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PKBK > SEC Filings for PKBK > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for PARKE BANCORP, INC.

Form 10-Q for PARKE BANCORP, INC.


15-May-2014

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 March 31, 2014 and December 31, 2013

At March 31, 2014, the Company's total assets increased to $800.0 million from $794.9 million at December 31, 2013, an increase of $5.1 million or 0.6%, primarily due to an increase in loans available for sale.

Cash and cash equivalents increased $5.7 million to $51.4 million at March 31, 2014 from $45.7 million at December 31, 2013.

Total investment securities decreased to $33.26 million at March 31, 2014 from $37.80 million at December 31, 2013, a decrease of $4.54 million or 12.0%. The decrease was due to the sale of three TruPS collateralized debt investment securities. Due to the recently enacted Volcker Rule, financial institutions are no longer permitted to hold these securities in portfolio. The sale generated a gain of $178,000.

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 ended March 31, 2014, the Company did not recognize any credit-related OTTI charges.

Total gross loans decreased to $650.8 million at March 31, 2014 from $654.5 million at December 31, 2013, a decrease of $3.7 million or 0.6%.

Delinquent loans totaled $35.4 million or 5.4% of total loans at March 31, 2014, a decrease of $4.3 million from December 31, 2013. Delinquent loan balances by number of days delinquent were: 30 to 89 days --- $2.7 million; 90 days and greater not accruing interest --- $32.7 million.

At March 31, 2014, the Company had $32.7 million in nonaccrual loans or 5.0% of total loans, a decrease from $36.0 million or 5.5% of total loans at December 31, 2013. The three largest nonperforming loans are a $5.0 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 March 31, 2014 and December 31, 2013 was as follows:

                                        March 31,               December 31,
                                           2014                     2013
                                        (Amounts in thousands except ratios)
Commercial and Industrial            $            462       $                122
Real Estate Construction:
Residential                                       851                        967
Commercial                                      8,303                      9,908
Real Estate Mortgage:
Commercial - Owner Occupied                     1,472                        976
Commercial - Non-owner Occupied                 9,558                     10,853
Residential - 1 to 4 Family                    11,954                     12,914
Residential - Multifamily                           -                         99
Consumer                                           94                        115
Total                                $         32,694       $             35,954

Nonperforming loans to total loans                5.0 %                      5.5 %

At March 31, 2014, allowance for loan losses was $19.4 million, as compared to $18.6 million at December 31, 2013. The ratio of allowance for loan losses to total loans was 3.0% at March 31, 2014 compared to 2.8% at December 31, 2013. The increase is due to the establishment of a $2.4 million specific reserve on a nonperforming residential mortgage loan based on an updated appraisal. The ratio of allowance for loan losses to non-performing loans improved to 59.5% at March 31, 2014, compared to 51.6% at December 31, 2013. During the three month period ended March 31, 2014, the Company charged-off $124,000 in loans, and recovered $2,000. Compared to $267,000 charged off in 2013 and no recoveries. Specific allowances for loan losses have been established in the amount of $4.2 million on impaired loans totaling $67.6 million at March 31, 2014, as compared to $1.9 million at December 31, 2013. We have provided for all losses that are both probable and reasonably estimable at March 31, 2014 and December 31, 2013. 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 8.2% of total assets at December 31, 2013 to 7.8% at March 31, 2014. 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 March 31, 2014 was $29.6 million, compared to $28.9 million at December 31, 2013, the largest being a condominium development valued at $11.9 million.

An analysis of OREO activity is as follows:

                                                 For the Three Months Ended
                                                          March 31,
                                                  2014                2013
                                                   (Amounts in thousands)
Balance at beginning of period                $      28,910       $      26,057
Real estate acquired in settlement of loans           1,324               1,030
Sales of real estate                                   (241 )              (817 )
Loss on sale of real estate                             (76 )              (206 )
Write-down of real estate carrying values              (319 )              (158 )
Donated property                                        (22 )                 -
Capitalized improvements to real estate                  66                   -
Balance at end of period                      $      29,642       $      25,906

At March 31, 2014, the Bank's total deposits increased to $633.5 million from $626.8 million at December 31, 2013, an increase of $6.7 million or 1.1%.

At March 31, 2014, total shareholders' equity increased to $95.9 million from $93.7 million at December 31, 2013, an increase of $2.2 million, or 2.3%, due to the retention of earnings from the period.


Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013

General: Net income available to common shareholders for the three months ended March 31, 2014 was $2.0 million, compared to $1.9 million for the same period in 2013. The change was impacted by the following:

Interest Income: Interest income increased $314,000, or 3.4%, to $9.6 million for the three months ended March 31, 2014, from $9.3 million for the three months ended March 31, 2013. The increase is attributable to higher yield on loans and an increase in average loan balances. Average loans for the three month period ended March 31, 2014 were $652.7 million compared to $631.0 million for the same period last year. The average yield on loans was 5.30% for the three months ended March 31, 2014 compared to 5.13% for the same period in 2013.

Interest Expense: Interest expense decreased $199,000 to $1.4 million for the three months ended March 31, 2014, from $1.6 million for the three months ended March 31, 2013. 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 March 31, 2014 was 0.80% compared to 0.92% for the same period last year.

Net Interest Income: Net interest income increased $513,000 to $8.2 million for the three months ended March 31, 2014, as compared to $7.7 million for the same period last year. We experienced an increase in our net interest rate spread of 21 basis points, to 4.44% for the three months ended March 31, 2014, from 4.13% for the same period last year. Our net interest margin increased 20 basis points to 4.53% for the three months ended March 31, 2014, from 4.33% for the same period last year.

Provision for Loan Losses: We recorded a provision for loan losses of $1.0 million for the three months ended March 31, 2014, unchanged from the same period last year.

Non-interest Income: Non-interest income was $960,000 for the three months ended March 31, 2014, compared to $647,000 for the same period last year. The increase was primarily attributable to a $178,000 increase in gain on the sale of investment securities and a $290,000 increase in other fee income off-set by a decline in gain on sale of SBA loans of $178,000.

Non-interest Expense: Non-interest expense increased $815,000 to $4.5 million for the three months ended March 31, 2014, from $3.8 million for the three months ended March 31, 2013. The increase was primarily due to a $375,000 increase in OREO expenses. Also contributing was an increase in compensation and benefits of $185,000 resulting from additional staff, salary increases and increased benefit costs.

Income Taxes: The Company recorded income tax expense of $1.2 million, on income before taxes of $3.6 million for the three months ended March 31, 2014, resulting in an effective tax rate of 32.1%, compared to income tax expense of $1.4 million on income before taxes of $3.6 million for the same period of 2013, resulting in an effective tax rate of 37.9%. The decrease is due to an immaterial over accrual in a prior period that was corrected during the current period.


                                                    For the Three Months Ended March 31,
                                               2014                                       2013
                                             Interest                                   Interest
                               Average       Income/        Yield/        Average       Income/        Yield/
                               Balance       Expense         Cost         Balance       Expense         Cost
                                                 (Amounts in thousands, except percentages)
Assets
Loans                         $ 652,666     $    9,290          5.77 %   $ 630,983     $    9,045          5.81 %
Investment securities            39,642            293          3.00 %      21,735            205          3.83 %
Federal funds sold and cash
equivalents                      43,015             23          0.22 %      67,438             42          0.25 %
Total interest-earning
assets                          735,323     $    9,606          5.30 %     720,156     $    9,292          5.13 %

Other assets                     77,122                                     64,417
Allowance for loan losses       (19,071 )                                  (19,577 )
Total assets                  $ 793,374                                  $ 764,996

Liabilities and
Shareholders' Equity
Interest bearing deposits:
NOWs                          $  27,231     $       34          0.51 %   $  23,111     $       33          0.58 %
Money markets                    93,797            138          0.60 %      85,352            146          0.69 %
Savings                         221,659            341          0.62 %     229,756            415          0.73 %
Time deposits                   246,039            643          1.06 %     245,032            724          1.20 %
Brokered certificates of
deposit                           8,399             21          1.01 %      19,789             56          1.15 %
Total interest-bearing
deposits                        597,125          1,177          0.80 %     603,040          1,374          0.92 %
Borrowings                       65,204            221          1.37 %      43,823            223          2.06 %
Total interest-bearing
liabilities                     662,329          1,398          0.86 %     646,863          1,597          1.00 %

Non-interest bearing
deposits                         31,965                                     28,838
Other liabilities                 4,950                                      4,227
Total liabilities                36,915                                     33,065
Shareholders' equity             94,130                                     85,068
Total liabilities and
shareholders' equity          $ 793,374                                  $ 764,996
Net interest income                         $    8,208                                 $    7,695
Interest rate spread                                            4.44 %                                     4.13 %
Net interest margin                                             4.53 %                                     4.33 %


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 nonperforming loans, loan concentrations by loan category and by property type, seasonality of the portfolio, internal and external analysis of credit quality, peer group data, loan charge offs, local and national economic conditions and single and total credit exposure. Large balance and/or more complex loans, such as multi-family and commercial real estate loans, commercial business loans, and construction loans are evaluated individually for impairment in accordance with FASB ASC Topic 310 "Receivables". If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's effective interest rate or at the fair value of collateral if repayment is expected solely from the collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available or as projected events change.

Management reviews the level of the allowance monthly. Although management used the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the FDIC and the Department, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.


Other Than Temporary Impairment on Investment Securities: Management periodically performs analyses to determine whether there has been an OTTI in the value of one or more securities. The available for sale securities portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholder's equity. The held to maturity securities portfolio, consisting of debt securities for which there is a positive intent and ability to hold to maturity, is carried at amortized cost. Management conducts a quarterly review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. If such decline is deemed other-than-temporary, the cost basis of the security is adjusted by writing down the security to estimated fair market value through a charge to current period earnings to the extent that such decline is credit related. All other changes in unrealized gains or losses for investment securities available for sale are recorded, net of tax effect, through other comprehensive income.

Income Taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Realization of deferred tax assets is dependent on generating sufficient taxable income in the future.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Liquidity: Liquidity describes the ability of the Company 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 102.7 % and 104.4% at March 31, 2014 and December 31, 2013, respectively. Funds received from new and existing depositors provided a large source of liquidity for the three month period ended March 31, 2014. The Company seeks to rely primarily on core deposits from customers to provide stable and cost-effective sources of funding to support loan 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 advances from the FHLB. As of March 31, 2014, the Company maintained lines of credit with the FHLB of $93.9 million, of which $43.2 million was outstanding at March 31, 2014.


As of March 31 2014, the Company's investment securities portfolio included $29.7 million of residential mortgage-backed securities that provide cash flow each month. The majority of the investment portfolio is classified as available for sale, is 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 and the Bank are subject to various regulatory capital requirements. Regulatory capital is defined in terms of Tier I capital (shareholders' equity as adjusted for unrealized gains or losses on available for sale securities), Tier II capital (which includes a portion of the allowance for loan losses) and total capital (Tier I plus Tier II). Risk-based capital ratios are expressed as a percentage of risk-weighted assets. Risk-weighted assets are determined by assigning various weights to all assets and off-balance sheet associated risk in accordance with regulatory criteria. . . .

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