UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 2007
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 000-51338
PARKE BANCORP, INC.
(Exact name of registrant as specified in its charter)
New Jersey 65-1241959
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation) or organization
601 Delsea Drive, Washington Township, New Jersey 08080
(Address of principal executive offices) (Zip Code)
856-256-2500
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 14, 2007, there were issued and outstanding 3,168,618 shares of
the registrant's common stock.
PARKE BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2007
INDEX
Page
----
Part I FINANCIAL INFORMATION
------
Item 1. Financial Statements................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........16
Item 4. Controls and Procedures............................................16
Part II OTHER INFORMATION
-------
Item 1. Legal Proceedings..................................................16
Item 1A. Risk Factors.......................................................17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........17
Item 3. Defaults Upon Senior Securities....................................17
Item 4. Submission of Matters to a Vote of Security Holders................17
Item 5. Other Information..................................................18
Item 6. Exhibits...........................................................18
SIGNATURES
EXHIBITS and CERTIFICATIONS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARKE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
2007 2006
------------- -------------
Assets
Cash and cash due from banks $ 5,246,697 $ 6,183,916
Federal funds sold and other cash equivalents 12,557,889 5,076,895
------------- -------------
Cash and cash equivalents 17,804,586 11,260,811
------------- -------------
Investment securities available for sale, at market value 26,238,342 24,530,067
Investment securities held to maturity, at amortized cost
(market value $2,423,025 at March 31, 2007 and
$2,425,629 at December 31, 2006) 2,436,987 2,430,958
------------- -------------
Total investment securities 28,675,329 26,961,025
------------- -------------
Restricted stock, at cost 1,378,300 1,492,800
------------- -------------
Loans 357,066,870 310,555,306
Less: allowance for loan losses (5,011,500) (4,511,004)
------------- -------------
Total net loans 352,055,370 306,044,302
------------- -------------
Bank premises and equipment, net 3,361,293 3,431,794
Accrued interest receivable and other assets 11,258,092 10,806,039
------------- -------------
Total assets $ 414,532,970 $ 359,996,771
============= =============
See Notes to Consolidated Financial Statements 1
PARKE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
2007 2006
------------- -------------
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing demand $ 27,591,033 $ 18,287,577
Interest-bearing 317,945,178 271,641,283
------------- -------------
Total deposits 345,536,211 289,928,860
Borrowed funds - 100,000
Federal Home Loan Bank advances 22,012,303 24,441,370
Subordinated debentures 10,310,000 10,310,000
Accrued interest payable and other liabilities 4,201,051 4,507,381
------------- -------------
Total liabilities 382,059,565 329,287,611
------------- -------------
Commitments and Contingencies (Note 1)
Shareholders' Equity
Common stock, $0.10 par value, 10,000,000 shares authorized;
3,230,460 shares issued at March 31, 2007 and 2,884,937
shares issued at December 31, 2006 323,046 288,494
Preferred stock, 1,000,000 shares authorized; no shares issued
and outstanding - -
Additional paid-in capital 21,538,837 21,153,220
Retained earnings 12,124,993 10,847,763
Accumulated other comprehensive (loss) (353,404) (420,250)
Treasury stock, at cost (61,842 shares at March 31, 2007 and at
December 31, 2006) (1,160,067) (1,160,067)
------------- -------------
Total shareholders' equity 32,473,405 30,709,160
------------- -------------
Total liabilities and shareholders' equity $ 414,532,970 $ 359,996,771
============= =============
See Notes to Consolidated Financial Statements 2
PARKE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
March 31, December 31,
2007 2006
---------- ----------
Interest and Dividend Income
Loans, including fees $6,941,600 $5,249,988
Investment securities 386,217 302,452
Federal funds sold and other cash equivalents 91,182 17,057
---------- ----------
Total interest and dividend income 7,418,999 5,569,497
---------- ----------
Interest Expense
Deposits 3,358,209 2,023,658
Borrowings 521,337 390,330
---------- ----------
Total interest expense 3,879,546 2,413,988
---------- ----------
Net interest income 3,539,453 3,155,509
Provision for Loan Losses 500,496 235,000
---------- ----------
Net interest income after provision for loan losses 3,038,957 2,920,509
---------- ----------
Noninterest Income
Service charges on deposit accounts 36,016 36,132
Other fee income 490,595 219,718
---------- ----------
Total noninterest income 526,611 255,850
---------- ----------
Noninterest Expenses
Compensation and benefits 785,835 676,497
Occupancy, equipment and data processing 267,235 212,711
Marketing and business development 67,483 53,428
Professional services 114,171 149,029
Other operating expenses 244,516 265,011
---------- ----------
