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, 2006
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 incorporation (IRS Employer
or organization) Identification No.)
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 4, 2006, there were issued and outstanding 2,830,811 shares of
the registrant's common stock.
PARKE BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2006
INDEX
Page
----
Part I FINANCIAL INFORMATION
------
Item 1. Financial Statements........................................................1
Item 2. Management's Discussion and Analysis of Financial Conditional
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..........................................................17
Item 1A. Risk Factors...............................................................17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................17
Item 3. Default Upon Senior Securities.............................................17
Item 4. Submission of Matters to a Vote of Security Holders........................17
Item 5. Other Information..........................................................17
Item 6. Exhibits...................................................................18
SIGNATURES
EXHIBITS and CERTIFICATIONS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARKE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2006 2005
------------- -------------
(Unaudited)
Assets
Cash and cash due from banks $ 3,759,026 $ 4,377,196
Federal funds sold 687,097 2,840
------------- -------------
Cash and cash equivalents 4,446,123 4,380,036
------------- -------------
Investment securities available for sale, at market value 21,118,393 22,022,944
Investment securities held to maturity, at amortized cost
(market value $2,362,043 at March 31, 2006 and
$2,322,985 at December 31, 2005) 2,413,397 2,405,841
------------- -------------
Total investment securities 23,531,790 24,428,785
------------- -------------
Restricted stock, at cost 1,072,400 1,348,900
------------- -------------
Loans 271,966,530 259,035,088
Less: allowance for loan losses (3,808,812) (3,573,812)
------------- -------------
Total net loans 268,157,718 255,461,276
------------- -------------
Bank premises and equipment, net 3,023,429 3,079,876
Accrued interest receivable and other assets 8,940,041 9,111,571
------------- -------------
Total assets $ 309,171,501 $ 297,810,444
============= =============
See Notes to Consolidated Financial Statements
1
PARKE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2006 2005
------------- -------------
(Unaudited)
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing demand $ 21,033,447 $ 17,918,339
Interest-bearing 227,283,148 214,137,969
------------- -------------
Total deposits 248,316,595 232,056,308
Borrowed funds 5,049,750 5,082,500
Federal Home Loan Bank advances 14,418,978 20,574,360
Subordinated debentures 10,310,000 10,310,000
Accrued interest payable and other accrued liabilities 2,590,780 2,593,949
------------- -------------
Total liabilities 280,686,103 270,617,117
------------- -------------
Commitments and Contingencies (Note 1)
Shareholders' Equity
Common stock, $0.10 par value, 10,000,000 shares
authorized; 2,825,107 shares issued and outstanding at
March 31, 2006 and 2,317,364 shares issued and
outstanding at December 31, 2005 282,511 231,736
Preferred stock, 1,000,000 shares authorized; no shares issued
and outstanding -- --
Additional paid-in capital 20,749,046 20,511,410
Retained earnings 7,862,581 6,787,118
Accumulated other comprehensive (loss) (350,720) (286,296)
Treasury stock, at cost (3,288 shares at March 31, 2006 and
2,380 shares at December 31, 2005) (58,020) (50,641)
------------- -------------
Total shareholders' equity 28,485,398 27,193,327
------------- -------------
Total liabilities and shareholders' equity $ 309,171,501 $ 297,810,444
============= =============
2
PARKE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months ended March 31,
------------------------------------
2006 2005
---------- ----------
Interest and Dividend Income
Loans, including fees $5,249,988 $3,399,121
Investment securities 302,452 297,248
Federal funds sold 17,057 118
---------- ----------
Total interest and dividend income 5,569,497 3,696,487
---------- ----------
Interest Expense
Deposits 2,023,658 1,115,880
Borrowings 390,330 149,321
---------- ----------
Total interest expense 2,413,988 1,265,201
---------- ----------
Net interest income 3,155,509 2,431,286
