Parke Bancorp, Inc. (PKBK) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Stockholders for Parke Bancorp, Inc. Please note that today's meeting is being recorded. [Operator; Instructions] It is now my pleasure to turn today's meeting over to Chuck Pennoni, Chairman of the Board. Mr. Pennoni, the floor is yours.

Thank you very much, and good morning, everyone. The meeting will please come to order. Welcome to the Annual Meeting of Shareholders of Parke Bancorp, Inc. This meeting is being held by means of remote communications as a result of COVID-19 pandemic. Any questions from stockholders attending the webcast will be addressed while the voting is underway. I am Chuck Pennoni, Chairman of the Board of Directors of the company, and I will act as Chairman of the meeting. Linda A. Kaiser, Corporate Secretary of the company, will act as Secretary of the meeting. I would like to introduce members of our Board of Directors present today who are all participating in the meeting by remote communications. They are Vito S. Pantilione, who's also our President and CEO; Fred G. Choate; Daniel J. Dalton; Arret F. Dobson; Edward Infantolino; Anthony J. Jannetti; Jeffrey H. Kripitz; Elizabeth Milavsky, and Jack C. Sheppard, Jr. The Board of Directors have previously appointed Paul Palmieri as the Inspector of Election to act at this meeting and any adjournments. The oath of the inspector of election will be attached to the minutes of this meeting. We posted the meeting procedures and rules for conduct of the annual meeting on the meeting web page for your review. In order to conduct an orderly meeting, we ask you to please follow these rules. The company has prepared a list of shareholders entitled to vote at the annual meeting as of the close of business on March 9, 2022, the record date for voting. The records of the company show that there were 11,907,641 shares of common stock outstanding on the record date and entitled to vote at this meeting. We have previously received an affidavit that the notice of meeting and a form of proxy were mailed on or about March 23, 2022, to each holder of record on the close of business on March 9, 2022. A copy of the affidavit will be attached to the minutes of this meeting. The company has delivered to the Inspector of Election the list of shareholders and all proxies that have been received. The Secretary has informed me that more than a majority of the shares entitled to vote at the meeting are present online or by proxy. The Inspector of Election is making an exact count and will submit a formal report on the number of shares present during the course of this meeting. A quorum is declared present, subject to the confirmation of that fact by the Inspector of the Election report. In order to save time at this meeting, we have arranged the proceeding so that the votes will be taken at this time. And while the inspector is counting the ballots, we will continue with other business. If you have already voted by proxy, by mail, by telephone or by Internet, you need not vote in person at this meeting. Shareholders participating in the webcast may vote on the web page as indicated by "Vote Here" and selecting the "Vote Now" button. Now I would like to officially open the polls. At this time, no additional proxies may be voted. The voting by Internet on the meeting web page will close in a few minutes after we have discussed the proposals to be voted on today and those attending the meeting electronically have had an opportunity to vote on each matter. The only item of business to be acted upon the meeting as stated in the notice of the annual meeting is the election of 3 directors as follows: Fred G. Choate, Jeffrey H. Kripitz and Jack C. Sheppard Jr., each to serve for a 3-year term expiring in 2025 and until their successors have been elected and qualified. Under the company's bylaws, no nominations may be made at the meeting. Therefore, I declare nominations to be closed. The vote will now be taken on the election of directors. Remember, if you have already voted by proxy, you do not need to vote today unless you want to change your vote. In order to vote today, please press the "Vote Now" button on your meeting web page and follow the directions. [Voting]

At this time, while the online voting is underway, we will take questions from the meeting participants through our meeting web page. If you have a question regarding proposal 1, please click on the "Question" button on the meeting page and text your question to me. Has everyone had an opportunity to vote? If so, I declare the polls closed. While the inspector of election is counting the votes, our President and Chief Operating or Chief Executive Officer; Mr. Vito S. Pantilione, will report on the affairs of the company for the fiscal year ended December 31, 2021. Mr. Pantilione.