Total noninterest expenses 1,479,240 1,376,676
---------- ----------
Income Before Income Tax Expense 2,086,328 1,799,683
Income Tax Expense 809,098 724,220
---------- ----------
Net Income $1,277,230 $1,075,463
========== ==========
Net Income Per Common Share:
Basic $ 0.41 $ 0.35
========== ==========
Diluted $ 0.36 $ 0.30
========== ==========
Weighted Average Shares Outstanding:
Basic 3,138,993 3,065,325
========== ==========
Diluted 3,583,979 3,612,035
========== ==========
See Notes to Consolidated Financial Statements 3
PARKE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(unaudited)
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Treasury Shareholders'
Stock Capital Earnings Income (Loss) Stock Equity
----- ------- -------- ------------- ----- ------
Balance, December 31, 2005 $231,736 $20,511,410 $ 6,787,118 $(286,296) $ (50,641) $27,193,327
Stock options and warrants
exercised 3,805 284,606 - - - 288,411
Treasury stock purchased - - - - (7,379) (7,379)
20% stock dividend 46,970 (46,970) - - - -
Comprehensive income:
Net income for the period - - 1,075,463 - - 1,075,463
Change in net unrealized gain on
securities available for sale,
net of reclassification
adjustment and tax effects, if any - - - (64,424) - (64,424)
-----------
Total comprehensive income 1,011,039
-------- ----------- ----------- --------- ----------- -----------
Balance, March 31, 2006 $282,511 $20,749,046 $ 7,862,581 $(350,720) $ (58,020) $28,485,398
======== =========== =========== ========= =========== ===========
Balance, December 31, 2006 $288,494 $21,153,220 $10,847,763 $(420,250) $(1,160,067) $30,709,160
Stock options and warrants
exercised 5,184 406,722 - - - 411,906
Stock compensation - 8,263 - - - 8,263
10% stock dividend 29,368 (29,368) -
Comprehensive income:
Net income for the period - - 1,277,230 - - 1,277,230
Change in net unrealized gain
on securities available for
sale, net of reclassification
adjustment and tax effects, if any - - - 61,884 - 61,884
Adjustment to minimum
pension liability - - - 4,962 - 4,962
-----------
Total comprehensive income 1,344,076
-------- ----------- ----------- --------- ----------- -----------
Balance, March 31, 2007 $323,046 $21,538,837 $12,124,993 $(353,404) $(1,160,067) $32,473,405
======== =========== =========== ========= =========== ===========
See Notes to Consolidated Financial Statements 4
PARKE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Three Months Ended March 31,
2007 2006
------------ ------------
Operating Activities
Net income $ 1,277,230 $ 1,075,463
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 78,862 63,125
Provision for loan losses 500,496 235,000
Stock compensation 8,263 -
Net accretion of investment securities premiums/discounts (10,751) (5,530)
Changes in operating assets and liabilities:
(Increase) Decrease in accrued interest receivable and other assets (470,712) 714,479
(Decrease) Increase in accrued interest payable and other liabilities (323,964) (3,169)
------------ ------------
Net cash provided by operating activities 1,059,424 2,079,368
------------ ------------
Investing Activities
Purchases of investment securities available for sale (3,480,994) -
Proceeds from redeemed restricted stock 114,500 276,500
Proceeds from maturities of investment securities available for sale 1,550,000 -
Principal payments on mortgage-backed securities 330,580 295,152
Net increase in loans (46,511,564) (12,931,442)
Purchase of bank premises and equipment (8,361) (6,678)
------------ ------------
Net cash used in investing activities (48,005,839) (12,366,468)
------------ ------------
Financing Activities
Proceeds from exercise of stock options and warrants 411,906 288,411
Purchase of treasury stock - (7,379)
Proceeds from borrowings 27,375,000 1,500,000
Repayment of borrowings (29,904,067) (7,688,132)
Net increase in interest-bearing deposits 46,303,895 13,145,179
Net increase in noninterest-bearing deposits 9,303,456 3,115,108
------------ ------------
Net cash provided by financing activities 53,490,190 10,353,187
------------ ------------
Increase in cash and cash equivalents 6,543,775 66,087
Cash and Cash Equivalents, January 1, 11,260,811 4,380,036
============ ============
Cash and Cash Equivalents, March 31, $ 17,804,586 $ 4,446,123
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest on deposits and borrowings $ 3,641,723 $ 2,146,876
============ ============
Income taxes $ 810,821 $ 850,000
============ ============
See Notes to Consolidated Financial Statements 5
PARKE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. GENERAL
BUSINESS
Parke Bancorp, Inc. ("Parke Bancorp or the "Company") is a bank holding
company incorporated under the laws of the State of New Jersey in January 2005
for the sole purpose of becoming the holding company of Parke Bank (the "Bank").
The Bank is a commercial bank which commenced operations on January 28,
1999. The Bank is chartered by the New Jersey Department of Banking and insured
by the Federal Deposit Insurance Corporation ("FDIC"). Parke Bancorp and the
Bank maintain their principal offices at 601 Delsea Drive, Washington Township,
New Jersey. The Bank also conducts business through offices in Northfield and
Washington Township, New Jersey and Philadelphia, Pennsylvania and has a loan
production office in Millville, New Jersey.
