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PKBK > SEC Filings for PKBK > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for PARKE BANCORP, INC.

Form 10-Q for PARKE BANCORP, INC.


14-Aug-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 June 30, 2014 and December 31, 2013

At June 30, 2014, the Company's total assets increased to $819.3 million from $794.9 million at December 31, 2013, an increase of $24.4 million or 3.1%.

Cash and cash equivalents increased $24.0 million to $69.7 million at June 30, 2014 from $45.7 million at December 31, 2013.

Total investment securities decreased to $32.5 million at June 30, 2014 from $37.8 million at December 31, 2013, a decrease of $5.3 million or 13.9%. 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.

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 and six months ended June 30, 2014, the Company did not recognize any credit-related OTTI charges.

Total gross loans increased to $658.4 million at June 30, 2014 from $654.5 million at December 31, 2013, an increase of $3.9 million or 0.6%.

Delinquent loans totaled $34.8 million or 5.3% of total loans at June 30, 2014, a decrease of $4.8 million from December 31, 2013. Delinquent loan balances by number of days delinquent at June 30, 2014 were: 30 to 89 days --- $1.7 million; 90 days and greater not accruing interest --- $33.1 million.

At June 30, 2014, the Company had $33.1 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 $6.9 million land development loan, a $4.5 million retail center construction loan, and a $2.9 residential home loan.


The composition of nonaccrual loans as of June 30, 2014 and December 31, 2013 was as follows:

                                        June 30,                December 31,
                                           2014                     2013
                                         (Amounts in thousands except ratios)
Commercial and Industrial            $            61       $                   122
Real Estate Construction:
 Residential                                     512                           967
 Commercial                                   13,232                         9,908
Real Estate Mortgage:                                                               `
 Commercial - Owner Occupied                   1,262                           976
 Commercial - Non-owner Occupied               9,214                        10,853
 Residential - 1 to 4 Family                   8,775                        12,914
 Residential - Multifamily                         -                            99
Consumer                                          94                           115
Total                                $        33,150       $                35,954

Nonperforming loans to total loans               5.0 %                         5.5 %

At June 30, 2014, allowance for loan losses was $17.5 million, as compared to $18.6 million at December 31, 2013. The ratio of allowance for loan losses to total loans was 2.7% at June 30, 2014 compared to 2.8% at December 31, 2013. The decrease is due to continuing improvements in the credit quality of the loan portfolio. The ratio of allowance for loan losses to non-performing loans improved to 52.7% at June 30, 2014, compared to 51.6% at December 31, 2013. During the six month period ended June 30, 2014, the Company charged-off $3.1 million in loans, and recovered $18,000, compared to $267,000 in loans charged off in 2013 and $198,000 in recoveries. Specific allowances for loan losses have been established in the amount of $1.6 million on impaired loans totaling $67.1 million at June 30, 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 June 30, 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 7.0% at June 30, 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 June 30, 2014 was $24.2 million, compared to $28.9 million at December 31, 2013, the largest being a condominium development valued at $10.1 million.

An analysis of OREO activity is as follows:

                                                 For the Six Months Ended
                                                         June 30,
                                                  2014               2013
                                                  (Amounts in thousands)
Balance at beginning of period                $     28,910       $     26,057
Real estate acquired in settlement of loans          1,712              1,160
Provision for OREO                                    (500 )                -
Sales of real estate                                (5,871 )           (3,157 )
Gain on sale of real estate                            250                (50 )
Write-down of real estate carrying values             (684 )             (404 )
Donated property                                       (22 )                -
Capitalized improvements to real estate                361                 63
Balance at end of period                      $     24,156       $     23,669

At June 30, 2014, the Bank's total deposits increased to $648.8 million from $626.8 million at December 31, 2013, an increase of $22.0 million or 3.5%.

At June 30, 2014, total shareholders' equity increased to $98.0 million from $93.7 million at December 31, 2013, an increase of $4.3 million, or 4.6%, due to the retention of earnings from the period.


Comparison of Operating Results for the Six Months Ended June 30, 2014 and 2013

General: Net income available to common shareholders for the six months ended June 30, 2014 was $4.2 million, compared to $3.6 million for the same period in 2013. The change was impacted by the following:

Interest Income: Interest income increased $1.0 million, or 5.9%, to $19.3 million for the six months ended June 30, 2014, from $18.3 million for the six months ended June 30, 2013. The increase is attributable to an increase in average loan balances. Average loans for the six month period ended June 30, 2014 were $671.3 million compared to $635.3 million for the same period last year. The average yield on loans was 5.63% for the six months ended June 30, 2014 compared to 5.65% for the same period in 2013.

Interest Expense: Interest expense decreased $290,000 to $2.8 million for the six months ended June 30, 2014, from $3.1 million for the six months ended June 30, 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 partially offset by an increase in average deposit balances. The average rate paid on deposits for the six month period ended June 30, 2014 was 0.79% compared to 0.90% for the same period last year. Also, the average rate on borrowings decreased to 1.36% for the six months ended June30, 2014 from 2.03% for the same period last year, as higher rate advances have matured and been replaced with lower cost borrowings.

Net Interest Income: Net interest income increased $1.3 million to $16.5 million for the six months ended June 30, 2014, as compared to $15.2 million for the same period last year. We experienced an increase in our net interest rate spread of 14 basis points, to 4.31% for the six months ended June 30, 2014, from 4.17% for the same period last year. Our net interest margin increased 13 basis points to 4.41% for the six months ended June 30, 2014, from 4.28% for the same period last year.

Provision for Loan Losses: We recorded a provision for loan losses of $2.0 million for the six months ended June 30, 2014, unchanged from the same period last year.

Non-interest Income: Non-interest income was $2.6 million for the six months ended June 30, 2014, compared to $2.0 million 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 $138,000 increase in other loan fee income, which was the result of several large prepayment fees, off-set by a decline in gain on sale of SBA loans of $136,000 due to lower sales volumes.

Non-interest Expense: Non-interest expense increased $1.5 million to $9.4 million for the six months ended June 30, 2014, from $8.0 million for the six months ended June 30, 20134. The increase was primarily due to a $1.2 million increase in OREO expenses which included a $500,000 loss reserve established against a condominium project in Absecon, NJ. Also contributing was an increase in compensation and benefits of $223,000 resulting from additional staff, salary increases and increased benefit costs.

Income Taxes: The Company recorded income tax expense of $2.4 million, on income before taxes of $7.7 million for the six months ended June 30, 2014, resulting in an effective tax rate of 31.4%, compared to income tax expense of $2.6 million on income before taxes of $7.2 million for the same period of 2013, resulting in an effective tax rate of 36.8%. The decrease is due to an immaterial over accrual in a prior period that was corrected during the current period.


                                                         For the Six Months Ended June 30,
                                                2014                                           2013
                                              Interest                                      Interest
                               Average        Income/                        Average         Income/
                               Balance        Expense       Yield/Cost       Balance         Expense       Yield/Cost
                                                     (Amounts in thousands, except percentages)
Assets
Loans                         $  671,288     $   18,732            5.63 %   $  635,247     $    17,811            5.65 %
Investment securities             38,053            556            2.95 %       23,278             383            3.32 %
Federal funds sold and cash
equivalents                       46,680             55            0.24 %       56,306              73            0.26 %
Total interest-earning
assets                           756,021     $   19,343            5.16 %      714,831     $    18,267            5.15 %

Other assets                      64,006                                        60,429
Allowance for loan losses        (19,435 )                                     (19,979 )
Total assets                  $  800,592                                    $  755,281

Liabilities and
Shareholders' Equity
Interest bearing deposits:
NOWs                          $   26,755     $       67            0.50 %   $   23,154     $        65            0.57 %
Money markets                     96,091            273            0.57 %       84,748             292            0.69 %
Savings                          217,911            654            0.61 %      230,871             838            0.73 %
Time deposits                    251,402          1,332            1.07 %      238,803           1,375            1.16 %
Brokered certificates of
deposit                            8,266             37            0.90 %       16,272              94            1.16 %
Total interest-bearing
deposits                         600,425          2,363            0.79 %      593,848           2,664            0.90 %
Borrowings                        64,654            437            1.36 %       42,282             426            2.03 %
Total interest-bearing
liabilities                      665,079          2,800            0.85 %      636,130           3,090            0.98 %

Non-interest bearing
deposits                          33,959                                        29,244
Other liabilities                  5,466                                         4,339
Total non-interest bearing
liabilities                       39,425                                        33,583
Shareholders' equity              96,088                                        85,568
Total liabilities and
shareholders' equity          $  800,592                                    $  755,281
Net interest income                          $   16,543                                    $    15,177
Interest rate spread                                               4.31 %                                         4.17 %
Net interest margin                                                4.41 %                                         4.28 %


Comparison of Operating Results for the Three Months Ended June 30, 2014 and 2013

General: Net income available to common shareholders for the three months ended June 30, 2014 was $2.2 million, compared to $1.7 million for the same period in 2013. The change was impacted by the following:

Interest Income: Interest income increased $759,000, or 8.5%, to $9.7 million for the three months ended June 30, 2014, from $9.0 million for the three months ended June 30, 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 June 30, 2014 were $675.6 million compared to $638.4 million for the same period last year. The average yield on loans was 5.61% for the three months ended June 30, 2014 compared to 5.51% for the same period in 2013.

