Parke Bancorp, Inc. 2023 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023. 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 parts of New York.
Business Context
The Bank focuses on commercial real estate, residential real estate, construction, commercial and industrial, and consumer lending. Funding is primarily provided by customer deposits, supplemented by brokered deposits, Federal Home Loan Bank advances and subordinated debt. At year-end, the Company had 101 full-time and five part-time employees.
Key Financial Metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net income available to common shareholders | $28.4 million | $41.8 million | Down 32.0% |
| Basic/diluted EPS | $2.38/$2.35 | $3.51/$3.44 | Declined |
| Net interest income | $64.2 million | $73.3 million | Down 12.4% |
| Net interest margin | 3.34% | 3.77% | Down 43 basis points |
| Total interest income | $112.7 million | $87.5 million | Up 28.8% |
| Total interest expense | $48.5 million | $14.2 million | Up 242.5% |
| Recovery/(provision) for credit losses | $(2.1) million recovery | $1.8 million provision | Improved $3.9 million |
| Non-interest income | $6.7 million | $8.4 million | Down 20.2% |
| Non-interest expense | $35.3 million | $23.8 million | Up 48.0% |
| Effective tax rate | 24.5% | 25.4% | Improved |
| Total assets | $2.02 billion | $1.98 billion | Up 1.9% |
| Total loans | $1.79 billion | $1.75 billion | Up 2.0% |
| Total deposits | $1.55 billion | $1.58 billion | Down 1.5% |
| Total equity | $284.3 million | $266.0 million | Up 6.9% |
Profitability and Operating Results
- Interest income increased because of higher loan balances and market rates, but funding costs rose substantially as deposit rates increased, non-interest-bearing deposits declined and brokered deposits increased.
- Net interest margin contracted to 3.34% from 3.77%, and the interest-rate spread declined to 2.42% from 3.41%.
- Non-interest expense included a one-time $9.5 million contingent loss related to cash stolen from a third-party armored-carrier facility used by the Company. This was the primary driver of the $11.4 million increase in operating expenses.
- Compensation and benefits expense increased 13.9% to $12.3 million. FDIC insurance and other assessments increased 23.0% to $1.3 million.
- Cannabis-related deposit fee income declined to $3.4 million from $4.4 million and was included in service fees on deposit accounts.
Cash Flow, Liquidity and Capital
- Cash provided by operating activities was $23.0 million, compared with $43.5 million in 2022.
- Investing activities used $34.9 million, principally because net loan growth used $36.0 million.
- Financing activities provided $10.1 million. Cash and cash equivalents ended at $180.4 million, compared with $182.2 million at year-end 2022.
- FHLB borrowings increased to $125.0 million from $83.2 million. The Company had a $944.4 million FHLB credit line, with $769.4 million unused and $50.0 million committed to a letter of credit securing public deposits.
- Brokered deposits increased to $223.4 million from $140.8 million and represented a more volatile funding source. Uninsured deposits totaled $601.5 million at period-end.
- The Company had $93.8 million of unused loan commitments and $1.5 million of standby letters of credit. Management stated that it had adequate resources to fund commitments and meet contractual obligations.
- The Bank was well capitalized. The Company reported a Tier 1 risk-based capital ratio of 20.84%, a Tier 1 leverage ratio of 15.04% and a Community Bank Leverage Ratio of 16.49% at December 31, 2023.
Asset Quality and Portfolio Composition
- Loans were concentrated in residential real estate, commercial real estate and construction. Commercial real estate loans totaled $511.7 million; office, hotel, retail and restaurant sectors collectively represented 11.5% of total loans, with no individual sector exceeding 3.6%.
- Non-performing loans declined to $7.2 million, or 0.40% of period-end loans, from $21.7 million, or 0.93%, in 2022.
- The allowance for credit losses was $32.1 million, equal to 1.80% of period-end loans, compared with 1.82% in 2022. The allowance covered 443.9% of non-performing loans.
