What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 133 added, 123 removed, 237 unchanged (52% of the section changed)

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Forward-Looking Statements

Throughout this report, "Parke Bancorp" and "the Company" refer to Parke Bancorp Inc.

and its consolidated subsidiaries.

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".

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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.

During the first quarter 2023, the Federal Reserve increased the target federal funds rate another 0.25 percent and further increased the target federal funds rate another 0.25 percent in May 2023.

At its June 2023 meeting, the Federal Reserve left interest rates unchanged for the first time since March 2022, in order to give themselves time to assess the still developing effects of previous increases in interest rates and borrowing costs.

However, on July 26, 2023, the Federal Reserve increased the target funds rate another 0.25 percent.

The Federal Reserve has indicated that it may further increase the target federal funds rate in the second half 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.

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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

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 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 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.

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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.

At June 30, 2023, we had total assets of $1.98 billion, and total equity of $279.1 million.

Net income available to common shareholders for the three and six months ended June 30, 2023 was $8.1 million and $19.3 million, respectively.

Results of Operations

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

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.

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Our net income available to common shareholders for the second quarter of 2023 decreased $2.6 million, or 24.3%, to $8.1 million, compared to $10.7 million for the same period last year.

Earnings per share were $0.68 per basic common share and $0.67 per diluted common share for the second quarter of 2023 compared to $0.90 per basic common share and $0.88 per diluted common share for the same period last year.

The decrease in net income available to common shareholders primarily

resulted from a $2.1 million decrease in net interest income, a $918.0 thousand decrease in non-interest income, and a $659.0 thousand increase in non-interest expense.

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.

Our net interest income was $15.9 million for the second quarter of 2023 compared to $18.0 million for the second quarter of 2022, a decrease of $2.1 million, or 11.7%.

Interest income increased $6.8 million, or 33.0%, during the three months ended June 30, 2023 as compared to the same period in the prior year.

The increase in interest income was primarily due to an increase of $6.3 million in interest and fees on loans, due to higher loan balances and market interest rates, as well as a $412.0 thousand increase in interest on deposits with banks.

The increase in interest income was offset by an increase in interest expense of $8.9 million, or 350.5%, due to an increase in market interest rates on deposits and the mix of deposits of $7.3 million and an increase in interest on borrowings of $1.6 million, due to an increase in borrowing levels at market 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.

For the three months ended June 30, 2023, the provision for credit losses was $500.0 thousand, compared to $350.0 thousand for the three months ended June 30, 2022.

The provision for credit losses during the second quarter of 2023 was primarily driven by an increase in outstanding loan balances, and specific reserves required on a collateral-dependent loan.

Non-interest Income :

Our non-interest income was $1.6 million for the three months ended June 30, 2023, a decrease of $918.0 thousand, compared to $2.5 million for the three months ended June 30, 2022.

The decrease is primarily attributable to a decrease in service fees on deposit account of $382.0 thousand, primarily attributable to a decrease in our cannabis banking deposit accounts, a decrease in gain on the sale of OREO of $281.0 thousand, as well as a decrease in loan fees of $200.0 thousand.

Non-interest Expense :

Our non-interest expense increased $661.0 thousand, or 11.5%, to $6.4 million for the three months ended June 30, 2023, from $5.7 million for the three months ended June 30, 2022.

The increase in non-interest expense was primarily driven by a $482.0 thousand increase in compensation and benefits and a $141.0 thousand increase in OREO expense.

The increase in compensation and benefits was mainly driven by an increase in salaries, and a decrease in deferred origination costs attributed to lower loan origination volume.

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 expense was $2.5 million on income before taxes of $10.6 million for the three months ended June 30, 2023, resulting in an effective tax rate of 23.2%, compared to income tax expense of $3.7 million on income before taxes of $14.4 million for the same period of 2022, resulting in an effective tax rate of 25.6%.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Our net income available to common shareholders for the six months ended June 30, 2023 decreased $1.6 million, or 7.5%, to $19.2 million compared to $20.8 million for the six months ended June 30, 2022.

Earnings per share were $1.61 per basic common share and $1.59 per diluted common share for the six months ended June 30, 2023 compared to $1.75 per basic common share and $1.71 per diluted common share for the same period last year.

