PARKE BANCORP, INC. (PKBK)

Item 7.         Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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, Pennsylvania, and New York. 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 measures.

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

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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, 2024, we had total assets of $2.14 billion, total liabilities of $1.84 billion, and total shareholders' equity of $300.1 million. Net income available to common shareholders for 2024 was $27.5 million. In 2024, net income available to common shareholders decreased 3.3% over the previous year primarily due to a decrease in net interest income, an increase in the provision for credit losses, and a decrease in non-interest income, partially offset by a decrease in non-interest expense. At December 31, 2024, total assets increased 5.9% and total equity increased 5.5%, compared to December 31, 2023. Our risk based tier 1 capital ratio was 21.2% at December 31, 2024. In addition, during the fiscal year ended December 31, 2024 we returned $8.6 million of capital to our common shareholders through cash dividends, and we repurchased 200,000 common stock shares at a total cost of $4.3 million.

Our business operations are subject to risks and uncertainties that could materially affect our operating results. The extent of such impact will depend on future developments, which are highly uncertain. 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 Board's monetary policy, other government policies, and actions of regulatory agencies.

Results of Operations

Net Income

We recorded net income available to common shareholders of $27.5 million or $2.30 per basic common share and $2.27 per diluted common share, for the year ended December 31, 2024, compared to $28.4 million, or $2.38 per basic common share and $2.35 per diluted common share, for the year ended December 31, 2023, a decrease of $0.9 million or 3.3%.

Net Interest Income

Net interest income decreased $5.5 million, or 8.6%, to $58.7 million for the year ended 2024 compared to $64.2 million for the year ended 2023. The decrease in net interest income was primarily due to an increase in interest expense of $17.9 million, partially offset by an increase in interest income of $12.4 million. Interest income for 2024 increased to $125.1 million, an increase of $12.4 million, or 11.0%, from $112.7 million for 2023, primarily due to an increase in interest and fees on loans of $11.8 million, or 11.1%. Interest and fees on loans increased during the year ended December 31, 2024, due to higher average outstanding loan balances and higher market interest rates. Interest expense increased to $66.4 million for 2024, from $48.5 million for 2023, an increase of $17.9 million, or 36.9%. The increase in interest expense was primarily due to an increase in market interest rates on deposit accounts at the Bank, as well as a change in the deposit mix. In addition, a decrease in non-interest bearing demand balances and an increase in interest-bearing deposit balances contributed to the increase in interest expense during the 2024 fiscal year..

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, 2024 and 2023. 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.

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(1) Interest income includes $3.6 million and $3.8 million of net fee income for the years ended 2024 and 2023, respectively.

(2) Average balances are net of unearned income and include nonperforming loans.

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.

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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 rate.

Provision for credit losses

Our provision for credit losses in each period is driven by net charge-offs and changes to the allowance for credit losses. We recorded a provision for credit losses of $0.7 million and a recovery for credit losses of $2.1 million in 2024 and 2023, respectively. The provision (recovery) for credit losses as a percentage of interest income was 0.58% and 1.82% in 2024 and 2023, respectively.

Our provision for credit losses increased by $2.8 million in 2024 compared to 2023 primarily as a result of an increase in outstanding loan balances, partially offset by a decrease in loss rates. Additionally, the provision for unfunded commitments contributed to $369.0 thousand of the increase. For more information about our provision and allowance for credit losses and our loss experience, see “Risk Management and Asset Quality-Allowance for Credit Losses” and NOTE 4. Loans and Allowance for Credit Losses in the Notes to the Consolidated Financial Statements.

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Non-interest Income

The table below shows the components of non-interest income for the years ended December 31, 2024 and 2023.

Non-interest income decreased by $2.4 million to $4.3 million during the year ended December 31, 2024 compared to 2023, primarily due to a decrease in fee income related to cannabis related business deposit fees and other loan fees.

The fee income for the year ended December 31, 2024 from the commercial deposit accounts of depositors who do business in the cannabis industry totaled $1.1 million and is included in service fees on deposit accounts in the accompanying consolidated statements of income. Such deposit fee income totaled $3.4 million during the year ended December 31, 2023. 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 cannabis industry.

Non-Interest Expense

The following table displays the components of non-interest expense for 2024 and 2023.

