UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[☒] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2022March 31, 2023
or
[☐] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 000-51338
PARKE BANCORP, INC.
(Exact name of registrant as specified in its charter)
| | | | | |
New Jersey | 65-1241959 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| |
601 Delsea Drive, Washington Township, New Jersey | 08080 |
(Address of principal executive offices) | (Zip Code) |
856-256-2500
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbols | Name of Each Exchange on Which Registered |
Common Stock, par value $0.10 per share | PKBK | The Nasdaq Stock Market, LLC |
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 [☒] No [☐]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes [☒] No [☐]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer”, “accelerated filer", “smaller reporting company” and “emerging growth company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [☐] Accelerated filer [ ] Non-accelerated filer [x] Smaller reporting company [☒] Emerging growth company [☐ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [☐ ] No [☒]
As of November 10, 2022,May 9, 2023, there were 11,922,57511,946,671 shares of the registrant's common stock ($0.10 par value) outstanding.
INDEX
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Part I | FINANCIAL INFORMATION | |
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Item 1. | Financial Statements | |
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Item 2. | | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
Item 4. | Controls and Procedures | |
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Part II | OTHER INFORMATION | |
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Item 1. | Legal Proceedings | |
Item 1A. | Risk Factors | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. | Defaults Upon Senior Securities | |
Item 4. | Mine Safety Disclosures | |
Item 5. | Other Information | |
Item 6. | Exhibits | |
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SIGNATURES | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Parke Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
(Dollars in thousands except per share data)
| | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
Assets | Assets | | | | Assets | | | |
Cash and due from banks | Cash and due from banks | $ | 29,225 | | | $ | 25,321 | | Cash and due from banks | $ | 21,472 | | | $ | 27,165 | |
Interest bearing deposits with banks | Interest bearing deposits with banks | 164,119 | | | 571,232 | | Interest bearing deposits with banks | 124,502 | | | 154,985 | |
Cash and cash equivalents | Cash and cash equivalents | 193,344 | | | 596,553 | | Cash and cash equivalents | 145,974 | | | 182,150 | |
Investment securities available for sale, at fair value | Investment securities available for sale, at fair value | 9,790 | | | 13,351 | | Investment securities available for sale, at fair value | 8,977 | | | 9,366 | |
Investment securities held to maturity (fair value of $7,720 at September 30, 2022 and $10,025 at December 31, 2021) | 9,575 | | | 9,918 | | |
Investment securities held to maturity (fair value of $7,966 at March 31, 2023 and $7,805 at December 31, 2022) | | Investment securities held to maturity (fair value of $7,966 at March 31, 2023 and $7,805 at December 31, 2022) | 9,359 | | | 9,378 | |
Total investment securities | Total investment securities | 19,365 | | | 23,269 | | Total investment securities | 18,336 | | | 18,744 | |
| Loans, net of unearned income | Loans, net of unearned income | 1,679,357 | | | 1,484,847 | | Loans, net of unearned income | 1,762,696 | | | 1,751,459 | |
Less: Allowance for loan losses | (30,989) | | | (29,845) | | |
Less: Allowance for credit losses | | Less: Allowance for credit losses | (31,507) | | | (31,845) | |
Net loans | Net loans | 1,648,368 | | | 1,455,002 | | Net loans | 1,731,189 | | | 1,719,614 | |
Accrued interest receivable | Accrued interest receivable | 8,028 | | | 7,681 | | Accrued interest receivable | 8,930 | | | 8,768 | |
Premises and equipment, net | Premises and equipment, net | 6,008 | | | 6,265 | | Premises and equipment, net | 5,842 | | | 5,958 | |
Restricted stock | Restricted stock | 4,989 | | | 5,144 | | Restricted stock | 9,129 | | | 5,439 | |
Bank owned life insurance (BOLI) | Bank owned life insurance (BOLI) | 28,001 | | | 27,577 | | Bank owned life insurance (BOLI) | 28,288 | | | 28,145 | |
Deferred tax asset | Deferred tax asset | 7,891 | | | 7,608 | | Deferred tax asset | 9,878 | | | 9,184 | |
Other real estate owned (OREO) | | Other real estate owned (OREO) | 1,673 | | | 1,550 | |
Other | Other | 7,238 | | | 7,346 | | Other | 5,006 | | | 5,363 | |
Total assets | Total assets | $ | 1,923,232 | | | $ | 2,136,445 | | Total assets | $ | 1,964,245 | | | $ | 1,984,915 | |
Liabilities and Equity | | | | |
Liabilities and Shareholders' Equity | | Liabilities and Shareholders' Equity | | | |
Liabilities | Liabilities | | | | Liabilities | | | |
Deposits | Deposits | | | | Deposits | | | |
Noninterest-bearing deposits | Noninterest-bearing deposits | $ | 393,853 | | | $ | 553,810 | | Noninterest-bearing deposits | $ | 277,128 | | | $ | 352,546 | |
Interest-bearing deposits | Interest-bearing deposits | 1,141,376 | | | 1,214,600 | | Interest-bearing deposits | 1,186,666 | | | 1,223,435 | |
Total deposits | Total deposits | 1,535,229 | | | 1,768,410 | | Total deposits | 1,463,794 | | | 1,575,981 | |
FHLBNY borrowings | FHLBNY borrowings | 73,150 | | | 78,150 | | FHLBNY borrowings | 165,150 | | | 83,150 | |
| Subordinated debentures | Subordinated debentures | 42,874 | | | 42,732 | | Subordinated debentures | 42,969 | | | 42,921 | |
Accrued interest payable | Accrued interest payable | 1,082 | | | 1,603 | | Accrued interest payable | 3,143 | | | 2,664 | |
Other | Other | 13,569 | | | 13,189 | | Other | 16,083 | | | 14,165 | |
Total liabilities | Total liabilities | 1,665,904 | | | 1,904,084 | | Total liabilities | 1,691,139 | | | 1,718,881 | |
Equity | | | | |
Preferred stock, 1,000,000 shares authorized, $1,000 liquidation value Series B non-cumulative convertible; 445 shares and 445 shares outstanding at September 30, 2022 and December 31, 2021, respectively | 445 | | | 445 | | |
Common stock, $0.10 par value; authorized 15,000,000 shares; Issued: 12,207,097 shares and 12,182,081 shares at September 30, 2022 and December 31, 2021, respectively | 1,221 | | | 1,218 | | |
Shareholders' Equity | | Shareholders' Equity | | | |
Preferred stock, 1,000,000 shares authorized, $1,000 liquidation value Series B non-cumulative convertible; 445 shares outstanding at March 31, 2023 and December 31, 2022 | | Preferred stock, 1,000,000 shares authorized, $1,000 liquidation value Series B non-cumulative convertible; 445 shares outstanding at March 31, 2023 and December 31, 2022 | 445 | | | 445 | |
Common stock, $0.10 par value; authorized 15,000,000 shares; Issued: 12,231,193 shares and 12,225,097 shares at March 31, 2023 and December 31, 2022, respectively | | Common stock, $0.10 par value; authorized 15,000,000 shares; Issued: 12,231,193 shares and 12,225,097 shares at March 31, 2023 and December 31, 2022, respectively | 1,223 | | | 1,223 | |
Additional paid-in capital | Additional paid-in capital | 135,885 | | | 135,451 | | Additional paid-in capital | 136,341 | | | 136,201 | |
Retained earnings | Retained earnings | 123,409 | | | 98,017 | | Retained earnings | 138,577 | | | 131,706 | |
Accumulated other comprehensive (loss) income | (617) | | | 245 | | |
Treasury stock, 284,522 shares at Sept. 30, 2022 and Dec. 31, 2021, at cost | (3,015) | | | (3,015) | | |
Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (465) | | | (526) | |
Treasury stock, 284,522 shares at March 31, 2023 and Dec. 31, 2022, at cost | | Treasury stock, 284,522 shares at March 31, 2023 and Dec. 31, 2022, at cost | (3,015) | | | (3,015) | |
Total shareholders’ equity | Total shareholders’ equity | 257,328 | | | 232,361 | | Total shareholders’ equity | 273,106 | | | 266,034 | |
| Total liabilities and equity | $ | 1,923,232 | | | $ | 2,136,445 | | |
Total liabilities and shareholders' equity | | Total liabilities and shareholders' equity | $ | 1,964,245 | | | $ | 1,984,915 | |
See accompanying notes to consolidated financial statements
Parke Bancorp Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Dollars in thousands except per share data)
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| | | | |
Interest income: | Interest income: | | | | Interest income: | | | | |
Interest and fees on loans | Interest and fees on loans | $ | 20,854 | | | $ | 20,211 | | | $ | 59,511 | | | $ | 61,502 | | Interest and fees on loans | $ | 24,545 | | | $ | 19,199 | | |
Interest and dividends on investments | Interest and dividends on investments | 194 | | | 170 | | | 565 | | | 552 | | Interest and dividends on investments | 210 | | | 189 | | |
Interest on deposits with banks | Interest on deposits with banks | 1,290 | | | 199 | | | 2,404 | | | 453 | | Interest on deposits with banks | 1,269 | | | 248 | | |
Total interest income | Total interest income | 22,338 | | | 20,580 | | | 62,480 | | | 62,507 | | Total interest income | 26,024 | | | 19,636 | | |
Interest expense: | Interest expense: | | | | | | Interest expense: | | | | |
Interest on deposits | Interest on deposits | 2,284 | | | 2,356 | | | 5,893 | | | 7,654 | | Interest on deposits | 7,582 | | | 1,840 | | |
Interest on borrowings | Interest on borrowings | 758 | | | 743 | | | 2,176 | | | 2,482 | | Interest on borrowings | 1,293 | | | 696 | | |
Total interest expense | Total interest expense | 3,042 | | | 3,099 | | | 8,069 | | | 10,136 | | Total interest expense | 8,875 | | | 2,536 | | |
Net interest income | Net interest income | 19,296 | | | 17,481 | | | 54,411 | | | 52,371 | | Net interest income | 17,149 | | | 17,100 | | |
Provision for loan losses | 600 | | | — | | | 950 | | | 500 | | |
Net interest income after provision for loan losses | 18,696 | | | 17,481 | | | 53,461 | | | 51,871 | | |
Provision for (recovery of) credit losses | | Provision for (recovery of) credit losses | (2,400) | | | — | | |
Net interest income after provision for (recovery of) credit losses | | Net interest income after provision for (recovery of) credit losses | 19,549 | | | 17,100 | | |
Non-interest income | Non-interest income | | | | | | | Non-interest income | | | | |
Service fees on deposit accounts | Service fees on deposit accounts | 1,133 | | | 1,350 | | | 3,762 | | | 4,173 | | Service fees on deposit accounts | 1,215 | | | 1,316 | | |
Gain on sale of SBA loans | 76 | | | 56 | | | 98 | | | 180 | | |
| Other loan fees | Other loan fees | 422 | | | 403 | | | 1,138 | | | 998 | | Other loan fees | 178 | | | 276 | | |
Bank owned life insurance income | Bank owned life insurance income | 144 | | | 146 | | | 424 | | | 429 | | Bank owned life insurance income | 143 | | | 138 | | |
Net gain on sale and valuation adjustment of OREO | Net gain on sale and valuation adjustment of OREO | — | | | — | | | 328 | | | 51 | | Net gain on sale and valuation adjustment of OREO | — | | | 47 | | |
Other | Other | 253 | | | 240 | | | 827 | | | 693 | | Other | 246 | | | 298 | | |
Total non-interest income | Total non-interest income | 2,028 | | | 2,195 | | | 6,577 | | | 6,524 | | Total non-interest income | 1,782 | | | 2,075 | | |
Non-interest expense | Non-interest expense | | | | | | | Non-interest expense | | | | |
Compensation and benefits | Compensation and benefits | 2,819 | | | 2,281 | | | 7,964 | | | 7,360 | | Compensation and benefits | 3,641 | | | 2,688 | | |
Professional services | Professional services | 578 | | | 998 | | | 1,670 | | | 2,740 | | Professional services | 593 | | | 551 | | |
Occupancy and equipment | Occupancy and equipment | 621 | | | 623 | | | 1,891 | | | 1,773 | | Occupancy and equipment | 644 | | | 645 | | |
Data processing | Data processing | 348 | | | 303 | | | 985 | | | 986 | | Data processing | 301 | | | 324 | | |
FDIC insurance and other assessments | FDIC insurance and other assessments | 265 | | | 261 | | | 811 | | | 833 | | FDIC insurance and other assessments | 225 | | | 287 | | |
OREO expense | OREO expense | 314 | | | 72 | | | 404 | | | 199 | | OREO expense | 172 | | | 34 | | |
Other operating expense | Other operating expense | 1,347 | | | 890 | | | 3,957 | | | 3,026 | | Other operating expense | 1,185 | | | 1,149 | | |
Total non-interest expense | Total non-interest expense | 6,292 | | | 5,428 | | | 17,682 | | | 16,917 | | Total non-interest expense | 6,761 | | | 5,678 | | |
Income before income tax expense | Income before income tax expense | 14,432 | | | 14,248 | | | 42,356 | | | 41,478 | | Income before income tax expense | 14,570 | | | 13,497 | | |
Income tax expense | Income tax expense | 3,892 | | | 3,705 | | | 10,987 | | | 10,584 | | Income tax expense | 3,440 | | | 3,406 | | |
Net income attributable to Company and noncontrolling interest | 10,540 | | | 10,543 | | | 31,369 | | | 30,894 | | |
Less: Net income attributable to noncontrolling interest | — | | | (42) | | | — | | | (207) | | |
Net income attributable to Company | Net income attributable to Company | 10,540 | | | 10,501 | | | 31,369 | | | 30,687 | | Net income attributable to Company | 11,130 | | | 10,091 | | |
| Less: Preferred stock dividend | Less: Preferred stock dividend | (7) | | | (7) | | | (20) | | | (21) | | Less: Preferred stock dividend | (7) | | | (7) | | |
Net income available to common shareholders | Net income available to common shareholders | $ | 10,533 | | | $ | 10,494 | | | $ | 31,349 | | | $ | 30,666 | | Net income available to common shareholders | $ | 11,123 | | | $ | 10,084 | | |
Earnings per common share | Earnings per common share | | | | | | | Earnings per common share | | | | |
Basic | Basic | $ | 0.88 | | | $ | 0.88 | | | $ | 2.63 | | | $ | 2.58 | | Basic | $ | 0.93 | | | $ | 0.85 | | |
Diluted | Diluted | $ | 0.87 | | | $ | 0.87 | | | $ | 2.58 | | | $ | 2.53 | | Diluted | $ | 0.92 | | | $ | 0.83 | | |
Weighted average common shares outstanding | Weighted average common shares outstanding | | | | | | | Weighted average common shares outstanding | | | | |
Basic | Basic | 11,919,472 | | | 11,893,323 | | | 11,913,085 | | | 11,885,709 | | Basic | 11,944,163 | | | 11,905,330 | | |
Diluted | Diluted | 12,170,144 | | | 12,125,628 | | | 12,178,572 | | | 12,115,389 | | Diluted | 12,160,793 | | | 12,180,320 | | |
See accompanying notes to consolidated financial statements
Parke Bancorp Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| |
Net income | $ | 10,540 | | | $ | 10,543 | | | $ | 31,369 | | | $ | 30,894 | |
Unrealized losses on investment securities, net of reclassification into income: | | | | | | | |
Unrealized losses on non-OTTI securities | (478) | | | (30) | | | (1,161) | | | (156) | |
Tax impact on unrealized loss | 123 | | | 8 | | | 299 | | | 40 | |
Total unrealized losses on investment securities | (355) | | | (22) | | | (862) | | | (116) | |
Comprehensive income | 10,185 | | | 10,521 | | | 30,507 | | | 30,778 | |
Less: Comprehensive income attributable to noncontrolling interests | — | | | (42) | | | — | | | (207) | |
Comprehensive income attributable to the Company | $ | 10,185 | | | $ | 10,479 | | | $ | 30,507 | | | $ | 30,571 | |
| | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| |
Net income | $ | 11,130 | | | $ | 10,091 | | | | | |
Unrealized gain (loss) on investment securities: | | | | | | | |
Unrealized gain (loss) on investment securities | 82 | | | (584) | | | | | |
Tax impact on unrealized (gain) loss | (21) | | | 151 | | | | | |
Total unrealized gain (loss) on investment securities | 61 | | | (433) | | | | | |
| | | | | | | |
| | | | | | | |
Comprehensive income attributable to the Company | $ | 11,191 | | | $ | 9,658 | | | | | |
See accompanying notes to consolidated financial statements
Parke Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(Dollars in thousands except share data)
| | | Preferred Stock | | Shares of Common Stock issued | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Treasury Stock | | Total Shareholders' Equity | | Non-Controlling Interest | | Total Equity | | Preferred Stock | | Shares of Common Stock issued | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Treasury Stock | | Total Shareholders' Equity | |
3 Months Ended | | |
Balance, June 30, 2022 | $ | 445 | | | 12,199,483 | | | $ | 1,220 | | | $ | 135,709 | | | $ | 115,020 | | | $ | (262) | | | $ | (3,015) | | | $ | 249,117 | | | $ | — | | | $ | 249,117 | | |
Three Months Ended | | Three Months Ended | |
Balance, December 31, 2021 | | Balance, December 31, 2021 | $ | 445 | | | 12,182,081 | | | $ | 1,218 | | | $ | 135,451 | | | $ | 98,017 | | | $ | 245 | | | $ | (3,015) | | | $ | 232,361 | | |
Net income | Net income | — | | | — | | | — | | | — | | | 10,540 | | | — | | | — | | | 10,540 | | | — | | | 10,540 | | Net income | — | | | — | | | — | | | — | | | 10,091 | | | — | | | — | | | 10,091 | | |
| Common stock options exercised | Common stock options exercised | — | | | 7,614 | | | 1 | | | 59 | | | — | | | — | | | — | | | 60 | | | — | | | 60 | | Common stock options exercised | — | | | 15,938 | | | 2 | | | 112 | | | — | | | — | | | — | | | 114 | | |
| Other comprehensive loss | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (355) | | | — | | | (355) | | | — | | | (355) | | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (433) | | | — | | | (433) | | |
Stock compensation expense | Stock compensation expense | — | | | — | | | — | | | 117 | | | — | | | — | | | — | | | 117 | | | — | | | 117 | | Stock compensation expense | — | | | — | | | — | | | 60 | | | — | | | — | | | — | | | 60 | | |
| Dividend on preferred stock (1) | Dividend on preferred stock (1) | — | | | — | | | — | | | — | | | (7) | | | — | | | — | | | (7) | | | — | | | (7) | | Dividend on preferred stock (1) | — | | | — | | | — | | | — | | | (7) | | | — | | | — | | | (7) | | |
Dividend on common stock (2) | Dividend on common stock (2) | — | | | — | | | — | | | — | | | (2,144) | | | — | | | — | | | (2,144) | | | — | | | (2,144) | | Dividend on common stock (2) | — | | | — | | | — | | | — | | | (1,907) | | | — | | | — | | | (1,907) | | |
Balance, September 30, 2022 | $ | 445 | | | 12,207,097 | | | $ | 1,221 | | | $ | 135,885 | | | $ | 123,409 | | | $ | (617) | | | $ | (3,015) | | | $ | 257,328 | | | $ | — | | | $ | 257,328 | | |
9 Months Ended | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2021 | $ | 445 | | | 12,182,081 | | | $ | 1,218 | | | $ | 135,451 | | | $ | 98,017 | | | $ | 245 | | | $ | (3,015) | | | $ | 232,361 | | | $ | — | | | $ | 232,361 | | |
Balance, March 31, 2022 | | Balance, March 31, 2022 | $ | 445 | | | 12,198,019 | | | $ | 1,220 | | | $ | 135,623 | | | $ | 106,194 | | | $ | (188) | | | $ | (3,015) | | | $ | 240,279 | | |
Three Months Ended | | Three Months Ended | | | | | | | | | | | | | | | | |
Balance, December 31, 2022 | | Balance, December 31, 2022 | $ | 445 | | | 12,225,097 | | | $ | 1,223 | | | $ | 136,201 | | | $ | 131,706 | | | $ | (526) | | | $ | (3,015) | | | $ | 266,034 | | |
Cumulative effect of adoption of ASU 2016-13 | | Cumulative effect of adoption of ASU 2016-13 | — | | | — | | | — | | | — | | | (2,102) | | | — | | | — | | | (2,102) | | |
Net income | Net income | — | | | — | | | — | | | — | | | 31,369 | | | — | | | — | | | 31,369 | | | — | | | 31,369 | | Net income | — | | | — | | | — | | | — | | | 11,130 | | | — | | | — | | | 11,130 | | |
| Common stock options exercised | Common stock options exercised | — | | | 25,016 | | | 3 | | | 182 | | | — | | | — | | | — | | | 185 | | | — | | | 185 | | Common stock options exercised | — | | | 6,096 | | | — | | | 33 | | | — | | | — | | | — | | | 33 | | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (862) | | | — | | | (862) | | | — | | | (862) | | |
Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 61 | | | — | | | 61 | | |
Stock compensation expense | Stock compensation expense | — | | | — | | | — | | | 252 | | | — | | | — | | | — | | | 252 | | | — | | | 252 | | Stock compensation expense | — | | | — | | | — | | | 107 | | | — | | | — | | | — | | | 107 | | |
Dividend on preferred stock (1) | Dividend on preferred stock (1) | — | | | — | | | — | | | — | | | (20) | | | — | | | — | | | (20) | | | — | | | (20) | | Dividend on preferred stock (1) | — | | | — | | | — | | | — | | | (7) | | | — | | | — | | | (7) | | |
Dividend on common stock (2) | Dividend on common stock (2) | — | | | — | | | — | | | — | | | (5,957) | | | — | | | — | | | (5,957) | | | — | | | (5,957) | | Dividend on common stock (2) | — | | | — | | | — | | | — | | | (2,150) | | | — | | | — | | | (2,150) | | |
Balance, September 30, 2022 | $ | 445 | | | 12,207,097 | | | $ | 1,221 | | | $ | 135,885 | | | $ | 123,409 | | | $ | (617) | | | $ | (3,015) | | | $ | 257,328 | | | $ | — | | | $ | 257,328 | | |
Balance, March 31, 2023 | | Balance, March 31, 2023 | $ | 445 | | | 12,231,193 | | | $ | 1,223 | | | $ | 136,341 | | | $ | 138,577 | | | $ | (465) | | | $ | (3,015) | | | $ | 273,106 | | |
(1) Dividends per share of $15.0 and $45.0, respectively, were declared on series B preferred stock for the three and nine months ended September 30, 2022.March 31, 2023 and 2022, respectively.
