Parke Bancorp, Inc. 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. The unaudited consolidated results cover Parke Bancorp, Inc., Parke Bank, and its 51%-owned Parke Direct Lending joint venture. The company provides commercial and retail banking services in New Jersey and Pennsylvania through Parke Bank.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $14.3 million | $11.6 million | $27.7 million | $22.6 million |
| Provision for loan losses | $450,000 | $200,000 | $1.15 million | $600,000 |
| Noninterest income | $766,000 | $646,000 | $1.69 million | $1.51 million |
| Noninterest expense | $4.52 million | $3.99 million | $8.68 million | $7.89 million |
| Net income available to common shareholders | $7.46 million | $5.94 million | $14.52 million | $11.46 million |
| Basic/diluted EPS | $0.69/$0.68 | $0.66/$0.56 | $1.35/$1.33 | $1.28/$1.09 |
| Net interest margin | 3.80% | 3.91% | 3.83% | 3.97% |
Second-quarter net income available to common shareholders increased 25.5%, while six-month net income increased 26.7%. Growth was driven primarily by higher loan balances and yields, partly offset by higher deposit and borrowing costs, provisions, and operating expenses. The effective tax rate was 24.6% in the quarter and 24.5% for the six-month period.
Balance sheet, liquidity, and capital
- Total assets were $1.55 billion at June 30, 2019, up 5.6% from December 31, 2018.
- Loans, net of unearned income, were $1.31 billion, up $68.0 million, led by construction and residential one-to-four-family loans.
- Total deposits were $1.25 billion, up 5.6%; time deposits increased to $542.4 million from $431.4 million.
- Cash and cash equivalents were $167.8 million, compared with $154.5 million at year-end 2018.
- Borrowings were $118.1 million, unchanged from December 31, 2018. The company had $332.7 million of FHLBNY borrowing capacity, with $104.7 million outstanding.
- Total equity was $167.3 million, compared with $155.0 million at year-end 2018.
- The company and Parke Bank were classified as well capitalized. Parke Bank reported total risk-based capital of 16.55%, Tier 1 risk-based capital of 15.29%, Tier 1 leverage of 11.62%, and Tier 1 common equity of 15.15%.
Cash flow and asset quality
- Six-month operating cash flow was $15.9 million, compared with $12.3 million in the prior-year period.
- Investing activities used $65.3 million, primarily because of net loan growth. Financing activities provided $62.7 million, principally from deposit growth.
- The allowance for loan losses was $20.3 million, or 1.55% of total loans, compared with $19.1 million and 1.54% at year-end 2018.
- The company recorded no loan charge-offs and $65,000 of recoveries during the first six months of 2019.
- Delinquent loans were $8.9 million, or 0.7% of total loans. Loans 90 days or more past due and not accruing interest were $8.4 million, compared with $3.1 million at December 31, 2018.
- Impaired loans increased to $26.3 million from $21.9 million at year-end. Performing TDRs were $17.8 million, and one nonperforming TDR totaled $286,000.
- OREO declined to $4.2 million from $5.1 million at year-end, reflecting sales and valuation adjustments.
Material changes and unusual items
- Medical-use cannabis customers represented approximately $227.3 million, or 18.2%, of total deposits at June 30, 2019. Two customers accounted for 39.7% of those balances. Cannabis-related deposits were $253.8 million, or 21.4%, at year-end 2018.
- Deposit service-fee income from cannabis-industry customers was $401,000 in the second quarter and $713,000 for the six months, compared with $20,000 in each comparable 2018 period.
- The company adopted the new lease standard in the first quarter of 2019, recognizing approximately $2.7 million of right-of-use assets and lease liabilities; the adoption did not materially affect results.
- Available-for-sale securities had $281,000 of unrealized losses at June 30, 2019. Management did not consider the losses other-than-temporary because the securities were primarily government or government-sponsored mortgage-backed securities and the company did not intend to sell them.
- The company declared a quarterly common dividend of $0.16 per share on June 25, 2019, payable July 26, 2019.
- No formal earnings or financial guidance was provided in the filing.
Outlook, risks, and contingencies
Management remains focused on organic growth in customers, loans, deposits, and revenue while managing expenses, credit risk, liquidity, and capital. Results remain sensitive to economic conditions, interest rates and Federal Reserve policy, funding costs, competition, regulatory changes, and local real estate conditions.
- Federal enforcement of cannabis laws could change, potentially requiring the bank to cease servicing cannabis-related businesses. The filing notes that such deposits and related fee income are material.
- Loan growth has increased exposure to construction, residential real estate, and commercial real estate credit risk. Management states that additional provisions could be required if actual losses exceed estimates.
- The company had $189.4 million of unused loan commitments and $20.0 million of standby letters of credit at June 30, 2019. A $40.0 million municipal letter of credit was also available to support public deposits, with no borrowings outstanding under it.
- A lawsuit alleging RICO and other claims related to defaulted loans was dismissed with prejudice against the Parke parties. Plaintiffs appealed to the U.S. Court of Appeals for the Third Circuit; the matter was pending and fully briefed.
- Management stated that liquidity was adequate and that internal controls over financial reporting and disclosure controls were effective.
Investor verification checklist
- Verify the sustainability and concentration of cannabis-related deposits, fee income, and loans, including the exposure to the two largest deposit customers.
- Track nonperforming loans, impaired loans, TDRs, OREO, and the allowance coverage ratio as the loan portfolio continues to grow.
- Assess whether higher deposit and borrowing costs continue to pressure the net interest margin, which declined year over year.
- Review construction and real estate concentration, collateral values, and future credit-loss provisions.
- Confirm the status and potential financial impact of the pending Third Circuit appeal.
- Reconcile reported liquidity with unfunded commitments, standby letters of credit, deposit concentration, and available borrowing capacity.