PARKE BANCORP, INC. - Quarter Report: 2022 September (Form 10-Q)

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, 2022

[☐] 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, there were 11,922,575 shares of the registrant's common stock ($0.10 par value) outstanding.

INDEX


		Page
Part I	FINANCIAL INFORMATION

Item 1.	Financial Statements	1
	Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (unaudited)	1
	Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021 (unaudited)	2
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021 (unaudited)	3
	Consolidated Statements of Equity for the three and nine months ended September 30, 2022 and 2021 (unaudited)	4
	Consolidated Statements of Cash Flow for the nine months ended September 30, 2022 and 2021 (unaudited)	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	41

SIGNATURES		42

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
Assets
Cash and due from banks	$	29,225	$	25,321
Interest bearing deposits with banks	164,119		571,232
Cash and cash equivalents	193,344		596,553
Investment securities available for sale, at fair value	9,790		13,351
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
Total investment securities	19,365		23,269

Loans, net of unearned income	1,679,357		1,484,847
Less: Allowance for loan losses	(30,989)		(29,845)
Net loans	1,648,368		1,455,002
Accrued interest receivable	8,028		7,681
Premises and equipment, net	6,008		6,265
Restricted stock	4,989		5,144
Bank owned life insurance (BOLI)	28,001		27,577
Deferred tax asset	7,891		7,608
Other	7,238		7,346
Total assets	$	1,923,232	$	2,136,445
Liabilities and Equity
Liabilities
Deposits
Noninterest-bearing deposits	$	393,853	$	553,810
Interest-bearing deposits	1,141,376		1,214,600
Total deposits	1,535,229		1,768,410
FHLBNY borrowings	73,150		78,150

Subordinated debentures	42,874		42,732
Accrued interest payable	1,082		1,603
Other	13,569		13,189
Total liabilities	1,665,904		1,904,084
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
Additional paid-in capital	135,885		135,451
Retained earnings	123,409		98,017
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)
Total shareholders’ equity	257,328		232,361


Total liabilities and equity	$	1,923,232	$	2,136,445

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,
	2022		2021		2022		2021

Interest income:
Interest and fees on loans	$	20,854	$	20,211	$	59,511	$	61,502
Interest and dividends on investments	194		170		565		552
Interest on deposits with banks	1,290		199		2,404		453
Total interest income	22,338		20,580		62,480		62,507
Interest expense:
Interest on deposits	2,284		2,356		5,893		7,654
Interest on borrowings	758		743		2,176		2,482
Total interest expense	3,042		3,099		8,069		10,136
Net interest income	19,296		17,481		54,411		52,371
Provision for loan losses	600		—		950		500
Net interest income after provision for loan losses	18,696		17,481		53,461		51,871
Non-interest income
Service fees on deposit accounts	1,133		1,350		3,762		4,173
Gain on sale of SBA loans	76		56		98		180
Other loan fees	422		403		1,138		998
Bank owned life insurance income	144		146		424		429
Net gain on sale and valuation adjustment of OREO	—		—		328		51
Other	253		240		827		693
Total non-interest income	2,028		2,195		6,577		6,524
Non-interest expense
Compensation and benefits	2,819		2,281		7,964		7,360
Professional services	578		998		1,670		2,740
Occupancy and equipment	621		623		1,891		1,773
Data processing	348		303		985		986
FDIC insurance and other assessments	265		261		811		833
OREO expense	314		72		404		199
Other operating expense	1,347		890		3,957		3,026
Total non-interest expense	6,292		5,428		17,682		16,917
Income before income tax expense	14,432		14,248		42,356		41,478
Income tax expense	3,892		3,705		10,987		10,584
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	10,540		10,501		31,369		30,687
Less: Preferred stock dividend	(7)		(7)		(20)		(21)
Net income available to common shareholders	$	10,533	$	10,494	$	31,349	$	30,666
Earnings per common share
Basic	$	0.88	$	0.88	$	2.63	$	2.58
Diluted	$	0.87	$	0.87	$	2.58	$	2.53
Weighted average common shares outstanding
Basic	11,919,472		11,893,323		11,913,085		11,885,709
Diluted	12,170,144		12,125,628		12,178,572		12,115,389

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

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, 2022	$	445	12,199,483	$	1,220	$	135,709	$	115,020	$	(262)	$	(3,015)	$	249,117	$	—	$	249,117
Net income	—		—	—		—		10,540		—		—		10,540		—		10,540


