-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DbnxnGsx0spx96IsHmq/8XEm+CVExaH5nceY/WdCAJZDI+IAXcEieAJ+8OUr6Yyq tBKnA0FYUtVQHutMInl4iw== 0000946275-06-000279.txt : 20060329 0000946275-06-000279.hdr.sgml : 20060329 20060329134547 ACCESSION NUMBER: 0000946275-06-000279 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060329 DATE AS OF CHANGE: 20060329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARKE BANCORP, INC. CENTRAL INDEX KEY: 0001315399 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 000000000 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-51338 FILM NUMBER: 06717947 BUSINESS ADDRESS: STREET 1: 601 DELSEA DRIVE CITY: WASHINGTON TOWNSHIP STATE: NJ ZIP: 08080 BUSINESS PHONE: 856 256-2500 MAIL ADDRESS: STREET 1: 601 DELSEA DRIVE CITY: WASHINGTON TOWNSHIP STATE: NJ ZIP: 08080 10-K 1 f10k_123105-0343.txt FORM UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2005 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File No. 000-51338 PARKE BANCORP, INC. (Exact Name of Registrant as Specified in Its Charter) New Jersey 65-1241959 (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 601 Delsea Drive, Washington Township, New Jersey 08080 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 856-256-2500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.10 per share (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ ] NO [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [ ] NO [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). YES [ ] NO [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of the Registrant's common stock as quoted on the Nasdaq Capital Market on June 30, 2005, was approximately $23.1 million. As of March 22, 2006 there were issued and outstanding 2,327,995 shares of the Registrant's common stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Shareholders for the Fiscal Year Ended December 31, 2005. (Parts II and IV) 2. Portions of the Proxy Statement for the 2006 Annual Meeting of Shareholders. (Parts II and III) PARKE BANCORP, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 INDEX
Page ---- Part I - ------ Item 1. Business............................................................................................. 1 Item 1A. Risk Factors.........................................................................................18 Item 1B. Unresolved Staff Comments............................................................................20 Item 2. Description of Property..............................................................................20 Item 3. Legal Proceedings....................................................................................21 Item 4. Submission of Matters to a Vote of Security Holders..................................................21 Part II - ------- Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.................................................................................22 Item 6. Selected Financial Data..............................................................................22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........................................22 Item 8. Financial Statements and Supplementary Data..........................................................22 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................22 Item 9A. Controls and Procedures..............................................................................22 Item 9B. Other Information....................................................................................23 Part III - -------- Item 10. Directors and Executive Officers of the Registrant...................................................24 Item 11. Executive Compensation...............................................................................24 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......24 Item 13. Certain Relationships and Related Transactions.......................................................25 Item 14. Principal Accountant Fees and Services...............................................................25 Part IV - ------- Item 15. Exhibits and Financial Statement Schedules...........................................................25
i PART I Forward-Looking Statements Parke Bancorp, Inc. (the "Company") may from time to time make written or oral "forward-looking statements," including statements contained in the Company's filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K and the exhibits hereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions, that 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's wholly-owned subsidiary, Parke Bank (the "Bank"), conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rates, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Bank 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; changes in consumer spending and saving habits; and the success of the Company at managing the risks resulting from these factors. The Company cautions that the listed factors are not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. Item 1. Business Parke Bancorp, Inc. ("Parke Bancorp" or the "Company") is a bank holding company incorporated under the laws of the State of New Jersey in January 2005 for the sole purpose of becoming the holding company of Parke Bank (the "Bank"). The Company commenced operations on June 1, 2005, upon completion of the reorganization of the Bank into the holding company form of organization following approval of the reorganization by shareholders of the Bank at its 2005 Annual Meeting of Shareholders. The Company's business and operations primarily consist of its ownership of the Bank. The Bank is a commercial bank, which commenced operations on January 28, 1999. The Bank is chartered by the New Jersey Department of Banking and insured by the Federal Deposit Insurance Corporation ("FDIC"). Parke Bancorp and the Bank maintain their principal offices at 601 Delsea Drive, Washington Township, New Jersey. The Bank also conducts business through offices in Northfield and Washington Township, New Jersey. In addition, the Bank also has a Loan Production Office in Philadelphia, Pennsylvania maintained exclusively for loan production. The Bank is a full service bank, with an emphasis on providing personal and business financial services to individuals and small to mid-sized businesses in Gloucester, Atlantic and Cape May Counties in New Jersey and the Philadelphia area in Pennsylvania. At December 31, 2005, the Bank had assets of $297.8 million, deposits of $232.1 million and shareholders' equity of $27.2 million. 1 The Bank focuses its commercial loan originations on small and mid-sized business (generally up to $7 million in annual sales). Commercial loan products include residential and commercial real estate construction loans; working capital loans and lines of credit; demand, term and time loans; and equipment, inventory and accounts receivable financing. Residential construction loans in tract development are also included in the commercial loan category. The Bank also offers a range of deposit products to its commercial customers. Commercial customers also have the ability to use overnight depository, ACH activity and wire transfer service, all at reduced rates. The Bank's retail banking activities emphasize consumer deposit and checking accounts. An extensive range of these services is offered by the Bank to meet the varied needs of its customers in all age groups. In addition to traditional products and services, the Bank offers contemporary products and services, such as debit cards and Internet banking. Retail lending activities by the Bank include residential mortgage loans, home equity lines of credit, fixed rate second mortgages, new and used auto loans and overdraft protection. Market Area Substantially all of the Bank's business is with customers in its market areas of Southern New Jersey and the Philadelphia area of Pennsylvania. Most of the Bank's customers are individuals and small and medium-sized businesses which are dependent upon the regional economy. Adverse changes in economic and business conditions in the Bank's markets could adversely affect the Bank's borrowers, their ability to repay their loan and to borrow additional funds, and consequently the Bank's financial condition and performance. Additionally, most of the Bank's loans are secured by real estate located in Southern New Jersey and the Philadelphia area. A decline in local economic conditions could adversely affect the values of such real estate. Consequently, a decline in local economic conditions may have a greater effect on the Bank's earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse. Competition The Bank faces significant competition, both in making loans and attracting deposits. The Bank's competition in both areas comes principally from other commercial banks, thrift and savings institutions, including savings and loan associations and credit unions, and other types of financial institutions, including brokerage firms and credit card companies. The Bank faces additional competition for deposits from short-term money market mutual funds and other corporate and government securities funds. Most of the Bank's competitors, whether traditional or nontraditional financial institutions, have a longer history and significantly greater financial and marketing resources than does the Bank. Among the advantages certain of these institutions have over the Bank are their ability to finance wide-ranging and effective advertising campaigns, to access international money markets and to allocate their investment resources to regions of highest yield and demand. Major banks operating in the primary market area offer certain services, such as international banking and trust services, which are not offered directly by the Bank. In commercial transactions, the Bank's legal lending limit to a single borrower enables the Bank to compete effectively for the business of individuals and smaller enterprises. However, the Bank's legal lending limit is considerably lower than that of various competing institutions, which have substantially greater capitalization. The Bank has a relatively smaller capital base than most other competing institutions which, although above regulatory minimums, may constrain the Bank's effectiveness in competing for loans. 2 Lending Activities Composition of Loan Portfolio. Set forth below is selected data relating to the composition of the Bank's loan portfolio by type of loan at the dates indicated.(1)
At December 31, --------------------------------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ---------------------- -------------------- -------------------- ------------------- -------------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------------ ------- ------------ ------- ----------- ------- ----------- ------- ----------- ------- Commercial................ $ 11,053,481 4.3% $ 9,708,142 5.1% $ 8,799,899 6.0% $ 7,035,669 7.4% $ 7,013,258 11.1% Real estate construction: Residential............ 1,174,233 0.5 1,252,811 0.7 2,164,811 1.5 1,370,266 1.4 1,491,077 2.4 Commercial............. 70,156,767 27.1 37,270,464 19.8 29,896,562 20.4 17,122,397 18.0 6,912,656 10.9 Real estate mortgage: Residential............ 17,308,735 6.7 16,360,109 8.7 18,013,087 12.3 13,188,780 13.9 10,417,895 16.5 Commercial............. 154,287,964 59.6 120,051,646 63.6 84,054,063 57.5 53,503,768 56.3 35,550,050 56.2 Consumer.................. 5,053,908 1.8 3,963,818 2.1 3,405,909 2.3 2,874,330 3.0 1,852,236 2.9 ------------ ----- ------------ ----- ------------ ----- ----------- ----- ----------- ----- Total Loans.......... $259,035,088 100.0% $188,606,990 100.0% $146,334,331 100.0% $95,095,210 100.0% $63,237,172 100.0% ============ ===== ============ ===== ============ ===== =========== ===== =========== =====
- ------------------------------------ (1) Amounts presented include adjustments for related unamortized deferred costs and fees. 4 Loan Maturity. The following table sets forth the contractual maturity of certain loan categories at December 31, 2005.
Due after Due within 1 through 5 Due after 1 year years 5 years Total -------------- ------------- ------------- ------------- Commercial................................ $ 7,805,102 $ 2,765,286 $ 483,093 $ 11,053,481 Real estate construction: Residential............................ 1,174,233 - - 1,174,233 Commercial............................. 50,704,662 12,645,429 6,806,676 70,156,767 -------------- ------------- ------------- ------------- Total amount due..................... $ 59,683,997 $ 15,410,715 $ 7,289,769 $ 82,384,481 ============== ============= ============= =============
The following table sets forth the dollar amount of loans in certain loan categories due after December 31, 2006, which have predetermined interest rates and which have floating or adjustable interest rates.
Floating or Fixed Rates(1) Adjustable Rates Total -------------- ---------------- ----- Commercial......................................... $ 3,047,959 $ 8,005,522 $ 11,053,481 Real estate construction: Residential..................................... - 1,174,233 1,174,233 Commercial...................................... 3,716,527 66,440,240 70,156,767 ---------------- --------------- --------------- Total amount due.............................. $ 6,764,486 $ 75,619,995 $ 82,384,481 ================ =============== ===============
(1) Construction loans are adjustable rate loans, however, due to interest rate floors, they have been reclassified as fixed rate loans. Commercial Loans. The Bank originates secured loans for business purposes. Loans are made to provide working capital to businesses in the form of lines of credit, which may be secured by real estate, accounts receivable, inventory, equipment or other assets. The financial condition and cash flow of commercial borrowers are closely monitored by the submission of corporate financial statements, personal financial statements and income tax returns. The frequency of submissions of required financial information depends on the size and complexity of the credit and the collateral that secures the loan. The Bank's general policy is to obtain personal guarantees from the principals of the commercial loan borrowers. Such loans are made to businesses located in the Bank's market area. Commercial business loans generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the mobility of collateral, the effects of general economic conditions and the increased difficulty of evaluating and monitoring these types of loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment. If the cash flow from business operations is reduced, the borrower's ability to repay the loan may be impaired. Real Estate Development and Construction Loans. The Bank has emphasized the origination of construction loans to individuals and real estate developers in its market area. The advantages of construction lending are that the market is typically less competitive than more standard mortgage 5 products, the interest rate typically charged is a variable rate, which permits the Bank to protect against sudden changes in its costs of funds, and the fees or "points" charged by the Bank to its customers can be amortized over the shorter term of a construction loan, typically, one to two years, which permits the Bank to recognize income received over a shorter period of time. The Bank from time to time structures construction loans in excess of the legal lending limit of the Bank, with respect to which the Bank sells participation interests in the construction loans to other lenders, while maintaining and servicing the construction loan. The Bank provides interim real estate acquisition development and construction loans to builders and developers. Real estate development and construction loans to provide interim financing on the property are based on acceptable percentages of the appraised value of the property securing the loan in each case. Real estate development and construction loan funds are disbursed periodically at pre-specified stages of completion. Interest rates on these loans are generally adjustable. The Bank carefully monitors these loans with on-site inspections and control of disbursements. These loans are generally made on properties located in the Bank's market area. Development and construction loans are secured by the properties under development and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely in the value of the underlying property, the Bank considers the financial condition and reputation of the borrower and any guarantors, the amount of the borrower's equity in the project, independent appraisals, costs estimates and pre-construction sale information. Loans to residential builders are for the construction of residential homes for which a binding sales contract exists and the prospective buyers have been pre-qualified for permanent mortgage financing. Loans to residential developers are made only to developers with a proven sales record. Generally, these loans are extended only when the borrower provides evidence that the lots under development will be sold to potential buyers satisfactory to the Bank. The Bank also originates loans to individuals for construction of single family dwellings. These loans are for the construction of the individual's primary residence. They are typically secured by the property under construction, occasionally include additional collateral (such as second mortgage on the borrower's present home), and commonly have maturities of six to twelve months. Construction financing is labor intensive for the Bank, requiring employees of the Bank to expend substantial time and resources in monitoring and servicing each construction loan to completion. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction and development, the accuracy of projections, such as the sales of homes or the future leasing of commercial space, and the accuracy of the estimated cost (including interest) of construction. Substantial deviations can occur in such projections. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. Also, a construction loan that is in default can cause problems for the Bank such as designating replacement builders for a project, considering alternate uses for the project and site and handling any structural and environmental issues that might arise. Commercial Real Estate Mortgage Loans. The Bank originates mortgage loans secured by commercial real estate. Such loans are primarily secured by office buildings, retail buildings, warehouses 6 and general purpose business space. Although terms may vary, the Bank's commercial mortgages generally have maturities of twenty years, but re-price within five years. Loans secured by commercial real estate are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern, in commercial and multi-family real estate lending is the borrower's creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties are often dependent on successful operation or management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. The Bank seeks to reduce the risks associated with commercial mortgage lending by generally lending in its primary market area and obtaining periodic financial statements and tax returns from borrowers. It is also the Bank's general policy to obtain personal guarantees from the principals of the borrowers and assignments of all leases related to the collateral. Residential Real Estate Mortgage Loans. The Bank originates adjustable and fixed-rate residential mortgage loans. Such mortgage loans are generally originated under terms, conditions and documentation acceptable to the secondary mortgage market. Although the Bank has placed all of these loans into its portfolio, a substantial majority of such loans can be sold in the secondary market or pledged for potential borrowings. Consumer Loans. The Bank offers a variety of consumer loans. These loans are typically secured by residential real estate or personal property, including automobiles. Home equity loans (closed-end and lines of credit) are typically made up to 80% of the appraised or assessed value of the property securing the loan in each case, less the amount of any existing prior liens on the property, and generally have maximum terms of ten years, although the Bank does offer a 90% loan to value product if certain conditions related to the borrower and property are satisfied. The interest rates on second mortgages are generally fixed, while interest rates on home equity lines of credit are variable. Loans to One Borrower. Federal regulations limit loans to one borrower in an amount equal to 15% of unimpaired capital and unimpaired surplus. At December 31, 2005, the Bank's loan to one borrower limit was approximately $5.9 million and the Bank had 13 borrowers with loan balances in excess of $5.0 million. At December 31, 2005, the Bank's largest loan to one borrower was a loan for construction and development, with a balance of $5.0 million and was secured by real estate. This loan is scheduled to be funded in stages after the houses are sold. At December 31, 2005, this loan was current and performing in accordance with the terms of the loan agreement. The size of loans which the Bank can offer to potential borrowers is less than the size of loans which many of the Bank's competitors with larger capitalization are able to offer. The Bank may engage in loan participations with other banks for loans in excess of the Bank's legal lending limits. However, no assurance can be given that such participations will be available at all or on terms which are favorable to the Bank and its customers. Non-Performing and Problem Assets Non-Performing Assets. Non-accrual loans are those on which the accrual of interest has ceased. Loans are generally placed on non-accrual status if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more unless the collateral is considered sufficient to cover principal and interest and the loan is in the process of collection. Interest accrued, but not collected at the date a loan is placed on non-accrual status, is reversed and charged against interest income. Subsequent cash receipts are applied either to the outstanding principal or recorded as interest income, 7 depending on management's assessment of ultimate collectability of principal and interest. Loans are returned to an accrual status when the borrower's ability to make periodic principal and interest payments has returned to normal (i.e., brought current with respect to principal or interest or restructured) and the paying capacity of the borrower and/or the underlying collateral is deemed sufficient to cover principal and interest. Impaired loans are measured based on the present value of expected future discounted cash flows, the market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. The recognition of interest income on impaired loans is the same as for non-accrual loans discussed above. The following table sets forth information regarding non-accrual loans at the dates indicated.
