Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Throughout this report, "Parke Bancorp" and "the Company" refer to Parke Bancorp Inc. and its consolidated subsidiaries. The Company is collectively referred to as "we", "us" or "our". Parke Bank is referred to as the "Bank".
The Company may from time to time make written or oral "forward-looking statements" including statements contained in this Report and in other communications by the Company which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, such as statements of the Company's plans, objectives, expectations, estimates and intentions, involve risks and uncertainties and are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of the COVID-19 pandemic on the United States economy in general and the local economies in which the Company operates; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the potential adverse effects of the Consent Orders and any additional regulatory restrictions that may be imposed by banking regulators; the timely development of, and acceptance of, new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); the effect of any change in federal government enforcement of federal laws affecting the cannabis industry; technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.
Financial institutions can be affected by changing conditions in the real estate and financial markets. The lingering effects of the COVID-19 pandemic, geopolitical instability, including the conflict between Russia and Ukraine, foreign currency exchange volatility, volatility in global capital markets, inflationary pressures, and higher interest rates may meaningfully impact loan production, income levels, and the measurement of certain significant estimates such as the allowance for credit losses. Moreover, in a period of economic contraction, we may experience elevated levels of credit losses, reduced interest income, impairment of financial assets, diminished access to capital markets and other funding sources, and reduced demand for our products and services. Volatility in the housing markets, real estate values and unemployment levels results in significant write-downs of asset values by financial institutions. Our lending relationships are primarily with small to mid-sized businesses and individual consumers residing in and around s outhern New Jersey and Philadelphia, Pennsylvania. We focus our lending efforts primarily in three lending areas: residential mortgage loans, commercial mortgage loans, and construction loans. As a result of this geographic concentration, a significant broad-based deterioration in economic conditions in these areas could have a material adverse impact on the quality of our loan portfolio, results of operations and future growth potential.
An unexpected COVID-19 pandemic resurgence due to new variants could cause us to experience higher credit losses in our lending portfolio, additional increases in our allowance for credit losses, impairment of financial assets, diminished access to capital markets and other funding sources, further reduced demand for our products and services, and other negative impacts on our financial position, results of operations.
During 2022, the Federal Reserve took unprecedented action during the year to restrain inflation and improve the stability of the economy by raising the target federal funds rate several times from 25 basis points in the beginning of the year to 75 basis points toward the end of the year and brought the benchmark interest rates up by a collective 4.50 percent. During the first quarter 2023, the Federal Reserve increased the target federal funds rate another 0.25 percent and may further increase the target federal funds rate in 2023 in an attempt to reduce inflation. Any substantial or unexpected change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations. As inflation increases and market interest rates rise, the value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments. In addition, inflation generally increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our non-interest expenses. Furthermore, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.
Any of these effects, if sustained, may impair our capital and liquidity positions, require us to take capital actions, prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements, or result in downgrades in our credit ratings and the reduction or elimination of our common stock dividend in future periods. The extent to which current economic environment has a further impact on our business, results of operations, and financial condition, as well as the regulatory capital
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and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the current economic environment and actions taken by governmental authorities and other third parties in response to the geopolitical conflict, and inflationary pressure.
The Company cautions that the foregoing list of important factors is not exclusive. The Company also cautions readers not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date on which they are given. The Company is not obligated to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after any such date.
Overview
The following discussion provides information about our results of operations, financial condition, liquidity and asset quality. We intend that this information facilitates 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, 2022.
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.
At March 31, 2023, we had total assets of $1.96 billion, and total equity of $273.1 million. Net income available to common shareholders for the three months ended March 31, 2023 was $11.1 million.
Results of Operations
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Net Income : Our net income available to common shareholders for the first quarter of 2023 increased $1.0 million, or 10.3%, to $11.1 million, compared to $10.1 million for the same period last year. Earnings per share were $0.93 per basic common share and $0.92 per diluted common share for the first quarter of 2023 compared to $0.85 per basic common share and $0.83 per diluted common share for the same period last year. The increase in net income available to common shareholders primarily resulted from a $2.4 million reversal of allowance for credit loss, partially offset by a $293.0 thousand decrease in non-interest income and a $1.1 million increase in non-interest expense.
