-----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, A0LcZXlGr+ckqlH8aVxQWZpithw+Zhq0AObBLthLiRPSQFj6OniOxXZl5h+g2/GN OJrU71DR/TKb0kHNZFtt9A== 0000946275-07-000306.txt : 20070402 0000946275-07-000306.hdr.sgml : 20070402 20070402170533 ACCESSION NUMBER: 0000946275-07-000306 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070402 DATE AS OF CHANGE: 20070402 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: 07740155 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_123106-0343.txt FORM 10-K 12-31-06 PARKE BANCORP, INC. 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, 2006 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 Incorporation or Organization) (IRS Employer Identification No.) 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: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- COMMON STOCK, $0.10 PAR VALUE THE NASDAQ STOCK MARKET LLC Securities registered pursuant to Section 12(g) of the Act: NONE 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, 2006, was approximately $29.2 million. As of March 22, 2007 there were issued and outstanding 2,873,860 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, 2006. (Parts II and IV) 2. Portions of the Proxy Statement for the 2007 Annual Meeting of Shareholders. (Parts II and III) PARKE BANCORP, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
INDEX Page ---- Part I - ------ Item 1. Business............................................................................................. 1 Item 1A. Risk Factors.........................................................................................17 Item 1B. Unresolved Staff Comments............................................................................19 Item 2. Properties...........................................................................................19 Item 3. Legal Proceedings....................................................................................20 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............................................................21 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....................................................................................22 Part III - -------- Item 10. Directors, Executive Officers and Corporate Governance...............................................23 Item 11. Executive Compensation...............................................................................23 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters......................................................................23 Item 13. Certain Relationships and Related Transactions, and Director Independence............................24 Item 14. Principal Accounting Fees and Services...............................................................24 Part IV - ------- Item 15. Exhibits and Financial Statement Schedules...........................................................24
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 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 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, and in Philadelphia, Pennsylvania. In addition, the Bank also has a Loan Production Office in Millville, New Jersey 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, 2006, the Company had assets of $360.0 million, loans of $310.6 million, deposits of $289.9 million and shareholders' equity of $30.7 million. 1 The Bank focuses its commercial loan originations on small and mid-sized business (generally up to $25 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) Except as set forth below, the Bank had no concentrations of loans exceeding 10% of its loans.
At December 31, --------------------------------------------------------------------------------- 2006 2005 2004 ------------------------ ------------------------ ------------------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- Commercial....................... $ 13,436,690 4.3% $ 11,053,481 4.3% $ 9,708,142 5.1% Real estate construction: Residential................... 2,464,820 0.8 1,174,233 0.5 1,252,811 0.7 Commercial.................... 69,254,592 22.3 70,156,767 27.1 37,270,464 19.8 Real estate mortgage: Residential................... 19,727,682 6.4 17,308,735 6.7 16,360,109 8.7 Commercial.................... 198,667,009 64.0 154,287,964 59.6 120,051,646 63.6 Consumer......................... 7,004,513 2.2 5,053,908 1.8 3,963,818 2.1 ------------- ----- ------------- ----- ------------- ----- Total Loans................. $ 310,555,306 100.0% $ 259,035,088 100.0% $ 188,606,990 100.0% ============= ===== ============= ===== ============= ===== At December 31, ---------------------------------------------------- 2003 2002 ------------------------ ------------------------ Amount Percent Amount Percent ------ ------- ------ ------- Commercial....................... $ 8,799,899 6.0% $ 7,035,669 7.4% Real estate construction: Residential................... 2,164,811 1.5 1,370,266 1.4 Commercial.................... 29,896,562 20.4 17,122,397 18.0 Real estate mortgage: Residential................... 18,013,087 12.3 13,188,780 13.9 Commercial.................... 84,054,063 57.5 53,503,768 56.3 Consumer......................... 3,405,909 2.3 2,874,330 3.0 ------------- ----- ------------- ----- Total Loans................. $ 146,334,331 100.0% $ 95,095,210 100.0% ============= ===== ============= ====== - ------------------------------------ (1) Amounts presented include adjustments for related unamortized deferred costs and fees.
3 LOAN MATURITY. The following table sets forth the contractual maturity of certain loan categories at December 31, 2006.
Due after Due within 1 through 5 Due after 1 year years 5 years Total ------ ----- ------- ----- Commercial................................ $ 9,622,980 $ 3,813,710 $ - $ 13,436,690 Real estate construction: Residential............................ 2,464,820 - - 2,464,820 Commercial............................. 54,545,380 7,262,395 7,446,817 69,254,592 Real estate mortgage: Residential............................ - - - 19,727,682 Commercial............................. - - - 198,667,009 Consumer.................................. - - - 7,004,513 ------------- ------------- ------------ ------------- Total loans.......................... $ 180,178,091 $ 73,340,250 $ 57,036,965 $ 310,555,306 ============= ============= ============ =============
The following table sets forth the dollar amount of loans in certain loan categories due one year or more 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......................................... $ 3,128,630 $ 685,080 $ 3,813,701 Real estate construction: Residential..................................... - - - Commercial...................................... 14,709,212 - 14,709,212 Real estate mortgage: Residential..................................... 9,305,544 8,472,479 17,778,023 Commercial...................................... 29,250,997 57,831,290 87,082,287 Consumer........................................... 2,446,450 4,547,533 6,993,983 ------------- ------------ ------------- Total loans................................... $ 58,840,833 $ 71,536,382 $ 130,377,215 ============= ============ ============= - ---------- (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. 4 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 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, 5 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 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, 2006, the Bank's loan to one borrower limit was approximately $6.7 million and the Bank had 13 borrowers with loan balances in excess of $5.0 million. At December 31, 2006, the Bank's largest loan to one borrower was a loan for construction and development, with a balance of $6.7 million and was secured by real estate. This loan is scheduled to be funded in stages after the houses are sold. At December 31, 2006, 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. 6 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, 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. As of the dates indicated, the Bank did not have any troubled restructurings as defined in Statement of Financial Accounting Standards No. 15.
At December 31, --------------------------------------------------------------------- 2006 2005 2004 2003 2002 ---------- ----------- ----------- ----------- ----------- Loans accounted for on a non-accrual basis: Commercial....................................... $ 90,850 $ 50,000 $ - $ - $ - Real estate construction: Residential................................... - - 240,816 289,257 289,000 Commercial.................................... - - - - - Real estate mortgage: Residential................................... - 20,000 - 504,878 742,067 Commercial.................................... 686,933 1,865,000 - - - Consumer......................................... 11,021 - - - - ---------- ----------- ----------- ----------- ----------- Total....................................... 788,804 1,935,000 240,816 794,135 1,031,067 ---------- ----------- ----------- ----------- ----------- Accruing loans delinquent 90 days or more: Commercial....................................... - - - - - Real estate construction: Residential................................... - - - - - Commercial.................................... - - - - - Real estate mortgage: Residential................................... - - 54,859 - - Commercial.................................... 267,150 665,000 - - 50,000 Consumer......................................... - - - - - ---------- ----------- ----------- ----------- ----------- Total....................................... 267,150 665,000 54,859 - 50,000 ---------- ----------- ----------- ----------- ----------- Total non-performing loans.............. $1,055,954 $ 2,590,000 $ 295,675 $ 794,135 $ 1,081,067 ========== =========== =========== =========== =========== Total non-performing loans as a percentage of net loans....................... 0.34% 1.01% 0.16% 0.55% 1.15% ========== =========== =========== =========== ===========
When a loan is more than 30 days delinquent, the borrower is contacted by mail or phone and payment is requested. If the delinquency continues, subsequent efforts are made to contact the delinquent borrower. In certain instances, the Registrant may modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize their financial affairs. If the loan 7 continues in a delinquent status for 90 days or more, the Registrant generally will initiate foreclosure proceedings. Loans are generally placed on non-accrual status when either principal or interest is 90 days or more past due. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Such interest, when ultimately collected, is credited to income in the period received. At December 31, 2006, the Bank had $788,804 of loans that were held on a non-accrual basis. Gross interest income of $51,000 would have been recorded during the year ended December 31, 2006 if these loans had been performing in accordance with their terms. Interest income of $71,791 was recorded on these loans during the year ended December 31, 2006. At December 31, 2006, the Bank did not have any loans not classified as non-accrual, 90 days past due or restructured but where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and may result in disclosure as non-accrual, 90 days past due or restructured. 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. 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, 2006, the Bank had assets classified as follows: Special mention....................................... $6,308,539 Substandard........................................... 2,369,550 Doubtful.............................................. 11,021 Loss.................................................. - ---------- Total........................................... $8,689,110 ---------- 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, 2006, the Bank had real estate owned totaling $1.25 million, which is valued at current fair market value. 8 ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE OWNED. It is the policy of management to provide for losses on unidentified loans in its portfolio in addition to classified loans. A provision for loan losses is charged to operations based on management's evaluation of the inherent losses that may be incurred in the Bank's loan portfolio. Management also periodically performs valuations of Real Estate Owned and establishes allowances to reduce book values of the properties to their net realizable values when necessary. Management's judgment as to the level of future losses on existing loans is based on its internal review of the loan portfolio, including an analysis of the borrowers' current financial position, the consideration of current and anticipated economic conditions and their potential effects on specific borrowers. In determining the collectability of certain loans, management also considers the fair value of any underlying collateral. However, management's determination of the appropriate allowance level is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that charge-offs in future period will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required. The following table sets forth information with respect to the Bank's allowance for losses on loans at the dates and for the periods indicated.
For the Year Ended December 31, ------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ------------ ------------ ------------ ------------ ----------- Balance at beginning of period...............$ 3,573,812 $ 2,620,651 $ 2,256,070 $ 1,333,000 $ 834,483 Charge-offs: Commercial................................... - - - - - Real estate construction: Residential............................... - - - - - Commercial................................ - (227,001) - - - Real estate mortgage: Residential............................... - - (460,743) - - Commercial................................ - - - - - Consumer..................................... (2,500) - - (1,000) - ------------ ------------ ------------ ------------ ----------- Total charge-offs:...................... (2,500) (227,001) (460,743) (1,000) - ------------ ------------ ------------ ------------ ----------- Recoveries: Commercial................................... - - - - - Real estate construction: Residential............................... - - - - - Commercial................................ - - - - - Real estate mortgage: Residential............................... - - - - - Commercial................................ - - - - - Consumer..................................... - - - 1,000 - ------------ ------------ ------------ ------------ ----------- Total recoveries:....................... - - - 1,000 - ------------ ------------ ------------ ------------ ----------- Net charge-offs.............................. (2,500) (227,001) (460,743) - - Provision for loan losses.................... 939,692 1,180,162 825,324 923,070 498,517 ------------ ------------ ------------ ------------ ----------- Balance at end of period.....................$ 4,511,004 $ 3,573,812 $ 2,620,651 $ 2,256,070 $ 1,333,000 ============ ============ ============ ============ =========== Period-end loans outstanding (net of deferred costs/fees)......................$310,555,306 $259,035,088 $188,606,990 $146,344,331 $95,095,210 ============ ============ ============ ============ =========== Average loans outstanding....................$286,691,000 $223,821,300 $154,794,200 $120,796,806 $78,245,329 ============ ============ ============ ============ =========== Allowance as a percentage of period end loans................................. 1.45% 1.38% 1.39% 1.54% 1.40% ============ ============ ============ ============ =========== Net loans charged off as a percentage of average loans outstanding................. 0.00% 1.10% 0.30% 0.00% 0.00% ============ ============ ============ ============ ===========
9 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth the allocation of the Bank's allowance for loan losses by loan category at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses that may occur within the loan category as the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio.
