Parke Bancorp, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Parke Bancorp, Inc. is a New Jersey bank holding company whose principal subsidiary, Parke Bank, operates branches in New Jersey and Pennsylvania. The unaudited report covers the three months ended March 31, 2017, with comparisons to March 31, 2016 and December 31, 2016 balance-sheet amounts. The company is a smaller reporting company.
Financial performance and condition
| Metric | Q1 2017 | Comparable period or prior year-end |
|---|---|---|
| Net income available to common shareholders | $3.16 million | $2.31 million in Q1 2016 |
| Basic / diluted EPS | $0.46 / $0.38 | $0.34 / $0.29 in Q1 2016 |
| Net interest income | $9.26 million | $8.75 million in Q1 2016 |
| Net interest margin | 3.94% | 4.15% in Q1 2016 |
| Provision for loan losses | $500,000 | $700,000 in Q1 2016 |
| Total assets | $1.016 billion | $1.016 billion at December 31, 2016 |
| Gross loans | $885.1 million | $852.0 million at December 31, 2016 |
| Total deposits | $787.0 million | $788.7 million at December 31, 2016 |
| Borrowings | $93.1 million, including $79.7 million of FHLBNY borrowings and $13.4 million of subordinated debentures | $93.1 million at December 31, 2016 |
| Shareholders’ equity | $129.7 million | $127.1 million at December 31, 2016 |
Interest income increased 7.3% to $11.1 million, primarily from higher average loan balances. Interest expense increased to $1.8 million as deposit and borrowing costs rose. The net interest spread narrowed to 3.80% from 4.03%, and the net interest margin declined 21 basis points.
Noninterest income fell to $395,000 from $1.2 million, principally because Q1 2016 included a $1.4 million gain on sale of SBA loans. Noninterest expense declined to $3.7 million from $4.7 million, reflecting lower compensation, OREO expense and other operating costs. The effective tax rate increased to 36.7% from 34.1%.
Operating activities generated $3.0 million of cash, while investing activities used $31.5 million, mainly because of a $33.8 million net increase in loans. Financing activities used $2.4 million. Cash and cash equivalents declined $31.0 million to $39.7 million.
Material changes and credit quality
- Gross loans grew 3.9% sequentially, driven by commercial real estate and mortgage lending. The loan-to-deposit ratio increased to 112.5% from 108.0%.
- A $30.0 million commercial customer wire transfer reduced noninterest-bearing deposits. Management replaced some funding through a $61.2 million brokered CD transaction and a 13-month CD special.
- Delinquent loans decreased to $12.0 million, or 1.4% of total loans, from $12.6 million. Nonaccrual loans declined to $10.4 million, or 1.2% of loans, from $11.3 million, or 1.3%.
- The allowance for loan losses was $15.5 million, or 1.7% of loans, compared with $15.6 million, or 1.8%, at year-end. The allowance covered 148.7% of nonperforming loans versus 137.9% previously.
- Loan charge-offs were $682,000 and recoveries were $77,000. Impaired loans totaled $35.3 million and had $1.7 million of specific allowances.
- OREO declined to $9.8 million from $10.5 million. The largest property was a condominium development valued at approximately $3.0 million.
Outlook, risks and unusual items
The filing provides no quantitative earnings or revenue guidance. Management states that liquidity is supported by deposits, marketable securities, residential mortgage loans, short-term funding and FHLBNY borrowing capacity. FHLBNY lines totaled $150.9 million, of which $79.7 million was outstanding at March 31, 2017.
Management reported that the company and bank met applicable capital requirements. The bank's March 31, 2017 capital ratios exceeded the “well-capitalized” thresholds, including total risk-based capital of 17.71%, Tier 1 risk-based capital of 16.46% and Tier 1 leverage of 14.31%.
Key risks include commercial real estate, construction and residential lending concentrations; borrower defaults; collateral valuation changes; interest-rate and deposit-cost pressure; reliance on brokered CDs; regulatory changes; and estimation risk in the allowance for loan losses, OREO valuations, deferred taxes and securities impairment analysis. The company recorded no credit-related OTTI charge during the quarter.
The company is defending a federal RICO and related lawsuit brought by borrowers whose loans defaulted. Management believes the allegations are without merit and has moved to dismiss the claims. The filing does not provide a clear estimate of potential loss or timing.
During the quarter, 97 Series B preferred shares converted into 10,024 common shares. The company declared a $0.10 per-share quarterly common dividend and, after quarter-end, declared a 10% common stock dividend payable May 19, 2017.
Most important facts for investors to verify
- Whether rapid loan growth and a loan-to-deposit ratio above 100% can be sustained without increasing funding costs or liquidity risk.
- Trends in nonaccrual loans, impaired loans, collateral values, charge-offs and the adequacy of the allowance.
- The effect of declining net interest margin and higher deposit and borrowing costs on future profitability.
- Exposure to commercial real estate and construction borrowers, including the largest nonperforming relationships.
- The financial and legal consequences of the pending borrower litigation, which are not quantified in the filing.
- Dependence on brokered and time deposits and availability of remaining FHLBNY borrowing capacity.
- The effect of the planned 10% stock dividend and ongoing preferred-stock conversions on share count, EPS and capital.