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PKBK > SEC Filings for PKBK > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for PARKE BANCORP, INC.

Form 10-Q for PARKE BANCORP, INC.


14-Nov-2013

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 nonperforming 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, 2013 and December 31, 2012

At September 30, 2013, the Company's total assets decreased to $747.1 million from $770.5 million at December 31, 2012, a decrease of $23.4 million or 3.0%. The decrease was due to a decrease in cash.

Cash and cash equivalents decreased $55.3 million to $21.6 million at September 30, 2013 from $76.9 million at December 31, 2012, due to a planned payoff of certificates of deposit and an increase in loan production.

Total investment securities decreased to $18.7 million at September 30, 2013 ($16.6 million classified as available for sale, or 88.8%) from $21.4 million at December 31, 2012, a decrease of $2.7 million, or 12.6%, due to principal payments on mortgage-backed securities.

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 nine months and the three months ended September 30, 2013, the Company did not recognize any credit-related OTTI charges.

Total gross loans increased to $660.7 million at September 30, 2013 from $629.7 million at December 31, 2012, an increase of $31.0 million or 4.9%.

Delinquent loans totaled $43.9 million or 6.6% of total loans at September 30, 2013, a decrease of $12.1 million from December 31, 2012. Delinquent loan balances by number of days delinquent were: 30 to 89 days --- $2.8 million; 90 days and greater not accruing interest --- $41.1 million.

At September 30, 2013, the Company had $41.1 million in nonaccrual loans or 6.2% of total loans, a decrease from $47.5 million or 7.6% of total loans at December 31, 2012. The three largest relationships in nonperforming loans are a $6.3 million retail center construction loan, a $4.7 residential home loan, and a $3.0 million residential home loan.


The composition of nonaccrual loans as of September 30, 2013 and December 31, 2012 was as follows:

                                        September 30,           December 31,
                                             2013                   2012
                                       (Amounts in thousands except ratios)
Commercial and Industrial            $               130       $           248
Real Estate Construction:
Residential                                          972                   799
Commercial                                        12,941                12,958
Real Estate Mortgage:
Commercial - Owner Occupied                        1,047                 1,218
Commercial - Non-owner Occupied                   11,896                19,228
Residential - 1 to 4 Family                       13,380                10,072
Residential - Multifamily                            482                 2,838
Consumer                                             252                   188
Total                                $            41,100       $        47,549

Nonperforming loans to total loans                   6.2 %                 7.6 %

At September 30, 2013, the Company's allowance for loan losses was $19.7 million, an increase of $744 thousand from December 31, 2012. The ratio of allowance for loan losses to total loans remained the same at 3.0% at September 30, 2013 and December 31, 2012. During the nine month period ended September 30, 2013, the Company charged-off $1.5 million in loans, net of recoveries. Specific allowances for loan losses have been established in the amount of $2.2 million on impaired loans totaling $80.3 million at September 30, 2013. We have provided for all losses that are both probable and reasonably estimable at September 30, 2013 and December 31, 2012. 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. 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 nonperforming 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. With all these measures in place, our nonperforming assets have decreased from 9.6% of total assets at December 31, 2012 to 9.2% at September 30, 2013. 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, 2013 was $27.9 million, compared to $26.1 million at December 31, 2012 and $28.1 million at September 30, 2012, the largest being a condominium development valued at $11.9 million. This property was sold in 2010 but does not qualify for a sales treatment under GAAP.

An analysis of OREO activity is as follows:

                                                       For the Nine Months Ended September 30,
                                                          2013                        2012
                                                               (Amounts in thousands)
Balance at beginning of period                     $            26,057         $            19,410
Real estate acquired in settlement of loans                      6,925                      10,691
Allowance for OREO                                              (1,200 )                         -
Sales of real estate                                            (3,572 )                    (1,331 )
Loss on sale of real estate                                        (43 )                      (757 )
Write-down of real estate carrying values                         (464 )                      (138 )
Capitalized improvements to real estate                            168                         227
Balance at end of period                           $            27,871         $            28,102

At September 30, 2013, the Bank's total deposits decreased to $611.4 million from $637.2 million at December 31, 2012, a decrease of $25.8 million or 4%. The decrease was the result of a planned runoff of higher priced certificates of deposits.

At September 30, 2013, total equity increased to $86.7 million from $83.6 million at December 31, 2012, an increase of $3.1 million, or 3.7%, due to the retention of earnings from the period. In addition, during the second quarter, the Company repurchased the outstanding warrant that was issued to the U.S. Treasury in connection with TARP for $1.7 million thereby reducing shareholders' equity by that amount.


Comparison of Operating Results for the Nine Months Ended September 30, 2013 and 2012

General: Net income available to common shareholders for the nine months ended September 30, 2013 was $5.4 million, compared to $4.6 million for the same period in 2012. The change was resulted from the following:

Interest Income: Interest income decreased $1.3 million, or 4.5%, to $27.3 million for the nine months ended September 30, 2013, from $28.6 million for the nine months ended September 30, 2012. The decrease is attributable to lower yield on loans. Average loans for the nine month period ended September 30, 2013 were $639.1 million compared to $614.0 million for the same period last year. The average yield on loans was 5.57% for the nine months ended September 30, 2013 compared to 6.01% for the same period in 2012.