Non-interest expense decreased $9.3 million to $26.0 million for the year ended December 31, 2024, from $35.3 million for 2023 primarily due to a decrease in other operating expense of $10.1 million, partially offset by an increase in compensation and benefits of $0.4 million, and an increase in professional services of $0.4 million. The decrease in other operating expense was primarily driven from the recognition of a one-time contingent loss during 2023 of $9.5 million. The increase in compensation and benefits during the year ended December 31, 2024, was primarily due to a $0.4 million increase in salaries, and a $0.2 million decrease in deferred loan origination costs attributable to a reduction in the number of loans originated, partially offset by a $0.2 million decrease in SERP expense. The increase in professional fees of $0.4 million was primarily due to a $0.7 million increase in consulting fees attributed to our Bank Secrecy Act compliance, partially offset by a decrease of $0.3 million decrease in legal expense.

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Income Tax

Income tax expense decreased $0.4 million to $8.8 million on income before taxes of $36.3 million for 2024, compared to income tax expense of $9.2 million on income before taxes of $37.7 million for 2023. The effective income tax rates for 2024 and 2023 were 24.2% and 24.5%, respectively.

Financial Condition

General

At December 31, 2024, the Company’s total assets were $2.14 billion, an increase of $118.7 million or 5.9%, from December 31, 2023. The increase in total assets was primarily attributable to an increase in cash and cash equivalents and total loans outstanding. Cash and cash equivalents increased $41.2 million, to $221.5 million at December 31, 2024. Total loans outstanding increased $80.8 million at December 31, 2024, primarily due to an increase in residential multi-family loans of $71.4 million, and commercial owner-occupied loans of $18.7 million, partially offset by a decrease in construction loans of $8.2 million.

Total liabilities were $1.84 billion at December 31, 2024. This represented a $103.0 million, or 5.9%, increase from $1.74 billion at December 31, 2023. The increase in total liabilities was primarily due to an increase in deposits. Total deposits increased $78.2 million, or 5.0%, to $1.63 billion at December 31, 2024, from $1.55 billion at December 31, 2023. Deposits from the cannabis industries increased to $151.9 million at December 31, 2024, from $96.7 million at December 31, 2023. Total borrowings were $188.3 million at December 31, 2024, an increase of $20.2 million, compared to December 31, 2023, primarily due to an increase in FHLB advances of $20.0 million.

Total equity was $300.1 million and $284.3 million at December 31, 2024 and December 31, 2023, respectively, an increase of $15.8 million from December 31, 2023.

The following table presents certain key condensed balance sheet data as of December 31, 2024 and December 31, 2023:

Cash and cash equivalents

Cash and cash equivalents increased $41.2 million to $221.5 million at December 31, 2024, from $180.4 million at December 31, 2023, an increase of 22.8%. The increase was mainly due to an increase in deposits and borrowings, partially offset by an increase in loans.

Investment securities

Total investment securities decreased to $14.8 million at December 31, 2024, from $16.4 million at December 31, 2023, a decrease of $1.6 million or 9.9%. The decrease was primarily due to pay downs of $1.8 million, partially offset by a $0.1 million valuation increase.

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Loans, net unearned income

Loans receivable increased to $1.87 billion at December 31, 2024, from $1.79 billion at December 31, 2023. The increase was primarily due to an increase in residential multi-family loans of $71.4 million, and commercial owner-occupied loans of $18.7 million, partially offset by a decrease in construction loans of $8.2 million.

Allowance for credit losses

Allowance for credit losses increased $0.4 million, to $32.6 million, or 1.38%, at December 31, 2024, from $32.1 million at December 31, 2023. The increase was primarily due to an increase in the portfolio balance, partially offset by a decrease in historical loss rates.

Deposits

At December 31, 2024, the Bank’s total deposits increased to $1.63 billion from $1.55 billion at December 31, 2023, an increase of $78.2 million, or 5.0%. The increase in deposits was primarily attributed to an increase in time deposits of $108.1 million, and money market deposits of $48.4 million, partially offset by a decrease in non-interest bearing demand deposits of $48.2 million, and savings deposits of $27.6 million. Deposits from the cannabis businesses increased to $151.9 million at December 31, 2024, from $96.7 million at December 31, 2023, an increase of $55.2 million.

Borrowings

At December 31, 2024, total borrowings increased $20.2 million to $188.3 million at December 31, 2024, from $168.1 million at December 31, 2023. The increase in borrowings was primarily due to an increase in FHLBNY advances of $20.0 million.