Provision for Loan Losses 235,000 232,134
---------- ----------
Net interest income after provision for loan losses 2,920,509 2,199,152
---------- ----------
Noninterest Income
Service charges on deposit accounts 36,132 42,644
Other fee income 219,718 110,063
---------- ----------
Total noninterest income 255,850 152,707
---------- ----------
Noninterest Expenses
Compensation and benefits 676,497 526,032
Occupancy, equipment and data processing 212,711 195,078
Marketing and business development 53,428 33,827
Professional services 149,029 197,408
Other operating expenses 265,011 181,497
---------- ----------
Total noninterest expenses 1,376,676 1,133,842
---------- ----------
Income Before Income Tax Expense 1,799,683 1,218,017
Income Tax Expense 724,220 486,000
---------- ----------
Net Income $1,075,463 $ 732,017
========== ==========
Net Income Per Common Share:
Basic $ 0.39 $ 0.28
========== ==========
Diluted $ 0.33 $ 0.23
========== ==========
Weighted Average Shares Outstanding:
Basic 2,786,659 2,645,734
========== ==========
Diluted 3,283,668 3,153,211
========== ==========
3
PARKE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited)
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Shareholders'
Stock Capital Earnings Income (Loss) Treasury Stock Equity
----- ------- -------- ------------- -------------- ------
Balance, December 31, 2004 $217,556 $19,390,102 $3,292,697 $ (71,204) $ - $22,829,151
Stock options and warrants exercised 5,757 468,438 - - - 474,195
Comprehensive income:
Net income for the period - - 732,017 - - 732,017
Change in net unrealized gain on
securities available for sale,
net of reclassification
adjustment and tax effects, if
any - - - (159,275) - (159,275)
-----------
Total comprehensive income 572,742
-------- ----------- ---------- --------- ---------- -----------
Balance, March 31, 2005 $223,313 $19,858,540 $4,024,714 $(230,479) $ - $23,876,088
======== =========== ========== ========= ========== ===========
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
======== =========== ========== ========= ========== ===========
4
PARKE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31,
------------------------------------
2006 2005
------------ ------------
Operating Activities
Net income $ 1,075,463 $ 732,017
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 63,125 65,752
Provision for loan losses 235,000 232,134
Net accretion of investment securities premiums/discounts (5,530) (34,944)
Changes in operating assets and liabilities:
Increase (Decrease) in accrued interest receivable and other assets 714,479 (398,416)
(Decrease) Increase in accrued interest payable and other liabilities (3,169) 500,819
------------ ------------
Net cash provided by operating activities 2,079,368 1,097,362
------------ ------------
Investing Activities
Purchases of investment securities available for sale - (1,000,000)
Proceeds from redeemed restricted stock 276,500 65,700
Principal payments on mortgage-backed securities 295,152 276,896
Net increase in loans (12,931,442) (11,943,300)
Purchase of building premises and equipment (6,678) (24,725)
------------ ------------
Net cash used in investing activities (12,366,468) (12,625,429)
------------ ------------
Financing Activities
Proceeds from exercise of stock options and warrants 288,411 474,195
Purchase of treasury stock (7,379) -
Proceeds from borrowings 1,500,000 -
Repayment of borrowings (7,688,132) (885,808)
Net increase in interest-bearing deposits 13,145,179 14,409,973
Net increase in noninterest-bearing deposits 3,115,108 (705,314)
------------ ------------
Net cash provided by financing activities 10,353,187 13,293,046
------------ ------------
Increase in cash and cash equivalents 66,087 1,764,979
Cash and Cash Equivalents, January 1, 4,380,036 1,801,788
------------ ------------
Cash and Cash Equivalents, March 31, $ 4,446,123 $ 3,566,767
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest on deposits and borrowings $ 2,146,876 $ 1,032,738
============ ============
Income taxes $ 850,000 $ -
============ ============
6
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").
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 ("GAAP") and are presented as if the exchange of shares
occurred as of January 1, 2005. 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
completion 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 March 31, 2006 and for the three-month
periods ended March 31, 2006 and 2005 included herein have not been audited.