At December 31, ---------------------------------------------------------------------------------------------------- 2006 2005 2004 2003 2002 --------------------- ------------------ ------------------- ------------------- ------------------ Percent of Percent of Percent of Percent of Percent of Loans in Loans in Loans in Loans in Loans in Each in Each Each Each Each Category Category Category Category Category to Total to Total to Total to Total to Total Type of Loans: Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans - -------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Commercial.................$ 187,958 4.3% $ 153,674 4.3% $ 133,653 5.1% $ 135,364 6.0% $ 98,642 7.4% Real estate construction: Residential............. 24,648 0.8 17,869 0.5 18,344 0.7 33,841 1.5 18,662 1.4 Commercial.............. 847,029 22.3 968,503 27.1 518,889 19.8 460,238 20.4 239,940 18.0 Real estate mortgage: Residential............. 218,191 6.4 239,445 6.7 227,997 8.7 277,497 12.3 184,287 13.9 Commercial.............. 3,184,846 64.0 2,129,992 59.6 1,666,734 63.6 1,297,240 57.5 750,479 56.3 Consumer................... 48,332 2.2 64,329 1.8 55,034 2.1 51,890 2.3 39,990 3.0 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total Allowance $4,511,004 100.0% $3,573,812 100.0% $2,620,651 100.0% $2,256,070 100.0% $1,333,000 100.0% ========== ===== ========== ===== ========== ===== ========== ===== ========== =====
10 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, 2006, 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, 2006, the Company did not hold investment securities of any one issuer the book value of which exceeds 10% of its stockholders' equity.
At December 31, -------------------------------------------------- 2006 2005 2004 -------------- -------------- -------------- Securities Held to Maturity: Municipals................................................. $ 2,430,958 $ 2,405,841 $ 547,632 Corporate trust preferred securities....................... - - - -------------- -------------- -------------- Total securities held to maturity........................ 2,430,958 2,405,841 547,632 -------------- -------------- -------------- Securities Available for Sale: U.S. government agency securities.......................... - - - U.S. government-sponsored entity securities................ 6,415,780 6,202,390 8,670,230 Municipals................................................. - - - Mortgage-backed securities................................. 9,908,837 9,004,256 12,176,244 Mutual funds............................................... - - 3,196,328 Corporate and trust preferred securities................... 8,205,450 6,316,298 - Stock...................................................... - 500,000 - -------------- -------------- -------------- Total securities available for sale...................... 24,530,067 22,022,944 24,042,802 -------------- -------------- -------------- Total.................................................. $ 26,961,025 $ 24,428,785 $ 24,590,434 ============== ============== ==============
11 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, 2006 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............. $ - -% $ 544,898 3.97% $ - -% $ 1,886,060 6.38% $ 2,430,958 5.85% $ 2,425,629 -------- ---- ----------- ---- ---------- ---- ----------- ---- ----------- ---- ----------- Total securities held to maturity..... - -% 544,898 3.97% - -% 1,886,060 6.38% 2,430,958 5.85% 2,425,629 -------- ---- ----------- ---- ---------- ---- ----------- ---- ----------- ---- ----------- Securities Available for Sale: - ------------------------------ U.S. government- sponsored entity securities............. 999,060 5.23% 2,481,320 4.99% 1,000,000 5.25% 1,935,400 6.18% 6,415,780 5.41% 6,415,780 Mortgage-backed securities............. - -% - -% - -% 9,908,837 5.30% 9,908,837 5.30% 9,908,837 Corporate securities... - -% 507,600 5.13% - - 7,697,850 5.39% 8,205,450 5.51% 8,205,450 -------- ---- ----------- ---- ---------- ---- ----------- ---- ----------- ---- ----------- Total securities available for sale... $989,060 5.23% 2,988,920 5.01% 1,000,000 5.25% 19,542,087 5.43% 24,530,067 5.40% 24,530,067 -------- ---- ----------- ---- ---------- ---- ----------- ---- ----------- ---- ----------- Total.............. $999,060 5.23% $ 3,533,818 4.86% $1,000,000 5.25% $21,428,147 5.51% $26,961,025 5.44% $26,955,696 ======== ==== =========== ==== ========== ==== =========== ==== =========== ==== ===========
12 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 $87.6 million and $67 million at December 31, 2006 and 2005, 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, 2006.
At December 31, 2006 ----------------------------------------- Daily Average Average Percent Balance Rate of Total ------- ---- -------- NOW and money market savings deposits................................ $ 26,568,000 2.8% 10.2% Regular savings deposits........................... 28,991,000 3.5% 11.1% Time deposits...................................... 188,040,000 4.5% 71.8% ------------- ----- Total interest-bearing deposits............... 243,599,000 93.1% Non interest-bearing demand deposits............... 18,174,000 6.9% ------------- ----- Total deposits...................................$ 261,773,000 100.0% ============= ===== 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% ============= ===== 13 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% ============= =====
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, 2006. Certificates of Maturity Period Deposit - --------------- ------- Within three months.......................... $ 27,141,290 Three through six months..................... 22,369,068 Six through twelve months.................... 33,553,602 Over twelve months........................... 47,491,514 -------------- Total................................... $ 130,555,474 ============== 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 2006, 2005 and 2004 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, ---------------------------------------------------------- 2006 2005 2004 ----------------- ----------------- ----------------- Amount outstanding at year end......................... $ 34,851,370 $ 35,966,860 $ 20,378,726 Weighted average interest rates at year end............ 5.49% 4.8% 2.8% Maximum outstanding at any month end................... $ 41,092,497 $ 35,966,860 $ 20,378,726 Average outstanding.................................... $ 34,321,000 $ 28,172,795 $ 10,721,726 Weighted average interest rate during the year......... 5.2% 3.1% 2.2%
SUBSIDIARY ACTIVITY The largest subsidiary of the Company is the Bank. The Bank has two subsidiaries, Parke Capital Markets and Farm Folly. Parke Capital Markets is a corporation, which was formed in 2001 to generate fee income from capital markets financing activities, which include term financings. Farm Folly, LLC, which was formed in 2006, was created to hold the Bank's repossessed real estate. PERSONNEL At December 31, 2006, the Bank had 35 full-time and 12 part-time employees. 14 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. 15 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. Pursuant to the Reform Act, the FDIC has determined to maintain the designated reserve ratio at its current 1.25%. The FDIC has also adopted a new risk-based premium system that provides for quarterly assessments based on an insured institution's ranking in one of four risk categories based on their examination ratings and capital ratios. Beginning in 2007, well-capitalized institutions with the CAMELS ratings of 1 or 2 will be grouped in Risk Category I and will be assessed for deposit insurance at an annual rate of between five and seven basis points with the assessment rate for an individual institution to be determined according to a formula based on a weighted average of the institution's individual CAMEL component ratings plus either five financial ratios or the average ratings of its long-term debt. Institutions in Risk Categories II, III and IV will be assessed at annual rates of 10, 28 and 43 basis points, respectively. The Bank anticipates that it will be able to offset its deposit insurance premium for 2007 with the special assessment credit. 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 16 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. At December 31, 2006, 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, 2006, approximately 23.1% 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, 2006, approximately 95% 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. 17 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, 2006, the Bank's non-performing loans were 0.34% 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 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, 2006, the allowance for loan losses was approximately $4.5 million, which represented 1.45% of outstanding net loans. At such date, we had non-accruing loans totaling $789,000. 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. 18 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, Robert A. Kuehl, the Bank's Senior Vice President and Chief Financial Officer, David O. Middlebrook, the Bank's Senior Vice President and Senior Loan Officer, and Elizabeth A. Milavsky, the Bank's Senior Vice President of Retail Operations, Human Resources and Compliance. The Bank has been able to retain the services of Mr. Pantilione since its inception and of Mr. Middlebrook since he joined the Bank in 1999. The Bank has needed, 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. 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, 2006, the Bank's total interest-earning assets maturing or re-pricing within one year exceeded interest-bearing liabilities maturing or re-pricing during the same time period by $3.9 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, 2007, the Company's and the Bank's directors and executive officers beneficially owned 1,419,739 shares or exercisable warrants and options, or 49.4%, 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. PROPERTIES (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, a full-service office in 19 Philadelphia, Pennsylvania, and a loan production office in Millville New Jersey. These offices were opened by the Bank in September 2002, February 2003, August 2006 and August 2006, respectively. The Northfield office, the Philadelphia 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, 2006, net property and equipment totaled approximately $3.4 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. (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. 20 In December, 2006, the Bank reached a preliminary agreement with both Atlantic Central Bankers Bank and New Century Bank. Upon further negotiations with both Banks in 2007, a final agreement between the Bank and Atlantic Central Bankers Bank and New Century Bank was signed and subsequently approved by the court and the action was dismissed in February, 2007. As a result of the settlement there are no longer any outstanding legal issues or potential liability by the Bank relating to either party. Payments were recently made in the amounts of $150,000 and $ 60,000, respectively to Atlantic Central Bankers Bank and New Century Bank as a result of the settlements. There has been no subsequent change in the First Republic Bank action. 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, 2006, the Company was not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the security holders during the fourth quarter of fiscal year 2006. PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (a) The information contained under the section captioned "Market Prices and Dividends" in the Company's 2006 Annual Report is incorporated herein by reference. (b) Not applicable. (c) There were no repurchases of the Company's stock in the fourth quarter of 2006. 21 ITEM 6. SELECTED FINANCIAL DATA The information contained under the section captioned "Selected Financial Data" in the 2006 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. ITEM 9B. OTHER INFORMATION Not applicable. 22 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information contained under the headings "Section 16(a) Beneficial Ownership Reporting Compliance" and "Proposal I - Election of Directors" in the Company's Proxy Statement for its 2007 Annual Meeting of Stockholders (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. There have been no material changes to the procedures by which security holders may recommend nominees to the Registrant's Board of Directors since the date of the Registrant's last proxy statement mailed to its stockholders. 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, 2006 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance. 23
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............. 348,248 $ 13.52 147,688 ------- -------- ------- TOTAL....................... 348,248 $ 13.52 147,688 ======= ======== =======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information contained in the section captioned "Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information contained in the section captioned "Principal Accounting 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, 2006 and 2005 o Consolidated Statements of Income For the Years Ended December 31, 2006, 2005 and 2004 o Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2006, 2005 and 2004 24 o Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004 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, 2006 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. 25 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 30, 2007 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 30, 2007.
