PARKE BANCORP, INC.

(Exact name of registrant as specified in its charter)

New Jersey	65-1241959
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
601 Delsea Drive, Washington Township, New Jersey	08080
(Address of principal executive offices)	(Zip Code)

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Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbols	Name of Each Exchange on Which Registered
Common Stock, par value $0.10 per share	PKBK	The Nasdaq Stock Market, LLC

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Parke Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(unaudited)

(Dollars in thousands except share and per share data)

	March 31, 2020				December 31, 2019
Assets
Cash and due from banks	$	18,053			$	10,082
Interest bearing deposits with banks	265,138				181,525
Cash and cash equivalents	283,191				191,607
Investment securities available for sale, at fair value	26,022				26,613
Investment securities held to maturity (fair value of $1,441 at March 31, 2020 and $1,430 at December 31, 2019)	1,181				1,167
Total investment securities	27,203				27,780
Loans held for sale	193				190
Loans, net of unearned income	1,468,204				1,420,749
Less: Allowance for loan losses	(23,219		)		(21,811		)
Net loans	1,444,985				1,398,938
Accrued interest receivable	6,358				6,069
Premises and equipment, net	6,901				6,946
Other real estate owned	3,950				4,727
Restricted stock	7,440				7,440
Bank owned life insurance (BOLI)	26,556				26,410
Deferred tax asset	6,117				6,285
Other	2,662				4,768
Total Assets	$	1,815,556			$	1,681,160
Liabilities and Equity
Liabilities
Deposits
Noninterest-bearing deposits	$	351,892			$	259,269
Interest-bearing deposits	1,117,438				1,079,950
Total deposits	1,469,330				1,339,219
FHLBNY borrowings	134,650				134,650
Subordinated debentures	13,403				13,403
Accrued interest payable	1,968				2,260
Other	11,335				12,204
Total liabilities	1,630,686				1,501,736
Equity
Preferred stock,1,000,000 shares authorized, $1,000 liquidation value Series B non-cumulative convertible; 500 shares outstanding at March 31, 2020 and December 31, 2019, respectively	500				500
Common stock, $.10 par value; authorized 15,000,000 shares; Issued:12,133,640 shares and 12,132,855 shares at March 31, 2020 and Dec. 31, 2019, respectively	1,213				1,213
Additional paid-in capital	134,769				134,706
Retained earnings	49,449				44,143
Accumulated other comprehensive income	573				58
Treasury stock, 284,522 shares at March 31, 2020 and Dec. 31, 2019, at cost	(3,015		)		(3,015		)
Total shareholders’ equity	183,489				177,605
Noncontrolling interest in consolidated subsidiaries	1,381				1,819
Total equity	184,870				179,424
Total liabilities and equity	$	1,815,556			$	1,681,160

All share information as of March 31, 2019 has been adjusted for the stock dividend effective on March 3, 2020.

See accompanying notes to consolidated financial statements

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Parke Bancorp Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	For the Three Months Ended   March 31,
	2020				2019
	(Dollars in thousands except share data)
Interest income:
Interest and fees on loans	$	20,328			$	17,441
Interest and dividends on investments	278				315
Interest on federal funds sold and deposits with banks	951				601
Total interest income	21,557				18,357
Interest expense:
Interest on deposits	5,451				3,963
Interest on borrowings	907				962
Total interest expense	6,358				4,925
Net interest income	15,199				13,432
Provision for loan losses	1,396				700
Net interest income after provision for loan losses	13,803				12,732
Non-interest income
Gain on sale of SBA loans	—				40
Other loan fees	241				191
Bank owned life insurance income	146				147
Service fees on deposit accounts	568				381
Net loss on sale of OREO	(132		)		—
Other	165				160
Total non-interest income	988				919
Non-interest expense
Compensation and benefits	2,545				2,141
Professional services	355				391
Occupancy and equipment	480				471
Data processing	317				218
FDIC insurance and other assessments	141				27
OREO expense	111				75
Other operating expense	920				837
Total non-interest expense	4,869				4,160
Income before income tax expense	9,922				9,491
Income tax expense	2,554				2,316
Net income attributable to Company and noncontrolling interest	7,368				7,175
Less: Net income attributable to noncontrolling interest	(156		)		(114		)
Net income attributable to Company	7,212				7,061
Less: Preferred stock dividend	(8		)		(1		)
Net income available to common shareholders	$	7,204			$	7,060
Earnings per common share
Basic	$	0.61			$	0.60
Diluted	$	0.60			$	0.59
Weighted average common shares outstanding
Basic	11,848,964				11,819,386
Diluted	12,008,200				12,003,380

All share and per share information as of March 31, 2019 has been adjusted for the stock dividend effective on March 3, 2020.

See accompanying notes to consolidated financial statements

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Parke Bancorp Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

	For the Three Months Ended   March 31,
	2020				2019
	(Dollars in thousands)
Net income	$	7,368			$	7,175
Unrealized gains on investment securities, net of reclassification into income:
Unrealized gains on non-OTTI securities	683				480
Tax impact on unrealized gain	(168		)		(119		)
Total unrealized (losses) gains on investment securities	515				361
Comprehensive income	$	7,883			$	7,536
Less: Comprehensive income attributable to noncontrolling interests	156				114
Comprehensive income attributable to the Company	$	7,727			$	7,422

See accompanying notes to consolidated financial statements

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Parke Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)

	Preferred Stock				Shares of Common Stock			Common Stock				Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive (Loss) Income				Treasury Stock				Total Shareholders' Equity				Non-Controlling Interest				Total Equity
	(Dollars in thousands except share data)
Balance, December 31, 2018	$	1,224			10,953,081			$	1,095			$	112,807			$	42,079			$	(633	)		$	(3,015	)		$	153,557			$	1,439			$	154,996
Net income	—				—			—				—				7,061				—				—				7,061				114				7,175
Common stock options exercised					8,374			1				47				—				—				—				48				—				48
Preferred stock shares conversion	(664		)		83,030			8				655				—				—				—				(1		)		—				(1		)
Other comprehensive income	—				—			—				—				—				361				—				361				—				361
Stock compensation expense	—				—			—				52				—				—				—				52				—				52
Dividend on preferred stock	—				—			—				—				(1		)		—				—				(1		)		—				(1		)
Dividend on common stock	—				—			—				—				(1,515		)		—				—				(1,515		)		—				(1,515		)
Balance, March 31, 2019	$	560			11,044,485			$	1,104			$	113,561			$	47,624			$	(272	)		$	(3,015	)		$	159,562			$	1,553			$	161,115
Balance, December 31, 2019	$	500			12,132,855			$	1,213			$	134,706			$	44,143			$	58			$	(3,015	)		$	177,605			$	1,819			$	179,424
Net income	—				—			—				—				7,212				—				—				7,212				156				7,368
Earnings distribution to non-controlling interest	—				—			—				—				—				—				—				—				(594		)		(594		)
Common stock options exercised					845			—				—				—				—				—				—				—				—
Other comprehensive income	—				—			—				—				—				515				—				515				—				515
Stock compensation expense	—				—			—				64				—				—				—				64				—				64
Stock dividend*	—				(60	)		—				(1		)		(2		)		—				—				(3		)		—				(3		)
Dividend on preferred stock	—				—			—				—				(8		)		—				—				(8		)		—				(8		)
Dividend on common stock	—				—			—				—				(1,896		)		—				—				(1,896		)		—				(1,896		)
Balance, March 31, 2020	$	500			12,133,640			$	1,213			$	134,769			$	49,449			$	573			$	(3,015	)		$	183,489			$	1,381			$	184,870

* The Company retroactively adjusted the stock dividend declared in January 2020 into the December 2019 financial statements according to Generally Accepted Accounting Principals (GAAP). The actual

shares of the stock dividend issued subsequently were less than the shares assumed for December 31, 2019 due to the cash distribution for fraction shares to the common shareholders.

See accompanying notes to consolidated financial statements

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Parke Bancorp Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the Three Months Ended   March 31,
	2020				2019
	(Dollars in thousands)
Cash Flows from Operating Activities:
Net income	$	7,368			$	7,175
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	119				98
Provision for loan losses	1,396				700
Increase in value of bank-owned life insurance	(146		)		(147		)
Gain on sale of SBA loans					(40		)
Proceeds from sale of SBA loans originated for sale	—				459
Net loss on sale of OREO and valuation adjustments	132				—
Net accretion of purchase premiums and discounts on securities	7				5
Stock based compensation	64				52
Net changes in:
Decrease in accrued interest receivable and other assets	1,754				1,153
Increase (decrease) in accrued interest payable and other accrued liabilities	(1,273		)		1,179
Net cash provided by operating activities	9,421				10,634
Cash Flows from Investing Activities:
Repayments and maturities of investment securities available for sale	1,253				1,173
Net increase in loans	(47,443		)		(57,550		)
Purchases of bank premises and equipment	(74		)		(180		)
Proceeds from sale of OREO, net	645				13
Net cash used in investing activities	(45,619		)		(56,544		)
Cash Flows from Financing Activities:
Cash dividends	(1,735		)		(1,514		)
Earnings distribution to non-controlling interest	(594		)		—
Proceeds from exercise of stock options	—				48
Net increase in noninterest-bearing deposits	92,623				14,997
Net increase in interest-bearing deposits	37,488				66,438
Other	—				(12		)
Net cash provided by financing activities	127,782				79,957
Net increase in cash and cash equivalents	91,584				34,047
Cash and Cash Equivalents, January 1,	191,607				154,471
Cash and Cash Equivalents, March 31,	$	283,191			$	188,518
Supplemental Disclosure of Cash Flow Information:
Interest paid	$	5,217			$	4,529
Income taxes paid	$	—			$	—
Non-cash Investing and Financing Items
Loans transferred to OREO	$	—			$	45

See accompanying notes to consolidated financial statements

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Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. ORGANIZATION

Parke Bancorp, Inc. (the “Company, we, us, our”) is a bank holding company headquartered in Sewell, New Jersey. Through subsidiaries, the Company provides individuals, corporations and other businesses, and institutions with commercial and retail banking services, principally loans and deposits. The Company was incorporated in January 2005 under the laws of the State of New Jersey for the sole purpose of becoming the holding company of Parke Bank (the "Bank").

