What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-03-13 compared with 2023-03-15 · 74 added, 98 removed, 257 unchanged (40% of the section changed)

9 unchanged sentences

We focus on small to mid - sized business and retail customers and offer a range of loan products, deposit 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.

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:

7 unchanged sentences

Net income available to common shareholders for 2023 was $28.4 million.

In 2022, net income available to common shareholders increased 2.6% over the previous year primarily due to higher net interest income, partially offset by an increase in the provision for loan losses and higher non-interest expense.

At December 31, 2022, total assets decreased 7.1% and total equity increased 14.5%, compared to December 31, 2021.

Our risk based tier 1 capital ratio remained strong during the year and was 19.3% at December 31, 2022.

In 2023, net income available to common shareholders decreased 32.0% over the previous year primarily due to a $11.4 million increase in non-interest expenses, primarily due to a one-time recognition of a $9.5 million contingent loss related to cash that was stolen from a third-party armored car carrier facility that was used by the Company.

In addition, non-interest expense increased due to an increase in compensation and benefits expense, lower net interest income, and lower non-interest income, partially offset by lower provision for credit losses.

At December 31, 2023, total assets increased 1.9% and total equity increased 6.9%, compared to December 31, 2022.

Our risk based tier 1 capital ratio was 20.8% at December 31, 2023.

In addition, during 2023 we returned $8.6 million of capital to our common shareholders through common stock dividends.

Our business operations are subject to risks and uncertainties that could materially affect our operating results, including the continued adverse impact of the COVID-19 pandemic on the local and national economy and our business and results of operations.

Our business operations are subject to risks and uncertainties that could materially affect our operating results.

The extent of such impact will depend on future developments, which are highly uncertain.

2 unchanged sentences

Results of Operations

We recorded net income available to common shareholders of $41.8 million or $3.51 per basic common share and $3.44 per diluted common share, for the year ended December 31, 2022, compared to $40.7 million, or $3.43 per basic common share and $3.36 per diluted common share, for the year ended December 31, 2021, an increase of $1.1 million or 2.6%.

We recorded net income available to common shareholders of $28.4 million or $2.38 per basic common share and $2.35 per diluted common share, for the year ended December 31, 2023, compared to $41.8 million, or $3.51 per basic common share and $3.44 per diluted common share, for the year ended December 31, 2022, a decrease of $13.4 million or 32.0%.

Net Interest Income

Net interest income increased $4.2 million, or 6.1%, to $73.3 million for the year ended 2022 compared to $69.1 million for the year ended 2021.

The increase in net interest income was primarily due to an increase in interest income of $5.4 million, partially offset by an increase in interest expense of $1.2 million.

Interest income for 2022 increased to $87.5 million, an increase of $5.4 million, or 6.6%, from $82.1 million for 2021, primarily due to an increase in interest earned on average deposits held at the Federal Reserve Bank ("FRB") of $3.1 million and an increase in interest and fees on loans of $2.3 million due to higher average outstanding loan balances and higher interest rates.

Net interest income decreased $9.1 million, or 12.4%, to $64.2 million for the year ended 2023 compared to $73.3 million for the year ended 2022.

The decrease in net interest income was primarily due to an increase in interest expense of $34.3 million, partially offset by an increase in interest income of $25.2 million.

Interest income for 2023 increased to $112.7 million, an increase of $25.2 million, or 28.8%, from $87.5 million for 2022, primarily due to an increase in interest and fees on loans of $23.2 million, or 27.9%.

Interest and fees on loans increased during the year ended December 31, 2023, due to higher average outstanding loan balances and higher market interest rates, and an increase in interest earned on average deposits held at the Federal Reserve Bank ("FRB") of $1.8 million, due to higher interest rates paid on deposits, partially offset by a decrease in the average balance of $225.1 million.

Interest expense increased to $48.5 million for 2023, from $14.2 million for 2022, an increase of $34.3 million, or 242.5%.

The increase in interest expense was primarily due to an increase in market interest rates on our deposit accounts.

The increase in interest expense was primarily due to an increase in market interest rates on deposit accounts at the Bank, as well as a change in the deposit mix.

In addition, a decrease in non-interest bearing demand balances and an increase in brokered deposit balances contributed to the increase in interest expense during the 2023 fiscal year..

Comparative Average Balances, Yields and Rates

17 unchanged sentences

Non-interest earning assets 78,253 79,869

Allowance for loan losses (30,449) (30,019)

Allowance for credit losses (31,965) (30,449)

Total assets $ 1,968,391 $ 1,993,937

36 unchanged sentences

Interest Expense:

Deposits (244) 1,561 1,317

NOWs (25) 985 960

Money markets 568 12,625 13,193

Savings (314) 895 581

Time deposits (155) 10,497 10,342

Brokered CDs 3,303 1,809 5,112

Borrowed funds 1,309 2,837 4,146

1 unchanged sentence

Net interest income $ 3,358 $ (12,471) $ (9,113)

Provision for loan losses

Our provision for loan losses in each period is driven by net charge-offs and changes to the allowance for loan losses.

We recorded a provision for loan losses of $1.8 million and $0.5 million in 2022 and 2021, respectively.

The provision for loan losses as a percentage of interest income was 2.06% and 0.61% in 2022 and 2021, respectively.

Our provision for loan losses increased by $1.3 million in 2022 compared to 2021 primarily as a result of the growth of the loan portfolio.

For more information about our provision and allowance for loan and lease losses and our loss experience, see “Risk Management and Asset Quality-Allowance for Loan and Lease Losses” and NOTE 4.

Loans and Allowance for Loan and Lease Losses in the Notes to the Consolidated Financial Statements.

Provision for credit losses

Our provision for credit losses in each period is driven by net charge-offs and changes to the allowance for credit losses.

We recorded a recovery for credit losses of $2.1 million and a provision for loan losses of $1.8 million in 2023 and 2022, respectively.

The (recovery) provision for credit losses as a percentage of interest income was (1.82)% and 2.06% in 2023 and 2022, respectively.

Our provision for credit losses decreased by $3.9 million in 2023 compared to 2022 primarily as a result of a decrease in vintage loss rates and a change in the loan portfolio mix, partially offset by an increase in outstanding loan balances.

Additionally, the provision for unfunded commitments contributed to $461.0 thousand of the decrease.

For more information about our provision and allowance for credit losses and our loss experience, see “Risk Management and Asset Quality-Allowance for Credit Losses” and NOTE 4.

Loans and Allowance for Credit Losses in the Notes to the Consolidated Financial Statements.

Non-interest Income

The table below displays the components of non-interest income for 2022 and 2021.

The table below shows the components of non-interest income for the years ended December 31, 2023 and 2022.

2023 2022 $ Change % Change

7 unchanged sentences

Total non-interest income $ 6,692 $ 8,382 $ (1,690) (20.2) %

Non-interest income decreased by $0.4 million to $8.4 million in 2022 compared to 2021 primarily due to a decrease in fee income related to commercial deposit accounts, partially offset by an increase in the gain on sale of OREO.

Non-interest income decreased by $1.7 million to $6.7 million during the year ended December 31, 2023 compared to 2022, primarily due to a decrease in fee income related to commercial deposit accounts and other loan fees, partially offset by an increase in income earned on bank owned life insurance.

The fee income for the year ended December 31, 2023 from the commercial deposit accounts of depositors who do business in the cannabis industry totaled $3.4 million and is included in service fees on deposit accounts in the accompanying consolidated statements of income.

14 unchanged sentences

Total non-interest expense $ 35,267 $ 23,833 $ 11,434 48.0 %

Non-interest expense increased $1.3 million to $23.8 million for 2022, from $22.5 million for 2021 primarily due to an increase in other operating expense of $1.4 million, an increase in compensation and benefits of $1.1 million, and an increase in OREO expense of $206 thousand, partially offset by a decrease in professional services expense of $1.5 million.

The increase in other operating expense was primarily driven by a $793 thousand increase in Pennsylvania shares tax, a $172 thousand increase in director fees, and a $321 thousand increase in other loan expense.

The increase in compensation and benefits was primarily due to a $425 thousand increase in salaries, and a $597 thousand increase in pension cost.

The decrease in professional services expense was mainly due to the prior year remediation efforts related to our BSA Secrecy Act ("BSA") compliance.

Income tax expense increased $0.3 million to $14.3 million on income before taxes of $56.1 million for 2022, compared to income tax expense of $13.9 million on income before taxes of $54.9 million for 2021.

Non-interest expense increased $11.4 million to $35.3 million for the year ended December 31, 2023, from $23.8 million for 2022 primarily due to an increase in other operating expense of $9.1 million, an increase in compensation and benefits of $1.5 million, and an increase in OREO expense of $0.3 million.

The increase in other operating expense was primarily driven from a one-time recognition of a $9.5 million contingent loss related to cash that was stolen from a third-party armored car carrier facility that was used by the Company.

The increase in compensation and benefits was primarily due to a $0.5 million increase in salaries, and a $0.9 million decrease in deferred loan origination costs, attributable to a reduction in the number of loans originated.

The increase in OREO expense is due to higher costs to maintain the Company's OREO inventory.

