Parke Bancorp, Inc. — Q2 2022 Form 10-Q Summary
Business Context and Reporting Period
Parke Bancorp, Inc. is a New Jersey-based bank holding company operating primarily through Parke Bank, serving individuals and small to mid-sized businesses in New Jersey and Pennsylvania. Its principal lending activities are residential real estate, commercial real estate, construction, commercial and industrial, and consumer lending.
This unaudited filing covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. The Company had $1.99 billion of assets, $249.1 million of shareholders’ equity, and 11,914,961 common shares outstanding as of August 8, 2022.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 | Year-over-Year Change | Six Months Ended June 30, 2022 | Year-over-Year Change |
|---|---|---|---|---|
| Net interest income | $18.0 million | Down 0.6% | $35.1 million | Up 0.5% |
| Provision for loan losses | $0.35 million | Up from none | $0.35 million | Down from $0.50 million |
| Non-interest income | $2.5 million | Up 20.1% | $4.6 million | Up 6.0% |
| Non-interest expense | $5.7 million | Down 0.2% | $11.4 million | Down 0.9% |
| Net income available to common shareholders | $10.7 million | Down 0.2% | $20.8 million | Up 3.2% |
| Basic/diluted EPS | $0.90/$0.88 | Basic flat; diluted down from $0.89 | $1.75/$1.71 | Up from $1.70/$1.67 |
| Net interest margin | 3.66% | Up from 3.55% | 3.54% | Up from 3.41% |
| Effective tax rate | 25.6% | Up from 25.1% | 25.4% | Up from 25.3% |
Interest income declined as loan yields and average loan balances decreased, but higher market rates increased interest earned on Federal Reserve deposits. Lower deposit and borrowing costs partly offset the decline in interest income.
Balance Sheet, Liquidity, and Capital
- Loans increased $63.3 million, or 4.3%, from December 31, 2021, to $1.55 billion. Growth was concentrated in residential 1-to-4-family and commercial non-owner-occupied real estate loans.
- Total deposits declined $162.1 million, or 9.2%, to $1.61 billion, primarily reflecting lower noninterest-bearing deposits and time deposits.
- Cash and cash equivalents declined $203.3 million, or 34.1%, to $393.2 million, primarily due to deposit withdrawals and loan funding.
- Total borrowings were $121.0 million, including $78.2 million of FHLBNY borrowings and $42.8 million of subordinated debentures.
- FHLBNY borrowing capacity was $603.5 million, of which $78.2 million was outstanding, leaving reported availability of $465.3 million. The Company also had $10.0 million and $50.0 million municipal letters of credit supporting public deposits.
- Shareholders’ equity increased 7.2% from year-end 2021 to $249.1 million, primarily from retained earnings after dividends.
- The Company and Bank were considered well capitalized. The Company reported a 13.01% Tier 1 leverage ratio and the Bank reported a 14.43% Community Bank Leverage Ratio, compared with a 9.00% applicable capital adequacy threshold.
Material Changes and Asset Quality
- Quarterly net income was essentially flat because lower net interest income and the new $350,000 loan-loss provision offset higher non-interest income.
- Six-month net income improved because interest expense fell $2.0 million and the loan-loss provision declined $150,000, more than offsetting a $1.8 million decrease in interest income.
- The allowance for loan losses increased to $30.4 million from $29.8 million at year-end, while the allowance-to-loans ratio declined to 1.97% from 2.01%.
- Delinquent loans increased to $18.5 million, or 1.2% of total loans, from $4.7 million at year-end. The increase was primarily driven by two commercial real estate loans that were 30 to 89 days past due.
- Loans 90 days or more past due and not accruing interest declined to $3.9 million, or 0.3% of loans, from $4.3 million. Impaired loans declined to $9.5 million from $10.3 million, and performing TDR loans declined to $5.6 million from $6.0 million.
- There were no charge-offs during the six months ended June 30, 2022, compared with $153,000 in the 2021 period; recoveries were $253,000 versus $23,000.
- OREO declined to zero after sales and valuation adjustments, compared with $1.7 million at June 30, 2021.
Outlook, Risks, Contingencies, and Unusual Items
- Management did not provide quantitative earnings or revenue guidance. It stated that it remains focused on organic growth in customers, loans, deposits, and revenue while managing expenses, risk, and capital.
- The Company continued implementing the current expected credit loss model and expects to adopt CECL on January 1, 2023. Management was conducting parallel model runs and had not yet determined the financial statement impact.
- Management identified economic conditions, inflation, interest rates, monetary policy, geopolitical tensions, COVID-19 effects, collateral values, credit losses, cybersecurity, regulatory restrictions, and competition as risks to future results.
- Cannabis-related deposits were approximately $275.8 million, or 17.1% of total deposits, at June 30, 2022, compared with $375.2 million, or 21.2%, at year-end. Two customers represented 42.2% of cannabis-related deposits. Federal enforcement could change despite the Company’s compliance program under FinCEN guidance.
- Cannabis-related fee income was $2.3 million in the first six months of 2022, compared with $2.8 million in the 2021 period. Cannabis-related loans totaled $4.0 million.
- Unused commitments to extend credit were $140.2 million, and standby letters of credit were $1.5 million. Management stated that off-balance-sheet risk was not material and that it had adequate resources to fund commitments.
- Unrealized investment-security losses increased because of interest-rate changes. Management did not consider the securities to be other-than-temporarily impaired, citing government or government-sponsored guarantees and its intent and ability to hold them until recovery.
- The filing reported no legal proceedings, no defaults on senior securities, and no material changes in internal control over financial reporting. Disclosure controls were considered effective.
Important Facts for Investors to Verify
- Whether the increase in 30-to-89-day delinquencies leads to additional charge-offs, nonaccrual loans, or higher provisions.
- The effect of CECL adoption on the allowance, equity, regulatory capital, and future earnings beginning January 1, 2023.
- Deposit stability and liquidity following the $162.1 million decline in deposits and $203.3 million reduction in cash.
- Interest-rate sensitivity, including the effect of rising rates on loan yields, deposit pricing, borrowing costs, and securities valuations.
- Concentration and regulatory risks associated with cannabis-related deposits, including the exposure to two major customers and potential changes in federal enforcement.
- Whether residential and commercial real estate loan growth remains consistent with underwriting standards and risk tolerance.