Parke Bancorp, Inc. — 2019 Q1 Form 10-Q Summary
Business context and reporting period
Parke Bancorp, Inc. is a New Jersey-based bank holding company operating primarily through Parke Bank, which provides commercial and retail banking services in New Jersey and Pennsylvania. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018, and the balance sheet is compared with December 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Comparable / prior period |
|---|---|---|
| Net interest income | $13.4 million | $11.0 million; up 21.8% |
| Net interest margin | 3.86% | 4.03%; down 17 basis points |
| Net income attributable to common shareholders | $7.1 million | $5.5 million; up 27.9% |
| Basic / diluted EPS | $0.66 / $0.65 | $0.63 / $0.53 |
| Total assets at period end | $1.56 billion | $1.47 billion at December 31, 2018 |
| Total loans | $1.30 billion | $1.24 billion at December 31, 2018 |
| Allowance for loan losses | $19.8 million, or 1.53% of loans | $19.1 million, or 1.54% at December 31, 2018 |
| Total deposits | $1.27 billion | $1.18 billion at December 31, 2018 |
| Cash and cash equivalents | $188.5 million | $154.5 million at December 31, 2018 |
| Total equity | $161.1 million | $155.0 million at December 31, 2018 |
Interest income increased 35.9% to $18.4 million, primarily from higher average loan balances and yields. Interest expense increased 98.3% to $4.9 million as deposit and borrowing costs rose. The reported net interest margin declined despite net interest income growth because funding costs increased faster than earning-asset yields.
Provision for loan losses was $700,000, compared with $400,000. Noninterest income was $919,000, compared with $866,000, while noninterest expense increased to $4.2 million from $3.9 million. Pre-tax income was $9.5 million and income tax expense was $2.3 million, producing a 24.4% effective tax rate.
Net cash provided by operating activities was $10.6 million. Investing activities used $56.5 million, primarily because of $57.6 million of net loan growth. Financing activities provided $80.0 million, principally from an $81.4 million increase in deposits, partly offset by $1.5 million of dividends. Cash and cash equivalents increased $34.0 million during the quarter.
Borrowings were $118.1 million, consisting primarily of $104.7 million of FHLBNY borrowings and $13.4 million of subordinated debentures, unchanged from year-end. The Bank had $335.1 million of FHLBNY borrowing capacity, with $104.7 million outstanding.
Material changes versus comparable periods
- Loans increased $57.5 million, or approximately 4.6%, from year-end, led by residential one-to-four-family, commercial non-owner-occupied, and multifamily real estate loans.
- Deposits increased $81.4 million, or 6.9%, from year-end. Time deposits increased to $514.1 million from $431.4 million, and deposits exceeding $250,000 increased to $71.5 million from $59.5 million.
- Average loans increased to $1.27 billion from $1.02 billion, while average interest-bearing deposits increased to $860.9 million from $750.4 million.
- Delinquent loans increased to $8.4 million, or 0.6% of total loans, from $3.4 million at year-end. Loans 90 days or more past due and not accruing increased to $3.4 million from $3.1 million.
- The allowance increased $735,000, but the allowance-to-loans ratio declined slightly to 1.53% from 1.54%. The Company recorded no charge-offs and $35,000 of recoveries in Q1 2019.
- Other real estate owned was $5.2 million, down from $6.8 million at March 31, 2018.
- Preferred shareholders converted 664 shares into 83,030 common shares. The remaining preferred stock balance was $560,000 at March 31, 2019.
Outlook, risks, contingencies, and unusual items
No formal earnings or revenue guidance was provided. Management stated that it remains focused on organic growth in customers, loans, deposits, and revenue while managing risk, expenses, liquidity, and capital. Management cautioned that results may be affected by economic conditions, interest rates and Federal Reserve policy, regulation, competition, technology, acquisitions, consumer behavior, and changes in federal enforcement policies.
Medical-use cannabis-related deposits were approximately $274.2 million, or 17.6% of total deposits, at March 31, 2019; two customers represented 40.9% of those balances. Cannabis-related loans were $2.9 million. Although the business is permitted under applicable state law and the Company follows FinCEN guidance, cannabis activity remains illegal under federal law, and a change in federal enforcement could require the Bank to cease providing related services.
The Company had $164.5 million of outstanding loan commitments, approximately $201.4 million of used commitments to extend credit, and $20.0 million of standby letters of credit. A $40.0 million FHLBNY municipal letter of credit was entered into on March 4, 2019, with no borrowings outstanding under it at quarter-end.
Performing troubled debt restructurings were $18.4 million, with no nonperforming TDRs. Impaired loans totaled $21.9 million. Management noted that future additions to the allowance may be required. The Company also identified the expected credit loss standard, CECL, as a potentially significant future accounting change; implementation was expected for fiscal years beginning after December 15, 2019.
The Company and Bank were classified as well capitalized. At March 31, 2019, Parke Bank reported total risk-based capital of 16.39%, Tier 1 risk-based capital of 15.14%, Tier 1 leverage of 11.99%, and Tier 1 common equity of 15.00%.
A previously disclosed RICO-related lawsuit was dismissed with prejudice in favor of the Parke parties, but the plaintiffs appealed to the U.S. Court of Appeals for the Third Circuit. The matter was pending and sub judice as of the filing.
The Company declared a $0.14 per-share quarterly dividend in March and subsequently announced an increase to $0.16 per share effective with the July 2019 dividend payment.
Most important facts for investors to verify
- Whether loan growth and deposit growth can continue without further deterioration in delinquencies, nonperforming loans, or credit costs.
- The effect of rising deposit and borrowing costs on the 3.86% net interest margin and future earnings.
- The concentration and stability of cannabis-related deposits, including exposure to two major customers and potential federal enforcement changes.
- The adequacy of the $19.8 million allowance relative to construction, commercial real estate, impaired loans, and performing TDR exposure.
- The timing and financial impact of CECL implementation.
- The status and potential financial consequences of the appealed RICO litigation.
- The ability to fund $164.5 million of loan commitments while maintaining liquidity and regulatory capital.