PKBK - Parke Bancorp: Trading At A 20% Discount To Tangible Book Value

2023-08-16 10:30:00 ET

Summary

• Parke Bancorp, Inc.'s Q2 results show a decrease in net interest income and an increase in net non-interest expenses.
• The bank reported a pre-tax and pre-provision income of just over $11M in Q2.
• The bank's loan book remains robust, with the majority consisting of residential real estate loans.

Introduction

As it has been nine months since I last had a look at Parke Bancorp, Inc. (PKBK), I thought the Q2 results are a good enough reason to have another look at this small regional bank focusing on New Jersey with a residential real estate heavy loan book. Needless to say, the bank crisis experienced in the first half of the year has also hit Parke Bancorp, but its share price kept the losses relatively limited and the bank has recouped most of the ground it lost during the difficult times. As the bank was trading at about 6 times earnings before, I wanted to check if the earnings potential is still alive and if I should move the bank a bit higher on my list of priorities.

All eyes are on the net interest income

During the second quarter of the year, Parke reported a total interest income of approximately $27.3M , and although that is an increase of in excess of 30% compared to the second quarter of last year, the total amount of interest expenses more than quadrupled to $11.4M, which ultimately resulted in a net interest income of $15.9M. This is about $2M lower compared to the same quarter a year ago. Unfortunately, it also represents a QoQ decrease, as the net interest income exceeded $17M in the first quarter of this year.

This doesn't mean the bank's second quarter was bad, but the increase of the net non-interest expenses to $4.8M (coming from $3.2M in Q2 2022) didn't help Parke's bottom line, although the second quarter of last year did contain some non-recurring items that boosted the result.

The bank reported a pre-tax and pre-provision income of just over $11M in the second quarter of the year, and after recording a $0.5M loan loss provision, the pre-tax income fell to $10.6M, which resulted in a net income of $8.1M, or $0.68 per share.

While that is less than in Q2 2022 or even Q1 2023, let's not forget that generating an EPS of $0.68 is actually pretty good for a stock that is currently trading around the $18 level. Additionally, the H1 EPS was $1.61 thanks to a $19.3M net profit, although that included a $1.9M net reversal of loan loss provisions.

Parke currently pays a quarterly dividend of $0.18 , giving the stock a relatively attractive yield of around 4%, but the main takeaway here is that the bank retained about $0.50 per share in earnings, which helps to boost the book value.

At the end of June, the bank had a total balance sheet of $1.98B, of which $279M consisted of equity (that's a $13M increase compared to the end of last year). There are no intangible assets on the balance sheet which means the book value equals the tangible book value, which comes in at approximately $23.35/share (rounded, the official tangible book value was $23.33/share ). This means the stock is currently trading at just under 0.8 times the tangible book value.

The loan book remains robust

At the end of June, the bank had about $1.75B in (net) loans, and as you can see below, that already includes about $32M in loan loss provisions.

The majority of the loan book still consists of residential real estate related loans, which account for almost 60% of the loan book. Unfortunately, the bank has not provided any details on the LTV values of those loans.

The vast majority of the loans are current, but as you can see below, about $20.5M of the loan book is past due, with the main problem child in the non-owner occupied commercial real estate segment.

A total of $18.8M of the loans are on non-accrual status and the bank should be able to recoup a substantial portion of its investment. And with about $32M in loan loss provisions versus $18.8M in non-accruing loans, the risk is pretty well covered. That being said, I'll keep an eye on the evolution of the loans past due in the coming few quarters.

Investment thesis

In November last year, I liked Parke because the stock was trading at just 6 times earnings and at no premium to its tangible book value. Today, the stock is still trading at about 6 times earnings (although there will be some volatility in the net earnings as the bank is still adjusting itself to the "new reality" when it comes to market interest rates), but it is now trading at a 20% discount to its tangible book value.

I currently have no position in Parke Bancorp, but I will keep an eye on the stock from here on as the bank is now perhaps even more attractively priced than a year ago.

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