PARKE BANCORP, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)


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, and 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

We focus on small to mid - sized business and retail customers and offer a range
of loan products, deposit services, and other financial products through our
retail branches and other channels. The Company's results of operations are
dependent primarily on its net interest income, which is the difference between
the interest income earned on its interest earning-assets and the interest
expense paid on its interest-bearing liabilities. 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.

As of December 31, 2021, we had total assets of $2.14 billion, total liabilities
of $1.90 billion, and total shareholders' equity of $232.4 million. Net income
available to common shareholders for 2021 was $40.7 million. In 2021, net income
available to common shareholders increased 43.4% over the previous year
primarily as a result of lower interest expense on deposits, lower provision for
loan losses, and higher fee income. Total assets increased 2.8% and total equity
increased 14.7% compared to December 31, 2020. We also maintained a strong
capital position. Our risk based tier 1 capital ratio was 19.0% at December 31,
2021. During 2021, we returned $9.5 million of capital to our common
shareholders through common stock dividends.

Our business operations are subject to risks and uncertainties that could
materially affect our operating results. 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. Given its ongoing and dynamic nature, it is
difficult to predict the full impact of the COVID-19 outbreak on the business of
the Company, its customers, employees and third-party service providers. The
extent of such impact will depend on future developments, which are highly
uncertain. There continues to be various other risks and uncertainties that
could impact the Company's businesses and future results, such as changes to the
U.S. economic condition, market interest rates, the Federal Reserve monetary
policy, other government policies, and actions of regulatory agencies.

Operating results

Net revenue

We recorded net income available to common shareholders of $40.7 million or
$3.43 per basic common share and $3.36 per diluted common share, for the year
ended December 31, 2021 compared to $28.4 million, or $2.40 per basic common
share and $2.37 per diluted common share for the year ended December 31, 2020,
an increase of $12.3 million or 43.4%.

Net interest income

Net interest income increased $6.5 million, or 10.3%, to $69.1 million for the
year ended 2021 compared to $62.6 million for the year ended 2020. The increase
in net interest income was primarily due to a decrease in deposit rates,
partially offset by lower interest income from loans due to a decline in the
loan portfolio. Interest income for 2021 decreased to $82.1 million, a decrease
of $2.5 million, or 2.9%, from $84.5 million for 2020. Interest expense
decreased to $13.0 million for 2021, from $21.9 million for 2020, a reduction of
$8.9 million, or 40.8%.

Comparative Average Balances, Yields and Rates

The following table 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
years ended December 31, 2021 and 2020. Interest rate spread is the difference
between the average yield earned on interest-earning assets and the average rate
paid on interest-bearing liabilities. Net interest margin is net interest income
divided by average earning assets. All average balances are daily average
balances. Non-accrual loans were included in the computation of average balances
and have been reflected in the table as loans carrying a zero yield. The yields
set forth below include the effect of deferred fees, discounts and premiums that
are amortized or accreted to interest income or expense.


                                                                    For the Years Ended December 31,
                                                          2021                                            2020
                                                        Interest                                        Interest
                                           Average       Income/       Yield/              Average       Income/       Yield/
                                           Balance       Expense        Cost               Balance       Expense        Cost
                                                             (Dollars in thousands except Yield/ Cost data)
Loans                                   $ 1,513,959    $ 80,643           5.33  %       $ 1,527,999    $ 82,336           5.39  %
Investment securities                        26,000         753           2.90  %            32,065       1,008           3.14  %
Deposits with banks                         523,491         676           0.13  %           331,718       1,194           0.36  %
Total interest-earning assets             2,063,450    $ 82,072           3.98  %         1,891,782    $ 84,538           4.47  %
Non-interest earning assets                  77,370                                          70,279
Allowance for loan losses                   (30,019)                                        (25,145)
Total assets                            $ 2,110,801                                     $ 1,936,916
Liabilities and Equity
Interest bearing deposits
NOWs                                    $    75,502    $    323           0.43  %       $    63,086    $    328           0.52  %
Money markets                               322,201       2,140           0.66  %           279,947       3,670           1.31  %
Savings                                     146,585         664           0.45  %           140,466         711           0.51  %
Time deposits                               632,874       6,399           1.01  %           562,655      11,016           1.96  %
Brokered certificates of deposit             34,292         228           0.66  %           126,968       1,986           1.56  %
Total interest-bearing deposits           1,211,454       9,754           0.81  %         1,173,122      17,711           1.51  %
Borrowings                                  158,943       3,202           2.01  %           216,641       4,182           1.93  %

