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

Hello and welcome to the Annual Meeting of Stockholders of 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 Dan Dalton, Chairman of the Board. Mr. Dalton. The floor is yours.

Good morning. The meeting will please come to order. Welcome to the Virtual Annual Meeting of Shareholders of Parke Bancorp, Inc. This meeting is being held by means of remote communications. Any questions from shareholders attending the webcast will be addressed while the voting is underway. I'm Dan Dalton, Chairman of the Board of Directors of the company and will act as Chairman of the meeting. Linda A. Keiser, Corporate Secretary of the company, will act as Secretary of the meeting. I would like to introduce members of your Board of Directors present today who are also participating in the meeting by remote communications. Our Vice Chairman, Arret Dobson; Fred Choate; Edward Infantolino; Tony Jannetti; Jeff Kripitz; Betty Milavsky; Vito Pantilione, Jack Sheppard; and our Chairman Emeritus, Chuck Pennoni. The Board of Directors has previously appointed Paul Palmieri as the Inspector of Election. 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 15, 2023, the record date for voting. The records of the company show that there were 11,946,671 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 24, 2023, to each holder of record on the close of business on March 15, 2023. 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 Elections is making an exact count and will submit a formal report on the number of shares present during the course of the meeting. A quorum is declared present, subject to the confirmation of that fact by the Inspector of Elections report. In order to save time at this meeting, we have arranged the proceedings 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 online 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 the opportunity to vote on the matters. The first item of business to be acted upon at the meeting, as stated in the Notice of Annual Meeting is the election of 3 directors, as follows: Vito S. Pantilione; Edward Infantolino; and Elizabeth A. Milavsky, each to serve for a 3-year term expiring in 2026 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 our meeting web page and follow the directions. At this time, while the online voting is underway, we will take questions from meeting participants through our meeting web page. If you have any questions regarding proposal #1, please click on the question button on the meeting web page and text your question to me. There are no questions. As everyone had the opportunity to vote, if so, I declare the polls close on proposal #1. The next item of business on the agenda is the ratification of the appointment of S.R. Snodgrass, P.C., as the company's independent auditor for the fiscal year ending December 31, 2023. The vote will now be taken on this proposal. 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 our meeting web page and follow the directions. At this time, while the online voting is underway, we will take questions from meeting participants regarding proposal #2, through our meeting web page. If you have a question, please click on the question button on the meeting web page and text your question to me. There are no questions. Has everyone had the opportunity to vote? If so, I declare the polls closed on proposal #2. The last item of business on the agenda is the approval of an advisory nonbinding proposal regarding our executive compensation. The vote will now be taken on this proposal. Remember, if you 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 our meeting web page and follow the directions. At this time, while the online voting is underway, we will take questions from meeting participants regarding proposal #3 through our meeting web page. If you have a question, please click on the question button on the meeting web page and text your question to me. There are no questions. Has everyone had the opportunity to vote? if so, I declare the polls closed. While the Inspector of Elections is counting the votes, our President and Chief Executive Officer, Mr. Vito S. Pantilione, will report on the affairs of the company for the fiscal year ended December 31, 2022. Vito?

