UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2006 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 000-51338
PARKE BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW JERSEY 65-1241959
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.)
601 DELSEA DRIVE, WASHINGTON TOWNSHIP, NEW JERSEY 08080
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 856-256-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK, $0.10 PAR VALUE THE NASDAQ STOCK MARKET LLC
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
YES [ ] NO [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Registrant's common stock as
quoted on the Nasdaq Capital Market on June 30, 2006, was approximately $29.2
million.
As of March 22, 2007 there were issued and outstanding 2,873,860 shares of
the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the Fiscal Year Ended
December 31, 2006. (Parts II and IV)
2. Portions of the Proxy Statement for the 2007 Annual Meeting of
Shareholders. (Parts II and III)
PARKE BANCORP, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
INDEX
Page
----
Part I
------
Item 1. Business............................................................................................. 1
Item 1A. Risk Factors.........................................................................................17
Item 1B. Unresolved Staff Comments............................................................................19
Item 2. Properties...........................................................................................19
Item 3. Legal Proceedings....................................................................................20
Item 4. Submission of Matters to a Vote of Security Holders..................................................21
Part II
-------
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities............................................................21
Item 6. Selected Financial Data..............................................................................22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........................................22
Item 8. Financial Statements and Supplementary Data..........................................................22
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................22
Item 9A. Controls and Procedures..............................................................................22
Item 9B. Other Information....................................................................................22
Part III
--------
Item 10. Directors, Executive Officers and Corporate Governance...............................................23
Item 11. Executive Compensation...............................................................................23
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters......................................................................23
Item 13. Certain Relationships and Related Transactions, and Director Independence............................24
Item 14. Principal Accounting Fees and Services...............................................................24
Part IV
-------
Item 15. Exhibits and Financial Statement Schedules...........................................................24
PART I
FORWARD-LOOKING STATEMENTS
Parke Bancorp, Inc. (the "Company") may from time to time make written or
oral "forward-looking statements," including statements contained in the
Company's filings with the Securities and Exchange Commission (including this
Annual Report on Form 10-K and the exhibits hereto), in its reports to
shareholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company's wholly-owned
subsidiary, Parke Bank (the "Bank"), conducts operations; the effects of, and
changes in, trade, monetary and fiscal policies and laws, including interest
rate policies of the Board of Governors of the Federal Reserve System,
inflation, interest rates, market and monetary fluctuations; the timely
development of and acceptance of new products and services of the Bank and the
perceived overall value of these products and services by users, including the
features, pricing and quality compared to competitors' products and services;
the impact of changes in financial services' laws and regulations (including
laws concerning taxes, banking, securities and insurance); technological
changes; changes in consumer spending and saving habits; and the success of the
Company at managing the risks resulting from these factors.
The Company cautions that the listed factors are not exclusive. The Company
does not undertake to update any forward-looking statement, whether written or
oral, that may be made from time to time by or on behalf of the Company.
ITEM 1. BUSINESS
The Company is a bank holding company incorporated under the laws of the
State of New Jersey in January 2005 for the sole purpose of becoming the holding
company of the Bank. The Company commenced operations on June 1, 2005, upon
completion of the reorganization of the Bank into the holding company form of
organization following approval of the reorganization by shareholders of the
Bank at its 2005 Annual Meeting of Shareholders. The Company's business and
operations primarily consist of its ownership of the Bank.
The Bank is a commercial bank, which commenced operations on January 28,
1999. The Bank is chartered by the New Jersey Department of Banking and insured
by the Federal Deposit Insurance Corporation ("FDIC"). Parke Bancorp and the
Bank maintain their principal offices at 601 Delsea Drive, Washington Township,
New Jersey. The Bank also conducts business through offices in Northfield and
Washington Township, New Jersey, and in Philadelphia, Pennsylvania. In addition,
the Bank also has a Loan Production Office in Millville, New Jersey maintained
exclusively for loan production. The Bank is a full service bank, with an
emphasis on providing personal and business financial services to individuals
and small to mid-sized businesses in Gloucester, Atlantic and Cape May Counties
in New Jersey and the Philadelphia area in Pennsylvania. At December 31, 2006,
the Company had assets of $360.0 million, loans of $310.6 million, deposits of
$289.9 million and shareholders' equity of $30.7 million.
1
The Bank focuses its commercial loan originations on small and mid-sized
business (generally up to $25 million in annual sales). Commercial loan products
include residential and commercial real estate construction loans; working
capital loans and lines of credit; demand, term and time loans; and equipment,
inventory and accounts receivable financing. Residential construction loans in
tract development are also included in the commercial loan category. The Bank
also offers a range of deposit products to its commercial customers. Commercial
customers also have the ability to use overnight depository, ACH activity and
wire transfer service, all at reduced rates.
The Bank's retail banking activities emphasize consumer deposit and
checking accounts. An extensive range of these services is offered by the Bank
to meet the varied needs of its customers in all age groups. In addition to
traditional products and services, the Bank offers contemporary products and
services, such as debit cards and Internet banking. Retail lending activities by
the Bank include residential mortgage loans, home equity lines of credit, fixed
rate second mortgages, new and used auto loans and overdraft protection.
MARKET AREA
Substantially all of the Bank's business is with customers in its market
areas of Southern New Jersey and the Philadelphia area of Pennsylvania. Most of
the Bank's customers are individuals and small and medium-sized businesses which
are dependent upon the regional economy. Adverse changes in economic and
business conditions in the Bank's markets could adversely affect the Bank's
borrowers, their ability to repay their loan and to borrow additional funds, and
consequently the Bank's financial condition and performance.
Additionally, most of the Bank's loans are secured by real estate located
in Southern New Jersey and the Philadelphia area. A decline in local economic
conditions could adversely affect the values of such real estate. Consequently,
a decline in local economic conditions may have a greater effect on the Bank's
earnings and capital than on the earnings and capital of larger financial
institutions whose real estate loan portfolios are geographically diverse.
COMPETITION
The Bank faces significant competition, both in making loans and attracting
deposits. The Bank's competition in both areas comes principally from other
commercial banks, thrift and savings institutions, including savings and loan
associations and credit unions, and other types of financial institutions,
including brokerage firms and credit card companies. The Bank faces additional
competition for deposits from short-term money market mutual funds and other
corporate and government securities funds.
Most of the Bank's competitors, whether traditional or nontraditional
financial institutions, have a longer history and significantly greater
financial and marketing resources than does the Bank. Among the advantages
certain of these institutions have over the Bank are their ability to finance
wide-ranging and effective advertising campaigns, to access international money
markets and to allocate their investment resources to regions of highest yield
and demand. Major banks operating in the primary market area offer certain
services, such as international banking and trust services, which are not
offered directly by the Bank.
In commercial transactions, the Bank's legal lending limit to a single
borrower enables the Bank to compete effectively for the business of individuals
and smaller enterprises. However, the Bank's legal lending limit is considerably
lower than that of various competing institutions, which have substantially
greater capitalization. The Bank has a relatively smaller capital base than most
other competing institutions which, although above regulatory minimums, may
constrain the Bank's effectiveness in competing for loans.
2
LENDING ACTIVITIES
COMPOSITION OF LOAN PORTFOLIO. Set forth below is selected data relating to
the composition of the Bank's loan portfolio by type of loan at the dates
indicated. (1) Except as set forth below, the Bank had no concentrations of
loans exceeding 10% of its loans.