Income tax expense decreased $5.0 million to $9.2 million on income before taxes of $37.7 million for 2023, compared to income tax expense of $14.3 million on income before taxes of $56.1 million for 2022.

The effective income tax rates for 2023 and 2022 were 24.5% and 25.4%, respectively.

Financial Condition

At December 31, 2022, the Company’s total assets were $1.98 billion, a decrease of $151.5 million or 7.1%, from December 31, 2021.

The decrease in total assets was primarily attributable to a decrease in cash and cash equivalents, partially offset by an increase in loans.

Cash and cash equivalents decreased $414.4 million, to $182.2 million at December 31, 2022, primarily due to a decrease in deposits, as well as in increase in loans receivable.

At December 31, 2023, the Company’s total assets were $2.02 billion, an increase of $38.6 million or 1.9%, from December 31, 2022.

The increase in total assets was primarily attributable to an increase in loans, restricted stock, and other assets.

Cash and cash equivalents decreased $1.8 million, to $180.4 million at December 31, 2023.

Total loans outstanding increased $35.9 million at December 31, 2023, primarily due to an increase in residential 1 to 4 family loans of $29.0 million;

commercial non-owner occupied loans of $72.3 million;

and construction loans of $39.7 million;

net of a decrease of $24.7 million in commercial and industrial loans.

The decrease in the commercial and industrial loan portfolio is primarily due to the Paycheck Protection Program loans, which decreased $25.1 million to $2.8 million at December 31, 2022, from $27.8 million at December 31, 2021.

residential 1 to 4 family investment loans of $24.0 million;

and commercial owner occupied loans of $15.7 million;

partially offset by a decrease in construction loans of $34.8 million.

Total liabilities were $1.74 billion at December 31, 2023.

This represented a $185.2 million, or 9.7%, decrease from $1.90 billion at December 31, 2021.

The decrease in total liabilities was primarily due to a decrease in total deposits, partially offset by an increase in borrowings.

This represented a $20.3 million, or 1.2%, increase from $1.72 billion at December 31, 2022.

The increase in total liabilities was primarily due to an increase in borrowings, partially offset by a decrease in deposits.

Total deposits decreased $23.2 million, or 1.5%, to $1.55 billion at December 31, 2023, from $1.58 billion at December 31, 2022.

Deposits from the cannabis industries decreased to $177.3 million at December 31, 2022, from $375.2 million at December 31, 2021.

Deposits from the cannabis industries decreased to $96.7 million at December 31, 2023, from

$177.3 million at December 31, 2022.

Total borrowings were $168.1 million at December 31, 2023, an increase of $42.0 million, compared to December 31, 2022, primarily due to an increase in FHLB advances of $41.9 million.

7 unchanged sentences

Loans, net of unearned income 1,787,340 1,751,459 35,881 2.0 %

Allowance for loan losses (31,845) (29,845) (2,000) 6.7 %

Allowance for credit losses (32,131) (31,845) (286) 0.9 %

Total assets 2,023,500 1,984,915 38,585 1.9 %

7 unchanged sentences

Cash and cash equivalents decreased $1.8 million to $180.4 million at December 31, 2023, from $182.2 million at December 31, 2022, a decrease of 1.0%.

The decrease was primarily due to a decrease in deposits mainly attributed to a decrease in deposits from the cannabis businesses, as well as in increase in loans receivable.

The decrease in cannabis deposits is primarily due to increased competition for such deposits from other banks.

See “Deposits” below.

During 2022, an armored car company used by the Bank to transport and store cash for the Bank’s cannabis-related customers, informed the Company that some of the cash stored for the Bank is missing from its vault and is presumed to have been stolen.

Based on preliminary estimates, the Company believes that the amount missing that is attributable to the Bank is approximately $9.5 million.

The exact amount of the potential loss, if any, is unknown at this time.

Please see Note 15 Commitments and Contingencies of the Notes to Consolidated Financial Statements.

Investment securities

Total investment securities decreased to $16.4 million at December 31, 2023, from $18.7 million at December 31, 2022, a decrease of $2.4 million or 12.6%.

The decrease was primarily due to pay downs of $2.9 million and $1.0 million valuation decline.

The decrease was primarily due to pay downs of $2.5 million, partially offset by a $0.1 million valuation increase.

Loans, net unearned income

1 unchanged sentence

The increase was primarily due to an increase in residential 1 - 4 family of $29.0 million;

commercial non-owner occupied of $72.3 million;

and construction loans of $39.7 million;

partially offset by a decrease of $24.7 million in commercial and industrial loans.

