Parke Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020; filed November 6, 2020. Parke Bancorp is a New Jersey bank holding company operating primarily through Parke Bank in New Jersey and Pennsylvania, serving retail customers and small to mid-sized businesses.
Financial condition and results
| Metric | Q3 2020 | Q3 2019 | Change |
|---|
| Net interest income | $15.4 million | $14.5 million | +6.5% |
| Provision for loan losses | $2.4 million | $0.9 million | +$1.5 million |
| Net income available to common shareholders | $6.5 million | $7.8 million | -15.7% |
| Basic and diluted EPS | $0.55 | $0.65 | Down from prior year |
| Net interest margin | 3.14% | 3.67% | Down 53 basis points |
| Metric | Nine months 2020 | Nine months 2019 | Change |
|---|
| Net interest income | $45.5 million | $42.2 million | +7.9% |
| Provision for loan losses | $5.8 million | $2.1 million | +$3.7 million |
| Net income available to common shareholders | $20.3 million | $22.3 million | -9.0% |
| Basic and diluted EPS | $1.71 / $1.69 | $1.88 / $1.86 | Down from prior year |
| Net interest margin | 3.29% | 3.77% | Down 48 basis points |
- Assets and loans: Total assets were $2.08 billion, up 23.5% from December 31, 2019. Loans were $1.57 billion, up $153.9 million, including $95.1 million of SBA Paycheck Protection Program loans.
- Deposits and funding: Deposits were $1.60 billion, up 19.2% from year-end 2019. Borrowings totaled $270.9 million, including $134.7 million of FHLBNY borrowings, $93.8 million of Federal Reserve advances related to PPP lending, and $42.5 million of subordinated debentures.
- Liquidity: Cash and cash equivalents were $442.7 million versus $191.6 million at year-end. The Bank had $349.3 million of remaining FHLBNY borrowing capacity, excluding other available sources.
- Capital: Total equity was $194.4 million, compared with $179.4 million at December 31, 2019. The Company and Bank reported Tier 1 leverage ratios of 10.80% and 12.32%, respectively, and both were considered well capitalized.
- Cash flow: Nine-month operating cash flow was $22.5 million. Investing activities used $145.4 million, primarily for net loan growth, while financing activities provided $374.0 million, primarily from deposit growth, Federal Reserve advances and subordinated debt issuance.
- Credit reserves and asset quality: The allowance for loan losses increased to $27.6 million, or 1.75% of loans, from $21.8 million, or 1.54%, at year-end 2019. Delinquent loans totaled $10.4 million, including $9.5 million of loans over 90 days past due and not accruing interest. Impaired loans totaled $25.6 million.
- OREO: Other real estate owned declined to $567,000 from $4.7 million at year-end 2019, primarily due to property sales.
Material changes versus prior comparable periods
- Net interest income increased because of loan growth and PPP loan interest and fees, but lower market rates reduced asset yields and compressed the net interest margin.
- Provision expense rose substantially because management increased qualitative credit-risk factors in response to COVID-19-related economic uncertainty and portfolio growth.
- Non-interest income declined to $741,000 in the quarter and $2.7 million year to date, partly because of lower loan fees and losses or valuation adjustments on OREO.
- Non-interest expense increased to $4.8 million in the quarter and $14.6 million year to date, driven primarily by compensation, FDIC insurance and other assessments.
- The Company issued $30 million of ten-year fixed-to-floating subordinated notes in July 2020, generating approximately $29.1 million of net proceeds and qualifying initially as Tier 2 capital.
- The Company declared a quarterly common dividend of $0.16 per share and completed a 10% common stock dividend effective March 3, 2020.
Outlook, risks and unusual items
- COVID-19: Management stated that the pandemic could reduce product demand, increase delinquencies, foreclosures and loan losses, weaken collateral values and guarantor liquidity, compress margins, and increase cybersecurity risks from remote work. The duration and economic effects remained uncertain.
- Loan modifications: The Company operated COVID-19 loan deferral programs. Qualifying short-term COVID-19 modifications generally were not classified as troubled debt restructurings under the applicable interagency guidance. Most previously deferred loans were no longer in deferral status at September 30, 2020.
- Cannabis banking exposure: Deposits from cannabis-related customers were approximately $269.1 million, or 16.9% of total deposits, and cannabis-related loans were $8.5 million. Cannabis activity remains legal in certain states but illegal federally; a change in federal enforcement could require the Bank to cease these services.
- Regulatory matter: On October 7, 2020, Parke Bank entered into FDIC and New Jersey Department of Banking and Insurance consent orders concerning weaknesses in its Bank Secrecy Act and anti-money-laundering compliance program. No civil money penalty or additional capital was required at issuance, but additional compliance expenses and potential future enforcement, sanctions, restrictions or fines remain possible.
- Off-balance-sheet commitments: Unused commitments to extend credit were $160.7 million and standby letters of credit were $14.8 million at September 30, 2020. Management stated that off-balance-sheet risk was not material.
- Accounting: As a small reporting company, the Company expects to adopt the current expected credit loss methodology for fiscal years beginning after December 15, 2022 and was evaluating its impact.
- The filing provides no formal earnings or revenue guidance.
Investor verification points
- Track COVID-19-related deferrals, criticized and classified loans, nonperforming assets, charge-offs and whether additional allowance provisions are required.
- Assess the sustainability of the 1.75% allowance-to-loans ratio under changing economic and real estate conditions.
- Monitor net interest margin sensitivity to near-zero interest rates, deposit pricing and the high cash balance.
- Evaluate concentration and retention risk associated with cannabis-related deposits, including the two customers representing a significant portion of those balances.
- Review implementation of the FDIC and New Jersey consent orders, related compliance spending and any subsequent regulatory action.
- Verify the terms, cost and capital treatment of the 2030 subordinated notes and the Company’s continuing well-capitalized status.