- The Company adopted the current expected credit loss standard on January 1, 2023, reducing retained earnings by $2.1 million after tax, including $1.9 million related to loans and $1.0 million related to unfunded commitments, partially offset by tax effects.
- Other real estate owned remained $1.6 million, consisting of two commercial owner-occupied properties.
Material Changes Versus 2022
- Net income available to common shareholders fell $13.4 million, primarily because of higher funding costs, lower non-interest income and the $9.5 million one-time contingent loss.
- Loan balances grew $35.9 million, while construction loans declined $34.8 million and residential investment loans increased $48.0 million.
- Deposits declined $23.2 million. Non-interest-bearing deposits fell $120.4 million, partly offset by a $218.4 million increase in money-market deposits and a $46.2 million increase in brokered certificates of deposit.
- Cannabis-related deposits declined to $96.7 million from $177.3 million, while cannabis-related loans increased to $27.1 million from $3.8 million.
- FHLB borrowings increased $41.9 million, reflecting greater reliance on wholesale and secured funding.
- Common dividends increased to $0.18 per share per quarter, and total common dividends paid increased to $8.6 million from $7.9 million.
Outlook, Risks and Unusual Items
The filing does not provide specific earnings, revenue or balance-sheet guidance. Management expects net interest income and margin to remain sensitive to changes in market interest rates, asset mix and funding costs, and stated that it intends to pursue organic growth while managing risk, expenses and capital.
- Regulatory matters: Consent Orders issued by the FDIC and New Jersey Department of Banking and Insurance in 2020 concerning Bank Secrecy Act and anti-money-laundering weaknesses remain in effect. They require enhanced oversight, policies, training, monitoring, testing and a historical account review. The Orders have increased compliance expenses and could lead to additional sanctions, costs or operating restrictions.
- Cannabis banking: The Bank serves state-licensed cannabis businesses even though cannabis remains illegal under federal law. Changes in federal enforcement policy could require the Bank to discontinue these relationships. Cannabis customers represented 6.2% of deposits at year-end, with customer concentration among a small number of depositors.
- Real estate and credit risk: The loan portfolio is geographically concentrated and heavily secured by real estate, including commercial real estate and construction loans. Declines in property values, borrower cash flow or regional economic conditions could increase losses and require additional provisions.
- Funding and interest-rate risk: Higher deposit rates, reduced non-interest-bearing deposits, brokered deposits and increased borrowings pressure margins and could affect liquidity if funding sources become more expensive or unavailable.
- Legal contingencies: Absecon Gardens Condominium Association alleges approximately $1.7 million of damages; the matter remains in early discovery and the outcome is not predictable. Mori Restaurant LLC has asserted claims related to a foreclosed restaurant property; the Bank denies liability and intends to defend the matter.
- Cybersecurity: Management reported that cybersecurity threats, including prior incidents, had not materially affected the Company during 2023. Cyberattacks, system disruptions and third-party service-provider failures remain identified risks.
- Unusual accounting item: The $9.5 million stolen-cash contingent loss was recognized in 2023 operating expenses and materially affected comparability with 2022.
Important Facts for Investors to Verify
- Whether deposit repricing and greater use of brokered deposits and FHLB advances continue to compress net interest margin.
- Progress toward termination or modification of the BSA/AML Consent Orders and the level of related compliance spending.
- Trends in cannabis-related deposits, fee income and loans, including concentration among major customers and federal regulatory developments.
- Performance of commercial real estate, construction and residential investment loans, particularly office, hotel, retail and restaurant exposures.
- Whether the decline in non-performing loans is sustained and whether the $32.1 million allowance remains adequate under changing economic conditions.
- Resolution and potential financial exposure from the Absecon Gardens and Mori Restaurant legal matters.
- Future dividend capacity, considering earnings, liquidity, capital requirements and restrictions on dividends from the Bank to the holding company.
- The impact of the one-time stolen-cash loss on normalized earnings and the Company’s ability to maintain profitability after excluding that item.