Common stock options exercised	—		7,614	1		59		—		—		—		60		—		60

Other comprehensive loss	—		—	—		—		—		(355)		—		(355)		—		(355)
Stock compensation expense	—		—	—		117		—		—		—		117		—		117

Dividend on preferred stock (1)	—		—	—		—		(7)		—		—		(7)		—		(7)
Dividend on common stock (2)	—		—	—		—		(2,144)		—		—		(2,144)		—		(2,144)
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
Net income	—		—	—		—		31,369		—		—		31,369		—		31,369

Common stock options exercised	—		25,016	3		182		—		—		—		185		—		185

Other comprehensive loss	—		—	—		—		—		(862)		—		(862)		—		(862)
Stock compensation expense	—		—	—		252		—		—		—		252		—		252
Dividend on preferred stock (1)	—		—	—		—		(20)		—		—		(20)		—		(20)
Dividend on common stock (2)	—		—	—		—		(5,957)		—		—		(5,957)		—		(5,957)
Balance, September 30, 2022	$	445	12,207,097	$	1,221	$	135,885	$	123,409	$	(617)	$	(3,015)	$	257,328	$	—	$	257,328

(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.

(2) Dividends per share of $0.18 and $0.50, respectively, were declared on common stock outstanding for the three and nine months ended September 30, 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,
	2022		2021

Cash Flows from Operating Activities:
Net income	$	31,369	$	30,894
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	487		517
Provision for loan losses	950		500
Increase in value of bank owned life insurance	(424)		(429)
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	(328)		(51)

Net accretion of purchase premiums and discounts on securities	(4)		36
Stock based compensation	252		168

Net changes in:
Decrease (increase) in accrued interest receivable and other assets	226		(960)
Increase (decrease) in accrued interest payable and other accrued liabilities	1,769		(1,177)
Net cash provided by operating activities	34,297		29,498
Cash Flows from Investing Activities:
Repayments and maturities of investment securities available for sale	2,367		4,972
Repayments and maturities of investment securities held to maturity	380		—
Purchases of investment securities	—		(8,693)
Net (increase) decrease in loans	(196,324)		90,020
Purchases of bank premises and equipment	(88)		(47)
Proceeds from sale of OREO, net	1,887		245
Redemptions of restricted stock	155		1,813
Net cash (used in) provided by investing activities	(191,623)		88,310
Cash Flows from Financing Activities:
Cash dividends	(7,887)		(7,628)
Earnings distribution to non-controlling interest	—		(447)
Proceeds from exercise of stock options	185		220

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
Cash and Cash Equivalents, January 1,	596,553		458,601
Cash and Cash Equivalents, June 30,	$	193,344	$	623,825

Supplemental Disclosure of Cash Flow Information:
Interest paid	$	8,590	$	11,226
Income taxes paid	$	9,638	$	13,683

Non-cash Investing and Financing Items
Loans transferred to OREO	$	2,008	$	1,811

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.

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. The accompanying interim financial statements for the three and nine months ended September 30, 2022 and 2021 are unaudited. The balance sheet as of December 31, 2021, 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, 2022 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:

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing 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.

During 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") 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. The guidance of the Financial Instruments-Credit Losses became 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, and is currently evaluating the impact of this new guidance on its consolidated financial statements.

In March 2020, 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 effective for all entities as of March 12, 2020 through December 31, 2022. The Company intends to adopt this guidance on its effective date and does not expect the adoption of this guidance to materially impact its financial condition, results of operations and consolidated financial statements.

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, 2022 and December 31, 2021:


As of September 30, 2022	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
	(Dollars in thousands)
Available for sale:
Corporate debt obligations	$	500	$	—	$	—	$	500
Residential mortgage-backed securities	10,120		1		832		9,289
Collateralized mortgage obligations	1		—		—		1
Total available for sale	$	10,621	$	1	$	832	$	9,790

Held to maturity:
Residential mortgage-backed securities	$	5,768	$	—	$	1,156	$	4,612
States and political subdivisions	3,807		18		717		3,108
Total held to maturity	$	9,575	$	18	$	1,873	$	7,720


