ars_123112-0343.htm






 








PARKE BANCORP, INC.

2012 ANNUAL REPORT TO SHAREHOLDERS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 
 

 


PARKE BANCORP, INC.
2012 ANNUAL REPORT TO SHAREHOLDERS


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
21
   
Management’s Report on Internal Control Over Financial Reporting
23
   
Section Two
 
   
Report of Independent Registered Public Accounting Firm
1
   
Consolidated Financial Statements
2
   
Notes to Consolidated Financial Statements
7
   
Corporate Information
55
     
     

 
 

 




To Our Shareholders:


2012 has been another very challenging year for the business community and the banking industry both nationally and regionally. However, Parke Bancorp, Inc. has again generated near record earnings, with $6.3 million, or $1.17 per diluted share, in net income, an increase of 0.5% over 2011. We are again proud of this accomplishment as this is our 12th consecutive year of strong earnings, especially when considering the continued weak real estate market, which is responsible for many non-performing loans in the banking industry and at Parke Bank. Non-performing loans have a negative impact on the Bank’s earnings, through charge offs, increased expenses, legal and carrying costs, combined with the loss of interest income from that asset. Borrowers continue to have use of their property while the bank has to protect its collateral by paying real estate taxes, insurance and maintenance. We are making positive progress in disposing of our non-performing loans by taking an aggressive approach to troubled asset disposition. Although in some cases this has been seriously delayed by the length of time it takes to work through the foreclosure process in New Jersey.  By taking an aggressive approach to troubled asset disposition, our losses have been minimized, and in some instances, recoveries have been made.

Growth has been very difficult in 2012, with our total assets decreasing 2.6% to $770.5 million as of December 31, 2012. Competition has been fierce, with the big banks starting to aggressively compete in the small loan marketplace, combined with many small businesses deleveraging their balance sheets and avoiding increased debt. The extremely low interest rate environment has increased pressure to modify existing loans to a lower interest rate, which also adds pressure to our net interest margin. However, management and our lending staff have remained diligent, maintaining a net interest margin in excess of 4%, keeping Parke Bank as one of the leaders in our peer group in this category. Persistent low interest rates will increase the pressure on the banking industry’s net interest margin, which will negatively impact Bank earnings. There is no relief for increased interest rates on the near term horizon, which makes it much more important to maintain very tight controls of expenses and to generate earnings through alternative avenues.

Although our Bank’s cost efficiency rate has increased to 43%, we are still one of the leaders in our peer group in controlling our Bank’s expenses. The primary reason for the higher ratio is the dramatic increase in regulatory requirements. New regulations in the Dodd-Frank Act brought increases to a community bank’s operating costs which makes it more difficult to provide our customers with prompt quality service. Banking requirements like stress testing and Enterprise Risk Management (ERM) are the new buzz terms in community banking. Although initially reported as requirements for only the biggest banks, it is now an important requirement for community banks, which costs tens of thousands of dollars. We have implemented stress testing of our loan portfolio and implemented an ERM program. Parke Bank has always maintained tight controls over expenses and in this rising cost environment, it is even more important in supporting our strong earnings.

 
1

 

There continues to be signs that the economy, and specifically the real estate market, has bottomed out and that specific markets have seen an improvement in real estate sales and values. A specific example is a construction project of 28 townhomes that we were fortunate enough to finance for one of our quality borrowers that in only three months is sold out. We are hopeful that this trend continues and becomes more wide spread. The residential rental market has remained strong, especially in the Philadelphia area. Several previously planned condominium projects have been converted to rental projects and have enjoyed a level of success. These are all positive signs that the economy and the real estate market have a heartbeat and may be coming back to life. Although modest when compared to our past growth rates, our Bank’s loan portfolio grew close to 1% in 2012 to $630 million, a strong accomplishment in a difficult lending environment.

Our SBA Company, 44 Business Capital, continues to be the top SBA lender in the Delaware Valley area for the second year in a row. Thanks to an extremely talented and committed staff, this company continues to be a leader in SBA lending. We carefully expanded into the Florida market two years ago and we are now in the top 25 SBA lenders in that market. We continue to carefully analyze potential new markets for expansion. As always, any expansion is balanced with careful credit policies, underwriting, quality staff and servicing of our loan portfolio.

We will continue to focus on maintaining our Bank’s financial strength in 2013. This will be accomplished on multiple fronts; continued strong earnings that will strengthen our capital position, which is already twice the amount required for Tier 1 capital of a well capitalized bank, careful control of our Bank’s expenses and a clear focus on reducing our non-performing and classified loans, while complying with all regulatory requirements. Our Board of Directors, management and staff is committed to continuing to work very hard to support a strong return for our investors, which was close to 10% in 2012. We appreciate our shareholders’ commitment and loyalty; it is something that we don’t take for granted.
 
 
 
 
 
 
C.R. “Chuck” Pennoni
 
Vito S. Pantilione
Chairman
 
President and Chief Executive Officer

 
2

 
 
Selected Financial Data
 
   
At or for the Year Ended December, 31
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
Balance Sheet Data: (in thousands)
                             
Assets
  $ 770,477     $ 790,738     $ 756,853     $ 654,198     $ 601,952  
Loans, Net
  $ 610,776     $ 605,794     $ 611,950     $ 590,997     $ 539,883  
Securities Available for Sale
  $ 19,340     $ 22,517     $ 27,730     $ 29,420     $ 31,930  
Securities Held to Maturity
  $ 2,066     $ 2,032     $ 1,999     $ 2,509     $ 2,482  
Cash and Cash Equivalents
  $ 76,866     $ 110,228     $ 57,628     $ 4,154     $ 7,270  
OREO
  $ 26,057     $ 19,410     $ 16,701     $     $ 859  
Deposits
  $ 637,207     $ 634,855     $ 604,722     $ 520,313     $ 495,327  
Borrowings
  $ 43,851     $ 74,010     $ 75,616     $ 67,831     $ 61,943  
Equity
  $ 83,543     $ 77,273     $ 70,732     $ 61,973     $ 40,301  
                                         
Operational Data: (in thousands)
                                       