At December 31, ---------------------------------------------------------------------- 2005 2004 2003 2002 2001 ----------- ----------- ----------- ----------- ----------- Loans accounted for on a non-accrual basis: Commercial....................................... $ 50,000 $ - $ - $ - $ - Real estate construction: Residential................................... - 240,816 289,257 289,000 - Commercial.................................... - - - - - Real estate mortgage: Residential................................... 20,000 - 504,878 742,067 745,000 Commercial.................................... 1,865,000 - - - - Consumer......................................... - - - - - ----------- ----------- ----------- ----------- ----------- Total....................................... 1,935,000 240,816 794,135 1,031,067 745,000 ----------- ----------- ----------- ----------- ----------- Accruing loans delinquent 90 days or more: Commercial....................................... - - - - - Real estate construction: Residential................................... - - - - - Commercial.................................... - - - - - Real estate mortgage: Residential................................... - 54,859 - - - Commercial.................................... 665,000 - - 50,000 - Consumer......................................... - - - - - ----------- ----------- ----------- ----------- ----------- Total....................................... 665,000 54,859 - 50,000 - ----------- ----------- ----------- ----------- ----------- Total non-performing loans.............. $ 2,590,000 $ 295,675 $ 794,135 $ 1,081,067 $ 745,000 =========== =========== =========== =========== =========== Total non-performing loans as a percentage of net loans....................... 1.01% 0.16% 0.55% 1.15% 1.19% =========== =========== =========== =========== ===========
Classified Assets. Federal Regulations provide for a classification system for problem assets of insured institutions. Under this Classification System, problem assets of insured institutions are classified as substandard, doubtful or loss. An asset is considered "substandard" if it involves more than an acceptable level of risk due to a deteriorating financial condition, unfavorable history of the borrower, inadequate payment capacity, insufficient security or other negative factors within the industry, market or management. Substandard loans have clearly defined weaknesses which can jeopardize the timely payments of the loan. Assets classified as "doubtful" exhibit all of the weakness defined under the Substandard Category but with enough risk to present a high probability of some principal loss on the loan, although not yet fully ascertainable in amount. Assets classified as "loss" are those considered un-collectable or of little value, even though a collection effort may continue after the classification and potential charge-off. 8 The Bank also internally classifies certain assets as "special mention;" such assets do not demonstrate a current potential for loss but are monitored in response to negative trends which, if not reversed, could lead to a substandard rating in the future. When an insured institution classifies problem assets as either "substandard" or "doubtful," it may establish specific allowances for loan losses in an amount deemed prudent by management. When an insured institution classifies problem assets as "loss," it is required either to establish an allowance for losses equal to 100% of that portion of the assets so classified or to charge off such amount. At December 31, 2005, the Bank had assets classified as follows: Special mention....................................... $ 800,411 Substandard........................................... 3,221,945 Doubtful.............................................. 20,000 Loss.................................................. 9,440 ---------------- Total........................................... $ 4,051,846 ================ Foreclosed Real Estate. Real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time as it is sold. When real estate owned is acquired, it is recorded at the lower of the unpaid principal balance of the related loan or its fair value less disposal costs. Any write-down of real estate owned is charged to operations. At December 31, 2005, the Bank had real estate owned totaling $43,936 which is totally reserved. Allowance for Losses on Loans and Real Estate Owned. It is the policy of management to provide for losses on unidentified loans in its portfolio in addition to classified loans. A provision for loan losses is charged to operations based on management's evaluation of the inherent losses that may be incurred in the Bank's loan portfolio. Management also periodically performs valuations of Real Estate Owned and establishes allowances to reduce book values of the properties to their net realizable values when necessary. Management's judgment as to the level of future losses on existing loans is based on its internal review of the loan portfolio, including an analysis of the borrowers' current financial position, the consideration of current and anticipated economic conditions and their potential effects on specific borrowers. In determining the collectability of certain loans, management also considers the fair value of any underlying collateral. However, management's determination of the appropriate allowance level is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that charge-offs in future period will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required. 9 The following table sets forth information with respect to the Bank's allowance for losses on loans at the dates and for the periods indicated.
For the Year Ended December 31, ------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ------------- ------------- ------------- ------------- ------------- Balance at beginning of period................... $ 2,620,651 $ 2,256,070 $ 1,333,000 $ 834,483 $ 467,484 Charge-offs: Commercial....................................... - - - - (7,000) Real estate construction: Residential................................... - - - - - Commercial.................................... (227,001) - - - - Real estate mortgage: Residential................................... - (460,743) - - - Commercial.................................... - - - - - Consumer......................................... - - (1,000) - - ------------- ------------- ------------- ------------- ------------- Total charge-offs:.......................... (227,001) (460,743) (1,000) - (7,000) ------------- ------------- ------------- ------------- ------------- Recoveries: Commercial....................................... - - - - - Real estate construction: Residential................................... - - - - - Commercial.................................... - - - - - Real estate mortgage: Residential................................... - - - - - Commercial.................................... - - - - - Consumer......................................... - - 1,000 - - ------------- ------------- ------------- ------------- ------------- Total recoveries:........................... - - 1,000 - - ------------- ------------- ------------- ------------- ------------- Net charge-offs.................................. (227,001) (460,743) - - (7,000) ------------- ------------- ------------- ------------- ------------- Provision for loan losses........................ 1,180,162 825,324 923,070 498,517 373,999 ------------- ------------- ------------- ------------- ------------- Balance at end of period......................... $ 3,573,812 $ 2,620,651 $ 2,256,070 $ 1,333,000 $ 834,483 ============= ============= ============= ============= ============= Period-end loans outstanding (net of deferred costs/fees).......................... $ 259,035,088 $ 188,606,990 $ 146,344,331 $ 95,095,210 $ 63,237,172 ============= ============= ============= ============= ============= Average loans outstanding........................ $ 223,821,300 $ 154,794,200 $ 120,796,806 $ 78,245,329 $ 49,878,934 ============= ============= ============= ============= ============= Allowance as a percentage of period end loans..................................... 1.38% 1.39% 1.54% 1.40% 1.32% ============= ============= ============= ============= ============= Loans charged off as a percentage of average loans outstanding..................... 1.10% 0.30% 0.00% 0.00% 0.01% ============= ============= ============= ============= =============
10 Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the Bank's allowance for loan losses by loan category at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses that may occur within the loan category as the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio.
At December 31, ------------------------------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ------------------ ------------------- ------------------ ----------------- ----------------- Percent of Percent Percent of Percent Percent Loans in of Loans Loans in of Loans of Loans Each in Each Each in Each in Each Category Category Category Category Category to Total to Total to Total to Total to Total Type of Loans: Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans - ------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Commercial................ $ 153,674 4.3% $ 133,653 5.1% $ 135,364 6.0% $ 98,642 7.4% $ 92,628 11.1% Real estate construction: Residential............ 17,869 0.5 18,344 0.7 33,841 1.5 18,662 1.4 20,027 2.4 Commercial............. 968,503 27.1 518,889 19.8 460,238 20.4 239,940 18.0 90,959 10.9 Real estate mortgage: Residential............ 239,445 6.7 227,997 8.7 277,497 12.3 184,287 13.9 137,690 16.5 Commercial............. 2,129,992 59.6 1,666,734 63.6 1,297,240 57.5 750,479 56.3 468,979 56.2 Consumer.................. 64,329 1.8 55,034 2.1 51,890 2.3 39,990 3.0 24,200 2.9 ---------- ----- ---------- ----- ---------- ----- ---------- ----- --------- ----- Total Allowance $3,573,812 100.0% $2,620,651 100.0% $2,256,070 100.0% $1,333,000 100.0% $ 834,483 100.0% ========== ===== ========== ===== ========== ===== ========== ===== ========= =====
11 Investment Activities General. The investment policy of the Bank is established by senior management and approved by the Board of Directors. It is based on asset and liability management goals and is designed to provide a portfolio of high quality investments that foster interest income within acceptable interest rate risk and liquidity guidelines. In accordance with SFAS No. 115, the Bank classifies its portfolio of investment securities as "available for sale" or "held to maturity." At December 31, 2005, the Bank's investment policy allowed investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S. government agency or government-sponsored agency obligations, (iii) local municipal obligations, (iv) mortgage-backed securities, (v) certificates of deposit, and (vi) investment grade corporate bonds, trust preferred securities and mutual funds. The Board of Directors may authorize additional investments. Composition of Investment Securities Portfolio. The following table sets forth the carrying value of the Bank's investment securities portfolio at the dates indicated. For additional information, see Note 3 of the Notes to the Consolidated Financial Statements.
At December 31, -------------------------------------------------- 2005 2004 2003 -------------- -------------- -------------- Securities Held to Maturity: - --------------------------- Municipals................................................. $ 2,405,841 $ 547,632 $ 548,999 Corporate trust preferred securities....................... - - 250,000 -------------- -------------- -------------- Total securities held to maturity........................ 2,405,841 547,632 798,999 -------------- -------------- -------------- Securities Available for Sale: - ----------------------------- U.S. government agency securities.......................... - - - U.S. government-sponsored entity securities................ 6,202,390 8,670,230 4,255,820 Municipals................................................. - - - Mortgage-backed securities................................. 9,004,256 12,176,244 6,931,181 Mutual funds............................................... - 3,196,328 3,136,034 Corporate & trust preferred securities..................... 6,316,298 - - Stock...................................................... 500,000 - - -------------- -------------- -------------- Total securities available for sale...................... 22,022,944 24,042,802 14,323,035 -------------- -------------- -------------- Total.................................................. $ 24,428,785 $ 24,590,434 $ 15,122,034 ============== ============== ==============
12 Investment Portfolio Maturities. The following table sets forth information regarding the scheduled maturities, carrying values, estimated fair values, and weighted average yields for the Bank's investments securities portfolio at December 31, 2005 by contractual maturity. The following table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments.
At December 31, --------------------------------------------------------------------------------------------------------- Within One Year One to Five Years Five to Ten Years More than Ten Years Total Investment Securities --------------- ----------------- ----------------- ------------------- ------------------------------- Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield Value Yield Market Value ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------------ Securities Held to Maturity: - --------------------------- Municipals............. $ - -% $ 538,055 2.62% $ - -% $ 1,867,786 4.33% $ 2,405,841 3.95% $ 2,322,985 ------ ----- --------- ---- ------ ----- ----------- ---- ----------- ---- ----------- Total securities held to maturity..... - -% 538,055 2.62% - -% 1,867,786 4.33% 2,405,841 3.95% 2,322,985 ------ ----- --------- ---- ------ ----- ----------- ---- ----------- ---- ----------- Securities Available for Sale: - ------------------------------ U.S. government agency securities...... - -% 2,484,490 4.49% - -% 3,717,900 4.46% 6,202,390 4.47% 6,202,390 U.S. government- sponsored entity securities............. - -% - -% - -% - -% - -% - Municipals............. - -% - -% - -% 9,004,256 4.85% 9,004,256 4.85% 9,004,256 Mortgage-backed securities............. - -% 513,200 5.75% - -% 5,803,098 5.61% 6,316,298 5.60% 6,316,298 Mutual funds........... - -% - -% - -% 500,000 0.00% 500,000 0.00% 500,000 Total securities available for sale... - -% 2,997,690 4.70% - -% 19,025,254 4.90% 22,022,944 4.86% 22,022,944 ------ ----- --------- ---- ------ ----- ----------- ---- ----------- ---- ----------- Total.............. - -% 3,535,745 4.94% - -% $20,893,040 4.81% $24,428,785 4.77% $24,345,929 ====== ===== ========= ==== ====== ===== =========== ==== =========== ==== ===========
13 Sources of Funds General. Deposits are the major external source of the Bank's funds for lending and other investment purposes. In addition to deposits, the Bank derives funds from the amortization, prepayment or sale of loans, maturities of investment securities and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and market conditions. Deposits. The Bank offers individuals and businesses a wide variety of accounts, including checking, savings, money market accounts, individual retirement accounts and certificates of deposit. Deposits are obtained primarily from communities that the Bank serves, however, the Bank held brokered deposits of $67 million and $39 million at December 31, 2005 and 2004, respectively. Brokered deposits are a more volatile source of funding than core deposits and do not increase the deposit franchise of the Bank. In a rising rate environment, the Bank may be unwilling or unable to pay a competitive rate. To the extent that such deposits do not remain with the Bank, they may need to be replaced with borrowings which could increase the Bank's cost of funds and negatively impact its interest rate spread, financial condition and results of operation. The following tables detail the average amount, the average rate paid, and the percentage of each category to total deposits for the three years ended December 31, 2005.
At December 31, 2005 ---------------------------------------------------------- Daily Average Average Percent Balance Rate of Total -------------- ------------- -------------- NOW and money market savings deposits........................ $ 23,729,040 1.8% 11.4% Regular savings deposits................... 29,199,866 2.7% 14.0% Time deposits.............................. 138,586,970 3.3% 66.5% -------------- ----- Total interest-bearing deposits....... 191,515,876 91.9% Non interest-bearing demand deposits....... 16,946,509 8.1% -------------- ----- Total deposits........................ $ 208,462,385 100.0% ============== =====
At December 31, 2004 ---------------------------------------------------------- Daily Average Average Percent Balance Rate of Total -------------- ------------- -------------- NOW and money market savings deposits........................ $ 28,510,645 1.7% 18.4% Regular savings deposits................... 22,160,550 2.1% 14.3% Time deposits.............................. 91,104,040 2.8% 58.7% -------------- ----- Total interest-bearing deposits....... 141,775,235 91.4% Non interest-bearing demand deposits....... 13,422,274 8.6% -------------- ----- Total deposits........................ $ 155,197,509 100.0% ============== =====
14
At December 31, 2003 ---------------------------------------------------------- Daily Average Average Percent Balance Rate of Total -------------- ------------- -------------- NOW and money market savings deposits........................ $ 24,351,546 1.6% 19.8% Regular savings deposits................... 22,104,323 2.2% 18.0% Time deposits.............................. 67,298,382 3.2% 54.7% -------------- ----- Total interest-bearing deposits....... 113,754,251 92.5% Non interest-bearing demand deposits....... 9,270,022 7.5% -------------- ----- Total deposits........................ $ 123,024,273 100.0% ============== =====
The following table indicates the amount of the Bank's certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2005. Certificates of Maturity Period Deposit - --------------- ------- Within three months.......................... $ 21,364,066 Three through six months..................... 22,183,181 Six through twelve months.................... 14,331,938 Over twelve months........................... 37,402,940 -------------- Total................................... $ 95,282,066 ============== Borrowings. Borrowings consist of reverse repurchase agreements, subordinated debt and advances from the FHLB and other parties. Reverse repurchase agreements were priced at origination and are payable in four years or less. Borrowings from FHLB outstanding during 2005, 2004 and 2003 had maturities of five years or less and cannot be prepaid without penalty. The following table sets forth information regarding the Bank's borrowings:
December 31, ------------------------------------------------ 2005 2004 2003 -------------- -------------- -------------- Amount outstanding at year end......................... $ 35,966,860 $ 20,378,726 $ 10,340,123 Weighted average interest rates at year end............ 4.8% 2.8% 1.8% Maximum outstanding at any month end................... $ 35,966,860 $ 20,378,726 $ 14,195,110 Average outstanding.................................... $ 28,172,795 $ 10,721,726 $ 7,827,679 Weighted average interest rate during the year......... 3.1% 2.2% 2.1%