Equity

Total shareholders’ equity increased to $300.1 million at December 31, 2024, from $284.3 million at December 31, 2023, an increase of $15.8 million or 5.5%. The increase in total shareholders' equity was primarily due to the retention of earnings from the period, partially offset by the recognition of $8.6 million of cash dividend, and repurchases of shares of the Company's common stock in the amount of $4.3 million during the year ended December 31, 2024.

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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 December 31, 2024, our cash position was $221.5 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. The Bank joined the IntraFi network to secure an additional alternative funding source. IntraFi provides the Bank an additional source of external funds through their weekly CDARS® settlement process, as well as their ICS® money market product. As of December 31, 2024, the Company has $13.5 million of brokered deposits from IntraFi. Additionally, we have access to other brokered deposit funding sources that we utilize as a source of additional liquidity. In addition to IntraFi, we utilize Wells Fargo, Piper Sandler, and Stonecastle to obtain brokered deposits, and as of December 31, 2024, the Company had $202.2 million sourced from these broker relationships. While deposit accounts comprise the vast majority of our funding needs, we maintain secured borrowing lines with the FHLBNY and the Federal Reserve Bank ("FRB"). During 2024, the Company reallocated a portion of its eligible collateral from the FHLBNY to the FRB discount window in order to diversify its borrowing capabilities. At December 31, 2024, the Company had a $740.5 million line of credit from the FHLBNY, of which $145.0 million was outstanding, $50.0 million was a letter of credit to secure public deposits, and $545.5 million was unused. As of December 31, 2024, the Company had a borrowing capacity through the FRB discount window of $252.0 million. There were no outstanding balances with the FRB as of December 31, 2024.

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, 2024, the Company's investment securities portfolio classified as available for sale was $5.6 million.

We had unused loan commitments of $122.5 million at December 31, 2024. 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, 2024, 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 sensitivity.

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.

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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, 2024 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.

(1) Loan balances exclude non-accruing 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

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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, 2024 and December 31, 2023, unused commitments to extend credit amounted to approximately $122.5 million and $93.8 million, respectively. Commitments to fund fixed-rate loans were immaterial at December 31, 2024. 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, 2024 and December 31, 2023, standby letters of credit with customers were $0.6 million and $1.5 million, respectively.

At December 31, 2024, we had contractual obligations primarily relating to commitments to extend 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 Changing Prices

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 inflation.

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.

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Allowance for Credit Losses: Our allowances for credit losses represents management's best estimate of probable losses inherent in our investment and loan portfolios, excluding those loans accounted for under fair value. Refer to Note 1 in the Notes to the Consolidated Financial Statements for further information.

Our determination of the allowance for credit losses is based on periodic evaluations of the loan and lease portfolios and other relevant factors, broken down into vintage based on year of origination. These critical estimates include significant use of our own historical data and other qualitative, and quantitative data. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change. Our allowance for credit losses is comprised of two components, a specific allowance and a general calculation. A specific allowance is calculated for loans and leases that do not share similar risk characteristics with other financial assets, and include collateral dependent loans. A loan is considered to be collateral dependent when foreclosure of the underlying collateral is probable. Parke has elected to apply the practical expedient to measure expected credit losses of a collateral dependent asset using the fair value of the collateral, less any estimated costs to sell, when foreclosure is not probable but repayment of the loan is expected to be provided substantially through the operation or sale of the collateral, and the borrower is experiencing financial difficulty. The general based component covers loans and leases on which there are expected credit losses that are not yet individually identifiable. The allowance calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, projected industry outlook, and economic conditions. One key assumption in the vintage model is the underlying prepayment speeds, which is derived by the average loan life within the various pools. To provide a sensitivity of the impact to the ACL estimate, management adjusted the average lives of the vintage pools, by both increasing and decreasing the prepayment speeds by 20%, which provided an estimated range of impact between $0.9 million for a lower prepayment speed and $(1.2) million for a higher prepayment speed. This range was deemed immaterial to the overall ACL reserve balance.

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

Item 7.         Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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, Pennsylvania, and New York. 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 measures.