The Bank is a commercial bank, which was incorporated on August 25, 1998, and commenced operations on January 28, 1999. The Bank is chartered by the New Jersey Department of Banking and Insurance and its deposits are insured by the Federal Deposit Insurance Corporation. The Bank maintains its principal office at 601 Delsea Drive, Sewell, New Jersey, and seven additional branch office locations; 501 Tilton Road, Northfield, New Jersey, 567 Egg Harbor Road, Washington Township, New Jersey, 67 East Jimmie Leeds Road, Galloway Township, New Jersey, 1150 Haddon Avenue, Collingswood, New Jersey, 1610 Spruce Street, Philadelphia, Pennsylvania, and 1032 Arch Street, Philadelphia, Pennsylvania.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Financial Statement Presentation: We prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary the Bank (including certain partnership interests). Also included are the accounts of Parke Direct Lending LLC ("PDL"), a joint venture formed in 2018 to originate short-term alternative real estate loan products. Parke Bank has a 51% ownership interest in the joint venture. Parke Capital Trust I, Parke Capital Trust II and Parke Capital Trust III are wholly-owned subsidiaries but are not consolidated because they do not meet the requirements for consolidation under applicable accounting guidance. We have eliminated inter-company balances and transactions. We have also reclassified certain prior year amounts to conform to the current year presentation, which did not have a material impact on our consolidated financial condition or results of operations.

The accompanying interim financial statements should be read in conjunction with the annual financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The accompanying interim financial statements for the three months ended March 31, 2020 and 2019 are unaudited. The balance sheet as of December 31, 2019, was derived from the audited financial statements. In the opinion of management, these financial statements include all normal and recurring adjustments necessary for a fair statement of the results for such interim periods. Results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results for the full year.

Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the allowance for loan losses, the valuation of deferred income taxes, and the carrying value of other real estate owned ("OREO").

Recently Issued Accounting Pronouncements:

During June 2016, the Financial Accounting Standard Board (FASB) issued ASU 2016-13, Financial Instruments-Credit Losses. ASU 2016-13 (Topic 326), replaces the incurred loss impairment methodology in current GAAP with an expected credit loss (CECL) methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. The ASU was amended in some aspects by subsequent Accounting Standards Updates. The guidance of the Financial Instruments-Credit Losses became effective for public entities except small reporting companies ("SRCs") for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all entities, early adoption will continue to be allowed. As a small reporting company, CECL is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement-Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 (Topic 820) requires public entities to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements for instruments held at the end of the reporting period, and also disclose the range and weighted average used to develop significant inputs for Level 3 fair value measurements. This ASU is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning

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after December 15, 2019. The Company adopted this guidance in the first quarter of 2020. The adoption of the guidance did not have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General-Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU 2018-14 ( Subtopic 715) requires entities to disclose weighted-average interest crediting rates for plans with promised interest crediting rates and reasons for significant gains and losses related to changes in the benefit obligation for reporting period. it also clarifies some disclosure requirements. This ASU is effective for fiscal years ending after December 15, 2020, for public business entities. The Company does not expect the amendments will have any material impact on our consolidated financial statements.

In December 2019, The FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by removing certain tax exceptions to the general principles in Topic 740. The ASU also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for public business entities for fiscal years ending after December 15, 2020. Early adoption of the ASU is permitted. The Company is currently evaluating the impact of this new guidance and doesn't expect the adoption of the ASU will have a material impact to our consolidated financial statements.

In March 2020, The FASB issued ASU 2020-4, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU 2020-4 (Topic 848) provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the amendments will have any material impact on our consolidated financial statements.

 

NOTE 3. INVESTMENT SECURITIES

The following is a summary of the Company's investments in available for sale and held to maturity securities as of March 31, 2020 and December 31, 2019: 

As of March 31, 2020	Amortized cost				Gross unrealized gains				Gross unrealized losses				Fair value
	(Dollars in thousands)
Available for sale:
Corporate debt obligations	$	500			$	—			$	—			$	500
Residential mortgage-backed securities	24,717				777				8				25,486
Collateralized mortgage obligations	35				1				—				36
Total available for sale	$	25,252			$	778			$	8			$	26,022
Held to maturity:
States and political subdivisions	$	1,181			$	260			$	—			$	1,441

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As of December 31, 2019	Amortized cost				Gross unrealized gains				Gross unrealized losses				Fair value
	(Dollars in thousands)
Available for sale:
Corporate debt obligations	$	500			$	—			$	—			$	500
Residential mortgage-backed securities	25,989				282				196				26,075
Collateralized mortgage obligations	37				1				—				38
Total available for sale	$	26,526			$	283			$	196			$	26,613
Held to maturity:
States and political subdivisions	$	1,167			$	263			$	—			$	1,430

The amortized cost and fair value of debt securities classified as available for sale and held to maturity, by contractual maturity as of March 31, 2020 are as follows:

	Amortized Cost				Fair Value
	(Dollars in thousands)
Available for sale:
Due within one year	$	—			$	—
Due after one year through five years	127				125
Due after five years through ten years	14,077				14,442
Due after ten years	11,048				11,455
Total available for sale	$	25,252			$	26,022
Held to maturity:
Due within one year	$	—			$	—
Due after one year through five years	—				—
Due after five years through ten years	1,181				1,441
Due after ten years	—				—
Total held to maturity	$	1,181			$	1,441

Expected maturities may differ from contractual maturities because the issuers of certain debt securities do have the right to call or prepay their obligations without any penalty.

At March 31, 2020, the Company used a letter of credit $40.0 million and investment securities with amortized costs of $12.2 million as collateral to secure public deposits.

The Company did not sell any securities during the three months ended March 31, 2020. The following tables show the gross unrealized losses and fair value of the Company's investments which are aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2020 and December 31, 2019:

As of March 31, 2020		Less Than 12 Months								12 Months or Greater								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(Dollars in thousand)
Available for sale:
Residential mortgage-backed securities		$	—			$	—			$	676			$	8			$	676			$	8
Total available for sale		$	—			$	—			$	676			$	8			$	676			$	8

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As of December 31, 2019		Less Than 12 Months								12 Months or Greater								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(Dollars in thousands)
Available for sale:
Residential mortgage-backed securities		$	232			$	1			$	10,271			$	195			$	10,503			$	196
Total available for sale		$	232			$	1			$	10,271			$	195			$	10,503			$	196

Other Than Temporarily Impaired Debt Securities (OTTI)

On at least a quarterly basis, we review all debt securities that are in an unrealized loss position for OTTI. An investment security is deemed impaired if the fair value of the investment is less than its amortized cost. Amortized cost includes adjustments (if any) made to the cost basis of an investment for accretion, amortization, and previous other-than-temporary impairments. After an investment security is determined to be impaired, we evaluate whether the decline in value is other-than-temporary. Estimating recovery of the amortized cost basis of a debt security is based upon an assessment of the cash flows expected to be collected. If the present value of the cash flows expected to be collected, discounted at the security’s effective yield, is less than the security’s amortized cost, OTTI is considered to have occurred.

For a debt security for which there has been a decline in the fair value below the amortized cost basis, if we intend to sell the security, or if it is more likely than not we will be required to sell the security before recovery of the amortized cost basis, an OTTI write-down is recognized in earnings equal to the entire difference between the amortized cost basis and fair value of the security. For debt securities that are considered OTTI and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of expected future cash flows is due to factors that are not credit-related and, therefore, is recognized in other comprehensive income.

We have a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. We consider relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events; (4) any change in rating agencies’ credit ratings at evaluation date from acquisition date and any likely imminent action; (5) for asset-backed securities, the credit performance of the underlying collateral, including delinquency rates, level of non-performing assets, cumulative losses to date, collateral value and the remaining credit enhancement compared with expected credit losses.

The Company’s unrealized loss for the debt securities is comprised of 3 securities in the 12 months or greater loss position at March 31, 2020, and 1 securities in the less than 12 months loss position and 7 securities in the 12 months or greater loss position at December 31, 2019. The mortgage-backed securities that had unrealized losses were issued or guaranteed by the US government or US government sponsored entities. The unrealized losses associated with those mortgage-backed securities are generally driven by changes in interest rates and are not due to credit losses given the explicit or implicit guarantees provided by the U.S. government. Because the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, the Company does not consider the unrealized loss in these securities to be OTTI at March 31, 2020.

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NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES

As of March 31, 2020, the Company had $1.47 billion in loans receivable outstanding. Outstanding balances include a total net increase of $280,000 and $138,000 at March 31, 2020 and December 31, 2019, respectively, for unearned income, net deferred loan fees, and unamortized discounts and premiums. We had loans held for sale $193,000 at March 31, 2020 and had $190,000 loans available for sale at December 31, 2019. The portfolios of loans receivable at March 31, 2020 and December 31, 2019, consist of the following:

	March 31, 2020				December 31, 2019
	Amount				Amount
	(Dollars in thousands)
Commercial and Industrial	$	37,938			$	36,777
Construction	260,581				231,095
Real Estate Mortgage:
Commercial – Owner Occupied	142,047				136,753
Commercial – Non-owner Occupied	298,726				298,204
Residential – 1 to 4 Family	645,598				636,891
Residential – Multifamily	71,215				68,258
Consumer	12,099				12,771
Total Loans	$	1,468,204			$	1,420,749

An age analysis of past due loans by class at March 31, 2020 and December 31, 2019 is as follows:

March 31, 2020	30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days and Not Accruing				Total Past Due				Current				Total Loans				Loans > 90 Days and Accruing
	(Dollars in Thousands)
Commercial and Industrial	$	—			$	—			$	396			$	396			$	37,542			$	37,938			$	—
Construction	—				—				1,365				1,365				259,216				260,581				—
Real Estate Mortgage:
Commercial – Owner Occupied	2,854				—				2,776				5,630				136,417				142,047				—
Commercial – Non-owner Occupied	—				—				69				69				298,657				298,726				—
Residential – 1 to 4 Family	1,470				—				1,309				2,779				642,819				645,598				—
Residential – Multifamily	171				—				—				171				71,044				71,215				—
Consumer	—				—				—				—				12,099				12,099				—
Total Loans	$	4,495			$	—			$	5,915			$	10,410			$	1,457,794			$	1,468,204			$	—

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December 31, 2019	30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days and Not Accruing				Total Past Due				Current				Total Loans				Loans > 90 Days and Accruing
	(Dollars in thousands)
Commercial and Industrial	$	—			$	—			$	286			$	286			$	36,491			$	36,777			$	—
Construction	—				—				1,365				1,365				229,730				231,095				—
Real Estate Mortgage:
Commercial – Owner Occupied	—				1,722				2,702				4,424				132,329				136,753				—
Commercial – Non-owner Occupied	—				—				70				70				298,134				298,204				—
Residential – 1 to 4 Family	—				262				925				1,187				635,704				636,891				—
Residential – Multifamily	—				—				—				—				68,258				68,258				—
Consumer	—				—				—				—				12,771				12,771				—
Total Loans	$	—			$	1,984			$	5,348			$	7,332			$	1,413,417			$	1,420,749			$	—

Allowance For Loan and Lease Losses (ALLL)

We maintain the ALLL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan portfolios as of the balance sheet date. We established our allowance in accordance with guidance provided in Accounting Standard Codification ("ASC") - Contingencies ("ASC 450") and Receivables ("ASC 310").