Good morning. I want to first welcome Dan Dalton as our new Chairman of Parke Bank. Dan has been a critical part of our company since we opened in 1999. And he was Vice Chairman before moving into the Chairman's position and we're confident that Dan will carry on with the high standards that Chuck Pennoni set for Parke Bank. And I want to thank Chuck for his excellent leadership and guidance as Chairman of our bank for 24 years. Chuck retired as Chairman and as Mr. Dalton just stated, will continue to be a part of our bank as Chairman Emeritus. I also want to congratulate Arret Dobson. Arret is one of our founding directors. And as Mr. Dalton stated, he has been moved into the Vice Chairman's position. The last couple of years, we kept talking about looking forward to getting to having our annual meetings in person again. However, based on our shareholder feedback, it looks like virtual meetings were preferred, so here we are. I'm happy to report that once again, your company had a strong financial performance in 2022. But before we get into the financial details, I want to introduce our senior management team and we have had a couple of changes this past year. I first want to introduce Ralph "Guy" Gallo. He is our Executive Vice President and he's our Chief Operating Officer. He is responsible for asset quality, IT, human resources, our branches and internal audit. Next is Paul Palmieri. Paul is 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 in addition to conducting internal loan review on our existing loan portfolio. Paul and his department also monitors our credit policies and spreading financial statements for analysis. Next is Nick Pantilione. Nick is a Senior Vice President and our Chief Lending Officer. Nick is responsible for our lending team in addition to generating loans in his own portfolio. Nick has to make sure that our lenders are active in our lending area and competitive in the market and boy! in today's market, that's a big challenge. Nick also heads up our marketing department. And recently, Nick assumed the responsibility of our new residential mortgage expansion program. This is a marketing effort to reach potential residential mortgage borrowers in the Black and Hispanic minority neighborhoods of Philadelphia. D. Calvello is next. Senior Vice President. She is responsible for loan administration, construction lending and is assisting with the supervision of our BSA department, then recently took over the responsibility of our cannabis department. And cannabis is one tough and ever-changing industry. Next is John Kaufman, John is a Senior Vice President and our Chief Financial Officer. John is responsible for all of our financial reporting, deposit operations processing, budgeting. And he continues to make sure our financial records are accurate, transparent and timely. Next is Linda Kaiser. Linda is a Senior Vice President and our Corporate Secretary. And Linda is responsible for the Board of Directors' meetings and all Director Committee meetings. Linda also closes about $100 million in loans every year. But once again, I have to admit that her toughest job is working with me as my assistant and trying to keep me out of trouble. And for some reason, that job seems to be getting tougher for Linda. Next is a new member of our senior management team and that's Ralph Bonadies. Ralph is Senior Vice President and Chief Risk Officer. Ralph's responsibilities include identifying and reporting on the many risks that face Parke Bank, especially regulatory and compliance matters. Ralph is also responsible for our BSA department and BSA is a very tough part of the banking environment today. Ralph has incredible amount of experience and expertise and is a great addition to our senior management team. We're happy to report that once again Parke Bank generated record earnings in 2022. I'm going to talk a little bit more about our earnings in more detail in a couple of minutes but I want to start our discussion about our financials with our assets. Our assets declined to $1.98 billion as of December 31, 2022 and that's down from $2.14 billion as of December 31, 2021 and that's a decrease of 7.1% year-over-year. And the primary reason for the decline was the [indiscernible] in deposits. And the major factors in the decline of our deposits is the increased competition in the cannabis banking industry as well as the competition for retail deposits. The exodus of bank retail deposits is partially due to government incentives running out and skyrocketing inflation. The cost to operate a biz and a household today have increased dramatically over the last year, requiring businesses and consumers to use more of their cash. It looks like the war for deposits is on, as actors, even nonbanks that have jumped into the war, like Apple. As I mentioned, our deposits declined in 2022. Deposit balances decreased to $1.58 billion and that's down from $1.77 billion in 2021 and that's a decrease of close to 10%. And the decline, as I just mentioned, primarily due to the increased competition in the cannabis industry and combined with the dramatic increase in the battle for retail and business deposits. The cannabis industry continues to change and there's [indiscernible] regulation that has been identified to minimally provide some level of legalization of