Total interest-bearing debt 1,370,397 $12,956 0.95% 1,389,763 $21,893

           1.58  %
Non-interest bearing deposits               506,645                                         342,325
Other liabilities                            15,030                                          13,084
Total liabilities                         1,892,072                                       1,745,172
Equity                                      218,729                                         191,564
Total liabilities and equity            $ 2,110,801                                     $ 1,936,736
Net interest income                                    $ 69,116                                        $ 62,645
Interest rate spread                                                      3.03  %                                         2.89  %
Net interest margin                                                       3.35  %                                         3.31  %

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. We
expect net interest income and our net interest margin to fluctuate based on
changes in interest rates and changes in the amount and composition of our
interest-earning assets and interest-bearing liabilities.

Rate/volume analysis

For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by the previous rate) and (ii) changes in rate
(i.e., changes in rate multiplied by old volume). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately to the change due to volume and the change due to
                                                    Years ended December 31,
                                                          2021 vs 2020
                                                    Variance due to change in
                                              Average        Average       Increase/
                                              Volume          Rate        (Decrease)
                                                     (Dollars in thousands)
Interest Income:

Loans (net of fees/deferred fees) ($760) ($933) $


 Investment securities                         (179)            (76)        


 Federal funds sold and cash equivalents        100            (618)            (518)
Total interest income                          (839)         (1,627)          (2,466)
Interest Expense:
 Deposits                                       559          (8,516)          (7,957)
 Borrowed funds                              (1,059)             79             (980)
Total interest expense                         (500)         (8,437)          (8,937)
Net interest income                        $   (339)        $ 6,810      $     6,471

Provision for loan losses

Our provision for loan losses in each period is driven by net charge-offs and
changes to the allowance for loan losses. We recorded a provision for loan
losses of $0.5 million and $7.6 million in 2021 and 2020, respectively. The
provision for loan losses as a percentage of interest income was 0.61% and 9.04%
in 2021 and 2020, respectively.

Our provision for loan losses decreased by $7.1 million in 2021 compared to 2020
primarily as a result of the economic uncertainties related to COVID-19 which
were evaluated in 2020. For more information about our provision and allowance
for loan and lease losses and our loss experience, see "Risk Management and
Asset Quality-Allowance for Loan and Lease Losses" and   NOTE 4. Loans and
Allowance for Loan and Lease Losses   in the Consolidated Financial Statements.

Non-interest Income

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

                                                                  2021                   2020
                                                                    (Dollars in thousands)
Gain on sale of SBA loans                                   $          214          $         -
Other Loan fees                                                      1,346                  860
Bank owned life insurance income                                       575                  592
Service fees on deposit accounts                                     5,662                2,521
Gain/(loss) on sale and valuation adjustments of OREO                   60                 (371)
Other                                                                  942                  581
Total non-interest income                                   $        8,799          $     4,183

Non-interest income increased by $4.6 million for $8.8 million in 2021 compared to 2020 mainly due to:

• An increase in commission income related to commercial deposit accounts;

The fee income for the year ended December 31, 2021 from the commercial deposit
accounts of depositors who do business in the medical-use cannabis industry
totaled $5.1 million and is included in service fees on deposit accounts in the
accompanying consolidated statements of income. Such deposit fee income totaled
$2.2 million during the year ended December 31, 2020. Please refer to   Note 15.
Commitments and Contingencies   in the Notes to the Consolidated Financial
Statements for our banking services to customers who do business in the
medical-use cannabis industry.


Non-interest charges

The following table displays the components of non-interest expense for 2021 and

                                               2021               2020
                                             (Dollars in thousands)
Compensation and benefits              $      9,731            $ 10,611
Professional services                         3,724               1,987
Occupancy and equipment                       2,381               2,031
Data processing                               1,306               1,290
FDIC insurance and other assessments          1,104                 805
OREO expense                                    287                 271
Other operating expense                       3,970               3,301
Total non-interest expense             $     22,503            $ 20,296

Non-interest expense increased $2.2 million to $22.5 million for 2021, from
$20.3 million for 2020 primarily due to an increase in professional services,
and other operating expense. Professional services increased $1.7 million, or
87.4% as a result of our consent order remediation efforts surrounding our BSA
operations. Other operating expense increased $0.7 million, or 20.3%, generally
due to the growth of the Company. These increases were partially offset by a
decrease in compensation and benefits expense.

