Parke Bancorp: Highly Valued But Worth A Look

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About: Parke Bancorp, Inc. (PKBK)
by: Fred Campbell
Summary

Community Banks are often overlooked by mainstream investors.

Parke Bancorp (PKBK) is a small community bank in New Jersey that is very shareholder friendly.

Financials are great, and the fundamental ratios are outstanding.

They sell at a premium, but have shown explosive growth and look to have excellent buyout potential.

Parke Bancorp, Inc. is the holding company for Parke Bank, which operates from its corporate headquarters in Washington Township, New Jersey and 7 branch offices in Washington Township, New Jersey, Northfield, New Jersey, Galloway Township, New Jersey, Collingswood, New Jersey, Center City Philadelphia, and Chinatown in Philadelphia. Parke Bank opened in 1999 but restructured in 2005 to become the subsidiary of Parke Bancorp.

For my second article I have gone away from one of my main tenets in bank investing, i.e., a low Price to Book Value; I generally like it at 1 or lower. In the case of PKBK, the value is around 1.4 but the bank’s performance, along with the actions of the Board of Directors to increase shareholder value, has caused me to rate this a buy even though it seems to be selling at a premium. This will be discussed in detail later but before doing any type of deep dive we always want to look at the capitalization first.

Parke Bancorp Capitalization Ratios

Capital Ratios

Min Req

2017

2016

2015

2014

Total Risk Based

10.00%

17.17%

18.33%

17.24%

17.23%

Tier 1 Risk Based

8.00%

15.92%

17.07%

15.98%

15.98%

Leverage Ratio

5.00%

14.31%

15.25%

14.69%

14.12%

The bank is well capitalized.

Next, here are the technical details using my spreadsheet. Most of the numbers are pulled from the annual financial reports but often my ratios don’t equal what is posted on the bank website. I always use the diluted share counts and net income after all deductions so these are worst case analyses.

Parke Bancorp Financials and Ratios

PKBK (Thousands)

2018

2017

2016

2015

2014

Assets

$1,467,398

$1,137,452

$1,016,185

$885,124

$821,706

Liabilities

$1,312,402

$1,002,672

$889,051

$773,084

$718,801

Shareholder Equity (Total)

$154,996

$134,780

$127,134

$112,040

$102,905

Total Loans Outstanding

$1,241,157

$1,011,717

$851,953

$758,501

$713,061

Non-Performing Loans

$3,100

$4,500

$11,300

$13,600

$26,900

Deposits

$1,183,873

$866,383

$788,694

$665,210

$647,933

Shares Outstanding

10,911,344

10,515,599

8,964,700

7,973,588

7,924,859

Net Interest Income

$48,093

$40,375

$35,438

$33,598

$32,553

Provisions for Loan Losses

$1,800

$2,500

$1,462

$3,040

$3,250

Non-Interest Expense

$16,295

$15,293

$16,628

$16,852

$18,911

Total Noninterest Income

$3,417

$1,645

$10,290

$5,080

$7,631

Income Taxes

$8,377

$12,389

$8,695

$6,843

$5,711

Net Income (Total)

$24,378

$10,751

$17,310

$9,497

$9,273

Earnings/Share

$2.23

$1.02

$1.93

$1.19

$1.17

Dividends/ Share

$0.52

$0.44

$0.31

$0.24

$0.10

Share Price at Close of Year

$19.62

$20.15

$17.82

$11.56

$9.91

Yield

2.65%

2.18%

1.74%

2.08%

1.01%

FINANCIAL RATIOS

Shareholder Equity/ Assets

10.56%

11.85%

12.51%

12.66%

12.52%

Book Value

$14.21

$12.82

$14.18

$14.05

$12.99

Efficiency Ratio

32%

36%

36%

44%

47%

Net Interest Margin

3.69%

3.75%

3.73%

3.94%

Price/Earnings

8.78

19.71

9.23

9.71

8.47

Price/Book

1.38

1.57

1.26

0.82

0.76

Dividend Payout

23.27%

43.04%

16.05%

20.15%

8.55%

Return on Equity

16.83%

8.21%

14.47%

8.84%

Return on Assets

1.87%

1.00%

1.82%

1.11%

% of Non-Performing Loans/Total Loans

0.25%

0.44%

1.33%

1.79%

3.77%

Non-Performing Assets/Total Assets

0.60%

1.00%

2.15%

3.40%

5.80%

Stock Valuation

P/B (Using industry average of 1.23)

$17.48

P/E (Using industry average of 12.33)

$27.50

One note is that 2017 saw a $3.2 million non-recurring charge due to the new tax law. This tended to skew the numbers downward for some of the ratios and the earnings. Other than that, assets, shareholder equity, profits, and non-performing assets are moving the right direction. The percentage of non-performing loans and other assets are moving significantly downward as we like to see.