As of December 31, 2021	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
	(Dollars in thousands)
Available for sale:
Corporate debt obligations	$	500	$	—	$	—	$	500
Residential mortgage-backed securities	12,513		372		42		12,843
Collateralized mortgage obligations	8		—		—		8
Total available for sale	$	13,021	$	372	$	42	$	13,351

Held to maturity:
Residential mortgage-backed securities	6,157		—		118		6,039
States and political subdivisions	$	3,761	$	241	$	16	$	3,986
Total held to maturity	$	9,918	$	241	$	134	$	10,025

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, 2022 are as follows:


	Amortized Cost		Fair Value
	(Dollars in thousands)
Available for sale:
Due within one year	$	—	$	—
Due after one year through five years	724		708
Due after five years through ten years	5,552		5,157
Due after ten years	4,345		3,925
Total available for sale	$	10,621	$	9,790

Held to maturity:
Due within one year	$	—	$	—
Due after one year through five years	1,330		1,348
Due after five years through ten years	—		—
Due after ten years	8,245		6,372
Total held to maturity	$	9,575	$	7,720

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. The following tables show the gross unrealized losses and fair value of the Company's investments which are aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2022 and December 31, 2021:


As of September 30, 2022	Less Than 12 Months				12 Months or Greater				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousand)
Available for sale:
Residential mortgage-backed securities	$	7,985	$	694	$	1,128	$	138	$	9,113	$	832
Total available for sale	$	7,985	$	694	$	1,128	$	138	$	9,113	$	832
Held to maturity:
Residential mortgage-backed securities	$	—	$	—	$	4,612	$	1,156	$	4,612	$	1,156
States and political subdivisions	—		—		1,760		717		1,760		717
Total held to maturity	$	—	$	—	$	6,372	$	1,873	$	6,372	$	1,873


As of December 31, 2021	Less Than 12 Months				12 Months or Greater				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
Available for sale:
Residential mortgage-backed securities	$	168	$	1	$	1,418	$	41	$	1,586	$	42
Total available for sale	$	168	$	1	$	1,418	$	41	$	1,586	$	42
Held to maturity:
Residential mortgage-backed securities	6,039		$	118	$	—	$	—	$	6,039	$	118
States and political subdivisions	2,462		16		—		—		2,462		16
Total held to maturity	$	8,501	$	134	$	—	$	—	$	8,501	$	134

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 20 securities in the less than 12 months loss position and 7 securities in the 12 months or greater loss position at September 30, 2022. 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 OTTI at September 30, 2022.

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

An age analysis of past due loans by class at September 30, 2022 and December 31, 2021 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
	(Dollars in Thousands)
Commercial and Industrial	$	—	$	—	$	—	$	—	$	29,407	$	29,407	$	—
Construction	—		—		1,139		1,139		192,972		194,111		—
Real Estate Mortgage:
Commercial – Owner Occupied	—		—		988		988		129,118		130,106		—
Commercial – Non-owner Occupied	—		—		14,553		14,553		332,990		347,543		—
Residential – 1 to 4 Family	85		—		163		248		892,740		892,988		—
Residential – Multifamily	—		—		—		—		78,162		78,162		—
Consumer	—		—		70		70		6,970		7,040		—
Total Loans	$	85	$	—	$	16,913	$	16,998	$	1,662,359	$	1,679,357	$	—


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	$	—

Allowance For Loan and Lease Losses (ALLL)

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

The allowance for loan and lease losses represents management’s estimate of probable losses inherent in the Company’s lending activities excluding loans accounted for under fair value. The allowance for loan losses is maintained through charges to the provision for loan losses in the Consolidated Statements of Income as losses are estimated to have occurred. 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 loan 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 nonperforming loans. To determine the asset-specific component of the allowance, the loans are evaluated individually based on the borrower's ability to repay amounts owed, collateral, relative risk grade of the loans, and other factors given current events and conditions. The Company generally measures the asset-specific allowance as the difference between the 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 valuation allowance. The historical loss experience is measured by type of credit and internal risk grade, loss severity, specific homogeneous risk pools. A historical loss ratio and valuation allowance are established for each pool of similar loans and updated periodically based on actual charge-off experience and current events. The general valuation allowance is based on general economic conditions and other qualitative risk factors both internal and external to the Company. It is generally determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank's lending management and staff; (ii) the effectiveness of the Bank's 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 process of determining the level of the allowance for loan and lease losses requires a high degree of estimate and judgment. It is reasonably possible that actual outcomes may differ from our estimates.