The decrease in net income available to common shareholders primarily resulted from a decrease in net interest income of $2.1 million, a decrease in non-interest income of $1.2 million, and an increase in non-interest expense of $1.7 million, partially offset by a decrease in the provision for credit losses of $2.4 million.

Net interest income :

Our net interest income decreased $2.1 million, or 5.9%, to $33.0 million for the six months ended June 30, 2023, compared to $35.1 million for the same period last year.

Interest income for the six months ended June 30, 2023, increased $13.1 million to $53.3 million, or 32.8%, from $40.1 million for the same period of 2022.

The increase in interest income was primarily due to an increase in interest and fees on loans of $11.7 million due to an increase in market interest rates and balances outstanding, and an increase in interest earned on Federal Reserve Bank ("FRB") deposits of $1.4 million.

Interest expense increased $15.2 million, or 300.1%, for the year to date June 30, 2023, compared to the same period in 2022, primarily due to an increase in interest paid on deposits of $13.0 million, or 356.5%, primarily due to an increase in market interest rates and a shift in deposit mix.

Further contributing to the increase in interest expense was an increase in interest on borrowings of $2.2 million, or 155.0%, due to an increase in borrowing levels and higher market interest rates.

Provision for credit losses :

The provision for credit losses was a recovery of $1.9 million for the six months ended June 30, 2023 compared to a provision for credit losses of $350.0 thousand for the six months ended June 30, 2022.

The recovery in the provision for credit losses for the six months ended June 30, 2023 was primarily related to decreases in loss factors related to the construction, commercial owner occupied, and residential 1 to 4 family investment portfolios from December 31, 2022, partially offset by increases in outstanding balance.

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.

For more information about our provision

for credit losses and our allowance for loan and lease losses and 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.

Our non-interest income was $3.4 million for the six months ended June 30, 2023, a decrease of $1.2 million, or 26.4%, compared to $4.6 million for the same period last year.

The decrease is primarily attributable to a decrease in service fees on deposit accounts of $483.0 thousand, a decrease in the gain on the sale of OREO assets of $328.0 thousand, and a decrease in other loan fees of $297.0 thousand.

Fee income for the six months ended June 30, 2023 from commercial deposit accounts of depositors who do business in the cannabis-related industry totaled $2.0 million, compared to $2.5 million for the same period last year.

Fee income is included in service fees on deposit accounts in the accompanying Consolidated Statements of Income.

Non-interest expense:

Our non-interest expense increased $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 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%.

Our non-interest expense increased $1.7 million to $13.1 million for the six months ended June 30, 2023, from $11.4 million for the six months ended June 30, 2022.

The increase was primarily due to an increase in compensation and benefits of $1.4 million, as well as OREO expense of $281.0 thousand.

The increase in compensation and benefits was primarily driven by an increase in salary expense of $681.5 thousand, and a decrease in deferred origination costs of $554.0 thousand, as a result of lower loan origination volume.

The increase in OREO costs is due to the increase in costs associated with the management and disposition of our foreclosed properties.

Income tax expense was $5.9 million on income before taxes of $25.2 million for the six months ended June 30, 2023, resulting in an effective tax rate of 23.5%, compared to income tax expense of $7.1 million on income before taxes of $27.9 million for the same period of 2022, resulting in an effective tax rate of 25.4%.

Net Interest Income

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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,

For the Three Months Ended June 30,

Balance Interest

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** Includes balances of FHLB and ACBB stock.

For the Six Months Ended June 30,

Average Balance Interest Income/ Expense Yield/ Cost Average Balance Interest Income/ Expense Yield/ Cost

(Dollars in thousands)

Loans* $ 1,766,704 $ 50,307 5.74 % $ 1,492,635 $ 38,656 5.22 %

Investment securities** 26,883 437 3.28 % 27,201 371 2.75 %

Interest bearing deposits 111,619 2,547 4.60 % 480,878 1,115 0.47 %

Total interest-earning assets 1,905,206 53,291 5.64 % 2,000,714 40,142 4.05 %

Other assets 79,744 78,633

Allowance for credit losses (31,677) (30,016)

