A Very Mixed Picture For Parke Bancorp (NASDAQ:PKBK)

We want to remind you that we were pushing our members, and our public followers, to purchase financial stock exposure in late summer and early fall. We have seen an amazing rally in the bank stocks over the last few months, even with a December pull back. We do believe markets are heading lower near-term here in Q1, but we believe you should use any weakness to scoop shares of attractive bank stocks.

One such little-known bank stock that has not really participated in the rally is Parke Bancorp, Inc. (NASDAQ:PKBK). This is a winning stock that we have traded in the past, and we think it is a potential buy again under $20. We are highlighting it today as it just reported earnings that were mixed

Regional banks should continue to benefit from higher interest rates because margins should remain strong, making the earnings potential of the banks much stronger going forward. Interest rates are going to remain higher for longer, that we believe strongly. The fact is, with higher rates, banks should make more money, even if the cost of funds rise. What that means is that banks will have to pay more on customer deposits as they compete for deposit dollars. Yields on loans are increasing, as is earnings power.

To be clear, we like Parke Bancorp as it is a simple bank, with a relatively safe dividend per many factors that go into Seeking Alpha’s safety metrics. Further, the bank has continued to raise its dividend, and now yields 3.3%. There are many regional bank stocks to choose from, but they are not all attractive. Parke Bancorp, Inc. stock may be attractive, though a recent theft and declines in deposits are a concern. The valuation is reasonable as well as the critical metrics we follow. Let us discuss these earnings results.

Valuation

Parke Bancorp stock, in our opinion, has a very attractive valuation, with shares trading at $21.00, and especially if the stock pulls back under $20. With the present PKBK share price, we have a stock trading at 6X trailing twelve-month earnings, which is attractive on its own. If we conservatively assume that earnings will grow 10% over coming year, that puts earnings at about $3.70, which means valuation is just over 6.1X FWD EPS. That is attractive. On a book value basis, Parke Bancorp stock is attractive, trading at 1.1X book. This suggests PKBK stock is very close to fair value, and we like that.

Q4 performance

The bank saw strong loan growth in Q4, but a slight dip in deposits compared to the start of 2022. The bank saw strong margins along with its revenues increase nicely from last year. In Q4, the bank reported a top line that grew substantially from a year ago. The bank saw revenues of $26.8 million. With this result, revenues were up from 40.9% from last year.

So, Parke Bancorp, Inc. saw a strong increase in revenues year-over-year, but this was offset by a $0.85 million increase in loan loss provisions from no provision in Q4 2021. However, net interest margin was strong, and we see room for improvement with higher rates. Margins were up to 3.91% versus 3.15% in Q4 2021. This is strong growth. With the wider margin, net interest income was up 13.0% to $18.9 million versus $16.7 million last year.

We continue to expect margins and net interest income to remain elevated in 2023. Rates are not being lowered any time soon, in fact, apparently they will continue to be raised. The strong revenue and margins led to some strong earnings numbers. The bank reported net income of $10.4 million, or $0.88 per share, up from $0.85 per share a year ago. This is reliable growth.

Theft of cash a material event

Investors should be aware of a reported theft of cash that will impact Parke Bancorp, Inc. The bank disclosed that an armored car company used by the Bank to transport and store cash for the Bank’s cannabis-related customers has informed Parke that some physical cash stored on behalf of the bank is missing from its vault and is “presumed to have been stolen.” Parke Bancorp indicated that there was approximately $9.5 million on hand here. While “management believes that some amount of loss is probable, the situation is currently under investigation and the amount of the loss cannot be reasonably estimated.” This is likely to be an issue that materially impacts a future report. Something to keep in mind as a short-term headwind.

Loans and deposits

Despite a questionable economy, loans are up nicely since the start of the year. Total loans were up 18.0% from the start of the year, and now total $1.75 billion. Newer loans that are being issued are also at higher rates, which bodes well for future revenues and margins. However, deposits were down 10.9% in the year to $1.58 billion. As a result of lower deposits and losses on investment securities, partially offset by the loans being higher, Parke Bancorp, Inc. total assets dipped 7.1% from the start of the year.

A look at asset quality and return metrics

Return metrics such as the return on average assets and return on average equity are important to look at for any regional bank to assess the bank’s health. The return on average assets increased to 2.13% from 1.87% a year ago, while the return on average equity dipped. It fell from 17.48% to 15.77, likely due in part to a higher float, as well as some decreases in income sources. The efficiency ratio was 29.7% in Q4. That is incredibly strong, but it worsened slightly from 29.4% last year.

We also saw some mixed news in asset quality metrics for Parke Bancorp. Nonperforming loans increased to $16.3 million, representing 0.93% of total loans. This is a huge increase from a year ago, but was driven by just two commercial real estate loans. Thus, we do not see quality trending poor, but this was a big negative impact. The allowance for loan losses was $31.8 million, which was 1.82% of total loans, down from 2.01% of loans having allowances to start the year. Finally, loans issued where payments were past due by 30 to 89 days were $0.22 million to end the quarter, a decrease of $0.2 million to start the year.

Final thoughts

Parke Bancorp, Inc. pays a 3.3% dividend yield while you wait for shares to appreciate. The bank stock has suffered some from economic conditions, as well as some losses associated with theft. The quarter was mixed. Loans are up but deposits are down. The bank earns money efficiently but asset quality indicators were also mixed. Near term, we expect volatility, but long term we see Parke Bancorp, Inc. shares moving higher as earnings power should remain elevated for years with rates being higher.