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

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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, 2023, we had total assets of $2.02 billion, total liabilities of $1.74 billion, and total shareholders' equity of $284.3 million. Net income available to common shareholders for 2023 was $28.4 million. In 2023, net income available to common shareholders decreased 32.0% over the previous year primarily due to a $11.4 million increase in non-interest expenses, primarily due to a one-time recognition of a $9.5 million contingent loss related to cash that was stolen from a third-party armored car carrier facility that was used by the Company. In addition, non-interest expense increased due to an increase in compensation and benefits expense, lower net interest income, and lower non-interest income, partially offset by lower provision for credit losses. At December 31, 2023, total assets increased 1.9% and total equity increased 6.9%, compared to December 31, 2022. Our risk based tier 1 capital ratio was 20.8% at December 31, 2023. In addition, during 2023 we returned $8.6 million of capital to our common shareholders through common stock dividends.

Our business operations are subject to risks and uncertainties that could materially affect our operating results. 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 Board's monetary policy, other government policies, and actions of regulatory agencies.

Results of Operations

Net Income

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

Net Interest Income

Net interest income decreased $9.1 million, or 12.4%, to $64.2 million for the year ended 2023 compared to $73.3 million for the year ended 2022. The decrease in net interest income was primarily due to an increase in interest expense of $34.3 million, partially offset by an increase in interest income of $25.2 million. Interest income for 2023 increased to $112.7 million, an increase of $25.2 million, or 28.8%, from $87.5 million for 2022, primarily due to an increase in interest and fees on loans of $23.2 million, or 27.9%. Interest and fees on loans increased during the year ended December 31, 2023, due to higher average outstanding loan balances and higher market interest rates, and an increase in interest earned on average deposits held at the Federal Reserve Bank ("FRB") of $1.8 million, due to higher interest rates paid on deposits, partially offset by a decrease in the average balance of $225.1 million. Interest expense increased to $48.5 million for 2023, from $14.2 million for 2022, an increase of $34.3 million, or 242.5%. The increase in interest expense was primarily due to an increase in market interest rates on deposit accounts at the Bank, as well as a change in the deposit mix. In addition, a decrease in non-interest bearing demand balances and an increase in brokered deposit balances contributed to the increase in interest expense during the 2023 fiscal year..

Comparative Average Balances, Yields and Rates

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, 2023 and 2022. 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.

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(1) Interest income includes $3.8 million and $5.0 million of net fee income for the years ended 2023 and 2022, respectively.

(2) Average balances are net of unearned income and include nonperforming loans.

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 rate.

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Provision for credit losses

Our provision for credit losses in each period is driven by net charge-offs and changes to the allowance for credit losses. We recorded a recovery for credit losses of $2.1 million and a provision for loan losses of $1.8 million in 2023 and 2022, respectively. The (recovery) provision for credit losses as a percentage of interest income was (1.82)% and 2.06% in 2023 and 2022, respectively.

Our provision for credit losses decreased by $3.9 million in 2023 compared to 2022 primarily as a result of a decrease in vintage loss rates and a change in the loan portfolio mix, partially offset by an increase in outstanding loan balances. Additionally, the provision for unfunded commitments contributed to $461.0 thousand of the decrease. For more information about our provision and allowance for credit losses and our loss experience, see “Risk Management and Asset Quality-Allowance for Credit Losses” and NOTE 4. Loans and Allowance for Credit Losses in the Notes to the Consolidated Financial Statements.

Non-interest Income

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

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

The fee income for the year ended December 31, 2023 from the commercial deposit accounts of depositors who do business in the cannabis industry totaled $3.4 million and is included in service fees on deposit accounts in the accompanying consolidated statements of income. Such deposit fee income totaled $4.4 million during the year ended December 31, 2022. 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 cannabis industry.

Non-Interest Expense

The following table displays the components of non-interest expense for 2023 and 2022.

Non-interest expense increased $11.4 million to $35.3 million for the year ended December 31, 2023, from $23.8 million for 2022 primarily due to an increase in other operating expense of $9.1 million, an increase in compensation and benefits of $1.5 million, and an increase in OREO expense of $0.3 million. The increase in other operating expense was primarily driven from a one-time recognition of a $9.5 million contingent loss related to cash that was stolen from a third-party armored car carrier facility that was used by the Company. The increase in compensation and benefits was primarily due to a $0.5 million increase in salaries, and a $0.9 million decrease in deferred loan origination costs, attributable to a reduction in the number of loans originated. The increase in OREO expense is due to higher costs to maintain the Company's OREO inventory.