Thanks, Chuck. Good morning, and welcome to our Annual Shareholders Meeting. Last year, we talked about having this year's annual meeting in person because we or at least I thought that the COVID-19 pandemic would be gone or at least it'd be under control. But unfortunately, here we are again in a virtual meeting. We received some comments last year that some meeting participants had difficulty in asking the question. There are instructions with the proxy and registration explaining that you need to utilize the code in your proxy to register to ask a question. I really apologize for any confusion this process may be causing. However, I think we did get a question, and I'm going to address that at the end of our presentation. Most of the people who are participating in today's meeting are familiar with our senior management team. But we do have some new investors that we've talked to recently and a special welcome to those who are joining us for the first time. So before I begin discussing our company's 2021 financial performance, I want to introduce our senior management team, which kind of loses something when we're not in person. First is Ralph Guy Gallo, who is our Executive Vice President and Chief Operating Officer. He is responsible for operations, asset quality, IT, human resources, and our branches. Next is Paul Palmieri. Paul is the Senior Vice President and our Chief Credit Officer. Paul and his credit department are responsible for the credit quality analysis of our lending teams new loans and our loan portfolio in addition to monitoring credit policies and spreading financial statements. Next is Nick Pantilione, Nick is the Senior Vice President. He's our Chief Lending Officer. Nick is responsible for our lending team, in addition to generating loans in his own portfolio, and Nick has to make sure that our lenders are active and competitive in the market. And Nick also heads up our marketing department. Next is [ Dee Cabello ] Dee is a Senior Vice President and is responsible for loan administration, construction lending, and is assisting with the supervision of our BSA department. Dee actually worked with us in 1998 when we first started putting Parke Bank together. Next is John Kaufman. John is a Senior Vice President and our Chief Financial Officer. John is responsible for all of our financial reporting, our operations processing and making sure our financial records are accurate and timely. And you're going to see in a couple of minutes the great job John has done in reducing our cost of funding in 2021. And last but not least, is Linda Kaiser. Linda has been our Corporate Secretary for several years and was recently promoted to Senior Vice President. She's responsible for all of the Board of Directors' meetings, all of the Director Committee meetings. She also closes about $100 million in loans every year. But our toughest job is working with me as my assistant and having to keep me out of trouble. And believe me, that's a full-time job all by itself. A good indication of the quality of our management team is our financial performance in 2021. So let's get into the numbers. First, I'm very proud to report that Parke Bank had record earnings in 2021. And I'm going to get into the details of our earnings in a couple of minutes. But let's start off with our assets. Our assets grew to $2.14 billion, and that's an increase of 2.8% year-over-year. However, for 2 consecutive years, our growth was driven by deposits and not by loans. So let's talk about our deposits. Our deposits grew to $1.77 billion, and that's an increase of 11.1% over year-end, 12/31/20. Our deposit growth was really driven by the many stimulus plans issued by the government, and that was combined with the growth in our cannabis business, and we're going to be talking about cannabis quite a bit today. The cannabis industry is ever changing with federal legislation that's currently pending that would provide some level of legalization of cannabis or at least I hope as far as banks being permitted to do business with properly licensed cannabis companies. New Jersey officials just announced that 13 recreation cannabis stores will open in New Jersey this week. Recreational cannabis will accelerate the growth of the industry, which is already having substantial growth. There are banks that are jumping into the cannabis banking industry and that's going to make it more important that we remain competitive, responsive and aggressive. Many of the banks now getting into the industry didn't have to go through the regulatory requirements that we have gone through due to Parke Bank being one of the first banks in the country to provide banking services to the cannabis industry. In fact, at one time, we were only 1 of 6 banks in the country servicing the cannabis industry. Cannabis remains a federal Schedule I drug, and that is what's causing all the problems. Although there are 35 states that have legalized some form of marijuana sales, whether it's medical, recreational or both, the cost to comply with changing regulations is very substantial. And that raises the possibility of some banks that are just getting into the industry and not having to go through all those changing regulations and being able to charge lower fees, which we are constantly monitoring. This is the first time in our bank's 22-year history that our loan portfolio actually decreased in 2021. Our outstanding loan portfolio balance went down from $1.56 billion to $1.48 billion, and that's from December 31, 2020 to December 31, 2021, and that's a 5.2% decline. The decline was due to a few factors, including the forgiveness of close to $70 million in the government's PPP loans. We had a lot of construction loan payoffs and that was due to the strength of the real estate market. And the pandemic economy raised concerns that the availability of quality new loan generation would be a little tough. Now let's get back to what's most important to many of the participants in today's meeting, and that's our company's earnings. And as I mentioned at the beginning of my presentation, we had record earnings in 2021 with net income of close to $41 million or $3.36 per diluted common share and that's a 43.4% increase over our net income in 2020. The primary factors supporting our earnings increase include the reduction of our cost of funding. As I mentioned, John did a great job and our cost of funding was 95 basis points as of December 31, 2021, and that is a 63 basis point improvement from December 31, 2020. We also generated additional fee income from the government's forgiveness of $70 million in PPP loans, and we generated fee income from our cannabis business. These factors, combined with my favorite, which is continued tight controls of our expenses. In fact, we had a cost efficiency ratio that was again below 30% and that's one of the best cost efficiency ratios in the banking industry. These factors combined provided the foundation of our record net income. And this was accomplished without sacrificing the strength of our allowance for loan loss reserves, and I'm going to talk about that in a few minutes. Our average return on assets in '21 was 1.94% and our return on average common equity was 18.79%. And this chart illustrates our earnings over the last 5 years, and we've gone from $1.03 earnings per share to $3.36 per share. Capital is always king, and our total equity increased $29.8 million to $232,381,000, and that's a 14.7% increase from 12/31/20 and to 12/31/21. Tangible book value per diluted share improved from $16.63 as of 12/31/20 to $19.17 as of 12/31/21. Our community bank leverage ratio is 12.8%, and that's over the regulatory well-capitalized ratio of 8.5%. And although it's not reported in our call report, our total risk-based capital is 23.13%, and that's more than twice the regulatory well-capitalized ratio of 10%. Asset quality. Asset quality will always be a major focus of our company