PARKE BANCORP, INC. 10-Q

Item 1. Financial Statements Parke Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) (Dollars in thousands except share data) March 31, 2022 December 31, 2021 Assets Cash and due from banks $ 25,334 $ 25,321 Interest bearing deposits with banks 478,495 571,232 Cash and cash equivalents 503,829 596,553 Investment securities available for sale, at fair value 11,810 13,351 Investment securities held to maturity (fair value of $ 9,058 at March 31, 2022 and $ 10,025 at December 31, 2021) 9,897 9,918 Total investment securities 21,707 23,269 Loans, net of unearned income 1,495,839 1,484,847 Less: Allowance for loan losses ( 29,981 ) ( 29,845 ) Net loans 1,465,858 1,455,002 Accrued interest receivable 7,344 7,681 Premises and equipment, net 6,185 6,265 Restricted stock 5,157 5,144 Bank owned life insurance (BOLI) 27,715 27,577 Deferred tax asset 7,742 7,608 Other 8,654 7,346 Total assets $ 2,054,191 $ 2,136,445 Liabilities and Equity Liabilities Deposits Noninterest-bearing deposits $ 471,940 $ 553,810 Interest-bearing deposits 1,205,270 1,214,600 Total deposits 1,677,210 1,768,410 FHLBNY borrowings 78,150 78,150 Subordinated debentures 42,779 42,732 Accrued interest payable 1,029 1,603 Other 14,744 13,189 Total liabilities 1,813,912 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 March 31, 2022 and December 31, 2021, respectively 445 445 Common stock, $ 0.10 par value; authorized 15,000,000 shares; Issued: 12,198,019 shares and 12,182,081 shares at March 31, 2022 and December 31, 2021, respectively 1,220 1,218 Additional paid-in capital 135,623 135,451 Retained earnings 106,194 98,017 Accumulated other comprehensive (loss) income ( 188 ) 245 Treasury stock, 284,522 shares at March 31, 2022 and Dec. 31, 2021, at cost ( 3,015 ) ( 3,015 ) Total shareholders’ equity 240,279 232,361 Total liabilities and equity $ 2,054,191 $ 2,136,445 See accompanying notes to consolidated financial statements 1 Parke Bancorp Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (unaudited) For the Three Months Ended March 31, 2022 2021 (Dollars in thousands except share data) Interest income: Interest and fees on loans $ 19,199 $ 20,238 Interest and dividends on investments 189 200 Interest on deposits with banks 248 123 Total interest income 19,636 20,561 Interest expense: Interest on deposits 1,840 2,827 Interest on borrowings 696 928 Total interest expense 2,536 3,755 Net interest income 17,100 16,806 Provision for loan losses — 500 Net interest income after provision for loan losses 17,100 16,306 Non-interest income Service fees on deposit accounts 1,316 1,612 Gain on sale of SBA loans — 45 Other loan fees 276 265 Bank owned life insurance income 138 140 Net gain (loss) on sale and valuation adjustment of OREO 47 ( 21 ) Other 298 196 Total non-interest income 2,075 2,237 Non-interest expense Compensation and benefits 2,688 2,625 Professional services 551 853 Occupancy and equipment 645 544 Data processing 324 345 FDIC insurance and other assessments 287 261 OREO expense 34 15 Other operating expense 1,149 1,127 Total non-interest expense 5,678 5,770 Income before income tax expense 13,497 12,773 Income tax expense 3,406 3,247 Net income attributable to Company and noncontrolling interest 10,091 9,526 Less: Net income attributable to noncontrolling interest — ( 97 ) Net income attributable to Company 10,091 9,429 Less: Preferred stock dividend ( 7 ) ( 7 ) Net income available to common shareholders $ 10,084 $ 9,422 Earnings per common share Basic $ 0.85 $ 0.79 Diluted $ 0.83 $ 0.78 Weighted average common shares outstanding Basic 11,905,330 11,872,246 Diluted 12,180,320 12,108,846 See accompanying notes to consolidated financial statements 2 Parke Bancorp Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) For the Three Months Ended March 31, 2022 2021 (Dollars in thousands) Net income $ 10,091 $ 9,526 Unrealized losses on investment securities, net of reclassification into income: Unrealized losses on non-OTTI securities ( 584 ) ( 112 ) Tax impact on unrealized loss 151 29 Total unrealized losses on investment securities ( 433 ) ( 83 ) Comprehensive income 9,658 9,443 Less: Comprehensive loss attributable to noncontrolling interests — ( 97 ) Comprehensive income attributable to the Company $ 9,658 $ 9,346 See accompanying notes to consolidated financial statements 3 Parke Bancorp, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EQUITY (unaudited) 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 (Dollars in thousands except share data) 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 — — — — 9,429 — — 9,429 97 9,526 Earnings distribution to non-controlling interest — — — — — — — — ( 447 ) ( 447 ) Common stock options exercised — 29,945 3 197 — — — 200 — 200 Preferred stock shares conversion ( 10 ) 1,375 — 10 — — — — — — Other comprehensive loss — — — — — ( 83 ) — ( 83 ) — ( 83 ) Stock compensation expense — — — 50 — — — 50 — 50 Dividend on common stock — — — — ( 1,899 ) — — ( 1,899 ) — ( 1,899 ) Balance, March 31, 2021 $ 470 12,167,887 $ 1,217 $ 135,246 $ 74,324 $ 380 $ ( 3,015 ) $ 208,622 $ 1,322 $ 209,944 Balance, December 31, 2021 $ 445 12,182,081 $ 1,218 $ 135,451 $ 98,017 $ 245 $ ( 3,015 ) $ 232,361 $ — $ 232,361 Net income — — — — 10,091 — — 10,091 — 10,091 Common stock options exercised — 15,938 2 112 — — — 114 — 114 Other comprehensive loss — — — — — ( 433 ) — ( 433 ) — ( 433 ) Stock compensation expense — — — 60 — — — 60 — 60 Dividend on preferred stock — — — — ( 7 ) — — ( 7 ) — ( 7 ) Dividend on common stock — — — — ( 1,907 ) — — ( 1,907 ) — ( 1,907 ) Balance, March 31, 2022 $ 445 12,198,019 $ 1,220 $ 135,623 $ 106,194 $ ( 188 ) $ ( 3,015 ) $ 240,279 $ — $ 240,279 See accompanying notes to consolidated financial statements 4 Parke Bancorp Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the Three Months Ended March 31, 2022 2021 (Dollars in thousands) Cash Flows from Operating Activities: Net income $ 10,091 $ 9,526 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 165 173 Provision for loan losses — 500 Increase in value of bank-owned life insurance ( 138 ) ( 140 ) Gain on sale of SBA loans — ( 45 ) SBA loans originated for sale — ( 903 ) Proceeds from sale of SBA loans originated for sale — 402 Net (gain) loss on sale of OREO and valuation adjustments ( 47 ) 21 Net accretion of purchase premiums and discounts on securities — 18 Stock based compensation 60 50 Net changes in: Increase in accrued interest receivable and other assets ( 2,443 ) ( 682 ) Increase in accrued interest payable and other accrued liabilities 981 2,131 Net cash provided by operating activities 8,669 11,051 Cash Flows from Investing Activities: Repayments and maturities of investment securities available for sale 944 1,870 Repayments and maturities of investment securities held to maturity 35 — Net (increase) decrease in loans ( 10,927 ) 18,227 Purchases of bank premises and equipment ( 38 ) ( 25 ) Proceeds from sale of OREO, net 1,606 48 (Purchase) redemptions of restricted stock ( 13 ) 1,435 Net cash (used in) provided by investing activities ( 8,393 ) 21,555 Cash Flows from Financing Activities: Cash dividends ( 1,914 ) ( 1,899 ) Earnings distribution to non-controlling interest — ( 447 ) Proceeds from exercise of stock options 114 200 Net decrease in FHLBNY and short-term borrowings — ( 33,000 ) Net decrease in other borrowings — ( 90,026 ) Net (decrease) increase in noninterest-bearing deposits ( 81,870 ) 101,373 Net (decrease) increase in interest-bearing deposits ( 9,330 ) 36,949 Net cash (used in) provided by financing activities ( 93,000 ) 13,150 Net (decrease) increase in cash and cash equivalents ( 92,724 ) 45,756 Cash and Cash Equivalents, January 1, 596,553 458,601 Cash and Cash Equivalents, March 31, $ 503,829 $ 504,357 Supplemental Disclosure of Cash Flow Information: Interest paid $ 3,110 $ 4,665 Income taxes paid $ 3,894 $ — Non-cash Investing and Financing Items Loans transferred to OREO $ 71 $ 55 See accompanying notes to consolidated financial statements 5 Notes to Consolidated Financial Statements (Unaudited) NOTE 1. ORGANIZATION Parke Bancorp, Inc. (the “Company, we, us, our”) is a bank holding company headquartered in Sewell, New Jersey. Through subsidiaries, the Company provides individuals, corporations and other businesses and institutions with