The following tables present the information regarding the allowance for loan and lease losses and associated loan data by portfolio segment:


					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

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

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

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
	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, 2021
June 30, 2021	$	312	$	3,483	$	3,502	$	8,514	$	12,883	$	1,250	$	125	$	30,069
Charge-offs	—		(226)		—		—		(49)		—		—		(275)
Recoveries	2		—		38		4		—		—		—		44
Provisions (benefits)	95		(350)		(105)		(350)		878		(166)		(2)		—
Ending Balance at September 30, 2021	$	409	$	2,907	$	3,435	$	8,168	$	13,712	$	1,084	$	123	$	29,838

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
Individually evaluated for impairment	$	9	$	300	$	6	$	235	$	63	$	—	$	—	$	613
Collectively evaluated for impairment	400		2,607		3,429		7,933		13,649		1,084		123		29,225
Ending Balance at September 30, 2021	$	409	$	2,907	$	3,435	$	8,168	$	13,712	$	1,084	$	123	$	29,838

Loans
Individually evaluated for impairment	$	47	$	1,139	$	2,443	$	5,625	$	1,022	$	—	$	178	$	10,454
Collectively evaluated for impairment	66,230		170,012		124,909		306,272		710,886		76,522		8,531		1,463,362
Ending Balance at September 30, 2021	$	66,277	$	171,151	$	127,352	$	311,897	$	711,908	$	76,522	$	8,709	$	1,473,816

The increase in the allowance for loan loss balance for the residential 1 to 4 family portfolio segment for the nine months ended September 30, 2021 is mainly due to loan growth. The increase in the allowance for loan loss balance for the commercial owner occupied portfolio segment is mainly due to increase in the non-performing loan balance. The decrease in the allowance for loan loss balance for the residential multifamily portfolio segment for the nine months ended September 30, 2021 is due to the decrease in loan balance.

Impaired 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:


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


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 by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2022 and 2021:


	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


	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.

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.

An analysis of the credit risk profile by internally assigned grades as of September 30, 2022 and December 31, 2021 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
	(Dollars in thousands)
Commercial and Industrial	$	56,927	$	—	$	224	$	—	$	57,151
Construction	152,938		—		1,139		—		154,077
Real Estate Mortgage:
Commercial – Owner Occupied	118,473		3,029		2,170		—		123,672
Commercial – Non-owner Occupied	291,864		14,380		242		—		306,486
Residential – 1 to 4 Family	749,904		—		621		—		750,525
Residential – Multifamily	84,964		—		—		—		84,964
Consumer	7,972		—		—		—		7,972
Total	$	1,463,042	$	17,409	$	4,396	$	—	$	1,484,847

NOTE 5. EARNINGS PER SHARE (“EPS”)

The following tables set forth the calculation of basic and diluted EPS for the three and nine-month periods ended September 30, 2022 and 2021.


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021
	(Dollars in thousands except share and per share data)
Basic earnings per common share
Net income available to the Company	$	10,540	$	10,501	$	31,369	$	30,687
Less: Dividend on series B preferred stock	(7)		(7)		(20)		(21)
Net income available to common shareholders	10,533		10,494		31,349		30,666
Basic weighted-average common shares outstanding	11,919,472		11,893,323		11,913,085		11,885,709
Basic earnings per common share	$	0.88	$	0.88	$	2.63	$	2.58
Diluted earnings per common share
Net income available to common shares	$	10,533	$	10,494	$	31,349	$	30,666
Add: Dividend on series B preferred stock	7		7		20		21
Net income available to diluted common shares	10,540		10,501		31,369		30,687
Basic weighted-average common shares outstanding	11,919,472		11,893,323		11,913,085		11,885,709
Dilutive potential common shares	250,672		232,305		265,487		229,680
Diluted weighted-average common shares outstanding	12,170,144		12,125,628		12,178,572		12,115,389
Diluted earnings per common share	$	0.87	$	0.87	$	2.58	$	2.53

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

For the nine months ended September 30, 2022, 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, 2022 and 2021.