Interest Income
  $ 37,746     $ 41,309     $ 41,684     $ 40,395     $ 36,909  
Interest Expense
    7,424       9,231       11,350       15,734       19,291  
Net Interest Income
    30,322       32,078       30,334       24,661       17,618  
Provision for Loan Losses
    7,300       10,450       9,001       5,300       2,063  
Net Interest Income after Provision for Loan Losses
    23,022       21,628       21,333       19,361       15,555  
Noninterest Income (Loss)
    4,368       4,725       2,709       (540 )     (1,251 )
Noninterest Expense
    15,079       12,625       11,650       8,757       7,209  
Income Before Income Tax Expense
    12,311       13,728       12,392       10,064       7,095  
Income Tax Expense
    4,242       5,524       4,895       3,964       2,848  
Net Income Attributable to Company and Noncontrolling Interest
    8,069       8,204       7,497       6,100       4,247  
Net Income Attributable to Noncontrolling Interest
    (756 )     (932 )     (157 )            
Preferred Stock Dividend and Discount Accretion
    1,012       1,000       988       899        
Net Income Available to Common Shareholders
  $ 6,301     $ 6,272     $ 6,352     $ 5,201     $ 4,247  
                                         
Per Share Data: 1
                                       
Basic Earnings per Common Share
  $ 1.17     $ 1.17     $ 1.19     $ 0.97     $ 0.85  
Diluted Earnings per Common Share
  $ 1.17     $ 1.15     $ 1.15     $ 0.97     $ 0.79  
Book Value per Common Share
  $ 12.49     $ 11.35     $ 10.13     $ 8.58     $ 7.62  
                                         
Performance Ratios:
                                       
Return on Average Assets
    0.94 %     0.97 %     1.05 %     0.94 %     0.79 %
Return on Average Common Equity
    9.70 %     10.51 %     12.19 %     11.82 %     11.03 %
Net Interest Margin
    4.12 %     4.46 %     4.44 %     3.97 %     3.36 %
Efficiency Ratio
    43.12 %     34.18 %     33.26 %     33.88 %     36.80 %
                                         
Capital Ratios:
                                       
Equity to Assets
    10.84 %     9.77 %     9.35 %     9.47 %     6.70 %
Dividend Payout Ratio
    0.00 %     0.00 %     0.00 %     0.00 %     0.00 %
Tier 1 Risk-based Capital2
    14.99 %     14.17 %     12.93 %     13.02 %     9.89 %
Total Risk-based Capital2
    16.26 %     15.44 %     14.19 %     14.27 %     11.14 %
                                         
Asset Quality Ratios:
                                       
Nonperforming Loans/Total Loans
    7.55 %     7.11 %     4.38 %     4.22 %     1.50 %
Allowance for Loan Losses/Total Loans
    3.01 %     3.09 %     2.36 %     2.06 %     1.42 %
Allowance for Loan Losses/Non-performing Loans
    39.82 %     43.46 %     53.89 %     48.74 %     94.61 %
                                         
1 Per share computations give retroactive effect to stock dividends declared in each of 2008-2012
 
2 Capital ratios for Parke Bank
 
 
 
3

 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
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 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 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 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 noninterest income such as service charges, Bank Owned Life Insurance (“BOLI”) income, gains on sales of loans guaranteed by the Small Business Administration (“SBA”) and other fees. The Company's noninterest expenses primarily consist of employee compensation and benefits, occupancy expenses, marketing expenses, professional services, FDIC insurance assessments, data processing costs and other operating expenses. The Company is also subject to losses from its loan portfolio if borrowers fail to meet their obligations. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory agencies.

Results of Operation.

The Company recorded net income available to common shareholders of $6.3 million, or $1.17 per diluted share, and $6.3 million, or $1.15 per diluted share, for 2012 and 2011, respectively. Pre-tax earnings amounted to $12.3 million for 2012 and $13.7 million for 2011.

 
4

 

Total assets of $770.5 million at December 31, 2012 represented a decrease of $20.3 million, or 2.6%, from December 31, 2011. Total loans amounted to $629.7 million at year end 2012 for an increase of $4.6 million, or 0.7% from December 31, 2011. Deposits grew by $2.4 million, an increase of 0.4%. Total capital at December 31, 2012 amounted to $83.5 million and increased $6.3 million, or 8.1%, during the past year.
 
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 thereto.

 
5

 

Comparative Average Balances, Yields and Rates. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. Interest rate spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is net interest income divided by average earning assets. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, and have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

   
For the Years Ended December 31,
 
   
2012
   
2011
 
   
Average
Balance
   
Interest
Income/
Expense
   
Yield/
Cost
   
Average
Balance
   
Interest
Income/
Expense
   
Yield/
Cost
 
   
(Amounts in thousands except Yield/Cost data)
 
Assets
                                   
Loans
  $ 612,342     $ 36,474       5.96 %   $ 630,570     $ 39,851       6.32 %
Investment securities
    25,870       1,026       3.97 %     30,403       1,329       4.37 %
Federal funds sold and cash equivalents
    98,189       246       0.25 %     57,901       129       0.22 %
Total interest-earning assets
    736,401     $ 37,746       5.13 %     718,874     $ 41,309       5.75 %
Noninterest earning assets
    58,199                       50,092                  
Allowance for loan losses
    (18,579 )                     (16,337 )                      
Total assets
  $ 776,021                     $ 752,629                  
                                                 
Liabilities and Equity
                                               
Interest bearing deposits
                                               
NOWs
  $ 19,905     $ 135       0.68 %   $ 15,972     $ 152       0.95 %
Money markets
    92,068       734       0.80 %     90,860       959       1.06 %
Savings
    223,560       1,970       0.88 %     197,069       2,399       1.22 %
Time deposits
    256,326       3,378       1.32 %     234,068       3,565       1.52 %
Brokered certificates of deposit
    23,458       266       1.13 %     44,101       803       1.82 %
Total interest-bearing deposits
    615,317       6,483       1.05 %     582,070       7,878       1.35 %
Borrowings
    46,165       941       2.04 %     64,519       1,353       2.10 %
Total interest-bearing liabilities
    661,482     $ 7,424       1.13 %     646,589     $ 9,231       1.43 %
Noninterest bearing deposits
    29,157                       23,357                  
Other liabilities
    4,491                       7,247                  
Total liabilities
    695,130                       677,193                  
Equity
    80,891                       75,436                  
Total liabilities and equity
  $ 776,021                     $ 752,629                  
Net interest income
          $ 30,322                     $ 32,078          
Interest rate spread
                    4.00 %                     4.32 %
Net interest margin
                    4.12 %                     4.46 %

 
6

 
 
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 previous 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.
 