Subsidiary Activity The largest subsidiary of the Company is the Bank. The Bank has one subsidiary, Parke Capital Markets, a corporation, which was formed in 2001 to generate fee income from capital markets financing activities, which include term financings. Personnel At December 31, 2005, the Bank had 30 full-time and 10 part-time employees. 15 Regulation General. Set forth below is a brief description of certain laws which relate to the regulation of the Bank and the Company. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Holding Company Regulation General. The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the "BHC Act"), and is regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Federal Reserve Board has enforcement authority over the Company and the Company's non-bank subsidiaries which also permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary bank. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for shareholders of the Company. As a bank holding company, the Company is required to file with the Federal Reserve Board an annual report and any additional information as the Federal Reserve Board may require under the BHC Act. The Federal Reserve Board will also examine the Company and its subsidiaries. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the BHC Act on extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries, and on the taking of such stock or securities as collateral for loans to any borrower. Furthermore, under amendments to the BHC Act and regulations of the Federal Reserve Board, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of credit or providing any property or services. Generally, this provision provides that a bank may not extend credit, lease or sell property, or furnish any service to a customer on the condition that the customer provide additional credit or service to the bank, to the bank holding company, or to any other subsidiary of the bank holding company or on the condition that the customer not obtain other credit or service from a competitor of the bank, the bank holding company, or any subsidiary of the bank. Extensions of credit by the Bank to executive officers, directors, and principal shareholders of the Bank or any affiliate thereof, including the Company, are subject to Section 22(h) of the Federal Reserve Act, which among other things, generally prohibits loans to any such individual where the aggregate amount exceeds an amount equal to 15% of a bank's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral. Federal Securities Law. The Company's common stock is registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Company is subject to the periodic reporting and other requirements of Section 12(g) of the 1934 Act, as amended. Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the "SOX Act") was enacted to address corporate and accounting fraud. The SEC has promulgated new regulations pursuant to the SOX Act and may continue to propose additional implementing or clarifying regulations as necessary in furtherance of the SOX Act. The passage of the SOX Act by Congress and the implementation of new regulations by the SEC subject publicly-traded companies to additional and more cumbersome reporting regulations and disclosure. Compliance with the SOX Act and corresponding regulations may increase the Company's expenses. 16 Regulation of the Bank The Bank operates in a highly regulated industry. This regulation and supervision establishes a comprehensive framework of activities in which a bank may engage and is intended primarily for the protection of the deposit insurance fund and depositors and not shareholders of the Bank. Any change in applicable statutory and regulatory requirements, whether by the New Jersey Department of Banking and Insurance, the Federal Deposit Insurance Corporation (the "FDIC") or the United States Congress, could have a material adverse impact on the Bank, and its operations. The adoption of regulations or the enactment of laws that restrict the operations of the Bank or impose burdensome requirements upon it could reduce its profitability and could impair the value of the Bank's franchise which could hurt the trading price of the Bank's stock. As a New Jersey-chartered commercial bank, the Bank is subject to the regulation, supervision, and control of the New Jersey Department of Banking and Insurance. As an FDIC-insured institution, the Bank is subject to regulation, supervision and control of the FDIC, an agency of the federal government. The regulations of the FDIC and the New Jersey Department of Banking and Insurance affect virtually all activities of the Bank, including the minimum level of capital the Bank must maintain, the ability of the Bank to pay dividends, the ability of the Bank to expand through new branches or acquisitions and various other matters. Insurance of Deposits. The Bank's deposits are insured up to a maximum of $100,000 per depositor under the Bank Insurance Fund of the FDIC. The FDIC has established a risk-based assessment system for all insured depository institutions. Under the risk-based assessment system, deposit insurance premium rates range from 0-27 basis points. Currently, the Bank's deposit insurance premium has been assessed at [zero] basis points of deposits. Capital Adequacy Guidelines. The Bank is subject to risk-based capital guidelines promulgated by the FDIC that are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Under the guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least 4% of the total capital is required to be "Tier I Capital," consisting of common shareholders' equity and qualifying preferred stock, less certain goodwill items and other intangible assets. The remainder ("Tier II Capital") may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets, (b) excess of qualifying preferred stock, (c) hybrid capital instruments, (d) perpetual debt, (e) mandatory convertible securities, and (f) qualifying subordinated debt and intermediate-term preferred stock up to 50% of Tier I capital. Total capital is the sum of Tier I and Tier II capital less reciprocal holdings of other banking organizations, capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the FDIC (determined on a case-by-case basis or as a matter of policy after formal rule-making). In addition to the risk-based capital guidelines, the FDIC has adopted a minimum Tier I capital (leverage) ratio, under which a bank must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank that has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other banks are expected to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum. 17 At December 31, 2005, the Company and the Bank had the requisite capital levels to qualify as "well capitalized." Item 1A. Risk Factors The following is a summary of the material risks related to an investment in the Company's securities. A significant amount of the Bank's business is concentrated in real estate development and construction lending. At December 31, 2005, approximately 27.5% of our loans are commercial and residential real estate development and construction loans, which are secured by the real estate under development. Construction lending involves extensive risks. In addition to the risk that the market values of the real estate securing these loans may deteriorate, these loans are also subject to the development risks that the projects will not be completed in a timely manner or according to original specifications. Real estate development and construction projects that are not completed in a timely manner or according to original specifications are generally less marketable than projects that are fully developed, and the loans underlying such projects may be subject to greater losses in the event that the real estate collateral becomes the source of repayment. Construction projects are commonly underwritten based upon projections, such as the sales of homes or future leasing of commercial spaces, and substantial deviations from such projections can occur. Construction lending is also labor intensive for the Bank, requiring Bank employees to expend substantial time and resources in monitoring and servicing each construction loan to completion. In addition, a construction loan that is in default can create problems for the Bank, such as designating replacement builders for a project, considering alternate users for the project and site and handling any structural or environmental issues that might arise. Such problems and the risks inherent in construction lending may have a material adverse effect on the Company's earnings and overall financial condition. Most of the Bank's loans are secured, in whole or in part, with real estate collateral. In addition to the financial strength and cash flow characteristics of the borrower in each case, the Bank often secures its loans with real estate collateral. At December 31, 2005, approximately 95.8% of the Bank's loans had real estate as a primary, secondary or tertiary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower, but such collateral may deteriorate in value during the time the credit is extended. If we are required to liquidate the collateral securing a loan during a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected. Some of the Bank's assets are classified as non-performing assets that may lose further value. The Bank has non-performing assets, which at this time only include non-accruing loans. At December 31, 2005, the Bank's non-performing loans were 1.4% of outstanding net loans. There is a possibility that the Bank's earnings could be reduced in the event that the eventual values of these non-performing assets are or become less than the values that we have assigned to them. The Bank may experience loan losses in excess of its allowance. The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. The Bank's 18 management maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectability of the loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding balances and for specific loans when their ultimate collectability is considered questionable. If the Bank's management's assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, or if the bank regulatory authorities require the Bank to increase the allowance for loan losses as a part of their examination process, the Bank's earnings and capital could be significantly and adversely affected. As of December 31, 2005, the allowance for loan losses was approximately $3.6 million, which represented 1.4% of outstanding net loans. At such date, we had non-accruing loans totaling $1.9 million. The Bank actively manages its non-accruing loans in an effort to minimize credit losses. Although the Bank's management believes that its allowance for loan losses is adequate, there can be no assurance that the allowance will prove sufficient to cover future loan losses. Further, although the Bank's management uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to the Bank's non-performing or performing loans. Material additions to the Bank's allowance for loan losses would result in a decrease in the Bank's net income and capital, and could have a material adverse effect on the Company's financial condition and results of operations. The Bank operates in a competitive market. The Bank operates in a competitive environment, competing for deposits and loans with commercial banks, savings associations and other financial entities. Competition for deposits comes primarily from other commercial banks, savings associations, credit unions, money market and mutual funds and other investment alternatives. Competition for loans comes primarily from other commercial banks, savings associations, mortgage banking firms, credit unions and other financial intermediaries. Many of the financial intermediaries operating in our market area offer certain services, such as trust investment and international banking services, which the Bank does not offer. In addition, banks with a larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the needs of larger customers. Finally, the Bank's continued growth and profitability will depend upon its ability to attract and retain skilled managerial, marketing and technical personnel. Competition for qualified personnel in the banking industry is intense, and there can be no assurance that the Bank will be successful in attracting and retaining such personnel. The Bank is dependent on certain key personnel. The success of the Bank depends, to a great extent, upon the services of Vito S. Pantilione, the Bank's President and Chief Executive Officer, Ernest D. Huggard, the Bank's Senior Vice President and Chief Financial Officer, and David O. Middlebrook, the Bank's Vice President and Senior Loan Officer. The Bank has been able to retain the services of Mr. Pantilione and Mr. Huggard since its inception and of Mr. Middlebrook since he joined the Bank in 1999. The Bank also needs, from time to time, to recruit personnel to fill vacant positions for experienced lending and credit administration officers. There can be no assurance that the Bank will continue to be successful in recruiting and retaining the necessary personnel for the Bank's lending, operations, accounting and administrative functions. The Bank's inability to hire or retain key personnel could have a material adverse effect on the Company's results of operations. 19 Changes in interest rates affect the Company's profitability and assets. The Company derives its income mainly from the difference, or "spread," between the interest earned by the Bank on loans, securities and other interest-earning assets, and the interest paid by the Bank on deposits, borrowings and other interest-bearing liabilities. If more interest-earning assets than interest-bearing liabilities re-price or mature during a time when interest rates are declining, then the Company's net interest income may be reduced. If more interest-bearing liabilities than interest-earning assets re-price or mature during a time when interest rates are rising, then the Company's net interest income may be reduced. At December 31, 2005, the Bank's total interest-bearing liabilities maturing or re-pricing within one year exceeded interest-earning assets maturing or re-pricing during the same time period by $27.4 million. As a result, the cost on its interest-bearing liabilities should adjust to changes in interest rates at a faster rate than the yield of its interest-earning assets, and its net interest income may be reduced when interest rates increase significantly for this period of time. The Bank's management controls a significant percentage of our common stock. At March 22, 2006, the Company's and the Bank's directors and executive officers beneficially owned 1,245,161 shares or exercisable warrants and options, or 48.8%, of our common stock. Because of the large percentage of stock held by the Company's and the Bank's directors and executive officers, these persons could influence the outcome of any matter submitted to a vote of our shareholders. Item 1B. Unresolved Staff Comments None. Item 2. Description of Property (a) Properties. The Company's and the Bank's main office is located in Washington Township, Gloucester County, New Jersey, in an office building of approximately 13,000 square feet. The main office facilities include teller windows, a lobby area, drive-through windows, automated teller machine, a night depository, and executive and administrative offices. In December 2002, the Bank executed its lease option to purchase the building for $1.5 million. The Bank also conducts business from a full-service office in Northfield, New Jersey, a full-service office in Washington Township, Gloucester County, New Jersey and a loan production office in Philadelphia, Pennsylvania. These offices were opened by the Bank in September 2002, February 2003, and February 2004 respectively. The Northfield office and loan production office are leased. The Washington Township office was purchased in February 2003. Management considers the physical condition of all offices to be good and adequate for the conduct of the Bank's business. At December 31, 2005, net property and equipment totaled approximately $3.1 million. (b) Investment Policies. See "Item 1. Business" above for a general description of the Company's investment policies, which are implemented by the Bank. The Bank's investments are primarily acquired to produce income, and to a lesser extent, possible capital gain. 20 (1) Investments in Real Estate or Interests in Real Estate. See "Item 1. Business - Lending Activities." (2) Investments in Real Estate Mortgages. See "Item 1. Business - Lending Activities." (3) Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities." (c) Description of Real Estate and Operating Data. Not Applicable. Item 3. Legal Proceedings On December 27, 2004, Republic First Bank filed an action captioned Republic First Bank v. Parke Bank and Vito S. Pantilione in the Superior Court of New Jersey Law Division, Gloucester County. The Bank believes that the action is without merit and intends to vigorously defend against it. The suit alleges, among other things, fraud, negligent misrepresentation, breach of fiduciary duty and breach of contract in connection with certain loans to two Parke Bank customers in which Republic First Bank became a participant. Republic First Bank is seeking unspecified damages and requesting that a receivership be appointed for certain collateral. The complaint in the action was served on us in January 2005. The Bank filed an answer to the complaint, and the case is currently in the discovery phase. On June 1, 2005, Atlantic Central Bankers Bank and New Century Bank filed an action captioned Atlantic Central Bankers Bank and New Century Bank v. Parke Bank and Parke Capital Markets in the Superior Court of New Jersey Chancery Division, Cape May County. The Bank believes that the action is without merit and intends to vigorously defend against it. The suit alleges breach of participation agreements and fraudulent misrepresentation in connection with the plaintiffs' participations in loans to the same Parke Bank customers as the Republic First Bank matter discussed above. In August 2005, the plaintiffs' motion for a preliminary injunction was denied, and they were ordered to pay the Bank's expenses. This case has been consolidated with the Republic First Bank case, and is currently in the discovery phase. On November 4, 2004, Stephen P. Magenta and other parties filed an action captioned Stephen P. Magenta, et. al. v. General Insulation Services, Inc., et. al. in the Superior Court of New Jersey Law Division, Gloucester County, related to the alleged embezzlement of over $1 million by an employee of one of our customers of funds maintained in accounts at the Bank. All but one of the claims against the Bank have been dismissed. The Bank believes that the action is without merit and intends to vigorously defend against it. In addition, the Bank believes that this action is covered by its insurance. Other than the foregoing, at December 31, 2005, the Company was not a party to any material legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders On December 20, 2005, the Company held a special meeting of shareholders to approve the Parke Bancorp, Inc. 2005 Stock Option Plan, which was approved with 1,173,136 votes cast for approval, 137,540 votes cast against approval and 27,670 abstentions. 21 PART II Item 5. Market for Common Equity, Related Shareholder Matters and Small Business Issuer Purchases of Equity Securities The information contained under the section captioned "Market Prices and Dividends" in the Company's Proxy Statement for the 2005 Annual Meeting of Shareholders (the "Proxy Statement") is incorporated herein by reference. Item 6. Selected Financial Data The information contained under the section captioned "Selected Financial Data" in the Company's 2005 Annual Report (the "Annual Report") is incorporated herein by reference. Item 7. Management's Discussion and Analysis or Plan of Operation The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Interest Rate Sensitivity and Liquidity -- Rate Sensitivity Analysis" in the Annual Report is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Company's financial statements listed under Item 15 are incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the Company's principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Annual Report on Form 10-K such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) Changes in internal control over financial reporting. During the last quarter of the year under report, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 22 Item 9B. Other Information Not applicable. 23 PART III Item 10. Directors and Executive Officers of the Registrant The information contained under the headings "Section 16(a) Beneficial Ownership Reporting Compliance" and "Proposal I - Election of Directors" in the Proxy Statement is incorporated herein by reference. The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. A copy of the Code of Ethics will be furnished without charge upon written request to the Chief Financial Officer, Parke Bancorp, Inc., 601 Delsea Drive, Washington Township, New Jersey, 08080. Item 11. Executive Compensation The information contained in the section captioned "Director and Executive Officer Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters (a) Security Ownership of Certain Beneficial Owners The information contained in the section captioned "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference. (b) Security Ownership of Management The information contained in the section captioned "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference. (c) Management of the Registrant knows of no arrangements, including any pledge by any person of securities of the Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant. (d) Securities Authorized for Issuance Under Equity Compensation Plans Set forth below is information as of December 31, 2005 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance. 24
EQUITY COMPENSATION PLAN INFORMATION (a) (b) (c) Number of securities remaining available for future issuance under equity compensation Number of securities to Weighted-average plans (excluding be issued upon exercise exercise price of securities reflected in of outstanding options outstanding options column (a)) ---------------------- ------------------- ----------- Equity compensation plans approved by shareholders............. 275,807 $15.87 138,073 ------- ------ ------- TOTAL....................... 275,807 $15.87 138,073 ======= ====== =======
Item 13. Certain Relationships and Related Transactions The information contained in the section captioned "Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information contained in the section captioned "Principal Accountant Fees and Services" in the Proxy Statement is incorporated herein by reference. PART IV Item 15. Exhibits and Financial Statement Schedules (a) Listed below are all financial statements and exhibits filed as part of this report. 1. The following financial statements and the independent auditors' report included in the Annual Report are incorporated herein by reference: o Report of Independent Registered Public Accounting Firm o Consolidated Balance Sheets as of December 31, 2005 and 2004 o Consolidated Statements of Income For the Years Ended December 31, 2005, 2004 and 2003 o Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2005, 2004 and 2003 25 o Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003 o Notes to Consolidated Financial Statements 2. Schedules omitted as they are not applicable. 3. The following exhibits are included in this Report or incorporated herein by reference: 3(i) Certificate of Incorporation of Parke Bancorp, Inc.* 3(ii) Bylaws of Parke Bancorp, Inc.* 4.1 Specimen stock certificate of Parke Bancorp, Inc.* 4.2 Specimen common stock purchase warrant of Parke Bancorp, Inc.* 10.1 Employment Agreement Between Bank and Vito S. Pantilione* 10.2 Supplemental Executive Retirement Plan* 10.3 1999 Stock Option Plan* 10.4 2002 Stock Option Plan* 10.5 2003 Stock Option Plan* 10.6 2005 Stock Option Plan** 13 Annual Report to Stockholders for the fiscal year ended December 31, 2005 21 Subsidiaries of the Registrant* 23 Consent of McGladrey & Pullen, LLP 31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Incorporated by reference to the Company's Registration Statement on Form S-4 filed with the SEC on January 31, 2005. ** Incorporated by reference to the Company's Definitive Proxy Statement filed with the SEC on December 20, 2005. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. PARKE BANCORP, INC. Dated: March 29, 2006 By: /s/Vito S. Pantilione ---------------------------------- Vito S. Pantilione President, Chief Executive Officer and Director Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on March 29, 2006.