Income tax

Income tax expense increased $3.9 million to $13.9 million on income before
taxes of $54.9 million for 2021, compared to income tax expense of $10.0 million
on income before taxes of $38.9 million for 2020. The effective income tax rates
for 2021 and 2020 were 25.4% and 25.7%, respectively.

Financial Condition


At December 31, 2021, the Company's total assets were $2.14 billion, an increase
of $58.1 million or 2.8%, from December 31, 2020. The increase in total assets
was primarily attributable to an increase in cash and cash equivalents,
partially offset by a decrease in loans. Cash and cash equivalents increased
$138.0 million, to $596.6 million at December 31, 2021. Total loans outstanding
decreased $81.0 million, primarily due to the decrease in the commercial loan
portfolio related to the Paycheck Protection Program loans, which decreased
$63.4 million to $27.8 million at December 31, 2021, from $91.2 million at
December 31, 2020.

Total liabilities were $1.90 billion at December 31, 2021. This represented a
$28.4 million, or 1.5%, increase from $1.88 billion at December 31, 2020. The
increase in total liabilities was primarily due to an increase in total
deposits, partially offset by a decrease in borrowings of $146.3 million. Total
deposits increased $176.0 million, or 11.1%, to $1.8 billion at December 31,
2021, from $1.6 billion at December 31, 2020. Deposits from the medical-use
cannabis industries increased to $375.2 million at December 31, 2021, from
$259.4 million at December 31, 2020. Total borrowings were $120.9 million at
December 31, 2021, a decrease of $146.3 million, compared to December 31, 2020,
primarily due to the repayment of $90.0 million in advances from the Federal
Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF") for the
Small Business Administration ('SBA") of PPP loans, and $56.5 million in pay
downs of FHLBNY advances.

Total equity was $232.4 million and $202.6 million at December 31, 2021 and
December 31, 2020respectively, for an increase of $29.8 million from
December 31, 2020.


The following table presents certain key data from the condensed balance sheet as at
December 31, 2021 and December 31, 2020:

                                             December 31,       December 31,
                                                 2021               2020
                                                  (Dollars in thousands)
            Cash and cash equivalents       $     596,553      $     458,601
            Investment securities                  23,269             21,106
            Loans held for sale                         -                200
            Loans, net of unearned income       1,484,847          1,565,807
            Allowance for loan losses             (29,845)           (29,698)
            Total assets                        2,136,445          2,078,322
            Total deposits                      1,768,410          1,592,443
            FHLBNY borrowings                      78,150            134,650
            Subordinated debt                      42,732             42,542
            FRB advances                                -             90,026
            Total liabilities                   1,904,084          1,875,725
            Total equity                          232,361            202,597
            Total liabilities and equity        2,136,445          2,078,322

Cash and cash equivalents

Cash and cash equivalents increased $138.0 million for $596.6 million at
December 31, 2021from $458.6 million at December 31, 2020, an increase of 30.1%. The increase was primarily due to cash received from increased deposits from medical cannabis businesses and loan repayments, partially offset by reduced borrowings.

Investment security

Total investment securities increased to $23.3 million at December 31, 2021,
from $21.1 million at December 31, 2020, an increase of $2.2 million or 10.2%.
The increase was primarily due to the purchase of $8.7 million of securities
classified as held-to-maturity, net of normal pay downs of mainly
mortgage-backed securities.


Loans held for sale (HFS): Loans held for sale include SBA loans held for sale. There were no loans held for sale to December 31, 2021 and
$200.0 thousand at December 31, 2020.

Loans, net of unearned income: Loans receivable decreased to $1.48 billion at
December 31, 2021, from $1.57 billion at December 31, 2020. The decrease was
largely driven by the reduction in the commercial loan portfolio attributed to
the payoff of Paycheck Protection Program loans.

Allowance for loan losses

Allowance for loan losses increased $0.1 million, to $29.8 million, or 0.5%, at
December 31, 2021, from $29.7 million at December 31, 2020. The decrease in the
provision was primarily due to the increase in qualitative factors made in 2020
as a result of economic uncertainty associated with the COVID-19 pandemic.


At December 31, 2021, the Bank's total deposits increased to $1.8 billion from
$1.6 billion at December 31, 2020, an increase of $176.0 million, or 11.1%. The
increase in deposits was primarily driven by the increase in noninterest-bearing
deposits from the medical-use cannabis businesses.