Interest Expense: Interest expense decreased $91,000 to $1.4 million for the three months ended June 30, 2014, from $1.5 million for the three months ended June 30, 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 partially offset by an increase in average deposit balances. The average rate paid on deposits for the three month period ended June 30, 2014 was 0.79% compared to 0.88% for the same period last year. Also, the average rate on borrowings decreased to 1.35% for the three months ended June30, 2014 from 2.01% for the same period last year, as higher rate advances have matured and been replaced with lower cost borrowings.

Net Interest Income: Net interest income increased $850,000 to $8.3 million for the three months ended June 30, 2014, as compared to $7.5 million for the same period last year. We experienced an increase in our net interest rate spread of 14 basis points, to 4.28% for the three months ended June 30, 2014, from 4.14% for the same period last year. Our net interest margin increased 13 basis points to 4.38% for the three months ended June 30, 2014, from 4.25% 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 June 30, 2014, unchanged from the same period last year.

Non-interest Income: Non-interest income was $1.7 million for the three months ended June 30, 2014, compared to $1.3 million for the same period last year. The increase was primarily attributable to an $180,000 increase in other fee income, which was the result of several large prepayment fees.

Non-interest Expense: Non-interest expense increased $667,000 to $4.9 million for the three months ended June 30, 2014, from $4.2 million for the three months ended June 30, 2013. The increase was primarily due to an $845,000 increase in OREO expenses which included a $500,000 loss reserve established against a condominium project in Absecon, NJ, offset by a $101,000 decrease in professional fees due to lower legal fees associated with nonperforming loans.

Income Taxes: The Company recorded income tax expense of $1.3 million, on income before taxes of $4.1 million for the three months ended June 30, 2014, resulting in an effective tax rate of 30.8%, compared to income tax expense of $1.3 million on income before taxes of $3.6 million for the same period of 2013, resulting in an effective tax rate of 35.7%. 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 June 30,
                                                 2014                                           2013
                                              Interest                                        Interest
                               Average         Income/                        Average         Income/
                               Balance         Expense       Yield/Cost       Balance         Expense        Yield/Cost
                                                      (Amounts in thousands, except percentages)
Assets
Loans                         $  675,572     $     9,442            5.61 %   $  638,386     $      8,765            5.51 %
Investment securities             36,482             262            2.88 %       22,606              179            3.18 %
Federal funds sold and cash
equivalents                       50,304              32            0.26 %       45,297               33            0.29 %
Total interest-earning
assets                           762,358     $     9,736            5.12 %      706,289     $      8,977            5.10 %

Other assets                      65,168                                         59,761
Allowance for loan losses        (19,795 )                                      (20,377 )
Total assets                  $  807,731                                     $  745,673

Liabilities and
Shareholders' Equity
Interest bearing deposits:
NOWs                          $   26,285     $        33            0.50 %   $   23,196     $         31            0.54 %
Money markets                     98,360             135            0.55 %       84,150              147            0.70 %
Savings                          214,204             313            0.59 %      231,974              423            0.73 %
Time deposits                    256,706             689            1.08 %      232,642              651            1.12 %
Brokered certificates of
deposit                            8,134              16            0.79 %       12,793               37            1.16 %
Total interest-bearing
deposits                         603,689           1,186            0.79 %      584,755            1,289            0.88 %
Borrowings                        64,110             216            1.35 %       40,757              204            2.01 %
Total interest-bearing
liabilities                      667,799           1,402            0.84 %      625,512            1,493            0.96 %

Non-interest bearing
deposits                          35,931                                         29,646
Other liabilities                  5,977                                          4,449
Total non-interest bearing
liabilities                       41,908                                         34,095
Shareholders' equity              98,024                                         86,066
Total liabilities and
shareholders' equity          $  807,731                                     $  745,673
Net interest income                          $     8,334                                    $      7,484
Interest rate spread                                                4.28 %                                          4.14 %
Net interest margin                                                 4.38 %                                          4.25 %


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 . . .

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