At December 31,
---------------------------------------------------------------------------------
2006 2005 2004
------------------------ ------------------------ -------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Commercial....................... $ 13,436,690 4.3% $ 11,053,481 4.3% $ 9,708,142 5.1%
Real estate construction:
Residential................... 2,464,820 0.8 1,174,233 0.5 1,252,811 0.7
Commercial.................... 69,254,592 22.3 70,156,767 27.1 37,270,464 19.8
Real estate mortgage:
Residential................... 19,727,682 6.4 17,308,735 6.7 16,360,109 8.7
Commercial.................... 198,667,009 64.0 154,287,964 59.6 120,051,646 63.6
Consumer......................... 7,004,513 2.2 5,053,908 1.8 3,963,818 2.1
------------- ----- ------------- ----- ------------- -----
Total Loans................. $ 310,555,306 100.0% $ 259,035,088 100.0% $ 188,606,990 100.0%
============= ===== ============= ===== ============= =====
At December 31,
----------------------------------------------------
2003 2002
------------------------ ------------------------
Amount Percent Amount Percent
------ ------- ------ -------
Commercial....................... $ 8,799,899 6.0% $ 7,035,669 7.4%
Real estate construction:
Residential................... 2,164,811 1.5 1,370,266 1.4
Commercial.................... 29,896,562 20.4 17,122,397 18.0
Real estate mortgage:
Residential................... 18,013,087 12.3 13,188,780 13.9
Commercial.................... 84,054,063 57.5 53,503,768 56.3
Consumer......................... 3,405,909 2.3 2,874,330 3.0
------------- ----- ------------- -----
Total Loans................. $ 146,334,331 100.0% $ 95,095,210 100.0%
============= ===== ============= ======
------------------------------------
(1) Amounts presented include adjustments for related unamortized deferred
costs and fees.
3
LOAN MATURITY. The following table sets forth the contractual maturity of
certain loan categories at December 31, 2006.
Due after
Due within 1 through 5 Due after
1 year years 5 years Total
------ ----- ------- -----
Commercial................................ $ 9,622,980 $ 3,813,710 $ - $ 13,436,690
Real estate construction:
Residential............................ 2,464,820 - - 2,464,820
Commercial............................. 54,545,380 7,262,395 7,446,817 69,254,592
Real estate mortgage:
Residential............................ - - - 19,727,682
Commercial............................. - - - 198,667,009
Consumer.................................. - - - 7,004,513
------------- ------------- ------------ -------------
Total loans.......................... $ 180,178,091 $ 73,340,250 $ 57,036,965 $ 310,555,306
============= ============= ============ =============
The following table sets forth the dollar amount of loans in certain loan
categories due one year or more after December 31, 2006, which have
predetermined interest rates and which have floating or adjustable interest
rates.
Floating or
Fixed Rates(1) Adjustable Rates Total
-------------- ---------------- -----
Commercial......................................... $ 3,128,630 $ 685,080 $ 3,813,701
Real estate construction:
Residential..................................... - - -
Commercial...................................... 14,709,212 - 14,709,212
Real estate mortgage:
Residential..................................... 9,305,544 8,472,479 17,778,023
Commercial...................................... 29,250,997 57,831,290 87,082,287
Consumer........................................... 2,446,450 4,547,533 6,993,983
------------- ------------ -------------
Total loans................................... $ 58,840,833 $ 71,536,382 $ 130,377,215
============= ============ =============
----------
(1) Construction loans are adjustable rate loans, however, due to interest rate
floors, they have been reclassified as fixed rate loans.
COMMERCIAL LOANS. The Bank originates secured loans for business purposes.
Loans are made to provide working capital to businesses in the form of lines of
credit, which may be secured by real estate, accounts receivable, inventory,
equipment or other assets. The financial condition and cash flow of commercial
borrowers are closely monitored by the submission of corporate financial
statements, personal financial statements and income tax returns. The frequency
of submissions of required financial information depends on the size and
complexity of the credit and the collateral that secures the loan. The Bank's
general policy is to obtain personal guarantees from the principals of the
commercial loan borrowers. Such loans are made to businesses located in the
Bank's market area.
Commercial business loans generally involve a greater degree of risk than
residential mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the mobility of collateral, the effects
of general economic conditions and the increased difficulty of evaluating and
monitoring these types of loans. Unlike residential mortgage loans, which
generally are made on the basis of the borrower's ability to make repayment from
his or her employment and other income and which are secured by real property
whose value tends to be more easily ascertainable, commercial business loans
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business.
4
As a result, the availability of funds for the repayment of commercial business
loans may be substantially dependent on the success of the business itself and
the general economic environment. If the cash flow from business operations is
reduced, the borrower's ability to repay the loan may be impaired.
REAL ESTATE DEVELOPMENT AND CONSTRUCTION LOANS. The Bank has emphasized the
origination of construction loans to individuals and real estate developers in
its market area. The advantages of construction lending are that the market is
typically less competitive than more standard mortgage products, the interest
rate typically charged is a variable rate, which permits the Bank to protect
against sudden changes in its costs of funds, and the fees or "points" charged
by the Bank to its customers can be amortized over the shorter term of a
construction loan, typically, one to two years, which permits the Bank to
recognize income received over a shorter period of time. The Bank from time to
time structures construction loans in excess of the legal lending limit of the
Bank, with respect to which the Bank sells participation interests in the
construction loans to other lenders, while maintaining and servicing the
construction loan.
The Bank provides interim real estate acquisition development and
construction loans to builders and developers. Real estate development and
construction loans to provide interim financing on the property are based on
acceptable percentages of the appraised value of the property securing the loan
in each case. Real estate development and construction loan funds are disbursed
periodically at pre-specified stages of completion. Interest rates on these
loans are generally adjustable. The Bank carefully monitors these loans with
on-site inspections and control of disbursements. These loans are generally made
on properties located in the Bank's market area.
Development and construction loans are secured by the properties under
development and personal guarantees are typically obtained. Further, to assure
that reliance is not placed solely in the value of the underlying property, the
Bank considers the financial condition and reputation of the borrower and any
guarantors, the amount of the borrower's equity in the project, independent
appraisals, costs estimates and pre-construction sale information.
Loans to residential builders are for the construction of residential homes
for which a binding sales contract exists and the prospective buyers have been
pre-qualified for permanent mortgage financing. Loans to residential developers
are made only to developers with a proven sales record. Generally, these loans
are extended only when the borrower provides evidence that the lots under
development will be sold to potential buyers satisfactory to the Bank.
The Bank also originates loans to individuals for construction of single
family dwellings. These loans are for the construction of the individual's
primary residence. They are typically secured by the property under
construction, occasionally include additional collateral (such as second
mortgage on the borrower's present home), and commonly have maturities of six to
twelve months.
Construction financing is labor intensive for the Bank, requiring employees
of the Bank to expend substantial time and resources in monitoring and servicing
each construction loan to completion. Construction financing is generally
considered to involve a higher degree of risk of loss than long-term financing
on improved, occupied real estate. Risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction and development, the accuracy of
projections, such as the sales of homes or the future leasing of commercial
space, and the accuracy of the estimated cost (including interest) of
construction. Substantial deviations can occur in such projections. During the
construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
5
with a project having a value which is insufficient to assure full repayment.
Also, a construction loan that is in default can cause problems for the Bank
such as designating replacement builders for a project, considering alternate
uses for the project and site and handling any structural and environmental
issues that might arise.
COMMERCIAL REAL ESTATE MORTGAGE LOANS. The Bank originates mortgage loans
secured by commercial real estate. Such loans are primarily secured by office
buildings, retail buildings, warehouses and general purpose business space.