Total assets $ 1,953,273 $ 2,049,331

Liabilities and Shareholders’ Equity

Interest bearing deposits:

Checking $ 79,381 $ 247 0.63 % $ 97,969 $ 195 0.40 %

Money markets 337,504 6,068 3.63 % 357,026 971 0.55 %

Savings 157,035 907 1.16 % 194,968 339 0.35 %

Time deposits 504,891 6,792 2.71 % 537,081 2,090 0.78 %

Brokered certificates of deposit 112,522 2,647 4.74 % 9,019 55 1.23 %

Total interest-bearing deposits 1,191,333 16,661 2.82 % 1,196,063 3,650 0.62 %

Borrowings 179,471 3,615 4.06 % 120,922 1,418 2.36 %

Total interest-bearing liabilities 1,370,804 20,276 2.98 % 1,316,985 5,068 0.78 %

Non-interest bearing deposits 291,310 477,188

Other liabilities 16,425 13,306

Total non-interest bearing liabilities 307,735 490,494

Equity 274,734 241,852

Total liabilities and shareholders’ equity $ 1,953,273 $ 2,049,331

Net interest income $ 33,015 $ 35,074

Interest rate spread 2.66 % 3.27 %

Net interest margin 3.49 % 3.54 %

* The average balance of loans includes loans on nonaccrual.

** Includes balances of FHLB and ACBB stock.

Financial Condition

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.

At June 30, 2023, the Company’s total assets were $1.98 billion, a decrease of $2.4 million, or 0.1%, from December 31, 2022.

The decrease in total assets was primarily attributable to a decrease in cash and cash equivalents of $44.7 million, partially offset by an increase in loans receivable, and an increase in FHLBNY restricted stock, and other assets.

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.

Loans increased $34.6 million at June 30, 2023, primarily due to increases in loan balances classified as CRE owner occupied and residential 1-4 family investment, partially offset by a decrease in the construction loan portfolio, compared to the balances at December 31, 2022.

Total liabilities were $1.70 billion at June 30, 2023.

This represented a $15.6 million, or 0.9%, 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.

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 decrease in total liabilities was primarily due to a decrease in total deposits, which decreased $129.6 million, or 8.2%, to $1.45 billion at June 30, 2023, from $1.58 billion at December 31, 2022.

The decrease in deposits was attributable to a decrease in non-interest demand deposits of $81.6 million and savings deposits of $59.6 million, partially offset by an increase in time deposits of $21.5 million, an increase in interest checking deposits of $16.5 million, and an increase in money market balances of $11.4 million.

The decrease in total deposits was partially offset by an increase in borrowings of $113.0 million, driven by an increase in FHLBNY advances of $103.0 million, and an increase in FRB advances of $10.0 million.

Total equity was $279.1 million and $266.0 million at June 30, 2023 and December 31, 2022, respectively, an increase of $13.1 million from December 31, 2022.

The increase was primarily due to the retention of earnings, partially offset by the payment of $4.3 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 :

The following table presents certain key condensed balance sheet data as of June 30, 2023 and December 31, 2022 :

2023 December 31,

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FHLBNY borrowings 186,150 83,150 103,000 123.9 %

FRB Advances 10,000 — 10,000 100.0 %

Subordinated debt 43,016 42,921 95 0.2 %

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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.

Cash and cash equivalents decreased $44.7 million to $137.5 million at June 30, 2023 from $182.2 million at December 31, 2022, a decrease of 24.5%.

The decrease was primarily due to cash withdrawn from deposits and the funding of loans, partially offset by an increase in borrowings.

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.

Total investment securities decreased to $17.8 million at June 30, 2023, from $18.7 million at December 31, 2022, a decrease of $986.0 thousand or 5.3%.

The decrease was attributed to normal pay downs of $1.0 million, partially offset by an increase in the fair market valuation of $22.0 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.

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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

Loans receivable increased to $1.79 billion at June 30, 2023 from $1.75 billion at December 31, 2022.

T he increase was primarily due to increases in the CRE owner occupied loans and residential - 1 to 4 family investment loans,

partially offset by a decrease in the construction loan portfolio.

