Parke Bancorp, Inc. — Q3 2017 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. The unaudited results cover Parke Bancorp, Inc., Parke Bank and consolidated subsidiaries. The company is a New Jersey-based bank holding company operating branches in New Jersey and Philadelphia. Amounts are in thousands unless otherwise stated.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Interest income | $12.8 million | $10.4 million | $35.7 million | $31.2 million |
| Net interest income | $10.7 million | $8.7 million | $29.7 million | $26.2 million |
| Provision for loan losses | $0.5 million | $0.7 million | $2.0 million | $0.8 million |
| Noninterest income | $14 thousand | $130 thousand | $1.0 million | $9.8 million |
| Noninterest expense | $3.6 million | $4.2 million | $10.9 million | $12.9 million |
| Net income available to common shareholders | $3.9 million | $3.6 million | $10.4 million | $14.2 million |
| Diluted EPS | $0.42 | $0.39 | $1.15 | $1.54 |
- Q3 net income available to common shareholders increased approximately 8.1%, while diluted EPS increased from $0.39 to $0.42.
- Net interest margin increased to 4.15% in Q3 from 3.83%; the nine-month margin increased to 4.03% from 3.98%.
- Q3 income before taxes was $6.6 million and income tax expense was $2.4 million, producing a 36.9% effective tax rate. The prior-year quarter included a $1.5 million Historic Tax Credit, resulting in an unusually low 1.3% tax rate.
- Total assets increased 8.2% from December 31, 2016, to $1.099 billion. Gross loans increased 11.9% to $953.3 million, led by commercial real estate and residential mortgage lending.
- Deposits increased 7.0% to $843.6 million. FHLBNY borrowings increased $20.0 million to $99.7 million, and subordinated debentures were $13.4 million.
- Total shareholders’ equity rose 6.5% to $135.4 million. The company paid a $0.10 per-share common dividend during the nine-month period and declared a $0.12 per-share quarterly dividend payable October 27, 2017.
Cash Flow and Liquidity
- Operating activities provided $11.4 million of cash during the first nine months, compared with $11.8 million in the prior-year period.
- Investing activities used $99.5 million, primarily reflecting a $103.3 million net increase in loans.
- Financing activities provided $72.8 million through deposit growth, increased borrowings and stock-option proceeds.
- Cash and cash equivalents declined $15.3 million to $55.4 million at September 30, 2017, principally because cash funded loan growth.
- The loan-to-deposit ratio increased to 113.0% from 108.0%. The company reported $176.5 million of FHLB borrowing capacity, of which $99.7 million was outstanding.
Material Changes Versus Prior Comparable Period
- Interest income rose 23.8% in Q3, driven by higher average loans and a 25-basis-point increase in the average loan yield. Average loans were $943.1 million versus $801.3 million.
- Interest expense increased 26.5% in Q3 because of higher average interest-bearing deposits and borrowings and higher funding costs.
- Noninterest income was nearly flat in Q3 and materially lower year to date because the 2016 period included gains from the sale of SBA-related assets, including a $7.6 million SBA portfolio gain and a $1.8 million gain on SBA loan sales.
- On an adjusted basis excluding the 2016 SBA asset-sale impact, management stated that nine-month net income would have increased by approximately $2.1 million.
- Noninterest expense declined 15.5% year to date, reflecting the sale of the SBA business, lower OREO costs, lower FDIC insurance expense and reduced operating expenses.
- Asset quality improved: nonaccrual loans declined to $5.7 million, or 0.6% of total loans, from $11.3 million, or 1.3%, at December 31, 2016. Delinquent loans declined to $6.4 million from $12.6 million.
- The allowance for loan losses increased modestly to $15.8 million, but declined to 1.7% of total loans from 1.8%. Coverage of nonperforming loans increased to 276.6% from 137.9%.
- OREO declined to $7.5 million from $10.5 million, although the company recorded $1.4 million of OREO losses and write-downs during the first nine months.
Outlook, Risks, Contingencies and Unusual Items
- No formal earnings or financial guidance was provided. Management described liquidity and capital as adequate and reported no known trends or commitments expected to cause a material liquidity change.
- The bank was categorized as well capitalized. At September 30, 2017, Parke Bank reported total risk-based capital of 17.34%, Tier 1 risk-based capital of 16.09%, Tier 1 leverage of 14.33% and Tier 1 common equity of 16.09%.
- Principal risks include credit concentration in commercial real estate, construction and residential real estate; changes in interest rates; economic and real estate conditions; deposit competition; regulatory changes; and the subjectivity of loan-loss, OREO, deferred-tax and fair-value estimates.
- Management cautioned that additional loan-loss provisions could be required if economic conditions, collateral values or loan performance deteriorate. Loans classified as troubled debt restructurings totaled $21.2 million of performing TDRs and $416 thousand of nonperforming TDRs.
- The company is defending a federal lawsuit alleging RICO and other violations arising from defaulted loans. Management believes the allegations are without merit and has moved to dismiss the claims. The filing does not provide a quantified loss exposure.
- The company was evaluating the future expected-credit-loss standard, ASU 2016-13, and had not yet determined its financial statement impact.
- Available-for-sale securities included $40.2 million at fair value, with $325 thousand of unrealized losses on residential mortgage-backed securities that management did not consider other-than-temporary.
Most Important Facts for Investors to Verify
- Whether rapid loan growth and the 113.0% loan-to-deposit ratio remain supported by stable core deposits and available borrowing capacity.
- Whether the improvement in nonaccrual loans and delinquency metrics persists, particularly within commercial real estate, construction and residential loans.
- Whether the $15.8 million allowance remains adequate under changing interest rates, property values and economic conditions.
- The sustainability of the 4.15% quarterly net interest margin as deposit and borrowing costs rise.
- The extent to which future earnings comparisons are affected by the absence of the 2016 SBA asset-sale gains and Historic Tax Credit.
- The potential legal, credit or valuation consequences of the pending litigation, OREO portfolio and collateral-dependent impaired loans.
- The eventual effect of ASU 2016-13 and other pending accounting standards on capital, earnings and the allowance for credit losses.