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

Hello, and welcome to the Annual Meeting of Shareholders of Parke Bancorp, Inc. Please note that today's meeting is being recorded. During the meeting, we'll have a question-and-answer session. [Operator Instructions] It is now my pleasure to turn today's meeting over to Daniel J. Dalton, Chairman of the Board of Directors of the company. Mr. Dalton, the floor is yours.

Thank you. The meeting will please come to order. Welcome to the Virtual Annual Meeting of the Shareholders of Parke Bancorp, Inc. I am Daniel Dalton, Chairman of the Board of Directors of the company, and I will act as Chairman of the meeting. Before we get started, I have a brief announcement to make. As many of you already know, our dear friend and fellow Director, Anthony J. Jannetti has died. Mr. Jannetti was a Founding Director of the Board of Directors beginning in 1999 and has continuously served our company and Parke Bank with distinction since that time. He will be greatly missed by the entire Parke Bancorp family. Because Mr. Jannetti passed away after the record date for voting at today's meeting, our proxy statement includes Mr. Jannetti as a nominee for reelection at this meeting; however, we are not going to call for a vote for his reelection or report the results of any voting for him by those shareholders who already voted by proxy. In order to eliminate the vacancy on the Board created by Mr. Jannetti's untimely passing, the Board has reduced the size of the board by one member. Any questions from stockholders attending the webcast will be addressed while the voting is underway. Linda A. Kaiser, 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. Vito S. Pantilione, our President and CEO, who you will hear from shortly. Board; Vice Chairperson, Arret Dobson; Director, Fred Choate; Director, Edward Infantolino; Director, Elizabeth Milavsky; Director, Jack C. Sheppard, Jr; and Director, Jeff Kripitz. The Board of Directors has previously appointed Paul E. 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 13, 2024, the record date for voting. The records of the company show that there were 11,958,321 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 formal proxy were mailed on or about May 22, to each holder of record on the close of business on March 13, 2024. 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 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. Stockholders 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. Any questions on the proposals will be addressed at the end of our prepared remarks before the polls are closed. The first item of business to be acted upon at the meeting, as stated in the notice of the annual meeting, is the election of directors as follows: Daniel Dalton and Arret F Dobson, each to serve for a 3-year term expiring in 2027 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 webpage and follow the directions. If you have a question regarding proposal 1, please click on the question button on the meeting web page and text your question to me. The last 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, 2024. 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 Vote Now button on our meeting webpage and follow the directions. If you have a question regarding proposal 2, please click on the question button on the Meeting web page and text your question to me. We will now give everyone an opportunity to vote and submit any questions. [Voting]

Seeing no questions for either of the proposals, I declare the polls closed. While the Inspector of Election is counting in 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, 2023. Vito?