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

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, 2022 and December 31, 2021:


September 30, 2022	Carrying Amount		Fair Value
			Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial Assets:


Investment securities HTM	$	9,575	$	7,720	$	—	$	7,720	$	—


Loans, net	1,648,368		1,583,190		—		1,558,076		25,114


Financial Liabilities:

Time deposits	$	516,695	$	520,306	$	—	$	520,306	$	—
Borrowings	$	116,024	$	115,222	$	—	$	115,222	$	—


December 31, 2021	Carrying Amount		Fair Value
			Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial Assets:


Investment securities HTM	9,918		10,025		—		10,025		—


Loans, net	1,455,002		1,440,398		—		1,430,686		9,712


Financial Liabilities:

Time deposits	$	593,746	$	597,791	$	—	$	597,791	$	—
Borrowings	$	120,882	$	117,636	$	—	$	117,636	$	—

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. 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, 2022 and December 31, 2021, unused commitments to extend credit amounted to approximately $176.5 million and $117.7 million, respectively.

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, 2022 and December 31, 2021, standby letters of credit with customers were $1.5 million and $1.5 million, respectively.

On September 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. There were no outstanding borrowings on the letter of credit as of September 30, 2022.

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. Cannabis businesses are legal under the laws of these States and now in New Jersey, although it is not legal under federal law. 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, 2022 and December 31, 2021, deposit balances from cannabis customers were approximately $208.1 million and $375.2 million, or 13.6% and 21.2% of total deposits, respectively, with two customers accounting for 42.7% and 19.3% of the total at September 30, 2022 and December 31, 2021. At September 30, 2022 and December 31, 2021, there were cannabis-related loans in the amounts of $3.9 million and $5.4 million, respectively. We recorded approximately $108 thousand and $336 thousand 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 indicated 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 that the loss is neither probable or reasonably estimable. While the potential future liabilities could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known, 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 and 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 amount in the range.

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

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.

The COVID-19 pandemic has had, and may continue to have, an adverse impact on the Company and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including whether the coronavirus can continue to be controlled and abated. As the result of the COVID-19 pandemic and the related adverse local 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, resulting 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 respect to the growth of total assets 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.

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 following discussion we provide information about our results of operations, financial condition, liquidity and asset quality. We intend that this information facilitate 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 Discussion and Analysis of Financial Condition and Results of 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, we had total assets of $1.92 billion, and total equity of $257.3 million. Net income available to common shareholders for the three and nine months ended September 30, 2022 was $10.5 million and $31.3 million, respectively.

Results of Operations

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Net Income: Our net income available to common shareholders for the third quarter of 2022 increased $39.0 thousand, or 0.4%, to $10.53 million, compared to $10.49 million for the same period last year. Earnings per share were $0.88 per basic common share and $0.87 per diluted common share for the third quarter of 2022 compared to $0.88 per basic common share and $0.87 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 million increase in net interest income, partially offset by a $600.0 thousand increase in provision for loan loss, a $167.0 thousand decrease in non-interest income, and a $864.0 thousand increase in non-interest expense.

Net Interest Income: Our net interest income increased $1.8 million, or 10.4%, to $19.3 million for the third quarter of 2022 compared to $17.5 million for the third quarter of 2021. The increase in net interest income was primarily due to an increase of $1.8 million in interest income, driven by an increase of $643.0 thousand on interest and fees on loans, and a $1.1 million increase on interest on deposits with banks. The increase in interest and fees on loans was driven by the increase in outstanding loan balance during the quarter ended September 30, 2022. The increase in interest on deposits with banks is due to an increase on interest earned on cash held at the Federal Reserve Bank ("FRB") due to an increase in market interest rates. For the three months ended September 30, 2022, total interest expense decreased $57.0 thousand as compared to the second quarter of 2021, primarily due to a reduction in outstanding deposit balances, which reduced interest expense by $71.0 thousand.

Provision for loan losses: For the three months ended September 30, 2022, the provision for loan losses increased $600.0 thousand, compared to zero for the three months ended September 30, 2021. The increase in the provision was primarily due to an increase in 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 $2.0 million for the three months ended September 30, 2022, a decrease of $167.0 thousand, compared to $2.2 million for the three months ended September 30, 2021. The decrease is primarily attributable to a decrease in service fees on deposit account of $217.0 thousand, primarily attributed to our cannabis banking deposit accounts.