/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/ Robert A. Kuehl - -------------------------------------------- ----------------------------------------------- Robert A. Kuehl Arret F. Dobson Senior Vice President and Director Chief Financial Officer (Principal Financial and Accounting Officer) /s/Thomas E. Hedenberg - -------------------------------------------- ----------------------------------------------- Thomas E. Hedenberg Edward Infantolino, M.D. Director Director
SIGNATURES (continued)
/s/Anthony Jannetti - -------------------------------------------- ----------------------------------------------- Anthony Jannetti Jeff H. Kripitz Director Director /s/Richard Phalines /s/Jack C. Sheppard, Jr. - -------------------------------------------- ----------------------------------------------- Richard Phalines Jack C. Sheppard, Jr. Director Director - -------------------------------------------- Ray H. Tresch Director
EX-13 2 ex13.txt EXHIBIT 13 PARKE BANCORP, INC. 2006 ANNUAL REPORT PARKE BANCORP, INC. 2006 ANNUAL REPORT TABLE OF CONTENTS Page Section One 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...................................................16 Section Two Report of Independent Registered Public Accounting Firm........................1 Consolidated Financial Statements..............................................2 Notes to Consolidated Financial Statements.....................................9 Corporate Information.........................................................32 -------------------- 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. [LETTERHEAD OF PARKE BANCORP, INC.] To Our Shareholders: 2006 was another record year of growth and profit for Parke Bancorp. The year was pivotal in many ways including the opening of our first full service branch in Philadelphia. There also were many new hurdles that faced the banking industry; such as continued Federal Reserve increases in interest rates, the continued compression of the net interest margin and the dramatic decline of the real estate market. The commitment of our Board of Directors, management team and employees was evident in facing these challenges by continuing to focus on our business plan. This dedication resulted in over a 32% increase in net income to $4.6 million, or $1.40 per share, and asset growth of 21% to $360 million. Parke Bancorp's return on assets and return on equity grew to 1.41% and 15.68% respectively for the full year ended December 31, 2006. The continued strong growth of our bank provided the opportunity to enhance shareholder value by issuing a $.20 per share cash dividend in 2006. The opening of our full service branch in Philadelphia helped support deposit growth for the bank of $58 million, a 25% increase from a year earlier. Paul Palmieri is a Senior Vice President and is responsible for our Philadelphia division. Paul has done a great job growing our loans and deposits in the Philadelphia area and continues to focus on developing new business relationships in the community. Parke Bancorp's deposit base expansion helped fund the growth in our loan portfolio, which grew by 20% to $310 million. The growth in our real estate loan portfolio was particularly noteworthy considering the nationwide decline in real estate development. David Middlebrook, Senior Vice President and Senior Loan Officer, is credited with the success in the sustained quality and growth of our loan portfolio. The continued growth reflects the expertise and experience of our loan officers and loan administration personnel. Construction lending has been and continues to be an important part of Parke Bancorp's business plan. Although new construction lending slowed in 2006, construction loan repayments remained strong. We continue to carefully monitor the real estate markets in our lending area and pursue opportunities that match our lending expertise. Our primary commitment continues to be quality customer service, making a "Return to Better Banking" more than a bi-line, it is our bank's promise to our customers. Betty Milavsky, a Senior Vice President, continues to focus on innovative technology and bank products that provide our customers with "one stop" banking. Betty is spearheading new internet products that will be introduced in 2007, including on-line bill paying and remote check capturing services. Today's technology provides our customers with the same banking conveniences of the nation's largest banks, combined with "hometown" quality personal service. 1 We are proud to have a new member on our Senior Management team, Robert Kuehl, our Senior Vice President and Chief Financial Officer. Parke Bancorp is very fortunate to have someone with Bob's qualifications and experience join our organization. He has extensive experience and expertise in all facets of finance and accounting, in addition to bank acquisition and SEC expertise at a money center bank, larger regional bank and various community banks. The addition of Bob to Parke Bancorp further supports management's ability to face upcoming regulatory and market challenges while taking advantage of opportunities that will become available as our bank continues to grow. The continued turmoil in the Mideast, oil price volatility, increased regulatory requirements and other geopolitical uncertainties combine to make forecasting the economic future of our country and specifically our markets difficult. There are indications, according to area pundits, that the real estate market may have "bottomed out" within our regional market, which could be good news for our local economy. There are also conflicting indicators on the direction of interest rates. It appears that recent inflation news may redirect the Federal Reserve's previous indication of lowering interest rates. There continues to be increased competition from banking and non-banking sources, including unfair advantages enjoyed by credit unions. While these challenges are daunting, we are confident that the talent and commitment of our directors, management and staff, combined with the strong locations of our branch network will enable Parke Bancorp to face the volatility and uncertainty of the market place. Our ongoing commitment to, and focus on, our business plan will assist us in meeting these challenges and sustain our growth while providing the best banking services and products in the Delaware Valley area, as we continue to enhance shareholder value. /S/ C.R. Chuck Pennoni /s/ Vito S. Pantilione C.R. "Chuck" Pennoni Vito S. Pantilione Chairman President and Chief Executive Officer 2 SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
At or for the Year Ended December 31, -------------------------------------------------------- 2006 2005 2004 2003 2002 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Assets............................. $359,997 $297,810 $224,339 $174,004 $130,903 Loans Receivable, Net.............. $306,044 $255,461 $185,986 $144,078 $ 93,762 Securities--Available for Sale..... $ 24,530 $ 22,023 $ 24,043 $ 14,323 $ 22,903 Securities--Held to Maturity....... $ 2,431 $ 2,406 $ 548 $ 779 $ 250 Cash and Cash Equivalents.......... $ 11,261 $ 4,380 $ 1,802 $ 4,267 $ 7,540 Deposits........................... $289,929 $232,056 $179,585 $142,447 $107,548 Borrowings ........................ $ 34,851 $ 35,967 $ 20,379 $ 10,340 $ 4,949 Stockholders' Equity............... $ 30,709 $ 27,193 $ 22,829 $ 19,993 $ 17,628 OPERATIONS DATA: Interest Income...................... $ 25,475 $ 17,336 $ 11,766 $ 9,444 $ 6,612 Interest Expense .................... 12,022 6,684 3,746 3,182 2,960 -------- -------- -------- -------- -------- Net Interest Income ................. 13,453 10,652 8,020 6,263 3,651 Provision for Loan Losses ........... 940 1,180 825 923 298 -------- -------- -------- -------- -------- Net Interest Income after ........... Provision for Loan Losses ........ 12,513 9,472 7,194 5,340 3,153 Non-Interest Income ................. 857 896 861 799 488 Non-Interest Expense ................ 5,827 4,544 3,589 2,837 2,079 -------- -------- -------- -------- -------- Income Before Income Taxes .......... 7,543 5,824 4,466 3,282 1,562 Income Tax Expense .................. 2,919 2,330 1,744 1,279 620 -------- -------- -------- -------- -------- Net Income........................... $ 4,624 $ 3,494 $ 2,722 $ 2,002 $ 942 ======== ======== ======== ======== ======== SELECTED FINANCIAL RATIOS: Equity to Assets .................... 8.54% 10.96% 10.77% 12.27% 10.49% Book Value/Common Share.............. $ 10.65 $ 9.79 $ 8.75 $ 7.77 $ 7.06 Cash Dividends declared per Share.... $ .20 $ -- $ -- $ -- $ -- Basic Income per Common Share........ $ 1.64 $ 1.30 $ 1.05 $ .80 $ .66 Diluted Income per Common Share...... $ 1.40 $ 1.10 $ .87 $ .71 $ .65 Return on Average Assets ............ 1.41% 1.35% 1.45% 1.33% 0.94% Return on Average Equity ............ 15.68% 13.91% 13.24% 10.72% 7.20% Net Interest Margin ................. 4.25% 4.33% 4.58% 4.40% 3.84% Non-Interest Expense/Average Assets ........................... 1.77% 1.76% 1.91% 1.88% 2.07% Non-Interest Income/Average Assets ........................... 0.26% 0.35% 0.46% 0.52% 0.49% Non-Performing Loans/Loans(1) ....... .30% .77% 0.17% 0.54% 1.13% Allowance for Loan Losses/Loans(1) .................. 1.45% 1.38% 1.39% 1.54% 1.40% Dividend Payout Patio ............... 12.20% -- -- -- -- __________ (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 stockholders 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. The Company recorded net income of $4.6 million, or $1.40 per diluted share, $3.5 million, or $1.10 per diluted share, and $2.7 million, or $0.87 per diluted share, for 2006, 2005 and 2004, respectively, Pre-tax earnings amounted to $7.5 million for 2006, $5.8 million for 2005 and $4.5 million for 2004. Total assets of $360.0 million at December 31, 2006 increased by $61.2 million, or 20.8%, reflecting continued strong loan growth for the Company. Total loans increased by $51.5 million, or 19.9%, and investment securities grew by $2.5 million, or 10.4%, during the past year. This strong asset growth was funded primarily by deposit growth of $57.9 million, or 24.9% as borrowings declined slightly during 2006. The Company continues to expand its balance sheet primarily through the generation of loan growth through its effective development of new and existing business relationships. 4 Total capital increased $3.5 million, or 12.9%, during the past year and the first cash dividend was paid out by the Company with a special one-time payment of $0.20 per share in December of 2006. 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, 2006 DECEMBER 31, 2005 DECEMBER 31, 2004 ------------------------- --------------------------- ------------------------- AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE ------- ------- ---- ------- ------- ---- ------- ------- ---- ASSETS: Loans (net of deferred costs/fees)(1)........ $286,691 $23,992 8.4% $219,217 $16,108 7.3% $154,764 $10,978 7.1% Investment securities........................ 26,774 1,341 5.0% 24,276 1,159 4.8% 17,219 750 4.4% Federal funds sold........................... 2,856 142 5.0% 2,107 69 3.3% 3,044 38 1.3% -------- ------- -------- ------- -------- ------- Total interest-earning assets........... 316,321 $25,475 8.1% 245,600 $17,336 7.1% 175,027 $11,766 6.7% ======== ======= ======== ======= ======== ======= Allowance for loan losses.................... (4,051) (3,009) (2,280) Other assets................................. 16,267 15,322 14,802 -------- -------- -------- Total assets............................ $328,537 $257,913 $187,549 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing deposits: Regular savings deposits.................. $ 28,991 $ 1,012 3.5% $ 29,200 $ 797 2.7% $ 22,160 $ 464 2.1% NOW & money market savings................ 26,568 751 2.8% 23,729 416 1.8% 28,511 477 1.7% Time deposits............................. 188,040 8,469 4.5% 138,587 4,599 3.3% 91,104 2,584 2.8% -------- ------- -------- ------- -------- ------- Total interest-bearing deposits......... 243,599 10,232 4.2% 191,516 5,812 3.0% 141,775 3,525 2.5% Borrowed funds............................... 34,321 1,790 5.2% 22,376 872 3.9% 10,272 221 2.2% -------- ------- -------- ------- -------- ------- Total interest-bearing liabilities...... 277,920 $12,022 4.3% 213,892 $ 6,684 3.1% 152,047 $ 3,746 2.5% ======= ======= ======= Non-interest-bearing demand deposits......... 18,174 16,946 13,422 Other liabilities............................ 2,957 1,948 1,520 Stockholders' equity......................... 29,486 25,127 20,559 -------- -------- -------- Total liabilities and stockholders' equity.................... $328,537 $257,913 $187,549 ======== ======== ======== Interest rate spread (average yield less average rate)........................ 3.8% 4.0% 4.2% Net interest income (interest income less interest expense).................... $13,453 $10,652 $ 8,020 ======= ======= ======= Net interest margin (net interest income/ average interest-earning assets).......... 4.3% 4.3% 4.6% ________________ (1) Non-accrual loans and loan fees, which are not material, are included in the calculation of average balances.