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Net Interest Income : Our net interest income was flat at $17.1 million for the first quarter of 2023 compared to $17.1 million for the first quarter of 2022. Interest income increased $6.4 million during the three months ended March 31, 2023 as compared to the same period in the prior year. The increase in interest income was primarily due to an increase of $5.3 million in interest and fees on loans, due to higher loan balances and interest rates, as well as a $1.0 million increase on interest on deposits with banks. The increase in interest income was partially offset by an increase in interest expense of $6.3 million, due to an increase in interest on deposits of $5.7 million and an increase in interest on borrowings of $600.0 thousand. During the three months ended March 31, 2023, interest on deposits increased due to an increase in market interest rates, while the increase in interest on borrowings was due to an increase in the amount of borrowings and an increase in interest rates.
Provision for credit losses : For the three months ended March 31, 2023, the provision for credit losses decreased $2.4 million, compared to zero for the three months ended March 31, 2022. On January 1, 2023 we implemented ASU 2016-13 Financial Instruments - Credit Losses. This resulted in an increase to the allowance for credit losses of $1.9 million. For the three months ended March 31, 2023, we recorded a recovery to the allowance for credit losses of $2.4 million, mainly due to the decrease in the construction loan portfolio balance. For more information about our provision and allowance for loan and lease losses and our loss experience, see “Financial Condition-Allowance for Loan and Lease Losses” below and Note 4 - Loans And Allowance For Credit Losses on Loans to the unaudited consolidated financial statements.
Non-interest Income : Our non-interest income was $1.8 million for the three months ended March 31, 2023, a decrease of $293.0 thousand, compared to $2.1 million for the three months ended March 31, 2022. The decrease is primarily attributable to a decrease in service fees on deposit account of $101.0 thousand, primarily attributable to a decrease in our cannabis banking deposit accounts, as well as a decrease in loan fees of $97.0 thousand.
Non-interest Expense : Our non-interest expense increased $1.1 million to $6.8 million for the three months ended March 31, 2023, from $5.7 million for the three months ended March 31, 2022. The increase is primarily driven by a $953.0 thousand increase in compensation and a $139.0 thousand increase in OREO expense. The increase in compensation and benefits was mainly driven by an increase in salaries, an increase in pension cost, and a decrease in deferred origination costs. The increase in OREO costs is due to higher costs to maintain the properties, as well as legal expenses related to the OREO properties.
Income Tax : Income tax expense was $3.4 million on income before taxes of $14.6 million for the three months ended March 31, 2023, resulting in an effective tax rate of 23.6%, compared to income tax expense of $3.4 million on income before taxes of $13.5 million for the same period of 2022, resulting in an effective tax rate of 25.2%.
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.
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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,
2023 2022
Average
Balance Interest
Income/
Expense Yield/
Cost Average
Balance Interest
Income/
Expense Yield/
Cost
(Dollars in thousands)
Assets
Loans* $ 1,763,219 $ 24,545 5.65 % $ 1,468,889 $ 19,199 5.30 %
Investment securities** 25,434 210 3.35 % 27,623 189 2.77 %
Interest bearing deposits 117,128 1,269 4.39 % 534,886 248 0.19 %
Total interest-earning assets 1,905,781 26,024 5.54 % 2,031,398 19,636 3.92 %
Other assets 80,113 77,969
Allowance for credit losses (31,843) (29,956)
Total assets $ 1,954,051 $ 2,079,411
Liabilities and Shareholders’ Equity
Interest bearing deposits:
Checking $ 83,278 $ 130 0.63 % $ 98,576 $ 96 0.39 %
Money markets 335,722 2,758 3.33 % 351,625 450 0.52 %
Savings 174,600 463 1.08 % 187,943 163 0.35 %
Time deposits 499,910 2,931 2.38 % 562,777 1,104 0.80 %
Brokered certificates of deposit 113,372 1,300 4.65 % 9,120 27 1.20 %
Total interest-bearing deposits 1,206,882 7,582 2.55 % 1,210,041 1,840 0.62 %
Borrowings 143,021 1,293 3.67 % 120,899 696 2.33 %
Total interest-bearing liabilities 1,349,903 8,875 2.67 % 1,330,940 2,536 0.77 %
Non-interest bearing deposits 316,365 497,733
Other liabilities 16,331 12,966
Total non-interest bearing liabilities 332,696 510,699
Equity 271,452 237,772
Total liabilities and shareholders’ equity $ 1,954,051 $ 2,079,411
Net interest income $ 17,149 $ 17,100
Interest rate spread 2.87 % 3.15 %
Net interest margin 3.65 % 3.41 %
* The average balance of loans includes loans on nonaccrual.