FINANCIAL STATEMENTS
The financial statements as of March 31, 2007 and for the three month
periods ended March 31, 2007 and 2006 included herein have not been audited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP") have been condensed or omitted;
therefore, these financial statements should be read in conjunction with the
Company's audited financial statements and the notes thereto for the years ended
December 31, 2006 included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2006, as filed with the SEC. The accompanying
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to present a fair statement of the results for the interim
periods presented. Such adjustments are of a normal recurring nature. The
results for the three months ended March 31, 2007 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2007 or any
other periods.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements include the accounts of Parke Bancorp Inc. and its
wholly owned subsidiaries, Parke Bank, Parke Capital Markets and Farm Folly,
LLC. Parke Capital Trust I and Parke Capital Trust II are wholly-owned
subsidiaries but are not consolidated because they do not meet the requirements.
All significant inter-company balances and transactions have been eliminated.
Such statements have been prepared in accordance with GAAP and general practice
within the banking industry.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from such estimates.
INVESTMENTS
The Company has identified investment securities that will be held for
indefinite periods of time, including securities that will be used as a part of
the Bank's asset/liability management strategy and may be sold in response to
changes in interest rates, prepayments and similar factors. These securities are
classified as "available-for-sale" and are carried at fair value, with temporary
unrealized gains or losses reported as a separate component of accumulated other
comprehensive income (losses), net of the related income tax effect. Declines in
the fair value of the individual available-for-sale securities below their cost
that are other than temporary have resulted in write downs of the individual
securities to their fair value and are included in noninterest income in the
consolidated statements of operations. Factors affecting the determination of
whether an other-than-temporary impairment has occurred include a downgrading of
6
PARKE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
the security by a rating agency, a significant deterioration in the financial
condition of the issuer, or that the Company would not have the intent and
ability to hold a security for a period of time sufficient to allow for any
anticipated recovery in fair value. The unrealized losses that existed as of
March 31, 2007 are the result of market changes in interest rates since the
securities were purchased. This factor, coupled with the fact the Company has
both the intent and ability to hold securities for a period of time sufficient
to allow for any anticipated recovery in fair value, substantiates that the
unrealized losses in the available-for-sale portfolio are temporary.
COMMITMENTS
In the general course of business, there are various outstanding
commitments to extend credit, such as letters of credit and un-advanced loan
commitments, which are not reflected in the accompanying financial statements.
Management does not anticipate any material losses as a result of these
commitments.
CONTINGENCIES
The Company is from time to time a party to routine litigation in the
normal course of its business. Management does not believe that the resolution
of this litigation will have a material adverse effect on the financial
condition or results of operations of the Company. However, the ultimate outcome
of any such litigation, as with litigation generally, is inherently uncertain
and it is possible that some litigation matters may be resolved adversely to the
Company.
INCOME TAXES
When corporate income tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken
or the amount of the position that ultimately would be sustained. The benefit of
a tax position is recognized in the financial statements in the period during
which, based on all available evidence, management believes it is
more-likely-than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. The
evaluation of a tax position taken is considered by itself and not offset or
aggregated with other positions. Tax positions that meet the more-likely-than
not recognition threshold are measured as the largest amount of tax benefit that
is more than 50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of benefits associated with tax
positions taken that exceeds the amount measured as described above is reflected
as a liability for unrecognized tax benefits in the accompanying balance sheet
along with any associated interest and penalties that would be payable to the
taxing authorities upon examination. Interest and penalties associated with
unrecognized tax benefits are recognized in income tax expense on the statement
of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS No. 157"). This statement defines fair value, established a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS No. 157 does not require any new
fair value measurements, but provides enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair value. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those years. The
Company is currently evaluating the impact of SFAS No. 157 on its financial
statements.
7
PARKE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In February 2007, the FASB issued SFAS No. 159, Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS No. 159"). This statement
permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value. SFAS No. 159 is effective for fiscal years beginning after November 15,
2007, with early adoption permitted provided the entity also elects to apply the
provisions of SFAS No. 157. The Bank is currently evaluating the impact, if any,
of SFAS No. 159 on its financial position and results of operation.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
holders of common stock (the numerator) by the weighted average number of common
shares outstanding (the denominator) during the period. Shares issued during the
period are weighted for the portion of the period that they were outstanding.
The weighted average number of common shares outstanding for the three months
ended March 31, 2007 and 2006 was 3,138,993 and 3,065,325, respectively.
Diluted earnings per share are similar to the computation of basic earnings
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
options and warrants outstanding had been exercised. The assumed conversion of
dilutive options and warrants resulted in 444,986 and 546,710 additional shares
for the three months period ended March 31, 2007 and 2006, respectively.
Both basic and diluted earnings per share calculations give retroactive
effect to stock dividends declared, including the most recently completed 10%
stock dividend that was effective April 23, 2007.
NOTE 3. STOCK COMPENSATION
Effective January 1, 2006, the Company adopted Financial Accounting
Standards Board ("FASB") Statement No. 123 Share-Based Payment (Revised 2004)
("SFAS 123R") utilizing the modified prospective approach. Under the modified
prospective transition method, the Company is required to recognize compensation
cost for 1) all share-based payments granted prior to, but not vested as of,
January 1, 2006 based on the grant date fair value estimated in accordance with
the original provisions of SFAS 123; and 2) for all share-based payments granted
on or after January 1, 2006 based on the grant date fair value estimated in
accordance with SFAS 123R. In accordance with the modified prospective method,
the Company has not restated prior period results.