6 RETURN ON EQUITY AND ASSETS
DECEMBER 31, --------------------------- 2006 2005 2004 ------ ------ ----- Return on average assets ...................... 1.41% 1.35% 1.45% Return on average equity ...................... 15.68% 13.91% 13.24% Dividend payout ratio ......................... 12.2% 0 0 Average equity to average assets ratio ........ 8.97% 9.74% 10.96%
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, ------------------------------------------------------------------------------- 2006 VS. 2005 2005 VS. 2004 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)............ $ 4,957,960 $ 2,926,537 $ 7,884,497 $ 4,576,187 $ 554,203 $ 5,130,390 Investment securities.... 119,245 62,843 182,088 310,506 98,651 409,157 Federal funds sold....... 24,494 48,352 72,846 (12,182) 42,891 30,709 ----------- ----------- ----------- ----------- ----------- ----------- Total interest income....... 5,101,699 3,037,732 8,139,431 4,874,512 695,744 5,570,256 ----------- ----------- ----------- ----------- ----------- ----------- Interest Expense: Deposits................. 1,580,733 2,838,798 4,419,530 1,243,516 1,044,265 2,287,781 Borrowed funds........... 465,230 453,813 919,044 266,290 383,751 650,041 ----------- ----------- ----------- ----------- ----------- ----------- Total interest expense...... 2,045,963 3,292,611 5,338,574 1,509,806 1,428,016 2,937,822 ----------- ----------- ----------- ----------- ----------- ----------- Net interest income......... $ 3,055,736 $ (254,879) $ 2,800,857 $ 3,364,706 $ (732,272) $ 2,632,434 =========== =========== =========== =========== =========== ===========
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, 2006, 2005 AND 2004 NET INTEREST INCOME/MARGINS. The Company's 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 interest-bearing liabilities, such as deposits and borrowings, The level of net interest income is determined primarily by the average level of balances ("volume") and the market rates associated with the interest-earning assets and interest-bearing liabilities. Net interest income amounted to $13.5 million for 2006, which represented an increase of $2.8 million, or 26.3%, above the level of $10.7 million in 2005. The 2005 results reflected an increase of $2.6 million, or 32.8%, above the level of $8.0 million in 2004. The increases for both years were mainly related to the growth in average interest-earning assets, primarily loans. Interest income in 2006, which amounted to $25.5 million, increased by $8.1 million, or 47.0%, due to an increase in average interest-earning assets of $70.7 million year-over-year coupled with an increase in the level of market interest rates during 2006. Average loans, which represented the largest component of the change in average interest-earning assets, increased by $67.4 million, or 30.8%, during 2006 and increased by $64.5 million, or 41.7%, during 2005. Interest expense for 2006 amounted to $12.0 million and increased $5.3 million, or 79.9%, resulting from increased average interest-bearing liabilities of $64.0 million year-over-year coupled with an increase in the interest rates paid for both deposits and borrowed funds and a greater concentration of higher cost time deposits within the retail deposit base. Average interest-bearing deposits amounted to $243.6 million in 2006 and increased by $52.1 million, or 27.2%, from the average in 2005 of $191.5 million. The change in average interest-bearing deposits in 2005 amounted to $49.7 million, which resulted in an increase of 35.1% from the average in 2004. The key performance measure for net interest income is the "net interest margin", which represents net interest income divided by interest-earning assets. The Company's net interest income is affected by loan and deposit pricing, the mix of earning assets and deposit products and the impact of market interest rates on borrowings. The net interest margin was 4.25% for 2006, as compared to 4.34% for 2005 and 4.60% for 2004. During 2006, the yield on interest-earning assets increased 100 basis points to 8.1%, while the rates paid for interest-bearing liabilities increased by 120 basis points to 4.3%. During 2005, the yield on average interest-earning assets increased to 7.1% from 6.7% in 2004, while the cost of interest-bearing liabilities increased by 60 basis points to 3.1% from 2.5%. The provision for loan losses is a charge to earnings in the current year to maintain an allowance at a level management has determined to be adequate based upon the risk of the loan portfolio, current charge-off experience and other factors related to credit quality. The provision for loan losses amounted to $940,000, $1.2 million and $825,000 for 2006, 2005 and 2004, respectively. Loan charge-offs amounted to $2,500 for 2006 and reflected a decline from $227,000 in 2005 and $461,000 in 2004. NONINTEREST INCOME. Noninterest income is principally derived from fee income from loan services, service fees on deposits, BOLI (Bank-Owned Life Insurance) income and gains/losses on the sale of investment securities. Noninterest income was $856,644 in 2006 as compared to $896,367 in 2005 and $860,986 in 2004. Service charges on deposit accounts, which amounted to $146,209 in 2006, declined $38,516, or 20.9%, from $184,725 in 2005. Service charges on deposit accounts amounted to $243,501 in 2004. The decline in 2006 was primarily attributed to the loss of a large commercial lockbox customer. Other fee income of $710,435 in 2006 declined slightly from $720,882 in 2005 and increased from $609,596 in 2004. This decline was mainly attributable to a reduction of $14,285 in BOLI income which amounted to $172,211 in 2006, due to the surrender of a life insurance policy. The major 8 component of other income is loan fees, which consist of "exit fees" that are charged on construction loans if the builder sells the property prior to the completion of the construction project. Exit fees are intended to discourage construction borrowers from starting projects and "flipping out" of the project or selling before it is completed. There were no gains or losses on the sale of securities during 2006, while the sale of securities amounted to a loss of $9,240 in 2005 and a gain of $7,889 in 2004. NONINTEREST EXPENSE. Noninterest expense of $5.8 million reflected an increase of $1.3 million, or 28.2%, above the level of $4.5 million in 2005. The year over year change was comprised of increases in compensation and benefits, occupancy and other operating expenses, which were primarily related to the continued growth of the Company. Noninterest expense for 2004 amounted to $3.6 million. Compensation and benefits expense for 2006 of $2.8 million increased $686,912, or 32.9%, during 2006 and $518,030, or 33.1%, during 2004. This increase was comprised of higher benefits expense, routine salary increases coupled with increased staffing associated with the opening of a new branch in center city Philadelphia in 2006 and a new loan production office in Millville, New Jersey. Occupancy, equipment and data processing expense amounted to $1.1 million in 2006 versus $960,059 in 2005 and $957,588 in 2004. The resulting $125,643 year over year increase was primarily related to incremental occupancy costs associated with the new branch facility and loan production office and increased costs for data processing related to pricing and higher activity levels. Professional services amounted to $680,750, $738,307 and $290,226 in 2006, 2005 and 2004, respectively. The decline during 2006 was mainly due to the absence of the holding company reorganization expenses, which occurred in 2005. The nonrecurring holding company reorganization expenses in 2005 coupled with additional legal expenses contributed to the increase in professional services expense above 2004's level. Other operating expense of $1.0 million increased $554,732 during 2006. The increase was comprised of office supplies, shareholder expenses, and travel and entertainment, which were all related to the Company's expansion and growth. In addition an accrual for the anticipated settlement of litigation and a normalized level of loan servicing costs relative to 2005 accounted for the balance of the increase. The litigation accrual related to loans participated with other banks in previous years that were subsequently impaired and resulted in loan charge-offs. Other operating expense of $473,244 in 2005 declined from $599,116 in 2004 primarily due mainly to a decline in loan servicing costs from the previous year. INCOME TAXES. Income tax expense amounted to $2.9 million, $2.3 million and $1.7 million for 2006, 2005 and 2004, respectively, resulting in effective tax rates of 38.7%, 40.0% and 39.1% for the respective years. FINANCIAL CONDITION AT DECEMBER 31, 2006 AND DECEMBER 31, 2005 Total assets at December 31, 2006 amounted to $360.0 million, compared to $297.8 million at December 31, 2005, resulting in an increase of $62.2 million, or 20.9%. This increase was driven primarily by loan growth as the Company continued to expand through business development of new and existing business relationships. Total loans at December 31, 2006 were $310.6 million, which represented an increase of $51.5 million, or 19.9% above the level of $259.0 million at December 31, 2005. Growth occurred in all loan categories with commercial loan growth of $45.9 million, or 19.5 %, representing the majority of the loan growth for 2006. Investment securities amounted to $26.5 million at December 31, 2006 versus $24.4 9 million at December 31, 2005. The allowance for loan losses amounted to $4.5 million at December 31, 2006 compared to $3.6 million at December 31, 2005. The year over year increase of $937,192 primarily corresponded to the loan growth in 2006. At December 31, 2006, total deposits amounted to $289.9 million, resulting in deposit growth of $57.9 million, or 24.9% from the December 31, 2005 level of $232.1 million. All deposit categories experienced growth in 2006 except savings accounts and there was a greater concentration of time deposits due to attractive rates paid on certificates of deposit. Borrowings, which included Federal Home Loan Bank Advances, repurchase agreements and subordinated debentures amounted to $34.9 million at December 31, 2006 and declined slightly from $36.0 million at December 31, 2005. Shareholders' equity was $30.7 million at December 31, 2006 an increase of $3.5 million, or 12.9%, from $27.2 million at December 31, 2005. Earnings of $4.6 million and the exercise of warrants and stock options accounted for the increase and were partially offset by the purchase of treasury stock and investment portfolio losses included in other comprehensive income. LOAN QUALITY The Company attempts manage to 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 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. The Company had approximately $788,000 in non-accruing loans at December 31, 2006 as compared to $1.9 million at December 31, 2005 and $241,000 at December 31, 2004. The decline in non-accruing loans was mainly attributable to two large loans no longer being carried as loans on the Company's balance sheet but rather as Real-Estate Owned (REO). This change in balance sheet classification was the result of the foreclosure in 2006 of these two large delinquent loans from the previous year and the Bank ultimately owning the collateral associated with these two loans, which is currently valued at $1.7 million. Nonperforming loans, expressed as a percentage of total loans, declined to 0.3% at December 31, 2006, compared to 0.8% at December 31, 2005 and 0.1% at December 31, 2004. 10 The provision for loan losses is a charge to earnings in the current year to maintain an allowance at a level management has determined to be adequate based upon the factors noted above. The provision for loan losses amounted to $940,000, $1.2 million and $825,000 for 2006, 2005 and 2004, respectively. Loan charge-offs amounted to $2,500 for 2006 and reflected a decline from $227,000 in 2005 and $461,000 in 2004. At December 31, 2006, the allowance for loan losses was $4.5 million, compared to $3.6 million at December 31, 2005 and $2.6 million at December 31, 2004, which represents an increase of $937,000, or 26.2%, during 2006 and a net increase of $953,000, or 36.4%, during 2005. The growth in the allowance was primarily driven by the growth in the loan portfolio. The following table summarizes the allowance activities:
YEARS ENDED DECEMBER 31, ------------------------------------------------- 2006 2005 2004 ------------- ------------- ------------- Allowance for loan losses, beginning of year ..... $ 3,573,812 $ 2,620,651 $ 2,256,070 Loans charged off ................................ (2,500) (227,001) (460,743) Recoveries ....................................... -- -- -- Provision for loan losses ........................ 939,692 1,180,162 825,324 ------------- ------------- ------------- Allowance for loan losses, end of year ........... $ 4,511,004 $ 3,573,812 $ 2,620,651 ============= ============= ============= Loans (net of deferred costs/fees) period-end balance ............................ $ 310,555,306 $ 259,035,088 $ 188,606,990 ============= ============= ============= Allowance as percentage of period-end loan balance 1.45% 1.38% 1.39% ============= ============= =============
Management's judgment as to the level of losses on existing loans is based upon 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 assurances that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance will not be required. In addition a separate analysis of the loan loss reserve is conducted quarterly by an independent third party vendor. 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. 11 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 balance sheet 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, 2006 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 deposits exhibiting general stability and being spread fairly evenly over a seven year time horizon. 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, 2006, our interest sensitive assets exceeded interest sensitive liabilities within a one year period by $3.9 million, or 0.19% of total assets.