The allowance for loan and lease losses represents management’s estimate of probable losses inherent in the Company’s lending activities excluding loans accounted for under fair value. The allowance for loan losses is maintained through charges to the provision for loan losses in the Consolidated Statements of Income as losses are estimated to have occurred. Loans or portions thereof that are determined to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance.

The Company performs periodic reviews of its loan and lease portfolios to identify credit risks and to assess the overall collectability of those portfolios. The Company's allowance for loan losses includes a general component and an asset-specific component. The asset-specific component of the allowance relates to loans considered to be impaired, which includes performing troubled debt restructurings (“TDRs”) as well as nonperforming loans. To determine the asset-specific component of the allowance, the loans are evaluated individually based on the borrower's ability to repay amounts owed, collateral, relative risk grade of the loans, and other factors given current events and conditions. The Company generally measures the asset-specific allowance as the difference between the fair value (net realizable value) and the recorded investment of a loan.

The general component of the allowance evaluates the impairments of pools of the loan and lease portfolio collectively. It incorporates a historical valuation allowance and general valuation allowance. The historical loss experience is measured by type of credit and internal risk grade, loss severity, specific homogeneous risk pools. A historical loss ratio and valuation allowance are established for each pool of similar loans and updated periodically based on actual charge-off experience and current events. The general valuation allowance is based on general economic conditions and other qualitative risk factors both internal and external to the Company. It is generally determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank's lending management and staff; (ii) the effectiveness of the Bank's loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks; (ix) the impact of rising interest rates on portfolio risk; and (x) national and local economic trends and conditions, and industry conditions. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, high-moderate, moderate, low-moderate or low degree of risk. The results are then input into a "general allocation matrix" to determine an appropriate general valuation allowance.

The process of determining the level of the allowance for loan and lease losses requires a high degree of estimate and judgment. It is reasonably possible that actual outcomes may differ from our estimates.

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The following tables present the information regarding the allowance for loan and lease losses and associated loan data:

									Real Estate Mortgage
	Commercial and Industrial				Construction				Commercial Owner Occupied				Commercial Non-owner Occupied				Residential 1 to 4 Family				Residential Multifamily				Consumer				Total
Allowance for loan losses	(Dollars in thousands)
Three months ended March 31, 2020
December 31, 2019	$	964			$	2,807			$	2,023			$	5,860			$	9,151			$	819			$	187			$	21,811
Charge-offs	—				—				—				—				—				—				—				—
Recoveries	4				—				5				3				—				—				—				12
Provisions	(7		)		320				207				348				474				71				(17		)		1,396
Ending Balance at March 31, 2020	$	961			$	3,127			$	2,235			$	6,211			$	9,625			$	890			$	170			$	23,219
Allowance for loan losses
Individually evaluated for impairment	$	262			$	141			$	31			$	457			$	249			$	—			$	—			$	1,140
Collectively evaluated for impairment	699				2,986				2,204				5,754				9,376				890				170				22,079
Ending Balance at March 31, 2020	$	961			$	3,127			$	2,235			$	6,211			$	9,625			$	890			$	170			$	23,219
Loans
Individually evaluated for impairment	$	396			$	4,991			$	4,804			$	10,304			$	1,823			$	—			$	—			$	22,318
Collectively evaluated for impairment	37,542				255,590				137,243				288,422				643,775				71,215				12,099				1,445,886
Ending Balance at March 31, 2020	$	37,938			$	260,581			$	142,047			$	298,726			$	645,598			$	71,215			$	12,099			$	1,468,204

									Real Estate Mortgage
	Commercial and Industrial				Construction				Commercial Owner Occupied				Commercial Non-owner Occupied				Residential 1 to 4 Family				Residential Multifamily				Consumer				Total
Allowance for loan losses	(Dollars in thousands)
Three months ended March 31, 2019
December 31, 2018	$	718			$	1,694			$	2,062			$	5,853			$	7,917			$	621			$	210			$	19,075
Charge-offs	—				—				—				—				—				—				—				—
Recoveries	6				—				6				21				2				—				—				35
Provisions	(36		)		102				(184		)		524				179				122				(7		)		700
Ending Balance at March 31, 2019	$	688			$	1,796			$	1,884			$	6,398			$	8,098			$	743			$	203			$	19,810
Allowance for loan losses
Individually evaluated for impairment	$	13			$	80			$	34			$	190			$	294			$	—			$	—			$	611
Collectively evaluated for impairment	675				1,716				1,850				6,208				7,804				743				203				19,199
Ending Balance at March 31, 2019	$	688			$	1,796			$	1,884			$	6,398			$	8,098			$	743			$	203			$	19,810
Loans
Individually evaluated for impairment	$	13			$	5,470			$	2,338			$	11,167			$	2,884			$	—			$	—			$	21,872
Collectively evaluated for impairment	35,076				139,584				138,708				328,681				561,354				59,506				13,916				1,276,825
Ending Balance at March 31, 2019	$	35,089			$	145,054			$	141,046			$	339,848			$	564,238			$	59,506			$	13,916			$	1,298,697

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Impaired Loans

A loan is considered impaired when, based on the current information and events, it is probable that the Company will be unable to collect the payments of principal and interest as of the date such payments were due. 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. 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.

All our impaired loans are assessed for recoverability based on an independent third-party full appraisal to determine the net realizable value (“NRV”) based on the fair value of the underlying collateral, less cost to sell and other costs or the present value of discounted cash flows in the case of certain impaired loans that are not collateral dependent.

The following tables provide further detail on impaired loans and the associated ALLL at March 31, 2020 and December 31, 2019:

March 31, 2020	Recorded Investment				Unpaid Principal Balance				Related Allowance
	(Dollars in thousands)
With no related allowance recorded:
Commercial and Industrial	$	134			$	134			$	—
Construction	—				—				—
Real Estate Mortgage:
Commercial – Owner Occupied	2,776				2,776				—
Commercial – Non-owner Occupied	69				69				—
Residential – 1 to 4 Family	534				534				—
Residential – Multifamily	—				—				—
Consumer	—				—				—
	3,513				3,513				—
With an allowance recorded:
Commercial and Industrial	262				269				262
Construction	4,991				9,481				141
Real Estate Mortgage:
Commercial – Owner Occupied	2,028				2,028				31
Commercial – Non-owner Occupied	10,235				10,235				457
Residential – 1 to 4 Family	1,289				1,289				249
Residential – Multifamily	—				—				—
Consumer	—				—				—
	18,805				23,302				1,140
Total:
Commercial and Industrial	396				403				262
Construction	4,991				9,481				141
Real Estate Mortgage:
Commercial – Owner Occupied	4,804				4,804				31
Commercial – Non-owner Occupied	10,304				10,304				457
Residential – 1 to 4 Family	1,823				1,823				249
Residential – Multifamily	—				—				—
Consumer	—				—				—
	$	22,318			$	26,815			$	1,140

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December 31, 2019	Recorded Investment				Unpaid Principal Balance				Related Allowance
	(Dollars in thousands)
With no related allowance recorded:
Commercial and Industrial	$	—			$	—			$	—
Construction	—				—				—
Real Estate Mortgage:
Commercial – Owner Occupied	2,702				2,702				—
Commercial – Non-owner Occupied	70				70				—
Residential – 1 to 4 Family	194				194				—
Residential – Multifamily	—				—				—
Consumer	—				—				—
	2,966				2,966				—
With an allowance recorded:
Commercial and Industrial	286				292				286
Construction	5,110				9,600				141
Real Estate Mortgage:
Commercial – Owner Occupied	2,131				2,131				33
Commercial – Non-owner Occupied	10,354				10,355				457
Residential – 1 to 4 Family	1,251				1,251				211
Residential – Multifamily	—				—				—
Consumer	—				—				—
	19,132				23,629				1,128
Total:
Commercial and Industrial	286				292				286
Construction	5,110				9,600				141
Real Estate Mortgage:
Commercial – Owner Occupied	4,833				4,833				33
Commercial – Non-owner Occupied	10,424				10,425				457
Residential – 1 to 4 Family	1,445				1,445				211
Residential – Multifamily	—				—				—
Consumer	—				—				—
	$	22,098			$	26,595			$	1,128

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The following table presents by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
	2020								2019
	Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
	(Dollars in thousands)
Commercial and Industrial	$	341			$	4			$	14			$	—
Construction	5,051				40				5,530				45
Real Estate Mortgage:
Commercial – Owner Occupied	4,819				32				2,390				43
Commercial – Non-owner Occupied	10,364				138				11,233				152
Residential – 1 to 4 Family	1,634				14				2,699				10
Residential – Multifamily	—				—				—				—
Consumer	—				—				—				—
Total	$	22,209			$	228			$	21,866			$	250

Troubled debt restructuring (TDRs)

We reported performing TDR loans (not reported as non-accrual loans) of $16.4 million and $16.8 million, respectively, at March 31, 2020 and December 31, 2019. Nonperforming TDR loans were $279,500 and $281,000 at March 31, 2020 and December 31, 2019, respectively. There were no new loans modified as a TDR and no additional commitments to lend additional funds to debtors whose loans have been modified in TDRs for the three months ended March 31, 2020 and the year ended December 31, 2019, respectively.

A TDR is a loan the terms of which have been restructured in a manner that grants a concession to a borrower experiencing financial difficulty. TDRs result from our loss mitigation activities that include rate reductions, extension of maturity, or a combination of both, which are intended to minimize economic loss and to avoid foreclosure or repossession of collateral. TDRs are classified as impaired loans and are included in the impaired loan disclosures. TDRs are also evaluated to determine whether they should be placed on non-accrual status. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is repaid in full, foreclosed, sold or it meets the criteria to be removed from TDR status.

At the time a loan is modified in a TDR, we consider the following factors to determine whether the loan should accrue interest:

•	Whether there is a period of current payment history under the current terms, typically 6 months;

•	Whether the loan is current at the time of restructuring; and

•	Whether we expect the loan to continue to perform under the restructured terms with a debt coverage ratio that complies with the Bank’s credit underwriting policy of 1.25 times debt service.

