Assuming NAL + OREO = $80.4M, and eventual recovery was $80.4M, then there would be no net charge-offs and the allowance would remain $18M. NAL don't equate to (necessarily) to allowances, but net charge-offs need to be covered by charge-offs.
Does anyone know if property values are starting to rise in PKBK's service areas where the NALs and OREO is concentrated? If it is rebounding significantly, maybe that is factored into management's assessment of allowance for loan losses, as well as their track record of recoveries.
Credit related cost include collection cost, maintenance--Grass, security, tax, insurance--of OREO, write down of OREO carrying value, gain or loss upon sales. Only the last two are included in charge offs.
RE property value.
My understanding is there is severe shortage of rental units. Some folks were put up by FEMA in motels as far a Philly.
There is going to be a mad dash to restore Boardwalk, etc. in anticipation of the tourist season. Not sure the residential side could move so fast. This shortage can push RE value up a notch I am sure.
There seems to be more RAL moving to OREO by 3Q12. 4Q should update that soon. Overall, the pace of foreclosure was very slow. Probably delayed further by Sandy.
The bank is also battling the Township that failed to support reuse of a repossessed golf course. The resolution of which will have a big impact.
As not all NAL turns into total loss, 40% is sort of a "norm". That percentage can vary a great deal depending on financial condition of borrowers and also collateral, but in general the percentage needs be a little higher at the beginning of credit cycle and lower toward the end as is now.
There is no way for us to know, but 33% seems about right. (I am an optimist.)
Another common gauge is ALLL against total loans t. As a percentage 1.5% would be for banks in mink condition. 3% is not unusual for loan portfolio in distress, as is the case for Parke Bank.
Texas Ratio is commonly used to gauge the financial risk. Which divide the sum of NAL and OREO(repo'd properties) by the sum of ALLL and bank's (not PKBK, the parent) equity.
NAL was $52.9 million, OREO was $27.5 million. The sum was $80.4 million.
Bank level equity was $95.6 million and ALLL was $17.5 million, the total was $113.1 million.
The problem asset was 71.1% of available resource to deal with it.
In comparison, US average was 11.4%. The bank has six times as much troubled asset for average bank of its size!
In that light, even for ALLL over loan port at 3% might not be sufficient.
If it were not that the earning stream was so healthy, charge offs in the past few years would have killed the bank. There will be large charge off ahead still.
The share price pretty much reflected the above risk.
Can the healthy operating earnings continue? if so, PKBK will make it okay. If not, all bets are off.