cannabis or at least for the banking industry but that still has not been finalized. However, that didn't stop more banks that have now jumped into the market, providing banking services to the can industry and many are large regional banks and this has put pressure on us to maintain cannabis relationships and deposits. There also continues to be a consolidation in the cannabis industry. And a lot of the large cannabis companies are merging and acquiring smaller companies and some of these larger companies are banking with the larger banks. It remains to be seen where the industry will shake out but we will continue to work hard and be creative in providing quality banking services to the cannabis industry. Next to our loans. We had a good year in generating new loans in '22. Our loan portfolio grew to $1.8 billion as of December 31, 2022 and that's an 18% increase from $1.5 billion in 2021. The growth in the portfolio was primarily driven by our 1- to 4- family residential lending. And our commercial real estate loan portfolio also grew in 2022. This next slide is very important to you, our shareholders and that's our company's earnings. And as I mentioned at the beginning of my presentation, our financials were strong in '22, with our earnings surpassing our record earnings in 2021. We had net income of $41.8 million in 2022 and that's $3.44 per diluted common share and this is a 3% increase over our previous net income in 2021. The primary factors that supported that increase includes the growth of our loan portfolio and the improvement in our margins to 3.7% and that's due to rising interest rates in our loan portfolio. Although there is some offsets that have added as our cost of funding has also increased. And these factors, when combined with our continued tight controls of our expenses, which, by the way, supported a cost efficiency ratio that continues to be below 30% and is still one of the best cost efficiency ratios in the banking industry. And these factors provided the foundation of our record net income and that was accomplished without sacrificing the strength of our allowance for loan loss reserves. And I'm going to talk a little bit more about our ALLL in a couple of minutes. Our earnings support an average return on assets in 2022 of 2.1% and that's up from 1.94% in 2021. And our return on average common equity is 16.72%. And this chart illustrates our earnings over the last 5 years. We have gone from $2.07 earnings per diluted share to $3.44 per diluted share over that time span. In these tough times, especially turbulent times, a bank's capital position is more important than ever. Parke Bank's total equity increased $34 million to $266 million and that's up 14.7% from December 31, 2021 to December 31, 2022. And the tangible book value per diluted share improved from $19.17 as of the end of '21 to $21.83 as of the end of 2022. Our community bank leverage ratio increased to 15.85% in 2022 and that's up from 12.82% in 2021. And that's over the regulatory well-capitalized ratio of 8.5%. Although not reported in our -- on our [ call ] report, our total risk-based capital was 23.11% and that's more than twice the regulatory well-capitalized ratio of 10%. Asset quality will always be a major focus of our company. Our total nonperforming assets, the total assets picked up to 0.9% in 2022. And the increase was primarily due to 2 loans to the same borrower. As you can see from this chart, classified loans to Tier 1 capital plus allowance for loan loss reserves increased to 5.24% as of December 31, 2022 and that's up from 1.99% as of December 31, 2021. And again, that was primarily due to the relationship with 1 borrower. We continue to maintain a very strong allowance for loan loss reserves, our ALLL of 1.82%. And that's primarily due to the economic uncertainty. 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 and we sure are in challenging times. But beginning in 2023, banks now have to use CECL to calculate loan loss reserves. And by the way, that stands for current expected credit losses. And we've been carefully calculating our loan loss reserves, paralleling CECL requirements. And we don't believe this change will have a major affect on our ALLL. And I will talk a little bit more about that when reviewing our 2023 first quarter financial performance. It appeared that the affects of COVID-19 diminished in 2022, only to be raised by skyrocketing inflation and an unprecedented increase in interest rates, close to 5% by the Federal Reserve. This rapid increase in rates has had a devastating affect on some banks and we are carefully monitoring our loan portfolio to identify if there is any change in delinquencies. Unfortunately, like most publicly traded banks, our stock price declined in '22 to $20.74 per share and that's as of December 31, 2022. And this chart illustrates the continued decline in the markets and Parke Bank's stock price in 2023. And that's primarily due to the recent bank failures which caused turmoil in the banking industry. Let's take a quick look at our company's financial performance in the first quarter of 2023 and we're going to compare these numbers to the first quarter of 2022. So let's go straight to the bottom line, and that's our net income. And that increased to $11.1 million, a 10% increase over $10.1 million