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PKBK > SEC Filings for PKBK > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for PARKE BANCORP, INC.

Form 10-Q for PARKE BANCORP, INC.


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, the impact of the Bank's compliance with the Consent Orders entered into with the FDIC and the Department, 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.

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 non-interest income such as service charges, gains from the sale of loans, earnings from BOLI, loan exit fees and other fees. The Company's non-interest 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.

The Company is intently focused on managing its non-performing assets. The deterioration of the local real estate market and the continued high levels of unemployment have had a significant negative impact on the credit quality of our loan portfolio. Management has allocated significant resources to resolve these issues, either through foreclosure or working with borrowers to bring the loans current. New processes have been implemented to identify and monitor impaired loans. New appraisals of the collateral securing impaired loans have been obtained to identify any potential exposure. The lengthy process of foreclosure has had a negative impact on earnings due to higher levels of legal fees.


Comparison of Financial Condition at September 30, 2012 and December 31, 2011

At September 30, 2012, the Company's total assets decreased to $770.2 million from $790.7 million at December 31, 2011, a decrease of $20.5 million or 2.6%.

Cash and cash equivalents decreased $9.3 million to $100.9 million at September 30, 2012 from $110.2 million at December 31, 2011.

Total investment securities decreased to $23.5 million at September 30, 2012 ($21.5 million classified as available for sale or 91.2%) from $24.5 million at December 31, 2011, a decrease of $1.0 million or 4.2%.

Management evaluates the investment portfolio for OTTI on a quarterly basis. Factors considered in the analysis include, but are not limited to, whether an adverse change in cash flows has occurred, the length of time and the extent to which the fair value has been less than cost, whether the Company intends to sell, or will more likely than not be required to sell, the investment before recovery of its amortized cost basis, which may be maturity, credit rating downgrades, the percentage of performing collateral that would need to default or defer to cause a break in yield or a temporary interest shortfall, and management's assessment of the financial condition of the underlying issuers. For the three months and nine months ended September 30, 2012, the Company did not recognize any credit-related OTTI charges.

Total gross loans decreased to $603.6 million at September 30, 2012 from $625.1 million at December 31, 2011, a decrease of $21.5 million or 3.4%. The decrease in the loan portfolio was a result of charge-offs of impaired loan balances and loan pay-offs.

Delinquent loans totaled $59.7 million or 9.9% of total loans at September 30, 2012, an increase of $8.8 million from December 31, 2011. Delinquent loan balances by number of days delinquent were: 30 to 59 days --- $1.8 million; 60 to 89 days --- $5.0 million; 90 days and greater not accruing interest --- $52.9 million.

At September 30, 2012, the Company had $52.9 million in nonaccrual loans or 8.8% of total loans, an increase from $44.5 million or 7.1% of total loans at December 31, 2011. The three largest relationships in nonaccrual loans are a $7.9 million retail center construction loan, a $6.6 million retail center construction loan and a $3.2 million residential condominium loan.


The composition of nonaccrual loans as of September 30, 2012 and December 31, 2011 was as follows:

                                        September 30,           December 31,
                                             2012                   2011
                                       (Amounts in thousands except ratios)
Commercial and Industrial            $               303       $             -
Real Estate Construction:
Residential                                        1,035                 5,265
Commercial                                        14,501                 7,703
Real Estate Mortgage:
Commercial - Owner Occupied                        1,864                 4,797
Commercial - Non-owner Occupied                   24,122                18,132
Residential - 1 to 4 Family                        7,634                 7,691
Residential - Multifamily                          3,160                   597
Consumer                                             291                   274
Total                                $            52,910       $        44,459

Nonperforming loans to total loans                  8.76 %                7.11 %

At September 30, 2012 Parke Bancorp's allowance for loan losses was $17.5 million, a decrease of $1.8 million from December 31, 2011. The ratio of allowance for loan losses to total loans decreased to 2.9% at September 30, 2012 from 3.1% at December 31, 2011. During the nine month period ended September 30, 2012, the Company charged-off $8.1 million in loans. Specific allowances for loan losses have been established in the amount of $150,000 on impaired loans totaling $91.8 million at September 30, 2012. To our knowledge, we have provided for all losses that are both probable and reasonably estimable at September 30, 2012 and December 31, 2011. There can be no assurance, however, that further additions to the allowance will not be required in future periods.