Non-interest Expense: Our non-interest expense increased $864.0 thousand to $6.3 million for the three months ended September 30, 2022, from $5.4 million for the three months ended September 30, 2021. The increase is primarily driven by a $538.0 thousand increase in compensation and benefits, a $456.0 thousand increase in other operating expense, and a $242.0 thousand increase in OREO expense, partially offset by a $419.0 thousand decrease in professional services. The increase in compensation and benefits was mainly driven by an increase in pension costs 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 loan expenses, and director fees. The decrease in professional services was attributed to the prior year remediation efforts related to our Bank Secrecy Act (BSA) compliance.

Income Tax: Income tax expense was $3.9 million on income before taxes of $14.4 million for the three months ended September 30, 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%.

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,
	2022						2021
	Average Balance		Interest Income/ Expense		Yield/ Cost		Average Balance		Interest Income/ Expense		Yield/ Cost
	(Dollars in thousands)
Assets
Loans*	$	1,619,133	$	20,854	5.11	%	$	1,489,565	$	20,211	5.38	%
Investment securities**	25,887		194		2.97	%	24,080		170		2.80	%
Interest bearing deposits	241,134		1,290		2.12	%	522,586		199		0.15	%
Total interest-earning assets	1,886,154		22,338		4.70	%	2,036,231		20,580		4.01	%
Other assets	79,037						79,180
Allowance for loan losses	(30,658)						(30,077)
Total assets	$	1,934,533					$	2,085,334
Liabilities and Shareholders’ Equity
Interest bearing deposits:
Checking	$	88,875	$	102	0.46	%	$	71,193	$	78	0.43	%
Money markets	349,594		990		1.12	%	321,708		537		0.66	%
Savings	196,528		187		0.38	%	153,999		175		0.45	%
Time deposits	486,702		945		0.77	%	649,657		1,525		0.93	%
Brokered certificates of deposit	12,614		60		1.89	%	30,453		41		0.53	%
Total interest-bearing deposits	1,134,313		2,284		0.80	%	1,227,010		2,356		0.76	%
Borrowings	120,450		758		2.50	%	136,771		743		2.16	%
Total interest-bearing liabilities	1,254,763		3,042		0.96	%	1,363,781		3,099		0.90	%
Non-interest bearing deposits	410,604						484,919
Other liabilities	14,493						13,892
Total non-interest bearing liabilities	425,097						498,811
Equity	254,673						222,742
Total liabilities and shareholders’ equity	$	1,934,533					$	2,085,334
Net interest income			$	19,296					$	17,481
Interest rate spread					3.74	%					3.11	%
Net interest margin					4.06	%					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, the Company’s total assets were $1.92 billion, a decrease of $213.2 million, or 10.0%, from December 31, 2021. The decrease in total assets was primarily attributable to a decrease in cash and cash equivalents of $403.2 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. Loans increased $194.5 million at September 30, 2022, primarily due to increases in loan balances classified as residential 1-4 family, commercial non-owner occupied real estate mortgage loans, and 1-4 family construction, compared to the balances at December 31, 2021.

Total liabilities were $1.67 billion at September 30, 2022. This represented a $238.2 million, or 12.5%, decrease, from $1.90 billion at December 31, 2021. The decrease in total liabilities was primarily due to a decrease in total deposits, which decreased $233.2 million, or 13.2%, to $1.54 billion at September 30, 2022, from $1.77 billion at December 31, 2021. The decrease in deposits was attributed to a decrease in non-interest demand deposits of $160.0 million, and time deposits of $77.0 million, partially offset by an increase in savings deposits of $9.8 million.

Total equity was $257.3 million and $232.4 million at September 30, 2022 and December 31, 2021, respectively, an increase of $25.0 million from December 31, 2021. The increase was primarily due to the retention of earnings, partially offset by the payment of $6.0 million of cash dividends.

The following table presents certain key condensed balance sheet data as of September 30, 2022 and December 31, 2021:


	September 30, 2022		December 31, 2021		Change		% Change
	(Dollars in thousands)
Cash and cash equivalents	$	193,344	$	596,553	$	(403,209)	(67.6)	%
Investment securities	19,365		23,269		(3,904)		(16.8)	%

Loans, net of unearned income	1,679,357		1,484,847		194,510		13.1	%
Allowance for loan losses	(30,989)		(29,845)		(1,144)		3.8	%
Total assets	1,923,232		2,136,445		(213,213)		(10.0)	%
Total deposits	1,535,229		1,768,410		(233,181)		(13.2)	%
FHLBNY borrowings	73,150		78,150		(5,000)		(6.4)	%
Subordinated debt	42,874		42,732		142		0.3	%

Total liabilities	1,665,904		1,904,084		(238,180)		(12.5)	%
Total equity	257,328		232,361		24,967		10.7	%
Total liabilities and equity	1,923,232		2,136,445		(213,213)		(10.0)	%

Cash and cash equivalents

Cash and cash equivalents decreased $403.2 million to $193.3 million at September 30, 2022 from $596.6 million at December 31, 2021, a decrease of 67.6%. The decrease was primarily due to cash withdrawn from deposits and the funding of loans.