(2) Dividends per share of $0.18 and $0.50,$0.16, respectively, were declared on common stock outstanding for the three and nine months ended September 30,March 31, 2023 and 2022.
See accompanying notes to consolidated financial statements
Parke Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(Dollars in thousands except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Shares of Common Stock issued | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Treasury Stock | | Total Shareholders' Equity | | Non-Controlling Interest | | Total Equity |
3 Months Ended | |
Balance, June 30, 2021 | $ | 470 | | | 12,177,765 | | | $ | 1,218 | | | $ | 135,318 | | | $ | 81,262 | | | $ | 369 | | | $ | (3,015) | | | $ | 215,622 | | | $ | 1,389 | | | $ | 217,011 | |
Net income | — | | | — | | | — | | | — | | | 10,501 | | | — | | | — | | | 10,501 | | | 42 | | | 10,543 | |
Common stock options exercised | — | | | 732 | | | — | | | 6 | | | — | | | — | | | — | | | 6 | | | — | | | 6 | |
| | | | | | | | | | | | | | | | | | | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (22) | | | — | | | (22) | | | — | | | (22) | |
Stock compensation expense | — | | | — | | | — | | | 59 | | | — | | | — | | | — | | | 59 | | | — | | | 59 | |
Dividend on preferred stock (1) | — | | | — | | | — | | | — | | | (7) | | | — | | | — | | | (7) | | | — | | | (7) | |
Dividend on common stock (2) | — | | | — | | | — | | | — | | | (1,903) | | | — | | | — | | | (1,903) | | | — | | | (1,903) | |
Balance, September 30, 2021 | $ | 470 | | | 12,178,497 | | | $ | 1,218 | | | $ | 135,383 | | | $ | 89,853 | | | $ | 347 | | | $ | (3,015) | | | $ | 224,256 | | | $ | 1,431 | | | $ | 225,687 | |
9 Months Ended | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2020 | $ | 480 | | | 12,136,567 | | | $ | 1,214 | | | $ | 134,989 | | | $ | 66,794 | | | $ | 463 | | | $ | (3,015) | | | $ | 200,925 | | | $ | 1,672 | | | $ | 202,597 | |
Net income | — | | | — | | | — | | | — | | | 30,687 | | | — | | | — | | | 30,687 | | | 207 | | | 30,894 | |
Earnings distribution to non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (448) | | | (448) | |
Common stock options exercised | — | | | 40,555 | | | 4 | | | 216 | | | — | | | — | | | — | | | 220 | | | — | | | 220 | |
Preferred stock shares conversion | (10) | | | 1,375 | | | — | | | 10 | | | — | | | — | | | — | | | — | | | — | | | — | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (116) | | | — | | | (116) | | | — | | | (116) | |
Stock compensation expense | — | | | — | | | — | | | 168 | | | — | | | — | | | — | | | 168 | | | — | | | 168 | |
| | | | | | | | | | | | | | | | | | | |
Dividend on preferred stock (1) | — | | | — | | | — | | | — | | | (21) | | | — | | | — | | | (21) | | | — | | | (21) | |
Dividend on common stock (2) | — | | | — | | | — | | | — | | | (7,607) | | | — | | | — | | | (7,607) | | | — | | | (7,607) | |
Balance, September 30, 2021 | $ | 470 | | | 12,178,497 | | | $ | 1,218 | | | $ | 135,383 | | | $ | 89,853 | | | $ | 347 | | | $ | (3,015) | | | $ | 224,256 | | | $ | 1,431 | | | $ | 225,687 | |
(1) Dividends per share of $15.0 and $45.0, respectively, were declared on series B preferred stock for the three and nine months ended September 30, 2021.
(2) Dividends per share of $0.16 and $0.48, respectively, were declared on common stock outstanding for the three and nine months ended September 30, 2021.
See accompanying notes to consolidated financial statements
Parke Bancorp Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
| | | For the Nine Months Ended September 30, | | For the Three Months Ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| | | | |
Cash Flows from Operating Activities: | Cash Flows from Operating Activities: | | | | Cash Flows from Operating Activities: | | | |
Net income | Net income | $ | 31,369 | | | $ | 30,894 | | Net income | $ | 11,130 | | | $ | 10,091 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | Depreciation and amortization | 487 | | | 517 | | Depreciation and amortization | 31 | | | 165 | |
Provision for loan losses | 950 | | | 500 | | |
(Recovery of) provision for credit losses | | (Recovery of) provision for credit losses | (2,400) | | | — | |
Increase in value of bank owned life insurance | Increase in value of bank owned life insurance | (424) | | | (429) | | Increase in value of bank owned life insurance | (143) | | | (138) | |
Gain on sale of SBA loans | (98) | | | (177) | | |
SBA loans originated for sale | (1,723) | | | (1,331) | | |
Proceeds from sale of SBA loans originated for sale | 1,821 | | | 1,508 | | |
| Net gain on sale of OREO and valuation adjustments | Net gain on sale of OREO and valuation adjustments | (328) | | | (51) | | Net gain on sale of OREO and valuation adjustments | — | | | (47) | |
| Net accretion of purchase premiums and discounts on securities | Net accretion of purchase premiums and discounts on securities | (4) | | | 36 | | Net accretion of purchase premiums and discounts on securities | (9) | | | — | |
Stock based compensation | Stock based compensation | 252 | | | 168 | | Stock based compensation | 107 | | | 60 | |
| Net changes in: | Net changes in: | | | | Net changes in: | | | |
Decrease (increase) in accrued interest receivable and other assets | Decrease (increase) in accrued interest receivable and other assets | 226 | | | (960) | | Decrease (increase) in accrued interest receivable and other assets | 195 | | | (2,443) | |
Increase (decrease) in accrued interest payable and other accrued liabilities | 1,769 | | | (1,177) | | |
Increase in accrued interest payable and other accrued liabilities | | Increase in accrued interest payable and other accrued liabilities | 1,638 | | | 981 | |
Net cash provided by operating activities | Net cash provided by operating activities | 34,297 | | | 29,498 | | Net cash provided by operating activities | 10,549 | | | 8,669 | |
Cash Flows from Investing Activities: | Cash Flows from Investing Activities: | | | | Cash Flows from Investing Activities: | | | |
Repayments and maturities of investment securities available for sale | Repayments and maturities of investment securities available for sale | 2,367 | | | 4,972 | | Repayments and maturities of investment securities available for sale | 465 | | | 944 | |
Repayments and maturities of investment securities held to maturity | Repayments and maturities of investment securities held to maturity | 380 | | | — | | Repayments and maturities of investment securities held to maturity | 34 | | | 35 | |
Purchases of investment securities | — | | | (8,693) | | |
Net (increase) decrease in loans | (196,324) | | | 90,020 | | |
Purchases of bank premises and equipment | (88) | | | (47) | | |
| Net increase in loans | | Net increase in loans | (11,356) | | | (10,927) | |
Sales (purchases) of bank premises and equipment | | Sales (purchases) of bank premises and equipment | 133 | | | (38) | |
Proceeds from sale of OREO, net | Proceeds from sale of OREO, net | 1,887 | | | 245 | | Proceeds from sale of OREO, net | — | | | 1,606 | |
Redemptions of restricted stock | 155 | | | 1,813 | | |
Net cash (used in) provided by investing activities | (191,623) | | | 88,310 | | |
| Purchases of restricted stock | | Purchases of restricted stock | (3,690) | | | (13) | |
Net cash used in investing activities | | Net cash used in investing activities | (14,414) | | | (8,393) | |
Cash Flows from Financing Activities: | Cash Flows from Financing Activities: | | | | Cash Flows from Financing Activities: | | | |
Cash dividends | Cash dividends | (7,887) | | | (7,628) | | Cash dividends | (2,157) | | | (1,914) | |
Earnings distribution to non-controlling interest | — | | | (447) | | |
| Proceeds from exercise of stock options | Proceeds from exercise of stock options | 185 | | | 220 | | Proceeds from exercise of stock options | 33 | | | 114 | |
| Net decrease in FHLBNY and short-term borrowings | (5,000) | | | (43,500) | | |
Net decrease in other borrowings | — | | | (90,026) | | |
Net (decrease) increase in noninterest-bearing deposits | (159,957) | | | 113,736 | | |
Net (decrease) increase in interest-bearing deposits | (73,224) | | | 75,061 | | |
Net cash (used in) provided by financing activities | (245,883) | | | 47,416 | | |
Net (decrease) increase in cash and cash equivalents | (403,209) | | | 165,224 | | |
Decrease in FHLBNY and short-term borrowings | | Decrease in FHLBNY and short-term borrowings | (30,000) | | | — | |
Increase in FHLBNY and short-term borrowings | | Increase in FHLBNY and short-term borrowings | 112,000 | | | — | |
| Net decrease in noninterest-bearing deposits | | Net decrease in noninterest-bearing deposits | (75,418) | | | (81,870) | |
Net decrease in interest-bearing deposits | | Net decrease in interest-bearing deposits | (36,769) | | | (9,330) | |
Net cash used in financing activities | | Net cash used in financing activities | (32,311) | | | (93,000) | |
Net decrease in cash and cash equivalents | | Net decrease in cash and cash equivalents | (36,176) | | | (92,724) | |
Cash and Cash Equivalents, January 1, | Cash and Cash Equivalents, January 1, | 596,553 | | | 458,601 | | Cash and Cash Equivalents, January 1, | 182,150 | | | 596,553 | |
Cash and Cash Equivalents, June 30, | $ | 193,344 | | | $ | 623,825 | | |
Cash and Cash Equivalents, March 31, | | Cash and Cash Equivalents, March 31, | $ | 145,974 | | | $ | 503,829 | |
| Supplemental Disclosure of Cash Flow Information: | Supplemental Disclosure of Cash Flow Information: | | | | Supplemental Disclosure of Cash Flow Information: | | | |
Interest paid | Interest paid | $ | 8,590 | | | $ | 11,226 | | Interest paid | $ | 8,396 | | | $ | 3,110 | |
Income taxes paid | Income taxes paid | $ | 9,638 | | | $ | 13,683 | | Income taxes paid | $ | 1,445 | | | $ | 3,894 | |
| Non-cash Investing and Financing Items | Non-cash Investing and Financing Items | | | | Non-cash Investing and Financing Items | | | |
Loans transferred to OREO | Loans transferred to OREO | $ | 2,008 | | | $ | 1,811 | | Loans transferred to OREO | $ | 123 | | | $ | 71 | |
Accrued dividends payable | | Accrued dividends payable | $ | 2,157 | | | $ | 2,157 | |
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1. ORGANIZATION
Parke Bancorp, Inc. (the “Company, we, us, our”) is a bank holding company headquartered in Sewell, New Jersey. Through subsidiaries, the Company provides individuals, corporations and other businesses and institutions with commercial and retail banking services, principally loans and deposits. The Company was incorporated in January 2005 under the laws of the State of New Jersey for the sole purpose of becoming the holding company of Parke Bank (the "Bank").
The Bank is a commercial bank, which was incorporated on August 25, 1998, and commenced operations on January 28, 1999. The Bank is chartered by the New Jersey Department of Banking and Insurance and its deposits are insured by the Federal Deposit Insurance Corporation. The Bank maintains its principal office at 601 Delsea Drive, Sewell, New Jersey, and has six additional branch office locations; 501 Tilton Road, Northfield, New Jersey, 567 Egg Harbor Road, Washington Township, New Jersey, 67 East Jimmie Leeds Road, Galloway Township, New Jersey, 1150 Haddon Avenue, Collingswood, New Jersey, 1610 Spruce Street, Philadelphia, Pennsylvania, and 1032 Arch Street, Philadelphia, Pennsylvania. The Bank also has a loan office located at 1817 East Venango Street, Philadelphia, Pennsylvania.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation: We prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Parke Bank (including certain partnership interests). Also included are the accounts of Parke Direct Lending LLC ("PDL"), a joint venture formed in 2018 to originate short-term alternative real estate loan products. Parke Bank had a 51% ownership interest in the joint venture. In 2021, PDL was fully liquidated and all earnings were distributed. Parke Capital Trust I, Parke Capital Trust II and Parke Capital Trust III are wholly-owned subsidiaries but are not consolidated as they do not meet the requirements for consolidation under applicable accounting guidance. We have eliminated inter-company balances and transactions. We have also reclassified certain prior year amounts to conform to the current year presentation, which did not have a material impact on our consolidated financial condition or results of operations.
The accompanying interim financial statements should be read in conjunction with the annual financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022. The accompanying interim financial statements for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 are unaudited. The balance sheet as of December 31, 2021,2022, was derived from the audited financial statements. In the opinion of management, these financial statements include all normal and recurring adjustments necessary for a fair statement of the results for such interim periods. Results of operations for the three and nine months ended September 30, 2022March 31, 2023 are not necessarily indicative of the results for the full year or any other period.
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, the valuation of deferred income taxes, and the carrying value of other real estate owned ("OREO").
Recently Issued Accounting Pronouncements:Allowance for Credit Losses on Loans and Leases
In March 2022,The allowance for credit losses on loans and leases is a valuation account that is deducted from the FASB issued ASU 2022-02,loan or lease’s amortized cost basis to present the net amount expected to be collected on the loans and leases. Loans and leases deemed to be uncollectible are charged against the allowance for credit losses on loans and leases, and subsequent recoveries, if any, are credited to the allowance for credit losses on loans and leases. Changes to the allowance for credit losses on loans and leases are recorded through the provision for credit losses. The allowance for credit losses on loans and leases is maintained at a level considered appropriate to absorb expected credit losses over the expected life of the portfolio as of the reporting date.
The allowance for credit losses on loans and leases is measured on a collective (pool) basis when similar risk characteristics exist. Parke's loan portfolio segments include commercial and industrial, construction, commercial - owner occupied, commercial - non-owner occupied, residential - 1 to 4 family, residential - 1 to 4 family investment, residential - multifamily, and consumer. Loans that do not share similar risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For individually assessed loans, see related details in the Individually Assessed Loans section below.
The allowance for credit losses on collectively assessed loans and leases is measured over the expected life of the loan or lease usinga vintage loss rate approach, which will then be supplemented with qualitative factors. The vintage loss rate approach creates pools of loans (made up of individual loans) based on the loan segmentation. The loan pools are aggregated by origination year. Charge-offs, net of recoveries, are allocated by the year of charge-off to each loan pool. An average life is prescribed to a pool of loans that were originated in a particular year. The actual charge-offs as a percent of total loans are calculated for each historical year, and projected for future years for each year within the average life time horizon. The sum of the actual charge-offs and projected charge-offs are divided by the average amortized origination amount for each respective year. Those charge-off percentages are added together to obtain an aggregated vintage loss percentage which is then multiplied by the outstanding loan balances to obtain a reserve requirement. Parke runs the Current Expected Credit Loss ("CECL") impairment models on a quarterly basis and qualitatively adjusts model results for risk factors that are not considered within the model but which are relevant in assessing the expected credit losses within the loan and lease pools. Management generally considers the following qualitative factors:
•Volume and severity of past-due loans, non-accrual loans and classified loans;
•Lending policies and procedures, including underwriting standards and historically based loss/collection, charge-off and recovery practices;
•National and economic conditions that may have an impact on credit quality;
•Nature and volume of the portfolio;
•Existence and effect of any credit concentrations and changes in the level of such concentrations;
•The value of the underlying collateral for loans that are not collateral dependent;
•Changes in the quality of the loan review system; and
•Experience, ability and depth of lending management and staff
Parke has elected to not estimate an allowance for credit losses on accrued interest receivable, as it already has a policy in place to reverse or write-off accrued interest, through interest income, in a timely manner.
Allowance for Credit Losses on Lending-Related Commitments
Parke estimates expected credit losses over the contractual period in which it is exposed to credit risk on contractual obligations to extend credit, unless the obligation is unconditionally cancellable by the Company. The allowance for credit losses on lending-related commitments is recorded in other liabilities in the consolidated balance sheet and is recorded as a provision for credit losses in the consolidated income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. The lifetime loss rates for off-balance sheet credit exposures are calculated in the same manner as on-balance sheet credit exposures, using the same model and economic forecasts, adjusted for the estimated likelihood that funding will occur.
Individually Assessed Loans and Leases
ASC 326 provides that a loan or lease is measured individually if it does not share similar risk characteristics with other financial assets. For Parke, loans and leases which are identified to be individually assessed under CECL typically would have been evaluated individually as impaired loans using accounting guidance in effect in periods prior to the adoption of CECL and include collateral dependent loans.
Collateral Dependent Loans
Parke considers a loan to be collateral dependent when foreclosure of the underlying collateral is probable. Parke has also elected to apply the practical expedient to measure expected credit losses of a collateral dependent asset using the fair value of the collateral, less any estimated costs to sell, when foreclosure is not probable but repayment of the loan is expected to be provided substantially through the operation or sale of the collateral, and the borrower is experiencing financial difficulty.
Allowance for Credit Losses on Held to Maturity Securities
We follow Accounting Standards Codification (ASC) 326-20, Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs)Loss - Measured at Amortized Cost, to measure expected credit losses on held-to-maturity debt securities on a collective basis by security investment grade. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancingreasonable and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of the existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in Update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption using prospective application, including adoption in an interim period where the guidance should be applied as of the beginning of the fiscal year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.supportable forecasts.
The Company classifies the held-to-maturity debt securities into the following major security types: residential mortgage backed, and state and political subdivisions. These securities are highly rated with a history of no credit losses, and are assigned ratings based on the most recent data from ratings agencies depending on the availability of data for the security. Credit ratings of held-
to-maturity debt securities, which are a significant input in calculating the expected credit loss, are reviewed on a quarterly basis. Based on the credit ratings of our held-to-maturity securities and our historical experience including no losses, we have determined that an allowance for credit loss on the held-to-maturity portfolio is not required
Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses and is included in Accrued interest receivable on the Consolidated Statements of Financial Condition.
During
Allowance for Credit Losses on Available for Sale Securities
We follow ASC 326-30, Financial Instruments - Credit Loss - Available-for-Sale Debt Securities, which provides guidance related to the recognition of and expanded disclosure requirements for expected credit losses on available-for-sale debt securities. For available-for-sale debt securities in an unrealized loss position, the Company first evaluates whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is reduced to fair value and recognized as a reduction to non-interest income in the Consolidated Statements of Income.
For debt securities available-for-sale which the Company does not intend to sell, or it is not likely the security would be required to be sold before recovery, we evaluate whether a decline in fair value has resulted from credit losses or other adverse factors, such as a change in the security's credit rating. In assessing whether a credit loss exists, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance is recorded, limited to the fair value of the security.
Recently Issued Accounting Pronouncements:
In March 2020, the FASB issued ASU No. 2020.-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide optional guidance to entities for a limited period of time to ease the transition in accounting for and recognizing the effects of reference rate reform on financial reporting. Under the guidance, modifications of contracts due to reference rate reform will not require contract remeasurement or reassessment of a previous accounting determination. For hedge accounting, modification of critical terms of the hedge due to changes in reference rate reform will not affect hedge accounting or dedesignate the hedging relationship. The guidance also provides specific expedients for fair value hedges, cash flow hedges, and excluded components. Further, the guidance provides a none-time election to sell or transfer held to maturity debt 46 securities that are affected by the reference rate change. The guidance is effective upon issuance through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the sunset (or expiration) date of Accounting Standards Codification (ASC) Topic 848 to December 31, 2024. This gives reporting entities two additional years to apply the accounting relief provided under ASC Topic 848 for matters related to reference rate reform. ASU 2022-06 is effective for all reporting entities immediately upon issuance and must be applied on a prospective basis. The Company does not expect the application of this guidance to have a material impact on the Consolidated Financial Statements.
Accounting Pronouncements Adopted in 2023
In June 2016, the Financial Accounting Standard Board (FASB) issued accounting standards update ("ASU") 2016-13, Financial Instruments-Credit Losses. ASU 2016-13 (Topic 326), replaces the incurred loss impairment methodology in current GAAP with an expected credit loss ("CECL")a CECL methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. The ASU was amended in some aspects by subsequent Accounting Standards Updates. TheThis guidance of the Financial Instruments-Credit Lossesbecame effective for public entities except small reporting companies ("SRCs") for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all entities, early adoption will continue to be allowed. As a small reporting company, CECL is effective for fiscal years beginning after December 15, 2022 and interim periods within those years. The Company has selected a third-party software vendor for the CECL calculation and to assist in the implementation of the model. The Company will utilize a lifetime loss rate calculation for all its loan portfolio's, as well as supplement the loss estimate by including reasonable and supportable forecasts of macroeconomic conditions. The Company began to perform parallel runs of the new model to its current ALLL model during the first quarter of 2022 and continues to evaluate the results and assumptions. Implementation efforts are continuing to focus on model validation, model calibration, qualitative factors, finalizing procedures and other governance and control documentation. The Company will adopt this new guidance on January 1, 2023 for the Company. Results and is currently evaluating the impact of this new guidance on its consolidated financial statements.disclosures for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.
In March 2020,The Company adopted this guidance, and subsequent related updates, using the FASB issued ASU 2020-4, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-4 (Topic 848) provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU is effectivemodified retrospective approach for all entities asfinancial assets measured at amortized cost, including loans and held-to-maturity debt securities, and unfunded commitments. On January 1, 2023, the Company recorded a cumulative effect decrease to retained earnings of March 12, 2020 through December 31, 2022. The$2.1 million, net of tax, of which $1.9 million related to loans, and $960.0 thousand related to unfunded commitments. There were no such charges for securities held by the Company intends to adopt this guidance on its effectiveat the date and does not expect the adoption of this guidance to materially impact its financial condition, results of operations and consolidated financial statements.adoption.