The negative economic trends that began in 2008, including the weakness in the residential and commercial real estate markets and high levels of unemployment, have had a significant impact on the credit quality of our loan portfolio. Nonperforming assets have increased from 8.1% of total assets at December 31, 2011 to 10.5% at September 30, 2012. We are aggressively managing all loan relationships by enhancing our credit monitoring and tracking systems. New processes have been established to manage delinquencies. We are working closely with borrowers to resolve these non-performing loans. Updated appraisals are being obtained, where appropriate, to ensure that collateral values are sufficient to cover outstanding loan balances, and we are establishing specific reserves for any potential shortfall. See Note 4 - Loans for additional information. Cash flow-dependent commercial real estate properties are being visited to inspect current tenant lease status. Where necessary, we will apply our loan work-out experience to protect our collateral position.


OREO at September 30, 2012 was $28.1 million, compared to $19.4 million at December 31, 2011, the largest being a condominium development valued at $12.7 million. This property was sold in 2010 but does not qualify for a sales treatment under GAAP.

An analysis of OREO activity is as follow:

                                                  For the Nine Months Ended
                                                        September 30,
                                                  2012                2011
                                                   (Amounts in thousands)
Balance at beginning of period                $      19,410       $      16,701
Real estate acquired in settlement of loans          10,691                 802
Sales of real estate                                 (1,331 )            (3,175 )
Loss on sale of real estate                            (757 )               (45 )
Write-down of real estate carrying values              (138 )              (480 )
Capitalized improvements to real estate                 227               4,387
Balance at end of period                      $      28,102       $      18,190

At September 30, 2012, the Bank's total deposits increased to $639.7 million from $634.9 million at December 31, 2011, an increase of $4.8 million or 0.8%. The increase was due to continued core deposit growth.

At September 30, 2012, total equity increased to $81.6 million from $77.3 million at December 31, 2011, an increase of $4.3 million, or 5.6% due to the retention of earnings from the period.


Comparison of Operating Results for the Nine Months Ended September 30, 2012 and 2011

General: Net income available to common shareholders for the nine months ended September 30, 2012 was $4.6 million, compared to $5.3 million for the same period in 2011. The decrease was impacted by the following:

Interest Income: Interest income decreased $2.3 million, or 7.4%, to $28.6 million for the nine months ended September 30, 2012, from $30.9 million for the nine months ended September 30, 2011. The decrease is attributable to lower average loan balances and lower average yield on loans. Average loans for the nine month period ended September 30, 2012 were $614.0 million compared to $634.8 million for the same period last year. The average yield on loans was 6.01% for the nine months ended September 30, 2012 compared to 6.28% for the same period in 2011.

Interest Expense: Interest expense decreased $1.3 million to $5.7 million for the nine months ended September 30, 2012, from $7.0 million for the nine months ended September 30, 2011. The decrease is primarily attributable to a lower cost of deposits as the Bank has been able to re-price deposits due to the current, historically low, interest rate environment while still maintaining strong deposit growth. The average rate paid on deposits for the nine month period ended September 30, 2012 was 1.09% compared to 1.39% for the same period last year.

Net Interest Income: Net interest income decreased $984,000 to $22.9 million for the nine months ended September 30, 2012, as compared to the same period last year. We experienced a decrease in our net interest rate spread of 29 basis points, to 4.03% for the nine months ended September 30, 2012, from 4.32% for the same period last year. Our net interest margin decreased 32 basis points to 4.15% for the nine months ended September 30, 2012, from 4.47% for the same period last year.

Provision for Loan Losses: We recorded a provision for loan losses of $5.8 million for the nine months ended September 30, 2012, compared to $6.9 million for the same period last year. The continued high level of provision for losses correlates to credit deterioration within the loan portfolio and management's analysis of non-performing loans, and credit risks inherent in the overall loan portfolio.

Non-interest Income: Non-interest income was $2.6 million for the nine months ended September 30, 2012, compared to $3.9 million for the same period last year. There was a $1.8 million decrease in gain on sale of SBA loans as compared to the same period in 2011. The 2011 gain was higher due to a change in the SBA sales agreement; warranty language was removed from the sales agreement and Parke Bancorp was no longer required to defer the recognition of the gain for 90 days. The gain recorded in the 2011 period represented loans sold during the 2011 period as well as previously deferred gains of $1.4 million from the quarter ended December 31, 2010. In addition, the Company recorded a loss on OREO of $895,000 during the nine month period ended September 30, 2012 as compared to a loss of $525,000 in the corresponding period in 2011.