Allowance for loan losses

Allowance for loan losses increased $2.0 million, to $31.8 million, or 6.70%, at December 31, 2022, from $29.8 million at December 31, 2021.

The increase was primarily due to the provision of $1.8 million due to the increase in the loan portfolio.

residential 1 to 4 family investment of $24.0 million;

and commercial owner-occupied loans of $15.7 million;

partially offset by a decrease of $34.8 million in construction loans.

Allowance for credit losses

Allowance for credit losses increased $0.3 million, to $32.1 million, or 0.90%, at December 31, 2023, from $31.8 million at December 31, 2022.

The increase was primarily due to an increase in the portfolio balance, net of a decrease in historical loss rates.

In 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses , 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.

At December 31, 2023, the Bank’s total deposits decreased to $1.55 billion from $1.58 billion at December 31, 2022, a decrease of $23.2 million, or 1.5%.

The decrease in deposits was primarily attributed to a decrease in non-interest bearing demand deposits of $201.3 million, and time deposits of $91.9 million, partially offset by an increase in brokered CD balances of $101.3 million.

The decrease in deposits was primarily attributed to a decrease in non-interest bearing demand deposits of $120.4 million, savings of $105.1 million, time deposits of $42.2 million, and interest checking of $20.1 million

partially offset by an increase in money market of $218.4 million, and brokered CD balances of $46.2 million.

Deposits from the cannabis businesses decreased to $96.7 million at December 31, 2023, from $177.3 million at December 31, 2022, a decrease of $80.6 million.

The decrease in such deposits is primarily attributable to increased competition from other banks, as more banks are soliciting deposits from these businesses and offering favorable terms and fees for such deposits.

The decrease in such deposits is primarily attributable to increased competition from other banks, and the consolidation of the cannabis industry.

The Bank expects this trend to continue in the foreseeable future.

12 unchanged sentences

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 the IntraFi 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 time than brokered deposits.

We also use brokered deposits as a funding source.

The Bank joined the IntraFi network to secure an additional alternative funding source.

IntraFi provides the Bank an additional source of external funds through their weekly CDARS® settlement process, as well as their ICS® money market product.

While deposit accounts comprise the vast majority of our funding needs, we maintain secured borrowing lines with the FHLBNY.

93 unchanged sentences

The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

Allowance for Loan and Lease Losses :

Our allowances for loan and lease losses represents management's best estimate of probable losses inherent in our loan portfolio excluding those loans accounted for under fair value.

Our process for determining the allowance for loan and lease losses is discussed in Note 1 to the Consolidated Financial Statements.

We maintain the ALLL at levels that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan and lease portfolios as of the balance sheet date.

Our determination of the allowances is based on periodic evaluations of the

loan and lease portfolios and other relevant factors.

These critical estimates include significant use of our own historical data and other qualitative, quantitative data.

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.

Refer to N ote 1 in the Notes t o the Consolidated Financial Statements for further information.

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 loan and lease losses is comprised of two components.

The specific allowance covers impaired loans and is calculated on an individual loan basis.

The general based component covers loans and leases on which there are incurred losses that are not yet individually identifiable.

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 loan and lease losses requires a high degree of judgment.

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.

The Company uses valuation techniques that are consistent with the market approach.

The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities.

The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis.

The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs).

Valuation techniques should be consistently applied.

Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability.

Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances.

In that regard, a fair value hierarchy has been established for valuation inputs that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlations or other means.

Level 3 Inputs - Significant unobservable inputs that reflect an entity's own assumptions that market participants would use in pricing the assets or liabilities.

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 also may have a small balance of SBA loans recorded at fair value, which represents the face value of the guaranteed portion of the SBA loans pending settlement.

Other real estate owned (OREO) is recorded at fair value on a non-recurring basis and is based on the values of independent third-party full appraisals, less costs to sell (a range of 5% to 10%).

Appraisals are updated every 12 months or sooner if we have identified possible further deterioration in value.

Refer to Note 16 - Fair Value in the Notes to the Consolidated Financial Statements for further information.

Income Taxes:

In the normal course of business, we and our subsidiaries enter into transactions for which the tax treatment is unclear or subject to varying interpretations.

We evaluate and assess the relative risks and merits of the tax treatment of transactions, filing positions, filing methods and taxable income calculations after considering statutes, regulations, and other information, and maintain tax accruals consistent with our evaluation of these relative risks and merits.

The result of our evaluation and assessment is by its nature an estimate.

When tax returns are filed, it is highly likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained.

The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination.

The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions.

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.

Quantitative and Qualitative Disclosures About Market Risk.

1 unchanged sentence

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-K

Item 7. Management’s Discussion and Analysis