AT December 31, 2021total borrowing decreased $146.3 million for $120.9 million at December 31, 2021from $267.2 million at December 31, 2020. The decrease in borrowings is mainly due to the repayment of $90 million in advance of Federal Reserve Bank PPPLF for the SBA of PPP loans, and
$56.5 million in the repayment of advances from FHLBNY.


Total shareholders' equity increased to $232.4 million at December 31, 2021,
from $200.9 million at December 31, 2020, an increase of $31.4 million or 15.6%.
Total equity increased to $232.4 million at December 31, 2021, from $202.6
million at December 31, 2020. The increases in total shareholders' equity and
total equity were primarily due to the retention of earnings from the period.

Cash 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 December 31, 2021, our cash position was $596.6
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. At December 31, 2021, the Company had a $596.5 million
line of credit from the FHLBNY, of which $78.2 million was outstanding, $40.0
million was a letter of credit to secure public deposits, and $478.3 million was

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 December 31, 2021, the
Company's investment securities portfolio classified as available for sale was
$13.4 million.

We had unused loan commitments of $117.7 million at December 31, 2021. Our loan
commitments are normally originated with the full amount of collateral. Such
commitments have historically been drawn at only a fraction of the total
commitment. 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.

Capital adequacy

Consistent with the goal to operate a sound and profitable financial
organization, the Company and Bank actively seeks to maintain their status as
well-capitalized in accordance with regulatory standards. As of December 31,
2021, the Company and the Bank exceeded all applicable regulatory capital
requirements. See Note 13 to our consolidated financial statements for more
information about the Company's and the Bank's regulatory capital compliance.

Interest Rate Sensitivity

Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of earning assets and funding sources.
The primary objective of asset/liability management is to ensure the steady
growth of our primary earnings component, net interest income. Net interest
income can fluctuate with significant interest rate movements. To lessen the
impact of interest rate movements, management endeavors to structure the balance
sheet so that repricing opportunities exist for both assets and liabilities in
roughly equivalent amounts at approximately the same time intervals. Imbalances
in these repricing opportunities at any point in time constitute interest rate

The measurement of our interest rate sensitivity, or "gap," is one of the
principal techniques used in asset/liability management. Interest sensitive gap
is the dollar difference between assets and liabilities that are subject to
interest-rate pricing within a given time period, including both floating rate
or adjustable rate instruments and instruments that are approaching maturity.

Our management and the Board of Directors oversee the asset/liability management
function through the asset/liability committee of the Board that meets
periodically to monitor and manage the balance sheet, control interest rate
exposure, and evaluate our pricing strategies. The asset mix of the balance
sheet is continually evaluated in terms of several variables: yield, credit
quality, appropriate funding sources and liquidity. Management of the liability
mix of the balance sheet focuses on expanding the various funding sources.


In theory, interest rate risk can be diminished by maintaining a nominal level
of interest rate sensitivity. In practice, this is made difficult by a number of
factors, including cyclical variation in loan demand, different impacts on
interest-sensitive assets and liabilities when interest rates change, and the
availability of funding sources. Accordingly, we undertake to manage the
interest-rate sensitivity gap by adjusting the maturity of and establishing
rates on the earning asset portfolio and certain interest-bearing liabilities
commensurate with management's expectations relative to market interest rates.
Management generally attempts to maintain a balance between rate-sensitive
assets and liabilities as the exposure period is lengthened to minimize our
overall interest rate risk.

The interest rate sensitivity position as of December 31, 2021 is presented in
the following table. Assets and liabilities are scheduled based on maturity or
re-pricing data except for mortgage loans and mortgage-backed securities, which
are based on prevailing prepayment assumptions and expected maturities and
deposits which are based on recent retention experience of core deposits. The
difference between rate-sensitive assets and rate-sensitive liabilities, or the
interest rate sensitivity gap, is shown at the bottom of the table.
                                                                                     As of December 31, 2021
                                                             Over 3
                                                             Months            Over 1 Year        Over 3  Years
                                         3 Months          Through 12            Through             Through
                                         or Less             Months              3 Years             5 Years            Over 5 Years             Total
                                                                                      (Dollars in thousands)
Interest-earning assets:
Loans (1)                              $ 151,716          $  232,323          $  390,824          $   259,460          $    444,534          $ 1,478,857
Investment securities                      1,886               4,249               7,842                4,025                 5,267               23,269
Cash and cash equivalents                571,232                   -                   -                    -                     -              571,232