Non-interest Expense: Non-interest expense increased $1.5 million to $11.0 million for the nine months ended September 30, 2012, from $9.5 million for the nine months ended September 30, 2011. The increase was primarily attributable to OREO and loan expenses related to the payment of expenses resulting from a higher level of properties acquired through foreclosure or deed in lieu of foreclosure.

Income Taxes: The Company recorded income tax expense of $2.9 million, on income before taxes of $8.7 million for the nine months ended September 30, 2012, resulting in an effective tax rate of 33.3%, compared to income tax expense of $4.6 million on income before taxes of $11.4 million for the same period of 2011, resulting in an effective tax rate of 40.2%. The decrease in income tax expense is due to lower earnings and the change to an alternative tax methodology for BOLI income whereby it is treated on a tax free basis.


The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, and have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. Yields and costs have been annualized.

                                                  For the Nine Months Ended September 30,
                                              2012                                      2011
                                            Interest                                  Interest
                               Average       Income/       Yield/        Average       Income/       Yield/
                               Balance       Expense        Cost         Balance       Expense        Cost
                                                (Amounts in thousands, except percentages)
Assets
Loans                         $ 614,015     $  27,637          6.01 %   $ 634,841     $  29,802          6.28 %
Investment securities            23,798           800          4.49 %      31,060         1,033          4.45 %
Federal funds sold and cash
equivalents                      99,314           178          0.24 %      47,555            75          0.21 %
Total interest-earning
assets                          737,127        28,615          5.19 %     713,456        30,910          5.79 %

Other assets                     58,977                                    45,393
Allowance for loan losses       (18,758 )                                 (16,046 )
Total assets                  $ 777,346                                 $ 742,803

Liabilities and
Shareholders' Equity
Interest bearing deposits
NOWs                          $  18,952            99          0.70 %   $  15,354           113          0.98 %
Money markets                    93,871           581          0.83 %      90,427           734          1.09 %
Savings                         221,317         1,524          0.92 %     192,368         1,784          1.24 %
Time deposits                   258,275         2,599          1.34 %     228,231         2,652          1.55 %
Brokered certificates of
deposit                          23,824           208          1.17 %      47,420           682          1.92 %
Total interest-bearing
deposits                        616,239         5,011          1.09 %     573,800         5,965          1.39 %
Borrowings                       46,938           709          2.02 %      64,099         1,066          2.22 %
Total interest-bearing
liabilities                     663,177         5,720          1.15 %     637,899         7,031          1.47 %

Non-interest bearing
deposits                         29,620                                    22,122
Other liabilities                 4,466                                     8,194
Total liabilities               697,263                                   668,215
Shareholders' equity             80,083                                    74,588
Total liabilities and
shareholders' equity          $ 777,346                                 $ 742,803
Net interest income                         $  22,895                                 $  23,879
Interest rate spread                                           4.03 %                                    4.32 %
Net interest margin                                            4.15 %                                    4.47 %


Comparison of Operating Results for the Three Months Ended September 30, 2012 and 2011

General: Net income available to common shareholders for the three months ended September 30, 2012 was $1.5 million, compared to $1.3 million for the same period in 2011. The change was impacted by the following:

Interest Income: Interest income decreased $1.2 million, or 11.6%, to $9.1 million for the three months ended September 30, 2012, from $10.3 million for the three months ended September 30, 2011. The decrease is attributable to lower average loan balances and lower yield on loans. Average loans for the three month period ended September 30, 2012 were $607.4 million compared to $631.6 million for the same period last year. The average yield on loans was 5.74% for the three months ended September 30, 2012 compared to 6.24% for the same period in 2011.

Interest Expense: Interest expense decreased $526,000 to $1.8 million for the three months ended September 30, 2012, from $2.3 million for the three months ended September 30, 2011. The decrease is primarily attributable to a lower cost of deposits as the Bank has been able to re-price deposits due to the current, historically low, interest rate environment while still maintaining deposit growth. The average rate paid on deposits for the three month period ended September 30, 2012 was 1.00% compared to 1.33% for the same period last year.

Net Interest Income: Net interest income decreased $662,000 to $7.3 million for the three months ended September 30, 2012, as compared to the same period last year. We experienced a decrease in our net interest rate spread of 40 basis points, to 3.85% for the three months ended September 30, 2012, from 4.25% for the same period last year. Our net interest margin decreased 42 basis points to 3.96% for the three months ended September 30, 2012, from 4.38% for the same period last year.