** Includes balances of FHLB and ACBB stock.
Financial Condition
General
At March 31, 2023, the Company’s total assets were $1.96 billion, a decrease of $20.7 million, or 1.0%, from December 31, 2022. The decrease in total assets was primarily attributable to a decrease in cash and cash equivalents of $36.2 million, partially offset by an increase in loans receivable. The decrease in cash and cash equivalents was primarily due to cash withdrawn from deposits, as well as an increase in loans receivable, partially offset by an increase in borrowings. Loans increased $11.2 million at March 31, 2023, primarily due to increases in loan balances classified as CRE owner occupied and residential 1-4 family, partially offset by a decrease in the construction loan portfolio, compared to the balances at December 31, 2022.
Total liabilities were $1.69 billion at March 31, 2023. This represented a $27.7 million, or 1.6%, decrease, from $1.72 billion at December 31, 2022. The decrease in total liabilities was primarily due to a decrease in total deposits, which decreased $112.2 million, or 7.1%, to $1.46 billion at March 31, 2023, from $1.58 billion at December 31, 2022. The decrease in deposits was attributable to a decrease in non-interest demand deposits of $75.4 million and savings of $35.9 million, partially offset by an increase in time deposits of $13.3 million.
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Total equity was $273.1 million and $266.0 million at March 31, 2023 and December 31, 2022, respectively, an increase of $7.1 million from December 31, 2022. The increase was primarily due to the retention of earnings, partially offset by the payment of $2.2 million of cash dividends, and $2.1 million adoption of ASC 326.
The following table presents certain key condensed balance sheet data as of March 31, 2023 and December 31, 2022 :
March 31,
2023 December 31,
2022 Change % Change
(Dollars in thousands)
Cash and cash equivalents $ 145,974 $ 182,150 $ (36,176) (19.9) %
Investment securities 18,336 18,744 (408) (2.2) %
Loans, net of unearned income 1,762,696 1,751,459 11,237 0.6 %
Allowance for credit losses (31,507) (31,845) 338 (1.1) %
Total assets 1,964,245 1,984,915 (20,670) (1.0) %
Total deposits 1,463,794 1,575,981 (112,187) (7.1) %
FHLBNY borrowings 165,150 83,150 82,000 98.6 %
Subordinated debt 42,969 42,921 48 0.1 %
Total liabilities 1,691,139 1,718,881 (27,742) (1.6) %
Total equity 273,106 266,034 7,072 2.7 %
Total liabilities and equity 1,964,245 1,984,915 (20,670) (1.0) %
Cash and cash equivalents
Cash and cash equivalents decreased $36.2 million to $146.0 million at March 31, 2023 from $182.2 million at December 31, 2022, a decrease of 19.9%. The decrease was primarily due to cash withdrawn from deposits and the funding of loans.
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Investment securities
Total investment securities decreased to $18.3 million at March 31, 2023, from $18.7 million at December 31, 2022, a decrease of $408.0 thousand or 2.2%. The decrease was attributed to normal pay downs of $490.0 thousand, partially offset by an increase in the fair market valuation of $82.0 thousand. For detailed information on the composition and maturity distribution of our investment portfolio, see NOTE 3 - Investment Securities in the notes to the unaudited consolidated financial statements.