The following table illustrates the impact of adopting ASC 326:
| | | | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | | January 1, 2023 |
Assets | | Pre-adoption | | Adoption Impact | | As Reported |
ACL on loans | | | | | | |
Commercial and Industrial | | $ | 390 | | | $ | 168 | | | $ | 558 | |
Construction | | 2,581 | | | 1,899 | | | 4,480 | |
Commercial - Owner Occupied | | 2,298 | | | (171) | | | 2,127 | |
Commercial - Non-owner Occupied | | 9,709 | | | (951) | | | 8,758 | |
Residential - 1 to 4 Family | | 6,076 | | | 1,782 | | | 7,858 | |
Residential - 1 to 4 Family Investment | | 9,381 | | | (795) | | | 8,586 | |
Residential - Multifamily | | 1,347 | | | (128) | | | 1,219 | |
Consumer | | 63 | | | 53 | | | 116 | |
Total ACL on loans | | 31,845 | | | 1,857 | | | 33,702 | |
Deferred Tax Assets | | 9,184 | | | 716 | | | 9,900 | |
Liabilities | | | | | | |
ACL for unfunded commitments | | — | | | 960 | | | 960 | |
Equity | | | | | | |
Retained Earnings | | $ | 131,706 | | | $ | (2,101) | | | $ | 129,605 | |
| | | | | | |
| | | | | | |
NOTE 3. INVESTMENT SECURITIES
The following is a summary of the Company's investments in available for sale and held to maturity securities as of September 30, 2022March 31, 2023 and December 31, 2021:2022:
| As of September 30, 2022 | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value | |
As of March 31, 2023 | | As of March 31, 2023 | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| | (Dollars in thousands) | | (Dollars in thousands) |
Available for sale: | Available for sale: | | | | | | | | Available for sale: | | | | | | | |
Corporate debt obligations | Corporate debt obligations | $ | 500 | | | $ | — | | | $ | — | | | $ | 500 | | Corporate debt obligations | $ | 500 | | | $ | — | | | $ | — | | | $ | 500 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 10,120 | | | 1 | | | 832 | | | 9,289 | | Residential mortgage-backed securities | 9,104 | | | 4 | | | 631 | | | 8,477 | |
Collateralized mortgage obligations | 1 | | | — | | | — | | | 1 | | |
| Total available for sale | Total available for sale | $ | 10,621 | | | $ | 1 | | | $ | 832 | | | $ | 9,790 | | Total available for sale | $ | 9,604 | | | $ | 4 | | | $ | 631 | | | $ | 8,977 | |
| | | | | | | | | | | | | | | | |
Held to maturity: | Held to maturity: | | | | | | | | Held to maturity: | | | | | | | |
Residential mortgage-backed securities | Residential mortgage-backed securities | $ | 5,768 | | | $ | — | | | $ | 1,156 | | | $ | 4,612 | | Residential mortgage-backed securities | $ | 5,521 | | | $ | — | | | $ | 1,032 | | | $ | 4,489 | |
States and political subdivisions | States and political subdivisions | 3,807 | | | 18 | | | 717 | | | 3,108 | | States and political subdivisions | 3,838 | | | 62 | | | 423 | | | 3,477 | |
Total held to maturity | Total held to maturity | $ | 9,575 | | | $ | 18 | | | $ | 1,873 | | | $ | 7,720 | | Total held to maturity | $ | 9,359 | | | $ | 62 | | | $ | 1,455 | | | $ | 7,966 | |
| As of December 31, 2021 | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value | |
As of December 31, 2022 | | As of December 31, 2022 | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| | (Dollars in thousands) | | (Dollars in thousands) |
Available for sale: | Available for sale: | | | | | | | | Available for sale: | | | | | | | |
Corporate debt obligations | Corporate debt obligations | $ | 500 | | | $ | — | | | $ | — | | | $ | 500 | | Corporate debt obligations | $ | 500 | | | $ | — | | | $ | — | | | $ | 500 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 12,513 | | | 372 | | | 42 | | | 12,843 | | Residential mortgage-backed securities | 9,575 | | | 3 | | | 712 | | | 8,866 | |
Collateralized mortgage obligations | 8 | | | — | | | — | | | 8 | | |
| Total available for sale | Total available for sale | $ | 13,021 | | | $ | 372 | | | $ | 42 | | | $ | 13,351 | | Total available for sale | $ | 10,075 | | | $ | 3 | | | $ | 712 | | | $ | 9,366 | |
| | | | | | | | | | | | | | | | |
Held to maturity: | Held to maturity: | | | | | | | | Held to maturity: | | | | | | | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 6,157 | | | — | | | 118 | | | 6,039 | | Residential mortgage-backed securities | $ | 5,556 | | | $ | — | | | $ | 1,096 | | | $ | 4,460 | |
States and political subdivisions | States and political subdivisions | $ | 3,761 | | | $ | 241 | | | $ | 16 | | | $ | 3,986 | | States and political subdivisions | 3,822 | | | 56 | | | 533 | | | 3,345 | |
Total held to maturity | Total held to maturity | $ | 9,918 | | | $ | 241 | | | $ | 134 | | | $ | 10,025 | | Total held to maturity | $ | 9,378 | | | $ | 56 | | | $ | 1,629 | | | $ | 7,805 | |
The amortized cost and fair value of debt securities classified as available for sale and held to maturity, by contractual maturity as of September 30, 2022March 31, 2023 are as follows:
| | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | (Dollars in thousands) | | (Dollars in thousands) |
Available for sale: | Available for sale: | | Available for sale: | |
Due within one year | Due within one year | $ | — | | | $ | — | | Due within one year | $ | 500 | | | $ | 500 | |
Due after one year through five years | Due after one year through five years | 724 | | | 708 | | Due after one year through five years | 1,868 | | | 1,712 | |
Due after five years through ten years | Due after five years through ten years | 5,552 | | | 5,157 | | Due after five years through ten years | 3,183 | | | 3,028 | |
Due after ten years | Due after ten years | 4,345 | | | 3,925 | | Due after ten years | 4,053 | | | 3,737 | |
Total available for sale | Total available for sale | $ | 10,621 | | | $ | 9,790 | | Total available for sale | $ | 9,604 | | | $ | 8,977 | |
| Held to maturity: | Held to maturity: | | | Held to maturity: | | |
Due within one year | Due within one year | $ | — | | | $ | — | | Due within one year | $ | — | | | $ | — | |
Due after one year through five years | Due after one year through five years | 1,330 | | | 1,348 | | Due after one year through five years | 1,362 | | | 1,425 | |
Due after five years through ten years | Due after five years through ten years | — | | | — | | Due after five years through ten years | — | | | — | |
Due after ten years | Due after ten years | 8,245 | | | 6,372 | | Due after ten years | 7,997 | | | 6,541 | |
Total held to maturity | Total held to maturity | $ | 9,575 | | | $ | 7,720 | | Total held to maturity | $ | 9,359 | | | $ | 7,966 | |
Expected maturities may differ from contractual maturities because the issuers of certain debt securities do have the right to call or prepay their obligations without any penalty.
The Company did not sell any securities during the three and nine months ended September 30, 2022.March 31, 2023. The following tables show the gross unrealized losses and fair value of the Company's investments for which an allowance for credit losses has not been recorded, which are aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2022March 31, 2023 and December 31, 2021:2022:
| As of September 30, 2022 | | Less Than 12 Months | | 12 Months or Greater | | Total | |
As of March 31, 2023 | | As of March 31, 2023 | | Less Than 12 Months | | 12 Months or Greater | | Total |
Description of Securities | Description of Securities | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | Description of Securities | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | | (Dollars in thousand) | | | (Dollars in thousand) |
Available for sale: | Available for sale: | | | | | | | | | | | | | Available for sale: | | | | | | | | | | | | |
Residential mortgage-backed securities | Residential mortgage-backed securities | | $ | 7,985 | | | $ | 694 | | | $ | 1,128 | | | $ | 138 | | | $ | 9,113 | | | $ | 832 | | Residential mortgage-backed securities | | $ | 882 | | | $ | 15 | | | $ | 7,361 | | | $ | 616 | | | $ | 8,243 | | | $ | 631 | |
Total available for sale | Total available for sale | | $ | 7,985 | | | $ | 694 | | | $ | 1,128 | | | $ | 138 | | | $ | 9,113 | | | $ | 832 | | Total available for sale | | $ | 882 | | | $ | 15 | | | $ | 7,361 | | | $ | 616 | | | $ | 8,243 | | | $ | 631 | |
Held to maturity: | Held to maturity: | | | | | | | | | | | | | Held to maturity: | | | | | | | | | | | | |
Residential mortgage-backed securities | Residential mortgage-backed securities | | $ | — | | | $ | — | | | $ | 4,612 | | | $ | 1,156 | | | $ | 4,612 | | | $ | 1,156 | | Residential mortgage-backed securities | | $ | — | | | $ | — | | | $ | 4,489 | | | $ | 1,032 | | | $ | 4,489 | | | $ | 1,032 | |
States and political subdivisions | States and political subdivisions | | — | | | — | | | 1,760 | | | 717 | | | 1,760 | | | 717 | | States and political subdivisions | | — | | | — | | | 2,052 | | | 423 | | | 2,052 | | | 423 | |
Total held to maturity | Total held to maturity | | $ | — | | | $ | — | | | $ | 6,372 | | | $ | 1,873 | | | $ | 6,372 | | | $ | 1,873 | | Total held to maturity | | $ | — | | | $ | — | | | $ | 6,541 | | | $ | 1,455 | | | $ | 6,541 | | | $ | 1,455 | |
| As of December 31, 2021 | | Less Than 12 Months | | 12 Months or Greater | | Total | |
As of December 31, 2022 | | As of December 31, 2022 | | Less Than 12 Months | | 12 Months or Greater | | Total |
Description of Securities | Description of Securities | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | Description of Securities | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | | (Dollars in thousands) | | | (Dollars in thousands) |
Available for sale: | Available for sale: | | | | | | | | | | | | | Available for sale: | | | | | | | | | | | | |
Residential mortgage-backed securities | Residential mortgage-backed securities | | $ | 168 | | | $ | 1 | | | $ | 1,418 | | | $ | 41 | | | $ | 1,586 | | | $ | 42 | | Residential mortgage-backed securities | | $ | 7,579 | | | $ | 576 | | | $ | 1,043 | | | $ | 136 | | | $ | 8,622 | | | $ | 712 | |
Total available for sale | Total available for sale | | $ | 168 | | | $ | 1 | | | $ | 1,418 | | | $ | 41 | | | $ | 1,586 | | | $ | 42 | | Total available for sale | | $ | 7,579 | | | $ | 576 | | | $ | 1,043 | | | $ | 136 | | | $ | 8,622 | | | $ | 712 | |
Held to maturity: | Held to maturity: | | | | | | | | | | | | | Held to maturity: | | | | | | | | | | | | |
Residential mortgage-backed securities | Residential mortgage-backed securities | | 6,039 | | | $ | 118 | | | $ | — | | | $ | — | | | $ | 6,039 | | | $ | 118 | | Residential mortgage-backed securities | | $ | — | | | $ | — | | | $ | 4,460 | | | $ | 1,096 | | | $ | 4,460 | | | $ | 1,096 | |
States and political subdivisions | States and political subdivisions | | 2,462 | | | 16 | | | — | | | — | | | 2,462 | | | 16 | | States and political subdivisions | | — | | | — | | | 1,943 | | | 533 | | | 1,943 | | | 533 | |
Total held to maturity | Total held to maturity | | $ | 8,501 | | | $ | 134 | | | $ | — | | | $ | — | | | $ | 8,501 | | | $ | 134 | | Total held to maturity | | $ | — | | | $ | — | | | $ | 6,403 | | | $ | 1,629 | | | $ | 6,403 | | | $ | 1,629 | |
Other Than Temporarily Impaired Debt Securities (OTTI)
On at least a quarterly basis, we review all debt securities that are in an unrealized loss position for OTTI. An investment security is deemed impaired if the fair value of the investment is less than its amortized cost. Amortized cost includes adjustments (if any) made to the cost basis of an investment for accretion, amortization, and previous other-than-temporary impairments. After an investment security is determined to be impaired, we evaluate whether the decline in value is other-than-temporary. Estimating recovery of the amortized cost basis of a debt security is based upon an assessment of the cash flows expected to be collected. If the present value of the cash flows expected to be collected, discounted at the security’s effective yield, is less than the security’s amortized cost, OTTI is considered to have occurred.
For a debt security for which there has been a decline in the fair value below the amortized cost basis, if we intend to sell the security, or if it is more likely than not we will be required to sell the security before recovery of the amortized cost basis, an OTTI write-down is recognized in earnings equal to the entire difference between the amortized cost basis and fair value of the security. For debt securities that are considered OTTI and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of expected future cash flows is due to factors that are not credit-related and, therefore, is recognized in other comprehensive income.
We have a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. We consider relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events; (4) any change in rating agencies’ credit ratings at evaluation date from acquisition date and any likely imminent
action; (5) for asset-backed securities, the credit performance of the underlying collateral, including delinquency rates, level of non-performing assets, cumulative losses to date, collateral value and the remaining credit enhancement compared with expected credit losses.
The Company’s unrealized loss for the debt securities is comprised of 208 securities in the less than 12 months loss position and 716 securities in the 12 months or greater loss position at September 30, 2022.March 31, 2023. The mortgage-backed securities that had unrealized losses were issued or guaranteed by the US government or US government sponsored entities. The unrealized losses associated with those mortgage-backed securities are generally driven by changes in interest rates and are not due to credit losses given the explicit or implicit guarantees provided by the U.S. government. The states and political subdivisions securities that had unrealized losses were issued by a school district, and the loss is attributed to changes in interest rates and not due to credit losses. Because the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, the Company does not consider the unrealized loss in these securities to be OTTIcredit losses at September 30, 2022.March 31, 2023.
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES
At September 30, 2022 and December 31, 2021, the Company had $1.68 billion and $1.48 billion, respectively, in loans receivable outstanding. Outstanding balances include a total net increase of $1.8 million and $1.7 million at September 30, 2022 and December 31, 2021, respectively, for net deferred loan costs, and unamortized discounts. We had no loans held for sale at September 30, 2022 and December 31, 2021, respectively. Also, at September 30, 2022 and December 31, 2021, our commercial and industrial loan portfolio includes $2.9 million and $27.8 million, respectively, of loans to small businesses through the Paycheck Protection Program ("SBA PPP" loans), which is a loan designed by the Federal government to provide a direct incentive for small businesses to keep their workers on the payroll.The portfolio segments of loans receivable at September 30, 2022 and December 31, 2021, consist of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Amount | | Amount |
| (Dollars in thousands) |
Commercial and Industrial | $ | 29,407 | | | $ | 57,151 | |
Construction | 194,111 | | | 154,077 | |
Real Estate Mortgage: | | | |
Commercial – Owner Occupied | 130,106 | | | 123,672 | |
Commercial – Non-owner Occupied | 347,543 | | | 306,486 | |
Residential – 1 to 4 Family | 892,988 | | | 750,525 | |
Residential – Multifamily | 78,162 | | | 84,964 | |
Consumer | 7,040 | | | 7,972 | |
Total Loans | $ | 1,679,357 | | | $ | 1,484,847 | |
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES ON LOANS
At March 31, 2023 and December 31, 2022, the Company had $1.76 billion and $1.75 billion, respectively, in loans receivable outstanding. Outstanding balances include a total net increase of $2.2 million and $1.9 million at March 31, 2023 and December 31, 2022, respectively, for net deferred loan costs, and unamortized discounts. The portfolio segments of loans receivable at March 31, 2023 and December 31, 2022, consist of the following:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Amount | | Amount |
| (Dollars in thousands) |
Commercial and Industrial | $ | 34,138 | | | $ | 32,383 | |
Construction | 169,375 | | | 192,357 | |
Real Estate Mortgage: | | | |
Commercial – Owner Occupied | 141,083 | | | 125,950 | |
Commercial – Non-owner Occupied | 379,140 | | | 377,452 | |
Residential – 1 to 4 Family | 442,110 | | | 444,820 | |
Residential – 1 to 4 Family Investment | 490,779 | | | 476,210 | |
Residential – Multifamily | 99,586 | | | 95,556 | |
Consumer | 6,485 | | | 6,731 | |
Total Loan receivable | 1,762,696 | | | 1,751,459 | |
Allowance for credit losses on loans | (31,507) | | | (31,845) | |
Total loan receivable, net of allowance for credit losses on loans | $ | 1,731,189 | | | $ | 1,719,614 | |
An age analysis of past due loans by class at September 30, 2022March 31, 2023 and December 31, 20212022 is as follows:
| September 30, 2022 | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater than 90 Days and Not Accruing | | Total Past Due | | Current | | Total Loans | | Loans > 90 Days and Accruing | |
March 31, 2023 | | March 31, 2023 | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater than 90 Days | | Total Past Due | | Current | | Total Loans | |
| | (Dollars in Thousands) | | (Dollars in Thousands) |
Commercial and Industrial | Commercial and Industrial | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 29,407 | | | $ | 29,407 | | | $ | — | | Commercial and Industrial | $ | 45 | | | $ | 87 | | | $ | 198 | | | $ | 330 | | | $ | 33,808 | | | $ | 34,138 | | |
Construction | Construction | — | | | — | | | 1,139 | | | 1,139 | | | 192,972 | | | 194,111 | | | — | | Construction | — | | | — | | | 1,091 | | | 1,091 | | | 168,284 | | | 169,375 | | |
Real Estate Mortgage: | Real Estate Mortgage: | | | | | | | | | | | | | Real Estate Mortgage: | | | | | | | | | | | | |
Commercial – Owner Occupied | Commercial – Owner Occupied | — | | | — | | | 988 | | | 988 | | | 129,118 | | | 130,106 | | | — | | Commercial – Owner Occupied | — | | | — | | | 400 | | | 400 | | | 140,683 | | | 141,083 | | |
Commercial – Non-owner Occupied | Commercial – Non-owner Occupied | — | | | — | | | 14,553 | | | 14,553 | | | 332,990 | | | 347,543 | | | — | | Commercial – Non-owner Occupied | — | | | — | | | 14,380 | | | 14,380 | | | 364,760 | | | 379,140 | | |
Residential – 1 to 4 Family | Residential – 1 to 4 Family | 85 | | | — | | | 163 | | | 248 | | | 892,740 | | | 892,988 | | | — | | Residential – 1 to 4 Family | 447 | | | — | | | — | | | 447 | | | 441,663 | | | 442,110 | | |
Residential – 1 to 4 Family Investment | | Residential – 1 to 4 Family Investment | — | | | — | | | — | | | — | | | 490,779 | | | 490,779 | | |
Residential – Multifamily | Residential – Multifamily | — | | | — | | | — | | | — | | | 78,162 | | | 78,162 | | | — | | Residential – Multifamily | — | | | — | | | — | | | — | | | 99,586 | | | 99,586 | | |
Consumer | Consumer | — | | | — | | | 70 | | | 70 | | | 6,970 | | | 7,040 | | | — | | Consumer | — | | | — | | | 70 | | | 70 | | | 6,415 | | | 6,485 | | |
Total Loans | Total Loans | $ | 85 | | | $ | — | | | $ | 16,913 | | | $ | 16,998 | | | $ | 1,662,359 | | | $ | 1,679,357 | | | $ | — | | Total Loans | $ | 492 | | | $ | 87 | | | $ | 16,139 | | | $ | 16,718 | | | $ | 1,745,978 | | | $ | 1,762,696 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater than 90 Days and Not Accruing | | Total Past Due | | Current | | Total Loans | | Loans > 90 Days and Accruing |
| (Dollars in thousands) |
Commercial and Industrial | $ | — | | | $ | 349 | | | $ | 224 | | | $ | 573 | | | $ | 56,578 | | | $ | 57,151 | | | $ | — | |
Construction | — | | | — | | | 1,139 | | | 1,139 | | | 152,938 | | | 154,077 | | | — | |
Real Estate Mortgage: | | | | | | | | | | | | | |
Commercial – Owner Occupied | — | | | — | | | 2,170 | | | 2,170 | | | 121,502 | | | 123,672 | | | — | |
Commercial – Non-owner Occupied | — | | | — | | | 242 | | | 242 | | | 306,244 | | | 306,486 | | | — | |
Residential – 1 to 4 Family | 81 | | | — | | | 533 | | | 614 | | | 749,911 | | | 750,525 | | | — | |
Residential – Multifamily | — | | | — | | | — | | | — | | | 84,964 | | | 84,964 | | | — | |
Consumer | — | | | — | | | — | | | — | | | 7,972 | | | 7,972 | | | — | |
Total Loans | $ | 81 | | | $ | 349 | | | $ | 4,308 | | | $ | 4,738 | | | $ | 1,480,109 | | | $ | 1,484,847 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater than 90 Days | | Total Past Due | | Current | | Total Loans | | |
| (Dollars in thousands) |
Commercial and Industrial | $ | — | | | $ | 89 | | | $ | — | | | $ | 89 | | | $ | 32,294 | | | $ | 32,383 | | | |
Construction | — | | | — | | | 1,091 | | | 1,091 | | | 191,266 | | | 192,357 | | | |
Real Estate Mortgage: | | | | | | | | | | | | | |
Commercial – Owner Occupied | — | | | — | | | 400 | | | 400 | | | 125,550 | | | 125,950 | | | |
Commercial – Non-owner Occupied | — | | | — | | | 14,553 | | | 14,553 | | | 362,899 | | | 377,452 | | | |
Residential – 1 to 4 Family | 58 | | | — | | | 162 | | | 220 | | | 444,600 | | | 444,820 | | | |
Residential – 1 to 4 Family Investment | — | | | — | | | — | | | — | | | 476,210 | | | 476,210 | | | |
Residential – Multifamily | — | | | — | | | — | | | — | | | 95,556 | | | 95,556 | | | |
Consumer | 78 | | | — | | | 70 | | | 148 | | | 6,583 | | | 6,731 | | | |
Total Loans | $ | 136 | | | $ | 89 | | | $ | 16,276 | | | $ | 16,501 | | | $ | 1,734,958 | | | $ | 1,751,459 | | | |
The following table provides the amortized cost of loans on nonaccrual status:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
(amounts in thousands) | | Nonaccrual with no ACL | | Nonaccrual with ACL | | Total Nonaccrual | | Loans Past Due Over 90 Days Still Accruing | | Total Nonperforming |
Commercial and Industrial | | $ | 198 | | | $ | — | | | $ | 198 | | | $ | — | | | $ | 198 | |
Construction | | 1,091 | | | — | | | 1,091 | | | — | | | 1,091 | |
Commercial - Owner Occupied | | — | | | 400 | | | 400 | | | — | | | 400 | |
Commercial - Non-owner Occupied | | 10,943 | | | 3,437 | | | 14,380 | | | — | | | 14,380 | |
Residential - 1 to 4 Family | | — | | | — | | | — | | | — | | | — | |
Residential - 1 to 4 Family Investment | | — | | | — | | | — | | | — | | | — | |
Residential - Multifamily | | — | | | — | | | — | | | — | | | — | |
Consumer | | 70 | | | — | | | 70 | | | — | | | 70 | |
Total | | $ | 12,302 | | | $ | 3,837 | | | $ | 16,139 | | | $ | — | | | $ | 16,139 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | December 31, 2022 |
(amounts in thousands) | | | | | | Total Nonaccrual | | Loans Past Due Over 90 Days Still Accruing | | |
Commercial and Industrial | | | | | | $ | — | | | $ | — | | | |
Construction | | | | | | 1,091 | | | — | | | |
Commercial - Owner Occupied | | | | | | 587 | | | — | | | |
Commercial - Non-owner Occupied | | | | | | 19,568 | | | — | | | |
Residential - 1 to 4 Family | | | | | | 417 | | | — | | | |
Residential - 1 to 4 Family Investment | | | | | | — | | | — | | | |
Residential - Multifamily | | | | | | — | | | — | | | |
Consumer | | | | | | 70 | | | — | | | |
Total | | | | | | $ | 21,733 | | | $ | — | | | |
Allowance For Loan and LeaseCredit Losses (ALLL)(ACL)
We maintain the ALLLACL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan portfolios as of the balance sheet date. We established our allowance in accordance with guidance provided in Accounting Standard Codification ("ASC") - ContingenciesFinancial Instruments - Credit Losses ("ASC 450") and Receivables ("ASC 310"326").