   
Years ended December 31,
 
   
2012 vs. 2011
   
2011 vs. 2010
 
   
Variance due to change in
   
Variance due to change in
 
   
Average Volume
   
Average Rate
   
Net Increase/ (Decrease)
   
Average Volume
   
Average Rate
   
Net Increase/ (Decrease)
 
   
(In thousands)
 
Interest Income:
                                   
Loans (net of deferred costs/fees)
  $ (1,130 )   $ (2,247 )   $ (3,377 )   $ 490     $ (573 )   $ (83 )
Investment securities
    (190 )     (113 )     (303 )     (236 )     (137 )     (373 )
Federal funds sold
    95       22       117       73       8       81  
Total interest income
    (1,225 )     (2,338 )     (3,563 )     327       (702 )     (375 )
                                                 
Interest Expense:
                                               
Deposits
    596       (1,991 )     (1,395 )     611       (2,333 )     (1,722 )
Borrowed funds
    (378 )     (34 )     (412 )     (35 )     (362 )     (397 )
Total interest expense
    218       (2,025 )     (1,807 )     576       (2,695 )     (2,119 )
                                                 
Net interest income
  $ (1,443 )   $ (313 )   $ (1,756 )   $ (249 )   $ 1,993     $ 1,744  

 
7

 

Quarterly Financial Data (unaudited).

The following represents summarized unaudited quarterly financial data of the Company which, in the opinion of management, reflects adjustments (comprised only of normal recurring accruals) necessary for fair presentation.

    
Three Months Ended
 
   
December 31,
   
September 30,
   
June 30,
   
March 31,
 
   
(Amounts in thousands, except per share amounts)
 
2012
                       
                         
Interest income
  $ 9,132     $ 9,084     $ 9,676     $ 9,854  
Interest expense
    1,703       1,786       1,920       2,015  
Net interest income
    7,429       7,298       7,756       7,839  
Provision for loan losses
    1,500       1,500       2,050       2,250  
Income before income tax expense
    3,618       3,280       2,247       3,166  
Income tax expense1
    1,348       1,365       257       1,272  
Net income
    2,270       1,915       1,990       1,894  
Net income available to common shareholders
    1,702       1,468       1,596       1,535  
                                 
Net income per common share:
                               
Basic
  $ 0.31     $ 0.25     $ 0.30     $ 0.31  
Diluted
  $ 0.31     $ 0.25     $ 0.30     $ 0.31  
                                 
                                 
2011
                               
                                 
Interest income
  $ 10,399     $ 10,272     $ 10,404     $ 10,234  
Interest expense
    2,200       2,312       2,312       2,407  
Net interest income
    8,199       7,960       8,092       7,827  
Provision for loan losses
    3,600       2,350       2,100       2,400  
Income before income tax expense
    2,269       2,883       3,877       4,699  
Income tax expense
    919       1,161       1,564       1,880  
Net income
    1,350       1,722       2,313       2,819  
Net income available to common shareholders
    1,016       1,319       1,894       2,043  
                                 
Net income per common share:
                               
Basic
  $ 0.17     $ 0.23     $ 0.35     $ 0.42  
Diluted
  $ 0.17     $ 0.23     $ 0.35     $ 0.40  
                                 
 
 
1 Lower income tax expense in the quarter ended June 30, 2012 was due to the adoption of an alternative tax methodology for bank owned life insurance (“BOLI”) income whereby it is treated on a tax free basis.

 
8

 

 
Critical Accounting Policies and Estimates
 
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.
 
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.
 
Valuation of Investment Securities. Available for sale securities are reported at fair market value with unrealized gains and losses reported, net of deferred taxes, as comprehensive income, a component of shareholders’ equity.  Although held to maturity securities are reported at amortized cost, the valuation of all securities is subject to impairment analysis at each reporting date. The current market volatility may have an impact on the financial condition and the credit ratings of issuers and hence, the ability of issuers to meet their payment obligations.  Accordingly, these conditions could adversely impact the credit quality of the securities, and require an adjustment to the carrying value.
 
Other Than Temporary Impairment on Investment Securities. Management periodically performs analyses to determine whether there has been an other than temporary decline in the value of one or more securities. The available for sale securities portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders’ equity. The held to maturity securities portfolio, consisting of debt securities for which there is a positive intent and ability to hold to maturity, is carried at amortized cost. Management conducts a quarterly review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other than temporary. If such decline is deemed other than temporary, the cost basis of the security is adjusted by writing down the security to estimated fair market value through a charge to current period earnings to the extent that such decline is credit related. All other changes in unrealized gains or losses for investment securities available for sale are recorded, net of tax effect, through other comprehensive income.
 
Income Taxes. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry forwards 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

 
9

 
 
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.
 
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured, as described above, is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Operating Results for the Years Ended December 31, 2012 and 2011

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 decreased $1.8 million, or 5.5%, to $30.3 million for 2012, from $32.1 million for 2011. We experienced a decrease in our interest rate spread of 32 basis points, to 4.00% for 2012, from 4.32% for 2011. Our net interest margin decreased 34 basis points, to 4.12% for 2012, from 4.46% for 2011. The decline is attributable to the combined effects of a lower yield on loans as well as a decrease in the average balance of loans, partially offset by a lower cost of deposits.

Interest income decreased $3.6 million, or 8.6%, to $37.7 million for 2012, from $41.3 million for 2011. The decrease is attributable to lower loan volumes and a lower yield on loans. Loan yields have been negatively impacted by the level of non-performing loans and the general interest rate environment.  Average loans for the year were $612.3 million compared to $630.6 million for 2011, while average loan yields were 5.96% for 2012 compared to 6.32% for 2011. Also, a decrease in the average volume of investments in 2012 contributed to this decrease.

Interest expense decreased $1.8 million, or 19.6%, to $7.4 million for 2012, from $9.2 million for 2011. The decrease is primarily attributable to a decline in the cost of funds. The average rate paid on deposits for 2012 was 1.05% compared to 1.35% for 2011. The Bank has been able to reprice deposits due to the current, historically low, rate environment while still maintaining deposit growth.

Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider, among other things, past and current loss experience, evaluations of real estate collateral, volume and type of lending, adverse

 
10

 

situations that may affect a borrower’s ability to repay a loan, the levels of delinquent loans and current local and national industry and economic conditions. The amount of the allowance is based on estimates, and the ultimate losses may vary from such estimates as more information becomes available or conditions change. We assess the allowance for loan losses and make provisions for loan losses on a monthly basis.

