PARKE BANCORP, INC. quarterly report, Q2 FY2016

Parke Bancorp, Inc. — Q2 2016 Form 10-Q Summary

Business Context and Reporting Period

Parke Bancorp is a New Jersey bank holding company whose principal subsidiary, Parke Bank, operates branches in New Jersey and Pennsylvania. The filing covers the three and six months ended June 30, 2016; financial statements are unaudited. The company is classified as a smaller reporting company.

Key Financial Metrics

Metric	Three Months Ended June 30, 2016	Six Months Ended June 30, 2016	Comparable 2015 Period
Total interest income	$10.5 million	$20.8 million	$9.9 million / $19.3 million
Net interest income	$8.8 million	$17.5 million	$8.5 million / $16.5 million
Noninterest income	$8.5 million	$9.6 million	$0.9 million / $2.1 million
Income before taxes	$13.9 million	$18.4 million	$4.3 million / $8.4 million
Net income available to common shareholders	$8.3 million	$10.7 million	$2.2 million / $4.4 million
Basic EPS	$1.22	$1.56	$0.33 / $0.67
Diluted EPS	$0.97	$1.26	$0.29 / $0.57
Net interest margin	3.99%	4.06%	4.14% / 4.17%

Total assets were $924.5 million at June 30, 2016, up 4.5% from December 31, 2015.
Gross loans were $783.4 million, up 3.3%; growth was concentrated in commercial real estate and residential mortgage loans.
Cash and cash equivalents increased to $52.6 million from $27.4 million, primarily following the sale of SBA assets.
Total deposits increased 7.2% to $712.8 million. Interest-bearing deposits were $665.5 million, including brokered certificate of deposit funding.
FHLBNY borrowings declined to $69.7 million from $84.7 million. The company reported $150.0 million of FHLB credit lines, with $69.7 million outstanding.
Shareholders’ equity increased 9.1% to $122.2 million. Parke Bank’s regulatory capital ratios exceeded applicable “well-capitalized” thresholds.
Six-month operating cash flow was $7.9 million versus $6.6 million in the prior-year period. Cash used in investing was $13.1 million, while financing activities provided $30.4 million.

Material Changes Versus Prior Comparable Period

Quarterly net income available to common shareholders rose to $8.3 million from $2.2 million; six-month earnings rose to $10.7 million from $4.4 million.
The principal driver was the April 29, 2016 sale to Berkshire Bank of 44 Business Capital assets, the company’s $42.6 million SBA loan portfolio and related servicing rights. The transaction generated a reported $7.6 million gain on SBA-related assets and approximately $9.3 million of total pretax benefit, including approximately $1.7 million of allowance relief.
Net interest income increased, reflecting higher average loan balances, but net interest margin narrowed by 15 basis points in the quarter and 11 basis points year to date as funding costs rose and loan yields declined.
The quarterly provision for loan losses was a $638,000 credit versus a $750,000 provision in the prior-year quarter. The six-month provision was $62,000 versus $1.6 million in 2015, including the effect of the SBA portfolio sale.
Nonperforming loans declined to $11.5 million, or 1.5% of total loans, from $13.6 million, or 1.8%, at year-end. The allowance for loan losses declined to $14.2 million from $16.1 million, while coverage of nonperforming loans increased to 122.9% from 119.0%.
OREO declined to $12.8 million from $16.6 million, although the company recorded $1.2 million of OREO write-downs during the first six months.

Outlook, Risks, Contingencies, and Unusual Items

The filing provides no formal earnings or revenue guidance. Management states that interim results are not necessarily indicative of full-year results.
Future performance depends primarily on loan growth, credit quality, deposit and borrowing costs, interest rates, economic conditions, competition and banking regulation. The lower net interest margin indicates pressure on spread profitability.
Credit risk remains material because the portfolio is concentrated in commercial real estate, non-owner-occupied real estate, residential mortgages and construction lending. Total past-due loans were $12.1 million, including $11.5 million of loans over 90 days past due and not accruing interest.
Impaired loans totaled $37.7 million at June 30, 2016, with $416,000 of related allowance. Performing troubled debt restructurings totaled $26.2 million and nonperforming troubled debt restructurings totaled $3.2 million.
Allowance adequacy, collateral values, OREO valuations, deferred tax assets and investment-security impairment assessments involve significant management judgment. Management cautions that additional provisions may be required.
The company is defending a federal lawsuit alleging RICO and other claims arising from loans that defaulted. Management believes the allegations are without merit and intends to defend the action; the filing does not provide a quantified potential loss.
The company identified no subsequent events requiring recognition or disclosure through the issuance date. It also reported effective disclosure controls and no material change in internal control over financial reporting.
Recently issued accounting standards, including the expected-credit-loss standard, leases, financial instruments, stock compensation and revenue recognition guidance, were under evaluation; the filing does not quantify their eventual effect.

Important Facts for Investors to Verify

Whether the SBA asset sale creates a sustainable change in earnings, given the substantial one-time gain and allowance release.
The post-sale trajectory of loan growth, commercial real estate concentrations, nonaccrual loans, impaired loans and OREO.
Whether the allowance for loan losses remains adequate as the portfolio expands and as collateral values and economic conditions change.
The effect of rising deposit and borrowing costs on the declining net interest margin.
The terms, status and potential financial exposure of the pending litigation.
The company’s future treatment and quantified impact of newly issued credit-loss, lease and financial-instrument accounting standards.