Parke Bancorp, Inc. — 2018 Form 10-K Summary
Business Context and Reporting Period
Parke Bancorp, Inc. is a New Jersey bank holding company whose principal subsidiary, Parke Bank, provides commercial and consumer banking services in Southern New Jersey and the Philadelphia area. Core lending activities include commercial real estate, residential real estate, construction, commercial and industrial, and consumer loans. The filing covers the fiscal year ended December 31, 2018 and was filed March 15, 2019.
At December 31, 2018, the Company reported total assets of $1.47 billion, loans of $1.24 billion, deposits of $1.18 billion, and total equity of $155.0 million. Parke Bank had 79 full-time and 19 part-time employees.
Key Financial Metrics
| Metric | 2018 | Prior comparable period |
|---|---|---|
| Period-end loans | $1.241 billion | $1.012 billion at December 31, 2017 |
| Average loans | $1.111 billion | $923.3 million in 2017 |
| Allowance for loan losses | $19.1 million; 1.54% of period-end loans | $16.5 million; 1.63% in 2017 |
| Provision for loan losses | $1.8 million | $2.5 million in 2017 |
| Non-performing loans | $3.1 million; 0.25% of loans | $4.5 million; 0.45% at December 31, 2017 |
| Impaired loans | $21.9 million | $25.5 million at December 31, 2017 |
| FHLB advances | $104.7 million; 2.67% weighted-average year-end rate | $114.7 million; 1.76% in 2017 |
| Trust preferred debentures | $13.4 million | Not clearly stated in the provided filing text |
Net charge-offs were $742,000 in 2018, compared with net recoveries of $1.547 million in 2017. Recoveries of $965,000 exceeded 2018 charge-offs of $223,000. The filing text provided does not include clear consolidated revenue, net income, net interest margin, return ratios, or operating cash flow amounts; those figures are incorporated by reference to the 2018 Annual Report.
Funding consisted primarily of deposits. Brokered deposits totaled $92.4 million at December 31, 2018, up from $83.5 million in 2017. The Bank was described as well capitalized under prompt corrective action rules.
Material Changes Versus the Prior Comparable Period
- Loans increased approximately 23% from $1.012 billion to $1.241 billion.
- Average loans increased approximately 20% from $923.3 million to $1.111 billion.
- Deposits from medical-use cannabis customers increased sharply to $253.8 million, or 21.4% of total deposits, from $37.0 million, or 4.3%, in 2017.
- Two cannabis customers represented 65.9% of cannabis-related deposits at year-end 2018, indicating significant customer concentration.
- Non-performing loans declined to $3.1 million from $4.5 million, and the non-performing loan ratio declined to 0.25% from 0.45%.
- Total impaired loans declined to $21.9 million from $25.5 million; troubled debt restructurings declined to $18.8 million from $21.2 million.
- The allowance increased to $19.1 million from $16.5 million, while the allowance ratio declined to 1.54% from 1.63% because of loan growth.
- FHLB advances declined by $10.0 million, while their weighted-average year-end rate increased from 1.76% to 2.67%.
- The Company formed PDL LLC, a 51%-owned joint venture with Bridgestone Capital LLC, to originate short-term alternative real estate loans. Bridgestone contributed $1.2 million to the joint venture in 2018.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide formal earnings or financial guidance.
- Management identifies sensitivity to local economic conditions because most loans and collateral are concentrated in Southern New Jersey and the Philadelphia area. Declines in local real estate values or borrower cash flows could adversely affect credit quality, earnings, and capital.
- Medical-use cannabis banking creates material regulatory and concentration risk. Cannabis remains illegal under federal law, and a change in federal enforcement policy could require the Bank to cease servicing the industry. Cannabis-related deposits represented 21.4% of total deposits at year-end 2018.
- Brokered deposits are considered more volatile than core deposits and could increase funding costs or require replacement with borrowings in a rising-rate environment.
- Construction and commercial real estate lending carry elevated risks related to cost overruns, project delays, collateral values, leasing conditions, and borrower cash flow.
- Management identified $6.7 million of loans with potential credit problems that were not yet classified as non-accrual loans or troubled debt restructurings.
- Real estate owned totaled $5.1 million across eight properties, including a condominium development carried at $1.5 million.
- A lawsuit alleging RICO and other claims arising from defaulted loans was dismissed with prejudice against the Parke parties; plaintiffs appealed to the U.S. Court of Appeals for the Third Circuit, where the matter was pending at filing.
- The Company stated that disclosure controls and procedures were effective and that no material changes affected internal control over financial reporting during the last quarter of 2018.
Important Facts for Investors to Verify
- Retrieve the incorporated 2018 Annual Report to verify net income, revenue, net interest margin, profitability ratios, and operating cash flow.
- Assess the sustainability and concentration risk of the $253.8 million medical-use cannabis deposit base, including the two customers representing 65.9% of those deposits.
- Review capital ratios and liquidity metrics in the financial statements, beyond the qualitative statement that the Bank was well capitalized.
- Evaluate credit exposure to commercial real estate and construction lending, including the $6.7 million of loans with potential credit problems and $5.1 million of real estate owned.
- Monitor brokered deposit dependence, FHLB borrowing costs, and interest-rate sensitivity.
- Confirm the status and potential financial impact of the pending appellate litigation.