Comparison to 2005 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 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, 2005 included
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2005, 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, 2006 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2006 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 and Parke Capital Markets. 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.
6
PARKE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 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, 2006 are the result of market changes in interest rates since the
securities where 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.
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, 2006 and 2005 were 2,786,659 and 2,645,734, 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 496,679 and 507,477
additional shares for the three months period ended March 31, 2006 and 2005,
respectively.
NOTE 3. STOCK-BASED EMPLOYEE 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
7
PARKE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Because options granted had an exercise price equal to or greater than the
market value of the underlying common stock on the date of the grant, no
stock-based employee compensation cost was included in determining net income
for the three months ended March 31, 2005.
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 for such options.
During the three months ended March 31, 2006, the Company did not issue any
options. The Company will use the Black-Scholes option pricing model to estimate
the fair value of any stock-based awards in 2006.
As of March 31, 2006, there were no unvested options and, accordingly,
no unrecognized compensation cost related to share-based payments to be
recognized in the future.
The following table illustrates the effect on net income and earnings
per share for the three months ended March 31, 2005, 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 March 31,
----------------------------
2005
---------------
Net income, as reported $ 732,017
Deduct total stock-based (90,000)
compensation expense
determined under the fair
value method for all awards,
net of related tax effects
---------------
Pro-forma net income $ 642,017
===============
Basic earnings per share:
As reported $ 0.28
Pro-forma $ 0.24
Diluted earnings per share:
As reported $ 0.23
Pro-forma $ 0.20
NOTE 4. REGULATORY RESTRICTIONS
Both the Company and the Bank are 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
8
PARKE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and 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).
Parke Bank
For Capital
Actual Adequacy Purpose
Amount Ratio Amount Ratio
------ ----- ------ -----
As of March 31, 2006:
---------------------
(amounts in thousands)
Total Risk Based Capital $41,084 15% $21,768 8%
(to Risk Weighted Assets)
Tier 1 Capital $37,678 14% $10,884 4%
(to Risk Weighted Assets)
Tier 1 Capital $37,678 12% $12,138 4%
(to Average Assets)
For Capital
Actual Adequacy Purpose
Amount Ratio Amount Ratio
------ ----- ------ -----
As of December 31, 2005:
------------------------
(amounts in thousands)
Total Risk Based Capital $39,416 15% $20,825 8%
(to Risk Weighted Assets)
Tier 1 Capital $36,158 14% $10,413 4%
(to Risk Weighted Assets)
Tier 1 Capital $36,158 13% $11,370 4%
(to Average Assets)
Parke Bancorp, Inc.
For Capital
Actual Adequacy Purpose
Amount Ratio Amount Ratio
------ ----- ------ -----
As of March 31, 2006:
---------------------
(amounts in thousands)
Total Risk Based Capital $42,217 17% $21,637 8%
(to Risk Weighted Assets)
Tier 1 Capital $35,705 13% $9,822 4%
(to Risk Weighted Assets)
Tier 1 Capital $35,705 12% $12,138 4%
(to Average Assets)
9
PARKE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For Capital
Actual Adequacy Purpose
Amount Ratio Amount Ratio
------ ----- ------ -----
As of December 31, 2005:
------------------------
(amounts in thousands)
Total Risk Based Capital $40,737 16% $20,856 8%
(to Risk Weighted Assets)
Tier 1 Capital $34,349 13% $10,428 4%
(to Risk Weighted Assets)
Tier 1 Capital $34,349 12% $11,370 4%
(to Average Assets)
Management believes, as of March 31, 2006 and December 31, 2005, that
the Bank and the Company 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 securities to investors. The
variable interest rate re-prices quarterly at the three-month LIBOR plus 1.66%
and was 6.43% at March 31, 2006. 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.
