Parke Bancorp, Inc. 2020 Form 10-K Summary
Business context and reporting period
Parke Bancorp, Inc. is a New Jersey bank holding company whose principal subsidiary, Parke Bank, provides commercial and retail banking services in Southern New Jersey and the Philadelphia area. Core lending activities are residential and commercial real estate, construction, commercial and industrial, and consumer lending. This filing covers the fiscal year ended December 31, 2020, with comparisons primarily to December 31, 2019.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net income available to common shareholders | $28.4 million | $29.8 million | Down 4.8% |
| Basic/diluted EPS | $2.40/$2.37 | $2.52/$2.48 | Down |
| Net interest income | $62.6 million | $56.9 million | Up 10.1% |
| Provision for loan losses | $7.6 million | $2.7 million | Up $4.9 million |
| Non-interest income | $4.2 million | $3.8 million | Up $0.3 million |
| Non-interest expense | $20.3 million | $18.0 million | Up $2.3 million |
| Net interest margin | 3.31% | 3.75% | Down 44 basis points |
| Total assets | $2.08 billion | $1.68 billion | Up 23.6% |
| Total loans | $1.57 billion | $1.42 billion | Up 10.2% |
| Total deposits | $1.59 billion | $1.34 billion | Up 18.9% |
| Total equity | $202.6 million | $179.4 million | Up 12.9% |
Cash and cash equivalents increased to $458.6 million from $191.6 million. Operating activities provided $36.5 million of cash, while investing activities used $133.8 million, primarily from net loan growth. Financing activities provided $364.3 million, including deposit growth, $90.0 million of Federal Reserve PPP Liquidity Facility advances, and proceeds from subordinated debt issuance.
The allowance for loan losses increased to $29.7 million from $21.8 million, equal to 1.90% of period-end loans versus 1.54% in 2019. Net charge-offs were $241,000. Non-performing loans increased to $8.7 million, or 0.56% of loans, from $5.3 million, or 0.38%. Impaired loans totaled $22.7 million.
At year-end, borrowings included $134.7 million of FHLB advances, $90.0 million of PPP Liquidity Facility advances, and $42.5 million of subordinated debt, including $30.0 million of 6.50% subordinated notes due 2030. The Bank reported a 12.35% Community Bank Leverage Ratio and was categorized as well capitalized.
Material changes versus the prior comparable period
- Loan growth was driven substantially by $91.2 million of PPP loans at December 31, 2020, compared with none at year-end 2019.
- Net interest income increased due to loan growth and lower deposit costs, although lower asset yields reduced the net interest margin.
- COVID-19 uncertainty drove a substantial increase in the loan-loss provision and allowance.
- Deposits from medical-use cannabis customers increased to $259.4 million, or 16.3% of total deposits, from $129.2 million, or 9.6%. Two customers represented 19.2% of total deposits at year-end.
- Commercial and industrial loans increased to $121.8 million from $36.8 million, while construction loans declined to $211.0 million from $231.1 million.
- Non-interest expense rose primarily from compensation, FDIC insurance and other assessments, data processing, and occupancy costs.
- OREO declined to $139,000 from $4.7 million after $4.2 million of dispositions, but the Company recognized a $371,000 net loss on OREO sales and valuation adjustments.
Outlook, risks, contingencies, and unusual items
Management did not provide quantitative earnings guidance. The Company expects results to remain sensitive to COVID-19 developments, economic conditions, interest rates, credit quality, loan demand, deposit funding costs, and real estate values. Management emphasized continued organic growth in customers, loans, deposits and revenue while managing risk, expenses and capital.
- In the fourth quarter, Parke Bank entered into substantially identical FDIC and New Jersey Department of Banking and Insurance consent orders addressing weaknesses in its Bank Secrecy Act and anti-money-laundering compliance program. Required actions include enhanced oversight, customer due diligence, transaction monitoring, training, independent testing, staffing, and a look-back review of accounts and transactions beginning January 1, 2019.
- The consent orders do not require a civil money penalty or additional capital, but are expected to increase compliance expenses and do not preclude further regulatory action, fines, sanctions, activity restrictions, or additional costs.
- Banking relationships with state-legal medical-use cannabis businesses remain federally illegal and expose the Company to regulatory, enforcement, reputational, concentration, and funding risks. Related deposit fee income was $2.2 million in 2020, and cannabis-related loans totaled $8.0 million.
- Unused loan commitments were $144.6 million and standby letters of credit were $1.7 million at year-end. Management stated that available resources were adequate to fund commitments and meet contractual obligations.
- The Company elected temporary COVID-19 relief from certain TDR accounting requirements and expects qualified loan modifications made through the end of 2021 not to be classified as TDRs.
- As a smaller reporting company, the Company is not required to adopt CECL until after December 15, 2022. Future adoption could materially affect credit-loss reserves and earnings.
- Auditors identified qualitative factors in the allowance for loan losses as a critical audit matter because of significant management judgment and estimation uncertainty.
Most important facts for investors to verify
- Whether credit deterioration, deferred payments, collateral values, and the post-PPP performance of borrowers require further increases to the allowance for loan losses.
- The concentration and stability of cannabis-related deposits, including the exposure to two customers and the potential effect of changes in federal enforcement policy.
- Progress, costs, and regulatory outcomes associated with the BSA/AML consent orders and required look-back review.
- The sustainability of the unusually high cash balance and deposit growth, including the funding and liquidity effects of brokered deposits, PPP-related balances, and borrowings.
- The effect of the lower interest-rate environment and future repricing on net interest margin and profitability.
- The terms, capital treatment, and future cost of the $30.0 million subordinated notes and $90.0 million PPP Liquidity Facility advances.
- Future dividend capacity, given regulatory restrictions, reliance on dividends from the Bank, capital needs, and potential compliance costs.