Although terms may vary, the Bank's commercial mortgages generally have
maturities of twenty years, but re-price within five years.
Loans secured by commercial real estate are generally larger and involve a
greater degree of risk than one- to four-family residential mortgage loans. Of
primary concern in commercial and multi-family real estate lending is the
borrower's creditworthiness and the feasibility and cash flow potential of the
project. Payments on loans secured by income properties are often dependent on
successful operation or management of the properties. As a result, repayment of
such loans may be subject to a greater extent than residential real estate loans
to adverse conditions in the real estate market or the economy.
The Bank seeks to reduce the risks associated with commercial mortgage
lending by generally lending in its primary market area and obtaining periodic
financial statements and tax returns from borrowers. It is also the Bank's
general policy to obtain personal guarantees from the principals of the
borrowers and assignments of all leases related to the collateral.
RESIDENTIAL REAL ESTATE MORTGAGE LOANS. The Bank originates adjustable and
fixed-rate residential mortgage loans. Such mortgage loans are generally
originated under terms, conditions and documentation acceptable to the secondary
mortgage market. Although the Bank has placed all of these loans into its
portfolio, a substantial majority of such loans can be sold in the secondary
market or pledged for potential borrowings.
CONSUMER LOANS. The Bank offers a variety of consumer loans. These loans
are typically secured by residential real estate or personal property, including
automobiles. Home equity loans (closed-end and lines of credit) are typically
made up to 80% of the appraised or assessed value of the property securing the
loan in each case, less the amount of any existing prior liens on the property,
and generally have maximum terms of ten years, although the Bank does offer a
90% loan to value product if certain conditions related to the borrower and
property are satisfied. The interest rates on second mortgages are generally
fixed, while interest rates on home equity lines of credit are variable.
LOANS TO ONE BORROWER. Federal regulations limit loans to one borrower in
an amount equal to 15% of unimpaired capital and unimpaired surplus. At December
31, 2006, the Bank's loan to one borrower limit was approximately $6.7 million
and the Bank had 13 borrowers with loan balances in excess of $5.0 million. At
December 31, 2006, the Bank's largest loan to one borrower was a loan for
construction and development, with a balance of $6.7 million and was secured by
real estate. This loan is scheduled to be funded in stages after the houses are
sold. At December 31, 2006, this loan was current and performing in accordance
with the terms of the loan agreement.
The size of loans which the Bank can offer to potential borrowers is less
than the size of loans which many of the Bank's competitors with larger
capitalization are able to offer. The Bank may engage in loan participations
with other banks for loans in excess of the Bank's legal lending limits.
However, no assurance can be given that such participations will be available at
all or on terms which are favorable to the Bank and its customers.
6
NON-PERFORMING AND PROBLEM ASSETS
NON-PERFORMING ASSETS. Non-accrual loans are those on which the accrual of
interest has ceased. Loans are generally placed on non-accrual status if, in the
opinion of management, collection is doubtful, or when principal or interest is
past due 90 days or more unless the collateral is considered sufficient to cover
principal and interest and the loan is in the process of collection. Interest
accrued, but not collected at the date a loan is placed on non-accrual status,
is reversed and charged against interest income. Subsequent cash receipts are
applied either to the outstanding principal or recorded as interest income,
depending on management's assessment of ultimate collectability of principal and
interest. Loans are returned to an accrual status when the borrower's ability to
make periodic principal and interest payments has returned to normal (i.e.,
brought current with respect to principal or interest or restructured) and the
paying capacity of the borrower and/or the underlying collateral is deemed
sufficient to cover principal and interest.
Impaired loans are measured based on the present value of expected future
discounted cash flows, the market price of the loan or the fair value of the
underlying collateral if the loan is collateral dependent. The recognition of
interest income on impaired loans is the same as for non-accrual loans discussed
above.
The following table sets forth information regarding non-accrual loans at
the dates indicated. As of the dates indicated, the Bank did not have any
troubled restructurings as defined in Statement of Financial Accounting
Standards No. 15.
At December 31,
---------------------------------------------------------------------
2006 2005 2004 2003 2002
---------- ----------- ----------- ----------- -----------
Loans accounted for on a non-accrual basis:
Commercial....................................... $ 90,850 $ 50,000 $ - $ - $ -
Real estate construction:
Residential................................... - - 240,816 289,257 289,000
Commercial.................................... - - - - -
Real estate mortgage:
Residential................................... - 20,000 - 504,878 742,067
Commercial.................................... 686,933 1,865,000 - - -
Consumer......................................... 11,021 - - - -
---------- ----------- ----------- ----------- -----------
Total....................................... 788,804 1,935,000 240,816 794,135 1,031,067
---------- ----------- ----------- ----------- -----------
Accruing loans delinquent 90 days or more:
Commercial....................................... - - - - -
Real estate construction:
Residential................................... - - - - -
Commercial.................................... - - - - -
Real estate mortgage:
Residential................................... - - 54,859 - -
Commercial.................................... 267,150 665,000 - - 50,000
Consumer......................................... - - - - -
---------- ----------- ----------- ----------- -----------
Total....................................... 267,150 665,000 54,859 - 50,000
---------- ----------- ----------- ----------- -----------
Total non-performing loans.............. $1,055,954 $ 2,590,000 $ 295,675 $ 794,135 $ 1,081,067
========== =========== =========== =========== ===========
Total non-performing loans as a
percentage of net loans....................... 0.34% 1.01% 0.16% 0.55% 1.15%
========== =========== =========== =========== ===========
When a loan is more than 30 days delinquent, the borrower is contacted by
mail or phone and payment is requested. If the delinquency continues, subsequent
efforts are made to contact the delinquent borrower. In certain instances, the
Registrant may modify the loan or grant a limited moratorium on loan payments to
enable the borrower to reorganize their financial affairs. If the loan
7
continues in a delinquent status for 90 days or more, the Registrant generally
will initiate foreclosure proceedings.
Loans are generally placed on non-accrual status when either principal or
interest is 90 days or more past due. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income. Such
interest, when ultimately collected, is credited to income in the period
received. At December 31, 2006, the Bank had $788,804 of loans that were held on
a non-accrual basis. Gross interest income of $51,000 would have been recorded
during the year ended December 31, 2006 if these loans had been performing in
accordance with their terms. Interest income of $71,791 was recorded on these
loans during the year ended December 31, 2006. At December 31, 2006, the Bank
did not have any loans not classified as non-accrual, 90 days past due or
restructured but where known information about possible credit problems of
borrowers caused management to have serious concerns as to the ability of the
borrowers to comply with present loan repayment terms and may result in
disclosure as non-accrual, 90 days past due or restructured.
CLASSIFIED ASSETS. Federal Regulations provide for a classification system
for problem assets of insured institutions. Under this Classification System,
problem assets of insured institutions are classified as substandard, doubtful
or loss. An asset is considered "substandard" if it involves more than an
acceptable level of risk due to a deteriorating financial condition, unfavorable
history of the borrower, inadequate payment capacity, insufficient security or
other negative factors within the industry, market or management. Substandard
loans have clearly defined weaknesses which can jeopardize the timely payments
of the loan.
Assets classified as "doubtful" exhibit all of the weakness defined under
the Substandard Category but with enough risk to present a high probability of
some principal loss on the loan, although not yet fully ascertainable in amount.
Assets classified as "loss" are those considered un-collectable or of little
value, even though a collection effort may continue after the classification and
potential charge-off.
