Parke Bancorp, Inc. — 2018 Q3 Form 10-Q Summary
Business context and reporting period
Parke Bancorp is a bank holding company headquartered in New Jersey. Through Parke Bank, it provides commercial and retail banking services in New Jersey and Pennsylvania, with primary lending concentrations in residential real estate, commercial real estate, construction, and commercial and industrial loans. The filing covers the unaudited three and nine months ended September 30, 2018, compared with the corresponding 2017 periods; balance-sheet comparisons are primarily with December 31, 2017.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net interest income | $12.3 million | $10.7 million | $34.9 million | $29.7 million |
| Provision for loan losses | $0.6 million | $0.5 million | $1.2 million | $2.0 million |
| Noninterest income | $1.1 million | $14 thousand | $2.6 million | $1.0 million |
| Noninterest expense | $3.9 million | $3.6 million | $11.8 million | $10.9 million |
| Net income available to common shareholders | $6.1 million | $3.9 million | $17.6 million | $10.4 million |
| Diluted EPS | $0.56 | $0.38 | $1.65 | $1.05 |
| Effective tax rate | 29.6% | 36.9% | 26.0% | 36.8% |
| Net interest margin | 3.88% | 4.15% | 3.94% | 4.03% |
At September 30, 2018, total assets were $1.342 billion, up 18.0% from December 31, 2017. Net loans were $1.162 billion, while gross loans of $1.180 billion increased $168.1 million, or approximately 16.6%, led by $102.2 million of growth in residential one-to-four-family loans and $38.8 million of growth in construction loans.
Total deposits were $1.065 billion, up 22.9% from year-end, including noninterest-bearing deposits of $236.0 million versus $124.4 million at December 31, 2017. Cash and cash equivalents increased to $86.7 million from $42.1 million. Investment securities declined to $33.7 million from $40.3 million.
Total borrowings were $118.1 million, comprising $104.7 million of FHLBNY borrowings and $13.4 million of subordinated debentures, compared with $128.1 million at year-end. Total equity was $149.2 million, up from $134.8 million. The Bank and Company were reported as well capitalized; Parke Bank's total risk-based capital ratio was 16.88% and Tier 1 leverage ratio was 12.55%.
Operating cash flow for the first nine months was $18.9 million, compared with $11.5 million in 2017. Investing activities used $160.4 million, primarily because of net loan growth, while financing activities provided $186.2 million, principally from deposit growth. The company had $130.0 million of outstanding loan commitments and $18.6 million of standby letters of credit at September 30, 2018.
Material changes versus the prior comparable period
- Q3 net income available to common shareholders increased 58.0% to $6.1 million; nine-month net income increased 68.5% to $17.6 million.
- Net interest income increased 14.8% in Q3 and 17.3% for the nine-month period, reflecting larger loan balances and higher asset yields.
- Interest expense increased 74.0% in Q3 and 59.6% year to date as deposit and borrowing costs rose. The net interest margin declined 27 basis points in Q3 and 9 basis points year to date.
- Noninterest income increased substantially, primarily from commercial deposit and loan fees and lower OREO-related losses. Q3 OREO sale and valuation activity produced a $150 thousand gain versus a $958 thousand loss in the prior-year quarter.
- The provision for loan losses declined 40.0% for the first nine months, consistent with management's assessment of improved credit quality.
- Noninterest expense increased 8.9% for the nine-month period, mainly from compensation and benefits and occupancy costs.
- The effective tax rate declined materially following the Tax Cuts and Jobs Act enacted in December 2017.
- Preferred stock conversions reduced preferred stock from $16.0 million to $3.4 million and increased common shares outstanding. The company also completed an 11-for-10 stock dividend effective May 18, 2018.
Outlook, risks, contingencies, and unusual items
No specific earnings or financial guidance was provided. Management stated that it intends to continue growing customers, loans, deposits, and revenue while managing risk, expenses, and capital. Results remain sensitive to economic conditions, Federal Reserve policy, interest rates, competition, regulation, technology, consumer behavior, and the local New Jersey and Pennsylvania economies.
- Credit risk is concentrated in real estate-related lending. Delinquent loans were $4.3 million, or 0.4% of total loans; loans 90 days or more past due and not accruing were $3.1 million, or 0.3% of loans.
- Impaired loans were $23.0 million, including $20.2 million of troubled debt restructurings. OREO was $5.0 million, down from $7.2 million at December 31, 2017.
- The allowance for loan losses was $17.9 million, or 1.52% of total loans, compared with 1.63% at year-end. Management cautioned that future additions could be required.
- Interest-rate modeling indicated that a gradual 200-basis-point increase would reduce projected one-year net interest income by 1.31% and economic value of equity by 18.36%; a 200-basis-point decline would increase those measures by 4.15% and 24.86%, respectively.
- Available-for-sale securities had $1.342 million of unrealized losses, which management attributed primarily to interest-rate movements rather than credit deterioration. No OTTI was recognized.
- The Bank has a $40.0 million municipal letter of credit supporting public deposits, expiring March 1, 2019, with no borrowings outstanding under it at quarter-end.
- A pending federal lawsuit alleges RICO and other violations arising from defaulted loans. The company believes the allegations are without merit and is defending the claims. No loss amount or reserve is disclosed.
- The company adopted or early adopted several accounting standards in 2018 without a material reported effect. It is evaluating the future current expected credit loss standard, which management expects will affect the financial statements but had not yet quantified.
Important facts for investors to verify
- Whether rapid loan and deposit growth can continue without deterioration in underwriting, asset quality, funding costs, or net interest margin.
- The composition and performance of the residential, commercial real estate, and construction portfolios, including collateral values and concentrations.
- The adequacy of the $17.9 million allowance relative to impaired loans, TDRs, delinquency trends, and future adoption of expected-credit-loss accounting.
- The stability and cost of deposits, including $440.7 million of time deposits and the use of brokered certificates of deposit.
- The potential financial and reputational impact of the pending litigation and any future legal developments.
- The effect of rising interest rates on funding costs, earnings, securities valuations, and economic value of equity.
- The basis for the significant quarter-to-quarter change in OREO-related income and whether such gains are recurring.