Loans
Our lending relationships are primarily with small to mid-sized businesses and individual consumers residing in and around Southern New Jersey and Philadelphia, Pennsylvania. We have also expanded our lending footprint in other areas. We focus our lending efforts primarily in three lending areas: residential mortgage loans, commercial mortgage loans, and construction loans.
We originate residential mortgage loans with adjustable and fixed-rates that are secured by 1- 4 family and multifamily residential properties. These loans are generally underwritten under terms, conditions and documentation acceptable to the secondary mortgage market. A substantial majority of such loans can be pledged for potential borrowings.
We originate commercial real estate loans that are secured by commercial real estate properties that are owner and non-owner occupied real estate properties. These loans are typically larger in dollar size and are primarily secured by office buildings, retail buildings, warehouses and general purpose business space. The commercial mortgage loans generally have maturities of twenty years, but re-price within five years.
The construction loans we originate provide real estate acquisition, development and construction funds to individuals and real estate developers. The loans are secured by the properties under development. The construction loan funds are disbursed periodically at pre-specified stages of completion.
We also originate commercial and industrial loans, which provide liquidity to businesses in the form of lines of credit and may be secured by accounts receivable, inventory, equipment or other assets. In addition, we have a small consumer loan portfolio which provides loans to individual borrowers.
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Loans receivable : Loans receivable increased to $1.76 billion at March 31, 2023 from $1.75 billion at December 31, 2022. T he increase was primarily due to increases in the CRE owner occupied and the residential - 1 to 4 family portfolios, partially offset by a decrease in the construction loan portfolio. Loans receivable, excluding loans held for sale, as of March 31, 2023 and December 31, 2022, consisted of the following:
March 31, 2023 December 31, 2022
Amount Percentage of Loans to total
Loans Amount Percentage of Loans to total
Loans
(Dollars in thousands)
Commercial and Industrial $ 34,138 1.9 % $ 32,383 1.8 %
Construction 169,375 9.6 % 192,357 11.0 %
Real Estate Mortgage:
Commercial – Owner Occupied 141,083 8.0 % 125,950 7.2 %
Commercial – Non-owner Occupied 379,140 21.5 % 377,452 21.6 %
Residential – 1 to 4 Family 442,110 25.2 % 444,820 25.3 %
Residential – 1 to 4 Family Investment 490,779 27.8 % 476,210 27.2 %
Residential – Multifamily 99,586 5.6 % 95,556 5.5 %
Consumer 6,485 0.4 % 6,731 0.4 %
Total Loans $ 1,762,696 100.0 % $ 1,751,459 100.0 %
Deposits
At March 31, 2023, total deposits decreased to $1.46 billion from $1.58 billion at December 31, 2022, a decrease of $112.2 million, or 7.1%. The decrease in deposits was primarily due to a decrease in non-interest bearing demand deposits, and a decrease in savings deposits, partially offset by an increase in time deposit accounts. The decrease in non-interest bearing demand deposits was mainly driven by withdrawals from our cannabis related deposits, which decreased $53.9 million, from $176.6 million at December 31, 2022 to $122.8 million at March 31, 2023, as well as a decrease in business checking of $11.7 million during the same time period.
March 31, December 31,
2023 2022
(Dollars in thousands)
Noninterest-bearing $ 277,128 $ 352,546
Interest-bearing
Checking 76,983 83,080
Savings 152,604 188,541
Money market 338,927 348,680
Time deposits 618,152 603,135
Total deposits $ 1,463,794 $ 1,575,982
Estimated uninsured deposits $ 560,630 $ 622,966
Borrowings
Total borrowings were $208.1 million at March 31, 2023 and $126.1 million at December 31, 2022. The increase in borrowings is due to the increase in Federal Home Loan Bank of New York ("FHLBNY") advances.
Equity
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Total equity increased to $273.1 million at March 31, 2023 from $266.0 million at December 31, 2022, an increase of $7.1 million, or 2.7%, primarily due to the retention of earnings from the period, partially offset by $2.2 million of cash dividends, and $2.1 million adoption of ASC 326.
