UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20429
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2005
[ ] 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 small business issuer as specified in its charter)
New Jersey 65-1241959
------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
601 Delsea Drive, Washington Township, New Jersey 08080
-------------------------------------------------------
(Address of principal executive offices)
856-256-2500
------------
(Issuer's telephone number)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 No X
--- ---
Indicate be 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
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: 2,263,400 shares of common
stock outstanding as of October 20, 2005.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
PARKE BANCORP, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
INDEX
Page
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements..............................................1
Item 2. Management's Discussion and Analysis or Plan of Operation........10
Item 3. Controls and Procedures..........................................15
Part II OTHER INFORMATION
Item 1. Legal Proceedings................................................16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......16
Item 3. Default Upon Senior Securities...................................16
Item 4. Submission of Matters to a Vote of Security Holders..............16
Item 5. Other Information................................................16
Item 6. Exhibits.........................................................16
SIGNATURES...................................................................17
EXHIBITS and CERTIFICATIONS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARKE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
September 30, December 31,
2005 2004
------------- -------------
(unaudited)
ASSETS
Cash and cash due from banks $ 7,230,097 $ 1,780,280
Federal funds sold 5,587,798 21,508
------------- -------------
Cash and cash equivalents 12,817,895 1,801,788
Investment securities available for sale, at market value 20,126,308 24,042,802
Investment securities held to maturity, at amortized cost
(market value $2,339,691 in 2005 and $540,740 in 2004) 2,402,119 547,632
------------- -------------
Total investment securities 22,528,427 24,590,434
Restricted stock, at cost 746,900 1,064,200
Loans 232,109,937 188,606,990
Less: allowance for loan losses (3,199,812) (2,620,651)
------------- -------------
Total net loans 228,910,125 185,986,339
Building premises and equipment, net 3,139,169 3,247,179
Accrued interest receivable and other assets 8,010,246 7,648,623
------------- -------------
Total assets $ 276,152,762 $ 224,338,563
============= =============
See Notes to Consolidated Financial Statements
1
PARKE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
September 30, December 31,
2005 2004
------------- -------------
(unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest-bearing demand $ 17,580,840 $ 15,960,444
Interest-bearing 202,929,277 163,624,567
------------- -------------
Total deposits 220,510,117 179,585,011
Borrowed funds 5,082,500 3,100,000
Federal Home Loan Bank advances 12,230,738 17,278,726
Subordinated debentures 10,000,000 -
Accrued interest payable and other accrued liabilities 2,470,790 1,545,675
------------- -------------
Total liabilities 250,294,145 201,509,412
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 1)
SHAREHOLDERS' EQUITY
Common stock, $ 0.10 par value, 10,000,000 shares
authorized; 2,255,090 shares issued and outstanding at
September 30, 2005 and 2,175,559 shares issued and
outstanding at December 31, 2004 225,509 217,556
Preferred stock, 1,000,000 shares authorized; no shares issued and
outstanding at both dates - -
Additional paid-in capital 20,046,126 19,390,102
Retained earnings 5,818,130 3,292,697
Accumulated other comprehensive loss (231,148) (71,204)
------------- -------------
Total shareholders' equity 25,858,617 22,829,151
------------- -------------
Total liabilities and shareholders' equity $ 276,152,762 $ 224,338,563
============= =============
See Notes to Consolidated Financial Statements
2
PARKE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
------------ ------------ ------------ ------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 4,116,948 $ 2,770,890 $ 11,317,002 $ 8,022,093
Investment securities 273,994 193,454 868,372 524,030
Federal funds sold 43,426 16,006 52,290 30,905
------------ ------------ ------------ ------------
Total interest and dividend income 4,434,368 2,980,350 12,237,664 8,577,028
------------ ------------ ------------ ------------
INTEREST EXPENSE
Deposits 1,593,048 898,553 4,068,413 2,559,127
Federal Home Loan Bank advances 128,546 47,912 408,424 147,370
Borrowed funds 89,315 7,694 114,505 9,633
------------ ------------ ------------ ------------
Total interest expense 1,810,909 954,159 4,591,342 2,716.130