The allowance for loan and leasecredit losses represents management’s estimate of probableexpected losses inherent in the Company’s lending activities excluding loans accounted for under fair value. The allowance for loancredit losses is maintained through charges to the provision for loancredit losses in the Consolidated Statements of Income as expected losses are estimated to have occurred.estimated. Loans or portions thereof that are determined to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance.
The Company performs periodic reviews of its loan and lease portfolios to identify credit risks and to assess the overall collectability of those portfolios. The Company's allowance for loancredit losses includes a general component and an asset-specific component. The asset-specific component of the allowance relates to loans considered to be impaired, which includes performing troubled debt restructurings (“TDRs”) as well as nonperformingfor collateral-dependent loans. To determine the asset-specific component of the allowance, the loans are evaluated individually based on the borrower's ability to repay amounts owed, collateral, relative risk gradefair value of the loans, and other factors given current events and conditions.underlying collateral. The Company generally measures the asset-specific allowance as the difference between the net realizable value of loan collateral or present value of expected cash flow and the recorded investment of a loan.
The general component of the allowance evaluates the impairments of pools of the loan portfolio collectively. It incorporates a historical valuation allowance and general valuationqualitative allowance. The historical valuation utilizes a vintage loss experiencerate approach utilizing a third party software model. The vintage loss rate approach creates pools of loans based on the segments defined by management, and consists of commercial and industrial, construction, commercial - owner occupied, commercial - non-owner occupied, residential - 1 to 4 family, residential - 1 to 4 family investment, residential - multifamily, and consumer. The loan pools are aggregated by origination year. Charge-offs, net of recoveries, are allocated by the year of charge-off to each loan pool. An average life is measured by typeprescribed to a pool of credit and internal risk grade, loss severity, specific homogeneous risk pools. A historical loss ratio and valuation allowanceloans that were originated in a particular year. The actual charge-offs as a percent of total loans are establishedcalculated for each poolhistorical year, and projected for future years for each year within the average life time horizon. The sum of similar loansthe actual charge-offs and updated periodically based on actualprojected charge-offs are divided by the average amortized origination amount for each respective year. Those charge-off experience and current events. percentages are added together to obtain an aggregated vintage loss percentage which is then multiplied by the outstanding loan balances to obtain a reserve requirement.
The general valuationqualitative allowance component is based on general economic conditions and other qualitative risk factors both internal and external to the Company. It is generally determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank's lending management and staff; (ii) the effectiveness of the Bank's lending policies, procedures and internal controls;(iii) volume and severity of loan credit quality; (iv) nature and volume of portfolio and term of loans (v) the composition and concentrations of credit; (vi) the effectiveness of the internal loan review system; and (vii) national and local economic trends and conditions, and industry conditions. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, high-moderate, moderate, low-moderate or low degree of risk. The results are then input into a "general allocation matrix" to determine an appropriate general valuation allowance.
The Company has elected to exclude accrued interest receivable from the measurement of the ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is generally reversed against interest income.
The process of determining the level of the allowance for loan and leasecredit losses requires a high degree of estimate and judgment. It is reasonably possible that actual outcomes may differ from our estimates.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted through the provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. At March 31, 2023, the allowance for credit losses on off-balance sheet credit exposures was $760.0 thousand.
The following tables present the information regarding the allowance for credit losses and associated loan data by portfolio segment under the CECL model in accordance with ASC 326:
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| | | | | Real Estate Mortgage | | | | | |
| Commercial and Industrial | | Construction | | Commercial Owner Occupied | | Commercial Non-owner Occupied | | Residential 1 to 4 Family | | Residential 1 to 4 Family Investment | | Residential Multifamily | | Consumer | | Total | |
Allowance for credit losses | (Dollars in thousands) | |
Three months ended March 31, 2023 | | | | | | | | | | | | | | | | | | |
December 31, 2022 | $ | 390 | | | $ | 2,581 | | | $ | 2,298 | | | $ | 9,709 | | | $ | 6,076 | | | $ | 9,381 | | | $ | 1,347 | | | $ | 63 | | | $ | 31,845 | | |
Impact of adoption ASC 326 | 168 | | | 1,899 | | | (171) | | | (951) | | | 1,782 | | | (795) | | | (128) | | | 53 | | | 1,857 | | |
Charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
Recoveries | 3 | | | — | | | 2 | | | — | | | — | | | — | | | — | | | — | | | 5 | | |
Provisions (benefits) | 177 | | | (881) | | | (253) | | | (682) | | | (52) | | | (516) | | | 19 | | | (12) | | | (2,200) | | |
Ending Balance at March 31, 2023 | $ | 738 | | | $ | 3,599 | | | $ | 1,876 | | | $ | 8,076 | | | $ | 7,806 | | | $ | 8,070 | | | $ | 1,238 | | | $ | 104 | | | $ | 31,507 | | |
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During the quarter, the credit provisions to the Construction, Commercial Non-owner Occupied, and Residential 1-4 Family Investment segments were largely driven by declines or slowdowns to growth within the portfolio that lowered the loan exposure and also caused changes to the qualitative factors related to loan volume within the portfolio segments. The credit provision to the Commercial Owner Occupied segment was largely driven by a reduction in other assets especially mentioned ("OAEM") loans during the quarter, partially offset by increase in loan volume.
The following tables present the information regarding the allowance for loan and lease losses and associated loan data by portfolio segment:segment under the incurred loss model:
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| | | | | Real Estate Mortgage | | | | | |
| Commercial and Industrial | | Construction | | Commercial Owner Occupied | | Commercial Non-owner Occupied | | Residential 1 to 4 Family | | Residential Multifamily | | Consumer | | Total | |
Allowance for loan losses | (Dollars in thousands) | |
Three months ended September 30, 2022 | | | | | | | | | | | | | | | | |
June 30, 2022 | $ | 551 | | | $ | 2,202 | | | $ | 2,742 | | | $ | 7,549 | | | $ | 16,211 | | | $ | 1,098 | | | $ | 95 | | | $ | 30,448 | | |
Charge-offs | — | | | — | | | — | | | — | | | (66) | | | — | | | — | | | (66) | | |
Recoveries | 3 | | | — | | | 4 | | | — | | | — | | | — | | | — | | | 7 | | |
Provisions (benefits) | (137) | | | 653 | | | (140) | | | 368 | | | (221) | | | 92 | | | (15) | | | 600 | | |
Ending Balance at September 30, 2022 | $ | 417 | | | $ | 2,855 | | | $ | 2,606 | | | $ | 7,917 | | | $ | 15,924 | | | $ | 1,190 | | | $ | 80 | | | $ | 30,989 | | |
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Allowance for loan losses | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2022 | | | | | | | | | | | | | | | | |
December 31, 2021 | $ | 417 | | | $ | 2,662 | | | $ | 2,997 | | | $ | 7,476 | | | $ | 14,970 | | | $ | 1,215 | | | $ | 108 | | | $ | 29,845 | | |
Charge-offs | — | | | — | | | — | | | — | | | (66) | | | — | | | — | | | (66) | | |
Recoveries | 12 | | | 100 | | | 15 | | | — | | | 133 | | | — | | | — | | | 260 | | |
Provisions (benefits) | (12) | | | 93 | | | (406) | | | 441 | | | 887 | | | (25) | | | (28) | | | 950 | | |
Ending Balance at September 30, 2022 | $ | 417 | | | $ | 2,855 | | | $ | 2,606 | | | $ | 7,917 | | | $ | 15,924 | | | $ | 1,190 | | | $ | 80 | | | $ | 30,989 | | |
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Allowance for loan losses | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | — | | | $ | — | | | $ | 4 | | | $ | 125 | | | $ | 20 | | | $ | — | | | $ | — | | | $ | 149 | | |
Collectively evaluated for impairment | 417 | | | 2,855 | | | 2,602 | | | 7,792 | | | 15,904 | | | 1,190 | | | 80 | | | 30,840 | | |
Ending Balance at September 30, 2022 | $ | 417 | | | $ | 2,855 | | | $ | 2,606 | | | $ | 7,917 | | | $ | 15,924 | | | $ | 1,190 | | | $ | 80 | | | $ | 30,989 | | |
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Loans | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | — | | | $ | 1,139 | | | $ | 1,177 | | | $ | 19,655 | | | $ | 420 | | | $ | — | | | $ | 70 | | | $ | 22,461 | | |
Collectively evaluated for impairment | 29,407 | | | 192,972 | | | 128,929 | | | 327,888 | | | 892,568 | | | 78,162 | | | 6,970 | | | 1,656,896 | | |
Ending Balance at September 30, 2022 | $ | 29,407 | | | $ | 194,111 | | | $ | 130,106 | | | $ | 347,543 | | | $ | 892,988 | | | $ | 78,162 | | | $ | 7,040 | | | $ | 1,679,357 | | |
The increase in the allowance for loan loss balance for the nine months ended September 30, 2022 in the residential 1 to 4 family and commercial non-owner occupied portfolio segments was primarily attributable to loan growth. The decrease in the allowance for loan loss balance in the commercial owner occupied portfolio segment for the nine months ended September 30, 2022 was due to decreases in non-performing balances.
| | | Real Estate Mortgage | | | Real Estate Mortgage | |
| | Commercial and Industrial | | Construction | | Commercial Owner Occupied | | Commercial Non-owner Occupied | | Residential 1 to 4 Family | | Residential Multifamily | | Consumer | | Total | | Commercial and Industrial | | Construction | | Commercial Owner Occupied | | Commercial Non-owner Occupied | | Residential 1 to 4 Family | | Residential 1 to 4 Family Investment | | Residential Multifamily | | Consumer | | Total |
Allowance for loan losses | Allowance for loan losses | (Dollars in thousands) | Allowance for loan losses | (Dollars in thousands) |
Three months ended September 30, 2021 | | |
June 30, 2021 | $ | 312 | | | $ | 3,483 | | | $ | 3,502 | | | $ | 8,514 | | | $ | 12,883 | | | $ | 1,250 | | | $ | 125 | | | $ | 30,069 | | |
Three months ended March 31, 2022 | | Three months ended March 31, 2022 | |
December 31, 2021 | | December 31, 2021 | $ | 417 | | | $ | 2,662 | | | $ | 2,997 | | | $ | 7,476 | | | $ | 7,045 | | | $ | 7,925 | | | $ | 1,215 | | | $ | 108 | | | $ | 29,845 | |
Charge-offs | Charge-offs | — | | | (226) | | | — | | | — | | | (49) | | | — | | | — | | | (275) | | Charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Recoveries | Recoveries | 2 | | | — | | | 38 | | | 4 | | | — | | | — | | | — | | | 44 | | Recoveries | 6 | | | — | | | 2 | | | — | | | 121 | | | — | | | 7 | | | — | | | 136 | |
Provisions (benefits) | Provisions (benefits) | 95 | | | (350) | | | (105) | | | (350) | | | 878 | | | (166) | | | (2) | | | — | | Provisions (benefits) | 86 | | | (465) | | | 13 | | | (223) | | | 311 | | | 80 | | | 193 | | | 5 | | | — | |
Ending Balance at September 30, 2021 | $ | 409 | | | $ | 2,907 | | | $ | 3,435 | | | $ | 8,168 | | | $ | 13,712 | | | $ | 1,084 | | | $ | 123 | | | $ | 29,838 | | |
Ending Balance at March 31, 2022 | | Ending Balance at March 31, 2022 | $ | 509 | | | $ | 2,197 | | | $ | 3,012 | | | $ | 7,253 | | | $ | 7,477 | | | $ | 8,005 | | | $ | 1,415 | | | $ | 113 | | | $ | 29,981 | |
| Allowance for loan losses | | |
Nine months ended September 30, 2021 | | |
December 31, 2020 | $ | 492 | | | $ | 3,359 | | | $ | 3,078 | | | $ | 8,398 | | | $ | 12,595 | | | $ | 1,639 | | | $ | 137 | | | $ | 29,698 | | |
Charge-offs | — | | | (226) | | | (153) | | | — | | | (49) | | | — | | | — | | | (428) | | |
Recoveries | 15 | | | — | | | 49 | | | 4 | | | — | | | — | | | — | | | 68 | | |
Provisions (benefits) | (98) | | | (226) | | | 461 | | | (234) | | | 1,166 | | | (555) | | | (14) | | | 500 | | |
Ending Balance at September 30, 2021 | $ | 409 | | | $ | 2,907 | | | $ | 3,435 | | | $ | 8,168 | | | $ | 13,712 | | | $ | 1,084 | | | $ | 123 | | | $ | 29,838 | | |
| | Allowance for loan losses | Allowance for loan losses | | Allowance for loan losses | |
Individually evaluated for impairment | Individually evaluated for impairment | $ | 9 | | | $ | 300 | | | $ | 6 | | | $ | 235 | | | $ | 63 | | | $ | — | | | $ | — | | | $ | 613 | | Individually evaluated for impairment | $ | — | | | $ | — | | | $ | 4 | | | $ | 148 | | | $ | 29 | | | $ | — | | | $ | — | | | $ | — | | | $ | 181 | |
Collectively evaluated for impairment | Collectively evaluated for impairment | 400 | | | 2,607 | | | 3,429 | | | 7,933 | | | 13,649 | | | 1,084 | | | 123 | | | 29,225 | | Collectively evaluated for impairment | 509 | | | 2,197 | | | 3,008 | | | 7,105 | | | 7,448 | | | 8,005 | | | 1,415 | | | 113 | | | 29,800 | |
Ending Balance at September 30, 2021 | $ | 409 | | | $ | 2,907 | | | $ | 3,435 | | | $ | 8,168 | | | $ | 13,712 | | | $ | 1,084 | | | $ | 123 | | | $ | 29,838 | | |
Ending Balance at March 31, 2022 | | Ending Balance at March 31, 2022 | $ | 509 | | | $ | 2,197 | | | $ | 3,012 | | | $ | 7,253 | | | $ | 7,477 | | | $ | 8,005 | | | $ | 1,415 | | | $ | 113 | | | $ | 29,981 | |
| Loans | Loans | | Loans | |
Individually evaluated for impairment | Individually evaluated for impairment | $ | 47 | | | $ | 1,139 | | | $ | 2,443 | | | $ | 5,625 | | | $ | 1,022 | | | $ | — | | | $ | 178 | | | $ | 10,454 | | Individually evaluated for impairment | $ | 196 | | | $ | 1,139 | | | $ | 2,433 | | | $ | 5,369 | | | $ | 687 | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,824 | |
Collectively evaluated for impairment | Collectively evaluated for impairment | 66,230 | | | 170,012 | | | 124,909 | | | 306,272 | | | 710,886 | | | 76,522 | | | 8,531 | | | 1,463,362 | | Collectively evaluated for impairment | 38,629 | | | 134,871 | | | 129,842 | | | 310,884 | | | 395,587 | | | 383,608 | | | 84,970 | | | 7,624 | | | 1,486,015 | |
Ending Balance at September 30, 2021 | $ | 66,277 | | | $ | 171,151 | | | $ | 127,352 | | | $ | 311,897 | | | $ | 711,908 | | | $ | 76,522 | | | $ | 8,709 | | | $ | 1,473,816 | | |
Ending Balance at March 31, 2022 | | Ending Balance at March 31, 2022 | $ | 38,825 | | | $ | 136,010 | | | $ | 132,275 | | | $ | 316,253 | | | $ | 396,274 | | | $ | 383,608 | | | $ | 84,970 | | | $ | 7,624 | | | $ | 1,495,839 | |
The increase in the allowance for loan loss balance for the residential 1 to 4 family portfolio segment for the ninethree months ended September 30, 2021March 31, 2022 is mainly due to loan growth. The increase in the allowance for loan loss balance for the commercial owner occupiedresidential multifamily portfolio segment is mainly due to increaseincreases in the non-performing loan balance.qualitative factors, namely economic conditions. The decrease in the allowance for loan loss balance for the residential multifamilyconstruction portfolio segment for the ninethree months ended September 30, 2021March 31, 2022 is due to the decrease in loan balance.
ImpairedCollateral-Dependent Loans
A loan is considered impaired when, based on the current information and events, it is probable that the Company will be unable to collect the payments of principal and interest 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. 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.
All our impaired loans are assessed for recoverability based on an independent third-party full appraisal to determine the net realizable value (“NRV”) based on the fair value of the underlying collateral, less cost to sell and other costs or the present value of discounted cash flows in the case of certain impaired loans that are not collateral dependent.
The following tables provide further detail on impaired loans and the associated ALLL at September 30, 2022 and December 31, 2021:
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September 30, 2022 | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
| (Dollars in thousands) |
With no related allowance recorded: | | | | | |
Commercial and Industrial | $ | — | | | $ | — | | | $ | — | |
Construction | 1,139 | | | 5,856 | | | — | |
Real Estate Mortgage: | | | | | |
Commercial – Owner Occupied | 988 | | | 988 | | | — | |
Commercial – Non-owner Occupied | 14,553 | | | 14,553 | | | — | |
Residential – 1 to 4 Family | 163 | | | 163 | | | — | |
Residential – Multifamily | — | | | — | | | — | |
Consumer | 70 | | | 70 | | | — | |
| 16,913 | | | 21,630 | | | — | |
With an allowance recorded: | | | | | |
Commercial and Industrial | — | | | — | | | — | |
Construction | — | | | — | | | — | |
Real Estate Mortgage: | | | | | |
Commercial – Owner Occupied | 189 | | | 189 | | | 4 | |
Commercial – Non-owner Occupied | 5,102 | | | 5,102 | | | 125 | |
Residential – 1 to 4 Family | 257 | | | 257 | | | 20 | |
Residential – Multifamily | — | | | — | | | — | |
Consumer | — | | | — | | | — | |
| 5,548 | | | 5,548 | | | 149 | |
Total: | | | | | |
Commercial and Industrial | — | | | — | | | — | |
Construction | 1,139 | | | 5,856 | | | — | |
Real Estate Mortgage: | | | | | |
Commercial – Owner Occupied | 1,177 | | | 1,177 | | | 4 | |
Commercial – Non-owner Occupied | 19,655 | | | 19,655 | | | 125 | |
Residential – 1 to 4 Family | 420 | | | 420 | | | 20 | |
Residential – Multifamily | — | | | — | | | — | |
Consumer | 70 | | | 70 | | | — | |
| $ | 22,461 | | | $ | 27,178 | | | $ | 149 | |
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December 31, 2021 | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
| (Dollars in thousands) |
With no related allowance recorded: | | | | | |
Commercial and Industrial | $ | 216 | | | $ | 216 | | | $ | — | |
Construction | — | | | — | | | — | |
Real Estate Mortgage: | | | | | |
Commercial – Owner Occupied | 2,170 | | | 2,170 | | | — | |
Commercial – Non-owner Occupied | 242 | | | 242 | | | — | |
Residential – 1 to 4 Family | 465 | | | 599 | | | — | |
Residential – Multifamily | — | | | — | | | — | |
Consumer | — | | | — | | | — | |
| 3,093 | | | 3,227 | | | — | |
With an allowance recorded: | | | | | |
Commercial and Industrial | 8 | | | 16 | | | 8 | |
Construction | 1,139 | | | 5,856 | | | 300 | |
Real Estate Mortgage: | | | | | |
Commercial – Owner Occupied | 199 | | | 199 | | | 5 | |
Commercial – Non-owner Occupied | 5,335 | | | 5,335 | | | 218 | |
Residential – 1 to 4 Family | 528 | | | 528 | | | 60 | |
Residential – Multifamily | — | | | — | | | — | |
Consumer | — | | | — | | | — | |
| 7,209 | | | 11,934 | | | 591 | |
Total: | | | | | |
Commercial and Industrial | 224 | | | 232 | | | 8 | |
Construction | 1,139 | | | 5,856 | | | 300 | |
Real Estate Mortgage: | | | | | |
Commercial – Owner Occupied | 2,369 | | | 2,369 | | | 5 | |
Commercial – Non-owner Occupied | 5,577 | | | 5,577 | | | 218 | |
Residential – 1 to 4 Family | 993 | | | 1,127 | | | 60 | |
Residential – Multifamily | — | | | — | | | — | |
Consumer | — | | | — | | | — | |
| $ | 10,302 | | | $ | 15,161 | | | $ | 591 | |
The following table presents the collateral-dependent loans by loan portfolio class, the average recorded investmentsegment and interest income recognized on impaired loans for the three and nine months ended September 30, 2022 and 2021:
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| Three Months Ended September 30, |
| 2022 | | 2021 |
| Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
| (Dollars in thousands) |
Commercial and Industrial | $ | 79 | | | $ | — | | | $ | 48 | | | $ | — | |
Construction | 1,139 | | | — | | | 1,290 | | | — | |
Real Estate Mortgage: | | | | | | | |
Commercial – Owner Occupied | 1,770 | | | 4 | | | 2,446 | | | 3 | |
Commercial – Non-owner Occupied | 12,510 | | | 67 | | | 5,651 | | | 123 | |
Residential – 1 to 4 Family | 455 | | | 6 | | | 1,332 | | | 8 | |
Residential – Multifamily | — | | | — | | | — | | | — | |
Consumer | 70 | | | — | | | 178 | | | 2 | |
Total | $ | 16,023 | | | $ | 77 | | | $ | 10,945 | | | $ | 136 | |
collateral type at March 31, 2023:
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| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
| (Dollars in thousands) |
Commercial and Industrial | $ | 143 | | | $ | — | | | $ | 51 | | | $ | — | |
Construction | 1,139 | | | — | | | 1,365 | | | — | |
Real Estate Mortgage: | | | | | | | |
Commercial – Owner Occupied | 2,069 | | | 29 | | | 2,449 | | | 6 | |
Commercial – Non-owner Occupied | 8,991 | | | 580 | | | 5,673 | | | 135 | |
Residential – 1 to 4 Family | 573 | | | 14 | | | 1,496 | | | 26 | |
Residential – Multifamily | — | | | — | | | — | | | — | |
Consumer | 35 | | | 1 | | | 178 | | | 4 | |
Total | $ | 12,950 | | | $ | 624 | | | $ | 11,212 | | | $ | 171 | |
Troubled debt restructuring (TDRs)
We reported performing TDR loans (not reported as non-accrual loans) of $5.5 million and $6.0 million, respectively, at September 30, 2022 and December 31, 2021. Nonperforming TDR loans were zero at September 30, 2022 and December 31, 2021, respectively. There were no new loans modified as a TDR and no additional commitments to lend additional funds to debtors whose loans have been modified in TDRs for the three and nine months ended September 30, 2022 and the year ended December 31, 2021, respectively.