/s/Celestino R. Pennoni /s/Vito S. Pantilione - ----------------------------------------------- ----------------------------------------------- Celestino R. Pennoni Vito S. Pantilione Chairman President, Chief Executive Officer and Director (Principal Executive Officer) /s/Fred G. Choate /s/Daniel Dalton - ----------------------------------------------- ----------------------------------------------- Fred G. Choate Daniel Dalton Director Director /s/Ernest D. Huggard - ----------------------------------------------- Ernest D. Huggard Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
EX-13 2 ex-13.txt ANNUAL REPORT PARKE BANCORP, INC. 2005 ANNUAL REPORT TO SHAREHOLDERS PARKE BANCORP, INC. 2005 ANNUAL REPORT TO SHAREHOLDERS TABLE OF CONTENTS Page Letter to Shareholders.........................................................1 Selected Financial Data........................................................3 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................4 Market Prices and Dividends...................................................14 Report of Independent Registered Public Accounting Firm......................F-1 Consolidated Financial Statements............................................F-2 Notes to Consolidated Financial Statements...................................F-7 Corporate Information.................................................Back Cover -------------------- Parke Bancorp, Inc. (the "Company") may from time to time make written or oral "forward-looking statements," including statements contained in this Annual 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 involve risks and uncertainties, such as statements of the Company's plans, objectives, estimates and intentions that 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's bank subsidiary, Parke Bank, conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of Parke Bank and the perceived overall value of these products and services by customers, including the features, pricing and quality compared to competitors' products and services; the willingness of customers to substitute competitors' products and services for Parke Bank's products and services; the success of Parke Bank in gaining regulatory approval of its products and services, when required; 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 Parke Bank at managing these risks. iii PARKE BANCORP, INC. To Our Shareholders: The Delaware Valley's economic engine helped support the sixth consecutive year of record profits for Parke Bank. The real estate market and the business community, from the Jersey Shore to Philadelphia, remained strong despite eight interest rate increases by the Federal Reserve and record-high oil prices. Continued interest rate hikes increased pressure on the banking industry's already shrinking net interest margin. Parke Bank turned these challenges into opportunities, with assets growing 33% to $297.8 million and profits increasing 28% to $3.5 million, supported in part by the growth in our loan portfolio of 37% to over $259 million. The growth in our loan portfolio was primarily funded by a 29% growth in our deposits, which now exceeds $232 million. During 2005, Parke Bank reorganized into the holding company form of ownership. Through new business trust subsidiaries of our new holding company, Parke Bancorp, Inc., we raised approximately $8.5 million through the sale of $10 million in trust preferred securities, strengthening our financial position. Parke Bancorp has also given us the opportunity to pursue other business opportunities, including the opportunity to open a full-service bank branch in Philadelphia. We are pleased to report that we selected 1610 Spruce Street as our first full-service branch in Philadelphia. We hope to start renovations soon, with the branch opening planned for the third quarter of 2006. Paul Palmieri, our Senior Vice President in charge of the Philadelphia region, is already hard at work growing our loan portfolio and relationships in this market. Continued bank consolidations have provided Parke Bank with an excellent opportunity to offer quality personal banking services to the residents, businesses and professionals in the Center City area. The personal attention and competitive banking products that we provide to our customers are being well-received in this exciting new market for Parke Bank. Our new branch will be staffed with fine banking professionals committed to the Parke Bank's "Return to Better Banking" philosophy. We are also supporting our growth in the Vineland/Millville market in Cumberland County with the hiring of Milton Witte. Milton is a great addition to our management team and brings a wealth of experience and expertise to our bank. The Vineland/Millville area is one of the fastest growing areas in the New Jersey, with the construction of thousands of residential homes approved and under development. Commercial development has also exploded along Delsea Drive, with many national and regional retail chains opening flagship stores. Plans are under way to open a loan production office in this area, in addition to actively pursuing a quality, full-service branch location. The Parke Bank philosophy of personal service, competitive banking products and our commitment to a prompt response to our customers' requests will offer a clear alternative to the people and businesses in this area. 1 We continue to explore opportunities in other areas of the region that would be strategically ideal to support the growth of our bank and enhance shareholder value. Once again, the banking industry is facing many obstacles in 2006, with increased banking and SEC regulations, higher interest rates and a volatile economy. Changes in the political environment, both nationally and abroad pose significant challenges to forecasting the direction of interest rates and the economy. We will continue to work very hard to turn these challenges into opportunities that will further enhance shareholder value while maintaining a sound banking institution. /s/C.R. "Chuck" Pennoni /s/Vito S. Pantilione C.R. "Chuck" Pennoni Vito S. Pantilione Chairman President and Chief Executive Officer SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)
At or for the Year Ended December 31, -------------------------------------------------------- 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Assets .......................... $297,810 $224,339 $174,004 $130,903 $ 81,955 Loans Receivable, Net ........... $255,461 $185,986 $144,078 $ 93,762 $ 62,403 Securities--Available for Sale... $ 22,023 $ 24,043 $ 14,323 $ 22,903 $ 12,913 Securities--Held to Maturity .... $ 2,406 $ 548 $ 779 $ 250 $ 250 Cash and Cash Equivalents ....... $ 4,380 $ 1,802 $ 4,267 $ 7,540 $ 4,627 Deposits ........................ $232,056 $179,585 $142,447 $107,548 $ 65,609 Borrowings ...................... $ 35,967 $ 20,379 $ 10,340 $ 4,949 $ 6,835 Shareholders' Equity ............ $ 27,193 $ 22,829 $ 19,993 $ 17,628 $ 8,553 OPERATIONS DATA: Interest Income ................. $ 17,336 $ 11,766 $ 9,445 $ 6,612 $ 4,884 Interest Expense ................ 6,684 3,747 3,182 2,960 2,647 -------- -------- -------- -------- -------- Net Interest Income ............. 10,652 8,019 6,263 3,652 2,237 Provision for Loan Losses ....... 1,180 825 923 499 374 -------- -------- -------- -------- -------- Net Interest Income after Provision for Loan Losses .... 9,472 7,194 5,340 3,153 1,863 Non-Interest Income ............. 896 861 779 488 443 Non-Interest Expense ............ 4,544 3,589 2,838 2,079 1,564 -------- -------- -------- -------- -------- Income Before Income Taxes ...... 5,824 4,466 3,281 1,562 742 Income Tax Expense .............. 2,330 1,744 1,279 620 302 -------- -------- -------- -------- -------- Net Income ...................... $ 3,494 $ 2,722 $ 2,002 $ 942 $ 440 ======== ======== ======== ======== ======== SELECTED FINANCIAL RATIOS: Ratio of Equity to Assets ....... 9.13% 10.18% 11.49% 13.47% 10.44% Book Value/Common Share ......... $ 11.75 $ 10.50 $ 9.33 $ 8.47 $ 7.73 Dividends declared per Share .... $ - $ - $ - $ - $ - Basic Income per Common Share ... $ 1.55 $ 1.26 $ 0.96 $ 0.78 $ 0.39 Diluted Income per Common Share.. $ 1.32 $ 1.05 $ 0.85 $ 0.77 $ 0.39 Return on Average Assets ........ 1.35% 1.45% 1.33% 0.94% 0.69% Return on Average Equity ........ 13.91% 13.24% 10.76% 9.56% 5.28% Net Interest Margin ............. 4.33% 4.58% 4.40% 3.84% 3.55% Non-Interest Expense/Average Assets ....................... 1.76% 1.91% 1.88% 2.07% 2.44% Non-Interest Income/Average Assets ....................... 0.35% 0.46% 0.52% 0.49% 0.69% Non-Performing Loans/Loans(1) 1.01% 0.16% 0.55% 1.15% 1.19% Allowance for Loan Losses/Loans(1) .............. 1.38% 1.39% 1.54% 1.40% 1.32% Dividend Payout Patio ........... - - - - -
- --------------- (1) Total loans before allowance for loan losses 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Forward Looking Statements The Company may from time to time make written or oral "forward-looking statements," including statements contained in the Company's filings with the Securities and Exchange Commission (including the Proxy Statement and the Annual Report on Form 10-K, including the exhibits), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company. These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions, which 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 Bank conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rates, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Bank 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; changes in consumer spending and saving habits; and the success of the Bank at managing the risks resulting from these factors. The Company cautions that the listed factors are not exclusive. Overview The Company's results of operations are dependent primarily on the Bank's 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 Bank also generates non-interest income such as service charges, BOLI income and other fees. The Bank's non-interest expenses primarily consist of employee compensation and benefits, occupancy expenses, marketing expenses, data processing costs and other operating expenses. The Bank is also subject to losses from its loan portfolio if borrowers fail to meet their obligations. The Bank'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. We recorded net income of $3,494,421, or $1.32 per diluted share, $2,721,758, or $1.05 per diluted share, and $2,001,899, or $.85 per diluted share, for 2005, 2004 and 2003, respectively. Pre-tax earnings were $5,824,065 for 2005 compared to $4,465,858 for 2004 and $3,281,336 for 2003. Total assets increased by $73.5 million, or 32.7%, reflecting significant increases in loans. Loans outstanding increased by $69.5 million, or 37.4%, while investment securities remained constant at $24.4 million. Deposits also grew by $52.5 million, or 29.2%. Borrowings experienced a 76.5% or $15.6 million increase. The issuance of $10 million of trust securities enhanced our capital position for asset expansion. Growth in loans and deposits reflects our continued efforts in business development and advertising. Shareholders' Equity increased $4.4 million or 19.1%, as a result of earnings and the exercise of stock warrants and options. 4 The principal objective of this financial review is to provide a discussion and an overview of our consolidated financial condition and results of operations. This discussion should be read in conjunction with the accompanying financial statements and related notes. 5 Comparative Average Balances, Yields and Rates. The following table sets forth for the periods indicated the Company's average volume of interest-earning assets and interest-bearing liabilities and average yields and rates. Changes in net interest income from period to period result from increases or decreases in the volume and mix of interest-earning assets and interest-bearing liabilities, increases or decreases in the average rates earned and paid on such assets and liabilities and the availability of particular sources of funds, such as non-interest-bearing deposits.
For the Year Ended -------------------------------------------------------------------------------------- December 31, 2005 December 31, 2004 December 31, 2003 --------------------------- --------------------------- -------------------------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ------- ------- ---- (Dollars in thousands) Assets: Loans (net of deferred costs/fees)(1)....... $219,217 $16,108 7.3% $154,764 $10,978 7.1% $120,797 $8,699 7.2% -------- ------- --- -------- ------- --- -------- ------ --- Investment securities....................... 24,276 1,159 4.8% 17,219 750 4.4% 18,877 724 3.8% Federal funds sold.......................... 2,107 69 3.3% 3,044 38 1.3% 1,847 21 1.2% -------- ------- -------- ------- -------- ------ Total interest-earning assets.......... 245,600 17,336 7.1% 175,027 11,766 6.7% 141,521 9,444 6.7% ======== ======= ======== ======= ======== ====== Allowance for loan losses................... (3,009) (2,280) (1,729) Other assets................................ 15,322 14,802 10,979 -------- -------- -------- Total assets........................... $257,913 $187,549 $150,771 ======== ======== ======== Liabilities and Shareholders' Equity: Interest-bearing deposits: Regular savings deposits................. $ 29,200 $ 797 2.7% $ 22,160 $ 464 2.1% $ 22,104 $ 493 2.2% NOW & money market savings............... 23,729 416 1.8% 28,511 477 1.7% 24,351 381 1.6% Time deposits............................ 138,587 4,599 3.3% 91,104 2,584 2.8% 67,298 2,139 3.2% -------- ------- -------- ------- -------- ------ Total interest-bearing deposits........ 191,516 5,812 3.0% 141,775 3,525 2.5% 113,754 3,013 2.6% Borrowed funds 22,376 872 3.9% 10,272 221 2.2% 7,828 168 2.1% -------- ------- -------- ------- -------- ------ Total interest-bearing liabilities..... 213,892 $ 6,684 3.1% 152,047 $ 3,746 2.5% 121,582 $3,181 2.6% ======= ======= ====== Non-interest-bearing demand deposits........ 16,946 13,422 9,270 Other liabilities........................... 1,948 1,520 1,311 Shareholders' equity........................ 25,127 20,559 18,608 -------- -------- -------- Total liabilities and shareholders' equity................... $257,913 $187,549 $150,771 ======== ======== ======== Interest rate spread (average yield less average rate)....................... 4.0% 4.2% 4.1% Net interest income (interest income less interest expense)................... $10,652 $ 8,020 $6,263 ======= ======= ====== Net interest margin (net interest income/average interest-earning assets).. 4.3% 4.6% 4.4%
- --------------------------- (1) Non-accrual loans are included in the calculation of average balances. 6 Return on Equity and Assets
December 31, -------------------------------------------- 2005 2004 2003 ---- ---- ---- Return on average assets.................. 1.35% 1.45% 1.33% Return on average equity.................. 13.91% 13.24% 10.76% Dividend payout ratio..................... 0 0 0 Average equity to average assets ratio.... 9.74% 10.96% 12.34%
Rate/Volume Analysis. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by the old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Year's Ended December 31, ------------------------------------------------------------------------------------- 2005 vs. 2004 2004 vs. 2003 ---------------------------------------- ----------------------------------------- Variance Due to Changes In Variance Due to Changes In ---------------------------------------- ----------------------------------------- Net Net Average Average Increase/ Average Average Increase/ Volume Rate (Decrease) Volume Rate (Decrease) ----------- ----------- ----------- ----------- ----------- ----------- Interest Income: Loans (net of deferred costs/fees) ........... $ 4,576,187 $ 554,203 $ 5,130,390 $ 2,409,394 $ (130,276) $ 2,279,118 Investment securities 310,506 98,651 409,157 (72,209) 97,818 25,609 Federal funds sold ...... (12,181) 42,890 30,709 14,984 1,637 16,621 ----------- ----------- ----------- ----------- ----------- ----------- Total interest income ...... 4,874,512 695,744 5,570,256 2,352,169 (30,821) 2,321,348 ----------- ----------- ----------- ----------- ----------- ----------- Interest Expense: Deposits ................ 1,243,516 1,044,265 2,287,781 696,636 (186,075) 510,561 Borrowed funds .......... 266,290 383,751 650,041 52,686 1,214 53,900 ----------- ----------- ----------- ----------- ----------- ----------- Total interest expense ..... 1,509,806 1,428,016 2,937,822 749,322 (184,861) 564,461 ----------- ----------- ----------- ----------- ----------- ----------- Net interest income ........ $ 3,364,706 $ (732,272) $ 2,632,434 $ 1,602,847 $ 154,040 $ 1,756,887 =========== =========== =========== =========== =========== ===========
Critical Accounting Policies Allowance for Losses on Loans. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses. Loans that are determined to be uncollectible are charged against the allowance account, and subsequent recoveries, if any, are credited to the allowance. When evaluating the adequacy of the allowance, an assessment of the loan portfolio will typically include changes in the composition and volume of the loan portfolio, overall portfolio quality and past loss experience, review of specific problem loans, current economic conditions which may affect borrowers' ability to repay, and other factors which may warrant current recognition. Such periodic assessments may, in management's judgment, require the Company to recognize additions or reductions to the allowance. 7 Operating Results for the Years Ended December 31, 2005, 2004 and 2003 Net Interest Income/Margins. Our primary source of earnings is net interest income, which is the difference between income earned on interest-earning assets, such as loans and investment securities, and interest expense incurred on the interest-bearing sources of funds, such as deposits and borrowings. The level of net interest income is determined primarily by the average balances ("volume") and the rate spreads between the interest-earning assets and our funding sources. Net interest income increased to $10.7 million for 2005 compared to $8.0 million for 2004 and $6.3 million for 2003. The 32.8% increase in 2005 compared to 2004 and 28.1% increase in 2004 compared to 2003 were primarily attributable to the growth in average interest-earning assets, which totaled $245.6 million, $175.0 million and $141.5 million for 2005, 2004 and 2003, respectively. Average loans increased during 2005 by 41.6% to $219.2 million and increased by 28.1% during 2004 to $154.8 million at year-end. Average investments increased during 2005 by 41.0% to $24.3 million and decreased during 2004 by 8.8% to $17.2 million at year-end. Interest-earning asset growth was funded by a $49.7 million, or 35.1%, increase in average interest-bearing deposits during 2005 and by a $28.0 million, or 24.6%, increase in average interest-bearing deposits during 2004. The average borrowed funds increased $12.1 million during 2005 and $2.4 million during 2004. The key performance measure for net interest income is the "net interest margin," or net interest income divided by average interest-earning assets. Our net interest margin is affected by loan pricing, mix of earning assets, and the distribution and pricing of deposits and borrowings. Our net interest margin was 4.3% for 2005, compared to 4.6% for 2004 and 4.4% for 2003. During 2005, the yield on average interest-earning assets increased to 7.1%, while the cost of interest-bearing liabilities increased by 60 basis points to 3.1%. During 2004, the yield on average interest-earning assets remained at 6.7%, while the cost of interest-bearing liabilities decreased by one basis point to 2.5%. Non-Interest Income. Non-interest income is principally derived from service fees on deposit accounts, BOLI income, fee income from loan services and gains on sale of investment securities. Non-interest income for 2005 was $896,367 compared to $860,986 for 2004 and $779,044 for 2003. Other fee income increased to $720,882 for 2005 from $609,596 for 2004 and $496,237 for 2003 due primarily to increased loan fees. Loan fees included in other fee income consist of "exit fees" that are charged on construction loans if the builder sells the property before completing the construction project. Exit fees are intended to discourage construction borrowers from starting projects and quickly "flipping out" of the project before the project is completed. The loss on sale of securities amounted to $9,240 for 2005. A gain on sale of securities amounted to $7,889 in 2004 and $63,681 in 2003. Service charges on deposit accounts decreased $58,776, or 21.1%, during 2005 to $184,725. An increase of $24,375, or 11.1%, occurred during 2004 over 2003. Non-Interest Expense. Nearly all categories of non-interest expense increased during 2005 and 2004. Non-interest expenses totaled $4.5 million for 2005 compared to $3.6 million for 2004 and $2.8 million for 2003, increases of $954,770, or 26.6%, and $752,053, or 26.5%, for 2005 and 2004, respectively. These increases reflect greater costs associated with the growth of the Company, including compensation and benefits, as well as increases in lending and deposit activities. 8 Compensation and benefits increased $518,030, or 33.1%, during 2005 and $294,406, or 23.1%, during 2004, primarily due to staffing increases to support loan and deposit growth, as well as regular salary increases and higher benefit costs. Occupancy, equipment and data processing costs grew $2,471, or 0.3%, and $166,969 or 21.1% for 2005 and 2004, respectively. Professional services fees and expenses increased by $448,081, or 154.4%, during 2005. Costs associated with the holding company and additional legal fees were the primary reason for the increase. During 2004 a $118,688, or 69.2%, an increase over 2003 occurred from normal operations. Marketing and business development expenses increased by $112,060, or 63.9%, to $287,318, due to a major advertising campaign conducted during 2005. Other operating expenses decreased $125,872, or 21.0%, in 2005 because of less loan servicing costs and increased to $272,767, or 54.5%, during 2004 due to expenses associated with servicing loans. Income Taxes. We recorded tax expenses of $2.3 million, $1.7 million, and $1.3 million in 2005, 2004 and 2003, respectively, for an effective tax rate of 40.0% in 2005, 39.1% in 2004 and 39.0% in 2003. Financial Condition at December 31, 2005 and December 31, 2004 At December 31, 2005, we had total assets of $297.8 million, compared to $224.3 million at December 31, 2004, representing an increase of 32.7%. This increase was due to the continued expansion of business development efforts, and continued marketing of deposit and loan products. The Company's overall growth in its core business, generating loans and gathering of deposits grew at the same rate as overall asset growth. Loans at December 31, 2005 were $259.0 million, compared to $188.6 million at December 31, 2004, which represents an increase of $70.4 million, or 37.3%. Growth occurred in all categories of loans. Investment securities at December 31, 2005 slightly decreased by $161,649, or 0.7%, to $24.4 million. Total deposits increased by $52.5 million to $232.1 million, an increase of 29.2%, from $179.6 million at December 31, 2004. Borrowings augmented funding of assets by increasing by $15.6 million or 76.5%, to $36.0 million at December 31, 2005, from $20.4 million at December 31, 2004. Shareholders equity increased by $4.4 million. The increase is attributable earnings of $3.5 million and the exercise of stock options and warrants offset by the purchase of treasury stock. Loan Quality The Company attempts to manage the risk characteristics of its loan portfolio through various control processes, such as credit evaluation of borrowers, establishment of lending limits and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances. However, the Company seeks to rely primarily on the cash flow of its borrowers as the principal source of repayment. Although credit policies are designed to minimize risk, management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio as well as general and regional economic conditions. The allowance for loan losses represents a reserve for losses in the loan portfolio. The adequacy of the allowance for loan loss is evaluated periodically based on a review of all significant loans, with a 9 particular emphasis on non-accruing loans; past due and other loans that management believes require special attention. For significant problem loans, management's review consists of evaluation of the financial strengths of the borrower and the guarantor, the related collateral, and the effects of economic conditions. General reserves against the remaining loan portfolio are based on analysis of historical loan loss ratios, loan charge-offs, delinquency trends, previous collection experience, and the risk rating on each individual loan along with an assessment of the effects of external economic conditions. As of December 31, 2005, we had approximately $1.9 million in non-accruing loans, compared with $240,816 at December 31, 2004 and $794,135 at December 31, 2003. The increase in non-accruing loans was attributable to two borrower relationships, consisting of commercial and residential loans more than 90 days delinquent. Foreclosure proceedings have been commenced, and we believe the loans are adequately collateralized. Non-performing loans, expressed as a percentage of total loans, increased to 0.7% at December 31, 2005 from 0.1% at December 31, 2004 and 0.5% at December 31, 2003. At December 31, 2005, the allowance for loan losses was nearly twice the amount of non-accruing loans. The provision for loan losses is a charge to earnings in the current period to maintain the allowance at a level management has determined to be adequate based upon factors noted above. We made provision for loan losses of $1.2 million, $825,324 and $923,070 for 2005, 2004 and 2003, respectively. As of December 31, 2005, the allowance for loan losses was $3.6 million, compared to $2.6 million at December 31, 2004 and $2.3 million at December 31, 2003, which represents a net increase of $953,161, or 36.4%, during 2005 and a net increase of $364,581, or 16.2%, during 2004. The growth in the allowance was driven by the growth and mix in the loan portfolio. The following table summarizes the allowance activities:
Years Ended December 31, ------------------------------------------------- 2005 2004 2003 ------------- ------------- ------------- Allowance for loan losses, beginning of year ........ $ 2,620,651 $ 2,256,070 $ 1,333,000 Loans charged off ................................... (227,001) (460,743) (1,000) Recoveries .......................................... - - 1,000 Provision for loan losses ........................... 1,180,162 825,324 923,070 ------------- ------------- ------------- Allowance for loan losses, end of year .............. $ 3,573,812 $ 2,620,651 $ 2,256,070 ============= ============= ============= Loans (net of deferred costs/fees) period-end balance ............................... $ 259,035,088 $ 188,606,990 $ 146,334,331 ============= ============= ============= Allowance as percentage of period-end loan balance... 1.4% 1.4% 1.5% ============= ============= =============
Management's judgment as to the level of losses on existing loans is based on its internal review of the loan portfolio, including an analysis of the borrowers' current financial position, the consideration of current and anticipated economic conditions and their potential effects on specific borrowers. In determining the collectability of certain loans, management also considers the fair value of any underlying collateral. There can be no assurance that charge-offs in future period will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required. In addition an outside loan reviewer conducts an independent analysis of the loan loss reserve to ensure completeness. 10 Interest Rate Sensitivity and Liquidity Interest rate sensitivity is an important factor in the management of the composition and maturity configurations of earning assets and funding sources. The primary objective of asset/liability management is to ensure the steady growth of our primary earnings component, net interest income. Net interest income can fluctuate with significant interest rate movements. To lessen the impact of interest rate movements, management endeavors to structure the statement of financial condition so that re-pricing opportunities exist for both assets and liabilities in roughly equivalent amounts at approximately the same time intervals. Imbalances in these re-pricing opportunities at any point in time constitute interest rate sensitivity. The measurement of our interest rate sensitivity, or "gap," is one of the principal techniques used in asset/liability management. Interest sensitive gap is the dollar difference between assets and liabilities that are subject to interest-rate pricing within a given time period, including both floating rate or adjustable rate instruments and instruments that are approaching maturity. Our management and the Board of Directors oversee the asset/liability management function through the asset/liability committee of the Board and meeting periodically to monitor and manage the statement of financial condition, control interest rate exposure, and evaluate our pricing strategies. The asset mix of the statement of financial condition is continually evaluated in terms of several variables: yield, credit quality, appropriate funding sources and liquidity. Management of the liability mix of the statement of financial condition focuses on expanding the various funding sources. In theory, interest rate risk can be diminished by maintaining a nominal level of interest rate sensitivity. In practice, this is made difficult by a number of factors including cyclical variation in loan demand, different impacts on interest-sensitive assets and liabilities when interest rates change, and the availability of funding sources. Accordingly, we undertake to manage the interest-rate sensitivity gap by adjusting the maturity of and establishing rates on the earning asset portfolio and certain interest-bearing liabilities commensurate with management's expectations relative to market interest rates. Management generally attempts to maintain a balance between rate-sensitive assets and liabilities as the exposure period is lengthened to minimize our overall interest rate risk. Rate Sensitivity Analysis. The interest rate sensitivity position as of December 31, 2005 is presented in the table below. Assets and liabilities are scheduled based on maturity or re-pricing data except for mortgage loans and mortgage-backed securities that are based on prevailing prepayment assumptions and core deposits which are based on core deposit re-pricing immediately. The difference between rate-sensitive assets and rate-sensitive liabilities or the interest rate sensitivity gap, is shown at the bottom of the table. As of December 31, 2005, our interest sensitive liabilities exceeded interest sensitive assets within a one year period by $27.4 million, or 0.24% of total assets. 11
As of December 31, 2005 ---------------------------------------------------------------------- Over 3 Months Over 1 Year Over 3 Years Over 5 Years 3 Months Through Through Through Through or Less 12 Months 3 Years 5 Years 30 Years Total ------- --------- ------- ------- -------- ----- (Dollars in thousands) Interest-earning assets: Loans .................... $134,325 $ 16,136 $ 18,226 $ 86,572 $ 3,776 $259,035 Investment securities .... 1,612 1,314 994 2,889 18,097 24,906 Federal funds sold ....... 3 - - - - 3 -------- -------- -------- -------- -------- -------- Total interest-earning assets ................. $135,940 $ 17,450 $ 19,220 $ 89,461 $ 21,873 $283,944 ======== ======== ======== ======== ======== ======== Interest-bearing liabilities: Regular savings deposits.. $ 38,824 $ 5,241 $ 6,988 $ 13,977 $ 6,988 $ 38,824 NOW & money market savings deposits ....... 22,371 4,245 5,660 7,237 1,578 22,371 Time deposits ............ 30,551 67,679 46,737 7,976 - 152,943 Borrowed funds ........... 15,247 6,100 2,964 10,155 1,500 35,966 -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities ............ $106,993 $ 73,779 $ 49,701 $ 18,131 $ 1,500 $250,104 ======== ======== ======== ======== ======== ======== Interest rate sensitive gap.. $ 28,947 $(56,329) $(30,481) $ 71,330 $ 20,373 $ 33,840 Cumulative interest rate gap ...................... $ 28,947 $(27,382) $(57,863) $ 13,467 $ 33,840 $ - Ratio of rate sensitive assets to rate-sensitive liabilities .............. 1.27% 0.24% 0.38% 4.93% 14.58% 1.14%
Liquidity describes our ability to meet the financial obligations that arise out of the ordinary course of business. Liquidity addresses the Company's ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund current and planned expenditures. Liquidity is derived from increased repayment and income from earning-assets. Our loan to deposit ratio was 111.6%, 105.0% and 102.7% at December 31, 2005, December 31, 2004 and December 31, 2003, respectively. Funds received from new and existing depositors provided a large source of liquidity during 2005 and 2004. The Company seeks to rely primarily on core deposits from customers to provide stable and cost-effective sources of funding to support local growth. The Bank 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 requirements can be obtained through advances from the Federal Home Loan Bank ("FHLB"). As of December 31, 2005, the Bank maintained lines of credit with the FHLB totaling $23.9 million. As of December 31, 2005, the Bank's investment securities portfolio included $9.1 million of mortgage-backed securities that provide significant cash flow each month. The majority of the investment portfolio is classified as available for sale, is readily marketable, and is available to meet liquidity needs. The Bank's residential real estate portfolio includes loans, which are underwritten to secondary market criteria, and provide an additional source of liquidity. Presently the mortgage portfolio is pledged to the FHLB as collateral. Management is not aware of any known trends, demands, commitments or uncertainties that are reasonably likely to result in material changes in liquidity. 12 Off-Balance Sheet Arrangements The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of the Bank's involvement in these particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, equipment and income-producing commercial properties. As of December 31, 2005, 2004 and 2003, commitments to extend credit amounted to approximately $101.8 million, $70.4 million and $35.2 million, respectively. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of December 31, 2005, 2004 and 2003, standby letters of credit with customers were $4.5 million, $2.5 million and $2.3 million, respectively. The Bank does not issue or hold derivative instruments with the exception of loan commitments and standby letters of credit. These instruments are issued in the ordinary course of business to meet customer needs. Commitments to fund fixed-rate loans were immaterial at December 31, 2005. Variable-rate commitments are generally issued for less than one year and carry market rates of interest. Such instruments are not likely to be affected by annual rate caps triggered by rising interest rates. Management believes that off-balance sheet risk is not material to the results of operations or financial condition. Impact of Inflation and Changing Prices The consolidated financial statements and notes presented elsewhere in this Proxy Statement have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike most industrial companies, nearly all of our assets are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. 13 Recent Accounting Pronouncements In December 2002, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effects of the method used on reported results. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment." This statement revises the original guidance contained in SFAS No. 123 and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees, and its related implementation guidance. Under SFAS No. 123 (revised 2004), a public entity such as the Company will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions) and recognize such cost over the period during which an employee is required to provide service in exchange for the reward (usually the vesting period). For stock options and similar instruments, grant-date fair value will be estimated using option-pricing models adjusted for the unique characteristics of instruments (unless observable market prices for the same or similar instruments are available). For public entities, such as the Company, SFAS No. 123 (revised 2004) is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The Company is currently assessing the financial statement impact of adopting SFAS No. 123(R). MARKET PRICES AND DIVIDENDS General The Company's or the Bank's common stock has been traded in the over the counter market and listed on the Nasdaq Stock Market under the trading symbol of "PKBK" since it commenced trading upon completion of the Bank's public offering on November 26, 2002. The following table reflects high and low bid prices as reported on www.nasdaq.com during each quarter of the last two fiscal years. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions. Prices reflect a 20% stock dividend paid in December 2004. Quarter Ended High Low ------------- ---- --- March 31, 2004 $14.58 $14.08 June 30, 2004 $14.33 $13.29 September 30, 2004 $14.60 $13.47 December 31, 2004 $19.45 $14.00 March 31, 2005 $19.40 $16.65 June 30, 2005 $16.85 $14.90 September 30, 2005 $19.99 $15.25 December 31, 2005 $21.71 $18.00 The number of shareholders of record of common stock as of March 22, 2006, was approximately 407. This does not reflect the number of persons or entities who held stock in nominee or "street" name through various brokerage firms. At March 22, 2006, there were 2,327,995 shares of our common stock outstanding. To date, the Company has not paid cash dividends. 14 Holders of the Company's common stock are entitled to receive dividends when, and if declared by the Board of Directors of out of funds legally available therefor. The timing and amount of future dividends will be within the discretion of the Board of Directors and will depend on the consolidated earnings, financial condition, liquidity, and capital requirements of the Company and its subsidiaries, applicable governmental regulations and policies, and other factors deemed relevant by the Board. To date, the Company has not paid cash dividends. The Company's ability to pay dividends is substantially dependent upon the dividends it receives from the Bank. Under current regulations, the Bank's ability to pay dividends is restricted as follows. Under the New Jersey Banking Act of 1948, a bank may declare and pay dividends only if after payment of the dividend the capital stock of the bank will be unimpaired and either the bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the bank's surplus. The Federal Deposit Insurance Act generally prohibits all payments of dividends by any insured bank that is in default of any assessment to the FDIC. Additionally, because the FDIC may prohibit a bank from engaging in unsafe or unsound practices, it is possible that under certain circumstances the FDIC could claim that a dividend payment constitutes an unsafe or unsound practice. The New Jersey Department of Banking and Insurance has similar power to issue cease and desist orders to prohibit what might constitute unsafe or unsound practices. The payment of dividends may also be affected by other factors (e.g., the need to maintain adequate capital or to meet loan loss reserve requirements). 15 McGladrey & Pullen Certified Public Accountants Report of Independent Registered Public Accounting Firm Directors and Shareholders Parke Bancorp, Inc. Sewell, New Jersey We have audited the accompanying consolidated balance sheets of Parke Bancorp, Inc. and Subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ending December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Parke Bancorp, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ending December 31, 2005, in conformity with U.S. generally accepted accounting principles. /s/McGladrey & Pullen, LLP Blue Bell, Pennsylvania January 20, 2006 McGladrey & Pullen, LLP is a member firm of RSM International - an affiliation of separate and independent legal entities. F-1 Parke Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2005 and 2004
2005 2004 - -------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 4,377,196 $ 1,780,280 Federal funds sold 2,840 21,508 ------------------------------------ Cash and cash equivalents 4,380,036 1,801,788 ------------------------------------ Investment securities available for sale, at market value 22,022,944 24,042,802 Investment securities held to maturity, at amortized cost (market value 2005 - $2,322,985; 2004 - $540,740) 2,405,841 547,632 ------------------------------------ Total investment securities 24,428,785 24,590,434 ------------------------------------ Restricted stock, at cost 1,348,900 1,064,200 ------------------------------------ Loans 259,035,088 188,606,990 Less: allowance for loan losses (3,573,812) (2,620,651) ------------------------------------ Total net loans 255,461,276 185,986,339 ------------------------------------ Bank premises and equipment, net 3,079,876 3,247,179 Accrued interest receivable and other assets 9,111,571 7,648,623 ------------------------------------ $ 297,810,444 $ 224,338,563 ====================================
(Continued) F-2 Parke Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (Continued) December 31, 2005 and 2004
2005 2004 - --------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Liabilities Deposits Noninterest-bearing demand $ 17,918,339 $ 15,960,444 Interest-bearing 214,137,969 163,624,567 --------------------------------- Total deposits 232,056,308 179,585,011 Borrowed funds 5,082,500 3,100,000 Federal Home Loan Bank advances 20,574,360 17,278,726 Subordinated debentures 10,310,000 - Accrued interest payable and other accrued liabilities 2,593,949 1,545,675 --------------------------------- Total liabilities 270,617,117 201,509,412 --------------------------------- Commitments and Contingencies (Notes 7 and 16) Shareholders' Equity Common stock, $.10 par value, 10,000,000 shares authorized; 2,317,364 and 2,175,559 shares issued at December 31, 2005 and 2004, respectively 231,736 217,556 Preferred stock, 1,000 shares authorized; no shares issued and outstanding - - Additional paid-in capital 20,511,410 19,390,102 Retained earnings 6,787,118 3,292,697 Accumulated other comprehensive loss (286,296) (71,204) Treasury stock (2,380 shares in 2005 and none in 2004), at cost (50,641) - --------------------------------- Total shareholders' equity 27,193,327 22,829,151 --------------------------------- $297,810,444 $224,338,563 =================================
See Notes to Consolidated Financial Statements. F-3 Parke Bancorp, Inc. and Subsidiaries Consolidated Statements of Income Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003 - --------------------------------------------------------------------------------------------------------- Interest and Dividend Income Interest and fees on loans $ 16,108,210 $ 10,977,820 $ 8,698,702 Interest and dividends on securities 1,159,004 749,847 724,238 Interest on federal funds sold 68,830 38,121 21,500 ----------------------------------------------- Total interest and dividend income 17,336,044 11,765,788 9,444,440 ----------------------------------------------- Interest Expense Interest on deposits 5,812,487 3,524,706 3,014,145 Interest on borrowings 871,468 221,427 167,527 ----------------------------------------------- Total interest expense 6,683,955 3,746,133 3,181,672 ----------------------------------------------- Net interest income 10,652,089 8,019,655 6,262,768 Provision for Loan Losses 1,180,162 825,324 923,070 ----------------------------------------------- Net interest income after provision for loan losses 9,471,927 7,194,331 5,339,698 ----------------------------------------------- Noninterest Income Service charges on deposit accounts 184,725 243,501 219,126 Other fee income 720,882 609,596 496,237 Net gain (loss) on the sale of securities (9,240) 7,889 63,681 ----------------------------------------------- Total noninterest income 896,367 860,986 779,044 ----------------------------------------------- Noninterest Expenses Compensation and benefits 2,085,301 1,567,271 1,272,865 Occupancy, equipment and data processing 960,059 957,588 790,619 Marketing and business development 287,318 175,258 101,857 Professional services 738,307 290,226 171,538 Other operating expenses 473,244 599,116 500,527 ----------------------------------------------- Total noninterest expenses 4,544,229 3,589,459 2,837,406 ----------------------------------------------- Income Before Income Tax Expense 5,824,065 4,465,858 3,281,336 Income Tax Expense 2,329,644 1,744,100 1,279,437 ----------------------------------------------- Net income $ 3,494,421 $ 2,721,758 $ 2,001,899 =============================================== Net Income Per Common Share: Basic $ 1.55 $ 1.26 $ 0.96 =============================================== Diluted $ 1.32 $ 1.05 $ 0.85 =============================================== Weighted Average Shares Outstanding: Basic 2,247,928 2,152,069 2,088,730 =============================================== Diluted 2,644,256 2,598,864 2,351,230 ===============================================
See Notes to Consolidated Financial Statements. F-4 Parke Bancorp, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity Years Ended December 31, 2005, 2004 and 2003