AS OF DECEMBER 31, 2006 --------------------------------------------------------------------------- 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 .................. $ 152,937 $ 22,257 $ 68,110 $ 61,494 $ 5,757 $ 310,555 Investment securities .. 5,402 3,081 8,110 2,654 7,714 26,961 Federal funds sold ..... 5,077 -- -- -- -- 5,077 --------- --------- --------- --------- --------- --------- Total interest-earning assets ............... $ 163,416 $ 25,338 $ 76,220 $ 64,148 $ 13,471 $ 342,593 ========= ========= ========= ========= ========= ========= Interest-bearing liabilities: Regular savings deposits(1) .......... $ 7,201 $ 7,995 $ 21,307 $ 4,434 $ 4,434 $ 45,371 NOW & money market savings deposits ..... 1,426 1,326 3,542 1,770 1,770 9,834 Time deposits .......... 42,534 117,248 43,214 13,440 -- 216,436 Borrowed funds ......... 2,928 4,204 9,520 17,507 692 34,851 --------- --------- --------- --------- --------- --------- Total interest-bearing liabilities .......... $ 54,089 $ 130,773 $ 77,583 $ 37,151 $ 6,896 $ 306,492 ========= ========= ========= ========= ========= ========= Interest rate sensitive gap $ 109,327 $(105,435) $ (1,363) $ 26,997 $ 6,575 $ 36,101 Cumulative interest rate gap .................... $ 109,327 $ 3,892 $ 2,529 $ 29,526 $ 36,101 $ -- Ratio of rate sensitive assets to rate-sensitive liabilities ............ 3.02% 0.19% 0.98% 1.73% 1.95% 1.12%
12 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 107.1%, 111.6% and 105.0% at December 31, 2006, December 31, 2005 and December 31, 2004, respectively. Funds received from new and existing depositors provided a large source of liquidity during 2006 and 2005. 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, 2006, the Bank maintained lines of credit with the FHLB totaling $35.5 million, of which $24.4 million was outstanding at December 31,2006. As of December 31, 2006, the Bank's investment securities portfolio included $10.1 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. 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, plant and equipment and income-producing commercial properties. As of December 31, 2006, 2005 and 2004, commitments to extend credit amounted to approximately $117.3 million, $101.8 million and $70.4 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, 2006, 2005 and 2004, standby letters of credit with customers were $7.2 million, $4.5 million and $2.5 million, respectively. 13 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, 2006. 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 Annual Report 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, market 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 2006, the FASB issued Interpretation ("FIN") No.48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect that the adoption of this interpretation will have a material impact on its financial position, results of operation and cash flows. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS No. 157"). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. The Company is currently evaluating the impact of SFAS No. 157 on its financial statements. In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R) ("SFAS No.158"). This Statement requires an employer to recognize the overfunded or underfunded status of a defined postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 also requires measurement of the funded status of a plan as of the date of the fiscal year-end statement of financial position. Requirements for the recognition of the funded status of a defined postretirement plan and to provide the required disclosures were effective for the Company as of December 31, 2006. The requirement to measure plan assets and benefit obligations as of the date of the fiscal year-end financial statements is effective for fiscal years ending after December 15, 2008. The Company's adoption of the recognition and disclosure requirements as of December 31, 2006 did not have a material impact on its financial position, results of operation and cash flows. 14 In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115 ("SFAS No. 159" or "Standard"). SFAS No. 159 provides all entities with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. The Standard also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not eliminate disclosure requirements included in other accounting standards. The Standard is effective for the Company on January 1, 2008. Early adoption is permitted under certain conditions. The Company is currently evaluating the impact of SFAS No. 159 on its financial statements. STOCK PERFORMANCE GRAPH Set forth below is a performance graph for the Common Stock for the five fiscal years ended December 31, 2006. The performance graph compares the cumulative total return on the Company's Common Stock with (i) the cumulative total return on stocks listed on the Nasdaq Capital Market, and (ii) the cumulative total return of Nasdaq Stocks- Commercial Banks (banks with the same SIC code as the Company) listed on the Nasdaq Capital Market. Comparisons assume the investment of $100 as of November 21, 2002, the date the Company's common stock became listed for quotation on Nasdaq. The respective cumulative total returns are computed with the reinvestment of dividends at the frequency with which dividends, if applicable, were paid during the period. There can be no assurance that the Company's future stock performance will be the same or similar to the historical stock performance shown in the graph below. The Company neither makes nor endorses any predictions as to stock price performance. The Stock Price Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed "filed" under such Acts. 15 PARKE BANCORP INC STOCK PRICE PERFORMANCE [Line graph shown here with the plot points as shown in table below]
NOV-02 DEC-02 DEC-03 DEC-04 DEC-05 DEC-06 ------ ------ ------ ------ ------ ------ PARKE BANCORP 100.0 94.4 155.5 209.0 222.4 233.0 NASDAQ COMPOSITE 100.0 90.4 136.2 148.7 151.9 167.6 NASDAQ BANK 100.0 99.7 132.6 150.7 147.8 168.2
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 Capital 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 sales 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 April 2006. 16 2005 HIGH LOW - ----------------------------------- --------------------- -------------------- 1st Quarter $16.17 $13.88 2nd Quarter $14.04 $12.42 3rd Quarter $16.66 $12.71 4th Quarter $18.09 $15.00 2006 HIGH LOW - ----------------------------------- --------------------- -------------------- 1st Quarter $24.10 $16.00 2nd Quarter $24.98 $19.55 3rd Quarter $20.82 $17.30 4th Quarter $19.59 $16.59 The number of stockholders of record of common stock as of March 22, 2007, was approximately 410. 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, 2007, there were 2,873,860 shares of our common stock outstanding. The Company paid a one-time special cash dividend of $0.20 per share on December 22, 2006 to shareholders of record on December 12, 2006. 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. The Company paid a one-time special cash dividend of $0.20 per share on December 22, 2006 to shareholders of record on December 12, 2006. 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). 17 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 consolidated balance sheets of Parke Bancorp, Inc. and Subsidiaries as of December 31, 2006 and 2005 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ending December 31, 2006. 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, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ending December 31, 2006, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123R, "Share-Based Payment," effective January 1, 2006 and Statement of Financial Accounting Standards No. 158, "Employer's Accounting for Defined Benefit Pension and other Postretirement Plans" in 2006. /s/ McGladrey & Pullen Blue Bell, Pennsylvania March 28, 2007 1 PARKE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2006 AND 2005
2006 2005 - ------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 6,183,916 $ 4,377,196 Federal funds sold 5,076,895 2,840 ------------------------------ CASH AND CASH EQUIVALENTS 11,260,811 4,380,036 ------------------------------ Investment securities available for sale, at market value 24,530,067 22,022,944 Investment securities held to maturity, at amortized cost (market value 2006 - $2,425,629; 2005 - $2,322,985) 2,430,958 2,405,841 ------------------------------ TOTAL INVESTMENT SECURITIES 26,961,025 24,428,785 ------------------------------ Restricted stock, at cost 1,492,800 1,348,900 Loans 310,555,306 259,035,088 Less: allowance for loan losses (4,511,004) (3,573,812) ------------------------------ TOTAL NET LOANS 306,044,302 255,461,276 ------------------------------ Bank premises and equipment, net 3,431,794 3,079,876 Accrued interest receivable and other assets 10,806,039 9,111,571 ------------------------------ $ 359,996,771 $ 297,810,444 ============================== (Continued)
2 PARKE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) DECEMBER 31, 2006 AND 2005
2006 2005 - ---------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Noninterest-bearing demand $ 18,287,577 $ 17,918,339 Interest-bearing 271,641,283 214,137,969 ------------------------------ TOTAL DEPOSITS 289,928,860 232,056,308 Borrowed funds 100,000 5,082,500 Federal Home Loan Bank advances 24,441,370 20,574,360 Subordinated debentures 10,310,000 10,310,000 Accrued interest payable and other accrued liabilities 4,507,381 2,593,949 ------------------------------ TOTAL LIABILITIES 329,287,611 270,617,117 ------------------------------ Commitments and Contingencies (Notes 7 and 15) Shareholders' Equity Common stock, $.10 par value, 10,000,000 shares authorized; 2,884,937and 2,317,364 shares issued at December 31, 2006 and 2005, respectively 288,494 231,736 Preferred stock, 1,000,000 shares authorized; no shares issued and outstanding -- -- Additional paid-in capital 21,153,220 20,511,410 Retained earnings 10,847,763 6,787,118 Accumulated other comprehensive loss (420,250) (286,296) Treasury stock (61,842 shares in 2006 and 2,380 shares in 2005), at cost (1,160,067) (50,641) ------------------------------ TOTAL SHAREHOLDERS' EQUITY 30,709,160 27,193,327 ------------------------------ $ 359,996,771 $ 297,810,444 ==============================
See Notes to Consolidated Financial Statements. 3 PARKE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005 2004 - ------------------------------------------------------------------------------------------------- Interest and Dividend Income Interest and fees on loans $ 23,992,705 $ 16,108,210 $ 10,977,820 Interest and dividends on securities 1,341,093 1,159,004 749,847 Interest on federal funds sold 141,677 68,830 38,121 ------------------------------------------- TOTAL INTEREST AND DIVIDEND INCOME 25,475,475 17,336,044 11,765,788 ------------------------------------------- Interest Expense Interest on deposits 10,232,017 5,812,487 3,524,706 Interest on borrowings 1,790,512 871,468 221,427 ------------------------------------------- TOTAL INTEREST EXPENSE 12,022,529 6,683,955 3,746,133 ------------------------------------------- Net interest income 13,452,946 10,652,089 8,019,655 Provision for Loan Losses 939,692 1,180,162 825,324 ------------------------------------------- Net interest income after provision for loan losses 12,513,254 9,471,927 7,194,331 ------------------------------------------- Noninterest Income Service charges on deposit accounts 146,209 184,725 243,501 Other fee income 710,435 720,882 609,596 Net gain (loss) on the sale of securities -- (9,240) 7,889 ------------------------------------------- TOTAL NONINTEREST INCOME 856,644 896,367 860,986 ------------------------------------------- Noninterest Expenses Compensation and benefits 2,772,213 2,085,301 1,567,271 Occupancy, equipment and data processing 1,085,702 960,059 957,588 Marketing and business development 260,517 287,318 175,258 Professional services 680,750 738,307 290,226 Other operating expenses 1,027,976 473,244 599,116 ------------------------------------------- TOTAL NONINTEREST EXPENSES 5,827,158 4,544,229 3,589,459 ------------------------------------------- Income Before Income Tax Expense 7,542,740 5,824,065 4,465,858 Income Tax Expense 2,919,060 2,329,644 1,744,100 ------------------------------------------- NET INCOME $ 4,623,680 $ 3,494,421 $ 2,721,758 =========================================== Net Income Per Common Share: Basic $ 1.64 $ 1.30 $ 1.05 =========================================== Diluted $ 1.40 $ 1.10 $ 0.87 =========================================== Weighted Average Shares Outstanding: Basic 2,813,464 2,697,514 2,582,483 =========================================== Diluted 3,304,612 3,173,107 3,118,637 ===========================================
See Notes to Consolidated Financial Statements. 4 PARKE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