The Bank also internally classifies certain assets as "special mention;"
such assets do not demonstrate a current potential for loss but are monitored in
response to negative trends which, if not reversed, could lead to a substandard
rating in the future.
When an insured institution classifies problem assets as either
"substandard" or "doubtful," it may establish specific allowances for loan
losses in an amount deemed prudent by management. When an insured institution
classifies problem assets as "loss," it is required either to establish an
allowance for losses equal to 100% of that portion of the assets so classified
or to charge off such amount.
At December 31, 2006, the Bank had assets classified as follows:
Special mention....................................... $6,308,539
Substandard........................................... 2,369,550
Doubtful.............................................. 11,021
Loss.................................................. -
----------
Total........................................... $8,689,110
----------
FORECLOSED REAL ESTATE. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until such time as it is sold. When real estate owned is acquired, it is
recorded at the lower of the unpaid principal balance of the related loan or its
fair value less disposal costs. Any write-down of real estate owned is charged
to operations. At December 31, 2006, the Bank had real estate owned totaling
$1.25 million, which is valued at current fair market value.
8
ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE OWNED. It is the policy of
management to provide for losses on unidentified loans in its portfolio in
addition to classified loans. A provision for loan losses is charged to
operations based on management's evaluation of the inherent losses that may be
incurred in the Bank's loan portfolio. Management also periodically performs
valuations of Real Estate Owned and establishes allowances to reduce book values
of the properties to their net realizable values when necessary.
Management's judgment as to the level of future losses on existing loans is
based on its internal review of the loan portfolio, including an analysis of the
borrowers' current financial position, the consideration of current and
anticipated economic conditions and their potential effects on specific
borrowers. In determining the collectability of certain loans, management also
considers the fair value of any underlying collateral. However, management's
determination of the appropriate allowance level is based upon a number of
assumptions about future events, which are believed to be reasonable, but which
may or may not prove valid. Thus, there can be no assurance that charge-offs in
future period will not exceed the allowance for loan losses or that additional
increases in the allowance for loan losses will not be required.
The following table sets forth information with respect to the Bank's
allowance for losses on loans at the dates and for the periods indicated.
For the Year Ended December 31,
-------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------ ------------ ------------ ------------ -----------
Balance at beginning of period...............$ 3,573,812 $ 2,620,651 $ 2,256,070 $ 1,333,000 $ 834,483
Charge-offs:
Commercial................................... - - - - -
Real estate construction:
Residential............................... - - - - -
Commercial................................ - (227,001) - - -
Real estate mortgage:
Residential............................... - - (460,743) - -
Commercial................................ - - - - -
Consumer..................................... (2,500) - - (1,000) -
------------ ------------ ------------ ------------ -----------
Total charge-offs:...................... (2,500) (227,001) (460,743) (1,000) -
------------ ------------ ------------ ------------ -----------
Recoveries:
Commercial................................... - - - - -
Real estate construction:
Residential............................... - - - - -
Commercial................................ - - - - -
Real estate mortgage:
Residential............................... - - - - -
Commercial................................ - - - - -
Consumer..................................... - - - 1,000 -
------------ ------------ ------------ ------------ -----------
Total recoveries:....................... - - - 1,000 -
------------ ------------ ------------ ------------ -----------
Net charge-offs.............................. (2,500) (227,001) (460,743) - -
Provision for loan losses.................... 939,692 1,180,162 825,324 923,070 498,517
------------ ------------ ------------ ------------ -----------
Balance at end of period.....................$ 4,511,004 $ 3,573,812 $ 2,620,651 $ 2,256,070 $ 1,333,000
============ ============ ============ ============ ===========
Period-end loans outstanding (net of
deferred costs/fees)......................$310,555,306 $259,035,088 $188,606,990 $146,344,331 $95,095,210
============ ============ ============ ============ ===========
Average loans outstanding....................$286,691,000 $223,821,300 $154,794,200 $120,796,806 $78,245,329
============ ============ ============ ============ ===========
Allowance as a percentage of period
end loans................................. 1.45% 1.38% 1.39% 1.54% 1.40%
============ ============ ============ ============ ===========
Net loans charged off as a percentage of
average loans outstanding................. 0.00% 1.10% 0.30% 0.00% 0.00%
============ ============ ============ ============ ===========
9
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth the
allocation of the Bank's allowance for loan losses by loan category at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses that may occur
within the loan category as the total loan loss allowance is a valuation reserve
applicable to the entire loan portfolio.
At December 31,
----------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
--------------------- ------------------ ------------------- ------------------- ------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each in Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Type of Loans: Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial.................$ 187,958 4.3% $ 153,674 4.3% $ 133,653 5.1% $ 135,364 6.0% $ 98,642 7.4%
Real estate construction:
Residential............. 24,648 0.8 17,869 0.5 18,344 0.7 33,841 1.5 18,662 1.4
Commercial.............. 847,029 22.3 968,503 27.1 518,889 19.8 460,238 20.4 239,940 18.0
Real estate mortgage:
Residential............. 218,191 6.4 239,445 6.7 227,997 8.7 277,497 12.3 184,287 13.9
Commercial.............. 3,184,846 64.0 2,129,992 59.6 1,666,734 63.6 1,297,240 57.5 750,479 56.3
Consumer................... 48,332 2.2 64,329 1.8 55,034 2.1 51,890 2.3 39,990 3.0
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total Allowance $4,511,004 100.0% $3,573,812 100.0% $2,620,651 100.0% $2,256,070 100.0% $1,333,000 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
10
INVESTMENT ACTIVITIES
GENERAL. The investment policy of the Bank is established by senior
management and approved by the Board of Directors. It is based on asset and
liability management goals and is designed to provide a portfolio of high
quality investments that foster interest income within acceptable interest rate
risk and liquidity guidelines. In accordance with SFAS No. 115, the Bank
classifies its portfolio of investment securities as "available for sale" or
"held to maturity." At December 31, 2006, the Bank's investment policy allowed
investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S.
government agency or government-sponsored agency obligations, (iii) local
municipal obligations, (iv) mortgage-backed securities, (v) certificates of
deposit, and (vi) investment grade corporate bonds, trust preferred securities
and mutual funds. The Board of Directors may authorize additional investments.
COMPOSITION OF INVESTMENT SECURITIES PORTFOLIO. The following table sets
forth the carrying value of the Bank's investment securities portfolio at the
dates indicated. For additional information, see Note 3 of the Notes to the
Consolidated Financial Statements. At December 31, 2006, the Company did not
hold investment securities of any one issuer the book value of which exceeds 10%
of its stockholders' equity.
At December 31,
--------------------------------------------------
2006 2005 2004
-------------- -------------- --------------
Securities Held to Maturity:
Municipals................................................. $ 2,430,958 $ 2,405,841 $ 547,632
Corporate trust preferred securities....................... - - -
-------------- -------------- --------------
Total securities held to maturity........................ 2,430,958 2,405,841 547,632
-------------- -------------- --------------
Securities Available for Sale:
U.S. government agency securities.......................... - - -
U.S. government-sponsored entity securities................ 6,415,780 6,202,390 8,670,230
Municipals................................................. - - -
Mortgage-backed securities................................. 9,908,837 9,004,256 12,176,244
Mutual funds............................................... - - 3,196,328
Corporate and trust preferred securities................... 8,205,450 6,316,298 -
Stock...................................................... - 500,000 -
-------------- -------------- --------------
Total securities available for sale...................... 24,530,067 22,022,944 24,042,802
-------------- -------------- --------------
Total.................................................. $ 26,961,025 $ 24,428,785 $ 24,590,434
============== ============== ==============
11
INVESTMENT PORTFOLIO MATURITIES. The following table sets forth information
regarding the scheduled maturities, carrying values, estimated fair values, and
weighted average yields for the Bank's investments securities portfolio at
December 31, 2006 by contractual maturity. The following table does not take
into consideration the effects of scheduled repayments or the effects of
possible prepayments.