Liquidity and Capital Resources
Liquidity is a measure of our ability to generate cash to support asset growth, meet deposit withdrawals, satisfy other contractual obligations, and otherwise operate on an ongoing basis. At March 31, 2023, our cash position was $146.0 million. We invest cash that is in excess of our immediate operating needs primarily in our interest-bearing account at the Federal Reserve.
Our primary source of funding has been deposits. Funds from other operations, financing arrangements, investment securities available-for-sale also provide significant sources of funding. The Company seeks to rely primarily on core deposits from customers to provide stable and cost-effective sources of funding to support loan growth. We focus on customer service which we believe has resulted in a history of customer loyalty. Stability, low cost and customer loyalty comprise key characteristics of core deposits.
We also use brokered deposits as a funding source, which is more volatile than core deposits. The Bank also joined IntraFi Financial Network to secure an additional alternative funding source. IntraFi 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, 2023, the Company had lines of credit with the FHLBNY of $732.3 million, of which $165.2 million was outstanding, and an additional $50.0 million from a letter of credit for securing public funds. The remaining borrowing capacity was $517.1 million at March 31, 2023.
Our investment portfolio primarily consists of mortgage-backed available for sale securities issued by US government agencies and government sponsored entities. These available for sale securities are readily marketable and are available to meet our additional liquidity needs. At March 31, 2023, the Company's investment securities portfolio classified as available for sale was $9.0 million.
We had outstanding loan commitments of $133.9 million at March 31, 2023. Our loan commitments are normally originated with the full amount of collateral. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The funding requirements for such commitments occur on a measured basis over time and would be funded by normal deposit growth.
The following is a discussion of our cash flows for the three months ended March 31, 2023 and 2022.
Cash provided by operating activities was $10.5 million in the three months ended March 31, 2023, compared to $8.7 million for the same period in the prior year. The increase in operating cash flow was primarily due to the increase in accrued interest payable and other accrued liabilities and the increase in net income, net of the decrease in the provision for credit losses.
Cash used in investing activities was $14.4 million in the three months ended March 31, 2023, compared to cash used in investing activities of $8.4 million in the same period last year. The increase in cash used in the investing activities was primarily due to the cash outflow from the increase in loans during the period, as well as the purchase of FHLBNY restricted stock.
Cash used in financing activities was $32.3 million in the three months ended March 31, 2023, compared to cash used in financing activities of $93.0 million in the same period of last year. The decrease in cash used in financing activities was driven by a net increase in FHLBNY borrowings of $82.0 million, partially offset by $112.2 million of cash outflows from the decrease in deposits.
Capital Adequacy
We utilize a comprehensive process for assessing the Company’s overall capital adequacy. We actively review our capital strategies in light of current and anticipated business risks, future growth opportunities, industry standards, and compliance with regulatory requirements. The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, earnings stability, competitive forces, economic conditions, and strength of management. Our objective is to maintain capital at an amount commensurate with our risk profile and risk tolerance objectives, and to meet both regulatory and market expectations. We primarily manage our capital through the retention of earnings. We also use other means to manage our capital. Total equity increased $7.1 million at March 31, 2023, from December 31, 2022, primarily from the Company’s net income of
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$11.1 million for the period, net of common and preferred stock dividends of $2.2 million and the adoption of ASC 326 of $2.1 million.
Banks and bank holding companies are subject to various regulatory capital requirements administered by federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and the Company must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Failure to meet minimum capital requirements can result in regulatory actions.
Under the capital rules issued by the Federal Banking agencies, which became effective in January 2015, the Company and the Bank elected to exclude the effects of certain Accumulated Other Comprehensive Income (“AOCI”) items from its regulatory capital calculation. At March 31, 2023, the Bank and the Company were both considered “well capitalized”.