A TDR is a loan the terms of which have been restructured in a manner that grants a concession to a borrower experiencing financial difficulty. TDRs result from our loss mitigation activities that include rate reductions, extension of maturity, or a combination of both, which are intended to minimize economic loss and to avoid foreclosure or repossession of collateral. TDRs are classified as impaired loans and are included in the impaired loan disclosures. TDRs are also evaluated to determine whether they should be placed on non-accrual status. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is repaid in full, foreclosed, sold or it meets the criteria to be removed from TDR status.
At the time a loan is modified in a TDR, we consider the following factors to determine whether the loan should accrue interest:
•Whether there is a period of current payment history under the current terms, typically 6 months;
•Whether the loan is current at the time of restructuring; and
•Whether we expect the loan to continue to perform under the restructured terms with a debt coverage ratio that complies with the Bank’s credit underwriting policy of 1.25 times debt service.
TDRs are generally included in nonaccrual loans and may return to performing status after a minimum of six consecutive monthly payments under restructured terms and also meeting other performance indicators. We review the financial performance of the borrower over the past year to be reasonably assured of repayment and performance according to the modified terms. This review consists of an analysis of the borrower’s historical results; the borrower’s projected results over the next four quarters; and current financial information of the borrower and any guarantors. The projected repayment source needs to be reliable, verifiable, quantifiable and sustainable. At the time of restructuring, the amount of the loan principal for which we are not reasonably assured of repayment is charged-off, but not forgiven.
All TDRs are also reviewed quarterly to determine the amount of any impairment. The nature and extent of impairment of TDRs, including those that have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses. For TDR loans, we had specific reserves of $149,000 and $254,000 in the allowance at September 30, 2022 and December 31, 2021, respectively. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and result in potential incremental losses. These potential incremental losses have been factored into our overall allowance for loan losses estimate. | | | | | | | | | | | | | | | | | | | | |
(amounts in thousands) | | Real Estate | | Business Assets | | Other |
Commercial and Industrial | | $ | 198 | | | $ | — | | | $ | — | |
Construction | | 1,091 | | | — | | | — | |
Commercial - Owner Occupied | | 400 | | | — | | | — | |
Commercial - Non-owner Occupied | | 14,380 | | | — | | | — | |
Residential - 1 to 4 Family | | — | | | — | | | — | |
Residential - 1 to 4 Family Investment | | — | | | — | | | — | |
Residential - Multifamily | | — | | | — | | | — | |
Consumer | | 70 | | | — | | | — | |
Total | | $ | 16,139 | | | $ | — | | | $ | — | |
Credit Quality Indicators: As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends related to the risk grades of loans, the level of classified loans, net charge-offs, nonperforming loans (see details above) and the general economic conditions in the region.
The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 7. Grades 1 through 4 are considered “Pass”. A description of the general characteristics of the seven risk grades is as follows:
1.Good: Borrower exhibits the strongest overall financial condition and represents the most creditworthy profile.
2.Satisfactory (A): Borrower reflects a well-balanced financial condition, demonstrates a high level of creditworthiness and typically will have a strong banking relationship with the Bank.
3.Satisfactory (B): Borrower exhibits a balanced financial condition and does not expose the Bank to more than a normal or average overall amount of risk. Loans are considered fully collectable.
4.Watch List: Borrower reflects a fair financial condition, but there exists an overall greater than average risk. Risk is deemed acceptable by virtue of increased monitoring and control over borrowings. Probability of timely repayment is present.
5.Other Assets Especially Mentioned (OAEM): Financial condition is such that assets in this category have a potential weakness or pose unwarranted financial risk to the Bank even though the asset value is not currently impaired. The asset does not currently warrant adverse classification but if not corrected could weaken and could create future increased risk exposure. Includes loans that require an increased degree of monitoring or servicing as a result of internal or external changes.
6.Substandard: This classification represents more severe cases of #5 (OAEM) characteristics that require increased monitoring. Assets are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral. Asset has a well-defined weakness or weaknesses that impairs the ability to repay debt and jeopardizes the timely liquidation or realization of the collateral at the asset’s net book value.
7.Doubtful: Assets which have all the weaknesses inherent in those assets classified #6 (Substandard) but the risks are more severe relative to financial deterioration in capital and/or asset value; accounting/evaluation techniques may be questionable and the overall possibility for collection in full is highly improbable. Borrowers in this category require constant monitoring, are considered work-out loans and present the potential for future loss to the Bank.
The following tables provide an analysis of loans by portfolio segment based on the credit quality indicators used to determine the allowance for credit losses, as of March 31, 2023 under the current expected credit loss model.
| | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans at Amortized Cost Basis | |
As of March 31, 2023 | 2023 | 2022 | 2021 | 2020 | | Prior | Total |
Commercial and Industrial | | | | | | | | |
Pass | $ | 723 | | $ | 2,147 | | $ | 190 | | $ | 3,538 | | | $ | 9,027 | | $ | 18,323 | | $ | 33,948 | |
OAEM | — | | — | | — | | — | | | — | | — | | — | |
Substandard | — | | — | | — | | — | | | 190 | | — | | 190 | |
Doubtful | — | | — | | — | | — | | | — | | — | | — | |
| $ | 723 | | $ | 2,147 | | $ | 190 | | $ | 3,538 | | | $ | 9,217 | | $ | 18,323 | | $ | 34,138 | |
Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | |
| | | | | | | | |
Construction | | | | | | | | |
Pass | $ | — | | $ | 5,693 | | $ | 4,500 | | $ | 194 | | | $ | — | | $ | 157,897 | | $ | 168,284 | |
OAEM | — | | — | | — | | — | | | — | | — | | — | |
Substandard | — | | — | | — | | — | | | — | | 1,091 | | 1,091 | |
Doubtful | — | | — | | — | | — | | | — | | — | | — | |
| $ | — | | $ | 5,693 | | $ | 4,500 | | $ | 194 | | | $ | — | | $ | 158,988 | | $ | 169,375 | |
Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commercial – Owner Occupied | | | | | | | | |
Pass | $ | 14,822 | | $ | 32,507 | | $ | 13,407 | | $ | 7,504 | | | $ | 61,420 | | $ | 11,023 | | $ | 140,683 | |
OAEM | — | | — | | — | | — | | | — | | — | | — | |
Substandard | — | | — | | — | | — | | | 400 | | — | | 400 | |
Doubtful | — | | — | | — | | — | | | — | | — | | — | |
| $ | 14,822 | | $ | 32,507 | | $ | 13,407 | | $ | 7,504 | | | $ | 61,820 | | $ | 11,023 | | $ | 141,083 | |
Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | |
| | | | | | | | |
Commercial – Non-owner Occupied | | | | | | | | |
Pass | $ | 2,540 | | $ | 101,039 | | $ | 39,364 | | $ | 34,950 | | | $ | 186,456 | | $ | 452 | | $ | 364,801 | |
OAEM | — | | — | | — | | — | | | — | | — | | — | |
Substandard | — | | — | | — | | — | | | 14,339 | | — | | 14,339 | |
Doubtful | — | | — | | — | | — | | | — | | — | | — | |
| $ | 2,540 | | $ | 101,039 | | $ | 39,364 | | $ | 34,950 | | | $ | 200,795 | | $ | 452 | | $ | 379,140 | |
Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | |
| | | | | | | | |
Residential – 1 to 4 Family | | | | | | | | |
Performing | $ | 14,340 | | $ | 122,576 | | $ | 65,675 | | $ | 34,717 | | | $ | 200,096 | | $ | 4,706 | | $ | 442,110 | |
Nonperforming | — | | — | | — | | — | | | — | | — | | — | |
| $ | 14,340 | | $ | 122,576 | | $ | 65,675 | | $ | 34,717 | | | $ | 200,096 | | $ | 4,706 | | $ | 442,110 | |
Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | |
| | | | | | | | |
Residential – 1 to 4 Family Investment | | | | | | | | |
Performing | $ | 19,217 | | $ | 146,553 | | $ | 124,391 | | $ | 54,042 | | | $ | 146,576 | | $ | — | | $ | 490,779 | |
Nonperforming | — | | — | | — | | — | | | — | | — | | — | |
| $ | 19,217 | | $ | 146,553 | | $ | 124,391 | | $ | 54,042 | | | $ | 146,576 | | $ | — | | $ | 490,779 | |
Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | |
| | | | | | | | |
Residential – Multifamily | | | | | | | | |
Pass | $ | 500 | | $ | 5,312 | | $ | 26,956 | | $ | 14,451 | | | $ | 52,367 | | $ | — | | $ | 99,586 | |
OAEM | — | | — | | — | | — | | | — | | — | | $ | — | |
Substandard | — | | — | | — | | — | | | — | | — | | $ | — | |
Doubtful | — | | — | | — | | — | | | — | | — | | — | |
| $ | 500 | | $ | 5,312 | | $ | 26,956 | | $ | 14,451 | | | $ | 52,367 | | $ | — | | $ | 99,586 | |
Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | |
| | | | | | | | |
Consumer | | | | | | | | |
Performing | $ | 11 | | $ | — | | $ | — | | $ | — | | | $ | 6,385 | | $ | 18 | | $ | 6,414 | |
Nonperforming | — | | — | | — | | — | | | 71 | | — | | 71 | |
| $ | 11 | | $ | — | | $ | — | | $ | — | | | $ | 6,456 | | $ | 18 | | $ | 6,485 | |
Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | |
| | | | | | | | |
An analysis of the credit risk profile by internally assigned grades under the incurred loss model as of September 30, 2022 and December 31, 20212022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At September 30, 2022 | Pass | | OAEM | | Substandard | | Doubtful | | Total |
| (Dollars in thousands) |
Commercial and Industrial | $ | 29,407 | | | $ | — | | | $ | — | | | $ | — | | | $ | 29,407 | |
Construction | 192,972 | | | — | | | 1,139 | | | — | | | 194,111 | |
Real Estate Mortgage: | | | | | | | | | |
Commercial – Owner Occupied | 126,089 | | | 3,029 | | | 988 | | | — | | | 130,106 | |
Commercial – Non-owner Occupied | 332,990 | | | — | | | 14,553 | | | — | | | 347,543 | |
Residential – 1 to 4 Family | 892,825 | | | — | | | 163 | | | — | | | 892,988 | |
Residential – Multifamily | 78,162 | | | — | | | — | | | — | | | 78,162 | |
Consumer | 6,970 | | | — | | | 70 | | | — | | | 7,040 | |
Total | $ | 1,659,415 | | | $ | 3,029 | | | $ | 16,913 | | | $ | — | | | $ | 1,679,357 | |
| At December 31, 2021 | Pass | | OAEM | | Substandard | | Doubtful | | Total | |
At December 31, 2022 | | At December 31, 2022 | Pass | | OAEM | | Substandard | | Doubtful | | Total |
| | (Dollars in thousands) | | (Dollars in thousands) |
Commercial and Industrial | Commercial and Industrial | $ | 56,927 | | | $ | — | | | $ | 224 | | | $ | — | | | $ | 57,151 | | Commercial and Industrial | $ | 32,383 | | | $ | — | | | $ | — | | | $ | — | | | $ | 32,383 | |
Construction | Construction | 152,938 | | | — | | | 1,139 | | | — | | | 154,077 | | Construction | 191,266 | | | — | | | 1,091 | | | — | | | 192,357 | |
Real Estate Mortgage: | Real Estate Mortgage: | | | | | | | | | | Real Estate Mortgage: | | | | | | | | | |
Commercial – Owner Occupied | Commercial – Owner Occupied | 118,473 | | | 3,029 | | | 2,170 | | | — | | | 123,672 | | Commercial – Owner Occupied | 122,523 | | | 3,027 | | | 400 | | | — | | | 125,950 | |
Commercial – Non-owner Occupied | Commercial – Non-owner Occupied | 291,864 | | | 14,380 | | | 242 | | | — | | | 306,486 | | Commercial – Non-owner Occupied | 362,899 | | | — | | | 14,553 | | | — | | | 377,452 | |
Residential – 1 to 4 Family | Residential – 1 to 4 Family | 749,904 | | | — | | | 621 | | | — | | | 750,525 | | Residential – 1 to 4 Family | 444,658 | | | — | | | 162 | | | — | | | 444,820 | |
Residential – 1 to 4 Family Investment | | Residential – 1 to 4 Family Investment | 476,210 | | | — | | | — | | | — | | | 476,210 | |
Residential – Multifamily | Residential – Multifamily | 84,964 | | | — | | | — | | | — | | | 84,964 | | Residential – Multifamily | 95,556 | | | — | | | — | | | — | | | 95,556 | |
Consumer | Consumer | 7,972 | | | — | | | — | | | — | | | 7,972 | | Consumer | 6,661 | | | — | | | 70 | | | — | | | 6,731 | |
Total | Total | $ | 1,463,042 | | | $ | 17,409 | | | $ | 4,396 | | | $ | — | | | $ | 1,484,847 | | Total | $ | 1,732,156 | | | $ | 3,027 | | | $ | 16,276 | | | $ | — | | | $ | 1,751,459 | |
There were no loans modified to borrowers with financial difficulty during the quarter ended March 31, 2023.
NOTE 5. EARNINGS PER SHARE (“EPS”)
The following tables set forth the calculation of basic and diluted EPS for the three and nine-monththree-month periods ended September 30, 2022March 31, 2023 and 2021.2022.
| | | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | |
| | (Dollars in thousands except share and per share data) | | | (Dollars in thousands except share and per share data) | |
Basic earnings per common share | Basic earnings per common share | | | Basic earnings per common share | | |
Net income available to the Company | Net income available to the Company | $ | 10,540 | | | $ | 10,501 | | | $ | 31,369 | | | $ | 30,687 | | | Net income available to the Company | $ | 11,130 | | | $ | 10,091 | | |
Less: Dividend on series B preferred stock | Less: Dividend on series B preferred stock | (7) | | | (7) | | | (20) | | | (21) | | | Less: Dividend on series B preferred stock | (7) | | | (7) | | |
Net income available to common shareholders | Net income available to common shareholders | 10,533 | | | 10,494 | | | 31,349 | | | 30,666 | | | Net income available to common shareholders | 11,123 | | | 10,084 | | |
Basic weighted-average common shares outstanding | Basic weighted-average common shares outstanding | 11,919,472 | | | 11,893,323 | | | 11,913,085 | | | 11,885,709 | | | Basic weighted-average common shares outstanding | 11,944,163 | | | 11,905,330 | | |
Basic earnings per common share | Basic earnings per common share | $ | 0.88 | | | $ | 0.88 | | | $ | 2.63 | | | $ | 2.58 | | | Basic earnings per common share | $ | 0.93 | | | $ | 0.85 | | |
Diluted earnings per common share | Diluted earnings per common share | | | | | | | | | Diluted earnings per common share | | | | |
Net income available to common shares | Net income available to common shares | $ | 10,533 | | | $ | 10,494 | | | $ | 31,349 | | | $ | 30,666 | | | Net income available to common shares | $ | 11,123 | | | $ | 10,084 | | |
Add: Dividend on series B preferred stock | Add: Dividend on series B preferred stock | 7 | | | 7 | | | 20 | | | 21 | | | Add: Dividend on series B preferred stock | 7 | | | 7 | | |
Net income available to diluted common shares | Net income available to diluted common shares | 10,540 | | | 10,501 | | | 31,369 | | | 30,687 | | | Net income available to diluted common shares | 11,130 | | | 10,091 | | |
Basic weighted-average common shares outstanding | Basic weighted-average common shares outstanding | 11,919,472 | | | 11,893,323 | | | 11,913,085 | | | 11,885,709 | | | Basic weighted-average common shares outstanding | 11,944,163 | | | 11,905,330 | | |
Dilutive potential common shares | Dilutive potential common shares | 250,672 | | | 232,305 | | | 265,487 | | | 229,680 | | | Dilutive potential common shares | 216,630 | | | 274,990 | | |
Diluted weighted-average common shares outstanding | Diluted weighted-average common shares outstanding | 12,170,144 | | | 12,125,628 | | | 12,178,572 | | | 12,115,389 | | | Diluted weighted-average common shares outstanding | 12,160,793 | | | 12,180,320 | | |
Diluted earnings per common share | Diluted earnings per common share | $ | 0.87 | | | $ | 0.87 | | | $ | 2.58 | | | $ | 2.53 | | | Diluted earnings per common share | $ | 0.92 | | | $ | 0.83 | | |
|
NOTE 6. FAIR VALUE
Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures (Topic 820) of FASB Accounting Standards Codification, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
Fair value is a market-based measurement, not an entity-specific measurement. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its assets and liabilities carried at fair value in three levels as follows:
Level 1 Input:
1)Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 Inputs:
1)Quoted prices for similar assets or liabilities in active markets.
2)Quoted prices for identical or similar assets or liabilities in markets that are not active.
3)Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (e.g., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”
Level 3 Inputs:
1)Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.
2)These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Fair Value on a Recurring Basis:
The following is a description of the Company’s valuation methodologies for assets carried at fair value on a recurring basis. These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes that its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting measurement date.
Investments in Available for Sale Securities:
Where quoted prices are available in an active market, securities or other assets are classified in Level 1 of the valuation hierarchy. If quoted market prices are not available for the specific security or available for sale loans, then fair values are provided by independent third-party valuation services. These valuation services estimate fair values using pricing models and other accepted valuation methodologies, such as quotes for similar securities and observable yield curves and spreads. As part of the Company’s overall valuation process, management evaluates these third-party methodologies to ensure that they are representative of exit prices in the Company’s principal markets. For loans held for sale, the fair value represents the value of the guaranteed portion of the SBA loans pending settlement. There were no loans held for sale at September 30, 2022 and December 31, 2021. Securities in Level 2 include mortgage-backed securities, corporate debt obligations, and collateralized mortgage-backed securities.
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial Assets | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (Dollars in thousands) |
Available for Sale Securities | | | | | | | | |
As of September 30, 2022 | | | | | | | | |
Corporate debt obligations | | $ | — | | | $ | 500 | | | $ | — | | | $ | 500 | |
Residential mortgage-backed securities | | — | | | 9,289 | | | — | | | 9,289 | |
Collateralized mortgage-backed securities | | — | | | 1 | | | — | | | 1 | |
| | | | | | | | |
Total | | $ | — | | | $ | 9,790 | | | $ | — | | | $ | 9,790 | |
As of December 31, 2021 | | | | | | | | |
Corporate debt obligations | | $ | — | | | $ | 500 | | | $ | — | | | $ | 500 | |
Residential mortgage-backed securities | | — | | | 12,843 | | | — | | | 12,843 | |
Collateralized mortgage-backed securities | | — | | | 8 | | | — | | | 8 | |
| | | | | | | | |
Total | | $ | — | | | $ | 13,351 | | | $ | — | | | $ | 13,351 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial Assets | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (Dollars in thousands) |
Available for Sale Securities | | | | | | | | |
As of March 31, 2023 | | | | | | | | |
Corporate debt obligations | | $ | — | | | $ | 500 | | | $ | — | | | $ | 500 | |
Residential mortgage-backed securities | | — | | | 8,477 | | | — | | | 8,477 | |
| | | | | | | | |
| | | | | | | | |
Total | | $ | — | | | $ | 8,977 | | | $ | — | | | $ | 8,977 | |
As of December 31, 2022 | | | | | | | | |
Corporate debt obligations | | $ | — | | | $ | 500 | | | $ | — | | | $ | 500 | |
Residential mortgage-backed securities | | — | | | 8,866 | | | — | | | 8,866 | |
| | | | | | | | |
| | | | | | | | |
Total | | $ | — | | | $ | 9,366 | | | $ | — | | | $ | 9,366 | |
For the ninethree months ended September 30, 2022,March 31, 2023, there were no transfers between the levels within the fair value hierarchy. There were no level 3 assets or liabilities held during the three and nine months ended September 30, 2022March 31, 2023 and 2021.2022.
Fair Value on a Non-recurring Basis:
Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial Assets | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (Dollars in thousands) |
As of September 30, 2022 | | | | | | | | |
Collateral-dependent impaired loans | | $ | — | | | $ | — | | | $ | 1,139 | | | $ | 1,139 | |
OREO | | — | | | — | | | 1,922 | | | 1,922 | |
As of December 31, 2021 | | | | | | | | |
Collateral-dependent impaired loans | | $ | — | | | $ | — | | | $ | 1,139 | | | $ | 1,139 | |
OREO | | — | | | — | | | 1,654 | | | 1,654 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial Assets | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (Dollars in thousands) |
As of March 31, 2023 | | | | | | | | |
Collateral-dependent loans | | $ | — | | | $ | — | | | $ | 1,091 | | | $ | 1,091 | |
OREO | | — | | | — | | | 1,673 | | | 1,673 | |
As of December 31, 2022 | | | | | | | | |
Collateral-dependent loans | | $ | — | | | $ | — | | | $ | 1,091 | | | $ | 1,091 | |
OREO | | — | | | — | | | 1,550 | | | 1,550 | |
All collateral-dependent impaired loans have an independent third-party full appraisal to determine the NRV based on the fair value of the underlying collateral, less cost to sell (a range of 5% to 10%) 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.
OREO consists of real estate properties that are recorded at fair value based upon current appraised value, or agreements of sale, less estimated disposition costs using level 3 inputs. Properties are reappraised annually.
Fair Value of Financial Instruments
The Company discloses estimated fair values for its significant financial instruments in accordance with FASB ASC (Topic 825), “Disclosures about Fair Value of Financial Instruments”. The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above.
For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include cash and cash equivalents, accrued interest receivable, bank owned life insurance, restricted stock, demand and other non-maturity deposits and accrued interest payable, and they are considered to be level 1 measurements.