At December 31,
---------------------------------------------------------------------------------------------------------
Within One Year One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
--------------- ----------------- ----------------- ------------------- -------------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield Market Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------------
Securities Held to Maturity:
---------------------------
Municipals............. $ - -% $ 544,898 3.97% $ - -% $ 1,886,060 6.38% $ 2,430,958 5.85% $ 2,425,629
-------- ---- ----------- ---- ---------- ---- ----------- ---- ----------- ---- -----------
Total securities
held to maturity..... - -% 544,898 3.97% - -% 1,886,060 6.38% 2,430,958 5.85% 2,425,629
-------- ---- ----------- ---- ---------- ---- ----------- ---- ----------- ---- -----------
Securities Available for Sale:
------------------------------
U.S. government-
sponsored entity
securities............. 999,060 5.23% 2,481,320 4.99% 1,000,000 5.25% 1,935,400 6.18% 6,415,780 5.41% 6,415,780
Mortgage-backed
securities............. - -% - -% - -% 9,908,837 5.30% 9,908,837 5.30% 9,908,837
Corporate securities... - -% 507,600 5.13% - - 7,697,850 5.39% 8,205,450 5.51% 8,205,450
-------- ---- ----------- ---- ---------- ---- ----------- ---- ----------- ---- -----------
Total securities
available for sale... $989,060 5.23% 2,988,920 5.01% 1,000,000 5.25% 19,542,087 5.43% 24,530,067 5.40% 24,530,067
-------- ---- ----------- ---- ---------- ---- ----------- ---- ----------- ---- -----------
Total.............. $999,060 5.23% $ 3,533,818 4.86% $1,000,000 5.25% $21,428,147 5.51% $26,961,025 5.44% $26,955,696
======== ==== =========== ==== ========== ==== =========== ==== =========== ==== ===========
12
SOURCES OF FUNDS
GENERAL. Deposits are the major external source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from the amortization, prepayment or sale of loans, maturities of
investment securities and operations. Scheduled loan principal repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and market
conditions.
DEPOSITS. The Bank offers individuals and businesses a wide variety of
accounts, including checking, savings, money market accounts, individual
retirement accounts and certificates of deposit. Deposits are obtained primarily
from communities that the Bank serves, however, the Bank held brokered deposits
of $87.6 million and $67 million at December 31, 2006 and 2005, respectively.
Brokered deposits are a more volatile source of funding than core deposits and
do not increase the deposit franchise of the Bank. In a rising rate environment,
the Bank may be unwilling or unable to pay a competitive rate. To the extent
that such deposits do not remain with the Bank, they may need to be replaced
with borrowings which could increase the Bank's cost of funds and negatively
impact its interest rate spread, financial condition and results of operation.
The following tables detail the average amount, the average rate paid, and
the percentage of each category to total deposits for the three years ended
December 31, 2006.
At December 31, 2006
-----------------------------------------
Daily
Average Average Percent
Balance Rate of Total
------- ---- --------
NOW and money market
savings deposits................................ $ 26,568,000 2.8% 10.2%
Regular savings deposits........................... 28,991,000 3.5% 11.1%
Time deposits...................................... 188,040,000 4.5% 71.8%
------------- -----
Total interest-bearing deposits............... 243,599,000 93.1%
Non interest-bearing demand deposits............... 18,174,000 6.9%
------------- -----
Total deposits...................................$ 261,773,000 100.0%
============= =====
At December 31, 2005
-----------------------------------------
Daily
Average Average Percent
Balance Rate of Total
------- ---- --------
NOW and money market
savings deposits................................ $ 23,729,040 1.8% 11.4%
Regular savings deposits........................... 29,199,866 2.7% 14.0%
Time deposits...................................... 138,586,970 3.3% 66.5%
------------- -----
Total interest-bearing deposits............... 191,515,876 91.9%
Non interest-bearing demand deposits............... 16,946,509 8.1%
------------- -----
Total deposits............................... $ 208,462,385 100.0%
============= =====
13
At December 31, 2004
-----------------------------------------
Daily
Average Average Percent
Balance Rate of Total
------- ---- --------
NOW and money market
savings deposits................................ $ 28,510,645 1.7% 18.4%
Regular savings deposits........................... 22,160,550 2.1% 14.3%
Time deposits...................................... 91,104,040 2.8% 58.7%
------------- -----
Total interest-bearing deposits....................141,775,235 91.4%
Non interest-bearing demand deposits............... 13,422,274 8.6%
------------- -----
Total deposits...................................$ 155,197,509 100.0%
============= =====
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
2006.
Certificates of
Maturity Period Deposit
--------------- -------
Within three months.......................... $ 27,141,290
Three through six months..................... 22,369,068
Six through twelve months.................... 33,553,602
Over twelve months........................... 47,491,514
--------------
Total................................... $ 130,555,474
==============
BORROWINGS. Borrowings consist of reverse repurchase agreements,
subordinated debt and advances from the FHLB and other parties. Reverse
repurchase agreements were priced at origination and are payable in four years
or less. Borrowings from FHLB outstanding during 2006, 2005 and 2004 had
maturities of five years or less and cannot be prepaid without penalty.
The following table sets forth information regarding the Bank's borrowings:
December 31,
----------------------------------------------------------
2006 2005 2004
----------------- ----------------- -----------------
Amount outstanding at year end......................... $ 34,851,370 $ 35,966,860 $ 20,378,726
Weighted average interest rates at year end............ 5.49% 4.8% 2.8%
Maximum outstanding at any month end................... $ 41,092,497 $ 35,966,860 $ 20,378,726
Average outstanding.................................... $ 34,321,000 $ 28,172,795 $ 10,721,726
Weighted average interest rate during the year......... 5.2% 3.1% 2.2%
SUBSIDIARY ACTIVITY
The largest subsidiary of the Company is the Bank. The Bank has two
subsidiaries, Parke Capital Markets and Farm Folly. Parke Capital Markets is a
corporation, which was formed in 2001 to generate fee income from capital
markets financing activities, which include term financings. Farm Folly, LLC,
which was formed in 2006, was created to hold the Bank's repossessed real
estate.
PERSONNEL
At December 31, 2006, the Bank had 35 full-time and 12 part-time employees.
14
REGULATION
GENERAL. Set forth below is a brief description of certain laws which
relate to the regulation of the Bank and the Company. The description does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
HOLDING COMPANY REGULATION
GENERAL. The Company is a bank holding company within the meaning of the
Bank Holding Company Act of 1956 (the "BHC Act"), and is regulated by the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"). The
Federal Reserve Board has enforcement authority over the Company and the
Company's non-bank subsidiaries which also permits the Federal Reserve Board to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary bank. This regulation and oversight is intended primarily for the
protection of the depositors of the Bank and not for shareholders of the
Company.