Prior to January 1, 2006, the Company accounted for share-based payments
under the recognition and measurement provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations, as
permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation.
All outstanding stock options as of January 1, 2006 were fully vested (in
prior years, all options vested upon issuance), thus no compensation expense was
recognized during the three months ended March 31, 2006 or 2007 for such
options. The Company used the Black-Scholes option pricing model to estimate the
fair value of stock-based awards in 2006 and thereafter.
As of March 31, 2007, there were 14,000 unvested options, which was no
change from December 31, 2006. Compensation cost related to share-based payments
amounted to $8,263 during the first quarter of 2007, which related to options
issued in 2006. The Company utilizes the Black-Scholes option pricing model to
estimate the fair value of any stock-based awards.
8
PARKE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 4. REGULATORY RESTRICTIONS
The Bank is subject to various regulatory capital requirements of federal
and state banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined).
For Capital
Actual Adequacy Purpose
Amount Ratio Amount Ratio
------ ----- ------ -----
As of March 31, 2007:
---------------------
(amounts in thousands)
Total Risk Based Capital $ 46,842 13.0% $ 28,740 8%
(to Risk Weighted Assets)
Tier 1 Capital $ 42,345 11.8% $ 14,370 4%
(to Risk Weighted Assets)
Tier 1 Capital $ 42,345 11.1% $ 15,214 4%
(to Average Assets)
For Capital
Actual Adequacy Purpose
Amount Ratio Amount Ratio
------ ----- ------ -----
As of December 31, 2006:
------------------------
(amounts in thousands)
Total Risk Based Capital $44,405 14.5% $24,499 8%
(to Risk Weighted Assets)
Tier 1 Capital $40,569 13.3% $12,249 4%
(to Risk Weighted Assets)
Tier 1 Capital $40,569 11.6% $14,054 4%
(to Average Assets)
Management believes, as of March 31, 2007 and December 31, 2006, that the
Bank met all capital adequacy requirements to which either of them was subject.
NOTE 5. SUBORDINATED DEBENTURES
On August 23, 2005, Parke Capital Trust I, a Delaware statutory business
trust and a wholly-owned subsidiary of the Company, issued $5 million of
variable rate capital trust pass-through
9
PARKE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
securities to investors. The variable interest rate re-prices quarterly at the
three-month LIBOR plus 1.66% and was 7.02% at March 31, 2007. Parke Capital
Trust I purchased $5.2 million of variable rate junior subordinated deferrable
interest debentures from the Company. The debentures are the sole asset of the
Trust. The terms of the junior subordinated debentures are the same as the terms
of the capital securities. The Company has also fully and unconditionally
guaranteed the obligations of the Trust under the capital securities. The
capital securities are redeemable by the Company on or after November 23, 2010,
at par or earlier if the deduction of related interest for federal income taxes
is prohibited, classification as Tier 1 Capital is no longer allowed, or certain
other contingencies arise. The capital securities must be redeemed upon final
maturity of the subordinated debentures on November 23, 2035. Proceeds of
approximately $4.2 million were contributed to paid-in capital at the Bank. The
remaining $800,000 was retained at the Company for future use.
On August 23, 2005, Parke Capital Trust II, a Delaware statutory business
trust and a wholly-owned subsidiary of the Company, issued $5 million of
fixed/variable rate capital trust pass-through securities to investors.
Currently, the interest rate is fixed at 6.25%. The fixed/variable interest rate
re-prices quarterly at the three-month LIBOR plus 1.66% beginning November 23,
2010. Parke Capital Trust II purchased $5.2 million of variable rate junior
subordinated deferrable interest debentures from the Company. The debentures are
the sole asset of the Trust. The terms of the junior subordinated debentures are
the same as the terms of the capital securities. The Company has also fully and
unconditionally guaranteed the obligations of the Trust under the capital
securities. The capital securities are redeemable by the Company on or after
November 23, 2010, at par or earlier if the deduction of related interest for
federal income taxes is prohibited, classification as Tier 1 Capital is no
longer allowed, or certain other contingencies arise. The capital securities
must be redeemed upon final maturity of the subordinated debentures on November
23, 2035. Proceeds of approximately $4.2 million were contributed to paid-in
capital at the Bank. The remaining $800,000 was retained at the Company for
future use.