Total interest-earning assets $724,834 $236,572

   $  398,666          $   263,485          $    449,801          $ 2,073,358
Interest-bearing liabilities:
NOW, Saving and Money market deposits  $  32,892          $   98,674          $  263,130          $   195,733          $     30,426          $   620,855
Retail time deposits                     158,434             287,666              91,108               31,579                     -              568,787
Brokered time deposits                         -              20,341               2,888                1,730                     -               24,959
Borrowed funds                            13,403              20,000              58,150                    -                30,000              121,553

Total interest-bearing liabilities $204,729 $426,681

$415,276 $229,042 $60,426 $1,336,154
Interest rate sensitive spread

            $ 520,105          $ (190,109)       

($16,610) $34,443 $389,375 $737,204
Accumulated interest rate differential

           $ 520,105          $  329,996          $  313,386          $   347,829          $    737,204          $         -
Ratio of rate-sensitive assets to
rate-sensitive liabilities                 354.0  %             55.4  %             96.0  %             115.0  %              744.4  %             155.2  %
Cumulative interest sensitivity gap to
total assets                                24.3  %             15.4  %             14.7  %              16.3  %               34.5  %                 -

(1) Loan balances exclude unearned loans, deferred fees and costs and loan discounts.

Off-balance sheet arrangements 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 December 31, 2021 and December 31, 2020, unused
commitments to extend credit amounted to approximately $117.7 million and
$144.6 million, respectively. Commitments to fund fixed-rate loans were
immaterial at December 31, 2021. 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 of the Company.

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 December 31, 2021 and December 31,
2020, standby letters of credit with customers were $1.5 million and
$1.7 million, respectively.

At December 31, 2021, we had contractual obligations primarily relating to
commitments to extent credits, deposits, secured and unsecured borrowings, and
operating leases. We have adequate resources to fund all unfunded commitments to
the extent required and meet all contractual obligations as they come due.
Please refer to Notes 6, 7, 9, and 15 of the Notes to the Consolidated Financial
Statements for detailed information regarding our contractual obligations.

Impact of inflation and price changes

The financial statements included in this document have been prepared in
accordance with accounting principles generally accepted in the United States of
America. These principles require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.

Our primary assets and liabilities are monetary in nature. As a result, interest
rates have a more significant impact on our performance than the effects of
general levels of inflation. Interest rates, however, do not necessarily move in
the same direction or with the same magnitude as the price of goods and
services, since such prices are affected by inflation. In a period of rapidly
rising interest rates, the liquidity and maturities of our assets and
liabilities are critical to the maintenance of acceptable performance levels.

The principal effect of inflation on earnings, as distinct from levels of
interest rates, is in the area of non-interest expense. Expense items such as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to

Critical Accounting Policies

The Company's accounting policies are more fully described in   Note 1 -
Description of Business and Summary of Significant Accounting Policies   in the
Consolidated Financial Statements. As disclosed in Note 1, the preparation of
financial statements in conformity with generally accepted accounting principles
in the United States ("GAAP") requires management to make estimates and
assumptions about future events that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
significantly from those estimates. The Company believes that the following
discussion addresses the Company's most critical accounting policies, which are
those that are most important to the portrayal of the Company's financial
condition and results of operations and require management's most difficult,
subjective and complex judgments.

Allowance for Loan and Lease Losses: Our allowances for loan and lease losses
represents management's best estimate of probable losses inherent in our loan
portfolio excluding those loans accounted for under fair value. Our process for
determining the allowance for loan and lease losses is discussed in Note 1 to
the Consolidated Financial Statements.

We maintain the ALLL at levels that we believe to be appropriate to absorb
estimated probable credit losses incurred in the loan and lease portfolios as of
the balance sheet date. Our determination of the allowances is based on periodic
evaluations of the

loan and lease portfolios and other relevant factors. These critical estimates
include significant use of our own historical data and other qualitative,
quantitative data. 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: ASC 820 - Fair Value Measurements defines fair value as a
market-based measurement and is the price that would be received to sell a
financial asset or paid to transfer a financial liability in an orderly
transaction between market participants at the measurement date. The Company
uses valuation techniques that are consistent with the market approach. The
market approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets and liabilities. The
income approach uses valuation techniques to convert future amounts, such as
cash flows or earnings, to a single present amount on a discounted basis. The
cost approach is based on the amount that currently would be required to replace
the service capacity of an asset (replacement costs). Valuation techniques
should be consistently applied. Inputs to valuation techniques refer to the
assumptions that market participants would use in pricing the asset or
liability. Inputs may be observable, meaning those that reflect the assumptions
market participants would use in pricing the asset or liability and are
developed based on market data obtained from independent sources, or
unobservable, meaning those that reflect the reporting entity's own assumptions
about the assumptions market participants would use in pricing the asset or
liability and developed based on the best information available in the
circumstances. In that regard, a fair value hierarchy has been established for
valuation inputs that gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as follows:

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

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. These
include quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are
not active, inputs other than quoted prices that are observable for the asset or
liability (for example, interest rates, volatilities, prepayment speeds, loss
severities, credit risks and default rates) or inputs that are derived
principally from or corroborated by observable market data by correlations or
other means.