Accumulated Additional Other Total Common Paid-In Retained Comprehensive Treasury Shareholders' Stock Capital Earnings Income (Loss) Stock Equity - ---------------------------------------------------------------------------------------------------------------------------- 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 - - 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 (2,380 shares) - - - - (50,641) (50,641) Comprehensive income: Net income - - 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 Stock options and warrants exercised 9,515 656,432 - - - 665,947 Stock compensation - 37,350 - - - 37,350 20% common stock dividend 47,243 (51,972) - - - (4,729) Treasury stock purchased (59,462 shares) - - - - (1,109,426) (1,109,426) Cash dividends paid ($0.20 per share) - - (563,035) - - (563,035) Net income - - 4,623,680 - - 4,623,680 Change in net unrealized loss on securities available for sale, net of reclassification adjustment and tax effects - - - 72,653 - 72,653 Adjustment to initially apply FASB statement No. 158, net of tax - - - (206,607) - (206,607) ----------- Total comprehensive income 4,489,726 -------------------------------------------------------------------------------- Balance, December 31, 2006 $288,494 $21,153,220 $10,847,763 $ (420,250) $(1,160,067) $30,709,160 ================================================================================
See Notes to Consolidated Financial Statements. 5 PARKE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005 2004 - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income $ 4,623,680 $ 3,494,421 $ 2,721,758 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 279,319 264,105 251,482 Provision for loan losses 939,692 1,180,162 825,324 Stock compensation 37,350 - - Realized losses (gains) on sales of securities - 9,240 (7,889) Net (accretion) amortization of purchase premiums and discounts on securities (19,614) (72,795) 2,995 Deferred income tax benefit (531,591) (387,382) (45,972) Changes in operating assets and liabilities: Increase in accrued interest receivable and other assets (573,579) (932,172) (717,345) Increase in accrued interest payable and other accrued liabilities 1,569,091 1,048,274 321,277 ----------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,324,348 4,603,853 3,351,630 ----------------------------------------------- Cash Flows from Investing Activities Purchases of investment securities held to maturity - (1,854,018) - Purchases of investment securities available for sale (5,063,958) (5,559,000) (15,054,401) Purchases of restricted stock (143,900) (284,700) (566,900) Proceeds from sales of investment securities available for sale 1,000,000 5,092,055 1,071,509 Proceeds from maturities of investment securities available for sale - - 2,000,000 Principal payments on mortgage-backed securities 1,172,421 2,187,681 2,304,558 Net increase in loans (51,522,718) (70,655,099) (42,733,402) Purchases of bank premises and equipment (631,237) (96,802) (259,248) ----------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (55,189,392) (71,169,883) (53,237,884) ----------------------------------------------- Cash Flows from Financing Activities Proceeds from exercise of stock options and warrants 665,947 1,135,488 243,683 Purchase of treasury stock (1,109,426) (50,641) - Cash dividends paid (567,764) - - Proceeds from borrowings 27,934,835 27,652,500 18,850,000 Repayment of borrowings (29,050,325) (12,064,366) (8,811,397) Net increase in interest-bearing deposits 57,503,314 50,513,402 33,923,365 Net increase in noninterest-bearing deposits 369,238 1,957,895 3,215,135 ----------------------------------------------- Net cash provided by financing activities 55,745,819 69,144,278 47,420,786 ----------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,880,775 2,578,248 (2,465,468) Cash and Cash Equivalents, January 1, 4,380,036 1,801,788 4,267,256 ----------------------------------------------- Cash and Cash Equivalents, December 31, $ 11,260,811 $ 4,380,036 $ 1,801,788 =============================================== Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest on deposits and borrowed funds $ 11,247,627 $ 5,992,826 $ 3,681,682 =============================================== Income taxes $ 3,510,000 $ 2,466,000 $ 2,179,000 =============================================== See Notes to Consolidated Financial Statements.
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 three additional branch office locations, one at 501 Tilton Road, Northfield, New Jersey, one at 567 Egg Harbor Road, Washington Township, New Jersey, and one at 1610 Spruce Street in Philadelphia, Pennsylvania. In addition, the Bank has a loan production office in Millville, New Jersey. 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 ("GAAP") 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, Parke Capital Markets and Farm Folly, Inc. 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, 2006 and 2005, 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, 2006 and 2005, 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. 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 Income 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. 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. 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. Comprehensive Income: Comprehensive income consists of net income and other - --------------------- gains and losses affecting shareholders' equity that, under GAAP, are excluded from net income, including unrealized gains and losses on available for sale securities and gains or losses, prior service costs or credits, and transition assets or obligations associated with pension or other postretirement benefits that have not been recognized as components of net periodic benefit cost. At December 31, 2006, 2005 and 2004, accumulated other comprehensive loss consisted of the following:
2006 2005 2004 ------------------------------------------ Unrealized gains (losses) on available for sale securities (net of tax of $142,428, $190,857, and $47,470) $ (213,643) $ (286,296) $ (71,204) Minimum pension liability (net of tax of $137,737) (206,607) - - ------------------------------------------ $ (420,250) $ (286,296) $ (71,204) ==========================================
In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," which amends Statement No. 87, "Employers' Accounting for Pensions," Statement No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," Statement No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits," and other related accounting literature. Statement No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or a liability in the statement of financial position and to recognize changes in that funded status through comprehensive income in the year the changes occur. This Statement also requires an employer to measure the funded status of a plan as of the date of the employer's year-end statement of financial position. The Company adopted the funded status recognition and related disclosure requirements of Statement No. 158 as of December 31, 2006, and measured the funded status of their defined benefit plans as of that date, which resulted in the Company recording a liability of $344,344 as of December 31, 2006, relating to a Supplemental Executive Retirement Plan ("SERP") (Note 11). The adoption of Statement No. 158 did not materially affect the Company's financial position or results of operations. 10 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Comprehensive Income (Continued): The components of other comprehensive income - -------------------------------- and related tax effects relating to the unrealized gains and losses on available for sale securities is as follows:
2006 2005 2004 ----------------------------------------- Unrealized holding gains (losses) on available for sale securities $ 121,082 $ (367,719) $ (206,939) Reclassification adjustment for net losses (gains) realized in income - 9,240 (7,889) ----------------------------------------- Net unrealized gains (losses) 121,082 (358,479) (214,828) Tax effect (48,429) 143,387 85,931 ----------------------------------------- Net-of-tax amount $ 72,653 $ (215,092) $ (128,897) =========================================
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 2006 (Note 13). Earnings per common share have been computed based on the following for 2006, 2005 and 2004:
2006 2005 2004 ------------------------------------------ Net income $4,623,680 $3,494,421 $2,721,758 ========================================== Average number of common shares outstanding 2,813,464 2,697,514 2,582,483 Effect of dilutive options 491,148 475,593 536,154 ------------------------------------------ Average number of common shares outstanding used to calculate diluted earnings per common share 3,304,612 3,173,107 3,118,637 ==========================================
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 Stock-Based Employee Compensation: At December 31, 2006 the Company had - ----------------------------------- stock-based employee compensation plans, which are described more fully in Note 13. Prior to January 1, 2006 the Company accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by the Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting for Stock-Based Compensation. No stock-based employee compensation cost was recognized in the Statement of Income during the years ended December 31, 2005 and 2004 as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, using the modified-prospective-transition method. The following table illustrates the effect on net income and earnings per share for 2005 and 2004 if the Company had applied the fair value recognition provisions of Statement 123 to stock-based employee compensation. For purposes of this proforma disclosure, the value of the options is estimated using Black-Scholes option-pricing model. Both basic and diluted calculations give retroactive effect to stock dividends declared in 2006. 11 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 (Continued): - ----------------------------------------------
2005 2004 -------------------------- Net income, as reported $3,494,421 $2,721,758 Deduct total stock-based compensation expense determined under the fair value method for all awards, net of related tax effects (670,000) (41,000) -------------------------- Pro forma net income $2,824,421 $2,680,758 ========================== Earnings per share: Basic: As reported $1.30 $1.05 Pro forma $1.05 $1.04 Diluted: As reported $1.10 $0.87 Pro forma $0.89 $0.86
All outstanding stock options as of January 1, 2006 were fully vested (in prior years, all options vested upon issuance), thus no compensation expense was recognized during the year ended December 31, 2006 for such options. The Company uses the Black-Scholes option pricing model to estimate the fair value of any stock-based awards in 2006. Under the modified prospective transition method, the Company is required to recognize compensation cost for 1) all share-based payments granted prior to, but not vested as of, January 1, 2006 based on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and 2) for all share-based payments granted on or after January 1, 2006 based on the grant date fair value estimated in accordance with SFAS 123R. In accordance with the modified prospective method, the Company has not restated prior period results. Recent Issued Accounting Pronouncements: In July 2006, FASB published FASB - ----------------------------------------- Interpretation No. 48, "Accounting for Uncertainty in Income Taxes and Related Interpretation Issues" ("FIN 48"). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction.) According to the terms of FIN 48, the financials will reflect expected future tax consequences of such positions presuming the taxing authorities full knowledge of the position and all relevant facts, but without time values. The Company will be required to adopt the provisions of FIN 48 as of the beginning of its first annual period that begins after December 15, 2006, which will be the year ending December 31, 2007. The adoption of FIN 48 is not expected to have a material impact on the Company. In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements." Statement No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measures. Statement No. 157 is effective for fiscal years beginning after November 15, 2007, with early adoption encouraged. The provisions of Statement No. 157 are to be applied on a prospective basis, with the exception of certain financial instruments for which retrospective application id required. The adoption of Statement No. 157 is not expected to materially affect the Company's financial position or results of operations. 12 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recent Issued Accounting Pronouncements (Continued): In February 2007, the FASB - ---------------------------------------------------- issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." Statement No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Statement No. 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted provided the entity also elects to apply the provisions of Statement No. 157. The Company is currently evaluating the impact, if any, of Statement No. 159 on the Company's financial position and results of operations. 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, 2006, because reserve requirements were covered by vault cash. NOTE 3. INVESTMENT SECURITIES The Company's investment securities as of December 31, 2006 were as follows:
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------------------------------------------------------- Available For Sale - ------------------ U.S. Government sponsored entities $ 6,484,892 $ - $ 69,112 $ 6,415,780 Corporates 8,348,575 34,667 177,792 8,205,450 Mortgage-backed securities 10,052,671 34,629 178,463 9,908,837 --------------------------------------------------------- Total securities available for sale $24,886,138 $ 69,296 $425,367 $24,530,067 ========================================================= Held to Maturity - ---------------- Municipals $ 2,430,958 $ 36,783 $ 42,112 $ 2,425,629 =========================================================