At December 31, 2012, the Company’s allowance for loans losses was $18.9 million, as compared to $19.3 million at December 31, 2011, a decrease of $387,000 or 2.0%. The allowance for loan loss as a percentage of gross loans decreased to 3.01% of gross loans at December 31, 2012, from 3.09% of gross loans at December 31, 2011. The allowance for loan losses to nonperforming loans coverage ratio decreased to 39.8% at December 31, 2012, from 43.5% at December 31, 2011. The decline in the allowance is attributable to the charge-off of specific reserves that had been established at December 31, 2011. We recorded a provision for loan losses of $7.3 million for 2012 compared to $10.5 million for 2011. Refer to Asset Quality on Page 14 for further discussion on the allowance.
 
Noninterest Income. Noninterest income is principally derived from gains on the sale of SBA loans, service fees on deposit accounts, fee income from loan services and BOLI income. Noninterest income totaled $4.4 million in 2012 versus $4.7 million in 2011.

The Company recognized $3.6 million in gains from the sale of the guaranteed portion of SBA loans in 2012, compared to a gain of $4.4 million in 2011. Warranty language was removed from the sales agreement during the first quarter of 2011 and the Company was no longer required to defer the recognition of the gain for 90 days. The gain recorded in 2011 represents loans sold during 2011 and previously deferred gains of $912 thousand from the quarter ended December 31, 2010.

Service charges on deposit accounts were $220 thousand in 2012, as compared to $221 thousand in 2011.

Loan fees were $394 thousand in 2012, an increase from $220 thousand in 2011. Loan fees consist primarily of “exit fees” that are charged on construction loans if the builder sells the property prior to the completion of the construction project and prepayment fees. These loan fees are variable in nature and are dependent upon the borrowers’ course of action.

OREO losses were $999 thousand in 2012, compared to $557 thousand in 2011. The increase in the loss was primarily attributable to a write-down in the carrying values of OREO due to a decline in the appraised values of the properties.

Other noninterest income, which includes ATM fees, debit card fees, early CD withdrawal penalties, rental income and other miscellaneous income, amounted to $969 thousand in 2012 and $352 thousand in 2011. The majority of the increase is due the recovery of legal fees that had been expensed in prior years.
 
Noninterest Expense. Noninterest expense for 2012 was $15.1 million, an increase of $2.5 million, or 19.4%, above 2011’s level of $12.6 million.

Compensation and benefits expense for 2012 was $5.9 million, an increase of $228 thousand over 2011. The increase is attributable to routine salary increases, higher benefits expense and increased staff.

 
11

 
 
Professional services in 2012 amounted to $1.7 million, an increase of $511 thousand from 2011. The continued high level of expense is primarily the result of the legal costs related to loan and compliance matters.

Occupancy and equipment expense was $1.0 million for 2012, an increase of $37 thousand over 2011.

FDIC insurance expense was $1.1 million for 2012, an increase of $109 thousand over 2011, with the increase due to deposit growth.

OREO expenses increased to $1.5 million in 2012, from $642 thousand in 2011. The increase is related to the carrying costs of OREO including property taxes, insurance and maintenance associated with a greater number of real estate properties than in the prior year.

Other operating expense increased to $3.4 million in 2012, from $2.7 million in 2011. The majority of the increase is expenses related to nonperforming loans, including force-placed insurance and payment of real estate taxes to protect the Bank’s lien position.

Income Taxes. Income tax expense amounted to $4.2 million for 2012, compared to $5.5 million for 2011, resulting in effective tax rates of 34.5% and 40.2% for the respective years. The decrease in income tax expense is due to lower earnings and the change to an alternative tax methodology for BOLI income whereby it is treated on a tax free basis.

 
12

 
 
Financial Condition at December 31, 2012 and December 31, 2011

At December 31, 2012, the Company’s total assets decreased to $770.5 million from $790.7 million at December 31, 2011, a decrease of $20.2 million or 2.6%.

Cash and cash equivalents decreased $33.3 million to $76.9 million at December 31, 2012, from $110.2 million at December 31, 2011. The decrease is due to the payoff of maturing borrowings.
 
Total investment securities decreased to $21.4 million at December 31, 2012 ($19.3 million classified as available for sale or 90.3%) from $24.5 million at December 31, 2011, a decrease of $3.1 million or 12.8%. The Company received $6.9 million in cash flow from maturities and principal payments, partially offset by purchases of $4.1 million.

Management evaluates the investment portfolio for other than temporary impairment (“OTTI”) on a quarterly basis. Factors considered in the analysis include, but are not limited to, whether an adverse change in cash flows has occurred, the length of time and the extent to which the fair value has been less than cost, whether the Company intends to sell, or will more likely than not be required to sell the investment before recovery of its amortized cost basis, which may be maturity, credit rating downgrades, the percentage of performing collateral that would need to default or defer to cause a break in yield or a temporary interest shortfall, and management’s assessment of the financial condition of the underlying issuers. For the year ended December 31, 2012, the Company did not recognize additional credit-related OTTI charges.

Total gross loans increased to $629.7 million at December 31, 2012, from $625.1 million at December 31, 2011, an increase of $4.6 million or 0.7%. Loan growth continues to be impacted by a difficult credit market.

OREO at December 31, 2012 was $26.1 million, compared to $19.4 million at December 31, 2011, an increase of $6.7 million. The real estate owned consisted of 33 properties, the largest being a condominium development at $12.8 million. This property was sold in 2010 but does not qualify for a sales treatment under accounting principles generally accepted in the United States (“GAAP”) because of continuing involvement by the Company in the form of financing.

BOLI increased to $10.7 million at December 31, 2012, from $5.5 million at December 31, 2011, an increase of $5.2 million or 93.9%. The Company increased its position by $5.0 million in the fourth quarter in order to offset the rising cost of employee benefits.

Other assets increased to $15.2 million at December 31, 2012, from $14.3 million at December 31, 2011, an increase of $930 thousand or 6.5%.