------------ ------------ ------------ ------------
Net interest income 2,623,459 2,026,191 7,646,322 5,860,898
PROVISION FOR LOAN LOSSES 298,005 101,951 806,162 399,411
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 2,325,454 1,924,240 6,840,160 5,461,487
------------ ------------ ------------ ------------
NONINTEREST INCOME
Loan brokerage fees -- 5,225 -- 5,225
Service charges and other fee income 237,771 278,144 718,238 575,696
Gain (loss) on sale of securities -- 7,889 (9,240) 7,889
------------ ------------ ------------ ------------
Total noninterest income 237,771 291,258 708,998 588,810
------------ ------------ ------------ ------------
NONINTEREST EXPENSES
Compensation and benefits 560,614 479,440 1,619,496 1,275,220
Occupancy, equipment and data processing 196,282 184,027 594,611 600,138
Marketing and business development 74,361 27,246 208,878 128,565
Professional services 161,522 75,646 564,672 191,037
Other operating expenses 88,945 190,534 362,418 498,599
------------ ------------ ------------ ------------
Total noninterest expenses 1,081,724 956,893 3,350,075 2,693.559
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 1,481,501 1,258,605 4,199,083 3,356,738
INCOME TAX EXPENSE 592,100 490,000 1,673,650 1,309,500
------------ ------------ ------------ ------------
NET INCOME $ 889,401 $ 768,605 $ 2,525,433 $ 2,047,238
============ ============ ============ ============
NET INCOME PER COMMON SHARE
Basic $ 0.39 $ 0.36 $ 1.13 $ 0.95
============ ============ ============ ============
Diluted $ 0.34 $ 0.31 $ 0.96 $ 0.81
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 2,253,522 2,151,334 2,235,239 2,149,081
============ ============ ============ ============
Diluted 2,652,323 2,519,009 2,626,906 2,525,064
============ ============ ============ ============
See Notes to Consolidated Financial Statements
3
PARKE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
Additional Accumulated
Paid Other Total
Common in Retained Comprehensive Shareholders'
Stock Capital Earnings Income (Loss) Equity
----- ------- -------- ------------- ------
Balance, December 31, 2003 $178,624 $19,185,351 $570,939 $57,693 $19,992,607
Stock options and
warrants exercised 902 82,092 - - 82,994
Comprehensive income
Net income for the period - - 2,047,238 - 2,047,238
Change in net unrealized gain on
securities available for sale,
net of reclassification adjustment
and tax effects, if any - - - (29,956) (29,956)
Total comprehensive income 2,017,282
-------- ----------- ---------- ------- -----------
Balance, September 30, 2004 $179,526 $19,267,443 $2,618,177 $27,737 $22,092,883
======== =========== ========== ======= ===========
Balance, December 31, 2004 $217,556 $19,390,102 $3,292,697 $(71,204) $22,829,151
Stock options and
warrants exercised 7,953 656,024 - - 663,977
Comprehensive income
Net income for the period - - 2,525,433 - 2,525,433
Change in net unrealized loss on
securities available for sale,
net of reclassification adjustment
and tax effects, if any - - - (159,944) (159,944)
Total comprehensive income 2,365,489
-------- ----------- ---------- ------- -----------
Balance, September 30, 2005 $225,509 $20,046,126 $5,818,130 $(231,148) $25,858,617
======== =========== ========== ========= ===========
See Notes to Consolidated Financial Statements
4
PARKE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
2005 2004
------------ ------------
OPERATING ACTIVITIES
Net income $ 2,525,433 $ 2,047,238
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization 198,960 184,111
Provision for loan losses 806,162 399,411
Net accretion of investment securities premiums/discounts (66,656) (46,394)
Realized losses (gains) on sale of securities 9,240 (7,889)
Changes in operating assets and liabilities:
Increase in accrued interest receivable and other assets (254,995) (641,808)
Increase in accrued interest payable and other liabilities 925,115 578,788
------------ ------------
Net cash provided by operating activities 4,143,259 2,513,457
------------ ------------
INVESTING ACTIVITIES
Purchases of investment securities available for sale (4,836,518) (7,455,477)
Proceeds from sales of restricted stock 317,300 28,100
Proceeds from sales of investment securities available for sale 5,092,055 1,144,694
Proceeds from maturities/call of investment securities
available for sale - 1,000,000
Principal payments on mortgage-backed securities
available for sale 1,597,314 1,956,324
Net increase in loans (43,729,948) (21,770,986)
Purchase of building premises and equipment (90,950) (192,763)
------------ ------------
Net cash used in investing activities (41,650,747) (25,290,108)
------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 663,977 82,994
Net increase in borrowed funds 1,982,500 2,592,970
Net increase in subordinated debt 10,000,000 -
Net decrease in Federal Home Loan Bank advances (5,047,988) (3,295,775)
Net increase in interest-bearing deposits 39,304,710 26,485,733
Net increase in noninterest-bearing deposits 1,620,396 3,105,624
------------ ------------
Net cash provided by financing activities 48,523,595 28,971,546
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 11,016,107 6,194,895
CASH AND CASH EQUIVALENTS, JANUARY 1, 1,801,788 4,267,256
------------ ------------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30, $ 12,817,895 $ 10,462,151
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and borrowed funds/FHLB advances $ 4,023,000 $ 2,599,419
============ ============
Income taxes $ 1,220,000 $ 1,413,115
============ ============
See Notes to Consolidated Financial Statements
5
PARKE BANCORP, INC. AND SUBSIDIARY
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").
Parke Bancorp recognized the assets and liabilities transferred at the carrying
amounts in the accounts of the Bank as of June 1, 2005, the effective date of
the reorganization. The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and are presented as if the exchange of shares occurred
as of January 1, 2004. Pursuant to the Plan of Acquisition, each outstanding
share of Parke Bank was converted automatically by operation of law into one
share of Parke Bancorp. Parke Bancorp had no activity prior to the competition
of this reorganization. Parke Bancorp is authorized to issue 10,000,000 shares
of common stock, par value $0.10 per share and 1,000,000 shares of serial
preferred stock, par value $0.10 per share. Options and warrants outstanding
under the Bank's various Plans were converted automatically by operation of law
into options and warrants to purchase shares of Parke Bancorp on the same terms
and conditions.
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. In addition, the Bank also has a
Loan Production Office in Philadelphia, Pennsylvania maintained exclusively for
loan production.
Financial Statements
The financial statements as of September 30, 2005 and for the
three-month and nine-month periods ended September 30, 2005 and September 30,
2004 included herein have not been audited. Comparison to 2004 year-end and
interim period financial data relate to the financial condition and results of
operations of Parke Bank. 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 Bank's audited financial statements and the notes thereto
for the years ended December 31, 2004 and 2003 included in the Bank's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2004, as filed with
the FDIC. 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 and nine months ended
September 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005 or any other periods.
Basis of Financial Statement Presentation
The financial statements include the accounts of Parke Bancorp and the
Bank. All significant inter-company accounts and transactions have been
eliminated. Such statements have been prepared in accordance with accounting
principles generally accepted in the United States of America 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.
6
Investments
The Bank 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 result 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 the
security by a rating agency, a significant deterioration in the financial
condition of the issuer, or that the Bank 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 September 30,
2005 are the result of market changes in interest rates since the securities
where purchased. This factor coupled with the fact the Bank 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.
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 September 30, 2005 and 2004 was 2,253,522 and 2,151,334, respectively, and
for the nine months ended September 30, 2005 and 2004, was 2,235,239 and
2,149,081, 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 398,801 and 367,675
additional shares for the three months period ended September 30, 2005 and 2004,
respectively, and for the nine months ended September 30, 2005 and 2004 was
391,667 and 375,983, respectively.
Both basic and diluted earnings per share computations give retroactive
effect to stock dividends declared and paid in December 2004.
7
NOTE 3. STOCK-BASED EMPLOYEE COMPENSATION
The Company has stock-based employee compensation plans. As permitted
under generally accepted accounting principles, grants of options under the
plans are accounted for under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. Because options granted under the plans had an exercise price
equal to or greater than the market value of the underlying common stock on the
date of grant, no stock-based employee compensation cost is included in
determining net income. The following table illustrates the effect on net income
and earnings per share for the three and nine months ended September 30, 2005
and 2004, if the Company had applied the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting for
Stock-Based Employee Compensation, to stock-based employee compensation. Both
basic and diluted calculations give retroactive effect to stock dividends
declared.
Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
-------- -------- ---------- ----------
Net income, as reported $889,401 $768,605 $2,525,433 $2,047,238
Deduct total stock-based
compensation expense determined
under the fair value method for
all awards, net of related tax
effects - - (90,000) (34,800)
-------- -------- ---------- ----------
Pro-forma net income $889,401 $768,605 $2,435,433 $2,012,438
======== ======== ========== ==========
Basic earnings per share:
As reported $0.39 $0.36 $1.13 $0.95
Pro-forma $0.39 $0.36 $1.09 $0.94
Diluted earnings per share:
As reported $0.34 $0.31 $0.96 $0.81
Pro-forma $0.34 $0.31 $0.93 $0.80
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
Company'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).
8
Parke Bank
For Capital
Actual Adequacy Purpose
Amount Ratio Amount Ratio
------ ----- ------ -----
As of September 30, 2005:
-------------------------
Total Risk Based Capital $37,574 16% $18,790 8%
(to Risk Weighted Assets)
Tier 1 Capital $34,627 15% $9,419 4%
(to Risk Weighted Assets)
Tier 1 Capital $34,627 13% $10,688 4%
(to Average Assets)
For Capital
Actual Adequacy Purpose
Amount Ratio Amount Ratio
------ ----- ------ -----
As of December 31, 2004:
------------------------
Total Risk Based Capital $25,254 13% $15,042 8%
(to Risk Weighted Assets)
Tier 1 Capital $22,900 12% $7,521 4%
(to Risk Weighted Assets)
Tier 1 Capital $22,900 11% $8,301 4%
(to Average Assets)
Parke Bancorp, Inc.
For Capital
Actual Adequacy Purpose
Amount Ratio Amount Ratio
------ ----- ------ -----
As of September 30, 2005:
-------------------------
Total Risk Based Capital $29,036 10% $18,830 8%
(to Risk Weighted Assets)
Tier 1 Capital $26,089 11% $9,415 4%
(to Risk Weighted Assets)
Tier 1 Capital $26,089 12% $10,688 4%
(to Average Assets)
For Capital
Actual Adequacy Purpose
Amount Ratio Amount Ratio
------ ----- ------ -----
As of December 31, 2004:
------------------------
Total Risk Based Capital n/a n/a n/a 8%
(to Risk Weighted Assets)
Tier 1 Capital n/a n/a n/a 4%
(to Risk Weighted Assets)
Tier 1 Capital n/a n/a n/a 4%
(to Average Assets)
Management believes, as of September 30, 2005 and December 31, 2004,
that the Bank and the Bancorp met all capital adequacy requirements to which it
was subject.
9
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 securities to investors. The
variable interest rate re-prices quarterly at the three-month LIBOR plus 1.66%
and was 5.48% at September 30, 2005. 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.
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-QSB, annual reports on
Form 10-KSB and any current reports on Form 8-K.
10
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 September 30, 2005 Compared to
Three Months Ended September 30, 2004
(Unaudited)
The following discussion compares the results of operations for the
three month period ended September 30, 2005 (unaudited) to the results of
operations for the three month period ended September 30, 2004 (unaudited). This
discussion should be read in conjunction with the accompanying financial
statements (unaudited) and related notes as well as the financial information
included in the 2004 annual report on Form 10KSB.
Net Income. For the three months ended September 30, 2005, net income
totaled $889,401, compared to $768,605 for the three months ended September 30,
2004. Diluted earnings per share for the three months ended September 30, 2005
totaled $0.34, compared to $0.31 per share for the same period of 2004.
Increased net income for the three months ended September 30, 2005 was
attributable primarily to increases in revenue (net interest income and non
interest income) of $543,781, partially offset by an increase in the provision
for loan losses of $196,054, an increase in non interest expenses of $124,831,
and an increase in tax expense of $102,100.
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 three months ended September 30, 2005
totaled $2.6 million, an increase of 29.5% compared to $2.0 million for the
three months ended September 30, 2004. The increase is directly attributable to
the growth in loan balances. The net interest margin for the three months ended
September 30, 2005 was 4.2%, compared to 4.3% for the comparable period of 2004.
Interest income increased by $1.5 million for the three months ended
September 30, 2005, primarily as a result of an increase of $64.6 million in
average interest-earning assets. Average loans outstanding increased by $60.2
million and average investment securities increased by $4.4 million. Yields on
earning assets for the three months ended September 30, 2005 increased to 7.0%
from 6.4% for the same period of 2004. Interest expense increased by $856,750,
which is primarily attributable to average interest-bearing liabilities
increasing by $59.9 million coupled with a general rise in interest rates.
Average interest-bearing deposits increased by $49.0 million and average
borrowings increased by $10.9 million. The average rate paid on interest-bearing
liabilities increased to 3.3% for the three months ended September 30, 2005 from
2.2% for the same period of 2004.
Noninterest Income. Noninterest income decreased $53,487, or 18.4%, for
the three months ended September 30, 2005 to $237,771, down from $291,258 for
the same period of 2004, reflecting mainly a decrease in service charges.
Provision for Loan Losses. The provision for loan losses was $298,005
for the three months ended September 30, 2005, compared to $101,951 for the same
period in 2004. The increase in the provision for the 2005 period was due to
substantial loan growth in 2005.
11
Noninterest Expenses. For the three months ended September 30, 2005,
noninterest expenses increased by $124,831, or 13.1%, to $1.1 million compared
to $956,893 for the same period of 2004. A 16.9% increase in compensation
expenses was related to personnel costs for staffing increases to support loan
and deposit growth. In addition, marketing costs increased for new promotional
programs, and professional fees increased due to the formation of the holding
company.
Income Taxes. The Company recorded income tax expense of $592,100, on
income before taxes of $1.5 million for the three months ended September 30,
2005, resulting in an effective tax rate of 40.0%, compared to income tax
expense of $490,000 on income before taxes of $1.3 million for the same period
of 2004, resulting in an effective tax rate of 38.9%.
Results of Operations
Nine Months Ended September 30, 2005 Compared to
Nine Months Ended September 30, 2004
(Unaudited)
The following discussion compares the results of operations for the
nine months ended September 30, 2005 (unaudited) to the results of operations
for the nine months ended September 30, 2004 (unaudited). This discussion should
be read in conjunction with the accompanying financial statements (unaudited)
and related notes as well as the financial information included in the 2004
annual report on Form 10KSB.
Net Income. For the nine months ended September 30, 2005, net income
totaled $2.5 million, compared to $2.0 million for the nine months ended
September 30, 2004. Diluted earnings per share for the first nine months of 2005
totaled $0.96, compared to $0.81 per share for the same period of 2004.
Increased net income for the first nine months of 2004 was attributable
primarily to increases in revenue (net interest income and noninterest income)
of $1.9 million, partially offset by an increase in the provision for loan
losses of $406,751, an increase in noninterest expenses of $656,516, and an
increase in tax expense of $364,150.
Net Interest Income. Net interest income for the first nine months of
2005 totaled $7.6 million, an increase of 30.4% over $5.9 million for the nine
months ended September 30, 2004. Net interest income increased during the nine
months ended September 30, 2005 due to increased interest income. The net
interest margin for the nine months ended September 30, 2005 was 4.3%, which was
the slightly lower for the comparable period last year of 4.4%..
Interest income increased by $3.7 million, driven by an increase of
$58.7 million in average interest-earning assets. Average loans outstanding
increased by $52.7 million, while average investment securities increased by
$6.0 million and federal funds sold decreased by $1.4 million. Yields on earning
assets for the nine months ended September 30, 2005 increased to 6.9% from 6.4%
for the same period of 2004. Interest expense increased by $1.9 million for the
nine months. Average interest-bearing liabilities increased by $51.1 million.
Average interest-bearing deposits increased by $42.0 million and average
borrowings increased by $9.1 million. The average rate paid on interest-bearing
liabilities increased to 3.0% for the nine months ended September 30, 2005 from
2.3% for the same period of 2004.
Noninterest Income. Noninterest income increased $120,188, or 20.4%,
for the nine months ended September 30, 2005 to $708,998, up from $588,810 for
the same period of 2004 due to additional loan exit fees in 2005.
Provision for Loan Losses. The provision for loan losses was $806,162
for the nine months ended September 30, 2005, compared to $399,411 for the same
period in 2004. The increase in the provision for the 2005 period was due to
substantial loan growth in 2005.
Noninterest Expenses. For the nine months ended September 30, 2005,
noninterest expenses increased by $656,516, or 24.4%, to $3.4 million compared
to $2.7 million for the same period of 2004. A 27.0% increase in compensation
expenses was related to personnel costs as a result of staffing increases in the
loan and deposit areas compared to the same period of 2004. Professional
expenses increased $373,635 to $564,672 due to reorganization and costs
associated with the formation of the holding company.
Income Taxes. The Company recorded income tax expense of $1.7 million
on income before taxes of $4.2 million for the nine months ended September 30,
2005, resulting in an effective tax rate of 39.9%, compared to income tax
expense of $1.3 million on income before taxes of $3.4 million for the same
period of 2004, resulting in an effective tax rate of 39.0%.
12
Financial Condition
At September 30, 2005 and December 31, 2004
(Unaudited)
The following discussion compares the financial condition at September
30, 2005 (unaudited0 to the financial statements at December 31, 2004. This
discussion should be read in conjunction with the accompanying financial
statements (unaudited) and related notes as well as statistical information
included in this Form 10-QSB.
Total assets increased to $276.2 million at September 30, 2005,
compared to $224.3 million at December 31, 2004, increasing $51.8 million, or
23.1%. Loans outstanding increased $43.5 million, or 23.2%. Deposits increased
by $40.9 million, or 22.8%. Borrowed funds increased by $6.9 million, or 34.0%.
Shareholders' equity increased by $3.0 million, or 13.3%, driven by net income
of $2.5 million for the nine months ended September 30, 2005, and the exercise
of warrants and options in the amount of $663,977.
The increase in total loans was primarily due to increases in the
commercial loans, which grew by $41.7 million and totaled $209.0 million as of
September 30, 2005. This increase is in line with the Company's management's
strategic plan and reflects increased origination activity over the past year
and a strong local real estate market. All other categories of loans increased
in the aggregate by $1.8 million.
Allowance for Loan Losses. The allowance for loan losses was $3.2
million at September 30, 2005 as compared to $2.6 million at December 31, 2004.
The ratio of the allowance for loan losses to total loans decreased to 1.38% at
September 30, 2005 from 1.39% at December 31, 2004. The Company's management has
considered non-performing assets and other assets of concern 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's
assessment of the risks within the portfolio based on the information revealed
in credit reporting processes. The Company utilizes a risk-rating system on all
commercial, business, agricultural, construction and multi-family and commercial
real estate loans, including purchased loans. A periodic credit review is
performed on all types of loans to establish the necessary reserve based on the
estimated risk within the portfolio. This assessment of risk takes into account
the composition of the loan portfolio, historical loss experience for each loan
category, previous loan experience, concentrations of credit, current economic
conditions, and other factors that in management's judgment deserve recognition.
Although the Company's management believes that it uses the best
information available to determine the allowances, unforeseen market conditions
could result in adjustments and net earnings being significantly affected 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 and thus cannot be predicted in
advance.
Non-performing assets, expressed as a percentage of total assets,
increased to 0.2% at September 30, 2005, from 0.1% at December 31, 2004. At
September 30, 2005, the Company had $520,000 in non-accruing loans, which
increased from $240,816 in non-accruing loans at December 31, 2004. One loan
became non-accrual during the quarter
Deposits. Deposits totaled $220.5 million at September 30, 2005,
increasing $40.9 million, or 22.8%, from the December 31, 2004 balance of $179.6
million. The increase in deposits is attributable to the Company's management's
growth strategy, which includes significant marketing, promotion and cross
selling of additional products to existing customers. New accounts generated
$15.0 million in savings deposits in the third quarter due to a successful
promotion program. In addition, the Company continued to use brokered deposits
as a funding source when needed.
Included in deposits at September 30, 2005 and December 31, 2004 were
$61.4 million and $38.9 million, respectively, of brokered deposits.
Borrowed Funds. Borrowed funds totaled $27.3 million at September 30,
2005, increasing $6.9 million, or 34.0%, from December 31, 2004. This increase
was attributable to the issuance of trust preferred securities totaling $10
million in August 2005 offset by maturities of the Federal Home Loan Bank
("FHLB") advances.
13
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:
` Nine Months Ended
-----------------------------------------------------------------------------------------
September 30, 2005 September 30, 2004
------------------------------------------- -------------------------------------------
Average Interest Annual Average Interest Annual
Balance Income/Expense Yield Balance Income/Expense Yield
------- -------------- ----- ------- -------------- -----
Assets
Loans $209,947,182 $11,317,002 7.2% $157,224,069 $8,022,093 6.8%
Investment securities 24,289,057 868,372 4.8 16,889,054 524,030 4.1
Federal funds sold 2,221,788 52,290 3.1 3,654,156 30,905 1.1
------------ ----------- ------------ ----------
Total interest-earning assets 236,458,027 $12,237,664 6.9 177,767,279 $8,577,028 6.4
=========== ==========
Allowance for loan losses (2,906,584) (2,425,438)
Other assets 15,486,413 15,804,506
------------ ------------
Total assets $249,037,856 $191,146,347
============ ============
Liabilities and Shareholders' Equity
Regular savings deposits $ 25,254,599 $ 466,304 2.5% $ 22,031,171 $ 326,297 2.0%
NOW & money market 25,456,954 330.053 1.7 29,378,005 344,090 1.6
Time deposits 135,735,369 3,272,056 3.2 93,035,065 1,888,740 2.7
------------ ---------- ------------ ---------- -
Total interest-bearing deposits 186,446,922 4,068,413 2.9 144,444,241 2,559,127 2.2
Borrowed funds & FHLB advances 19,748,951 522,929 3.5 10,645,789 157,003 2.0
------------ ---------- ------------ ----------
Total interest-bearing liabilities 206,195,873 $4,591,342 3.0 155,090,030 $2,716,130 2.3
========== ==========
Non interest-bearing demand deposits 16,473,659 13,547,222
Other liabilities 1,777,934 1,498,584
Shareholders' equity 24,590,390 21,010,511
------------ ------------
Total liabilities and shareholders'
Equity $249,037,856 $191,146,347
============ ============
Net interest income $7,646,322 $5,860,898
========== ==========
Interest rate spread 3.9% 4.1%
Net interest margin 4.3% 4.4%
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 used 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 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". Although management
believes the levels of this allowance as of September 30, 2005 and December 31,
2004 were 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.
14
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 103.8% and 105.0% at September 30, 2005
and December 31, 2004, respectively. Funds received from new and existing
depositors provided a large source of liquidity for the nine month period ended
September 30, 2005. 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
September 30, 2005, the Company maintained lines of credit with the FHLB of
$23.9 million.
As of September 30, 2005, the Company's investment securities portfolio
included $8.6 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. Regulators have also adopted minimum Tier
I leverage ratio standards, which measure the ratio of Tier I capital to total
assets.
At September 30, 2005, the Company's management believes that the Bank
and the Company are "well-capitalized" and in compliance with all applicable
regulatory requirements.
ITEM 3. 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-QSB, 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
fiscal 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.
15
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, alleging, 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. The Bank believes that the action is without merit and intends
to vigorously defend against it.
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, alleging 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, and
is currently in the discovery phase. The Bank believes that the action is
without merit and intends to vigorously defend against it.
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 September 30, 2005, the Company was not a
party to any material legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31 Certifications required by Rule 13a-14(a) or 15d-14(a).
32 Certification required by Rule 13a-14(b) or 15d-14(b) and 18
U.S.C. Section 1350.
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PARKE BANCORP, INC.
Date: November 9, 2005 /s/Vito S. Pantilione
-------------------------------------
Vito S. Pantilione
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 9, 2005 /s/Ernest D. Huggard
-------------------------------------
Ernest D. Huggard
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)