NOTE 6. INCOME TAXES
The Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, ("FIN 48"), on January 1, 2007. The
Company files United States (US) federal income tax returns and state tax
returns in New Jersey. Based upon the statute of limitations, the Company is no
longer subject to US federal and state examinations by tax authorities for years
before 2003. Based on the review of the tax returns filed for the years 2003
through 2005 and the deferred tax benefits accrued in the 2006 annual financial
statements, management determined that all tax positions taken had a probability
of greater than 50 percent of being sustained and that 100 percent of the
benefits accrued were expected to be realized. Management has a high confidence
level in the technical merits of the positions. It believes that the deductions
taken and benefits accrued are based on widely understood administrative
practices and procedures and are based on clear and unambiguous tax law. As a
result of this evaluation, management did not see a need to record a liability
for unrecognized tax benefits.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
The Company may from time to time make written or oral "forward-looking
statements" including statements contained in this Report and in other
communications by the Company which are made in good faith pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements, such as statements of the Company's plans,
objectives, expectations, estimates and intentions, involve risks and
uncertainties and are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the impact of changes in financial services
laws and regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks involved
in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company also cautions readers not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date on which they are given. The Company is not obligated to publicly
revise or update these forward-looking statements to reflect events or
circumstances that arise after any such date. Readers should carefully review
the risk factors described in other documents the Company files from time to
time with the SEC, including quarterly reports on Form 10-Q, annual reports on
Form 10-K and any current reports on Form 8-K.
GENERAL
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its
interest-earning assets, such as loans and securities, and the interest expense
paid on its interest-bearing liabilities, such as deposits and borrowings. The
Company also generates noninterest income such as service charges, earnings from
bank owned life insurance (BOLI), loan exit fees and other fees. The Company's
noninterest expenses primarily consist of employee compensation and benefits,
occupancy expenses, marketing expenses, data processing costs and other
operating expenses. The Company is also subject to losses in its loan portfolio
if borrowers fail to meet their obligations. The Company's results of operations
are also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory agencies.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006
(UNAUDITED)
The following discussion compares the results of operations for the three
month period ended March 31, 2007 to the results of operations for the three
month period ended March 31, 2006. This discussion should be read in conjunction
with the accompanying financial statements and related notes as well as the
financial information included in the 2006 Annual Report on Form 10-K.
11
Net Income. For the three months ended March 31, 2007, net income totaled
$1.3 million, and increased by 18.8% above the $1.1 million for the three months
ended March 31, 2006. Diluted earnings per share for the three months ended
March 31, 2007 totaled $0.36, compared to $0.30 per share for the same period of
2006, representing an increase of 20% year over year. Increased net income for
the three months ended March 31, 2007 was attributable primarily to an increase
in net interest income of $384,000 and noninterest income of $271,000, partially
offset by increases in the provision for loan losses of $265,000, noninterest
expense of $103,000 and income tax expense of $85,000.
Net Interest Income. Our primary source of earnings is net interest income,
which is the difference between income earned on interest-earning assets, such
as loans and investment securities, and interest expense incurred on the
interest-bearing sources of funds, such as deposits and borrowings. The level of
net interest income is determined primarily by the average balances ("volume")
and the rate spreads between the interest-earning assets and our funding
sources.
Net interest income for the quarter ended March 31, 2007, totaled $3.5
million, which amounted to an increase of $384,000, or 12.2%, compared to $3.2
million for the quarter ended March 31, 2006. The increase was primarily
attributable to the growth in loan balances. The net interest margin for the
quarter ended March 31, 2007 was 3.9%, compared to 4.3% for the comparable
period of 2006.
Interest income of $7.4 million for the quarter ended March 31, 2007,
increased primarily as a result of an increase of $75.5 million in average
interest-earning assets. Average loans outstanding increased by $67.0 million
and average investment securities and federal funds sold increased by $8.5
million. In addition, yields on earning assets for the three months ended March
31, 2007 increased to 8.1% from 7.6% for the comparable period of 2006 due to an
increase in the level of market interest rates during 2006. Interest expense
increased by $1.5 million, which was primarily attributable to average
interest-bearing liabilities increasing by $70.5 million coupled with higher
interest rates for both deposits and borrowed funds. Average interest-bearing
deposits increased by $64.1 million and average borrowings increased by $6.4
million. The average rate paid on interest-bearing liabilities increased to 4.8%
for the three months ended March 31, 2007 from 3.8% for the comparable period of
2006.
Provision for Loan Losses. The provision for loan losses amounted to
$500,000 for the three months ended March 31, 2007, compared to $235,000 for the
same period in 2006. The year over year increase reflected the significant loan
growth during the first quarter of 2007. At March 31, 2007, the allowance for
loan losses amounted to 1.40% of total gross loans as compared to 1.45% of total
gross loans at December 31, 2006.
Noninterest Income. Noninterest income of $527,000 for the quarter ended
March 31, 2007 increased from $256,000 for the comparable quarter of 2006. This
increase was attributed to insurance reimbursements totaling $377,000 for legal
and other expenses incurred during the past few years related to recently
settled lawsuits and costs associated with repossessed assets, respectively,
that were partially covered by the Company's insurance. Excluding these
insurance reimbursements, noninterest income for the current quarter amounted to
$150,000, which represented a decline of $106,000 from the comparable quarter of
2006 mainly due to a lower level of exit fees for the Company in the current
quarter.