The following table summarizes the carrying amounts and fair values for financial instruments that are not carried at fair value at September 30, 2022March 31, 2023 and December 31, 2021:2022:
| September 30, 2022 | Carrying Amount | | Fair Value | |
| Total | | Level 1 | | Level 2 | | Level 3 | |
March 31, 2023 | | March 31, 2023 | Carrying Amount | | Fair Value |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| | (Dollars in thousands) | | (Dollars in thousands) |
Financial Assets: | Financial Assets: | | Financial Assets: | |
| Investment securities HTM | Investment securities HTM | $ | 9,575 | | | $ | 7,720 | | | $ | — | | | $ | 7,720 | | | $ | — | | Investment securities HTM | $ | 9,359 | | | $ | 7,966 | | | $ | — | | | $ | 7,966 | | | $ | — | |
| Loans, net | Loans, net | 1,648,368 | | | 1,583,190 | | | — | | | 1,558,076 | | | 25,114 | | Loans, net | 1,731,189 | | | 1,674,609 | | | — | | | 1,657,686 | | | 16,923 | |
| | Financial Liabilities: | Financial Liabilities: | | | | | | | | | | Financial Liabilities: | | | | | | | | | |
| Time deposits | Time deposits | $ | 516,695 | | | $ | 520,306 | | | $ | — | | | $ | 520,306 | | | $ | — | | Time deposits | $ | 618,152 | | | $ | 626,111 | | | $ | — | | | $ | 626,111 | | | $ | — | |
Borrowings | Borrowings | $ | 116,024 | | | $ | 115,222 | | | $ | — | | | $ | 115,222 | | | $ | — | | Borrowings | $ | 208,119 | | | $ | 210,354 | | | $ | — | | | $ | 210,354 | | | $ | — | |
|
| December 31, 2021 | Carrying Amount | | Fair Value | |
| Total | | Level 1 | | Level 2 | | Level 3 | |
December 31, 2022 | | December 31, 2022 | Carrying Amount | | Fair Value |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| | (Dollars in thousands) | | (Dollars in thousands) |
Financial Assets: | Financial Assets: | | Financial Assets: | |
| Investment securities HTM | Investment securities HTM | 9,918 | | | 10,025 | | | — | | | 10,025 | | | — | | Investment securities HTM | $ | 9,378 | | | $ | 7,805 | | | $ | — | | | $ | 7,805 | | | $ | — | |
| Loans, net | Loans, net | 1,455,002 | | | 1,440,398 | | | — | | | 1,430,686 | | | 9,712 | | Loans, net | 1,719,614 | | | 1,661,974 | | | — | | | 1,641,444 | | | 20,530 | |
| | Financial Liabilities: | Financial Liabilities: | | | | | | | | Financial Liabilities: | | | | | | | |
| Time deposits | Time deposits | $ | 593,746 | | | $ | 597,791 | | | $ | — | | | $ | 597,791 | | | $ | — | | Time deposits | $ | 603,135 | | | $ | 609,097 | | | $ | — | | | $ | 609,097 | | | $ | — | |
Borrowings | Borrowings | $ | 120,882 | | | $ | 117,636 | | | $ | — | | | $ | 117,636 | | | $ | — | | Borrowings | 126,071 | | | 127,254 | | | — | | | 127,254 | | | — | |
|
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of the Company’s involvement in these particular classes of financial instruments. The Company’s exposure to the maximum possible credit risk in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable; inventory; property, plant and equipment and income-producing commercial properties. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments to fund fixed-rate loans were immaterial at September 30, 2022.March 31, 2023. Variable-rate commitments are generally issued for less than one year and carry market rates of interest. Such instruments are not likely to be affected by annual rate caps triggered by rising interest rates. Management believes that off-balance sheet risk is not material to the results of operations or financial condition. As of September 30, 2022March 31, 2023 and December 31, 2021,2022, unused commitments to extend credit amounted to approximately $176.5$133.9 million and $117.7$159.0 million, respectively. At March 31, 2023, the allowance for credit losses on off-balance sheet credit exposures was $760.0 thousand.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities
to customers. As of September 30, 2022March 31, 2023 and December 31, 2021,2022, standby letters of credit with customers were $1.5 million and $1.5 million, respectively.
On SeptemberDecember 30, 2022, the Bank entered into an agreement with the FHLBNY for a Municipal Letter of Credit ("MLOC") of $50.0 million. The MLOC is used to pledge against public deposits and expires on December 30, 2022.April 4, 2023. There were no outstanding borrowings on the letter of credit as of September 30, 2022.March 31, 2023.
The Company also has entered into an employment contract with the President of the Company, which provides for continued payment of certain employment salary and benefits prior to the expiration date of the agreement and in the event of a change in control, as defined. The Company has also entered in Change-in-Control Severance Agreements with certain officers which provide for the payment of severance in certain circumstances following a change in control.
In 2021, cannabis in the State of New Jersey became legal for recreational use. An amendment legalizing cannabis became part of the New Jersey State Constitution, and enabling legislation and related bills were signed into law in 2021. The new law legalized and regulated cannabis use and possession for adults 21 years and older. The new law also clarifies marijuana and cannabis use and possession penalties for individuals younger than 21 years old. Retail sales of cannabis began in New Jersey in April 2022. We provide banking services to customers that are licensed by various States to do business in the cannabis industry as growers, processors and dispensaries and who participate in retail sales of cannabis in New Jersey.dispensaries. Cannabis businesses are legal under the laws ofin these States, and now in New Jersey, although it is not legal underat the federal law.level. The U.S. Department of the Treasury’s
Financial Crimes Enforcement Network (“FinCEN”) published guidelines in 2014 for financial institutions servicing state legal cannabis businesses. A financial institution that provides services to cannabis-related businesses can comply with Bank Secrecy Act (“BSA”) disclosure standards by following the FinCEN guidelines. We maintain stringent written policies and procedures related to the acceptance of such businesses and to the monitoring and maintenance of such business accounts. We conduct a significant due diligence review of the cannabis business before the business is accepted, including confirmation that the business is properly licensed by the applicable state. Throughout the relationship, we continue monitoring the business, including site visits, to ensure that the business continues to meet our stringent requirements, including maintenance of required licenses and periodic financial reviews of the business.
While we believe we are operating in compliance with the FinCEN guidelines, there can be no assurance that federal enforcement guidelines will not change. Federal prosecutors have significant discretion and there can be no assurance that the federal prosecutors will not choose to strictly enforce the federal laws governing cannabis. Any change in the Federal government’s enforcement position, could cause us to immediately cease providing banking services to the cannabis industry.
At September 30, 2022March 31, 2023 and December 31, 2021,2022, deposit balances from cannabis customers were approximately $208.1$123.5 million and $375.2$177.3 million, or 13.6%8.4% and 21.2%11.3% of total deposits, respectively, with twothree customers accounting for 42.7%48.3% and 19.3%36.9% of the total at September 30, 2022March 31, 2023 and December 31, 2021.2022. At September 30, 2022March 31, 2023 and December 31, 2021,2022, there were cannabis-related loans in the amounts of $3.9$18.8 million and $5.4$3.8 million, respectively. We
Armored Car Matter
An armored car company used by the Bank to transport and store cash for the Bank’s cannabis-related customers, has informed the Company that some of the cash stored for the Bank is missing from its vault and is presumed to have been stolen. The amount that the Bank had recorded approximately $108 thousandas being held at the armored car company's facility on the last day that records were provided was $9.5 million. There is not enough information to determine the exact amount of the potential loss, if any, as well as the amount that could be recovered. The Bank is working with relevant state and $336 thousandfederal law enforcement authorities to investigate this matter as well as pursuing judicial avenues of interest income in the nine months ended September 30, 2022 and year ended December 31, 2021, respectively, related to these loans.
Management identified information during the quarter, which indicatedrecovery. The Bank is pursuing various avenues of recovery that it may have, including, among others, possible insurance claims. If it is ultimately determined that a loss contingency event may be reasonably possible, however, an analysis of the situation through the subsequent events date of these financial statements indicated thatis probable and estimable, we will record the loss is neither probable or reasonably estimable. While the potential future liabilities could be material in the particular quarterly or annual periodsappropriate fiscal period. If we are successful in which they are recorded, based on information currently known,making recoveries, we did not believe an accrual was appropriate at this time.
We accrue loss contingencies when it is probable that a loss has been incurred andwill record the amount of the loss can be reasonably estimated. If a range of loss is estimated, and some amount within that range appears to be a better estimate than any other amount within that range, then that amount is accrued. If no amount within the range can be identified as a better estimate than any other amount, we accrue the minimum amountrecoveries in the range.period received, or when the receipt of such recoveries becomes certain.
NOTE 8. REGULATORY MATTERS
The leverage ratios of the Company and the Bank at September 30, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
Regulatory Capital Compliance | | | | | | | |
As of September 30, 2022 | Actual | | For Capital Adequacy Purposes |
(Dollars in thousands except ratios) | Amount | | Ratio | | Amount | | Ratio |
Company: | | | | | | | |
Tier 1 leverage | $ | 271,347 | | | 14.03 | % | | $ | 174,108 | | | 9.00 | % |
Parke Bank: | | | | | | | |
Community Bank Leverage Ratio | $ | 300,171 | | | 15.52 | % | | $ | 174,072 | | | 9.00 | % |
The Company and Bank's regulatory capital as of December 31, 2021, is presented in the following table.
| | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2021 | Actual | | For Capital Adequacy Purposes* |
(Dollars in thousands except ratios) | Amount | | Ratio | | Amount | | Ratio |
Company: | | | | | | | |
Total risk-based capital | $ | 290,965 | | | 22.57 | % | | $ | 103,151 | | | 8.00 | % |
Tier 1 risk-based capital | 245,519 | | | 19.04 | % | | 77,363 | | | 6.00 | % |
Tier 1 leverage | 245,519 | | | 11.49 | % | | 85,494 | | | 4.00 | % |
Tier 1 common equity | 231,671 | | | 17.97 | % | | 58,023 | | | 4.50 | % |
Parke Bank: | | | | | | | |
Tier 1 leverage | 273,884 | | | 12.82 | % | | 181,640 | | | 8.50 | % |
* Combination of both community bank leverage approach and the regular rule of capital adequacy.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Throughout this report, "Parke Bancorp" and "the Company" refer to Parke Bancorp Inc. and its consolidated subsidiaries. The Company is collectively referred to as "we", "us" or "our". Parke Bank is referred to as the "Bank".
The Company may from time to time make written or oral "forward-looking statements" including statements contained in this Report and in other communications by the Company which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, such as statements of the Company's plans, objectives, expectations, estimates and intentions, involve risks and uncertainties and are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of the COVID-19 pandemic on the United States economy in general and the local economies in which the Company operates; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the potential adverse effects of the Consent Orders and any additional regulatory restrictions that may be imposed by banking regulators; the timely development of, and acceptance of, new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); the effect of any change in federal government enforcement of federal laws affecting the cannabis industry; technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.
Financial institutions can be affected by changing conditions in the real estate and financial markets. The lingering effects of the COVID-19 pandemic, has had,geopolitical instability, including the conflict between Russia and Ukraine, foreign currency exchange volatility, volatility in global capital markets, inflationary pressures, and higher interest rates may continuemeaningfully impact loan production, income levels, and the measurement of certain significant estimates such as the allowance for credit losses. Moreover, in a period of economic contraction, we may experience elevated levels of credit losses, reduced interest income, impairment of financial assets, diminished access to capital markets and other funding sources, and reduced demand for our products and services. Volatility in the housing markets, real estate values and unemployment levels results in significant write-downs of asset values by financial institutions. Our lending relationships are primarily with small to mid-sized businesses and individual consumers residing in and around southern New Jersey and Philadelphia, Pennsylvania. We focus our lending efforts primarily in three lending areas: residential mortgage loans, commercial mortgage loans, and construction loans. As a result of this geographic concentration, a significant broad-based deterioration in economic conditions in these areas could have ana material adverse impact on the Companyquality of our loan portfolio, results of operations and future growth potential.
An unexpected COVID-19 pandemic resurgence due to new variants could cause us to experience higher credit losses in our lending portfolio, additional increases in our allowance for credit losses, impairment of financial assets, diminished access to capital markets and other funding sources, further reduced demand for our products and services, and other negative impacts on our financial position, results of operations.
During 2022, the Federal Reserve took unprecedented action during the year to restrain inflation and improve the stability of the economy by raising the target federal funds rate several times from 25 basis points in the beginning of the year to 75 basis points toward the end of the year and brought the benchmark interest rates up by a collective 4.50 percent. During the first quarter 2023, the Federal Reserve increased the target federal funds rate another 0.25 percent and may further increase the target federal funds rate in 2023 in an attempt to reduce inflation. Any substantial or unexpected change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations. As inflation increases and market interest rates rise, the value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments. In addition, inflation generally increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our non-interest expenses. Furthermore, our customers are also affected by inflation and the communities it serves. Given its ongoingrising costs of goods and dynamic nature, it is difficultservices used in their households and businesses, which could have a negative impact on their ability to predictrepay their loans with us.
Any of these effects, if sustained, may impair our capital and liquidity positions, require us to take capital actions, prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements, or result in downgrades in our credit ratings and the fullreduction or elimination of our common stock dividend in future periods. The extent to which current economic environment has a further impact of the COVID-19 pandemic on our business. The extentbusiness, results of such impactoperations, and financial condition, as well as the regulatory capital
and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including whether the coronavirus can continue to be controlledscope and abated. As the resultduration of the COVID-19 pandemiccurrent economic environment and the related adverse localactions taken by governmental authorities and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy worsens, loan delinquencies, problem assets, and foreclosures may increase, resultingother third parties in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; due to a decline in our stock price or other factors, goodwill may become impaired and be required to be written down; and our cyber security risks are increased as the result of an increase in the number of employees working remotely.
The majority of the assets and liabilities of a financial institution are monetary in nature, and therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an impact on the Company, particularly with respectresponse to the growth of total assetsgeopolitical conflict, and noninterest expenses, which tend to rise during periods of general inflation. Risks also exist due to supply and demand imbalances, employment shortages, the interest rate environment, and geopolitical tensions. It is reasonably foreseeable that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and the fair value of financial instruments that are carried at fair value.inflationary pressure.
The Company cautions that the foregoing list of important factors is not exclusive. The Company also cautions readers not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date on which they are given. The Company is not obligated to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after any such date.
Throughout this report, “Parke Bancorp” and “the Company” refer to Parke Bancorp Inc. and its consolidated subsidiaries. The Company is collectively referred to as “we,” “us” or “our.” Parke Bank is referred to as the “Bank.”
In the
Overview
The following discussion we provideprovides information about our results of operations, financial condition, liquidity and asset quality. We intend that this information facilitatefacilitates your understanding and assessment of significant changes and trends related to our financial condition and results of operations. You should read this section in conjunction with “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Overview
We are a bank holding company and are headquartered in Washington Township, New Jersey. Through the Bank, we provide personal and business financial services to individuals and small to mid-sized businesses primarily in New Jersey and Pennsylvania. The Bank has branches in Galloway Township, Northfield, Washington Township, Collingswood, New Jersey and Philadelphia, Pennsylvania. The vast majority of our revenue and income is currently generated through the Bank.
We manage our Company for the long term. We are focused on the fundamentals of growing customers, loans, deposits and revenue and improving profitability, while investing for the future and managing risk, expenses and capital. We continue to invest in our products, markets and brand, and embrace our commitments to our customers, shareholders, employees and the communities where we do business. Our approach is concentrated on organically growing and deepening client relationships across our businesses that meet our risk/return measures.
We focus on small to mid-sized business and retail customers and offer a range of loan products, deposits services, and other financial products through our retail branches and other channels. The Company's results of operations are dependent primarily on its net interest income, which is the difference between the interest income earned on its interest earning-assets and the interest expense paid on its interest-bearing liabilities. In our operations, we have three major lines of lending: residential real estate mortgage, commercial real estate mortgage, and construction lending. Our interest income is primarily generated from our lending and investment activities. Our deposit products include checking, savings, money market accounts, and certificates of deposit. The majority of our deposit accounts are obtained through our retail banking business, which provides us with low cost funding to grow our lending efforts. The Company also generates income from loan and deposit fees and other non-interest related activities. The Company's non-interest expense primarily consists of employee compensation, administration, and other operating expenses.
At September 30, 2022,March 31, 2023, we had total assets of $1.92$1.96 billion, and total equity of $257.3$273.1 million. Net income available to common shareholders for the three and nine months ended September 30, 2022March 31, 2023 was $10.5 million and $31.3 million, respectively.$11.1 million.
Results of Operations
Three Months Ended September 30, 2022March 31, 2023 Compared to Three Months Ended September 30, 2021March 31, 2022
Net Income: Our net income available to common shareholders for the thirdfirst quarter of 20222023 increased $39.0 thousand,1.0 million, or 0.4%10.3%, to $10.53$11.1 million, compared to $10.49$10.1 million for the same period last year. Earnings per share were $0.88$0.93 per basic common share and $0.87$0.92 per diluted common share for the thirdfirst quarter of 20222023 compared to $0.88$0.85 per basic common share and $0.87$0.83 per diluted common share for the same period last year. The increase in net income available to common shareholders primarily resulted from a $1.8$2.4 million increase in net interest income,reversal of allowance for credit loss, partially offset by a $600.0 thousand increase in provision for loan loss, a $167.0$293.0 thousand decrease in non-interest income and a $864.0 thousand$1.1 million increase in non-interest expense.
Net Interest Income: Our net interest income increased $1.8 million, or 10.4%, to $19.3was flat at $17.1 million for the thirdfirst quarter of 20222023 compared to $17.5$17.1 million for the thirdfirst quarter of 2021.2022. Interest income increased $6.4 million during the three months ended March 31, 2023 as compared to the same period in the prior year. The increase in net interest income was primarily due to an increase of $1.8$5.3 million in interest income, driven by an increase of $643.0 thousand on interest and fees on loans, due to higher loan balances and interest rates, as well as a $1.1$1.0 million increase on interest on deposits with banks. The increase in interest and fees on loansincome was drivenpartially offset by thean increase in outstanding loan balance during the quarter ended September 30, 2022. Theinterest expense of $6.3 million, due to an increase in interest on deposits with banks is due toof $5.7 million and an increase in interest on borrowings of $600.0 thousand. During the three months ended March 31, 2023, interest earned on cash held at the Federal Reserve Bank ("FRB")deposits increased due to an increase in market interest rates. Forrates, while the three months ended September 30, 2022, totalincrease in interest expense decreased $57.0 thousand as compared to the second quarter of 2021, primarilyon borrowings was due to a reductionan increase in outstanding deposit balances, which reducedthe amount of borrowings and an increase in interest expense by $71.0 thousand.rates.
Provision for loancredit losses: For the three months ended September 30, 2022,March 31, 2023, the provision for loancredit losses increased $600.0 thousand,decreased $2.4 million, compared to zero for the three months ended September 30, 2021. TheMarch 31, 2022. On January 1, 2023 we implemented ASU 2016-13 Financial Instruments - Credit Losses. This resulted in an increase to the allowance for credit losses of $1.9 million. For the three months ended March 31, 2023, we recorded a recovery to the allowance for credit losses of $2.4 million, mainly due to the decrease in the provision was primarily due to an increase inconstruction loan balances.portfolio balance. For more information about our provision and allowance for loan and lease losses and our loss experience, see “Financial Condition-Allowance for Loan and Lease Losses” below and Note 4 - Loans And Allowance For LoanCredit Losses on Loans to the unaudited consolidated financial statements.
Non-interest Income: Our non-interest income was $2.0$1.8 million for the three months ended September 30, 2022,March 31, 2023, a decrease of $167.0$293.0 thousand, compared to $2.2$2.1 million for the three months ended September 30, 2021.March 31, 2022. The decrease is primarily attributable to a decrease in service fees on deposit account of $217.0$101.0 thousand, primarily attributedattributable to a decrease in our cannabis banking deposit accounts.accounts, as well as a decrease in loan fees of $97.0 thousand.
Non-interest Expense: Our non-interest expense increased $864.0 thousand$1.1 million to $6.3$6.8 million for the three months ended September 30, 2022,March 31, 2023, from $5.4$5.7 million for the three months ended September 30, 2021.March 31, 2022. The increase is primarily driven by a $538.0$953.0 thousand increase in compensation and benefits, a $456.0 thousand increase in other operating expense, and a $242.0$139.0 thousand increase in OREO expense, partially offset by a $419.0 thousand decrease in professional services.expense. The increase in compensation and benefits was mainly driven by an increase in salaries, an increase in pension cost, and a decrease in deferred origination costs. The increase in OREO costs is due to higher costs to maintain the properties, as well as an increase in salaries. The increase in other operating expense was primarily driven by an increase in the Pennsylvania shares tax, other loanlegal expenses and director fees. The decrease in professional services was attributedrelated to the prior year remediation efforts related to our Bank Secrecy Act (BSA) compliance.OREO properties.
Income Tax: Income tax expense was $3.9$3.4 million on income before taxes of $14.4$14.6 million for the three months ended September 30,March 31, 2023, resulting in an effective tax rate of 23.6%, compared to income tax expense of $3.4 million on income before taxes of $13.5 million for the same period of 2022, resulting in an effective tax rate of 27.0%, compared to income tax expense of $3.7 million on income before taxes of $14.2 million for the same period of 2021, resulting in an effective tax rate of 26.0%25.2%.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Net income: Our net income available to common shareholders for the nine months ended September 30, 2022 increased $683.0 thousand, or 2.2%, to $31.3 million compared to $30.7 million for the nine months ended September 30, 2021. Earnings per share were $2.63 per basic common share and $2.58 per diluted common share for the nine months ended September 30, 2022 compared to $2.58 per basic common share and $2.53 per diluted common share for the same period last year. The increase in net income available to common shareholders primarily resulted from a decrease in total interest expense of $2.1 million, partially offset by an increase in the provision for loan losses of $450.0 thousand, and an increase in non-interest expense of $765.0 thousand.
Net interest income: Our net interest income increased $2.0 million, or 3.9%, to $54.4 million for the nine months ended September 30, 2022, compared to $52.4 million for the same period last year. Interest income for the nine months ended September 30, 2022, decreased $27.0 thousand to $62.48 million, or 0.04%, from $62.51 million for the same period of 2021. The decrease in interest income was primarily due to a decrease in interest and fees on loans of $2.0 million, partially offset by an increase in interest earned on FRB deposits of $1.9 million, attributed to an increase in market interest rates. Interest expense decreased $2.1 million for the year to date September 30, 2022, compared to the same period in 2021, primarily due to the decrease in outstanding deposit balances, resulting from a decrease in time deposits of $150.9 million, which resulted in a decrease of $2.1 million, as well as a decrease of $307.0 thousand on interest on borrowings, due primarily to a decrease in the amount of borrowings outstanding.
