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 Form 10-Q covers the quarter and six months ended June 30, 2013, with comparisons to the corresponding 2012 periods and to December 31, 2012 for balance-sheet data. The company was a smaller reporting company.
Financial Performance and Condition
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net interest income | $7.5 million, versus $7.8 million | $15.2 million, versus $15.6 million |
| Provision for loan losses | $1.0 million, versus $2.1 million | $2.0 million, versus $4.3 million |
| Noninterest income | $1.3 million, versus $0.5 million | $2.0 million, versus $1.6 million |
| Noninterest expense | $4.2 million, versus $4.0 million | $8.0 million, versus $7.5 million |
| Net income available to common shareholders | $1.7 million, or $0.29 per diluted share, versus $1.6 million, or $0.27 | $3.6 million, or $0.61 per diluted share, versus $3.1 million, or $0.53 |
| Net interest margin | 4.26%, versus 4.21% | 4.29%, versus 4.23% |
- Total assets were $738.4 million at June 30, 2013, down 4.2% from $770.5 million at year-end 2012.
- Gross loans increased 2.3% to $644.0 million. The allowance for loan losses rose to $20.9 million, or 3.2% of loans, from $18.9 million, or 3.0%.
- Nonaccrual loans declined to $45.3 million, or 7.0% of loans, from $47.5 million, or 7.6%. Total delinquent loans were $50.9 million, or 7.9% of loans.
- Other real estate owned declined to $23.7 million from $26.1 million. Nonperforming assets declined from 9.6% to 9.3% of total assets.
- Deposits decreased 4.3% to $609.5 million, primarily from the planned runoff of higher-priced certificates of deposit. The loan-to-deposit ratio increased to 105.7% from 98.8%.
- Cash and cash equivalents declined to $37.1 million from $76.9 million, principally due to the planned payoff of certificates of deposit.
- Borrowings totaled $38.8 million, consisting primarily of $20.4 million of FHLBNY borrowings, $5.0 million of other borrowed funds and $13.4 million of subordinated debentures. The company maintained $95.8 million of FHLB borrowing capacity, with $20.4 million outstanding.
- The company reported $6.8 million of operating cash flow for the six months, compared with $8.9 million in the prior-year period. Investing activities used $10.9 million and financing activities used $35.7 million, resulting in a $39.8 million decrease in cash.
- At June 30, 2013, Parke Bank reported total risk-based capital of 16.46%, Tier 1 risk-based capital of 15.18% and Tier 1 leverage capital of 13.45%; management considered the company and bank well-capitalized.
Material Changes Versus Prior Comparable Period
- Interest income declined as loan yields fell despite higher average loan balances. Average loan yield decreased to 5.66% for the six months from 6.15%.
- Interest expense declined 21.5% for the six months, reflecting lower deposit costs and lower average deposit balances. The average deposit cost fell to 0.90% from 1.13%.
- The provision for loan losses declined by $2.3 million for the six months, reflecting modest charge-offs and management’s assessment that the loan portfolio had stabilized.
- Noninterest income increased due principally to higher gains on SBA loan sales, higher loan fees and lower OREO losses.
- Noninterest expense increased $458,000 for the six months, primarily because of higher compensation and benefits from additional staff, salary increases and benefit costs.
- The effective tax rate increased to 39.1% for the six months from 28.2%; the second-quarter rate was 39.2% versus 11.4%. The filing attributes the quarterly change principally to the prior-year tax treatment of BOLI income.
- In May 2013, the company redeemed the TARP warrant for approximately $1.7 million and paid a 10% common stock dividend. The warrant redemption reduced shareholders’ equity.
Outlook, Risks, Contingencies and Unusual Items
- The Bank remains subject to FDIC and New Jersey Department of Banking and Insurance Consent Orders entered in April 2012. Required actions include reducing delinquent and classified assets, independent loan reviews, revising lending policies and managing credit concentrations. Prior regulatory approval is required for certain dividends and senior management changes. Management stated that the Bank believes it is in substantial compliance.
- Management is focused on resolving nonperforming loans through foreclosure and borrower workouts. The filing notes that weak residential and commercial real estate markets, unemployment, collateral values and lengthy foreclosure processes have adversely affected credit quality and earnings.
- Credit exposure remains concentrated in commercial real estate, including non-owner-occupied commercial real estate and construction lending. At June 30, 2013, $85.7 million of loans were impaired, with $3.3 million of related allowance.
- Performing troubled debt restructurings totaled $39.5 million and nonperforming TDRs totaled $23.6 million. Future economic conditions could result in re-defaults and incremental losses.
- The securities portfolio included $4.0 million of collateralized debt obligations classified as Level 3 assets and $1.2 million of gross unrealized losses on available-for-sale securities. No credit-related OTTI charges were recognized during the 2013 periods, but valuations depend on assumptions regarding defaults, payment deferrals, prepayments and discount rates.
- Management stated that it was not aware of trends or commitments reasonably likely to cause a material change in liquidity. However, the loan-to-deposit ratio above 100% and the decline in deposits and cash warrant monitoring.
- No material legal proceedings or subsequent events requiring recognition or disclosure were reported. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was identified.
- The filing provides no formal earnings or balance-sheet guidance.
Important Facts for Investors to Verify
- Whether nonaccrual loans, impaired loans, TDRs and OREO continue to decline and whether collateral values support recorded amounts.
- Whether the $20.9 million allowance remains adequate relative to the 7.0% nonaccrual ratio, commercial real estate exposure and future charge-offs.
- Deposit retention, additional certificate-of-deposit runoff, the 105.7% loan-to-deposit ratio and available borrowing capacity.
- The sustainability of earnings growth given lower loan yields, reliance on SBA loan-sale gains and reduced loan-loss provisions.
- The valuation and cash-flow performance of the Level 3 collateralized debt obligations and other securities with unrealized losses.
- Compliance with the Consent Orders and any required regulatory approvals affecting dividends, capital actions or management changes.