and our total nonperforming assets to total assets improved from 0.43% as of 12/31/20 to 0.28% as of 12/31/21. And as you can see from this chart, classified loans to Tier 1 capital plus allowance for loan loss reserves improved from 3.32% as of December 31, 2020, and that went down to 1.99% as of December 31, 2021. This ratio has dropped from 11.72% in 2017, and Guy has done just a great job in improving our asset quality. We continue to maintain a very strong allowance for loan loss reserves. Our ALLL is 2.01% as of 12/31/21. Many banks reversed loan loss reserves into income as the effect of COVID-19 seemed to ameliorate in '21. We were not one of those banks. The COVID-19 pandemic continues to have a serious economic effect on the country and our region, in fact, Philadelphia is the first major city in the country to reinstate an indoor mask mandate this month. It's important for a bank to have strong loan loss reserves in order to assist in supporting the bank's financial strength during economic challenging times. Last year, I indicated our hope, which unfortunately was not a strategy, that COVID-19 positive cases would decline, and we can get back to some form of normalcy. Although we began to see some improvement during the year, positive COVID-19 cases exploded over the Christmas holidays. In fact, Parke Bank had more positive COVID-19 cases in January and February of '22 than we had in all of '21. Fortunately, we're again seeing a decline in positive cases in the region with many of the pandemic restrictions being lifted, although, as I just mentioned, Philadelphia has reinstated some COVID restrictions. The Russia-Ukraine war added additional worries, not only with what's happening to innocent people, but also the wars effect on the skyrocketing cost of gas plus other goods and services, we need to be aware and prepared for a possible economic downturn. Historically, skyrocketing gas prices are a precursor to a recession, and there are some economic experts, including some big bank CEOs that are forecasting our recession in 2023. These factors support maintaining a strong position for their allowance for loan losses. Shareholder value increased in 2021. Parke Bank's stock price closed at $20.98 on December 31, 2021, and that's up from $14.90 on December 31, 2020, and that's a 41% increase in value. Our stock hit a 52-week high in February of 2022 going over $24 per share. And in fact, it's over $24 per share again today, although the recent craziness in the world markets and skyrocketing inflation have the market really going all over the place lately. The merger and acquisition market bounced back in 2021, increasing to 195 transactions, and that was almost double the transactions in 2020, although it's still less than 2018 and 2019. The average multiple in '21 was 1.5x tangible book. And this slide shows the merger activity over the last 4 years. As a public company that continues to focus on shareholder value, we monitor the M&A market to see if there is an opportunity to acquire a bank that would improve our market presence and be accretive. It's also important in the event an offer is made to purchase Parke Bank. Any offer needs to be evaluated and fair to our shareholders seriously considered. Let's take a quick look at our company's financial performance in the first quarter of 2022. And we're going to compare these numbers to the first quarter of 2021. Let's go straight to the bottom line, and that's our net income. And that increased to $10.1 million, and that's a 7.4% increase over $9.4 million in the first quarter of 2021. Our assets declined slightly to $2.054 billion, and that's down from $2.1 billion in 2021's first quarter. And the primary reason for the decline was a reduction in investment cannabis deposits. Once again, loans declined in the first quarter down to $1.5 billion in 2022 compared to $1.55 billion in the first quarter of 2021. And again, we've had a lot of construction loan payoffs because the market is so strong, but we have seen some -- an increase in new loans closing. However, some of those loans are construction loans, so the loan portfolio balance won't really increase until the construction draws start. And as mentioned, deposits were down in the first quarter to $1.68 billion from $1.7 billion in the first quarter of '21. And that's one of the characteristics of cannabis banking. Large inflow of deposits can occur for cannabis investment purposes. And with most of the investment targeted deposits not remaining at Parke Bank for very long. In fact, we were just contacted by one of our customers who want to deposit $200 million in investment funds. But again, most of it would not stick with Parke Bank for very long. There are economic challenges every year, and 2022 is certainly no different. Although there just may be more challenges in '22 than most years. One of the unknowns is certainly the Russia, Ukraine war. This war has turned the world markets upside down. Sanctions are being implemented against Russia by most of the free world, and that will have an effect on many businesses. Gas supplies are affected, which is making the already escalating gas prices rise even faster. There's runaway inflation. In fact, it's the highest since 1981, and that caused the Fed to raise interest rates much sooner than expected, and they also stated to anticipate 6 more possible interest rate increases this year. Raising interest rates are aimed at slowing down the economy, and that should reduce inflation. So that's the plan. Especially hard hit could be the real estate industry where increased rates have historically slowed down real estate development and residential sales. We're in a changing workforce with the Great Resignation having an effect on many businesses. skyrocketing salaries are increasing expenses and new employee demands that include working from home, and more flexible in office hours is changing the way companies operate. The pandemic economy has also changed the demands from customers. Restaurants have had to change the product delivery, increase outdoor dining. Online shopping has exploded, requiring more warehouse space and delivery capability while also affecting retail centers. And the way people want to bank is also changing with more people requiring a strong digital banking platform with diversified products from their bank. And this pandemic has accelerated that change in banking because that was already well underway, but a result of this change was the record number of bank branch closures in 2021. Although there are still a couple of banks in this area that are still opening up some new branches, new bricks-and-mortar facilities. Parke Bank is well positioned to face a challenging economy while being prepared to take advantage of opportunities. We have strong reserves, strong capital and we continue to have tight control of our expenses as we improve our digital banking capabilities. Parke Bank has diversified products, both deposits and loans, and we provide services to diversified industries like cannabis, MSB money service businesses, real estate construction, commercial lending, SBA lending and residential mortgage lending. Over the last couple of years, we've expanded our market reach with the addition of experienced lenders to provide loans and banking services in Central and Northern New Jersey in addition to niche markets in Brooklyn and the Bronx. And these markets, they performed pretty well even during this crazy pandemic economy. We need to proceed with caution but not with fear. There are and will continue to be opportunities that we will pursue in our continued focus on creating shareholder value. So I again want to thank everyone for taking time out of your busy schedules today to join us, and I'm going to check to see if we have any questions. Hold on one second. It was on mute. Chuck, could we do the questions after you finish your part of the meeting?