To place an initial value on the bank, I’ll use two rudimentary methods as shown under the Stock Valuation section of the table:

  1. Book value. Per CSI Market, the average P/B of a regional bank is 1.23. Multiplying this by the $14.21 book value gives $17.48.
  2. Again using data from the above source, the average P/E for regional banks is 12.33 which would indicate a $27.50 price.

Obviously these two methods give us a wide variance and, if this were a normal bank, I could argue that at the current price of slightly greater than $20 the shares are overvalued, or at least not a good buy at this point.

But this is not a normal situation for two reasons:

1. The bank ratios are incredible for its size. There is a very nice briefing on Community Bank M&A by Thomas R. Mecredy, SVPVining Sparks Community Bank Advisory Group, that is one of the most insightful I have found in recent times (M&A Presentation). Here are the average ratios for bank performance in 2017 compared to PKBK:

PKBK Ratios Compared to Comparable Banks (Greater than $1 Billion)

Average (2017)

PKBK

Return on Equity

8.47%

16.83%

Return on Assets

0.92%

1.87%

Efficiency Ratio

60.65

32%

Net Interest Margin

3.49%

3.69%

Tier 1 Risk Based

9.96%

15.92%

Loan Growth Rate*

8.78%

15.00%

Deposit Growth Rate*

6.56%

16.00%

% of Non-Performing Loans/Total Loans

0.08%

0.25%

Non-Performing Assets/Total Assets

0.62%

0.60%

* Average past four years

As shown, PKBK easily beats the average in all categories except the percentage of bad loans and non-performing assets, and the numbers are moving downward in these. And, although I said in a previous article that Efficiency Ratio (non-interest expense divided by total income) doesn’t mean much to me, I would state that the 32% is an incredibly low number for a bank of PKBK’s size (almost half the industry average).

From the presentation:

Earnings have re-emerged as the primary driver of bank valuations. In 2017, banks with ROAA above 1.00% sold at a median P/TBV of 186%.

PKBK’s ROA value of 1.87% easily beats this ratio. And location is important as well; according to the presentation suburban banks are worth significantly more than those in rural areas. PKBK is headquartered less than 20 miles from Philadelphia and already has two branches in the metro area; so they check that box. But if we want to find a negative, it is also stated that Northeast banks tend to have a lower P/B premium than industry average (about 86% of the average). So using these numbers, we can get a range of an expected buyout price. The low end, at 160% buyout, would fetch $22.75 and the high end would be $26.43. This is a 10-30% return from the recent price.

2. Even without a buyout, the Board of Directors is shareholder friendly and doing its best to increase value. Here is what they have done since the inception of the holding company in 2005.

PKBK Shareholder Perks

Date

Stock Div

Cash Div

Mar-06

20.00%

Nov-06

$0.20

Mar-07

10.00%

Mar-08

15.00%

Apr-10

10.00%

Apr-11

10.00%

Apr-12

10.00%

Apr-13

10.00%

Dec-14

$0.10

Jan-15

$0.24

Apr-16

10.00%

$0.31

Apr-17

10.00%

$0.44

Apr-18

10.00%

$0.52

Since inception they have paid at least a 10% stock dividend on ten occasions, including each of the last three years. And, since the initial regular dividend payment was made in 2014, the rate has increased about 30% per year. The dividend payout rate for the last year was slightly over 23%, compared to a 30% industry average. This would indicate a potential increase of 8-10 cents per share again this year.

A share of PKBK purchased in 2005 at $7.19 would be worth about $65 today, an 800% return in 14 years. Obviously this rate can’t continue but I am comfortable with the leadership even if a buyout doesn’t materialize.

Anyway, do your due diligence and see what you think. I haven’t bought yet as I am waiting for some cash to free up and will try to get some for around $20 or so.

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.