TDRs are generally included in nonaccrual loans and may return to performing status after a minimum of six consecutive monthly payments under restructured terms and also meeting other performance indicators. We review the financial performance of the borrower over the past year to be reasonably assured of repayment and performance according to the modified terms. This review consists of an analysis of the borrower’s historical results; the borrower’s projected results over the next four quarters; and current financial information of the borrower and any guarantors. The projected repayment source needs to be reliable, verifiable, quantifiable and sustainable. At the time of restructuring, the amount of the loan principal for which we are not reasonably assured of repayment is charged-off, but not forgiven.

All TDRs are also reviewed quarterly to determine the amount of any impairment. The nature and extent of impairment of TDRs, including those that have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses. For the TDR loans, we had specific reserves of $627,000 and $607,300 in the allowance at March 31, 2020 and December 31, 2019, respectively. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and result in potential incremental losses. These potential incremental losses have been factored into our overall allowance for loan losses estimate.

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Credit Quality Indicators: As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends related to the risk grades of loans, the level of classified loans, net charge-offs, nonperforming loans (see details above) and the general economic conditions in the region.

 

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 7. Grades 1 through 4 are considered “Pass”. A description of the general characteristics of the seven risk grades is as follows:

1.	Good: Borrower exhibits the strongest overall financial condition and represents the most creditworthy profile.

2.	Satisfactory (A): Borrower reflects a well-balanced financial condition, demonstrates a high level of creditworthiness and typically will have a strong banking relationship with the Bank.

3.	Satisfactory (B): Borrower exhibits a balanced financial condition and does not expose the Bank to more than a normal or average overall amount of risk. Loans are considered fully collectable.

4.	Watch List: Borrower reflects a fair financial condition, but there exists an overall greater than average risk. Risk is deemed acceptable by virtue of increased monitoring and control over borrowings. Probability of timely repayment is present.

5.

Other Assets Especially Mentioned (OAEM): Financial condition is such that assets in this category have a potential weakness or pose unwarranted financial risk to the Bank even though the asset value is not currently impaired. The asset does not currently warrant adverse classification but if not corrected could weaken and could create future increased risk exposure. Includes loans that require an increased degree of monitoring or servicing as a result of internal or external changes.

6.

Substandard: This classification represents more severe cases of #5 (OAEM) characteristics that require increased monitoring. Assets are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral. Asset has a well-defined weakness or weaknesses that impairs the ability to repay debt and jeopardizes the timely liquidation or realization of the collateral at the asset’s net book value.

7.

Doubtful: Assets which have all the weaknesses inherent in those assets classified #6 (Substandard) but the risks are more severe relative to financial deterioration in capital and/or asset value; accounting/evaluation techniques may be questionable and the overall possibility for collection in full is highly improbable. Borrowers in this category require constant monitoring, are considered work-out loans and present the potential for future loss to the Bank.

An analysis of the credit risk profile by internally assigned grades as of March 31, 2020 and December 31, 2019 is as follows:

At March 31, 2020	Pass				OAEM				Substandard				Doubtful				Total
	(Dollars in thousands)
Commercial and Industrial	$	37,541			$	—			$	397			$	—			$	37,938
Construction	249,144				4,086				7,351				—				260,581
Real Estate Mortgage:
Commercial – Owner Occupied	139,271				—				2,776				—				142,047
Commercial – Non-owner Occupied	298,530				—				196				—				298,726
Residential – 1 to 4 Family	643,488				694				1,416				—				645,598
Residential – Multifamily	71,215				—				—				—				71,215
Consumer	12,099				—				—				—				12,099
Total	$	1,451,288			$	4,780			$	12,136			$	—			$	1,468,204

 

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At December 31, 2019	Pass				OAEM				Substandard				Doubtful				Total
	(Dollars in thousands)
Commercial and Industrial	$	36,491			$	—			$	286			$	—			$	36,777
Construction	219,289				4,275				7,531				—				231,095
Real Estate Mortgage:
Commercial – Owner Occupied	134,051				—				2,702				—				136,753
Commercial – Non-owner Occupied	298,006				—				198				—				298,204
Residential – 1 to 4 Family	634,937				920				1,034				—				636,891
Residential – Multifamily	68,258				—				—				—				68,258
Consumer	12,771				—				—				—				12,771
Total	$	1,403,803			$	5,195			$	11,751			$	—			$	1,420,749

NOTE 5. TIME DEPOSITS

The Company’s total deposits were $1.47 billion and $1.34 billion at March 31, 2020 and December 31, 2019. The time deposits greater than $250,000 were $99.7 million and $123.8 million at March 31, 2020 and December 31, 2019, respectively.

NOTE 6. EQUITY AND CHANGES IN OTHER COMPREHENSIVE INCOME (LOSS)

The Company's total equity was $184.9 million and $179.4 million at March 31, 2020 and December 31, 2019, respectively.

Common stock dividend: On March 27, 2020, the Company declared a quarterly cash dividend of $0.16 per share to the common shareholders of record as of April 10, 2020 and paid the dividend on April 24, 2020. The Company also paid a cash dividend $1.7 million on the common stock on January 24, 2020 which had been declared in the fourth quarter of 2019.

In January 2020, the Company declared a 10% common stock dividend to shareholders. The Company declared the stock dividend before the Company's 2019 financial statements were issued or were available to be issued. As the result, the company retroactively adjusted the assumed 10% dividend shares 1,077,121 to the outstanding shares at December 31, 2019. At March 3, 2020, actual shares issued to the shareholders excluding the cash distribution on the fraction shares was 1,077,061.

Preferred stock dividend: The Company paid cash dividend $7,500 and $10,850 to preferred stock holders during the three months ended March 31, 2020 and March 31, 2019.

Conversion of preferred stock: During the three months ended March 31, 2020, there was no conversion from preferred stock shares to common shares. The preferred stock holders converted 664 shares of preferred shares into 83,030 shares of common shares during the three months ended March 31, 2019.

Non-controlling interests: The Company has a joint venture with Bridgestone Capital LLC in PDL LLC, a joint venture formed in 2018 to originate short-term alternative real estate loan products. The Company has a 51% ownership interest in the joint venture. The Company distributed PDL earnings $594,000 to Bridgestone during the first quarter 2020.

The changes in accumulated other comprehensive income (loss) consisted of the following for the three months ended March 31, 2020 and 2019:

	For the Three Months Ended   March 31,
	2020				2019
	(Dollars in thousands)
Investment securities:
Net unrealized gains arising during the period	$	683			$	480
Tax effect related to the unrealized gains during the periods	(168		)		(119		)
Change in other comprehensive income	$	515			$	361

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NOTE 7. EARNINGS PER SHARE (“EPS”)

The following tables set forth the calculation of basic and diluted EPS for the three-month periods ended March 31, 2020 and 2019.

	Three months ended March 31,
	2020				2019
	(Dollars in thousands except share and per share data)
Basic earnings per common share
Net income available to the Company	$	7,212			$	7,061
Less: Dividend on series B preferred stock	8				1
Net income available to common shareholders	7,204				7,060
Basic weighted-average common shares outstanding	11,848,964				11,819,386
Basic earnings per common share	$	0.61			$	0.60
Diluted earnings per common share
Net income available to common shares	$	7,204			$	7,060
Add: Dividend on series B preferred stock	8				1
Net income available to diluted common shares	7,212				7,061
Basic weighted-average common shares outstanding	11,848,964				11,819,386
Dilutive potential common shares	159,236				183,994
Diluted weighted-average common shares outstanding	12,008,200				12,003,380
Diluted earnings per common share	$	0.60			$	0.59

All share and per share information as of March 31, 2019 has been adjusted for the 10% stock dividend effective on March 3, 2020.

NOTE 8. FAIR VALUE

Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures (Topic 820) of FASB Accounting Standards Codification, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Fair value is a market-based measurement, not an entity-specific measurement. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its assets and liabilities carried at fair value in three levels as follows:

Level 1 Input:

1)	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

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Level 2 Inputs:

1)	Quoted prices for similar assets or liabilities in active markets.

2)	Quoted prices for identical or similar assets or liabilities in markets that are not active.

3)	Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (e.g., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”

Level 3 Inputs:

1)	Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.

2)	These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Fair Value on a Recurring Basis:

The following is a description of the Company’s valuation methodologies for assets carried at fair value on a recurring basis. These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes that its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting measurement date.

Investments in Available for Sale Securities and Loans Held for Sale:

Where quoted prices are available in an active market, securities or other assets are classified in Level 1 of the valuation hierarchy. If quoted market prices are not available for the specific security or available for sale loans, then fair values are provided by independent third-party valuation services. These valuation services estimate fair values using pricing models and other accepted valuation methodologies, such as quotes for similar securities and observable yield curves and spreads. As part of the Company’s overall valuation process, management evaluates these third-party methodologies to ensure that they are representative of exit prices in the Company’s principal markets. For the loans held for sale, the fair value represents the face value of the guaranteed portion of the SBA loans pending settlement. Securities and loans in Level 2 include mortgage-backed securities, corporate debt obligations, collateralized mortgage-backed securities, and SBA loans available for sale.

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The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.

Financial Assets		Level 1				Level 2				Level 3				Total
		(Dollars in thousands)
Available for Sale Securities and Loans Held for Sale
As of March 31, 2020
Corporate debt obligations		$	—			$	500			$	—			$	500
Residential mortgage-backed securities		—				25,486				—				25,486
Collateralized mortgage-backed securities		—				36				—				36
Loans held for sale		—				193				—				193
Total		$	—			$	26,215			$	—			$	26,215
As of December 31, 2019
Corporate debt obligations		$	—			$	500			$	—			$	500
Residential mortgage-backed securities		—				26,075				—				26,075
Collateralized mortgage-backed securities		—				38				—				38
Loans held for sale		—				190				—				190
Total		$	—			$	26,803			$	—			$	26,803

For the three months ended March 31, 2020, there were no transfers between the levels within the fair value hierarchy. There were no level 3 assets or liabilities held during three months ended March 31, 2020 and 2019.

Fair Value on a Non-recurring Basis:

Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Financial Assets		Level 1				Level 2				Level 3				Total
		(Dollars in thousands)
As of March 31, 2020
Collateral-dependent impaired loans		$	—			$	—			$	8,893			$	8,893
OREO		—				—				3,950				3,950
As of December 31, 2019
Collateral-dependent impaired loans		$	—			$	—			$	8,460			$	8,460
OREO		—				—				4,727				4,727

All collateral-dependent impaired loans have an independent third-party full appraisal to determine the NRV based on the fair value of the underlying collateral, less cost to sell (a range of 5% to 10%) and other costs, such as unpaid real estate taxes, that have been identified, or the present value of discounted cash flows in the case of certain impaired loans that are not collateral dependent. The appraisal will be based on an "as-is" valuation and will follow a reasonable valuation method that addresses the direct sales comparison, income, and cost approaches to market value, reconciles those approaches, and explains the elimination of each approach not used. Appraisals are updated every 12 months or sooner if we have identified possible further deterioration in value.

