Parke Bancorp, Inc. — Q1 2020 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, which provides commercial and retail banking services in New Jersey and Pennsylvania. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019, and the balance sheet is compared with December 31, 2019.
Key financial metrics
| Metric | Q1 2020 / March 31, 2020 | Comparable period / December 31, 2019 |
|---|---|---|
| Net income available to common shareholders | $7.2 million | $7.1 million in Q1 2019 |
| Basic / diluted EPS | $0.61 / $0.60 | $0.60 / $0.59 in Q1 2019 |
| Net interest income | $15.2 million | $13.4 million in Q1 2019 |
| Net interest margin | 3.43% | 3.86% in Q1 2019 |
| Provision for loan losses | $1.4 million | $0.7 million in Q1 2019 |
| Total assets | $1.82 billion | $1.68 billion |
| Total loans | $1.47 billion | $1.42 billion |
| Allowance for loan losses | $23.2 million, or 1.58% of loans | $21.8 million, or 1.54% of loans |
| Total deposits | $1.47 billion | $1.34 billion |
| Cash and cash equivalents | $283.2 million | $191.6 million |
| Total borrowings | $148.1 million | $148.1 million |
| Total equity | $184.9 million | $179.4 million |
Interest income increased 17.4% to $21.6 million, primarily because of higher average loan balances and increased interest income from deposits and federal funds. Interest expense increased 29.1% to $6.4 million, reflecting higher average interest-bearing deposits. The resulting net interest income increased 13.2%, while the net interest margin declined from 3.86% to 3.43%.
Net cash provided by operating activities was $9.4 million, compared with $10.6 million in Q1 2019. Investing activities used $45.6 million, principally for $47.4 million of net loan growth. Financing activities provided $127.8 million, primarily from a $130.1 million increase in deposits. Cash and cash equivalents increased $91.6 million during the quarter.
Material changes versus the prior comparable period
- Net income available to common shareholders increased 2.0% to $7.2 million, despite higher credit provisions and operating expenses.
- Net interest income increased $1.8 million, but the net interest margin contracted by 43 basis points.
- The provision for loan losses doubled to $1.4 million, reflecting management’s estimate of increased COVID-19-related credit risk and continued loan growth.
- Non-interest expense increased 17.0% to $4.9 million, driven primarily by compensation and benefits and higher FDIC insurance and other assessments.
- Total assets increased 8.0% from year-end 2019, with loans increasing $47.5 million, primarily in construction lending, and cash increasing $91.6 million.
- Deposits increased $130.1 million, or 9.7%, including a $92.6 million increase in noninterest-bearing deposits. Borrowings were unchanged.
- Delinquent loans increased to $10.4 million, or 0.7% of total loans, from $7.3 million at December 31, 2019. Nonaccrual loans increased to $5.9 million, or 0.4% of loans.
- No loans were charged off during either comparable quarter. The allowance increased by $1.4 million, while recoveries were $12,000.
Guidance, outlook, risks, contingencies, and unusual items
- The filing provides no formal earnings or revenue guidance. Management states that results are subject to significant uncertainty from the COVID-19 pandemic, economic conditions, unemployment, financial-market volatility, interest rates, monetary policy, and regulatory actions.
- COVID-19 began affecting the business during the first quarter. Management increased the loan-loss provision because of estimated pandemic-related credit risk, but the ultimate effect on the economy and the Company was described as unclear.
- Beginning in April 2020, the Company originated approximately $58.9 million of SBA Paycheck Protection Program loans through April 30, 2020.
- The Company provides banking services to state-legal cannabis businesses. Cannabis-related deposits were approximately $264.8 million, or 18.0% of total deposits, at March 31, 2020; two customers accounted for 53.2% of those deposits. Cannabis-related loans totaled $7.9 million. Federal enforcement or regulatory changes could require the Company to discontinue these services.
- Unused commitments to extend credit totaled approximately $191.3 million, and standby letters of credit totaled $19.4 million. Management stated that off-balance-sheet risk was not material and that resources were adequate to fund commitments.
- The Bank had $494.7 million of FHLBNY credit lines, with $134.7 million outstanding, leaving approximately $320.0 million of borrowing capacity. A $40.0 million municipal letter of credit secured public deposits.
- The Company and Bank were considered well capitalized. The Q1 2020 community bank leverage ratios were 10.82% for the Company and 10.81% for Parke Bank.
- The Company reported a pending U.S. Supreme Court certiorari petition in litigation involving alleged RICO and other claims related to loan transactions. The lower court dismissed the claims with prejudice, and the Third Circuit denied the plaintiffs’ appeal; the Supreme Court decision had no stated timetable.
- Unrealized gains on investment securities increased accumulated other comprehensive income by $515,000. The remaining securities with unrealized losses were primarily government or government-sponsored mortgage-backed securities, and management did not consider the losses to be other-than-temporary.
Most important facts for investors to verify
- Whether COVID-19-related deterioration in borrowers, particularly construction, commercial real estate, residential mortgage, and cannabis-related exposures, results in materially higher provisions, nonperforming loans, or charge-offs.
- The sustainability and concentration of cannabis-related deposits, including the exposure to two customers representing 53.2% of cannabis deposits.
- Whether the 3.43% net interest margin continues to compress as funding costs, deposit mix, loan yields, and interest rates change.
- Future allowance requirements under the incurred-loss model and the eventual effect of CECL adoption, which the Company stated is not required until fiscal years beginning after December 15, 2022 for small reporting companies.
- Liquidity and funding trends, including deposit stability, brokered deposits, available FHLBNY capacity, and the $191.3 million of unfunded loan commitments.
- The outcome of the pending Supreme Court certiorari matter and any resulting financial or regulatory exposure.