Your choice, whichever way you want to do it.

Yes, why don't we do that? So I get a chance to see what the questions are.

Okay. Well, then I'll continue. Thank you, President Pantilione for that very detailed, comprehensive and excellent presentation, and I want to compliment you and the excellent leadership team you put together on the wonderful performance of this bank. It's outstanding. Thank you very, very much. The inspector of election has completed the count, and I'll now read the inspector of election report. The report confirms that a quorum is and has been in attendance at this meeting for all purposes. The report shows that Fred J. Choate, Jeffrey H. Kripitz, and Jack C. Sheppard, Jr. have each been elected to serve for a 3-year term expiring in 2025 and until their successors are qualified and elected. The report of the inspector of election has been accepted and approved and will be attached to the minutes of the meeting. We've completed our business for the meeting. Before we adjourn, Vito, do you want to address the questions?

Yes. Thanks, Chuck. Let me read the question that we just got in. In recent years, Parke Bancorp has provided banking services to customers in the medical-use cannabis industry. Could you please comment on any plans to provide banking services to customers and the cannabis sector beyond the medical-use cannabis industry such as the growers, processors and dispensaries of nonmedical use cannabis. And my answer is simply absolutely. We've spent an incredible amount of money over the last 2 years, structuring our BSA department and bank in order to provide banking to cannabis companies. And believe me, we got into this business strictly by accident because the first permit issue would happen to be a customer of Parke Bank. But once the customer started coming in, it was substantial. The deposits were substantial. But the regulations are extremely, extremely tough. And just to give you a small example, we went from 3 people in the BSA department to 14 people in the BSA department. But believe me, it's still a profitable venture. So as New Jersey is now approved and will open for recreational cannabis. We will be banking those recreational customers. In fact, we already have most of them as customers. So I anticipate that as the business continues to grow, we will grow with it and hopefully continue to have a profitable product in our arsenal products. So hopefully, that answers your question. And Chuck, that's the only one that we got.

Okay. Vito, thank you very much. There being no further business to come before the meeting, a motion to adjourn is in order. I see that Dr. Ed and Pantilione moved the meeting for adjournment. Mr. Arret Dobson second motion. Those in favor, signify by saying aye. Those opposed, say no. [Voting]

I see that the motion has carried. Therefore, the meeting is now adjourned. Thank you, one and all, for attending our meeting, and we look forward to seeing you next year.

This concludes the meeting. You may now disconnect.