in the first quarter of 2022. But the primary reason for the increase was due to entries needing to be made to comply with CECL, the new loan loss reserve calculation that I just mentioned. These calculations are very detailed. So a portion of our ALLL had to be reversed due to this requirement. We actually over reserve based on these new calculations. If this policy was not implemented in 2023, our net income would have been $9.3 million. Assets declined slightly to $1.964 billion and that's down from $2.05 billion in '22. And again, the primary reason was a decline in our deposits. And our loan portfolio increased to $1.76 billion and that's a $267 million increase over the first quarter of 2022. But the current uncertainty in the economy, combined with much higher loan interest rates are making it more difficult than 2023 to find and qualify new loans. As disclosed in our 10-K, we experienced a presumed cash theft by one of the cash couriers in '22. That company informed us that some of the cash stored for the bank is missing from their vault. Bank records indicate that there was $9.5 million in that vault. There's not enough information to determine the exact amount of the potential loss as well as the amount that could be recovered. And we're working with state and federal law enforcement authorities that are investigating the matter. And we are pursuing various avenues of recovery, including, among others, possible insurance claims. If it's determined that a loss is probable, we will record the loss in the appropriate fiscal period. If we are successful in making recoveries, the amount recovered would be recorded in the period received. There are always many challenges facing the economy and the banking industry. However, we are now facing historic rising interest rates, high inflation and if not already existing, a possible recession. And these challenges have been compounded by the failure of Silicon Valley Bank and Signature Bank. The market was disrupted and there was a run on these banks that required the Fed to take action. The Fed stepped in and assured the market that all depositors of these banks would be protected and that somewhat calmed the market but certainly not entirely. Interest rates rose so quickly in the past year that these banks who had large investment portfolios were not able to unwrap these investments fast enough without incurring a substantial loss. Hopefully, the Feds will not overreact and put unnecessary increased regulatory pressure and monitoring on the banking industry, especially on community banks. One of the results of this new challenge is banks needing to carry more liquidity on their balance sheet. The retail deposit market, as I've already talked about, is very, very tight and that leaves brokered CDs and borrowed money as a couple of the few options that are available. Fortunately, Parke Bank is structured with a good amount of on-balance sheet liquidity and that's mostly in cash. And our off-balance sheet liquidity that is available, if necessary and it can address these challenges. However, the result could be increased funding costs and that could negatively affect the net interest margin of Parke Bank. To date, we have not experienced, well, at least to our knowledge anyway, an exodus of deposits that are due to the customers' banking industry concerns. But regardless of these many challenges, Parke Bank has strong capital. We have strong reserves, strong earnings and tight control of our expenses to face these market hurdles head-on. And we're going to continue to search for opportunities in the market, even bad economies have opportunities, while remaining cautious. And I want to thank everyone for participating today and your continued support and just give me 1 minute to check to see if there was any questions. Thank you. I must have put all you people to sleep. We don't have any questions at all. So again, thank you all for participating today and supporting our company. Mr. Chairman?

Thank you, Vito. The Inspector of Elections has completed the count. I will now read the report. The report of the Inspector of Elections confirms that a quorum is and has been in attendance at this meeting for all purposes. The report shows that Vito S. Pantilione; Edward Infantolino; and Elizabeth A. Milavsky, have each been elected to serve for a 3-year term expiring in 2026 and until the -- their successors are qualified and elected. The report also shows that more than a majority of the shares present have voted in favor of proposal #2, ratification of the appointment of S.R. Snodgrass, P.C., as company's independent auditor for the fiscal year ending December 31, 2023. And proposal 3, approval of an advisory nonbinding proposal regarding our executive compensation. The report of the Inspector of Election has been accepted and approved and will be attached to the minutes of the meeting. There being no further business to come before the meeting, a motion to adjourn is in order. Mr. Arret Dobson moves that the meeting be adjourned. Dr. Edward Infantolino seconds the motion. Those in favor signify by saying aye. Those opposed, say no. The motion is carried and the meeting is adjourned. Thank you for attending online and we look forward to seeing you next year.

This concludes the meeting. You may now disconnect.