commercial and retail banking services, principally loans and deposits. The Company was incorporated in January 2005 under the laws of the State of New Jersey for the sole purpose of becoming the holding company of Parke Bank (the "Bank"). The Bank is a commercial bank, which was incorporated on August 25, 1998, and commenced operations on January 28, 1999. The Bank is chartered by the New Jersey Department of Banking and Insurance and its deposits are insured by the Federal Deposit Insurance Corporation. The Bank maintains its principal office at 601 Delsea Drive, Sewell, New Jersey, and 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 months ended March 31, 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 months ended March 31, 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 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 . 6 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 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 is currently evaluating the impact of this new guidance on its 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 March 31, 2022 and December 31, 2021: As of March 31, 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 11,558 38 292 11,304 Collateralized mortgage obligations 6 — — 6 Total available for sale $ 12,064 $ 38 $ 292 $ 11,810 Held to maturity: Residential mortgage-backed securities $ 6,121 $ — $ 527 $ 5,594 States and political subdivisions 3,776 112 424 3,464 Total held to maturity $ 9,897 $ 112 $ 951 $ 9,058 7 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: States and political subdivisions $ 3,761 $ 241 $ 16 $ 3,986 Residential mortgage-backed securities 6,157 — 118 6,039 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 March 31, 2022 are as follows: Amortized Cost Fair Value (Dollars in thousands) Available for sale: Due within one year $ 4 $ 3 Due after one year through five years 752 742 Due after five years through ten years 6,512 6,359 Due after ten years 4,796 4,706 Total available for sale $ 12,064 $ 11,810 Held to maturity: Due within one year $ — $ — Due after one year through five years 1,299 1,410 Due after five years through ten years — — Due after ten years 8,598 7,648 Total held to maturity $ 9,897 $ 9,058 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. 8 The Company did not sell any securities during the three months ended March 31, 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 March 31, 2022 and December 31, 2021: As of March 31, 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 $ 8,572 $ 194 $ 1,230 $ 98 $ 9,802 $ 292 Total available for sale $ 8,572 $ 194 $ 1,230 $ 98 $ 9,802 $ 292 Held to maturity: Residential mortgage-backed securities $ 5,594 $ 527 $ — $ — $ 5,594 $ 527 States and political subdivisions 2,054 424 — — 2,054 424 Total held to maturity $ 7,648 $ 951 $ — $ — $ 7,648 $ 951 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 $ 118 $ — $ — $ 6 $ 118 States and political subdivisions 2,462 16 — — 2,462 16 Total held to maturity $ 2,468 $ 134 $ — $ — $ 2,468 $ 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 9 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 15 securities in the less than 12 months loss position and 3 securities in the 12 months or greater loss position at March 31, 2022, and 5 securities in the less than 12 months loss position and 3 securities in the 12 months or greater loss position at December 31, 2021. 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 March 31, 2022. NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES At March 31, 2022 and December 31, 2021, the Company had $ 1.50 billion and $ 1.48 billion, respectively, in loans receivable outstanding. Outstanding balances include a total net increase of $ 1.6 million and $ 1.7 million at March 31, 2022 and December 31, 2021, respectively, for unearned income, net deferred loan fees, and unamortized discounts and premiums. We had no loans held for sale at March 31, 2022 and December 31, 2021, respectively. Also, at March 31, 2022 and December 31, 2021, our commercial and industrial loan portfolio includes $ 10.0 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 portfolios of loans receivable at March 31, 2022 and December 31, 2021, consist of the following: March 31, 2022 December 31, 2021 Amount Amount (Dollars in thousands) Commercial and Industrial $ 38,825 $ 57,151 Construction 136,010 154,077 Real Estate Mortgage: Commercial – Owner Occupied 132,275 123,672 Commercial – Non-owner Occupied 316,253 306,486 Residential – 1 to 4 Family 779,882 750,525 Residential – Multifamily 84,970 84,964 Consumer 7,624 7,972 Total Loans $ 1,495,839 $ 1,484,847 10 An age analysis of past due loans by class at March 31, 2022 and December 31, 2021 is as follows: March 31, 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 $ 93 $ — $ 1,335 $ 1,428 $ 37,397 $ 38,825 $ — Construction — — — — 136,010 136,010 — Real Estate Mortgage: Commercial – Owner Occupied — — 1,016 1,016 131,259 132,275 — Commercial – Non-owner Occupied 14,380 — 1,328 15,708 300,545 316,253 — Residential – 1 to 4 Family — — 231 231 779,651 779,882 — Residential – Multifamily — — — — 84,970 84,970 — Consumer — — — — 7,624 7,624 — Total Loans $ 14,473 $ — $ 3,910 $ 18,383 $ 1,477,456 $ 1,495,839 $ — 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. 11 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. 12 The following tables present the information regarding the allowance for loan and lease losses and associated loan data: Real Estate Mortgage Commercial and Industrial Construction Commercial Owner Occupied Commercial Non-owner Occupied Residential 1 to 4 Family Residential Multifamily Consumer Total Allowance for loan losses (Dollars in thousands) Three months ended March 31, 2022 December 31, 2021 $ 417 $ 2,662 $ 2,997 $ 7,476 $ 14,970 $ 1,215 $ 108 $ 29,845 Charge-offs — — — — — — — — Recoveries 6 — 2 — 121 7 — 136 Provisions (benefits) 86 ( 465 ) 13 ( 223 ) 391 193 5 — Ending Balance at March 31, 2022 $ 509 $ 2,197 $ 3,012 $ 7,253 $ 15,482 $ 1,415 $ 113 $ 29,981 Allowance for loan losses Individually evaluated for impairment $ — $ — $ 4 $ 148 $ 29 $ — $ — $ 181 Collectively evaluated for impairment 509 2,197 3,008 7,105 15,453 1,415 113 29,800 Ending Balance at March 31, 2022 $ 509 $ 2,197 $ 3,012 $ 7,253 $ 15,482 $ 1,415 $ 113 $ 29,981 Loans Individually evaluated for impairment $ 196 $ 1,139 $ 2,433 $ 5,369 $ 687 $ — $ — $ 9,824 Collectively evaluated for impairment 38,629 134,871 129,842 310,884 779,195 84,970 7,624 1,486,015 Ending Balance at March 31, 2022 $ 38,825 $ 136,010 $ 132,275 $ 316,253 $ 779,882 $ 84,970 $ 7,624 $ 1,495,839 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 March 31, 2021 December 31, 2020 $ 492 $ 3,359 $ 3,078 $ 8,398 $ 12,595 $ 1,639 $ 137 $ 29,698 Charge-offs — — — — — — — — Recoveries 4 — 8 — — — — 12 Provisions (benefits) ( 22 ) 385 249 762 ( 770 ) ( 101 ) ( 3 ) 500 Ending Balance at March 31, 2021 $ 474 $ 3,744 $ 3,335 $ 9,160 $ 11,825 $ 1,538 $ 134 $ 30,210 Allowance for loan losses Individually evaluated for impairment $ 11 $ 295 $ 40 $ 226 $ 137 $ — $ — $ 709 Collectively evaluated for impairment 463 3,449 3,295 8,934 11,688 1,538 134 29,501 Ending Balance at March 31, 2021 $ 474 $ 3,744 $ 3,335 $ 9,160 $ 11,825 $ 1,538 $ 134 $ 30,210 Loans Individually evaluated for impairment $ 49 $ 4,690 $ 4,370 $ 5,741 $ 1,495 $ — $ — $ 16,345 Collectively evaluated for impairment 120,013 203,060 127,920 320,972 665,876 83,864 9,689 1,531,394 Ending Balance at March 31, 2021 $ 120,062 $ 207,750 $ 132,290 $ 326,713 $ 667,371 $ 83,864 $ 9,689 $ 1,547,739 13 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 March 31, 2022 and December 31, 2021: March 31, 2022 Recorded Investment Unpaid Principal Balance Related Allowance (Dollars in thousands) With no related allowance recorded: Commercial and Industrial $ 196 $ 196 $ — Construction 1,139 5,856 — Real Estate Mortgage: Commercial – Owner Occupied 2,237 2,237 — Commercial – Non-owner Occupied 106 106 — Residential – 1 to 4 Family 232 232 — Residential – Multifamily — — — Consumer — — — 3,910 8,627 — With an allowance recorded: Commercial and Industrial — — — Construction — — — Real Estate Mortgage: Commercial – Owner Occupied 196 196 4 Commercial – Non-owner Occupied 5,263 5,263 148 Residential – 1 to 4 Family 455 455 29 Residential – Multifamily — — — Consumer — — — 5,914 5,914 181 Total: Commercial and Industrial 196 196 — Construction 1,139 5,856 — Real Estate Mortgage: Commercial – Owner Occupied 2,433 2,433 4 Commercial – Non-owner Occupied 5,369 5,369 148 Residential – 1 to 4 Family 687 687 29 Residential – Multifamily — — — Consumer — — — $ 9,824 $ 14,541 $ 181 14 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 15 The following table presents by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (Dollars in thousands) Commercial and Industrial $ 206 $ — $ 49 $ — Construction 1,139 — 4,765 36 Real Estate Mortgage: Commercial – Owner Occupied 2,367 3 4,534 21 Commercial – Non-owner Occupied 5,472 67 10,244 120 Residential – 1 to 4 Family 690 7 1,505 15 Residential – Multifamily — — — — Consumer — — — — Total $ 9,874 $ 77 $ 21,097 $ 192 Troubled debt restructuring (TDRs) We reported performing TDR loans (not reported as non-accrual loans) of $ 5.9 million and $ 6.0 million, respectively, at March 31, 2022 and December 31, 2021. Nonperforming TDR loans were zero at March 31, 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 months ended March 31, 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 $ 181,000 and $ 254,000 in the allowance at March 31, 2022 and December 31, 2021, respectively. Some loan modifications classified as TDRs may not ultimately result in the full collection of 16 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 March 31, 2022 and December 31, 2021 is as follows: At March 31, 2022 Pass OAEM Substandard Doubtful Total (Dollars in thousands) Commercial and Industrial $ 38,629 $ — $ 196 $ — $ 38,825 Construction 134,871 — 1,139 — 136,010 Real Estate Mortgage: Commercial – Owner Occupied 128,230 3,029 1,016 — 132,275 Commercial – Non-owner Occupied 300,545 14,380 1,328 — 316,253 Residential – 1 to 4 Family 779,566 — 316 — 779,882 Residential – Multifamily 84,970 — — — 84,970 Consumer 7,624 — — — 7,624 Total $ 1,474,435 $ 17,409 $ 3,995 $ — $ 1,495,839 17 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. EQUITY AND CHANGES IN OTHER COMPREHENSIVE INCOME The Company's total equity was $ 240.3 million and $ 232.4 million at March 31, 2022 and December 31, 2021, respectively. Common stock dividend : On March 22, 2022, the Company declared a cash dividend of $ 0.16 per share to common shareholders of record as of April 6, 2022, and paid the dividend April 20, 2022. Preferred stock dividend : The Company declared cash dividends of $ 6,675 and $ 7,050 to preferred stockholders during the three months ended March 31, 2022 and March 31, 2021, respectively. Conversion of preferred stock : During the three months ended March 31, 2022, there were no conversions from preferred stock to common shares. During the three months ended March 31, 2021, preferred stockholders converted 10 shares of preferred shares into 1,375 shares of common stock. Non-controlling interests : The Company had a joint venture with Bridgestone Capital LLC in PDL LLC, a joint venture formed in 2018 to originate short-term alternative real estate loan products. In 2021, the joint venture was liquidated and all earnings in the joint venture were distributed. Prior to the liquidation, the Company had a 51 % ownership interest in the joint venture. The Company distributed PDL earnings of $ 447,000 to Bridgestone during the first three months of 2021. Other comprehensive income The changes in accumulated other comprehensive loss consisted of the following for the three months ended March 31, 2022 and 2021: For the Three Months Ended March 31, 2022 2021 (Dollars in thousands) Investment securities: Net unrealized losses arising during the period $ ( 584 ) $ ( 112 ) Tax effect related to the unrealized loss during the periods 151 29 Loss in other comprehensive income $ ( 433 ) $ ( 83 ) 18 NOTE 6. EARNINGS PER SHARE (“EPS”) The following tables set forth the calculation of basic and diluted EPS for the three-month periods ended March 31, 2022 and 2021. Three months ended March 31, 2022 2021 (Dollars in thousands except share and per share data) Basic earnings per common share Net income available to the Company $ 10,091 $ 9,429 Less: Dividend on series B preferred stock ( 7 ) ( 7 ) Net income available to common shareholders 10,084 9,422 Basic weighted-average common shares outstanding 11,905,330 11,872,246 Basic earnings per common share $ 0.85 $ 0.79 Diluted earnings per common share Net income available to common shares $ 10,084 $ 9,422 Add: Dividend on series B preferred stock 7 7 Net income available to diluted common shares 10,091 9,429 Basic weighted-average common shares outstanding 11,905,330 11,872,246 Dilutive potential common shares 274,990 236,600 Diluted weighted-average common shares outstanding 12,180,320 12,108,846 Diluted earnings per common share $ 0.83 $ 0.78 NOTE 7. 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: 19 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 and Loans Held for Sale: 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 the loans held for sale, the fair value represents the face value of the guaranteed portion of the SBA loans pending settlement. Securities and loans in Level 2 include mortgage-backed securities, corporate debt obligations, collateralized mortgage-backed securities, and SBA loans available for sale. 20 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 and Loans Held for Sale As of March 31, 2022 Corporate debt obligations $ — $ 500 $ — $ 500 Residential mortgage-backed securities — 11,304 — 11,304 Collateralized mortgage-backed securities — 6 — 6 Total $ — $ 11,810 $ — $ 11,810 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 three months ended March 31, 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 months ended March 31, 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 March 31, 2022 Collateral-dependent impaired loans $ — $ — $ 4,014 $ 4,014 OREO — — — — As of December 31, 2021 Collateral-dependent impaired loans $ — $ — $ 4,087 $ 4,087 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. The methodologies for estimating the fair value of other financial assets and liabilities are discussed below. 21 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, demand and other non-maturity deposits and accrued interest payable. The Company used the following methods and assumptions in estimating the fair value of the following financial instruments: Investment Securities: Fair value of securities available for sale is described above. Fair value of held to maturity securities is based upon quoted market prices for identical or similar assets. Loans Held for Sale: Fair value represents the face value of the guaranteed portion of SBA loans pending settlement. Loans Receivable: For residential mortgages loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the risk adjusting current interest rates at which similar loans would be made to borrowers with similar credit ratings and same remaining maturities, adjusted for the liquidity discount and underwriting uncertainty. Restricted stock: Carrying value of Federal Home Loan Bank of New York ("FHLBNY") and the Atlantic Central Bankers Bank stocks represent the par values of the stocks and is adjusted for impairments if any. The carrying value approximated fair value. Time deposits: The fair value of time deposits is based on the discounted value of contractual cash flows, where the discount rate is estimated using the market rates currently offered for deposits of similar remaining maturities. Borrowings: The fair values of FHLBNY borrowings and Federal Reserve Bank advance, other borrowed funds and subordinated debt are based on the discounted value of estimated cash flows. The discounted rate is estimated using market rates currently offered for debts with similar credit rating, terms and remaining maturities. For a further discussion of the Company’s valuation methodologies for financial instruments measured at fair value, see the descriptions in the Company's 2021 Annual Report on Form 10-K. Bank premises and equipment, customer relationships, deposit base and other information required to compute the Company’s aggregate fair value are not included in the above information. Accordingly, the above fair values are not intended to represent the aggregate fair value of the Company. 22 The following table summarizes the carrying amounts and fair values for financial instruments at March 31, 2022 and December 31, 2021: March 31, 2022 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (Dollars in thousands) Financial Assets: Cash and cash equivalents $ 503,829 $ 503,829 $ 503,829 $ — $ — Investment securities AFS 11,810 11,810 — 11,810 — Investment securities HTM 9,897 9,058 — 9,058 — Restricted stock 5,157 5,157 — — 5,157 Loans, net 1,465,858 1,431,268 — 1,426,302 4,966 Accrued interest receivable 7,344 7,344 — 7,344 — Financial Liabilities: Non-time deposits $ 1,136,827 $ 1,136,827 $ — $ 1,136,827 $ — Time deposits 540,383 543,987 — 543,987 — Borrowings 120,929 116,455 — 116,455 — Accrued interest payable 1,029 1,029 — 1,029 — December 31, 2021 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (Dollars in thousands) Financial Assets: Cash and cash equivalents $ 596,553 $ 596,553 $ 596,553 $ — $ — Investment securities AFS 13,351 13,351 — 13,351 — Investment securities HTM 9,918 10,025 — 10,025 — Restricted stock 5,144 5,144 — — 5,144 Loans, net 1,455,002 1,440,398 — 1,430,686 9,712 Accrued interest receivable 7,681 7,681 — 7,681 — Financial Liabilities: Non-time deposits $ 1,174,664 $ 1,174,664 $ — $ 1,174,664 $ — Time deposits 593,746 597,791 — 597,791 — Borrowings 120,882 117,636 — 117,636 — Accrued interest payable 1,603 1,603 — 1,603 — Note 8. Leases We lease three retail branches and a parcel of land for a retail branch location. These leases generally have remaining terms of 5 years or less except the land lease, which has a remaining lease term of eighty-four years . Some of the leases may include options to renew the leases. The exercise of lease renewals is at our sole discretion. Our ROU assets and lease liabilities for operating leases are included in other assets and other liabilities on our consolidated balance sheets. We use the interest rate implicit in the lease or incremental borrowing rate in determining the present value of lease payments. At March 31, 2022, we had future minimum lease payments of $ 26.9 million and lease liability $ 2.0 million. The weighted average remaining lease term was 50.0 years and weighted average discount rate was 7.3 % at March 31, 2022, 23 respectively. We also sublease some space for one of our leased facilities to a company. Our operating lease expense is included in occupancy expenses within non-interest expense in our consolidated statements of income. Total operating lease expense consists of operating lease cost, which is recognized on a straight-line basis over the lease term, and variable lease cost, which is recognized based on actual amounts incurred. The following table presents information about our operating leases at March 31, 2022: March 31, 2022 (Dollars in thousands) Lease right of use ("ROU") assets $ 2,001 Lease liabilities $ 2,001 The following table presents future undiscounted cash flows on our operating leases: March 31, 2022 (Dollars in thousands) Remainder of 2022 $ 208 2023 250 2024 262 2025 262 2026 188 Thereafter 25,733 Total undiscounted lease payments $ 26,903 NOTE 9. 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 March 31, 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 March 31, 2022 and December 31, 2021, unused commitments to extend credit amounted to approximately $ 125.5 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 March 31, 2022 and December 31, 2021, standby letters of credit with customers were $ 1.5 million and $ 1.5 million, respectively. 24 On March 8, 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 June 29, 2022. There were no outstanding borrowings on the letter of credit as of March 31, 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 in these States and now in New Jersey, although it is not legal at the federal level. The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) published guidelines in 2014 for financial institutions servicing state legal cannabis businesses. A financial institution that provides services to cannabis-related businesses can comply with Bank Secrecy Act (“BSA”) disclosure standards by following the FinCEN guidelines. We maintain stringent written policies and procedures related to the acceptance of such businesses and to the monitoring and maintenance of such business accounts. We conduct a significant due diligence review of the cannabis business before the business is accepted, including confirmation that the business is properly licensed by the applicable state. Throughout the relationship, we continue monitoring the business, including site visits, to ensure that the business continues to meet our stringent requirements, including maintenance of required licenses and periodic financial reviews of the business. While we believe we are operating in compliance with the FinCEN guidelines, there can be no assurance that federal enforcement guidelines will not change. Federal prosecutors have significant discretion and there can be no assurance that the federal prosecutors will not choose to strictly enforce the federal laws governing cannabis. Any change in the Federal government’s enforcement position, could cause us to immediately cease providing banking services to the cannabis industry. At March 31, 2022 and December 31, 2021, deposit balances from cannabis customers were approximately $ 289.1 million and $ 375.2 million, or 17.2 % and 21.2 % of total deposits, respectively, with two customers accounting for 26.1 % and 19.3 % of the total at March 31, 2022 and December 31, 2021. At March 31, 2022 and December 31, 2021, there were cannabis-related loans in the amounts of $ 4.0 million and $ 5.4 million, respectively. We recorded approximately $ 23 thousand and $ 336 thousand of interest income in the three months ended March 31, 2022 and year ended December 31, 2021, respectively, related to these loans. The fee income for the three months ended March 31, 2022 and year ended December 31, 2021, from the commercial deposit accounts of depositors who do business in the cannabis industry were $ 1.2 million and $ 5.1 million, respectively, and are included in service fees on deposit accounts, in the accompanying consolidated statements of income. NOTE 10. REGULATORY MATTERS Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action. The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was being phased in from 0.0% for 2015 to 2.50% by 2019. The Bank made a one-time election to opt-out of including the net unrealized gain or loss on available for sale securities in computing regulatory capital. At March 31, 2022 and December 31, 2021, the Company and Bank were both considered “well capitalized". Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically under-capitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of March 31, 2022 and December 31, 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory 25 framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. Under final regulations adopted by the federal banking agencies under the Economic Growth, Regulatory Relief and Consumer Protection Acct ( "EGRRCPA"), a community banking organization may opt into the Community Bank Leverage Ratio ("CBLR") framework if it has a Tier 1 leverage ratio of at least 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework will not be required to report or calculate compliance with risk-based capital requirements and will also be considered to have met the well-capitalized ratio requirements under the prompt corrective action regulations. We have elected to use the CBLR framework and is presented as of March 31, 2022. On April 6, 2020, federal banking regulatory agencies modified the original (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 CBLR framework. The modified rule also states that the CBLR 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 CBLR requirement. The leverage ratios of the Company and the Bank at March 31, 2022 are as follows: Regulatory Capital Compliance As of March 31, 2022 Actual For Capital Adequacy Purposes (Dollars in thousands except ratios) Amount Ratio Amount Ratio Company: Tier 1 leverage $ 253,870 12.21 % $ 187,147 9.00 % Parke Bank: Community Bank Leverage Ratio $ 282,651 13.60 % $ 187,111 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. 26