The following table presents the tier 1 regulatory capital leverage ratios of the Company and the Bank at March 31, 2023:
Amount Ratio Amount Ratio
(Dollars in thousands except ratios)
Company Parke Bank
Tier 1 leverage $ 286,529 14.66 % $ 315,662 16.15 %
Also, in July 2020, we issued $30 million in ten-year, fixed-to-floating rate subordinated notes due 2030 to certain qualified institutional buyers and accredited investors. The Notes have been structured to qualify initially as Tier 2 capital for regulatory capital purposes for our consolidated entity.
Risk Management and Asset Quality
In the normal course of business the Company is exposed to a variety of operational, reputational, legal, regulatory, market, liquidity, and credit risks that could adversely affect our financial performance and financial position. Sound risk management enables us to serve our customers and deliver for our shareholders.
Our asset risk is primarily tied to credit risk. We define credit risk as the risk of loss associated with a borrower or counterparty default. Credit risk exists with many of our assets and exposures including loans, deposit overdrafts, and assets held-for-sale. The discussion below focuses on our loan portfolios, which represent the largest component of assets on our balance sheet for which we have credit risk.
We manage our credit risk by establishing what we believe are sound credit policies for underwriting new loans, while monitoring and reviewing the performance of our existing loan portfolios. We employ various credit risk management and monitoring activities to mitigate risks associated with loans we hold or originate. In making credit decisions, we consider loan concentrations and related credit quality, economic and market conditions, regulatory mandates, and changes in interest rates.
A key to our credit risk management is adherence to a well-controlled underwriting process. When we originate a loan, we assess the borrower’s ability to meet the loan’s terms and conditions based on the risk profile of the borrower, repayment sources, the nature of underlying collateral, and other support given current events, conditions and expectations. We actively monitor and review our loan portfolio throughout a borrower’s credit cycle. A borrower’s ability to repay can be adversely affected by economic and personal financial changes as well as other factors. Likewise, changes in market conditions and other external factors can affect collateral valuations. We adjust our financial assessments to reflect changes in the financial condition, cash flow, risk profile or outlook of a borrower.
We have established a credit monitoring and tracking system and closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. The system supplements the credit review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit risk, loan delinquencies, loan modifications made to borrowers experiencing financial difficulty, nonperforming loans and potential problems loans.
The Company also maintains an outsourced independent loan review program that reviews and validates the credit risk assessment program on a periodic basis. Results of these external independent reviews are presented to management. The external independent loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit risk management personnel.
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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 Credit Losses:
We maintain the allowance for credit 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 Credit Losses on Loans in the notes to the unaudited consolidated financial statements for further discussion on management's methodology for estimating the allowance for credit losses.
At March 31, 2023, the allowance for credit losses was $31.5 million, as compared to $31.8 million at December 31, 2022. The ratio of the allowance for credit losses to total loans was 1.79% and 1.82% at March 31, 2023 and December 31, 2022, respectively. The ratio of the allowance for credit losses to non-performing assets decreased to 176.9% at March 31, 2023, compared to 178.6% at December 31, 2022. During the three month periods ended March 31, 2023 and 2022, the Company did not charge off any loans, and recovered $5,000 and $136,000, respectively. Specific allowances for loan losses have been established in the amount of $398.0 thousand at March 31, 2023, as compared to $549.0 thousand at December 31, 2022. We have established reserves for all expected credit losses at March 31, 2023 and December 31, 2022. There can be no assurance, however, that further additions to the allowance will not be required in future periods.
On January 1, 2023, we implemented ASU 2016-13 Financial Instruments - Credit Losses. This resulted in an increase to the allowance for credit losses on loans of $1.9 million.
The Company estimates the loan credit allowance using an expected life of loss credit methodology in accordance with ASU 2016-13 Financial Instruments - Credit Losses. We recorded a credit loss recovery of $2.4 million during the three months ended March 31, 2023, of which $2.2 million related to the allowance for credit loss on loans, and $200.0 thousand related to the allowance for credit loss on unfunded commitments, compared to zero during the three months ended March 31, 2022.