13 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3. INVESTMENT SECURITIES (CONTINUED) 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 $ 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 =========================================================
The amortized cost and estimated market value of investment securities at December 31, 2006 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 $ 1,000,000 $ 999,060 $ - $ - Maturing after one year but within five years 3,019,048 2,988,920 544,898 523,957 Maturing after five years, but within ten years 1,000,000 1,000,000 - - Maturing after ten years 9,814,419 9,633,250 1,886,060 1,901,672 ------------------------------------------------------------- 14,833,467 14,621,230 2,430,958 2,425,629 Mortgage-backed securities 10,052,671 9,908,837 - - ------------------------------------------------------------- Total securities $ 24,886,138 $ 24,530,067 $ 2,430,958 $ 2,425,629 =============================================================
Gross realized gains on the sale of investment securities were $53,770 in 2005 and $8,044 in 2004. Gross realized losses on the sale of investment securities were $63,010 in 2005 and $155 in 2004. There were no sales of investment securities in 2006. As of December 31, 2006, approximately $14,272,000 of investment securities are pledged as collateral for borrowed funds (Note 9). In addition, securities with a carrying value of $461,000 were pledged to secure public deposits at December 31, 2006. As of December 31, 2005, approximately $13,273,000 of investment securities are pledged as collateral for borrowed funds (Note 9). In addition, securities with a carrying value of $478,595 were pledged to secure public deposits at December 31, 2005. 14 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, 2006, are as follows:
Continuous Unrealized Losses Continuous Unrealized Lossess 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 $1,497,550 $ 2,450 $ 3,918,230 $ 66,662 Corporates 746,250 2,344 836,000 175,448 Mortgage-backed securities 190,765 10,095 4,636,105 168,368 ------------------------------------------------------------ 2,434,565 14,889 9,390,335 410,478 Held to Maturity - ---------------- Municipals - - 1,760,444 42,112 ------------------------------------------------------------ Total temporarily impaired securities $2,434,565 $14,889 $11,150,779 $452,590 ============================================================
Management does not believe any individual unrealized loss as of December 31, 2006 represents an other-than-temporary impairment. A total of 23 securities are included in the continuous unrealized portion, of which 21 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, 2005 are as follows:
Continuous Unrealized Losses Continuous Unrealized Lossess 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 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 ============================================================
15 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 4. LOANS The composition of net loans as of December 31, 2006 and 2005 are as follows: 2006 2005 ---------------------------- Commercial $281,819,002 $ 236,013,459 Residential real estate 22,192,502 18,482,968 Consumer 7,004,513 5,053,908 ---------------------------- Total loans 311,016,017 259,550,335 Less: allowance for loan losses (4,511,004) (3,573,812) Less: net deferred loan fees (460,711) (515,247) ---------------------------- Net loans $306,044,302 $ 255,461,276 ============================ At December 31, 2006 and 2005, approximately $22,896,000 and $16,358,000, respectively, of residential real estate and consumer loans were pledged to the FHLBNY on borrowings (Note 9). NOTE 5. LOANS 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 2006 and 2005 is as follows: 2006 2005 ---------------------------- Balance, beginning of year $ 12,347,626 $ 10,325,629 Advances 10,175,662 5,619,948 Less: repayments (2,242,004) (3,597,951) ---------------------------- Balance, end of year $ 20,281,284 $ 12,347,626 ============================ 16 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 2006 and 2005 is as follows:
2006 2005 2004 -------------------------------------------- Balance, beginning of year $ 3,573,812 $ 2,620,651 $ 2,256,070 Provision for loan losses 939,692 1,180,162 825,324 Charge offs (2,500) (227,001) (460,743) Recoveries - - - -------------------------------------------- Balance, end of year $ 4,511,004 $ 3,573,812 $ 2,620,651 ============================================
Information about impaired loans and nonaccrual loans as of and for the years ended December 31, 2006 and 2005 is as follows:
2006 2005 Impaired loans with a valuation allowance $ 2,207,817 $ 511,211 Impaired loans without a valuation allowance 161,733 - ---------------------------- Total impaired loans $ 2,369,550 $ 511,211 ============================ Related allowance for loan losses for impaired loans $ 403,997 $ 60,181 ============================ Nonaccrual loans $ 788,804 $ 1,935,000 ============================ Loans past due ninety days or more and still accruing interest $ 267,150 $ 665,000 ============================ Average monthly balance of impaired loans (based on month-end balances) $ 1,255,000 $ 457,000 ============================ Interest income recognized on cash basis on impaired loans $ 71,791 $ 36,914 ============================
Interest income of $51,000, $66,000 and $64,000 would have been recorded on non-accrual loans had those loans paid in accordance with their original terms in 2006, 2005 and 2004, respectively. 17 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, 2006 and 2005 is as follows: 2006 2005 --------------------------- Land $ 470,000 $ 470,000 Building and improvements 3,006,764 2,587,564 Furniture and equipment 986,213 873,017 --------------------------- Total premises and equipment 4,462,977 3,930,581 Less: accumulated depreciation and amortization (1,031,183) (850,705) --------------------------- Premises and equipment, net $ 3,431,794 $ 3,079,876 =========================== Depreciation expense was $279,319 in 2006, $264,105 in 2005 and $251,482 in 2004. The Company has non-cancelable operating lease agreements related to its Northfield and Philadelphia branch offices. The term of the Northfield lease is for 10 years through March 2011 with two 5-year renewal options. The term of the Philadelphia lease is for 10 years through June 2016. 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 offices. The Company also has a month to month lease for a loan production office in Millville, New Jersey. In addition, the Company leases certain computer software under an operating lease expiring 2008. At December 31, 2006, the required future rental payments under these leases are as follows: Year Ending December 31, ------------------------ 2007 $ 251,000 2008 248,000 2009 113,000 2010 114,000 2011 125,000 Thereafter 326,000 ---------- Total minimum lease payments $1,117,000 ========== Rent expense was approximately $225,000 in 2006, $176,000 in 2005 and $165,000 in 2004. 18 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 8. DEPOSITS Deposits at December 31, 2006 and 2005 consisted of the following: 2006 2005 ---------------------------- Demand deposits, noninterest-bearing $ 18,287,577 $ 17,918,339 Demand deposits, interest-bearing 9,834,053 22,371,195 Savings deposits 45,371,156 38,823,726 Time deposits of $100,000 or more 130,555,474 95,282,066 Other time deposits 85,880,600 57,660,982 ---------------------------- Total deposits $289,928,860 $ 232,056,308 ============================ Time deposits included brokered deposits totaling approximately $87,585,000 and $67,159,000 at December 31, 2006 and 2005, respectively. Scheduled maturities of certificates of deposit at December 31, 2006 are as follows: Year Ending December 31, ------------------------ 2007 $159,782,005 2008 27,994,857 2009 15,218,886 2010 9,548,833 2011 3,891,493 ------------ $216,436,074 ============ Deposits from related parties totaled approximately $8,229,000 and $5,740,000 at December 31, 2006 and 2005, respectively. NOTE 9. BORROWINGS An analysis of borrowings as of December 31, 2006 and 2005 is as follows:
2006 2005 ------------------------------------------------- Maturity Date Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------------------------- Borrowed funds: Federal Home Loan Bank - January 2007 $ 100,000 5.39% $ 1,000,000 3.05% repurchase agreements December 2006 - - 1,100,000 3.33% Other - repurchase agreements January 2006 - - 982,500 3.99% February 2006 - - 1,000,000 4.33% March 2006 - - 1,000,000 4.49% --------- ----------- $ 100,000 $ 5,082,500 ========= ===========
19 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 9. BORROWINGS (CONTINUED)
2006 2005 ------------------------------------------------- Maturity Date Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------------------------- Federal Home Loan Bank Advances 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% January 2007 2,296,883 5.42% 464,360 4.73% March 2007 500,000 5.40% - - April 2007 1,000,000 5.43% - - May 2007 1,862,000 5.44% - - August 2007 500,000 5.38% - - December 2007 750,000 4.92% 750,000 4.92% April 2008 500,000 5.36% - - June 2008 750,000 3.89% 750,000 3.89% December 2008 1,000,000 5.14% - - December 2008 1,000,000 4.97% 1,000,000 4.97% April 2009 500,000 5.36% - - June 2009 4,000,000 4.07% 4,000,000 4.07% July 2009 1,500,000 5.75% - - April 2010 500,000 5.41% - - December 2010 1,000,000 5.05% 1,000,000 5.05% September 2011 5,400,000 5.10% - - December 2015 1,382,487 5.19% 1,500,000 5.19% ------------ ------------ $ 24,441,370 $ 20,574,360 ============ ============ Subordinated debentures - capital trusts November 2035 $ 5,155,000 7.03% $ 5,155,000 6.04% November 2035 5,155,000 6.25% 5,155,000 6.25% ------------ ------------ $ 10,310,000 $ 10,310,000 ============ ============
At December 31, 2006, the Company had a $35,474,000 line of credit from the FHLBNY, of which $24,441,370 was outstanding at December 31, 2006. Certain investment securities (Note 3), loans (Note 4), and FHLBNY stock are pledged as collateral for borrowings. 20 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 9. BORROWINGS (CONTINUED) 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 7.03% at December 31, 2006. 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. 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, 2006 but a majority was allowed as Tier I Capital for regulatory capital purposes (Note 12). NOTE 10. INCOME TAXES The net deferred tax asset, which is included in "accrued interest receivable and other assets" at December 31, 2006 and 2005, includes the following: 2006 2005 --------------------------- Deferred tax assets $ 2,278,528 $ 1,676,004 Deferred tax liabilities (451,664) (470,039) --------------------------- Net deferred tax asset $ 1,826,864 $ 1,205,965 =========================== 21 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 10. INCOME TAXES (CONTINUED) Income tax expense for 2006, 2005 and 2004 consisted of the following:
2006 2005 2004 -------------------------------------------- Current tax expense: Federal $ 2,599,297 $ 2,092,771 $ 1,357,072 State 851,354 624,255 433,000 -------------------------------------------- 3,450,651 2,717,026 1,790,072 Deferred tax (benefit) (531,591) (387,382) (45,972) --------------------------------------------- Income tax expense $ 2,919,060 $ 2,329,644 $ 1,744,100 =============================================
The components of the net deferred tax asset, which is included in other assets, are as follows:
2006 2005 Allowance for loan losses $ 1,745,393 $ 1,354,558 Deferred loan costs (167,614) (213,276) Securities available for sale 142,428 190,857 Minimum pension liability 137,737 - Other (31,080) (126,174) ---------------------------- $ 1,826,864 $ 1,205,965 ============================
A reconciliation of the Company's effective income tax rate with the statutory Federal rate for 2006, 2005 and 2004 is as follows:
2006 2005 2004 -------------------------------------------- Tax expense at statutory rate (35%) $ 2,639,959 $ 2,038,423 $ 1,563,050 Permanent differences and other, net (93,511) 3,513 (39,564) State income taxes, net of Federal tax benefit 448,039 345,949 265,272 Benefit of income taxed at lower rates (75,427) (58,241) (44,658) -------------------------------------------- $ 2,919,060 $ 2,329,644 $ 1,744,100 ============================================
