PARKE BANCORP, INC. quarterly report, Q2 FY2018

Parke Bancorp, Inc. — Q2 2018 Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2018; interim financial statements are unaudited. Parke Bancorp is a bank holding company operating primarily through Parke Bank, serving individuals and small to mid-sized businesses in New Jersey and Pennsylvania.

Financial Highlights

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Net interest income	$11.6 million	$9.8 million	$22.6 million	$19.1 million
Provision for loan losses	$0.2 million	$1.0 million	$0.6 million	$1.5 million
Net income available to common shareholders	$5.9 million	$3.4 million	$11.5 million	$6.6 million
Basic/diluted EPS	$0.66/$0.56	$0.41/$0.34	$1.28/$1.09	$0.79/$0.66
Net interest margin	3.92%	4.00%	3.97%	3.97%
Effective tax rate	23.9%	36.9%	24.0%	36.8%

Revenue and earnings: Q2 net interest income increased 18.3%, driven by higher average loan balances and yields. Net income available to common shareholders increased 74.7%. Six-month net income available to common shareholders also increased 74.7%.
Margins: Q2 net interest margin declined modestly to 3.92% from 4.00%, as funding costs increased. The six-month margin was unchanged at 3.97%.
Noninterest income and expense: Q2 noninterest income was $649,000, up 9.8%; six-month noninterest income was $1.5 million, up 53.8%. Q2 noninterest expense increased 12.2% to $4.0 million; six-month expense increased 8.8% to $7.9 million.
Cash flow: Six-month operating cash flow was $12.3 million versus $4.2 million in the prior-year period. Investing activities used $84.5 million, primarily for net loan growth. Financing activities provided $140.4 million, primarily from deposit growth. Cash and cash equivalents increased to $110.2 million from $42.1 million at December 31, 2017.

Balance Sheet, Debt and Liquidity

Total assets increased 13.4% to $1.290 billion from December 31, 2017.
Total loans increased 8.9% to $1.101 billion, led by a $59.4 million increase in residential one-to-four-family loans and a $34.8 million increase in construction loans.
Total deposits increased 17.5% to $1.018 billion. Noninterest-bearing deposits increased to $210.7 million from $124.4 million, while time deposits increased to $434.2 million from $367.9 million.
Total borrowings declined $10.0 million to $118.1 million, consisting primarily of $104.7 million of FHLBNY borrowings and $13.4 million of subordinated debentures.
The Bank had $279.5 million of FHLB borrowing capacity, with $104.7 million outstanding. Available-for-sale securities totaled $34.2 million, and the Bank maintained $110.2 million of cash and cash equivalents.
Total equity increased to $144.6 million from $134.8 million. The Company and Bank were classified as well capitalized; the Bank’s total risk-based capital ratio was 16.43% and Tier 1 leverage ratio was 13.27%.

Asset Quality and Credit Risk

The allowance for loan losses increased to $17.3 million from $16.5 million, while the allowance-to-total-loans ratio declined to 1.57% from 1.63%.
Six-month net recoveries were $140,000, compared with net charge-offs of $521,000 in the prior-year period. The provision declined to $600,000 from $1.5 million.
Delinquent loans totaled $3.8 million, or 0.29% of total loans, compared with $5.0 million at year-end 2017. Nonaccrual loans greater than 90 days totaled $3.2 million.
Impaired loans declined to $23.5 million from $25.5 million. Troubled debt restructurings totaled $20.6 million, including $20.3 million performing TDRs and $277,000 nonperforming TDRs.
Other real estate owned declined to $6.2 million from $7.2 million at year-end 2017. The Company recorded a $509,000 loss on OREO sales and valuation adjustments during the six-month period.

Material Changes and Unusual Items

The lower effective tax rate primarily reflected the Tax Cuts and Jobs Act enacted in December 2017.
The Company paid an 11-for-10 stock dividend on May 18, 2018. Preferred shareholders converted 6,776 Series B preferred shares into 847,023 common shares before the stock dividend adjustment.
The common dividend was increased from $0.12 per share for the first quarter to $0.14 per share for the second quarter, payable July 27, 2018.
The Company formed a 51%-owned joint venture, PDL LLC, to originate short-term alternative real estate loans. The other joint-venture participant contributed $1.2 million during the first six months.
The Company early adopted guidance permitting reclassification of stranded tax effects from accumulated other comprehensive income to retained earnings; the $27,000 reclassification was immaterial.
Unrealized losses on available-for-sale securities totaled $1.1 million at June 30, 2018, compared with $436,000 at year-end 2017. Management attributed the losses primarily to interest-rate changes and did not identify other-than-temporary impairment.

Outlook, Risks and Contingencies

The filing provides no formal earnings or revenue guidance. Management expects results to remain sensitive to loan and deposit growth, funding costs, interest-rate movements, credit quality, local economic conditions and regulatory developments. Management stated that the business remained focused on organic customer, loan, deposit and revenue growth while managing expenses, risk and capital.

Interest-rate risk is material. A modeled 200-basis-point increase was estimated to reduce economic value of equity by 12.46%, while a 200-basis-point decrease was estimated to increase it by 17.78%. Management stated that exposures remained within policy guidelines.
The allowance for loan losses and collateral valuations require significant judgment. Future additions to the allowance may be required.
The Company had $134.9 million of unfunded loan commitments and $19.8 million of standby letters of credit at June 30, 2018.
A $40.0 million municipal letter of credit secured public deposits and expires March 1, 2019; there were no borrowings against it at quarter-end.
Parke parties are defending a 2015 federal lawsuit alleging RICO and other violations related to loans that subsequently defaulted. Management believes the material allegations are without merit and has moved to dismiss the claims.
The Company disclosed no material changes to previously reported risk factors and no material subsequent events through issuance of the financial statements.

Investor Verification Checklist

Verify whether loan growth, particularly residential and construction lending, remains supported by credit quality and adequate reserves.
Monitor deposit pricing, brokered and time-deposit dependence, and the effect of rising funding costs on the net interest margin.
Review nonaccrual loans, TDR balances, OREO valuations and the adequacy of the $17.3 million allowance.
Assess the effect of interest-rate changes on earnings, securities’ accumulated other comprehensive loss and economic value of equity.
Review the performance, underwriting and risk concentration of the new PDL LLC alternative real estate lending joint venture.
Follow developments in the pending litigation and any potential financial or regulatory consequences.