Investment securities

Total investment securities decreased to $19.4 million at September 30, 2022, from $23.3 million at December 31, 2021, a decrease of $3.9 million or 16.8%. The decrease was attributed to normal pay downs of $2.7 million and a decrease in the fair market valuation of $1.2 million. 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 billion at September 30, 2022 from $1.48 billion at December 31, 2021. The increase was primarily due to increases in the residential - 1 to 4 family, commercial - non-owner occupied, and construction portfolio's, partially offset by a decrease in commercial and industrial due to the payoff of SBA PPP loans of $24.9 million. Loans receivable, excluding loans held for sale, as of September 30, 2022 and December 31, 2021, consisted of the following:


	September 30, 2022				December 31, 2021
	Amount		Percentage of Loans to total Loans		Amount		Percentage of Loans to total Loans
	(Dollars in thousands)
Commercial and Industrial	$	29,407	1.8	%	$	57,151	3.8	%
Construction	194,111		11.6	%	154,077		10.4	%
Real Estate Mortgage:
Commercial – Owner Occupied	130,106		7.7	%	123,672		8.3	%
Commercial – Non-owner Occupied	347,543		20.7	%	306,486		20.6	%
Residential – 1 to 4 Family	892,988		53.1	%	750,525		50.7	%
Residential – Multifamily	78,162		4.7	%	84,964		5.7	%
Consumer	7,040		0.4	%	7,972		0.5	%
Total Loans	$	1,679,357	100.0	%	$	1,484,847	100.0	%

Deposits

At September 30, 2022, total deposits decreased to $1.54 billion from $1.77 billion at December 31, 2021, a decrease of $233.2 million, or 13.2%. The decrease in deposits was primarily due to a decrease in non-interest bearing demand deposits and a decrease in time deposit accounts. The decrease in non-interest bearing demand deposits was mainly driven by withdrawals from our cannabis related deposits. The decrease in time deposits was mainly driven by maturities of certificates of deposit.


	September 30,		December 31,
	2022		2021
	(Dollars in thousands)
Noninterest-bearing	$	393,853	$	553,810
Interest-bearing
Checking	90,545		93,189
Savings	189,023		179,238
Money market	345,114		348,427
Time deposits	516,694		593,746

Total deposits	$	1,535,229	$	1,768,410

Borrowings

Total borrowings were $116.0 million at September 30, 2022 and $120.9 million at December 31, 2021. The decrease in borrowings is due to the paydown of a $5.0 million Federal Home Loan Bank ("FHLB") advance.

Equity

Total equity increased to $257.3 million at September 30, 2022 from $232.4 million at December 31, 2021, an increase of $25.0 million, or 10.7%, primarily due to the retention of earnings from the period, partially offset by the payment of $6.0 million of cash dividends.

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, our cash position was $193.3 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 Inter Financial Network to secure an additional alternative funding source. Promontory 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, the Company had lines of credit with the FHLBNY of $641.7 million, of which $73.2 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 million at September 30, 2022.

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, the Company's investment securities portfolio classified as available for sale was $9.8 million.

We had outstanding loan commitments of $176.5 million at September 30, 2022. 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 nine months ended September 30, 2022 and 2021.

Cash provided by operating activities was $34.3 million in the nine months ended September 30, 2022, compared to $29.5 million for the same period in the prior year. The increase in operating cash flow was primarily due to the decrease in accrued interest receivable and other assets, and increase in net income.

Cash used in investing activities was $191.6 million in the nine months ended September 30, 2022, compared to cash provided by investing activities of $88.3 million in the same period last year. The decrease in cash provided in the investing activities was primarily due to the cash outflow from the increase in loans during the period.

