Parke Bancorp, Inc. — 2017 Form 10-K Summary
Business Context and Reporting Period
Parke Bancorp, Inc. is a New Jersey bank holding company whose primary business is ownership of Parke Bank, an FDIC-insured commercial bank. The filing covers the fiscal year ended December 31, 2017, and was filed March 15, 2018. Parke Bank serves individuals and small to mid-sized businesses primarily in Southern New Jersey and the Philadelphia area through seven offices.
At December 31, 2017, the Company reported $1.1 billion of assets, $1.0 billion of loans net of unearned income, $866.4 million of deposits and $134.8 million of equity. The Bank had 70 full-time and 21 part-time employees.
Key Financial Metrics
- Total loans increased to $1.012 billion from $851.953 million in 2016, an increase of approximately 18.8%.
- Deposits were $866.4 million at year-end. Average deposits increased to $809.3 million from $723.1 million in 2016.
- Borrowings were $114.650 million at year-end, compared with $79.650 million in 2016. The year-end weighted-average borrowing rate increased to 1.76% from 1.57%.
- The loan-to-deposit ratio was 116.8%, indicating that loans exceeded deposits and that the Bank relied on borrowings and other funding sources.
- The allowance for loan losses increased to $16.533 million from $15.580 million, while the allowance ratio declined to 1.63% of period-end loans from 1.83%.
- The provision for loan losses was $2.5 million, compared with $1.5 million in 2016. Net charge-offs declined to $1.547 million from $2.018 million.
- Nonperforming loans declined to $4.534 million, or 0.45% of loans, from $11.298 million, or 1.30%, in 2016. Total impaired loans declined to $25.5 million from $36.4 million.
- Real estate owned was $7.2 million, consisting of 11 properties.
- Investment securities totaled $40.259 million, including $37.991 million of securities available for sale. Approximately 91.6% of the securities portfolio consisted of mortgage-backed securities.
- Brokered deposits increased to $83.5 million from $51.2 million. The filing identifies these deposits as more volatile than core deposits.
- The Bank qualified as “well capitalized” under applicable prompt corrective action rules. The filing does not provide the individual year-end capital ratios in the supplied text.
- The supplied filing text does not provide clear consolidated revenue, net income, earnings per share, net interest margin, operating margin, or cash-flow amounts; those data are incorporated by reference to the 2017 Annual Report.
Material Changes Versus the Prior Comparable Period
- Loan growth was substantial, led by residential one-to-four-family mortgage loans, which increased to $416.3 million from $309.3 million, and residential construction loans, which increased to $28.5 million from $8.8 million.
- Commercial and industrial loans increased approximately 4.0% to $39.0 million.
- Nonperforming loans and impaired loans improved materially, although risk elements remained significant.
- The provision for loan losses increased by approximately $1.0 million despite lower net charge-offs.
- Borrowings increased by $35.0 million and brokered deposits increased by $32.3 million, reflecting greater reliance on non-core or wholesale funding to support asset growth.
- The allowance for loan losses grew in dollars but declined relative to total loans because of rapid portfolio growth.
- Available-for-sale securities declined to $38.0 million from $44.9 million, primarily reflecting lower mortgage-backed securities and the elimination of collateralized debt obligations from the reported portfolio.
- Risk elements, including nonperforming loans, troubled debt restructurings still accruing, loans delinquent 90 days or more and other real estate owned, declined to $25.5 million from $36.4 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management describes a strategy of continued moderate growth in loans, assets and deposits, subject to the availability of loans meeting underwriting standards and the ability to manage growth effectively.
- The portfolio is geographically concentrated in Southern New Jersey and the Philadelphia area. Approximately 94.5% of loans had real estate as a primary or secondary component of collateral.
- Commercial real estate, construction and commercial lending carry elevated credit risk because repayment depends on borrower cash flow, property values and local economic conditions.
- At year-end, $7.1 million of loans were not classified as nonaccrual or troubled debt restructurings but involved known credit concerns that could lead to future nonperforming status.
- The top 25 lending relationships had $322.9 million of commitments and $220.8 million of outstanding loans, or 21.8% of the loan portfolio, creating concentration risk.
- Interest-rate changes could pressure net interest income, liquidity and the market value of the investment portfolio. The filing states that rising rates could negatively affect investment portfolio values because of the duration of certain securities.
- Brokered deposits and borrowings expose the Bank to refinancing and higher funding-cost risk, particularly in a rising-rate or stressed-liquidity environment.
- Investment securities had approximately $207,000 of unrealized losses at year-end. The Company also held $6.1 million of FHLB stock and could face impairment charges if values decline on an other-than-temporary basis.
- The Company disclosed pending RICO and related litigation brought by borrowers concerning loans that subsequently defaulted. Management believes the allegations are without merit and intends to defend the claims.
- The recently enacted U.S. tax reform law could increase tax expense through remeasurement of the Company’s net deferred tax asset and could reduce capital ratios.
- Basel III capital conservation requirements were being phased in through January 1, 2019. Failure to maintain required buffers could restrict dividends, share repurchases and discretionary executive bonuses.
- The Company disclosed risks related to cybersecurity, third-party technology providers, internal controls, regulatory changes, competition, key personnel, dividend restrictions and the ability to raise additional capital.
- Management and the principal financial officer concluded that disclosure controls and procedures were effective as of December 31, 2017. No material change in internal control over financial reporting was reported during the fourth quarter.
Important Facts for Investors to Verify
- Obtain the incorporated 2017 Annual Report sections for net income, revenue, earnings per share, net interest margin, profitability ratios and operating cash flow.
- Review the complete capital-ratio disclosures for the Company and Bank, including the effect of the Basel III capital conservation buffer.
- Assess whether rapid loan growth, particularly in residential and real estate lending, is consistent with underwriting standards and sustainable funding capacity.
- Monitor the $7.1 million of identified potential problem loans, $7.2 million of real estate owned and the $25.5 million of total risk elements.
- Evaluate the sustainability and cost of the Bank’s $83.5 million of brokered deposits and $114.650 million of borrowings.
- Review the allowance methodology and coverage of impaired and restructured loans, especially given the decline in the allowance ratio to 1.63% of loans.
- Review the status, potential exposure and insurance coverage of the disclosed RICO litigation.
- Confirm the effect of tax reform on deferred tax assets, tax expense and regulatory capital.