Parke Bancorp, Inc. — Fiscal 2022 Form 10-K Summary
Reporting period: Year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter report. Parke Bancorp is a New Jersey bank holding company operating primarily through Parke Bank, a full-service commercial bank serving Southern New Jersey, the Philadelphia area, and New York. Core lending activities include residential and commercial real estate, construction, commercial and industrial, and consumer loans.
Financial Performance and Condition
| Metric | 2022 | Change versus 2021 |
|---|---|---|
| Net income available to common shareholders | $41.8 million | Up 2.6% |
| Basic/diluted EPS | $3.51/$3.44 | Up from $3.43/$3.36 |
| Net interest income | $73.3 million | Up 6.1% |
| Net interest margin | 3.77% | Up from 3.35% |
| Provision for loan losses | $1.8 million | Up from $0.5 million |
| Non-interest income | $8.4 million | Down 4.7% |
| Non-interest expense | $23.8 million | Up 5.9% |
| Effective income tax rate | 25.4% | Comparable with 2021 |
| Total assets | $1.985 billion | Down 7.1% |
| Total loans | $1.751 billion | Up 18.0% |
| Total deposits | $1.576 billion | Down 10.9% |
| Total equity | $266.0 million | Up 14.5% |
- Revenue and profitability: Interest income increased 6.6% to $87.5 million, driven by higher earnings on Federal Reserve deposits and growth in loans. Interest expense rose 9.3% to $14.2 million as deposit costs increased. Net income benefited from the higher net interest margin, partially offset by higher credit-loss provisions and operating expenses.
- Cash flow: Operating activities generated $43.5 million. Investing activities used $262.9 million, principally because net loan growth used $268.4 million. Financing activities used $194.9 million, reflecting deposit outflows, debt activity, and $7.9 million of common dividends. Cash and cash equivalents declined $414.4 million, or 69.5%, to $182.2 million.
- Asset quality: The allowance for loan losses increased to $31.8 million from $29.8 million, while allowance coverage declined to 1.82% of period-end loans from 2.01%. Non-accrual loans increased to $16.3 million, or 0.93% of loans, from $4.3 million, or 0.29%. Impaired loans increased to $21.7 million from $10.3 million. Net charge-offs were low, with a net recovery of $0.2 million.
- Loan mix: Growth was concentrated in residential one-to-four-family loans, which rose $165.1 million; commercial non-owner-occupied real estate, up $72.3 million; and construction loans, up $39.7 million. Commercial and industrial loans declined $24.7 million, largely because Paycheck Protection Program loans declined.
- Debt and liquidity: Total borrowings were $126.1 million, including $83.2 million of FHLB advances and $42.9 million of subordinated debt. The Bank had a $693.7 million FHLB credit line, of which $560.5 million was unused, and $50.0 million was committed to a letter of credit securing public deposits.
- Capital: The Bank was considered well capitalized. Its community bank leverage ratio was 15.85%, compared with a 9.00% requirement. The Company reported a Tier 1 risk-based capital ratio of 19.34%.
- Dividends: Common quarterly dividends increased from $0.16 per share in the first two quarters to $0.18 per share in the third and fourth quarters. The Company paid $7.9 million in common dividends and made approximately $26,700 of preferred dividends during 2022.
Material Changes Versus 2021
- Net income increased modestly despite higher provisions and operating costs.
- Loans expanded substantially while deposits contracted, resulting in a significant reduction in cash and cash equivalents.
- Cannabis-related deposits declined to $177.3 million, or 11.3% of deposits, from $375.2 million, or 21.2%. Two customers represented 36.9% of cannabis deposits at year-end 2022.
- Brokered deposits increased to $140.8 million from $9.1 million, including $106.6 million of CDARS deposits, increasing reliance on potentially more rate-sensitive funding.
- Service fees on deposit accounts declined $0.7 million, primarily because cannabis-related commercial deposit fees fell to $4.4 million from $5.1 million.
- Professional services expense declined because 2021 included elevated BSA remediation costs; compensation and benefits and other operating expenses increased.
- Accumulated other comprehensive income moved to a $0.5 million loss from $0.2 million of income, primarily because of unrealized investment-security losses associated with higher interest rates.
Outlook, Risks, Contingencies, and Unusual Items
- BSA/AML consent orders: Parke Bank remains subject to FDIC and New Jersey Department of Banking and Insurance consent orders issued in 2020 relating to BSA/AML weaknesses. Required remediation includes enhanced oversight, policies, customer due diligence, training, monitoring, independent testing, and a historical account review. The orders remain enforceable and may result in additional expenses, sanctions, restrictions, or further government action. No civil money penalty or additional capital requirement was imposed under the orders.
- Cannabis banking exposure: The Bank services state-legal cannabis businesses even though cannabis remains illegal under federal law. A change in federal enforcement policy could require the Bank to discontinue these relationships and could adversely affect deposits, fee income, liquidity, and earnings.
- Armored-car matter: An armored-car provider reported that approximately $9.5 million of cash associated with the Bank’s cannabis-related customers was missing or presumed stolen. The ultimate loss and recoveries were not determinable at filing, and no loss was recorded because it was not yet probable and estimable.
- Litigation: In the Absecon Gardens condominium matter, plaintiffs alleged approximately $1.7 million of damages. The case was in early discovery, and management stated that liability and the ultimate outcome could not be predicted.
- Interest-rate and funding risk: Rising rates may increase deposit and borrowing costs, reduce margins, affect real estate values, increase defaults, and pressure loan demand. Management expects net interest income and margin to fluctuate with rates and asset-liability mix.
- Credit and concentration risk: The loan portfolio is concentrated in real estate and in regional markets. Commercial real estate, construction lending, and local economic conditions create heightened sensitivity to property values, borrower cash flows, and regional economic weakness.
- CECL adoption: As a smaller reporting company, the Company expected to adopt the current expected credit loss methodology for fiscal years beginning after December 15, 2022. Management estimated an adoption increase of $0 to $3.0 million in the allowance for credit losses and $0 to $1.0 million for off-balance-sheet commitments, net of tax effects through retained earnings.
- Other commitments: Unused commitments to extend credit were $159.0 million and standby letters of credit were $1.5 million. Management stated that available resources were adequate to meet contractual obligations and expected funding needs.
Key Facts Investors Should Verify
- Whether the elevated non-accrual and impaired loan balances continue to rise, particularly in commercial real estate and construction portfolios.
- The impact of CECL adoption on retained earnings, the allowance for credit losses, capital ratios, and future provisions.
- The final amount of any loss or recovery related to the approximately $9.5 million armored-car cash matter.
- Progress toward terminating the FDIC and NJDOBI BSA/AML consent orders and the level of ongoing remediation costs.
- The stability of cannabis-related deposits, brokered deposits, uninsured deposits, and associated fee income.
- The effect of higher interest rates on deposit pricing, funding costs, net interest margin, loan demand, and real estate collateral values.
- The outcome and potential financial exposure from the Absecon Gardens litigation.
- The continued availability of FHLB borrowing capacity and compliance with well-capitalized regulatory standards.