As a bank holding company, the Company is required to file with the Federal
Reserve Board an annual report and any additional information as the Federal
Reserve Board may require under the BHC Act. The Federal Reserve Board will also
examine the Company and its subsidiaries.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the BHC Act on extensions of credit to the bank holding
company or any of its subsidiaries, on investments in the stock or other
securities of the bank holding company or its subsidiaries, and on the taking of
such stock or securities as collateral for loans to any borrower. Furthermore,
under amendments to the BHC Act and regulations of the Federal Reserve Board, a
bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit or
provision of credit or providing any property or services. Generally, this
provision provides that a bank may not extend credit, lease or sell property, or
furnish any service to a customer on the condition that the customer provide
additional credit or service to the bank, to the bank holding company, or to any
other subsidiary of the bank holding company or on the condition that the
customer not obtain other credit or service from a competitor of the bank, the
bank holding company, or any subsidiary of the bank.
Extensions of credit by the Bank to executive officers, directors, and
principal shareholders of the Bank or any affiliate thereof, including the
Company, are subject to Section 22(h) of the Federal Reserve Act, which among
other things, generally prohibits loans to any such individual where the
aggregate amount exceeds an amount equal to 15% of a bank's unimpaired capital
and surplus, plus an additional 10% of unimpaired capital and surplus in the
case of loans that are fully secured by readily marketable collateral.
FEDERAL SECURITIES LAW. The Company's common stock is registered under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), and the Company is subject to the periodic reporting and other
requirements of Section 12(g) of the 1934 Act, as amended.
SARBANES-OXLEY ACT OF 2002. The Sarbanes-Oxley Act of 2002 (the "SOX Act")
was enacted to address corporate and accounting fraud. The SEC has promulgated
new regulations pursuant to the SOX Act and may continue to propose additional
implementing or clarifying regulations as necessary in furtherance of the SOX
Act. The passage of the SOX Act by Congress and the implementation of new
regulations by the SEC subject publicly-traded companies to additional and more
cumbersome reporting regulations and disclosure. Compliance with the SOX Act and
corresponding regulations may increase the Company's expenses.
15
REGULATION OF THE BANK
The Bank operates in a highly regulated industry. This regulation and
supervision establishes a comprehensive framework of activities in which a bank
may engage and is intended primarily for the protection of the deposit insurance
fund and depositors and not shareholders of the Bank.
Any change in applicable statutory and regulatory requirements, whether by
the New Jersey Department of Banking and Insurance, the Federal Deposit
Insurance Corporation (the "FDIC") or the United States Congress, could have a
material adverse impact on the Bank, and its operations. The adoption of
regulations or the enactment of laws that restrict the operations of the Bank or
impose burdensome requirements upon it could reduce its profitability and could
impair the value of the Bank's franchise which could hurt the trading price of
the Bank's stock.
As a New Jersey-chartered commercial bank, the Bank is subject to the
regulation, supervision, and control of the New Jersey Department of Banking and
Insurance. As an FDIC-insured institution, the Bank is subject to regulation,
supervision and control of the FDIC, an agency of the federal government. The
regulations of the FDIC and the New Jersey Department of Banking and Insurance
affect virtually all activities of the Bank, including the minimum level of
capital the Bank must maintain, the ability of the Bank to pay dividends, the
ability of the Bank to expand through new branches or acquisitions and various
other matters.
INSURANCE OF DEPOSITS. The Bank's deposits are insured up to a maximum of
$100,000 per depositor under the Bank Insurance Fund of the FDIC. The FDIC has
established a risk-based assessment system for all insured depository
institutions. Under the risk-based assessment system, deposit insurance premium
rates range from 0-27 basis points. Currently, the Bank's deposit insurance
premium has been assessed at zero basis points of deposits.
Pursuant to the Reform Act, the FDIC has determined to maintain the
designated reserve ratio at its current 1.25%. The FDIC has also adopted a new
risk-based premium system that provides for quarterly assessments based on an
insured institution's ranking in one of four risk categories based on their
examination ratings and capital ratios. Beginning in 2007, well-capitalized
institutions with the CAMELS ratings of 1 or 2 will be grouped in Risk Category
I and will be assessed for deposit insurance at an annual rate of between five
and seven basis points with the assessment rate for an individual institution to
be determined according to a formula based on a weighted average of the
institution's individual CAMEL component ratings plus either five financial
ratios or the average ratings of its long-term debt. Institutions in Risk
Categories II, III and IV will be assessed at annual rates of 10, 28 and 43
basis points, respectively. The Bank anticipates that it will be able to offset
its deposit insurance premium for 2007 with the special assessment credit.
CAPITAL ADEQUACY GUIDELINES. The Bank is subject to risk-based capital
guidelines promulgated by the FDIC that are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks, to
account for off-balance sheet exposure, and to minimize disincentives for
holding liquid assets. Under the guidelines, assets and off-balance sheet items
are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items.
The minimum ratio of total capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) is 8%.
At least 4% of the total capital is required to be "Tier I Capital," consisting
of common shareholders' equity and qualifying preferred stock, less certain
goodwill items and other intangible assets. The remainder ("Tier II Capital")
may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted
assets, (b) excess of qualifying preferred stock, (c) hybrid
16
capital instruments, (d) perpetual debt, (e) mandatory convertible securities,
and (f) qualifying subordinated debt and intermediate-term preferred stock up to
50% of Tier I capital. Total capital is the sum of Tier I and Tier II capital
less reciprocal holdings of other banking organizations, capital instruments,
investments in unconsolidated subsidiaries and any other deductions as
determined by the FDIC (determined on a case-by-case basis or as a matter of
policy after formal rule-making).
In addition to the risk-based capital guidelines, the FDIC has adopted a
minimum Tier I capital (leverage) ratio, under which a bank must maintain a
minimum level of Tier I capital to average total consolidated assets of at least
3% in the case of a bank that has the highest regulatory examination rating and
is not contemplating significant growth or expansion. All other banks are
expected to maintain a leverage ratio of at least 100 to 200 basis points above
the stated minimum.
At December 31, 2006, the Company and the Bank had the requisite capital
levels to qualify as "well capitalized."
ITEM 1A. RISK FACTORS
The following is a summary of the material risks related to an investment
in the Company's securities.
A SIGNIFICANT AMOUNT OF THE BANK'S BUSINESS IS CONCENTRATED IN REAL ESTATE
DEVELOPMENT AND CONSTRUCTION LENDING.
At December 31, 2006, approximately 23.1% of our loans are commercial and
residential real estate development and construction loans, which are secured by
the real estate under development. Construction lending involves extensive
risks. In addition to the risk that the market values of the real estate
securing these loans may deteriorate, these loans are also subject to the
development risks that the projects will not be completed in a timely manner or
according to original specifications. Real estate development and construction
projects that are not completed in a timely manner or according to original
specifications are generally less marketable than projects that are fully
developed, and the loans underlying such projects may be subject to greater
losses in the event that the real estate collateral becomes the source of
repayment. Construction projects are commonly underwritten based upon
projections, such as the sales of homes or future leasing of commercial spaces,
and substantial deviations from such projections can occur. Construction lending
is also labor intensive for the Bank, requiring Bank employees to expend
substantial time and resources in monitoring and servicing each construction
loan to completion. In addition, a construction loan that is in default can
create problems for the Bank, such as designating replacement builders for a
project, considering alternate users for the project and site and handling any
structural or environmental issues that might arise. Such problems and the risks
inherent in construction lending may have a material adverse effect on the
Company's earnings and overall financial condition.
MOST OF THE BANK'S LOANS ARE SECURED, IN WHOLE OR IN PART, WITH REAL ESTATE
COLLATERAL.