Accumulated Additional Other Total Common Paid-In Retained Comprehensive Treasury Shareholders' Stock Capital Earnings Income (Loss) Stock Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 $ 157,606 $ 15,963,324 $ 1,306,860 $ 200,123 $ - $ 17,627,913 Stock options and warrants exercised 4,877 500,756 - - - 505,633 10% common stock dividend 16,140 2,721,272 (2,737,820) - - (408) Comprehensive income: Net income - 2003 - - 2,001,899 - 2,001,899 Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects - - - (142,430) - (142,430) ------------ Total comprehensive income 1,859,469 ----------------------------------------------------------------------------------- Balance, December 31, 2003 178,623 19,185,352 570,939 57,693 - 19,992,607 Stock options and warrants exercised 2,696 241,490 - - - 244,186 20% common stock dividend 36,237 (36,740) - - - (503) Comprehensive income: Net income - 2004 - - 2,721,758 - - 2,721,758 Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects - - - (128,897) - (128,897) ------------ Total comprehensive income 2,592,861 ----------------------------------------------------------------------------------- Balance, December 31, 2004 217,556 19,390,102 3,292,697 (71,204) - 22,829,151 Stock options and warrants exercised 14,180 1,121,308 - - - 1,135,488 Treasury stock purchased - - - - (50,641) (50,641) Comprehensive income: Net income - 2005 - - 3,494,421 - - 3,494,421 Change in net unrealized loss on securities available for sale, net of reclassification adjustment and tax effects - - - (215,092) - (215,092) ------------ Total comprehensive income 3,279,329 ----------------------------------------------------------------------------------- Balance, December 31, 2005 $ 231,736 $ 20,511,410 $ 6,787,118 $ (286,296) $ (50,641) $ 27,193,327 ===================================================================================
See Notes to Consolidated Financial Statements. F-5 Parke Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003 - ---------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income $ 3,494,421 $ 2,721,758 2,001,899 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 264,105 251,482 194,874 Provision for loan losses 1,180,162 825,324 923,070 Realized losses (gains) on sales of securities 9,240 (7,889) (63,681) Net (accretion) amortization of purchase premiums and discounts on securities (72,795) 2,995 (6,714) Deferred income tax benefit (387,382) (45,972) (290,700) Changes in operating assets and liabilities: Increase in accrued interest receivable and other assets (932,172) (717,345) (857,385) Increase in accrued interest payable and other accrued liabilities 1,048,274 321,277 445,204 ------------------------------------------------- Net cash provided by operating activities 4,603,853 3,351,630 2,346,567 ------------------------------------------------- Cash Flows from Investing Activities Purchases of investment securities held to maturity (1,854,018) - (549,682) Purchases of investment securities available for sale (5,559,000) (15,054,401) (6,376,623) Purchases of restricted stock (284,700) (566,900) (201,300) Proceeds from sales of investment securities available for sale 5,092,055 1,071,509 8,905,271 Proceeds from maturities of investment securities available for sale - 2,000,000 2,500,000 Principal payments on mortgage-backed securities 2,187,681 2,304,558 3,385,509 Purchase of bank-owned life insurance - - (2,000,000) Net increase in loans (70,655,099) (42,733,402) (51,239,121) Purchases of bank premises and equipment (96,802) (259,248) (839,313) ------------------------------------------------- Net cash used in investing activities (71,169,883) (53,237,884) (46,415,259) ------------------------------------------------- Cash Flows from Financing Activities Proceeds from exercise of stock options and warrants 1,135,488 243,683 505,225 Purchase of treasury stock (50,641) - - Proceeds from borrowings 27,652,500 18,850,000 8,000,000 Repayment of borrowings (12,064,366) (8,811,397) (2,608,567) Net increase in interest-bearing deposits 50,513,402 33,923,365 30,791,290 Net increase in noninterest-bearing deposits 1,957,895 3,215,135 4,107,624 ------------------------------------------------- Net cash provided by financing activities 69,144,278 47,420,786 40,795,572 ------------------------------------------------- Increase (Decrease) In Cash and Cash Equivalents 2,578,248 (2,465,468) (3,273,120) Cash and Cash Equivalents, January 1, 1,801,788 4,267,256 7,540,376 ------------------------------------------------- Cash and Cash Equivalents, December 31, $ 4,380,036 $ 1,801,788 $ 4,267,256 ================================================= Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest on deposits and borrowed funds $ 5,992,826 $ 3,681,682 $ 3,171,116 ================================================= Income taxes $ 2,466,000 $ 2,179,000 $ 1,492,000 =================================================
See Notes to Consolidated Financial Statements. F-6 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 1. Description of Business and Summary of Significant Accounting Policies Description of Business: Parke Bancorp, Inc. ("Parke Bancorp") is a bank holding company headquartered in Sewell, New Jersey. Through subsidiaries, Parke Bancorp provides individuals, corporations and other businesses, and institutions with commercial and retail banking services, principally loans and deposits. Parke Bancorp was incorporated in January 2005 under the laws of the State of New Jersey for the sole purpose of becoming the holding company of Parke Bank (the "Bank"). Parke Bank (the "Bank") is a commercial bank, which was incorporated on August 25, 1998, and commenced operations on January 28, 1999. The Bank is chartered by the New Jersey Department of Banking and Insurance and insured by the Federal Deposit Insurance Corporation. The Bank maintains its principal office at 601 Delsea Drive, Washington Township, New Jersey, and two additional branch office locations, one at 501 Tilton Road, Northfield, New Jersey and the other at 567 Egg Harbor Road, Washington Township, New Jersey. In addition, the Bank has a loan production office in Philadelphia, Pennsylvania. The accounting and financial reporting policies of Parke Bancorp and Subsidiaries (the "Company") conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The policies that materially affect the determination of financial position, results of operations and cash flows are summarized below. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Parke Bancorp, Inc. and its wholly-owned subsidiaries Parke Bank and Parke Capital Markets. Parke Capital Trust I and Parke Capital Trust II are wholly-owned subsidiaries but are not consolidated because they do not meet the requirements. All significant inter-company balances and transactions have been eliminated. Investment Securities: Investment securities are classified under one of the following categories: "held to maturity" and accounted for at historical cost, adjusted for accretion of discounts and amortization of premiums; "available for sale" and accounted for at fair market value, with unrealized gains and losses reported as a separate component of shareholders' equity; or "trading" and accounted for at fair market value, with unrealized gains and losses reported as a component of net income. The Company does not hold trading securities. At December 31, 2005 and 2004, the Company held investment securities that would be held for indefinite periods of time, including securities that would be used as part of the Company's asset/liability management strategy and possibly sold in response to changes in interest rates, prepayments and similar factors. These securities are classified as "available for sale" and are carried at fair value, with any temporary unrealized gains or losses reported as a separate component of other comprehensive income, net of the related income tax effect. Also, at December 31, 2005 and 2004, the Company reported investments in securities that were carried at cost, adjusted for amortization of premium and accretion of discount. The Company has the intent and ability to hold these investment securities to maturity considering all reasonably foreseeable events or conditions. These securities are classified as "held to maturity." Declines in the fair value of individual available for sale and held to maturity securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value, and the losses are included in noninterest income in the statements of operations. Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by rating agency, a significant deterioration in the financial condition of the issuer, the length of time a security has been in a loss position, or that management would not have the intent and ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value. F-7 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 1. Description of Business and Summary of Significant Accounting Policies (Continued) Investment Securities (Continued): The amortization of premiums and accretion of discounts over the contractual lives of the related securities, are recognized in interest income using the interest method. Gains and losses on the sale of such securities are accounted for using the specific identification method. Restricted Stock: Restricted stock includes investments in the common stock of the Federal Home Loan Bank of New York ("FHLBNY") and the Atlantic Central Bankers Bank for which no market exists and, accordingly, is carried at cost. Loans: The Company makes commercial, real estate and consumer loans to customers. A substantial portion of the loan portfolio is represented by loans in the Southern New Jersey and Philadelphia, Pennsylvania markets. The ability of the Company's debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal amount, adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans. Interest income on loans is recognized as earned based on contractual interest rates applied to daily principal amounts outstanding. Loans-Nonaccrual: Loans are placed on nonaccrual status and the accrual of interest income ceases when a default of principal or interest exists for a period of ninety days except when, in management's judgment, the collection of principal and interest is reasonably anticipated (i.e. the loan is well secured and in the process of collection). Interest receivable on nonaccrual loans previously credited to income is reversed, and subsequently recognized as income only as received if the collection of principal is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loans-Restructured: Restructured loans are those loans whose terms have been modified because of deterioration in the financial condition of the borrower to provide for a reduction of either interest or principal or an extension of the payment period. Concentration of Credit Risk: The Company's loans are generally to diversified customers in Southern New Jersey and the Philadelphia area of Pennsylvania. Loans to general building contractors, general merchandise stores, restaurants, motels, warehouse space, and real estate ventures (including construction loans) constitute a majority of commercial loans. The concentrations of credit by type of loan are set forth in Note 4. Generally, loans are collateralized by assets of the borrower and are expected to be repaid from the borrower's cash flow or proceeds from the sale of selected assets of the borrower. Loan Fees: Loan fees and direct costs associated with loan originations are netted and deferred. The deferred amount is recognized as an adjustment to loan interest over the term of the related loans using the interest method. Loan brokerage fees, which represent commissions earned for facilitating loans between borrowers and other Company's, are recorded in income as earned. Allowance for Loan Losses: The allowance for loan losses is maintained through charges to the provision for loan losses in the Statement of Operation as losses are estimated to have occurred through a provision for loan losses. Loans that are determined to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses in the balance of the loan portfolio, based on an evaluation of collectability of existing loans and prior loss experience. When evaluating the adequacy of the allowance, an assessment of the loan portfolio will typically include changes in the composition and volume of the loan portfolio, overall portfolio quality and past loss experience, review of specific problem loans, current economic conditions which may affect borrowers' ability to repay, and other factors which may warrant current recognition. Such periodic assessments may, in management's judgment, require the Company to recognize additions or reductions to the allowance. F-8 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 1. Description of Business and Summary of Significant Accounting Policies (Continued) Allowance for Loan Losses (Continued): Various regulatory agencies periodically review the adequacy of the Company's allowance for loan losses as an integral part of their examination process. Such agencies may require the Company to recognize additions or reductions to the allowance based on their evaluation of information available to them at the time of their examination. It is reasonably possible that the above factors may change significantly and, therefore, affect management's determination of the allowance for loan losses in the near term. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loans effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures. Interest Rate Risk: The Company is principally engaged in the business of attracting deposits from the general public and using these deposits, together with other borrowed and brokered funds, to make commercial, commercial mortgage, residential mortgage, and consumer loans, and to invest in overnight and term investment securities. Inherent in such activities is interest rate risk that results from differences in the maturities and re-pricing characteristics of these assets and liabilities. For this reason, management regularly monitors the level of interest rate risk and the potential impact on net income. Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed and charged to expense using the straight-line method over the estimated useful lives of the assets, generally three to seven years. Leasehold improvements are amortized to expense over the shorter of the term of the respective lease or the estimated useful life of the improvements, generally terms ranging from ten to forty years. Income Taxes: The amount provided for federal income taxes is based on income reported for consolidated financial statement purposes. 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. F-9 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 1. Description of Business and Summary of Significant Accounting Policies (Continued) Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the allowance for loan losses and the valuation of deferred income taxes. Reclassification: Certain items in the 2004 financial statements have been reclassified to conform with the 2005 presentation with no affect on net income or shareholder's equity. Comprehensive Income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. However, certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The components of other comprehensive income and related tax effects are as follows:
2005 2004 2003 ------------------------------------------ Unrealized holding losses on available for sale securities $ (367,719) $ (206,939) $ (173,703) Reclassification adjustment for net losses (gains) realized in income 9,240 (7,889) (63,681) ------------------------------------------ Net unrealized losses (358,479) (214,828) (237,384) Tax effect 143,387 85,931 94,954 ------------------------------------------ Net-of-tax amount $ (215,092) $ (128,897) $ (142,430) ==========================================
Earnings Per Common Share: Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share considers common stock equivalents (when dilutive) outstanding during the period such as options and warrants outstanding. Both basic and diluted earnings per share computations give retroactive effect to stock dividends declared in 2004 (Note 14). Earnings per common share have been computed based on the following for 2005, 2004 and 2003:
2005 2004 2003 ------------------------------------------ Net income $3,494,421 $2,721,758 $2,001,899 ========================================== Average number of common shares outstanding 2,247,928 2,152,069 2,088,730 Effect of dilutive options 396,328 446,795 262,500 ------------------------------------------ Average number of common shares outstanding used to calculate diluted earnings per common share 2,644,256 2,598,864 2,351,230 ==========================================
Statement of Cash Flows: Cash and cash equivalents include cash on hand, balances due from banks and federal funds sold. For the purposes of the statement of cash flows, changes in loans and deposits are shown on a net basis. F-10 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 1. Description of Business and Summary of Significant Accounting Policies (Continued) Stock-Based Employee Compensation: The Company has stock-based employee compensation plans which are more fully described in Note 14. As permitted under generally accepted accounting principles, grants of options under the plan are accounted for under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Because options granted under the plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant, no stock-based employee compensation cost is included in determining net income. The following table illustrates the effect on net income and earnings per share for 2005, 2004 and 2003 if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting for Stock-Based Employee Compensation, to stock-based employee compensation. Both basic and diluted calculations give retroactive effect to stock dividends declared.
2005 2004 2003 ------------------------------------------- Net income, as reported $3,494,421 $2,721,758 $2,001,899 Deduct total stock-based compensation expense determined under the fair value method for all awards, net of related tax effects (670,000) (41,000) (114,000) ------------------------------------------- Pro forma net income $2,824,421 $2,680,758 $1,887,899 =========================================== Earnings per share: Basic: As reported $1.55 $1.26 $0.96 Pro forma $1.26 $1.25 $0.90 Diluted: As reported $1.32 $1.05 $0.85 Pro forma $1.07 $1.03 $0.80
Recent Accounting Pronouncements: EITF Issue 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments In March 2004, the Financial Accounting Standards Board ("FASB") released EITF Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments ("Issue 03-1") which provides guidance for determining when an investment is impaired and whether the impairment is other than temporary. In September 2004, the FASB approved for issuance a FASB Staff Position ("FSP") on Issue 03-1. This position delayed the effective date, originally set for periods beginning after June 15, 2004, for the measurement and recognition guidance contained in paragraphs 10-20 of Issue 03-1. However, it did not suspend the requirements to recognize other-than-temporary impairments as required by existing authoritative literature. On June 29, 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment and directed the staff to propose a final FSP, EITF Issue 03-1-a, which will supersede Issue 03-1. The final FSP (retitled FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application of Certain Investments) was issued on November 3, 2005 and replaces the guidance set forth in certain paragraphs of Issue 03-1 with references to existing other-than-temporary impairment guidance. The final FSP is to be applied prospectively and is effective for the Company beginning January 1, 2006. The Company does not expect application of the FSP to have a material impact on the consolidated financial statements. F-11 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 1. Description of Business and Summary of Significant Accounting Policies (Continued) Recent Accounting Pronouncements (Continued): Statement No. 123 (Revised) Share-Based Payment ("SFAS No. 123(R)") In December 2004, the FASB issued SFAS No. 123(R), which establishes accounting standards for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123(R) also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including stock options, restricted stock plans, performance-based stock awards, stock appreciation rights, and employee stock purchase plans. SFAS No. 123(R) replaces existing requirements under SFAS No. 123, "Accounting for Stock-Based Compensation," and eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25. The provisions for SFAS No. 123(R) are effective for the Company on January 1, 2006. As of December 31, 2005, all of the stock options the Company has granted have been vested and therefore will not require any stock-based employee compensation expense to be recognized in future periods. The financial impact of any stock options granted in the future will be determined using the Black-Scholes option pricing model. Note 2. Cash and Due from Banks The Company maintains various deposit accounts with other banks to meet normal funds transaction requirements, to satisfy deposit reserve requirements, and to compensate other banks for certain correspondent services. Management is responsible for assessing the credit risk of its correspondent banks. The withdrawal or usage restrictions of these balances did not have a significant impact on the operations of the Company as of December 31, 2005, because reserve requirements were covered by vault cash. Note 3. Investment Securities The Company's investment securities as of December 31, 2005 were as follows:
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------------------------------------------------------------- Available For Sale - ------------------ U.S. Government sponsored entities $ 6,533,381 $ 60 $ 331,051 60 $ 6,202,390 Corporates 6,317,394 13,047 14,143 6,316,298 Stock 500,000 - - 500,000 Mortgage-backed securities 9,149,322 13,671 158,737 9,004,256 --------------------------------------------------------------- Total securities available for sale $ 22,500,097 $ 26,778 $ 503,931 $ 22,022,944 =============================================================== Held to Maturity - ---------------- Municipals $ 2,405,841 $ - $ 82,856 $ 2,322,985 ===============================================================
F-12 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 3. Investment Securities (Continued) The Company's investment securities as of December 31, 2004 were as follows:
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------------------------------------------------------------- Available For Sale - ------------------ U.S. Government sponsored entities $ 8,886,211 $ 10,883 $ 226,864 $ 8,670,230 Mutual Funds 3,237,520 41,192 3,196,328 Mortgage-backed securities 12,037,745 178,090 39,591 12,176,244 --------------------------------------------------------------- Total securities available for sale $ 24,161,476 $ 188,973 $ 307,647 $ 24,042,802 =============================================================== Held to Maturity - ---------------- Municipals $ 547,632 $ - $ 6,892 $ 540,740 ===============================================================
The amortized cost and estimated market value of investment securities at December 31, 2005 by contractual maturities are shown below. Expected maturities may differ from contractual maturities for mortgage-backed securities because the mortgages underlying the securities may be called or prepaid without any penalties; therefore, these securities are not included in the maturity categories in the following maturity summary.