OREO consists of real estate properties that are recorded at fair value based upon current appraised value, or agreements of sale, less estimated disposition costs using level 3 inputs. Properties are reappraised annually.

Fair Value of Financial Instruments

The Company discloses estimated fair values for its significant financial instruments in accordance with FASB ASC (Topic 825), “Disclosures about Fair Value of Financial Instruments”. The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for estimating the fair value of other financial assets and liabilities are discussed below.

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For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include cash and cash equivalents, accrued interest receivable, demand and other non-maturity deposits and accrued interest payable.

The Company used the following methods and assumptions in estimating the fair value of the following financial instruments:

 

Investment Securities: Fair value of securities available for sale is described above. Fair value of held to maturity securities is based upon quoted market prices for identical or similar assets.

Loans Held for Sale: Fair value represents the face value of the guaranteed portion of SBA loans pending settlement.

Loans Receivable: For residential mortgages loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the risk adjusting current interest rates at which similar loans would be made to borrowers with similar credit ratings and same remaining maturities, adjusted for the liquidity discount and underwriting uncertainty.

Restricted stock: Carrying value of FHLBNY and the Atlantic Central Bankers Bank stocks represent the par values of the stocks

and is adjusted for impairments if any. The carrying value approximated fair value.

Time deposits: The fair value of time deposits is based on the discounted value of contractual cash flows, where the discount rate is estimated using the market rates currently offered for deposits of similar remaining maturities.

Borrowings: The fair values of FHLBNY borrowings, other borrowed funds and subordinated debt are based on the discounted value of estimated cash flows. The discounted rate is estimated using market rates currently offered for debts with similar credit rating, terms and remaining maturities.

For a further discussion of the Company’s valuation methodologies for financial instruments measured at fair value, see the descriptions in the Company's 2019 Annual Report included in its Annual Report on Form 10-K.

Bank premises and equipment, customer relationships, deposit base and other information required to compute the Company’s aggregate fair value are not included in the above information. Accordingly, the above fair values are not intended to represent the aggregate fair value of the Company.

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The following table summarizes the carrying amounts and fair values for financial instruments at March 31, 2020 and December 31, 2019:

March 31, 2020	Carrying Amount				Fair Value
					Total				Level 1				Level 2				Level 3
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	283,191			$	283,191			$	283,191			$	—			$	—
Investment securities AFS	26,022				26,022				—				26,022				—
Investment securities HTM	1,181				1,441				—				1,441				—
Restricted stock	7,440				7,440				—				—				7,440
Loans held for sale	193				193				—				193				—
Loans, net	1,444,985				1,461,486				—				1,440,308				21,178
Accrued interest receivable	6,358				6,358				—				6,358				—
Financial Liabilities:
Non-time deposits	$	792,268			$	792,268			$	—			$	792,268			$	—
Time deposits	677,062				683,858				—				683,858				—
Borrowings	148,053				149,776				—				149,776				—
Accrued interest payable	1,968				1,968				—				1,968				—

December 31, 2019	Carrying Amount				Fair Value
					Total				Level 1				Level 2				Level 3
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	191,607			$	191,607			$	191,607			$	—			$	—
Investment securities AFS	26,613				26,613				—				26,613				—
Investment securities HTM	1,167				1,430				—				1,430				—
Restricted stock	7,440				7,440				—				—				7,440
Loans held for sale	190				190				—				190				—
Loans, net	1,398,938				1,393,288				—				1,372,317				20,971
Accrued interest receivable	6,069				6,069				—				6,069				—
Financial Liabilities:
Non-time deposits	$	652,544			$	652,544			$	—			$	652,544			$	—
Time deposits	686,675				692,177				—				692,177				—
Borrowings	148,053				156,479				—				156,479				—
Accrued interest payable	2,260				2,260				—				2,260				—

 

Note 9. Leases

We lease three retail branches and a parcel of land for a retail branch location. These leases generally have remaining terms of 6 years or less except the land lease, which has a remaining lease term of eighty-six years. Some of the leases may include options to renew the leases. The exercise of lease renewal is at our sole discretion.

When we adopted the Accounting Standards Update (ASU) 2016-02, we recognized operating right-of-use assets and lease liabilities each for $2.8 million. At adoption of ASU 2016-02, we elected the practical expedients package, which allows us to not reassess the lease classification for any existing leases. All our leases existed before the adoption of the new lease standard were measured

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under operating leases according to the applicable GAAP standard then. As the result, we have recorded all our lease as operating leases.

Our right-of-use assets and lease liabilities for operating leases are included in other assets and other liabilities on our consolidated balance sheets. We use interest rate implicit in the lease or incremental borrowing rate in determining the present value of lease payments. At March 31, 2020 , we had future minimum lease payments of $27.6 million, imputed interest $25.1 million, and lease liability $2.5 million. The weighted average remaining lease term was 51.72 years year and weighted average discount rate was 7.29% at March 31, 2020 , respectively. We also sublease some space of the one of our leased facilities to a company. Our operating lease expense is included in occupancy expenses within non-interest expense in our consolidated statements of income. Total operating lease expense consists of operating lease cost, which is recognized on a straight-line basis over the lease term, and variable lease cost, which is recognized based on actual amounts incurred.

The following table presents information about our operating leases at the year ended March 31, 2020 .

Dollars in thousands	March 31, 2020
Lease right of use ("ROU") assets	$	2,484
Lease liabilities	$	2,484

The following table presents future undiscounted cash flows on our operating leases:

	March 31, 2020
	(Dollars in thousands)
Remainder of 2020	$	232
2021	319
2022	290
2023	250
2024	252
Thereafter	26,211
Total undiscounted lease payments	$	27,554

NOTE 10. COMMITMENTS AND CONTINGENCIES

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of the Company’s involvement in these particular classes of financial instruments. The Company’s exposure to the maximum possible credit risk in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable; inventory; property, plant and equipment and income-producing commercial properties. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments to fund fixed-rate loans were immaterial at March 31, 2020. Variable-rate commitments are generally issued for less than one year and carry market rates of interest. Such instruments are not likely to be affected by annual rate caps triggered by rising interest rates. Management believes that off-balance sheet risk is not material to the results of operations or financial condition. As of March 31, 2020 and December 31, 2019, unused commitments to extend credit amounted to approximately $191.3 million and $205.1 million, respectively.

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Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of March 31, 2020 and December 31, 2019, standby letters of credit with customers were $19.4 million and $20.8 million, respectively.

On March 4, 2020, the Bank entered into an agreement with the FHLBNY, for a Municipal Letter of Credit ("MLOC"), of $40.0 million. The MLOC is used to pledge against public deposits and expires on March 4, 2021. There were no outstanding borrowings on the letter of credit as of March 31, 2020.

We provide banking services to customers that are licensed by various States to do business in the cannabis industry as growers, processors and dispensaries. Cannabis businesses are legal in these States, although it is not legal at the federal level. The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) published guidelines in 2014 for financial institutions servicing state legal cannabis businesses. A financial institution that provides services to cannabis-related businesses can comply with Bank Secrecy Act (“BSA”) disclosure standards by following the FinCEN guidelines. We maintain stringent written policies and procedures related to the acceptance of such businesses and to the monitoring and maintenance of such business accounts. We conduct a significant due diligence review of the cannabis business before the business is accepted, including confirmation that the business is properly licensed by the applicable state. Throughout the relationship, we continue monitoring the business, including site visits, to ensure that the business continues to meet our stringent requirements, including maintenance of required licenses and periodic financial reviews of the business.

While we believe we are operating in compliance with the FinCEN guidelines, there can be no assurance that federal enforcement guidelines will not change. Federal prosecutors have significant discretion and there can be no assurance that the federal prosecutors will not choose to strictly enforce the federal laws governing cannabis. Any change in the Federal government’s enforcement position, could cause us to immediately cease providing banking services to the cannabis industry.

At March 31, 2020 and December 31, 2019, deposit balances from Cannabis customers were approximately $264.8 million and $129.2 million, or 18.0% and 9.6% of total deposits, respectively, with two customers accounting for 53.2% and 13.6% of the total at March 31, 2020 and December 31, 2019. At March 31, 2020 and December 31, 2019, there were cannabis-related loans in the amounts of $7.9 million and $5.5 million, respectively. We recorded approximately $109,500 and $30,500 of interest income in the three months ended March 31, 2020 and 2019, respectively, related to these loans.

NOTE 11 REGULATORY MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action. The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was being phased in from 0.0% for 2015 to 2.50% by 2019. The Bank made a one-time election to opt-out the net unrealized gain or loss on available for sale securities in computing regulatory capital. At March 31, 2020 and December 31, 2019, the Company and Bank were both considered “well capitalized".

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, under capitalized, significantly under capitalized, and critically under-capitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If under capitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of March 31, 2020 and December 31, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.

In November 2019, Federal bank regulatory agencies finalized a rule that simplifies capital requirements for community banks by allowing them to optionally adopt a simple leverage ratio to measure capital adequacy, which removes requirements for calculating and reporting risk-based capital ratios for a qualifying community bank that have less than $10 billion in total consolidated assets, limited amounts of off-balance-sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9 percent. The community bank leverage ratio framework was effective on January 1, 2020. The Company has elected to adopt the optional

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community bank leverage ratio framework in the first quarter of 2020. The leverage ratios of the Company and the Bank at March 31, 2020 are as follow:

Regulatory Capital Compliance
As of March 31, 2020	Actual							For Capital Adequacy Purposes							For Capital Adequacy Purposes With Capital Conservation Buffer*							To be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands except ratios)	Amount				Ratio			Amount				Ratio			Amount				Ratio			Amount				Ratio
Company:
Tier 1 leverage	$	197,296			10.82	%		$	72,964			4.00	%		$	72,964			4.00	%		$	91,206			5.00	%
Parke Bank:
Tier 1 leverage	$	197,083			10.81	%		$	72,948			4.00	%		$	72,948			4.00	%		$	91,185			5.00	%

The following table presents the total risk based, Tier 1 risk based, Tier 1 common equity, and Tier 1 leverage ratios of the The Company and the Bank as of December 31, 2019:

As of December 31, 2019	Actual							For Capital Adequacy Purposes							For Capital Adequacy Purposes With Capital Conservation Buffer*							To be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands except ratios)	Amount				Ratio			Amount				Ratio			Amount				Ratio			Amount				Ratio
Company:
Total risk-based capital	$	208,013			16.70	%		$	99,654			8.00	%		$	130,795			10.50	%		$	124,567			10.00	%
Tier 1 risk-based capital	192,365				15.44	%		74,740				6.00	%		105,882				8.50	%		99,654				8.00	%
Tier 1 leverage	192,365				11.87	%		64,802				4.00	%		64,802				4.00	%		81,002				5.00	%
Tier 1 common equity	177,068				14.21	%		56,055				4.50	%		87,197				7.00	%		80,969				6.50	%
Parke Bank:
Total risk-based capital	$	207,620			16.67	%		$	99,621			8.00	%		$	130,752			10.50	%		$	124,526			10.00	%
Tier 1 risk-based capital	191,977				15.42	%		74,716				6.00	%		105,847				8.50	%		99,621				8.00	%
Tier 1 leverage	191,977				11.85	%		64,785				4.00	%		64,785				4.00	%		80,982				5.00	%
Tier 1 common equity	190,158				15.27	%		56,037				4.50	%		87,168				7.00	%		80,942				6.50	%

* The general capital rules require banks and covered financial institution holding companies to maintain a capital conservation buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The fully phased-in minimums are 10.5% (Total risk-based capital), 8.5% (Tier 1 risk-based capital), and 7.0% (Tier 1 common equity).