In addition to the financial strength and cash flow characteristics of the
borrower in each case, the Bank often secures its loans with real estate
collateral. At December 31, 2006, approximately 95% of the Bank's loans had real
estate as a primary, secondary or tertiary component of collateral. The real
estate collateral in each case provides an alternate source of repayment in the
event of default by the borrower, but such collateral may deteriorate in value
during the time the credit is extended. If we are required to liquidate the
collateral securing a loan during a period of reduced real estate values to
satisfy the debt, our earnings and capital could be adversely affected.
17
SOME OF THE BANK'S ASSETS ARE CLASSIFIED AS NON-PERFORMING ASSETS THAT MAY LOSE
FURTHER VALUE.
The Bank has non-performing assets, which at this time only include
non-accruing loans. At December 31, 2006, the Bank's non-performing loans were
0.34% of outstanding net loans. There is a possibility that the Bank's earnings
could be reduced in the event that the eventual values of these non-performing
assets are or become less than the values that we have assigned to them.
THE BANK MAY EXPERIENCE LOAN LOSSES IN EXCESS OF ITS ALLOWANCE.
The risk of credit losses on loans varies with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the value and marketability of the collateral for the loan. The Bank's
management maintains an allowance for loan losses based upon, among other
things, historical experience, an evaluation of economic conditions and regular
reviews of delinquencies and loan portfolio quality. Based upon such factors,
management makes various assumptions and judgments about the ultimate
collectability of the loan portfolio and provides an allowance for loan losses
based upon a percentage of the outstanding balances and for specific loans when
their ultimate collectability is considered questionable. If the Bank's
management's assumptions and judgments prove to be incorrect and the allowance
for loan losses is inadequate to absorb future losses, or if the bank regulatory
authorities require the Bank to increase the allowance for loan losses as a part
of their examination process, the Bank's earnings and capital could be
significantly and adversely affected.
As of December 31, 2006, the allowance for loan losses was approximately
$4.5 million, which represented 1.45% of outstanding net loans. At such date, we
had non-accruing loans totaling $789,000. The Bank actively manages its
non-accruing loans in an effort to minimize credit losses. Although the Bank's
management believes that its allowance for loan losses is adequate, there can be
no assurance that the allowance will prove sufficient to cover future loan
losses. Further, although the Bank's management uses the best information
available to make determinations with respect to the allowance for loan losses,
future adjustments may be necessary if economic conditions differ substantially
from the assumptions used or adverse developments arise with respect to the
Bank's non-performing or performing loans. Material additions to the Bank's
allowance for loan losses would result in a decrease in the Bank's net income
and capital, and could have a material adverse effect on the Company's financial
condition and results of operations.
THE BANK OPERATES IN A COMPETITIVE MARKET.
The Bank operates in a competitive environment, competing for deposits and
loans with commercial banks, savings associations and other financial entities.
Competition for deposits comes primarily from other commercial banks, savings
associations, credit unions, money market and mutual funds and other investment
alternatives. Competition for loans comes primarily from other commercial banks,
savings associations, mortgage banking firms, credit unions and other financial
intermediaries. Many of the financial intermediaries operating in our market
area offer certain services, such as trust investment and international banking
services, which the Bank does not offer. In addition, banks with a larger
capitalization and financial intermediaries not subject to bank regulatory
restrictions have larger lending limits and are thereby able to serve the needs
of larger customers. Finally, the Bank's continued growth and profitability will
depend upon its ability to attract and retain skilled managerial, marketing and
technical personnel. Competition for qualified personnel in the banking industry
is intense, and there can be no assurance that the Bank will be successful in
attracting and retaining such personnel.
18
THE BANK IS DEPENDENT ON CERTAIN KEY PERSONNEL.
The success of the Bank depends, to a great extent, upon the services of
Vito S. Pantilione, the Bank's President and Chief Executive Officer, Robert A.
Kuehl, the Bank's Senior Vice President and Chief Financial Officer, David O.
Middlebrook, the Bank's Senior Vice President and Senior Loan Officer, and
Elizabeth A. Milavsky, the Bank's Senior Vice President of Retail Operations,
Human Resources and Compliance. The Bank has been able to retain the services of
Mr. Pantilione since its inception and of Mr. Middlebrook since he joined the
Bank in 1999. The Bank has needed, from time to time, to recruit personnel to
fill vacant positions for experienced lending and credit administration
officers. There can be no assurance that the Bank will continue to be successful
in recruiting and retaining the necessary personnel for the Bank's lending,
operations, accounting and administrative functions. The Bank's inability to
hire or retain key personnel could have a material adverse effect on the
Company's results of operations.
CHANGES IN INTEREST RATES AFFECT THE COMPANY'S PROFITABILITY AND ASSETS.
The Company derives its income mainly from the difference, or "spread,"
between the interest earned by the Bank on loans, securities and other
interest-earning assets, and the interest paid by the Bank on deposits,
borrowings and other interest-bearing liabilities. If more interest-earning
assets than interest-bearing liabilities re-price or mature during a time when
interest rates are declining, then the Company's net interest income may be
reduced. If more interest-bearing liabilities than interest-earning assets
re-price or mature during a time when interest rates are rising, then the
Company's net interest income may be reduced. At December 31, 2006, the Bank's
total interest-earning assets maturing or re-pricing within one year exceeded
interest-bearing liabilities maturing or re-pricing during the same time period
by $3.9 million. As a result, the cost on its interest-bearing liabilities
should adjust to changes in interest rates at a faster rate than the yield of
its interest-earning assets, and its net interest income may be reduced when
interest rates increase significantly for this period of time.
THE BANK'S MANAGEMENT CONTROLS A SIGNIFICANT PERCENTAGE OF OUR COMMON STOCK.
At March 22, 2007, the Company's and the Bank's directors and executive
officers beneficially owned 1,419,739 shares or exercisable warrants and
options, or 49.4%, of our common stock. Because of the large percentage of stock
held by the Company's and the Bank's directors and executive officers, these
persons could influence the outcome of any matter submitted to a vote of our
shareholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
(a) Properties.
The Company's and the Bank's main office is located in Washington Township,
Gloucester County, New Jersey, in an office building of approximately 13,000
square feet. The main office facilities include teller windows, a lobby area,
drive-through windows, automated teller machine, a night depository, and
executive and administrative offices. In December 2002, the Bank executed its
lease option to purchase the building for $1.5 million.
The Bank also conducts business from a full-service office in Northfield,
New Jersey, a full-service office in Washington Township, Gloucester County, New
Jersey, a full-service office in
19
Philadelphia, Pennsylvania, and a loan production office in Millville New
Jersey. These offices were opened by the Bank in September 2002, February 2003,
August 2006 and August 2006, respectively. The Northfield office, the
Philadelphia office and loan production office are leased. The Washington
Township office was purchased in February 2003.
Management considers the physical condition of all offices to be good and
adequate for the conduct of the Bank's business. At December 31, 2006, net
property and equipment totaled approximately $3.4 million.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Company's
investment policies, which are implemented by the Bank. The Bank's investments
are primarily acquired to produce income, and to a lesser extent, possible
capital gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item 1.
Business - Lending Activities."
(2) Investments in Real Estate Mortgages. See "Item 1. Business - Lending
Activities."
(3) Investments in Securities of or Interests in Persons Primarily Engaged
in Real Estate Activities. See "Item 1. Business - Lending
Activities."
(c) Description of Real Estate and Operating Data.
Not Applicable.
