Parke Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
Parke Bancorp, Inc. is a New Jersey bank holding company whose principal subsidiary, Parke Bank, operates branches in New Jersey and Pennsylvania. The filing covers the unaudited three and nine months ended September 30, 2014, compared primarily with the corresponding 2013 periods and December 31, 2013 balances. The filing header contains an apparent reference to a June 30, 2014 period, but the financial statements and report identify September 30, 2014 as the reporting date.
The FDIC and New Jersey Department of Banking and Insurance consent orders were terminated effective May 19, 2014, and the Federal Reserve Bank memorandum of understanding was lifted effective August 4, 2014.
Financial condition and key metrics
| Metric | September 30, 2014 | Change or comparison |
|---|---|---|
| Total assets | $813.9 million | Up 2.4% from $794.9 million at December 31, 2013 |
| Gross loans | $680.7 million | Up 4.0% from $654.5 million |
| Allowance for loan losses | $17.7 million | Down from $18.6 million; 2.6% of loans versus 2.8% |
| Cash and cash equivalents | $59.2 million | Up from $45.7 million |
| Total deposits | $641.6 million | Up 2.4% from $626.8 million |
| FHLBNY borrowings | $50.8 million | Down from $55.3 million |
| Total equity | $101.5 million | Up from $94.0 million |
| Nonaccrual loans | $32.1 million | 4.7% of loans, down from $36.0 million and 5.5% |
| OREO | $17.9 million | Down from $28.9 million |
For the nine months ended September 30, 2014, net income attributable to the Company was $8.3 million, and net income available to common shareholders was $7.4 million, or $1.23 basic and $1.04 diluted earnings per share. For the comparable 2013 period, net income available to common shareholders was $5.4 million, or $0.90 basic and diluted EPS.
For the third quarter, net income attributable to the Company was $3.5 million, and net income available to common shareholders was $3.2 million, or $0.53 basic and $0.44 diluted EPS, compared with $1.8 million and $0.30 basic and diluted EPS in the third quarter of 2013.
| Nine-month income statement item | 2014 | 2013 |
|---|---|---|
| Total interest income | $28.8 million | $27.3 million |
| Net interest income | $24.6 million | $22.8 million |
| Provision for loan losses | $2.25 million | $2.20 million |
| Noninterest income | $6.5 million | $3.4 million |
| Noninterest expense | $14.3 million | $13.4 million |
| Income before taxes | $14.6 million | $10.7 million |
| Net income attributable to common shareholders | $7.4 million | $5.4 million |
The nine-month net interest margin increased to 4.33% from 4.30%, while the interest-rate spread increased to 4.22% from 4.20%. In the third quarter, however, the net interest margin declined to 4.16% from 4.34%, and the spread declined to 4.05% from 4.24%. The nine-month effective tax rate was 31.4%, compared with 36.9% in 2013.
Operating cash flow was $17.7 million for the first nine months of 2014, compared with $7.8 million in 2013. Investing activities used $12.4 million, primarily reflecting a $31.4 million net increase in loans, while financing activities provided $8.3 million. Cash and cash equivalents increased $13.5 million during the period.
At September 30, 2014, the Bank reported total risk-based capital of 17.51%, Tier 1 risk-based capital of 16.25%, and Tier 1 leverage capital of 13.98%; management stated that the Company and Bank were well-capitalized.
Material changes versus prior comparable periods
- Loan growth increased interest income, although average loan yields declined modestly to 5.54% for the nine months from 5.56%.
- Interest expense declined for the nine-month period as deposit and borrowing costs decreased, despite higher average deposit and borrowing balances.
- Noninterest income increased $3.1 million, primarily because gains on SBA loan sales increased to $4.1 million from $2.2 million. The Company also recognized a $178,000 gain on sales of investment securities.
- Noninterest expense increased $896,000 for the nine months, mainly because OREO expense increased by $580,000, including a $1.5 million reserve related to a condominium project.
- Nonperforming asset levels improved: nonaccrual loans declined by $3.8 million, OREO declined by $11.1 million, and nonperforming assets as a percentage of total assets declined from 8.2% to 6.1%.
- Delinquent loans declined to $34.3 million, or 5.0% of total loans, from $39.6 million at December 31, 2013. However, 90-days-or-more nonaccrual loans remained significant at $32.1 million.
- Loan charge-offs increased to $3.1 million from $1.7 million, while recoveries declined to $34,000 from $203,000.
- The Company sold three TruPS collateralized debt investment securities, reducing total investment securities to $31.1 million from $37.8 million. No credit-related OTTI charge was recorded during the reported periods.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects results to remain sensitive to loan growth, interest rates, deposit pricing, credit quality, real estate values, foreclosure activity, economic conditions, regulatory requirements and competition.
Management continues to focus on resolving nonperforming assets through foreclosures and borrower workouts. Commercial real estate, construction and land-development lending carry elevated risk because repayment depends on property values, leasing or sales activity, borrower cash flow and availability of permanent financing. Allowance adequacy and collateral valuations require significant judgment, and additional provisions or write-downs may be required if economic or credit conditions deteriorate.
Liquidity appears supported by $59.2 million of cash and cash equivalents, marketable securities, deposit growth, residential mortgage assets that could potentially be sold or pledged, and $98.6 million of FHLB lines of credit, of which $50.8 million was outstanding. The loan-to-deposit ratio was 106.1% at September 30, 2014.
The Company declared a quarterly common dividend of $0.05 per share on September 23, 2014, payable October 28, 2014. It also had $20.0 million of Series B noncumulative convertible preferred stock outstanding; full conversion could result in issuance of up to approximately 1.9 million common shares based on the stated conversion rate.
The Company is evaluating the effect of recently issued revenue-recognition and foreclosure-accounting standards. The filing states that no material subsequent events required recognition or disclosure through the issuance date.
Important facts for investors to verify
- Whether the improvement in nonperforming assets and OREO continues, particularly for the largest land-development, construction and residential loans.
- Whether the $17.7 million allowance remains adequate relative to $32.1 million of nonaccrual loans and $65.2 million of impaired loans.
- The sustainability of SBA loan-sale gains and other loan fees, which materially increased 2014 earnings.
- The effect of declining quarterly net interest margin on future profitability.
- Potential dilution from the Series B preferred stock conversion and the impact of preferred dividends on common earnings.
- Liquidity and funding exposure arising from a loan-to-deposit ratio above 100% and outstanding FHLB borrowings.
- Future OREO reserves, foreclosure costs and collateral valuation changes, including the condominium project reserve.
- Continued compliance with regulatory capital requirements following the lifting of prior supervisory orders.