PARKE BANCORP, INC. annual report, FY2021

Parke Bancorp, Inc. 2021 Form 10-K Summary

Business Context and Reporting Period

Parke Bancorp, Inc. is a New Jersey bank holding company operating primarily through Parke Bank, a full-service commercial bank serving Southern New Jersey and the Philadelphia area. Core lending activities include residential and commercial real estate, construction, commercial and industrial, and consumer lending. The filing covers the fiscal year ended December 31, 2021, including fourth-quarter results.

At year-end, the Company reported approximately $2.14 billion of assets, $1.77 billion of deposits, $1.48 billion of loans, and $232.4 million of total equity. The Company operated seven branches and had 98 full-time and 12 part-time employees.

Financial Performance and Key Metrics

Metric	2021	2020	Change
Net income available to common shareholders	$40.7 million	$28.4 million	Up 43.4%
Basic/diluted EPS	$3.43/$3.36	$2.40/$2.37	Improved
Net interest income	$69.1 million	$62.6 million	Up 10.3%
Provision for loan losses	$0.5 million	$7.6 million	Down $7.1 million
Non-interest income	$8.8 million	$4.2 million	Up $4.6 million
Non-interest expense	$22.5 million	$20.3 million	Up $2.2 million
Effective tax rate	25.4%	25.7%	Lower
Net interest margin	3.35%	3.31%	Up 4 basis points

Fourth-quarter 2021 net income available to common shareholders was $10.1 million, or $0.85 basic EPS and $0.83 diluted EPS, compared with $8.1 million, or $0.69 basic EPS and $0.68 diluted EPS, in the fourth quarter of 2020. Fourth-quarter net interest income was $16.7 million, with no provision for loan losses.

Interest income declined 2.9% to $82.1 million, primarily because of lower loan balances and yields. Interest expense fell 40.8% to $13.0 million, principally because of lower deposit costs. The average cost of interest-bearing deposits declined to 0.81% from 1.51%.

Cash Flow, Balance Sheet, Debt and Liquidity

Cash and cash equivalents increased 30.1% to $596.6 million, and operating activities generated $38.6 million of cash.
Investing activities provided $79.2 million, primarily because loans decreased by $79.0 million. Financing activities provided $20.1 million.
Total loans declined 5.2% to $1.48 billion, largely due to PPP loan repayments. PPP loans declined to $27.8 million from $91.2 million.
Total deposits increased 11.1% to $1.77 billion, including a $125.0 million increase in non-interest-bearing deposits.
Total borrowings declined $146.3 million to approximately $120.9 million, including repayment of $90.0 million of PPPLF advances and $56.5 million of FHLBNY advances.
The Company had a $596.5 million FHLBNY credit line, of which $78.2 million was outstanding, $40.0 million supported a letter of credit, and $478.3 million was unused.
Unused loan commitments were $117.7 million, and standby letters of credit were $1.5 million.
The Bank was reported as well capitalized. The Company’s Tier 1 risk-based capital ratio was 19.0%; the Bank’s Community Bank Leverage Ratio was 12.82%, versus an applicable 2021 requirement of 8.5%.

Asset Quality and Other Financial Items

The allowance for loan losses was $29.8 million, or 2.01% of period-end loans, compared with 1.90% in 2020.
Nonperforming loans declined to $4.3 million, or 0.29% of loans, from $8.7 million, or 0.56%.
Impaired loans declined to $10.3 million from $22.7 million, while performing TDRs declined to $6.0 million from $13.9 million.
Other real estate owned increased to $1.7 million from $0.1 million after $1.8 million of property was acquired through settlement of loans.
The loan portfolio remained concentrated in residential real estate, commercial real estate and construction lending, primarily in Southern New Jersey and the Philadelphia area.

Material Changes Versus the Prior Comparable Period

Profitability improved substantially, driven by lower funding costs, a sharply lower loan-loss provision, and increased fee income.
Non-interest income more than doubled, primarily because commercial deposit service-fee income increased to $5.1 million from $2.2 million.
Professional-services expense increased 87.4% to $3.7 million, primarily due to remediation efforts related to the Bank’s BSA compliance consent orders.
The balance sheet shifted from borrowings and PPP-related funding toward deposits and cash. Deposits from medical-use cannabis customers increased to $375.2 million from $259.4 million.
The residential 1-to-4-family loan portfolio increased to $750.5 million from $670.8 million, while commercial and industrial loans declined to $57.2 million from $121.8 million and construction loans declined to $154.1 million from $211.0 million.
Common dividends were reported at $0.16 per share each quarter. The filing reports $7.6 million of common cash dividends paid in one section and $9.5 million of common dividends in the consolidated equity statement and MD&A; the difference should be reconciled.

Guidance, Outlook, Risks and Unusual Items

Management did not provide numerical earnings or balance-sheet guidance. Management stated that net interest income and net interest margin are expected to fluctuate with interest rates and changes in the size and composition of earning assets and liabilities, and that it intends to focus on organic growth, customer relationships, risk management, expense control and capital.

BSA/AML consent orders: In 2020, the Bank entered into substantially identical consent orders with the FDIC and the New Jersey Department of Banking and Insurance concerning weaknesses in its BSA/AML compliance program. Required actions include enhanced oversight, staffing, policies, training, customer due diligence, suspicious-activity monitoring, independent testing and a historical look-back review. The orders remain in effect and may result in additional costs, sanctions, fines or activity restrictions.
Medical-use cannabis exposure: Cannabis-related deposits represented approximately 21.2% of total deposits, with two customers accounting for 19.3% of total deposits. The business remains illegal under federal law, and a change in federal enforcement policy could require the Bank to discontinue these relationships. Cannabis-related fee income represented a significant portion of reported non-interest income.
COVID-19: The pandemic continued to create uncertainty regarding credit quality, collateral values, loan demand, liquidity, employee operations, cybersecurity and net interest margins. PPP participation also creates potential litigation and reputational risks.
Interest-rate risk: The reported cumulative interest-sensitive gap was asset-sensitive, with rate-sensitive assets exceeding liabilities by $520.1 million within three months. Rising or falling rates could affect net interest income, deposit pricing, loan demand and credit performance.
Accounting change: As a smaller reporting company, the Company stated that CECL accounting would not be required until fiscal years beginning after December 15, 2022, with implementation expected in 2023.
Other contingencies: The Company reported $117.7 million of unused commitments and $1.5 million of standby letters of credit. Management stated that no material losses were anticipated from outstanding legal claims, but the filing does not quantify potential PPP or regulatory-related exposure.

Most Important Facts for Investors to Verify

Whether BSA/AML remediation remains on schedule, the expected duration and total cost of the consent orders, and whether regulators may impose additional sanctions or restrictions.
The sustainability and concentration of cannabis-related deposits and fee income, particularly the exposure to two customers and the federal legal and enforcement risks.
The effect of changing interest rates on the Company’s asset-sensitive balance sheet, deposit costs, loan yields and net interest margin.
The adequacy of the $29.8 million allowance for loan losses as PPP effects fade, commercial real estate and construction exposures mature, and CECL implementation approaches.
The reason for the difference between the $7.6 million common dividends reported as paid and the $9.5 million common dividend amount shown elsewhere in the filing.
The increase in OREO and the outlook for localized real estate values, construction activity and borrower repayment capacity.
The expected effect of CECL adoption in 2023 on the allowance, capital and earnings.