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, 2009

 

INDEX

 

 

 

 

 

SIGNATURES

 

EXHIBITS and CERTIFICATIONS

 

 

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements

 

 

 

 

 

 

 

 

 

Notes to Financial Statements (Unaudited)

 

NOTE 1. ORGANIZATION

 

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.

 

The Bank competes with other banking and financial institutions in its primary market areas. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time certificates of deposit and all types of loans. Such institutions, as well as consumer financial and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders.

 

The Bank is subject to regulations of certain state and federal agencies, and accordingly, the Bank is periodically examined by such regulatory authorities. As a consequence of the regulation of commercial banking activities, the Bank’s business is particularly susceptible to future state and federal legislation and regulations.

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Financial Statement Presentation: The accounting and reporting policies of the Bank conform to accounting principles generally accepted in the United States of America (US GAAP) and predominant practices within the banking industry.

 

The financial statements include the accounts of Parke Bancorp, Inc. and its wholly owned subsidiaries, Parke Bank, Parke Capital Markets, Farm Folly LLC and Taylors Glen LLC. Parke Capital Markets and Farm Folly LLC are presently inactive and Taylors Glen LLC was sold in March of 2009. 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.

 

The accompanying interim financial statements should be read in conjunction with the annual financial statements and notes thereto included in Parke Bancorp Inc.’s Annual Report for the year ended December 31, 2008 since they do not include all of the information and footnotes required by U.S. generally accepted accounting principles. The accompanying interim financial statements for the three months and six months ended June 30, 2009 and 2008 are unaudited. The balance sheet as of December 31, 2008, was derived from the audited financial statements. In the opinion of management, these financial statements include all normal and recurring adjustments necessary for a fair statement of the results for such interim periods. Results of operations for the three months and six months ended June 30, 2009 are not necessarily indicative of the results for the full year.

 

 

Use of Estimates: In preparing the interim financial statements, management makes estimates and assumptions based on available information that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the balance sheet and reported amounts of expenses and revenues. Actual results could differ from such estimates. The allowance for loan losses, deferred taxes, evaluation of investment securities for other-than-temporary impairment and fair values of financial instruments are particularly subject to change.

 

Recently Issued Accounting Pronouncements: Effective April 1, 2009 the Company adopted the three amendments to the fair value measurement, disclosure and other-than-temporary impairment standards issued by the Financial Accounting Standards Board (FASB), that became effective for Parke Bancorp, Inc. in the quarter ending June 30, 2009. These amendments are described below.

 

FASB Staff Position (FSP) No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

 

FSP FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with SFAS No. 157.

 

This FSP clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value. Adoption of this FSP did not have a significant impact on the manner in which management determines fair value of illiquid investments in the Company’s portfolio.

 

FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (OTTI)

 

FSP FAS 115-2 and FAS 124-2 clarify the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it had both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

 

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security or it is not more likely than not that it will not be required to sell the debt security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The

 

 

amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. Accordingly, management has expanded the presentation and disclosure of OTTI of investment securities as more fully described in Note 3.

 

FSP No. FAS 107-1 and APB 28-1, Interim Fair Value Disclosures

 

FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. Accordingly, management has included the fair value of financial instruments disclosures required by FASB Statement No. 107 as detailed in Note 7.

 

FASB Statement No. 165 Subsequent Events

 

In May 2009, the FASB issued Statement No. 165, Subsequent Events, which the Company adopted as of June 30, 2009. This Statement establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued (i.e., complete in a form and format that complies with generally accepted accounting principles (GAAP) and approved for issuance). However, Statement No. 165 does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. There are two types of subsequent events to be evaluated under this Statement:

 

Recognized subsequent events - An entity must recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements.

 

Non-recognized subsequent events - An entity must not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but that arose after the balance sheet date but before financial statements are issued or are available to be issued. Some non-recognized subsequent events may be of such a nature that they must be disclosed to keep the financial statements from being misleading. For such events, an entity must disclose the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made.

 

Statement No. 165 also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date - that is, whether that date represents the date the financial statements were issued or were available to be issued.

 

This Statement applies to both interim financial statements and annual financial statements. Statement No. 165 is effective for interim and annual periods ending after June 15, 2009, and should be applied prospectively. Parke Bancorp, Inc. management believes that Statement No. 165 will not result in significant changes in the subsequent events that the Company reports - either through recognition or disclosure - in its financial statements.

