Business Context and Reporting Period
Parke Bancorp, Inc. is a New Jersey bank holding company operating through Parke Bank, which provides commercial and retail banking services in New Jersey and Pennsylvania. The unaudited Form 10-Q covers the three and nine months ended September 30, 2019, with balance-sheet comparisons to December 31, 2018 and operating comparisons to the corresponding 2018 periods.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net income available to common shareholders | $7.8 million | $6.1 million | $22.3 million | $17.6 million |
| Diluted EPS | $0.71 | $0.56 | $2.04 | $1.65 |
| Net interest income | $14.5 million | $12.3 million | $42.2 million | $34.9 million |
| Provision for loan losses | $0.9 million | $0.6 million | $2.1 million | $1.2 million |
| Noninterest income | $1.3 million | $1.1 million | $3.0 million | $2.6 million |
| Noninterest expense | $4.5 million | $3.9 million | $13.1 million | $11.8 million |
| Effective tax rate | 24.5% | 29.6% | 24.5% | 26.0% |
| Net interest margin | 3.67% | 3.88% | 3.77% | 3.94% |
Balance Sheet, Liquidity and Capital
- Total assets were $1.598 billion at September 30, 2019, up 8.9% from December 31, 2018. Total loans were $1.376 billion, up $135.1 million, led by construction and residential one-to-four-family loans.
- Total deposits were $1.293 billion, up 9.2% from year-end. Interest-bearing deposits increased to $963.7 million, while noninterest-bearing deposits declined to $329.4 million.
- Cash and cash equivalents were $151.7 million, compared with $154.5 million at year-end. Available-for-sale and held-to-maturity securities totaled $29.3 million.
- Borrowings were $118.1 million, consisting primarily of $104.7 million of FHLBNY borrowings and $13.4 million of subordinated debentures. FHLBNY credit lines totaled $348.9 million, leaving substantial stated borrowing capacity.
- Total equity was $173.5 million, compared with $155.0 million at December 31, 2018. The Company and Bank were reported as well capitalized; Parke Bank’s total risk-based capital ratio was 16.44% and Tier 1 leverage ratio was 11.55%.
Cash Flow and Asset Quality
- For the nine months, operating cash flow was $25.2 million, investing cash outflow was $132.5 million, and financing cash inflow was $104.4 million. Net cash decreased $2.8 million.
- The allowance for loan losses was $21.1 million, or 1.54% of total loans, compared with $19.1 million and the same 1.54% ratio at year-end. The Company recorded $56,000 of charge-offs and $77,000 of recoveries during the nine months.
- Delinquent loans totaled $5.8 million, or 0.4% of loans, including $5.7 million of loans more than 90 days past due and on nonaccrual status. Nonperforming loans increased from $3.1 million at year-end, primarily due to one borrower relationship.
- Impaired loans totaled $22.8 million, including $17.4 million of troubled debt restructurings. Performing TDRs totaled $17.1 million and one nonperforming TDR totaled $283,000.
- Other real estate owned increased to $5.8 million from $5.1 million at December 31, 2018.
Material Changes Versus Comparable Period
- Third-quarter net income available to common shareholders increased 27.1% to $7.8 million; nine-month net income increased 26.8% to $22.3 million.
- Net interest income increased 18.0% in the quarter and 21.0% year to date, driven by higher loan balances and yields. Interest income rose faster than interest expense, although the net interest margin declined to 3.67% from 3.88% in the quarter and to 3.77% from 3.94% year to date.
- Loan growth was substantial, particularly in construction, which increased to $228.5 million from $139.9 million, and residential one-to-four-family mortgages, which increased to $605.3 million from $545.4 million.
- Noninterest income increased primarily because of higher deposit service fees and improved OREO results. Noninterest expense rose due to compensation, professional services and data-processing costs.
- The allowance increased by $2.1 million and the provision increased by $0.9 million year to date, reflecting higher loan volume. Nonperforming assets and impaired loans also increased.
- Accumulated other comprehensive income improved to a $61,000 gain from a $633,000 loss, primarily due to unrealized gains on investment securities.
Outlook, Risks, Contingencies and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management expects results to remain sensitive to economic conditions, interest rates, Federal Reserve policy, competition, regulatory changes, technology and credit performance.
- Medical-use cannabis customers represented approximately $215.9 million, or 16.7%, of deposits at September 30, 2019, compared with 21.4% at year-end. Cannabis-related loans were $4.0 million. The business is legal in applicable states but remains illegal federally; a change in federal enforcement could require the Bank to cease servicing these customers. Deposit concentration was significant, with two customers representing 24.9% of cannabis-related deposits.
- Unused commitments to extend credit were approximately $202.1 million, and standby letters of credit were $20.6 million. These create potential future funding and credit exposure, although management stated that adequate resources were available.
- The Bank had a $40.0 million municipal letter of credit with the FHLBNY, expiring March 3, 2020, with no borrowings outstanding against it at quarter-end.
- A RICO-related lawsuit was dismissed with prejudice in favor of the Parke parties; plaintiffs appealed to the Third Circuit, where the matter was pending and sub judice at the filing date.
- The Company adopted the new lease standard in the first quarter of 2019, recognizing right-of-use assets and lease liabilities. The filing also discusses anticipated implementation timing for the CECL credit-loss standard applicable to smaller reporting companies; the filing text does not provide a quantified expected transition impact.
Important Facts for Investors to Verify
- Whether rapid loan growth, particularly in construction and residential real estate, leads to additional nonperforming loans, charge-offs or allowance provisions.
- The sustainability and concentration risk of cannabis-related deposits and fee income, including potential federal enforcement changes and customer concentration.
- The effect of rising deposit and borrowing costs on the declining net interest margin.
- The liquidity impact of $202.1 million in unused loan commitments and $20.6 million in standby letters of credit.
- The status and potential financial impact of the pending RICO appeal.
- The eventual CECL adoption date and quantified effect on the allowance, earnings and regulatory capital.