At December 31, 2012, the Bank’s total deposits increased to $637.2 million from $634.9 million at December 31, 2011, an increase of $2.3 million or 0.4%.  Noninterest bearing deposits decreased $804 thousand, or 2.6%, to $30.3 million at December 31, 2012, from $31.1 million at December 31, 2011.  NOW and money market accounts decreased $5.7 million, or 5.1%, to $106.2 million at December 31, 2012, from $111.9 million at December 31, 2011.  Savings accounts increased $17.2 million, or 8.1%, to $230.6 million at December 31, 2012, from $213.4 million at December 31, 2011.  Retail certificates of deposit decreased $7.2 million, or 2.8%, to $248.3 million at December 31, 2012, from $255.5 million at December 31, 2011. Brokered deposits decreased $1.2 million, or 5.2%, to $21.7 million at December

 
13

 

31, 2012, from $22.9 million at December 31, 2011. During 2012 the Company reduced its municipal deposit portfolio by $8.7 million due to the higher interest rates and collateralization requirements associated with these deposits.

Borrowings decreased $30.1 million, or 40.7%, to $43.9 million at December 31, 2012, from $74.0 million at December 31, 2011. Maturing Federal Home Loan Bank (“FHLBNY”) advances were allowed to runoff due to the Company’s cash position.

At December 31, 2012, total equity increased to $83.5 million from $77.3 million at December 31, 2011, an increase of $6.2 million, or 8.1%.

Asset Quality
 
The Company attempts to manage the risk characteristics of its loan portfolio through various control processes, such as credit evaluation of borrowers, establishment of lending limits and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances. However, the Company seeks to rely primarily on the cash flow of its borrowers as the principal source of repayment. Although credit policies are designed to minimize risk, management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio as well as general and regional economic conditions.
 
The allowance for loan losses represents a reserve for losses inherent in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with a particular emphasis on nonaccrual loans, past due and other loans that management believes require special attention.
 
For significant problem loans, management's review consists of an evaluation of the financial strengths of the borrower and the guarantor, the related collateral, and the effects of economic conditions. 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. Impaired loans include loans identified as troubled debt restructurings (TDRs). Impairment is measured on a loan by loan basis for commercial loans in order to establish specific reserves by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. General reserves against the remaining loan portfolio are based on an 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 maintains interest reserves for the purpose of making periodic and timely interest payments for borrowers that qualify. Management on a monthly basis reviews loans with interest reserves to assess current and projected performance. Total loans with interest reserves were $864 thousand and $14.6 million at December 31, 2012 and December 31, 2011, respectively.

Delinquent loans increased $5.0 million to $56.0 million, or 8.9% of total loans, at December 31, 2012, from $50.9 million, or 8.2% of total loans, at December 31, 2011. Delinquent loan balances by number of days delinquent at December 31, 2012 were: 31 to 89 days --- $8.4 million and 90 days and greater --- $47.5 million. Loans 90 days and more past due are no longer accruing interest.

 
14

 

At December 31, 2012, the Company had $47.5 million in nonperforming loans, or 7.6% of total loans, an increase from $44.5 million, or 7.1% of total loans, at December 31, 2011. The three largest relationships in nonperforming loans are a $7.9 million retail center construction loan, a $7.5 residential and commercial development loan, and a $6.6 million retail center construction loan.

At December 31, 2012, the Company had $73.6 million in nonperforming assets, which includes $47.5 million of nonperforming loans and $26.1 million of OREO, or 9.6% of total assets, an increase from $63.9 million, or 8.1% of total assets at December 31, 2011.

At December 31, 2012, the Company had $87.6 million in loans deemed impaired, a decrease from $97.2 million at December 31, 2011. Included in impaired loans are TDRs that were in compliance with their modified terms, totaling $40.0 million and $41.1 million at December 31, 2012 and December 31, 2011, respectively.

In response to the increase in impaired loans, the Company has developed and implemented several asset quality monitoring and management initiatives including the hiring of a Chief Credit Officer, creation of a Credit Risk Management Department and the establishment of a Credit Strategies Committee. Credit risk management activities include:

·  
Stringent oversight of the real estate appraisal process in conformance with regulatory guidelines.
·  
Monitoring overall portfolio quality and process integrity.
·  
Reporting loan quality statistics and trends to executive management and to the Board.
·  
Timely identification of problem credits.
·  
Establishing problem asset action plans for OREO and criticized assets.
·  
Identifying credit losses and presenting charge-off recommendations to the Asset Quality Committee and to the Board of Directors.
·  
Assessing and recommending appropriate credit risk ratings to ensure that adequate quarterly provisions from earnings are made and that an adequate Allowance for Loan Losses is maintained.

The Company has also initiated certain actions to ensure that our origination of new loans and the identification and management of problem loans is sound. These actions include:

·  
Implementation of added training for lending officers, portfolio managers and loan workout staff.
·  
Increased focus on loan approvals and renewals that are based on global cash flows rather than individual transactions.
·  
Implementation of more stringent real estate appraisal processes, policies and procedures.
·  
Implementation of updated and enhanced credit policies related to credit underwriting, credit review and problem asset management.
·  
Broadened focus on the reduction and collection of nonperforming and OREO assets through realignment of staff resources to ensure that we are acting on problem loans appropriately and in a timely manner.

The provision for loan losses is a charge to earnings in the current year to maintain the allowance at a level management has determined to be adequate based upon the factors noted above. The provision for loan losses amounted to $7.3 million for 2012, compared to $10.5 million for 2011. Net loan charge-offs/recoveries were $7.7 million in 2012 and $5.9 million in 2011.

 
15

 

At December 31, 2012, the Company’s allowance for loan losses decreased to $18.9 million, from $19.3 million at December 31, 2011, a decrease of $387 thousand or 2.0%. The allowance for loan loss ratio decreased to 3.01% of gross loans at December 31, 2012, from 3.09% of gross loans at December 31, 2011. The allowance for loan losses to nonperforming loans coverage ratio decreased to 39.8% at December 31, 2012, from 43.5% at December 31, 2011. The decline in the allowance is primarily attributable to the charge-off of specific reserves that had been established at December 31, 2011.

We believe we have appropriately established adequate loss reserves on problem loans that we have identified and to cover credit risks that are inherent in the portfolio as of December 31, 2012. However, we believe that nonperforming and delinquent loans will continue to increase as the current recession persists. We are aggressively managing all loan relationships. Credit monitoring and tracking systems have been instituted. Updated appraisals are being obtained, where appropriate, to ensure that collateral values are sufficient to cover outstanding loan balances. Cash flow dependent commercial real estate properties are being visited to inspect current tenant lease status. Where necessary, we will apply our loan work-out experience to protect our collateral position and actively negotiate with borrowers to resolve these nonperforming loans.