Available For Sale Held to Maturity ----------------------------------------------------------------- Amortized Market Amortized Market Cost Value Cost Value ----------------------------------------------------------------- Maturing within one year $ - $ - $ - $ - Maturing after one year but within five years 3,026,191 2,997,690 538,055 523,697 Maturing after five years, but within ten years - - - - Maturing after ten years 9,824,584 9,520,998 1,867,786 1,799,288 ----------------------------------------------------------------- 12,850,775 12,518,688 2,405,841 2,322,985 Mortgage-backed securities 9,149,322 9,004,256 - - Stock 500,000 500,000 - - ----------------------------------------------------------------- Total securities $ 22,500,097 $ 22,022,944 $ 2,405,841 $ 2,322,985 =================================================================
Gross realized gains on the sale of investment securities were $53,770 in 2005, $8,043 in 2004 and $75,814 in 2003. Gross realized losses on the sale of investments securities were $63,010 in 2005, $155 in 2004 and $12,133 in 2003. As of December 31, 2005, approximately $13,273,000 of investment securities are pledged as collateral for borrowed funds (Note 10). In addition, securities with a carrying value of $478,595 were pledged to secure public deposits at December 31, 2005. As of December 31, 2004, approximately $12,187,192 of investment securities are pledged as collateral for borrowed funds (Note 10). In addition, securities with a carrying value of $558,880 were pledged to secure public deposits at December 31, 2004. F-13 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 3. Investment Securities (Continued) The fair value of securities with unrealized losses by length of time that the individual securities have been in a continuous loss position at December 31, 2005, are as follows:
Continuous Unrealized Losses Continuous Unrealized Losses Existing for Less Than 12 Months Existing for More Than 12 Months ------------------------------------------------------------------ Unrealized Unrealized Market Value Losses Market Value Losses ----------------------------------------------------------------- Available For Sale - ------------------ U.S. Government sponsored entities $ 3,427,330 $ 56,051 $ 2,275,000 $ 275,000 Corporates 513,200 12,991 746,318 1,152 Stock - - - - Mortgage-backed securities 6,225,181 158,132 153,736 605 ----------------------------------------------------------------- 10,165,711 227,174 3,175,054 276,757 Held to Maturity - ---------------- Municipals 1,799,287 68,499 523,698 14,357 ----------------------------------------------------------------- Total temporarily impaired securities $ 11,964,998 $ 295,673 $ 3,698,752 $ 291,114 =================================================================
Management does not believe any individual unrealized loss as of December 31, 2005 represents an other-than-temporary impairment. A total of 25 securities are included in the continuous unrealized portion, of which 22 are in the available for sale category. The unrealized losses on these securities are primarily due to changes in general market interest rates. The Company believes it will collect all amounts contractually due on these securities as it has the ability to hold these securities until the fair value is at least equal to the carrying value. Should the impairment become other-than-temporary, the carrying value of the investment will be reduced and the unrealized loss be recorded in the statement of income. The fair value of securities with unrealized losses by length of time that the individual securities have been in a continuous loss position at December 31, 2004 are as follows:
Continuous Unrealized Losses Continuous Unrealized Losses Existing for Less Than 12 Months Existing for More Than 12 Months ------------------------------------------------------------------ Unrealized Unrealized Market Value Losses Market Value Losses ----------------------------------------------------------------- Available For Sale - ------------------ U.S. Government sponsored entities $ 746,250 $ 94 $ 2,050,000 $ 226,770 Mutual funds 74,888 196 3,121,440 40,996 Mortgage-backed securities 2,167,568 39,591 - - ----------------------------------------------------------------- 2,988,706 39,881 5,171,440 267,766 Held to Maturity - ---------------- Municipals - - 540,740 6,892 ----------------------------------------------------------------- Total temporarily impaired securities $ 2,988,706 $ 39,881 $ 5,712,180 $ 274,658 =================================================================
F-14 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 4. Loans The composition of net loans as of December 31, 2005 and 2004 are as follows: 2005 2004 ------------------------------ Commercial $ 236,013,459 $ 167,376,451 Residential real estate 18,482,968 17,612,920 Consumer 5,053,908 3,963,818 ------------------------------ Total loans 259,550,335 188,953,189 Less: allowance for loan losses (3,573,812) (2,620,651) Less: net deferred loan fees (515,247) (346,199) ------------------------------ Net loans $ 255,461,276 $ 185,986,339 ============================== At December 31, 2005 and 2004, approximately $16,358,000 and $14,970,000, respectively, of residential real estate and consumer loans were pledged to the FHLBNY on borrowings (Note 10). Note 5. Loans and Deposits to Related Parties In the normal course of business, the Company has granted loans to officers, directors and their affiliates (related parties). In the opinion of management, the terms of these loans, including interest rates and collateral, are similar to those prevailing for comparable transactions with other customers and do not involve more than a normal risk of collectability. An analysis of the activity of such related party loans for 2005 and 2004 is as follows: 2005 2004 ------------------------------ Balance, beginning of year $ 10,325,629 $ 10,219,179 Advances 5,619,948 8,761,251 Less: repayments (3,597,951) (8,654,801) ------------------------------ Balance, end of year $ 12,347,626 $ 10,325,629 ============================== F-15 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 6. Allowance for Loan Losses An analysis of the allowance for loan losses for 2005 and 2004 is as follows:
2005 2004 2003 ------------------------------------------------- Balance, beginning of year $ 2,620,651 $ 2,256,070 $ 1,333,000 Provision for loan losses 1,180,162 825,324 923,070 Charge offs (227,001) (460,743) (1,000) Recoveries - - 1,000 ------------------------------------------------- Balance, end of year $ 3,573,812 $ 2,620,651 $ 2,256,070 =================================================
Information about impaired loans and nonaccrual loans as of and for the years ended December 31, 2005 and 2004 is as follows: 2005 2004 -------------------------- Impaired loans with a valuation allowance $ 511,211 $ 240,816 Impaired loans without a valuation allowance - - -------------------------- Total impaired loans $ 511,211 $ 240,816 ========================== Related allowance for loan losses for impaired loans $ 60,181 $ 114,135 ========================== Nonaccrual loans $ 1,935,000 $ 240,816 ========================== Loans past due ninety days or more and still accruing interest $ 665,000 $ 54,859 ========================== Average monthly balance of impaired loans (based on month-end balances) $ 457,000 $ 709,000 ========================== Interest income recognized on cash basis on impaired loans $ 36,914 $ 12,674 ========================== Interest income of $66,000, $64,000 and $29,000 would have been recorded on non-accrual loans in accordance with their original terms in 2005, 2004 and 2003, respectively. F-16 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 7. Bank Premises and Equipment A summary of the cost and accumulated depreciation of Bank premises and equipment as of December 31, 2005 and 2004 is as follows: 2005 2004 ---------------------------- Land $ 470,000 $ 470,000 Building and improvements 2,587,564 2,536,512 Furniture and equipment 873,017 882,812 ---------------------------- Total premises and equipment 3,930,581 3,889,324 Less: accumulated depreciation and amortization (850,705) (642,145) ---------------------------- Premises and equipment, net $ 3,079,876 $ 3,247,179 ============================ Depreciation expense was $264,105 in 2005, $251,482 in 2004 and $194,874 in 2003. The Company has a non-cancelable operating lease agreement related to its Northfield branch office. The term of the lease is for 10 years through March 2011 with two 5-year renewal options. The Company is responsible for its pro-rata share of real estate taxes, and all insurance, utilities, maintenance and repair costs for the benefit of the branch office. The company has a month to month lease for the loan production office in Philadelphia, Pennsylvania. In addition, the Company leases certain computer software under an operating lease expiring 2008. At December 31, 2005, the required future rental payments under these leases are as follows: Years Ending December 31, ----------------------------------------------------- 2006 $ 187,000 2007 203,000 2008 204,000 2009 68,000 2010 69,000 Thereafter 29,000 ----------- Total minimum lease payments $ 760,000 =========== Rent expense was approximately $176,000 in 2005, $165,000 in 2004 and $53,000 in 2003. Note 8. Bank-Owned Life Insurance The Bank has purchased $4,500,000 of Bank-owned life insurance on selected officers, which amount is recorded at its cash surrender value and is included in "accrued interest receivable and other assets" in the accompanying consolidated balance sheets. There are no restrictions on the use of any proceeds and at December 31, 2005 and 2004 there were no loans outstanding. Earnings from the policies, which amounted to approximately $186,000 in 2005, $199,000 in 2004 and $180,000 in 2003, are credited to "other fee income" in the accompanying Statement of Income. F-17 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 9. Deposits Deposits at December 31, 2005 and 2004 consisted of the following: 2005 2004 ------------------------------ Demand deposits, noninterest-bearing $ 17,918,339 $ 15,960,444 Demand deposits, interest-bearing 22,371,195 28,327,050 Savings deposits 38,823,726 26,320,106 Time deposits of $100,000 or more 95,282,066 56,628,000 Other time deposits 57,660,982 52,349,411 ------------------------------ Total deposits $ 232,056,308 $ 179,585,011 ============================== Time deposits included brokered deposits totaling approximately $67,159,000 and $38,880,000 and at December 31, 2005 and 2004, respectively. Scheduled maturities of certificates of deposit at December 31, 2005 are as follows: Years Ending December 31, ----------------------------------------------------- 2006 $ 98,230,399 2007 38,856,108 2008 7,881,030 2009 3,597,173 2010 4,378,338 --------------- $ 152,943,048 =============== Deposits from related parties totaled approximately $5,740,000 and $6,092,000 at December 31, 2005 and 2004, respectively. Note 10. Borrowings An analysis of borrowings as of December 31, 2005 and 2004 is as follows:
2005 2004 ------------------------------------------------------ Maturity Date Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------------------------------------ Borrowed funds: Federal Home Loan Bank Repurchase Agreements June 2006 $ 1,000,000 3.05% $ 1,000,000 3.05% December 2006 1,100,000 3.33% 1,100,000 3.33% Repurchase agreements February 2005 - - 1,000,000 2.40% January 2006 982,500 3.99% - - February 2006 1,000,000 4.33% - - March 2006 1,000,000 4.49% - - ------------ ------------ $ 5,082,500 $ 3,100,000 ============ ============
F-18 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 10. Borrowings (Continued)
2005 2004 ------------------------------------------------------ Maturity Date Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------------------------------------ Federal Home Loan Bank Advances January 2005 $ - - $ 8,000,000 1.94% July 2005 - - 1,000,000 1.57% December 2005 - - 2,000,000 3.10% January 2006 6,610,000 4.08% - - February 2006 250,000 4.52% - - March 2006 250,000 4.61% - - April 2006 1,000,000 4.46% - - June 2006 250,000 4.78% - - October 2006 1,000,000 4.70% - - December 2006 1,750,000 4.05% 1,000,000 3.41% January 2007 464,360 4.73% 528,726 4.73% December 2007 750,000 4.92% - - June 2008 750,000 3.89% 750,000 3.89% December 2008 1,000,000 4.97% - - June 2009 4,000,000 4.07% 4,000,000 4.07% December 2010 1,000,000 5.05% - - December 2015 1,500,000 5.02% - - ------------- ------------- $ 20,574,360 $ 17,278,726 ============= ============= Subordinated debentures - capital trusts November 2035 $ 5,155,000 6.04% $ - - November 2035 5,155,000 6.25% - - ------------- ------------- $ 10,310,000 $ - ============= =============
At December 31, 2005, the Company had a $23,870,500 line of credit from the FHLBNY. In addition, the Company has available a $23,870,500 one-month overnight re-pricing line of credit. Certain investment securities (Note 3), loans (Note 4), and FHLBNY stock are pledged as collateral for borrowings. Subordinated Debentures - Capital Trusts: On August 23, 2005, Parke Capital Trust I, a Delaware statutory business trust and a wholly-owned Subsidiary of the Company, issued $5,000,000 of variable rate capital trust pass-through securities to investors. The variable interest rate re-prices quarterly at the three-month LIBOR plus 1.66% and was 6.04% at December 31, 2005. Parke Capital Trust I purchased $5,155,000 of variable rate junior subordinated deferrable interest debentures from the Company. The debentures are the sole asset of the Trust. The terms of the junior subordinated debentures are the same as the terms of the capital securities. The Company has also fully and unconditionally guaranteed the obligations of the Trust under the capital securities. The capital securities are redeemable by the Company on or after November 23, 2010, at par, or earlier if the deduction of related interest for federal income taxes is prohibited, classification as Tier 1 Capital is no longer allowed, or certain other contingencies arise. The capital securities must be redeemed upon final maturity of the subordinated debentures on November 23, 2035. Proceeds of approximately $4,200,000 were contributed to paid-in capital at the Bank. The remaining $800,000 was retained at the Company for future use. F-19 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 10. Borrowings (Continued) Subordinated Debentures - Capital Trusts (Continued): On August 23, 2005, Parke Capital Trust II, a Delaware statutory business trust and a wholly-owned Subsidiary of the Company, issued $5,000,000 of fixed/variable rate capital trust pass-through securities to investors. Currently, the interest rate is fixed at 6.25%. The fixed/variable interest rate re-prices quarterly at the three-month LIBOR plus 1.66% beginning November 23, 2010. Parke Capital Trust II purchased $5,155,000 of variable rate junior subordinated deferrable interest debentures from the Company. The debentures are the sole asset of the Trust. The terms of the junior subordinated debentures are the same as the terms of the capital securities. The Company has also fully and unconditionally guaranteed the obligations of the Trust under the capital securities. The capital securities are redeemable by the Company on or after November 23, 2010, at par, or earlier if the deduction of related interest for federal income taxes is prohibited, classification as Tier 1 Capital is no longer allowed, or certain other contingencies arise. The capital securities must be redeemed upon final maturity of the subordinated debentures on November 23, 2035. Proceeds of approximately $4,200,000 were contributed to paid-in capital at the Bank. The remaining $800,000 was retained at the Company for future use. The subordinates debentures are classified as liabilities in the Company's consolidated balance sheet at December 31, 2005 but a majority was allowed as Tier I Capital for regulatory capital purposes (Note 13). Note 11. Income Taxes The net deferred tax asset, which is included in "accrued interest receivable and other assets" at December 31, 2005 and 2004, includes the following:
2005 2004 ---------------------------- Deferred tax assets $ 1,676,004 $ 1,034,350 Deferred tax liabilities (470,039) (359,161) ---------------------------- Net deferred tax asset $ 1,205,965 $ 675,189 ============================
Income tax expense for 2005, 2004 and 2003 consisted of the following:
2005 2004 2003 --------------------------------------------- Current tax expense: Federal $ 2,092,771 $ 1,357,072 $ 1,212,122 State 624,255 433,000 358,015 --------------------------------------------- 2,717,026 1,790,072 1,570,137 Deferred tax (benefit) (387,382) (45,972) (290,700) --------------------------------------------- Income tax expense $ 2,329,644 $ 1,744,100 $ 1,279,437 =============================================
The components of the net deferred tax asset, which is included in other assets, are as follows:
2005 2004 ---------------------------- Allowance for loan losses $ 1,354,558 $ 1,004,511 Deferred loan costs (213,276) (213,276) Securities available for sale 190,857 47,470 Other (126,174) (163,516) ---------------------------- $ 1,205,965 $ 675,189 ============================
F-20 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 11. Income Taxes (Continued) A reconciliation of the Company's effective income tax rate with the statutory Federal rate for 2005, 2004 and 2003 is as follows:
2005 2004 2003 --------------------------------------------- Tax expense at statutory rate (35%) $ 2,038,423 $ 1,563,050 $ 1,148,467 Permanent differences and other, net 3,513 (39,564) (31,128) State income taxes, net of Federal tax benefit 345,949 265,272 194,911 Benefit of income taxed at lower rates (58,241) (44,658) (32,813) --------------------------------------------- $ 2,329,644 $ 1,744,100 $ 1,279,437 =============================================
Note 12. Retirement Plans Supplemental Executive Retirement Plan: The Company has a Supplemental Executive Retirement Plan ("SERP") covering certain members of management. The net periodic SERP pension cost was approximately $246,000 in 2005, $207,000 in 2004 and $151,000 in 2003. The unfunded accumulated benefit obligation, which was included in "accrued interest payable and other liabilities", was approximately $894,000 at December 31, 2005 and $672,000 at December 31, 2004. Simple IRA Plan: The Company has a simple IRA Plan (the "Plan") covering substantially all employees. The Company is required to contribute 2% of the employees' eligible salary to the Plan. All Company contributions are immediately vested. Plan expense amounted to approximately $33,000 in 2005, $22,000 in 2004 and $16,000 in 2003. Note 13. Regulatory Matters Capital Ratios: Parke Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the Regulatory framework for prompt corrective action, Parke Bancorp and the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Parke Bancorp and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require Parke Bancorp and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2005 and 2004, that Parke Bancorp and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2005, Parke Bancorp and the Bank were categorized as "well-capitalized" under the regulatory framework for prompt corrective action. At December 31, 2004, the Bank was categorized as "well-capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since December 31, 2005 that management believes have changed any subsidiary bank's capital category. F-21 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 13. Regulatory Matters (Continued) Capital Ratios (Continued): Parke Bancorp and the Bank's actual capital amounts and ratios as of December 31, 2005 and 2004 are presented in the following tables:
To Be Well Capitalized For Capital Prompt Under Corrective Actual Adequacy Purposes Action Provisions ----------------------------------------------------------------------- Parke Bancorp, Inc. Amount Ratio Amount Ratio Amount Ratio ----------------------------------------------------------------------- As of December 31, 2005: (amounts in thousands) - ---------------------- Total Risk Based Capital $ 40,737 16% $ 20,856 8% $ 26,070 10% (to Risk Weighted Assets) Tier I Capital $ 34,349 13% $ 10,428 4% $ 15,652 6% (to Risk Weighted Assets) Tier I Capital $ 34,349 12% $ 11,370 4% $ 14,212 5% (to Average Assets)
To Be Well Capitalized For Capital Prompt Under Corrective Actual Adequacy Purposes Action Provisions ----------------------------------------------------------------------- Parke Bank Amount Ratio Amount Ratio Amount Ratio ----------------------------------------------------------------------- As of December 31, 2005: (amounts in thousands) - ---------------------- Total Risk Based Capital $ 39,416 15% $ 20,825 8% $ 26,031 10% (to Risk Weighted Assets) Tier I Capital $ 36,158 14% $ 10,413 4% $ 15,618 6% (to Risk Weighted Assets) Tier I Capital $ 36,158 13% $ 11,370 4% $ 14,213 5% (to Average Assets)
To Be Well Capitalized For Capital Prompt Under Corrective Actual Adequacy Purposes Action Provisions ----------------------------------------------------------------------- Parke Bank Amount Ratio Amount Ratio Amount Ratio ----------------------------------------------------------------------- As of December 31, 2004: (amounts in thousands) - ---------------------- Total Risk Based Capital $ 25,254 13% $ 15,042 8% $ 18,802 10% (to Risk Weighted Assets) Tier I Capital $ 22,900 12% $ 7,521 4% $ 11,281 6% (to Risk Weighted Assets) Tier I Capital $ 22,900 11% $ 8,301 4% $ 10,376 5% (to Average Assets)
F-22 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 14. Shareholders' Equity Reorganization: Parke Bancorp was incorporated in 2005 for the sole purpose of becoming the holding company of the Bank. Parke Bancorp recognized the assets and liabilities transferred at the carrying amounts in the accounts of the Bank as of June 1, 2005, the effective date of the reorganization. The accompanying consolidated financial statements are presented as if the exchange of shares occurred as of January 1, 2003. Pursuant to the Plan of Acquisition, each outstanding share of Parke Bank was converted automatically by operation of law into one share of Parke Bancorp. Parke Bancorp had no activity prior to the competition of this reorganization. Parke Bancorp is authorized to issue 10,000,000 shares of common stock, par value $0.10 per share and 1,000,000 shares of serial preferred stock, par value $0.10 per share. Options and warrants outstanding under the Bank's various Plans were converted automatically by operation of law into options and warrants to purchase shares of Parke Bancorp on the same terms and conditions. Common Stock Dividend: In December 2004, the Company paid a 20% common stock dividend (362,363 shares) to shareholders. In December 2003, the Company paid a 10% common stock dividend (161,404 shares) to shareholders. Stock Options and Warrants: In 1999, 2002 and 2003, the shareholders approved the Company's Employee Stock Option Plans and in 2005 the shareholders approved the Company's Directors and Employee Stock Option Plan (the "Plans") The Plans are "non-qualified" stock option plans. Reserved for issuance upon the exercise of options granted or to be granted by the Board of Directors is an aggregate of 437,055 shares of common stock. All options issued under the Plans are fully vested upon issuance. All directors and certain officers and employees of the Company have been granted options under the Plans. All stock option amounts and prices included in the following discussions have been adjusted for stock dividends. A summary of the status of options granted is as follows:
2005 2004 2003 -------------------------------------------------------------------------------- Number Exercise Number Exercise Number Exercise of Options Price of Options Price of Options Price -------------------------------------------------------------------------------- Outstanding, beginning of year 133,367 $9.39 122,897 $8.88 74,796 $7.58 Granted 163,500 $20.50 12,420 $15.00 49,553 $10.61 Expired / terminated (360) $10.61 (300) $7.58 - - Exercised (20,700) $10.58 (1,650) $7.58 (1,452) $7.58 ------------ ----------- ------------ Outstanding, end of year 275,807 $15.87 133,367 $9.39 122,897 $8.88 ============ =========== ============
Information regarding options outstanding and exercisable at December 31, 2005 is as follows: Number Weighted-Average Exercise Outstanding and Remaining Price Exercisable Contractual Life ------------------------------------------------- $7.58 65,292 4.6 $10.61 38,795 7.5 $15.00 8,220 8.1 $18.00 27,500 9.2 $21.00 136,000 9.9 -------------- 275,807 ============== F-23 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 14. Shareholders' Equity (Continued) Stock Options and Warrants (Continued): At December 31, 2005, there were 138,073 shares available for grant under the Plans. The Bank has adopted the disclosure-only provisions of FASB No. 123. The Bank accounts for its Plans in accordance with Accounting Principles Board Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for the Plan in 2005, 2004 or 2003. Compensation cost that would have been recognized using the fair value method pursuant to FASB No. 123, if the Bank had so elected, would have been approximately $1,117,000 in 2005, $68,000 in 2004 and $190,000 in 2003. The method of determining pro-forma compensation cost for 2005, 2004 and 2003 was based on certain assumptions, including the past trading ranges of the Bank's stock, volatility of 25%, expected option lives of 5 - 7 years, risk-free interest rate of 4%, and no expected payment of dividends. In connection with the Company's initial stock offering in 1998, approximately 732,000 (as adjusted for stock dividends in 2003 and 2004) warrants were issued. These warrants have an exercise price of $7.58 per share and expire in 2008. During 2005, 2004 and 2003, 122,156, 25,586 and 47,675 warrants were exercised, respectively. Note 15. Other Related Party Transactions A member of the Board of Directors is a principal of a commercial insurance agency that provides all the insurance coverage for the Company. The cost of the insurance was approximately $98,000 in 2005, $102,000 in 2004 and $81,000 in 2003. An insurance agency owned by another Board Member provides employee benefits (medical insurance, life insurance, and disability insurance). The cost of these employee benefits totaled $284,000 in 2005, $197,000 in 2004 and $151,000 in 2003. Note 16. Commitments and Contingencies The Company has entered into employment contract with the President of the Company, which provides for continued payment of certain employment salaries and benefits in the event of a change in control, as defined. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of the Company's involvement in these particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. F-24 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 16. Commitments and Contingencies (Continued) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. As of December 31, 2005 and 2004, commitments to extend credit amounted to approximately $101,815,000 and $70,418,000, respectively. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of December 31, 2005 and 2004, standby letters of credit with customers were $4,536,000 and $2,489,492, respectively. The Company does not issue or hold derivative instruments with the exception of loan commitments and standby letters of credit. These instruments are issued in the ordinary course of business to meet customer needs. Commitments to fund fixed-rate loans were immaterial at December 31, 2005. Variable-rate commitments are generally issued for less than one year and carry market rates of interest. Such instruments are not likely to be affected by annual rate caps triggered by rising interest rates. Management believes that off-balance sheet risk is not material to the results of operations or financial condition. In the normal course of business, there are outstanding various contingent liabilities such as claims and legal action, which are not reflected in the financial statements. In the opinion of management, no material losses are anticipated as a result of these actions or claims. Note 17. Fair Value of Financial Instruments The Company discloses estimated fair values for its significant financial instruments. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The following fair value estimates, methods and assumptions were used to estimate the fair value of each class of significant financial instruments, for which it is practical to estimate that value: Cash and Cash Equivalents: The carrying amount of cash and federal funds sold approximates fair value. Investment Securities: The fair value of investment securities is based upon quoted market prices or dealer quotes. Restricted Stock: The carrying value of restricted stock approximates fair value based on redemption provisions. Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, residential mortgage and other consumer. Each loan category is further segmented into groups by fixed and adjustable rate interest terms and by performing and non-performing categories. F-25 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 17. Fair Value of Financial Instruments (Continued) Loans (Continued): The fair value of performing loans is typically calculated by discounting scheduled cash flows through their estimated maturity, using estimated market discount rates that reflect the credit and interest rate risk inherent in each group of loans. The estimate of maturity is based on contractual maturities for loans within each group, or on the Company's historical experience with repayments for each loan classification, modified as required by an estimate of the effect of current economic conditions. Fair value for nonperforming loans is based on the discounted value of expected future cash flows, discounted using a rate commensurate with the risk associated with the likelihood of repayment and/or the fair value of collateral (if repayment of the loan is collateral dependent). For all loans, assumptions regarding the characteristics and segregation of loans, maturities, credit risk, cash flows, and discount rates are judgmentally determined using specific borrower and other available information. Accrued Interest Receivable and Payable: The fair value of interest receivable and payable is estimated to approximate the carrying amounts. Deposits: The fair value of deposits with no stated maturity, such as demand deposits, checking accounts, savings and money market accounts, is equal to the carrying amount. The fair value of certificates of deposit is based on the discounted value of contractual cash flows, where the discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Borrowings: The fair value of borrowings is based on the discounted value of estimated cash flows. The discounted rate is estimated using the rates currently offered for similar advances. Off-Balance Sheet Instruments: Since the majority of the Company's off-balance sheet instruments consist of non fee-producing, variable rate commitments, the Company has determined they do not have a distinguishable fair value. The following table summarizes carrying amounts and fair values for financial instruments at December 31, 2005: Carrying Value Fair Value -------------------------------- Financial Assets: Cash and cash equivalents $ 4,380,036 $ 4,380,036 Investment securities 24,428,785 24,345,929 Restricted stock 1,348,900 1,348,900 Loans, net 255,461,276 252,907,849 Accrued interest receivable 1,545,443 1,545,443 Financial Liabilities: Demand deposits and savings deposits $ 79,113,260 $ 79,113,260 Time deposits 152,943,048 154,935,630 Borrowings 35,966,860 35,966,860 Accrued interest payable 1,073,713 1,073,713 F-26 Parke Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 17. Fair Value of Financial Instruments (Continued) The following table summarizes carrying amounts and fair values for financial instruments at December 31, 2004: Carrying Value Fair Value ------------------------------ Financial Assets: Cash and cash equivalents $ 1,801,788 $ 1,801,788 Investment securities 24,590,434 24,583,542 Restricted stock 1,064,200 1,064,200 Loans, net 185,986,339 186,968,704 Accrued interest receivable 972,235 972,235 Financial Liabilities: Demand deposits and savings deposits $ 70,607,600 $ 70,607,600 Time deposits 108,977,411 108,745,773 Borrowings 20,378,726 20,378,726 Accrued interest payable 382,583 382,583 Note 18. Quarterly Financial Data (unaudited) The following represents summarized unaudited quarterly financial data of the Company which, in the opinion of management, reflects adjustments (comprising only normal recurring accruals) necessary for fair presentation. Note 18. Quarterly Financial Data (unaudited) The following represents summarized unaudited quarterly financial data of the Company which, in the opinion of management, reflects adjustments (comprising only normal recurring accruals) necessary for fair presentation.
Three Months Ended ---------------------------------------------------------------- December 31, September 30, June 30, March 31, ---------------------------------------------------------------- 2005 ---- Interest income $ 5,098,380 $ 4,434,368 $ 4,106,809 $ 3,696,487 Interest expense 2,092,613 1,810,909 1,515,232 1,265,201 Net interest income 3,005,767 2,623,459 2,591,577 2,431,286 Provision for loan losses 374,000 298,005 276,023 232,134 Income before income tax expense 1,624,981 1,481,502 1,499,565 1,218,017 Income tax expense 655,994 592,100 595,550 486,000 Net income 968,987 889,402 904,015 732,017 Net income per common share: Basic $ 0.42 $ 0.39 $ 0.40 $ 0.33 Diluted $ 0.36 $ 0.34 $ 0.35 $ 0.28 2004 ---- Interest income $ 3,188,760 $ 2,980,350 $ 2,839,127 $ 2,757,551 Interest expense 1,030,003 954,159 861,999 899,972 Net interest income 2,158,757 2,026,191 1,977,128 1,857,579 Provision for loan losses 425,913 101,951 184,585 112,875 Income before income tax expense 1,109,120 1,258,605 1,074,408 1,023,725 Income tax expense 434,600 490,000 419,100 400,400 Net income 674,520 768,605 655,308 623,325 Net income per common share: Basic $ 0.30 $ 0.36 $ 0.31 $ 0.29 Diluted $ 0.23 $ 0.31 $ 0.26 $ 0.25
F-27
CORPORATE INFORMATION PARKE BANCORP, INC. 601 Delsea Drive Washington Township, New Jersey 08080 (856) 256-2500 Board of Directors Celestino R. ("Chuck") Pennoni Fred Choate Daniel J. Dalton Chairman of the Board of Directors Director Director ----------------------------------- Officers Vito S. Pantilione Ernest D. Huggard, CPA David O. Middlebrook President and Senior Vice President and Senior Vice President and Chief Executive Officer Chief Financial Officer Corporate Secretary ----------------------------------- Local Counsel Independent Auditors Duane Morris McGladrey & Pullen, LLP One Liberty Place 512 Township Line Road Philadelphia, PA 19103 One Valley Square, Suite 250 Blue Bell, PA 19422 Special Counsel Transfer Agent and Registrar Malizia Spidi & Fisch, PC Registrar and Transfer Company 901 New York Avenue, N.W. 10 Commerce Drive Suite 210 East Cranford, NJ 07016 Washington, D.C. 20001
PARKE BANK Board of Directors Celestino R. ("Chuck") Pennoni Vito S. Pantilione Chairman of the Board of Directors President, Chief Executive Officer and Director Thomas Hedenberg Arret F. Dobson Vice Chairman of the Board of Directors Director Daniel J. Dalton Edward Infantolino Director Director Anthony J. Jannetti Jeffrey H. Kripitz Director Director Richard Phalines Jack C. Sheppard, Jr. Director Director Ray H. Tresch Fred G. Choate Director Director Victor Fabietti, CPA/Special Consultant to the Board of Directors Officers Vito S. Pantilione Ernest D. Huggard, CPA President and Chief Executive Officer Senior Vice President and Chief Financial Officer David O. Middlebrook Elizabeth A. Milavsky Senior Vice President, Senior Senior Vice President and Loan Officer, Corporate Secretary Systems/Retail Officer Paul E. Palmieri James Talerico Senior Vice President of the Vice President Philadelphia Region Milton Witte John J. Murphy Vice President Treasurer Dolores M. Calvello Allen M. Bachman Assistant Vice President Assistant Vice President Kathleen A. Conover Mary Ann Seal Assistant Vice President Assistant Vice President Mark Prater Assistant Vice President
BRANCH OFFICES Northfield Office Main Office Kennedy Office 501 Tilton Road 601 Delsea Drive 567 Egg Harbor Road Northfield, NJ 08225 Washington Township, NJ 08080 Washington Township, NJ 08080 (609) 646-6677 (856) 256-2500 (856) 582-6900 ----------------------------------- Loan Production Office 1610 Spruce Street Philadelphia, PA 19103 (215) 772-1113 ----------------------------------- PARKE BANK PARKE CAPITAL MARKETS PARKE CAPITAL TRUST I 601 Delsea Drive 601 Delsea Drive PARKE CAPITAL TRUST II Washington Township, NJ 08080 Washington Township, NJ 08080 601 Delsea Drive (856) 256-2500 (856) 256-2500 Washington Township, NJ 08080 (856) 256-2500
EX-23 3 ex-23.txt CONSENT OF MCGLADREY & PULLEN LLP Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in Registration Statement (No.333-128202) on Form S-8 of Parke Bancorp, Inc. of our report dated January 20, 2006 relating to our audit of the consolidated financial statements, which appear in the Annual Report to Stockholders, which is incorporated in this Annual Report on Form 10-K of Parke Bancorp, Inc. for the year ended December 31, 2005. /s/ McGladrey & Pullen, LLP Blue Bell, Pennsylvania March 27, 2006 EX-31 4 ex-31.txt CERTIFICATIONS SECTION 302 CERTIFICATION I, Vito S. Pantilione, President and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Parke Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 29, 2006 /s/Vito S. Pantilione ------------------------------------- Vito S. Pantilione President and Chief Executive Officer SECTION 302 CERTIFICATION I, Ernest D. Huggard, Senior Vice President and Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Parke Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 29, 2006 /s/Ernest D. Huggard --------------------------- Ernest D. Huggard Senior Vice President and Chief Financial Officer EX-32 5 ex-32.txt CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Parke Bancorp, Inc. (the "Company") for the fiscal year ended December 31, 2005 (the "Report") as filed with the Securities and Exchange Commission, we, Vito S. Pantilione, President and Chief Executive Officer, and Ernest D. Huggard, Senior Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 29, 2006 /s/Vito S. Pantilione /s/Ernest D. Huggard - ------------------------------------- ------------------------- Vito S. Pantilione Ernest D. Huggard President and Chief Executive Officer Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----