Loans receivable, excluding loans held for sale, as of June 30, 2023 and December 31, 2022, consisted of the following:

June 30, 2023 December 31, 2022

Amount Percentage of Loans to total

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Total Loans $ 1,786,046 100.0 % $ 1,751,459 100.0 %

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,

At June 30, 2023, total deposits decreased to $1.45 billion from $1.58 billion at December 31, 2022, a decrease of $129.6 million, or 8.2%.

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 increases in money market and time deposit accounts.

The decrease in non-interest bearing demand deposits was mainly driven by withdrawals from our cannabis related deposits, which decreased $65.7 million, from $177.3 million at December 31, 2022, to $111.6 million at June 30, 2023, as well as a decrease in business checking of $12.8 million during the same time period.

June 30, December 31,

2023 2022 $ Change % Change

(Dollars in thousands)

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Estimated uninsured deposits $ 524,542 $ 622,966 $ (98,424) (15.8) %

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.

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.

Total borrowings were $239.2 million at June 30, 2023 and $126.1 million at December 31, 2022.

The increase in borrowings is due to the increase of $103.0 million in FHLBNY advances, and $10.0 million in FRB advances.

$128.0 million of the outstanding FHLBNY advances, and the $10.0 million FRB advances have short-term maturities.

Total equity increased to $279.1 million at June 30, 2023 from $266.0 million at December 31, 2022, an increase of $13.1 million, or 4.9%, primarily due to the retention of earnings from the period, partially offset by $4.3 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.

At June 30, 2023, our cash position was $137.5 million.

We invest cash that is in excess of our immediate operating needs primarily in our interest-bearing account at the Federal Reserve.

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The rates are comparable to brokered deposits and can be obtained within a shorter period of time than brokered deposits.

As of June 30, 2023, the Company had $119.4 million of brokered deposits sourced from IntraFi.

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.

As of June 30, 2023, the Company had lines of credit with the FHLBNY of $957.5 million, of which $186.2 million was outstanding, and an additional $50.0 million from a letter of credit for securing public funds.

The remaining borrowing capacity was $721.4 million at June 30, 2023.

In the second quarter of 2023, we opened a secured borrowing line with the FRB under the Bank Term Funding Program ("BTFP").

The BTFP is secured by certain eligible investment securities.

As of June 30, 2023, we had a line of credit under this program of $13.8 million, of which $10.0 million was outstanding.

The remaining borrowing capacity under this program was $3.8 million as of June 30, 2023.

We had outstanding loan commitments of $124.9 million at June 30, 2023.

Our loan commitments are normally originated with the full amount of collateral.

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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.

The following is a discussion of our cash flows for the six months ended June 30, 2023 and 2022.

Cash provided by operating activities was $14.7 million in the six months ended June 30, 2023, compared to $21.9 million for the same period in the prior year.

The decrease in operating cash flow was primarily due to the increase in accrued interest receivable, the recovery of provision for credit losses, and the decrease in net income.

Cash used in investing activities was $38.5 million in the six months ended June 30, 2023, compared to cash used in investing activities of $59.4 million in the same period last year.

The decrease in cash used in the investing activities was primarily due to the decrease in cash outflow from the origination of loans during the period, partially offset by the net purchase of FHLBNY restricted stock.

Cash used in financing activities was $20.9 million in the six months ended June 30, 2023, compared to cash used in financing activities of $165.8 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 $103.0 million, an increase in FRB advances of $10.0 million, a decrease in the withdrawal of noninterest-bearing deposits of $19.0 million, and a decrease in the withdrawal of interest-bearing deposits of $13.6 million.

Capital Adequacy

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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

Total equity increased $13.1 million at June 30, 2023, from December 31, 2022, primarily from the Company’s net income of

$19.3 million for the period, net of common and preferred stock dividends of $4.3 million and the adoption of ASC 326 of $2.1 million.

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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:

Under the capital rules issued by the Federal Banking agencies, the Company and the Bank elected to exclude the effects of certain Accumulated Other Comprehensive Income (“AOCI”) items from its regulatory capital calculation.

At June 30, 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 June 30, 2023:

Amount Ratio Amount Ratio

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Tier 1 leverage $ 292,608 14.99 % $ 321,286 16.46 %

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.

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.

Critical Accounting Policies

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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.

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.

23 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis