Parke Bancorp: Getting Paid (NASDAQ:PKBK)

Parke Bancorp, Inc. (NASDAQ:PKBK) is a stock we have traded in the past. We are highlighting it today as it has just raised its dividend 12.5% to $0.18 quarterly, pushing the yield back over 3%. This comes as the stock saw some monster gains off the June lows, but it has recently pulled back about 7% since the latest correction began last week in this bear market.

One sector that we think is going to benefit in 2023 from higher interest rates are regional banks, as margins should improve, making the earnings potential of the banks seem much stronger. The fact is, with higher rates, banks should make more money. We like Parke Bancorp as it is a simple bank, with a relatively safe dividend. That said, like any regional bank you should have an understanding of the critical metrics we follow. We find Parke Bancorp to be operationally efficient, with strong return metrics, and the valuation is attractive.

Q2 performance

The bank saw solid loan growth in Q2, 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 Q2, the bank reported a top line that grew substantially from a year ago. The bank saw revenues of $23.0 million. With this result, Parke Bancorp revenues surged 13.9% from $20.2 million in Q2 2021. Solid.

So this bodes well, and we are seeing increased loan activity. The bank saw a strong increase in revenues year-over-year, but this was offset by a $0.35 million increase in loan loss provisions from no provision in Q1 2022, and also no provision in Q2 2021. However, net interest margin was strong, and we see room for improvement with higher rates. Margins were up 5 basis points from last year to 3.61% but net interest income was actually down slightly.

We see this dip as temporary, given that many loans on the books were issued before the big spike in rates. Expect margins and net interest income to rise. Net interest income was $18.0 million. Overall, Parke Bancorp reported net income of $10.7 million, or $0.90, this quarter, flat from $0.90 last year.

Trends in Parke Bancorp’s loans and deposits

Loans are up nicely since the start of the year, even with the “rate shock” felt by many would-be borrowers in Q2. We must stress the importance of growth in loans, and we would love to see growing deposits, as this is how the bank makes its money. This is bread and butter banking. Parke takes in deposits and pays a small rate of interest, while loaning the money to others at a higher rate and pocketing the difference.

Total loans were up 4.3% from the start of the year, but total $1.55 billion, up from $1.48 billion at the start of 2022. So there is growth, and this comes in a world where PPP loans are no longer benefitting banks, and the real estate market may be starting to cool. Deposits also were down. Total deposits came in at $1.61 billion down 9.2% from the start of the year. Why the big decline? In the press release: “The decrease in deposits was [due] to a decrease in non-interest demand deposits of $100.5 million, and time deposits of $85.2 million.” Management also indicated that “one of the primary reasons for the decline in our deposits is the fluctuation in our cannabis deposits,” which makes sense as this is a capital intensive industry.

Parke Bancorp asset quality and return metrics

With any bank we need to look at return metrics, specifically return on average assets and return on average equity. We hope to see this numbers expanding, which we believe we will as the bank starts to benefit more from better rates. The return on average assets increased to 2.13% from 2.08% a year ago, while the return on average equity dipped. It fell from 20.24% to 17.54%, likely due in part to a higher float, as well as some decreases in income sources.

We should point out that the efficiency ratio with this bank is the best we have seen. Despite some of the return metrics, the bank became even more efficient, with the efficiency ratio being 27.9% in Q2. That is incredibly strong, and it improved from 28.35% last year.

You should also be aware of the quality of assets. We saw mostly strong trends in asset quality metrics for Parke Bancorp, and this is quite bullish. The provision for loan losses were increased due to the potential headwinds that could come if a bad recession lands. Keep an eye on these metrics. Nonperforming loans decreased to $3.9 million, representing 0.25% of total loans, a decrease of $0.4 million from the start of the year. Finally, the allowance for loan losses was $30.4 million, which was 1.97% of total loans, down from 2.01% of loans having allowances.

Parke Bancorp stock valuation

Parke Bancorp has a nice valuation too, especially of the stock pulls back more toward $20. With a share price of $22.60 at the time of this writing we have a stock trading at 6.7X trailing twelve-month earnings, which is attractive on its own. If we conservatively assume that earnings will grow 10% over last 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 1.08X book This suggests the stock is very close to fair value, and we like that.

Take home

Parke Bancorp pays a 3% dividend yield while you wait for shares to appreciate. The company is issuing more loans, and should benefit from higher rates by seeing its net interest margins spread. The provisions for loan losses are defensive in nature, while deposits fluctuate, but are up long-term. The bank earns money efficiently. We think it is a quality dividend payer to own.