Loan Delinquencies and Nonperforming Assets:
We have established credit monitoring and tracking systems and closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency rates may be a key indicator, among other considerations, of credit risk within the loan portfolios.
The measurement of delinquency status is based on the contractual terms of each loan. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans that are 30 days or more past due in terms of principal and interest payments are considered delinquent. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when a loan is 90 days past due, unless the loan is well secured and in the process of collection, as required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Delinquent loans totaled $16.7 million, or 0.9% of total loans at March 31, 2023, an increase of $0.2 million from December 31, 2022. At March 31, 2023, loans 30 to 89 days delinquent totaled $579.0 thousand, an increase of $354.0 thousand from December 31, 2022. The increase in loans 30 to 89 days delinquent is mainly driven by an increase in residential 1 to 4 family loans that became delinquent during the quarter ended March 31, 2023. Loans delinquent 90 days or more and not accruing interest totaled $16.1 million or 0.9% of total loans at March 31, 2023, a decrease of $0.1 million from $16.3 million, or 0.9% of total loans, at December 31, 2022. The two largest nonperforming loan relationships as of March 31, 2023 were a $10.9 million and a $3.4 million owner occupied commercial real estate loan.
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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, 2022. As disclosed in Note 1, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments.
Allowance for Credit Losses : Our allowances for credit losses represents management's best estimate of probable losses inherent in our investment and loan portfolios, excluding those loans accounted for under fair value. Our process for determining the allowance for credit losses is discussed in Note 1 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K .
Our determination of the allowance for credit losses is based on periodic evaluations of the loan and lease portfolios and other relevant factors, broken down into vintage based on year of origination. These critical estimates include significant use of our own historical data and other qualitative, and quantitative data. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change. Our allowance for credit losses is comprised of two components, a specific allowance and a general calculation. A specific allowance is calculated for loans and leases that do not share similar risk characteristics with other financial assets, and include collateral dependent loans. A loan is considered to be collateral dependent when foreclosure of the underlying collateral is probable. Parke has elected to apply the practical expedient to measure expected credit losses of a collateral dependent asset using the fair value of the collateral, less any estimated costs to sell, when foreclosure is not probable but repayment of the loan is expected to be provided substantially through the operation or sale of the collateral, and the borrower is experiencing financial difficulty. The general based component covers loans and leases on which there are expected credit losses that are not yet individually identifiable. The allowance calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, projected industry outlook, and economic conditions.
The process of determining the level of the allowance for credit losses requires a high degree of judgment. To the extent actual outcomes differ from our estimates, additional provision for loan and lease losses may be required that would reduce future earnings.
Fair Value Estimates: ASC 820 - Fair Value Measurements defines fair value as a market-based measurement and is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. We classify fair value measurements of financial instruments based on the three-level fair value hierarchy in the accounting standards. We are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value. The fair values of assets may include using estimates, assumptions, and judgments. Valuations of assets or liabilities using techniques non quoted market price are sensitive to assumptions used for the significant inputs. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Changes in underlying factors, assumptions, or estimates used for estimating fair values could materially impact our future financial condition and results of operations.
The majority of our assets recorded at fair value are our investment securities available for sale. The fair value of our available for sale securities are provided by independent third-party valuation services. We may also have a small amount of SBA loans recorded at fair value, which represents the face value of the guaranteed portion of the SBA loans pending settlement. OREO is recorded at fair value on a non-recurring basis and is based on the values of independent third-party full appraisals, less costs to sell (a range of 5% to 10%). Appraisals are updated every 12 months or sooner if we have identified possible further deterioration in value. Refer to Note 7. Fair Value in the Notes to the unaudited consolidated financial statements for further information.
Income Taxes: In the normal course of business, we and our subsidiaries enter into transactions for which the tax treatment is unclear or subject to varying interpretations. We evaluate and assess the relative risks and merits of the tax treatment of transactions, filing positions, filing methods and taxable income calculations after considering statutes, regulations, and other information, and maintain tax accruals consistent with our evaluation of these relative risks and merits. The result of our evaluation and assessment is by its nature an estimate.
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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
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