Parke Bancorp, Inc. — 2018 First-Quarter Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results. Parke Bancorp is a New Jersey bank holding company whose principal subsidiary, Parke Bank, operates branches in New Jersey and Philadelphia.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 / Prior Period | Change |
|---|---|---|---|
| Total assets | $1.167 billion | $1.137 billion at Dec. 31, 2017 | +2.6% sequentially |
| Total loans | $1.042 billion | $1.012 billion at Dec. 31, 2017 | +$30.2 million, +3.0% |
| Total deposits | $902.2 million | $866.4 million at Dec. 31, 2017 | +$35.8 million, +4.1% |
| Net interest income | $11.0 million | $9.3 million | +19.1% |
| Net income attributable to the Company | $5.8 million | $3.5 million | +66.6% |
| Net income available to common shareholders | $5.5 million | $3.2 million | +74.7% |
| Basic / diluted EPS | $0.69 / $0.58 | $0.42 / $0.35 | Increased |
| Net interest margin | 4.03% | 3.94% | +9 basis points |
| Allowance for loan losses | $17.1 million | $16.5 million at Dec. 31, 2017 | Allowance ratio remained 1.6% |
| Cash and cash equivalents | $46.7 million | $42.1 million at Dec. 31, 2017 | +$4.6 million |
Revenue, Profitability, Cash Flow, Debt and Liquidity
- Total interest income increased 21.7% to $13.5 million, driven by higher average loan balances and an 18-basis-point increase in average loan yields to 5.15%.
- Interest expense increased to $2.5 million from $1.8 million as average interest-bearing deposits and borrowing costs increased. The average rate paid on liabilities rose to 1.16% from 0.93%.
- Net interest income after the $400,000 loan-loss provision was $10.6 million, compared with $8.8 million in the prior-year quarter.
- Noninterest income increased to $869,000 from $395,000, primarily due to a $178,000 gain on the sale of SBA loans and higher deposit service fees.
- Noninterest expense increased 5.6% to $3.9 million. Income before taxes was $7.6 million, and the effective tax rate declined to 24.2% from 36.7%, primarily reflecting the Tax Cuts and Jobs Act.
- Operating cash flow was $6.6 million, compared with $3.0 million in Q1 2017. Investing activities used $26.7 million, principally because of a $30.4 million net increase in loans. Financing activities provided $24.7 million, mainly from deposit growth, partly offset by a $10.0 million reduction in FHLBNY and short-term borrowings.
- FHLBNY borrowings were $104.7 million at March 31, 2018, down from $114.7 million at year-end. The Bank maintained FHLB credit lines of $247.3 million, with $104.7 million outstanding.
- The loan-to-deposit ratio was 115.5%, compared with 116.8% at December 31, 2017. Management reported no known trends or commitments expected to cause a material change in liquidity.
- Shareholders’ equity increased to $138.9 million from $134.8 million. The Company declared a $0.12 per-share quarterly common dividend and subsequently declared a 10% common stock dividend payable May 18, 2018.
Material Changes and Credit Quality
- Loan growth was concentrated primarily in residential one-to-four-family mortgages, which increased to $442.8 million from $416.3 million at year-end.
- Total delinquent loans declined to $4.7 million, or 0.5% of total loans, from $5.0 million. Non-accrual loans declined to $4.2 million, or 0.4% of loans, from $4.5 million.
- Net charge-offs were $17,000, while recoveries were $165,000, compared with $682,000 of charge-offs and $77,000 of recoveries in Q1 2017.
- Impaired loans declined to $24.8 million from $25.5 million. Performing troubled debt restructurings totaled $20.6 million, with related allowances of $382,000; no new TDRs were recorded during the quarter.
- OREO declined to $6.8 million from $7.2 million. The largest property was a condominium development valued at approximately $2.5 million.
- Investment securities declined to $37.0 million from $40.3 million due to mortgage-backed security paydowns and the call of a $1.2 million municipal security. Accumulated other comprehensive loss increased to $623,000, primarily from unrealized losses on residential mortgage-backed securities related to interest-rate movements.
Guidance, Outlook, Risks and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management stated that quarterly results are not necessarily indicative of full-year results.
- Management described interest-rate exposure as within policy limits. A modeled 200-basis-point increase in rates would reduce projected one-year net interest income by 1.91% and economic value of equity by 13.05%; these estimates depend on assumptions regarding deposit behavior, prepayments and other factors.
- The Bank was categorized as well capitalized under prompt corrective action rules. At March 31, 2018, Parke Bank reported total risk-based capital of 16.96%, Tier 1 risk-based capital of 15.70%, Tier 1 leverage of 13.22% and Tier 1 common equity of 15.70%.
- Key risks include credit losses in the predominantly real-estate-focused loan portfolio, construction and commercial real-estate exposure, changes in interest rates, deposit pricing and funding costs, regulatory requirements, economic conditions, collateral values and competition.
- Management’s allowance for loan losses is judgmental and may require future increases if economic or credit conditions deteriorate. The Company is evaluating the future expected-credit-loss standard, ASU 2016-13, and expects it to affect the financial statements, although the amount is not yet clear.
- The Company is defending a federal lawsuit alleging RICO and other claims arising from defaulted loans. Management believes the allegations are without merit and has moved to dismiss the claims.
- Disclosure controls were considered effective, and the filing reports no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether rapid loan growth, a 115.5% loan-to-deposit ratio and real-estate concentration increase future funding or credit risk.
- Whether non-accrual loans, impaired loans, TDRs and OREO continue to decline and whether the $17.1 million allowance remains adequate.
- The effect of rising deposit and borrowing costs on the 4.03% net interest margin and future earnings.
- The eventual adoption impact of the expected-credit-loss accounting standard and related capital effects.
- The status and potential financial exposure of the pending litigation.
- Whether the 10% stock dividend, common dividend and preferred-stock obligations affect future per-share results and capital flexibility.