NOTE 12. SUBSEQUENT EVENTS

Beginning in the first quarter of 2020, the COVID-19 pandemic has posed a significant threat to people's health as well as the global and U.S. economies. As COVID-19 locked down business activities across the U.S. and globally, there has been a dramatic slow-down in business productivity, changes in consumer behaviors, volatility in financial market, and a sharp rise in unemployment. The situation is developing rapidly and the effect on the economy and other areas will depend on the severity and duration of the pandemic. Because COVID-19 appears to have flattened in some states in the second half of April, these states have started to reopen for businesses. Many more states may follow the trend. Although the federal government, Federal Reserve, and state governments have been providing support to businesses and individuals to stabilize the economy, it is still unclear what effect federal and local government actions will have on the economy. Additionally, it is still not clear how significantly this pandemic will impact the overall national economy and our business in the long run.

Beginning in April 2020, the Company has been lending to small business through Paycheck Protection Program loans ("SBA PPP" loans), which is a loan designed by Federal government to provide a direct incentive for small businesses to keep their workers on the payroll. As of April 30, we have originated approximately $58.9 million of SBA PPP loans.

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The Company may from time to time make written or oral "forward-looking statements" including statements contained in this Report and in other communications by the Company which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, such as statements of the Company's plans, objectives, expectations, estimates and intentions, involve risks and uncertainties and are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of the COVID-19 pandemic on the United States economy in general and the local economies in which the Company operates; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the 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 medical-use cannabis industry; technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

The Company cautions that the foregoing list of important factors is not exclusive. The Company also cautions readers not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date on which they are given. The Company is not obligated to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after any such date.

Throughout this report, “Parke Bancorp” and “the Company” refer to Parke Bancorp Inc. and its consolidated subsidiaries. The Company is collectively referred to as “we,” “us” or “our.” Parke Bank is referred to as the “Bank.”

In the following discussion we provide information about our results of operations, financial condition, liquidity and asset quality. We intend that this information facilitate your understanding and assessment of significant changes and trends related to our financial condition and results of operations. You should read this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Overview

We are a bank holding company and are headquartered in Washington Township, New Jersey. Through the Bank, we provide personal and business financial services to individuals and small to mid-sized businesses primarily in New Jersey and Pennsylvania. The Bank has branches in Galloway Township, Northfield, Washington Township, Collingswood, New Jersey and Philadelphia, Pennsylvania. The vast majority of our revenue and income is currently generated through the Bank.

We manage our Company for the long term. We are focused on the fundamentals of growing customers, loans, deposits and revenue and improving profitability, while investing for the future and managing risk, expenses and capital. We continue to invest in our products, markets and brand, and embrace our commitments to our customers, shareholders, employees and the communities where we do business. Our approach is concentrated on organically growing and deepening client relationships across our businesses that meet our risk/return measures.

We focus on small to mid - sized business and retail customers and offer a range of loan products, deposits services, and other financial products through our retail branches and other channels. The Company's results of operations are dependent primarily on its net interest income, which is the difference between the interest income earned on its interest earning-assets and the interest expense paid on its interest-bearing liabilities. In our operations, we have three major lines of lending: residential real estate mortgage, commercial real estate mortgage, and construction lending. Our interest income is primarily generated from our lending and investment activities. Our deposit products include checking, savings, money market accounts, and certificates of deposit. The 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.

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At March 31, 2020, we had total assets of $1.82 billion, and total equity of $184.9 million. Net income available to common shareholders for three months ended March 31, 2020 was $7.2 million.

Our business operations are subject to risks and uncertainties that could materially affect our operating results. Beginning in the first quarter of 2020, the COVID-19 pandemic has posed a significant threat to people's health as well as the global and U.S. economies. As COVID-19 locked down business activities across the U.S. and globally, there has been a dramatic slow-down in business productivity, changes in consumer behaviors, volatility in financial market, and a sharp rise in unemployment. The situation is developing rapidly and the effect on the economy and other areas will depend on the severity and duration of the pandemic. Because COVID-19 appears to have flattened in some states in the second half of April, these states have started to reopen for businesses. Many more states may follow the trend. Although the federal government, Federal Reserve, and state governments have been providing support to businesses and individuals to stabilize the economy, it is still unclear what effect federal and local government actions will have on the economy. Additionally, it is still not clear how significantly this pandemic will impact the overall national economy and our business in the long run. There continues to be various other risks and uncertainties that could impact the Company’s businesses and future results; particularly, changes to the U.S. economic condition, market interest rates, the Federal Reserve monetary policy, other government policies, and actions of regulatory agencies.

Results of Operations

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Net Income: Our net income available to common shareholders for the first quarter of 2020 increased $144,000, or 2.0%, to $7.2 million compared to $7.1 million for the same period last year. Earnings per share were $0.61 per basic common share and $0.60 per diluted common share for the first quarter of 2020 compared to $0.60 per basic common share and $0.59 per diluted common share for the same period last year. The increase in net income available to common shareholders primarily resulted from a $3.2 million increase in interest income, partially offset by a $1.4 million increase in interest expense, a $696,000 increase in the provision for loan and lease losses and a $709,000 increase in non-interest expense.

Net Interest Income: Our net interest income increased $1.8 million, or 13.2%, to $15.2 million for the first quarter of 2020 compared to $13.4 million for the first quarter of 2019. Interest income for the first quarter of 2020 increased to $21.6 million, an increase of $3.2 million, or 17.4%, from $18.4 million for the first quarter of 2019. The increase in interest income was primarily due to higher average loan balances. In addition, a $350,000 increase in interest income from federal funds sold and deposits with banks also contributed to the increase in interest income for the first quarter of 2020. Interest expense increased to $6.4 million for the three months ended March 31, 2020, from $4.9 million for the three months ended March 31, 2019. The increase was attributable to an increase in average interest bearing deposits.

Provision for loan losses: The provision for loan losses increased $696,000 for the three months ended March 31, 2020 to $1.4 million compared to $700,000 for the same period last year. The increase in the provision was primarily due to the estimated probable increase of credit risk resulting from the effect of the Covid-19 pandemic on our borrowers as of March 31, 2020, as well as the increased loan volumes. For more information about our provision and allowance for loan and lease losses and our loss experience, see “Financial Condition-Allowance for Loan and Lease Losses” below and Note 4 - Loans And Allowance For Loan Losses to the unaudited consolidated financial statements.

Non-interest Income: Our non-interest income was $988,000 for the three months ended March 31, 2020, an increase of $69,000 compared to $919,000 for the same period last year. The increase is primarily attributable to increased fee income from deposit accounts, partially offset by loss on sale of other real estate owned (OREO). The fee income for the three months ended March 31, 2020 from the commercial deposit accounts of depositors who do business in the cannabis industry totaled $470,000 compared to $312,000 for the same period last year. Such fee income is included in service fees on deposit accounts in the accompanying consolidated statements of income. Please refer to Note 10. Commitments And Contingencies in the notes to the unaudited consolidated financial statements for our banking services to customers who do business in the medical-use cannabis industry.

Non-interest Expense: Our non-interest expense increased $709,000 to $4.9 million for the three months ended March 31, 2020, from $4.2 million for the three months ended March 31, 2019. The increase was primarily due to a $404,000 increase in compensation and benefits and a $114,000 increase in FDIC insurance and other assessments.

Income Tax: Income tax expense was $2.6 million on income before taxes of $9.9 million for the three months ended March 31, 2020, resulting in an effective tax rate of 25.7%, compared to income tax expense of $2.3 million on income before taxes of $9.5 million for the same period of 2019, resulting in an effective tax rate of 24.4%.

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Net Interest Income

Net interest income is the interest earned on debt securities, loans and other interest-earning assets minus the interest paid on deposits, short-term borrowings and long-term debt. The net interest margin is the average yield of net interest income on average earning assets. Net interest income and the net interest margin in any one period can be significantly affected by a variety of factors including the mix and overall size of our earning assets portfolio and the cost of funding those assets.

The following tables presents the average daily balances of assets, liabilities and equity and the respective interest earned or paid on interest-earning assets and interest-bearing liabilities, as well as average annualized rates, for the periods indicated.