Income Taxes

The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation reserves are established against certain deferred tax assets when it is more likely than not that the deferred tax assets will not be realized. Increases or decreases in the valuation reserve are charged or credited to the income tax provision.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits would be recognized in income tax expense on the income statement.

For additional information on income taxes, see Note 10 to the Consolidated Financial Statements.

 
16

 

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 balance sheet so that repricing opportunities exist for both assets and liabilities in roughly equivalent amounts at approximately the same time intervals. Imbalances in these repricing opportunities at any point in time constitute interest rate sensitivity.
 
The measurement of our interest rate sensitivity, or "gap," is one of the principal techniques used in asset/liability management. Interest sensitive gap is the dollar difference between assets and liabilities that are subject to interest-rate pricing within a given time period, including both floating rate or adjustable rate instruments and instruments that are approaching maturity.
 
Our management and the Board of Directors oversee the asset/liability management function through the asset/liability committee of the Board that meets periodically to monitor and manage the balance sheet, control interest rate exposure, and evaluate our pricing strategies. The asset mix of the balance sheet 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.

 
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Rate Sensitivity Analysis. The interest rate sensitivity position as of December 31, 2012, is presented in the table below. Assets and liabilities are scheduled based on maturity or repricing data except for mortgage loans and mortgage-backed securities, which are based on prevailing prepayment assumptions and expected maturities and deposits which are based on recent retention experience of core deposits. 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, 2012, our interest sensitive liabilities exceeded interest sensitive assets within a one year period by $20.2 million, or 58.2%, of total assets.
 
    
As of December 31, 2012
 
   
3 Months or Less
   
Over 3 Months Through 12 Months
   
Over 1 Year Through 3 Years
   
Over 3 Years Through 5 Years
   
Over 5 Years Through 10 Years
   
Total
 
(Amounts in thousands)
 
Interest-earning assets:
                                   
Loans
  $ 72,712     $ 113,841     $ 167,577     $ 96,234     $ 133,859     $ 584,223  
Investment securities
    2,400       3,492       5,932       1,903       8,677       22,404  
Federal funds sold and cash equivalents
    74,265                               74,265  
Total interest-earning assets
  $ 149,377     $ 117,333     $ 173,509     $ 98,137     $ 142,536     $ 680,892  
                                                 
Interest-bearing liabilities:
                                               
Regular savings deposits
  $ 10,785     $ 32,355     $ 86,280     $ 80,243     $ 20,958     $ 230,621  
NOW and money market deposits
    6,132       18,394       48,349       29,143       4,177       106,195  
Retail time deposits
    50,172       128,982       48,826       20,317             248,297  
Brokered time deposits
    4,934       11,810       5,008                   21,752  
Borrowed funds
    13,403       10,000       20,448                   43,851  
Total interest-bearing liabilities
  $ 85,426     $ 201,541     $ 208,911     $ 129,703     $ 25,135     $ 650,716  
                                                 
Interest rate sensitive gap
  $ 63,951     $ (84,208 )   $ (35,402 )   $ (31,566 )   $ 117,401     $ 30,176  
                                                 
Cumulative interest rate gap
  $ 63,951     $ (20,257 )   $ (55,659 )   $ (87,225 )   $ 30,176        
                                                 
Ratio of rate-sensitive assets to rate-sensitive liabilities
    174.86 %     58.22 %     83.05 %     75.66 %     567.08 %     104.64 %
 
 
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 98.8% and 98.5% at December 31, 2012 and December 31, 2011, respectively. Funds received from new and existing depositors provided a large source of liquidity during 2012 and 2011. The Company seeks to rely primarily on core deposits from customers to provide stable and cost-effective sources of funding to support loan growth. The Bank also seeks to augment such deposits with longer term and higher yielding certificates of deposit.

 
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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. To mitigate the potential negative impact associated with brokered deposits, the Bank joined Promontory Inter Financial Network to secure an additional alternative funding source. Promontory provides the Bank an additional source of external funds through their weekly CDARS® settlement process. The rates are comparable to brokered deposits and can be obtained within a shorter period time than brokered deposits. The Bank’s CDARS deposits included within the brokered deposit total amounted to $21.8 million and $22.9 million at December 31, 2012 and December 31, 2011, respectively.  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 FHLBNY. As of December 31, 2012, the Bank maintained unused lines of credit with the FHLBNY totaling $75.5 million.
 
As of December 31, 2012, the Bank's investment securities portfolio included $12.9 million of mortgage-backed securities that provide additional 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 residential mortgage loan portfolio and certain qualifying commercial real estate loans are pledged under a blanket lien to the FHLBNY 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 the 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, 2012 and 2011, commitments to extend credit amounted to approximately $50.8 million and $54.8 million, respectively.

 
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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, 2012 and 2011, standby letters of credit with customers were $5.8 million and $6.9 million, respectively.
 
Loan commitments and standby letters of credit are issued in the ordinary course of business to meet customer needs. Commitments to fund fixed-rate loans were immaterial at December 31, 2012. 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.
 
The following table sets forth information regarding the Bank’s contractual obligations and commitments as of December 31, 2012.
 
 
Payments Due by Period
 
 
Less than 1 year
 
1-3 Years
 
3-5 years
 
More than 5 years
 
Total
 
         
(Amounts in thousands)
       
                               
Retail time deposits
  $ 179,154     $ 48,826     $ 20,317     $     $ 248,297  
Brokered time deposits
    16,744       5,008                   21,752  
Borrowed funds
    10,000       20,448             13,403       43,851  
Operating lease obligations
    140       387       31             558  
Total contractual obligations
  $ 206,038     $ 74,669     $ 20,348     $ 13,403     $ 314,458  
                                         
                                         
 
Amount of Commitments Expiring by Period
 
 
Less than 1 year
 
1-3 Years
 
3-5 years
 
More than 5 years
 
Total
 
           
(Amounts in thousands)
         
                                         
Loan Commitments
  $ 20,534     $     $     $     $ 20,534  
Lines of Credit
    31,449       3,914       789       14,668       50,820  
Total Commitments
  $ 51,983     $ 3,914     $ 789     $ 14,668     $ 71,354  
 
Impact of Inflation and Changing Prices
 
The consolidated financial statements and notes have been prepared in accordance with GAAP, 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.

