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. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016; balance-sheet comparisons are to December 31, 2015 and earnings comparisons are to the comparable 2015 periods.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total interest income | $10.4 million | $9.9 million | $31.2 million | $29.3 million |
| Net interest income | $8.7 million | $8.4 million | $26.2 million | $24.9 million |
| Provision for loan losses | $0.7 million | $1.5 million | $0.8 million | $3.0 million |
| Noninterest income | $0.1 million | $2.1 million | $9.8 million | $4.2 million |
| Noninterest expense | $4.2 million | $4.4 million | $12.9 million | $13.0 million |
| Net income available to common shareholders | $3.6 million | $2.1 million | $14.2 million | $6.6 million |
| Basic/diluted EPS | $0.52/$0.43 | $0.32/$0.28 | $2.08/$1.69 | $0.98/$0.87 |
| Net interest margin | 3.83% | 4.06% | 3.98% | 4.13% |
At September 30, 2016, total assets were $954.6 million, up 7.9% from year-end 2015. Gross loans were $817.4 million, up 7.8%, while total deposits were $739.9 million, up 11.2%. Cash and cash equivalents were $52.1 million, compared with $27.4 million at December 31, 2015.
The allowance for loan losses was $14.9 million, or 1.8% of gross loans, compared with $16.1 million, or 2.1%, at year-end. Nonaccrual loans declined to $11.3 million, or 1.4% of loans, from $13.6 million, or 1.8%. OREO declined to $10.6 million from $16.6 million. The allowance covered 132.0% of nonperforming loans at September 30, 2016.
Net cash provided by operating activities was $11.8 million for the first nine months. Investing activities used $43.7 million, primarily reflecting a $104.5 million net increase in loans, partly offset by $50.3 million of proceeds from the sale of SBA-related assets. Financing activities provided $56.7 million. Cash and cash equivalents increased $24.7 million during the period.
FHLBNY borrowings were $69.7 million, down from $84.7 million at year-end, and subordinated debentures were $13.4 million. The loan-to-deposit ratio was 110.5%. The Company reported $145.0 million of FHLB borrowing capacity, of which $69.7 million was outstanding. Parke Bank exceeded applicable well-capitalized regulatory thresholds, including an 18.01% total risk-based capital ratio and a 15.00% Tier 1 leverage ratio.
Material Changes Versus Prior Periods
- Quarterly net income available to common shareholders rose 67.8% to $3.6 million, primarily because of lower loan-loss provisioning and a substantially lower effective tax rate.
- Nine-month net income available to common shareholders more than doubled to $14.2 million, benefiting from the sale of the SBA business and related assets.
- On April 29, 2016, the Bank sold 44 Business Capital assets, a $42.6 million SBA loan portfolio and related servicing rights to Berkshire Bank. The transaction generated a reported pretax gain of approximately $9.3 million, including a $7.6 million gain on SBA-related assets and approximately $1.7 million of related allowance relief.
- Net interest income increased, but the net interest margin declined 23 basis points in the quarter and 15 basis points for the nine months as loan yields fell and funding costs increased.
- Loan growth was concentrated in real estate lending, including residential one-to-four-family, commercial non-owner-occupied and multifamily loans.
- Asset quality improved overall: delinquent loans fell to $12.7 million from $14.8 million at year-end, and specific allowances on impaired loans declined to $0.8 million from $2.5 million.
Outlook, Risks, Contingencies and Unusual Items
The filing provides no quantitative earnings or revenue guidance. Management states that future results depend principally on loan growth, funding costs, interest rates, economic conditions, regulatory developments and credit performance.
- The effective tax rate was unusually low in Q3 at 1.3%, reflecting use of a $1.5 million Historic Tax Credit. For the nine months, the effective rate was 30.2%; management also disclosed a $482,000 write-down of the related tax-credit partnership investment.
- Credit risk remains material because the portfolio is concentrated in commercial real estate, construction and residential real estate loans. Management notes that collateral values, borrower cash flows, economic conditions and interest rates could require additional provisions.
- Four mortgage-backed securities had $12,000 of unrealized losses at September 30, 2016; management recorded no current-period credit-related OTTI charges.
- The Company and Bank are defendants in a federal RICO and related lawsuit arising from defaulted loans. Plaintiffs seek compensatory and punitive damages; management believes the allegations are without merit and is seeking dismissal.
- The filing states that there were no material subsequent events through issuance and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether earnings growth can be sustained after the one-time SBA asset-sale gain and related allowance relief.
- The ongoing effect of declining net interest margins and rising deposit and borrowing costs.
- Future credit performance, especially in commercial real estate, construction and other impaired or nonaccrual loans.
- The sustainability and tax treatment of Historic Tax Credits and the impact of the partnership investment write-down.
- Liquidity implications of a loan-to-deposit ratio above 100%, brokered certificates of deposit and reliance on FHLB funding capacity.
- The status and potential financial exposure of the pending litigation.