ITEM 3. LEGAL PROCEEDINGS
On December 27, 2004, Republic First Bank filed an action captioned
Republic First Bank v. Parke Bank and Vito S. Pantilione in the Superior Court
of New Jersey Law Division, Gloucester County. The Bank believes that the action
is without merit and intends to vigorously defend against it. The suit alleges,
among other things, fraud, negligent misrepresentation, breach of fiduciary duty
and breach of contract in connection with certain loans to two Parke Bank
customers in which Republic First Bank became a participant. Republic First Bank
is seeking unspecified damages and requesting that a receivership be appointed
for certain collateral. The complaint in the action was served on us in January
2005. The Bank filed an answer to the complaint, and the case is currently in
the discovery phase.
On June 1, 2005, Atlantic Central Bankers Bank and New Century Bank filed
an action captioned Atlantic Central Bankers Bank and New Century Bank v. Parke
Bank and Parke Capital Markets in the Superior Court of New Jersey Chancery
Division, Cape May County. The Bank believes that the action is without merit
and intends to vigorously defend against it. The suit alleges breach of
participation agreements and fraudulent misrepresentation in connection with the
plaintiffs' participations in loans to the same Parke Bank customers as the
Republic First Bank matter discussed above. In August 2005, the plaintiffs'
motion for a preliminary injunction was denied, and they were ordered to pay the
Bank's expenses. This case has been consolidated with the Republic First Bank
case.
20
In December, 2006, the Bank reached a preliminary agreement with both
Atlantic Central Bankers Bank and New Century Bank. Upon further negotiations
with both Banks in 2007, a final agreement between the Bank and Atlantic Central
Bankers Bank and New Century Bank was signed and subsequently approved by the
court and the action was dismissed in February, 2007. As a result of the
settlement there are no longer any outstanding legal issues or potential
liability by the Bank relating to either party. Payments were recently made in
the amounts of $150,000 and $ 60,000, respectively to Atlantic Central Bankers
Bank and New Century Bank as a result of the settlements. There has been no
subsequent change in the First Republic Bank action.
On November 4, 2004, Stephen P. Magenta and other parties filed an action
captioned Stephen P. Magenta, et. al. v. General Insulation Services, Inc., et.
al. in the Superior Court of New Jersey Law Division, Gloucester County, related
to the alleged embezzlement of over $1 million by an employee of one of our
customers of funds maintained in accounts at the Bank. All but one of the claims
against the Bank have been dismissed. The Bank believes that the action is
without merit and intends to vigorously defend against it. In addition, the Bank
believes that this action is covered by its insurance.
Other than the foregoing, at December 31, 2006, the Company was not a party
to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during
the fourth quarter of fiscal year 2006.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
(a) The information contained under the section captioned "Market
Prices and Dividends" in the Company's 2006 Annual Report is
incorporated herein by reference.
(b) Not applicable.
(c) There were no repurchases of the Company's stock in the fourth
quarter of 2006.
21
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the section captioned "Selected Financial
Data" in the 2006 Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Interest Rate
Sensitivity and Liquidity -- Rate Sensitivity Analysis" in the Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements listed under Item 15 are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")),
the Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Annual Report on Form
10-K such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal control over financial reporting. During the last
quarter of the year under report, there was no change in the Company's internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
22
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information contained under the headings "Section 16(a) Beneficial
Ownership Reporting Compliance" and "Proposal I - Election of Directors" in the
Company's Proxy Statement for its 2007 Annual Meeting of Stockholders (the
"Proxy Statement") is incorporated herein by reference.
The Company has adopted a Code of Ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller or persons performing similar functions. A copy of the Code of Ethics
will be furnished without charge upon written request to the Chief Financial
Officer, Parke Bancorp, Inc., 601 Delsea Drive, Washington Township, New Jersey,
08080.
There have been no material changes to the procedures by which security
holders may recommend nominees to the Registrant's Board of Directors since the
date of the Registrant's last proxy statement mailed to its stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the section captioned "Director and Executive
Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
(a) Security Ownership of Certain Beneficial Owners
The information contained in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
(b) Security Ownership of Management
The information contained in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
(c) Management of the Registrant knows of no arrangements, including any
pledge by any person of securities of the Registrant, the operation of which may
at a subsequent date result in a change in control of the Registrant.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
Set forth below is information as of December 31, 2006 with respect to
compensation plans under which equity securities of the Registrant are
authorized for issuance.
23
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities
remaining available for
future issuance under
equity compensation
Number of securities to Weighted-average plans (excluding
be issued upon exercise exercise price of securities reflected in
of outstanding options outstanding options column (a))
---------------------- ------------------- -----------
Equity compensation plans approved
by shareholders............. 348,248 $ 13.52 147,688
------- -------- -------
TOTAL....................... 348,248 $ 13.52 147,688
======= ======== =======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information contained in the section captioned "Certain Relationships
and Related Transactions" in the Proxy Statement is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information contained in the section captioned "Principal Accounting
Fees and Services" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Listed below are all financial statements and exhibits filed as part of
this report.
1. The following financial statements and the independent auditors'
report included in the Annual Report are incorporated herein by
reference:
o Report of Independent Registered Public Accounting Firm
o Consolidated Balance Sheets as of December 31, 2006 and 2005
o Consolidated Statements of Income For the Years Ended
December 31, 2006, 2005 and 2004
o Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2006, 2005 and 2004
24
o Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004
o Notes to Consolidated Financial Statements
2. Schedules omitted as they are not applicable.
3. The following exhibits are included in this Report or incorporated
herein by reference:
3(i) Certificate of Incorporation of Parke Bancorp, Inc.*
3(ii) Bylaws of Parke Bancorp, Inc.*
4.1 Specimen stock certificate of Parke Bancorp, Inc.*
4.2 Specimen common stock purchase warrant of Parke Bancorp, Inc.*
10.1 Employment Agreement Between Bank and Vito S. Pantilione*
10.2 Supplemental Executive Retirement Plan*
10.3 1999 Stock Option Plan*
10.4 2002 Stock Option Plan*
10.5 2003 Stock Option Plan*
10.6 2005 Stock Option Plan**
13 Annual Report to Stockholders for the fiscal year ended December
31, 2006
21 Subsidiaries of the Registrant
23 Consent of McGladrey & Pullen, LLP
31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
* Incorporated by reference to the Company's Registration Statement
on Form S-4 filed with the SEC on January 31, 2005.
** Incorporated by reference to the Company's Definitive Proxy
Statement filed with the SEC on December 20, 2005.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PARKE BANCORP, INC.
Dated: March 30, 2007 By: /s/ Vito S. Pantilione
-----------------------------------
Vito S. Pantilione
President, Chief Executive Officer
and Director
Pursuant to the requirement of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on March 30, 2007.
/s/ Vito S. Pantilione
-------------------------------------------- -----------------------------------------------
Celestino R. Pennoni Vito S. Pantilione
Chairman President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Fred G. Choate /s/ Daniel Dalton
-------------------------------------------- -----------------------------------------------
Fred G. Choate Daniel Dalton
Director Director
/s/ Robert A. Kuehl
-------------------------------------------- -----------------------------------------------
Robert A. Kuehl Arret F. Dobson
Senior Vice President and Director
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/Thomas E. Hedenberg
-------------------------------------------- -----------------------------------------------
Thomas E. Hedenberg Edward Infantolino, M.D.
Director Director
SIGNATURES (continued)
/s/Anthony Jannetti
-------------------------------------------- -----------------------------------------------
Anthony Jannetti Jeff H. Kripitz
Director Director
/s/Richard Phalines /s/Jack C. Sheppard, Jr.
-------------------------------------------- -----------------------------------------------
Richard Phalines Jack C. Sheppard, Jr.
Director Director
--------------------------------------------
Ray H. Tresch
Director