Business Context and Reporting Period
Parke Bancorp, Inc. is a New Jersey bank holding company operating primarily through Parke Bank in New Jersey and Pennsylvania. The Company provides commercial and retail banking services, with lending concentrated in residential real estate, commercial real estate, construction, and commercial and industrial loans.
This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Results were materially affected by the COVID-19 pandemic, near-zero interest rates, the SBA Paycheck Protection Program, and related economic uncertainty.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net interest income | $14.9 million, up 4.2% | $30.1 million, up 8.5% |
| Provision for loan losses | $2.0 million, versus $0.5 million | $3.4 million, versus $1.2 million |
| Net income attributable to common shareholders | $6.5 million, down 12.4% | $13.7 million, down 5.4% |
| Basic/diluted EPS | $0.55/$0.55 | $1.16/$1.15 |
| Net interest margin | 3.32%, versus 3.80% | 3.38%, versus 3.83% |
| Non-interest income | $0.9 million, up 20.9% | $1.9 million, up 13.6% |
| Non-interest expense | $4.9 million, up 7.6% | $9.7 million, up 12.1% |
Income before tax was $9.0 million in the second quarter and $18.9 million year to date. The effective tax rate was 25.8% in both periods, compared with 24.6% and 24.5%, respectively, in the prior-year periods.
Financial Condition, Cash Flow, Debt, and Liquidity
- Total assets were $1.94 billion at June 30, 2020, up 15.2% from December 31, 2019.
- Loans increased to $1.54 billion from $1.42 billion. Commercial and industrial loans increased to $112.1 million, including approximately $78.0 million of SBA PPP loans.
- Total deposits increased 12.6% to $1.51 billion, including noninterest-bearing deposits of $356.4 million.
- Cash and cash equivalents rose 67.5% to $320.9 million. Cash provided by operating activities was $11.3 million; investing activities used $120.0 million, primarily for net loan growth; financing activities provided $238.0 million.
- Total borrowings were $220.9 million, comprising $134.7 million of FHLBNY borrowings, $72.9 million of other borrowings related primarily to SBA PPP loans, and $13.4 million of subordinated debentures.
- FHLBNY borrowing capacity was $519.0 million, with $134.7 million outstanding and approximately $344.4 million of remaining capacity. The Company also held $24.4 million of available-for-sale securities.
- Total equity was $189.7 million, up from $179.4 million at year-end 2019. The Company and Bank were considered well capitalized; June 30 tier 1 leverage ratios were 11.28% for the Company and 11.26% for the Bank.
Material Changes Versus Prior Comparable Period
- Net income declined despite higher net interest income, primarily because the provision for loan losses increased by $1.6 million in the quarter and $2.2 million year to date.
- Net interest margin contracted as lower market rates reduced asset yields, particularly on cash and deposit balances. Average loan volumes and PPP loan interest and fees partly offset the rate pressure.
- Loan growth accelerated, primarily from commercial and industrial and construction lending, while deposits and liquidity increased substantially.
- The allowance for loan losses increased to $25.2 million from $21.8 million. The allowance-to-loans ratio increased to 1.63% from 1.54%.
- Nonperforming loans increased to $10.0 million, or 0.6% of total loans, from $5.3 million at December 31, 2019. There were no charge-offs during the six months ended June 30, 2020, and recoveries were $21,000.
- Non-interest income benefited from higher deposit service fees and lower OREO losses. Cannabis-related customer accounts contributed $921,000 of deposit fee income year to date, compared with $713,000 in 2019.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing provides no formal earnings or revenue guidance. Management stated that the COVID-19 outlook remained highly uncertain and could adversely affect loan demand, delinquencies, foreclosures, collateral values, credit losses, net interest margin, liquidity, and cybersecurity risk from remote work.
- The Company established COVID-19 loan deferral and relief programs. Qualifying short-term modifications generally were not classified as TDRs under interagency guidance, which may limit the comparability of reported troubled-loan trends.
- Management increased qualitative loss factors because of pandemic-related economic uncertainty. Future additions to the allowance may be required if borrower performance or economic conditions deteriorate.
- Cannabis-related deposits were approximately $184.6 million, or 12.2% of total deposits, and cannabis-related loans were $8.0 million. Cannabis activity remains legal in applicable states but illegal federally; a change in federal enforcement could require the Bank to cease these services.
- Unused commitments to extend credit were $163.6 million, and standby letters of credit were $19.0 million. Management stated that off-balance-sheet risk was not material.
- At June 30, 2020, the Company had $2.4 million of operating lease liabilities and $27.5 million of future undiscounted lease payments.
- A previously disclosed RICO lawsuit became final after the U.S. Supreme Court denied the plaintiffs’ petition on June 8, 2020.
- In July 2020, the Company completed a $30 million private placement of ten-year subordinated notes. The notes bear a fixed 6.50% rate for five years and then reset to three-month SOFR plus 644 basis points; they initially qualify as Tier 2 capital.
Important Facts for Investors to Verify
- Whether pandemic-related loan deferrals, PPP lending, and applicable TDR relief mask emerging credit deterioration.
- Future provision needs, nonperforming loans, collateral values, and the adequacy of the $25.2 million allowance.
- The sustainability of deposit growth, elevated cash balances, PPP-related borrowings, and reliance on brokered or other non-core funding.
- The effect of prolonged low interest rates on asset yields, funding costs, net interest margin, and earnings.
- Concentration and regulatory risks associated with cannabis-related deposits and loans.
- The terms, capital treatment, and future interest expense of the $30 million subordinated note issuance.
- The filing states that CECL adoption is not required for the Company until fiscal years beginning after December 15, 2022; investors should verify the eventual transition impact.