NOTE 11. 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 $230,000 in 2006, $246,000 in 2005 and $207,000 in 2004. The unfunded benefit obligation, which was included in "accrued interest payable and other liabilities", was approximately $1,179,000 at December 31, 2006 and $894,000 at December 31, 2005. 22 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 11. RETIREMENT PLANS (CONTINUED) Supplemental Executive Retirement Plan (Continued): The benefit obligation at - ---------------------------------------------------- December 31, 2006 was calculated as follows: Benefit obligation, December 31, 2005 $ 894,235 Service cost 152,730 Interest cost 53,495 (Gain) loss 78,395 ----------- Benefit obligation, December 31, 2006 $ 1,178,855 =========== The net periodic pension cost for 2006 was calculated as follows: Service cost $ 152,730 Interest cost 53,495 Prior service cost recognized 24,176 --------- $ 230,401 ========= 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 $38,000 in 2006, $33,000 in 2005 and $22,000 in 2004. NOTE 12. 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, 2006 and 2005, that Parke Bancorp and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2006 and 2005, Parke Bancorp and the Bank were categorized as "well-capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since December 31, 2006 that management believes have changed Parke Bancorp and Parke Bank's capital category. 23 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12. REGULATORY MATTERS (CONTINUED) Capital Ratios (Continued): Parke Bancorp and the Bank's actual capital amounts - -------------------------- and ratios as of December 31, 2006 and 2005 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, 2006 (amounts in thousands) - ---------------------- Total Risk Based Capital $ 45,347 14.8% $ 24,499 8% $ 30,624 10% (to Risk Weighted Assets) Tier I Capital $ 39,599 12.9% $ 12,249 4% $ 18,374 6% (to Risk Weighted Assets) Tier I Capital $ 39,599 11.0% $ 14,054 4% $ 17,568 5% (to Average Assets) 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 15.6% $ 20,856 8% $ 26,070 10% (to Risk Weighted Assets) Tier I Capital $ 34,349 13.2% $ 10,428 4% $ 15,642 6% (to Risk Weighted Assets) Tier I Capital $ 34,349 12.1% $ 11,370 4% $ 14,212 5% (to Average Assets)
24 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12. REGULATORY MATTERS (CONTINUED) Capital Ratios (Continued): - ---------------------------
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, 2006 (amounts in thousands) - ---------------------- Total Risk Based Capital $ 44,405 14.5% $ 24,499 8% $ 30,624 10% (to Risk Weighted Assets) Tier I Capital $ 40,569 13.3% $ 12,249 4% $ 18,374 6% (to Risk Weighted Assets) Tier I Capital $ 40,569 11.6% $ 14,054 4% $ 17,568 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 15.1% $ 20,825 8% $ 26,031 10% (to Risk Weighted Assets) Tier I Capital $ 36,158 13.9% $ 10,413 4% $ 15,618 6% (to Risk Weighted Assets) Tier I Capital $ 36,158 12.7% $ 11,370 4% $ 14,213 5% (to Average Assets)
NOTE 13. 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, 2004. 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 April 2006 and December 2004 the Company paid a 20% - ---------------------- common stock dividend to shareholders (2006 - 472,430 shares and 2004 - 362,363 shares). All share and per share information have been retroactively adjusted. In December 2006, the Company paid a $.20 cash dividend to shareholders. 25 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 13. SHAREHOLDERS' EQUITY (CONTINUED) Treasury Stock: During 2006 and 2005, the Company repurchased 59,462 and 2,380 - -------------- shares of the Company's common stock. 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 524,466 shares of common stock. All options issued under the Plans through December 31, 2005 were 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. Option awards are granted with an exercise price equal to the market price of the Company's stock at the date of the grant. Options awarded prior to December 31, 2006 vested upon issuance and options issued in 2006 generally vest over four to five years. All options issued have 10 year contractual terms. At December 31, 2006, there were 147,688 shares available for grant under the Plans. Prior to January 1, 2006, the Company accounted for its Plans in accordance with Accounting Principles Board Opinion No. 25 and related interpretations and the disclosure-only provisions of FASB No. 123. Accordingly, no compensation cost has been recognized for the Plan in 2005 or 2004. 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 and $68,000 in 2004. Effective January 1, 2006, the Company adopted FAS 123R. The method of determining pro-forma compensation cost for 2005 and 2004 and compensation expense in 2006 was based on certain assumptions, including the past trading ranges of the Bank's stock, volatility of 25-33%, expected option lives of 5-7 years, risk-free interest rate of 4-5%, and no expected payment of dividends. Compensation expense recognized during 2006 amounted to $37,000. A summary of option activity under the Plan as of December 31, 2006, and changes during the year ended December 31, 2006, is presented below:
Weighted- Weighted- Average Average Remaining Aggregate Exercise Contractual Intrinsic Options Shares Price Term Value - ------------------------------------------------------------------------------------------------------ Outstanding at January 1, 2006 330,968 $ 13.23 Granted 18,000 $ 19.00 Exercised (720) $ 16.04 Expired/terminated - $ - ------- Outstanding at December 31, 2006 348,248 $ 13.52 7.2 $ 1,365,000 ======= ======================= Exercisable at December 31, 2006 334,348 $ 13.32 7.4 $ 1,378,000 ======= =======================
26 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 13. SHAREHOLDERS' EQUITY (CONTINUED) Stock Options and Warrants (Continued): The weighted-average grant-date fair - -------------------------------------- value of options granted during the years 2006, 2005 and 2004 was $7.16, $5.69 and $4.56, respectively. The total intrinsic value of options exercised during the years 2006, 2005 and 2004 was $3,000, $140,000 and $10,000, respectively. A summary of the status of the Company's nonvested shares as of December 31, 2006 and changes during the year ended December 31, 2006 is as follows: Weighted- Average Grant-Date Nonvested Shares Shares Fair Value - -------------------------------------------------------------------------------- Nonvested at January 1, 2006 - $ $ - Granted 18,000 $ 7.34 Vested (4,500) $ 7.34 Forfeited - $ - ---------- Nonvested at December 31, 2006 13,500 $ 7.34 ========== At December 31, 2006, there was $92,000 of total unrecognized compensation cost relating to nonvested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 3 years. The total fair value of shares vested during 2006 was $30,000. In connection with the Company's initial stock offering in 1998, warrants were issued. These warrants have an exercise price of $6.32 per share and expire in 2008. During 2006, 2005 and 2004, warrants exercised were 94,419, 122,156 and 25,586, respectively. At December 31, 2006, 541,000 warrants remained unexercised. NOTE 14. 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 $88,000 in 2006, $98,000 in 2005 and $102,000 in 2004. 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 $286,000 in 2006, $284,000 in 2005 and $197,000 in 2004. 27 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 15. COMMITMENTS AND CONTINGENCIES The Company has entered into an 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. 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, 2006 and 2005, commitments to extend credit amounted to approximately $117,266,000 and $101,815,000, 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, 2006 and 2005, standby letters of credit with customers were $7,158,000 and $4,536,000, 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, 2006. 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 16. 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. 28 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) 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. 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. 29 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Off-Balance Sheet Instruments (Continued): The following table summarizes - -------------------------------------------- carrying amounts and fair values for financial instruments at December 31, 2006: Carrying Value Fair Value -------------------------------- Financial Assets: Cash and cash equivalents $ 11,260,811 $ 11,260,811 Investment securities 26,961,025 26,955,780 Restricted stock 1,492,800 1,492,800 Loans, net 306,044,302 304,778,644 Accrued interest receivable 2,095,179 2,095,179 Financial Liabilities: Demand deposits and savings deposits $ 73,492,786 $ 73,492,786 Time deposits 216,436,074 219,133,994 Borrowings 34,851,370 34,235,825 Accrued interest payable 1,848,612 1,848,612 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 30 PARKE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 17. 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, ------------------------------------------------------------------- 2006 - ---- Interest income $ 6,994,565 $ 6,752,958 $ 6,158,455 $ 5,569,497 Interest expense 3,541,705 3,240,908 2,825,928 2,413,988 Net interest income 3,452,860 3,512,050 3,332,527 3,155,509 Provision for loan losses 165,692 211,000 328,000 235,000 Income before income tax expense 1,859,565 2,022,282 1,861,210 1,799,683 Income tax expense 649,240 805,600 740,000 724,220 Net income 1,210,325 1,216,682 1,121,210 1,075,463 Net income per common share: Basic $ 0.43 $ 0.43 $ 0.40 $ 0.39 Diluted $ 0.37 $ 0.37 $ 0.33 $ 0.33 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 $ 0.35 $ 0.33 $ 0.34 $ 0.28 Diluted $ 0.30 $ 0.28 $ 0.29 $ 0.23
31 CORPORATE INFORMATION PARKE BANCORP, INC 601 Delsea Drive Washington Township, NJ 08080 (856) 256-2500 www.parkebank.com BOARD OF DIRECTORS (PARKE BANK AND PARKE BANCORP, INC.)
Celestino R. ("Chuck") Pennoni Thomas Hedenberg Chairman of the Board of Directors Vice Chairman of the Board of Directors Vito S. Pantilione President, Chief Executive Officer and Director Fred G. Choate Daniel J. Dalton Arret F. Dobson Director Director Director Edward Infantolino Anthony J. Jannetti Jeffrey H. Kripitz Director Director Director Richard Phalines Jack C. Sheppard, Jr. Ray H. Tresch Director Director Director Victor Fabietti CPA/Special Consultant to the Board of Directors ______________________________ PARKE BANCORP OFFICERS Vito S. Pantilione Robert A. Kuehl David O. Middlebrook President and Senior Vice President and Senior Vice President and Chief Executive Officer Chief Financial Officer Corporate Secretary _______________________________ TRANSFER AGENT & REGISTRAR INDEPENDENT AUDITORS SPECIAL COUNSEL Registrar and Transfer Company McGladrey & Pullen, LLP Malizia Spidi & Fisch 10 Commerce Dr. 512 Township Line Road 901 New York Avenue, N.W. Cranford, NJ 07016 One Valley Square, Suite 250 Suite 210 East Blue Bell, PA 19422 Washington, D.C. 20001
OFFICERS Vito S. Pantilione Robert A. Kuehl President and Chief Executive Officer Senior Vice President and Chief Financial Officer David O. Middlebrook Elizabeth A. Milavsky Senior Vice President, Senior Loan Officer Senior Vice President Paul E. Palmieri James S. Talarico Senior Vice President, Philadelphia Region Vice President John J. Murphy Milton H. Witte Treasurer Vice President Allen M. Bachman Kathleen A. Conover Assistant Vice President Assistant Vice President Dolores M. Calvello Claire R. Piccini Assistant Vice President Assistant Treasurer Mark A. Prater Mary Ann Seal Assistant Vice President Assistant Vice President Evette M. Snyder Assistant Vice President ------------------------------------- BRANCHES 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 PHILADELPHIA OFFICE MILLVILLE LOAN PRODUCTION OFFICE 1610 Spruce Street 411 North High Street Philadelphia, PA 19103 Millville, NJ 08332 (215) 772-1113 (856) 825-9111 ------------------------------------- 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-21 3 ex21.txt EXHIBIT 21 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT PARENT - ------ Parke Bancorp, Inc. STATE OR OTHER JURISDICTION OF PERCENTAGE SUBSIDIARIES INCORPORATION OWNERSHIP - ------------ ------------- --------- Parke Bank New Jersey 100% Parke Capital Trust I Deleware 100% Parke Capital Trust II Delaware 100% SUBSIDIARIES OF PARKE BANK - -------------------------- Parke Capital Markets New Jersey Farm Folly LLC New Jersey 100% EX-23 4 ex23.txt EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statements (No.333-128202and No.333-134249) on Forms S-8 of Parke Bancorp, Inc. of our report dated March 28, 2007 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, 2006. /s/ McGladrey & Pullen, LLP Blue Bell, Pennsylvania March 28, 2007 EX-31 5 ex31.txt EXHIBIT 31 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) and 15d-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 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 30, 2007 /s/ Vito S. Pantilione -------------------------------------------- Vito S. Pantilione President and Chief Executive Officer SECTION 302 CERTIFICATION I, Robert A. Kuehl, 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) and 15d-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 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 30, 2007 /s/ Robert A. Kuehl -------------------------------------------- Robert A. Kuehl Senior Vice President and Chief Financial Officer EX-32 6 ex32.txt EXHIBIT 32 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, 2006 (the "Report") as filed with the Securities and Exchange Commission, we, Vito S. Pantilione, President and Chief Executive Officer, and Robert A. Kuehl, 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) or 15(d) 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 30, 2007 /s/ Vito S. Pantilione /s/ Robert A. Kuehl - ------------------------------------- -------------------------------- Vito S. Pantilione Robert A. Kuehl President and Chief Executive Officer Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----