 

Accordingly, management has evaluated subsequent events through August 14, 2009, the date the financial statements were issued and has determined that no recognized or non-recognized subsequent events warranted inclusion or disclosure in the interim financial statements as of June 30, 2009.

 

 

NOTE 3. INVESTMENT IN DEBT AND MARKETABLE EQUITY SECURITIES

 

The following is a summary of the Company’s investment in available-for-sale and held-to-maturity securities as of June 30, 2009: 

 

 

The amortized cost and fair value of debt securities classified as available-for-sale and held-to-maturity, by contractual maturity, as of June 30, 2009, are as follows:

 

 

Expected maturities will differ from contractual maturities because the issuers of certain debt securities do have the right to call or prepay their obligations without any penalties.

 

 

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2009.

 

 

Corporate Debt Obligations: The Company’s unrealized loss on investments in corporate bonds relates to three trust preferred securities (TruPS) issued by financial institutions, totaling $2.0 million. The unrealized loss was primarily caused by an illiquid market for this sector of security. All three issues have been rated A or above by Moody’s. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider the investment to be other-than-temporarily impaired at June 30, 2009.

Residential Mortgage-Backed Securities: The unrealized losses on the Company’s investment in mortgage-backed securities were caused by movement in interest rates. The securities were issued by FNMA and FHLMC, government sponsored entities. It is expected that the U.S. government will guarantee all contractual cash flows. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider the investment in these securities to be other-than-temporarily impaired at June 30, 2009.

Collateralized Mortgage Obligations: The Company’s unrealized loss relates principally to a privately issued collateralized mortgage obligation, with amortized cost basis of $887,000 and fair value of $314,000. The unrealized loss was primarily caused by an illiquid market for this sector of security and movement in interest rates. The underlying collateral has been analyzed, and projections have been made regarding the future performance, considering factors including prepayment speed, default rates and loss severities. The analysis indicates that the Company should expect to receive all contractual cash flows. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider this investment to be other-than-temporarily impaired at June 30, 2009.

 

 

Collateralized Debt Obligations: The Company’s portfolio of collateralized debt obligations (CDOs) consist of four issues totaling $5.7 million, with a fair value of $681,000. CDOs are pooled securities primarily secured by trust preferred securities (TruPS), subordinated debt and surplus notes issued by small and mid-sized banks and insurance companies. These securities are generally floating rate instruments with 30-year maturities, and are callable at par after five years. The current economic downturn has had a significant adverse impact on the financial services industry, consequently, TruPS CDOs do not have an active trading market.

 

With the assistance of competent third-party valuation specialists, the Company utilized the following methodology to determine the existence of OTTI:

 

The credit quality of each collateral pool was assessed for the purpose of projecting defaults and recoveries. In general, the credit quality of most TruPS CDO collateral has declined significantly during the credit crisis, with roughly 10% of TruPS collateral currently in default or deferral. It was assumed, conservatively, that all issuers currently in deferral will default prior to their next payment dates. Bank trust preferred issues represent the majority of TruPS CDO collateral, and issuers are typically not rated by the major statistical rating agencies. Therefore, credit quality of each bank issuer was evaluated based on financial ratios generated from fourth quarter 2008 bank regulatory call report data, and focused on CAMELS ratios (capital adequacy, asset quality, earnings, liquidity, and sensitivity to interest rates). The CAMELS model is a relative risk model, i.e. stratifying the 8,400+ banks into a 1 through 5 ranking. There are 29 separate ratios that comprise the CAMELS model. Each of these ratios is weighted to arrive at a composite rating for each component. Each component is than re-weighed to arrive at a consolidated rating of 1 to 5. All 4 and 5 rated collateral are run through a second level filter to further segment these issuers based on potential default probability. A stress test was applied to all 4 and 5 rated issuers to categorize these names into 3 buckets: high risk (100% probability of default at next payment date), medium risk (50% probability), and low risk (0% probability). Due to the current stress on the banking system, and the fact that ratio analyses are backward looking, a baseline default rate of 2% was added annually for the next two years to the default projections for specific issuers.

