PARKE BANCORP, INC. quarterly report, Q3 FY2017

Parke Bancorp, Inc. — Q3 2017 Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2017. The unaudited results cover Parke Bancorp, Inc., Parke Bank and consolidated subsidiaries. The company is a New Jersey-based bank holding company operating branches in New Jersey and Philadelphia. Amounts are in thousands unless otherwise stated.

Financial Performance and Position

Metric	Q3 2017	Q3 2016	9M 2017	9M 2016
Interest income	$12.8 million	$10.4 million	$35.7 million	$31.2 million
Net interest income	$10.7 million	$8.7 million	$29.7 million	$26.2 million
Provision for loan losses	$0.5 million	$0.7 million	$2.0 million	$0.8 million
Noninterest income	$14 thousand	$130 thousand	$1.0 million	$9.8 million
Noninterest expense	$3.6 million	$4.2 million	$10.9 million	$12.9 million
Net income available to common shareholders	$3.9 million	$3.6 million	$10.4 million	$14.2 million
Diluted EPS	$0.42	$0.39	$1.15	$1.54

Q3 net income available to common shareholders increased approximately 8.1%, while diluted EPS increased from $0.39 to $0.42.
Net interest margin increased to 4.15% in Q3 from 3.83%; the nine-month margin increased to 4.03% from 3.98%.
Q3 income before taxes was $6.6 million and income tax expense was $2.4 million, producing a 36.9% effective tax rate. The prior-year quarter included a $1.5 million Historic Tax Credit, resulting in an unusually low 1.3% tax rate.
Total assets increased 8.2% from December 31, 2016, to $1.099 billion. Gross loans increased 11.9% to $953.3 million, led by commercial real estate and residential mortgage lending.
Deposits increased 7.0% to $843.6 million. FHLBNY borrowings increased $20.0 million to $99.7 million, and subordinated debentures were $13.4 million.
Total shareholders’ equity rose 6.5% to $135.4 million. The company paid a $0.10 per-share common dividend during the nine-month period and declared a $0.12 per-share quarterly dividend payable October 27, 2017.

Cash Flow and Liquidity

Operating activities provided $11.4 million of cash during the first nine months, compared with $11.8 million in the prior-year period.
Investing activities used $99.5 million, primarily reflecting a $103.3 million net increase in loans.
Financing activities provided $72.8 million through deposit growth, increased borrowings and stock-option proceeds.
Cash and cash equivalents declined $15.3 million to $55.4 million at September 30, 2017, principally because cash funded loan growth.
The loan-to-deposit ratio increased to 113.0% from 108.0%. The company reported $176.5 million of FHLB borrowing capacity, of which $99.7 million was outstanding.

Material Changes Versus Prior Comparable Period

Interest income rose 23.8% in Q3, driven by higher average loans and a 25-basis-point increase in the average loan yield. Average loans were $943.1 million versus $801.3 million.
Interest expense increased 26.5% in Q3 because of higher average interest-bearing deposits and borrowings and higher funding costs.
Noninterest income was nearly flat in Q3 and materially lower year to date because the 2016 period included gains from the sale of SBA-related assets, including a $7.6 million SBA portfolio gain and a $1.8 million gain on SBA loan sales.
On an adjusted basis excluding the 2016 SBA asset-sale impact, management stated that nine-month net income would have increased by approximately $2.1 million.
Noninterest expense declined 15.5% year to date, reflecting the sale of the SBA business, lower OREO costs, lower FDIC insurance expense and reduced operating expenses.
Asset quality improved: nonaccrual loans declined to $5.7 million, or 0.6% of total loans, from $11.3 million, or 1.3%, at December 31, 2016. Delinquent loans declined to $6.4 million from $12.6 million.
The allowance for loan losses increased modestly to $15.8 million, but declined to 1.7% of total loans from 1.8%. Coverage of nonperforming loans increased to 276.6% from 137.9%.
OREO declined to $7.5 million from $10.5 million, although the company recorded $1.4 million of OREO losses and write-downs during the first nine months.

Outlook, Risks, Contingencies and Unusual Items

No formal earnings or financial guidance was provided. Management described liquidity and capital as adequate and reported no known trends or commitments expected to cause a material liquidity change.
The bank was categorized as well capitalized. At September 30, 2017, Parke Bank reported total risk-based capital of 17.34%, Tier 1 risk-based capital of 16.09%, Tier 1 leverage of 14.33% and Tier 1 common equity of 16.09%.
Principal risks include credit concentration in commercial real estate, construction and residential real estate; changes in interest rates; economic and real estate conditions; deposit competition; regulatory changes; and the subjectivity of loan-loss, OREO, deferred-tax and fair-value estimates.
Management cautioned that additional loan-loss provisions could be required if economic conditions, collateral values or loan performance deteriorate. Loans classified as troubled debt restructurings totaled $21.2 million of performing TDRs and $416 thousand of nonperforming TDRs.
The company is defending a federal lawsuit alleging RICO and other violations arising from defaulted loans. Management believes the allegations are without merit and has moved to dismiss the claims. The filing does not provide a quantified loss exposure.
The company was evaluating the future expected-credit-loss standard, ASU 2016-13, and had not yet determined its financial statement impact.
Available-for-sale securities included $40.2 million at fair value, with $325 thousand of unrealized losses on residential mortgage-backed securities that management did not consider other-than-temporary.

Most Important Facts for Investors to Verify

Whether rapid loan growth and the 113.0% loan-to-deposit ratio remain supported by stable core deposits and available borrowing capacity.
Whether the improvement in nonaccrual loans and delinquency metrics persists, particularly within commercial real estate, construction and residential loans.
Whether the $15.8 million allowance remains adequate under changing interest rates, property values and economic conditions.
The sustainability of the 4.15% quarterly net interest margin as deposit and borrowing costs rise.
The extent to which future earnings comparisons are affected by the absence of the 2016 SBA asset-sale gains and Historic Tax Credit.
The potential legal, credit or valuation consequences of the pending litigation, OREO portfolio and collateral-dependent impaired loans.
The eventual effect of ASU 2016-13 and other pending accounting standards on capital, earnings and the allowance for credit losses.