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With a market capitalization of $207.9 million as of this writing, Parke Bancorp (NASDAQ:PKBK) is about as small as it gets when it comes to companies, especially banks, that I analyze. Generally speaking, smaller firms tend to be less stable than larger ones. But this is not always the case. This particular enterprise seems to be doing quite well given how volatile the banking sector has been this year. Management has done well to reduce debt over the past couple of quarters and deposits are now growing again. Shares look very cheap and the overall track record of the enterprise prior to this year has been solid. The company is so attractive that I almost decided to rate it a ‘strong buy’. But at the end of the day, fairly high exposure to uninsured deposits led me to rate it a very solid ‘buy’ for now.
A great bank to consider
Operationally speaking, Parke Bancorp is quite small. Part of the reason behind its small size is the fact that it is a fairly young institution. It was originally founded in New Jersey back in early 2005. And since then, it has grown to operate only a small number of branches spread between southern New Jersey, the Philadelphia area of Pennsylvania, and New York City. Most of its customers are individuals and small- to medium-sized businesses. And unlike many banks out there, it actually caters to the cannabis industry in New Jersey. Although that still accounts for only a small portion of the company's overall business, with only 11.3% of its deposits at the end of 2022 coming from cannabis customers.
Just like any commercial bank, Parke Bancorp accepts deposits and utilizes those deposits for the issuance of loans. Examples of the loans that it gives out include commercial and industrial loans, construction loans, commercial real estate loans, residential loans, and consumer loans. The greatest exposure that the company has had as of the end of the most recent quarter is to the residential space that focuses on one to four family investment properties. 27.8% of its loans by value fall under this category. Another 25.6% of its loans by value fall under the residential one to four family category but that is outside of the investment niche. Commercial non-owner-occupied properties come in at a solid third place with 21.3%.
Author - SEC EDGAR Data
Over the past few years, the overall trend for the bank has been quite positive. Net interest income expanded from $55 million in 2020 to $71.5 million in 2022. Non-interest income doubled from $4.2 million to $8.4 million. And net profits jumped from $28.4 million to $41.8 million. When it comes to the current fiscal year, we have seen some weakness. A decline in the company's net interest margin from 3.71% to 3.40% resulted in net interest income shrinking from $53.5 million to $50.3 million. Non-interest income followed suit and that was enough to bring net profits down from $31.3 million to $20.3 million. The trend of lower net interest margin has become very clear at this point. And that mainly centers around the idea that a rise in interest rates has made the company pay out more to keep deposits on its books than it did previously. Meanwhile, the interest rates on loans and securities increased at a slower rate than how much the company has to pay on deposits increased.
Author - SEC EDGAR Data
The overall growth for the company would not have been possible if it weren't for an increase in the value of loans on its books. Back in 2020, the bank had $1.57 billion in loans. These increased to $1.75 billion by the end of 2022. And by the end of the third quarter of this year, we have seen a further increase to $1.80 billion. The value of securities on its books has always been quite low, with the most recent reading coming in at $16.6 million. And cash and cash equivalents started dropping after the 2021 fiscal year. At the end of 2022, this metric came in at $182.2 million. By the end of the third quarter of this year, that number had fallen to $126.7 million.
Author - SEC EDGAR Data
Debt is also important during these times. And according to management, that metric has risen somewhat, growing from $42.9 million at the end of last year to $154.3 million in the third quarter. But that third quarter reading was actually lower than what the company reported for both the first and second quarters. There is one more metric that is worth discussing. And that would be deposits. After spiking from $1.59 billion in 2020 to $1.77 billion in 2021, the institution did see a decline to $1.58 billion by the end of last year. However, that decline in deposits continued through the second quarter, eventually hitting $1.45 billion before rebounding in the third quarter of this year to $1.53 billion. That rebound is nice to see. However, uninsured deposit exposure is still higher than I would like it to be. The most recent data available shows it at 36.2% of all deposits. I personally prefer a reading of 30% or lower. The good news is that this is still a decline from the 50.2% estimated for 2020. So management is making progress on this front.
Author - SEC EDGAR Data
In terms of valuation, the company is trading at a price to earnings multiple, using data from 2022, of 5. As you already read, this year has been a bit different, with profits falling materially. But even if we annualize results seen so far for the year, that would translate to net income for 2023 of $27.1 million. But even if that is what comes to fruition, it would still translate to a forward price to earnings multiple for the company of 7.7. And to make things even more exciting, the company is trading at a 19.8% discount to its tangible book value per share. So that does suggest that shares might have some rather meaningful upside to them.
Takeaway
As far as banks go, I believe that Parke Bancorp is about as interesting as they get. If it weren't for the high uninsured deposit exposure, I likely would rate shares of the business a ‘strong buy’. After all, pretty much everything else has fallen into place. This includes a return to deposit growth, low debt, a history of attractive revenue and profit growth, and other factors. But I do take the uninsured deposit exposure rather seriously. And when added to the fact that this year the bank is showing some weakness on its top and bottom lines, I would argue that a more appropriate rating at this time is a very solid ‘buy’.
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