Level 3 inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing assets or liabilities.

The majority of our assets recorded at fair value are our investment securities
available for sale. The fair value of our available for sale securities are
provided by independent third-party valuation services. We also may have 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 16 - Fair
Value   in the Notes to the Consolidated Financial Statements for further

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

When tax returns are filed, it is highly likely that some positions taken would
be sustained upon examination by the taxing authorities, while others are
subject to uncertainty about the merits of the position taken or the amount of
the position that ultimately would be sustained. The benefit of a tax position
is recognized in the financial statements in the period during which, based on
all available evidence, management believes it is more likely than not that the
position will be sustained upon examination. The evaluation of a tax position
taken is considered by itself and not offset or aggregated with other positions.

positions that meet the more likely than not recognition threshold are measured
as the largest amount of tax benefit that is more than 50 percent likely of
being realized upon settlement with the applicable taxing authority. The portion
of benefits associated with tax positions taken that exceeds the amount measured
as described above is reflected as a liability for unrecognized tax benefits in
the accompanying balance sheet along with any associated interest and penalties
that would be payable to the taxing authorities upon examination.

Current Expected Credit Losses: In June 2016, the Financial Accounting Standards
Board adopted a new accounting standard, Financial Instruments - Credit Losses,
referred to as Current Expected Credit Loss, or CECL, requires financial
institutions to make periodic estimates of lifetime expected credit losses on
financial instruments measured at amortized cost and recognize the expected
credit losses as allowances. This would likely require us to increase our
allowance for loan losses, and to greatly increase the types of data we would
need to collect and review to determine the appropriate level of the allowance
for loan and debt securities. For public business entities except smaller
reporting entities ("SRCs"), the guidance is effective for fiscal years
beginning after December 15, 2019, and interim periods within those fiscal
years. CECL will be effective for SEC filers which are SRCs and all other
nonpublic entities for fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years. For all entities, early adoption will
continue to be allowed. As a small reporting company, CECL is not effective for
the Company until after December 15, 2022.

Quarterly financial data (unaudited)

The following represents summarized unaudited quarterly financial data of the
Company which, in the opinion of management, reflects adjustments (comprised
only of normal recurring accruals) necessary for fair presentation.
                                                              Three Months Ended
                                  December 31,              September 30,          June 30,          March 31,
                                               (Amounts in thousands, except per share amounts)
Interest income               $        19,565             $       20,580          $ 21,366          $  20,561
Interest expense                        2,819                      3,099             3,283              3,755
Net interest income                    16,746                     17,481            18,083             16,806
Provision for loan losses                   -                          -                 -                500
Income before income tax
expense                                13,434                     14,249            14,457             12,773
Income tax expense                      3,353                      3,705             3,633              3,247
Net income                             10,073                     10,501            10,757              9,429
Preferred stock dividends                   7                          7                 7                  7
Net income available to
common shareholders                    10,066                     10,494            10,750              9,422
Net income per common share:
Basic                         $          0.85             $         0.88          $   0.90          $    0.80
Diluted                       $          0.83             $         0.87          $   0.89          $    0.77
Interest income               $        21,665             $       20,873          $ 20,443          $  21,557
Interest expense                        4,550                      5,433             5,552              6,358
Net interest income                    17,115                     15,440            14,891             15,199
Provision for loan losses               1,850                      2,400             2,000              1,396
Income before income tax
expense                                11,060                      8,949             8,955              9,922
Income tax expense                      2,840                      2,306             2,311              2,554
Net income                              8,132                      6,543             6,541              7,212
Preferred stock dividends                   7                          7                 7                  8
Net income available to
common shareholders                     8,125                      6,536             6,534              7,204
Net income per common share:
Basic                         $          0.69             $         0.55          $   0.55          $    0.61
Diluted                       $          0.68             $         0.55          $   0.54          $    0.60


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