Interest Expense: Interest expense decreased $1.3 million to $4.4 million for the nine months ended September 30, 2013, from $5.7 million for the nine months ended September 30, 2012. The decrease is primarily attributable to a lower average cost of deposits as the Bank has been able to re-price deposits due to the current, historically low, interest rate environment and the drop in the average deposit balances. The average rate paid on deposits for the nine month period ended September 30, 2013 was 0.87% compared to 1.09% for the same period last year.

Net Interest Income: Net interest income decreased $51,000 to $22.8 million for the nine months ended September 30, 2013, as compared to the same period last year. We experienced an increase in our net interest rate spread of 18 basis points, to 4.21% for the nine months ended September 30, 2013, from 4.03% for the same period last year. Our net interest margin increased 16 basis points to 4.31% for the nine months ended September 30, 2013, from 4.15% for the same period last year.

Provision for Loan Losses: We recorded a provision for loan losses of $2.2 million for the nine months ended September 30, 2013, a decrease of $3.6 million from the same period last year. The decline in the provision for loan losses correlates to the recent stabilization of the loan portfolio, modest charge-offs during the last nine months and management's analysis of nonperforming loans, and credit risks inherent in the overall loan portfolio.

Non-interest Income: Non-interest income was $3.4 million for the nine months ended September 30, 2013, compared to $2.6 million for the same period last year. The increase was primarily attributable to a decrease in the level of OREO losses of $249,000, an increase in the gain on the sale of SBA loans of $168,000, an increase in loan fees of $272,000 which includes a $225,000 increase in SBA loan servicing fees, an increase of $143,000 in BOLI income and a settlement of $275,000 on a lawsuit due to improper handling of a closing cost.

Non-interest Expense: Non-interest expense increased $2.4 million to $13.4 million for the nine months ended September 30, 2013, from $11.0 million for the nine months ended September 30, 2012. The increase was primarily due to an increase in OREO expenses of $1.8 million, mostly due to a partial write off of $1.2 million of two OREO properties, and an increase in real estate taxes of $504,000, and an increase in compensation and benefits of $768,000 resulting from additional staff, salary increases and increased benefit costs.

Income Taxes: The Company recorded income tax expense of $4.2 million on income before taxes of $10.7 million for the nine months ended September 30, 2013, resulting in an effective tax rate of 39.1%, compared to income tax expense of $2.9 million on income before taxes of $8.7 million for the same period in 2012, resulting in an effective tax rate of 33.3%. The increase in income tax expense is due to the increase in pre-tax income in the 2013 period.


                                                  For the Nine Months Ended September 30,
                                              2013                                      2012
                                            Interest                                  Interest
                               Average       Income/       Yield/        Average       Income/       Yield/
                               Balance       Expense        Cost         Balance       Expense        Cost
                                                (Amounts in thousands, except percentages)
Assets
Loans                         $ 639,072     $  26,632          5.57 %   $ 614,015     $  27,637          6.01 %
Investment securities            22,590           551          3.26 %      23,798           800          4.49 %
Federal funds sold and cash
equivalents                      47,114            92          0.26 %      99,314           178          0.24 %
Total interest-earning
assets                          708,776     $  27,275          5.15 %     737,127        28,615          5.19 %

Other assets                     61,860                                    58,977
Allowance for loan losses       (20,237 )                                 (18,758 )
Total assets                  $ 750,399                                 $ 777,346

Liabilities and
Shareholders' Equity
Interest bearing deposits:
NOWs                          $  23,319     $      95          0.54 %   $  18,952            99          0.70 %
Money markets                    84,084           422          0.67 %      93,871           581          0.83 %
Savings                         233,550         1,226          0.70 %     221,317         1,524          0.92 %
Time deposits                   235,384         1,990          1.13 %     258,275         2,599          1.34 %
Brokered certificates of
deposit                          13,311           116          1.17 %      23,824           208          1.17 %
Total interest-bearing
deposits                        589,648         3,849          0.87 %     616,239         5,011          1.09 %
Borrowings                       40,374           582          1.93 %      46,938           709          2.02 %
Total interest-bearing
liabilities                     630,022     $   4,431          0.94 %     663,177         5,720          1.15 %

Non-interest bearing
deposits                         30,002                                    29,620
Other liabilities                 4,516                                     4,466
Total liabilities               664,540                                   697,263
Shareholders' equity             85,859                                    80,083
Total liabilities and
shareholders' equity          $ 750,399                                 $ 777,346
Net interest income                         $  22,844                                 $  22,895
Interest rate spread                                           4.21 %                                    4.03 %
Net interest margin                                            4.31 %                                    4.15 %


Comparison of Operating Results for the Three Months Ended September 30, 2013 and 2012

General: Net income available to common shareholders for the three months ended September 30, 2013 was $1.8 million, compared to $1.5 million for the same period in 2012. The change was impacted by the following:

Interest Income: Interest income decreased $100,000, or 1.1%, to $9.0 million for the three months ended September 30, 2013, from $9.1 million for the three months ended September 30, 2012. The decrease is attributable to lower yield on loans. Average loans for the three month period ended September 30, 2013 were $648.9 million compared to $607.4 million for the same period last year. The average yield on loans was 5.39% for the three months ended September 30, 2013 compared to 5.74% for the same period in 2012.

Interest Expense: Interest expense decreased $446,000 to $1.3 million for the three months ended September 30, 2013, from $1.8 million for the three months ended September 30, 2012. The decrease is primarily attributable to a lower average cost of deposits as the Bank has been able to re-price deposits due to the current, historically low, interest rate environment and the drop in the average deposit balances. The average rate paid on deposits for the three month period ended September 30, 2013 was 0.81% compared to 1.00% for the same period last year.

Net Interest Income: Net interest income increased $371,000 to $7.7 million for the three months ended September 30, 2013, as compared to $7.3 million for the same period last year. We experienced an increase in our net interest rate spread of 40 basis points, to 4.25% for the three months ended September 30, 2013, from 3.85% for the same period last year. Our net interest margin increased 39 basis points to 4.35% for the three months ended September 30, 2013, from 3.96% for the same period last year.

Provision for Loan Losses: We recorded a provision for loan losses of $200,000 for the three months ended September 30, 2013, a decrease of $1.3 million from the same period last year. The decline in the provision for losses correlates to the recent stabilization of the loan portfolio, modest charge-offs during the last three months and management's analysis of nonperforming loans, and credit risks inherent in the overall loan portfolio.

Non-interest Income: Non-interest income was $1.5 million for the three months ended September 30, 2013, compared to $952,000 for the same period last year. The increase was primarily attributable to an increase in other non-interest income due to the receipt of a settlement payment of $275,000 on a lawsuit due to improper handling of a closing, a $79,000 decrease in OREO losses and a higher gain on the sale of SBA loans of $57,000.

Non-interest Expense: Non-interest expense increased $1.9 million to $5.4 million for the three months ended September 30, 2013, from $3.5 million for the three months ended September 30, 2012. The increase was primarily due to a $1.7 million increase in OREO expenses, mostly due to a partial write off of $1.2 million of two REO properties, and an increase in real estate taxes of $300,000. Also contributing was an increase in compensation and benefits of $238,000 resulting from additional staff, salary increases and increased benefit costs.

Income Taxes: The Company recorded income tax expense of $1.4 million, on income before taxes of $3.5 million for the three months ended September 30, 2013, resulting in an effective tax rate of 39.1%, compared to income tax expense of $1.4 million on income before taxes of $3.3 million for the same period of 2012, resulting in an effective tax rate of 41.6%.


                                                  For the Three Months Ended September 30,
                                               2013                                       2012
                                             Interest                                   Interest
                               Average       Income/        Yield/        Average       Income/        Yield/
                               Balance       Expense         Cost         Balance       Expense         Cost
                                                 (Amounts in thousands, except percentages)
Assets
Loans                         $ 648,833     $    8,821          5.39 %   $ 607,399     $    8,766          5.74 %
Investment securities            21,237            168          3.14 %      24,646            259          4.18 %
Federal funds sold and cash
equivalents                      29,502             19          0.26 %     101,422             59          0.23 %
Total interest-earning
assets                          699,572     $    9,008          5.11 %     733,467     $    9,084          4.93 %

Other assets                     61,966                                     60,765
Allowance for loan losses       (20,745 )                                  (18,543 )
Total assets                  $ 740,793                                  $ 775,689

Liabilities and
Shareholders' Equity
Interest bearing deposits:
NOWs                          $  23,645     $       31          0.52 %   $  19,749     $       31          0.62 %
Money markets                    82,776            131          0.63 %      88,971            167          0.75 %
Savings                         238,820            386          0.64 %     227,217            463          0.81 %
Time deposits                   228,659            613          1.06 %     256,771            825          1.28 %
Brokered certificates of
deposit                           7,488             23          1.22 %      23,219             66          1.13 %
Total interest-bearing
deposits                        581,388          1,184          0.81 %     615,927          1,552          1.00 %
Borrowings                       36,620            156          1.69 %      43,906            234          2.12 %
Total interest-bearing
liabilities                     618,008          1,340          0.86 %     659,833          1,786          1.08 %

Non-interest bearing
deposits                         31,492                                     29,506
Other liabilities                 4,864                                      4,687
Total liabilities               654,364                                    694,026
Shareholders' equity             86,429                                     81,663
Total liabilities and
shareholders' equity          $ 740,793                                  $ 775,689
Net interest income                         $    7,668                                 $    7,298
Interest rate spread                                            4.25 %                                     3.85 %
Net interest margin                                             4.35 %                                     3.96 %


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 . . .

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