Provision for loan losses: The provision for loan losses was $950.0 thousand for the nine months ended September 30, 2022 compared to the provision for loan losses of $500.0 thousand for the nine months ended September 30, 2021. The $450.0 thousand increase in the provision was primarily due to an increase in outstanding loan balances. For more information about our provision and allowance for loan and lease losses and our loss experience, see “Financial Condition-Allowance for Loan and Lease Losses” below and Note 4 - Loans And Allowance For Loan Losses to the unaudited consolidated financial statements.
Non-interest income: Our non-interest income was $6.6 million for the nine months ended September 30, 2022, an increase of $53.0 thousand, or 0.8%, compared to $6.5 million for the same period last year. The increase is primarily attributable to an increase in gain on the sale of OREO assets of $277.0 thousand, an increase in other loan fees of $140.0 thousand, and an increase in other income of $134.0 thousand, partially offset by a decrease in service fees on deposit accounts of $411.0 thousand. Fee income for the nine months ended September 30, 2022 from commercial deposit accounts of depositors who do business in the cannabis-related industry totaled $3.4 million, compared to $3.8 million for the same period last year. Fee income is included in service fees on deposit accounts in the accompanying consolidated statements of income.
Non-interest expense: Our non-interest expense increased $765.0 thousand to $17.7 million for the nine months ended September 30, 2022, from $16.9 million for the nine months ended September 30, 2021. The increase was primarily due to an increase in other operating expense of $931.0 thousand, an increase in compensation and benefits of $604.0 thousand, and an increase in OREO expense of $205.0 thousand, partially offset by a decrease in professional services of $1.1 million. The increase in other operating expense was primarily driven by a $573.0 thousand increase in Pennsylvania shares tax, and a $233.0 thousand increase in other loan expense. The increase in compensation and benefits was primarily due to a $573.0 thousand increase in salaries, and a $309.0 thousand increase in pension cost, partially offset by a $374.0 thousand increase in deferred loan origination expenses. The decrease in professional services was mainly due to the prior year remediation efforts related to our Bank Secrecy Act (BSA) compliance.
Income Tax: Income tax expense was $11.0 million on income before taxes of $42.4 million for the nine months ended September 30, 2022, resulting in an effective tax rate of 25.9%, compared to income tax expense of $10.6 million on income before taxes of $41.5 million for the same period of 2021, resulting in an effective tax rate of 25.5%.
Net Interest Income
Net interest income is the interest earned on investment securities, loans and other interest-earning assets minus the interest paid on deposits, short-term borrowings and long-term debt. The net interest margin is the average yield of net interest income on average earning assets. Net interest income and the net interest margin in any one period can be significantly affected by a variety of factors including the mix and overall size of our earning assets portfolio and the cost of funding those assets.
The following tables presents the average daily balances of assets, liabilities and equity and the respective interest earned or paid on interest-earning assets and interest-bearing liabilities, as well as average annualized rates, for the periods indicated.
| | | For the Three Months Ended September 30, | | For the Three Months Ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| | Average Balance | | Interest Income/ Expense | | Yield/ Cost | | Average Balance | | Interest Income/ Expense | | Yield/ Cost | | Average Balance | | Interest Income/ Expense | | Yield/ Cost | | Average Balance | | Interest Income/ Expense | | Yield/ Cost |
| | (Dollars in thousands) | | (Dollars in thousands) |
Assets | Assets | | | | | | | | | | | | Assets | | | | | | | | | | | |
Loans* | Loans* | $ | 1,619,133 | | | $ | 20,854 | | | 5.11 | % | | $ | 1,489,565 | | | $ | 20,211 | | | 5.38 | % | Loans* | $ | 1,763,219 | | | $ | 24,545 | | | 5.65 | % | | $ | 1,468,889 | | | $ | 19,199 | | | 5.30 | % |
Investment securities** | Investment securities** | 25,887 | | | 194 | | | 2.97 | % | | 24,080 | | | 170 | | | 2.80 | % | Investment securities** | 25,434 | | | 210 | | | 3.35 | % | | 27,623 | | | 189 | | | 2.77 | % |
Interest bearing deposits | Interest bearing deposits | 241,134 | | | 1,290 | | | 2.12 | % | | 522,586 | | | 199 | | | 0.15 | % | Interest bearing deposits | 117,128 | | | 1,269 | | | 4.39 | % | | 534,886 | | | 248 | | | 0.19 | % |
Total interest-earning assets | Total interest-earning assets | 1,886,154 | | | 22,338 | | | 4.70 | % | | 2,036,231 | | | 20,580 | | | 4.01 | % | Total interest-earning assets | 1,905,781 | | | 26,024 | | | 5.54 | % | | 2,031,398 | | | 19,636 | | | 3.92 | % |
Other assets | Other assets | 79,037 | | | | | | | 79,180 | | | | | | Other assets | 80,113 | | | | | | | 77,969 | | | | | |
Allowance for loan losses | (30,658) | | | | | | | (30,077) | | | | | | |
Allowance for credit losses | | Allowance for credit losses | (31,843) | | | | | | | (29,956) | | | | | |
Total assets | Total assets | $ | 1,934,533 | | | | | | | $ | 2,085,334 | | | | | | Total assets | $ | 1,954,051 | | | | | | | $ | 2,079,411 | | | | | |
Liabilities and Shareholders’ Equity | Liabilities and Shareholders’ Equity | | | | | | | | | | | | Liabilities and Shareholders’ Equity | | | | | | | | | | | |
Interest bearing deposits: | Interest bearing deposits: | | | | | | | | | | | | Interest bearing deposits: | | | | | | | | | | | |
Checking | Checking | $ | 88,875 | | | $ | 102 | | | 0.46 | % | | $ | 71,193 | | | $ | 78 | | | 0.43 | % | Checking | $ | 83,278 | | | $ | 130 | | | 0.63 | % | | $ | 98,576 | | | $ | 96 | | | 0.39 | % |
Money markets | Money markets | 349,594 | | | 990 | | | 1.12 | % | | 321,708 | | | 537 | | | 0.66 | % | Money markets | 335,722 | | | 2,758 | | | 3.33 | % | | 351,625 | | | 450 | | | 0.52 | % |
Savings | Savings | 196,528 | | | 187 | | | 0.38 | % | | 153,999 | | | 175 | | | 0.45 | % | Savings | 174,600 | | | 463 | | | 1.08 | % | | 187,943 | | | 163 | | | 0.35 | % |
Time deposits | Time deposits | 486,702 | | | 945 | | | 0.77 | % | | 649,657 | | | 1,525 | | | 0.93 | % | Time deposits | 499,910 | | | 2,931 | | | 2.38 | % | | 562,777 | | | 1,104 | | | 0.80 | % |
Brokered certificates of deposit | Brokered certificates of deposit | 12,614 | | | 60 | | | 1.89 | % | | 30,453 | | | 41 | | | 0.53 | % | Brokered certificates of deposit | 113,372 | | | 1,300 | | | 4.65 | % | | 9,120 | | | 27 | | | 1.20 | % |
Total interest-bearing deposits | Total interest-bearing deposits | 1,134,313 | | | 2,284 | | | 0.80 | % | | 1,227,010 | | | 2,356 | | | 0.76 | % | Total interest-bearing deposits | 1,206,882 | | | 7,582 | | | 2.55 | % | | 1,210,041 | | | 1,840 | | | 0.62 | % |
Borrowings | Borrowings | 120,450 | | | 758 | | | 2.50 | % | | 136,771 | | | 743 | | | 2.16 | % | Borrowings | 143,021 | | | 1,293 | | | 3.67 | % | | 120,899 | | | 696 | | | 2.33 | % |
Total interest-bearing liabilities | Total interest-bearing liabilities | 1,254,763 | | | 3,042 | | | 0.96 | % | | 1,363,781 | | | 3,099 | | | 0.90 | % | Total interest-bearing liabilities | 1,349,903 | | | 8,875 | | | 2.67 | % | | 1,330,940 | | | 2,536 | | | 0.77 | % |
Non-interest bearing deposits | Non-interest bearing deposits | 410,604 | | | | | | | 484,919 | | | | | | Non-interest bearing deposits | 316,365 | | | | | | | 497,733 | | | | | |
Other liabilities | Other liabilities | 14,493 | | | | | | | 13,892 | | | | | | Other liabilities | 16,331 | | | | | | | 12,966 | | | | | |
Total non-interest bearing liabilities | Total non-interest bearing liabilities | 425,097 | | | | | | | 498,811 | | | | | | Total non-interest bearing liabilities | 332,696 | | | | | | | 510,699 | | | | | |
Equity | Equity | 254,673 | | | | | | | 222,742 | | | | | | Equity | 271,452 | | | | | | | 237,772 | | | | | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 1,934,533 | | | | | | | $ | 2,085,334 | | | | | | Total liabilities and shareholders’ equity | $ | 1,954,051 | | | | | | | $ | 2,079,411 | | | | | |
Net interest income | Net interest income | | | $ | 19,296 | | | | | | | $ | 17,481 | | | | Net interest income | | | $ | 17,149 | | | | | | | $ | 17,100 | | | |
Interest rate spread | Interest rate spread | | | | | 3.74 | % | | | | | | 3.11 | % | Interest rate spread | | | | | 2.87 | % | | | | | | 3.15 | % |
Net interest margin | Net interest margin | | | | | 4.06 | % | | | | | | 3.41 | % | Net interest margin | | | | | 3.65 | % | | | | | | 3.41 | % |
*The average balance of loans includes loans on nonaccrual.
** Includes balances of FHLB and ACBB stock.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2022 | | 2021 |
| Average Balance | | Interest Income/ Expense | | Yield/ Cost | | Average Balance | | Interest Income/ Expense | | Yield/ Cost |
| (Dollars in thousands) |
Assets | | | | | | | | | | | |
Loans* | $ | 1,535,264 | | | $ | 59,511 | | | 5.18 | % | | $ | 1,528,020 | | | $ | 61,502 | | | 5.38 | % |
Investment securities** | 26,758 | | | 565 | | | 2.82 | % | | 24,917 | | | 552 | | | 2.96 | % |
Interest bearing deposits | 400,085 | | | 2,404 | | | 0.80 | % | | 502,218 | | | 453 | | | 0.12 | % |
Total interest-earning assets | 1,962,107 | | | 62,480 | | | 4.26 | % | | 2,055,155 | | | 62,507 | | | 4.07 | % |
Other assets | 78,769 | | | | | | | 76,767 | | | | | |
Allowance for loan losses | (30,232) | | | | | | | (30,067) | | | | | |
Total assets | $ | 2,010,644 | | | | | | | $ | 2,101,855 | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | | | |
Interest bearing deposits: | | | | | | | | | | | |
Checking | $ | 94,904 | | | $ | 296 | | | 0.42 | % | | $ | 71,055 | | | $ | 238 | | | 0.45 | % |
Money markets | 354,522 | | | 1,962 | | | 0.74 | % | | 315,762 | | | 1,630 | | | 0.69 | % |
Savings | 195,494 | | | 527 | | | 0.36 | % | | 138,853 | | | 511 | | | 0.49 | % |
Time deposits | 520,103 | | | 2,994 | | | 0.77 | % | | 641,191 | | | 5,078 | | | 1.06 | % |
Brokered certificates of deposit | 10,230 | | | 114 | | | 1.49 | % | | 40,484 | | | 197 | | | 0.65 | % |
Total interest-bearing deposits | 1,175,253 | | | 5,893 | | | 0.67 | % | | 1,207,345 | | | 7,654 | | | 0.85 | % |
Borrowings | 120,763 | | | 2,176 | | | 2.41 | % | | 168,114 | | | 2,482 | | | 1.97 | % |
Total interest-bearing liabilities | 1,296,016 | | | 8,069 | | | 0.83 | % | | 1,375,459 | | | 10,136 | | | 0.99 | % |
Non-interest bearing deposits | 454,749 | | | | | | | 496,367 | | | | | |
Other liabilities | 13,706 | | | | | | | 15,223 | | | | | |
Total non-interest bearing liabilities | 468,455 | | | | | | | 511,590 | | | | | |
Equity | 246,173 | | | | | | | 214,806 | | | | | |
Total liabilities and shareholders’ equity | $ | 2,010,644 | | | | | | | $ | 2,101,855 | | | | | |
Net interest income | | | $ | 54,411 | | | | | | | $ | 52,371 | | | |
Interest rate spread | | | | | 3.43 | % | | | | | | 3.08 | % |
Net interest margin | | | | | 3.71 | % | | | | | | 3.41 | % |
* The average balance of loans inlcudes loans on nonaccrual..
** Includes balances of FHLB and ACBB stock.
Financial Condition
General
At September 30, 2022,March 31, 2023, the Company’s total assets were $1.92$1.96 billion, a decrease of $213.2$20.7 million, or 10.0%1.0%, from December 31, 2021.2022. The decrease in total assets was primarily attributable to a decrease in cash and cash equivalents of $403.2$36.2 million, partially offset by an increase in loans receivable. The decrease in cash and cash equivalents was primarily due to cash withdrawn from deposits, as well as an increase in loans receivable.receivable, partially offset by an increase in borrowings. Loans increased $194.5$11.2 million at September 30, 2022,March 31, 2023, primarily due to increases in loan balances classified as CRE owner occupied and residential 1-4 family, commercial non-owner occupied real estate mortgage loans, and 1-4 familypartially offset by a decrease in the construction loan portfolio, compared to the balances at December 31, 2021.2022.
Total liabilities were $1.67$1.69 billion at September 30, 2022.March 31, 2023. This represented a $238.2$27.7 million, or 12.5%1.6%, decrease, from $1.90$1.72 billion at December 31, 2021.2022. The decrease in total liabilities was primarily due to a decrease in total deposits, which decreased $233.2$112.2 million, or 13.2%7.1%, to $1.54$1.46 billion at September 30, 2022,March 31, 2023, from $1.77$1.58 billion at December 31, 2021.2022. The decrease in deposits was attributedattributable to a decrease in non-interest demand deposits of $160.0$75.4 million and time depositssavings of $77.0$35.9 million, partially offset by an increase in savingstime deposits of $9.8$13.3 million.
Total equity was $257.3$273.1 million and $232.4$266.0 million at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively, an increase of $25.0$7.1 million from December 31, 2021.2022. The increase was primarily due to the retention of earnings, partially offset by the payment of $6.0$2.2 million of cash dividends.
dividends, and $2.1 million adoption of ASC 326.
The following table presents certain key condensed balance sheet data as of September 30, 2022March 31, 2023 and December 31, 20212022:
| | | September 30, 2022 | | December 31, 2021 | | Change | | % Change | | March 31, 2023 | | December 31, 2022 | | Change | | % Change |
| | (Dollars in thousands) | | | | | | (Dollars in thousands) | | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 193,344 | | | $ | 596,553 | | | $ | (403,209) | | | (67.6) | % | Cash and cash equivalents | $ | 145,974 | | | $ | 182,150 | | | $ | (36,176) | | | (19.9) | % |
Investment securities | Investment securities | 19,365 | | | 23,269 | | | (3,904) | | | (16.8) | % | Investment securities | 18,336 | | | 18,744 | | | (408) | | | (2.2) | % |
| Loans, net of unearned income | Loans, net of unearned income | 1,679,357 | | | 1,484,847 | | | 194,510 | | | 13.1 | % | Loans, net of unearned income | 1,762,696 | | | 1,751,459 | | | 11,237 | | | 0.6 | % |
Allowance for loan losses | (30,989) | | | (29,845) | | | (1,144) | | | 3.8 | % | |
Allowance for credit losses | | Allowance for credit losses | (31,507) | | | (31,845) | | | 338 | | | (1.1) | % |
Total assets | Total assets | 1,923,232 | | | 2,136,445 | | | (213,213) | | | (10.0) | % | Total assets | 1,964,245 | | | 1,984,915 | | | (20,670) | | | (1.0) | % |
Total deposits | Total deposits | 1,535,229 | | | 1,768,410 | | | (233,181) | | | (13.2) | % | Total deposits | 1,463,794 | | | 1,575,981 | | | (112,187) | | | (7.1) | % |
FHLBNY borrowings | FHLBNY borrowings | 73,150 | | | 78,150 | | | (5,000) | | | (6.4) | % | FHLBNY borrowings | 165,150 | | | 83,150 | | | 82,000 | | | 98.6 | % |
Subordinated debt | Subordinated debt | 42,874 | | | 42,732 | | | 142 | | | 0.3 | % | Subordinated debt | 42,969 | | | 42,921 | | | 48 | | | 0.1 | % |
| Total liabilities | Total liabilities | 1,665,904 | | | 1,904,084 | | | (238,180) | | | (12.5) | % | Total liabilities | 1,691,139 | | | 1,718,881 | | | (27,742) | | | (1.6) | % |
Total equity | Total equity | 257,328 | | | 232,361 | | | 24,967 | | | 10.7 | % | Total equity | 273,106 | | | 266,034 | | | 7,072 | | | 2.7 | % |
Total liabilities and equity | Total liabilities and equity | 1,923,232 | | | 2,136,445 | | | (213,213) | | | (10.0) | % | Total liabilities and equity | 1,964,245 | | | 1,984,915 | | | (20,670) | | | (1.0) | % |
Cash and cash equivalents
Cash and cash equivalents decreased $403.2$36.2 million to $193.3$146.0 million at September 30, 2022March 31, 2023 from $596.6$182.2 million at December 31, 2021,2022, a decrease of 67.6%19.9%. The decrease was primarily due to cash withdrawn from deposits and the funding of loans.
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Investment securities
Total investment securities decreased to $19.4$18.3 million at September 30, 2022,March 31, 2023, from $23.3$18.7 million at December 31, 2021,2022, a decrease of $3.9 million$408.0 thousand or 16.8%2.2%. The decrease was attributed to normal pay downs of $2.7 million and a decrease$490.0 thousand, partially offset by an increase in the fair market valuation of $1.2 million.$82.0 thousand. For detailed information on the composition and maturity distribution of our investment portfolio, see NOTE 3 - Investment Securities in the notes to the unaudited consolidated financial statements.
Loans
Our lending relationships are primarily with small to mid-sized businesses and individual consumers residing in and around Southern New Jersey and Philadelphia, Pennsylvania. We have also expanded our lending footprint in other areas. We focus our lending efforts primarily in three lending areas: residential mortgage loans, commercial mortgage loans, and construction loans.
We originate residential mortgage loans with adjustable and fixed-rates that are secured by 1- 4 family and multifamily residential properties. These loans are generally underwritten under terms, conditions and documentation acceptable to the secondary mortgage market. A substantial majority of such loans can be pledged for potential borrowings.
We originate commercial real estate loans that are secured by commercial real estate properties that are owner and non-owner occupied real estate properties. These loans are typically larger in dollar size and are primarily secured by office buildings, retail buildings, warehouses and general purpose business space. The commercial mortgage loans generally have maturities of twenty years, but re-price within five years.
The construction loans we originate provide real estate acquisition, development and construction funds to individuals and real estate developers. The loans are secured by the properties under development. The construction loan funds are disbursed periodically at pre-specified stages of completion.
We also originate commercial and industrial loans, which provide liquidity to businesses in the form of lines of credit and may be secured by accounts receivable, inventory, equipment or other assets. In addition, we have a small consumer loan portfolio which provides loans to individual borrowers.
Loans held for sale ("HFS"): Loans held for sale are comprised of SBA loans originated for sale. We had no loans held for sale at September 30, 2022 or at December 31, 2021.
Loans receivable: Loans receivable increased to $1.68$1.76 billion at September 30, 2022March 31, 2023 from $1.48$1.75 billion at December 31, 2021.2022. The increase was primarily due to increases in the CRE owner occupied and the residential - 1 to 4 family commercial - non-owner occupied, and construction portfolio's,portfolios, partially offset by a decrease in commercial and industrial due to the payoff of SBA PPP loans of $24.9 million.construction loan portfolio. Loans receivable, excluding loans held for sale, as of September 30, 2022March 31, 2023 and December 31, 2021,2022, consisted of the following:
| | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| | Amount | | Percentage of Loans to total Loans | | Amount | | Percentage of Loans to total Loans | | Amount | | Percentage of Loans to total Loans | | Amount | | Percentage of Loans to total Loans |
| | (Dollars in thousands) | | (Dollars in thousands) |
Commercial and Industrial | Commercial and Industrial | $ | 29,407 | | | 1.8 | % | | $ | 57,151 | | | 3.8 | % | Commercial and Industrial | $ | 34,138 | | | 1.9 | % | | $ | 32,383 | | | 1.8 | % |
Construction | Construction | 194,111 | | | 11.6 | % | | 154,077 | | | 10.4 | % | Construction | 169,375 | | | 9.6 | % | | 192,357 | | | 11.0 | % |
Real Estate Mortgage: | Real Estate Mortgage: | | Real Estate Mortgage: | |
Commercial – Owner Occupied | Commercial – Owner Occupied | 130,106 | | | 7.7 | % | | 123,672 | | | 8.3 | % | Commercial – Owner Occupied | 141,083 | | | 8.0 | % | | 125,950 | | | 7.2 | % |
Commercial – Non-owner Occupied | Commercial – Non-owner Occupied | 347,543 | | | 20.7 | % | | 306,486 | | | 20.6 | % | Commercial – Non-owner Occupied | 379,140 | | | 21.5 | % | | 377,452 | | | 21.6 | % |
Residential – 1 to 4 Family | Residential – 1 to 4 Family | 892,988 | | | 53.1 | % | | 750,525 | | | 50.7 | % | Residential – 1 to 4 Family | 442,110 | | | 25.2 | % | | 444,820 | | | 25.3 | % |
Residential – 1 to 4 Family Investment | | Residential – 1 to 4 Family Investment | 490,779 | | | 27.8 | % | | 476,210 | | | 27.2 | % |
Residential – Multifamily | Residential – Multifamily | 78,162 | | | 4.7 | % | | 84,964 | | | 5.7 | % | Residential – Multifamily | 99,586 | | | 5.6 | % | | 95,556 | | | 5.5 | % |
Consumer | Consumer | 7,040 | | | 0.4 | % | | 7,972 | | | 0.5 | % | Consumer | 6,485 | | | 0.4 | % | | 6,731 | | | 0.4 | % |
Total Loans | Total Loans | $ | 1,679,357 | | | 100.0 | % | | $ | 1,484,847 | | | 100.0 | % | Total Loans | $ | 1,762,696 | | | 100.0 | % | | $ | 1,751,459 | | | 100.0 | % |
Deposits
At September 30, 2022,March 31, 2023, total deposits decreased to $1.54$1.46 billion from $1.77$1.58 billion at December 31, 2021,2022, a decrease of $233.2$112.2 million, or 13.2%7.1%. The decrease in deposits was primarily due to a decrease in non-interest bearing demand deposits, and a decrease in savings deposits, partially offset by an increase in time deposit accounts. The decrease in non-interest bearing demand deposits was mainly driven by withdrawals from our cannabis related deposits. Thedeposits, which decreased $53.9 million, from $176.6 million at December 31, 2022 to $122.8 million at March 31, 2023, as well as a decrease in business checking of $11.7 million during the same time deposits was mainly driven by maturities of certificates of deposit.period.
| | | September 30, | | December 31, | | March 31, | | December 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| | (Dollars in thousands) | | (Dollars in thousands) |
Noninterest-bearing | Noninterest-bearing | $ | 393,853 | | | $ | 553,810 | | Noninterest-bearing | $ | 277,128 | | | $ | 352,546 | |
Interest-bearing | Interest-bearing | | Interest-bearing | |
Checking | Checking | 90,545 | | | 93,189 | | Checking | 76,983 | | | 83,080 | |
Savings | Savings | 189,023 | | | 179,238 | | Savings | 152,604 | | | 188,541 | |
Money market | Money market | 345,114 | | | 348,427 | | Money market | 338,927 | | | 348,680 | |
Time deposits | Time deposits | 516,694 | | | 593,746 | | Time deposits | 618,152 | | | 603,135 | |
| Total deposits | Total deposits | $ | 1,535,229 | | | $ | 1,768,410 | | Total deposits | $ | 1,463,794 | | | $ | 1,575,982 | |
Estimated uninsured deposits | | Estimated uninsured deposits | $ | 560,630 | | | $ | 622,966 | |
Borrowings
Total borrowings were $116.0$208.1 million at September 30, 2022March 31, 2023 and $120.9$126.1 million at December 31, 2021.2022. The decreaseincrease in borrowings is due to the paydown of a $5.0 millionincrease in Federal Home Loan Bank of New York ("FHLB"FHLBNY") advance.advances.