 
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MARKET PRICES AND DIVIDENDS
 
General
 
The Company's common stock is listed on the Nasdaq Capital Market under the trading symbol of "PKBK". The following table reflects high and low sales prices as reported on www.nasdaq.com during each quarter of the last two fiscal years. Prices reflect a 10% stock dividend paid in May 2012.
 
2012
 
High
 
Low
             
1st Quarter
 
$
6.49
 
$
4.95
2nd Quarter
 
$
6.93
 
$
4.88
3rd Quarter
 
$
5.50
 
$
5.01
4th Quarter
 
$
6.28
 
$
4.97
             
2011
 
High
 
Low
             
1st Quarter
 
$
9.30
 
$
8.27
2nd Quarter
 
$
8.70
 
$
6.71
3rd Quarter
 
$
7.23
 
$
6.14
4th Quarter
 
$
6.72
 
$
4.72

 
The number of shareholders of record of common stock as of March 14, 2013, was approximately 343.  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, 2013, there were 5,383,893 shares of our common stock outstanding.
 
Holders of the Company's common stock are entitled to receive dividends when, and if declared by the Board of Directors out of funds legally available therefore. 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's ability to pay dividends is substantially dependent upon the dividends it receives from the Bank and is subject to other restrictions. Under current regulations, the Bank's ability to pay dividends is restricted as well. On April 9, 2012, the Bank entered into Consent Orders with the FDIC and the New Jersey Department of Banking and Insurance (the “Department”) that requires the Bank to obtain the prior approval of the FDIC and the Department before declaring or paying any dividend (see Note 12).
 
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.

 
21

 
 
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).
 
 
22

 
 
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a- 15(f). The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
 
Under supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2012.
 
 
March 22, 2013
 
 
 
 
Vito S. Pantilione
 
John F. Hawkins
President and Chief Executive Officer
 
Senior Vice President and Chief Financial Officer

 
23

 





Parke Bancorp, Inc. and Subsidiaries



Consolidated Financial Report
December 31, 2012


 
 

 
 
Parke Bancorp, Inc. and Subsidiaries



Contents
 
 
Page
   
Report of Independent Registered Public Accounting Firm
1
   
Financial Statements
 
Consolidated Balance Sheets
2
Consolidated Statements of Income
3
Consolidated Statements of Comprehensive Income
4
Consolidated Statements of Equity
5
Consolidated Statements of Cash Flows
6
Notes to Consolidated Financial Statements
7

 
 

 
 
Report of Independent Registered Public Accounting Firm
 



To the Board of Directors and Shareholders
Parke Bancorp, Inc.


We have audited the accompanying consolidated balance sheets of Parke Bancorp, Inc. and Subsidiaries (the “Company”) as of December 31, 2012 and 2011 and the related consolidated statements of income, comprehensive income, equity, and cash flows for the years then ended.  These consolidated 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.  The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audits included consideration of internal controls over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.





/s/ McGladrey LLP
Blue Bell, Pennsylvania
March 22, 2013

 
1

 

Parke Bancorp, Inc. and Subsidiaries
 
Consolidated Balance Sheets
 
December 31, 2012 and 2011
 
(in thousands except share and per share data)
 
December 31,
   
December 31,
 
   
2012
   
2011
 
Assets
           
Cash and due from financial institutions
  $ 2,601     $ 3,733  
Federal funds sold and cash equivalents
    74,265       106,495  
Cash and cash equivalents
    76,866       110,228  
Investment securities available for sale, at fair value
    19,340       22,517  
Investment securities held to maturity (fair value of  $2,239  at December 31, 2012 and $2,080 at December 31, 2011)
    2,066       2,032  
Total investment securities
    21,406       24,549  
Loans held for sale
    495       225  
Loans, net of unearned income
    629,712       625,117  
Less: Allowance for loan losses
    (18,936 )     (19,323 )
Net loans
    610,776       605,794  
Accrued interest receivable
    2,727       3,039  
Premises and equipment, net
    3,989       4,122  
Other real estate owned (OREO)
    26,057       19,410  
Restricted stock, at cost
    2,223       3,565  
Bank owned life insurance (BOLI)
    10,743       5,541  
Deferred tax asset
    11,898       10,594  
Other assets
    3,297       3,671  
Total Assets
  $ 770,477     $ 790,738  
                 
Liabilities and Equity
               
Liabilities
               
Deposits
               
Noninterest-bearing deposits
  $ 30,342     $ 31,146  
Interest-bearing deposits
    606,865       603,709  
Total deposits
    637,207       634,855  
FHLBNY borrowings
    20,448       50,607  
Other borrowed funds
    10,000       10,000  
Subordinated debentures
    13,403       13,403  
Accrued interest payable
    537       618  
Other liabilities
    5,339       3,982  
Total liabilities
    686,934       713,465  
Equity
               
Preferred stock, cumulative perpetual, $1,000 liquidation value; authorized 1,000,000 shares; Issued: 16,288 shares at December 31, 2012 and December 31, 2011
    16,065       15,868  
Common stock, $.10 par value; authorized 10,000,000 shares; Issued: 5,594,793 shares at December 31, 2012 and 5,097,078 shares at December 31, 2011
    560       510  
Additional paid-in capital
    48,869       45,844  
Retained earnings
    21,068       17,808  
Accumulated other comprehensive loss
    (745 )     (626 )
Treasury stock, 210,900 shares at December 31, 2012 and December 31, 2011, at cost
    (2,180 )     (2,180 )
Total shareholders’ equity
    83,637       77,224  
Noncontrolling interest in consolidated subsidiaries
    (94 )     49  
Total equity
    83,543       77,273  
Total liabilities and equity
  $ 770,477     $ 790,738  
 
See accompanying notes to consolidated financial statements
 
 
2

 

Parke Bancorp, Inc. and Subsidiaries
 
Consolidated Statements of Income
 
Years Ended December 31, 2012 and 2011
 
(in thousands except share and per share data)
 
2012
   
2011
Interest income:
         
Interest and fees on loans
  $ 36,474     $ 39,851  
Interest and dividends on investments
    1,026       1,329  
Interest on federal funds sold and cash equivalents
    246       129  
Total interest income
    37,746       41,309  
Interest expense:
               
