PARKE BANCORP, INC. 10-Q

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 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. T he 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. 27 At March 31, 2022, we had total assets of $2.05 billion, and total equity of $240.3 million. Net income available to common shareholders for the three months ended March 31, 2022 was $10.1 million. The Global Outbreak of the COVID-19 Coronavirus The COVID-19 pandemic is continuing to have an adverse impact on the Company, its customers and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on the business of the Company, its customers, employees and third-party service providers. The extent of such impact will depend on future developments, which are highly uncertain, including whether the pandemic can be controlled and abated. Additionally, the responses of various governmental and nongovernmental authorities to curtail business and consumer activities in an effort to mitigate the pandemic will have material long-term effects on the Company and its customers which are difficult to quantify in the near-term or long-term. As a participating lender in the SBA Paycheck Protection Program (“PPP”), we are subject to additional risks of litigation from our customers or other parties regarding our processing of loans for the PPP which could have a significant adverse impact on our business, financial position, results of operations, and prospects. The COVID-19 pandemic and its impact on the economy have led to actions including the enactment of the Coronavirus Aid, Relief and Economic Security Act, including the establishment of the PPP administered by the Small Business Administration (“SBA”). Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. We are participating as a lender in the PPP. Since the initiation of the PPP, several banks have been subject to litigation or threatened litigation regarding the process and procedures that such banks used in processing applications for the PPP. We may be exposed to the risk of litigation, from both clients and non-clients that approached us regarding PPP loans. If any such litigation is filed or threatened against us and is not resolved in a manner favorable to us, it may result in significant cost or adversely affect our reputation. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial position, results of operations and prospects. Results of Operations Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 Net Income : Our net income available to common shareholders for the first quarter of 2022 increased $0.7 million, or 7.0%, to $10.1 million, compared to $9.4 million for the same period last year. Earnings per share were $0.85 per basic common share and $0.83 per diluted common share for the first quarter of 2022 compared to $0.79 per basic common share and $0.78 per diluted common share for the same period last year. The increase in net income available to common shareholders primarily resulted from a $1.2 million decrease in interest paid on deposits and borrowings and a $0.5 million decrease in the provision for loan losses, partially offset by a decrease in interest income of $0.9 million. Net Interest Income : Our net interest income increased $0.3 million, or 1.7%, to $17.1 million for the first quarter of 2022 compared to $16.8 million for the first quarter of 2021. The increase in net interest income was primarily due to a decrease of $1.2 million in total interest expense, driven by a reduction in interest rates on deposits which reduced interest expense by $1.0 million, as well as a decrease of $0.2 million in interest on borrowings due to lower outstanding balances. This increase in net interest income was partially offset by a $0.9 million decrease in interest income, primarily due to a reduction in interest and fees on loans of $1.0 million. Provision for loan losses : For the three months ended March 31, 2022, the provision for loan losses decreased to zero, compared to $0.5 million for the three months ended March 31, 2021. The decrease in the provision was primarily due to the prior year consideration of the potential impact of the COVID-19 pandemic. 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 $2.1 million for the three months ended March 31, 2022, a decrease of $0.2 million, compared to $2.2 million for the same period last year. The decrease is primarily attributable to a decrease in service fees from deposit accounts attributable to our cannabis-related businesses of $0.3 million, net of an increase in other income of $0.1 million. Please refer to Note 9. Commitments And Contingencies in the notes to the unaudited consolidated financial statements for our banking services to customers who do business in the cannabis industry. 28 Non-interest Expense : Our non-interest expense decreased $0.1 million to $5.7 million for the three months ended March 31, 2022, from $5.8 million for the three months ended March 31, 2021. The decrease was primarily due to a decrease in professional fees related to our BSA remediation efforts of $0.3 million, partially offset by an increase in occupancy and equipment expense of $0.1 million. Income Tax : Income tax expense was $3.4 million on income before taxes of $13.5 million for the three months ended March 31, 2022, resulting in an effective tax rate of 25.2%, compared to income tax expense of $3.2 million on income before taxes of $12.8 million for the same period of 2021, resulting in an effective tax rate of 25.4%. 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 March 31, 2022 2021 Average Balance Interest Income/ Expense Yield/ Cost Average Balance Interest Income/ Expense Yield/ Cost (Dollars in thousands, except percentages) Assets Loans $ 1,468,889 $ 19,199 5.30 % $ 1,561,075 $ 20,238 5.26 % Investment securities* 27,623 189 2.77 % 28,279 200 2.87 % Interest bearing deposits 534,886 248 0.19 % 498,401 123 0.10 % Total interest-earning assets 2,031,398 19,636 3.92 % 2,087,755 20,561 3.99 % Other assets 77,969 71,278 Allowance for loan losses (29,956) (29,912) Total assets $ 2,079,411 $ 2,129,121 Liabilities and Shareholders’ Equity Interest bearing deposits: Checking $ 98,576 $ 96 0.39 % $ 67,651 $ 76 0.46 % Money markets 351,625 450 0.52 % 317,120 574 0.73 % Savings 187,943 163 0.35 % 122,769 157 0.52 % Time deposits 562,777 1,104 0.80 % 628,373 1,911 1.23 % Brokered certificates of deposit 9,120 27 1.20 % 55,825 109 0.79 % Total interest-bearing deposits 1,210,041 1,840 0.62 % 1,191,738 2,827 0.96 % Borrowings 120,899 696 2.33 % 224,275 928 1.68 % Total interest-bearing liabilities 1,330,940 2,536 0.77 % 1,416,013 3,755 1.08 % Non-interest bearing deposits 497,733 492,745 Other liabilities 12,966 14,093 Total non-interest bearing liabilities 510,699 506,838 Equity 237,772 206,270 Total liabilities and shareholders’ equity $ 2,079,411 $ 2,129,121 Net interest income $ 17,100 $ 16,806 Interest rate spread 3.15 % 2.91 % Net interest margin 3.41 % 3.26 % * Includes balances of FHLB and ACCBB stock. 29 Financial Condition General At March 31, 2022, the Company’s total assets were $2.05 billion, a decrease of $82.3 million, or 3.9%, from December 31, 2021. The decrease in total assets was primarily attributable to a decrease in cash and cash equivalents of $92.7 million as well as an increase in loans receivable. The decrease in cash and cash equivalents was primarily due to cash withdrawn from deposits. Loans increased $11.0 million at March 31, 2022, primarily due to increases in loan balances classified as commercial non-onwer occupied real estate mortgage loans, compared to the balances at December 31, 2021. Total liabilities were $1.81 billion at March 31, 2022. This represented a $90.2 million, or 4.7%, 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 $91.2 million, or 5.2%, to $1.68 billion at March 31, 2022, from $1.77 billion at December 31, 2021. Total equity was $240.3 million and $232.4 million at March 31, 2022 and December 31, 2021, respectively, an increase of $7.9 million from December 31, 2021. The following table presents certain key condensed balance sheet data as of March 31, 2022 and December 31, 2021 : March 31, 2022 December 31, 2021 (Dollars in thousands) Cash and cash equivalents $ 503,829 $ 596,553 Investment securities 21,707 23,269 Loans, net of unearned income 1,495,839 1,484,847 Allowance for loan losses (29,981) (29,845) Total assets 2,054,191 2,136,445 Total deposits 1,677,210 1,768,410 FHLBNY borrowings 78,150 78,150 Subordinated debt 42,779 42,732 Total liabilities 1,813,912 1,904,084 Total equity 240,279 232,361 Total liabilities and equity 2,054,191 2,136,445 Cash and cash equivalents Cash and cash equivalents decreased $92.7 million to $503.8 million at March 31, 2022 from $596.6 million at December 31, 2021, a decrease of 15.5%. The decrease was primarily due to cash withdrawn from deposits. Investment securities Total investment securities decreased to $21.7 million at March 31, 2022, from $23.3 million at December 31, 2021, a decrease of $1.6 million or 6.7%. The decrease was attributed to normal pay downs of $1.0 million and a decrease in the fair market valuation of $0.6 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. 30 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. Beginning in April 2020, the Company has been lending to small business through the SBA PPP loan program, which is a loan designed by the Federal government to provide a direct incentive for small businesses to keep their workers on the payroll during the COVID-19 pandemic. Since the beginning of the loan program through March 31, 2022, the Bank has originated approximately $117.8 million of SBA PPP loans, and had $10.0 million of such loans outstanding as of March 31, 2022. 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 March 31, 2022 or at December 31, 2021. Loans receivable : Loans receivable increased to $1.50 billion at March 31, 2022 from $1.48 billion at December 31, 2021. T he increase was primarily due to increases in the commercial - owner occupied, commercial - non-owner occupied, and residential - 1 to 4 family portfolio's. Loans receivable, excluding loans held for sale, as of March 31, 2022 and December 31, 2021, consisted of the following: March 31, 2022 December 31, 2021 Amount Percentage of Loans to total Loans Amount Percentage of Loans to total Loans (Dollars in thousands) Commercial and Industrial $ 38,825 2.6 % $ 57,151 3.8 % Construction 136,010 9.1 % 154,077 10.4 % Real Estate Mortgage: Commercial – Owner Occupied 132,275 8.8 % 123,672 8.3 % Commercial – Non-owner Occupied 316,253 21.1 % 306,486 20.6 % Residential – 1 to 4 Family 779,882 52.2 % 750,525 50.7 % Residential – Multifamily 84,970 5.7 % 84,964 5.7 % Consumer 7,624 0.5 % 7,972 0.5 % Total Loans $ 1,495,839 100.0 % $ 1,484,847 100.0 % Deposits At March 31, 2022, total deposits decreased to $1.68 billion from $1.77 billion at December 31, 2021, a decrease of $91.2 million, or 5.2%. The decrease in deposits was primarily due to a decrease in non-interest bearing demand deposits and a decrease in time deposit accounts. 31 March 31, December 31, 2022 2021 (Dollars in thousands) Noninterest-bearing $ 471,940 $ 553,810 Interest-bearing Checking 101,202 93,189 Savings 198,282 179,238 Money market 365,403 348,427 Time deposits 540,383 593,746 Total deposits $ 1,677,210 $ 1,768,410 Borrowings Total borrowings were $120.9 million at March 31, 2022 and December 31, 2021, respectively. Equity Total equity increased to $240.3 million at March 31, 2022 from $232.4 million at December 31, 2021, an increase of $7.9 million, or 3.4%, primarily due to the retention of earnings from the period. 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 March 31, 2022, our cash position was $503.8 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 March 31, 2022, the Company had lines of credit with the FHLBNY of $593.4 million, of which $78.2 million was outstanding, and an additional $50.0 million from a letter of credit for securing public funds. The remaining borrowing capacity was $465.2 million at March 31, 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 March 31, 2022, the Company's investment securities portfolio classified as available for sale was $11.8 million. We had outstanding loan commitments of $125.5 million at March 31, 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 three months ended March 31, 2022 and 2021. Cash provided by operating activities was $8.7 million in the three months ended March 31, 2022, compared to $11.1 million for the same period in the prior year. The decrease in operating cash flow was primarily due to the increase in accrued interest receivable and decrease in accrued interest payable, net of the increase in net income. 32 Cash used in investing activities was $8.4 million in the three months ended March 31, 2022, compared to cash provided by investing activities of $21.6 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 $93.0 million in the three months ended March 31, 2022, compared to cash from financing of $13.2 million in the same period of last year. The current year included $91.2 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 $7.9 million at March 31, 2022, from December 31, 2021, primarily from the Company’s net income of $10.1 million for the period, net of common and preferred stock dividends of $1.9 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 March 31, 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 March 31, 2022: Amount Ratio Amount Ratio (Dollars in thousands except ratios) Company Parke Bank Tier 1 leverage $ 253,870 12.21 % $ 282,651 13.60 % 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 33 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 March 31, 2022, the allowance for loan losses was $30.0 million, as compared to $29.8 million at December 31, 2021. The ratio of the allowance for loan losses to total loans was 2.00% and 2.01% at March 31, 2022 and December 31, 2021, respectively. The ratio of the allowance for loan losses to non-performing assets increased to 766.8% at March 31, 2022, compared to 500.6% at December 31, 2021. During the three month periods ended March 31, 2022 and 2021, the Company did not charge off any loans, and recovered $136,000 and $12,000, respectively. Specific allowances for loan losses have been established in the amount of $0.2 million at March 31, 2022, as compared to $0.6 million on impaired loans at December 31, 2021. We have established reserves for all losses that we believe are both probable and reasonably estimable at March 31, 2022 and December 31, 2021. There can be no assurance, however, that further additions to the allowance will not be required in future periods. 34 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 zero during the three months ended March 31, 2022, compared to $0.5 million during the three months ended March 31, 2021. The decrease was primarily due to the increase in qualitative factors made in 2021 as a result of economic uncertainty associated with the COVID-19 pandemic. 35 The table below presents changes in the Company’s allowance for loan losses for the periods indicated. Three Months Ended March 31, 2022 2021 (Dollars in thousands) Balance at the beginning of the period $ 29,845 $ 29,698 Charge-offs: Commercial and Industrial — — Construction — — Real Estate Mortgage: Commercial – Owner Occupied — — Commercial – Non-owner Occupied — — Residential – 1 to 4 Family — — Residential – Multifamily — — Consumer — — Total charge - offs — — Recoveries: Commercial and Industrial 6 4 Construction — — Real Estate Mortgage: Commercial – Owner Occupied 2 8 Commercial – Non-owner Occupied — — Residential – 1 to 4 Family 121 — Residential – Multifamily 7 — Consumer — — Total recoveries 136 12 Net charge-offs (recoveries) 136 12 Provisions for loan losses — 500 Balance at the end of the period $ 29,981 $ 30,210 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 $18.4 million, or 1.2% of total loans at March 31, 2022, an increase of $13.6 million from December 31, 2021. At March 31, 2022, loans 30 to 89 days delinquent totaled $14.5 million, an increase of $14.0 million from December 31, 2021. The increase in loans 30 to 89 days delinquent is driven by two, commercial real estate non-occupied loans. The Company is working closely with the borrowers to remediate the delinquency of these loans. Loans delinquent 90 days or more and not accruing interest totaled $3.9 million or 0.3% of total loans at March 31, 2022, a decrease of $0.4 million from $4.3 million, or 36 0.3% of total loans, at December 31, 2021. The two largest nonperforming loan relationships as of March 31, 2022 were a $1.2 million owner occupied commercial real estate loan and a $1.1 million construction loan. The table below presents an age analysis of past due loans by loan class and the percentage of the nonperforming loans to total loans at March 31, 2022. March 31, 2022 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days and Not Accruing (NPL) Greater than 90 Days and Accruing Current Total Loans NPL to Loan Type % (Dollars in thousands except ratios) Commercial and Industrial $ 93 $ — $ 1,335 $ — $ 37,397 $ 38,825 3.44 % Construction — — — — 136,010 136,010 — % Real Estate Mortgage: Commercial – Owner Occupied — — 1,016 — 131,259 132,275 0.77 % Commercial – Non-owner Occupied 14,380 — 1,328 — 300,545 316,253 0.42 % Residential – 1 to 4 Family — — 231 — 779,651 779,882 0.03 % Residential – Multifamily — — — — 84,970 84,970 — % Consumer — — — — 7,624 7,624 — % Total Loans $ 14,473 $ — $ 3,910 $ — $ 1,477,456 $ 1,495,839 0.26 % Impaired Loans Impaired loans include nonperforming loans and TDRs, regardless of nonperforming status. At March 31, 2022 and December 31, 2021, we had $9.8 million and $10.3 million, respectively, of loans deemed impaired. Impaired loans at March 31, 2022 and December 31, 2021 included $5.9 million and $6.0 million, respectively, of TDR loans. Troubled Debt Restructurings We reported performing TDR loans (not reported as non-accrual loans) of $5.9 million and $6.0 million, respectively, at March 31, 2022 and December 31, 2021. We had nonperforming TDR loans of 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 as a TDR for the three months ended March 31, 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 March 31, 2022 was zero, compared to $124,000 at March 31, 2021. An analysis of OREO activity is as follows: For the three months ended March 31, 2022 2021 (Dollars in thousands) Balance at beginning of period $ 1,654 $ 139 Real estate acquired in settlement of loans 71 55 Sales of OREO, net (1,606) (48) Valuation adjustment (119) (22) Balance at end of period $ — $ 124 37 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 March 31, 2022 and December 31, 2021, unused commitments to extend credit amounted to approximately $125.5 million and $144.6 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 March 31, 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 March 31, 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. 38 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: The 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. Other real estate owned ("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