Thank you, and good morning. I also want to welcome everyone to our 2024 Annual Shareholders Meeting. And this one is a little special because we are celebrating our 25th anniversary. It's hard to believe that it's already been 25 years since we've opened the bank in 1999. And I'm very proud of the Board of Directors, the management teams and the staff over the years for their commitment and hard work in supporting our company's growth and financial performance. And I also appreciate the investment support that many of the shareholders attending this meeting today provided to us in the early years. In fact, many of you probably remember that we started out in a trailer in the back parking lot of this bank, and we grew the bank organically to over $2 billion with 7 full-service branches. It's been an incredible journey, and it's not over yet. So we're going to take a look at some of the many challenges of 2023. However, first, I want to introduce our senior management team, and we have had some changes. I'm going to start off with our Executive Vice President and Chief Operating Officer, Ralph, but we call him Guy Gallo. Guy is responsible for IT, human resources, our retail branches, internal audit and asset quality. Any one of those responsibilities is a big job. Next is D Calvelo, and D was part of the team that started Parke Bank in 1999, so D is also celebrating her 25th anniversary with Parke Bank. She's a Senior Vice President and was recently promoted to Chief Administrative Officer. D is responsible for our loan administration department, our construction lending and as our CAO, she coordinates the responsibilities of each Senior Vice President to ensure that we're operating effectively and efficiently. Nick Pantilione is next. Nick is a Senior Vice President and our Chief Lending Officer. Nick is responsible for the loan production of our lending team that includes his own book of business. He's also responsible for our residential mortgage expansion plan, and that's in response to the recent focus of home mortgage financing and low-to-moderate income black and Hispanic census tracks in Philadelphia. And Nick is also responsible for our marketing department. Ralph Bonadies is next, and he's a Senior Vice President and our Chief Risk Officer. Ralph has the responsibility of identifying and protecting the bank against the many risks facing the banking industry. But one of Ralph's primary responsibilities is the many regulatory and compliance challenges, and that includes BSA, the Bank Secrecy Act, which continues to be a major regulatory focus. Paul Palmieri is next, Paul is a Senior Vice President and our Chief Credit Officer. Paul's department is responsible for the credit quality analysis of our existing loan portfolio, and that's in addition to new loans that are generated by our lending team. And Paul is also responsible for our credit policies and their periodic updates. Next is Linda Kaiser. Linda is a Senior Vice President and our Corporate Secretary. Linda is semi-retired, but she continues to be responsible for our Board meetings and our corporate filings. I've been trying to convince her to come back full time, but unfortunately, I haven't been successful. We have a new member of our senior management team, and that's Jonathan Hill. John is a Senior Vice President and our Chief Financial Officer. And we're really excited about John joining our team because of his extensive experience and expertise in all aspects of our financial needs, and that includes making sure that our statements are accurate, transparent and timely, and that's in addition to providing expertise in cost savings and revenue enhancements. 2023 was a very challenging year for many different reasons. Inflation levels that were the highest in 40 years was one of the big factors over the last couple of years, reaching 13%. Gas prices spiked due to many different factors, including the Russia-Ukraine war and the reduced gas production in this country, which added to the inflation pressure. The Israel-Hamas war made the world challenges even more difficult. For our government continued printing money to support Ukraine and Israel, and that was in addition to the many other funding commitments and that further fueled inflation. In an effort to fight the persistent and out-of-control inflation, the Feds continued to raise interest rates in 2023. Rates were raised in unprecedented 525 basis points from mid-2022 until the recent pause. At the end of '23, the Feds indicated that they would be slowly reducing interest rates in 2024 due to their belief that inflation seemed to be getting under control. In fact, there was even comments that suggested the reduction in rates could happen as early as March. Well, that didn't happen. It was pushed back by a surprisingly strong job market and inflation coming in higher than expected. Recent Fed comments indicate that they still expect rate cuts in 2024. The shifting of anticipated rate moves really keeps the banking industry and real estate market in flux and the war on deposits continues with the cost of funding skyrocketing over the last 2 years. Higher interest rates have historically had a negative effect on the real estate market, although there are some portions of the regional real estate market that have remained surprisingly strong. However, some new projects have been delayed, and that's because of the difficulty of making income properties work because of the higher debt service, and that's combined with the higher cost of construction for new projects. So caution dictated a much slower loan growth in 2023. And this combination put a lot of pressure on bank's net interest margin with the increase in cost of funding outpacing the increase in the loan portfolio yield negatively affecting profitability. So let's talk about our bank's financial performance in 2023. And although generating an average return on assets close to 1.5%, Parke Bank's financial performance in 2023 did not approach our record earnings of 2022. And the biggest factor affecting our profitability was the booking of a onetime $9.5 million loss caused by a theft by one of our cash couriers. And this wasn't a stick-'em-up theft. This occurred over time. And last year, I reported the theft, and I advise that although the theft occurred, we could not book the amount until it was confirmed. So we hired an outside forensic accounting firm and the $9.5 million loss was confirmed, and so it was booked. Unfortunately, proceeds from insurance policies that were in place at the time of the theft have not yet been confirmed or received, so recovery cannot yet be booked. We are continuing to aggressively pursue all avenues of recovery, including the sale of assets owned by the perpetrators. I'm going to mix it up a little bit, and I'm going to start off by talking about our net income in 2023 and our earnings per share. Net income was $28.4 million or $2.38 per basic common share and $2.35 per diluted common share, and that's $13.4 million less than our record earnings in 2022. Primary reason for the decrease was the already discussed onetime loss of $9.5 million. There was also lower net interest income due to narrowing margins and lower noninterest income primarily due to the increase in cannabis banking competition. I'm going to talk about that a little bit more in a few minutes, and that reduced our fee income that was being generated from cannabis accounts. Total assets increased to $2.02 billion as of the end of '23, and that's an increase of $38.6 million, and that's close to 2% of an increase from December 31, 2022. And you can see from the chart that our rate of growth really remained relatively flat in '23 from our peak in 2021 when we reached $2.14 billion. As an asset-driven bank, the primary reason for the slowdown in asset growth was due to our slow loan growth in '23. Also contributing to the slowdown in asset growth was a decrease in cash due to a decrease of our cannabis deposit accounts. And again, that's due to increased competition and industry consolidation. So let's take a look at our loan portfolio, and that grew 2% to $1.79 billion as of the end of '23, and that's up from $1.75 billion at the end of 2022. And as I mentioned, the increase in interest rates, combined with the turmoil in the economy and the real estate made it more difficult to finance new projects and grow the loan portfolio. And we also experienced an unexpected increase in loan payoffs in November and December of '23. One of the biggest challenges facing community banks, and that includes us, Parke Bank, is growing deposits. And I apologize for repeating myself, but as I already stated, skyrocketing interest rates caused deposit rates to go up much faster than loan rates. It has become a rate war and we're located in what's reported to be the most competitive region in the country for deposits. Total deposits declined 1.5% to $1.5 billion, and that's down $23.2 million from the end of '22. Further challenges to our deposit growth, which I already mentioned, was the increase in cannabis banking competition, and that triggered some cannabis deposits leaving Parke Bank or other banks that have recently entered the cannabis market. And the new banks in the cannabis space didn't face the same regulatory expense, especially BSA to set up cannabis banking as we experienced. We got into banking 12 years ago, and we were only 1 of 6 banks in the country initially offering cannabis banking when cannabis was first approved for sale. So this allows the new banks to offer accounts at a much lower cost, so they have lower fees. And although we continue to be aggressive in cannabis banking, I think competition will continue to grow as more banks are convinced that neither the government nor the regulators will interfere with banking these cannabis products due to close to 40 states now having some form of legalized cannabis sales. Asset quality continues to be an important focus of our bank. Nonperforming loans decreased $9 million, and that's 55% from $16.3 million at the end of '22 to $7.3 million at the end of '23, and that's 0.41% of total loans. Our classified loans to Tier 1 capital plus allowance for credit losses decreased to 2.46% in 2023, and that's down from 5.24% as of December 31, 2022. Our credit department continues to conduct stress testing on our loan portfolio, and we're going to be aware of any loans that could be negatively affected by upcoming rate adjustments because of the higher interest rates triggering a higher debt service. But we do have some tools available to assist some of these borrowers who may be facing challenges with a higher rate adjustment. Our allowance for credit losses remained strong and consistent at $32.1 million as of 12/31/2023 and that's compared to $31.8 million at the end of '22. And the ratio to total loans for the allowance was 1.8% from '23 and 1.81% at the end of '22. Another very important focus, especially to those of you participating in this meeting, is shareholder equity. Total equity increased $18.3 million, close to 7% over December 31, 2022, to $284.3 million, and this is in excess of the banking regulators definition of a well-capitalized bank. Capital is always important in banking, and that includes Parke Bank and is for many reasons. Primarily strong capital provides banks the financial strength to navigate challenging economic times and boy, are we in challenging economic times, but it also provides Parke Bank the ability to take advantage of opportunities as they arise in the market. So let's take a quick look at our first quarter of 2024, and we're going to compare it to the first quarter of 2023. First is total assets that grew 2.3% year-to-year to $2.009 billion in the first quarter of 2024. Next is our loan portfolio, which is up 1.3% in the first quarter of 2024 to $1.785 billion. And once again, the economic turmoil and the high interest rates have really slowed down loan growth. But lately, we're starting to see an increase in activity from borrowers looking to borrow money, I guess they're starting to get more accustomed to the higher interest rates. Total deposits did grow 6.8% from year-to-year to $1.563 billion in 2024 and net income declined $5 million from the first quarter of $23 to $6.1 million in the first quarter of 2024. The major factors affecting the decline was a onetime $2.6 million addition to income in the first quarter of 2023 due to banks being required to adopt CECL, the new methodology for calculating your allowance for loan loss. And so this new regulation, when utilizing the methodology for CECL required us to reverse a portion of the allowance into income. Also affecting net income was the continuing pressure on our net interest margin due to the higher cost of funding. Looking down the road, in 2024, there continues to be a lot of headwinds and uncertainty. And although there are signs of inflation being reined in from the high of 13%, there are troubling reports that surprisingly due to inflation being higher than what was expected, the Feds will continue to delay reducing interest rates as initially anticipated at the end of 2023. Goldman Sachs reported that the country is in its final descent to a soft landing, and they projected GDP of 2.1% in 2024, and that's a little higher than some other analysts are projecting. And they also believe that there is only a 15% chance of a recession in the next 12 months. They further state that higher interest rates will produce a flat real estate market. S&P Global is projecting a GDP of 1.5% for '24 and agrees that higher interest rates will hurt the real estate market. Well, I'm certainly no expert, but I think we'd be hard-pressed to find anyone that doesn't believe high interest rates doesn't hurt the real estate market. Additional risk that can't be ignored are the continuing wars in Russia, Ukraine and the Israel-Hamas war. In fact, there was concern that the wars could actually worsen and expand and the Israel Hamas war certainly has with Iran sending hundreds of missiles into Israel, and then just a few days ago, Israel retaliating. This is causing even more challenges in the world with -- that includes gas prices now again spiking. Due to recent bank failures and congressional criticism, many believes, and I am certainly one of them, that there will be increased regulatory requirements and pressure on community banks, and that will mean only one thing, increased bank expenses. Clearly, there are a lot of challenges out there and a lot of uncertainty. And it's difficult to forecast revenues and expenses when all of the factors just discussed are considered. However, the important factor is to stay focused, control expenses and be nimble, able to adjust your strategic plan if factors in the economy shift unexpectedly up or down. And as I say, this isn't our first rodeo. We are well structured with strong capital, strong reserves and additional talent on our senior management team to face these challenges. We know through experience that our opportunities arise even in challenging times, and we're prepared to keep our eyes open for these opportunities. And if they look good, move forward while maintaining safe and sound bank. So then I want to thank everybody for joining us today and for your continued support and just give me 1 minute to check to see if there's any questions. And there is one.

Does management foresee an increase to the dividends in the coming quarters? Our Board of Directors and management constantly focus on bringing value to our shareholders, and that is a primary concern. But during these kinds of times, these uncertain times of high interest rates and the banking industry being uncertain, we can't comfortably reduce the support to our shareholders' equity until there is a better and clearer picture of where things are going to be going in the near future. But believe me, as soon as there's a clear picture and as soon as it's positive, we are going to revisit adjusting the dividends for our shareholders. So I guess that's it. And again, thank you very much. Dan?

Thank you, Vito. The report of the Inspector of Election confirms that a quorum is and has been in attendance at this meeting for all purposes. The report shows that Daniel Dalton and Arret F. Dobson have each been elected to serve for a 3-year term expiring in 2027 and until their successors are qualified and elected. The report also shows that more than a majority of the shares present have been voted in favor of Proposal 2; ratification of the appointment of S.R. Snodgrass, P.C. as the company's independent auditor for the fiscal year ending December 31, 2024. 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. Sheppard moves that the meeting be adjourned. Mr. Dobson seconds that 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. We look forward to seeing you next year.

This concludes the meeting. You may now disconnect.