UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

 

 

 

 

 

 

PARKE BANCORP, INC.

 

FORM 10-Q

 

FOR THE QUARTER ENDED JUNE 30, 2008

 

INDEX

 

 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Parke Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

 

 

 

See Notes to Consolidated Financial Statements

 

(Continued)

 

 

Parke Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

Parke Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

 

 

See Notes to Consolidated Financial Statements

 

 

 

 

 

 

Parke Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

^(Unaudited)

 

 

See Notes to Consolidated Financial Statements.

 

 

NOTE 1. GENERAL

 

Business

 

Parke Bancorp, Inc. (“Parke Bancorp" or the “Company”) is a bank holding company incorporated under the laws of the State of New Jersey in January 2005 for the sole purpose of becoming the holding company of Parke Bank (the “Bank”).

 

The 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 branches in Northfield and Washington Township, New Jersey and Philadelphia, Pennsylvania and has a loan production office in Havertown, Pennsylvania.

 

Financial Statements

 

The accompanying financial statements as of June 30, 2008 and for the three and six month periods ended June 30, 2008 and 2007 included herein have not been audited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted; therefore, these financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as filed with the SEC. The accompanying financial statements reflect all adjustments, which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. Such adjustments are of a normal recurring nature. The results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or any other periods.

 

Basis of Financial Statement Presentation

 

The financial statements include the accounts of Parke Bancorp, Inc. and its wholly owned subsidiaries, Parke Bank, Parke Capital Markets and Farm Folly, LLC. Parke Capital Trust I, Parke Capital Trust II and Parke Capital Trust III are wholly-owned subsidiaries but are not consolidated because they do not meet the consolidation requirements. All significant inter-company balances and transactions have been eliminated. Such statements have been prepared in accordance with GAAP and general practice within the banking industry.

 

Use of Estimates

 

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates.

 

 

Investments

 

The Company has identified investment securities that will be held for indefinite periods of time, including securities that will be used as a part of the Bank’s asset/liability management strategy and may be 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 temporary unrealized gains or losses reported as a separate component of accumulated other comprehensive income (losses), net of the related income tax effect. Declines in the fair value of the individual available-for-sale securities below their cost that are other than temporary have resulted in write downs of the individual securities to their fair value and are included in non-interest income in the consolidated statements of operations. Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or that the Company 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.

 

The Company owns $1 million combined par value of preferred stock issued by the government sponsored enterprises (GSEs) known as Fannie Mae and Freddie Mac. Due to the Congressional approval of the Housing and Economic Recovery Act of 2008, a downgrade in Fannie and Freddie’s preferred stock credit ratings and the extent of the GSEs recently reported second quarter losses; the Company prudently recorded $488,000 in other-than-temporary impairment charges as of June 30, 2008. The net unrealized loss that existed as of June 30, 2008 in the available-for-sale investment portfolio is the result of market changes in interest rates since the securities were purchased. This factor, coupled with the fact the Company has both the intent and ability to hold securities for a period of time sufficient to allow for any anticipated recovery in fair value or maturity, substantiates the Company’s belief that the unrealized losses in the available-for-sale portfolio are temporary. The Company continuously monitors the investment portfolio to determine the impact of changing economic conditions. Should the Company determine that an impairment becomes other-than-temporary, the carrying value of the investment will be reduced and the unrealized loss will be recorded in the statement of income. (See Note 9 “Fair Value Measurement”).

 

Commitments

 

In the general course of business, there are various outstanding commitments to extend credit, such as letters of credit and un-advanced loan commitments, which are not reflected in the accompanying financial statements. Management does not anticipate any material losses as a result of these commitments.

 

Contingencies

 

The Company is from time to time a party to routine litigation in the normal course of its business. Management does not believe that the resolution of this litigation will have a material adverse effect on the financial condition or results of operations of the Company. However, the ultimate outcome of any such litigation, as with litigation generally, is inherently uncertain and it is possible that some litigation matters may be resolved adversely to the Company.

 

NOTE 2. EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing income available to holders of common stock (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. Shares issued during the period are weighted for the portion of the period that they were

 

 

 

outstanding. The weighted average number of common shares outstanding for the three months ended June 30, 2008 and 2007 was 3,736,418 and 3,638,513 respectively, and for the six months ended June 30, 2008 and 2007 was 3,718,193 and 3,624,110, respectively.

 

Diluted earnings per share are similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive options and warrants outstanding had been exercised. The assumed conversion of dilutive options and warrants resulted in 426,622 and 521,255 additional shares for the three months ended June 30, 2008 and 2007, respectively, and for the six months ended June 30, 2008 and 2007 was 430,787 and 517,779, respectively.

 

Both basic and diluted earnings per share calculations give retroactive effect to stock dividends declared, including the most recent 15% stock dividend that was effective April 18, 2008.

 

NOTE 3. STOCK COMPENSATION

 

Effective January 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 123 Share-Based Payment (Revised 2004) (“SFAS 123R”) utilizing the modified prospective approach. 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.

 

Prior to January 1, 2006, the Company accounted for share-based payments under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards effective January 1, 2006. No options were granted in 2008 or 2007.

 

As of June 30, 2008 and December 31, 2007, there were 11,385 unvested options after adjusting for the stock dividend in April 2008. Compensation cost related to share-based payments amounted to $16,526 during the first six months of 2008, which was related to options issued in 2006. As of June 30, 2008, there was approximately $45,000 of total unrecognized compensation cost related to share-based payments which is expected to be recognized over a weighted average period of 1.25 years.

 

 

 

 

NOTE 4. LOANS

 

The portfolio of the loans outstanding consists of:

 

 

At June 30, 2008, the $116.9 million reported for commercial real estate construction included $79.9 million in outstandings to commercial borrowers for the purpose of building one-to-four family houses. At December 31, 2007, the $106.3 million reported for commercial real estate construction included $76.6 million in outstandings to commercial borrowers for the purpose of building one-to-four family houses.

 

NOTE 5. REGULATORY RESTRICTIONS

 

The Company and the Bank are subject to various regulatory capital requirements of federal and state 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, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective actions are not applicable to bank holding companies.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company 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 June 30, 2008 and December 31, 2007, that the Company and the Bank met all capital adequacy requirements to which they are subject.

 

NOTE 6. SUBORDINATED DEBENTURES

 

On June 21, 2007, Parke Capital Trust III, a Delaware statutory business trust and a wholly-owned subsidiary of the Company, issued $3.0 million of variable rate capital trust pass-through securities to investors. The variable interest rate re-prices quarterly at the three-month LIBOR plus 1.50% and was 4.28% at June 30, 2008. Parke Capital Trust III purchased $3.1 million 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 June 15, 2012, 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 September 15, 2037. Proceeds of approximately $3.0 million were retained at the Company for future use.

 

NOTE 7. INCOME TAXES

 

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”), on January 1, 2007. The Company files United States (US) federal income tax returns and state tax returns in New Jersey. Based upon the statute of limitations, the Company is no longer subject to US federal and state examinations by tax authorities for years before 2003. Based on the review of the tax returns filed for the years 2003 through 2006 and the deferred tax benefits accrued in the 2007 annual financial statements, management determined that all tax positions taken had a probability of greater than 50 percent of being sustained and that 100 percent of the benefits accrued were expected to be realized. Management has a high confidence level in the technical merits of the positions and believes that the deductions taken and benefits accrued are based on widely understood administrative practices and procedures and are based on clear and unambiguous tax law. As a result of this evaluation, no liability for unrecognized tax benefits has been recorded.