Noninterest Expenses. For the three months ended March 31, 2007,
noninterest expense increased by $103,000, or 7.5%, to $1.5 million compared to
$1.4 million for the same period of 2006. The higher expense level was due
primarily to additional staffing costs and related expenses in 2007 for the new
retail branch in Philadelphia and the new loan production office in Millville,
New Jersey, which were opened in 2006. Partially offsetting this increase was a
decline in professional fees of $35,000 which was due to a lower level of legal
expenses during the first quarter of 2007.
Income Taxes. The Company recorded income tax expense of $809,098 on income
before taxes of $2.1 million for the three months ended March 31, 2007,
resulting in an effective tax rate of 38.8%, compared to income tax expense of
$724,220 on income before taxes of $1.8 million for the same period of 2006,
resulting in an effective tax rate of 40.3%.
12
Financial Condition
At March 31, 2007 and December 31, 2006
(unaudited)
The following discussion compares the financial condition at March 31, 2007
to the financial condition at December 31, 2006. This discussion should be read
in conjunction with the accompanying financial statements and related notes as
well as statistical information included in the 2006 Annual Report on Form 10-K.
Total assets at March 31, 2007 amounted to $414.5 million, compared to
$360.0 million at December 31, 2006, resulting in an increase of $54.5 million,
or 15.1%. This increase was driven primarily by loan growth as the Company
continued to expand its loan portfolio through development of new and existing
business relationships.
Total loans at March 31, 2007 were $357.1 million, which represented an
increase of $46.5 million, or 15.0% above the level of $310.6 million at
December 31, 2006. Growth occurred in all loan categories with commercial loan
growth of $43.9 million, or 15.6%, representing the majority of the loan growth
for 2007. Investment securities amounted to $28.7 million at March 31, 2007
versus $26.5 million at December 31, 2006.
The allowance for loan losses amounted to $5.0 million at December 31, 2006
compared to $4.5 million at December 31, 2006. The ratio of the allowance for
loan losses to total loans decreased from 1.45% at December 31, 2006 to 1.40% at
March 31, 2007. The Company's management has taken nonperforming loans and other
loans of concern into consideration in establishing the allowance for loan
losses. The Company continues to monitor its allowance for loan losses and will
make future additions or reductions in light of the level of loans in its
portfolio and as economic conditions dictate. The current level of the allowance
for loan losses is a result of the Company's management assessment of the risks
within the portfolio based upon the information revealed in credit reporting
processes. The Company utilizes a risk-rating system on all commercial,
business, agricultural, construction, consumer, multi-family, residential and
commercial real estate loans, including purchased loans. This risk assessment
takes into account the composition of the loan portfolio and historical loss
experience for each major loan category. In addition qualitative adjustments are
made for levels and trends in delinquencies, non-accruals and impaired loans;
trends in volume; effects, if any, for changes in the Company's credit policy;
experience and depth of the lending staff; any national and local economic
trends and conditions; and concentrations of credit within the total portfolio.
Although the Company's management believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in adjustments to the allowance, which could
significantly impact the Company's financial results, if circumstances differ
substantially from the assumptions used in making the final determinations.
Future additions to the Company's allowances may result from periodic loan,
property and collateral reviews coupled with negative trends in the factors
noted above and therefore cannot always be accurately predicted in advance.
Non-performing loans, expressed as a percentage of total loans, amounted to
0.2% at March 31, 2007 versus 0.3% at December 31, 2006. At March 31, 2007, the
Company had $668,000 in non-accruing loans, which declined from $788,000 at
December 31, 2006.
Borrowings, which included Federal Home Loan Bank advances, repurchase
agreements and subordinated debentures amounted to $32.3 million at March 31,
2007 and declined slightly from $34.9 million at December 31, 2006.
13
Shareholders' equity was $32.5 million at March 31, 2007 and $30.7
million at December 31, 2006. Net income of $1.3 million, the exercise of
warrants and stock options and a reduction in unrealized investment portfolio
losses included in other comprehensive income accounted for the 5.7% increase.