Income Tax

Income tax expense decreased $5.0 million to $9.2 million on income before taxes of $37.7 million for 2023, compared to income tax expense of $14.3 million on income before taxes of $56.1 million for 2022. The effective income tax rates for 2023 and 2022 were 24.5% and 25.4%, respectively.

Financial Condition

General

At December 31, 2023, the Company’s total assets were $2.02 billion, an increase of $38.6 million or 1.9%, from December 31, 2022. The increase in total assets was primarily attributable to an increase in loans, restricted stock, and other assets. Cash and cash equivalents decreased $1.8 million, to $180.4 million at December 31, 2023. Total loans outstanding increased $35.9 million at December 31, 2023, primarily due to an increase in residential 1 to 4 family loans of $29.0 million; residential 1 to 4 family investment loans of $24.0 million; and commercial owner occupied loans of $15.7 million; partially offset by a decrease in construction loans of $34.8 million.

Total liabilities were $1.74 billion at December 31, 2023. This represented a $20.3 million, or 1.2%, increase from $1.72 billion at December 31, 2022. The increase in total liabilities was primarily due to an increase in borrowings, partially offset by a decrease in deposits. Total deposits decreased $23.2 million, or 1.5%, to $1.55 billion at December 31, 2023, from $1.58 billion at December 31, 2022. Deposits from the cannabis industries decreased to $96.7 million at December 31, 2023, from

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$177.3 million at December 31, 2022. Total borrowings were $168.1 million at December 31, 2023, an increase of $42.0 million, compared to December 31, 2022, primarily due to an increase in FHLB advances of $41.9 million.

Total equity was $284.3 million and $266.0 million at December 31, 2023 and December 31, 2022, respectively, an increase of $18.3 million from December 31, 2022.

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

Cash and cash equivalents

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

Investment securities

Total investment securities decreased to $16.4 million at December 31, 2023, from $18.7 million at December 31, 2022, a decrease of $2.4 million or 12.6%. The decrease was primarily due to pay downs of $2.5 million, partially offset by a $0.1 million valuation increase.

Loans, net unearned income

Loans receivable increased to $1.79 billion at December 31, 2023, from $1.75 billion at December 31, 2022. The increase was primarily due to an increase in residential 1 - 4 family of $29.0 million; residential 1 to 4 family investment of $24.0 million; and commercial owner-occupied loans of $15.7 million; partially offset by a decrease of $34.8 million in construction loans.

Allowance for credit losses

Allowance for credit losses increased $0.3 million, to $32.1 million, or 0.90%, at December 31, 2023, from $31.8 million at December 31, 2022. The increase was primarily due to an increase in the portfolio balance, net of a decrease in historical loss rates. In 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses, and subsequent related updates, using the modified retrospective approach for all financial assets measured at amortized cost, including loans and held-to-maturity debt securities, and unfunded commitments. On January 1, 2023, the Company recorded a cumulative effect decrease to retained earnings of $2.1 million, net of tax, of which $1.9 million related to loans, and $960.0 thousand related to unfunded commitments. There were no such charges for securities held by the Company at the date of adoption.

Deposits

At December 31, 2023, the Bank’s total deposits decreased to $1.55 billion from $1.58 billion at December 31, 2022, a decrease of $23.2 million, or 1.5%. The decrease in deposits was primarily attributed to a decrease in non-interest bearing demand deposits of $120.4 million, savings of $105.1 million, time deposits of $42.2 million, and interest checking of $20.1 million

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partially offset by an increase in money market of $218.4 million, and brokered CD balances of $46.2 million. Deposits from the cannabis businesses decreased to $96.7 million at December 31, 2023, from $177.3 million at December 31, 2022, a decrease of $80.6 million. The decrease in such deposits is primarily attributable to increased competition from other banks, and the consolidation of the cannabis industry. The Bank expects this trend to continue in the foreseeable future.

Borrowings

At December 31, 2023, total borrowings increased $42.0 million to $168.1 million at December 31, 2023, from $126.1 million at December 31, 2022. The increase in borrowings was primarily due to an increase in FHLBNY advances of $41.9 million.

Equity

Total shareholders’ equity increased to $284.3 million at December 31, 2023, from $266.0 million at December 31, 2022, an increase of $18.3 million or 6.9%. The increase in total shareholders' equity was primarily due to the retention of earnings from the period, partially offset by the recognition of $8.6 million of cash dividends.

