Prepared by Stephanie, Analyst at BAD BEAT Investing
We have been providing a large number of key metric reviews in the financial sector in recent weeks. Sector-wide, we have seen how low interest rates have weighed, and downward pressure on bond yields have kept these stocks down for months. However, in just the last week, bond yields are moving higher and the outlook for banks has improved. This is largely due to uncertainty around the U.S. election dissipating, as well as promising and widespread news on COVID-19 vaccine progress. One name discussed with a few members over at BAD BEAT Investing this week was a little known banking company, Parke Bancorp (PKBK). In this column, we review the critical metrics you should be aware of and discuss why we see the stock as a buy in the low teens.
Thanks to solid loan growth and increased deposits, as well as decent margins the bank saw revenues increase nicely from last year. In Q3, the company reported a top line that grew from a year ago. With the present quarter’s revenues of $21.6 million, Parke Bancorp saw a 36.9% increase in this metric year-over-year.
We want to remind you that our reviews of the key metrics of many other regional banks revealed that performance has been mixed in the sector. Many banks have seen flat to down revenues versus last year, while others saw increases. Overall, this was a decent result. As we move down the lines of performance, the bank is in good condition in our estimation. Given the difficulty of handicapping where results would land, we think this was pretty strong. This result was a decent end to a challenging fiscal year for many banking institutions.
This solid increase in revenues year-over-year was bolstered by the fact that there was significant improvement in loss provisions this quarter. However, net interest margin was pressured given the situation with rates. Still, net interest income rose. Interest income increased $455,000 for Q3 2020 versus last year, primarily due to higher interest income generated from higher average loan volumes and partially offset by the impact of lower interest rates on average loans and a decrease in interest income from deposits in Federal Reserve Bank. Overall, Parke Bancorp reported net income of $6.5 million for the quarter compared to net income of $7.8 million for the quarter ended September 30, 2019. On a per share basis, this was $0.55 this quarter, down from $0.65 last year. However, better days are ahead with the prospects of a reopened economy in 2021 and COVID-19 being behind us. Parke continued to show growth in loans and deposits.
Loans and deposits grow
Every time we talk about a bank of any size, we talk about the importance of growth in loans and deposits. Such growth is critical for any bank, small or large. Total loans increased to $1.57 billion at September 30, 2020, from $1.42 billion at the start of the year, an increase of $153.9 million or 10.8%. Gross loans saw a benefit from Paycheck Protection Program loans, and loans from Parke’s deferment and relief programs. Total deposits were $1.60 billion at September 30, 2020, up from $1.34 billion at December 31, 2019, an increase of $257.3 million or 19.2% compared to December 31, 2019. Deposit growth was primarily due to an increase in non-interest bearing demand deposits and increase in other non-time deposits. Overall, the bank had solid growth. With seeing these trends we have to question asset quality.
A look at asset quality
Make no mistake, we love to see loan growth. But as we have seen with countless other banks, the quality of assets matters. We saw mostly strong trends in asset quality metrics for Parke Bancorp, and this is quite bullish.
One metric that hammered banks this year was massive provisions for loan losses. Some banks have seen huge improvements on this front but Parke Bancorp was not one of them, which was a bearish point to keep in mind. The provision for loan losses increased $1.5 million to $2.4 million for the third quarter of 2020, compared to the same period in 2019. While a year-over-year increase was not surprising, we do note that this was a bearish change from Q2 2020. Loan loss provisions in Q2 2020 were $2.0 million, so we saw a 20% increase here from the sequential quarter.
Nonperforming loans at September 30, 2020 increased to $9.5 million, representing 0.60% of total loans, an increase of $4.1 million, or 76.8%, from $5.3 million of nonperforming loans at the start of the year. What about the sequential quarter? Well we saw a bullish improvement here. Nonperforming loans at June 30, 2020 were $10.0 million, representing 0.65% of total loans. So this was an important improving trend. However, this was tempered by the total allowance for losses. The allowance for loan losses was $27.6 million at September 30, 2020, as compared to $21.8 million to start the year. It was also up from Q2 2020. The allowance for loan losses was $25.2 million at June 30, 2020. The ratio of the allowance for loan losses to total loans was 1.75% in Q3 2020, versus 1.63%. This was net bearish.
Overall, Parke Bancorp has been resilient during COVID. However, the country and the world continue to face unprecedented uncertainty and economic decline due to the COVID-19 pandemic and this has impacted asset quality. The business community, especially restaurants, hotels and retail centers have been hardest hit by the pandemic with the many restrictions placed on those industries and this has weighed on banks. Parke’s earnings continue to be strong, although reduced due to the increase in loan loss provisions. That said, the outlook for banks has improved. The stock has started to perk up. We think that if this stock retracts into the $13 range, you can buy, as shares will yield nearly 5%. Until then, wait for that pull back.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.