Equity
Total equity increased to $257.3$273.1 million at September 30, 2022March 31, 2023 from $232.4$266.0 million at December 31, 2021,2022, an increase of $25.0$7.1 million, or 10.7%2.7%, primarily due to the retention of earnings from the period, partially offset by the payment of $6.0$2.2 million of cash dividends.
dividends, and $2.1 million adoption of ASC 326.
Liquidity and Capital Resources
Liquidity is a measure of our ability to generate cash to support asset growth, meet deposit withdrawals, satisfy other contractual obligations, and otherwise operate on an ongoing basis. At September 30, 2022,March 31, 2023, our cash position was $193.3$146.0 million. We invest cash that is in excess of our immediate operating needs primarily in our interest-bearing account at the Federal Reserve.
Our primary source of funding has been deposits. Funds from other operations, financing arrangements, investment securities available-for-sale also provide significant sources of funding. The Company seeks to rely primarily on core deposits from customers to provide stable and cost-effective sources of funding to support loan growth. We focus on customer service which we believe has resulted in a history of customer loyalty. Stability, low cost and customer loyalty comprise key characteristics of core deposits.
We also use brokered deposits as a funding source, which is more volatile than core deposits. The Bank also joined Promontory InterIntraFi Financial Network to secure an additional alternative funding source. PromontoryIntraFi provides the Bank an additional source of external funds through their weekly CDARS® settlement process. The rates are comparable to brokered deposits and can be obtained within a shorter period of time than brokered deposits. While deposit accounts comprise the vast majority of our funding needs, we maintain secured borrowing lines with the FHLBNY. As of September 30, 2022,March 31, 2023, the Company had lines of credit with the FHLBNY of $641.7$732.3 million, of which $73.2$165.2 million was outstanding, and an additional $50.0 million from a letter of credit for securing public funds. The remaining borrowing capacity was $518.6$517.1 million at September 30, 2022.March 31, 2023.
Our investment portfolio primarily consists of mortgage-backed available for sale securities issued by US government agencies and government sponsored entities. These available for sale securities are readily marketable and are available to meet our additional liquidity needs. At September 30, 2022,March 31, 2023, the Company's investment securities portfolio classified as available for sale was $9.8$9.0 million.
We had outstanding loan commitments of $176.5$133.9 million at September 30, 2022.March 31, 2023. Our loan commitments are normally originated with the full amount of collateral. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The funding requirements for such commitments occur on a measured basis over time and would be funded by normal deposit growth.
The following is a discussion of our cash flows for the ninethree months ended September 30, 2022March 31, 2023 and 2021.2022.
Cash provided by operating activities was $34.3$10.5 million in the ninethree months ended September 30, 2022,March 31, 2023, compared to $29.5$8.7 million for the same period in the prior year. The increase in operating cash flow was primarily due to the decreaseincrease in accrued interest receivablepayable and other assets,accrued liabilities and the increase in net income.income, net of the decrease in the provision for credit losses.
Cash used in investing activities was $191.6$14.4 million in the ninethree months ended September 30, 2022,March 31, 2023, compared to cash provided byused in investing activities of $88.3$8.4 million in the same period last year. The decreaseincrease in cash providedused in the investing activities was primarily due to the cash outflow from the increase in loans during the period.period, as well as the purchase of FHLBNY restricted stock.
Cash used in financing activities was $245.9$32.3 million in the ninethree months ended September 30, 2022,March 31, 2023, compared to cash provided byused in financing activities of $47.4$93.0 million in the same period of last year. The current year included $233.2decrease in cash used in financing activities was driven by a net increase in FHLBNY borrowings of $82.0 million, partially offset by $112.2 million of cash outflows from the decrease in deposits.
Capital Adequacy
We utilize a comprehensive process for assessing the Company’s overall capital adequacy. We actively review our capital strategies in light of current and anticipated business risks, future growth opportunities, industry standards, and compliance with regulatory requirements. The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, earnings stability, competitive forces, economic conditions, and strength of management. Our objective is to maintain capital at an amount commensurate with our risk profile and risk tolerance objectives, and to meet both regulatory and market expectations. We primarily manage our capital through the retention of earnings. We also use other means to manage our capital. Total equity increased $25.0$7.1 million at September 30, 2022,March 31, 2023, from December 31, 2021,2022, primarily from the Company’s net income of $31.4
$11.1 million for the period, net of common and preferred stock dividends of $6.0$2.2 million and the adoption of ASC 326 of $2.1 million.
Banks and bank holding companies are subject to various regulatory capital requirements administered by federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and the
Company must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Failure to meet minimum capital requirements can result in regulatory actions.
Under the capital rules issued by the Federal Banking agencies, which became effective in January 2015, the Company and the Bank elected to exclude the effects of certain Accumulated Other Comprehensive Income (“AOCI”) items from its regulatory capital calculation. At September 30, 2022,March 31, 2023, the Bank and the Company were both considered “well capitalized”.
In November 2019, Federal bank regulatory agencies finalized a rule that simplifies capital requirements for community banks by allowing them to optionally adopt a simple leverage ratio to measure capital adequacy, which removes requirements for calculating and reporting risk-based capital ratios for a qualifying community bank that have less than $10 billion in total consolidated assets, limited amounts of off-balance-sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9 percent. The community bank leverage ratio framework was effective on January 1, 2020. The Company has elected to adopt the optional community bank leverage ratio framework in the first quarter of 2020.
In April 2020, the Federal banking regulatory agencies modified the original Community Bank Leverage Ratio (CBLR) framework and provided that, as of the second quarter 2020, a banking organization with a leverage ratio of 8 percent or greater and that meets the other existing qualifying criteria may elect to use the community bank leverage ratio framework. The modified rule also states that the community bank leverage ratio requirement will be greater than 8 percent for the second through fourth quarters of calendar year 2020, greater than 8.5 percent for calendar year 2021, and greater than 9 percent thereafter. The transition rule also maintains a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 100 basis points below the applicable community bank leverage ratio requirement.
The following table presents the tier 1 regulatory capital leverage ratios of the Company and the Bank at September 30, 2022:March 31, 2023:
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| Amount | | Ratio | | Amount | | Ratio |
| (Dollars in thousands except ratios) |
| Company | | Parke Bank |
Tier 1 leverage | $ | 271,347 | | | 14.03 | % | | $ | 300,171 | | | 15.52 | % |
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| Amount | | Ratio | | Amount | | Ratio |
| (Dollars in thousands except ratios) |
| Company | | Parke Bank |
Tier 1 leverage | $ | 286,529 | | | 14.66 | % | | $ | 315,662 | | | 16.15 | % |
Also, in July 2020, we issued $30 million in ten-year, fixed-to-floating rate subordinated notes due 2030 to certain qualified institutional buyers and accredited investors. The Notes have been structured to qualify initially as Tier 2 capital for regulatory capital purposes for our consolidated entity.
Risk Management and Asset Quality
In the normal course of business the Company is exposed to a variety of operational, reputational, legal, regulatory, market, liquidity, and credit risks that could adversely affect our financial performance and financial position. Sound risk management enables us to serve our customers and deliver for our shareholders.
Our asset risk is primarily tied to credit risk. We define credit risk as the risk of loss associated with a borrower or counterparty default. Credit risk exists with many of our assets and exposures including loans, deposit overdrafts, and assets held-for-sale. The discussion below focuses on our loan portfolios, which represent the largest component of assets on our balance sheet for which we have credit risk.
We manage our credit risk by establishing what we believe are sound credit policies for underwriting new loans, while monitoring and reviewing the performance of our existing loan portfolios. We employ various credit risk management and monitoring activities to mitigate risks associated with loans we hold or originate. In making credit decisions, we consider loan concentrations and related credit quality, economic and market conditions, regulatory mandates, and changes in interest rates.
A key to our credit risk management is adherence to a well-controlled underwriting process. When we originate a loan, we assess the borrower’s ability to meet the loan’s terms and conditions based on the risk profile of the borrower, repayment sources, the nature of underlying collateral, and other support given current events, conditions and expectations. We actively monitor and review our loan portfolio throughout a borrower’s credit cycle. A borrower’s ability to repay can be adversely affected by economic and personal financial changes as well as other factors. Likewise, changes in market conditions and other external
factors can affect collateral valuations. We adjust our financial assessments to reflect changes in the financial condition, cash flow, risk profile or outlook of a borrower.
We have established a credit monitoring and tracking system and closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. The system supplements the credit review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit risk, loan delinquencies, TDR,loan modifications made to borrowers experiencing financial difficulty, nonperforming loans and potential problems loans.
The Company also 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.
As we continue to navigate the COVID-19 pandemic, we have enhanced our credit review processes and procedures to identify and highlight high risk industries and individuals for probable credit risks. We have also increased our focus on delinquencies, looking for early warning signs for those customers that are not usually late and possibly adversely affected by the pandemic.
Although credit policies are designed to minimize risk, management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio as well as general and regional economic conditions.
Allowance for Loan and LeaseCredit Losses:
We maintain the allowance for loan and leasecredit losses at levels that we believe to be appropriate to absorb estimated probable credit losses incurred in the portfolios as of the balance sheet date. Refer to Note 4 - Loans and Allowance for Loan and LeaseCredit Losses on Loans in the notes to the unaudited consolidated financial statements for further discussion on management's methodology for estimating the allowance for loancredit losses. At September 30, 2022,March 31, 2023, the allowance for loancredit losses was $31.0$31.5 million, as compared to $29.8$31.8 million at December 31, 2021.2022. The ratio of the allowance for loancredit losses to total loans was 1.85%1.79% and 2.01%1.82% at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The ratio of the allowance for loancredit losses to non-performing assets decreased to 164.5%176.9% at September 30, 2022,March 31, 2023, compared to 500.6%178.6% at December 31, 2021.2022. During the ninethree month periods ended September 30,March 31, 2023 and 2022, and 2021, the Company chargeddid not charge off $66,150 and $427,400, respectively,any loans, and recovered $260,000$5,000 and $68,000,$136,000, respectively. Specific allowances for loan losses have been established in the amount of $149.0$398.0 thousand at September 30, 2022,March 31, 2023, as compared to $591.0$549.0 thousand on impaired loans at December 31, 2021.2022. We have established reserves for all expected credit losses that we believe are both probable and reasonably estimable at September 30, 2022March 31, 2023 and December 31, 2021.2022. There can be no assurance, however, that further additions to the allowance will not be required in future periods.
On January 1, 2023, we implemented ASU 2016-13 Financial Instruments - Credit Losses. This resulted in an increase to the allowance for credit losses on loans of $1.9 million.
The Company estimates the loan credit allowance based on a GAAP incurredusing an expected life of loss model. Accordingly, the Company did not estimate its loan allowance according to the expected credit loss methodology.methodology in accordance with ASU 2016-13 Financial Instruments - Credit Losses. We recorded a loancredit loss provisionrecovery of $600.0 thousand$2.4 million during the three months ended September 30, 2022,March 31, 2023, of which $2.2 million related to the allowance for credit loss on loans, and $200.0 thousand related to the allowance for credit loss on unfunded commitments, compared to zero during the three months ended September 30, 2021. The increase was primarily due to the increase in outstanding loan balances at September 30,March 31, 2022.
Loan Delinquencies and Nonperforming Assets:
We have established credit monitoring and tracking systems and closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency rates may be a key indicator, among other considerations, of credit risk within the loan portfolios.
The measurement of delinquency status is based on the contractual terms of each loan. 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 that are 30 days or more past due in terms of principal and interest payments are considered delinquent. 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.
Delinquent loans totaled $17.0$16.7 million, or 1.0%0.9% of total loans at September 30, 2022,March 31, 2023, an increase of $12.3$0.2 million from December 31, 2021.2022. At September 30, 2022,March 31, 2023, loans 30 to 89 days delinquent totaled $85.0$579.0 thousand, a decreasean increase of $345.0$354.0 thousand from December 31, 2021.2022. The decreaseincrease in loans 30 to 89 days delinquent is mainly driven by two, commercial real estate non-occupiedan increase in residential 1 to 4 family loans that migrated to non-accrualbecame delinquent during the quarter ended September 30, 2022.March 31, 2023. Loans delinquent 90 days or more and not accruing interest totaled $16.9$16.1 million or 1.0%0.9% of total loans at September 30, 2022, an increaseMarch 31, 2023, a decrease of $12.6$0.1 million from $4.3$16.3 million, or 0.3%0.9% of total loans, at December 31, 2021.2022. The two largest nonperforming loan relationships as of September 30, 2022March 31, 2023 were a $10.9 million and a $3.4 million owner occupied commercial real estate loan.
Impaired Loans
Impaired loans include nonperforming loans and TDRs, regardless of nonperforming status. At September 30, 2022 and December 31, 2021, we had $22.5 million and $10.3 million, respectively, of loans deemed impaired. Impaired loans at September 30, 2022 and December 31, 2021 included $5.5 million and $6.0 million, respectively, of TDR loans.
Troubled Debt Restructurings
We reported performing TDR loans (not reported as non-accrual loans) of $5.5 million and $6.0 million, respectively, at September 30, 2022 and December 31, 2021. We had nonperforming TDR loans of zero at September 30, 2022 and December 31, 2021, respectively. There were no new loans modified as a TDR and no additional commitments to lend additional funds to debtors whose loans have been modified as a TDR for the nine months ended September 30, 2022. Under the Interagency Statement issued by Federal banking agencies, financial institutions generally do not need to categorize COVID-19-related modifications as TDRs. As a result, loans that have been restructured for short term periods through our loan deferral program for COVID-19 related hardships and meet certain other criteria specified in the Interagency Statement are not categorized as TDRs.
Other Real Estate Owned (OREO)
OREO at September 30, 2022 was $1.9 million, compared to $1.8 million at September 30, 2021.
Off-Balance Sheet Arrangement and Contractual Obligations
In the ordinary course of business, we engage in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different from the full contract or notional amount of the transaction. Our off-balance sheet arrangements include commitments to extend credit, standby letters of credit and other commitments. These transactions are primarily designed to meet the financial needs of our customers.
We enter into commitments to lend funds to customers, which are usually at a stated interest rate, if funded, and for specific purposes and time periods. When we make commitments, we are exposed to credit risk. However, the maximum credit risk for these commitments will generally be lower than the contractual amount because a significant portion of these commitments are expected to expire without being used by the customer. In addition, we manage the potential risk in commitments to lend by limiting the total amount of commitments, by monitoring maturity structure of these commitments and by applying the same credit standards for these commitments as for all of our credit activities.
For commitments to lend, we generally require collateral or a guarantee. We may require various types of collateral, including accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Collateral requirements for each loan or commitment may vary based on the commitment type and our assessment of a customer’s credit risk according to the specific credit underwriting, including credit terms and structure.
Commitments to extend credit, or net unfunded loan commitments, represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. These commitments generally have fixed expiration dates, may require payment of a fee, and contain termination clauses in the event the customer’s credit quality deteriorates. At September 30, 2022 and December 31, 2021, unused commitments to extend credit amounted to approximately $176.5 million and $117.7 million, respectively. Management believes that off-balance sheet risk is not material to the results of operations or financial condition.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At the September 30, 2022 and December 31, 2021, standby letters of credit with customers were $1.5 million and $1.5 million, respectively.
We have adequate resources to fund all unfunded commitments to the extent required and meet all contractual obligations as they come due. At September 30, 2022, such contractual obligations were primarily comprised of deposits, secured and unsecured borrowings, interest payments, operating leases and commitments to originating loans.
Critical Accounting Policies
The Company’s accounting policies are more fully described in Note 1 of the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022. As disclosed in Note 1, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments.
We maintain the ALLL at levels that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan and lease portfolios as of the balance sheet date. Our determination of the allowancesallowance for credit losses is based on periodic evaluations of the loan and lease portfolios and other relevant factors.factors, broken down into vintage based on year of origination. These critical estimates include significant use of our own historical data and other qualitative, and quantitative data. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change. Our allowance for loan and leasecredit losses is comprised of two components. Thecomponents, a specific allowance covers impairedand a general calculation. A specific allowance is calculated for loans and leases that do not share similar risk characteristics with other financial assets, and include collateral dependent loans. A loan is calculated on an individualconsidered to be collateral dependent when foreclosure of the underlying collateral is probable. Parke has elected to apply the practical expedient to measure expected credit losses of a collateral dependent asset using the fair value of the collateral, less any estimated costs to sell, when foreclosure is not probable but repayment of the loan basis.is expected to be provided substantially through the operation or sale of the collateral, and the borrower is experiencing financial difficulty. The general based component covers loans and leases on which there are incurredexpected credit losses that are not yet individually identifiable. The allowance calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced
by observed changes in loan portfolio performance experience, the financial strength of the borrower, projected industry outlook, and economic conditions.
The process of determining the level of the allowance for loan and leasecredit losses requires a high degree of judgment. To the extent actual outcomes differ from our estimates, additional provision for loan and lease losses may be required that would reduce future earnings.
Fair Value Estimates: ASC 820 - Fair Value Measurements defines fair value as a market-based measurement and is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. We classify fair value measurements of financial instruments based on the three-level fair value hierarchy in the accounting standards. We are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value. The fair values of assets may include using estimates, assumptions, and judgments. Valuations of assets or liabilities using techniques non quoted market price are sensitive to assumptions used for the significant inputs. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Changes in underlying factors, assumptions, or estimates used for estimating fair values could materially impact our future financial condition and results of operations.
The majority of our assets recorded at fair value are our investment securities available for sale. The fair value of our available for sale securities are provided by independent third-party valuation services. We may also have a small amount of SBA loans recorded at fair value, which represents the face value of the guaranteed portion of the SBA loans pending settlement. OREO is recorded at fair value on a non-recurring basis and is based on the values of independent third-party full appraisals, less costs to sell (a range of 5% to 10%). Appraisals are updated every 12 months or sooner if we have identified possible further deterioration in value. Refer to Note 7. Fair Value in the Notes to the unaudited consolidated financial statements for further information. Income Taxes: In the normal course of business, we and our subsidiaries enter into transactions for which the tax treatment is unclear or subject to varying interpretations. We evaluate and assess the relative risks and merits of the tax treatment of transactions, filing positions, filing methods and taxable income calculations after considering statutes, regulations, and other information, and maintain tax accruals consistent with our evaluation of these relative risks and merits. The result of our evaluation and assessment is by its nature an estimate.
When tax returns are filed, it is highly likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4. CONTROLS AND PROCEDURES
The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, (the "Exchange Act")), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms.
DuringEffective January 1, 2023, the Company's last fiscal quarter covered byCompany adopted CECL. The Company designed new controls and modified existing controls as part of this report, thereadoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. There were no other changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended March 31, 2023 that have materially affected, or isare reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.Absecon Gardens Condominium Association v. Parke Bank Matter
Absecon Gardens Condominium Association v. Parke Bank, One Mechanic Street, et al, Superior Court of New Jersey, Law Division, Atlantic County, Docket No. ATL-L-2321-21. The Company is the successor to the interests of the developer of the Absecon Gardens Condominium project in Absecon NJ. Some of the unit owners have suggested that the Company is responsible for contributions and/or repair for alleged damages purportedly relating to construction. The owners filed a Complaint, alleging that the damages total approximately $1.7 million. The matter is in the early stages of discovery so it is difficult to determine whether that amount accurately reflects the claimed damages, or whether the Company is in any way culpable for the damages. At this time it is too early to predict whether an unfavorable outcome will result. The Company is vigorously defending this matter.In the normal course of business, there are outstanding various contingent liabilities such as claims and legal action, which are not reflected in the financial statements. In the opinion of management, no material losses are anticipated as a result of these actionsor claims.
Other than the foregoing, there were no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no repurchases of our common stock during the three months ended September 30, 2022.March 31, 2023.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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101 | The following materials from the Company’s Form 10-Q for the quarter ended September 30, 2022,March 31, 2023, formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. |
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101.INS | Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document) |
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101.SCH | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
(1) Incorporated by Reference to the Company’s Registration Statement on Form S-4 filed with the SEC on January 31, 2005 (File No. 333-122406).
(2) Incorporated by Reference to Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2021 (File No. 000-51338).
(3) Incorporated by Reference to Company’s Current Report on Form 8-K filed with the SEC on December 24, 2013 (File No. 000-51338).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | PARKE BANCORP, INC. |
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Date: | NovemberMay 10, 20222023 | /s/ Vito S. Pantilione |
| | Vito S. Pantilione |
| | President and Chief Executive Officer (Principal Executive Officer) |
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Date: | NovemberMay 10, 20222023 | /s/ John S. Kaufman |
| | John S. Kaufman |
| | Executive Vice President and Chief Financial Officer (Principal Accounting Officer) |