	For the Three Months Ended March 31,
	2020											2019
	Average Balance				Interest Income/ Expense				Yield/ Cost			Average Balance				Interest Income/ Expense				Yield/ Cost
	(Dollars in thousands, except percentages)
Assets
Loans	$	1,448,443			$	20,328			5.64	%		$	1,268,225			$	17,441			5.58	%
Investment securities	34,567				278				3.23	%		38,564				315				3.31	%
Federal funds sold and interest bearing deposits	298,020				951				1.28	%		104,720				601				2.33	%
Total interest-earning assets	1,781,030				21,557				4.87	%		1,411,509				18,357				5.27	%
Other assets	65,339											57,474
Allowance for loan losses	(22,039		)									(19,402		)
Total assets	$	1,824,330										$	1,449,581
Liabilities and Shareholders’ Equity
Interest bearing deposits:
NOWs	$	58,439			$	83			0.57	%		$	53,608			76				0.57	%
Money markets	243,722				1,146				1.89	%		205,090				1,096				2.17	%
Savings	210,573				254				0.49	%		125,495				162				0.52	%
Time deposits	564,942				3,267				2.33	%		370,733				1,930				2.11	%
Brokered certificates of deposit	131,006				701				2.15	%		105,984				699				2.67	%
Total interest-bearing deposits	1,208,682				5,451				1.81	%		860,910				3,963				1.87	%
Borrowings	148,053				907				2.46	%		118,475				962				3.29	%
Total interest-bearing liabilities	1,356,735				6,358				1.88	%		979,385				4,925				2.04	%
Non-interest bearing deposits	271,093											301,048
Other liabilities	12,378											10,086
Total non-interest bearing liabilities	283,471											311,134
Equity	184,124											159,062
Total liabilities and shareholders’ equity	$	1,824,330										$	1,449,581
Net interest income					$	15,199										$	13,432
Interest rate spread									2.99	%										3.23	%
Net interest margin									3.43	%										3.86	%

Financial Condition

General

At March 31, 2020, the Company’s total assets were $1.82 billion, an increase of $134.4 million, or 8.0%, from December 31, 2019. The increase in total assets was primarily attributable to the increase in cash and loans. Cash and cash equivalents increased $91.6 million compared to the cash balance at December 31, 2019. Loans increased $47.5 million at March 31, 2020, primarily due to increases in the construction loan portfolio, compared to the balances at December 31, 2019.

Total liabilities were $1.63 billion at March 31, 2020. This represented a $129.0 million, or 8.6%, increase from $1.50 billion at December 31, 2019. The increase in total liabilities was primarily due to an increase in total deposits, which increased $130.1 million, or 9.7%, to $1.47 billion at March 31, 2020 from $1.34 billion at December 31, 2019.

Total equity was $184.9 million and $179.4 million at March 31, 2020 and December 31, 2019, respectively, for an increase of $5.4 million from December 31, 2019.

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The following table presents certain key condensed balance sheet data as of March 31, 2020 and December 31, 2019:

	March 31, 2020				December 31, 2019
	(Dollars in thousands)
Cash and cash equivalents	$	283,191			$	191,607
Investment securities	27,203				27,780
Loans held for sale	193				190
Loans, net of unearned income	1,468,204				1,420,749
Allowance for loan losses	(23,219		)		(21,811		)
Total assets	1,815,556				1,681,160
Total deposits	1,469,330				1,339,219
FHLBNY borrowings	134,650				134,650
Subordinated debt	13,403				13,403
Total liabilities	1,630,686				1,501,736
Total equity	184,870				179,424
Total liabilities and equity	1,815,556				1,681,160

Cash and cash equivalents

Cash and cash equivalents increased $91.6 million to $283.2 million at March 31, 2020 from $191.6 million at December 31, 2019, an increase of 47.8%. The increase was primarily due to the cash received from the increase of deposits.

Investment securities

Total investment securities decreased to $27.2 million at March 31, 2020, from $27.8 million at December 31, 2019, a decrease of $577,000 or 2.1%. The decrease was primarily due to the normal pay downs of mortgage-backed securities. 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 by1- 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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At March 31, 2020, total loan balances net of unearned income, were $1.47 billion, a $47.5 million increase compared to December 31, 2019.

Loans held for sale (HFS): Loans held for sale are comprised of SBA loans originated for sale. We had loans held for sale totaling $193,000 at March 31, 2020 and $190,000 at December 31, 2019, respectively.

Loans receivable: Loans receivable increased to $1.47 billion at March 31, 2020 from $1.42 billion at December 31, 2019. The increase was primarily due to loan growth from the construction loan portfolios. Loans receivable, excluding loans held for sale, as of March 31, 2020 and December 31, 2019, consisted of the following:

	March 31, 2020							December 31, 2019
	Amount				Percentage of Loans to total Loans			Amount				Percentage of Loans to total Loans
	(Dollars in thousands)
Commercial and Industrial	$	37,938			2.6	%		$	36,777			2.6	%
Construction	260,581				17.7	%		231,095				16.3	%
Real Estate Mortgage:
Commercial – Owner Occupied	142,047				9.7	%		136,753				9.6	%
Commercial – Non-owner Occupied	298,726				20.3	%		298,204				21.0	%
Residential – 1 to 4 Family	645,598				44.0	%		636,891				44.8	%
Residential – Multifamily	71,215				4.9	%		68,258				4.8	%
Consumer	12,099				0.8	%		12,771				0.9	%
Total Loans	$	1,468,204			100.00	%		$	1,420,749			100.00	%

Deposits

At March 31, 2020, the Bank’s total deposits increased to $1.47 billion from $1.34 billion at December 31, 2019, an increase of $130.1 million, or 9.7%. Deposits growth was primarily due to an increase in non-interest bearing demand deposits and increase in other non-time deposits.

	March 31,				December 31,
	2019				2019
	(Dollars in thousands)
Noninterest-bearing	$	351,892			$	259,269
Interest-bearing
Checking	61,978				55,606
Savings	128,915				105,554
Money market	249,483				232,115
Time deposits	677,062				686,675
Total deposits	$	1,469,330			$	1,339,219

Borrowings

 

Total borrowings were $148.1 million at March 31, 2020, unchanged from December 31, 2019.

Equity

Total equity increased to $184.9 million at March 31, 2020 from $179.4 million at December 31, 2019, an increase of $5.4 million, or 3.0%, primarily due to the retention of earnings from the period.

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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 credit monitoring and tracking system and closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. The system supplements the credit review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit risk, loan delinquencies, TDR, nonperforming loans and potential problems loans.

The Company also maintains an outsourced independent loan review program that reviews and validates the credit risk assessment program on a periodic basis. Results of these external independent reviews are presented to management. The external independent loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit risk management personnel.

Although credit policies are designed to minimize risk, management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio as well as general and regional economic conditions.

Allowance for Loan and Lease Losses:

We maintain the allowance for loan and lease losses at levels that we believe to be appropriate to absorb estimated probable credit losses incurred in the portfolios as of the balance sheet date. Refer to the Note 4 - Loans and Allowance for Loan and Lease Losses in the notes to the unaudited consolidated financial statements for further discussion on management's methodology for estimating the allowance for loan losses.

At March 31, 2020, the allowance for loan losses was $23.2 million, as compared to $21.8 million at December 31, 2019. The ratio of the allowance for loan losses to total loans was 1.58% and 1.54% at March 31, 2020 and December 31, 2019, respectively. The ratio of the allowance for loan losses to non-performing assets increased to 235.4% at March 31, 2020, compared to 216.5% at December 31, 2019. During the three-month period ended March 31, 2020 and 2019, the Company did not charge off any loans, and recovered $12,000 and $35,000, respectively. Specific allowances for loan losses have been established in the amount of $1.14 million at March 31, 2020 as compared to $1.13 million on impaired loans at December 31, 2019. We have established reserves for all losses that we believe are both probable and reasonably estimable at March 31, 2020 and December 31, 2019. There can be no assurance, however, that further additions to the allowance will not be required in future periods.

The Company estimates the loan credit allowance based on GAAP incurred loss model. Accordingly, the Company did not set aside its loan allowance according to expected credit loss methodology. We increased our loan loss provision by $696,000 to $1.4 million for the period ended at March 31, 2020, compared to the three months ended March 31, 2019. The increase reflected the estimated probable increase of credit risk from the COVID-19 pandemic on our borrowers as of March 31, 2020.

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The table below presents changes in the Company’s allowance for loan losses for the periods indicated.

	Three Months Ended March 31,
	2020				2019
	(Dollars in thousands)
Balance at the beginning of the period	$	21,811			$	19,075
Charge-offs:
Commercial and Industrial	—				—
Construction:	—				—
Real Estate Mortgage:
Commercial – Owner Occupied	—				—
Commercial – Non-owner Occupied	—				—
Residential – 1 to 4 Family	—				—
Residential – Multifamily	—				—
Consumer	—				—
Total charge - offs	—				—
Recoveries:
Commercial and Industrial	4				6
Construction:	—				—
Real Estate Mortgage:
Commercial – Owner Occupied	5				6
Commercial – Non-owner Occupied	3				21
Residential – 1 to 4 Family	—				2
Residential – Multifamily	—				—
Consumer	—				—
Total recoveries	12				35
Net recoveries	12				35
Provisions for loan and lease losses	1,396				700
Balance at the end of the period	$	23,219			$	19,810

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 $10.4 million, or 0.7% of total loans at March 31, 2020, an increase of $3.1 million from December 31, 2019. At March 31, 2020, loans 30 to 89 days delinquent totaled $4.5 million, an increase of $2.5 million from December 31, 2019. The increase in loans 30 to 89 days delinquent was primarily related to loan relationships with one customer. Owner occupied commercial real estate loans and 1-4 family residential mortgage loans of 30 to 89 days delinquent increased $1.1 million and $1.2 million, respectively. Loans delinquent 90 days or more and not accruing interest totaled $5.9 million or 0.4% of total loans at March 31, 2020, an increase of $567,000 from $5.3 million, or 0.4% of total loans at December 31, 2019. The two largest

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nonperforming loan relationships as of March 31, 2020 were a $1.4 million construction loan and an aggregate of $2.7 million loans to one borrower secured by farmland, which was partially guaranteed by a Federal government agency.

The table below presents an age analysis of past due loans by loan class and the percentage of the nonperforming loans to total loans at March 31, 2020.

March 31, 2020	30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days and Not Accruing (NPL)				Greater than 90 Days and Accruing				Current				Total Loans				NPL to Loan Type %
	(Dollars in thousands except ratios)
Commercial and Industrial	$	—			$	—			$	396			$	—			$	37,542			$	37,938			1.04	%
Construction	—				—				1,365				—				259,216				260,581				0.52	%
Real Estate Mortgage:
Commercial – Owner Occupied	2,854				—				2,776				—				136,417				142,047				1.95	%
Commercial – Non-owner Occupied	—				—				69				—				298,657				298,726				0.02	%
Residential – 1 to 4 Family	1,470				—				1,309				—				642,819				645,598				0.20	%
Residential – Multifamily	171				—				—				—				71,044				71,215				—	%
Consumer	—				—				—				—				12,099				12,099				—	%
Total Loans	$	4,495			$	—			$	5,915			$	—			$	1,457,794			$	1,468,204			0.40	%

Impaired Loans

Impaired loans include nonperforming loans and TDRs, regardless of nonperforming status. At March 31, 2020 and December 31, 2019, we had $22.3 million and $22.1 million loans deemed impaired. Impaired loans at March 31, 2020 and December 31, 2019 included $16.7 million and $17.0 million of TDR loans.