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, 2006 Compared to Three Months Ended March 31, 2005
(Unaudited)
The following discussion compares the results of operations for the
three month period ended March 31, 2006 to the results of operations for the
three month period ended March 31, 2005. This discussion should be read in
conjunction with the accompanying financial statements and related notes as well
as the financial information included in the 2005 Annual Report on Form 10-K.
Net Income. For the three months ended March 31, 2006, net income
totaled $1,075,463, compared to $732,017 for the three months ended March 31,
2005. Diluted earnings per share for the three months ended March 31, 2006
totaled $0.33, compared to $0.23 per share for the same period of 2005.
Increased net income for the three months ended March 31, 2006 was attributable
primarily to increases in revenue (net interest income and non interest income)
of $827,366, partially offset by an
11
increase in the provision for loan losses of $2,866, an increase in non interest
expenses of $242,834 and an increase in income tax expense of $238,220.
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 March 31, 2006 totaled
$3.2 million, an increase of 29.8% compared to $2.4 million for the three months
ended March 31, 2005. The increase is primarily attributable to the growth in
loan balances. The net interest margin for the three months ended March 31, 2006
was 4.3%, compared to 4.5% for the comparable period of 2005.
Interest income increased by $1.9 million for the three months ended
March 31, 2006, primarily as a result of an increase of $73.3 million in average
interest-earning assets. Average loans outstanding increased by $71.2 million
and average investment securities and federal funds increased by $2.1 million.
Yields on earning assets for the three months ended March 31, 2006 increased to
7.6% from 6.8% for the same period of 2005. Interest expense increased by $1.1
million, which is primarily attributable to average interest-bearing liabilities
increasing by $65.6 million coupled with a general rise in interest rates.
Average interest-bearing deposits increased by $52.5 million and average
borrowings increased by $13.1 million. The average rate paid on interest-bearing
liabilities increased to 3.8% for the three months ended March 31, 2006 from
2.7% for the same period of 2005.
Provision for Loan Losses. The provision for loan losses was $235,000
for the three months ended March 31, 2006, compared to $232,134 for the same
period in 2005.
Noninterest Income. Noninterest income increased $103,143, or 67.6%,
for the three months ended March 31, 2006 to $255,850, up from $152,707 for the
same period of 2005, reflecting mainly an increase in other fee income.
Noninterest Expenses. For the three months ended March 31, 2006,
noninterest expenses increased by $242,834, or 21.4%, to $1.4 million compared
to $1.1 million for the same period of 2005. A 28.6% increase in compensation
expenses was related to personnel costs for staffing increases to support loan
and deposit growth. Marketing costs increased for new promotional deposit
programs.
Income Taxes. The Company recorded income tax expense of $724,220, on
income before taxes of $1.8 million for the three months ended March 31, 2006,
resulting in an effective tax rate of 40.3%, compared to income tax expense of
$486,000 on income before taxes of $1.2 million for the same period of 2005,
resulting in an effective tax rate of 39.9%.
Financial Condition
At March 31, 2006 and December 31, 2005
(Unaudited)
The following discussion compares the financial condition at March 31,
2006 to the financial statements at December 31, 2005. This discussion should be
read in conjunction with the accompanying financial statements and related notes
as well as statistical information included in this Form 10-Q.
Total assets increased to $309.2 million at March 31, 2006, compared to
$297.8 million at December 31, 2005, increasing $11.4 million, or 3.8%. Gross
loans outstanding increased to $272.0 million, or 5.0% from $259.0 million at
December 31, 2005. Deposits increased by $16.3 million, or 7.0%. Borrowed funds
decreased by $6.2 million, or 17.2%. Shareholders' equity increased by $1.3
million, or 4.8%, driven by net income of $1.1 million for the three months
ended March 31, 2006, and the exercise of warrants and options in the amount of
$288,411.
12
The increase in total loans was primarily due to increases in the
commercial loans, which grew by $10.9 million and totaled $246.9 million as of
March 31, 2006. This increase is in line with 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
$2.0 million.
Allowance for Loan Losses. The allowance for loan losses was $3.8
million at March 31, 2006 as compared to $3.6 million at December 31, 2005. The
ratio of the allowance for loan losses to total loans increased to 1.40% at
March 31, 2006 from 1.38% at December 31, 2005. 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,
remained the same at 0.6% at March 31, 2006 and December 31, 2005. At March 31,
2006, the Company had $2.0 million in non-accruing loans, which increased from
$1.9 million in non-accruing loans at December 31, 2005. One loan became
non-accrual during the quarter ended March 31, 2006.
Deposits. Deposits totaled $248.3 million at March 31, 2006, increasing
$16.3 million, or 7.0%, from the December 31, 2005 balance of $232.1 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.
Included in deposits at March 31, 2006 and December 31, 2005 were $64.9
million and $67.2 million, respectively, of brokered deposits.
Borrowings. Total borrowings, consisting of borrowed funds, Federal
Home Loan Bank (FHLB) advances and subordinated debentures, totaled $29.8
million at March 31, 2006, decreasing $6.2 million, or 17.2%, from December 31,
2005. The decrease was a result of maturities of FHLB advances during 2006.
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:
Three Months Ended
-----------------------------------------------------------------------------------
March 31, 2006 March 31, 2005
------------------------------------- ----------------------------------------
Interest Interest
Average Income/ Annual Average Income/ Annual
Balance Expense Yield Balance Expense Yield
------- ------- ----- ------- ------- -----
Assets
Loans $264,439,833 $5,249,988 7.9% $193,250,264 $3,399,121 7.0%
Investment securities 25,473,809 302,452 4.8 24,950,310 297,248 4.8
Federal funds sold 1,573,196 17,057 4.3 21,541 118 2.2
------------ ---------- ------------ ----------
Total interest-earning assets 291,486,838 $5,569,497 7.6 218,222,115 $3,696,487 6.8
========== ==========
Allowance for loan losses (3,642,812) (2,702,390)
Other assets 15,950,334 14,421,094
------------ ------------
Total assets $303,794,360 $229,940,819
============ ============
Liabilities and Shareholders' Equity
Regular savings deposits $ 34,264,053 $ 273,148 3.2% $ 22,967,645 $ 115,983 2.0%
NOW & money market 22,755,372 126,117 2.2 28,052,212 120,180 1.7
Time deposits 166,697,709 1,624,393 3.9 120,180,595 879,717 2.9
------------ ---------- ------------ ----------
Total interest-bearing deposits 223,717,134 2,023,658 3.6 171,200,452 1,115,880 2.6
Borrowings 32,090,464 390,330 4.9 18,978,761 149,321 3.1
------------ ---------- ------------ ----------
Total interest-bearing liabilities 255,807,598 $2,413,988 3.8 190,179,213 $1,265,201 2.7
========== ==========
Non interest-bearing
demand deposits 17,416,621 14,671,678
Other liabilities 2,602,665 1,587,403
Shareholders' equity 27,967,476 23,502,525
------------ ------------
Total liabilities and
shareholders' equity $303,794,360 $229,940,819
============ ============
Net interest income $3,155,509 $2,431,286
========== ==========
Interest rate spread 3.8% 4.1%
Net interest margin 4.3% 4.5%
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,
14
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 level of this allowance as of March 31, 2006 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 108.1% and 110.0% at March 31, 2006 and
December 31, 2005, respectively. Funds received from new and existing depositors
provided a large source of liquidity for the three-month period ended March 31,
2006. 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, 2006, the Company maintained lines of credit with the FHLB of $23.9 million.
As of March 31, 2006, the Company's investment securities portfolio
included $8.9 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 March 31, 2006, 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, 2005.
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
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.
16
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, and is currently in the discovery phase.
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, 2006, 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, 2005.
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.
17
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, 2006 /s/VITO S. PANTILIONE
-------------------------------------
Vito S. Pantilione
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2006 /s/ERNEST D. HUGGARD
-------------------------------------
Ernest D. Huggard
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)