commercial and Industrial		488		488		9
Real Estate Construction:
Residential		—		—		—
Commercial		3,426		3,484		135
Real Estate Mortgage:
Commercial – Owner Occupied		5,645		5,731		133
Commercial – Non-owner Occupied		22,022		22,022		615
Residential – 1 to 4 Family		9,048		11,991		700
Residential – Multifamily		366		366		6
Consumer		—		—		—
		40,995		44,082		1,598

Total:
Commercial and Industrial		549		944		9
Real Estate Construction:
Residential		512		1,253		—
Commercial		16,592		16,686		135
Real Estate Mortgage:
Commercial – Owner Occupied		6,622		5,891		133
Commercial – Non-owner Occupied		31,235		33,578		615
Residential – 1 to 4 Family		11,156		14,123		700
Residential – Multifamily		366		366		6
Consumer		94		94		—
	$	67,126	$	73,935	$	1,598

December 31, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(amounts in thousands)
With no related allowance recorded:
Commercial and Industrial	$	—	$	—	$	—
Real Estate Construction:
Residential		780		1,521		—
Commercial		9,568		9,592		—
Real Estate Mortgage:
Commercial – Owner Occupied		787		842		—
Commercial – Non-owner Occupied		10,853		13,153		—
Residential – 1 to 4 Family		9,892		10,084		—
Residential – Multifamily		99		306		—
Consumer		65		65		—
		32,044		35,563		—

With an allowance recorded:
Commercial and Industrial		622		622		131
Real Estate Construction:
Residential		187		661		21
Commercial		2,168		2,225		290
Real Estate Mortgage:
Commercial – Owner Occupied		5,752		5,782		331
Commercial – Non-owner Occupied		22,234		22,234		801
Residential – 1 to 4 Family		5,430		5,857		338
Residential – Multifamily		370		370		6
Consumer		49		49		23
		36,812		37,800		1,941

Total:
Commercial and Industrial		622		622		131
Real Estate Construction:
Residential		967		2,182		21
Commercial		11,736		11,817		290
Real Estate Mortgage:
Commercial – Owner Occupied		6,539		6,624		331
Commercial – Non-owner Occupied		33,087		35,387		801
Residential – 1 to 4 Family		15,322		15,941		338
Residential – Multifamily		469		676		6
Consumer		114		114		23
	$	68,856	$	73,363	$	1,941

The following tables present by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the six months and three months ended June 30, 2014 and 2013:

	Six Months Ended June 30,
	2014				2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(amounts in thousands)
Commercial and Industrial	$	822	$	8	$	688	$	13
Real Estate Construction:
Residential		652		—		736		—
Commercial		18,348		231		14,864		51
Real Estate Mortgage:
Commercial – Owner Occupied		6,868		133		6,550		131
Commercial – Non-owner Occupied		32,658		624		49,258		874
Residential – 1 to 4 Family		12,776		115		11,890		136
Residential – Multifamily		368		12		2,631		60
Consumer		94		1		252		3
Total	$	72,586	$	1,124	$	86,869	$	1,268

	Three Months Ended June 30,
	2014				2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(amounts in thousands)
Commercial and Industrial	$	753	$	4	$	631	$	4
Real Estate Construction:
Residential		588		—		769		—
Commercial		18,329		115		14,856		26
Real Estate Mortgage:
Commercial – Owner Occupied		6,783		59		6,564		69
Commercial – Non-owner Occupied		32,111		304		49,113		484
Residential – 1 to 4 Family		12,580		56		11,877		69
Residential – Multifamily		367		6		2,215		49
Consumer		94		1		252		1
Total	$	71,605	$	545	$	86,277	$	702

Troubled debt restructurings: Periodically management evaluates our loans in order to determine the appropriate risk rating, interest accrual status and potential classification as a TDR, some of which are performing and accruing interest. A TDR is a loan on which we have granted a concession due to a borrower’s financial difficulty. These are concessions that would not otherwise be considered. The terms of these modified loans may include extension of maturity, renewals, changes in interest rate, additional collateral requirements or infusion of additional capital into the project by the borrower to reduce debt or to support future debt service. On construction and land development loans we may modify the loan as a result of delays or other project issues such as slower than anticipated sell-outs, insufficient leasing activity and/or a decline in the value of the underlying collateral securing the loan. Management believes that working with a borrower to restructure a loan provides us with a better likelihood of collecting our loan. It is our policy not to renegotiate the terms of a commercial loan simply because of a delinquency status. However, we will use our Troubled Debt Restructuring Program to work with delinquent borrowers when the delinquency is temporary. We consider all loans modified in a troubled debt restructuring to be impaired.

At the time a loan is modified in a TDR, we consider the following factors to determine whether the loan should accrue interest: