PARKE BANCORP, INC. 10-Q

Item 1. Financial Statements Parke Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) (Dollars in thousands except per share data) March 31, 2023 December 31, 2022 Assets Cash and due from banks $ 21,472 $ 27,165 Interest bearing deposits with banks 124,502 154,985 Cash and cash equivalents 145,974 182,150 Investment securities available for sale, at fair value 8,977 9,366 Investment securities held to maturity (fair value of $ 7,966 at March 31, 2023 and $ 7,805 at December 31, 2022) 9,359 9,378 Total investment securities 18,336 18,744 Loans, net of unearned income 1,762,696 1,751,459 Less: Allowance for credit losses ( 31,507 ) ( 31,845 ) Net loans 1,731,189 1,719,614 Accrued interest receivable 8,930 8,768 Premises and equipment, net 5,842 5,958 Restricted stock 9,129 5,439 Bank owned life insurance (BOLI) 28,288 28,145 Deferred tax asset 9,878 9,184 Other real estate owned (OREO) 1,673 1,550 Other 5,006 5,363 Total assets $ 1,964,245 $ 1,984,915 Liabilities and Shareholders' Equity Liabilities Deposits Noninterest-bearing deposits $ 277,128 $ 352,546 Interest-bearing deposits 1,186,666 1,223,435 Total deposits 1,463,794 1,575,981 FHLBNY borrowings 165,150 83,150 Subordinated debentures 42,969 42,921 Accrued interest payable 3,143 2,664 Other 16,083 14,165 Total liabilities 1,691,139 1,718,881 Shareholders' Equity Preferred stock, 1,000,000 shares authorized, $ 1,000 liquidation value Series B non-cumulative convertible; 445 shares outstanding at March 31, 2023 and December 31, 2022 445 445 Common stock, $ 0.10 par value; authorized 15,000,000 shares; Issued: 12,231,193 shares and 12,225,097 shares at March 31, 2023 and December 31, 2022, respectively 1,223 1,223 Additional paid-in capital 136,341 136,201 Retained earnings 138,577 131,706 Accumulated other comprehensive loss ( 465 ) ( 526 ) Treasury stock, 284,522 shares at March 31, 2023 and Dec. 31, 2022, at cost ( 3,015 ) ( 3,015 ) Total shareholders’ equity 273,106 266,034 Total liabilities and shareholders' equity $ 1,964,245 $ 1,984,915 See accompanying notes to consolidated financial statements 1 Parke Bancorp Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (unaudited) (Dollars in thousands except per share data) For the Three Months Ended March 31, 2023 2022 Interest income: Interest and fees on loans $ 24,545 $ 19,199 Interest and dividends on investments 210 189 Interest on deposits with banks 1,269 248 Total interest income 26,024 19,636 Interest expense: Interest on deposits 7,582 1,840 Interest on borrowings 1,293 696 Total interest expense 8,875 2,536 Net interest income 17,149 17,100 Provision for (recovery of) credit losses ( 2,400 ) — Net interest income after provision for (recovery of) credit losses 19,549 17,100 Non-interest income Service fees on deposit accounts 1,215 1,316 Other loan fees 178 276 Bank owned life insurance income 143 138 Net gain on sale and valuation adjustment of OREO — 47 Other 246 298 Total non-interest income 1,782 2,075 Non-interest expense Compensation and benefits 3,641 2,688 Professional services 593 551 Occupancy and equipment 644 645 Data processing 301 324 FDIC insurance and other assessments 225 287 OREO expense 172 34 Other operating expense 1,185 1,149 Total non-interest expense 6,761 5,678 Income before income tax expense 14,570 13,497 Income tax expense 3,440 3,406 Net income attributable to Company 11,130 10,091 Less: Preferred stock dividend ( 7 ) ( 7 ) Net income available to common shareholders $ 11,123 $ 10,084 Earnings per common share Basic $ 0.93 $ 0.85 Diluted $ 0.92 $ 0.83 Weighted average common shares outstanding Basic 11,944,163 11,905,330 Diluted 12,160,793 12,180,320 See accompanying notes to consolidated financial statements 2 Parke Bancorp Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) (Dollars in thousands) For the Three Months Ended March 31, 2023 2022 Net income $ 11,130 $ 10,091 Unrealized gain (loss) on investment securities: Unrealized gain (loss) on investment securities 82 ( 584 ) Tax impact on unrealized (gain) loss ( 21 ) 151 Total unrealized gain (loss) on investment securities 61 ( 433 ) Comprehensive income attributable to the Company $ 11,191 $ 9,658 See accompanying notes to consolidated financial statements 3 Parke Bancorp, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EQUITY (unaudited) (Dollars in thousands except share data) Preferred Stock Shares of Common Stock issued Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Treasury Stock Total Shareholders' Equity Three Months Ended Balance, December 31, 2021 $ 445 12,182,081 $ 1,218 $ 135,451 $ 98,017 $ 245 $ ( 3,015 ) $ 232,361 Net income — — — — 10,091 — — 10,091 Common stock options exercised — 15,938 2 112 — — — 114 Other comprehensive loss — — — — — ( 433 ) — ( 433 ) Stock compensation expense — — — 60 — — — 60 Dividend on preferred stock (1) — — — — ( 7 ) — — ( 7 ) Dividend on common stock (2) — — — — ( 1,907 ) — — ( 1,907 ) Balance, March 31, 2022 $ 445 12,198,019 $ 1,220 $ 135,623 $ 106,194 $ ( 188 ) $ ( 3,015 ) $ 240,279 Three Months Ended Balance, December 31, 2022 $ 445 12,225,097 $ 1,223 $ 136,201 $ 131,706 $ ( 526 ) $ ( 3,015 ) $ 266,034 Cumulative effect of adoption of ASU 2016-13 — — — — ( 2,102 ) — — ( 2,102 ) Net income — — — — 11,130 — — 11,130 Common stock options exercised — 6,096 — 33 — — — 33 Other comprehensive income — — — — — 61 — 61 Stock compensation expense — — — 107 — — — 107 Dividend on preferred stock (1) — — — — ( 7 ) — — ( 7 ) Dividend on common stock (2) — — — — ( 2,150 ) — — ( 2,150 ) Balance, March 31, 2023 $ 445 12,231,193 $ 1,223 $ 136,341 $ 138,577 $ ( 465 ) $ ( 3,015 ) $ 273,106 (1) Dividends per share of $ 15.0 were declared on series B preferred stock for the three months ended March 31, 2023 and 2022, respectively. (2) Dividends per share of $ 0.18 and $ 0.16 , respectively, were declared on common stock outstanding for the three months ended March 31, 2023 and 2022. See accompanying notes to consolidated financial statements 4 Parke Bancorp Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Dollars in thousands) For the Three Months Ended March 31, 2023 2022 Cash Flows from Operating Activities: Net income $ 11,130 $ 10,091 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31 165 (Recovery of) provision for credit losses ( 2,400 ) — Increase in value of bank owned life insurance ( 143 ) ( 138 ) Net gain on sale of OREO and valuation adjustments — ( 47 ) Net accretion of purchase premiums and discounts on securities ( 9 ) — Stock based compensation 107 60 Net changes in: Decrease (increase) in accrued interest receivable and other assets 195 ( 2,443 ) Increase in accrued interest payable and other accrued liabilities 1,638 981 Net cash provided by operating activities 10,549 8,669 Cash Flows from Investing Activities: Repayments and maturities of investment securities available for sale 465 944 Repayments and maturities of investment securities held to maturity 34 35 Net increase in loans ( 11,356 ) ( 10,927 ) Sales (purchases) of bank premises and equipment 133 ( 38 ) Proceeds from sale of OREO, net — 1,606 Purchases of restricted stock ( 3,690 ) ( 13 ) Net cash used in investing activities ( 14,414 ) ( 8,393 ) Cash Flows from Financing Activities: Cash dividends ( 2,157 ) ( 1,914 ) Proceeds from exercise of stock options 33 114 Decrease in FHLBNY and short-term borrowings ( 30,000 ) — Increase in FHLBNY and short-term borrowings 112,000 — Net decrease in noninterest-bearing deposits ( 75,418 ) ( 81,870 ) Net decrease in interest-bearing deposits ( 36,769 ) ( 9,330 ) Net cash used in financing activities ( 32,311 ) ( 93,000 ) Net decrease in cash and cash equivalents ( 36,176 ) ( 92,724 ) Cash and Cash Equivalents, January 1, 182,150 596,553 Cash and Cash Equivalents, March 31, $ 145,974 $ 503,829 Supplemental Disclosure of Cash Flow Information: Interest paid $ 8,396 $ 3,110 Income taxes paid $ 1,445 $ 3,894 Non-cash Investing and Financing Items Loans transferred to OREO $ 123 $ 71 Accrued dividends payable $ 2,157 $ 2,157 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. The Bank also has a loan office located at 1817 East Venango Street, Philadelphia, Pennsylvania. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Financial Statement Presentation: We prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Parke Bank (including certain partnership interests). 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, 2022. The accompanying interim financial statements for the three months ended March 31, 2023 and 2022 are unaudited. The balance sheet as of December 31, 2022, was derived from the audited financial statements. In the opinion of management, these financial statements include all normal and recurring adjustments necessary for a fair statement of the results for such interim periods. Results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results for the full year or any other period. Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the allowance for loan losses, the valuation of deferred income taxes, and the carrying value of other real estate owned ("OREO"). Allowance for Credit Losses on Loans and Leases The allowance for credit losses on loans and leases is a valuation account that is deducted from the loan or lease’s amortized cost basis to present the net amount expected to be collected on the loans and leases. Loans and leases deemed to be uncollectible are charged against the allowance for credit losses on loans and leases, and subsequent recoveries, if any, are credited to the allowance for credit losses on loans and leases. Changes to the allowance for credit losses on loans and leases are recorded through the provision for credit losses. The allowance for credit losses on loans and leases is maintained at a level considered appropriate to absorb expected credit losses over the expected life of the portfolio as of the reporting date. The allowance for credit losses on loans and leases is measured on a collective (pool) basis when similar risk characteristics exist. Parke's loan portfolio segments include commercial and industrial, construction, commercial - owner occupied, commercial - non-owner occupied, residential - 1 to 4 family, residential - 1 to 4 family investment, residential - multifamily, and consumer. Loans that do not share similar risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For individually assessed loans, see related details in the Individually Assessed Loans section below. 6 The allowance for credit losses on collectively assessed loans and leases is measured over the expected life of the loan or lease using a vintage loss rate approach, which will then be supplemented with qualitative factors. The vintage loss rate approach creates pools of loans (made up of individual loans) based on the loan segmentation. The loan pools are aggregated by origination year. Charge-offs, net of recoveries, are allocated by the year of charge-off to each loan pool. An average life is prescribed to a pool of loans that were originated in a particular year. The actual charge-offs as a percent of total loans are calculated for each historical year, and projected for future years for each year within the average life time horizon. The sum of the actual charge-offs and projected charge-offs are divided by the average amortized origination amount for each respective year. Those charge-off percentages are added together to obtain an aggregated vintage loss percentage which is then multiplied by the outstanding loan balances to obtain a reserve requirement. Parke runs the Current Expected Credit Loss ("CECL") impairment models on a quarterly basis and qualitatively adjusts model results for risk factors that are not considered within the model but which are relevant in assessing the expected credit losses within the loan and lease pools. Management generally considers the following qualitative factors: •Volume and severity of past-due loans, non-accrual loans and classified loans; •Lending policies and procedures, including underwriting standards and historically based loss/collection, charge-off and recovery practices; • National and economic conditions that may have an impact on credit quality; •Nature and volume of the portfolio; •Existence and effect of any credit concentrations and changes in the level of such concentrations; •The value of the underlying collateral for loans that are not collateral dependent; •Changes in the quality of the loan review system; and •Experience, ability and depth of lending management and staff Parke has elected to not estimate an allowance for credit losses on accrued interest receivable, as it already has a policy in place to reverse or write-off accrued interest, through interest income, in a timely manner. Allowance for Credit Losses on Lending-Related Commitments Parke estimates expected credit losses over the contractual period in which it is exposed to credit risk on contractual obligations to extend credit, unless the obligation is unconditionally cancellable by the Company. The allowance for credit losses on lending-related commitments is recorded in other liabilities in the consolidated balance sheet and is recorded as a provision for credit losses in the consolidated income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. The lifetime loss rates for off-balance sheet credit exposures are calculated in the same manner as on-balance sheet credit exposures, using the same model and economic forecasts, adjusted for the estimated likelihood that funding will occur. Individually Assessed Loans and Leases ASC 326 provides that a loan or lease is measured individually if it does not share similar risk characteristics with other financial assets. For Parke, loans and leases which are identified to be individually assessed under CECL typically would have been evaluated individually as impaired loans using accounting guidance in effect in periods prior to the adoption of CECL and include collateral dependent loans. Collateral Dependent Loans Parke considers a loan to be collateral dependent when foreclosure of the underlying collateral is probable. Parke has also elected to apply the practical expedient to measure expected credit losses of a collateral dependent asset using the fair value of the collateral, less any estimated costs to sell, when foreclosure is not probable but repayment of the loan is expected to be provided substantially through the operation or sale of the collateral, and the borrower is experiencing financial difficulty. Allowance for Credit Losses on Held to Maturity Securities We follow Accounting Standards Codification (ASC) 326-20, Financial Instruments - Credit Loss - Measured at Amortized Cost, to measure expected credit losses on held-to-maturity debt securities on a collective basis by security investment grade. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company classifies the held-to-maturity debt securities into the following major security types: residential mortgage backed, and state and political subdivisions. These securities are highly rated with a history of no credit losses, and are assigned ratings based on the most recent data from ratings agencies depending on the availability of data for the security. Credit ratings of held- 7 to-maturity debt securities, which are a significant input in calculating the expected credit loss, are reviewed on a quarterly basis. Based on the credit ratings of our held-to-maturity securities and our historical experience including no losses, we have determined that an allowance for credit loss on the held-to-maturity portfolio is not required Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses and is included in Accrued interest receivable on the Consolidated Statements of Financial Condition. Allowance for Credit Losses on Available for Sale Securities We follow ASC 326-30, Financial Instruments - Credit Loss - Available-for-Sale Debt Securities, which provides guidance related to the recognition of and expanded disclosure requirements for expected credit losses on available-for-sale debt securities. For available-for-sale debt securities in an unrealized loss position, the Company first evaluates whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is reduced to fair value and recognized as a reduction to non-interest income in the Consolidated Statements of Income. For debt securities available-for-sale which the Company does not intend to sell, or it is not likely the security would be required to be sold before recovery, we evaluate whether a decline in fair value has resulted from credit losses or other adverse factors, such as a change in the security's credit rating. In assessing whether a credit loss exists, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance is recorded, limited to the fair value of the security. Recently Issued Accounting Pronouncements: In March 2020, the FASB issued ASU No. 2020.-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide optional guidance to entities for a limited period of time to ease the transition in accounting for and recognizing the effects of reference rate reform on financial reporting. Under the guidance, modifications of contracts due to reference rate reform will not require contract remeasurement or reassessment of a previous accounting determination. For hedge accounting, modification of critical terms of the hedge due to changes in reference rate reform will not affect hedge accounting or dedesignate the hedging relationship. The guidance also provides specific expedients for fair value hedges, cash flow hedges, and excluded components. Further, the guidance provides a none-time election to sell or transfer held to maturity debt 46 securities that are affected by the reference rate change. The guidance is effective upon issuance through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the sunset (or expiration) date of Accounting Standards Codification (ASC) Topic 848 to December 31, 2024. This gives reporting entities two additional years to apply the accounting relief provided under ASC Topic 848 for matters related to reference rate reform. ASU 2022-06 is effective for all reporting entities immediately upon issuance and must be applied on a prospective basis. The Company does not expect the application of this guidance to have a material impact on the Consolidated Financial Statements. Accounting Pronouncements Adopted in 2023 In June 2016, the Financial Accounting Standard Board (FASB) issued accounting standards update ("ASU") 2016-13, Financial Instruments-Credit Losses. ASU 2016-13 (Topic 326) , replaces the incurred loss impairment methodology in current GAAP with a CECL methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. The ASU was amended in some aspects by subsequent Accounting Standards Updates. This guidance became effective on January 1, 2023 for the Company. Results and disclosures for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company adopted this guidance, and subsequent related updates, using the modified retrospective approach for all financial assets measured at amortized cost, including loans and held-to-maturity debt securities, and unfunded commitments. On January 1, 2023, the Company recorded a cumulative effect decrease to retained earnings of $ 2.1 million, net of tax, of which $ 1.9 million related to loans, and $ 960.0 thousand related to unfunded commitments. There were no such charges for securities held by the Company at the date of adoption. 8 The following table illustrates the impact of adopting ASC 326: (Amounts in thousands) January 1, 2023 Assets Pre-adoption Adoption Impact As Reported ACL on loans Commercial and Industrial $ 390 $ 168 $ 558 Construction 2,581 1,899 4,480 Commercial - Owner Occupied 2,298 ( 171 ) 2,127 Commercial - Non-owner Occupied 9,709 ( 951 ) 8,758 Residential - 1 to 4 Family 6,076 1,782 7,858 Residential - 1 to 4 Family Investment 9,381 ( 795 ) 8,586 Residential - Multifamily 1,347 ( 128 ) 1,219 Consumer 63 53 116 Total ACL on loans 31,845 1,857 33,702 Deferred Tax Assets 9,184 716 9,900 Liabilities ACL for unfunded commitments — 960 960 Equity Retained Earnings $ 131,706 $ ( 2,101 ) $ 129,605 NOTE 3. INVESTMENT SECURITIES The following is a summary of the Company's investments in available for sale and held to maturity securities as of March 31, 2023 and December 31, 2022: As of March 31, 2023 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 9,104 4 631 8,477 Total available for sale $ 9,604 $ 4 $ 631 $ 8,977 Held to maturity: Residential mortgage-backed securities $ 5,521 $ — $ 1,032 $ 4,489 States and political subdivisions 3,838 62 423 3,477 Total held to maturity $ 9,359 $ 62 $ 1,455 $ 7,966 9 As of December 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 9,575 3 712 8,866 Total available for sale $ 10,075 $ 3 $ 712 $ 9,366 Held to maturity: Residential mortgage-backed securities $ 5,556 $ — $ 1,096 $ 4,460 States and political subdivisions 3,822 56 533 3,345 Total held to maturity $ 9,378 $ 56 $ 1,629 $ 7,805 The amortized cost and fair value of debt securities classified as available for sale and held to maturity, by contractual maturity as of March 31, 2023 are as follows: Amortized Cost Fair Value (Dollars in thousands) Available for sale: Due within one year $ 500 $ 500 Due after one year through five years 1,868 1,712 Due after five years through ten years 3,183 3,028 Due after ten years 4,053 3,737 Total available for sale $ 9,604 $ 8,977 Held to maturity: Due within one year $ — $ — Due after one year through five years 1,362 1,425 Due after five years through ten years — — Due after ten years 7,997 6,541 Total held to maturity $ 9,359 $ 7,966 Expected maturities may differ from contractual maturities because the issuers of certain debt securities do have the right to call or prepay their obligations without any penalty. 10 The Company did not sell any securities during the three months ended March 31, 2023. The following tables show the gross unrealized losses and fair value of the Company's investments for which an allowance for credit losses has not been recorded, which are aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2023 and December 31, 2022: As of March 31, 2023 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 $ 882 $ 15 $ 7,361 $ 616 $ 8,243 $ 631 Total available for sale $ 882 $ 15 $ 7,361 $ 616 $ 8,243 $ 631 Held to maturity: Residential mortgage-backed securities $ — $ — $ 4,489 $ 1,032 $ 4,489 $ 1,032 States and political subdivisions — — 2,052 423 2,052 423 Total held to maturity $ — $ — $ 6,541 $ 1,455 $ 6,541 $ 1,455 As of December 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 thousands) Available for sale: Residential mortgage-backed securities $ 7,579 $ 576 $ 1,043 $ 136 $ 8,622 $ 712 Total available for sale $ 7,579 $ 576 $ 1,043 $ 136 $ 8,622 $ 712 Held to maturity: Residential mortgage-backed securities $ — $ — $ 4,460 $ 1,096 $ 4,460 $ 1,096 States and political subdivisions — — 1,943 533 1,943 533 Total held to maturity $ — $ — $ 6,403 $ 1,629 $ 6,403 $ 1,629 The Company’s unrealized loss for the debt securities is comprised of 8 securities in the less than 12 months loss position and 16 securities in the 12 months or greater loss position at March 31, 2023. The mortgage-backed securities that had unrealized losses were issued or guaranteed by the US government or US government sponsored entities. The unrealized losses associated with those mortgage-backed securities are generally driven by changes in interest rates and are not due to credit losses given the explicit or implicit guarantees provided by the U.S. government. The states and political subdivisions securities that had unrealized losses were issued by a school district, and the loss is attributed to changes in interest rates and not due to credit losses. Because the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, the Company does not consider the unrealized loss in these securities to be credit losses at March 31, 2023. 11 NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES ON LOANS At March 31, 2023 and December 31, 2022, the Company had $ 1.76 billion and $ 1.75 billion, respectively, in loans receivable outstanding. Outstanding balances include a total net increase of $ 2.2 million and $ 1.9 million at March 31, 2023 and December 31, 2022, respectively, for net deferred loan costs, and unamortized discounts. The portfolio segments of loans receivable at March 31, 2023 and December 31, 2022, consist of the following: March 31, 2023 December 31, 2022 Amount Amount (Dollars in thousands) Commercial and Industrial $ 34,138 $ 32,383 Construction 169,375 192,357 Real Estate Mortgage: Commercial – Owner Occupied 141,083 125,950 Commercial – Non-owner Occupied 379,140 377,452 Residential – 1 to 4 Family 442,110 444,820 Residential – 1 to 4 Family Investment 490,779 476,210 Residential – Multifamily 99,586 95,556 Consumer 6,485 6,731 Total Loan receivable 1,762,696 1,751,459 Allowance for credit losses on loans ( 31,507 ) ( 31,845 ) Total loan receivable, net of allowance for credit losses on loans $ 1,731,189 $ 1,719,614 An age analysis of past due loans by class at March 31, 2023 and December 31, 2022 is as follows: March 31, 2023 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days Total Past Due Current Total Loans (Dollars in Thousands) Commercial and Industrial $ 45 $ 87 $ 198 $ 330 $ 33,808 $ 34,138 Construction — — 1,091 1,091 168,284 169,375 Real Estate Mortgage: Commercial – Owner Occupied — — 400 400 140,683 141,083 Commercial – Non-owner Occupied — — 14,380 14,380 364,760 379,140 Residential – 1 to 4 Family 447 — — 447 441,663 442,110 Residential – 1 to 4 Family Investment — — — — 490,779 490,779 Residential – Multifamily — — — — 99,586 99,586 Consumer — — 70 70 6,415 6,485 Total Loans $ 492 $ 87 $ 16,139 $ 16,718 $ 1,745,978 $ 1,762,696 12 December 31, 2022 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days Total Past Due Current Total Loans (Dollars in thousands) Commercial and Industrial $ — $ 89 $ — $ 89 $ 32,294 $ 32,383 Construction — — 1,091 1,091 191,266 192,357 Real Estate Mortgage: Commercial – Owner Occupied — — 400 400 125,550 125,950 Commercial – Non-owner Occupied — — 14,553 14,553 362,899 377,452 Residential – 1 to 4 Family 58 — 162 220 444,600 444,820 Residential – 1 to 4 Family Investment — — — — 476,210 476,210 Residential – Multifamily — — — — 95,556 95,556 Consumer 78 — 70 148 6,583 6,731 Total Loans $ 136 $ 89 $ 16,276 $ 16,501 $ 1,734,958 $ 1,751,459 The following table provides the amortized cost of loans on nonaccrual status: March 31, 2023 (amounts in thousands) Nonaccrual with no ACL Nonaccrual with ACL Total Nonaccrual Loans Past Due Over 90 Days Still Accruing Total Nonperforming Commercial and Industrial $ 198 $ — $ 198 $ — $ 198 Construction 1,091 — 1,091 — 1,091 Commercial - Owner Occupied — 400 400 — 400 Commercial - Non-owner Occupied 10,943 3,437 14,380 — 14,380 Residential - 1 to 4 Family — — — — — Residential - 1 to 4 Family Investment — — — — — Residential - Multifamily — — — — — Consumer 70 — 70 — 70 Total $ 12,302 $ 3,837 $ 16,139 $ — $ 16,139 13 December 31, 2022 (amounts in thousands) Total Nonaccrual Loans Past Due Over 90 Days Still Accruing Commercial and Industrial $ — $ — Construction 1,091 — Commercial - Owner Occupied 587 — Commercial - Non-owner Occupied 19,568 — Residential - 1 to 4 Family 417 — Residential - 1 to 4 Family Investment — — Residential - Multifamily — — Consumer 70 — Total $ 21,733 $ — Allowance For Credit Losses (ACL) We maintain the ACL at a level that we believe to be appropriate to absorb estimated credit losses in the loan portfolios as of the balance sheet date. We established our allowance in accordance with guidance provided in Accounting Standard Codification ("ASC") - Financial Instruments - Credit Losses ("ASC 326"). The allowance for credit losses represents management’s estimate of expected losses inherent in the Company’s lending activities excluding loans accounted for under fair value. The allowance for credit losses is maintained through charges to the provision for credit losses in the Consolidated Statements of Income as expected losses are estimated. Loans or portions thereof that are determined to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance. The Company performs periodic reviews of its loan and lease portfolios to identify credit risks and to assess the overall collectability of those portfolios. The Company's allowance for credit losses includes a general component and an asset-specific component for collateral-dependent loans. To determine the asset-specific component of the allowance, the loans are evaluated individually based on the fair value of the underlying collateral. The Company generally measures the asset-specific allowance as the difference between the net realizable value of loan collateral and the recorded investment of a loan. The general component of the allowance evaluates the impairments of pools of the loan portfolio collectively. It incorporates a historical valuation allowance and qualitative allowance. The historical valuation utilizes a vintage loss rate approach utilizing a third party software model. The vintage loss rate approach creates pools of loans based on the segments defined by management, and consists of commercial and industrial, construction, commercial - owner occupied, commercial - non-owner occupied, residential - 1 to 4 family, residential - 1 to 4 family investment, residential - multifamily, and consumer. The loan pools are aggregated by origination year. Charge-offs, net of recoveries, are allocated by the year of charge-off to each loan pool. An average life is prescribed to a pool of loans that were originated in a particular year. The actual charge-offs as a percent of total loans are calculated for each historical year, and projected for future years for each year within the average life time horizon. The sum of the actual charge-offs and projected charge-offs are divided by the average amortized origination amount for each respective year. Those charge-off percentages are added together to obtain an aggregated vintage loss percentage which is then multiplied by the outstanding loan balances to obtain a reserve requirement. The qualitative allowance component is based on general economic conditions and other qualitative risk factors both internal and external to the Company. It is generally determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank's lending management and staff; (ii) the effectiveness of the Bank's lending policies, procedures and internal controls;(iii) volume and severity of loan credit quality; (iv) nature and volume of portfolio and term of loans (v) the composition and concentrations of credit; (vi) the effectiveness of the internal loan review system; and (vii) national and local economic trends and conditions, and industry conditions. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, high-moderate, moderate, low-moderate or low degree of risk. The results are then input into a "general allocation matrix" to determine an appropriate general valuation allowance. The Company has elected to exclude accrued interest receivable from the measurement of the ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is generally reversed against interest income. 14 The process of determining the level of the allowance for credit losses requires a high degree of estimate and judgment. It is reasonably possible that actual outcomes may differ from our estimates. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted through the provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. At March 31, 2023, the allowance for credit losses on off-balance sheet credit exposures was $ 760.0 thousand. The following tables present the information regarding the allowance for credit losses and associated loan data by portfolio segment under the CECL model in accordance with ASC 326: Real Estate Mortgage Commercial and Industrial Construction Commercial Owner Occupied Commercial Non-owner Occupied Residential 1 to 4 Family Residential 1 to 4 Family Investment Residential Multifamily Consumer Total Allowance for credit losses (Dollars in thousands) Three months ended March 31, 2023 December 31, 2022 $ 390 $ 2,581 $ 2,298 $ 9,709 $ 6,076 $ 9,381 $ 1,347 $ 63 $ 31,845 Impact of adoption ASC 326 168 1,899 ( 171 ) ( 951 ) 1,782 ( 795 ) ( 128 ) 53 1,857 Charge-offs — — — — — — — — — Recoveries 3 — 2 — — — — — 5 Provisions (benefits) 177 ( 881 ) ( 253 ) ( 682 ) ( 52 ) ( 516 ) 19 ( 12 ) ( 2,200 ) Ending Balance at March 31, 2023 $ 738 $ 3,599 $ 1,876 $ 8,076 $ 7,806 $ 8,070 $ 1,238 $ 104 $ 31,507 During the quarter, the credit provisions to the Construction, Commercial Non-owner Occupied, and Residential 1-4 Family Investment segments were largely driven by declines or slowdowns to growth within the portfolio that lowered the loan exposure and also caused changes to the qualitative factors related to loan volume within the portfolio segments. The credit provision to the Commercial Owner Occupied segment was largely driven by a reduction in other assets especially mentioned ("OAEM") loans during the quarter, partially offset by increase in loan volume. 15 The following tables present the information regarding the allowance for loan losses and associated loan data by portfolio segment under the incurred loss model: Real Estate Mortgage Commercial and Industrial Construction Commercial Owner Occupied Commercial Non-owner Occupied Residential 1 to 4 Family Residential 1 to 4 Family Investment Residential Multifamily Consumer Total Allowance for loan losses (Dollars in thousands) Three months ended March 31, 2022 December 31, 2021 $ 417 $ 2,662 $ 2,997 $ 7,476 $ 7,045 $ 7,925 $ 1,215 $ 108 $ 29,845 Charge-offs — — — — — — — — — Recoveries 6 — 2 — 121 — 7 — 136 Provisions (benefits) 86 ( 465 ) 13 ( 223 ) 311 80 193 5 — Ending Balance at March 31, 2022 $ 509 $ 2,197 $ 3,012 $ 7,253 $ 7,477 $ 8,005 $ 1,415 $ 113 $ 29,981 Allowance for loan losses Individually evaluated for impairment $ — $ — $ 4 $ 148 $ 29 $ — $ — $ — $ 181 Collectively evaluated for impairment 509 2,197 3,008 7,105 7,448 8,005 1,415 113 29,800 Ending Balance at March 31, 2022 $ 509 $ 2,197 $ 3,012 $ 7,253 $ 7,477 $ 8,005 $ 1,415 $ 113 $ 29,981 Loans Individually evaluated for impairment $ 196 $ 1,139 $ 2,433 $ 5,369 $ 687 $ — $ — $ — $ 9,824 Collectively evaluated for impairment 38,629 134,871 129,842 310,884 395,587 383,608 84,970 7,624 1,486,015 Ending Balance at March 31, 2022 $ 38,825 $ 136,010 $ 132,275 $ 316,253 $ 396,274 $ 383,608 $ 84,970 $ 7,624 $ 1,495,839 The increase in the allowance for loan loss balance for the residential 1 to 4 family portfolio segment for the three months ended March 31, 2022 is mainly due to loan growth. The increase in the allowance for loan loss balance for the residential multifamily portfolio segment is mainly due to increases in qualitative factors, namely economic conditions. The decrease in the allowance for loan loss balance for the construction portfolio segment for the three months ended March 31, 2022 is due to the decrease in loan balance. Collateral-Dependent Loans The following table presents the collateral-dependent loans by portfolio segment and collateral type at March 31, 2023: (amounts in thousands) Real Estate Business Assets Other Commercial and Industrial $ 198 $ — $ — Construction 1,091 — — Commercial - Owner Occupied 400 — — Commercial - Non-owner Occupied 14,380 — — Residential - 1 to 4 Family — — — Residential - 1 to 4 Family Investment — — — Residential - Multifamily — — — Consumer 70 — — Total $ 16,139 $ — $ — Credit Quality Indicators : As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends related to the risk grades of loans, the level of classified loans, net charge-offs, nonperforming loans (see details above) and the general economic conditions in the region. 16 The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 7. Grades 1 through 4 are considered “Pass”. A description of the general characteristics of the seven risk grades is as follows: 1. Good : Borrower exhibits the strongest overall financial condition and represents the most creditworthy profile. 2. Satisfactory (A) : Borrower reflects a well-balanced financial condition, demonstrates a high level of creditworthiness and typically will have a strong banking relationship with the Bank. 3. Satisfactory (B) : Borrower exhibits a balanced financial condition and does not expose the Bank to more than a normal or average overall amount of risk. Loans are considered fully collectable. 4. Watch List : Borrower reflects a fair financial condition, but there exists an overall greater than average risk. Risk is deemed acceptable by virtue of increased monitoring and control over borrowings. Probability of timely repayment is present. 5. Other Assets Especially Mentioned (OAEM) : Financial condition is such that assets in this category have a potential weakness or pose unwarranted financial risk to the Bank even though the asset value is not currently impaired. The asset does not currently warrant adverse classification but if not corrected could weaken and could create future increased risk exposure. Includes loans that require an increased degree of monitoring or servicing as a result of internal or external changes. 6. Substandard : This classification represents more severe cases of #5 (OAEM) characteristics that require increased monitoring. Assets are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral. Asset has a well-defined weakness or weaknesses that impairs the ability to repay debt and jeopardizes the timely liquidation or realization of the collateral at the asset’s net book value. 7. Doubtful : Assets which have all the weaknesses inherent in those assets classified #6 (Substandard) but the risks are more severe relative to financial deterioration in capital and/or asset value; accounting/evaluation techniques may be questionable and the overall possibility for collection in full is highly improbable. Borrowers in this category require constant monitoring, are considered work-out loans and present the potential for future loss to the Bank. The following tables provide an analysis of loans by portfolio segment based on the credit quality indicators used to determine the allowance for credit losses, as of March 31, 2023 under the current expected credit loss model. (Dollars in thousands) Term Loans Amortized Cost Basis by Origination Year Revolving Loans at Amortized Cost Basis As of March 31, 2023 2023 2022 2021 2020 Prior Total Commercial and Industrial Pass $ 723 $ 2,147 $ 190 $ 3,538 $ 9,027 $ 18,323 $ 33,948 OAEM — — — — — — — Substandard — — — — 190 — 190 Doubtful — — — — — — — $ 723 $ 2,147 $ 190 $ 3,538 $ 9,217 $ 18,323 $ 34,138 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Construction Pass $ — $ 5,693 $ 4,500 $ 194 $ — $ 157,897 $ 168,284 OAEM — — — — — — — Substandard — — — — — 1,091 1,091 Doubtful — — — — — — — $ — $ 5,693 $ 4,500 $ 194 $ — $ 158,988 $ 169,375 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — 17 Commercial – Owner Occupied Pass $ 14,822 $ 32,507 $ 13,407 $ 7,504 $ 61,420 $ 11,023 $ 140,683 OAEM — — — — — — — Substandard — — — — 400 — 400 Doubtful — — — — — — — $ 14,822 $ 32,507 $ 13,407 $ 7,504 $ 61,820 $ 11,023 $ 141,083 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Commercial – Non-owner Occupied Pass $ 2,540 $ 101,039 $ 39,364 $ 34,950 $ 186,456 $ 452 $ 364,801 OAEM — — — — — — — Substandard — — — — 14,339 — 14,339 Doubtful — — — — — — — $ 2,540 $ 101,039 $ 39,364 $ 34,950 $ 200,795 $ 452 $ 379,140 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Residential – 1 to 4 Family Performing $ 14,340 $ 122,576 $ 65,675 $ 34,717 $ 200,096 $ 4,706 $ 442,110 Nonperforming — — — — — — — $ 14,340 $ 122,576 $ 65,675 $ 34,717 $ 200,096 $ 4,706 $ 442,110 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Residential – 1 to 4 Family Investment Performing $ 19,217 $ 146,553 $ 124,391 $ 54,042 $ 146,576 $ — $ 490,779 Nonperforming — — — — — — — $ 19,217 $ 146,553 $ 124,391 $ 54,042 $ 146,576 $ — $ 490,779 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Residential – Multifamily Pass $ 500 $ 5,312 $ 26,956 $ 14,451 $ 52,367 $ — $ 99,586 OAEM — — — — — — $ — Substandard — — — — — — $ — Doubtful — — — — — — — $ 500 $ 5,312 $ 26,956 $ 14,451 $ 52,367 $ — $ 99,586 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Consumer Performing $ 11 $ — $ — $ — $ 6,385 $ 18 $ 6,414 Nonperforming — — — — 71 — 71 $ 11 $ — $ — $ — $ 6,456 $ 18 $ 6,485 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — 18 An analysis of the credit risk profile by internally assigned grades under the incurred loss model as of December 31, 2022 is as follows: At December 31, 2022 Pass OAEM Substandard Doubtful Total (Dollars in thousands) Commercial and Industrial $ 32,383 $ — $ — $ — $ 32,383 Construction 191,266 — 1,091 — 192,357 Real Estate Mortgage: Commercial – Owner Occupied 122,523 3,027 400 — 125,950 Commercial – Non-owner Occupied 362,899 — 14,553 — 377,452 Residential – 1 to 4 Family 444,658 — 162 — 444,820 Residential – 1 to 4 Family Investment 476,210 — — — 476,210 Residential – Multifamily 95,556 — — — 95,556 Consumer 6,661 — 70 — 6,731 Total $ 1,732,156 $ 3,027 $ 16,276 $ — $ 1,751,459 There were no loans modified to borrowers with financial difficulty during the quarter ended March 31, 2023. NOTE 5. EARNINGS PER SHARE (“EPS”) The following tables set forth the calculation of basic and diluted EPS for the three-month periods ended March 31, 2023 and 2022. Three months ended March 31, 2023 2022 (Dollars in thousands except share and per share data) Basic earnings per common share Net income available to the Company $ 11,130 $ 10,091 Less: Dividend on series B preferred stock ( 7 ) ( 7 ) Net income available to common shareholders 11,123 10,084 Basic weighted-average common shares outstanding 11,944,163 11,905,330 Basic earnings per common share $ 0.93 $ 0.85 Diluted earnings per common share Net income available to common shares $ 11,123 $ 10,084 Add: Dividend on series B preferred stock 7 7 Net income available to diluted common shares 11,130 10,091 Basic weighted-average common shares outstanding 11,944,163 11,905,330 Dilutive potential common shares 216,630 274,990 Diluted weighted-average common shares outstanding 12,160,793 12,180,320 Diluted earnings per common share $ 0.92 $ 0.83 19 NOTE 6. FAIR VALUE Fair Value Measurements The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its assets and liabilities carried at fair value in three levels as follows: Level 1 Input: 1) Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 Inputs: 1) Quoted prices for similar assets or liabilities in active markets. 2) Quoted prices for identical or similar assets or liabilities in markets that are not active. 3) Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (e.g., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.” Level 3 Inputs: 1) Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities. 2) These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Fair Value on a Recurring Basis: The following is a description of the Company’s valuation methodologies for assets carried at fair value on a recurring basis. These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes that its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting measurement date. Investments in Available for Sale Securities: Where quoted prices are available in an active market, securities or other assets are classified in Level 1 of the valuation hierarchy. If quoted market prices are not available for the specific security or available for sale loans, then fair values are provided by independent third-party valuation services. These valuation services estimate fair values using pricing models and other accepted valuation methodologies, such as quotes for similar securities and observable yield curves and spreads. As part of the Company’s overall valuation process, management evaluates these third-party methodologies to ensure that they are representative of exit prices in the Company’s principal markets. Securities in Level 2 include mortgage-backed securities, corporate debt obligations, and collateralized mortgage-backed securities. 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 As of March 31, 2023 Corporate debt obligations $ — $ 500 $ — $ 500 Residential mortgage-backed securities — 8,477 — 8,477 Total $ — $ 8,977 $ — $ 8,977 As of December 31, 2022 Corporate debt obligations $ — $ 500 $ — $ 500 Residential mortgage-backed securities — 8,866 — 8,866 Total $ — $ 9,366 $ — $ 9,366 For the three months ended March 31, 2023, there were no transfers between the levels within the fair value hierarchy. There were no level 3 assets or liabilities held during the three months ended March 31, 2023 and 2022. Fair Value on a Non-recurring Basis: Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial Assets Level 1 Level 2 Level 3 Total (Dollars in thousands) As of March 31, 2023 Collateral-dependent loans $ — $ — $ 1,091 $ 1,091 OREO — — 1,673 1,673 As of December 31, 2022 Collateral-dependent loans $ — $ — $ 1,091 $ 1,091 OREO — — 1,550 1,550 All collateral-dependent impaired loans have an independent third-party full appraisal to determine the NRV based on the fair value of the underlying collateral, less cost to sell (a range of 5 % to 10 %) and other costs, such as unpaid real estate taxes, that have been identified, or the present value of discounted cash flows in the case of certain impaired loans that are not collateral dependent. The appraisal will be based on an "as-is" valuation and will follow a reasonable valuation method that addresses the direct sales comparison, income, and cost approaches to market value, reconciles those approaches, and explains the elimination of each approach not used. Appraisals are updated every 12 months or sooner if we have identified possible further deterioration in value. OREO consists of real estate properties that are recorded at fair value based upon current appraised value, or agreements of sale, less estimated disposition costs using level 3 inputs. Properties are reappraised annually. Fair Value of Financial Instruments The Company discloses estimated fair values for its significant financial instruments in accordance with FASB ASC (Topic 825), “ Disclosures about Fair Value of Financial Instruments ”. The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include cash and cash equivalents, accrued interest receivable, bank owned life insurance, restricted stock, demand and other non-maturity deposits and accrued interest payable, and they are considered to be level 1 measurements. 21 The following table summarizes the carrying amounts and fair values for financial instruments that are not carried at fair value at March 31, 2023 and December 31, 2022: March 31, 2023 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (Dollars in thousands) Financial Assets: Investment securities HTM $ 9,359 $ 7,966 $ — $ 7,966 $ — Loans, net 1,731,189 1,674,609 — 1,657,686 16,923 Financial Liabilities: Time deposits $ 618,152 $ 626,111 $ — $ 626,111 $ — Borrowings $ 208,119 $ 210,354 $ — $ 210,354 $ — December 31, 2022 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (Dollars in thousands) Financial Assets: Investment securities HTM $ 9,378 $ 7,805 $ — $ 7,805 $ — Loans, net 1,719,614 1,661,974 — 1,641,444 20,530 Financial Liabilities: Time deposits $ 603,135 $ 609,097 $ — $ 609,097 $ — Borrowings 126,071 127,254 — 127,254 — NOTE 7. COMMITMENTS AND CONTINGENCIES The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of the Company’s involvement in these particular classes of financial instruments. The Company’s exposure to the maximum possible credit risk in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable; inventory; property, plant and equipment and income-producing commercial properties. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments to fund fixed-rate loans were immaterial at March 31, 2023. Variable-rate commitments are generally issued for less than one year and carry market rates of interest. Such instruments are not likely to be affected by annual rate caps triggered by rising interest rates. Management believes that off-balance sheet risk is not material to the results of operations or financial condition. As of March 31, 2023 and December 31, 2022, unused commitments to extend credit amounted to approximately $ 133.9 million and $ 159.0 million, respectively. At March 31, 2023, the allowance for credit losses on off-balance sheet credit exposures was $ 760.0 thousand. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities 22 to customers. As of March 31, 2023 and December 31, 2022, standby letters of credit with customers were $ 1.5 million and $ 1.5 million, respectively. On December 30, 2022, the Bank entered into an agreement with the FHLBNY for a Municipal Letter of Credit ("MLOC") of $ 50.0 million. The MLOC is used to pledge against public deposits and expires on April 4, 2023. There were no outstanding borrowings on the letter of credit as of March 31, 2023. The Company also has entered into an employment contract with the President of the Company, which provides for continued payment of certain employment salary and benefits prior to the expiration date of the agreement and in the event of a change in control, as defined. The Company has also entered in Change-in-Control Severance Agreements with certain officers which provide for the payment of severance in certain circumstances following a change in control. We provide banking services to customers that are licensed by various States to do business in the cannabis industry as growers, processors and dispensaries. Cannabis businesses are legal in these States, 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, 2023 and December 31, 2022, deposit balances from cannabis customers were approximately $ 123.5 million and $ 177.3 million, or 8.4 % and 11.3 % of total deposits, respectively, with three customers accounting for 48.3 % and 36.9 % of the total at March 31, 2023 and December 31, 2022. At March 31, 2023 and December 31, 2022, there were cannabis-related loans in the amounts of $ 18.8 million and $ 3.8 million, respectively. Armored Car Matter An armored car company used by the Bank to transport and store cash for the Bank’s cannabis-related customers, has informed the Company that some of the cash stored for the Bank is missing from its vault and is presumed to have been stolen. The amount that the Bank had recorded as being held at the armored car company's facility on the last day that records were provided was $ 9.5 million. There is not enough information to determine the exact amount of the potential loss, if any, as well as the amount that could be recovered. The Bank is working with relevant state and federal law enforcement authorities to investigate this matter as well as pursuing judicial avenues of recovery. The Bank is pursuing various avenues of recovery that it may have, including, among others, possible insurance claims. If it is ultimately determined that a loss is probable and estimable, we will record the loss in the appropriate fiscal period. If we are successful in making recoveries, we will record the recoveries in the period received, or when the receipt of such recoveries becomes certain. 23