 

Quantifying losses given default is an important consideration in CDO valuation, as recoveries are applied to retire bond principal. TruPS collateral is deeply subordinated within issuers’ capital structures, so large recoveries are unlikely. Accordingly, recoveries of 10% were assumed on defaulted bank collateral, and zero recoveries on defaulted insurance companies.

 

The final step in the analysis involves modeling and valuing the cash flows for each deal under the assumptions described above. The fair value of each bond was assessed by discounting their projected cash flows by a discount rate ranging from 5.43% to 6.16%. The collateral discount rates were based on the yields of publicly traded TruPS and preferred stock issued by comparably rated banks. As the yields for these sectors vary, discount rates for each pool were weighted by the performing balance of each asset class.

 

The above analysis indicated that there is no break in yield, and that all contractual cash flows should be received by the Company. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider this portfolio to be other-than-temporarily impaired at June 30, 2009.

 

 

Other-Than-Temporarily Impaired Debt Securities

 

We assess whether we intend to sell or it is more likely than not that we will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income.

 

The present value of expected future cash flows is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best estimate cash flows vary depending on the type of security. The asset-backed securities cash flow estimates are based on bond specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds and structural support, including subordination and guarantees. The corporate bond cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using bond specific facts and circumstances including timing, security interests and loss severity.

 

We have a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. On a quarterly basis, we review all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. We consider relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (4) for fixed maturity securities, our intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, our ability and intent to hold the security for a period of time that allows for the recovery in value.

 

The following table presents a roll-forward of the credit loss component of the amortized cost of debt securities that we have written down for OTTI and the credit component of the loss that is recognized in earnings. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to adoption of the FSP on April 1, 2009. OTTI recognized in earnings subsequent to adoption in 2009 for credit-impaired debt securities is presented as additions in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairments). The credit loss component is reduced if we sell, intend to sell or believe we will be required to sell previously credit-impaired debt securities. Additionally, the credit loss component is reduced if we receive cash flows in excess of what we expected to receive over the remaining life of the credit-impaired debt security, the security matures or is fully written down. Changes in the credit loss component of credit-impaired debt securities were as follows for the six month period ended June 30, 2009.

 

 

 

 

 

A summary of investment gains and losses recognized in income during the six month period ended June 30, 2009 is as follows:

 

 

During the first half of 2009, the Company recognized $1.2 million of other-than-temporary impairment losses on available-for-sale securities, attributable to an impairment charge recognized on $2.2 million of privately issued collateralized mortgage obligations. The impairment charges for the mortgage-related securities were recognized in light of significant deterioration of housing values in the residential real estate market, the significant rise in delinquencies and charge-offs of underlying mortgage loans and resulting decline in market value of the securities.

 

With the assistance of competent third-party valuation specialists, the Company utilized the following methodologies to quantify the other-than-temporary-impairment. The underlying mortgage collateral was analyzed in order to project future cash flows and to calculate the credit component of the OTTI. Four major assumptions were utilized; prepayment (CPR), constant default rate (CDR), loss severity and risk adjusted discount rate. The methodologies for the four assumptions are:

 

CPR – An 18% CPR was utilized, was based on recent historical trends as well as adjustments made to incorporate forward looking expectations.

 

CDR - In order to develop a CDR assumption, the underlying mortgages were stratified based on loan to value ratios, the borrower’s FICO credit scores, documentation level and current delinquency status. Each of these segments was assigned a projected default rate based on historical data.

 

Loss Severity - The loss severity assumption was based on historical geographical data, adjusted for the underlying mortgage collateral’s LTV.

 

Risk Adjusted Discount Rate – The discount rate of 4.26% was derived based on the spread from the most recent active market indication for either the instrument in question or a proxy of the instrument.

 

 

The resulting spread was then used in conjunction with the swap curve to discount the expected cash flow stream.

 

NOTE 4. LOANS

The portfolio of the loans outstanding consists of:

 

Loans on non-accrual were $16.1 million at June 30, 2009 and $8.2 million at December 31, 2008. No loans with interest past due 90 days or more were still accruing at June 30, 2009 or December 31, 2008. The Company has created interest reserves for the purpose of making periodic and timely interest payments for borrowers that qualify. Total loans with interest reserves were $108.9 million at June 30, 2009 and $120.8 million at December 31, 2008. On a monthly basis management reviews loans with interest reserves to assess current and projected performance and determines whether such reserves will continue to be funded.

 

 

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 action provisions 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).