Interest on deposits
    6,483       7,878  
Interest on borrowings
    941       1,353  
Total interest expense
    7,424       9,231  
Net interest income
    30,322       32,078  
Provision for loan losses
    7,300       10,450  
Net interest income after provision for loan losses
    23,022       21,628  
Noninterest income
               
Gain on sale of SBA loans
    3,582       4,439  
Loan fees
    394       220  
Net income from BOLI
    202       179  
Service fees on deposit accounts
    220       221  
Other than temporary impairment losses
          (132 )
Portion of loss recognized in other comprehensive income (OCI) (before taxes)
          3  
Net impairment losses recognized in earnings
          (129 )
Loss on sale and write-down of real estate owned
    (999 )     (557 )
Other
    969       352  
Total noninterest income
    4,368       4,725  
Noninterest expense
               
Compensation and benefits
    5,866       5,638  
Professional services
    1,746       1,235  
Occupancy and equipment
    1,043       1,006  
Data processing
    410       405  
FDIC  insurance
    1,094       985  
OREO expense
    1,529       642  
Other operating expense
    3,391       2,714  
Total noninterest expense
    15,079       12,625  
Income before income tax expense
    12,311       13,728  
Income tax expense
    4,242       5,524  
Net income attributable to Company and noncontrolling interest
    8,069       8,204  
Net income attributable to noncontrolling interest
    (756 )     (932 )
Net income attributable to Company
    7,313       7,272  
Preferred stock dividend and discount accretion
    1,012       1,000  
Net income available to common shareholders
  $ 6,301     $ 6,272  
                 
Earnings per common share
               
Basic
  $ 1.17     $ 1.17  
Diluted
  $ 1.17     $ 1.15  
Weighted average shares outstanding
               
Basic
    5,379,558       5,374,561  
Diluted
    5,382,596       5,466,458  
 
See accompanying notes to consolidated financial statements
 
3

 
 
Parke Bancorp, Inc. and Subsidiaries
 
Consolidated Statements of Comprehensive Income
 
Years Ended December 31, 2012 and 2011
 
   
For the Year ended December 30,
 
   
2012
 
2011
 
   
(in thousands)
 
Net income attributable to Company and other comprehensive income:
  $ 7,313     $ 7,272  
Unrealized gains on securities:
               
   Non-credit related unrealized gains on securities with OTTI
    25       24  
   Unrealized (losses) gains on securities without OTTI
    (247 )     21  
   Tax Impact
    89       (18 )
Total unrealized (losses) gains on securities
    (133 )     27  
Gross pension liability adjustments
    23       68  
   Tax Impact
    (9 )     (28 )
Total pension liability adjustment
    14       40  
Total other comprehensive (loss) income
    (119 )     67  
Total comprehensive income
  $ 7,194     $ 7,339  
 
See accompanying notes to consolidated financial statements
 
 
4

 

Parke Bancorp, Inc. and Subsidiaries
 
Consolidated Statements of Equity
 
Years Ended December 31, 2012 and 2011
 
(in thousands)
 
   
Preferred Stock
   
Shares of Common Stock
   
Common Stock
   
Additional Paid-In Capital
   
 
Retained Earnings
   
Accumulated Other Comprehensive Loss
   
Treasury Stock
   
Total Shareholders’ Equity
   
Non-Controlling Interest
   
Total Equity
 
   
(in thousands except share data)
 
Balance, December 31, 2010
  $ 15,683       4,653,133     $ 465     $ 41,931     $ 15,494     $ (693 )   $ (2,180 )   $ 70,700     $ 32     $ 70,732  
Capital withdrawals by noncontrolling  interest
                                                                    (915 )     (915 )
10% common stock dividend
            443,945       45       3,913       (3,958 )                                    
Net income
                                    7,272                       7,272       932       8,204  
Changes in other comprehensive income
                                            67               67               67  
Dividend on preferred stock (5% annually)
                                    (815 )                     (815 )             (815 )
Accretion of discount on preferred stock
    185                               (185 )                                    
Balance, December 31, 2011
  $ 15,868       5,097,078     $ 510     $ 45,844     $ 17,808     $ (626 )   $ (2,180 )   $ 77,224     $ 49     $ 77,273  
                                                                                 
Capital withdrawals by noncontrolling  interest
                                                                    (899 )     (899 )
Stock options exercised
            9,332       1       34                               35               35  
10% common stock dividend
            488,383       49       2,991       (3,041 )                     (1 )             (1 )
Net income
                                    7,313                       7,313       756       8,069  
Changes in other comprehensive income
                                            (119 )             (119 )             (119 )
Dividend on preferred stock (5% annually)
                                    (815 )                     (815 )             (815 )
Accretion of discount on preferred stock
    197                               (197 )                                    
Balance, December 31, 2012
  $ 16,065       5,594,793     $ 560     $ 48,869     $ 21,068     $ (745 )   $ (2,180 )   $ 83,637     $ (94 )   $ 83,543  
 
See accompanying notes to consolidated financial statements
 
5

 

Parke Bancorp, Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows
 
Years Ended December 31, 2012 and 2011
 
(in thousands)
 
   
2012
   
2011
 
Cash Flows from Operating Activities
           
Net income
  $ 8,069     $ 8,204  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    358       366  
Provision for loan losses
    7,300       10,450  
Bank owned life insurance
    (202 )     (179 )
Supplemental executive retirement plan expense
    135       353  
Gain on sale of SBA loans
    (3,582 )     (4,439 )
SBA loans originated for sale
    (32,199 )     (27,171 )
Proceeds from sale of SBA loans originated for sale
    35,595       30,230  
Loss on sale & write down of other real estate owned
    999       558  
Contribution of OREO property
    139        
Other than temporary decline in value of investments
          129  
Net accretion of purchase premiums and discounts on securities
    3       (68 )
Deferred income tax benefit
    (1,343 )     (1,801 )
Changes in operating assets and liabilities:
               
(Increase) decrease in accrued interest receivable and other assets
    851       1,180  
Increase (decrease) in accrued interest payable and other accrued liabilities
    1,161       (328 )
Net cash provided by operating activities
    17,284       17,484  
Cash Flows from Investing Activities
               
Purchases of investment securities available for sale
    (4,148 )     (1,537 )
Redemptions (purchases) of restricted stock
    1,342       (525 )
Purchase of additional bank owned life insurance
 <