PARKE BANCORP, INC. quarterly report, Q3 FY2022

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Business Context and Reporting Period

Parke Bancorp, Inc. is a New Jersey-based bank holding company operating primarily through Parke Bank, serving retail customers and small to mid-sized businesses in New Jersey and Pennsylvania. The unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.

Key Financial Metrics

  • Third-quarter net income available to common shareholders: $10.5 million, or $0.88 basic and $0.87 diluted EPS.
  • Nine-month net income available to common shareholders: $31.3 million, or $2.63 basic and $2.58 diluted EPS.
  • Net interest income: $19.3 million for the quarter and $54.4 million year to date, compared with $17.5 million and $52.4 million, respectively, in 2021.
  • Net interest margin: 4.06% for the quarter and 3.71% year to date, compared with 3.41% for both comparable 2021 periods.
  • Provision for loan losses: $600,000 in the quarter and $950,000 year to date, versus zero and $500,000, respectively, in 2021.
  • Non-interest income: $2.0 million for the quarter and $6.6 million year to date.
  • Non-interest expense: $6.3 million for the quarter and $17.7 million year to date.
  • Effective tax rate: 27.0% in the quarter and 25.9% year to date.
  • Total assets: $1.92 billion at September 30, 2022, down 10.0% from December 31, 2021.
  • Loans: $1.68 billion, up 13.1% from year-end 2021, led by residential one-to-four-family, commercial non-owner-occupied real estate, and construction loans.
  • Deposits: $1.54 billion, down 13.2% from year-end 2021.
  • Allowance for loan losses: $31.0 million, or 1.85% of loans, compared with $29.8 million, or 2.01%, at year-end 2021.
  • Cash and cash equivalents: $193.3 million, down from $596.6 million at year-end 2021.
  • Borrowings: $116.0 million, consisting primarily of $73.2 million of FHLBNY borrowings and $42.9 million of subordinated debentures.
  • Shareholders’ equity: $257.3 million, up 10.7% from year-end 2021.
  • Capital: The Company reported a 14.03% Tier 1 leverage ratio and the Bank reported a 15.52% community bank leverage ratio; both were described as well capitalized.

Cash Flow, Liquidity, and Funding

  • Operating activities provided $34.3 million of cash during the first nine months of 2022.
  • Investing activities used $191.6 million, principally because loan growth used $196.3 million of cash.
  • Financing activities used $245.9 million, primarily reflecting a $233.2 million decline in deposits and $7.9 million of dividends.
  • Cash and cash equivalents declined by $403.2 million during the period as deposits were withdrawn and loans were funded.
  • The Bank had $641.7 million of FHLBNY borrowing capacity, with $73.2 million outstanding and approximately $518.6 million of remaining borrowing capacity at September 30, 2022.
  • Unused commitments to extend credit were approximately $176.5 million, and standby letters of credit were $1.5 million.

Material Changes Versus Prior Comparable Period

  • Quarterly earnings: Net income available to common shareholders increased 0.4%, as higher net interest income was largely offset by the new loan-loss provision, lower non-interest income, and higher operating expenses.
  • Year-to-date earnings: Net income available to common shareholders increased 2.2%, primarily because interest expense declined $2.1 million, partially offset by higher provisions and operating expenses.
  • Margin expansion: The quarterly net interest margin increased 65 basis points to 4.06%; the year-to-date margin increased 30 basis points to 3.71%.
  • Expense mix: Quarterly compensation and benefits increased $538,000 and other operating expense increased $456,000, while professional services declined $419,000 due largely to lower BSA remediation costs.
  • Deposit reduction: Deposits declined $233.2 million, primarily from lower non-interest-bearing and time deposits. Management attributed a significant portion of the demand-deposit decline to withdrawals from cannabis-related accounts.
  • Asset quality: Delinquent loans increased to $17.0 million, or 1.0% of loans, from $4.7 million at year-end 2021. Loans 90 days or more past due and not accruing increased to $16.9 million from $4.3 million.
  • Impaired loans: Impaired loans increased to $22.5 million from $10.3 million at year-end 2021, although performing TDR loans declined to $5.5 million from $6.0 million.

Guidance, Outlook, Commentary, Risks, and Unusual Items

  • The filing does not provide formal earnings or revenue guidance. Management states that it is focused on organic growth in customers, loans, deposits, and revenue while managing expenses, risk, liquidity, and capital.
  • The Company plans to adopt the current expected credit loss methodology on January 1, 2023. Parallel testing and model validation were in progress, but the financial statement impact had not yet been determined.
  • Interest-rate changes, inflation, economic weakness, geopolitical tensions, loan growth, and declining real estate collateral values could affect net interest income, fair values, credit losses, and liquidity.
  • Cannabis-related deposits were approximately $208.1 million, or 13.6% of total deposits, at September 30, 2022; two customers represented 42.7% of those deposits. Cannabis-related activities remain illegal under federal law.
  • Management identified a potentially material cannabis-related loss contingency as reasonably possible, but concluded that the loss was neither probable nor reasonably estimable and recorded no accrual. Future liabilities could be material in periods when recorded.
  • The Company recorded $328,000 of net gains on OREO sales and valuation adjustments during the first nine months, while quarterly OREO expense increased to $314,000.
  • Unrealized losses on securities increased because of interest-rate movements. Management concluded the losses were not credit-related or other-than-temporary, principally because the securities were government or government-sponsored securities and the Company did not intend to sell them.
  • There were no reported legal proceedings, defaults, or material changes in disclosure controls. Management concluded that disclosure controls and procedures were effective.

Important Facts for Investors to Verify

  • Whether the September 2022 increase in nonperforming and impaired loans results in additional charge-offs or allowance provisions.
  • The effect of CECL adoption on the allowance, capital, earnings, and regulatory ratios beginning January 1, 2023.
  • The stability and concentration of cannabis-related deposits, including the exposure to the two largest customers and any federal enforcement developments.
  • Whether continued loan growth can be funded if deposits remain below year-end 2021 levels.
  • The impact of higher interest rates on deposit pricing, net interest margin, securities’ accumulated other comprehensive loss, and borrower credit quality.
  • The adequacy of liquidity after the $403.2 million decline in cash and cash equivalents and the availability of unused FHLBNY borrowing capacity.