Cash used in financing activities was $245.9 million in the nine months ended September 30, 2022, compared to cash provided by financing activities of $47.4 million in the same period of last year. The current year included $233.2 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 million at September 30, 2022, from December 31, 2021, primarily from the Company’s net income of $31.4 million for the period, net of common and preferred stock dividends of $6.0 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, 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:


	Amount		Ratio		Amount		Ratio
	(Dollars in thousands except ratios)
	Company				Parke Bank
Tier 1 leverage	$	271,347	14.03	%	$	300,171	15.52	%

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, 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 Lease Losses:

We maintain the allowance for loan and lease 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 Lease Losses in the notes to the unaudited consolidated financial statements for further discussion on management's methodology for estimating the allowance for loan losses.

At September 30, 2022, the allowance for loan losses was $31.0 million, as compared to $29.8 million at December 31, 2021. The ratio of the allowance for loan losses to total loans was 1.85% and 2.01% at September 30, 2022 and December 31, 2021, respectively. The ratio of the allowance for loan losses to non-performing assets decreased to 164.5% at September 30, 2022, compared to 500.6% at December 31, 2021. During the nine month periods ended September 30, 2022 and 2021, the Company charged off $66,150 and $427,400, respectively, and recovered $260,000 and $68,000, respectively. Specific allowances for loan losses have been established in the amount of $149.0 thousand at September 30, 2022, as compared to $591.0 thousand on impaired loans at December 31, 2021. We have established reserves for all losses that we believe are both probable and reasonably estimable at September 30, 2022 and December 31, 2021. There can be no assurance, however, that further additions to the allowance will not be required in future periods.

The Company estimates the loan credit allowance based on a GAAP incurred loss model. Accordingly, the Company did not estimate its loan allowance according to the expected credit loss methodology. We recorded a loan loss provision of $600.0 thousand during the three months ended September 30, 2022, 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, 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 million, or 1.0% of total loans at September 30, 2022, an increase of $12.3 million from December 31, 2021. At September 30, 2022, loans 30 to 89 days delinquent totaled $85.0 thousand, a decrease of $345.0 thousand from December 31, 2021. The decrease in loans 30 to 89 days delinquent is driven by two, commercial real estate non-occupied loans that migrated to non-accrual during the quarter ended September 30, 2022. Loans delinquent 90 days or more and not accruing interest totaled $16.9 million or 1.0% of total loans at September 30, 2022, an increase of $12.6 million from $4.3 million, or 0.3% of total loans, at December 31, 2021. The two largest nonperforming loan relationships as of September 30, 2022 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. 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.

Allowance for Loan and Lease Losses: Our allowances for loan and lease losses represents management's best estimate of probable losses inherent in our loan portfolio, excluding those loans accounted for under fair value. Our process for determining the allowance for loan and lease losses is discussed in Note 1 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K.

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 allowances is based on periodic evaluations of the loan and lease portfolios and other relevant factors. These critical estimates include significant use of our own historical data and other qualitative, quantitative data. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change. Our allowance for loan and lease losses is comprised of two components. The specific allowance covers impaired loans and is calculated on an individual loan basis. The general based component covers loans and leases on which there are incurred 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 lease 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.

During the Company's last fiscal quarter covered by this report, there were no changes in the Company's internal control over financial reporting that have materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS




3.1			Certificate of Incorporation of Parke Bancorp, Inc. (1)

3.2			Bylaws of Parke Bancorp, Inc. (2)

3.3			Certificate of Amendment setting forth the terms of the Registrant's 6.00% Non-Cumulative Perpetual Convertible Preferred Stock, Series B (3)

4.1			Specimen stock certificate of Parke Bancorp, Inc. (1)

31.1			Certification of CEO required by Rule 13a-14(a).

31.2			Certification of CFO required by Rule 13a-14(a).

32			Certification required by 18 U.S.C. §1350.

101			The following materials from the Company’s Form 10-Q for the quarter ended September 30, 2022, 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.

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)

101.SCH			Inline XBRL Taxonomy Extension Schema Document

101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB			Inline XBRL Taxonomy Extension Labels Linkbase Document

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.


		PARKE BANCORP, INC.

Date:	November 10, 2022	/s/ Vito S. Pantilione
		Vito S. Pantilione
		President and Chief Executive Officer (Principal Executive Officer)

Date:	November 10, 2022	/s/ John S. Kaufman
		John S. Kaufman
		Executive Vice President and Chief Financial Officer (Principal Accounting Officer)