Comparative Average Balances, Interest and Yields
The following table provides information regarding the average balances
and yield/rates on interest-earning assets and interest-bearing liabilities
during the periods indicated:
Three Months Ended
---------------------------------------------------------------------------------------
March 31, 2007 March 31, 2006
------------------------------------------ --------------------------------------------
Interest Interest
Average Income/ Annual Average Income/ Annual
Balance Expense Yield Balance Expense Yield
------- ------- ----- ------- ------- -----
Assets
Loans $ 331,391,970 $ 6,941,600 8.4% $ 264,439,833 $ 5,249,988 7.9%
Investment securities 28,574,797 386,217 5.4 25,473,809 302,452 4.8
Federal funds sold and other
cash equivalents 6,990,581 91,182 5.2 1,573,196 17,057 4.3
--------------- ------------- --------------- -------------
Total interest-earning assets 366,957,348 $ 7,418,999 8.1 291,486,838 $ 5,569,497 7.6
============= =============
Allowance for loan losses (4,591,903) (3,642,812)
Other assets 18,532,153 15,950,334
--------------- ---------------
Total assets $ 380,897,598 $ 303,794,360
=============== ===============
Liabilities and Shareholders' Equity
Regular savings deposits $ 26,304,518 $ 239,892 3.6% $ 34,264,053 $ 273,148 3.2%
NOW & money market 30,410,244 248,862 3.3 22,755,372 126,117 2.2
Time deposits 231,133,782 2,869,455 5.0 166,697,709 1,624,393 3.9
--------------- ------------- --------------- -------------
Total interest-bearing deposits 287,848,544 3,358,209 223,717,134 2,023,658 3.6
Borrowings 38,506,192 521,337 5.4 32,090,464 390,330 4.9
--------------- ------------- --------------- -------------
Total interest-bearing liabilities 326,304,736 $ 3,879,546 4.8 255,807,598 $ 2,413,988 3.8
============= =============
Non interest-bearing
demand deposits 18,797,848 17,416,621
Other liabilities 3,891,777 2,602,665
Shareholders' equity 31,853,207 27,967,476
--------------- ---------------
Total liabilities and
shareholders' equity $ 380,897,598 $ 303,794,360
=============== ===============
Net interest income (interest
income less interest expense) $ 3,539,453 $ 3,155,509
============= =============
Interest rate spread (average yield 3.3% 3.8%
less average rate)
Net interest margin (net interest
income/average interest-earning
assets) 3.9% 4.3%
Critical Accounting Policy
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. The
financial information contained within these statements is, to a significant
extent, financial information that is based on approximate measures of the
financial effects of transactions and events that have already occurred. Based
on its consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be related to the allowance for loan losses. The
Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both
14
quantitative and qualitative in establishing an allowance for loan loss that
management believes is appropriate at each reporting date. Quantitative factors
include the Company's historical loss experience, delinquency and charge-offs
trends, collateral values, changes in nonperforming loans, and other factors.
Quantitative factors also incorporate known information about individual loans,
including borrowers' sensitivity to increase rate movements. Qualitative factors
include the general economic environment in the Company's market area. Size and
complexity of individual credits in relation to loan structure, existing loan
policies and pace of portfolio growth are other qualitative factors that are
considered in the methodology. Management may report a materially different
amount for the provision for loan losses in the statement of operations to
change the allowance for loan losses if its assessment of the above factors were
different. This discussion and analysis should be read in conjunction with the
Company's financial statements and the accompanying notes presented elsewhere
herein, as well as the portion of this Managements Discussion and Analysis,
which discusses the allowance for loan losses in this section, entitled
"Financial Condition" at March 31, 2007 and December 31, 2006. Although
management believes the level of this allowance as of March 31, 2007 was
adequate to absorb losses inherent in the loan portfolio, a decline in local
economic conditions, or other factors, could result in increasing losses that
can not be reasonably predicated at this time.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity describes our ability to meet the financial obligations that
arise out of the ordinary course of business. Liquidity addresses the Company's
ability to meet deposit withdrawals on demand or at contractual maturity, to
repay borrowings as they mature, and to fund current and planned expenditures.
Liquidity is derived from increased repayment and income from interest-earning
assets. The loan to deposit ratio was 103.3% and 107.1% at March 31, 2007 and
December 31, 2006, respectively. Funds received from new and existing depositors
provided a large source of liquidity for the three-month period ended March 31,
2007. The Company seeks to rely primarily on core deposits from customers to
provide stable and cost-effective sources of funding to support local growth.
The Company also seeks to augment such deposits with longer term and higher
yielding certificates of deposit. To the extent that retail deposits are not
adequate to fund customer loan demand, liquidity needs can be met in the
short-term funds market. Longer term funding can be obtained through the
issuance of trust preferred securities and advances from the FHLB. As of March
31, 2007, the Company maintained lines of credit with the FHLB of $34.3 million,
of which $22.0 million was outstanding at March 31, 2007.
As of March 31, 2007, the Company's investment securities portfolio
included $13.1 million of mortgage-backed securities that provide significant
cash flow each month. The majority of the investment portfolio is classified as
available for sale, is readily marketable, and is available to meet liquidity
needs. The Company's residential real estate portfolio includes loans, which are
underwritten to secondary market criteria, and accordingly could be sold in the
secondary mortgage market if needed as an additional source of liquidity. The
Company's management is not aware of any known trends, demands, commitments or
uncertainties that are reasonably likely to result in material changes in
liquidity.
CAPITAL
A strong capital position is fundamental to support the continued growth of
the Company. The Company is subject to various regulatory capital requirements.
Regulatory capital is defined in terms of Tier I capital (shareholders' equity
as adjusted for unrealized gains or losses on available-for-sale securities),
Tier II capital (which includes a portion of the allowance for loan losses) and
total capital (Tier I plus Tier II). Risk-based capital ratios are expressed as
a percentage of risk-weighted assets. Risk-weighted assets are determined by
assigning various weights to all assets and off-balance sheet associated risk in
accordance with regulatory criteria. Regulators have also adopted minimum Tier I
leverage ratio standards, which measure the ratio of Tier I capital to total
assets.
At March 31, 2007, the Company's management believes that the Bank and the
Company are "well-capitalized" and in compliance with all applicable regulatory
requirements.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information regarding market
risk disclosed under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Interest Rate Sensitivity and
Liquidity -- Rate Sensitivity Analysis" in the Company's Annual Report for the
fiscal year ended December 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Based on their evaluation
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, (the "Exchange Act")), the
Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Quarterly Report on
Form 10-Q, such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the required time periods.
INTERNAL CONTROLS
Changes in internal control over financial reporting. During the last
quarter, there was no change in the Company's internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 27, 2004, Republic First Bank filed an action captioned
Republic First Bank v. Parke Bank and Vito S. Pantilione in the Superior Court
of New Jersey Law Division, Gloucester County. The Bank believes that the action
is without merit and intends to vigorously defend against it. The suit alleges,
among other things, fraud, negligent misrepresentation, breach of fiduciary duty
and breach of contract in connection with certain loans to two Parke Bank
customers in which Republic First Bank became a participant. Republic First Bank
is seeking unspecified damages and requesting that a receivership be appointed
for certain collateral. The complaint in the action was served on us in January
2005. The Bank filed an answer to the complaint, and the case is currently in
the discovery phase.
On June 1, 2005, Atlantic Central Bankers Bank and New Century Bank filed
an action captioned Atlantic Central Bankers Bank and New Century Bank v. Parke
Bank and Parke Capital Markets in the Superior Court of New Jersey Chancery
Division, Cape May County. The Bank believes that the action is without merit
and intends to vigorously defend against it. The suit alleges breach of
participation agreements and fraudulent misrepresentation in connection with the
plaintiffs' participations in loans to the same Parke Bank customers as the
Republic First Bank matter discussed above. In August 2005, the plaintiffs'
motion for a preliminary injunction was denied, and they were ordered to pay the
Bank's expenses. This case has been consolidated with the Republic First Bank
case.
In December, 2006, the Bank reached a preliminary agreement with both
Atlantic Central Bankers Bank and New Century Bank. Upon further negotiations
with both banks in 2007, a final agreement between the Bank and Atlantic Central
Bankers Bank and New Century Bank was signed and subsequently approved by the
court and the action was dismissed in February, 2007. As a result of the
settlement there are no longer any outstanding legal issues or potential
liability by the Bank relating to either party. Payments were recently made in
the amounts of $150,000 and $ 60,000, respectively to Atlantic Central Bankers
Bank and New Century Bank as a result of the settlements. There has been no
subsequent change in the Republic First Bank action.
16
On November 4, 2004, Stephen P. Magenta and other parties filed an action
captioned Stephen P. Magenta, et. al. v. General Insulation Services, Inc., et.
al. in the Superior Court of New Jersey Law Division, Gloucester County, related
to the alleged embezzlement of over $1 million by an employee of one of our
customers of funds maintained in accounts at the Bank. All but one of the claims
against the Bank have been dismissed. The Bank believes that the action is
without merit and intends to vigorously defend against it. In addition, the Bank
believes that this action is covered by its insurance.
Other than the foregoing, at March 31, 2007, the Company was not a party to
any material legal proceedings.
ITEM 1A. RISK FACTORS
There have been no material changes from the Risk Factors disclosed in
Company's Annual Report for the fiscal year ended December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Parke Bancorp, Inc., which was held on April
24, 2007, the shareholders of Parke Bancorp, Inc. elected all ten directors who
were nominated by the Company, as follows:
VOTES VOTES
FOR WITHHELD
----------------------------- -----------------------------
Number Percentage Number Percentage
of Votes Of Votes Cast of Votes of Votes Cast
-------- ------------- -------- -------------
For Term Expiring 2008
----------------------
Thomas Hedenberg 2,406,923 97.2% 69,123 2.8%
Richard Phalines 2,412,150 97.4% 63,896 2.6%
Ray H. Tresch 2,412,150 97.4% 63,896 2.6%
For Term Expiring 2009
----------------------
Vito S. Pantilione 2,412,344 97.4% 63,702 2.6%
Arret F. Dobson 2,412,150 97.4% 63,896 2.6%
Anthony J. Jannetti 2,469,000 97.4% 7,046 0.3%
For Term Expiring 2010
----------------------
Fred C. Choate 2,412,150 97.4% 63,896 2.6%
Jeffrey H. Kripitz 2,411,870 97.4% 64,176 2.6%
Jack C. Sheppard, Jr. 2,412,150 97.4% 63,896 2.6%
Edward Infantolino 2,412,150 97.4% 63,896 2.6%
17
The shareholders also adopted the resolution for the appointment of
McGladrey & Pullen, LLP as the Company's independent auditor for the fiscal year
ending December 31, 2007. Of shareholders that voted (86.2%), 2,207,227 (89.3%)
approved the ratification, while 264,531 (10.7%) voted against the proposal and
4,288 (0%) abstained.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31 Certifications required by Rule 13a-14(a).
32 Certification required by 18 U.S.C. ss.1350.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARKE BANCORP, INC.
Date: May 15, 2007 /s/Vito S. Pantilione
----------------------------------------
Vito S. Pantilione
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2007 /s/Robert A. Kuehl
----------------------------------------
Robert A. Kuehl
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)