Troubled Debt Restructurings (TDRs)

We reported performing TDR loans (not reported as non-accrual loans) of $16.4 million and $16.8 million, respectively, at March 31, 2020 and December 31, 2019. We had nonperforming TDR loans $279,500 and $281,000 at March 31, 2020 and December 31, 2019, respectively. There were no new loans modified as a TDR and no additional commitments to lend additional funds to debtors whose loans have been modified as a TDR for the three month ended March 31, 2020 and the year ended December 31, 2019.

Other Real Estate Owned (OREO)

OREO at March 31, 2020 was $4.0 million, compared to $5.2 million at March 31, 2019 with the largest property being a commercial building valued at $2.0 million.

An analysis of OREO activity is as follows:

	For the three months ended
	March 31,
	2020				2019
	(Dollars in thousands)
Balance at beginning of period	$	4,727			$	5,124
Real estate acquired in settlement of loans	—				45
Sales of OREO, net	(777		)		(13		)
Balance at end of period	$	3,950			$	5,156

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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, 2020, our cash position was $283.2 million. We invest cash that is in excess of our immediate operating needs primarily in our interest-bearing account at the Federal Reserve.

Our primary source of funding has been deposits. Funds from other operations, financing arrangements, investment securities available-for-sale also provide significant sources of funding. The Company seeks to rely primarily on core deposits from customers to provide stable and cost-effective sources of funding to support loan growth. We focus on customer service which we believe has resulted in a history of customer loyalty. Stability, low cost and customer loyalty comprise key characteristics of core deposits.

We also use brokered deposits as a funding source, which is more volatile than core deposits. The Bank also joined Promontory Inter Financial Network to secure an additional alternative funding source. Promontory provides the Bank an additional source of external funds through their weekly CDARS® settlement process. The rates are comparable to brokered deposits and can be obtained within a shorter period 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, 2020, the Company had lines of credit with the FHLBNY of $494.7 million, of which $134.7 million was outstanding, and an additional $40.0 million was a letter of credit for securing public funds. The remaining borrow capacity was $320.0 million at March 31, 2020.

Our investment portfolio primarily consists of mortgage-backed available for sale securities issued by US government agency and government sponsored entities. These available for sale securities are readily marketable and are available to meet our additional liquidity needs. At March 31, 2020, the Company's investment securities portfolio classified as available for sale was $26.0 million.

We had outstanding loan commitments of $191.3 million at March 31, 2020. 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, 2020 and 2019.

Cash provided by operating activities was $9.4 million in the three month ended March 31, 2020, compared to $10.6 million for the same period in the prior year. The decrease in operating cash flow was primarily due to decrease in interest payable and accrued liabilities.

Cash used by investing activities was $45.6 million in the three months ended March 31, 2020, compared to $56.5 million in the same period last year. The cash used in the investing activities was primarily due to the cash outflow required for net loan growth during the period.

Cash provided by financing activities was $127.8 million in the three months ended March 31, 2020, compared to cash from financing of $80.0 million in the same period of last year. The current year included $130.1 million of cash inflows from deposits partially offset by $1.7 million of dividend payments.

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 meanings to manage our capital. Total equity increased $5.4 million at March 31, 2020, from December 31, 2019, predominantly from the Company’s net income of $7.2 million for the period, net of common and preferred stock dividends of $1.9 million.

Banks and bank holding companies are subject to various regulatory capital requirements administered by federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and the Company must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Failure to meet minimum capital requirements can result in regulatory actions.

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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, 2020, the Bank and the Company were both considered “well capitalized”.

In November 2019, Federal bank regulatory agencies finalized a rule that simplifies capital requirements for community banks by allowing them to optionally adopt a simple leverage ratio to measure capital adequacy, which removes requirements for calculating and reporting risk-based capital ratios for a qualifying community bank that have less than $10 billion in total consolidated assets, limited amounts of off-balance-sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9 percent. The community bank leverage ratio framework was effective on January 1, 2020. The Company has elected to adopt the optional community bank leverage ratio framework in the first quarter of 2020.

The following table presents the tier 1 regulatory capitals and leverage ratios of the Company and the Bank at March 31, 2020:

	Amount				Ratio			Amount				Ratio
	(Dollars in thousands except ratios)
	Company							Parke Bank
Tier 1 leverage	$	197,296			10.82	%		$	197,083			10.81	%

Off-Balance Sheet Arrangement and Contractual Obligations

In the ordinary course of business, we engage in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different from the full contract or notional amount of the transaction. Our off-balance sheet arrangements include commitments to extend credit, standby letters of credit and other commitments. These transactions are primarily designed to meet the financial needs of our customers.

We enter into commitments to lend funds to customers, which are usually at a stated interest rate, if funded, and for specific purposes and time periods. When we make commitments, we are exposed to credit risk. However, the maximum credit risk for these commitments will generally be lower than the contractual amount because a significant portion of these commitments is expected to expire without being used by the customer. In addition, we manage the potential risk in commitments to lend by limiting the total amount of commitments, by monitoring maturity structure of these commitments and by applying the same credit standards for these commitments as for all of our credit activities.

For commitments to lend, we generally require collateral or a guarantee. We may require various types of collateral, including accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Collateral requirements for each loan or commitment may vary based on the commitment type and our assessment of a customer’s credit risk according to the specific credit underwriting, including credit terms and structure.

Commitments to extend credit, or net unfunded loan commitments, represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. These commitments generally have fixed expiration dates, may require payment of a fee, and contain termination clauses in the event the customer’s credit quality deteriorates. At March 31, 2020 and December 31, 2019, unused commitments to extend credit amounted to approximately $191.3 million and $205.1 million, respectively. Management believes that off-balance sheet risk is not material to the results of operations or financial condition.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At the March 31, 2020 and December 31, 2019, standby letters of credit with customers were $19.4 million and $20.8 million, respectively.

We have adequate resources to fund all unfunded commitments to the extent required and meet all contractual obligations as they come due. At March 31, 2020, such contractual obligations were primarily comprised of deposits, secured and unsecured borrowings, interest payments, operating leases and commitments to originating loans.

Critical Accounting Policies

The Company’s accounting policies are more fully described in Note 1 of the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 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

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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 the 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. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change. Our allowance for loan and lease losses is comprised of two components. The specific allowance covers impaired loans and is calculated on an individual loan basis. The general based component covers loans and leases on which there are incurred losses that are not yet individually identifiable. The allowance calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, projected industry outlook, and economic conditions.

The process of determining the level of the allowance for loan and lease losses requires a high degree of judgment. To the extent actual outcomes differ from our estimates, additional provision for loan and lease losses may be required that would reduce future earnings.

Fair Value Estimates: The ASC 820 - Fair Value Measurements defines fair value as a market-based measurement and is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. We classify fair value measurements of financial instruments based on the three-level fair value hierarchy in the accounting standards. We are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value. The fair values of assets may include using estimates, assumptions, and judgments. Valuations of assets or liabilities using techniques non quoted market price are sensitive to assumptions used for the significant inputs. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Changes in underlying factors, assumptions, or estimates used for estimating fair values could materially impact our future financial condition and results of operations.

The majority of our assets recorded at fair value are our securities available for sale investment. The fair value of our available for sale securities are provided by independent third-party valuation services. We also have small 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 8. Fair Value in the Notes to the unaudited consolidated financial statements for further information.

Income Taxes: In the normal course of business, we and our subsidiaries enter into transactions for which the tax treatment is unclear or subject to varying interpretations. We evaluate and assess the relative risks and merits of the tax treatment of transactions, filing positions, filing methods and taxable income calculations after considering statutes, regulations, and other information, and maintain tax accruals consistent with our evaluation of these relative risks and merits. The result of our evaluation and assessment is by its nature an estimate.

When tax returns are filed, it is highly likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Evaluation of disclosure controls and procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, (the "Exchange Act")), the Company's principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms.

Internal Controls

Changes in internal control over financial reporting. During the last quarter, there were no changes in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On June 19, 2015, Devon Drive Lionville, LP, North Charlotte Road Pottstown, LP, Main Street Peckville, LP, Rhoads Avenue Newtown Square, LP, VG West Chester Pike, LP, 1301 Phoenix, LP, John M. Shea and George Spaeder (collectively, the “Plaintiffs”), filed suit in the U.S. District Court for the Eastern District of Pennsylvania, against Parke Bancorp, Inc., Parke Bank and Parke Bank's President and Chief Executive Officer and Senior Vice President (collectively the "Parke Parties") alleging civil violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), among other claims, seeking compensatory and punitive damages. The allegations stem from a series of loans made by Parke Bank to the various Plaintiffs which subsequently went into default. The Plaintiffs are alleging that funds of one or more of the Plaintiffs were used to repay loans of another. The Parke Parties believe the material allegations of wrongdoing are without merit and intend to vigorously defend against the claims asserted in this litigation. Following extensive motion practice over the course of several years, the Court dismissed all of the Plaintiffs’ claims against the Parke Parties, and each of them, with prejudice. Plaintiffs have now appealed the case to the United States Circuit Court of Appeals for the Third Circuit. The Third Circuit has rendered their decision and they have denied the Plaintiff’s appeal. The plaintiffs have filed a"Writ of Certiorari" which requires the U.S. Supreme Court to render an opinion. There is no timetable for this decision.

ITEM 1A. RISK FACTORS

 

Not applicable

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no repurchases of our common stock during the three months ended March 31, 2020.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

ITEM 5. OTHER INFORMATION

 

None.

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ITEM 6. EXHIBITS

3.2	Bylaws of Parke Bancorp, Inc.
10.1	Parke Bancorp, Inc. 2020 Equity Incentive Plan
31.1	Certification of CEO required by Rule 13a-14(a).
31.2	Certification of CFO required by Rule 13a-14(a).
32	Certification required by 18 U.S.C. §1350.
101.INS	XBRL Instance Document *
101.SCH	XBRL Schema Document *
101.CAL	XBRL Calculation Linkbase Document *
101.LAB	XBRL Labels Linkbase Document *
101.PRE	XBRL Presentation Linkbase Document *
101.DEF	XBRL Definition Linkbase Document *

*           Submitted as Exhibits 101 to this Form 10-Q are documents formatted in XBRL (Extensible Business Reporting Language).

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SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		PARKE BANCORP, INC.
Date:	May 8, 2020	/s/ Vito S. Pantilione
		Vito S. Pantilione
		President and Chief Executive Officer (Principal Executive Officer)
Date:	May 8, 2020	/s/ John F. Hawkins
		John F. Hawkins
		Senior Vice President and Chief Financial Officer (Principal Accounting Officer)

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