Provision for Loan Losses: We recorded a provision for loan losses of $1.5 million for the three months ended September 30, 2012, a decrease of $850,000 for the same period last year. The continued high level of provision for losses correlates to credit deterioration within the loan portfolio and management's analysis of non-performing loans, and credit risks inherent in the overall loan portfolio.

Non-interest Income: Non-interest income was $952,000 for the three months ended September 30, 2012, compared to $325,000 for the same period last year. The increase was primarily attributable to lower OREO losses.

Non-interest Expense: Non-interest expense increased $418,000 to $3.5 million for the three months ended September 30, 2012, from $3.1 million for the three months ended September 30, 2011. The increase was primarily attributable to OREO and loan expenses related to the payment of expenses resulting from a higher level of properties acquired through foreclosure or deed in lieu of foreclosure.

Income Taxes: The Company recorded income tax expense of $1.4 million, on income before taxes of $3.3 million for the three months ended September 30, 2012, resulting in an effective tax rate of 41.6%, compared to income tax expense of $1.2 million on income before taxes of $2.9 million for the same period of 2011, resulting in an effective tax rate of 40.3%. The increase in income tax expense is due to higher earnings.


                                                  For the Three Months Ended September 30,
                                               2012                                      2011
                                             Interest                                  Interest
                               Average       Income/        Yield/        Average       Income/       Yield/
                               Balance       Expense         Cost         Balance       Expense        Cost
                                                 (Amounts in thousands, except percentages)
Assets
Loans                         $ 607,399          8,766          5.74 %   $ 631,648     $   9,912          6.24 %
Investment securities            24,646            259          4.18 %      30,023           329          4.36 %
Federal funds sold and cash
equivalents                     101,422             59          0.23 %      59,685            31          0.21 %
Total interest-earning
assets                          733,467          9,084          4.93 %     721,356        10,272          5.66 %

Other assets                     60,765                                     49,643
Allowance for loan losses       (18,543 )                                  (17,214 )
Total assets                  $ 775,689                                  $ 753,785

Liabilities and
Shareholders' Equity
Interest bearing deposits
NOWs                          $  19,749             31          0.62 %   $  15,900            39          0.98 %
Money markets                    88,971            167          0.75 %      87,486           237          1.08 %
Savings                         227,217            463          0.81 %     203,665           637          1.24 %
Time deposits                   256,771            825          1.28 %     235,701           871          1.47 %
Brokered certificates of
deposit                          23,219             66          1.13 %      42,534           176          1.65 %
Total interest-bearing
deposits                        615,927          1,552          1.00 %     585,286         1,960          1.33 %
Borrowings                       43,906            234          2.12 %      64,062           352          2.19 %
Total interest-bearing
liabilities                     659,833          1,786          1.08 %     649,348         2,312          1.42 %

Non-interest bearing
deposits                         29,506                                     23,443
Other liabilities                 4,687                                      4,411
Total liabilities               694,026                                    676,202
Shareholders' equity             81,663                                     76,583
Total liabilities and
shareholders' equity          $ 775,689                                  $ 753,785
Net interest income                              7,298                                 $   7,960
Interest rate spread                                            3.85 %                                    4.25 %
Net interest margin                                             3.96 %                                    4.38 %


Critical Accounting Policies

In the preparation of our consolidated financial statements, management has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States. The significant accounting policies are described in Note 2 to the Consolidated Financial Statements.

Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities. Management considers these accounting policies to be critical accounting policies. The judgments and assumptions used are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of assets and liabilities and results of operations.

Allowance for Loan Losses: The allowance for loan losses is considered a critical accounting policy. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment.

In evaluating the allowance for loan losses, management considers historical loss factors, the mix of the loan portfolio (types of loans and amounts), geographic and industry concentrations, current national and local economic conditions and other factors related to the collectability of the loan portfolio, including underlying collateral values and estimated future cash flows. All of these estimates are susceptible to significant change. Large groups of smaller balance homogeneous loans, such as residential real estate, home equity loans, and consumer loans, are evaluated in the aggregate under FASB ASC Topic 450, "Accounting for Contingencies", using historical loss factors adjusted for economic conditions and other qualitative factors which include trends in delinquencies, classified and non-performing loans, loan concentrations by loan category and by property type, seasonality of the portfolio, internal and external analysis of credit quality, peer group data, . . .

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