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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 December 31, 2023, our cash position was $180.4 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. The Bank joined the IntraFi network to secure an additional alternative funding source. IntraFi provides the Bank an additional source of external funds through their weekly CDARS® settlement process, as well as their ICS® money market product. While deposit accounts comprise the vast majority of our funding needs, we maintain secured borrowing lines with the FHLBNY. At December 31, 2023, the Company had a $944.4 million line of credit from the FHLBNY, of which $125.0 million was outstanding, $50.0 million was a letter of credit to secure public deposits, and $769.4 million was unused.

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, 2023, the Company's investment securities portfolio classified as available for sale was $7.1 million.

We had unused loan commitments of $93.8 million at December 31, 2023. 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, 2023, 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 sensitivity.

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.

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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, 2023 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.

(1) Loan balances exclude nonaccruing 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.

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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, 2023 and December 31, 2022, unused commitments to extend credit amounted to approximately $93.8 million and $159.0 million, respectively. Commitments to fund fixed-rate loans were immaterial at December 31, 2023. 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, 2023 and December 31, 2022, standby letters of credit with customers were $1.5 million and $1.5 million, respectively.

At December 31, 2023, 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 Changing Prices

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 inflation.

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 Credit Losses: Our allowances for credit losses represents management's best estimate of probable losses inherent in our investment and loan portfolios, excluding those loans accounted for under fair value. Refer to Note 1 in the Notes to the Consolidated Financial Statements for further information.

Our determination of the allowance for credit losses is based on periodic evaluations of the loan and lease portfolios and other relevant factors, broken down into vintage based on year of origination. These critical estimates include significant use of our

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own historical data and other qualitative, and quantitative data. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change. Our allowance for credit losses is comprised of two components, a specific allowance and a general calculation. A specific allowance is calculated for loans and leases that do not share similar risk characteristics with other financial assets, and include collateral dependent loans. A loan is considered to be collateral dependent when foreclosure of the underlying collateral is probable. Parke has elected to apply the practical expedient to measure expected credit losses of a collateral dependent asset using the fair value of the collateral, less any estimated costs to sell, when foreclosure is not probable but repayment of the loan is expected to be provided substantially through the operation or sale of the collateral, and the borrower is experiencing financial difficulty. The general based component covers loans and leases on which there are expected credit losses that are not yet individually identifiable. The allowance calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, projected industry outlook, and economic conditions.

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

Item 7.         Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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, Pennsylvania, and New York. 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 measures.

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.

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As of December 31, 2022, we had total assets of $1.98 billion, total liabilities of $1.72 billion, and total shareholders' equity of $266.0 million. Net income available to common shareholders for 2022 was $41.8 million. In 2022, net income available to common shareholders increased 2.6% over the previous year primarily due to higher net interest income, partially offset by an increase in the provision for loan losses and higher non-interest expense. At December 31, 2022, total assets decreased 7.1% and total equity increased 14.5%, compared to December 31, 2021. Our risk based tier 1 capital ratio remained strong during the year and was 19.3% at December 31, 2022. In addition, during 2022 we returned $7.9 million of capital to our common shareholders through common stock dividends.

Our business operations are subject to risks and uncertainties that could materially affect our operating results, including the continued adverse impact of the COVID-19 pandemic on the local and national economy and our business and results of operations. 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 Board's monetary policy, other government policies, and actions of regulatory agencies.

Results of Operations

Net Income

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

Net Interest Income

Net interest income increased $4.2 million, or 6.1%, to $73.3 million for the year ended 2022 compared to $69.1 million for the year ended 2021. The increase in net interest income was primarily due to an increase in interest income of $5.4 million, partially offset by an increase in interest expense of $1.2 million. Interest income for 2022 increased to $87.5 million, an increase of $5.4 million, or 6.6%, from $82.1 million for 2021, primarily due to an increase in interest earned on average deposits held at the Federal Reserve Bank ("FRB") of $3.1 million and an increase in interest and fees on loans of $2.3 million due to higher average outstanding loan balances and higher interest rates. Interest expense increased to $14.2 million for 2022, from $13.0 million for 2021, an increase of $1.2 million, or 9.3%. The increase in interest expense was primarily due to an increase in market interest rates on our deposit accounts.

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, 2022 and 2021. 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.

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(1) Interest income includes $5.0 million and $7.5 million of net fee income for the years ended 2022 and 2021, respectively.

(2) Average balances are net of unearned income and include nonperforming loans.

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 rate.

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